How to optimize your OPEX

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Charter rates continue to disappoint in many segments. Ship managers are encouraged to scrutinize their operating expenses (OPEX) without compromising operational and asset performance.

Pressures on ship managers are increasing. Charter rates dropped sharply when the crisis began and have been at low levels for quite some time. Many new charter contracts closed during the past two to three years barely cover the operating expenses. Maintenance of a significant number of vessels has been reduced or delayed, but this is hardly a sustainable strategy to weather a longer crisis. More serious efforts must be taken. The challenge lies in the need to keep up a vessels operating (and safety) performance and condition while driving down the costs.

Performance expectations need to be clarified

It is an economic commonplace that maximizing performance and minimizing costs are irreconcilable opposites. Hence, expectations need to be clarified between the owner and the manager of a vessel. Performance or service levels need to be defined and costs minimized within these boundaries. Interestingly, ship management contracts typically fail to do that. The Baltic and International Maritime Councils (BIMCO) industry standard SHIPMAN 2009 covers administrative and legal issues inthe main body and crewing as well as budgeting in its annexes, but the subject of vessel performance is never touched. That amounts to a clear disadvantage for ship managers who want to play the quality card.

As a general rule, performance levels should be made part of ship management contracts. Operational performance is of paramount importance for the charterer and impacts the vessels position on the charter market. Asset-related performance is important for the owner and the financing bank, which typically uses the vessel as collateral.

Operational KPIs relate to off-hire, port state control, incident/accident statistics and occasionally, additional, more peripheral industry standards such as Oil Companies International Marine Forums (OCIMF) Tanker Management Self Assessment (TMSA) level (and vetting performance) or selected InterManager key performance indicators (KPIs). Asset-related KPIs likewise account for port state control performance, TMSA and occasionally, conditions of class imposed during regular inspections and specialized condition surveys. Pre-deined performance levels can be included in ship management contracts in a variety of ways. Performance-related fees can establish the desired level of commitment.

All cost positions should be challenged

Even ship managers who want to play the quality card need to address every single cost position to minimize costs within the defined performance level. For a ship manager, OPEX monitoring and benchmarking are the first steps towards achieving cost savings. Internal benchmarking (over time, across sister vessels, across comparable vesselclasses etc.) requires consistent cost categorization and solid analytics. Some shipping companies have the necessary IT infrastructure to support analytics. Those who do not suffer the consequences of insufficient itemization, poor data quality and system breaks. External benchmarking is even more challenging. Comparisons need to be made like for like (same performance level, similar vessel age, etc.) using the same basic categorization. Shipping companies often struggle even with reports from commonly used providers. Some new benchmarking initiatives with participating companies voluntarily opening their books to an independent third party are beginning to ill this gap. Following internal and external benchmarking of all cost items, a number of initiatives can be taken to enable OPEX reductions.

Dr Jan-Henrik Hübner

Global Head of Shipping Advisory, DNV GL – Maritime

Above text is a short version of the original article which has been initially published at DNV GL Magazine ”Maritime Impact Issue 01-15” and it is reproduced here with author’s kind permission