2020: Time for Shipping Companies to Consider a New Fuel Procurement Strategy

Spoiler Alert: It Must Include Outsourcing and Technology

Image Credit: Pixabay / Ship & Bunker

Carnival Corporation's FY'16 report, "Sustainability: From Ship to Shore" is a must-read. The colorful 126 page report, available on the company's website, complete with graphics, charts, tables, and pictures lays out an extraordinary overview of Carnival's "governance, stakeholder engagement, environmental, labor, human rights, society, product responsibility, economic and other sustainability-related issues and performance indicators."  

By coincidence, at around the same time Carnival published this report, the Cruise Industry News Quarterly Magazine (Summer 2017) offered a cover profile of Julia M. Brown, Chief Procurement Officer for Carnival Corp & plc. In her role, Brown oversees strategic sourcing and supplier relationship management with the company's nine brands, responsible for "$9 billion in annual operating expenses, including more than $1 billion on food products." This figure also take account the fleet's fuel consumption, which, as per Carnival's FY'16 10K, was just over 3.2 million metric tons, equating to $915 million (down from $1.25 billion the previous year). 

According to Brown, "about 35 to 40 percent of all supplies are sourced globally, 35 percent regionally and the balance locally." Carnival has "more than 33,000 suppliers globally, but spends less than $100,000 on 28,000 of these…the tail base of the supplier base is incredibly long." Brown challenges vendors to better understand Carnival's business, professing to have "suppliers that don't realize Carnival has 10 brands" and who need to appreciate the "logistical challenge of supplying a cruise ship that has to be loaded and unloaded in an eight-hour period."

The focus for Brown is on "total value," the metrics of which, are measured in "quality and service and value [that] includes innovation," a strategy that helps Carnival "maintain a competitive advantage." More important, Brown looks to distinguish between "cost and price" using a "bottoms up modeling, of what the product actually costs, how price is affected by demand, specifications and so on." Understanding the "difference between cost and price, allows Carnival to negotiate on the basis of data rather than just wanting a lower price."

And herein lies the differentiator. Total value is about more than just the best price of the day; it is an understanding of how value is created, according to Brown, by "buying better and getting better quality and service which is as important as streamlining the complexity of what we manage and create more strategic partnerships that will give us competitive advantages over time" (emphasis mine).

For obvious reasons, procurement for cruise ships is more complex than it is for commercial ships. But, just as cruise ship operators face procurement challenges, so too do commercial ship operators when it comes to fuel, the highest voyage line item cost of a ship's P&L. Fuel, a variable cost over which shipping companies have little or no control, represents the largest exposure requiring a proficiency that most lack in-house.

Certain shipping companies, especially the larger ones, are better at understanding this exposure, most however just seek the best price of the day. To overcome this shortfall, almost all rely on traders who, through their global networks, provide rapid access to information on pricing, quality, and availability. Less than a handful offer strategic insight, quality control, and risk management. The unregulated infrastructure of the marine fuels market has made the need for traders essential. Unfortunately, there are too many traders and only a few deliver true value in what is an ongoing stagnant market where sustained low prices have kept marginal traders in the mix.

In line with Brown's 'data vs. best price' approach, if the procurement function were to capture all  relevant data on supply availability, cost structures, financial risk, operational risks, service and quality metrics, it would better position itself to obtain the right price. In so doing, forecasting and strategic planning would become more reactive to unforeseen events for which root causes could more accurately be identified and analyzed. Data collection and advanced analytics hold the key for all future improvements in procurement performance.

Collecting data also improves process, efficiency, adherence, control, performance, and reporting. Automating benchmarks across entities, including arbitrage analyses, management costs by ship, segment, commodity, port, county, and region and tapping into external data sources and time-series data all the way to counterparty solvency data is critically important (especially true in the wake of OW and many of the second and third tier traders operating today). Last but not least, converging data to forecasts, budgets, P&L, and performance targets will achieve the holy grail of procurement, the kind of multi-tier visibility that companies can only dream of today.

Digital Procurement

In the marine fuel space, the question is still open as to which of the up and coming "digital procurement" software vendors will deliver the right platform. Maritime software providers Veson, Globaris, and Dataloy to name a few, offer very basic bunker modules in their ERP platforms, designed to support different business units. A number of small scale software vendors like Inatech, Brightoil Online, ClearLynx, Danaos, Firm Counter, and as we saw recently, Bunker-Ex and OilFront, offer a variety of platforms. All have, and will continue, to endure growing pains due to a perceived lack of neutrality, market pushback, and concerns about security and data breach. Fair or not, they all need to focus on overcoming these misconceptions.

Someone is going to get this right. And when they do, procurement managers be better positioned to understand the difference between "price and cost," which as Brown notes, is "knowing what a fuel should cost when produced at maximum efficiency and effectiveness" and provides a competitive advantage.

The risk that shipping companies face with exposure to the oil market is too high to just ignore. Putting off technology solutions designed to capture data along the value chain is no longer an option. Procurement managers and suppliers need to collaborate through a network that enables better end-to-end cost optimization, faster interaction times, and broader access to external innovations.

Will this automate the procurement manager's job? No. What it will do is allow for more thorough analysis and scrutiny, creating more impact the value of which will be the domain of capable talent. As Steve Jobs said way back in 1994: "It's not a faith in technology…what's important is that you have a faith in people…and if you give them tools, they'll do wonderful things with them."

Prediction: Despite the sound and fury of so many prognosticators as to what fuels will be available, where, and at what comparative price levels come 2020, the fact is, no one knows. The only certainty is that the fuel procurement process will become far more complicated. So much in fact, that…ready for it? Shipping companies will consider ways to outsource this function, and in so doing, focus all their resources on their core business: managing ships and the logistics of transporting goods and services (and vacationers!), in an environment of extraordinary and unending growth of trade.

The beneficiaries of this new model will be the top global, financially sound trading companies who are able to identify, assess, prioritize and mitigate risk. Combined with a strong technology platform they will be in the best position to streamline 2020's oncoming supply chain complexities. Shipping companies will seek out strategic partnerships with these traders to give them the competitive advantage they need.

None of this will happen without technology. Someone is going to get this right, and with 2020 looming, to that someone shall belong the spoils.