Supply Chain - Petroleum


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Explains the mechanics of a very complicated Supply Chain in the Petroleum Industry

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Supply Chain - Petroleum

  1. 1. INTRODUCTION • The petroleum industry plays an important role in the economic development of the country • Performance of its supply chain has become very important
  2. 2. INTRODUCTION (contd.) • The petroleum industry traditionally had prices decided by the Government of India. • Effective from August 1, 2004, the Government put in a revised methodology allowing oil companies to revise the prices of motor spirit and High Speed Diesel (HSD). • The total investment estimated in the petroleum sector from 1995 till 2010, is expected to be Rs. 4,32,000 cr (US$120 bn), out of which Rs. 2,58,000 cr (US$80 bn), are for the upstream sector alone • Petrochemical industry in India employs around 40,000 people directly and around 4 lakh indirectly
  3. 3. OBJECTIVES • Understanding the importance of supply chain management in the petroleum industry. • Identifying distinguishing features of the petroleum industry supply chain vis-à-vis discrete manufacturing supply chains. • Discussing the petroleum supply chain in India. • Identifying non-value added activities in the petroleum supply chain. • Discussing the role of information technology in revamping the petroleum industry supply chain.
  4. 4. SUPPLY CHAIN IN PETROLEUM INDUSTRY Crude Purchase Retailing / Consumer (Demand Centre) Crude Storage Product Transptn/Distribution (Tanker/PL/Rail/Road) Mktg Product Storage (Terminal/ Depot/ Port) Refining Supply Planning Distribution Planning Crude Transptn. (Tanker/PL)
  5. 5. DIFFERENT STAGES IN PETROLEUM SUPPLY CHAIN Exploration → Production → Refining → Marketing → Consumer • Exploration: Seismic, geophysical and geological operations • Production: Drilling, reservoir, production and facilities engineering. • Refining : complex operation and its output is the input to marketing. • Marketing : The retail sale of gasoline, engine oil and other refined products.
  6. 6. IMPORTANCE OF SUPPLY CHAIN IN PETROLEUM INDUSTRY •Petroleum industry is highly asset intensive •Like other chemical companies supply chain can account for upto 70% of overall cost . •Highly specialized business processes encourages fragmentation. •Chemical supply chains are typically non-linear in nature • Supply chain optimization at a strategic and operational level is a value creating opportunity for chemical companies and a potential source of competitive advantage
  7. 7. Petroleum Supply Chain In India Upstream Exploration & Production Ministry of Petroleum & Natural Gas Downstream Refining & Marketing Industry Bodies ONGC Oil India Limited OVL Pvt E&P Cos. CPCL, BRPL NRL Hindustan Petroleum Reliance Industries Ltd. • Petroleum Planning & Analysis Cell • Centre for High Technology • PCRA • PetroFed • Oil Industry Safety Directorate • Petroleum India International • Engineers India Limited • Director General of Hydrocarbon IndianOil Bharat Petroleum MRPL
  8. 8. UPSTREAM SUPPLY CHAIN • Acquisition of crude oil. • Operations – Exploration ,Forecasting , Production . • Logistics management - Delivering crude oil from remotely located oil wells to refineries
  9. 9. DOWN STREAM SUPPLY CHAIN • Refinery- The crude oil is manufactured into the consumable products that are the specialty of refineries and petrochemical companies. • Processes - forecasting, production, and the logistics management of delivering the crude oil derivatives to customers around the globe.
  11. 11. OBJECTIVES OF A SUCCESSFUL SUPPLY CHAIN IN PETROLEUM • Minimization of material procurement • Maximization of manufacturing capacity and sales • Meet demand numbers • Respond quickly to market opportunity by purchasing the production shortfall from other players • Objective of each production unit would be to maximize the throughput and its margin • Procurement would purchase the feedstock with not the best yields at lowest cost
  12. 12. SUPPLY CHAIN STRATEGIES • Planning – Which feed stock to buy – Where to process – How much to buy readymade and how much to make – What to make and where – How to transport
  13. 13. SUPPLY CHAIN STRATEGIES CONTD. • Scheduling – When and in what order feedstock should arrive at manufacturing facility – When and in what sequence or modes to run the equipments – Which orders to meet and what dates to promise
  14. 14. SUPPLY CHAIN STRATEGIES CONTD. • Demand planning: For demand forecasting and aggregation of the final demand numbers based on requirements of supply chain • Integrated Planning: Planning for the complete supply chain of the customer based on demand numbers • Distribution Planning: Generating operational plans for distribution • Production Planning: Generating operational plans for production. These modules are supported by various enablers that facilitate planning activity that include: • (1) Supply Chain Database (SCD) • (2) Geographical Information System (GIS) • (3)Data Interfaces
  15. 15. • The demand numbers are fed to an integrated planning module that contains representation of supply, production and distribution facilities • The production and the Supply and Distribution (S&D) structure forms the basis on which the optimised plan for the entire organisation is generated • This corporate plan is communicated to distribution modules and the production planning modules to generate operational plans • The optimised plan for the entire corporation is also used as a basis for feedstock selection runs. • GIS can be used to obtain the distances between locations, which are used as a basis for freight calculation SUPPLY CHAIN PLANNING SOLUTION
  16. 16. UNIQUE FEATURES OF THE PETROLEUM INDUSTRY SUPPLY CHAIN • Raw Material Supplies: Process industry has limited choice of suppliers for raw material Supplies in petroleum industry are dominated by cartels It is a sellers market wrt supply of raw material • Raw Material Prices: Raw material prices are highly unstable and fluctuating on weekly or even daily basis Fluctuating prices directly affect the supply chain costs and prices of final product
  17. 17. UNIQUE FEATURES OF THE PETROLEUM INDUSTRY SUPPLY CHAIN • Reverse Production Flow: The production flow is reversed in petroleum industry. In downstream petroleum companies, inventory starts from one product, i.e., crude and creates many products like petrol, diesel, naphtha, bitumen, etc • High Transportation Costs : Transportation costs about 20% of the production cost. • Length of Supply Chain: Very Complex and lengthy supply chain
  18. 18. UNIQUE FEATURES OF THE PETROLEUM INDUSTRY SUPPLY CHAIN • Integration of Supply Chain Partners :  Integration of suppliers as well as customers and distributors is difficult Cost pressures are the driving force in the supply chain. • Flexibility : Supply chains are highly inflexible both in terms of volumes handled and in terms of product variation/customization.
  19. 19. FUNCTIONS OF SUPPLY CHAIN DB • SCD provides distribution related inputs to both Integrated Planning and Distribution Planning models and has these following functions: – Temporal integration: Data for yearly and quarterly models available in one place and can be rolled up or down as per requirement. – Hierarchical integration: Aggregation for integrated model is done based on detailed data available for operational distribution models – Calculations: Final linkage costs are calculated using tax logic, current prices, distances and freight rates.
  20. 20. NON-VALUE ADDED ACTIVITIES IN THE PETROLEUM SUPPLY CHAIN • Waiting: – Crude oil is often imported. – Cargo ships have to often wait at the harbour before they can unload the crude. – Waiting leads to increase in inventory holding within the supply chain. – Occur while finished product is sent to storage installations by rail • Additional Quality Checks: – Adulteration usually happens in case of petroleum products like petrol and diesel – Adulteration is also possible in transit from storage installation to the retail outlet – Use of common pipeline for transporting different products leads to a small portion of product being "degraded“. – Testing of the product is required at various times.
  21. 21. NON-VALUE ADDED ACTIVITIES IN THE PETROLEUM SUPPLY CHAIN • Holding of Huge Inventories: – Product is made to stock and mammoth inventories are being kept at refineries and at storage installations – In Transit inventories – Information on demand and supply is not very clear and there is lack of visibility that adds up to increased safety stock requirements both for raw material and finished product • Over Production: – continuous process plants – continuous supply of feed stock, resulting in the production of several downstream products – inflexibility in capacity, as these plants have to run continuously all the time – This increases inventories of finished product and results in inefficient use of capital.
  22. 22. ROLE OF INFORMATION TECHNOLOGY IN THE PETROLEUM INDUSTRY • Timely flow of accurate information can affect performance of the supply chain to a large extent. • Integration of demand chain information • Hence process optimization is the key task for the Information Technologies function of process industries and currently seems to be a huge challenge • It is a method that unites the modelling, designing and monitoring of engineering assets with scheduling, supply chain, trading a fulfilment via multiple flows of information between stages in life cycle of products, bringing huge efficiencies • Customer-segmentation strategies and effective demand management, will lead to increased top line revenues and reduced cost of sales.
  23. 23. SUGGESTIONS • Raw Material Supplies: Formulating a long term agreement with some of the oil producing nations and in order to take care of price fluctuations Government should allow the petroleum companies to use hedging for finalizing deals involving purchase of crude oil. • Transportation Costs: Use of Pipeline transportation • Length of Supply Chain: Facilities at the ports should be improved and their capacity to be increased so that more tankers could berth at the harbour
  24. 24. SUGGESTIONS (Contd.) • Inventory Carrying Costs: Use of a reliable transportation system and quick information exchange can reduce carrying costs Government should aim at reducing the minimum safety stock, which oil companies are supposed to keep • Integration of Supply Chain Partners:  Oil companies should aggressively use information technology to integrate suppliers and customers. Effective use of ERP can help in this regard.