Business challenges for the Torvald Klaveness Group in the information age

1
Business challenges for the Torvald Klaveness
Group in the information age
Nils Arne Bakke, Director projects TKG Maritime
Logistics Professor Technology Management, NTNU

• NTNU,
• Trondheim 03.04.2003

2
Content

• (1) The Torvald Klaveness Group
• (2) The Dry bulk Challenge Logistic
  rationalisation through industry shipping or
  commodity shipping
• (3) Challenges within The Maritime Services and
  implications for IT-solutions
• (4) Challenges within The Maritime Logistic
  division and implications for IT-solutions

3
(1)The Torvald Klaveness Group

• A brief overview

4
The TKG group 2002 Organisation Chart
5
Key figures of The Torvald Klaveness Group 2001

• Financial highlights
• Revenue 600 mill. USD
• Operating profit 36 mill. USD
• (TKG Maritime Logistics Revenue ca. 180 Mill.
  USD, operating profit ca. 20 mill. USD
• TKG Maritime Services ca. 350 Mill. USD
  Operating profitca 5 mill. USD)

• Shipping acitivities
• Cargo carried 54,161 mill.tons
• Average daily operated vessels 100 (today ca.
  140)
• Owned or partly owned vessels 24
• TKG Maritime services the worlds largest operator
  of Panmax vessels, and large commercial
  operations within the handymax and handysize
  segments
• TKG Maritime logistics with strong presence in
  the iron-ore, alumina/caustic and coal industries

6
TKG Maritime logistics Vision and business
mission
Vision
Making a difference to the industries we operate
in
Business mission

• Maritime Logistics focuses on changing industries
  by improving their logistics efficiency
• Efficiency is achieved through standardization of
  technology and systems, and consolidation of
  volume, capacity and information
• We share the gains with our customers and partners

7
Infrastrukturen / IT fundamentet
8
2. The Dry bulk challengeLogistic
rationalisation through industrial shipping
and/or commercial pools ?

• Understanding the business logic within different
  industries vessel segments and deriving some
  consequences for business logic and IT-systems

9
OVERALL VIEW The space for competitive advantage
based on special vessels technology niche
solutions is shrinking

• Standardization
• Technology (vessels, harbors, terminals, handling
  technology interchangeable units liquid
  markets)
• Contracts business procedures (based on 19th
  century british standards)
• Information systems (content protocols, open
  standards)
• Consolidation
• Consolidation of capacity (vessels, harbors,
  terminals)
• Consolidation of cargo (3PLs, shared
  infrastructure for operational logistics)
• Consolidation of information (market places,
  3PLs)
• Global information networks with timely high
  quality information
• Gloabal real-time knowledge about available
  cargoes capacity units ( closer to perfect
  markets)
• Synchronisation integratrion of supply chains
• Vessels sizes lot-sizes needs to be harmonised
  with the rest of the supply chain
• Focus specialisation
• Specialization within the value chain
  (concentration on core competencies)
• Outsourcing of non-core business
• Alliances strategic partnerships within
  logistic chains
• Our attitude We want to utilize and promote
  trends as opposed to enter backwards into the
  future
• In the future relativly more value will be added
  by means of information handling and coordination
  development of concepts then through ownership
  of vessels

10
Key drivers influencing Klaveness long term
IT-strategy needs

• Long term ownership to std. vessels not
  profitable
• Easy to buy services related to both technical
  commercial mng.
• Capital not a bottleneck
• Competitiveness superior performance requires
  superior skills competencies (from asset based
  to competency based business model)
• Liquid standardised, global markets for std.
  Maritime transportation services open
  information networks require ability to
  continously collect, process convert large
  amounts of data to produce decision relevant
  information optimal decisions (Maritime
  Services Division)
• Industry focus on core competencies
  accelerating outsourcing to 3PL providers
  requires the Maritime Logistic division to
  develop capabilites of modelling controlling
  larger supply chains. This presupposes IT-systems
  capable of collecting processing decision
  relevant information to make optimised
  decisions balancing complex supply chains
• The role of information changes fundamentally
• - Previously utilising imperfect distribution
  availability of information to own advandage
• - Today taking advantage of the global
  availability of information by establishing
  superior ability to process, analyse information
  to make faster and better decisions than the
  competitors

11
Segmentation of shipping along the variables
standardisation of capacity, global information
availability and market liquidity
Commodity shipping market making, asset play
hedging through pools
Degree of standardisation of capacity global
info. availability
Industry shipping logistic rationalisation
Information Exhange through Market places
brokers
Information Exchange B2B
Degree of Market liquidity
Transloaders (20 ???)
Handymax (1140)
Cape (586)
Cement carriers (480)
Panmax (1080)
Handysize (2800)
12
Industry shipping Logistic rationalisation
improves suppliers margin and reduces customer
cost
Revenue/cost
Profit margin
Revenue per t. (CoA) share high
Cost of operation per t.

• Cargo pooling
• Scheduling
• Vessel technology
• Load discharge technology
• Harbour turnaround
• Multi modal chain optimization

Time
Rationalisation strategies
13
Key success factors of industry shipping

• Target industries do not have access to
  standardised, logisticly efficient and
  market-liquid logistic services. Reliable and
  cost-efficient logistics are business critical,
  but not core business.
• Logistic chains charachterised by unique
  combinations of constraints that must be
  overcome/circumvented to achieve logistic
  efficiency (prod. capacities, inventories,
  harbour restrictions, load discharge
  technologies, etc.)
• Supplier must have in depth understanding of the
  business logic and business processes of the
  target industries
• Technological and operational skills essential
  core competencies (e.g. Scheduling, load
  discharge systems, harbour operations, vessel
  technology, operational stability
  predictability etc.)
• A mix of long term contracts essential to, 1)
  Vindicate investments in non-liquid assets, 2) To
  achieve combinations of cargo that takes down
  total cost
• IT-systems integrating the supply chain (
  information about all capacity units all
  processes in the supply chain available for a
  central planning coordination unit typically
  a 3PL or a dominating actor in the chain)

14
Commodity Shipping Profit for pools through
market making, asset play hedge strategies
(Cape, panmax, handymax)
Revenue for std. vessels
Cost of std. vessels
Rationalisation strategies from a capacity pool
perspective

• Market influence
• Spot optimizing
• Hedging through FFA/CoA
• Asset play
• Cost optimising through volume

Rationalisation strategies from a cargo pool
perspective
15
Martime Logistics challengesKey success factors
for commercial pools

• Globally accepted institutions information
  systems to establish a global, real-time market
  enabling the use of derivates (papers, e.g. FFAs
  similar)
• Standardised vessels with equal predictable
  performance
• Scope of logistic rationalisation limited
• Availability of standard products for ship mng.
  commercial mng.
• Liquid market (critical of similar vessels
  critical of buyers of freight global open
  information networks)
• Owners of vessels without resources/interest to
  maintain own commercial operation
• Volatile market making pools attractive for
  risk mng. purposes
• Offering of flexible and individual hedging
  strategies, with individual risk profiles.
• Capability of outperforming spot indexes
• Capability to make CoAs FFAs effective hedging
  instruments for ship-owner (High liquidity makes
  cargo based strategies less attractive for
  ship-owner)
• Market influencing opportunities through
  controlling critical of vessels
• Buying power through volume (bunkers, purchasing
  agreements, port cost, etc.)
• Transaction cost reduced through volume
  (efficient systems routines)
• Pool manager to achieve profitability at fee of
  2-3 or lower adm. efficiency

16
TKG Maritime logistics involved in both industry
commodity shipping Maritime Services only in
commodity shipping
TKG minimize cost for customer improve own
margin through logistic rationalisation
Industry customer
TKG chooses mix of tools based on what gives most
efficient logistic chain
TKG Maritime logistics
Commodity Shipping Counterpart to std. vessel
owners (e.g.pools)
Industry-shipping TKG ownership to Assets incl.
Landbased installations
17
Commodity shipping vs. industry shipping
challenges

• Commodity shipping challenges
• Requires high volumes and administrative
  efficiency
• Requires homogenous, liquid market of sufficient
  size
• With low liquidity and low volatility hedging
  products less applicable
• Liquidity presupposes standardised vessel
  technology vessels must be interchangeable for
  the cargo volumes considered
• Liquidity presupposes real-time global
  information systems creating a meeting
  marketplace for cargo-owners ship-owners
• The creation of a paper market (derivates) for
  dry-bulk freight services requires reliable
  (trusted) institutions information systems to
  establish reliable market rates

• Industry shipping challenges
• High CoA share makes operational efficiency key
  to margins (50 of time in harbours today).
• Players without integrated commercial
  operational mangement long term capital basis
  have disadvantages
• Right combination of cargoes essential for
  logistic efficiency
• SCM information systems key to achieve
  operational excellence
• The uniqueness of the combinations of trades,
  cargoes, harbour-restrictions etc. makes
  taylor-made solutions superior to standardised
• High investments in non-liquid assets systems
  long term contracts essential

18
3. Klaveness Maritime Services business
challenges implications for IT-systems

• From traditional commercial shipping to optimised
  scheduling optimised spot management and
  portifolio management

19
TC rates the Panmax segment USD/day (source
Baltic exchange) Benchmark for pool manager
20
Long term decline of CoA contracts increase of
spot contracts for transportation needs satisfied
by standard vessels (example steam coal source
BHP Billington)
21
IT-systems requirements adapted to handle
spot-optimisation paper-based market for dry
bulk transportation services

• Basis for competitiveness a spot pool producing
  consistently better results then benchmark
• Real time knowledge about all relevant cargoes
  all relevant capacity units
• Scheduling software enabling tactical
  optimisation of capacities given available
  cargoes
• Strategic decision making based on
  macro-ecconomic knowledge about world ecconomy
  (e.g. Positioning of fleet in basins regions)
• In addition offerings based on financial
  instruments enabling customers to define
  individual hedge profiles to protect against
  volatility
• Requires understanding of risk-mng.,
  macro-ecconomic industry specific knowledge
  about markets (e.g. Skills from financial
  energy markets)
• Understanding of developments at the capacity
  side (incl. Yard capacities, order-books,
  IMO-rules etc.)
• The fundamental basis required reliable
  institutions reliable information systems to
  set the market
• Trust in institutions and reliability of
  information as precondition for a
  well-functioning market

22
Institutional framework for construction of
market rates for standardvessels in dry
vet-bulk segments (real-time trusted information)
23
Effektivisering
500 /d målsettingen
Mer perfekt prising i fremtiden gjør det
vanskelig å slå Benchmark vesentlig

• 500 /d har høyere risiko enn først antatt
• Kan vi long-term outperforme et perfekt
  marked?

/dag over BPI
500
?
100
Tid
2003
2004
2005
2006
2007
2008
24
Hvor ligger 500/d bidragene?
Hovedbidragene for å nå dette målet kommer fra
følgende fokusområder i Spot poolen

• 1.       Stordrift operasjonell
  effektivitet (kostnader) 10 (15?)
• 2.       Geografisk posisjonering basseng 20
• 3.       Durasjon positiv negativ
  lagging 15
• 4.       Arbitrage 15
• 5.       Kortsiktige posisjoner (T/C, CoAs) 25
  (20?)
• 6.       Markedsmakt merkenavn 10
• 7.       Utnytte gapet mellom FFA fysiske
  instr. 5

25
High anticiapated growth in the the dry bulk FFA
market
26
New derivates related pool-products from
Klaveness Maritime Services
Spot pool
Mngd. hedge
Fixed
Floor
Collar
27
Baumarine Spot pool Example product sheet

• Obtain a margin on top of the spot market.
• Participate in the volatility of the spot market.
• Reduce positional, operational and credit related
  risks.
• Outsource daily chartering and operation of
  vessels.
• As a basis for combining with Baumarine hedging
  tools.

Why use it

• Vessel is traded in the spot pool.
• The pool optimizes the short term freight market
  risk.
• You earn a share of the pools total income.
• Your share is calculated according to vessel
  characteristics.

How it works

• Full advantage of increases in the spot market.
• First Class Counterpart curtails credit risk.
• Baumarines size and pooling system reduces
  operational risk.
• Active positioning geographically and timewise
  ensures earnings that are comparable to the BPI
  Average 4 tc routes.
• Saved time and cost in the daily running of your
  fleet.

Reward

• Exposure to low spot markets.

Risk
Example

• Vessel trades spot together with the rest of the
  pool.

Settlement

• Pool result paid semi-monthly in arrears.
• Counterpart Baumarine AS

28
4. The Maritime Logistic DivisionKey challenges
business challenges implications for IT-systems

• Logistic provider with end-customer control or
  supplier to 3PLs?

29
Transportation providers face numerous challenges
that will continue to increase competitive
intensity and change the rules of the game
Globalization of networks

• Logistics leaders have expanded their services
  globally, acquiring capabilities where it is
  slower or harder to build them
• With most players rooted in Europe or the U.S.,
  geographic expansion has included a focus on Asia
  previously highly fragmented, and untapped by
  the major global players

Consolidation of services
Increased outsourcing of logistics services

• Service providers are expanding their offerings
  across all or several logistics domains
• Companies offer one-stop shopping solutions to
  their customers, and are gaining synergies from
  their network of complementary services

• Companies outsource larger components of their
  annual logistics budgets to 3PLs
• The outsourcing of purchasing and IT functions is
  an area which has generated interest and may be
  growth areas in the future

3PL and Freight Forwarder Industries
Customer preference for dealing with fewer
logistics providers

• Customers are utilizing fewer service providers
  for their logistics needs, placing 3PLs in a
  strong market position.
• Among customers who already outsource logistics
  to 3PLs, there has been a growing trend to move
  to one service provider to handle all of a
  companys needs

30
Traditionally, shipping companies have been asset
based providers. Now they are challenged by
system-based providers.
Customer relationship
Market
Asset based provider
Customer
System based provider
Scenario 1
Scenario 2
Customer relationship
Supplier

• Asset based provider develops system based
  capabilities or cooperates with system based
  provider
• Asset based provider maintains customer
  relationship

• System based provider takes over customer
  relationship
• Asset based provider operates as supplier to
  system based provider

31
Trends on the capacity side the lack of
logistic perspective on investments in dry-cargo
vessels

• Optimisiation of individual voyages vs. supply
  chain optimisation

32
The Development of the world fleet of bulk
carriers
33
Vessel technology as a means not an end in
itself
34
Supply chain modelling to determine optimal
vessel size as opposed to vessel size as only
parameter

• To benchmark and evaluate logistic efficiency we
  need more than seatransport cost. It makes sense
  to use the approach from current logistics
  trends, which is to focus on the total cost of
  the supply chain. Then its easy to see that it
  does not make sense to use a Panamax vessel if
  the yearly requirement is covered by 2 voyages
  per year. Main parameters in a simplified model,
  which we are using to calculate total supply
  cost, are
• The annual volumes required
• The FOB value of the product (High FOB value
  gives a significant cost impact if the product
  stay in stock for many additional weeks with the
  use of a Panamax vessel as compared to a
  Handysize vessel)
• The seatransport cost
• As Bulk shipping is based on combination of
  cargoes and that the best vessel size on one
  transport leg will not necessarily be best on the
  next one, supports using a heuristic rule that a
  vessel will be competitive as long as its cost
  does not exceed 20 on the most competitive on
  that transport leg.
•  

35
When is Handysize the most ecconomical solution?
E.g. Alumina
36
Offering integrated logistics solutions requires
several new services to be developed. Competitive
solutions have to be based on superior
understanding of industry and customers
IT-capabilties
Scale in development,
partly existing, existing
37
The challenges of bulk shipping in a logistic
perspective IT skills essential!

• How to keep and develop the relationships with
  the end-customers (cargo owners)
• Standardisation of ships and liquid markets
  making ownership of std. vessels non-profitable
  in the long term
• Changing focus from beeing an asset provider to
  become a systems and competence-based provider.
  Ownership only to strategic assets (either
  vessels or land based installations)
• The bulk-dilemma Larger ships and lots as
  opposed to logistic needs for higher frequency,
  smaller lots and synchronised supply chains
• The cultural challenge of changing pespective
  from seeing vessels as an end in itself towards
  looking at vessels as means change from
  technology focus to customer focus
• The need for combined industrial shipping skills
  commodity shipping skills
• Ability to establish develop information
  systems for coordinating optimising complex
  supply chains in challenging operational contexts
• Ability to use sophisticated IT-based modelling
  tools for business development, marketing sales
  (Sales as a consultative endeavour)