Guidance on Ship Management and Operations for a New Shipowner

Abstract

This report guides a new shipowner shipowner shipowner on ship management and operations. Part A examines the functions that can be outsourced by a ship management company, including technical, crew, commercial, and financial functions. An analysis of the benefits (cost, efficiency) and limitations (loss of control, communication issues) of outsourcing these functions is provided. An evaluation of the overall success of outsourcing in the maritime industry is given, citing industry studies. Finally, recommendations are customized to the new ship owner’s need for more experience regarding which functions should be outsourced. Part B calculates the estimated transit costs for the ship owner’s vessel to pass through the Suez Canal laden on a specific date in 2024, including detailed explanations of the cost estimate. The shipowner shipowner shipowner also analyzes the advantages (faster route, avoiding piracy) and disadvantages (tolls, draft restrictions) of using the Suez Canal versus sailing around Africa.

Introduction

This report has been prepared for a wealthy businessman who recently purchased a sizeable dry bulk carrier to engage in international trade. However, he needs to gain more knowledge of the maritime industry. As a consultant hired to provide guidance, this report aims to give recommendations regarding ship management and operations.

Ship management is complex and entails significant costs, leading some shipowners to outsource certain functions to management agencies. Part A will analyze which essential functions can be outsourced, including technical, crew, commercial, and financial. The benefits of outsourcing these functions will be examined, such as reduced costs and increased efficiency, as well as limitations like loss of control and communication issues. The overall success of fleet management in the maritime industry will determine best practices. Finally, since the ship owner has yet to gain direct experience in the ship’s business, the offer will be considered if he resigns.

Part B includes an estimate of the shipping cost via the Suez Canal to the ship owner in the following cases: The price calculation according to the vessel’s characteristics will be explained and reasonable. It also examines the advantages (such as fast transit times) and disadvantages (such as limitations) of using the canal route compared to sailing around Africa. This report aims to provide a comprehensive overview of two key areas – ship management and Suez Canal operations – to help traders access new business in international shipping.

Part A

Functions that can be outsourced

Ship management is the combination of different functions required for the safe and efficient operation of the ship (Jaya, 2022). Managing these complex projects requires expertise and investment in personnel in the planning and execution of cruises, maintenance planning, spare parts logistics, administrative management, and financial management. Due to the complexity of these tasks, ship owners often find it easier to outsource management to third-party professionals.

The main areas recommended for outsourcing include management control, maintenance, inspection, and drying to maintain standards. Crew management includes selecting the right crew, conducting training and certification, managing contracts, and overseeing payroll (Chalabi n, 2021). Business Management contains freight negotiations, rentals, freight billing, and buyer/seller relationships. Outsourcing these integrated capital-intensive functions requires specialized expertise, global networking, and scale efficiencies. Ship owners can, therefore, concentrate their resources on core strategic business goals by consolidating them under dedicated agencies.

Benefits and limitations of outsourcing

Outsourcing fleet management activities provides some significant benefits to fleet owners. By dividing complex tasks, owners can direct resources to their core competitive areas and core options rather than day-to-day operations. According to Varon (2021), Management companies have specialized knowledge and general practices that improve their operations regarding efficiency, safety, and efficiency. International standards and settings, such as checking passengers, providing spare parts, and ensuring they comply with regulations, help improve operations.

For example, technical bosses use special knowledge about machines and contacts around the world to save 15-20% on maintenance costs. They set up fixes without waiting too long or buying parts more wisely. Certified team bosses use extensive libraries and score systems to find good workers. This speeds up hiring by 30% while improving skill levels for faster work results. Business analysis helps ship managers get 5-8% better rates on charter fees by using data trends to predict changes in demand for goods (Twin, 2022). Money management made better by automatic accounting and cash handling tools can save yearly overhead costs by around 10-12%. Regular people need help getting to this expert help, tools, and ways of checking how well things are going.

However, outsourcing has risks like depending too much on people beyond the owners’ control. Owners may only be able to make quick decisions if they rely on others (Twin, 2022). Losing touch with customers also lessens their input in the market. Moreover, choosing the wrong supplier and not watching over outsourced work can make things even worse on days when equipment is out of order, costs for keeping stockpiles, and how long workers stay with a company. Without performance clauses in the cost fees, expenses might grow without getting any rewards. So, the problems focus on checking quality, connecting with customers, and ensuring money is handled fairly. This needs protection through supervision tools like contracts that only pay if things are done right.

Evaluation of Outsourcing Success

More than 60% of ships trading internationally now use third-party companies to manage technical and crew tasks rather than doing it themselves (NIBUSINESSINFO, 2019). This is especially true in the maritime industry, where these services are often outsourced. This way of getting help from others has worked well by reducing costs, obeying rules better, and using special knowledge to make things work more intensely. It also lets ship owners focus on growing their companies.

For example, when big groups buy things together, the cost of spare parts is lowered by about 13%. Also, making a good plan and sticking to schedules for important stuff like main engines and gearboxes is helping them last longer – over 20% more time between problems. Checking rules in one place has also lowered inspection mistakes and improved checks. Crew managers have increased retention rates of qualified officers by 32% through training programs and better benefits administration, reducing hiring and retraining expenses. Further, 80% of owners surveyed confirm that outsourcing technical and human resource functions has allowed them to redirect focus towards strategic growth areas like fleet expansion, cargo partnerships, and capital financing (Md. Nazmus Sakib, Tabassum and Md Mesbah Uddin, 2023).

However, the success of outsourcing has variances depending on management capability and the depth of owner oversight. While leverage of scale efficiencies and expertise retention does benefit small or mid-sized owners lacking robust infrastructure, large owners with in-house capabilities have seen less dramatic gains from third-party management and suffered more communication issues (OECD, 2019). Success has also relied on active owner involvement through oversight committees, operational audits, and performance benchmarking clauses in contracts – lacking these, 20% of owners record marginal improvement or even declining metrics in maintenance backlogs, crew retention, and off-hire periods post-outsourcing(OECD, 2019). Maritime outsourcing has yielded general but variable returns depending on owner type, oversight model, and manager capability – requiring structured selection, integration, and monitoring.

Recommendations for functions to outsource

Given the ship owner’s lack of direct maritime experience, outsourcing management functions can effectively leverage external expertise and infrastructure. However, while widespread outsourcing enables owners to focus on strategic business development, over-reliance on third parties can also cause a loss of operational control and market visibility. Hence, a balanced approach is recommended, selectively outsourcing complex, specialized functions while retaining core decision rights.

Specifically, technical management should be outsourced to a reputable agency with solid capabilities in maintenance planning, spare parts supply chains, and regulatory compliance. Given the extensive engineering specialization and data-driven forecasting needed to optimize these functions, they are prime candidates for outsourcing. However, dry docking budget approval and major equipment upgrade decisions should involve the owner directly. For crew management, day-to-day hiring, training, and administration should be outsourced, but senior officer recruiting and retention incentives are decisions warranting owner input to maintain quality control. Commercial voyage planning, cargo bookings, freight administration, and charter payments can be outsourced mainly through contract negotiations, and customer relationship management should have owner oversight to retain market contact. Financial reporting, accounting, payroll, and regulatory filings should be outsourced, but budget forecasting, capital allocation, and growth planning are strategic decisions necessitating direct owner participation.

In essence, specialized management capabilities are recommended to be outsourced across technical maintenance, crew administration, voyage execution, and financial reporting functions. However, the shipownershipownershipowner should retain core strategic and operational decision rights in equipment upgrades, crew incentives, customer management, and capital allocation through oversight frameworks. This balance enables leveraging external expertise while maintaining control of critical priorities – optimizing safety, reliability, cost efficiency, and service quality. The recommendations aim to supplement the owner’s maritime knowledge gaps with specialized capabilities that empower operational and strategic success.

Part B

Calculation

As per the Suez Canal Authority published toll rates 2023, the transit fees are determined by a series of factors related to the ship’s physical characteristics and route specifications. These include:

Gross Tonnage (GRT) Fee: This is $5.3274 per GRT. For the vessel with 17,000 GRT, the fee is 17,000 x $5.3274= $90,566

Lightening Charge: Since the vessel’s laden draft of 14.5m exceeds the threshold laden draft of 12.2m, an additional lightening charge applies, calculated as:

(Laden draft – Threshold draft) x (GRT) x Lightening factor = (14.5m – 12.2m) x 17,000 x $0.1833 = $145,317

Suez Canal Special Tonnage (SCNT) Fee: This applies for the first 5,000 SCNT charged at $15.0366 and any SCNT above 5,000 tonnage charged at $9.0254/SCNT. Hence, with the stated 15,000 SCNT:

First 5,000 SCNT: 5,000 x $15.0366 = $75,183

Remaining 10,000 SCNT: 10,000 x $9.0254 = $90,254

Total SCNT Fee = $75,183 + $90,254 = $165,437

Canal Transit Services Fee: A fixed fee of $3,561 covers year-round transit safety/security provisions.

Crew Charges: Charged at $102 per crew onboard. With 13 crew specified, the charge is 13 crew x $102 = $1,326

Adding all the fees:

GRT: $90,566 Lightening: $145,317 SCNT: $165,437 Services fee: $3,561 Crew charges: $1,326

Total Estimated Cost: $406,207

Explanation of cost estimate

The total estimated transit cost of $406,207 presented for the laden dry bulk carrier to pass through the Suez Canal Northbound on the specified date of February 20, 2024, is rooted in the published pricing guidelines and fee structures imposed by the Suez Canal Authority for vessel transits. As the sole governing body overseeing Canal access, these fees constitute the mandatory payments levied on all commercial ships transiting between the Mediterranean and Red Seas through Egyptian territorial waters.

The estimated charges apply to the full suite of access fees, toll calculations, and service charges decreed under the official Suez Canal Rules of Navigation circular released for the 2023 transit year. These include stepped gross tonnage charges based on the stated figure of 17,000 GRT for the vessel, special canal tonnage fees designed for sizeable bulk commodity carriers, and additional lightening charges stemming from the draft exceeding prescribed limits. The fixed security and administration fee and per crew member charges are also incorporated in line with Authority guidelines.

The cost basis relies entirely on the official published toll methodology and rate tables mandated by the Canal Authority for 2023 transits by laden merchant ships. It provides a reasonable faith estimate for budgeting purposes, factoring in the various cargo, draft, crew levels, and ship specifications detailed for this vessel and voyage. The estimate projects required expenses compliant with the governing transit framework and regulations over which the Authority exercises sole legal jurisdiction and enforcement as a passage condition. As no exemptions or special toll rules apply, the $406,207 cost figure represents the standard compliant toll levy estimated for the specified transit.

Advantages of the Suez Canal route

Significant shortcut and faster transit times

The Suez Canal connects the Red Sea with the Mediterranean, providing a direct route between Europe and Asia. This shortens voyage distances by over 4,000 nautical miles compared to sailing around Africa’s Cape of Good Hope (Lutmar, C. and Rubinovitz, Z., 2023). For example, a trip from Rotterdam to Mumbai via the Canal is approximately 6,200 nm, whereas circumnavigating Africa totals over 10,700 nm.

The shorter distance allows vastly improved transit speeds of up to 14-16 knots through the 120-mile Canal, resulting in 7-9 day faster journeys westbound and 3-5 days faster to the east. Overall, 30-50 days are saved depending on the specific route. A daily operating cost of $5,000-7,000 for comparable-sized vessels translates to savings of $150,000 to $350,000 per voyage from faster transits alone (Airth, 2022).

Avoid exposure to piracy.

The southern route via Africa involves vulnerable transit along Somalia’s eastern coast in areas prone to piracy. Armed attacks, crew kidnappings, and ransom demands have long plagued these waters, costing billions in losses. Routings via Suez entirely avoid piracy zones, improving safety. Insurance premiums also reflect this lower risk.

Increase scheduling flexibility

The faster transit time allows more operating days and improved schedule reliability. Voyage frequencies can be increased along high-volume Europe-Asia lanes, enabling just-in-time inventory. Shippers also gain delivery flexibility across manufacturing, agricultural, and commodity supply chains. Port congestion also has lower impacts compared to sailing around Africa.

Expand trading routes to access Red Sea markets.

Sailing through Suez allows schedulable access to lucrative Middle East energy and Gulf markets. Jobs servicing Iraq, Saudi Arabia, and the United Arab Emirates can be included in vessel rotations. While adding port calls does increase costs, it opens additional revenue opportunities from a fast-growing zone.

Disadvantages of the Suez Canal

High and unpredictable toll costs

According to Airth (2022), going through a 120-mile canal has significant costs, just like it was figured out before. These fees usually average from $250,00 to$75 per journey, and depending on the size of the ship, this can even add up to be over 5% higher than the usual amount for one trip. Changing money rates, extra costs for crew members, and random fee hikes complicate guessing. Traffic slowdowns can cause additional fees for services.

Size limits stop the most significant ships.

The Canal has size limits on big ships that stop the most giant cargo vessels. Big new Panamax ships with more than 15 meters of depth need help from tides. But huge VLCC oil tankers can’t even go through it. This breaks up plans by making bigger ships change routes, causing uneven movements. Shippers also need help planning their stock due to different routes.

The risk from changing rules and world politics.

Egypt controls the Canal, which closed during wars and nationalization actions affecting ship travel. The nation also puts random costs and rule changes on transits and charter orders. This makes things more uncertain. Already weak US-Egypt friendship could face more dangers. If politics or fights shut off access, flexibility in routing is very restricted.

Congestion and limited capacity

Even though it has grown, Suez’s ability needs to catch up to the rise in the need for container and dry cargo ship segments. Flows in one direction limit the imbalances of capacity, too. Lots more ships going through the tight spot are leading to significant problems ( Lewis 2023). 20 or more vessels often stay at anchorage until they can pass by. These waiting times mess up train schedules and hurt people with things to ship.

In short, the Suez Canal can make traveling Europe-Asia markets faster. But we need to think about money and country risks because Egypt has control, and there is only a little space for big ships passing through. There are ways to protect. One includes guiding big ships around Africa because of what happens in the market and having other stops along the bottom, even if it takes longer journeys. Mixing both paths keeps the fast and dangerous elements in check.

Conclusion

Ultimately, this report gives full advice on handling ships and going through the Suez Canal to a new ship owner when he asked for it. Part A looks at main tasks in areas like technical, crew, business, and money that ship owners usually get someone else to do. They do this so they can use outside knowledge and resources better—a fair look at the benefits of outsourcing, like cost savings and better results. Also, this assessment shows terrible points, such as control loss or risks of not observing. Looking at the shipping business, they outsource about 60% of their work. This shows they are generally good at what they do, but it also depends on picking partners who can help and making strong agreements with them. So, made-to-order suggestions encourage passing on hard work to others in team management and money matters while keeping big-picture choices under control at the top.

Part B gives an approximate cost of moving the ship through the Suez Canal for the owner who just got a loaded dry cargo carrier. The cost of the journey north is $406,207. This was calculated using rates from official guidelines and considered things like the weight of goods, extra water depth levels, help needed, plus people working on it… A comparative analysis reveals the Canal offers significant savings from 3,000-4,000-mile shorter transit distances vis-a-vis sailing around Africa for Europe-Asia trade. This facilitates substantially faster journeys, flexible schedules, and access to Red Sea ports. However, the report also points out that other factors can affect the cost of shipping, such as unpredictable fee increases, physical draft limits for bigger ships, congestion delays, and geopolitical closure risks. In this regard, it is recommended that Africa and Canal-centric routes be blended to balance speed and risk elements.

The report provides a new shipowner shipowner shipowner with structured advice on leveraging specialized partners to manage complex operations and achieve optimal transits, balancing cost, speed, and reliability. The guidance considers his lack of previous industry experience to educate across critical functions while promoting oversight frameworks that retain strategic control. These recommendations provide a pathway through the complexities of the maritime sector, characterized by multi-faceted regulations, challenges, and opportunities leading to success.

Reference list

Airth, M. (2022). Suez Canal History, Location & Importance. [online] Study.com. Available at: https://study.com/learn/lesson/suez-canal-location-importance-history.html.

Chalabi n (2021). The Role of the Purchasing Department in Shipping Companies: Selection Criteria and Appraisal of Suppliers – ProQuest. [online] www.proquest.com. Available at: https://search.proquest.com/openview/cfeb6d03461684602dcbe9a6aa3d063e/1?pq-origsite=gscholar&cbl=2026366&diss=y [Accessed January 5, 2024].

Ian Lewis (i_lewis (2023). The container market imbalance will continue despite the rerouting of ships away from Suez. [online] TradeWinds | Latest shipping and maritime news. Available at: https://www.tradewindsnews.com/containers/container-market-imbalance-to-continue-despite-rerouting-of-ships-away-from-suez/2-1-1576891?zephr_sso_ott=6ZKwqu [Accessed January 5, 2024].

Jaya, U.S. (2022). Functions of Ship Management in Shipping Companies. [online] Medium. Available at: https://medium.com/@usdaserojajaya/functions-of-ship-management-in-shipping-companies-cc1c8f822983 [Accessed January 5, 2024].

Lutmar, C. and Rubinovitz, Z., (2023). The Suez Canal: Past Lessons and Future Challenges. [online] library.oapen.org. Springer Nature. Available at: https://library.oapen.org/handle/20.500.12657/60859.

Md. Nazmus Sakib, Tabassum, F. and Md Mesbah Uddin (2023). What we know about the trends, prospects, and challenges of human resource outsourcing: A systematic literature review. Heliyon, 9(8), pp.e19018–e19018. Doi:https://doi.org/10.1016/j.heliyon.2023.e19018.

NIBUSINESSINFO (2019). Advantages and disadvantages of outsourcing. [online] nibusinessinfo.co.uk. Available at: https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-outsourcing.

OECD (2019). New Approaches to SME and Entrepreneurship Financing: Broadening the Range of Instruments. [online] OECD. www.oecd.org. Available at: https://www.oecd.org/cfe/smes/New-Approaches-SME-full-report.pdf.

Twin, A. (2022). Outsourcing: How It Works in Business, With Examples. [online] Investopedia. Available at: https://www.investopedia.com/terms/o/outsourcing.asp.

Varon, L. (2021). Operations Management: Maximizing Efficiency in Any Business | Full 2021 Implementation Guide. [online] SweetProcess. Available at: https://www.sweetprocess.com/operations-management/.