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Fueling Profits Through Automated Bunker Procurement

Introduction

The shipping industry has been facing dramatic changes in recent years. While demand for transportation services remains strong, the deregulated marketplace is forcing individual companies to compete harder for existing and new customers. Fuel purchase represents 50%-60% of a ship's operating costs and hence even a small saving in procurement would greatly impact the company's financial performance. Increasing overheads and declining margins are forcing shipping companies to re-look at their procurement strategies. What can shipping companies do to reduce overall costs in this high volume low margin business?

Intense competition, high price volatility, and fast changing opportunities are some of the challenges before a shipping company today. Geopolitical tensions and environmental regulations make the sourcing of fuel more complex. Business cycles are becoming shorter and therefore all players in the procurement cycle have to be quick to respond to market forces and continually anticipate change.

In such a dynamic environment the best way for companies to achieve a reduction in spiraling overall costs is by reduced transaction cost. This is possible through an efficient linkage of people, processes and systems. Shipping companies also need to evolve from a reactive to a more proactive and informed manner of procurement.

This paper describes the process and players involved in bunker procurement and analyze how IT can play a pivotal role in effectively streamlining and making the procurement process more proactive and efficient to create significant cost savings.

Bunker Procurement

Buying 'bunkers' is a very complex business and a demanding task, which requires a deep understanding of the market and an experienced buyer with an ability to adapt and respond to the ever-changing fuel market conditions.

Today typically in a bunker organization traders and analysts work with excel sheets. They need to collect data from various departments like inventory availability on board from the ship captain, prior supplier history from the administrative department, payment details from the finance personnel etc. Getting this information is just the beginning. He has to assimilate all this diverse information and analyze it to make an informed procurement decision. On receiving a bunker request from the operator they contact various suppliers at port, get quotes, negotiate, compare it with existing term contracts and decide on the mode of purchase. This triggers a chain of communication and transactions, between the various external (suppliers, brokers, traders) and internal (operations, accounting) entities in the bunker procurement supply chain.

On successful selection of the supplier the fuel delivery and logistics is scheduled. Based on the ships arrival, the agent at port coordinates with the terminal and barge operators and testing labs.

As is evident, in the manual process the correctness of the procurement decision depends a lot on the individual and less on factual data.

IT and Fuel Procurement

An Automated Bunker Procurement system comprehensively manages the entire purchase cycle from requisition-to-fulfillment. It leads to optimization of business functions across all levels of suppliers, partners & customers through the integration of technology, data and people-centric processes.

By increasing efficiency, eliminating maverick buying and reducing manual workload, these automated systems greatly reduce the cost of procurement. One of the key value add of an automated fuel procurement system is that it enables shipping companies to procure the highest quality of fuel, with a predictable supply at the lowest cost.

Over the past decade IT has seen a gradual shift from providing mere automation to improving efficiencies and adding value by providing real time decision support. This shift is reflected within the bunker procurement industry in terms of tighter integration and connectivity between the various supply chain partners, thereby eliminating process disconnects.

Strategic IT

The synergy of business acumen and smart usage of IT capabilities can greatly help improve a company's bottom line and create a substantial competitive advantage.

• IT enables decision support through dynamic reporting and on demand business analysis (trend and time based) for senior managers. Information on key business drivers like cash flow, profitability, exposure, risks etc, can be automatically made available from the system by sorting the existing data.
• Automation introduces a new paradigm of proactive bunkering which in turn ensures the purchasing company the best price and quality.
• Seamless transfer of information to all decision points ensures transparency and visibility at all levels within the organization.
• Increased productivity, through reduced human error and efficient data handling.

Operational IT

Automate Procurement

• Automate the entire procurement process from inquiry to delivery: The inquiry RFQ Receiving quotes - Negotiation Order confirmation- BDR Voucher Payables / Receivables can be completely automated.
• The system will enable a rule based supplier shortlisting. Based on the specifics of the inquiry for fuel the system will automatically send an RFQ in a predefined template to the preferred suppliers at the port. Rules are set such that information regarding the existing term contracts etc can be pulled up automatically.
• At the time of the inquiry the system automatically compares the spot and the term prices enabling an informed procurement decision
• By linking the business components and providing an automated inquiry to confirmation workflow it allows the traders to choose WHO / WHEN / WHERE to buy the bunker from.
• Checklists & alerts: To ensure that nothing is forgotten due to an oversight, IT systems can provide alerts and checklists which prompt the user at various decision points.

Streamline Processes

• Information maintained and retrieved at the click of a mouse:Various databases can be maintained and correlated. For eg: Database of each ship and route can be maintained. This data can be correlated to the fuel purchase history, claims and vessel characteristics. Demographic details of the suppliers can be stored along with past claims history, default in delivery, communication trails etc. This information can be made available across entities within the organization. IT systems can also restrict the flow of information to specific users.
• Integration with supply chain partners:Providing an integrated workflow and interlinking disparate data providers (market data, labs etc), and departments (Operator, bunker, supplier) and pulling the relevant information at the right time is where technology steps in to add value.
• Communication and connectivity:An automated system ensures quick and efficient communication linking all the players within the supply chain through emails and fax. Technology tools are available to convert emails to fax, and phone and vice versa. Email alerts can also be configured such that they are sent as an SMS to mobile phones.
• Real time risk monitoring:It ensures that traders and senior managers are in one smooth cycle of monitoring and execution in a transparent manner. It provides one central repository of trading and evaluation data deals, corporate strategies and market prices providing consistent and up-to-date information to all traders across the organization.

Quality Management

Off spec fuel quality will affect the ship machinery and lead to claims. It is imperative for the shipping company to track the quality of the delivered fuel. The fuel is sampled during bunkering both from onboard and the barge to avoid disputes incase of claims. All data with reference to the receipt of bunker fuel at ports name of supplier, port of receipt, grade of oil, viscosity, sulphur content etc. has to be stored for historical analysis and for any claims / disputes that may arise.

An automated fuel procurement system handles quality, quantity and demurrage claims. It has the ability to store all the data/ documents (like BDR, test results, delivery instructions etc) and retrieve it easily at a later stage. The system can also keep track of the entire negotiation and communications during the claims cycle. External labs can be integrated into the system such that the lab results are automatically imported and the results compared and analyzed.

Suppliers can be blacklisted for poor quality delivery so that the system automatically raises an alert if the supplier is selected for bunker delivery.

On the resolution of the claim the information automatically flows into the financials and a debit/ credit note for the same can be raised.

Conclusion

Automated Procurement solutions help businesses understand the pricing components and the impact on procurement prices due to fluctuations in ship schedules to achieve hard-dollar cost savings and improve procurement process efficiency, control, and costs.

Automated procurement solutions deliver savings over a manual system, such as reduced prices paid for purchases; effective contact utilization; shortened procurement and fulfillment cycles; reduced administrative costs; and enhanced responsiveness to employees, supply chain partners, and customers. Automation justifies the ROI for a company and the resultant savings more than pays for the cost of the solution.

IT by itself rarely confers a strategic differentiation; a clear understanding of the business, smart usage of technology and a careful adaptation of business practice is what will make a positive impact on the company's bottom line. IT has the potential to provide a cost-effective solution that addresses a shipping company's procurement needs. It will be a tragedy for businesses that continue to miss the opportunities that IT creates.