Newcastle University Business School

The Route to Profitability

The route to profitability

In a challenging economic climate, businesses are doing their level best to cut costs and maximise efficiencies to boost their profits.

This is particularly true for shipping companies that send containers full of goods to customers all over the world.

A new study has looked at various ways in which shipping companies can reduce carbon emissions and fuel consumption costs as they try to work out the most cost-effective trade route for sending containers to their end destination.

The research will be of use to company managers who are looking to solve real-time, practical problems within maritime operations. It could also help policymakers who want to promote environmentally sustainable business practices and reduce the carbon footprint of firms in the logistics supply chain.

Dr Arijit De of Newcastle University Business School says: “Container transport is the primary mode of transportation for the shipping industry. It is a huge business for these firms, with millions of tonnes of goods shipped across the globe on a yearly basis. We wanted to explore how fuel consumption and carbon emissions affect shipping companies’ attempts to maximise profits while mitigating the effect of disruptive activities on sending goods to their customers.”

The authors of the study created a mathematical model and a robust algorithm for enhancing firms’ profits, taking into account various aspects of the shipping operation such as designing vessel routes and determining the speed of the ship, carbon costs and the amount of fuel consumed by the vessel on each sailing leg. They explored ways in which firms could cope with unexpected disruptions caused by adverse weather conditions by considering possible recovery strategies such as swapping port visits, rescheduling the route of the vessel or operatingthe ship at lower speeds to save on fuel costs. The model and algorithm were then tested on a number of data sets of shipping companies over a two-week period, four-week period and six-week period – a comprehensive exercise that performed a thorough searching procedure on huge number of possible outcomes. From this, the most cost-effective outcome was determined.

In particular, the study considered the importance of fuel bunker management strategies within shipping operations. Bunker fuel is the term used to describe refuelling of a ship’s fuel tank which is then used to power engines of the ship. Typically, two types of fuel are used: marine diesel oil (MDO) when the ship performs its loading and unloading operation at the port and heavy fuel oil (HFO) when it sails at sea. The aim of the study was to explore how effective fuel bunker management decisions – related to which ports to refuel at, and how much to refuel – could help shipping companies to reduce costs and carbon emissions and maximise profits.

Dr De says: “Our study highlights several strategies that shipping companies can adopt to lower their fuel and carbon costs and therefore increase their profits. It’s essential that they redesign their vessel routes, determine which bunkering ports to use and accurately estimate the amounts of different types of fuels they need. Choosing ports with a lower bunker fuel price can help to reduce overall operational costs.

“It’s also important that companies have a contingency plan to cope with disruptions due to adverse weather or port closures. They could, for example, have several route options available; one for a scenario which has no disruptions and others for scenarios which consider the possible occurrence of disruptions.

“Our study showed that reducing the speed of the vessel could lead to a decrease in bunker fuel consumption or fuel cost. This strategy could also help to reduce carbon emissions – very important for routes that are subject to higher carbon taxes and therefore incur greater costs for the company. However, there is a trade-off; reducing the ship speed increases the time it takes for the vessel to travel between ports. Shipping managers need to be mindful of any delays that could mean customer demand is not met. Therefore, a decision related to lowering vessel speed should be taken into account while ensuring that there are not delays in meeting customer demand.”

The importance of the research extends, not just to individual companies, but also to firms across the logistics supply chain that might be affected by delays or costs incurred by shipping firms.

Dr De says: “Shipping companies will seek to maximise their profits, but if they incur more costs then they might decide to pass on some of these costs to their end-customers, which might have an adverse effect on the customer demand. Although, our study explores the possible strategies which can be adopted by shipping companies for reducing their cost component which will help to enhance the profitability. Increasingly, carbon taxes are a big factor as governments around the world look to reduce carbon emissions to help preserve the environment. Policymakers might therefore be interested in our research as they seek to regulate the shipping industry and wider logistics sector. They will want to promote sustainable shipping practices and clamp down on practices that have an adverse effect on the environment. Our study provides some useful insights into effective fuel bunker management strategies within shipping operations, both from a cost point of view and from an environmental perspective.”

Our study highlights several strategies that shipping companies can adopt to lower their fuel and carbon costs and therefore increase their profits. 

Dr Arijit De

Lecturer in Operations Management