This paper is about the current state of shipbuilding industry in India, the major problems in domestic shipyards and exploring methods to improve the situation. The paper starts with the importance of shipbuilding as an industry, its close association with manufacturing and development of other ancillary industry and its need especially in the Indian context. We then discuss the various policy issues such as taxes, duties and subsidies and how it impacts Indian shipbuilding. Further, we study the growth and competition within the domestic shipbuilding sector with Porter? s Five Forces framework and assess the strength and weaknesses of shipyards operating in different market segments.
The paper, then delves into the operational aspects such as planning and scheduling, product strategy, design, production, supply chain management, shipyard layout, construction method etc. In each section, we attempt to iden
...tify the major problem areas in domestic shipbuilding and discuss the various issues. In case of easily tractable problems we have tried to address them in reference to standard global best practices. If the problem is unique, we have discussed them in light of the particular context. Towards the end of the paper, in the recommendation section, we have conveyed our views on how to improve the current situation by adopting some strategies as well as some tactical and operational decisions.
Introduction
Research indicates that there is a positive and highly significant relationship between economic growth and manufacturing output growth (Tyler, 1980). History shows us that the evolution of nations as manufacturing powerhouses during various periods of time has a strong association with its shipbuilding output.
The English during 19th century and early
part of 20th century (Patrick et al, 1976), the Americans post orld-war II (Zendong Lu, 2005), the Japanese during 1960-90 (Chida, 1990; Koenig, 2001), the Koreans post 1990 & recently the Chinese have emerged as major shipbuilding nations accounting for over 40% (sometimes more than 70%) of annual world ship production in terms of tonnage. It is interesting to note that the period of rise of these countries as economic powerhouses and as major shipbuilding nations overlaps.
The shipbuilding industry, in addition to securing vital national security and economic interests, is critical in the development of other sectors such as steel, manufacturing, and other ancillary equipment & product ndustries (OECD, 2009). India being one Page | 2 among the fast growing BRIC nations is poised to be a major economic power by 2045 (Third World Quarterly, 2007).
There is a market out there which is untapped by Indian shipbuilders despite the unique advantages India has in shipbuilding & repair sector such long coastline, experience & expertise in ship construction, availability of cheap labor etc. The problems in our domestic shipbuilding will be touched upon in the subsequent sections of this paper. The consequence of these problems and deficiencies was explicit when India? s largest state owned shipping company placed its largest shipbuilding order of about $ 400 million for 6 aframax vessels in 2007 with a leading East Asian shipyard. Time & cost overruns, unfavorable fiscal olicies and locked up capacity of domestic yards were reasons attributed to this overseas order.
The situation calls for serious thinking regarding many aspects such as government policies, planning, capacity addition, design, production technology, scheduling, supply
chain management, improving productivity of domestic shipyards etc. The primary motivation of this paper is to study & analyze Indian shipbuilding industry, especially the management & operations practices, benchmark them with respect to global best practices, identify major problem areas and explore methods to improve the current situation. This article s based on field study of operations practices in various shipyards in India and East Asia.
Relevant inputs have been taken from shipyard top management, managers, engineers, naval architects, supervisors and workers, ship owners, regulatory authorities, class surveyors, vendors, subcontractors etc. In order to preserve the confidentiality of information, the names of these shipyards have been changed. In this paper we will be referring to two leading East Asian shipyards as “Shipyard U” and “Shipyard G”.
Current State of Indian Shipbuilding Industry
The Indian shipbuilding is mainly centered around 27 shipyards comprising 8 public sector and 19 private sector shipyards (Planning Commission, 2008). The shipyards have 20 dry-docks and 40 slipways between them with an estimated total capacity of 281,200 DWT. Existing Capacity & Expansion Plans
Cochin Shipyard Limited (CSL) has a shipbuilding capacity of 110,000 DWT and Hindustan Shipyard Limited (HSL), Visakhapatnam has a shipbuilding capacity of 80,000 DWT. These major public sector shipyards have the capacity and capability to manufacture large conventional vessels such as tankers and bulk carriers in handymax – aframax range. Other domestic yards are engaged in construction of smaller vessels. Indian order book during 2002-2007 was 1. 3 million DWT which is projected to be 5 million DWT during 2007- 2012.
As per Indian National Ship-owners Association (INSA), the total tonnage required to be
added in 11th Five Year Plan 2007-2012) will be around 5. 33 million GT involving an investment of Rs. 55,000 crore. Growth & Competition The growth of shipbuilding in India has gone up from 4. 5 % in the 9th Five Year Plan period up to 15 % in the 10th Five Year Plan period (Planning Commission, 2008). India? s share in world shipbuilding market has multiplied more than 10 times from 0. 1 % in 2002 to about 1. 6 % now.
India was able to increase its share in global shipbuilding as it could manufacture good quality vessels at a lower cost due to availability of cheap skilled labor supported by 30% subsidy provided by the government. However, it must be noted hat the increase in shipbuilding may be largely attributed to construction of medium and small vessels such as Offshore Supply Vessels (OSV) and Anchor Handling Tugs (AHT) for export orders. Cochin Shipyard (Small Ship Division – Tebma), ABG, Bharti and Chowgule have done remarkably well in the export segment.
The competition is stiff in the small ship segment as there are many players who have the capacity and expertise to build small vessels. On the other hand, in the large ship segment, the public sector shipyards CSL & HSL virtually hold the monopoly as only they have the capacity and proven expertise to build large essels. Private players such as Pipavav and L&T have made investments for construction of facilities to build large vessels of the order of Very Large Crude Carriers (VLCC). Nevertheless, these shipyards are in their initial stage of growth with evolving systems and procedures that
are promising but yet to be proven. Therefore, as it stands now, the public sector shipyards enjoy a monopoly in the large ship segment without much competition from other domestic yards.
The government of India provides 30% subsidy on shipbuilding to both public and private shipyards. The subsidy rate is expected to be revised to 20% in the 12th Five Year Plan and subsequently to 10% in the 13th Five Year Plan. Indian shipyards have to pay service tax, customs and excise duties, VAT on all indigenous items as well as on complete ships. The subsidy partially egates the effect of the taxes and duties and aids the yard in pricing competitively in the international market.
It is a well acknowledged fact that Indian shipyards were able to cash in during the shipbuilding boom of 2006-2009 due to the 30% subsidy that they currently enjoy. With the lowering of subsidies in 2012 when other East Asian yards (especially Chinese yards) continue to benefit from better government subsidies and reduced taxes, in addition to government funding in infrastructure, it would become difficult for Indian shipyards to competitively price their vessels in the international market.
Indian shipyards have o pay additional 4 % VAT and CST on domestic orders. This makes domestic orders especially from state owned shipping companies less attractive given the opportunity cost. It makes better sense for Indian shipyards to build vessels for foreign owners by importing materials.
The many small shipyards in India that do not have design expertise but get single or twin orders of the same ship type fall in the Make-to-Order manufacturers category. They buy standard
designs based on pecific customer requirements and only manufacture the vessel in small quantities. As the types of vessels are more and the number of vessels of similar type is less, the level of standardization possible is small. The larger shipyards in India such as “Shipyard K” fall in the Design-to-Order to Assemble-to-Order category.
Although basic design is not done in-house, the yard does detail engineering and production documentation based on the purchased basic design to suit the client requirements. However, the capacity of the yard to build larger vessels of the size of aframax or more is limited. Therefore, only 1 or 2 large essels can be built at a time. Nevertheless, this yard gets multiple orders (half a dozen to a dozen) for smaller high value vessels such as offshore supply vessels and anchor handling tugs that contribute better margins (in percentage) than conventional vessels. Standardization is limited in large ship segment but more in small ship segment.
The yard also offer repair services in addition to new ship building. Globally leading shipyards such as “Shipyard U” and “Shipyard G” build very large vessels in large quantities. They specialize in a particular ship type such as super-tankers or containers. Significant standardization is ossible in such small-variety-large-volume segment leading to higher profitability. These shipyards have a strong design competence. However, instead of making designs for each ship, they use standard initial designs which can be differentially modified to suit specific customer requirements toward later stages of design work.
Project Initiation & Planning Timely project initiation and planning are vital activities for successfully delivering vessels in time. During the signing of contract,
the cardinal dates – steel cutting, keel laying, mega-erection, launching, delivery & commissioning are fixed. “Shipyard U” does forward and backward lanning to ensure that all timelines can be met; keeping sufficient buffer for uncertainties.
The design and planning personnel work together so that technical activities such as steel fabrication block erection, outfitting etc. for a particular project align with availability of resources, subcontractors, capacity etc. which may be engaged or allotted to multiple projects. In “Shipyard G”, all design activity is completed, all required approval from classification societies and regulatory authorities is obtained before production work begins. In Indian context also, planning is done according to cardinal dates.
However, time overruns are not uncommon. Late start of design work, lack of coordination between planning, design and production departments are some of the important causes for such delays and problems in implementation of the project plan. The design work does not get frozen even after the production commences. This may lead to production rework later on due to change in design. Whether the number of qualified naval rchitects, planners and design engineers in Indian shipyards are sufficient? ; Their productivity etc. are some of the areas worth looking at.
Ship Design A strong design competence is essential for quickly resolving issues that arise in production. As of now there are less than a dozen firms in India that have basic design expertise. Some of these are standalone design units that do not have manufacturing facilities but team up with shipyards to form consortiums that leverage each other? s competencies. Only yards such as “Shipyard H” have both design and manufacturing expertise.
justify;">In order to build a strong overall ompetence, Indian shipyards may invest in building good design teams so that they need to rely less on external parties and avoid time delays when resolution of technical issues can be done internally. It may be noted that leading East Asian shipyards in Japan and Korea who had invested heavily in skilled manpower such as naval architects & engineers during 1960s and 70s are reaping the benefits now.
As in the case of any new product development, for ships as well, ship design units must take into account aspects such as Design-for-Manufacture (ease of manufacturing), modular & standardized design, and the impact of design on cheduling, production, vendors in the supply chain and cost of the overall project. Production Scheduling In world? s leading shipyards such as “Shipyard U” & “Shipyard G”, scheduling of the projects is done in house with the help of computer programs.
The program does the scheduling in order to minimize the total make-span, balance the load between various work-centers, maximize utilization of spatial and non-spatial resources and minimize the waiting time for work-in progress and final product inventories subject to following constraints: human resource capacity (denoted as man-hours), crane capacity, area capacity of workplates, recedence constraints of different blocks, machinery and shop capacities, load limit at different work centers etc. This spatial scheduling is like a bin packing problem with the base of the bin as the area available for working and height of bin as the time available (Raj, 2008).
The objective is to pack the bin as much as possible (with work) subject to the constraints mentioned above.
In Indian context, based on the broad level project plan provided by the planning department, the production department does independent scheduling. Although this is feasible schedule, often it is not the optimal schedule which minimizes makespan.
Preparation of an optimal schedule (with the help of mathematical program) in collaboration with other units such as design, procurement and production (constraints) will lead to better results and help reduce time overruns. Supply Chain Management Page | 8 Materials and Supply Chain Management is the single most important area, according to our study, which needs urgent improvement as it has a high impact on both cost and time of a project. In most of the Indian shipyards (for example, “Shipyard D” and “Shipyard K”), procurement of materials is done on project basis. Although the guidelines suggest scientific procurement olicies such as EOQ or better methods, they are rarely followed.
The ordering costs are high due to frequent separate orders for different projects. Often the estimate of materials is incorrect and piles of inventory (predominantly high-volume-low-value class “C” items) are stored in the warehouses even after the project is executed. These are hidden inventory carrying costs (incurred perpetually until the materials are not used for some other project or removed/sold as scrap) because the facility may be otherwise used for storing other materials and equipment or leased/rented out. Indian Shipyards have to pay more for uying indigenous goods than imports. This is because the government provides 100% tax waiver on imported shipbuilding materials. Hence, it makes better financial sense for Indian yards to import than buy locally. This is a government policy level problem.
Consequently, even
Indian state owned shipyards import materials, which means – longer lead time and associated delays. Just-in-time (JIT) type of system becomes impractical when the vendor is located far away from the manufacturing facility. Besides this, the policy also hampers the growth of local ancillary industries such as steel, equipment and ipe manufacturers which can supply materials (that account for 60-70 % of value) to domestic yards.
The ERP systems implemented in domestic shipyards are namesake only and help little in improving materials management or other systems. This is because these ERP packages were conceptualized for organizational setups that do not face the problems of Indian shipyards, and hence not applicable in their current form despite customization. It may be noted that East Asian shipyards such as “Shipyard U” developed their own in-house materials management IT systems that are more realistic solutions to their organizational context.
This shipyard has a well-developed state-of-the-art SCM system, integrating the shipyard with steel suppliers, machinery & equipment manufacturers, vendors, subcontractors etc. that are positioned locally (one hour drive from the shipyard) making good approximations of JIT systems possible. Shipyard Layout Indian Shipyards have a process oriented layout wherein there are different shops such as steel cutting shop, fabrication shop, outfitting shop, blasting & painting shop etc. wherein the product-part has to be taken for the operation to be performed. This is a reflection of the product mix which is highvariety- low-volume.
Process layout involves more material movement than product layout which tends to align with assembly line production. However, this is only possible when there exists low-variety-highvolume orders as with “Shipyard U” and “Shipyard G” that specialize
in a particular vessel type.
This method is extensively followed by leading shipyards worldwide. According to IHOP method, the design of the vessel would be done system-wise (structure, HVAC, piping etc. ) but construction would be done block-wise. Figure 3 - Block Construction Integrated blocks consisting of hull, piping, machinery, outfitting etc. would be separately & simultaneously build and welded together in the erection dock. Most Indian shipyards try to follow IHOP method, but there are major deviations in practice.
By the keel laying date only about 20% of the blocks are completed. In contrast, in “Shipyard U”, 80% of the blocks are ready by keel laying date. By launch date, the extent of pre-outfitting achieved in Indian yards is about 10 % while the figure is about 80 % in East Asian shipyards. Controlling the time for outfitting is an area to be seriously looked into if we intend to eliminate time overruns in Indian yards. Outsourcing / Subcontracting As a shipyard approaches its maturity stage it predominantly becomes an assembly center with a significant amount of work outsourced to subcontractors.
In our omestic shipyards, only simple blocks are outsourced to subcontractors whereas complex blocks are manufactured in-house. This means that the burden of critical manufacturing tasks is on the shipyard. In contrast, in leading East Asian shipyards such as “Shipyard U”, all the complex and difficult blocks are outsourced to subcontractors. The shipyard invests in the development and training of subcontractors to upgrade their skills and expertise. If a subcontractor defaults on delivery, it is black-listed. “It is difficult to get good outfitting subcontractors and very often fabrication work ends
up in rework”, says manager of “Shipyard H”.
Unique Advantages of Shipbuilding in India
Despite the many problems in the domestic shipbuilding industry, India is blessed with some unique advantages that ought to be leveraged upon to improve our position in the global shipbuilding industry. The Indian subcontinent is in the form of a peninsula, with a high coastline to land area ratio.
Most of the industrial cities have close proximity to ports and shipyards and even hose cities in interior regions are connected by an extensive network of rail and roadways. This enables the development of a robust supply chain network linking the shipbuilding and ancillary industries. Many of the ports are natural harbors with high drafts available for large vessels. Indian ports and shipyards are also well positioned to be trans-shipment and repair hubs for vessels plying on the east-west corridor across the Indian Ocean. India can also boast of an abundant supply of skilled labor available at globally very competitive rates.
India produces thousands of IT savvy engineering graduates every year who can e employed in shipbuilding industry to implement IT-enabled solutions that are more efficient. Although, not at the forefront of technology, Indian shipbuilders over the years have developed several frugal engineering practices for construction of vessels that can be fine-tuned to develop innovative solutions applicable in particular contexts. These heuristics (rules of thumb) that are conventionally used during the shipbuilding processes can be improved upon to come up with more efficient solutions.
Recommendations
Based on our study, the following recommendations are made for decision making at tactical and strategic levels. The tactical decisions
may be implemented in a time span of 2-3 years while the strategic decisions would be governing over a time span of 5-10 years. In the design of ships, there needs to be more integration between the design, planning & scheduling and production departments. Strategic level intervention is necessary to develop strong basic design to production documentation expertise in the long run.
The production scheduling may be done temporarily by constraint based optimization which will give reasonably good solutions; however, in the long run, shipyards may develop their in-house software suites to optimize their cheduling and inventory. The shipyard may invest in training and development of local subcontractors in the short run. At a strategic level, the government and major shipbuilding players must work to establish SEZs where ancillary industries may be developed in clusters and where businesses can benefit from tax break especially for export orders.
In the short run, the shipyards may work on completing the utfitting design work within specified time frame and subsequently, in the long run, train subcontractors to produce 80% preoutfitted blocks before launch. The shipyards may incrementally automate processes such as welding etc. in the short term and adopt newer technologies in the long term. The shipyards may invest in R units in-house to use OR techniques to optimize their operations. In the long run, they may collaborate with academic institutes for R and mentoring. A snapshot of the recommendations is given below.
While technical research on ship design and production is on-going, there is enormous scope for operations and managerial research in the shipbuilding context. In India, institutions such as National Ship Design &
Research Center (NSDRC), IIT Kharagpur and IIT Madras are engaged in technical research. In order to improve the organizational processes, managerial research is equally important.
As of now, there is a fair amount of extant literature on shipyard layouts, operations planning and scheduling etc. However, there is dearth of literature, especially in the Indian context in areas such as clustering of design units, production facilities and ancillary industries, centralized / decentralized procurement of materials, inventory control mechanisms for critical & non-critical resources, effect of different government policies on shipyard performance, game theoretical research on effect of monopolies, oligopolies and competition on shipbuilding output, effect of product-mix on standardization of part omponents, time-and-motion studies in ship production processes, organizational inertia in adoption of new technologies etc. which are all avenues for future research.
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