Reducing bunker costs requires a holistic approach
Do you expect bunker fuels to keep on rising in the future, thus adding costs to the shipping industry?
In recent years, tight bunker fuel supplies have caused bunker prices to outpace crude oil spot prices. We also see increased volatility. Prices are not expected to go down significantly anytime soon. Bunker is the single largest cost item for shipping companies, representing 35-50% of total costs. But this is just one part of the story. Environmental regulations such as MARPOL IV and the mandatory application of SEEMP (Ship Energy Efficiency Management Plan) urge companies to focus more on consumption. Declining freight rates (and their delayed recovery), and pressure on other costs such as crewing make bunker optimization and efficiency management planning even more crucial in this turbulent environment.
In your latest publication, you advocate a new approach towards lowering bunkering costs. Could you elaborate on this?
It would be a mistake not to recognize that the majority of shipping companies have already undertaken different kinds of initiatives in order to decrease bunker costs. What’s new in the approach we advocate is that it is holistic and it also addresses the pre-requisites (or enablers as we call them), in terms of organizational setup, processes, decision-making and transparency on the performance management.
It is holistic as it looks at six different types of levers to decrease bunker costs:
1. Planning: how to best optimize routing and waiting time to allow for more slow steaming and maximize loads at the lowest possible price
2. Procurement: how to maximize bunker value for money through purchasing initiatives and suppliers relations
3. Voyage execution: how to execute voyage efficiently, minimizing bunker consumption while meeting business requirements
4. Charter value: how to develop commercial arrangements and time charter agreements with bunker costs in mind
5. Technical efficiency: how to optimize vessels’ characteristics to reduce consumption
6. Fleet optimization: how to best shape the vessel portfolio, by focusing on fuel efficient vessels
Our approach also addresses the pre-requisites to maximize the value of the six levers above:
1. Deploy customized tools and lean processes to make efficient operational decisions
2. Review organizational structure to support optimized end-to-end bunker processes
3. Use bunker benchmarking and develop dashboards and key performance indicators to best monitor accountabilities, impact and continuous improvement
4. Drive transformation through a rigorous change management program
Combining a complete set of levers and their enablers makes our approach quite innovative and unique.
How much is the reduction in fuel costs that this approach guarantees? How is this derived?
We see players that undertake fundamental bunker optimization program realize savings ranging between 5 and 10% of bunker costs savings. It all depends on the baseline or starting point and the magnitude of the bunker program. For players to understand with accuracy where they are starting from (their baseline), BCG usually recommends to benchmark the company performance against its peers; we have created a benchmark that indeed allows companies to understand how they perform on bunkers, in terms of consumption on the one hand and in terms of procurement on the other hand. This allows companies to focus their improvement program where their specific needs are in order to optimize the impact on bunker costs, and, at the end of the day, create competitive advantage.
Which are the steps needed to be taken from ship owners in order to achieve these results?
As said, companies need to start by setting the right baseline, i.e. understanding where they are doing well already, where they can improve their competitive advantage further and where they need to catch up with peers. The benchmark allows for this. But keep in mind that no bunker optimization program will bring results if it is not a top priority for the company, with clear accountabilities, visibility and tracking of results, as well as a clear focus from top management.
What percentage of ship owners actually already use this type of holistic approach, when it comes to addressing their bunkering needs?
As said, all companies are doing ‘something’ to address bunker costs; however, few companies have so far launched ambitious holistic programs to address all aspects of potential improvements in a focused way. That said, we are seeing great appetite and many companies have put ‘bunkers’ on top of their strategic agenda for 2013.
How much is the gain they can achieve, when compared to the costs needed for the adoption of these new measures?
When speaking of bunker costs, which can represent more than 50% of the total cost base of shipping companies, one understands that the return on investment can only be significant. Of course, some technical initiatives require capital expenditures; but otherwise, most of the initiatives mentioned previously require ‘only’ to involve the right cross-functional task force within the company to design solutions. Resources are scarce, but the payback is very high and quite fast with quick wins that can be achieved within only a few weeks.
Does this new approach take into consideration possible investments towards newer and more efficient vessels, or the change of bunkering fuel (for instance LNG) onboard current vessels, or even the introduction of other fuel saving technologies on the existing fleet?
Yes, it does consider both aspects. Fuel efficiency needs to be considered in investment decisions more than ever. Some new technologies will be game-changers and companies need to have the visibility to navigate smartly to seize opportunities and not be left behind with fleet that can become obsolete because of their consumption profile.
Nikos Roussanoglou, Hellenic Shipping News Worldwide