THE SHIP OWNER’S STAND ON THIRD PARTY SHIP MANAGEMNET. INTRODUCTION

THE SHIP OWNER’S STAND ON THIRD PARTY SHIP MANAGEMNET.

INTRODUCTION

Analytic hierarchy process (AHP)is a mainly new type of decision making tool for service providers  ahp  allows customers define the performance requirements which are provided by service providers for the reward of incentives for excellent performance. Therefore, the paper will determine the optimum type of ship management provision for Nigerian Shipping Companies using the AHP tool.

The third party management

The background of third party managers

Traditionally the ship owner’s embraced several functions like financing of the vessel, employment of personnel, technical supervision, commercial utilization, operation etc. Ship owner’s then had the know-how to operate their own vessels thus they found it expedient to delegate certain aspects of their business to others.

Initially ship owners have been performing all the management functions for themselves. In 1960s 1970s, the ship owners began to lease their ships to the management companies. From then,   Ship operation has increasingly been a specialized and technical business which is often undertaken by specialist ship management companies. These, typically will not own the ships themselves, but will contract to operate them, manage and maintain them, and provide the detailed technical management to keep them operating efficiently. The contract between Ship management has thus grown to two distinct divisions – technical and commercial – while the shipping operation has had a related administrative and financial management arm. These activities have been co-ordinated at the strategic level. Management has been exposed to the risk of both commercially and operationally. Part of the risk exposure assessment – including its impact on the flexibility and immediacy of decision making – is the in-house versus third-party management debate manager and ship owner has specified the degree of the management that had been taking place.

The completion in the shipping industry

Ship operation business is growing into a more a specialized and technical business, which is mostly undertaken by specific ship management and shipping companies. For instance, ports play a significant role in the development of both domestic and foreign trade of a country. These companies mostly do not own the ships themselves, but they contract, manage and maintain them, and ensure that they are operating efficiently. The contract between manager and ship owner will specifies the extent of the management that will be involved. The ship-owners may wish to carry the business for themselves or they may wish the managing company to undertake full commercial operation of the ship, which may involve getting insurance, the purchase of storage facilities and full technical maintenance and operation, along with the provision of a properly trained crew. In such cases the managing company will treat the ship as theirs for the period of the contract, ensuring that it is always available, and maintained in good condition.

Third party ship managers do everything that the ship owners wish to be done. The owners may wish to keep the operation and technical management on their own but will hire the manager to undertake the technical functions that requires professionalism according to the needs. A good ship management company will always have access to all the necessary operations. The fee that the ship management company earns should always reflect the depth of the management task it hires to operate. The owner of the ship receives regular financial and technical reports on his/her ship.

The advantages of having ship managers includes; its easier to manage many vessels together than managing one, It also enables an owner of perhaps just a few ships to operate them without the need for a large in-house organization, efficient purchasing power for stores, repairs and other matters which the large manager will be able to obtain, with good management of the ships by the company, their demand increases thus more income to both the owner and the company

Approximately one third of the world’s fleet is under the ship management companies, which themselves have been creative  in developing competent systems of management due to the rise in competition between different management companies, so that there is always an incentive to be more efficient and innovative. Big management companies are highly regarded due to their ability to run ships more efficiently, training their own staff and providing a fine career structure for professionals ashore and afloat.

How the two relates, Ship owner and Managing company

The ship managers ensure that the vessel complies with international rules and regulations, is run in a safe and cost efficient manner, and take care of the environment. The ship-owners select one or more services offered by the ship managers, most often technical management, crew management and commercial management. The services of the ship management are independent from the ship-owners working with its own staff and from a separate office. There should be no common shareholding interests between the ship-owners and the manager, but in practice such shareholding interests exist in many instances, although the manager in every case will function as a separate cost centre and will provide equitable services to all clients according to a well defined contract and detailed budget agreed between the two main contracting parties thus the ship manager’s and the ship owner’s main objectives are different. The independent ship manager may therefore cover few or several of the ship owner’s functions and thus the ship manager may appear as an agent performing in the name of and for the account of the principal or as an independent body performing in its own name and for its own account. Various legal problems may occur in this connection related to the duties and functions of the ship owner and the manager.

 

The BIMCO SHIPMAN contract does not underline performance requirements for the ship manager, besides conformity with vital regulations. The managers shall:

‘undertake to use their best endeavours to provide the Management Services as agents

for and on behalf of the Owners in accordance with sound ship management practice

and to protect and promote the interests of the Owners in all matters relating to the

provision of services hereunder’ [4]. This is in line with the limited risk and fixed

management fee. In practice, experienced ship owners inform their managers of their

required operating standards in Nigeria.

 Aims and objectives.

Aim

 To determine the optimum type of ship management provision for
Nigerian Shipping Companies using the AHP tool.

Objecticx4ves

  1. To identify the various types of ship management provision in the maritime industry (look at various countries, shipping companies, trends & patterns etc.)
  2. To examine the factors that influences the effectiveness of the ship management function
  3. To develop a tool using AHP to assess the optimum type of ship management provision in the case of Nigeria
  4. To analyze the most effective type of ship management provision for Nigerian Shipping Companiess

Research question

The growing performance requirements and limited transfer of risk result to the question whether a new type of tool should be used in ship management: Analytic hierarchy process (AHP). AHP improves alignment of risks and incentives

between suppliers and customers, resulting in increased product availability at reduced cost of ownership [6]. AHP is productively applied in other industries. It need ship owners in Nigeria  to set performance requirements and use incentives to align the interests of ship managers, while the latter get the opportunity to demonstrate and be rewarded for excellent performance. This research  evaluates the use of AHP tool in contracting third party ship management services between  ship owner and manager in Nigeria shipping industries. Special case is attributted to competitive advantages achieved by the ship owner in Nigeria. This report answers the question whether AHP tool is an effective tool for the ship owner and how this can be achieved. The hypothesis of this

study is:

Can a ship owner gain optimum competitive advantage by using ahp tool under various type of ship management provision in Nigeria shipping industries.

This report is one of the first research into AHp tool in ship management. The outcome can be

used as justification and guidance towards further research of AHp in ship

management in Nigeria.

 

 

Research structure

This research reviews literature and applies case study research to answer the hypothesis.

First literature is reviewed to offer a theoretical answer to the hypothesis. The

principal-agency theory is used as a framework to analyze ship owner and manager

relationship in the shipping industries in Nigeria. Case study research method is explained and applied in two cases. The cases are excellent applications of performance-based contracting in ship management in Nigeria.

Thereafter the cases are reviewed using the theoretical framework of AHP tool. This result to a number of observations on the current condition of AHP in ship management and provides a need for further development.

Literature Review

Strategy in ship management in Nigeria

This paper analyses the use of AHP tool in ship management provision in Nigeria industry to obtain a competitive advantage. A competitive advantage allows a company to provide optimum  value to customers. Panayides and Gray (2011, 97) argued  that demand for ship management services is heterogeneous despite relatively basic homogeneous services. This is explained by the variations in ship type, crew, flag and differentiation in need services in Nigeria.

Panayides (2011, 98) then applied the strategic framework by Porter on strategies for

competitive advantage to examine performance of ship management organizations.

Panayides found that both low and high performing organizations pursue cost leadership, but a quality differentiation strategy is extremely vital for ship management companies. This minimies exposure in competition, enables optimum prices and establishes better alignment with clients. Therefore, differentiation forms the basis of competitive advantage in ship management in Nigeria shipping industry.  In addition, market and competitor analysis provide the input for differentiation.

Ship management provision

Many factors play a significant role in separating ship ownership and management. These include the company’s size, type, age and environment (). The larger the organization, the more delegation of decision-making takes place. This leads to changes in the hierarchical structure, which separates ownership from management. For instance, In a privately owned company the

Individuals or families owning the firm are usually the managers too. A public company with a large shareholder-base will more likely chose managers for day-to-day operations. The further the firm gets in the life-cycle, the more challenging in-house management succession is, an emerging reason for shipping provision to protect ownership.

Flexibility and expertise are the mostly common factors for provision to third party ship managers (). Flexibility is the ability to move in and out of markets without operational challenges like manning the ship. This allows asset-play and quick decision making in the shipping industry. Expertise also is reason for provision, but similarly a reason for owners to keep ship management in-house to keep the core competences. King and Mitroussi highlight succession problems leading to more provision of ship management

AHP

Third-party ship management is a service industry. Services provided by shipping industry in Nigeria include deeds, processes and performance (). Where deeds are attributed to activities used to solve problems which client cannot resolve alone. A process is a strategy used to carry out the necessary deeds. Performance indicates how well the deeds are executed and encompasses service effectiveness and efficiency.

AHP tool is attributed to manufacturers and authorities. For instance, in Nigeria manufacturers of goods are increasingly incorporating the delivery of services in their market offerings (David, 2010, 45). They search for business opportunities by offering after-sales solutions to a saturated market. This extends the scope for manufacturers to earn extra sources of revenue. In Nigerian market solutions are sold as performance, while equipment ownership is retained by the manufacturer (david, 2010, 46). According to David the aerospace industry is an example where only the ‘up time’ of aircraft engines is sold by the manufacturer.

On the other hand, authorities increasingly incorporate performance management techniques with incentives based on results. AHP tool is mainly applied in the construction sector. It allows authorities define the required result and performance, while leaving all the technicalities to the supplier. The key concept of AHP is the service provider taking over risk from the customer against payment. This aligns interests of both parties in the shipping industry. DEFine AHP.

One benefit of AHP is improved product reliability in the industry.  Current studies indicate drastically increased product reliability for aircraft engines contracted at Performance-basis compared to traditional contracting in Nigeria. The evidence support earlier conclusions indicate that AHP tool can produce a win win situation in the shipping industry.

Toffel (2009, 67) developed a theoretical framework to review AHP contracts based on transaction cost economics. The advantages of these contracts are: (1) mitigating sales transaction hazards, (2) increasing incentive for efficiency and (3) creating opportunities

for mutual gain by aligning incentives.

For instance, sales transaction hazards are mitigated because the supplier has no incentive to overstate claims of reliability or durability since the supplier remains liable after sale. Since the customer only pays for hours of operation, the incentive is increased to use the equipment more efficiently in Nigerian market. However, in a distinctive sales transaction the interests of manufacturer and customer are not aligned. Therefore, the customer seeks high quality and durability while the manufacturer aims to reduce production cost. The manufacturer seeks a high selling price. The manufacturer earns from providing maintenance and repair while the customer seeks reliability. A manufacturer intends to sell as many units with as many paid for features, against the customers trying to reduce purchase cost.

In the case of AHP the supplier is devoted to the product during the entire life cycle, which resolves several of the above-mentioned conflicts. The manufacturer is motivated to optimize reliability and efficiency at a low cost. Toffel notes two risks in AHP which adverse selection and moral hazard. These are key issues in a principal-agency relationship.

principal-agency relationship

Agency theory is employed as framework to review AHP tool in shipping industry in nigeria. This is possible when AHP is utilized in provision of a long term contract which demand performance of the supplier. Eisenhardt states: ‘agency theory is directed at the ubiquitous agency relationship, in which one party (Principal) delegates work to another (Agent), who performs that work […] using the metaphor of a contract’ . on the other hand, moral hazard, Eisenhardt adds the problem of risk preference a third fundamental challenge in agency theory.

An adverse selection issue result when the principal is not totally informed about the capabilities of the agent before contract signing: ex ante information asymmetry. The agent may withhold information or overrate capabilities. The agent has an incentive to do this because it leads to better contract conditions. On the other hand, moral hazard is the problem that the principal cannot predict and be totally informed about the agent’s behaviour after contract signing: ex post information asymmetry. The agent has no incentive to give the uppermost effort if the principal is not aware of this and thus the agent will not be rewarded the contract.

In agency theory it specifies interest on how to use contracts to align the interest of the agent and the principal. It also resolves the problem of adverse selection and moral

hazard. Therefore, to meet these high-powered incentives to ex ante align the parties’ goals are needed. For instance, agency theory differentiates between two payment models. In behaviour-based contracts the agent is paid by the principal based on (observed) behaviour (e.g. an hourly wage payment. On the other hand, in outcome-based contracts the agent is paid based on the achieved outcome (Failer, 2011, 68). Outcome-based contracts are considered effective to achieve the goal of controlling moral hazard.

 

After employing agency theory on shipping management, Logan (2010, 34) propose the  use of combined payment models in one contract which include long-term behaviour-based contracts with open book and cost plus and outcome-based incentives with shared cost reduction. This minimizes the risk for agents compared to full outcome-based contracts, which is vital since agents need to invest to achieve the demands of their clients, while it still provides principals the tools to make the provider responsive of the service goals.

 Methodology

This paper employs exploratory research into the application of Analytic hierarchy process  in the ship management provision for Nigerian Shipping Companies. Non-standardised and semistructured  interviews are used as a basis for qualitative research. All contributions to the research were made based on confidentiality. This research is based on is a qualitative case study methodology with a powerful investigative content. For instance, Eisenhardt [34] states that case study ‘is particularly well-suited to new research areas or research areas for which existing theory seems inadequate. This type of work is highly complementary to incremental theory building from normal science research. The former is useful in early stages of research on a topic or when a fresh perspective is needed.  Case studies are the preferred research method when ‘how’ and ‘why’ questions are being asked, when the researcher has little control over events and when the focus is on a contemporary phenomenon within some real-life context.

Literature research and expert interviews are used to conduct investigative research, because AHP in a ship management context is mainly a new and not covered in academic literature.

This paper analyses two cases, which have successfully applied AHP over several years, which generate adequate information to study the cases in detail. Both focus on  in the ship management provision for Nigerian Shipping Companies but in different contexts. The author is aware of more applications of AHP tool in the shipping industry in Nigeria but these lacked availability of data.

Theory-building research utilizes multiple data collection methods [34]. Using different data resources offers stronger basis for theory building. This report employs research based on documentation and interviews. The documents are based on literature associated with the cases, presentations at seminars, articles from industry newspapers and magazines.

The interviews were carried using face-to-face, by phone and email methods. In addition to people being involved directly with the cases, other industry participants were interviewed on the matter. The interviews were based on semi-structured questionnaires with different questions for ship manager and owners. The interviews were taken during the research period, which enabled verification of theories developed in researched cases. The participants were willing to discuss under the condition to keep all data anonymous.

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