A STUDY ON COST OPTIMIZATION IN THE SHIP MANAGEMENT

Asst. Prof. Dr. Ergün DEMİREL, Asst. Prof. Dr. Dinçer BAYER
Piri Reis University, Istanbul/Turkey, edemirel@pirireis.edu.tr
Piri Reis University, Istanbul/Turkey, dbayer@pirireis.edu.tr

ABSTRACT

Shipping is a risky business by its very nature that runs within a complex and ever changing market set up
having variables in both income and expenditure. Ship management is a highly competitive and a cost-
conscious arena of which one of the most prominent objectives is the cost optimization. The aim of this study is
to conduct a research on the cost optimization in the ship management, to define the dominant factors that
seriously affect the cost and to propose solutions which reduce the cost. Primary intention is to make an
investigation on the factors which affects the costs in the ship management and to evaluate the effects of these
factors on the costs. Then the fuzzy logic method is applied to find dominant factor(s) which are controllable
and could seriously reduce the cost. The findings on the dominant factors are used to produce proposals to
optimize the ship management costs for the shipping companies. This study not only helps to understand the
dominant cost factors in the industry, but also provides essential data for the organizational changes which
ensure the cost reduction in the ship management.

Key Words- Ship Management; Cost Optimization; Shipping; Procurement and Maintenance; Procurement and
Repair.

1. INTRODUCTION

Shipping business runs within a complex and ever changing market which leads to variables in both
income and expenditure. Accordingly, being an international business, the shipping activity should
follow both national and international law and regulations. The shipping operates under the supervision
of not only national authorities but also global actors such as classification societies, finance providers,
marine insurance companies, shipping related non-governmental organizations which regulate
commercial management.

Shipping is a high level risky business which is very sensitive to many risks which may jeopardize
survival of the shipping company. Sea transportation is full of hazards which may cause serious
damages on human lives and the ship to a degree of even total loss. Normally ships are owned by
credits and a financial risk is always possible. Shipping is also very sensitive for changes of the national
and international policy. Those alterations and risks require all ship management companies to handle
a continuous risk assessment and management process.

Additionally, shipping is a complex business – with a substantial exposure to financial, commercial,

political and physical risks – that requires skilled management. Ship management – again
unsurprisingly in a cost-conscious business such as ship ownership – is a highly competitive business
sector, especially in respect of management fee levels (Drewry, 2006).

Ship owners are always looking for securing their revenue to survive in a challenging business. To
control revenue flow, they need reduce the cost and increase the income. Increasing the income is not
possible whereas reducing the cost is much more available in general. Reduction of the capital,
operation and voyage costs is generally not applied due to the economic considerations. For that
reason, to secure cost savings, the ship owners are looking for instruments to control expenses of
additional crew travels, stores, spares, repairs, shipyard, port agency bills and extra insurance fees.

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Technical management is at the core of successful ship operation. A ship’s ability to earn revenue will
be hampered if it is unable to operate optimally. This introduces the need, among others, to attain the
appropriate standards for crewing, repairs and maintenance, procurement and inventory systems and
management itself (Drewry, 2006).

2. RESEARCH METHOD

The aim of this study is to conduct a research on the cost optimization in the ship management, to
define the dominant factors which seriously affect the cost and to propose solutions which reduce the
cost. To reach the aim, data is collected and processed by using literature review techniques. Problem
of the study is defined such as “to reduce the cost for shipping companies. “Accordingly, research is
conducted in three phases. In the first phase, it is intended to make an investigation on the factors
which affects the costs in the ship management and evaluate the effects of these factors on the cost.
Then the fuzzy logic method is applied to find dominant factor(s) which are controllable and seriously
reduce the cost. In the last phase, the findings on the dominant factors are used to produce proposals
to optimize the ship management costs for the shipping companies.

1 LITERATURE
RESEARCH

2
4 PROPOSALS & APPLICATION
CONCLUSION OF FUZZY
LOGIC

3 DISCUSSION
ON FINDINGS

Figure 1: The research method applied

This study not only will help to understand the dominant cost factors in the industry but also will
provide essential data for the organizational changes which ensure the cost reduction in the ship
management.

3. ANALYSIS OF REVENUE AND COSTS

3.1. Main Elements of Shipping Management

Main elements of the ship management are introduced in Figure 2. The commercial ship management
is “getting the income in’’ and the technical ship management is ‘‘keeping the hardware/seagoing
operation going’’. Administration is a set of activities in support of commercial and technical
managements.

Commercial management Technical management Administration

Crew management
(including recruitment, Policy / planning /
Securing vessel income training and retention) strategy
Organising and managing Financial, legal,
Organising and managing ship
various operating and operations/functions accounting
voyage Taxation
cost streams Supervision of R&M regime Office overheads
Advertising /
Supervision of procurement marketing
Maintaining vessel in class and
in seaworthy condition

Preserve owner's asset

Training programmes
Relationships with agents, brokers, other third parties

Figure 2: The Main Elements of Ship Management (Source: Drewry, 2006)

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According to Drewry (Drewry, 2006), the inevitable principal in commerce is “securing the revenue
stream”. In shipping there are two factors to provide earning income; freight rates secured for the
carriage of cargo and hire earned from chartering out the ship. In some extraordinary cases, the revenue
may be secured from selling ships.

Whoever has responsibility for commercial management, the success or otherwise of the venture will
hinge on two key factors; (i) an ability to ‘read the market’ and (ii) an element of luck. The latter may
sound disconcerting to those not closely involved with shipping markets but the truth is that shipping
markets are some way from being transparent. Hence, interpretations have to be made based on
incomplete or imperfect information. This creates a mix of speculation and sentiment to go with the
underlying ‘realities’. Sentiment is not something suited to ‘mathematical models’ (Drewry, 2006). As
it has been mentioned before, mostly the ship managers are lack the ability of reading the market and
that makes them play their games on luck in which success is not always possible. So it is clear that
they should work on “cost reduction” rather than” gaining or increasing income” which is very variable
and hard to forecast.

From an economic standpoint, the entrepreneur will try to maximize his profits and therefore expand
his output, so long as the increase in his total costs is less than the increase in his total revenue. He will
therefore continue to expand to the point where his marginal additional cost is equal to his marginal
additional revenue (Archer, 2008).

The following issues are key issues in ship management;

- Commercial Management:
- Freight development-negotiating and securing charters
- Cargo booking and ship scheduling
- Technical Management (Cost side based on the Voyage Estimation)
- Crew cost
- Bunkers & lubricators consumption and cost
- Hull and engine maintenance costs
- Insurance costs
- Capital costs
- Administration costs (Distribution of overhead for each voyage)
- Voyage costs for ports, agency, pilotage, cargo handling, canal transits, etc.)
- Administration;
- Financial control and accounting
3.2. Cost Factors in Ship Management
The share of the cost for each type of charter is shown in the Figure 3. Operating cost which is main
part of spending for all charter modes is under the ship owner responsibility except bareboat chartering.

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 Charter Type-Cost Relations
The most crucial factor in management terms between the two charter modes
(voyages and time) concerns their variation in cost responsibilities between the ship
owner and the charterer.

Bareboat Time Voyage

Cost:
Deposit
Capital Repayment of loan principal
Interest
Manning
Insurance
Operating Repairs and maintenance
Stores, spares and supplies
Administration and management
Bunkers
Voyage Port Disbursement(˖)
Canal and seaway transit coasts

Cost for shipowner’s account Cost for charterer’s account

(˖) FIO basis- all costs on charterer’s account
Liner terms-all costs on shipowner’s account
Gross load/discharge free-loading costs on owner’s account, discharge costs on charterer’s account

Figure 3: Charter Type Cost Relations (Source: Drewry, 2006)

It is not possible to negotiate for capital cost except initial stage which is related the financial markets’
fluctuation. Most part of the voyage costs (port disbursements, canal and seaway transit costs) are
dependant to tariffs and not negotiable. Bunker prices follows the fixture of the market and provides a
little opportunity to bargain. Some elements of operating cost (manning and insurance) are not
negotiable. But the others (Repairs and maintenance; stores, spares and supplies, administration and
management) are more flexible to negotiate for cost reduction. The quality of purchase/procurement
staff and technical staff and support of ship crew is important to make cost optimisation in these areas.

Marfin Management Company made a study on Operational Cost and Daily Overall expenses for ships
(Albertini, 2011). The following tables show these figures;

Table 1: Operational Expenses Proportion

Crew costs 48%

Administration 18%
Stores 16%
Insurance 13%
Spare &Repairs 5%

The biggest portion is the crew cost and it is not flexible for bargain. Insurance also has a very limited
chance to negotiate for cost. Except company staff salaries, all other administration aspects (office
rent, transportation, and communication, stationary) are in the procurement and purchase. The stores
and Spare & Repair cost are almost 19% of the operational expenses.

These are all related maintenance and repair policy and finally procurement/purchasing activities. If
we separate non-flexible factors (crew cost and insurance), the remaining cost factors are directly
related to maintenance, repair and procurement/purchasing.

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 Table 2: Proportion of Daily Overall Expenses

Financing 51%
Crew Cost 19%
Dry Docking 9%
Administration 7%
Stores 7%
Insurance 5%
Spares & Repairs 2%

As far as concerning Daily Overall expenses, except non-negotiable factors (financing, crew cost, and
insurance) all other aspects are also directly related to maintenance, repair and procurement &
purchasing.

3.2. Effectiveness of purchasing/procurement

The three areas which in the core of ship operations are important to evaluate cost optimization;
Maintenance, Repair and Procurement.

Maintenance is an activity should be based on a plan namely Planned Maintenance System (PMS).
Being a planned activity planners foreseen the cost and may prepare a budget which has a little
fluctuation in general. If company and ship masters are keen to follow application of PMS on board
there would not be an unexpected change in maintenance cost. The equipment and external manpower
for PMS is crystal clear and if company finds suitable material and organize suitable external
manpower with reasonable price there will be no surprise affecting cost seriously. The company should
make an applicable plan for maintenance, conduct it fully and establish a full control, the cost will be
reduced.

Repair requirements rise in case of malfunction of equipment which is mainly due to lack of
maintenance. Although it is not fully approved, many maritime management experts assume that the
cost of the maintenance (Cm) causes square of Cm(𝐶𝑚2 ) value of repair and missing opportunities
cost. The age of the ships is a critical factor which increases the probability of incidents.

Procurement is made for supplying for all types of expenditure for ship and company. The procurement
policy and the stores and supplies budget play a significant role in the expenses of the company. The
stores and supplies budget and account has the potential to be one or the more irksome aspects of ship
management. This is to do with the large number of transactions that it is capable of generating but,
allied to this; many of these purchases – on an individual basis – may be of relatively little cost. The
other key consideration is the manner in which these are purchased (i.e. the process adopted by the
managers, including the degree of autonomy delegated to the vessel) and the locations around the
world where deliveries to the vessel are affected. Clearly, it is vital that a cost-effective store, supplies
and inventory policy is established and operated. The ‘art’ is to see that this process is not ‘over
managed’.

That is, it is vital that an owner or manager does not fall into the trap of ‘knowing the price of
everything, but the value of nothing’. This is not to suggest that price is unimportant – but buyers have
to be aware of the potential of substitution of inferior products, reliability of delivery, etc. It is unlikely
that a 5% saving on a stores and supplies order will seem to be a bargain if late delivery means the
vessel is delayed for a day – or the vessel has to sail without its order (Drewry, 2006).

The purchase and procurement is a complex subject and requires a systematic approach to fulfil the
requirements. The fundamental of procurement is related to the following issues;
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 - The purchase staff should be well experienced and qualified
- The company staff and ship crew should be capable of providing exact information for purchase
staff
- There should be a reliable system to monitor supply follow ensuring that the right thing is
arrived to right place in right time as well as correct invoice and payment
- Geography plays a critical role on the price
- The actual product mix is highly diverse
- Purchase staff deals with a wide range of suppliers.
- Purchase requires a selection to meet both quality and price
- Supplier reliability is important for an uninterrupted supply flow

Traditionally, the picture of the ship stores and supplies market held by most has been one focused
solely on the negotiations and transactions between the ship owner or manager (as the marine
purchaser) and some category of ship supplier. Hence, purchasing has tended to become an ‘exclusive’
niche within the shipping company set up. However, this picture is changing. Purchasing becomes
‘less isolated’ as it moves within the wider considerations of procurement. Purchasing is self-
explanatory. Procurement, naturally, is about acquiring items needed by the vessel but it brings other
‘management’ and ‘analytical’ aspects beyond the pure purchasing process into the equation.

4. DISCUSSION

A study made by Fraunhofer CML and GL (Germanischer Lloyd) (2013), covering 100 shipping
company on the “best management of ship management showed that the followings are assumed as
the core tasks of ship managers by shipping companies;

- Technical management
- Quality and safety management
- Crewing
- Financial management
- Procurement

The financial management is an essential to survive and it is mainly dependent to the initial credit
agreements. Technical management including Crewing and Quality & Safety management is an
inevitable function to continue commercial operations and the cost of all this functions are
approximately fix exempt some minor changes. The only area which manager can make arrangements
related to the cost is procurement

In the Fraunhofer study it is also defined that “procurement of spares, supplies and services” is another
elementary task of every ship manager to keep the vessel ready to sail. He does that on the account of
the owner. Although low operational costs are a key differentiator for ship managers, there is no
immediate effect of good purchasing in their pockets. This might be a reason why this function often
gets less attention compared to Technical Management. However, the budgets {assigned for
procurement} handled are still significant with a steady trend to rise. Tighter regulations and new
international maritime conventions on safety, manning and the environment will continue to exert
pressure on budgets post-2013.

With the emerging changes in world patterns of manufacturing—with much of it now being relocated
to so-called low cost countries, of which China is perhaps the premier example—the issue of trading
also becoming even more important. To develop trading capabilities to be able to make long or short
positions when it comes to “procurement and supply” is becoming increasingly vital (Lorange, 2005).

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All these studies prove that means procurement will be rather important in the future and should be
carefully investigated for the survivability of the companies.

In a study on cost optimization “Services and Operations” of the shipping companies is analysed at a
second level as shown in the Figure 4. One of the core processes of the product (Door to Door and
Port to Port) is namely “Sea Voyage and Berthing”. The ship management is also analysed at a second
level in the Figure 5. This is a very important entity for the availability of the fleet vessels and hence
for the schedule keeping of a line (Lyridis et al, 2005).

Port arrangements

Sea Voyage &

Berthing

Bill of lading
handling

Bunkers purchasing

Service performance
follow-up

Figure 4: The Services and Operations of the Shipping Company

Technical
Management

Purchasing

Crewing

Insurance and
Claims

Figure 5: Ship Management Operations

If we examine the impact of successful commercial strategy and how it can deliver lower costs through
effective procurement, primarily the managers should;

 Understand the role strategic procurement plays in an effective commercial operation

 Find the balance between cost, quality and innovation in procurement
 Examine total costs and the opportunity costs in relation to pricing strategies
 Apply project management techniques to procurement and commercial projects
 Evaluate and mitigate the risks in commercial strategy
 Build your understanding of the tendering and bid processes from both buyers and sellers
perspective
 Realise how an effective negotiation strategy can achieve commercial success
 Discover the benefits of effective contract management

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Actually main parts of procurement is related to the maintenance and repair cost. To make a full
coverage study the regression analysis should be made between procurement and maintenance and
repair costs. But the maintenance and repair costs are variables pending upon the type, ages, operation
hours of the ship, maintenance policy of the company, quality of repair etc. So it is very difficult to
make a regression analysis between these factors. Such a regression analysis may be conducted for a
specific company but not for general survey. Another issue preventing such an analysis is the non-
transparent structure of the shipping business and this hampers the collection of essential data for
analysis.

4.1. Fuzzy Logic Application

This study is supported with a Fuzzy Logic Application supported with an expert team. Fuzzy logic
provides a method for representing analog processes in a digital framework. Processes that are
implemented through fuzzy logic are often not easily separated into discrete segments and may be
difficult to model with conventional mathematical or rule-based paradigms that require hard
boundaries or decisions, i.e., binary logic where elements are a member of a given set or they are not.
Consequently, fuzzy logic is valuable where the boundaries between sets of values are not sharply
defined or there is partial occurrence of an event (Klein, 2004).

A group of 6 doctorate students (1 ship master and 1 chief engineer working in the shipping companies,
1 ship master and 1 chief engineer working as maritime lecturer, in maritime transportation engineering
programme and a civil engineer who wants to work offshore structures) made a research study under
the supervision of a lecturer holding PhD on the maritime management as a part of their fleet
management course. Detailed information has been delivered the group to understand the main
elements of the cost in the ship management including a discussion period. They have investigated the
main activities affecting the cost reduction in the ship management. Considering main areas affecting
the cost in the ship management, they have decided that these factors are the procurement, maintenance
and repair. The followings are defined as the main areas that will be evaluated:

M= Maintenance
P= Procurement
R= Repair

The group has also evaluated factors which directly affect the success of the procurement, maintenance
and repair. The followings are defined as the factors (criteria) which will be weighted:

A: The experienced and qualified company staff is important to reduce the cost.
B: The well-organized outsourcing is important to reduce the cost
C: The geographic factor is important to reduce the cost.
D: The attitude of the ship crew is important to reduce the cost.

The group has studied on the weight of the each factor for each areas which are important in the cost
reduction. The scale used is between 1 and 5 and 5 is the most important weightiness. The weights of
each criterion for the areas which will be evaluated are defined in the Table 3.

Table 3: Weight of Importance of each factor

Factor A Factor B Factor C Factor D Sum

Importance Level 4 3 2 2 11
Importance Weight 36% 27% 18% 18% 100.0%

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The importance of the each factors for each area (Choice) to be investigated is discussed in the group
and group decision is reflected to Table 4. The scale used is between 0 and 1. The normalized score is
found used the formula below.

Normalized score= ½ (1-Sum/Total Sum)

Table 4: Normalized Scores based on Range

Criteria | Alternatives Choice M (Maintenance) Choice P (Procurement) Choice R (Repair)
Factor A (Staff) 0.8 0.9 0.8
Factor B (Outsourcing) 0.9 0.6 0.9
Factor C (Geography) 0.3 0.9 0.5
Factor D Ship Crew) 0.4 0.4 0.3
Sum 2.4 2.8 2.5
Normalized Score 29.5% 32% 34.5%

Sum for choices is M=29.5%, P=32% and R: 34.5%.

Having the normalized weight of each factor, now we can multiply the converted score of Table 4 with
the normalized weight and get the new weighted score as show in Table 5.

Table 5: Weighted Scores

Criteria | Alternatives Weight Choice M Choice P Choice R (Repair)

(Maintenance) (Procurement)
Factor A 36% 0.8 0.9 0.8
Factor B 27% 0.9 0.6 0.9
Factor C 18% 0.3 0.9 0.5
Factor D 18% 0.4 0.4 0.3
Sum (Initial) 100.0% 0.180 0.722 0.808

Criteria | Alternatives Weight Choice M Choice P Choice R (Repair)

(Maintenance) (Procurement)
Factor A 36% 0.29 0.32 0.29
Factor B 27% 0.24 0.16 0.24
Factor C 18% 0.05 0.16 0.09
Factor D 18% 0.07 0.07 0.05
Sum 100.0% 0.65 0.71 0.67
NORMALIZED SCORE 32% 35% 33%

Comparing the normalized score of Table 4 and Table 5 we can observed some shift on the choice. In
Table 5, choice R (Repair) is preferable than M (Maintenance) and P (Procurement). However, after
we include the weight of importance of each factor, we conclude that choice P (Procurement) is the
most preferable alternative.

4.2. Organizational Issues

As we progress through the early years of the twenty-first century, the size and the scope of the
shipping companies continue to change. The change is based on the company business plan formulated
by the directors. Archer (2008) draws attention the following factors which is going to be very
important issues in the near future;
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 (a) The IMO codes introduced in the past decade include the ISM, STCW and ISPS codes
which influence the company structure primarily in the marine sectors of the business in particular, the
chain of command between the ship and shore with emphasis on ship management and security.

(b) A further factor is the impact of information technology which continues to become more
sophisticated and quickens the pace of the decision-making process. It extends all parts of the shipping
company organization and in many companies has resulted in layers of management structure -
especially in the middle management range - being eliminated. The application of information
technology has shortened the decision management procedures and resulted in quicker decisions
thereby making the company more competitive.

(c) At the same time the headquarters structure tends to be much smaller with authority
devolved to encourage more accountability of personnel at all management levels. The profit centre
concept has been developed through strong budgeting management techniques. The devolution of
executive authority has involved cross border structures and in so doing yielded tax benefits and lower
wage scales. The development of computerized technology has greatly facilitated this devolution and
change.

(d) The development of third party ship management outsourcing is a growth section
especially in the area of crew, insurance, ship survey and bunker management.

If we make evaluation on the above mentioned facts related to the procurement, the following findings
may be listed;

(a) Improvement in the maritime regulations and respective strict applications will naturally
increase the cost. So, more measures should be taken to optimize the cost.

(b) A significant change in the organization of the companies is expected. In particular more
importance should be devoted to the branches which play crucial role to reduce cost.

(c)The close connection and information between company and ships will be rather important.
This will provide better control of maintenance and repair activities and cost. The close relations of
the company and the ships will also improve the decision making processes.

(d) Application of the third party management is expected to increase. This will require
establishment of a new branch which controls the operations of the third parties in particular cost.

It is not possible to say that all shipping companies are ready to apply or have intention to take measures
on the above mentioned facts. But they will take steps on the requirements mentioned e above to
survive.

Ship management companies fall into two main categories, one being a ship-owning company that
manages its own ships and offers the same services to the other ship owners. The other types are
companies that have no ships of their own and solely provide ship management services to the ship-
owners: Whichever type it is, the function of shipping management is the same and it falls under five
main headings (ICS, 2006);

- Crewing
- Technical
- Storage
- Insurance
- Operations
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The Germanischer Lloyd and Fraunhofer CML (2014) conducted a large scale study involving 100
ship management companies across the globe to find what they are doing to improve their operation
and what they consider as best practices in the industry. The companies have explained that their
biggest challenges of ship management in mid-term future could be stated in the following five areas;
Crewing (88%), Technical Management (62%), Financial Management (%50), Quality and Safety
(%27) and procurement (12%).

The Administrative Process Theory of Henri Fayol is based on economic efficiency and rationality.
Although Fayol’s theory does not cover only the organization issues but also other aspects of the
management, the organization (structure) is the key element to investigate management aspects of a
company (Kocel, 2007). Accordingly, studies on the shipping companies’ should be included in their
organization as well.

A study covering 17 Turkish shipping companies showed that most of the departments are missing in
their organization. The important findings are resumed in Table 1 (Demirel, 2015). The average
number of the staff varies between 10 and 20 and some posts are twin mandate. There is not a
department responsible for Procurement/Purchasing. Mostly one person is deployed as purchase staff
and, procurement and purchase decision is made by upper level management led by technical
management staff (Table 6).

Table 6: Existence of the Management Branch/Departments of the 17 companies

Commercial Department YES NO

Existence of Commercial Department 5 4
Chartering Capability 9 8
FFA Capability 2 15
Outsourced 8 9
Technical Management YES NO
Existence of Technical Management Department 15 2
Operations Branch 16 1
R/M Branch 14 3
New Ship Building 3 14
Crewing 15 2
Administration YES NO
Legal Branch 2 15
Finance Branch 2 15
Budgeting Branch 3 14
Accounting 17 0
Public Relations 3 12
In many companies procurement is conducted by deployment of technical staff as twin mandate such
as procurement which seriously creates negative impact in procurement with may cause many
problems in the operation of the ships and high costs. It is not an effective way of deployment for
critical duties. If possible the unification of some departments is considered as more feasible to solve
this problem.

The impacts of the each management factors on business functions are shown in the Figure 6 (Drewry,
2006). The Sales and Purchase(S/P) is an essential and interlinked function of the company to apply a
strategic plan for surviving in volatile maritime business. Stopford (2008) states that “When an owner

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24-25 October 2016, Bodrum, Muğla, TURKIYE
has finished with a ship, he sells it. Another shipping company buys it at a price at which it believes it
can make a profit”.

Maclachlan (2004) assumes finance, including budgeting, arranging loans and mortgages, sale and
purchase of new vessels as other shipping company functions. A department named S/P in coordination
with Finance Department is required. Lorange (2009) states that it is becoming more and more
important to have a purchase option that might to be executed at the end of a charter- assuming that
owner is willing to grant them. The companies in growing trend needs to establish such departments
soon. Actually S/P is a part of the procurement activities and requires additional competencies as well
as main qualification needs for procurement staff such as contract management, feasibility analysis,
legal issues etc.

Management and Administration Overview

Figure 6: The impacts of the each management factors on business functions.

The lack of sufficient finance may hamper all purchasing activities. The success of the purchasing is
closely related to the finance, budgeting and accounting. The close relationship should be established
between these departments and Purchasing department for better planning and conducting acquisition
activities.

As a nature of the maritime business, shipping companies operates worldwide. This situation also
requires planning and conducting acquisition and procurement activities in the global scale. So, the
procurement activities in the shipping sector should not be considered in the local supply chain but in
the international supply network. Detailed information on global markets will play a critical role for
decision making process.

5. CONCLUSION

The nature of the maritime business is a volatile and generally not a transparent. The success of a
company is dependent upon correct decisions to provide smooth operation of the organization and also
the “luck” factor. As a result of this study it is understood that income /profit of a shipping company
is variable in the shipping business which generally operates in a “diseconomies of scale” system. That
makes the companies to be very keen on the cost reduction.

It is evident that all institutions should adopt new business management techniques and practices to
survive in a challenging economic system. As a result of this study it is understood that “procurement”
plays a key role to reduce or optimize the cost for shipping companies. To achieve that (effective
procurement job), companies should adopt the contemporary business and management practices
taking into account the real requirements of today.
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The followings are suggested for the companies to improve their procurement systems;

a. A strong procurement department manned with competent staff is required.

b. In many companies procurement is conducted by deployment of technical personnel as twin

mandate which seriously creates negative impact in procurement with may cause many problems in
the operation of the ships and high costs. This is not an effective way of deployment for such critical
duties. The procurement department should be established and equipped with competent staff and
tools.

c. The success of the procurement relies on the following factors;

 The accurate technical and financial information to fully meet the requirements,
 Close information exchange between procurement and respective technical staff
including crew on board,
 Competent procurement staff qualified in contract management.

d. The Ship Sales and Purchase(S/P) is an essential function of the company to apply a strategic
plan for surviving in volatile maritime business. A new department named S/P in coordination with
finance department is required.

e. Finance, Budgeting and Accounting are closely related to Purchasing. The close relationship
should be established between these departments and Purchasing for better planning and conducting
acquisition activities.

f. As a nature of the maritime business, shipping companies operate worldwide. This situation
also requires global acquisition and procurement activities. So, the procurement activities in the
shipping sector should not be considered in the local supply chain but in the international supply
network.

Finally, the success of procurement plays a critical role for survival of shipping business. All
companies operating in this sector should carefully review and revise their procurement operations
taking required actions in particular in the organization and staffing.

REFERENCES

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[2] Demirel, E., 2015, “A study on the organization and management systems of Turkish shipping
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[3] Drewry, 2006, “Ship Management”, Drewry Shipping Consultants Ltd., London p. 1, 11, 54

[4] Fraunhofer CML and GL, (2014), “Best Practice Ship Management Study 2013”, GL Maritime Software
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[5] ICS (Institute of Chartered Shipbrokers), 2006, “Introduction to Shipping”, Whitherby Co Ltd., London p.
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[6] Kapetanis G. N., Psaraftis H.N., Fyrvik T., Ventikos N., Anaxagorou P., Uthaug E., Lyridis D.V., 2005,
“Optimizing shipping company operations using business process modelling”, Maritime Policy &
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The Second Global Conference on Innovation in Marine Technology and the Future of Maritime Transportation,
24-25 October 2016, Bodrum, Muğla, TURKIYE
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[8] Kocel T., 2007, “Business Management (Isletme Yoneticiligi)”, Arian Basim Yayin Ltd, Istanbul ISBN
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[9] Lorange F., 2005, “Shipping Company Strategies”, Global Management under Turbulent Conditions
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[10] Lorange P., 2009, “Shipping Strategy-Innovation for Success”, University Press, Cambridge
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[11] Maclachan M., 2004, “The Shipmaster’s Busıness Companıon”, O’Sullivan Printing Corporation,
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[12] Stopford M., 2009, “Maritime Economics”, 3rd Edition, Routledge, New York ISBN 0-203-89174-0 p. 31,
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