Reducing OPEX and Off-Hire at the same time. Can it be done?
by Constandinos Karikoglou*
…More often than not, your ship condition suffers, as a direct consequence of ill use of office human resources, and bad cooperation within and between office departments.
The recent market crisis, resulted in scrutinizing budgets and postponing as much as possible of the normal scheduled maintenance of the fleet. Spares & stores have been reduced to absolute minimum, and forwarding is taking place at more rare intervals.
Third party ship management companies, have to be competitive and for this reason the minimum budget is offered in order to attract more clients.
Listed companies have certain financial regular reporting demands in order to comply with accounting audits and keep share-holders happy. It is good to note that the price of the share, mirrors what stock holders believe the profits to be at next quarter or after that. So, if the profits miss estimates this will have a detrimental effect on the price of the stock. It is actually a well known trading strategy to speculate heavily on the published quarterly earnings of the company or EPS (Earnings Per Share).
Upcoming regulations regarding water ballast treatment plants and exhaust scrubbers, come to threaten the return estimates, and the future profits of many small owner companies which are now invited to budget for more than 1 million/ship to cover the retrofits required. Needless to mention that there has to be a legal coverage of the purchase contract in order to lock in suppliers and indemnify the owners if such an expensive investment does not meet the regulation approvals required. Kindly be reminded that partial approval is not accepted by authorities and the equipment you will purchase may need to be modified prior to obtaining the full approval, or the vessel may face heavy fines. All the modifications up to the final version have to be provided for free to the owners and that should be a major term in the contract.
It would be best to quote in the sale contract that in case of dispute the English Law shall apply. Owners have the right to do this in accordance with the Contracts (Applicable Law) Act 1990 c.36, Schedule 1, Title II Uniform Rules Article 3.1.
Furthermore, since the competition on various equipment is quite strong, a good digging into the operation expenses and any collateral expenses is to be made in order the comparison to be financially correct.
Charterers find now more than ever, where ship supply is greater than demand, that they can press for more seaworthy ships, less insurance premiums, by adding to the requirements through vetting inspections. Bulk carriers find it not easier through Rightship star system and guess what, the more observations you receive from PSC the more stars you lose, and without 5 Stars your ship is hard to be booked for cargo competitively.
As the requirements pile up, your fleet has no alternative, but to be at an impeccable condition.
Many ship owners try to be well prepared, by being prudent and by attending their ships at more regular intervals. So, what is the main factor that has the aftereffect of a continuation of off-hire, breakdowns, deficiencies, and near misses? Or in other words more expensive management?
Are unscheduled breakdowns so unavoidable that they are accepted as fate with no success of mitigation?
Human factor is a cause for a large factor of mishappenings on board a vessel, but is it true that it is also affected greatly by confusing and irrational management?
Notwithstanding the importance of a proficient crew team, it would be easy to leave the crew members to be the patsy of the situation, and as usual, terminate their contract as an immediate corrective action when a problem arises. But this is not going to the root of the problem.
ISM has always been looked with criticism, and many companies have allocated resources just to comply with procedures. However, it is a great monitoring and training tool and is meant to bring cooperation between departments and between company and vessel. The ISM mojo has always been “write down what you do and do what you write”, and still many companies have purchased an ISM manual which is hardly related to their real operation procedures.
To make matters worst, a number of KPI’s and risk management tools like TMSA for tankers are not properly used to the advantage of the owners / ship managers. Very few people know what the KPI formulas are and what they represent.
There is plenty of room for improvement and to indicate how some basic improvement steps can be taken we have to ask some basic questions such as:
- Does your departments operate as one company, or as individual units each with their own agenda?
- Examples of ill horizontal communication between departments are :
- Repatriation of crew at the beginning of drydockings where they are mostly needed
- Repatriation of crew during crucial inspections
- Repatriation of crew by removing at the same time important officers thus crippling the management of the ship, like for example Captain and Chief officer, or Chief Engineer and 2nd
- Re-employment of blacklisted crew because no new crew is available.
- Inspections from various departments to be carried out together, like for example flag inspection together with class inspection
- Arranging for bunkers together with divers, a contradicting operation.
- This is not a joke, but it has happened many times to arrange for repair of one machinery from one department and inspection of this item by another department. Does this look professional?
- Quite high on the list of questions is the Crew Agency. We all know that you cannot have 2 crew agencies for one vessel. So changing crewing agency is costly and takes time as you have to change the entire crew at one port. However, the ship management company has to scrutinize the crewing agency procedures. Sometimes we have all heard stories of foul movements within the crewing agencies. Good team members, and by that we mean good crew is hard to find. Marketers spend more than 50% of the product price for marketing and gaining new customers. Similarily, loosing one customer is as expensive as it gets and companies are all aware of it. The same applies for crew members.
- Are the leaders of your departments truly talented leaders? Or are they good employees and they continue to be good employees in a leaders position? As per Vance Packard words “Leadership appears to be the art of getting others to want to do something you are convinced should be done”
- How do you pick your Managers? Would you give the position to an inexperienced manager with natural leadership talent or would you give the position to an experienced manager without one?
- What is your department’s Office retention rate? What is the crew retention rate? What is your personnel hiring procedure?
- Will your manager hire the best suitable candidate for the job? The best suitable candidate with respect to qualifications? Or someone just safe to hire?
- Would you choose an employee with a lot of lateral movement activity? Or would you prefer stability? Which of the two would you consider a stronger negotiator and a better leader and at what circumstances? Which one would make more money for your company?
- What is each of your personnel specialty and how far could you expand this?
- Is there a repetitive pattern in the type of deficiencies of your fleets? Certain fleets will possibly have a repetition of similar deficiencies. Working backwards, you can identify areas of training of the Fleet Managers.
- Does your critical employees enjoy some free time during the day, saved for emergency situations? Remember that there will be critical times where you will have to speed up operations in order to save money and resolve a situation as fast as possible. If your employees are working at full speed all the time, then there will be no time or power resources spared for emergencies.
- What is the stress levels among your employees? Are they working 12 hours a day? Do they have a personal life?
- Is there a healthy motivation amongst the employees or they all feel that they are competitors for the next promotion.
- The ship is the final recipient of all correspondence, instructions and directions. If you work backwards from the vessel following all the correspondence to the office where it originated would you find repetition of the same instructions coming from different departments? is there any space for reduction and consolidation of procedures? Training can be in the form of instructions and not checklists which crew have to complete each time.
- Too many procedures and instructions will have exactly the same and perhaps worst effect than too little procedures.
- Attitude and behaviour is very important. Do you consider crew as part of your team? Can they feel this spirit of cooperation so that they can reciprocate?
- Finally, and perhaps the most important question to ask? Can you spent more today in order to reduce your opex for the year?
While there is plenty of work to be done between the department managers and their teams, the CEO of the company has another battle to win.
How to allocate correctly next year’s budget? For example, an increase of ticketing budget of the crewing department in order to have on board more qualified crew members, may well reduce substantially more damages, and spare part requisitions and orders which overall would be more economically viable.
Another example would be, a decrease of the crew contracts time for Ukranian crew to 4 months from 7 months would have as a consequence an increase of scheduled ticket costs but could easily increase also retention rate of more qualified crew members, which by using correct rotation could in the long run reduce many budget groups in the OPEX of the vessel, like spares, stores, food, etc.
A very important factor that managers have to take under consideration is that the itinerary of the vessel has nothing to do with quarter results. If the vessel is in Europe and lubricants are so much more cheap that where the vessel will be in the next 4 months, then spending more today will actually prove to be cheaper over the budget of the year.
Overall ship management is a truly demanding profession and a true team game.
*Constandinos Karikoglou has a BEng in Mechanical Engineering and an MSc in Marine Engineering from Newcastle UK, and has been actively involved in Technical Ship Management since 1995. He is currently doing his LLB with the University of London.