Outsourcing and third-party logistics in the Greek shipping industry

Future of Shipping

The shipping industry has a long history, but the nature of the business changes over that history. It has been changing in recent years because of the pressures for change caused by internationalization, globalization, technological advances, economic shifts in different parts of the world, and so on. Where the tradition has been for companies to sail their own ships, carrying cargo for a fee, more and more companies are finding different ways to accomplish the same business, such as by chartering vessels for the job at hand, or having other companies handle the procedures as a form of third-party management, or some other approach to cut costs, reduce risk, and yet increase business all at the same time. The changes in the global marketplace can mean bringing in more and more local players who can handle some of the difficult tasks involved in working through the bureaucracy, while chartering for shipping can involve more experienced people for certain specific runs.

The nature of competition now is such that shippers are no longer in the traditional port-to-port operations. Today, shipping goes further as shippers look for effective and credible ways to reduce costs, reduce transit times, increase flexibility, improve customer services, and, most importantly, remain competitive. In these circumstances, outsourcing their logistics needs to professional third party logistics providers serves the goal of supply chain management, which is to link the marketplace, the distribution network, the manufacturing process, and the procurement activity in such a way that customers are serviced at higher levels and yet at a lower total cost. Logistics on the other hand is all about gaining competitive advantage in the marketplace.

Some combination of the two approaches is not uncommon, either, as the shipping company may use a third-party management outfit to handle the chartering as well. It is important to ascertain the kinds of changes taking place at this time and to be able to make a more reliable forecast of how the business will be conducted in the future and how to take advantage of any changes that are made. The Greek shipping industry is a key one in the world, and as will be seen, much of the rest of the world follows the lead of the Greek companies, especially other European companies. An analysis of the state of the business today and the sorts of changes being made leads to a consideration of the forces shaping the course of shipping for the future. It is hypothesized that the major impetus for major changes today is economic, indicating a desire to cut costs and improve efficiency at the same time, and it is also believed that this trend will continue so long as charter shipping in all its forms continues to lower costs.

Methodology

The method of analysis begins with database searches followed by hand searches of various printed materials to develop an idea of the nature of the shipping industry, how it is change in the Greek industry, and what these changes say for the industry as a whole. In addition to descriptive analyses by various writes on the subject, the research will consider any relevant government documents, industry data, and other information that can be accessed and that then can be used in gaining a better picture of the issues involved, the changes being made, and what might be coming in the future. There are limitations to such an approach, but it is also the best approach when there is no likelihood of developing original data without a good deal of time to gather data directly. Industry reports and the like are useful because they take a longer term perspective than the individual is able to do without an organization backing the gathering of massive amounts of data over a period of years. The historical data in any case has to be gathered from what has already been published, and information on the current business climate can be gleaned from a variety of sources dedicated to keeping track of just that sort of change.. The analysis begins with an extensive review of literature and then analyzes the data found on the basis of careful reading, comparison, and a consideration of the sorts of data found, any themes that emerge, and a contrast between data from the past and data from the present, the organization of the industry in the past vs. that in the present, and trends that can be seen in any change.

Review of Literature

December 2004 2,074 31,457,642

These charts show the size and strength of the shipping industry in Greece on the basis of numbers, tonnage, and associations with other countries. Tracing the industry over time shows that it continues to grow in size and in its ability to serve more and more countries and more and more clients. The increasing tendency to outsource the management of vessels might be seen as evidence of this success, as if the companies had decided they could not handle the volume facing them and need external assistance, which may be as strong a force as the desire for lower costs.

Ship Management

Ship management can be broadly defined as the technique of managing vessels from a shore-based organization and including all the revenue, expenditure, investment, and overall policy, including both day-to-day and long-term aspects of the business. The term thus covers all the support services needed by a ship in order to carry cargo and passengers safely and economically from one port to another, while complying with local and international regulations. Ship management may be an in-house or third party operation.

Third party ship management is the term used for when a shipping company transfers or entrusts the management of a ship or fleet to a third party. In the very competitive maritime world of today, the regulations covering ship management are becoming more extensive all the time, with the result that smaller companies have fewer resources to enable them to cope with new laws and regulations. According to the Rochdale Report in 1970, there is an important part to be played by good independent ship management companies to help the small owner in developing his business. There may also be special circumstances where some larger companies may benefit from their employment. We regard the existence of good independent professional management companies as conducive to efficiency in the industry (Panayides 2000, p. 1).

Shipping today in terms of tonnage increases at the rate of 4 per cent per year, and ships are becoming larger even as their survey, maintenance, and port turnaround time is becoming shorter. This means improved ship productivity, but it also requires closer monitoring to reap the benefits. In addition, the increase in competition, introduction of national and international regulations like the ISM code, STCW and ISMA codes, and, most importantly, the need to manage profitably in compliance with these regulations means that ship owners are looking for more cost effective ways of managing their trade.

Third Party Ship Management is today an important industry in its own right, meaning that the client may not follow the traditional approach of doing business with the ship owner who is also the ship manager, and instead doing business with an owner and a manager whoa re two different persons entirely. Mitroussi (2004) describes this shift as similar in principle and practice to the separation of ownership and management in many industrial fields, as seen with the development of the salaried manager in the last half of the nineteenth century (p. 325). A large proportion of the world fleet today is operated by companies providing this sort of management service, meaning that ship owners are not merely chartering other vessels but are turning over the management of the process to a third party. The world fleet stands at about 50,000 ships, and currently about 10% are under third party ship management. The top ten ship managers do about 40% of the outsourced business, and they are followed by a number of smaller ship managers (Special report, 2003, para. 2). The ship manager conducts such operations as crewing and training, insurance, and managing the loading and unloading of the ships and the scheduling of deliveries.

While this approach has been growing, argument over whether this is the best approach and whether it is more or less costly for the shipping industry continues. Several different types of ships serve in the world fleet, performing slightly different tasks. Container ships carry most of the world's manufactured goods, and the most recent generation of such ships can carry the equivalent of 10,000 heavy trucks. Bulk carriers are used to transport raw materials such as iron ore, coal, and foodstuffs, and the largest of these ships can carry up to 20,000 tons of grain, which is enough for half a million people for a year. Tankers carry crude oil, chemicals, and petroleum products, and these ships can carry more than 300,000 tons of oil, enough to heat a city for a year. Among the other types of ships used are car carriers, gas carriers, heavy lift vessels, and ships for support of the offshore oil industry, as well as a number of smaller general cargo ships (Maritime International Secretariat Services Ltd. 2005, p. 6). Any of these ships may be managed by a third-party ship management company, a company that takes over management from the registered owner and then acts in the place of that owner. This system developed for several reasons, including as an imitation of other industries. In general, though, this form of management is considered to be more cost-effective and can also help reduce the costs of management and create greater efficiency in the operation of a fleet. The fact that only about ten percent of the world's cargo fleet is managed in this way today suggests that this approach is not yet considered a standard, though it may become so in the future.

Several definitions of ship management can be cited, such as that by Downward (1987, p. xi), who states,

The functions of taking care of a ship, i.e. responsibility for manning, maintaining, supplying and insuring the ship, and ensuring that the ship is available to the operators for the maximum amount of time possible. In other words, all the activities not carried out by the operators.

Spruyt (1994, p. I) says that ship management is "The contracted and professional supply of all on-board services, together with their shore supervision, which would normally enhance, a vessel from a bareboat into a time charter description, by a management company usually separate from the vessel's ownership." Rodger (1993, p. 3) says that ship management is "the management and sustenance of the ship itself rather than of the trade in which it is engaged." Most definitions show that ship management involves a number of functions that could be done by the owner or could be farmed out to a separate entity. Panayides offers his own definition when he states that "professional ship management may be defined as the rendering of services under contract related to the systematic organization of economic resources and transactions required for the sustenance of a ship as a revenue-earning entity. The advantage of this definition is that it recognizes that ship management involves the organization of economic resources and not the mere supply of services" (Panayides 2000, p. ).

History

Panayides (2000) finds that third party management began during the 1973 oil crisis, an economic crisis in which a significant number of vessels were repossessed or otherwise taken over by banks. The shipping markets then faced poor conditions and experienced low freight rates and poor sale and purchase market values, making it virtually impossible for ship owners to repay their debts. Many ship owners Did not survive these poor conditions, being forced into liquidation. They thus abandoned their vessels to their creditors, the banks, and the banks then entrusted these vessels to the hands of ship managers. After all, the banks did not have the expertise to operate these vessels and so needed to outsource. As Panayides writes,

This initial demand for third party ship management services encouraged experts from within the shipping industry to form offices and limited liability companies and tender for contracts. The fact is that the formation of such companies was an easy task since it required little capital investment encouraged their further development. Ship managers were not required to have an equity stake in the ship and hence faced little risk, as they were not directly affected by the vagaries of freight rates and shipping markets.

Panayides also finds that the ship management industry would have never become what it is today "if many of the traditional shipowners themselves had not recognized the opportunities offered by ship managers and handed over their own vessels for management," which they did because they recognized that third party management offered financial and administrative advantages and also because of "the increasingly regulated environment the shipping arena had grown to be" (Panayides 2000). One of the reasons for entrusting vessels to third-party managers was to "overcome national and international legal, ecological, public and trade union pressures and to enjoy the fiscal advantages of economies of scale" (Panayides 2000).

The idea of third-party management has been analyzed from those taking both a pro and a con view even as its use has increased. Third party ship management offers many significant advantages to those choosing to outsource, and it can also contribute to efficiency in a given shipping operation and for the shipping industry as a whole. As Paniyides writes,

It is also true that third party ship management does not appeal to many types of shipowners with various size and type fleets and based in various countries. The reasons for the choice not to entrust vessels to third party ship management may be very well justifiable in the context of the particular owner's circumstances. What is important, however, is for the owners to seek to satisfy the needs and wants of those, yet untapped, market segments (Paniyides 2000).

Among the arguments used to support third party management are improvements in efficiency, reductions in costs, and increased professionalism. For a traditional shipowning company, the primary issues will be efficiency and cost reduction. For companies like oil majors or banks, the primary consideration is that outsourcing is seen as a logical option given that shipping and ship management is not their primary activity:

Efficiency arises from the competency and ability of professional ship management firms in performing the ship management functions. It also arises from the global presence and networks of ship management firms that facilitate the capability to source crew from any of the various low cost supply centers throughout the world (Panayides 2000).

Given the tight labor market, the expertise of the ship's manager is invaluable, and ship managers also have contacts through global networks allowing them to obtain low cost crews and so cost reductions. Such a reduction in costs can be vital in shipping because of the volatility of the markets and a possible concurrent oversupply of tonnage that may mean depressed freight rates and an erosion of operating margins, and economies of scale can be in the service of third party managers:

This can be exploited by ship managers who can achieve low operating costs by reaping the benefits of scale economics and bargaining power by virtue of the number of vessels under their management. Bargaining power is used in the purchase of supplies for a large number of vessels and culminates in the achievement of large discounts. The prices that can be obtained by big ship management companies cannot be matched by small shipowners.

By achieving the right balance between the benefits to accrue to the company and those passed to clients, ship managers can assure profitability and competitiveness, and increase the attractiveness of outsourcing ship management (Panayides 2000).

Ship management firms are able to supply owners with crews on short notice when a fleet is being expanded. These companies also have a greater pool of managed vessels, which means that if faced with divestiture by shipowners, these companies can employ the crews elsewhere, which helps reduce the externalities or social costs:

The ship manager also relieves the owning company from the need to maintain a ship management department. Hence, the owner may concentrate on other aspects of the shipping business like sales and purchase or chartering, which are the two functions that are most often not entrusted to third party managers from traditional shipping companies. In other instances, it has been noted that many owners, being captains and engineers, are very good on the technical side of the business and prefer to concentrate on that and outsource commercial management (Panayides 2000).

Such outsourcing also contributes to cost reduction.

Panayides (2006) also notes the application of third party management because of changes in the prevailing concept of shipping. Panayides notes first that the conventional view says that the demand for maritime transport is a derived demand, specifically derived from the demand for goods. However, he then notes that "the demand for maritime transport nowadays cannot be solely considered to be a derived demand emanating from the need for products, but rather as an integrated demand emanating from the need to minimize costs, improve reliability, add value, and a series of other dimensions and characteristics pertaining to the transportation of goods from the point of production to the point of consumption" (Panayides 2006, para. 1).

Today, the nature of maritime transport has given rise to another concept, that of maritime logistics, noting that demand for maritime transport is differentiated from demand for maritime logistics ":on the basis of the added significance gained by specific dimensions and characteristics pertaining to the transportation of goods by sea. Hence, nowadays it is not simply the possession of products that is important, but rather the possession of products on time and at least cost. In fact, integrated demand in maritime logistics goes further, to demand for the possession of goods that have been transformed and have improved in value through their supply chain journey, on time, at least cost in the right quantity/level of quality and so on. This evolution in the characteristics of demand regarding the possession of goods brought about by globalization in production, consumption, changing consumer needs and global competition has opened up new areas for research in maritime economics and logistics" Panayides para. 2).

There has been a merging of the idea of logistics with that of supply chain management to alter the focus of much ship management. The supply chain is the first important issue. Virtual integration harnesses the economic benefits of two very different business models by offering the advantages of a tightly coordinated supply chain that have traditionally come through vertical integration, while at the same time, it benefits from the focus and specialization that drive virtual corporations. Supply chain management has as its goal keeping the supply chain running smoothly. Traditional methods used in vertical integration are altered to fit the virtual integration approach, but the ultimate goal remains the same. Swaminathan et al. (1995) offer the definition that the supply chain is "a network of autonomous or semi-autonomous business entities collectively responsible for procurement, manufacturing, and distribution activities associated with one or more families of related products" (Swaminathan et al. 1995). Ganeshan and Harrison (1995) offer the following definition:

supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers (Ganeshan & Harrison 1995).

Coates (2002) points out how retailers have taken a leading role in developing supply chain management and in innovating methods.

One model is reflected in companies like Dell Computer, which builds to specification. In the area of supply chain management, it has been found that in some cases, even though demand should remain relatively stable over time, there is a marked variability noted in the way orders are placed and supplies are restocked by retailers. The phenomenon is called the "bullwhip effect" and is named for the variations in reaction down the length of a whip after it is cracked. The effect happens in manufacturing when information about consumer demand becomes increasingly distorted as it moves upstream in the manufacturing process, a distortion which leads to excessive inventory throughout the system, poor product forecasts, insufficient or excessive capacities, product unavailability, and higher costs generally. Dell has made the supplier effectively into a partner. The company builds to specifications: "It's almost ideal from a supplier standpoint because we have real time information on what the demand is, and all the supplier has to do is get the product to us" (Coates 2002, p. 38).

The general operation of business today is described as follows:

Products reach customers through a chain of retailers, distributors, wholesalers, manufacturers, and component suppliers. Supply chain management is intended to accelerate the flow of goods, information, and capital in both directions, along the chain's entire length, and to help companies monitor that flow (Agrawal & Pak, 2001, p. 22).

More and more companies have used supply chain management (SCM) as a more comprehensive system to gain control of operations:

Businesses that adopt SCM generally view the entire supply chain as a single, integrated entity. Cost, quality, manufacturing, delivery, and customer service considerations are shared by every company in the chain, and inventory is the last resort for resolving the risk of supply-and-demand imbalances between suppliers and customers. Under this approach, a company and its suppliers work together to optimize the design, planning, production, and delivery of materials and other resources used in delivering or creating the end product or service (Harcourt & Hutchinson, 2004, p. 8).

As noted, there are different ways of ordering the supply chain, through production channels that may be horizontal or may be vertical. The decision as to which is preferred depends on the type of manufacturing system being used and the source of materials as well as the nature of the customers.

Another way of describing the difference between the two involves how different businesses are combined:

contrast is often drawn between vertical integration and horizontal integration. The latter arises when firms combine productive activities at the same stage of production. Horizontal integration would occur, for example, if one car manufacturer merged with another, such as when BMW took over the Rover Group; whereas vertical integration would occur if a car manufacture merged with a tire company, or a car battery manufacturer (Chrystal & Lipsey, 1997, p. 14).

A combination of companies is not necessary in either case, for the concept applies to companies with different business units. In the vertical organization, the units are arranged in a hierarchy, while in the horizontal organization, they are independent until their goods are combined.

Horizontal integration is a strategy for a company seeking to sell a type of product in different markets by creating several small subsidiary companies, each of which markets the same product to its own market segment or geographical territory. The horizontal integration of production is found when the company has plants in several locations to produce the same product or similar products. Horizontal integration of marketing is common, while horizontal integration of manufacturing is less so. Vertical integration is also a style of ownership and control, but here the companies are joined by means of a hierarchy with a common owner. Each unit of the hierarchy may produce a different product, and the central organization combines the products to satisfy a common need. Vertical integration can be for marketing and for manufacture alike.

Horizontal integration is more common, in part because of the perception that vertical integration does not work. This assessment is a fairly recent management idea, and there is still a good deal of debate on the issue. However, investigation shows that the "most successful industries of the past few decades -- personal computing, networking, and anything Internet-based -- are all aggressively horizontal" (Transparent horizontal integration equals bad customer experience, 2005, para. 1). Some analysts see this as a good thing given that horizontal integration has a number of advantages by allowing for maximal innovation and competition in every piece of a product or service, which in turn drives down costs and advances technology. At the same time, some significant risks can be cited, with one noted in particular: "if not handled carefully, horizontal integration leads to a really bad customer experience. It is no coincidence that some of the most infamous examples of bad products and services today -- personal computing and mobile phones, for example -- and also industries which are either the most aggressively horizontal, or industries which are moving from being vertical to horizontal." (Transparent horizontal integration equals bad customer experience, 2005, para. 3).

Coates further cites a number of specific issues involved in supply chain management for retailers and how they address the issues. The first is vendor managed inventories, which goes beyond Just in Time supply and is used by Wal Mart and Procter & Gamble, which have worked together in a partnership for soaps, detergents, and the like to be placed in retail stores, with title passing at the check out counter.

Second are pull through operations, made possible by it improvements, "where real time data and collaboration between supply chain members make it possible for demand at the point of sale to drive the order cycle and the supply chain" (Coates 2002, p. 38). Companies such as Polo Ralph Lauren and Bloomingdale's "make market demand the driving force" (Coates 2002, p. 38) and ask the same of their logistics providers.

Third is postponement and merge in transit, a practice that seeks to redefine the decision points for the supply chain:

Companies such as FedEx and UPS have implemented sophisticated merge in transit solutions for their retail clients. but, it's companies like Target which drive postponement, where cargo from various origins, including domestic, is taken out of the origin container and matched with products going to the appropriate stores or distribution centers (Coates 2002, p. 38).

Fourth is global sourcing, and retailers more than any other industry literally search the globe for the best combination of price, quality, and production availability. The Internet is one of their favorite tools for this process.

Fifth is door to door focus, the management of which enables the retailer to determine in store dates and landed costs so as to manage their margins and product offerings:

Retailers are less concerned with speeds over the water, ground or air, and more with the time in the order cycle and in the pipeline. Time is money to the retailer, and logistics outsourcing has been the result of this process in many instances (Coates 2002, p. 38).

Sixth is quantification, and both Home Depot and Wal Mart are well-known for using every available tool, particularly it, to measure and manage every phase of the operation:

They work with companies like NYK and MaerskSealand to develop measures of supply chain cost and performance, which in turn helps the retailer to determine modal trade offs, inventory strategy, and price point (Coates 2002, p. 38).

An issue that impacts supply chains is the question of life cycle. As Bradshaw notes,

Inventory is an asset that, if managed efficiently, can work to the retailer's advantage. Yet all too frequently, it goes the other way. Often, retailers find themselves saddled with excess merchandise that they can't move. The surplus goods languish in warehouses, their obsolescence growing with each passing day, accruing storage and carrying charges and impairing a buyer's cash flow (Bradshaw 2002, p. 178).

Keeping the issue of life cycle in mind provides a way to control this:

Every transaction has a life span that consists of various moving parts: shipping, inventory control, information services and financing solutions, among others. Integrating these parts into a single, uninterrupted flow is pivotal to avoiding the scenario described in the ad. In fact, it is absolutely essential to optimizing the efficiency of an entire enterprise (Bradshaw 2002, p. 178).

This is another definition of and rationale for a supply chain management approach. Managing the supply chain effectively can be key to maintaining a competitive advantage.

Supply chain management has become the focus for many different types of operation, both wholesale and retail. More specifically, a B2B marketplace has developed, defined as "a virtual market where buyers, suppliers, and distributors find and exchange information, conduct trade, and cooperate via portals, trading exchanges, and collaboration tools" (Knolmayer, Mertens, & Zeier 2002, p. 66). Online auctions, or virtual auctions, are seen as a highly developed form of virtual procurement. Such auctions started in 1995 and have since evolved to the point where they are an important element of electronic markets. Such auctions have certain advantages in that there are no costs for offices, personnel, or travel. Time pressure is much reduced as well, meaning there is less pressure on those participating (Knolmayer, Mertens, & Zeier 2002, p. 74).

The way this system works is that a company may need a particular product in a particular quantity. The company may institute a search using full-text retrieval or may search by product or manufacturer names. Sealed bid auctions may be used, and the end of an auction may be determined when a certin time is reached or based on a decision by the auctioneer or the supplier (Knolmayer, Mertens, & Zeier 2002, p. 75).

Such a means of acquiring needed products or materials has become more common as the Internet has become a necessary business tool and as companies have learned the value of conducting business online. B2B transactions in particular can streamline the process for both buyer and seller. There are certain problems inherent in the auction process, such as uncertainty about the success of a given transaction. If a company simply orders the goods it needs from another company on the Internet, it saves money because of lower overhead and is assured delivery in a timely manner. If a company engages in an online auction for the goods, the cost my be reduced even further, though the company cannot be certain it will be the winning bid and so will have to make numerous bids on different sites or have a second plan for how to purchase the goods. Such auctions are used for a wide variety of types of goods, including more and more for raw materials in bulk that can be turned into products for resale. Shipping has become part of the process and can now deliver raw godos to ports from which those goods can be delivered by truck to individual manufacturers.

Still, the fact that the practice has become more common suggests that it saves a good deal of money for companies in spite of possible drawbacks. Purchasing by computer for B2B transactions is more efficient, and a network has grown to serve these sellers and buyers and to make the process easier and more efficient, always serving the needs of supply chain management by keeping the goods moving between the two. Managers at the purchasing company need to recognize the time frame in which they can make bids and receive goods and the alternatives that will assure that the supply chain is not broken in any case.

Some companies have found that using such an e-procurement system leads to a case of automating failure, setting up a system that spends money but does not reduce costs sufficiently to make the system worthwhile. Such failures are usually attributable to not using proper or sufficient human oversight. An automated system can only make decisions on the basis of the program used and the data fed into that program. Human managers have to monitor the process and make changes when the system is not performing as desired. There are many ways to do this, Wal-Mart and Sara Lee both created collaborative forecasting programs by distributing demand data by e-mail (SCM Information Technology 2007, para. 4). Their success shows that the technology need not be complex to assure success but only that it needs to have the necessary data available when needed.

In the shipping industry, such requirements for supply chain management and just-in-time delivery requires concentration on not just the business of the shipping company but the business of clients. This adds a layer to what has to be considered in fulfilling shipping needs, and this can be another reason for turning to third party management, the need to see to it that the specific delivery requirements are given precedence over internal business issues facing the shipping company at a given time.

In the past, maritime shipping has been seen as an uncertain element in the supply chain, based on the view that trucks, planes, and trains are more reliable for deliveries, while delivery by sea can be more problematic. This is an old view and ignores the reality that the supply chain is best served by the new partnership among the different transportation modes, more and more using it as a way of assuring delivery and coordination among the different modes of transport. Transport of goods by sea then leads to the transfer of those goods to rail or truck, often using the same containers, as noted. Indeed, the use of such containers has increased the level of coordination among the different modes of delivery, and delivery by ship has had to become much more reliable in order to compete with the greater speed possible by air. Some goods simply lend themselves more to delivery by some type of sea-going vessel, especially between countries and different parts of the world, such as oil. Ships are also able to carry far more of a given good than can other forms of transport, which helps reduce shipping costs and so serves the needs of manufacturers and retailers. Shipping by sea is more and more a key component in the supply chain and has been adapted to the needs of even such time-sensitive methods as just-in-time delivery, aided by the use of technology and by more stringent management methods applied both in-house and by third parties.

Panayides sees shipping as made up of two areas, those being maritime transport and logistics and supply chain management. Maritime transport involves the transportation of goods and/or passengers between two seaports by sea. Logistics and supply chain management has been harder to define:

In general, logistics is the function responsible for the flow of materials from suppliers into an organization, through operations within the organization and then out to customers. A supply chain consists of the series of activities and organizations that materials (raw materials and information) move through on their journey from initial suppliers to final customers. Supply chain management involves the integration of all key business operations across the supply chain (Panayides 2006, para. 3).

The shift to logistics and supply chain management is a shift from simple transport to transport under very controlled conditions clearly requiring more management intervention. Panayides makes this clear when he writes,

The characteristics of logistics and supply chain management mean that maritime logistics as a concept largely applies to the transportation of containerized cargoes via a liner shipping service as opposed to the transportation of bulk cargoes say in a tramp shipping situation. There are instances, of course, where maritime logistics concepts can apply to the transportation of bulk cargoes, especially with regard to the integration of cargo owners and shipowners via alliances and the focus on the achievement of logistics goals such as timeliness, reliability, low cost, etc. (Panayides 2006, para. 5).

Traditional customers of maritime transport firms have shifted their focus to door-to-door service from a single provider. This shift is in keeping with the use of containers that can be transferred directly to truck beds, as noted, and delivered whole. Panayides indicates why ship managers are tending toward logistics rather than the traditional system when he writes,

The overall aim of logistics is to achieve high customer satisfaction by providing a high-quality service with low - or acceptable - costs since the key task, according to the Institute of Logistics and Transport, is the time-related positioning of resources. Arguably the time-related positioning of resources is also a key aim for liner shipping and maritime transport. Logistics adds value by making products available in the right place at the right time. Logistics adds the so-called place utility if it makes a product available at the place it is needed. It adds time utility if the product is delivered at the right time. Maritime transport and liner shipping in particular also aim for adding place and time utility in performing their related operations. Logistics has a number of indicators that measure the extent to which the broad logistics goals are achieved. These include the management of demand and supply to avoid surpluses and shortfalls, the full utilization of resources, minimization of losses in transportation, cost reduction in transportation and storage, meeting customer needs in order fulfillment and improving customer service and customer communication. These are indicators that also apply in measuring the performance of liner shipping operations (Panayides 2006, para. 7).

Clearly, logistics provides not only for the on-time delivery of goods and for full tacking of any given shipment but also contributes to the assessment of how well the system works. In this way, both cost reduction and improved efficiency are achieved.

Efficiency and cost reduction also appeal in the adherence to international shipping regulations, which are becoming more and more stringent. It is seen as increasingly difficult to implement and adhere to the specifications in regulations like the International Management safety (ISM) Code, which requires additional staff that are technically competent:

Bearing in mind the overwhelming need for cost reduction in order to remain competitive, it would seem almost impossible for smaller companies to employ additional staff to oversee the implementation of the Code and adherence to the increasingly regulated shipping environment. Professional ship management firms are able to do this because they can achieve economies of scale by virtue of the size of their managed fleet (Panayides 2000).

Panayides and Cullinane (2002) offer an assessment of the rationale for the vertical disintegration of ship management and find that it suggests that there might be compelling economic benefits for the separation of ownership from management, which is in keeping with the reason most often given for turning to this type of management. The authors note that in order to develop effective marketing strategies, it is important that ship managers know the criteria used by current and prospective clients for ship manager selection and evaluation as they try to make that same choice for their own situation. The authors set out to identify the dimensions for ship manager selection and performance evaluation and to indicate their relative importance in a discussion of the implications for marketing. The methodology they use includes the collection of secondary and primary data, both from ship managers and their clients, using interviews and a mail survey. The researchers find that the most important dimensions in selection today include technical ability, reputation, and competency, while the most important dimensions for evaluation are responsiveness, trustworthiness, and technical ability. The researchers also find that price alone is not perceived to be as important in ship manager selection. The authors conclude that placing an emphasis on these dimensions in the formulation of a marketing strategy will contribute towards the attraction and retention of clients, but that using cost-cutting measures to allow price reduction will be ineffective over the long-term. Of course, this may not mean that companies do not use third party management as a cost-cutting device, but it does indicate that they should not promote their service on that basis.

Legal Environment

Ship managers today face new challenges. They not only must manage more efficiently to ensure growth, expansion and profitability, but they also must ensure full compliance with national and international regulations and to keep up with changes in those regulations. With the introduction of the ISM Code, STCW, additional pressure is felt, and for those belonging to the ISMA, this means an additional "burden" on top of the quality standards already adhered to as required by the ISM Code and STCW.

The ISM Code was developed in response to a number of serious accidents in the late 1980s, accidents that were caused by human error and management faults. Lord Justice Sheen described the management failures as "the disease of sloppiness." In response the International Maritime Organization (IMO) adopted resolution a.647(16), Guidelines on Management for the Safe Operation of Ships and for Pollution Prevention, with the purpose being to provide responsible parties with a framework for the development, implementation, and assessment of safety and pollution prevention management based on good practice:

The objective was to ensure safety, to prevent human injury or loss of life, and to avoid damage to the environment, in particular, the marine environment, and to property. The Guidelines were based on general principles and objectives so as to promote evolution of sound management and operating practices within the industry as a whole (Safety management 2006, para. 5).

To this end, the Guidelines were based on the view that existing international instruments were the most important means of preventing maritime casualties and pollution of the sea, and the Guidelines included sections on management and the importance of a safety and environmental policy. In 1993, IMO adopted the International Management Code for the Safe Operation of Ships and for Pollution Prevention (known as the ISM Code). The Code was made mandatory in 1998.

The Code establishes safety-management objectives and requires a safety management system (SMS) to be established, with the responsible party defined as the shipowner or any person, such as the manager or bareboat charterer, who has assumed responsibility for operating the ship. This places the responsibility on third party managers as well. The responsible party must then establish and implement a policy for achieving these objectives, including providing the necessary resources and shore-based support. It is required that every company "designate a person or persons ashore having direct access to the highest level of management": "The procedures required by the Code should be documented and compiled in a Safety Management Manual, a copy of which should be kept on board" (Safety management 2006, para. 12).

The ISM Code is supported by various international groups and organizations, such as insurance carriers who see the Code as a good starting point for safety management and for the prevention of accidents. Lloyd's Register, for instance, notes the requirement for creating a safety management system, and the group also states that such systems have an important role to play and can help "ensure [that] safety, quality, environmental and business risks are managed while offering opportunity for continuous improvement" (International safety management (ISM) code: Managing risks and improving performance 2005, para. 2). The group also makes various recommendations about the system to be developed, such as to keep it simple and manageable and to concentrate on the benefits it can bring to the business.

Panayides (2000) notes that there is a belief that the demand for ship management services will increase because of the introduction of the ISM Code, and Panayides agrees to a certain extent "because many shipowners may have recognized that it is not economic to implement and maintain the requirements of the ISM Code. Hence they might have turned to managers that have the ability and expertise to implement the requirements of the Code. Nevertheless, this is only true for small shipowning companies. If companies own very fewA vessels, then maintaining an additional department or employing additional personnel for overseeing the requirements of the Code is not a viable option" (Panayides 2000). For large companies with many vessels, though, the economies of scale are achieved by implementing the Code over a large fleet and not necessarily by outsourcing management:

In fact, this is one of the reasons that ship management companies are able to offer this service and obtain ISM Code certification at a relatively lower average cost. Hence, although business has been set to increase prior to the implementation of the first phase of the Code, there has not been a major boom for the ship management industry. Benefits that have accrued to some ship managers are only for the short-term as the increase in business will only be a short-term phenomenon, and problems of competition will again arise as new companies enter the market. Ship managers should not, therefore, view the ISM Code as a long-term solution to their problems. Long-term solutions must be sought by concentrating on clients' needs (Panayides 2000).

Panayides cites Osier (1999, p. 8) on this issue:

Whatever the manifold merits of the International Safety Management Code... It did not spark the widespread flight to third party management many pundits were predicting just over a year ago (cited by Panayides 2000).

The second phase of the Code came in 2000, leading to more speculation about flight to third party managers. Panayides says this came about because of the belief that "owners of general cargo and break bulk vessels are not as well prepared as the tanker and dry bulk owners of phase 1. Nevertheless, it must be pointed out that such types of increase in business, despite being welcome, are not enough to sustain competitiveness and growth" (Panayides 2000).

Still, it is clear that the implementation of the ISM Code did have some effect and did increase the movement to third party management to a degree, if only for the expertise that could be bought in this manner.

Examples

The primary benefit that most shipowners attribute to outsourcing is the ability to reduce costs and operating expenses without compromising service, representing a major cost saving for the shipowners. Outsourcing often allows companies to focus on the strategic issues of running the business, which is one of the increasing complexities facing owners today. Benefits emerging from outsourcing ship management can include lower insurance premiums, more competitive ship yard prices, priority in survey period for dry-docking, crew cost reduction, software provision in preventative maintenance, and above all, substantial financial benefits to the company. The company can thus concentrate more on strategic issues, marketing, it development, and rolling investment programs.

As noted, traditional shipping represents a port-to-port operation. Today the system allows the logistics operator to have a supply chain from the seller's factory inland to the buyer's premises inland. The logistics operator also does all the packaging, labeling, sorting, customs, documentation, consolidation, collection and delivery. The current system is fully computerized and therefore offers a tracking system and online access to suppliers and buyers alike.

Consider how this has been achieved at various companies, specifically at Caterpillar Logistics, Agere Logistics, P & O. Ned Lloyds, and Danzas Intelligence Warehouse Management.. Caterpillar Logistics is a company that features its expertise in supply chain management and that states that "we know firsthand that logistics can either make or break a company... For more than 80 years, Caterpillar Inc. has been building the world's infrastructure and, in partnership with its worldwide dealer network, is driving positive and sustainable change on every continent. With 2005 sales and revenues of $36.34 billion, Caterpillar is a technology leader and the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. Approximately half of all sales were to customers outside of the United States, maintaining Caterpillar's position as a global supplier and leading U.S. exporter. The company employs more than 85,000 people around the world" (Our story 2006, para. 2).

The company is in a good position to offer expertise in supply chain management adapted to the logistics of maritime transport. This area has not been a focus for the company, which instead notes its expertise in areas like forestry management, chemicals, and energy. The company has adapted its methods to serve the needs of shipping and has been involved peripherally in shipping in any case, given its focus on energy supply and its handling of delivery of energy to different parts of the world. The methods used by this company for supply chain management apply equally well for managing shipping and for assuring on-time delivery of goods. Company representatives note the degree to which various types of company seek outside management of certain operations as a way of reducing costs, and cost reduction is a major focus for Caterpillar in order to serve the client and attract new clients.

Agere Logistics is a company that focuses on third party management and logistics, with a particular emphasis on Asia, though services are provided around the world. The company focuses on specific areas, such as transportation. As one analyst of the business notes, providers of third-party logistics services today are seeing strong growth as shippers look for help with mounting challenges, noting, "Demand for transportation services is high, capacity is tight, rates are booming and carrier costs are through the roof. Many manufacturers are seeing business pick up and increasing their global scope, but are having difficulty gaining the adequate freight capacity to get materials into manufacturing sites at a reasonable cost (ocean freight rates in some Asian lanes have skyrocketed almost 100% in the past year)" (Hannon 2005, para. 1). Agere has been giving special attention to its supply chain system and has made a number of changes to make it more efficient. A total Order Management system has been implemented to help Agere manage its production sites on a daily basis. The company has been working to overcome earlier losses when its telecommunications business crashed. As a result, the company has cut its supply chain costs by 33%, improving shipping performance (Douglas 2004, paras. 7-9).

Outsourcing has become more and more a part of the logistics management function, especially for underfunded logistics and supply chain organizations. The third-party logistics industry as a whole has grown an average of 14.2% in the U.S., but revenues for 2004 grew a robust 16.3% for the industry. One analyst notes that "as outsourcing for production and manufacturing increases and buyers get more materials from overseas, supply chains are getting more complicated and demand for 3 PLs will increase to help companies manage part or all of those global supply chains" (Hannon 2005, para. 2). Agere has found third party logistics helpful and sees a number of ways of making ship management more a key element in the delivery of both supplies and finished products in an on-time supply chain.

O, Ned Lloyd Lines is a smaller company that is now known as the Maersk Line offering a wide range of services. The Maersk line is to be fully implemented soon as it is now phasing in the P&O Nedlloyd vessels to offer an expanded geographical scope and service range in order to optimize cargo routing to give customers greater flexibility, higher frequency, and improved transit times. The company emphasizes security, and it also notes one of the new reasons why third-party management has become more valuable in order to comply with the new U.S. Customs 24-Hour Advance Vessel Manifest Rule, a rule carriers and shippers alike have to comply with in providing documentation for cargo on vessels calling at United States ports. A similar but not identical rule has been implemented for Canada (Transportation security 2006, paras. 4-5). Such requirements place a greater burden on shippers and shipping companies and can be handled more efficiently by a third-party dedicated to implementing all such rules and better able to prepare for any changes as they are made. Other ports also have more stringent rules all the time, something ship managers must monitor in order to know what is required and how to comply. As the smaller company is merged into the larger Maersk Line, the entire line is also shifting to greater centralized control in order to manage its supply chain system. Whether this leads to third party management or not depends on the course of business and on what third party management companies offer in the future. Maersk management sees value if the external management company has a fully automated system that allows for the tracking of all shipments and that helps cut costs. Indeed, cutting costs is cited by those companies that have started third party management, and it is cited as a goal for those considering doing the same thing. Without the cost saving, many companies would not consider such a move.

DHL Danzas Air & Ocean supports a number of it tools and management programs as part of its freight forwarding business, and the company also offers such value-added services as cross docking, pick up and delivery, customs clearance, and cargo insurance. The company also operates its own security network. This company shows the trend toward melding various operations so as to be able to provide logistical services ranging beyond basic tranasport by assuming full responsibility for a customer's supply chain, performing services such as warehouse management, packing, and billing. The company also provides industry-specific expertise. The company also notes that the ocean freight market grows by five to six percent per year, with the main engine of growth being "the increasing global linking of value chains and trade flows - especially in Asia - in addition to general global economy growth... within the ocean freight market, container shipping is the fastest growing segment and has experienced rapid growth rates over the last few years" (DHL Danzas Air & Ocean 2005, p. 3).

Information Technology

Information technology has transformed many industries in the global marketplace, and shipping is one of those industries. It has also been adapted to the process of third party management in shipping and provides greater efficiency as well as whatever cos benefits can accrue from improved efficiency. Power (2004) notes how cost-conscious shipowners have become and how this often interferes with plans to implement it solutions because "they may sell their vessels and buy new ones or move them in and out of third party management, making it difficult to plan it investment; owners may come from a maritime background where it was not used and view it with suspicion. In the meantime, technology keeps changing, encouraging a stance of wait and see" (p. 6). Still, there are it solutions for many issues in shipping and for management issues in particular.

According to one group providing training for the use of it in shipping, in the past the shipping and maritime industries were dependent on personnel with practical experience from the sea. More recently, though, shipping has become more dependent on personnel with an academic education and a background in scientific research and development. Shipping today is a knowledge based industry, and competence is not the main competitive advantage for the industry. As the group notes,

Studies of supply and demand for officers and ratings world wide concludes with 4% deficiency of officers in year 2000. This shortage is likely to increase in the coming decade. In the future we will therefore have to figure on national and international shortage of qualified officers. We still need experienced officers on board and in the shipowners office (Ship Management and Information Technology 2001, para. 2).

Information and communication technology (ICT) aboard vessels and the offices of at ship owners have become an important aid in the ordinary work of the company.

Roumboutsos, Nikitakos, and Gritzalis (2005) point out that shipping companies are high-vulnerability information handling organizations (HIHOs), companies that in the past used exclusively HIHO private communication networks and owned satellite resources in order to share and transport sensitive information. More recently, though, the ability for the HIHO network users to exploit the advantages of the low-vulnerability information handling organizations' (LIHOs) value added networks, allows for the augmentation of the HIHO networks. In the maritime sector, this is seen in a push-and-pull effect on the need and demand to transfer information onboard and ashore, causing many companies to experiment with interconnected HIHO and LIHO open distributed systems and networks for their ship-to-shore communications, causing security to become an issue in a domain, onboard-ashore data transmissions, where little information on the level of risk is available. The authors offer a modelof risk assessment and management that is applicable where information on potential risks and their impact is minimum and simultaneously changeable, and the model is also connected to a security profile for interconnected HIHO and LIHO open distributed systems and networks. Such connections allow for greater control from a distance with instant communication and with access to a wide variety of data that can be used in the operation of the vessel and in maintaining a supply chain in terms of delivery of goods. Such a system is useful for whatever sort of management process is in use, whether in-house or third party.

According to the Maritime Institute of Malaysia. It is today "a strategic tool for players in the maritime industry in gaining competitive advantage with its prominent use in a whole range of port operations" (Information Technology a Bid Edge for Maritime Industry Players 2007). Much of the technology in place today is geared to assuring just-in-time delivery of goods and in fulfilling other supply chain management concepts. This has been accompanied by less dependency on labor and greater reliance on cutting-edge it systems and state-of-the-art it-backed technologies. It is also important for port security. In addition, "Port community systems (PCS) meanwhile have been developed to assist the rapid flow of information between firms involved in moving goods in and out of ports" (Information Technology a Bid Edge for Maritime Industry Players 2007).

It has become even more valuable in a wireless and real-time environment, providing for such activities as tracking, tracing, and controlling cargo shipments.

The use of it serves much the same purpose as the use of third party management, that being to reduce costs while improving efficiency. The two together can provide the most savings while also enabling the owner to monitor operations in real-time if desired and to be prepared for any eventuality. The third party management firm also can monitor processes and see to it that goods are delivered on time and safely, and such an improvement in operations can provide a competitive edge

Summary and Conclusion

As is true for many other management techniques, the pressure for using third party management may increase in the future simply because more and more companies are using this approach, but this pressure will only be effective if outsourcing does indeed lower costs and yet maintaining or exceed existing levels of performance. As companies using third party management show lower costs and so increased profits, it becomes a competitive disadvantage not to do the same thing or something that is even more effective, and at this time there is no other approach that seems to deliver the same benefits. Third party management ha already grown as much as it has because of the perception that it works as intended and that it also does not lessen the effectiveness of the management process.

As can be seen from the above, such effectiveness has to encompass not only cutting costs but also on-time delivery and the assurance of safety, as well as the smooth operation of the vessel throughout its voyage. The use of it today is another competitive advantage that aids with all of these considerations, providing the means to achieve greater efficiency, better scheduling, and the entire panoply of other operations that have to accompany the transport of goods, such as assuring that there is a crew waiting to unload and transfer the goods to waiting vehicles to continue the transport of the goods to their final destination. The process can also involve juggling a large number of schedules for a variety of vessels at one time, an approach that would clearly be required for a large shipping company like some of those in Greece. Computer-assisted management is valuable for keeping track of a large number of vessels, the ports they visit, and the foods being transported to various destinations on a given schedule.

The growth of third party ship management has come about as part of the globalization of trade and accompanying changes in regulations as well as the increasing need for on-time delivery and the need to cut costs to remain competitive. Third-party management gained among smaller shipping companies first because this approach could provide them with expertise they did not have, with links to information they could not nurture in any other way, and in order to gain access to the sort of network that the third party ship management company has. Larger companies are better able to develop their own departments to do the same thing, and they will continue to do so as long as that gives them a competitive advantage. If outsourcing provides more cost benefits, then outsourcing will become the way these companies choose as well.