CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

In all markets and business in the world today, the expansion of customer base

network is an important ingredient in the development of that business. In other

to achieve this, certain factors are put into consideration. All but two of these

factors are of great importance; customer satisfaction and reduction in the

cost/price of goods, products and services.

Businesses strive as much as possible to maximally utilize its available

resources while at the same time reduce cost to its barest minimum to make

profit. Even business competitors gain advantage over the other through cost

reduction or cost optimization.

Sometimes, the cost on reducing investments operates 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 (Asiegbu & Nze, 2013)

The globalization of trade and subsequent breakdown in trade barriers has

generated terrific growth in maritime transportation. Thus the rigid competitions

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among port operators and privatization of our ports have increased the desire to

attract port users. 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, ‘the key to the world’s economy’

especially the port system is vital and instrumental to the national economic

survival of the country especially a country like Nigeria. Nigeria is a popular

nation, renowned for her international nature of business with her enormous

natural resources like crude oil, iron ore, coal, etc. Quality customer service is

the measure 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 (Asiegbu & Nze, 2013).

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 (Valverde, 1995). 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

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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 (Asiegbu &

Nze, 2013).

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, 2008) 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, 2006) 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, 2004) 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

3
calculation of key cost indicators (economics of scale, scope and so forth) is

best in determining optimal port structure in order to minimize the cost of port

operations.

In the light of the above, this study attempted bridging the gap by offering an

optimal cost to port operations in Nigeria using a linear programming approach.

1.2 Problem Statement

It is evident that Nigerian ports operate at very low optimal capacity, despite the

expected large volume of cargo traffic that passes through it. It is quite pertinent

to note that vessels delay period is a very serious problem that contributes over

60% of our ports low productivity problem in recent times as mentioned above.

(Ndikom, 2008) as mentioned above confirms that regrettably, at Lome port,

dock workers load 700mts per day as against less than 250mts per day at

Nigerian ports. The five days difference in loading arrangements between

Nigerian ports in terms of ship delay rate billings of US$4,000 rather too

staggering and unfortunate. In clear terms, this is enough to deny Nigerians

ports cargo and revenue that would ordinarily have come our way. Over the

years, authorities on costing matters have published dissertation on means and

ways of minimizing cost of port operations, quality and efficiency of services.

The study therefore will dwell on analysis of cost optimization of port

operations especially on the six major ports in Nigeria, which are Lagos

(Apapa) port, Tincan Island, Rivers, Onne, Calabar and Delta port.

4
1.3 Objective

The broad objective of the study is to analyse and achieve optimum cost of port

operations, optimize cargo flow and reduce terminal unit costs which positively

affect port performance and improve operational efficiency. The specific

objectives include:

i. To determine the minimum cost of port operations.

ii. To determine the optimal time estimates of port operations.

iii. To optimize cargo flow and reduce terminal unit cost.

iv. To improve terminal and port performance to achieve high

operational efficiency.

1.4 Research questions

The following research question was used to extract needed facts from the

respondent.

1. Is there a minimum cost of port operations?

2. What is the optimal time estimate of port operations?

3. What is the optimal cargo flow and reduced terminal cost?

4. What is the optimum terminal or port performance required to achieve high

operational efficiency?

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1.5 Research hypotheses

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

2. Ho: There is no optimal time estimate of port operations.

3. Ho: There is no optimal cargo flow and reduced terminal cost.

4. Ho: There is no optimal terminal or port performance required

to achieve high operational efficiency.

1.6 Significance of the study

This study attempts to optimize the cost of port operations in Nigeria. With
regards to costs emanating from vessels, 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. As aforementioned,
this study attempted bridging the gap by offering an optimal cost to port
operations in Nigeria.

1.7 Scope of the Study

For the purpose of this study, emphasis will be solely placed to minimize the

cost of port operations. The analysis will be based on the data gathered from

secondary source by the researcher and analysis will purely be based on linear

programming model.

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1.8 limitations of the study

i. Problem of Data Findings – Finding reliable and accurate data has always

been a major challenge. I had to travel far and source deep on the internet before

these data was found.

ii. Financial constraint - Insufficient fund tends to limit 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).

iii. Time constraints - 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.

iv. Epileptic power supply – Inadequate power supply has also greatly

hindered efficiency, as a bulk of the work is done over the internet and typing

using the computer.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Conceptual Frame Work

2.1.1 The concept of cost optimization

The global financial crisis, which started with sub-prime mortgages in the U.S.

in late 2007, has spread like a ripple effect across all businesses leading to a

severe liquidity crunch. The severity of this can be seen in GDP numbers per

cent to about 7 per cent in 2008-2009 and the estimates for 2009-2010 are at

about 5 per cent. During the boom period, several businesses pushed for high

revenue growth with consequential increase in costs. As burn rates soared and

the market plummeted, businesses became conscious about their failed thoughts

and strategies. It is time we contended with slow down and effective

optimization of product and strategies that may last longer than what was

perceived in the early days of its impact.

There is no way we can wholly talk about cost optimization without

understanding first what cost is actually. ‘Cost’ is the price paid or required for

acquiring, producing, or maintaining something, usually measured in money,

time, or energy; expense or expenditure; loss; penalty. Cost is the amount paid

for a commodity by its seller.

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Cost optimization is finding an alternative with the most cost effective or

highest achievable performance under the given constraints, by maximizing

desired ones. Cost optimization is essentially the inverting or reduction of cost

of production or operation in an organization and still maintaining that same fit

if not higher quality of produce or services rendered.

In comparison, maximization means trying to attain the highest or maximum

result or outcome without regard to cost or expense. Cost optimization aims at

reducing the baseline costs of the business while maintaining acceptable service

levels. It reduces the target cost by a systematic approach and giving the

customers good if not better value for their money while reducing cost of

production. Cost optimization must be done in such a way that it does not

undermine the organization’s efforts to capitalize on future growth

opportunities. In the context of technical analysis, optimization is the process of

adjusting a trading system in an attempt to make it more effective. These

adjustments include changing the number of periods used in moving averages,

changing the number of indicators used, or simply taking away what doesn’t

work. Practice of optimization is restricted by the lack of full information, and

the lack of time to evaluate what information is available. In computer

simulation (modelling) of business problems, optimization is achieved usually

by using linear programming techniques of operations research.

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Cost optimization is one of the four fundamental methods of improving

profitability and sometimes the only way open to companies for profit making.

Raising of price, increasing of sales volume, and improving the product size are

other ways of increasing profit. However, these later three ways are usually

external to firms and as a result beyond their control. For instance, increase in

price will be difficult if market is competitive or where legislation prevents such

e.g. price control policies. Therefore, cost optimization is the only safe and

simple way of increasing profits since it does not depend much on external

changes but internal.

According to E.J. Broster, there is only one objective peculiar to all firms and

that is a profit. There are two ways of making profit;

i. By expansion and

ii. By minimizing annual costs.

All other objectives such as company goods, increasing productivity,

introducing management by objectives (MBO), marginal costing etc are all

immediate aims subservient for the ultimate one of making more profit. He

concluded that cost minimization is not merely profitable, it is profit. Every

reduction in annual cost has its counterpart in an equivalent increase in annual

profit where a company succeeds in minimizing its annual cost of operation or

production by one percent. All things being equal, it will have a commensurate

increase in annual profit. Cost optimization according to CIMA is the

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achievement of a realized and permanent reduction in unit cost of goods

manufactured or services rendered without impairing their suitability for the use

intended.

These definition characteristics of cost optimization say thus;

i. Cost optimization must be permanent reduction in cost due to

windfalls change in market prices etc, does not fall in the purview of

cost optimization.

ii. Cost optimization must be real, say through productivity.

iii. Cost optimization must not impair the suitability of product or

services for the intended use. In other words, cost optimization should

not be at the expenses of essential characteristics of the products or

services. The term therefore is used for planned and positive approach

to improve efficiency.

Wild (1980) states that: it is the attempt to manufacture goods of low cost

through minimizing the materials used. Both Arora and Wild are of the

opinion that the reduction should come from an organized and planned

action of the organization. Contributing to this view, Asiegbu (2008) opined

that if a supplier gives cash discount because he wants to attract more sales,

though it is a fact that overall cost of the product will be decreased as a result

of the cash discount offer, of which should not be considerably cost

reduction because it is not brought about through an organized effort.

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 Recognizing such discount is against official cost optimization program.

This however does not prevent firms from looking for suppliers that have

better terms of payment. The scope of cost optimization is so wide that it is

not practicable to develop fully the areas in which it can be applied. Cost

optimization should be able to spread across all aspect of a firms operation.

Effort therefore should be made to minimize cost right from the top level to

the floor level. Product design, production, administration, marketing and

finance are also areas where minimization strategy can be adopted. The most

effective strategy is one which embraces all aspects of the firm’s operation

system and products, and those which have full top management support and

co-operation Lucey (1988).

Difference between cost control and cost reduction: the two most important

functions of cost accounting are cost control and cost reduction.

2.1.2 Cost control is a technique which provides the necessary information to

the management that actual costs are aligned with the budgeted costs or not.

2.1.3 Cost Reduction is a technique used to save the unit cost of the product

without compromising its quality. Now, you can see the differences between

cost accounting and cost control.

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2.1.4 Why cost reduction programs fail?

Programs to reduce costs are the most difficult form of organizational change to

maintain. It disrupts daily work rhythms by dampening morale, particularly

when head counts are cut. The heart of any business’s strategy is efficiency and

cost optimization particularly when economic conditions are adverse. It is tough

to ignore cost management issues during times of economic instability for

trimming the fat. Many businesses are seized of growing cost base and their

tactical response to squeeze their vendors. This is regarded as a simple measure,

delivering a short-term remedy. It is such remedies that fail to make a lasting

impact on cost optimization. Thus businesses not only require change in

behaviour but also in their mindset or thinking to gear up for high performance

that is measured by efficiency and simplification of the business model.

2.1.5 Push cost optimization as a movement

Cost optimization should be a priority for all businesses regardless of the

economic cycle. The higher a firm’s cost is above those of close rivals, the more

competitively vulnerable it becomes! A firm’s competitiveness depends on how

well it manages its value chain relative to competitors. Costs of performing each

value chain activity can be driven up or down by two types of factors-

a) structural cost drivers such as scale, experience curve, technology and

capital intensity and

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 b) executional cost drivers such as continuous improvement, quality, cycle

time, capacity utilization, effectiveness of business processes,

vendor/customer relationships. It is thus advisable that every business

take a holistic look at their organizations to ensure that any changes have

a broader perspective to tackle cost optimization from a strategic,

enterprise-wide perspective and ensure its sustainability to achieve

transformation without experiencing a crisis.

2.1.6 Common problems for tackling cost issue

Typically, cost reduction programs deliver short-term tactical gains and do not

deliver long-term sustainable improvements. The misplaced belief that genuine

cost optimization requires too much investment is difficult to justify when

revenues are slowing down. The degree of complexity in a business can be

addressed by simplifying and streamlining the processes by empowering the

team to perform. Mistakes and surprises are inevitable in any cost optimization

process that is by nature transformatory. By streamlining financial and

regulatory processes, costs can be reduced and time freed up for the

management to play a more strategic role. In finding solutions, there may be the

need to combine cost cutting with a focus on process optimization, anticipating

the unexpected, streamlining the supply chain while investing in value-added

technologies.

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2.1.7 Need for cost optimization strategy

Cost optimization is fundamentally about maintaining the “light on” operational

service (sometimes referred to as MOOSE – Maintenance of Organizations,

Operations, Systems and Equipment) at a lower price point, thereby freeing

budget to support innovation and Merger and Acquisition expenses. There are

numerous attractive advantages for optimizing cost or being a producer of

minimum cost in an industry. Cost optimization does not only increase

profitability and stakeholder’s value, it also releases scarce resources that can be

reinvested into new strategic initiatives.

The pace of delivering strategic objectives is often slow, hampered by resource

shortages, conflicting priorities and the complexity of existing structures,

processes and systems. The larger and more sophisticated an organization is, the

greater will be the drag on implementing change within required timescales and

costs.

Evidence shows that significant cost reductions normally occur through

exploiting new technologies, processes and business practices. However, most

organizations focus the majority of their resources into maintaining and

improving their current business model and related support infrastructure. In

such circumstances, opportunities will always exist to reduce costs and

accelerate strategic initiatives, the key challenges are to optimise resources

productivity and exploit strategic opportunities.

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2.1.8 Steps in cost optimization

Some six critical steps are outlined that can enable companies to deliver

significant and lasting cost reductions. These steps executed consecutively, can

be carried out separately for various categories of costs, including personnel and

non personnel costs. However, the time frame devoted to each steps depends

heavily on the level of urgency to reduce costs. If costs have to be cut right

away, the first steps can be taken rapidly, and efforts to reduce costs in different

categories can move at different speeds.

2.1.8.1 Build consensus and commitment on goals and scope.

Ensuring that company leadership and top management are in agreement about

the need for change is probably the most crucial point for the success of the

whole program. Before they begin, company leaders should clearly state what

they hope to achieve with firm, measurable targets whenever possible and then

rank these goals by level of importance. The aim is to ensure that the cost

reduction plan addresses these prioritized goals.

The scope of the effort- the business units or functions that will be included

must be clear and spelled out, at least among senior managers. In some cases,

such an effort may cover every facet of the company, while other programs may

target only certain business units, cost items, or specific functions such as HR or

finance. Any specific cost-reduction measure that is a “must” or a “no go”

16
should be outlined. At the same time, the areas that are off limits have to be

defined and agreed upon.

It is helpful to keep a couple of things in mind when defining the scope of the

program. First, the largest cost categories should be included in the effort unless

there is a very compelling reason to exclude them. And focus is critical: if there

is a small division with a separate organization and cost structure, for example,

it may make sense to leave that unit out of the program to avoid unnecessary

complexity.

Once the scope and goals are clear, management must decide when and how

employees will be involved in and informed about the program, and how their

participation will evolve over time. This means establishing clear rules for how

the process will move forward, making sure all managers are in agreement, and

providing a steady flow of information about the program’s progress. This does

not mean however, that everyone will have access to the same level of

information at the same time.

In addition, a compelling message describing why the efforts is critical for the

future success of the business must be crafted and communicated to employees,

unions, and other employee representatives, as well as to investors, suppliers

and customers. Since many organizations suffer from fatigue from prior cost-

cutting efforts, this step should explain what will be different about this

initiative. Underlying the whole effort must be an unwavering commitment

17
from management. If management’s firm commitment is not made clear from

the start and not reinforced over time, chances of success are slim.

2.1.8.2 Select the right methodologies.

In order to sort out exactly how cost reduction opportunities will be identified

and quantified, companies can select from a number of well proven

methodologies on the basis of the goals and scope of the program. Pulling

together the right group of methodologies is not a simple task. There is a well

established set of battle tested and standardized methodologies and a wide

variety of tools available for executing each of them. The trick is to tailor that

mix of methodologies to meet a company’s specific needs and challenges. Two

major factors in this determination are the industry sector and the type of

expenses that are on the table- which might include personnel and non

personnel costs of manufacturing the company’s product or delivering its

service, the cost of goods sold, working-capital costs, and capital expenditures.

The company’s culture, the urgency with which cost savings need to be

achieved, and the way in which management wants to drive change through

centralized or decentralized effort, for example will also lead to the selection of

the right methodologies.

These methodologies can be used to scrutinize cost and quality levels by

tracking certain key performance indicators (KPIs) of core processes and to

closely examine the organization’s structure. Benchmarking against competitors

18
or against other business units within the company can be a particularly

effective way of identifying strengths and weaknesses. The goal of all these

methodologies is to produce a comprehensive and clear picture of where

deficiencies are and therefore, opportunities for improvement.

2.1.8.3 Determine how efficient and effective the organization is and set

targets for change.

With the methodology and tools selected, the in-depth diagnostics starts. Take

the case of personnel costs. One of the most common methodologies for

analyzing personnel costs is “activity based optimization”. This involves

determining what tasks people actually do in their jobs, a process that gives

insights into the efficiency and the distribution of work in an organization.

2.1.8.4 Develop a plan to hit the target.

A bottom-up process is the best way to generate ideas about how to deliver the

program’s quantitative and qualitative goals. As part of this effort, managers

and employees further down in the organization outline concrete initiatives and

programs that will allow them to hit the set targets. Sometimes, however, people

within the organization believe that their targets are not achievable. In that case,

they need to prove why they cannot hit their goals and outline what level of

savings they can actually deliver.

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Creating concrete initiatives to hit the targets is often best achieved through a

series of workshops during which managers and employees work out the details.

The teams should consist of the individuals who know the processes or

representatives of the recipients and of the central team. When a process

involves several divisions or functions, valuable instruments include value

stream mapping, a technique used to analyze and design the flow of materials or

information across multiple groups, which involve employees from all affected

divisions and functions.

2.1.8.5 Drive implementation of the changes.

Once the program measures are outlined and have been kicked off, it is critical

to keep the organization focused on completing these discrete components of

the plan. Early wins and success stories in implementation generate cost savings

to fund investments that will make the changes sustainable and build real

momentum throughout the entire organization.

Maintaining the momentum and commitment can be a tall order, particularly

when the whole effort stretches out over a period of years. To ensure that

progress continues, all these measures and milestones should be put together in

one comprehensive execution plan so that each one can be tracked over time

and steps can be taken to address setbacks, shortfalls in cost savings and delays.

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A central project-management office (PMO) frequently monitors the

implementation of the measures. This ensures that there is one central group

that has the right tools to keep the effort on track and a process for correcting

problems that threaten successful execution. The role of the PMO however is

not restricted to tracking implementation and troubleshooting problems. The

PMO should take an activist stance, continually looking for new opportunities

for cost improvement and challenging the organization to do more,

communicating with top management about the program’s progress, and

providing early insight into the impact that the cost efforts is having on the

company’s financial results. In this way, the PMO becomes more of a partner of

management and not just a unit tasked with executing one plan.

2.1.8.6 Make the change sustainable.

Just as important as the execution, of course, is the effort to make changes stick.

After all, old habits are often cemented in a company’s processes and can

reverse hard-earned progress.

The overall process outlined here certainly goes a long way to prevent

backsliding. But there are additional steps that can be taken to make the changes

stick and that can be very specific to each company’s circumstances.

Manufacturing and service units can establish mechanisms for closely tracking

certain critical KPIs, and processes can be continually studied for improvement.

In other spending areas- such as capital expenditure and procurement, ongoing

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benchmarking against competitors can maintain the necessary focus on

efficiency. Processes can be created for filling new or vacant position to avoid

an unwanted uptick in head count levels. And incentive compensating systems

can be changed to drive higher quality. These steps along with many other

proven tactics can embed the new, more efficient processes deep into a

company’s DNA. At the heart of sustainability is the willingness to change any

process that allows a reversion to old behaviours. That can be achieved only if

the entire organization, from C-level executives to lower-level employees, is

behind the program.

2.1.9 Historical Origin of linear programming Techniques

George B. Dantzig(1947) is commonly credited with being the “father” of linear

programming techniques. Dantzig was involved in military strategic challenges

in the US Air force during the world war 11 and the areas he emphasized at the

initial stage were on transportation, assignment and deployment decisions. He

developed and formulated the Simplex method as a basic solution of the Linear

programming model in 1947. The use of linear programming technique was

extended to business organizations after the Second World War and has since

found applications in various fields of human endeavour.

Koopmans (1949) further developed the linear programming theory while

working with the planning of optimal transportation of ships back and forth the

Atlantic Ocean during the world war 11.

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Kuhn and Tucker (1950) developed further the technique of linear programming

independently in the United States of America. They were the first to use linear

programming on a large scale, in the scheduling of iron and steel production,

paper and oil industries and in the minimization of freight or transport costs.

Kantorovich (1953) showed how linear programming can be used to improve

economic planning in Russia; he analyzed efficiency conditions for an economy

as a whole, demonstrating the connection between the allocation of resources

and the price system. Assar (1957) extended the work of Kantorovich to deal

with more than one commodity and can also provide a measure of the

opportunity costs of different combinations of inputs and outputs which must be

linear. Cooper (1957) made an application of linear programming in the area of

petroleum –scheduling refineries, while Nueman in (1958) worked on problems

involving linear inequalities and the game theory.

In 1984, Karmarker, the Bell Laboratory Mathematician devised a radically new

procedure that may speed up the routine handling of problems by business and

government agencies and also make it possible to tackle problems that can be

applied to include a variety of commercial and government applications ranging

from allocating time on a communication satellite to routing millions of

telephone calls over long distances, or whenever time must be allocated most

efficiently among competing users. The above trend has continued with varying

23
degree of studies going on in the area of and application of linear programming

techniques to daily life situations.

2.2 Theoretical Review

The theory adopted is Mathematical optimization. In the simplest case, an

optimization problem consists of maximizing or minimizing a real function by

systematically choosing input values from within an allowed set and computing

the value of the function. The generalization of optimization theory and

techniques to other formulations comprises a large area of applied mathematics.

More generally, optimization includes finding “best available” values of some

objective function given a defined domain (or input), including a variety of

different types of objective functions and different types of domains.

Time – cost optimization: using GA and Fuzzy sets theory for uncertainties in

cost is also reviewed. This theory fully embeds the fuzzy structure of the

uncertainties in total direct cost into the model. An appropriate GA is used to

develop a solution to the multi-objective fuzzy time cost model.

Construction Management and Economics Journal: Pages 679 – 691/ Received

21 Apr 2007, Accept 05 March 2008, Published Online: 28 June 2010.

http://dx.doi.org/10.

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2.2.1 Implementation of cost optimization strategy

Technology can play a critical role in securing long term competitive advantage

and improving customer service. Innovation driven by IT is an imperative for

competitive success, but too often the investment in innovation is sacrificed to

“lights on” expenditures. The significant saving offered by precision IT cost

optimization can fund the innovation organization needs.

2.2.2 Classification of Shipping Costs

According to Ndikom (2011), cost of shipping may be regarded from two

perspectives: as cost borne by ship operators to provide services, and as cost

borne by the users of shipping services of which this study is more concerned

with.

Costs borne by ship operators are factors which determine the price for shipping

services. In shipping services and operations, there are four groups of cost and

they are:

i. Overhead expenses

ii. Operating expenses or vessel overheads

iii. Voyage expenses

iv. Cargo or direct costs

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2.2.3 Cargo or Direct costs

These are variable costs, as their amount vary with the quality and nature of

cargo handled to or from ship. The direct cost include the following items; cost

connected with the loading and discharging of cargo, including stevedores,

carriage from or to ship, tallying, measuring/weighing tonnage, etc.

2.2.4 Port Charges and Dues

These are the prices required by any port authority for services rendered, which

are distinct from facilities provided in connection with the handling of cargo.

Major port charges, which form the main sources of income for a port, are

constituted by general port dues, rates and specific tariffs.

According to Iheanacho (2005), rates are prices required for different services

performed, while dues are broadly divided into two main classes – dues on

vessels and dues on goods. Dues on vessels are otherwise known as tonnage

dues or duties on tonnage, the usual basis of payment being a certain sum per

net register ton of ship.

2.2.5 General Port Dues

a. Port dues on ship are calculated on the basis of the ship’s characteristics such

as gross registered tonnage (GRT), length of overall draft of the ship. The port

due is sometimes called the harbour or river due.

26
b. Port dues on cargo, which normally covers the utilization of port

infrastructure with respect to cargo. The calculation is based on the

characteristics of goods (such as weight, volume, value or a combination of

theses) (Ndikom, 2008).

2.2.6 Specific Port Tariffs

a. A tariff for the utilization of berth, mostly calculated as the function of the

vessel’s characteristics.

b. A tariff to cover the cost of providing adequate navigation lighting.

c. A conservancy fee to offset maintenance dredging cost and other expenses

incurred in order to keep access channels in shape.

d. Dockage tariff.

e. A pilotage tariff.

f. A towage tariff.

g. A set of cargo handling tariff (stevedoring on quay, delivery on truck/ on rail/

into barge, receipts for shipment, etc.)

h. A tariff on storage services.

i. Tariff on use of port equipments.

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j. A tariff for penalties on demurrage, double handling, cancellation of

bookings, queuing, etc.

Port handling rates depend on the type of cargo served. They are high for bulk

cargo than for break bulk cargo. Cargo utilization (containers, pallets, etc) has

led to considerably reduced unit handling cost and therefore increased labour

productivity (Ndikom 2008).

In summary, cost structure and their attendant revenue generation capability in

shipping have been much disjointed, disorganized and misrepresented issue in

the organization and management of the shipping industry. If well structured by

port reform implementation, revenue in improved form will accrue to both port

terminal operators and the government as there would be syndicate tax

structures and other financial arrangements that support national development

and economic growth.

2.3 Empirical Review

2.3.1 Economics of scale in ship design and cost control

Merk and Li (2013) surmised that the history of shipping is characterised by a

continuous search for reducing costs, resulting in economies of scale,

containerisation and continuously increasing ship. They pointed out most

especially the introduction of large container vessels in most routes. These very

large container carriers (VLCCs) and Ultra large container Carriers (ULCCs)

28
has improved ship and port productivity immensely. This has allowed ships to

achieve low prices. They observe that container vessels capable of carrying

more than 6000 TEUS are serving most trading routes especially developed

countries ports.

Design of Cellular ships capable of carrying 12,000 – 18,000 TEUS are

presently on the drawing boards of naval architects. It could take just nine (9) of

such vessels to serve a trading route between Europe and North- America.

Modern business enterprises see efficiency operations as cost control measures.

The port industry is no exception. According to Adzes et al (1999) port

efficiency signify cost effectiveness. Without management control of time,

quality of services rendered to customers mainly ships and cargo owners will be

inconsistent.

Management control of time especially among other port resources will ensure

accountability. Accountability ensures that seaports assets like shore cranes,

container yards etc are efficiently employed.

Cost control measures in port lead to efficient and cost effective port

organisation in a competitive environment. Most of the time, efficiency and cost

effectiveness occur concurrently for the port user to admit that the port is user

friendly (Prebir De and Chosh, 2001). To the port user, efficiency and cost

effectiveness in port will enable him predict and forecast the outcome of certain

29
decisions taken with certainty. He could predict in advance the output of certain

input resources such as time, fund and labour. Mostly, time efficiency and

effectiveness are part of quality services, or excellent services required from a

service facility such as port. Excellent service is a profitable because it results in

more new customers, fewer lost of customers and more insulation from price

competition.

Burch et al (1995) are of the opinion that in a competitive port business

environment, customer satisfaction determines market share increase and

continuous patronage. This will lead to cost reduction as well as improved

return on investment. It cost about five times as much in time, money and other

resources to attract a new customer as it does to retain an existing customer.

Consequently, customer retention is a very important strategy in a competitive

business environment such as the port. The only way to ensure customer

retention is by continuous quality service delivery.

2.3.2 Cargo Handling Rates and Port Delays

Haralambites and Veenstra (2000) remarked that conventional general cargo

ship operation involves a very labour intensive process. This has been the

genesis of most problems in port. Consequently, ships have to spend most

productive time in port during loading and unloading operations.

30
Congestion is a chronic problem that raises the cost of transportation to

countries whose ports experience it. It hinders the growth of international trade

as well as domestic trade.

Shippers and ship owners must choose those ports where their cargo and ships

must be handled rapidly, efficiently and economically. Such quality service is

not available in a congested port. There must be an improvement in labour and

capital productivity to tackle the problem of congestion. In other words,

increased cargo handling rates at the port will help remove congestion in the

ports.

To tackle the problem of congestion in the developing countries ports, Chin

Yuan and Chih-Wen (2002) advocated for the introduction of hub ports. The

hub port is a transhipment centre capable of accommodating larger container

carriers. Here, full economies of scale in port operation are enjoyed by calling

ships. Typical examples of hub ports are Singapore, Hong Kong, Rotterdam,

Antwerp etc. The hub port operates a kind of complex system known as ”hub

and spoke network”. The system enables big cellular vessels to call at the hub.

With the availability of feeder services, the huge surges of containers are

forwarded to regional and local ports and, economically efficient. The system

has proved advantageous to global shipping as it has dramatically reduced

congestion through improved cargo handling rate. Likewise, the cost of

31
shipping to various local and regional ports on the hub network has been

reduced.

Improved cargo handling rate will positively affect turnaround time of ship in

ports as well as improve port viability. The discussion so far has revealed that

increased cargo handling performance leads to reduced shore and berth costs.

This will definitely lead to reduction in freight rates and overall maritime

transport costs.

2.3.3 Problems Militating Against Operational Efficiency in Nigerian Ports

Nigeria port systems before early 2006 was a public investment run by

budgetary allocation, which in most times are released very late and in some

places inadequate for prompt equipment and facility replacement and

refurbishment. Adebayo (2005) identified cumbersome clearing system as one

of the problems of port efficiency in Nigeria. According to Adebayo (2005) the

cargo clearing system which depends on manual transactions or paper and

physical movements of documents to and from various processing centres

spread across vast locations within and outside the ports is obsolete.

He also decried the situation whereby the nation depends on trucks rather than

rail transport for mass movement of hinterland bound goods from the ports. The

situation is aggravated by the absence of designated holding areas for trucks to

park, awaiting their turn to load in the port.

32
Uzoanya (2000) is of the view that the presence of so many government

agencies in the port, all performing the same duty of physical examination of

cargo causes delay in cargo clearance as well as high cost of doing business in

Nigerian ports. According to Uzoanya, these illegal government agencies

engage in money extortions from clearing agents and shippers thereby

escalating the cost of clearing goods in port. He compared the delay witnessed

in clearing goods in both Cotonou and Lagos port. Uzoanya concludes that no

amount of patriotism could make a shipper abandon a port where he could

obtain quicker and cheaper services for where he would waste time. Hence, the

preference of Cotonou port to Lagos port by Nigerian shippers. There is always

a significant inducement in both monetary cost and time which makes Cotonou

port preferable to Lagos port. Cotonou port, he said has all necessary equipment

for cargo handling efficiency.

Apart from the over twenty six (26) government regulatory agencies operating

in the ports, the customs inclusive, Uzoanya identified the splitting of the

customs staff into various units such as federal operations unit, custom

investigation unit, custom enforcement unit, as well as controller General

monitoring unit as another problem militating against fast cargo operation in

Nigerian ports. These various units allegedly carry parallel custom

documentation procedures. All these problems make cargo clearance procedures

cumbersome, painful, and expensive and time consuming as these custom

33
officials make indiscriminate and unreceipted monetary demands. However, the

customs department claimed that the setting up of the various units is a measure

to check the excesses of fraudulent shippers who engage in irregularities and

malpractices associated with import declaration. Consequently, the delay caused

by the presence of these government officials in cargo clearance procedure

could be attributed to a certain extent on the dubious activities of the importers.

Gwandu (2000) attributed the inability of Nigerian ports to deliver customer

friendly services to corruption. According to Gwandu, corruption is the greatest

headache the ports in Nigeria have to tackle in order to remain relevant to the

economic growth. Delivering a paper titled “Eradication of Corruption and

Sharp Practices in the Seaports,” he posited that Nigeria aspirations of capturing

all her foreign trade through her ports and playing a leading role in maritime

industry in the West and Central African sub-region can only be achieved in an

atmosphere devoid of corrupt practices. This situation can only be achieved

under an atmosphere of transparency, accountability and commitment to

universally accepted ethical standards which will lead to universally accepted

operational standard in terms of port costs and operational delay in the ports. In

a world faced with the challenges of growing competition and globalization, the

way a port industry could meet the customer’s desire is by ensuring satisfactory

service delivery. A port could only continue to be relevant to customers if it

34
operates with minimum delay, utmost efficiency and at a reasonable cost to

users.

Gwandu, in his submission has listed the following as reasons why corruption

persists in some ports of the world and Nigeria in particular.

1. Cumbersome documentation system which makes room for manipulation

and collusion with relevant interests to deprive the port authority of

relevant revenue.

2. Dilapidated state of port infrastructure that result in reduced capacity

utilization thus causing dock stacking of containers and unholy bargains

for preferential treatment.

3. Low labour productivity and volatile dock labour environment fraught

with extortion and indiscipline.

4. Deliberate delay in performing official duties in order to elicit

gratifications.

5. Inadequate supply of crafts and plants which encourages some private

inducement for services to be rendered.

6. Submission of false documents and/or incorrect information. E.g. under-

declaration of ship and cargo tonnage. Wrong declaration leads to faulty

planning and preparation of cargo discharge, reception and clearing.

7. Incursion of miscreants into the ports thus jeopardizing port security.

35
8. Vandalization of port and navigable facilities e.g. buoys plants and

equipments.

9. Employment of sub-standard vessels on the sea routes resulting in

accidents whose wreckage deter ships from accessing the entry channel

easily and/or damage to port infrastructure and cargoes.

10.Indiscriminate litigation and the resultant high incidence of detention of

vessels at the berths, thus delaying incoming vessels and prolonging the

average turnaround time of vessels at the ports.

11.Swapping of voyage numbers to avoid payment of correct charges or

storage rents on cargoes.

12.Light judicial penalty which is not sufficient deterrent to port offences.

13.Supply of incomplete number of men in labour gangs and claiming pay

for the full gang.

14.Frequent fiscal changes as well as incorrect operational policy changes

e.g. from pre- shipment inspection to destination inspection and back to

pre- shipment and later change to destination inspection. Often, these

policy changes are made without adequate preparation in terms of

provision of all necessary human and material resources to ensure proper

execution and implementation.

15.Faking the port authority’s receipts of payment, indicating that bills rose

had been paid where the reverse is the case.

36
Adequate logistics are not often out in place for the adoption of the new system

before announcement or introduction. The resultant bottleneck and problems

often scare shippers who divert their shipment to neighbouring ports. Also, the

incoming ships may not be pleased with the sudden changes in policy hence

moves to other alternative ports outside the country to discharge their cargoes.

This leads to dwindling fortunes to Nigerian ports and the entire economy.

These changes in policy often put custom officials as well as importers into

confusion and before they could realize themselves, congestion may result at the

port. This above scenario may aid smuggling, which proves unpalatable to the

economy. This also prompted calls for reform in the port industry.

2.3.4 Port Reforms/Concession as a Tool to Improve Port Efficiency

In a bid to address some of the clear and immediate problems such as

congestion and delays that impede port efficiency in Nigerian ports, the NPA

introduced port concession to the Nation’s ports in order to bring in the

necessary expertise in the area of operations. Concession, according to the

Merriam Webster Dictionary is defined as an act or an instance of conceding as

by granting something as a right; a grant of land or property, especially by

government in return for services.

The objectives of the port concession was to increase efficiency in port

operations, decrease cost of port services to stakeholders, decrease cost to the

37
government for the support of port sector and attract private participation so as

to free public resources for public services (Mohammed, 2008).

In study conducted by Oghojafor et al (2012) which was aimed at the evaluation

of the impact of the concession exercise on port efficiency, they found the

concession exercise was not fulfilling its objectives as there still seems to

appear problems of inefficiency at the ports with a 45% charge imposed without

being tied to any services rendered due to corruption; cost of port services to

users increased, turnaround time has not significantly improved, same as berth

occupancy on the average and no worthy improvement on port facilities and

security. They are view that this is due to the government and concessionaires

not working in consonance with the terms of the concession so as to bring about

the necessary changes in port operations and character. In contrast, Okeudo

(2013) carried out a similar study but with Onne seaport as a case study with

aim to ascertain the impact of the reforms on port performance i.e. increasing

efficiency and raising cargo throughput volumes found out that, reforms have

been beneficial to the ports and invariably the economy, has also significantly

improve cargo throughput, dropped berth occupancy rate and achieved faster

vessel turnaround time. This she attributed to better cargo handling equipments

and ships with larger drafts visiting the ports due to the dredging activities

resulting in economies of scale. Okeudo also suggested ways to improve the

efficiency of Nigerian ports through:

38
1. Provision of integrated intermodal transport system.

2. Full utilization of management information system (MIS) in port

operations.

3. Full utilization of e-payment system to reduce cash gratifications and the

resulting delivery delays.

4. Stoppage of sitting oil despot (Tank Farms) in port areas as they take up

space that can be utilized by the ports.

As buttress to the findings contained in the preceding paragraph,

Olaogbebikan et al (2014) research study which evaluated the performance

of Nigerian ports since inception against the port concession era, found that

there was higher cargo throughput in the industry in the post concession era

and the concession exercise has led to the emergence of very large vessels

with greater cost effectiveness, speed delivery, improved cargo handling

technology and reduced unit freight cost, but showed that ship turnaround

time in the ports is still high at average of 5.22 days against the international

Maritime Organization’s 48 hours stipulation. Berth occupancy at average

46.6%in the ports. This implies an under capacity utilization of the ports.

They urged proactive measures on part of the government such as

employment opportunities to sustain the growth experienced.

39
2.3.5 Optimization of costs of Port Operations in Nigeria: A Scenario For

Emerging River Ports.

Asiegbu B.C. and Ibeawuchi Chibueze Nze from the research work with the

above title deduced that the optimal cost of port operations is given as

231.3835 US dollars per ton handled in a Nigerian port. This means that for

optimal cost of operations in Nigerian ports, the cost should be kept at

$231.3835 as charge for handling a ton of cargo. They also found out that

685.7727 US dollars can be paid in hiring a unit of the gang time while 0 US

dollars can be paid in hiring a unit of ship turnaround time and warehouse time

to continue to remain optimal. The resources which are the available time for

gang labour, ship turnaround and warehousing will continue to remain optimal

as long as gang time lies between negative infinity to 1357.773 hours; ship

turnaround time must be between 0.0001 hours to infinity and warehouse

time between 0.3143 hours to infinity. They concluded that for effectiveness of

port operations in Nigeria as well as providing services at optimum prices for

competitiveness, the port should be operated as an economic unit which it

really is. It should therefore make profit, maintain itself and provide reliable

and efficient services for the revenue it receives. Asiegbu, B.C. and Ibeawuchi

Chibueze Nze: West African Journal of Industrial & Academic Research Vol.6

No.1 March 2013.

40
2.4 Summary of Reviewed Literature

In general, the aforementioned literatures shed light on the concept of cost

optimization and need for cost control and cost reduction. It further lays

emphasis on cost optimization strategies and steps in achieving the fit to

maintain a cost efficient operation in Nigerian ports. Economics of scale and

port concession was highlighted as strategies as ways of improving port

performance.

41
 CHAPTER THREE

3.1 Research Methodology

This section of the project presents a description of the procedure used. The

research approach, the variables definition and the chosen data analysis method

employed are explained. It also unveils validity and reliability used in the study

followed by presentation and analysis of empirical findings. Research

methodology is a way research should be undertaken including the theoretical

and philosophical assumptions upon which research is based and the

implications for the method or methods adopted.

3.2 Reinstatement of Hypotheses

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

2. Ho: There is no optimal time frame of port operations.

3. Ho: There is no optimal cargo flow and reduced terminal cost.

4. Ho: There is no optimal terminal and port performance required to

achieve high operational efficiency.

3.3 Research Approach

In this project, the research approach is induction because conclusion is drawn

from empirical observation using Nigerian ports as the basis for the study.

42
3.4 Study Area

The study area for this research project is all major ports in Nigeria. These are

Lagos port complex, Rivers port, Onne port complex, Calabar port and Delta

port.

3.5 Data Collection

In the course of carrying out this project, data required for this study were

collected from secondary sources. Secondary source of data was a survey of

existing documents and published materials such as the NPA Simplified Tariff,

NPA Handbook, NPA Annual Reports, Current Publication, Journals and from

the internet.

3.6 Method of Data Analysis

In order to provide empirical answers to the research questions; Linear

programming technique is applied.

3.6.1 The Linear Programming Model

Linear programming is a mathematical technique concerned with the allocation

of scarce resources. It is a procedure adopted to optimize the value of some

objectives subject to some constraints. The objectives may be to maximize

profit or to minimize costs. The program is designed to help the production and

operations manager in planning and decision making relative to resource

allocation. The manager who is restricted in terms of solutions to be adopted is

43
however expected by management to produce the best of optimal solutions. A

linear programming model enables the manager to make optimal use of limited

available resources. These scarce resources can be in form of manpower,

money, materials, skills, time and facilities etc. The decision maker then aims at

finding the best decision or outcomes with the scarce resources. The decision or

outcome may be with respect to costs, profits, sales, return or investments,

general welfare of the society etc. The technique involves formulating a given

problem as a linear programming model with the variables clearly identified and

using standard techniques to solve the problem.

As is often formulated, linear programming seeks to find non – negative values

of the variables X1, X2, X3, X4 X5, X6………., Xn that satisfy the constraints:

a11x1 + a12x2 + ai3x3 + …………ainxn = b ,where I = 1,2,3…..m, that

maximizes or minimizes the linear form C1X1 + C2X2 + ……….CnXn

Against the above backdrop, the objective of this study is to expose and arouse

the interest of readers to practical applications and usage of linear programming

techniques in real life situations just like the purpose for this research. The

essence is to reconcile the seeming apathy towards linear programming

techniques with the benefits derived therein. The technique assumes a linear or

straight line relationship between variables. These variables are manipulated to

produce solution which is improved upon until the optimum solution is reached.

To capture all the issues involved, our discussion will focus on the following

44
key areas: The historical origin of linear programming techniques, basic

requirements and assumptions made in a linear programming model. The study

will also take more than a cursory look at formulation of linear programming

models, different methods of solving a linear programming model and its

application to practical decision making process. Thereafter, policy implications

will be drawn and necessary suggestions and recommendations proffered.

3.6.2 Basic Requirements for the use of a linear programming Technique.

To solve some problems using the linear programming approach, some basic

conditions must be met. These requirements can be grouped into two main

categories, namely the components and assumptions of linear programming

model. The components can be grouped into 4 major categories. They are the

objective function, the decision variables, constraints and the parameters. These

are briefly discussed below:

3.6.2.1 Objective Function: The linear programming problem must have a

quantitatively specified linear objective function or criterion to be optimized.

For example, one may wish to optimize returns on investments, productivity,

profit, costs etc. This is done by either maximizing or minimizing the objective

function. The objective of the problem must first be identified and then

translated into mathematical function in order to assess the degree of

effectiveness of the system. The aim is to find the optimal value of the objective

function.

45
3.6.2.2 Decision Variable: These are the unknown variables to be computed in

the models. Decision variables, represent choices that are available to the

decision maker and are measured in terms of inputs or outputs. Decision

variables can be represented by unit power of alphabets like XI, X2 or X, Y, Z

etc .If XI, X2…….. Xn are decision variables and P is the profit to be

maximized, then the objective function can be expressed as P =a1 XI + a2 X2

+…… an Xn

3.6.2.3 Structural constraints: Decision problems involving the use of linear

programming technique usually require the optimization of limited resources.

These limited resources are expressed as constraints in a linear Mathematical

Theory and Modelling. The constraints limit the value of decision variables in

the objective function. The constraints are represented as linear equation or

linear inequalities.

3.6.2.4 Parameters: A linear programming model has both the mathematical

statement of the objectives as well as that of the constraints. These

mathematical statements contain symbols representing the decision variables

and also numerical values in the form of constants called parameters.

3.6.3 Definition of the variables for objective function

I. Marine service costs denoted as X1: includes cost paid by the shipping

line for compulsory marine services such as pilotage, berthing and tug

46
 assistance. It is usually incurred when entering and leaving the port, and

based on vessel size.

II. Port Dues denoted as X2: this are charges levied by the port to all

entering ships and is generally calculated on the gross registered tonnage

of the ship based upon its tonnage certificate. It reflects the provision and

maintenance of harbour infrastructure such as entrance channel,

breakwaters, and turning basins, maintenance dredging and navigational

aids.

III. Cargo dues (also known as wharfage) denoted as X3: fee levied by the

port authority to the users (exporters, importers or shipping lines) for the

provision and maintenance of harbour infrastructure supporting cargo

movement such as quays, access roads, railway lines etc. This fee is

generally fixed and published as an official tariff.

IV. Terminal Handling Charges (THC) denoted as X4: the fee collected by

terminal operators from shipping lines, who in turn to recover from the

shippers the container terminal cost for loading or unloading of the

containers and other related costs borne by shipping lines at the port of

shipment or destination.

V. Bunkers Cost denoted as X5: includes the cost of oil, water and other

liquid fuel used by vessels.

47
 VI. Government Requirement Cost denoted as X6: includes cost paid to

customs, Entrance/clearance, Quarantine, Fumigation and other

associated cost.

VII. Supplies Cost denoted as X7: includes the cost of Chandler and

provisions laundry, medical, waste disposal, security and other related

cost.

VIII. Loading and Discharge Cost denoted as X8: Comprises the cost

associated with Stevedoring, Clerking and checking, Watching, Clearing

and fitting, Equipment rental, Agency fee and other related costs.

IX. Storage Cost denoted as X9: includes cost paid for Yard Handling,

Demurrage, Warehousing, Auto and truck storage, Grain storage,

Refrigerated storage, and other related costs.

3.6.4 Definition of Variables for the Constraint equations.

The activities above are influenced by the following constraints:

1. Labour productivity from Gang tonnage/period (including idle time).

2. Ship turnaround time.

3. Warehouse

4. Berth Occupancy

On an average, gang time is estimated as 28 days per month multiplied by

24hours in a day = 672 hours. Average ship turnaround time in a Nigerian

48
port is 12days in a month multiplied by 24hours = 288hours. Warehouse is

the average time a cargo can stay in storage without accumulating excess

demurrage given as 6 days multiplied by 24 hours = 144 hours. Berth

occupancy rate is gotten from the averages of each of the Nigerian sea ports

for the 5year study as computed from NPA annual report and statistics.

Time allocated for the various port activities are obtained by multiplying the

fraction of the cost of the port activity relating to the constraint by the

available time for each constraint. It is observed that the various constraints

are affected by a combination of variables. Gang time is related with service,

loading and discharge, and storage. Ship turnaround time is related with

service and bunkers while warehouse time is related with government

requirement, storage, and cargo dues.

49
 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

4.1 Data Presentation and Analysis

This study identified the major cost variables in port operations and the

constraints militating against them hence developed a linear programming

model which was used to provide minimum cost of port operations in Nigerian

ports. Data in Table 4.1 – 4.9 are ship and port activities which are marine

services, port dues, cargo dues, terminal handling charges, bunkers,

government requirements, supplies, loading and discharge and storage and

their expenses generated in a year for a period of 5 years (2011-2015) for the

six Nigerian ports which is used in model formulation.

Table 4.1: Marine Services Cost (Millions)

Ports 2011 2012 2013 2014 2015

Lagos(Apapa) 2.60 2.54 2.61 2.45 2.6

TinCan Island 2.58 2.47 2.49 2.24 2.43

Rivers 2.40 2.37 2.23 2.09 1.98

Onne 2.44 2.46 2.41 2.21 2.12

Calabar 1.86 2.31 1.97 1.84 1.82

Delta 2.12 2.22 2.23 1.99 1.87

50
Grand Total 14.0 14.37 13.94 12.82 12.82

Average 13.59

Source: Computed from NPA annual report and abstract of port

Statistics.

Data in Table 4.1 is Marine service costs, its grand total and the resulting

averages calculated for the year used in model formulation.

Table 4.2: Port Dues (Gross Registered Tonnage in Millions)

Ports 2011 2012 2013 2014 2015

Lagos(Apapa) 34.3 33.5 34.6 32.8 34.0

TinCan Island 32.4 31.7 32.6 36.2 32.0

Rivers 12.0 10.9 8.0 7.2 7.0

Onne 38.0 36.0 38.2 42.6 32.6

Calabar 9.2 8.8 6.2 7.6 5.0

Delta 11.9 19.1 7.6 8.0 7.2

Grand Total 133.8 140 127 134 117.2

Average 130.4

Source: Computed from NPA annual report and abstract of port

statistics

Data in Table 4.2 is Port dues, its grand total and the resulting averages

calculated for the year which is used in model formulation.

51
 Table 4.3: Cargo Dues (millions)

Ports 2011 2012 2013 2014 2015

Lagos(Apapa) 6.4 6.2 6.8 7.1 7.9

TinCan Island 5.1 4.8 4.2 5.6 6.1

Rivers 2.2 2.4 2 2.6 2.9

Onne 6.3 5.7 5.9 5.2 5.3

Calabar 1.3 1.6 1.9 2.2 2.5

Delta 2.6 2.8 3.0 3.5 3.3

Grand Total 23.9 23.5 23.8 26.2 28

Average 25.08

Source: Computed from NPA annual report and abstract of port

Statistics.

Data in Table 4.3 is Cargo dues, its grand total and the resulting averages

calculated for the year which is used in model formulation.

52
 Table 4.4: Terminal Handling Cost (million)

Ports 2011 2012 2013 2014 2015

Lagos(Apapa) 1.12 1.0 1.0 1.03 1.3

TinCan Island 1.0 0.9 1.0 1.1 1.2

Rivers 0.35 0.35 0.45 0.43 0.56

Onne 0.9 0.93 1.0 1.2 1.25

Calabar 0.25 0.36 0.35 0.45 0.52

Delta 0.2 0.25 0.3 0.27 0.46

Grand Total 3.82 3.79 4.1 4.75 5.29

Average 4.35

Source: Computed from NPA annual report and abstract of port

Statistics.

Data in Table 4.4 is Terminal Handling Charges, its grand total and the resulting

averages calculated for the year which is used in model formulation.

53
 Table 4.5: Bunker Cost (million)

Ports 2011 2012 2013 2014 2015

Lagos(Apapa) 1.9 2.05 2.10 2.15 2.2

TinCan Island 1.8 2.1 1.97 2.0 2.1

Rivers 1.36 1.3 1.5 1.5 1.6

Onne 1.9 2.0 2.18 2.1 2.17

Calabar 0.3 0.5 1.12 1.25 1.35

Delta 0.4 1.2 1.2 1.3 1.42

Grand Total 7.66 9.15 10.07 10.3 10.84

Average 9.604

Source: Computed from NPA annual report and abstract of port

Statistics.

Data in Table 4.5 is Bunker costs, its grand total and the resulting averages

calculated for the year which is used in model formulation.

54
 Table 4.6: Government Requirements (millions)

Ports 2011 2012 2013 2014 2015

Lagos(Apapa) 0.75 0.74 0.69 0.85 0.85

TinCan Island 0.75 0.76 0.69 0.86 0.84

Rivers 0.27 0.26 0.28 0.22 0.21

Onne 0.76 0.75 0.80 0.80 0.85

Calabar 0.12 0.17 0.18 0.18 0.16

Delta 0.25 0.27 0.27 0.25 0.25

Grand Total 2.9 2.95 2.91 3.16 3.16

Average 3.016

Source: Computed from NPA annual report and abstract of port

Statistics.

Data in Table 4.6 is Government requirements, its grand total and the resulting

averages calculated for the year which is used in model formulation.

55
 Table 4.7: Supplies (millions)

Ports 2011 2012 2013 2014 2015

Lagos(Apapa) 0.65 0.58 0.66 0.77 0.76

TinCan Island 0.76 0.75 0.68 0.69 0.78

Rivers 0.12 0.12 0.14 0.15 0.12

Onne 0.76 0.67 0.87 0.85 0.76

Calabar 0.10 0.11 0.13 0.13 0.14

Delta 0.13 0.14 0.16 0.15 0.15

Grand Total 2.52 2.37 2.64 2.74 2.71

Average 2.596

Source: Computed from NPA annual report and abstract of port

Statistics.

Data in Table 4.7 is Supplies cost, its grand total and the resulting averages

calculated for the year which is used in model formulation.

56
 Table 4.8: Loading & Discharge (millions)

Ports 2011 2012 2013 2014 2015

Lagos(Apapa) 7.85 7.87 7.45 6.57 6.95

TinCan Island 6.25 6.43 6.87 5.5 5.8

Rivers 3.15 3.15 2.56 3.47 3.83

Onne 8.05 7.8 7.35 7.52 6.672

Calabar 2.0 3.28 3.65 3.0 3.0

Delta 2.6 3.57 3.975 3.5 3.15

Grand Total 29.9 32.1 31.86 29.56 29.402

Average 30.56

Source: Computed from NPA annual report and abstract of port

Statistics.

Data in Table 4.8 is loading and discharge, its grand total and the resulting

averages calculated for the year which is used in model formulation.

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 Table 4.9: Storage (millions)

Ports 2011 2012 2013 2014 2015

Lagos(Apapa) 2.5 2.32 2.4 2.45 2.39

TinCan Island 2.02 2.13 2.27 2.26 2.28

Rivers 0.7 1.14 1.2 1.24 1.2

Onne 2.65 2.78 2.42 2.42 2.54

Calabar 0.4 0.48 0.48 0.68 0.8

Delta 1.01 1.12 1.13 1.16 1.22

Grand Total 9.28 9.97 9.9 10.21 1043

Average 9.96

Source: Computed from NPA annual report and abstract of port

Statistics.

Data in Table 4.9 is Storage, its grand total and the resulting averages

calculated for the year which is used in model formulation.

58
Table 4.10 Ship Turnaround Time and Table 4.11 Berth Occupancy are used as

constraints in formulating the Linear Programming equation.

Table 4.10Ship Turnaround time (Days)

Port 2011 2012 2013 2014 2015

Lagos(Apapa) 7.9 8.1 7.6 6.4 6.0

TinCan Island 5.0 5.0 5.8 5.2 6.0

Rivers 10.2 8.9 7.8 6.5 7.2

Onne 2.7 2.5 2.5 2.3 3.8

Calaba 5.3 5.6 5.4 5.8 6.2

Delta 6.2 5.7 5.8 6.0 6.2

Grand Total 37.3 35.8 34.9 32.2 35.4

Average 35.12

Source: Computed from NPA annual report and abstract of port

Statistics

Data in Table 4.10 is Ship Turnaround Time, its grand total and the resulting

averages calculated for the year which is used in model formulation.

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 Table 4.11: Berth Occupancy Rate (%)

Port 2011 2012 2013 2014 2015

Lagos(Apapa) 65.1 63.9 56.8 52.4 48.7

Tin Can Island 71.1 70.8 68.3 64.6 60.2

Rivers 61.0 62.3 47.9 45.3 44.6

Onne 36.8 32.4 24.6 22.6 22.4

Calaba 22.7 24.6 36.7 30.4 28.6

Delta 10.2 15.4 11.2 10.6 9.6

Grand Total 266.9 269.4 245.5 225.9 214.1

Average 244.36

Source: Computed from NPA annual report and abstract of port

Statistics.

Data in Table 4.11 is Berth Occupancy, its grand total and the resulting

averages calculated for the year which is used in model formulation.

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 Table 4.12: Ship/Port Operations and Expenses Generated Based on

Average of Different kinds of cargo for 5years

S/N Ship/port activity 2011 2012 2013 2014 2015 AVERAGE

1 Marine service cost 14.0 14.37 13.94 12.82 12.82 13.59

2 Port dues 133.8 140 127 134 117.2 130.4

3 Cargo dues 23.9 23.5 23.8 26.2 28 25.08

4 Terminal handling 3.82 3.79 4.1 4.75 5.29 4.35

cost

5 Bunkers 7.66 9.15 10.07 10.3 10.84 9.604

6 Gov. Requirements 2.9 2.95 2.91 3.16 3.16 3.016

7 Supplies 2.52 2.37 2.64 2.74 2.71 2.596

8 Loading & 29.9 32.1 31.86 29.56 29.40 30.56

discharging

9 Storage 9.28 9.97 9.9 10.21 10.43 9.96

Total 229.16

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4.2 The linear programming model is then obtained as follows:

Min
Z=13.59x1+130.4x2+25.08x3+4.35x4+9.604x5+3.016x6+2.596x7+30.56x8+9.96x

Subject to:

67.59x1+152.8x8+49.8x9≥672

125.40x3+15.08x6+19.8x9≥144

67.59x1+48.02x5≥288

67.59x1+152.8x8≥244

x1, x2, x3, x4, x5, x6, x7, x8, x9≥ 0

4.3 The optimum solution using excel for windows software is

Z = Minimum cost of port operations = N137, 346

X1 = N12.56

X2 = N 87.4

X3 = 0 Naira

X4 = N 1.086

X5 = N16.1

X6 = 0 Naira

X7 = 0 Naira

X8 = 0 Naira

X9 = 0 Naira

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 Table 4.13: Linear Programming Model

Port Activities Gang Ship Warehouse Berth

Time Turnaround Time Occupancy

Time

672 288 144 244

Services (X1) 67.59 - 67.59 67.59

Port dues (X2) - - - -

Cargo dues (X3) - 125.4 - -

THC (X4) - - - -

Bunkers (X5) - - 48.02 -

Gov. Requirement - 15.0 - -

(X6)

Supplies (X7) - - - -

Loading & Discharge 152.8 - - 152.8

(X8)

Storage (X9) 49.8 49.8 - -

- - - -

Source: Computation using obtained data

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 Table 4.14: Ranging Table

Variable Original value Calculated value

X1 13.59 12.56

X2 130.4 87.4

X3 25.08 0

X4 4.35 1.086

X5 9.604 16.1

X6 3.016 0

X7 2.596 0

X8 30.56 0

X9 9.96 0

Source. model from software

64
 Table 4.15: Variable definition table – Table Solution List

Variable Status Value

X1 Basic 12.56

X2 Basic 87.4

X3 Non basic 0

X4 Basic 1.086

X5 Basic 16.1

X6 Non basic 0

X7 Non basic 0

X8 Non basic 0

X9 Non basic 0

Optimal value(Z) 137.346

Source: Model Run from Software.

4.4 Discussion of Result Based on Research Questions

Results are discussed based on research questions.

4.4.1 Question 1

What are the optimal costs of port operation?

From the solution offered by the software used (Excel solver) shown in table

4.3, the optimal cost is given as N137.346 (million) per ton handled in a

65
Nigerian port. This means that for optimal cost of operations in Nigerian ports,

the cost should be kept at N137.346 as charge for handling a ton of cargo.

4.4.2 Question 2

What are the optimal time frames of the decision variables for port operation?
The optimal time frames computed using the model developed (Excel solver) is
given as:

X1= Marine Service = 12.56hours

X2 = Port Dues= 87.4hours
X3 = Cargo Dues = 0hours
X4 = Terminal Handling Cost = 1.086hours
X5 = Bunkers = 16.1hours
X6 = Government requirement = 0hours
X7 = Supplies = 0hours
X8 = Loading and Discharge = 0hours
X9 = Storage = 0

4.4.3 Question 3

What is the optimal cargo flow and reduced Terminal cost?

The reduced Terminal cost =1.086. The optimum cargo flow is the summation

or cost overview of all variables associated with cargo discharge.

For X1 = Marine Service =N12.56

For X2 = Port Dues = N87.4
For X3 = Cargo Dues = 0Naria
For X4 = Terminal Handling = 1.086
For X6 = Government Requirements = 0 Naira
For X8 = Loading & Discharge cost = 0 Naira
For X9 = Storage = 0 Naira

Z = N101. 046

66
4.4.4 Question 4

What is the optimal terminal and port performance required to achieve high

operational efficiency?

The optimal terminal and port performance required to achieve high operational
efficiency is to maintain or reduce costs of the under listed port and terminal
operations;

X1= Marine Service = 12.56hours

X2 = Port Dues= 87.4hours
X3 = Cargo Dues = 0hours
X4 = Terminal Handling Cost = 1.086hours
X5 = Bunkers = 16.1hours
X6 = Government requirement = 0hours
X7 = Supplies = 0hours
X8 = Loading and Discharge = 0hours
X9 = Storage = 0

And a total cost of N137.346

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 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary of Major Findings

The results above show that Nigerian ports are not operating at an optimal level.

Thus, there is an excessive cost of services of port operations and wastage and

underutilization of the available resources for the decision variable components.

The study further more proves that the application of optimality analysis on the

model shows the extent to which the cost and the resources can vary while the

solution remains optimal. This in essence helps us to achieve the objectives of

this research work whose main aim is to determine the optimal cost of port

operations, efficiency and high performance in Nigeria.

5.2 Conclusion

Nigerian ports have the resources and capability to operate efficiently if cost of

shipping and port operations can be kept at an optimal cost of

N137,346(Million) per ton and maintained using strategies researched and

discussed above. Thus, reinstating the objective of this research title; Analysis

of Cost Optimization of Port Operations in Nigeria.

68
5.3 Recommendations

From the above discussion, it is evident that for a port to become and maintain

status of a competitive port and high level performance, it has to improve on

performance, cost reduction or optimization strategies and throughput. The

efficiency of port depends on three basic parameters namely:

i. Cost.

ii. Quality.

iii. Throughput.

For effectiveness of port operations in Nigeria as well as providing services at

optimum prices for competitiveness, the following recommendation are made:

i. The use of mathematical models like linear programming should

be used as a reliable tool for management decision as it makes use

of quantitative analysis and provides more reliable outcomes.

Establishments other than ports can take advantage of these

models.

ii. Port authorities should strive to maintain the resources and decision

variables within the range specified for the solutions to continue to

remain optimal. Further research should be done in this area to be

able to understand and decipher more variables and constraints

69
 which can be used to develop more models for use in optimizing

cost of port operations in Nigeria.

iii. The Nigerian ports should seek to improve on timely services by

providing adequate labour and manpower and necessary equipment

and facilities for cargo handling and other related port operations.

iv. The Nigerian ports should maximize equipment and resource

utilization by ensuring preventive and predictive maintenance,

streamlined procurement, optimized equipment and workforce

assignments.

70
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