ANALYSIS OF COST OPTIMIZATION OF PORT OPERATION

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ANALYSIS OF COST OPTIMIZATION OF PORT OPERATION

CHAPTER ONE

INTRODUCTION

Background of the study

In many markets, firms compete over time by expending resources with the purpose of reducing their costs. Sometimes, the cost reducing investments operate directly on costs. In many instances, they take the form of developing new products that deliver what customers need more cheaply. Therefore, product development can have the same ultimate effect as direct cost reduction. In fact if one thinks of the product as the services rendered to customers, then product development often is just cost reduction. The globalization of trade and subsequent breakdown in trade barriers has generated tremendous growth in maritime transportation. Thus the stiff competitions among part operators have increased the desire to attract port uses. Therefore, port operators will have to optimize the cost of their operations if they must benchmark good productivity and performance for their terminals. There is no doubt that the maritime sector especially the port system is vital and instrumental to the national economic survival of the country. Nigeria is a popular nation, renowned for her international nature of business. Quality customer service is the benchmark principle for the maritime professional and customer care techniques. Therefore, the economic justification of a port is its ability to satisfy its customers at a lower price and also be able to make profits. With regards to costs emanating from the vessel, it can be affirmed that port costs, above all are the most significant, since they depend on the gross tonnage of the vessel and the time it spends in the port. Bulk carriers are those which tend to spend most time in port as well as being the greatest in size. The costs of towing, which depend on the circumstances of the movement, tend to represent approximately 10% to 15% of the cost scale of the vessel [5]. More so, other costs due to the vessels stay at port, including agency fees average approximately 5 or 10% of the total. The port tariffs on the merchandise are situated at less than 50% of the total. Where all costs of unloading are considered in relation to port costs, the former are situated at about 70% of the total where all costs are also included storage, weighing etc. With a clear tendency to drop when using cranes of greater efficiency and capacity, about 30% would correspond to port costs. It is evident that Nigerian ports operate at very low optimal capacity, in spite of the expected large volume of cargo traffic that passes through it. It is very pertinent to note that vessel delay period is a very serious problem that contributes to over 60% of our ports low productivity problem in recent times. Ndikom [3], further confirms that regrettably, at Lome port, dock workers load 700mts per day as against less than 250mt per day at Nigerian ports. The five days difference in loading arrangements between Nigerian ports and other ports in terms of ship delay rate billings of US$4,000 is rather too staggering and unfortunate. In clear terms, this is enough to deny Nigerian ports cargo and revenue that would ordinarily have come our way. Kaspi, et al, looked at the minimization of cost and optimum port performance as anchored on reducing port turnaround time. They developed a regression model to relate turnaround time and port cost which was highly related with allocation of port facilities. Beatriz et al, argues that the optimal organization of the industry can be studied by means of cost and production functions. They reviewed the literature on econometric ports’ structure and propose that the calculation of key cost indicators (economics of scale, scope and so forth) is best in determining optimal port structure is order to minimize the cost of port operations.

1.2 Statement of the problem

It is evident that Nigerian ports operate at very low optimal capacity, in spite of the expected large volume of cargo traffic that passes through it. It is very pertinent to note that vessel delay period is a very serious problem that contributes to over 60% of our ports low productivity problem in recent times. Ndikom [3], further confirms that regrettably, at Lome port, dock workers load 700mts per day as against less than 250mt per day at Nigerian ports. The five days difference in loading arrangements between Nigerian ports and other ports in terms of ship delay rate billings of US$4,000 is rather too staggering and unfortunate. In clear terms, this is enough to deny Nigerian ports cargo and revenue that would ordinarily have come our way. Kaspi, et al, [2], looked at the minimization of cost and optimum port performance as anchored on reducing port turnaround time. They developed a regression model to relate turnaround time and port cost which was highly related with allocation of port facilities. Beatriz et al [1], argues that the optimal organization of the industry can be studied by means of cost and production functions. They reviewed the literature on econometric ports’ structure and propose that the calculation of key cost indicators (economics of scale, scope and so forth) is best in determining optimal port structure is order to minimize the cost of port operations.

1.3 Significance of the study

This study attempts to optimize the cost of port operations in Nigeria. With regards to costs emanating from the vessel, it can be affirmed that port costs, above all are the most significant, since they depend on the gross tonnage of the vessel and the time it spends in the port. Bulk carriers are those which tend to spend most time in port as well as being the greatest in size. In the light of the above, this study attempted bridging the gap by offering an optimal cost to port operations in Nigeria.

1.4 Objectives of the study

The broad objective of the study is the analysis of optimum cost of port operations. The specific objectives include:

Determination of the minimum cost of port operations.

Determination of the optimality range of cost variability.

Determination of the optimality range of resource variability.

1.5 Research questions

1. Is there a minimum cost of port operations?

2. What is the optimality range of cost variability?

3. What is the optimality range of resource variability?

1.6 Research hypotheses

1. Ho: There is no minimum cost of port operations.

: There is minimum cost of port operations.

: There is no optimality range of cost variability.

: There is optimality range of cost variability.

: There is no optimality range of resource variability.

: There is optimality range of resource variability.

1.7 Limitations of the study

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 Scope of the study

The study focuses on the analysis of cost optimization of port operations using Apapa port as a case study.

1.9 Definition of terms

Cost: This is an amount that has to be paid or spent to buy or obtain something.

Cost optimization: This means finding an alternative with the most cost effective or highest achievable performance under the given constraints, by maximizing desired factors and minimizing undesired ones.

Port: This refers to a town or city with a harbor or access to navigable water where ships load or unload

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