Department of Science and Technology Institutionen för teknik och naturvetenskap
Examensarbete
LITH-ITN-KTS-EX--06/014--SE
Kostnadskalkylering för en
dörr till dörr transport och en
analys av det möjliga bidraget
från backhaul.
Torbjörn Gustafsson
LITH-ITN-KTS-EX--06/014--SE
Kostnadskalkylering för en
dörr till dörr transport och en
analys av det möjliga bidraget
från backhaul.
Examensarbete utfört i kommunikations-och transportsystem
vid Linköpings Tekniska Högskola, Campus
Norrköping
Torbjörn Gustafsson
Handledare Mats Enqvist
Examinator Thore Hagman
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2006-03-20
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LITH-ITN-KTS-EX--06/014--SE
Kostnadskalkylering för en dörr till dörr transport och en analys av det möjliga bidraget från backhaul.
Torbjörn Gustafsson
This study has been made with the purpose of trying to attain the competitiveness between container carriers and specialised reefers in offering door-door services for perishable cargo. In order to achieve a full scale picture of the investigated cost chains a number of different analyses and calculations have been performed regarding the door-door cost chain.
The results from this study show that there is a margin in most trades between the cost to produce the service, i.e. carrier cost and the shipper cost.
A backhaul cost model has also been constructed in order to find the possible effects which backhaul can play on the total round voyage cost. These results show that all investigated backhaul cargo covers the additional cost for the backhaul operation, hence giving contribution to container and ship
repositioning. However only live cargo shipped in operating 40`RHC can pay the full cost for the round voyage.
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This thesis is the result of 5 months of hard work conducted at LauritzenCoolLogistics situated in Danderyd Sweden. Writing this thesis has involved a lot of activities, amongst them are, model building, travelling, constructing questionnaires and learning the basics about perishable logistics. However most of the work has been to pick the brain and pester those people directly involved in the core business in LCL and NYKLauritzenCool.
I would therefore like to take this opportunity to thank everybody who has contributed to the making of this thesis. This involves all personal at LCL in Danderyd who have support and helped me during the last months. Special thanks goes out to Carolyne Wallmark who played a vital role in making of the backhaul cost study. I would furthermore like to express my gratitude to those regional managers and every one involved from the local LCL offices in the Netherlands, Brazil and Costa Rica.
Representatives from IMA in the UK and the Royal Burger Group in the Netherlands and Belgium also deserve recognition for their contribution. I would also like to thank everybody from NYKLauritzenCool who has been involved for the time and effort they have put into helping me.
Finally I would like to thank my personal coach and host Mats Enqvist, Vice president and head of business development at LCL. Without his patience help and knowledge the making of this study would never have been possible.
This thesis has been made as the final part of my Master of Science in Communications and Transport Systems at Linköping University. Final recognition therefore goes to Thore Hagman who has been examiner and to my opponents Johan Bauer and Johan Johansson. Norrköping, Mars 2006
Summary
This study has been made with the purpose of trying to attain the competitiveness between container carriers and specialised reefers in offering door-door services for perishable cargo. In order to achieve a full scale picture of the investigated cost chains a number of different analyses and calculations have been performed regarding the door-door cost chain. Two key trades where the NLC group is currently operating have been chosen as basis for this comparison. Still, the intention in this study has been to find the general benefits/disadvantages regard the chosen mode of transportation, which can be applicable to any trade using a certain mode.
A model has therefore been constructed based on earlier studies conducted within the NLC group, relevant shipping theory and new information gathered during interviews and questionnaires. This model computes a comparison between the shipper and carrier looking at the total door-door cost. An indication on the competition in the trade is hereby attained. However most importantly is that the comparison generates an overview of the economical conditions in the trade, i.e. are the trades theoretically making money.
The results from this study show that there is a margin in most trades between the cost to produce the service, i.e. carrier cost and the shipper cost. This is only natural however the troubles come from comparing the margins between the container and specialised reefer vessel. These result shows that the container margin in certain trades is almost three times the size of the specialised reefers looking at competing trades. This does not only indicate bigger revenue but also makes for a buffer towards market fluctuations.
Results from the study also show the importance in taking full control of the entire cost chain and not to be governed by strong importers controlling the end of the chain. This is especially true looking at pallets transported under deck where the haulage activity plays a critical scale of balance role, with the possibility of breaking the entire cost chain.
A backhaul cost model has also been constructed in order to find the possible effects which backhaul can play on the total round voyage cost. These results show that all investigated backhaul cargo covers the additional cost for the backhaul operation, hence giving contribution to container and ship repositioning. However only live cargo shipped in operating 40`RHC can pay the full cost for the round voyage.
Looking at the general competitiveness between the different transport modes this study does not produce any final conclusions. A tendency can however be noticed towards container lines under the right circumstances tend to produce the door-door service at a lower cost compared to the specialised reefer.
Table of contest
1 INTRODUCTION 8 1.1 BACKGROUND 8 1.2 DESCRIPTION OF ASSIGNMENT 10 1.3 PURPOSE 10 1.3.1 BREAKING POINT 11 2 SCENARIO DESCRIPTION 12 2.1 CARIBBEAN 12 2.2 BRAZIL 13 2.3 DELIMITATION 15 3 METHOD 16 3.1 METHODOLOGY 16 3.2 RESEARCH 163.3 DATA COLLECTION AND MODEL BUILDING 17
3.3.1 DOCUMENTED DATA - SECONDARY INFORMATION 17
3.3.2 INTERVIEWS - PRIMARY INFORMATION 17
4 COMPANY PRESENTATION 19
4.1 KEY FIGURES 19
4.2 HISTORY 19
4.3 NYKLAURITZENCOOL GROUP 19
4.3.1 12MONTHS SERVICE 19
4.3.2 SAF/NZ,LONDON 20
4.3.3 SOUTH AMERICA,SANTIAGO 20
4.3.4 SOUTH AMERICA SPOT 20
4.3.5 SEASONAL,STOCKHOLM 20
4.3.6 BANANAS,LONDON 20
4.3.7 LAURITZENCOOLLOGISTICS,LCL 20
5 THEORETICAL FRAMEWORK 22
5.1 TRADES 22
5.2 REFRIGERATED CARGO 23
5.3.1 STRUCTURAL IMBALANCE 23
5.3.2 CONSTRUCTIONAL IMBALANCE 23
5.3.3 OPERATIONAL IMBALANCE 24
5.4 SHIP TYPES 24
5.4.1 REFRIGERATED CARGO CARRYING VESSELS 24
5.4.2 CONTAINER SHIPS 24
5.5 STANDARDIZED UNIT HANDLING 24
5.6 FREIGHT CONTAINER 25
5.7 REEFER CONTAINER CONCEPT 26
5.8 CONTROLLED ATMOSPHERE 27
5.9 REEFER COMPARTMENT CONCEPT 28
5.10 INFLUENCE OF LOGISTICS IN THE REEFER INDUSTRY 30
5.11 OPTIMIZING AND MODEL BUILDING 31
5.11.1 MODEL BUILDING 32
6 ECONOMY AND SHIPPING 33
6.1 SHIPPING COSTS 33
6.1.1 FINANCIAL COST 33
6.1.2 DAILY RUNNING COST 34
6.1.3 VOYAGE COST 34 6.2 ECONOMY THEORY 34 6.2.1 BOOK COST 34 6.2.2 CALCULATED COST 34 6.3 ANNUITY 35 6.4 FUEL CONSUMPTION 35
6.4.1 MAIN AND AUXILIARY ENGINE 35
6.4.2 CONTAINER FUEL CONSUMPTION 36
6.5 DATALOY DISTANCE TABLE (DDT) 36
7 MODEL BUILDING 37
7.1 DOOR-DOOR STUDY 37
7.2 BACKHAUL STUDY 38
7.3 VERIFICATION AND VALIDATION 39
7.3.1 SOURCES OF ERROR 40
7.4 THE DOOR TO DOOR SUPPLY CHAIN 40
8 MODEL COST CALCULATION 44
8.1 SHIP CALCULATION 44
8.2 FINANCIAL COST 45
8.2.1 SHIP COST 45
8.2.2 CONTAINER COST 45
8.3 DAILY RUNNING COST 46
8.3.1 TIME CHARTER COST 46
9 MODEL DESCRIPTION 48 9.1 DOOR-FOT 48 9.1.1 COSTA RICA 48 9.1.2 BRAZIL MANGOES 49 9.1.3 BRAZIL MELONS. 49 9.2 HAULAGE 49 9.3 BACKHAUL 50
9.3.1 EMPTY REPOSITIONING –COOLMAN SERVICE 50
9.3.2 BACKHAUL CONTAINERS -COOLMAN SERVICE 51
9.3.3 BACKHAUL CONTAINERS –NYKBRAZILIAN EXPRESS TRADE 51
10 ANALYSIS DOOR-DOOR 52
10.1 SHIPPER COST DOOR-FOT 52
10.1.1 COSTA RICA 52
10.1.2 BRAZIL-MANGOES 53
10.1.3 BRAZIL-MELONS 54
10.1.4 DISCUSSION 55
10.2 SHIPPER VS CARRIER COST DOOR-FOT 55
10.2.1 COSTA RICA –COOLMAN 55
10.2.2 COSTA RICA –NCS 56 10.2.3 BRAZIL –LCMANGOES 57 10.2.4 BRAZIL –BRX 58 10.2.5 BRAZIL –LCMELONS 58 10.2.6 BRAZIL –ECSA 59 10.3 HAULAGE 59
10.3.1 BREAKING POINT –CONTAINER VS REEFER TRUCK 59
10.3.2 CONTAINER BREAKING POINT 59
10.3.3 IMPORTER INFLUENCE 60
10.3.4 DISCUSSION 61
10.3.5 DOOR-DOOR COST 62
10.3.6 DISCUSSION 62 11 ANALYSIS BACKHAUL 63 11.1.1 DISCUSSION 66 11.2 BRX–LCL OWN EQUIPMENT 67 11.3 SHIP COMPARISON 68 11.4 SENSITIVITY 70 12 SUMMARY – CONCLUSION 73
13 REFERENCES 76
13.1 INTERVIEWS:VERBAL AND MAIL 76
14 GLOSSARY 78
15 APPENDIX A SHIP CALCULATION 81
16 APPENDIX B RESULTS 89
Tables and figures
Figure 2.1 NCS service map (Hapag Loyd, 2005) ... 12
Figure 2.2 Map north east Brazil Copyright (c) 1996 - 2004 (Microsoft Corp, 2006)... 13
Figure 2.3 BRX Service map (NYK, 2005) ... 14
Figure 2.4 ECSA service map (Hamburg Süd, 2005)... 15
Figure 4.1 NYKLauritzenCool organization chart (NYKLC, 2005a) ... 21
Figure 5.1 Split between container and reefer exports on main fruit trades (Sandström, 2005)... 22
Figure 5.2 Cross section of a reefer container visualizing the air flow (GDV, 2006)... 27
Figure 5.3 Implementation of a grating solution inside a specialised reefer compartment (Mohlin, 2005). ... 28
Figure 5.4 General layout of a reefer compartment inside a specialised reefer vessel. (Mohlin, 2005) ... 29
Figure 5.5 Closing of areas where air escapes in a reefer compartment Vs reefer container (Mohlin, 2005)... 30
Figure 5.6 Building an optimizing model (Lundgren et al, 2001)... 32
Figure 7.1 Overview of the total door-door reefer cost chain. ... 41
Figure 10.1 Door-FOT shipper cost comparison, Caribbean... 53
Figure 10.2 Door-FOT shipper cost comparison, Brazilian Mangoes... 54
Figure 10.3 Door-FOT shipper cost comparison, Brazilian Melons... 54
Figure 10.4 Door-FOT shipper VS Carrier cost comparison, Caribbean... 56
Figure 10.5 Door-FOT shipper VS Carrier cost comparison, Brazilian mangoes... 57
Figure 10.6 Door-FOT shipper Vs Carrier cost comparison, Brazilian melons ... 58
Figure 11.1 Turn around time for containers in Sheerness... 63
Figure 11.2 Difference in turn around time between containers used for backhaul and empty repositioning. ... 64
Table 11.1 Summary of breaking points and cost for backhaul and empty repositioning... 65
Table 11.2 Cost for loading cars ... 65
Table 11.3 Cost for using dry containers in the Coolman service during 2004 ... 66
Table 11.4 Possible revenue from backhaul using different transport modes (CONVA/VO AGENCIES, 2005) ... 66
Table 11.5 Total cost for backhaul in the NYK Brazilian express trade (Zdolsek, 2005) ... 67
Figure 11.3 Total round voyage cost for investigated ships ... 68
Table 11.7 Analysis regarding load factors to compete with Coolman FCC ... 69
Figure 11.4 Sensitivity analyzes regards the ships investigated in the door-door cost study... 70
Appendix A
Table A.1 Round voyage cost calculation container ships ... 81Table A.2 Round voyage cost calculation reefer ships ... 84
Table A.3 Round voyage cost calculation ship comparison... 86
Appendix B
Table B.1 Door-FOT cost chain Caribbean ... 89Table B.2 Door-FOT cost chain Brazil, Mangoes ... 90
Table B.3 Door-FOT cost chain Brazil, Melons... 91
Table B.4 Summary Door-FOT cost chain ... 92
Table B.5 Haulage cost ... 93
Table B.6 Door-door cost calculation for an average commodity ... 96
Table B.7 Revenue from assorted backhaul commodities ... 98
Figure B.1 Caribbean Door-door shipper cost ... 99
Figure B.2 Brazilian mangoes Door-door shipper cost... 100
Figure B.3 Brazilian melons Door-door shipper cost ... 101
Figure B.4 Caribbean Door-door carrier cost... 102
Figure B.5 Brazilian mangoes Door-door carrier cost ... 103
1 Introduction
1.1 Background
The history of reefer shipping dates back to the early days of tramp shipping. A ship used for tramp shipping is by Fayle (1933) described as “the ship which can be hired as a
whole, by the voyage or the month, to load such cargo and to carry it between ports as the charterer may require”. This means that the main focus from the specialized reefer
shipping industry has always been on the port to port transport. Since then much has changed and the shipping industry worldwide has evolved and are now focusing on the whole supply chain from the door to door. This evolvement has much to do with the growing trend of containerization occurring throughout the shipping industry. (Drewry, 2003)
Containing about 1300 refrigerated cargo carrying vessels referred to as reefers and 1% of the market shares, the transportation of reefer cargo can be seen as a small and highly specialised niche in the shipping industry. The entire reefer fleet is estimated to carry about 7,8 dwt (dead weight ton) and a loading capacity of 345 million cubic feet. (Sjöfartens Bok, 2005)
The reefer industry is much characterized by the large fluctuations in seasonal demand. This means that there is an imbalance in shipping volumes between what is offered and needed. Therefore freight rates can rise as high as 100% in peak season. (Sopisco News, 2005) And when market drops there is high competition to fill the ships and the freight rates are lowered considerably.
Traditionally the reefer business has been controlled by a few major actors on the market; among them the newly formed NYKLauritzenCool later referred to as NLC. Since the introduction of the modern container by Malcolm Mclean in 1956 the shipping industry has been trough quite a revolution.
As an outcome of the ongoing containerization developing throughout the shipping industry the specialised reefer industry has also started to change. This is because the industry has lost market shares to the container lines and competition has hardened throughout the market. Enqvist, (2002) and Drewry, (2003) have listed a number of key competitive advantages which have contributed to this.
• Economy of scale, the size of container ships has grown dramatically during the last decade. Ships that early were considered large, about 3500 TEU is now considered small in comparison to the biggest ships built today1. These ships are
often equipped with about 15-20% reefer slot capacity. This hypothetically means that a modern container ship can carry about 2000 TEU of reefer cargo2.
• Building cost for both ships and reefer containers has drastically reduced due to a relocation of production to low cost areas like China.
• Deregulation of the statutory boards, the “single desk system”. The boards earlier controlled much of the export in early British colonies like New Zealand, Australia and India. The boards could by being the only exporter combine large volumes for high utilization of chartered ships. However during the last 20 years the board system has nearly been completely abolished. It is clear that this has had a big effect on the market. With the elimination of the board system the market has opened up and competition has hardened as farmers now mainly deals directly with the retail chains and supply chain managers.
• During the last decade big retail chains has also grown in importance and has started to dominate the receiving markets. These costumers are not interesting in making chartering commitments hence a move to a more liner based service. • Cargo balance; containers enable a two way flow of cargo, which has proven
difficult with, specialised reefer ships. Container ships usually carry cargo both to and from destination. This is more cost effective since both journeys add to the net profit. The early tradition in reefer shipping has been to only carry cargo on the front leg and seldom carry any backhaul3. Some of this has changed in time while companies have invested in newer and better ships with container facilitating backhaul.
• The container also holds an advantage when offering intermodal door to door transport from producer to receiver since it is easier to transship.
The main advantage when offering a door to door solution is that the costumers have a service provider taking full responsibility for the entire chain. Big retail chains, which are the normal costumers only cares about getting the right product, at the right time, to the right place, to the right cost. What happens in between is not interesting as long as it works. Since the shipping industry in general is quiet complex with different tariffs, taxes and regulations most costumers would prefer one cost for the whole service.
This is especially the case for smaller exporter which traditionally has been uninteresting for the specialised reefer sector. This is because they can not offer enough cargo to fill the
2 This is only hypothetical since container ships are equipped with more reefer slots than necessary. The
reason is to make the stowage planning more flexible and also because it is much cheaper to equip the ship with reefer slots when the ship is built than to add slots later. (Drewry shipping, 2003)
3 Backhaul is the return movement from original destination to the port of origin. This in the specialised
reefer sector is the empty leg going from originating port to a fruit port often located in the southern hemisphere.
ships. Consequently much of this cargo has been transported in reefer containers often at a higher cost compared to reefers however including a total door to door solution.
This new concept has attracted the attention from traditional shipping companies and many have started working on their own solution. One good example of this is LaruitzenCoolLogistics which is a subsidiary company working on logistic solutions in the NLC group. One of their main goals since starting in 2001 has been to find these smaller growers and exporters and make tailor maid solutions which fit their needs. This has also lead to a change in service in the reefer industry going from a time charter focus to a more linear based. This has been described as awakening call from the ideas the shipping is both the start and the end of the transport chain. Nowadays shipping companies has started to realize that they are in fact, a service provider. (Drewry, 2003)
1.2 Description of assignment
As an outcome of the ongoing shift in focus occurring throughout the specialised reefer industry the NLC group has requested a study made comparing the competitiveness in offering a door to door service between a specialised reefer and a container ship. The information required to complete this can be split up into two separate studies.
The first one is to compare a modern specialised reefer ship with a reefer containership in terms door to door service cost. The idea is to have two comparisons made, one between the Coolman and NCS service, and one comparing the BRX and ECSA trade to the LC melon trade from Brazil, see scenario description.
The second study is made concerns the flow of backhaul cargo both locking at under deck and containerized cargo. This is a natural focus point for a container line since this is almost half of their business4. However in the specialised reefer industry the backhaul has traditionally been conducted on a sheer cost reducing level. The NLC group would therefore like to get a better view on which criteria that makes certain cargo suitable for backhaul. A number of different commodities, which are currently transported, will therefore be investigated to find out their profitability.
This is done by summarizing all the associated cost and revenues involved in the backhaul for both the Coolman 12 month service and the BRX trade.
1.3 Purpose
One of the main purposes in the study is to get a better view of the different cost aspects occurring throughout the supply chain. If in fact either transport mode is found to be more cost effective the NLC group would like to know if possible what part of the supply chain which makes it more expensive. This is done in order to help the NLC group to focus attention on the problem areas and not spend time and resource adjusting the whole chain.
4 Depending on the balance in the trade, normally one of the legs is stronger and is therefore dictating the
One other aspect of the study is to get information regarding what ships that is most competitive in the future. Are the specialised reefer ships going to be outdated by the newer and more versatile container ships? In addition how much cargo is necessary to create profitability in the different trades and what ship is best suited for this.
The main purpose in the backhaul study is to emphasis on the different breaking points occurring through out the backhaul operation. Three different breaking points have therefore been created trying to visualize three different ambition levels.
1.3.1 Breaking point
• When the backhaul activity adds a contribution to the repositioning of the container. This breaking point occurs when the cost to use the container for backhaul is less then the cost for empty repositioning. This operation is not by nature profitable yet the cost is less compared to not doing the backhaul at all.
0 ≥ −
+Cost foremptyrepositioning Cost forbackhaulrepositioning
revenue Backhaul
• The second breaking point occurs when the backhaul revenue fully pays for the added cost for the backhaul operation. This is where the backhaul activity adds contribution to repositioning of the ship.
0 ≥
−Cost forbackhaulrepositioning
revenue Backhaul
• Third and final breaking point is where the backhaul covers the full cost for ship repositioning. This occurs when the backhaul pays in full for its share of the average voyage cost per pallet. Having all ships filled with backhaul commodities reaching the third breaking point is not a realistic objective. However this is considered a goal in which to strive for.
pallet per t Average revenue Backhaul ≥ cos
2 Scenario description
2.1 Caribbean
In the Caribbean the NLC group is shipping fruit via a 12 month service called Coolman. The main commodity in this trade is bananas however large quantities of pineapples and exotics like physalis are also shipped. The competition in this market comes from other reefer operators such as Fyffe’s, Chiquita and container lines operating in the Caribbean. Since this study is made comparing a specialised reefer and a container line the New
Caribbean service earlier referred to as NCS has been chosen to conduct the study on.
This service is carried out by following companies; Hapag Lloyd, CMA CGM Group, Hamburg Züd and P&O Nedlloyd.
• The Coolman trade starts in Costa Rica and Colombia loading bananas and pineapples, then continuing on to the Dominican Republic where they load ecological bananas. When loading is complete the final destinations are Zeebrugge in Belgium then continuing on to Sheerness located north of Dover in the United Kingdom. On the return journey Coolman uses cars loaded under deck and general cargo in containers as backhaul to reduce the repositioning cost. This service is carried out by four vessels using 28 days round voyage.
• The competing NCS trade starts in Hamburg and goes via Tilbury, Rotterdam and Le Havre down to ports in Trinidad, Venezuela, Netherlands Antilles, Colombia (Atlantic), Costa Rica, Jamaica, Dominican Republic and Puerto Rico, see figure
2.1 This trade is operated on the east-west rout where the container lines currently
are dominating the market due to the two way flow of cargo. The journey is carried out by six ships with a 42 days round voyage. The service calls fifteen ports in total which forces them to use two extra ships compared to the Coolman service to be able to offer a weakly service.
Figure 2.1 NCS service map (Hapag Loyd, 2005)
2.2 Brazil
For geographical reasons the Brazilian fruit market has been divided between melons and mangos in this study. When shipping mangoes from Petrolina through the port of Natal the NLC group mainly competes with the NYK South America Atlantic service Brazil
express trade referred to as BRX. And when shipping melons from Mocoró through
Natal the main competition comes from the East coast South America trade referred to as ECSA. The NLC group does not operate a regular twelve month service to Brazil; instead they operate their vessels under a contract of a freightment (COA) during the 5-6 month which the melons and mangoes are in season. This contract basically means that the NLC group only traffic Brazil when ever there is available cargo for loading. One ship, which has been used by NLC in this way, is the Polar Brazil. This ship has therefore been used in a theoretical 12 months calculation to compare the difference in cost between NLC and the two container services operating in Brazil.
Figure 2.2 Map northeast Brazil Copyright (c) 1996 - 2004 (Microsoft Corp, 2006)
• The NLC Brazil route starts in Natal loading mangos and melons later calling Rotterdam and one additional port in Europe which often is Sheerness. Both the melons and mangoes are picked up in Natal located in the north east corner of Brazil. Due to geographical reasons mangoes in this trade are exposed to a big disadvantage since they are trucked all the way from Petrolina. This adds an extra 1000 kilometers trucking cost for the NLC mangoes compared to the container line which pick their mangoes in Salvador, see figure 2.2 However the round
voyage in the NLC trade can be carried out in 28 days compared to 35 and 42 days for the container lines.
• The BRX trade is a containerized trade between Itajai and Santos in south Brazil via north Brazil and then to Rotterdam with a mix of general and reefer cargo. When generally operating on the north south bound leg there is a constant problem of finding cargo on the south bound leg. However due to a fairly strong import market in Brazil containing industrial products such as semi assembled cars this leg is not as weak as in other parts of South America. Yet the focus in this study is on the perishable cargo mainly mangoes transported out of Salvador. The service is carried out by 5 ships with a 35 days round voyage.
Figure 2.3 BRX Service map (NYK, 2005)
• The ECSA trade is also a containerized trade going to Brazil. This service start in Rotterdam then visiting 5 European and 9 South American ports on its 42 days round voyage. This trade has the same characteristics as NYK BRX trade since they operate in the same area. Because they use bigger ships and call additional ports they have to add an additional week on the round voyage time compared the BRX trade. The main focus in the study concerning this trade is the melons which are exported out of Pecem, see Fortaleza Figure 2.2 and Pecem figure 2.4
Figure 2.4 ECSA service map (Hamburg Süd, 2005)
2.3 Delimitation
Since this study is carried out in only 20 weeks time there has to be some limitations made to the study. The NCL group has therefore selected two main trades in which the study should be conducted on. During the first break down and problem formulating the level of detail has also been set to a manageable level within the fixed time frame.
Because of this most data collected for the study has been on an upper and general level. Hence container cost collected from LCL Costa Rica has been used for container both in Coolman and NCS since it is the same operation in both cost chains.
Another delimitating factor is that there can not be any conclusions drawn concerning the total cost and profitability in the container lines. The reason being that this study emphasis on the reefer slots and their round voyage cost. This will be discussed further when analyzing the results from the study.
In addition since the shipping industry is global in its nature there will always be fluctuations in the market. It is therefore possible that some of the currency and bunker assessments used in the study are no longer valid because of recent changes in the market.
3 Method
3.1 Methodology
In order to describe reality or even trying to understand it one always has to make assumptions about it. Since different methods make different assumptions about reality and create different systems the methodological approach to a study is very important. The methodology chosen in this study is called the analytical approach. This method has its roots in classic analytical philosophy. “The analytical assumption is that everything in
nature has a summative character, that is the whole is the sum of its parts” (Arbnor &
Bjerke 1997)
This method is the oldest of the methodologies used in business studies today. Both its main advantage and disadvantage to the other methods is its simplicity. The main ideas behind the method that the whole is the sum of its parts are not always true. There are times when synergy effects can make this assumption incorrect. However in most cases these effects can be neglected due their small impact.
Yet in some cases these effects make a great impact on the result and therefore one has to be very observant to this when using this method.
3.2 Research
The research methods used in science today can normally be divided into quantitative and qualitative research. These different methods can be seen as different tools and their utility is dependent on the researcher asking the right questions. As a tool the different methods require different skills from the user. When using a qualitative method the objective is to find what kind and the essential character of a subject. The main objective with the quantitative method on the other hand is to quantify, finding the amount of something for example how much, how large.
The issue of choosing one method in front of the other has long been a debate in social science. However this is not necessary since most research studies would benefit from using both methods. (Kvale, 1996)
Lekvall & Wahlbin, (2001) urge that it is the researcher and the way the research is performed which is important rather than how the data is interpreted. By this approach most case studies is considered qualitative since the first analysis is qualitative.
3.3 Data collection and model building
When conducting a study it is of the highest importance to collect appropriate data for the study. Data is often described as either secondary or primary. Lekvall & Wahlbin, (2001) describe primary data as information produced by the writer which is intended for a specific study; the tools can either be interviews, forms, or direct observations. The secondary data on the contrary is data collected from previous studies such as relating articles and other sources of information.
3.3.1 Documented data - secondary information
This study uses secondary information in the form of earlier studies and spreadsheet calculations also including webpages, and books and articles related to the subject. The secondary information is described by Tagesson, (2002) as already prepared and therefore ready to be used by the researcher. Much of the early work in the study has involved collecting secondary information in order to understand and get a better view on how the shipping industry works.
An example of secondary information used in study is the investment cost calculation which is based on the ides from on an earlier container study made by Enqvist, (2002). One other big source of for secondary information has been Sjöfartens Bok, (2005).
3.3.2 Interviews - primary information
Much information needed to complete the study has been collected in the primary form. This information has been recorded using personal interviews and mail questionnaires. Most personal interviews were held in the form of open discussions where the questions could be explained if necessary. Since the study has been carried out on sight most interviews were conducted at the NLC office in Stockholm. However in relations to the backhaul study there have also been some interviews with the agents in charge of booking backhaul cargo. These interviews have been conducted together with personal from LCL on sight at the different agencies in the United Kingdom, Belgium and Holland.
During the study there have also been some long and deep discussions with my personal coach Mats Enqvist on all subjects regarding the study. These rather open form of discussions is by Lekvall & Wahlbin, (2001) described as a qualitative method for data collection as earlier described.
Questionnaires have been used to collect cost information regarding the investigated trades from local LCL offices where personal interview have been impractical. A special cost structure spreadsheet was prepared to help the correspondents in their preparation of the answers. Questionnaires are by Lekvall & Wahlbin, (2001) described as a quantitative method for data collection.
The problem with mail questionnaires as described by Lekvall & Wahlbin, (2001) is that is rather slow and the questions need to be self explanatory. Much effort was therefore made into making the spreadsheet and questions as straightforward as it could possibly
be. However some problem concerning the questions still arose and many answers were irefully late.
Both the secondary and the primary data were in a quantitative form. This seems only natural since the problem was constructed as a case study.
4 Company presentation
4.1 Key figures
• 70 ships • 37.2 mill. Cbft • 300 staff (incl. LCL) • 700 MUSD Turnover • 3 Cold stores/Terminals • 23 companies in 14 countries4.2 History
The newly formed NYKLauritzenCool is joint venture between NYK reefers and J.Lauritzen. First initiations were taken in January 2004 when both parties agreed on a memorandum searching to find ways in which to merge their reefer activities. This collaboration involved a vessel chairing agreement, which finally lead to a complete merging in August 2005 when the deal was approved by the European commission. The new company is one of the largest specialised reefer companies in the world operating about 70 ships worldwide. The size of the ships range from about 300000 to 760000 cbft with many of the ships equipped with a high container facilitating capacity. Much of the ships also have state of the art equipment for controlled atmosphere, see
chapter 5.7 for further details. (NYKLC, 2005b)
NYKLauritzenCool is located in Stockholm Sweden occupying the former LauritzenCool office. The former NYK office in London will remain there as a branch office working in the NYKLauritzenCool group.
4.3 NYKLauritzenCool group
Since the merging is still very new all information regarding the divisions and their responsibilities is not yet finalized. However the main activities going on in the NLC group will be divided into three different activities, Se figure 4.1. All shipping activities are handled by the commercial division which consists of the following six units.
4.3.1 12 Months service
This is an all year operation conducted both on linear and long term charter terms, the main commodity in this trade are bananas and also pineapples to a certain extent. These commodities are exported out of Central America to all major banana markets worldwide i.e. Europe, North America and Asia.
4.3.2 SAF/NZ, London
The South Africa New Zealand department exports deciduous fruits and citrus out of South Africa to the North continent and Japan. They are also in charge of meat exports from Australia to the US as well as deciduous fruits and citrus from New Zeeland to the Continent and Mediterranean.
4.3.3 South America, Santiago
This service is controlled out of Santiago in Chile. The main commodity is deciduous fruit from Chile to the US East and West cost as well as the North continent. They also handle melons from Brazil and citrus and deciduous fruits from Argentina.
4.3.4 South America Spot
South America spot handles all ships, which are contracted on spot deals, meaning they are operated on single journeys.
4.3.5 Seasonal, Stockholm
Seasonal Stockholm handles all seasonal trades, which move throughout the year. This includes time charter deals from Chile and Citrus from Turkey and Israel.
4.3.6 Bananas, London
This service is controlled out of the NLC branch office in London. The transported commodity is bananas, exported from West Africa to Europe, Central America and the Arabian Gulf.
4.3.7 LauritzenCoolLogistics, LCL
The second department is LauritzenCoolLogistics referred to as LCL. This company has evolved from the ideas off offering a fully integrated logistical service for perishable cargo. The ideas was formed in Chile and has since then grown to include 15 offices worldwide.
Because of this LCL has greatly contributed to the ongoing shift in focus occurring throughout the specialised reefer segment. Where the reefer industry is shifting focus from filling the ships towards offering a complete door-door service.
The company is divided between the head office in Stockholm and local offices spread out all over the world. For natural reasons a lot of the activities are centered in South America where all major countries e.g. Brazil, Chile, Ecuador and Costa Rica are represented with a local office. New offices are continuously opened as business grows and there is a determination to have a local office in each country operated in. (LCL, 2005a)
LCL is a non-vessel operator common carrier (NVOCC) which means that they buy space from different carriers in order to consolidate cargo for smaller shippers as carrier using own bill of lading. This in turn means that LCL will not only use ships within the
NLC group when arranging for door-door transport solutions. The main objective is always to find the best solution for the costumer.
The third department consists of Corporate Communications, Finance & IT, human resources & administration, legal and finally market research. This section handles all activities, which are not directly related to shipping.
5 Theoretical framework
5.1 Trades
Reefer commodities can generally be divided between frozen cargo which include meat, fish and seafood and refrigerated fresh cargo including fruit and vegetables. The biggest difference is that the refrigerated fresh cargo continues to respire after it is being packed which will speed up the deterioration process.
In the frozen cargo segment the container lines has grown fast during the last years and are currently dominating the market. These trades are mainly on an East-West direction and incorporate big industrial countries like the United States, Japan UK and Australia. This in turn leads to a big flow of cargo in the East-West trade. This is also where the container ship holds a major advantage to the specialised reefer since it can utilize the two way flow of cargo in a much better way.
In the North-South trade there are bigger problems in balancing the flow of cargo. Much fresh fruit is requested by countries in the Northern Hemisphere. However the need for products from the Northern Hemisphere is not as large as desired. Therefore the specialised reefers still holds a big market share in North–South trades but are loosing in the East-West. (Enqvist, 2002; Sjöfartens Bok, 2005).
Figure 5.1 Split between container and reefer exports on main fruit trades (Sandström, 2005) RSA Cont49% Reef 51% CA-EUR Cont19% Reef 81% CA-USA Cont40% Reef 60% NZ Kiwi Cont12% Reef 88% NZ Apple Cont80% Reef 20% ARG Cont25% Reef 75% CHILE Cont21% Reef 79%
5.2 Refrigerated cargo
The movement of reefer cargo is very much dependant on the season. The season starts in November when citrus like mandarins, oranges and lemons are transported out of Egypt, Spain and Israel. This export continues until early spring where demand for shipping capacity is at its height when deciduous fruits like apples and pairs from the Southern Hemisphere are harvested. Grapes from Chile also help boost demand in this period. The midseason later starts with large amounts of oranges and lemons shipped out of South Africa and Argentina. Later during the season kiwi export from New Zealand is starting to compete for the shipping capacity. The season finally ends with the harvest of exotic fruits like melons and mangoes in Brazil.
In the early days of reefer shipping the high season went from February until the end of Jun when the deciduous fruits were harvested. Nowadays with the introduction of reefer containers the demand surplus has stabilized and the export has started to rise also in the low season.
The banana export however can be seen as a unique product and therefore can not be compared to other reefer products. Bananas are about 40% of the total reefer market and the demand is even throughout the year. The banana export has therefore long been considered a backbone in many reefer companies. The downside is that all bananas are highly sensitive to temperature and therefore require highly developed maturing and shipping equipment in order to reach a good quality. (Sjöfartens Bok, 2005).
5.3 Imbalances
5.3.1 Structural imbalance
Many ships and trades as earlier mentioned are operated on a market where one of the legs is stronger than the other and therefore dictates the conditions. This leads to imbalances in the trade since the cargo mainly is going one way. This is by Lumsden, (1998) referred to as a structural imbalance and is caused by the existing flow of cargo in a certain market. “These imbalances are solely dependent on the existing industrial
system and thus can not be affected by the transport system” To adept to these
imbalances one has to add extra cargo to the weaker leg. This can be achieved in a number of different ways; NLC do this by loading non reefer cargo in reefer containers to increase the flow of cargo going back.
5.3.2 Constructional imbalance
The second imbalance which Lusmden, (1998) discuss and reefer operators such as NLC have to deal with are imbalances due to construction. These imbalances occur because the normal reefer ships are purpose built and therefore consist of a large reefer compartment in order to accommodate the perishable cargo. Because of this design much of the ship becomes unsuitable for other sorts of cargo. However the NLC group has found ways to utilize some of their reefer compartment to ship cars on the backhaul leg.
5.3.3 Operational imbalance
Also present especially in the Coolman trade are operational imbalances. These are imbalances, which are affected by the way the fleet is operated. In the Coolman trade they conduct the service using four ships in a linear service. Three of the ships used are about the same size, yet the fourth has a greater container capacity. Because of this the entire service has to adjust their container fleet to suit the bigger ship, hence the container usage in the trade becomes imbalanced. (Lumsden, 1998)
5.4 Ship types
5.4.1 Refrigerated cargo carrying vessels
An average reefer ship has a length between 100-200 meters. The loading capacity is generally described in cubic foot (cbft), where the biggest ships are about 250000 cbft. The loading compartment is usually split into 4 different holds where each hold is divided into 4 decks, this computes 16 compartments in total. The loading compartments are usually isolated with either galvanized sheet metal or stainless steel. The cargo is preferably loaded in pallets but most reefer ships are also equipped with container slots. (Sjöfartens Bok 2005; Melén Eriksson 2005)
5.4.2 Container ships
The biggest global container carriers have in recent years grown to be somewhere in between 220-300 meters. These ships are referred to as post-panamax, and have a loading capacity of 8000 containers. They also have a reefer capacity of 20%, which is equivalent with that of a large reefer ship. However, because of their large nature they can only traffic certain routs. (Sjöfartens Bok, 2005) The container ships investigated in this study are between 1600-5500 TEU.
5.5 Standardized unit handling
To simplify the handling and coordination of cargo in transit one often uses standardized handling units such as containers and pallets. The purpose with a standardized unit is to keep the goods together in a way so that it can be treated as single unit. The standardized handling unit also holds a protective and carrying function against particles and other units.
For this reason Lumsden, (1998) mentions a number of vital physical functions that the standardized unit needs to fulfill.
• Size - The standardized unit should be as large as possible to create effectiveness, however not as large as it creates problem due to weight issues.
• Time - It is of high importance to form the standardized unit in an early stage of the transport chain and not to break it until as late as possible, preferably at the end consumer. This will reduce the unit size since most end consumers do not have any storage facility
• Form - The unit needs to be stable in a way that it can be mixed with other units with different size and weight attributes.
• Handling - The handling unit should be designed in a way which makes it possible to handle by all members of the supply chain, and thereby on all associated places.
The use of the standardized handling units is very much dependant on the handling capability throughout the supply chain. The effectiveness of unit handling is the key issue which limit the use. One other key issue is to retain a high frequency in deliveries. This can according to Lumsden, (1998) be achieved either by decreasing the capacity in the units or increasing the flow. By consolidating a diversified flow of cargo and turn it into standardized units one can create a large flow of cargo which in turn leads to a high utilization.
One complicating factor in the use of standardized units are repositioning of empty units. This problem is best solved by identifying systems in which there is a balance in the flow of cargo. When focusing on the reefer trades the balance problem grows even further. Big efforts in the reefer industry is put into finding cargo which is suitable for backhaul and thereby reduce the number of empty units.
5.6 Freight Container
The use of freight containers in both shipping and the industry in general has evolved from the need of an integrated transportation method. By allowing easy transaction between all means of transportation the container has opened up borders in the supply chain which traditionally has been costly to break. For this reason all containers are equipped with mounted fittings which are used to lift the containers when shifting between the different modes of transportation. These fittings are also used to secure the container when in transit.
To be able to standardize the use of containers ISO has set up certain criteria’s which define a freight container.
• The unit should be made robust. • It should hold for repeated use.
• Specially adapted to assist in the transaction of cargo between different modes of transportation without having to unload the cargo.
• Equipped with some sort of fitting which renders quick and effective use, especially in transactions between transport modes.
• Hold a volume of at least one cubic meter.
The first measurements stated by ISO were that the height and with should be 8 feet e.g. 2438 mm. The length of the container was later set to be somewhere between 5-40 feet, which correspond to about 1460-12192 mm. This is derived from multiples of 10 feet e.g. 10, 20, 30, 40 feet (Lumsden, 1998)
5.7 Reefer container concept
In the reefer shipping industry the totally dominating container size is the 40ft reefer high cube container later referred to as 40´RHC. This container measures 40 feet in length and 9´6 feet in height. This container is calculated to carry about 22 pallets5 compared to the normal 40 feet container which can only carry about 18 pallets (Lumsden, 1998)
In addition the reefer container is isolated and equipped with a cooling device, which enables the container to keep a constant temperature between -15 and 84(ºF) equivalent to -26,1 to 28,9 (ºC). In order not to break the cooling chain the container needs a constant supply of electricity. Therefore most containers are also equipped with a clip on system for a generator set later referred to as a genset. These gensets can be clipped on to the container and thereby provide electricity for the container when in transit. Gensets are generally driven on diesel and has a running time between 36 hours to 5 days. (Maersk Cool facts, 2001)
The reefer container is also equipped with some sort of air ventilation system which removes heat, carbon dioxide, water and other gases produced by the refrigerated cargo. When cargo is shipped the pallets should be loaded in a way which does not restrict the vertical airflow. This is best achieved if each carton of fruit loaded has symmetrical holes in it, analogous a banana carton.
5 Physically it can only hold 20 pallets however including the extra height the total number of pallets per container is calculated to be about 22.
Figure 5.2 Cross section of a reefer container visualizing the air flow © Gesamtverband der Deutschen Versicherungswirtschaft e.V. (GDV, 2006)
5.8 Controlled atmosphere
In order to keep the cargo in fresh state a technique called controlled atmosphere has been developed. If the live cargo would be left to itself decay or desiccation would eventually destroy it. The controlled atmosphere however can prolong the life span of the live cargo and slow down the desiccation process. In a controlled atmosphere the cargo is submitted to an optimum temperature combined with a perfect mix of nitrogen, carbon dioxide and oxygen to create the perfect climate for the cargo. (Maersk Cool facts, 2001)
The use of controlled atmosphere in reefer container is slowly growing and getting more common, yet it is still very expensive to equip a container with CA facility. The use of controlled atmosphere inside reefer compartments is even more uncommon. Some banana ships have been equipped with controlled atmosphere in order to improve the quality. However for the more common and durable fruits the CA technique is still considered to expensive.
The benefit other than improved quality from using controlled atmosphere is that the transit time can be extended. This is a major advantage for the container line when considering that they generally take longer time to complete the round voyage. Using CA technology also makes it possible to transport exotic fruits like avocados, which would normally be transported by air.
5.9 Reefer compartment concept
The reefer compartment is built around the same components and concept as the reefer container. The floor is built up from so called gratings, as earlier explained help lift the cargo from the floor and thereby let cold air circulate through the cargo. There are basically two techniques for cooling the air and thereby refrigerating the cargo used in the specialised reefer sector.
Figure 5.3 Implementation of a grating solution inside a specialised reefer compartment (Mohlin, 2005).
Both methods are based on the idea using freon as coolant for the air delivered to the reefer compartment. The big difference is that the newer and more modern method uses far less freon than the old. This is because it utilizes a heat changer and liquid called brine. The downside is that the method is more complex and thus more expensive. Yet it is gaining more and more favor since governments are addressing stricter environmental policies against freon. (Ralf Mohlin, 2005)
To keep the cargo at the right temperature the cool air is circulated about 90 times every hour, see figure 5.3. The temperature is measured both on the way in and on the way out of the reefer compartment. Fresh air is also circulated 2 times every hour in order to reduce the amount of carbon dioxide and other gases produced by the live cargo.
Figure 5.4 General layout of a reefer compartment inside a specialised reefer vessel. (Mohlin, 2005) Most reefer ships are equipped with about 4 holds. The general reefer hold consists of 4 decks sitting on top of each other. Due to this design the port operations can be conducted on all holds simultaneously however only one deck at a time. All containers which sits on top of the cargo hatch must however be moved in order to gain access to the reefer compartment. (Melén Eriksson, 2005)
On other important factor when loading both in reefer containers and reefer compartments is not trying to let the air escape in places where there is empty space. This is often handled using a simple plastic foil which is laid out on top of the gratings, see
figure 5.4. If one were to skip this isolation process or do any mistake the cargo in that
compartment/container would be ruined since the air would escape and there would be insufficient cooling.
Since it is much easier to control the temperature in a big compartment compared to controlling 20 different reefer containers the reefer ship holds a quality advantage. The palletized cargo receives an automatic quality control once the cargo is being discharged. Whereas the quality control for the container is not performed until the container is opened which in some cases can bee as late as at the end costumer.
Gratings Fresh air ~2/hr
Return air grid Cooler/Evaporator Return air
sensor
Figure 5.5 Closing of areas where air escapes in a reefer compartment Vs reefer container (Mohlin, 2005)
5.10 Influence of logistics in the reefer industry
Following information is from Drewry, (2003) Reefer shipping and logistics,
Re-engineering the cold chain.
As described, the shipping industry is slowly starting to realize that shipping itself is not the end but a part of a bigger network. Container lines have long been using the fact that traditional shipping companies has not reacted to this new way of thinking. A number of third party logistic providers are also starting to flourish on the market. However slowly as traditional shipping companies wakes up some of them has invested in there own logistic expertise. Others rely on third or sometimes four party logistic providers to do the job for them.
A big problem for many companies when dealing with logistical aspects is how to motivate the costumer to higher rates because there are actions in the supply chain, which adds value to the product. JIT or just in time deliveries is a technique which has totally reorganized much logistic companies worldwide. The basic idea is to have a moving storage and thereby reducing stock and thus the restricted equity.
However this also leads to some vulnerability aspects in terms of delays and other problems which can occur throughout the supply chain. A focusing towards JIT also leads to better focus on quality and costumers not forced to have their capital tied up for longer periods of time.
One of the most important logistical aspects in the supply chain for reefer cargo is to make the transaction between shipping, storage and haulage to distributor as cost effective as it could possibly be.
Drewry, (2003) states three primary sections where logistics will have an impact on shipping.
• “Communication”
• “The physical process - production, distribution, storage/warehouse, supply
chain management and transportation in all aspects”
• “The management process – including documentation, transfer of title, back up
and chase up processes, payment procedures, “what if”/ contingency planning”.
These elements can off course not be seen as isolated parts. Hence there is no use in investing time and money in sub optimizing the warehouse without concerning about transportation and information exchange.
LauritzenCool presented an illustration in 2001 on the trends in the reefer industry. This
illustration has also been used by Drewry, (2003) to describe the future trends.
The findings from this presentation were mainly.
• “Members of the traditional chain are becoming consolidated and
interchangeable”.
• “The end consumers are increasing their overall control”. The consumers are now going directly to the source and are thereby making themselves managers of the whole supply chain.
This development as mentioned earlier in the background is leading to a phase out of the traditional importers. And the big question arises who is taking over. There is a widespread idea that the major supermarket groups are gaining control over the supply chains. However the shipping companies still holds an advantage since demand is increasing and diversifying.
One other aspect is the growing use of track and trace in the industry as whole. This has not yet med a huge impact in the reefer industry. However, many experts for example
Drewry, (2003) states that the future use of track and trace system is inevitable. Both
buyers and investors has a big interest in knowing exactly where there cargo is, and even more important in what condition.
5.11 Optimizing and model building
The use of optimization is a branch of applied mathematics, which incorporates both mathematical models and methods to find the best solution for a problem. Optimization is often used in both economic and technical studies to attain better knowledge of the different solutions to a problem.
Optimization is about making something as good as it could possibly be6. The use of optimizing models is based on a problem formulation, which can be varied, influenced or affected by variables in the model.
Optimization is done by adjusting the variables until the best value is found according to the objective function. This can either be maximization or a minimizing function according to the problem formulated earlier. The limitations to the variables used by the objective function will be given in a number of constraints. This means that to be able to use an optimizing model you have to be able to express both an objective function and limitations by using mathematical functions. (Lundgren et al, 2001)
5.11.1 Model building
When using optimization to analyze and solve a problem one often apply a certain working procedure. This is often described as the optimizing process. This procedure starts by identifying what is the problem. The next step is to find a way in which to describe the problem by using mathematical functions. When the problem is formulated one requires finding an optimizing method which can solve the problem. The last step in the optimizing process is to evaluate and validate the results from the optimization. (Lundgren et al, 2001)
Figure 5.6 Building an optimizing model (Lundgren et al, 2001)
6 Optimizing comes from the Latin word “optimus” which means ”the best”
Validation Verification Simplified model Optimizing model Solution Result Reality Identifing Limitations, Formulating Optimizing method
6 Economy and shipping
Evolving companies constantly need to evaluate internal and external information and try to make good decisions from it. To help these companies increase the profit and keep an eye on cost a number of different economical methods have been developed over the years.
This study will try to use some of these methods in order to calculate the total door to door transport cost for a pallet of reefer cargo. To achieve this there are a number of economical and shipping fundamentals to take into consideration.
6.1 Shipping costs
Following section is from Sjöfartens Bok, (2005).
The shipping industry deals mainly with three different cost types. The use of these costs comes from the special conditions under which shipping is conducted. These cost types are:
o Financial costs o Daily running cost o Voyage costs
6.1.1 Financial cost
The shipping market can be seen as an international market without any borders. The
financial cost in the shipping industry is therefore the same every where in world if you
disregard certain subventions and tax aspects. Because of this calculating this cost is only dependant on the purchase price and the financial situation when it was bought e.g. the business cycle.
The financial cost is made up from the expected opportunity earnings from invested money and the borrowed capital including depreciations made during the estimated economic life for the ship. The depreciations should reflect the changes in value that occur for the ship based on the purchase value. The Swedish ship-owners association recommends not using a depreciation plan, which is longer than 25 years. However most companies use 20 years or less when calculating their financial costs. This study uses 25 years depreciation, this is because several ships investigated in the study are between 15-20 years old and all these ships are expected to last for at least 25 years. In addition there has not been any residual value included in the calculation, when the loan is returned the value is said to be zero.
6.1.2 Daily running cost
The daily running cost is directly applicable to the management of the ship. This includes cost for technical maintenance, which is the cost for spare parts, maintenance, reparations and food etc. It also incorporates crewing costs, which is the cost for wages to the crew both on and off the ship. Finally it contains the assurance costs which are insurances connected to operating the ship and administrative cost such as overhead etc.
6.1.3 Voyage cost
The voyage cost contains all costs, which can be directly tied to the specific journey. This includes costs for bunker, port, channel, pilot, terminal handling and stevedoring etc. On contrary to the day cost this is a cost which is paid for by the company time chartering the ship on top of the chartering cost. In addition to the above there can be some special costs assigned to the voyage cost which normally would be associated to the day cost. This can for example be extra insurances due to higher risk because of war or heavy ice etc. The day cost can also include reparations and cleaning after certain cargo has been shipped. Looking at the voyage cost in general all different parts of shipping is very unique and therefore creates the costs, which can be applicable in their special niche. A linear service for example has fixed voyage costs whereas a ship used for tramp shipping has a variable voyage cost.
6.2 Economy theory
6.2.1 Book cost
When addressing cost it is very important to know in which perspective to investigate and what kind of purpose you have for the study. The statutory requirements are based on a business transaction and therefore are expenditure. When making an economical calculation the cost is therefore defined as accrual expenditure. This cost is used in financial accounting and is referred to as book cost (Göran Andersson, 2001).
6.2.2 Calculated cost
In cost accounting the cost is instead defined as the value for resource consumption. The purpose of the cost accounting is to calculate a value, which can help in making correct decisions. Yet this is only a calculated cost and is therefore not public; it is only used internally by the company and as a complement to the financial accounting.
When making the cost calculation for resource consumption one often use the values from the financial accounting. This is often the case for products used in connection with the purchase. The purchase value of these products also makes a good measurement for the resource value. In these cases the calculated cost is exactly the same as the book cost. In other cases the procurement has taken place long before the resource is consumed. Since the price often has changed during this period it is incorrect to use the purchase value for this resource when calculating cost. Therefore one always transforms all resource consumptions into present value before making any cost calculations. (Göran Andersson, 2001).
