Manuel Perez, Director of Product Management, XVELA
Both capital expenditure and operating expense figures would concern any investor in the shipping industry. Massive investment in assets, port expenses, high stevedoring costs, extraordinary bunker fuel costs (definitively not recovered by the bunker adjustment factor (BAF)), vessel damage cost not recovered from terminals, and evermore security and environmental regulations all collate to keep moving costs upwards.
The shipping lines’ actual return on investment in the modern day scenario has become a sort of lottery in which financial forecasts and risk assessment is better coming from some kind of fortune teller than from the most brilliant market analyst. Rates are unpredictable and more volatile than in the past. Over capacity in the market is a disease without a cure. Despite the efforts for consolidating industry capacity, the antidote is not yet available.
Things get further complicated when countries protect their own strategic interest by financially sustaining unprofitable national carriers, thereby keeping capacity artificially high. Meanwhile, the carriers’ shippers continue fishing for lower rates in these troubled waters, taking advantage of the imbalance between supply and demand while the industry looks for economies of scale, whilst terminals focus on their own operations as they watch this bad industry movie play out.
What can the carriers do in this challenging scenario? They have little room to reduce their fixed costs and market and operational volatility will not allow them to establish a solid base for financial forecasting. Shipping lines must focus only on what they can control; reducing operational cost and doing their utmost to try and control market capacity. Reducing cost starts with rejecting unjustified costs, revising contracts and agreements and finally evaluating better ways to provide the same service at a lower cost (though not necessarily at the same service level).
Addressing unplanned disruption
What matters is what you can control. Carriers cannot control the weather, but they can do more to control contingency costs created by weather disruptions. Carriers cannot control a vessel breakdown, but they can establish the most efficient way of predicting the unpredictable. Carriers cannot control upfront the speed of the vessels to be on-time for the next port, but they can create pro formas and buffers that can absorb unplanned delays in the most cost efficient way. Conventional wisdom states carriers cannot control terminals, although this is not a concrete conclusion.
Why can’t the most important source of operational cost deviations for a carrier be shaped to mitigate disruptions and improve on-time and predictable vessel operations? Bunker fuel cost is not the most important operational cost for carriers on its own. It is the combined consequence of the different disruptions in a network which creates the greatest uncontrolled and unbudgeted costs, and this quickly derails any operational savings initiatives.
A delay in a port obliges the carrier to choose between speeding up to the next port to catch up (when possible) or be late and create a problem in the next terminal. This, in turn, will have a domino effect on the transport network around the terminal and subsequent port calls for those vessels.
Things get further complicated when countries protect their own strategic
interest by financially sustaining unprofitable national carriers, thereby
keeping capacity artificially high.Meanwhile, the carriers’ shippers continue
fishing for lower rates in these troubled waters, taking advantage of the imbalance between supply and demand while the industry looks for economies of scale, whilst terminals focus on their own preparations as they watch this bad industry movie play out.
What can the carriers do in this challenging scenario? They have little room to reduce their fixed costs and market and operational volatility will not
allow them to establish a solid base for financial forecasting. Shipping lines must focus only on what they can control; educing operational cost and doing their utmost to try and control market capacity.Reducing cost starts with rejecting unjustified costs, revising contracts and agreements and finally evaluating better ways to provide the same service at a lower cost (though not necessarily at the same service level).
If a terminal doesn’t try to understand the actual costs of their customers and the consequences of their internal decisions on the overall network complexity of the carriers, the terminal sector will continue to destroy value for its carrier customers, as well as the customers of their customers. Ultimately, this all adds up to damaging the viability and profitability of the customers terminals serve.
The day-to-day scenarios unchangeable: vessels will always be affected by unpredictable weather or engine breakdown, and the number of moves will always fluctuate from this week’s call to next week’s. Also, of course, ports can’t control the weather either, and port equipment will have unplanned breakdowns, labour disputes will cause disruptions and port stays will always vary subject to a plethora of factors.
Although the reality of the business conditions will not change, no matter how much ports, terminals and shipping liners keep blaming each other, the approach to managing this reality can be changed. Only when the industry can sit together at a table and come to an understanding of one another’s costs, make them visible and agree on the tradeoffs (and figure out how to share the additional costs generated) will we be able to enjoy a healthy and thriving industry for years to come.
This industry challenge to foster collaboration is one of the main reasons behind the creation of XVELA, a platform that can provide access to collaboration tools, analytics and exchange of information. Change can be difficult and slow even when the status quo is demonstrably not providing the productivity, but I believe matching the right tools with the will to change can lead to changes in behavior.
About the author
Manuel Perez is director of product management at XVELA. He recently joined Navis to manage the design, development and execution of XVELA products. Prior to joining Navis, Manuel worked for Maersk Line for 17 years in various operational roles and led the development of several IT projects focused on efficiencies and process optimisation.
About the organization
Ocean carriers and terminal operators know that efficiencies can be gained, waste eliminated and revenue increased through better collaboration on vessel stowage planning and execution. But the tools and incentives to change business processes have been lacking— until now. XVELA is a new company that utilizes the legacy of Navis PowerStow vessel stowage solutions to provide a transformative, cloud-based collaboration platform and network for ocean carriers and terminal operators. XVELA enables its users to easily connect and coordinate vessel stowage planning and execution activities, resulting in reduced vessel operation and terminal costs, as well as improved utilization of critical crane, vessel and manpower resources.
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