What can carriers do to reduce their fixed costs amidst operational volatility that will not allow them to establish a solid base for financial forecasting?
Carriers can reduce their costs by focusing on what they can control – reducing operational costs and doing their best to control market capacity, rejecting unjustified costs, revising contracts and agreements – but most importantly, by working more efficiently with the largest cost reduction opportunity of all: the terminals.
Both capital expenditures and operating expenses would concern any investor in the shipping industry. Massive investment in assets, escalating port expenses, high stevedoring costs, extraordinary bunker fuel costs, vessel damage costs, and increased security and environmental regulations keep moving costs upwards.
As a result, today a shipping line’s actual return on investment bears an uncomfortable similarity to a lottery, where accurate financial forecasts and risk assessments might be more accurately foretold by a palm reader than by even the most brilliant market analyst.
And the situation is further complicated when countries protect their own strategic interests by financially sustaining unprofitable national carriers, thus keeping capacity artificially high – resulting in shippers fishing for yet lower rates that the artificial imbalance between supply and demand creates.
Control what can be controlled.
While carriers cannot control the weather, they can do more to control contingency costs created by weather disruptions. And while they cannot control a vessel breakdown, they can establish more efficient and effective ways of monitoring vessels.
And while they cannot control the upfront speed of the vessels as they struggle to be on time for the next port, they can create pro-formas and buffers that can absorb unplanned delays in the most cost efficient way.
Admittedly, these afford only minor controls. Because vessels will always be affected by the weather or engine breakdown, number of moves will always fluctuate from week to week, and crane splits will always differ from original expectations.
Addressing Unplanned Disruption
The most important source of operational cost deviations for a carrier can be shaped to mitigate disruptions and improve on-time and predictable vessel operations. There is a misconception that bunker fuel costs are the most important operational cost for carriers on its own. But that’s just not true. It is the impact of the multiple cumulative disruptions in a network that creates the greatest uncontrolled and unbudgeted costs – costs which quickly derail any other operational savings initiative.
A delay in a port obliges the carrier to choose between two onerous options. On the one hand, carriers can keep being late, thus creating a problem in the next terminal – which creates a domino effect on the transport network around the terminal and subsequent ports. Or, they can speed up to the next port in an effort to make up for lost time – sometimes even skipping a port to avoid further impact on the network – requiring a complete re-planning of the cargo on board as well as the cargo left behind (incurring still more unforeseen costs). All because carriers and terminals operate as if their actions are independent of each other.
Understanding one another’s costs, and how the internal decisions of terminals and carriers impact the overall network efficiency, is important to finding the best trade-offs. And its one of the main reasons for the creation of XVELA and for the development of a platform that can provide access to collaboration tools, analytics and information exchange to help with intelligent operations.