Eurasia Case
Eurasia Case
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ALI FARHOOMAND
EURASIA INTERNATIONAL:
TOTAL QUALITY MANAGEMENT IN THE
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SHIPPING INDUSTRY
Introduction
In the 1990s, Hong Kong-based Eurasia International Ltd. (“Eurasia”) aimed to set itself apart
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from other ship managers by implementing Total Quality Management (TQM) principles.
The Company’s President and Group Managing Director, Rajaish Bajpaee – a 30-year veteran
of the shipping industry, had been instrumental in establishing the International Ship
Managers’ Association (ISMA) and assumed its presidency in 2003. In his dual role, Mr.
Bajpaee believed that a comprehensive approach was needed to address some of the
challenges facing his profession.
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After a series of high-profile accidents during the shipping crisis of the 1980s, ship managers
found themselves dealing with complex and evolving systems of regulation imposed by
national and international maritime administrations. The shipping business was suffering
from a fundamental image problem, and Mr. Bajpaee felt it was losing out to other industries
in attracting the best and brightest people. Mr. Bajpaee believed that a system of continuous
improvement was required to enhance his Company’s competitiveness, develop its human
capital and establish a reputation for quality. For the industry at large, a culture of voluntary
compliance could promote safety and forestall a state of over-regulation.
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Amir Hoosain prepared this Case under the supervision of Dr. Ali Farhoomand for class discussion. This Case is not intended to
show effective or ineffective handling of decision or business processes.
This Case is part of the Trade & Industry Department SME Case series funded by the Hong Kong Special Administrative Region
Trade and Industry Department SME Development Fund. Any opinions, conclusions or recommendations expressed in this
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material/event (by members of the project team) do not reflect the views of the Government of the Hong Kong Special
Administrative Region, Trade and Industry Department or the vetting committee for the SME Development Fund.
© 2004 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or
transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise (including the Internet)
- without the permission of The University of Hong Kong.
Ref. 04/203C 23 July 2004
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04/203C Eurasia International: Total Quality Management in the Shipping Industry
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When you go and fill up your car with gas, you never think about how the gas
came there in the gas station. Some ship brought it. The coal which is used
in the power plant in Lamma – who brings the coal? - The ships. So the
contribution of shipping to Hong Kong’s economy is not appreciated.
- Rajaish Bajpaee, President & Group Managing Director, Eurasia International.
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Shipping is one of the world’s oldest industries and perhaps the first of a truly global nature.
In olden times, a ship’s captain was typically also its owner and oversaw the purchase and
sale of cargo, the recruitment of crew members and the daily ins and outs of seafaring
operations. These ship-owners were renowned for their strong personalities and usually put
their own capital at risk.
The form and structure of the shipping industry has been transformed with the tides of
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history. As the monopolistic mercantile companies of the great European powers went into
decline, market forces gradually took over. The industry has become specialised in every
area – individual cargoes have given way to bulk pools, container pools and tanker pools; the
financing of vessels has become extremely sophisticated, and technological advancement has
forever changed shipping operations. Through all this, the individual ship-owner has become
a rarity, but the ship manager’s role has grown prominent.
It has been estimated that over 90% of the world’s commerce involves movements by sea;
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transported goods include fuel, raw materials, food, furniture, apparel and other finished
goods.1 The fortunes of the industry are directly affected by greater trends in world trade. In
the 1980s, the maritime industries suffered from the downturn in world trade, which was
further exacerbated by problems of excess capacity, rising costs and falling freight rates.2 Too
many ships were competing for too little cargo, and freight rates were often so low that they
barely covered operating costs.
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During this period of crisis, banks were often compelled to repossess ships that they lacked
the expertise to operate. In the recessionary 1980s, enthusiasm for outsourcing was running
high. Ship-management companies offered ship-owners the option of separating shipping
operations from the asset management, sales and marketing aspects of their business. This
freed the owners to focus on the revenue-generating side of their business (ie, marketing
cargo space).
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Eurasia Group
Eurasia was founded as a joint venture in Hong Kong in 1981 by three partner companies,
with the aim of establishing a technical ship management capability in Asia. Hong Kong had
one of the busiest container ports in the world and was chosen for Eurasia’s headquarters
because it met all five basic criteria that governed the choice of location: a sophisticated
telecommunications infrastructure, an extensive air transportation system, an advanced
banking infrastructure, a low tax regime and a productive workforce.3 Each company brought
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1
Wendy Ng, “Shipping firm calls talent to come aboard,” South China Morning Post, February 7th 2004.
2
In the 1970s, various governments around the world offered cheap ship-construction loans to aid struggling ship-owners. As a
result new vessel orders were placed in anticipation of an upturn in world trade.
3
The port of Hong Kong was served by about 80 international shipping lines providing over 400 container liner services per
week connecting to over 500 international destinations (Hong Kong Port Development Council). Other major international ship
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04/203C Eurasia International: Total Quality Management in the Shipping Industry
five ships into the partnership, and Eurasia continued to manage its own fleet until 1987,
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when one of the partners, The Bernhard Schulte Group, bought out the remaining two partners
and established Eurasia as a wholly owned subsidiary with a mandate to operate as a
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competitive third-party ship manager.4 Eurasia initially relied on Asian ship-owners,
particularly from Japan, to build its client base. In the early years, a typical Japanese-owned
ship would take raw materials into Japan and carry finished goods out. Over time, however,
manufacturing shifted to other countries and by the mid-1990s, the merchant ships that
Eurasia serviced were largely engaged in cross-trade.
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Eurasia’s President and Group Managing Director, Rajaish Bajpaee, had received an
education in the sciences and had gone on to study at a marine engineering college before
spending eight years at sea, where he worked his way up to chief engineer. He left to pursue
an MBA and began a shore-based career, initially as a ship superintendent and later rose to
management positions, where he gained exposure to the accounting, finance, human resources
and marketing sides of the business.
At Eurasia’s helm, Mr. Bajpaee saw the need to expand beyond an Asian base and to
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configure the group’s business accordingly. He developed a five-year plan to expand
Eurasia’s customer base and develop operations to cover the three major world regions: Asia
Pacific; Europe and the Americas, and the Middle-East and Africa. Disruptions due to the
Asian financial crisis of 1997 delayed implementation of this plan by two years. In due
course however, Eurasia had established regional headquarters in Hong Kong, Bombay and
Hamburg, and a number of regional offices, extending its coverage to offer year-round,
worldwide services. After starting with a fleet of just a few ships in the 1980s, the Company
had expanded to a total of 90 ships under management by 2004. Eurasia positioned itself as
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an Asian company with global operations.
Eurasia’s Services
By 2004, Eurasia was offering a suite of services that spanned the entire life-cycle of a ship
from construction to demolition. Fifty-six per cent of its managed fleet belonged to Asian
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owners (approximately 80% Japanese) and a growing European element was observed within
the remaining component. As a manager of its customers’ assets, the group offered services
in three categories: ship-management services (by far the biggest category), marine
consultancy services and shipping services:
While some of its competitors employed niche marketing strategies – claiming distinctive
competencies in managing certain classes of vessel or as technical, financial management,
risk management or liability experts – Eurasia’s service offerings were not product-centric. A
client could pick and choose among the various services and a service package would be
assembled accordingly. To meet customer requirements, Eurasia was able to offer dedicated
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seafarers qualified for any size or type of tanker, bulk carrier or container ship. It also
management centres included Singapore, Cyprus and Glasgow. Ship managers served a global market and faced global
competition.
4
The Bernhard Schulte Group was a German family-owned company that had been in the shipping business for over 120 years.
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04/203C Eurasia International: Total Quality Management in the Shipping Industry
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users access to timely and accurate information.
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Changes in the Shipping Industry
At the turn of the century, there were approximately 50,000 merchant ships in the world, of
which approximately 5,000 (10%) were managed by third-party ship managers.5 The top ten
international ship managers could collectively lay claim to about half the market, with the
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remainder comprised of managers controlling anywhere from one to several ships.
In a bid to enlist lower-cost crews, the shipping industry underwent major restructuring that
saw significant growth in the number of open-registry ships operating under offshore
management.6 Ships under open registry accounted for 5% of world shipping tonnage in
1950, 25% in 1980, and 45% in 1995.7 The industry had become more dispersed and
observers were noting a change in the balance of power in world shipping.8 The shipping
business was taking on a very different form from that of earlier times, when shipbuilders,
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ship-owners, agents and port service providers were concentrated around traditional port
cities. At the turn of the century, South Korea, Japan and China were the world’s largest
producers of ships; Greece and Japan were the largest owners of merchant ships; the
Philippines was the largest source of seafarers and Panama had the largest registry.9
The 1980s had seen a number of high-profile shipping accidents, culminating in the highly
publicised Exxon Valdez tragedy of 1989. Ship operators found themselves in the limelight
following such incidents, and in the position of having to guard their industry against
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perceived deficiencies. During this period, third-party ship managers received the lion’s share
of the blame for allegedly bringing down standards and providing inadequately trained crews.
In the ensuing years, safety and environmental standards received more attention as the
industry recognised the need for greater environmental awareness. As the industry grappled
with such issues, an increasing amount of regulation was being imposed upon it by national
governments and international bodies. Ship managers were operating in a climate of
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increasing complexity.
A ship is like a floating factory. A typical ship carries 2,500 boxes…it has the
horsepower of a power plant…an engine of about 30,000 horsepower. It has
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6
Ship-owners from countries such as the UK and the US were required to use crews from the country in which their ships had
been registered; work practices and salaries were generally established by union agreements. However, using a so-called “flag
of convenience”, a ship under open registry in a country such as Panama or Liberia could benefit from substantially lower
manning expenses; the state offering the flag of convenience was compensated according to the ship’s tonnage.
7
US Maritime Administration Statistics, 2003.
8
Armadillo Marine Consultants.
9
Lloyd's Register Fairplay and US Maritime Administration Statistics, 2003.
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04/203C Eurasia International: Total Quality Management in the Shipping Industry
care of it in the middle of the ocean. You are not in a static environment
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because you are confronted with the fury of the sea.
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- Rajaish Bajpaee, President and Group Managing Director, Eurasia International.
A ship manager’s primary customer was the ship’s owner, but in practice the ship manager’s
role was also to serve as an intermediary with secondary customers – the ship financiers and
cargo owners. Ship-owners typically sought three core competencies in selecting a ship
manager:
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Cost efficiency: the ability to control the daily running costs of a ship.
Earning period: owners were eager for the revenue-earning potential of their vessels
to be fully realised; if a ship was docked or under repair, it would not be generating
revenue.
Asset preservation: ship-owners had a vested interest to see that their vessels were
well maintained and able to earn revenue for a normal useful life of 25-30 years.
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The key to success for a ship manager was to offer cost-effective solutions by outsourcing
functions to low-cost areas and by establishing practices based on the latest know-how and
technology. Ultimately, to attract and retain customers, it was necessary to offer high service-
quality levels, while at the same time offering cost levels that could compete with what an
owner could achieve with internal operations. In recent years, this had become more
challenging because ship-owners could operate their vessels internally at very low cost by
using different flag states and alternative crewing arrangements.
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“Being the Best, Not Necessarily the Biggest”
There had only been a minor increase in the size of the world fleet from 1999 onwards, and
consequently third-party ship managers were competing in the same limited marketplace.
Some ship managers merged to form larger units, aiming to benefit from economies of scale.10
Eurasia bucked this trend – its strategy was not geared towards size. As a member of the
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Schulte group of companies, it could generate economies of scale by pooling resources with
the four other management groups under the parent company.
In total, the Schulte Group managers operated some 400 ships; expense items such as
training, human resources administration and insurance could be managed as a common pool.
Eight thousand diversely experienced seafarers of various nationalities were available to take
on contract assignments through the Schulte Group’s eight international manning and training
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centres. Eurasia thus escaped pressures to acquire or merge with other companies to remain
cost-competitive. By staying relatively small within the structure of the Schulte Group, the
Company was able to offer far more personalised services and to maintain a somewhat unique
business model compared with the competition. As Rajaish Bajpaee saw it, ship-owners did
not care whether a ship manager operated 50 ships or 500 ships; they were only concerned
that the vessel they owned was under professional management.
Thus, Eurasia could offer both cost competitiveness and product differentiation as advantages
over its rivals. Rajaish Bajpaee believed this two-pronged approach was needed to resolve
two seemingly conflicting customer requirements – low costs and personalised service. Mr.
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Bajpaee coined the strategy statement “Being the Best, Not Necessarily the Biggest” as his
10
For example, Hong Kong-based Anglo Eastern Group took over Denholm Ship Management in 2001. There had also been
talk of possible mergers involving ship managers Wallem and Thome (“Ship Management – Anglo Eastern says goodbye to
ISMA”, Lloyd’s List, January 9th 2003).
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04/203C Eurasia International: Total Quality Management in the Shipping Industry
Company’s objective – not to strive for significant growth in a given market, but to provide
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the highest-quality service while satisfying customers, shareholders and staff.
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Growing Regulation and the ISMA
From the early 1990s, ship managers found themselves dealing with an increasing regulatory
burden as international trade bodies and regional regulators introduced a jumble of rules and
security measures. As a result, it was necessary to employ highly skilled support, training and
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supervisory staff – yet at the same time, ship managers faced constant pressure to maintain or
even reduce management fees in the lows of shipping cycles.
As exponents of cost-cutting, ship managers also found themselves being made scapegoats for
a perceived decline in shipping standards. Recognising the need to counter these perceptions
and to forestall unilaterally mandated legislation, an informal association of leading ship
managers founded the International Ship Managers’ Association (ISMA) in 1991 to pursue a
quality ideal for the industry. The ISMA code of ship management was issued in 1998,
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stipulating audit-based compliance as a condition for membership.11
The ISMA code was a minimum quality benchmark for the industry, assessed impartially and
independently by classification societies. Rajaish Bajpaee had served on the executive board
of ISMA since its foundation and was a driving force in urging industry colleagues to
embrace voluntary standards and to take on a proactive role in shaping the evolution of their
industry. Mr. Bajpaee assumed the ISMA presidency in 2003 with a mandate to continue the
group’s pursuit of the highest standards in ship management.
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Eurasia’s Quality Journey
Having reflected upon the changes taking place in the industry and through his involvement
with ISMA, Rajaish Bajpaee believed that the most important determinant of a ship
management company’s success was its ability to balance the expectations of key
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constituencies and continuously add value through best practices. With limited resources at
hand, the challenge of ship management was to satisfy and balance the expectations of
shareholders (who wanted greater dividends), customers (who demanded personalised service
at low prices) and staff (who wanted job security, better compensation and good working
conditions). Mr. Bajpaee saw Total Quality Management (TQM) as a useful model that could
place his organisation in a favourable condition.
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ISMA members are audited twice a year. ISMA membership hit a peak of 32 ship managers in the mid 1990s, but this number
has since declined to 10 members due to duplication with the International Maritime Organization’s International Management
Code for the Safe Operation of Ships and for Pollution Prevention (ISM Code), which was instituted in 2002.
12
The Conference Board is a US-based not-for-profit organisation that functioned as an independent membership organisation,
conducting research, convening conferences and publishing information and analysis on leading-edge business practices.
13
Philip B. Crosby (1984), Quality without Tears: The Art of Hassle-free Management, New York: McGraw-Hill.
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A work system that included planning, budgeting, reward-recognition and other
systems to consistently produce quality
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A meaningful way to monitor and measure the results of the system
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Crew Recruitment and Training
A ship manager’s challenge was first and foremost to have the right people, at the right place
and at the right time to operate the vessels under its management. In Mr. Bajpaee’s opinion, it
was necessary to start by acknowledging that constant improvement of the crew was essential
to success. In this regard, there were two primary challenges: one was to attract the best
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people, and the other was to train them into leadership positions. With competing shore-
based jobs offering stable work hours and established career paths, Eurasia attempted to
create more congenial conditions for shipboard staff – for instance by allowing up to five
family members to accompany certain seafarers during their shipboard employment.14
Although Eurasia was Hong Kong-based, there were no training or education institutes in
Hong Kong geared towards developing maritime professionals. Eurasia recruited seafarers
internationally and assembled multinational crews. A ship’s captain could be likened to the
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managing director of a factory – responsible for the ship’s mission, for allocating resources
and for ensuring the safety of the vessel, its crew and cargo. The chief engineer could be
likened to a general manager, and the staff of marine engineers was responsible for all
technical aspects of ship maintenance and operations, including communications technology
[see Exhibit 1]. Vessel crew-members could advance their careers either through education
and the accumulation of experience, or by acquiring special skills in the course of their
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employment. Both seafarers and shore-based staff were formally appraised on a regular
periodic basis.
The crew for a ship had to be recruited, trained and developed according to the specific type
of vessel under management, the particular type of cargo or the voyage in question.15 It was
the role of the shore-based team to provide them with a system of safety, guidelines, policies
and procedures so that they would be equipped with the tools and knowledge necessary for
any foreseeable eventuality. This had to be backed up with well established daily, weekly and
monthly reporting systems; quarterly inspections; pre-embarkment and post-disembarkment
debriefings and ongoing satellite-based monitoring to ascertain whether the vessel was
making the right progress and consuming resources efficiently.
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14
Wendy Ng, “Shipping firm calls talent to come aboard,” South China Morning Post, February 7th 2004.
15
Training took place at Eurasia’s in-house training centres, on training ships, on-the-job or at specialised institutes or colleges.
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04/203C Eurasia International: Total Quality Management in the Shipping Industry
To ensure that the vessels under its management were operated safely and optimally, Eurasia
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instituted a management structure comprised of self-check, cross-check and external-check
components, corresponding to the company’s shipboard, fleet management and support teams
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[see Exhibit 2]
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The external check component was conducted by teams of cross-functional support
staff who acted as referees in resolving problematic situations.
When any defects or deficiencies were identified, they would be analysed by a “reliability
team” to determine whether the root cause was due to failure on the part of the crew, a failure
in the system, a failure of equipment or some combination of the three. The appropriate
remedy would then be arranged; if the cause of failure was people-related, then the situation
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was further analysed to determine whether the issue involved crew members’ skills,
knowledge or attitudes. If necessary, a training module would be established to address the
specific problem. If the failure was due to equipment malfunction, then adjustments were
made to the maintenance regimen. If it was deemed a failure of the system, then the relevant
policies and procedures were modified. Fleet-wide circulars were sent out regularly to
disseminate any lessons learned. Total employee training at Eurasia reached its highest level
in 2002, while in the same year, employee turnover was at its lowest level ever [see Exhibit
3].
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Organisational Performance
The business processes instituted at Eurasia provided the foundation for continuous
improvement throughout the organisation. So that management could gauge performance at
all functional levels, Eurasia devoted significant resources to maintaining performance
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Key Performance Indicators (KPIs) were established, for which corresponding objectives and
responsibilities were set [see examples in Exhibit 4]. All sea-based and shore-based groups
within the Company had performance targets – at the business unit, team and individual
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levels. This measurement framework allowed senior management to observe how all
parameters were working on a virtually real-time basis. To supplement this information, key
data from external market and financial information providers were collected and analysed
regularly. Various forms of analysis were employed, including financial analysis, root cause
analysis, trend analysis and regression analysis; the findings and results were transmitted to
the relevant parties for further action.
Eurasia in 2004
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I make it a point to mention that in business, profit is like oxygen, and just
like your blood flow, you need cashflow. But your purpose of existence is
beyond breathing and having a pulse. Similarly, the purpose of a business’
existence is beyond profit and cashflow. The purpose is to create value for
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04/203C Eurasia International: Total Quality Management in the Shipping Industry
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resources.
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- Rajaish Bajpaee, President and Group Managing Director, Eurasia International.
By early 2004, Eurasia’s commitment to quality management appeared to be paying off. The
Company obtained good financial results over a period of economic slowdown and
maintained high levels of customer retention and employee satisfaction. Eurasia was awarded
the “Best Ship Manager” designation by Lloyd’s Maritime Asia for the second year running
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in September 2002, and the Hong Kong Management Association’s Quality Award the
following year.
After 30 years in shipping and having been at Eurasia’s helm throughout its formative period,
Rajaish Bajpaee believed the challenges of shipping were fundamentally unchanged. The
biggest challenge was to attract, nurture and retain a talented crew. A ship manager had to
maintain the necessary HR focus while controlling the ship’s cost structure, staying in tune
with customer requirements and anticipating the competition. To achieve excellence in these
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respects, Mr. Bajpaee believed a voluntary culture of self-regulation was essential.
From the late 20th century, certain parties within the shipping industry were developing
prototypes of unmanned ships and were anticipating an age when ships could be operated
with nobody aboard them at all. Technically, there was no reason why this couldn’t be
accomplished in an age of advanced satellite communications, when unmanned probes could
be sent to Mars. Labour had always been a major issue in the shipping industry, where
substantial resources were needed to train and develop an efficient crew. Ship-owners in
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high-cost countries faced shrinking domestic labour forces and rising costs, high attrition rates
within the industry and occasional union problems. All this could be avoided by moving
towards automation; the shipyards’ R&D functions also stood to gain from such a change.
However, Rajaish Bajpaee was sceptical that a state of complete automation would come to
pass and felt that, aside from the humanistic arguments, highly-trained and experienced
seafarers would always be able to anticipate and respond to trouble in ways that machinery
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could not.
In the coming decades, ship-owners and managers could anticipate additional changes in the
shipping industry. Further global reshuffling of industry players was ongoing, new ships
would travel faster and cargo values would probably rise significantly. All this would mean
continuing pressure on ship managers to adapt. Managing a diverse fleet in such a climate
would challenge even the best of managers, but Mr. Bajpaee felt confident that the total
quality culture and systems of continuous improvement put into practice would enable
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Eurasia to navigate rough seas and continue to offer services superior to those of both its
competitors and clients.
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Source: Eurasia International (China) Limited Partnership
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