Risk Management Strategies for a Shipping Company

Introduction

To make all the important decisions in relation to management, some forms of risk assessment is utilized. These risk assessments and evaluations include the issues that need to be managed and the quantity of effort that is required to achieve adequate performance and avoid undesirable events. In many sectors, there are formal techniques for the accomplishment of such risk assessments, including the shipping industry.

Risk management and assessment must be utilized effectively to ensure the safety and the protection of individuals and businesses. More importantly, risk assessments and risk management strategies must be used efficiently in the shipping industry to promote the security and well-being of their passengers and customers, and enable the industry to establish their pleasant and excellent reputation in relation to service in the market. In addition to this, the use of risk management systems and strategies would somehow reduce accidents and other incidence related to the negligence and poor management of many shipping lines.

With this importance, this paper will be presenting a risk management system and its implementation for the operation of fleet vessels. It would also justify the proposed risk management system and its implementation strategy by evaluating the elements of the system and by analyzing examples of both poor and good risk management practices within the shipping industry. Moreover, techniques relating to risk and crisis management will be discussed, including the relationship between maritime incidents and poor management, onboard the ship and on the shore. This paper will also evaluate risk management strategies currently in use within the maritime industry.

Problem to Consider

A certain shipping company has just won a contract to manage a mixed fleet of twenty-seven vessels, which include 10 product tankers, 2 chemical tankers, 5 Very Large Crude Carriers or VLCCs, 9 bulk carriers, and 1 RoRo vessel. All of the vessels are aged between 5 and 12 years.

With this, a member of the middle management team of a ship management company is assigned by the company’s Chief Executive Officer or CEO to introduce and implement a risk management system to cover all of the operations of this newly acquired fleet of vessels.

Risk Management System

Before the implementation and proposal of specific risk management system, one must be able to define and discuss the concepts related to it.

It has been reported that a risk management system includes written procedures to ensure it is known what, how, when and by whom action is to be undertaken to treat risks (‘Risk Management’ 2005). Because it includes written procedures, proposals and plans can be made to ensure its effective implementation. A risk management system is important because it seeks to protect the safety of individuals, it defends the organization from legal liability, it provides better information in the decision-making process, it enables better asset management and maintenance, and it improves the perception of a specific organization among stakeholders (‘Risk Management’ 2005). With these, it can be seen that a risk management system must be developed by organizations in different sectors, to ensure the protection and security of their business and their consumers as well. Risk management is also related to crisis management, as risks should be identified first, for they can be regarded or they can arise as sources of crises or problems in the future operations of organizations. Before a company can properly and effectively implement crisis management strategies, it must be able to focus first in its development and improvement of risk management strategies. To be able to do so, companies, specifically shipping companies must recognize and determine the existence of several risks or threats that could become sources of greater crises in their future operations. Several risks or threats include:

• Human threats – which can come from individuals or organizations, illness and death
• Operational – from interruption to supplies and operations, loss of access to important assets and resources, and failures in allocation
• Reputational – from loss of business partners or employee confidence, or injury to reputation in the market
• Procedural – from failures of accountability, internal systems and controls, organization, fraud
• Project – threats of cost over-runs, slow pacing, inadequate product or service quality
• Financial – due to business failure or bankruptcy, stock market, interest rates, unemployment
• Technical – advances in technology, technical failure
• Natural – changes in weather, natural disaster, accidents, diseases
• Political – caused by changes in tax regimes, public opinion, government policy, foreign influences

(From ‘Risk Analysis & Risk Management’ 2007)

The identification of these threats or risks would be helpful for many business organizations, particularly to shipping companies, because the identification of these threats would enable the company to develop, improve and implement useful risk management and crisis management strategies. In addition, the analysis of these risks or threats would help the company assess and decide on what actions to take to reduce interruptions of the company’s plans. It will also enable the company to decide whether the company’s strategies used to control threats are cost effective (From ‘Risk Analysis & Risk Management’ 2007).

In relation to these threats or risks is the development, implementation and use of risk management and crisis management techniques that would enable companies to address a myriad of threats. There are four risk management techniques that can be used, and include avoidance, modification, retention, and sharing (‘Four Risk Management Techniques’ 2005). The Avoidance technique happens, when an organization cannot ensure high quality of service and safety at the same time. This becomes the most appropriate technique to use if the shipping company lacks financial resources required to fund effective and sufficient training, supervision, equipment or other safety measures. Another risk management technique is the Modification technique, which is simply changing an activity to make it safer for all the key persons involved, and this includes the implementation of policies and procedures. The third technique is the Retention technique, which involves two ways, either by design, or by getting into trouble. Through design, a company can decide on the use of other available techniques that are suitable and thus, maintain the risk or harm or loss, while by getting into trouble, risks are retained unintentionally, which are being caused by failing to understand exclusions of policies, scope of risks and neglect (‘Four Risk Management Techniques’ 2005). Last risk management technique is the Sharing technique, which involves sharing risk with another organization through a contract (‘Four Risk Management Techniques’ 2005). A shipping company can choose from these four techniques, on addressing specific threats or risks identified above. The use of these techniques would help the shipping company to address the problem and additional responsibility in operating the 27 fleet vessels of the company. In relation to this problem and added responsibility, an efficient and effective risk management system must be developed and implemented.

Proposed Risk Management System

To be able to implement an effective and strategic risk management system for the operation of the 27 fleet vessels, the shipping company must undergo several processes or steps. Steps or processes include the identification of risk and determination of tolerances, measuring risks, monitoring and reporting risks, controlling risks, and overseeing, auditing, tuning and realigning the risk management process (Culp 2001).

Identifying Risk and Determining Tolerances

Risk identification is the process by which a company determines and detects the different financial risks to which it is exposed, through the normal course of conducting its operations. The process by which members of the company review, analyze, and discuss their risk profiles is a vital means by which risks can be identified, and thus, managed (Culp 2001).

Several threats or risks can be identified in the related case or problem. Human risks include the employees of the shipping company, which involves the existence of internal and external conflicts among workers, their teamwork, coordination, communication, leadership and human resource for additional employees who would operate the additional fleet vessels. Operational risks of the shipping company include their resource allocation and budget for the new vessels, acquiring of additional supplies, and training for the employees who would operate the new vessels. Financial risks include the increase in cost due to the additional operation of the new fleet vessels, and the increase in budget allocation due to increase in oil prices in the international market. Project and technical risks involve the age of the ships, the innovations and systems used in the vessels, and the application of new information systems for its use. Natural risks include the possibility of having calamities brought about by weather changes and accidents. This also includes the pollution being caused by the operation of the new vessels, which could contribute to the contamination of marine environments. Lastly, political risks involve the implementation and compliance with restrictions regarding trade and the environment, which would limit the operation of the new vessels.

Measuring Risks

Culp (2001) reports that risk measurement involves the quantification of certain risk exposures for the purpose of comparison to company-defined risk tolerances, and the process by which different risks are quantified is a critical component in an organization’s broad risk management program. Without a good measure of risk, a determination can be hard to reach about whether the company is taking too much of some types of risks or not enough of another (Culp 2001). Measurement is essential because if the shipping company will be able to measure the mentioned risks, they will be able to allocate resources effectively, and develop or come up with marketing and business strategies that would contribute to the smooth operation of the new fleet vessels.

Monitoring and Reporting Risks

Monitoring and reporting of risks are important because changes do happen in the composition of the company’s assets or liabilities. The frequency with which a firm monitors its current risk profile depends on the nature of the risks to which the firm is subject, as well as the ability of the firm to fine-tune its risk-taking activities (Culp 2001). Proper monitoring and reporting of risks would be essential because with this, the shipping company will be able to recognize changes that the company would have to undergo, such that, these can be helpful in the continuous development and improvement of the individuals and the whole company as well.

The company must be able to monitor and report the operation and the system used in the new fleet vessels, to ensure its effective and efficient utilization for the profit of the shipping company. Because of the additional fleet vessels, major changes will happen in the shipping company, such as allocation of new resources and supplies for the new tankers, the allocation and budget for oil consumption, and the distribution of the employees or workers who would be responsible for the operation of the vessels. With this, the shipping company must be able to monitor their resources, if they are enough to sustain the needs and requirements for its operation.

Control Risks

In relation to the monitoring and reporting of risks is its control. Risks control involves the actions the shipping company may take to keep its actual risk profile at or below its risk tolerance. Appropriate risk control decisions are only possible when the measurement and risk monitoring or reporting parts of the process are working properly (Culp 2001). In essence, it is evident that risk control is dependent on the efficient and effective monitoring and reporting of risk factors. With this dependence, it can be deduced that proper monitoring and reporting must be done effectively first, before controlling the risks.

Oversee, Audit, Tune and Realign

This includes everything from external audits of risk management policies and procedures to internal reviews of quantitative exposure measurement models. In essence, this process involves the evaluation whether or not its risk management process is working properly and efficiently (Culp 2001). This must be done to assess if the company addresses the problems and risks being identified in the first process. Without this step, the shipping company would not be able to come up with policies and regulations regarding the use of the tankers and vessels, and would not be able to know if their measuring, monitoring and controlling processes are effective enough to suggest improvement of the shipping operation and profit.

The shipping company must adopt this risk management system and processes because this system serves as an effective guide to enable the company assess the risks that would be possible sources of conflicts or problems in the future. The processes or steps discussed above could be a possible means of providing solutions or answers to the problems or crises being faced by the shipping company, and this includes the operation of additional tankers and fleet vessels.

Suggested Strategies

Given the threats and the risk management system it must pass through, it is essential to discuss some possible strategies its implementation. From the list of threats that the acquisition of new fleet vessels may bring to the shipping company, the shipping company may manage them by using existing assets or existing resources as a counter risk, and involves improvements to existing methods and systems, changes in responsibilities, improvements to accountability and internal controls (From ‘Risk Analysis & Risk Management’ 2007). The use of the shipping company’s existing assets or resources would be beneficial for they will be able to reduce costs in seeking external help. Using the shipping company’s own resources not only include their utilization of financial assets, but their human resource as well. This would also enable the shipping company to maximize and utilize their work force, by extracting their creativity and ability to think critically in solving the crisis. In addition, the strategy would be helpful in building awareness of risk management initiatives and culture, in widening their skills through formal and informal training, in increasing the knowledge of employees through sharing best practices and experiences, and in building capacity, abilities and skills to work in teams (‘Integrated Risk Management Implementation Guide’ 2004).

Another strategy is through contingency planning, which allows the shipping company to take action immediately, with the minimum of project control (From ‘Risk Analysis & Risk Management’ 2007). In the event that a serious unpleasant incident happens, the whole shipping company has the responsibility to recover from the incidents in the minimum amount of time, with minimum interruption, and at minimum costs, which requires careful preparation and planning (‘Contingency Planning and Disaster Recovery Guide’ 2002). The primary step to be undertaken in using a contingency plan is to develop a team representing all functional areas of the company. The second step is to prepare a complete list of the potentially serious events, which could influence the normal operations of the business. Third, is the development of the plan, which involves the identification of effects or aftermaths of the incidents, involving emergency services and agencies that could help the company, and identifying the company’s functions that should continue functioning during the incident. Fourth is testing and experimenting with the plan under appropriate conditions to produce reliable results. Fifth involves personnel or employee training, to make them aware of the changes in the company, and to effectively distribute information and knowledge to the whole company. Lastly, contingency planning involves maintaining the plan, to update business events and accommodate further changes (‘Contingency Planning and Disaster Recovery Guide’ 2002). The use of the contingency plan as a risk management strategy in the operation of the new vessels would be important, because with contingency planning, the shipping company will be able to assess the importance and the utilization of the new fleet vessels, and the allocation of resources for its operation. An additional strategy to consider is through investment of new resources, which includes insuring the risk (From ‘Risk Analysis & Risk Management’ 2007) or the fleet vessels. This could be essential for the company for insuring the vessels would provide them a large sum of money during disasters or accidents, wherein they are not responsible for.

Moreover, the shipping company can ask for external help, such as financial and managerial help from other organizations and corporations in the same industry. They can ask for support from other companies, or can merge with other organizations to be able to manage the additional fleet vessels effectively. In this way, there will be more ideas and management strategies to be implemented, which would allow the shipping company the upper hand and the edge in dealing with crises and other problems. Given the young ages of the fleet vessels, their maintenance would be much easier, having less potential for repairs and damages. This would give the company its advantage of implementing strategies and addressing problems more effectively and more efficiently.

Maritime Incidents and Poor Management

From the discussion above, it is evident that the implementation of risk management and other relevant strategies are important to ensure smooth ship or fleet vessel operation. Cruise ships, including the Sea Cloud, which was built in Kiel, Germany in the late 1931, exhibit a good example of good ship management. Despite its very expensive price, Sea Cloud offers high standard and excellent amenities and services, which covers all meals, drinks, and tender rides to and from the yacht to various islands, a small library, and superb cabin service by friendly and amiable ship crews (Steif 1997). Good management is being exhibited by the Sea Cloud because of proper maintenance of facilities and amenities, including the ship itself. From this, it is evident that the management of the ship implements effective and efficient risk management strategies that enable the whole company to address specific problems appropriately. On the other hand, some shipping companies exhibit poor management, which result to unpleasant events with unpleasant effects. Such an incident happened during a bunkering operation on board an entered ship that resulted in the pollution of the port, extensive clean-up expenditures, and a grave fine from the local authorities (‘Signals Experiences Case Studies’ 2007). It has been reported that from the investigation, the owners of the ship identified that the bunkering operation was poorly planned and communication between the deck and engineering officers was clearly insufficient, such that the spill was caused by the overflow of the port tank onto the main deck, due to misunderstanding (‘Signals Experiences Case Studies’ 2007). In addition, the crisis worsens as the deck scupper plugs were left out, the oil spill response kit was not available and the lack of deck crew to respond to the clean-up operation (‘Signals Experiences Case Studies’ 2007).

From these, it is evident that risk management plans and strategies must readily be available during the build up of problems. From the latter example, it can be seen that the shipping company and its crews did not give importance to the value of proper understanding and communication in the process. With this, the relationship between maritime incidents and poor management can be seen as a cause and effect relationship. Poor management can result to maritime accidents and other unpleasant incidents. Similarly, negligence and lack of risk management skills and planning can bring about trouble during such incidents, wherein shipping companies are caught unprepared by the trouble or accident they have encountered. With this, the significance and importance of adopting and implementing risk management systems and strategies must be given emphasis. Primarily, the significance of risk management system is to protect and to secure the interests and welfare of key players involved in the management of the shipping company and its consumers. The implementation of these risk management systems would ensure their well-being. Second, this system is important in the growth and profit of the business, such that the use of risk management systems anticipates the problems and crises that the shipping company can prevent to happen. In this way, sustenance and maintenance of the company will be more effective. Third, having risk management systems can enhance the effective and efficient teamwork and coordination of members of the company. Creativity and critical thinking would be maximized to be able to provide solutions for the problems encountered. Fourth, with its implementation, the company will be able to provide excellent service to consumers, which would help build the reputation and brand image of the company in the market. Lastly, the implementation of the system prevents accidents from happening, which further prevents pollution that damages the environment and biological systems.

Current Risk Management Strategies

In relevance to the proposed risk management system or strategies, are the current implemented risk management strategies in the maritime industry. One of these strategies is the program of the World Meteorological Organization, named the Voluntary Observing Ships program. This is a worldwide program in which several ships will observe and will report weather conditions in the high seas, wherein marine meteorologists will use the gathered data to identify existing conditions over the ocean, where observations are limited (‘WMO Activities’ 2007). This risk management strategy is essential because this strategy can be used in providing relevant and needed information regarding ocean weather and conditions. This information will be very helpful for shipping companies for their operations rely on the relevant and essential information in the high seas. Moreover, taking note of these environmental conditions would enable shipping companies to lessen the incidences of accidents in the seas that would contribute to marine and estuarine pollution. In this way, they can help protect the welfare of the environment, including the living organisms and human beings.

Moreover, Tor Svensen, the chief operating officer of DNV Maritime, states that the maritime sector will be taking on effective risk management strategies, including these two. First, the European Union will start closing its harbors to single-hulled tankers and criminal penalties are being introduced for oil pollution (Brewer 2004). As such, zero tolerance to accidents and a raised focus on environmental performance will have an important overall impact on the maritime industry. In addition, increased legislation for shipping will be implemented, with more emphasis on security. The ISPS Code will be applied, which is a measure that will compel ship operators and port authorities worldwide to implement comprehensive security initiatives (Brewer 2004).

References

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Risk Analysis & Risk Management 2007, Mind Tools, viewed 25 January 2007, .

Four Risk Management Techniques 2005, Non Profit Risk Management Center, viewed 25 January 2007, .

Culp, C 2001, The Risk Management Process: Business Strategy and Tactics, Wiley Publishing, New York

Integrated Risk Management Implementation Guide 2004, Treasury Board of Canada Secretariat, viewed 25 January 2007, .

Contingency Planning and Disaster Recovery Guide 2002, The Contingency Planning Guide, viewed 25 January 2007, .

Steif, W 1997, jan. 5, Sea Cloud: Mrs. Post’s Ship Sails Onward, The Washington Times

Signals Experiences Case Studies 2007, NEPIA.com, viewed 25 January 2007, .

WMO Activities 2007, World Meteorological Organization, viewed 25 January 2007, .