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Home News & Features World 2020: Time for Shipping Companies to Consider a New Fuel Procurement Strategy

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Companies to Consider a New

IFO380 MGO
$/mt +/- $/mt +/-

Fuel Procurement Strategy

Singapore 336.00 3.00 510.50 1.00

Rotterdam 320.00 4.50 495.00 3.50

by Steve Leonard Houston 322.00 3.00 565.50 1.00

Tuesday September 12, 2017
Fujairah 330.50 2.50 572.00 3.00

Spoiler Alert: It Must Include Outsourcing and Technology View Bunker Prices in for 150 Ports

Carnival Corporation's FY'16 report,

"Sustainability: From Ship to Shore" is a must-
Popular Now More
read. The colorful 126 page report, available on
the company's website, complete with graphics, 2020: Time for Shipping
charts, tables, and pictures lays out an Companies to Consider a New
extraordinary overview of Carnival's Fuel Procurement Strategy
Sep 12
"governance, stakeholder engagement, "As we approach 2020 the one
environmental, labor, human rights, society, certainty is the fuel procurement
process will become far more
product responsibility, economic and other Image Credit: Pixabay / Ship & Bunker complicated, and Shipping companies
sustainability-related issues and performance will consider ways to outsource this
indicators." function," Steve Leonard writes for
Ship & Bunker.

By coincidence, at around the same time Carnival published this report, the Cruise Industry OilFront: New Technology-
News Quarterly Magazine (Summer 2017) offered a cover profile of Julia M. Brown, Chief Focused Bunker Broker
Procurement Officer for Carnival Corp & plc. In her role, Brown oversees strategic sourcing and Concept Launches in the UK
Sep 11
supplier relationship management with the company's nine brands, responsible for "$9 billion in "I believe the time is absolutely right
annual operating expenses, including more than $1 billion on food products." This figure also for technology to extend - not replace
- what the modern broker can do,"
take account the fleet's fuel consumption, which, as per Carnival's FY'16 10K, was just over 3.2 Head of Bunkering Neil Lamerton tells
million metric tons, equating to $915 million (down from $1.25 billion the previous year). Ship & Bunker.

According to Brown, "about 35 to 40 percent of Shipowners Fear 2020 Bunker
Price Spike and "Outrageous"
all supplies are sourced globally, 35 percent
regionally and the balance locally." Carnival has Understanding the Sep 14
LSFO Premiums
One estimate puts potential premium
"more than 33,000 suppliers globally, but spends "difference between on LSFO in 2020 at $400/mt
less than $100,000 on 28,000 of thesethe tail
base of the supplier base is incredibly long."
cost and price, allows
Brown challenges vendors to better understand Carnival to negotiate on
Carnival's business, professing to have
"suppliers that don't realize Carnival has 10
the basis of data rather
brands" and who need to appreciate the than just wanting a
"logistical challenge of supplying a cruise ship
that has to be loaded and unloaded in an eight-
lower price."
hour period."
The focus for Brown is on "total value," the metrics of which, are measured in "quality and
service and value [that] includes innovation," a strategy that helps Carnival "maintain a
competitive advantage." More important, Brown looks to distinguish between "cost and price"
using a "bottoms up modeling, of what the product actually costs, how price is affected by
demand, specifications and so on." Understanding the "difference between cost and price, allows
Carnival to negotiate on the basis of data rather than just wanting a lower price."

And herein lies the differentiator. Total value is about more than just the best price of the day; it is
an understanding of how value is created, according to Brown, by "buying better and getting
better quality and service which is as important as streamlining the complexity of what we
manage and create more strategic partnerships that will give us competitive advantages over
time" (emphasis mine).

For obvious reasons, procurement for cruise

ships is more complex than it is for commercial
ships. But, just as cruise ship operators face
procurement challenges, so too do commercial

Unfortunately, there are
too many traders and
ship operators when it comes to fuel, the highest
voyage line item cost of a ship's P&L. Fuel, a
only a few deliver true
variable cost over which shipping companies value in what is an
have little or no control, represents the largest
exposure requiring a proficiency that most lack
ongoing stagnant
in-house. market where sustained
Certain shipping companies, especially the low prices have kept
larger ones, are better at understanding this
marginal traders in the
exposure, most however just seek the best price
of the day. To overcome this shortfall, almost all mix.
rely on traders who, through their global
networks, provide rapid access to information on pricing, quality, and availability. Less than a
handful offer strategic insight, quality control, and risk management. The unregulated
infrastructure of the marine fuels market has made the need for traders essential. Unfortunately,
there are too many traders and only a few deliver true value in what is an ongoing stagnant
market where sustained low prices have kept marginal traders in the mix.

In line with Brown's 'data vs. best price' approach, if the procurement function were to capture
all relevant data on supply availability, cost structures, financial risk, operational risks, service
and quality metrics, it would better position itself to obtain the right price. In so doing, forecasting
and strategic planning would become more reactive to unforeseen events for which root causes
could more accurately be identified and analyzed. Data collection and advanced analytics hold
the key for all future improvements in procurement performance.

Collecting data also improves process, efficiency, adherence, control, performance, and
reporting. Automating benchmarks across entities, including arbitrage analyses, management
costs by ship, segment, commodity, port, county, and region and tapping into external data
sources and time-series data all the way to counterparty solvency data is critically important
(especially true in the wake of OW and many of the second and third tier traders operating
today). Last but not least, converging data to forecasts, budgets, P&L, and performance targets
will achieve the holy grail of procurement, the kind of multi-tier visibility that companies can only
dream of today.

Digital Procurement
In the marine fuel space, the question is still open as to which of the up and coming "digital
procurement" software vendors will deliver the right platform. Maritime software providers Veson,
Globaris, and Dataloy to name a few, offer very basic bunker modules in their ERP platforms,
designed to support different business units. A number of small scale software vendors like
Inatech, Brightoil Online, ClearLynx, Danaos, Firm Counter, and as we saw recently,
Bunker-Ex and OilFront, offer a variety of platforms. All have, and will continue, to endure
growing pains due to a perceived lack of neutrality, market pushback, and concerns about
security and data breach. Fair or not, they all need to focus on overcoming these
misconceptions.

Someone is going to get this right. And when

they do, procurement managers be better
positioned to understand the difference between
"price and cost," which as Brown notes, is
Despite the sound and
fury of so many
"knowing what a fuel should cost when produced
at maximum efficiency and effectiveness" and
prognosticators as to
provides a competitive advantage. what fuels will be
The risk that shipping companies face with available, where, and at
exposure to the oil market is too high to just
what comparative price
ignore. Putting off technology solutions designed
to capture data along the value chain is no levels come 2020, the
longer an option. Procurement managers and
fact is, no one knows.
suppliers need to collaborate through a network
that enables better end-to-end cost optimization, The only certainty is
faster interaction times, and broader access to
that the fuel
external innovations.
procurement process
Will this automate the procurement manager's
job? No. What it will do is allow for more
will become far more
thorough analysis and scrutiny, creating more complicated.
impact the value of which will be the domain of
capable talent. As Steve Jobs said way back in
1994: "It's not a faith in technologywhat's important is that you have a faith in peopleand if
you give them tools, they'll do wonderful things with them."

Prediction: Despite the sound and fury of so many prognosticators as to what fuels will be
available, where, and at what comparative price levels come 2020, the fact is, no one knows.
The only certainty is that the fuel procurement process will become far more complicated. So
much in fact, thatready for it? Shipping companies will consider ways to outsource this
function, and in so doing, focus all their resources on their core business: managing ships and
the logistics of transporting goods and services (and vacationers!), in an environment of
extraordinary and unending growth of trade.

The beneficiaries of this new model will be the top global, financially sound trading companies
who are able to identify, assess, prioritize and mitigate risk. Combined with a strong technology
platform they will be in the best position to streamline 2020's oncoming supply chain
complexities. Shipping companies will seek out strategic partnerships with these traders to give
them the competitive advantage they need.

None of this will happen without technology. Someone is going to get this right, and with 2020
looming, to that someone shall belong the spoils.

About Steve Leonard

Steve Leonard has an extensive international background in marine and industrial fuels having worked at Motor
Oil (Hellas), World Fuel Services, Aegean Marine, and Maxum Petroleum. He was with ClearLynx until
December 2016. Steve has also provided fuel procurement and supply consultancy services for a number of
shipping companies including FESCO and Norwegian Cruise Lines. He is a graduate of Vassar College and
 obtained his MBA at the Chapman Graduate School of
Business in Florida. He is fluent in English, French and
Greek.

Steve can be reached at stcleonard@gmail.com

To contact the editor responsible for this story email us at

editor@shipandbunker.com

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