“Managing cost & taking successful business decisions – Best Practices”

1. “Managing cost & taking successful business decisions – Best Practices” 12thJune, 2016 Science City, Kolkata.

2. Management Accounting System • Management Accounting Systems have become an effective foundation for management in private as well as public sectors and Manufacturing as well as Service sector • It provides the basic platform to the top managers for achieving satisfactory results through cost reduction and cost control

3. Management Accounting System in Ports • In the context of ports, such system ensures effective utilization of the oceanic resources for economic development of the country. • The oceanic shipping consists of two main participants namely the carriers and sea – ports which are influenced by the requirements of transportation for various commodities.

4. Management Accounting System in Ports (contd.) • The operational cost structure of sea- ports covers the infrastructure, superstructure, port labours and other enabling functions. • An effective management accounting system will be able to reflect on such operational and cost structure towards improving port operations and meeting the stakeholders’ interest.

5. Overview: India’s Port Sector • 95% of country’s trade by volume & 77% by value moves by sea • Length of the coastline 7,517 km - 9 maritime States & 4 UTs ( including 2 island groups) • 13 Major ports – 12 under Port Trust and 1 (Ennore) under Companies Act. • 200 notified Minor and Intermediary ports • Portlegislation & Structure - Indian Ports Act, 1908 allows Maritime States to set up their own port systems - Major Port trust Act, 1963, regulates 12 major ports. • Major Ports fall under operational & financial control of Ministry of Shipping and subject to tariff regulation by Law • Minor ports: under State Maritime Boards & free from formal tariff regulation

6. Port Infrastructure • The basic port infrastructure requires huge amount of fixed costs which is sunk cost • It is indivisible and long lived • It is constructed in a specific space for specific use • The infrastructure provides a service which is chargeable

7. Chennai Port • Chennai Port has 5 Docks of which Two Docks handle Containers and one has railway track • There are 24 Berths in these 5 Docks • Two Docks which handle containers are outsourced to third parties and the port gets revenue share • Except these two Docks, other three Docks suffer losses

8. Chennai Port (contd.) • However all the Berths have positive contribution • Their Operating expenditure was Rs.260.64 crores and their non-operating expenditure was Rs.338.4 crores (under the head Finance & Miscellaneous expenditure) in 2015 • After distribution of Finance and Miscellaneous expenditure, most of the Berths suffer losses.

9. Chennai Port (contd.) • Chennai Port calculates Operating Income under the following five heads: • Cargo Handling and Storage Charges • Port and Dock Charges • Railway Earnings • Estate Rentals • Revenue Share from Container handling

10. Chennai Port (contd.) • It’s Operating Expenditures are calculated under the following heads: • Cargo Handling and Storage Charges • Port and Dock Facilities for shipping • Railway Workings • Rentable Land & Buildings • Container Handling • Management and General Administrative Expenses

11. Chennai Port (contd.) • Non-Operating Income consists of • Finance and Miscellaneous Income • Non-Operating Expenditure consists of • Finance and Miscellaneous Expenditure

12. Chennai Port (contd.) • Their Budgets are prepared under the above mentioned heads which is used both as an estimate and as a control tool • Apart from that, Commodity wise traffic projections for Import and Export budget is also prepared • They also prepare Variance Analysis internally but it is not presented to Board of Trustees

13. What we have done

14. What we have done (contd.) • First we identified Birth wise revenue as well as cost • The common variable expenditure are distributed under different Births on a suitable basis • Then we calculated contribution of different Births • For Births handling Containers, we calculated contribution per TEU and for others contribution per tonne • All the Berths have positive contribution

15. The Key Performance Indicators of a Port • Tonnage worked • Berth occupancy revenue per ton of cargo = (Total birth occupancy revenue produced)/ Tonnage worked • Cargo handling revenue per ton of cargo = (Total revenue produced from transferring cargo to or from ships from or to storage areas)/Tonnage worked

16. The Key Performance Indicators of a Port (contd.) • Labour expenditure per ton of cargo = (Total direct labour expenditure for transfer of cargo to or from ships, from or to storage areas)/ Tonnage worked • Capital equipment expenditure per ton of cargo = (Total depreciation and interest allocated to and maintenance and operating costs incurred for the berth group, excluding the costs of transit sheds and warehouses)/ tonnage worked

17. The Key Performance Indicators of a Port (contd.) • Contribution per ton of cargo = (Total contribution)/Tonnage worked • Total contribution • In case of berths handling containers, instead of per ton, we can calculate contribution, revenue and cost per TEU.

18. The Key Performance Indicators of a Port (contd.) • The above KPIs will answer the following two questions: • How much revenue is produced from a service • What is the cost of the service

19. Suggestions for improvement • Identification of profit making resources/ entities • Identification of loss making resources/ entities • Identification of idle resources which will lead to improvement of productivity • Identification of overutilised resources which will lead to necessity of further investment • Fixation of port tariff/ pricing • Presentation of perspective plans