Ship management (KLSM) is a ship management company located in Singapore and involved in the technical management of a fleet of 30 container and tanker ships. It is a fully owned subsidiary company of K Line in Japan and all the ships managed by KLSM are owned by its parent company in Japan. Technical management activities include provision on crew members to man the ships, implementing and malntalnlng safety and quality management systems on board the vessels, maintaining safe and satisfactory vessel operations and maintenance of hull nd machinery on board the ship.
The company is involved in procurement and supply management of various goods and services including stores, spare parts, bunkers, food and beverage, manpower etc. One of the major functions of the company Is the maintenance of hull and machinery of vessels under Its management, Technical superintendents are responsible for the maintenance matters on board their controlled ships whilst managers are responsible for formulating and overseeing policy making and implementation. A major part of maintenance involves the supply of stores and spare parts to the vessel.
Each ship is fitted on board with a large number of complex equipments and machinery manufactured by hundreds of different makers and thus spare parts lists for all the equipment and machinery on board, runs into hundreds of pages. With the life of a ship being 20-30 years, several of these equipments/parts become obsolete and even OEM’s close shop during such course. Procuring spares and delivering these on board ships (in good time) that are trading worldwide thus becomes a great challenge for the technical department and in turn for the company.
Presently the responslblllty of procuring spare parts for each vessel Iles with the echnical superintendent In charge of the vessel. An admin lady assists him in this work. The technical superintendent, who is responsible for the smooth running of the vessel and its machinery, spends a majority of his time in such procurement and supply issues. It might be a good idea to outsource this function to another department or to another organization altogether.
This would free up the technical superintendents time to work on more critical operational and technical issues where his expertise might be better utlllzed and also perhaps make the procurement and upply management more efficient and organized. The decision to make or buy could be critical and various factors must be considered. Transaction Cost Economics is a central theory in Strategy. It addresses questions about why firms exist, how firms define their boundaries, and how they must govern operations. Transaction cost economics suggests that the costs and difficulties production) and sometimes markets as an economic governance structure.
An intermediate mechanism, called hybrid or relational, between these two extremes has recently emerged as a new governance structure. Coase (1937) defined the term transaction costs by asking two fundamental questions: “Why is there any organization? ” and “Why isn’t all production carried out by one big firm? ” Reason is that there are transaction costs that determine what is done in the market, with price as the regulating mechanism, and what is done inside the firm, with bureaucracy as the regulator.
Within this framework, all transactions carry a cost, either as an external market transaction cost or an internal bureaucratic transaction cost. The limit to the size of the firm is reached when the costs of rganizing additional transactions within the firm exceed the costs of carrying out the same transactions through the market (Coase 1993). The most important market transaction costs are the cost of determining the price of a product or service, the cost of negotiating and creating the contract, and the cost of information failure.
Williamson (1975, 1985) extended the argument by noting that two behavioral assumptions are critical. First, individuals in an organization are boundedly rational. Meaning individuals in an organization have the ability to make rational decisions ased on the limited knowledge they possess. This limitation makes it impossible to structure perfect contracts, and any contract will be incomplete even if all information is available. Second, individuals behave opportunistically. This means that they will act in self interest with guile. Organizing the vertical chain is an important part of business strategy.
Deciding which parts of the vertical chain must be produced in-house and which parts must be out-sourced, is an important strategic decision defined by the vertical boundaries of the firm. This decision is simply called the “make or buy’ decision. The company must compare the benefits and costs of in-house production versus using the market. Traditionally such procurement and supply function has been carried out by technical superintendents so they will always be fully aware of the maintenance requirements and status of spare parts and repair.
Completely outsourcing the function to another organization could result in the loss of control and loss of critical business contacts in the marketplace. Also then, reliance on a third party for such procurement and supply could be detrimental to the performance of the vessel in ase of non performance or poor performance which might be realized only after the problem occurs. Perhaps a better way to manage the sourcing and supply of spare parts on board ships would be to invest in an integrated software solution linking planned maintenance systems, spare part requisitions and approved vendor database worldwide, to optimize supply management.
The procurement and supply part of the can work closely with the technical department or be a subset of the technical department itself. As the maintenance system will be linked to the spare part equisition and supply system, the technical superintendent retains overview and control on this aspect at all times whilst being able to focus on his primary responsibilities. All planned maintenance is scheduled into the system and spare parts required to perform each maintenance item will also be part of the database.
Standard inventory of parts must always be maintained and a requisition for supply of these will be automatically generated for the superintendent’s approval as and when a planned maintenance Job is recorded on board the vessel system as complete. The age of the internet and speed of communication between ship and shore as well as amongst parties ashore has changed drastically. Automated information interchange and highly intelligible databases have made online purchasing and inventory maintenance very easy and efficient.
Vendor approval and management could be an integrated part of the software solution and any requirement of spare parts supply would come with a recommended approved vendor list which could be targeted for action. A variety of sourcing strategies could then be used for procurement of spares onsidering the technical complexity, lead time necessary, logistical issues etc. To help in formulation of appropriate sourcing and competitive strategies, KralJic (1983) developed a simple positioning matrix based on these factors.
This model could be applied by the purchasing department for procuring different spare parts with different levels of complexity in terms of source, logistics, coat, lead time etc. Pareto’s 80/20 rule may be applied to classify spares into A, B and C class items and determine strategic positioning and risk. Environmental and ethical issues are of growing concern as regulators continue to ighten the already stringent regulations for garbage disposal at sea. All supplies that come on board the vessel packaged substantially and this eventually generates waste on board.
A conscious effort needs to be made to push suppliers to use more eco friendly and bio degradable packaging and to have the vessel return all unwanted packaging back to the supplier for safe and eco friendly disposal ashore rather than disposal at sea or incineration. Instructions must be sent to all Vendor management and approvals must include vetting for compliance with standards like ISO 14001 etc. Another important supply management area for the company is bunkers. Fuel oil, diesel oil and lube oils supplied on board vessels are referred to as bunkers and more commonly the work bunkers denotes fuel oil.
Challenges faced here are mainly to do with availability, pricing and quality of bunkers stemmed. Since bunkers are supplied worldwide, optimal ports are identified for good quality and reasonably priced procurement. Several vendors are used at various ports worldwide and price negotiations are tough with little guarantee of quality at several of these. Bunker for vessel management and could be integrated with same. Such bunker supply modules help in optimizing bunker stems and also include capability of having an approved vendor database.
Hedging against bunker price volatility is another tool that must be considered as the price of fuel oil in the recent times has shown extreme volatility in the short term. Experts must be employed to carry out this function in house or alternatively hedge incorporated supply contracts must be negotiated with standard supplier groups who have the capability to supply bunkers t most major and frequent bunkering ports around the world. Such activity would effectively reduce the risk of exposure to extreme price fluctuations. Besides supply management of goods, the company also faces challenges in the supply management of services.
All ships need to be manned with a suitable regulated complement of officers and crew members. These crew members are contracted for a certain period and proper rotation of staff upon completion of contracts poses a logistical challenge. The supply of manpower to each vessel involves a rostering and planning process which becomes highly complex due to a arge gamut of regulatory requirements on competency, standards and other facets. The crew manning department struggles to have the right people on board the right vessel at the right time and there is a constant struggle with retention rates as well.
Resumes of all crew members are manually updated and maintained and the rostering as well is performed manually. An electronic system or module to cover this function will be extremely significant in increasing the departments efficiency and eventually benefit the overall organization as retention rates increase and crew erformance is enhanced. The strategic supply wheel (Cousins, 2006) suggests that it is imperative to maintain an alignment of corporate and supply policies. There seems to be good alignment of policies within KLSM and as a small company with less than 50 staff, this is relatively easy to implement.
With acute cost focus without compromise on quality of critical items, the strategy is uniform and understood by all involved. Overall KLSM deals with several unique supply chain management challenges because of the nature of the company’s functions and ships trading worldwide. An overall efficient supply management strategy implemented at all levels would become almost imperative for successful achievement of the company’s goals which is primarily safe, efficient and cost effective maintenance of the ships and their operations.
A comprehensive software solution to replace a lot of the traditional manual work in relation to supply management will certainly help optimize outcome, considerably improve cost efficiency and mitigate risk inherent in the manual system. Careful selection from available range of software in the marketplace will need to be one and suitable packages compared before making the important decision of which product to use.
Training of all staff involved with operations both on board ships and ashore will then become necessary to fully exploit the software’s capabilities and achieve desired results.