Exploring the Distribution Channel: Fuel industry [Analysis of Distribution Channel: Diesel] Submitted By: Mustafa Manzur Morshed ID # 082 486 060 Tasnuma Tanin ID # 083 013 060 Mahmudur Rahman ID # 082 546 060 A.H.M. Ismail ID # 073 268 060 Wasif Hasan ID # 010 0946 460 Submitted to: Dr. Mohammad Baktiar Rana

Faculty, MKT 625

Distribution Management

School of Business

North South University

[Wednesday, August 25, 2010] Summer 2010

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Acknowledgement First of all we would like to thank our honorable faculty Dr. Mohammad Baktiar Rana for providing us with important guideline about this assignment and giving

us the opportunity to work in the assignment, “Exploring the Distribution Channel: Fuel industry” which was very much relevant to the materials taught

in this course. We would like to appreciate the scope he has provided us for

analyzing the distribution channel of a particular industry namely Petroleum in

Bangladesh. We have selected the Distribution of Diesel in this case to properly

explore the distribution channel of Petroleum industry as Diesel Plays a vital role

in this sector.

The information used throughout the project were all collected from a secondary

source, mainly from the internet. It could have been better if we could have

conducted some primary surveys for collecting the information. The internet had

very few information through some news portal and through some government

website which was also very much insufficient to come into a very realistic and

fruitful conclusion of this assignment.

We would also like to thank All Mighty “Allah” for enabling us to complete this

case analysis. Last of all we would like to recognize the contribution of each team

members who worked equally to create this assignment as much relevant as

possible by the guidelines provided to us. If our faculty, after going through this

text has any valuable suggestions for us we would be very glad to incorporate it.

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August 25, 2010

Dr. Mohammad Baktiar Rana

Faculty, MKT 625

Distribution Management

School of Business

North South University

Basundhara R/A, Dhaka.

Subject: Submission of the assignment on “Exploring the Distribution Channel: Fuel

industry”.

Dear Sir,

We are please to submit the assignment “Exploring the Distribution Channel:

Fuel industry” which was due for the course MKT 625, Distribution Management.

The case analysis is very much relevant to what we are learning in this course. Since this

is a new course for us, the case has helped us a lot in understanding the practical aspects

of distribution channels in Petroleum Industry of Bangladesh.

Despite the time constraints and other problems, we have tried our best to make the case

as logical as we could. Therefore, we would be obliged if you could please accept this

report. If any further assistance are needed please contact us at mmanzur@dhaka.net

Sincerely yours,

Mustafa Manzur Morshed ID # 082 486 060

Tasnuma Tanin ID # 083 013 060

Mahmudur Rahman ID # 082 546 060

A.H.M. Ismail ID # 073 268 060

Wasif Hasan ID # 010 0946 460

4

Industry Distribution system 05~10

Firm specific Channels 11~19

Conflicting areas between channel partners 20

Power structure of channel system 21- 25

Strategic alliance 26~30

Major strengths of closest competitors 31~34

Possible threats of alternative 35~ 37

Recommendation 38~ 39

References 40

Table of Contents

5

Of Fuel and Distribution: Bangladesh Overview How Fuel Distribution Effects Bangladesh Economy

Politically, Bangladesh stands at a cross-road in 2008, with credible elections

and sustained democracy being a realistically attainable choice. Yet, it is an

economic issue that can overshadow all socio-political developments. Rising

food price inflation -- agflation -- is arguably the greatest problem facing the

country today. And while there are domestic factors at play, the global nature of

agflation makes it difficult for the policymakers to stem its rise.

Although agflation started picking up in 2003, it has gathered pace in the past

few months (Chart 1). Food prices rose by 11.7 per cent during the 12 months to

October 2007, to be over 50 per cent higher than their 2002 levels.

There are many reasons for high and rising agflation. While the impact of

Cyclone Sidr is not visible in the chart, it does show the impacts of the floods in

the summer of 2007. As it was, prior to the flooding, there were already

disruptions to the supply chain caused by various demolition drives and anti-

corruption operations earlier in the year. The anti-corruption drive was, at least in

part, a response to alleged market collusion that may have fuelled agflation

before 2007. In addition to these shocks and microeconomic reasons, the

depreciation of the taka against the Indian rupee also fuelled agflation in

Bangladesh since late 2003.1

However, even if these domestic reasons were absent, it is likely that we would

have to contend with high and rising agflation. This is because agflation is a

6

global problem, as shown in Chart 2, which compares agflation in Bangladesh

with international averages.

And the global agflation is set to continue into 2008, as a recent Financial Times article reports:

Global food prices will come under further pressure today as benchmark prices for

cereals at much higher levels kick in, making it almost inevitable that a second wave of

food price inflation will hit the world's leading economies. In Chicago wheat and rice

prices for delivery in March 2008 have jumped to an all-time record, soyabean prices are

at a 34-year high and corn prices at an 11-year peak. Knock-on price rises are set to hit

consumers in coming months, raising inflationary pressure and constraining the ability of

central banks to mitigate the slowdown in their economies. A first wave of surging cereal

prices hit the wholesale market during the summer and has fed through the supply chain

and contributed to rising inflation.

There are two major reasons behind this. The first -- rising income in the

emerging world -- is a welcome development that the world will need to cope

with. Rising income in the emerging world means that millions of people in these

countries can now afford to have meat and dairy items on a regular basis. This

has increased the price of farm and poultry produces. But animals are fed grain,

so prices of cereal crops also rise.

7

The emergence of China, India and other such economies is not a sudden

development. And it's not only food prices that have increased recently as a

result of increased demand from the emerging economies. Prices of oil and

various metals have also been at historic highs in recent years.

That said, changes in diet and food consumptions that have come with rising

prosperity have been gradual, whereas the rising global agflation is a much more

sudden phenomenon. The more recent global agflation is a direct result of strong

demand for subsidized corn-based ethanol as a fuel for cars.

With oil prices rising to around one hundred dollars a barrel, it is not surprising

that consumers are looking for alternative fuels. The alternative liquid fuel that is

the current favorite of American policymakers is ethanol, whose production is

currently subsidized by legislation. In the United States, the grain of choice for

ethanol production is corn, unlike the sugarcane used by Brazil for its ethanol.

The US corn market, like for the rest of US agriculture, is already distorted by

subsidies and interventions that are playing havoc in the world cereal markets.

The artificial expansion of ethanol production has created an increase in the

demand for its main input corn, driving up its price. American farmers have

reacted by diverting productions away from other crop, raising their prices as

well. According to the Economist:

8

This year the overall decline in stockpiles of all cereals will be about 53m tonnes -- a

very rough indication of by how much demand is outstripping supply. The increase in the

amount of American maize going just to ethanol is about 30m tonnes. In other words, the

demands of America's ethanol programme alone account for over half the world's unmet

need for cereals. Without that programme, food prices would not be rising anything like

as quickly as they have been.

The Economist's assessment is supported by the IMF. The director of its

research department says:

In the IMF staff's assessment, a significant part of the latest jump in food prices can be

traced directly to biofuels policy.

The US ethanol program has its origin in the idea of "energy security" -- an end

to American reliance on imported fossil fuel. But the way biofuel subsidies

interact with other policies can actually produce more demand for fossil fuel. For

example, production of "flexible-fuel vehicles" (that is, vehicles that can use both

ethanol as well as fossil fuels) are subsidized. Because the fuel-economy credit

is biggest for the least energy-efficient models, manufacturers concentrate on

sport utility vehicles and light trucks. Yet almost all the drivers of these vehicles

use ordinary petrol. The result is greater consumption of petrol, not less.

Biofuels are subsidized in Europe as well. In both sides of Atlantic, climate

change is another reason cited for the subsidies. But if that reason was genuine,

then surely the most environmentally efficient sugar-based Brazilian ethanol

wouldn't have been prohibited from entering American and European markets

through tariff.

9

Shafiq Alam/ driknews

Whatever the stated reason is, according to Global Subsidies Initiative, a

Geneva-based think Initiative, a Geneva-based think tank, biofuel subsidies are

really "farm programs masquerading as answers to energy insecurity and climate

change."

And what is the real price of this subsidy? Two statistics are widely quoted.

According to studies by Gary Becker, a Nobel laureate from Chicago, a one-third

rise in food prices reduces living standards in poor countries by a fifth. And

according to the World Bank, the grain needed to fill up an SUV would feed a

person for a year.

What would a more rational biofuels policy look like? The IMF recommends free

trade in biofuels while levying a carbon tax on all fuels to reflect emissions costs,

and promoting research and development of renewable energy. But the realistic

chances of scrapping this farm subsidies program in favor of a more rational

policy are perhaps not high during an election year.

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Raj Aniket/ driknews

It is self-evident that our policymakers will have to manage the adverse impacts

of food prices through macroeconomic and microeconomic policies in the short

term. It is also clear that agricultural productivity needs to rise to increase food

supply in the medium to long term. But agflation is going to continue to pose a

problem for us, and the world, so long as American ethanol subsidies and similar

interventions that distort the market place remain in effect.

Our government needs to act through intergovernmental channels. But activists

around the world need not wait for the governments. Global campaigns on issues

ranging from Aids awareness to the third world debt have changed government

policies. The time has now come for one against the ethanol subsidies. The grain

needed to fill up an SUV would feed a person for a year -- how can the world

conscience not move?

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Firm/company specific Channels participants Chain of intermediaries, each passing the

product down the chain to the next

organization, before it finally reaches the

consumer or end-user.... This process is

known as the 'distribution chain' or the

'channel.' Each of the elements in these

chains will have their own specific needs,

which the producer must take into account, along with those of the all-important

end-user.

Tough and strict competitive rules of world economy determine that today’s

business survival and further prosperity are based on efficient and operating

distribution system. Focus on producing high-quality and inexpensive goods are

not the only case nowadays. The mission lies in motivating prospective

customers to buy petroleum products and to make them stay with the company

while markets are fully overstocked by different alternative stuff.

Bangladesh Petroleum Corporation is a statutory organization under Petroleum

and Mineral Resources Division, Ministry of Power, Energy and Mineral

Resources, Government of People's Republic of Bangladesh. This corporation

was established in the year 1977 for the purposes of import, refining and

processing of crude petroleum, blending of lubricants, export and marketing of

petroleum products including by-products and lubricants. At present it has 3

(three) oil marketing companies, 2 (two) blending plants, 1 (one) LPG bottling

company and a refinery as its subsidiaries. The position of the corporation in

relation to these companies is similar to that of a holding company.

12

In 1976-77 the sale of petroleum products in the country was 11.14 lac MT which

has increased to 37.82 lac MT in 2005-06. From 1975-76 to 1980-81 the demand

increased @ 6.28% average per year. From 1980-81 to 1985-86 the demand

increased @ 2.9% average per year. The demand dropped by 4.06% in 1990-91

from 1985-86, which is a fall of 0.81% per year. From 1990-91 to 1995-96 the

demand increased @ 11.21% average and @ 7.40% per year from 1995-96 to

2007-08.

Location of oil depots

13

Diesel Less Than 119 Gallons Non-Bulk Diesel fuel is exempt from the

hazardous materials regulations if packaged in non-bulk (less than 119 gallons

each) containers. When carried in non-bulk containers, there is no limit on total

gallons carried at any one time. This falls under 49CFR 173.150(f) of the DOT

Hazardous Materials regulations which states that a flammable liquid with a flash

point above 100 degrees Fahrenheit may be re-classed as a combustible liquid.

It is recommended that employees be trained at a minimum in Hazard

Communication and Spill Response.

Vehicles should be equipped with a petroleum spill kit when transporting large

quantities of diesel fuel.

Greater Than 119 Gallons Bulk Diesel fuel carried in bulk (greater than 119

gallons) containers must comply with the following:

1. The container must be marked on one side as follows:

Diesel Fuel

NA 1993

2. The package/container must be labeled with a class 3, combustible label.

3. Shipping Papers must be immediately available uponrequest along with an

MSDS sheet for diesel fuel.

4. The driver must obtain a Commercial Driver License with a hazardous

materials endorsement. The driver and vehicle must meet several other federal

DOT requirements.

5. Diesel fuel weighs approximately 7.5 pounds per gallon. At quantities weighing

1,000 pounds or more, the vehicle must be placarded with the appropriate

placard.

14

Service Output that is demanded by the customers which in turn is carried by

Bangladesh Petroleum Corporation are:

Acquire, import crude petroleum and other refined petroleum products;

Refine crude petroleum and manufacture of various refined petroleum

products;

Set up refineries and ancillary facilities;

Import lubricating oil both in the form of base stock, necessary additives

and other chemicals as well as finished products;

Manufacture blended lubricating products;

The transportation of the diesel from the beginning to the end is illustrated in the side diagram. The diesel is either imported of being obtained from other sources. As the diagram shows that the petroleum is loaded in depot (Padma, Meghna, jamuna) and then subsequently transferred to the other regional depot and then they are carried out by long oil vehicles to different filling stations around the country.

15

Set up lubricating plants including plants for recycling or revamping of

used lubricants;

Process and set up facilities for processing of refinery waste or residual

products;

Plan and install petroleum (crude and refined) storage facilities;

Determine allocation of petroleum products against the marketing

companies;

Procure inland oil tankers;

Establish and expand petroleum marketing facilities;

Export petroleum and petroleum products;

Act as managing agents of or to enter into any management or any other

agreement or contract with, any farm or company;

Supervise co-ordinate and control the affairs of the enterprises;

Discharge any other function assigned or delegated to it by the

Government from time to time, and

Do such other acts and things as may be necessary for carrying out the

purposes of this ordinance.

16

BPC has 7 (Seven) subsidiary companies of which there are 3 (three) Oil

Marketing Companies, 1 (one) Refinery, 1 (one) LP Gas Plant and 2 (two) Lube

Blending Plants. Company-wise share of BPC are as under:

Blending Plants. Company-wise share of BPC are as under:

Name of subsidiaries Capital (Tk. in crore ) Ownership Authorized Paid-up

Refinery 1. (a) Eastern Refinery Limited (ERL) erl.gov.bd

500.00 33.00 100% BPC

Oil Marketing Companies 2. Padma Oil Company Limited(POCL) pocl.gov.bd

100.00 29.40 50.35% BPC 49.65% Other

3. Jamuna Oil Company Limited (JOCL) jamunaoil.gov.bd

300.00 45.00 70% BPC 30% Others

4. Meghna Petroleum Lmimite (MPL) mpl.gov.bd

400.00 40.00 100% BPC 30% Others

5. LP Gas Limited (LPG) 50.00 10.00 100% BPC Lube Blending Plants 6. Eastern Lubricants Blenders

Limited (ELBL) 1.00 0.99 59.32% BPC

40.68% Others 7.Standard Asiatic Oil Company

Limited (SAOCL) saocl.com

0.50 0.50 50% BPC 50% Private

Diesel is mainly used in large automobiles and generation of power using it in the

diesel generators.

A typical scenario of the PADMA Company is given below.

Distribution procedure of products or services:

At first the Company storages it’s all products in main installation at Patenga,

Chittagong. From the main installation, products are supplied to various locations

throughout the country. The storage network of the company is shown below:

17

From those storages, products are distributed to enlisted dealers/agents/retailer

and Government consumers & Industrial sectors.

Division-wise sales of POL Products for the last five years are as follows:

Division 2004-05 2005-06 2006-07 2007-08 2008-09 CHITTAGONG 830,690 919,313 888,816 887,346 729,857 SYLHET 164,802 172,282 167,634 155,875 141,235 DHAKA 1,328,617 1,300,443 1,217,786 1,226,763 1,117,552 RAJSHAHI 621,260 581,946 591,328 629,224 575,566 KHULNA 657,043 637,914 538,986 548,675 583,859 BARISAL 165,318 169,884 169,380 178,391 178,586

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Sector-wise sales of POL Products for the last five are as follows:

Sector 2004-05 2005-06 2006-07 2007-08 2008-09 Agriculture 744260 792606 722829 702767 795639 Industry 139161 99399 145334 153304 124988 Power 336834 325101 253729 264455 254950 Transport (Road, Rail, River, Air)

1968138 2031101 1938644 2040026 1766848

Domestic and others 579337 533575 513394 465722 384230

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So basically the most petroleum is consumed by the transport industry and next

by agriculture. So the channel members must ensure that these two segments

get access to them very smoothly. In Bangladesh the transport system is still not

that good. We do face legitimate logistic problem and in many parts of the

country the access is still not that smooth. The Diesel is a component of the fossil

fuel that with the evolution of technology and mankind this has turned out to be

the most crucial for survival. In Dhaka metropolitan city no new connection for

domestic electricity is provided any more. But the life is not at a stop. People now

consume Diesel to generate power. For example, the state of the art

Grameenphone corporate building doesn’t have any access to electricity from the

national grid. As a result it needs to produce its own power. So as a result it

consumes more than BDT 500,000 worth of Diesel per day. So Diesel is

extremely essential in our day to day life. The channel partners need to ensure

that it is being delivered at the right time, in the right place to the right people.

The remote access to many places is a hurdle that this industry is facing for a

prolong period of time. With the improvement of physical infrastructure, this

matured industry will foster its operation more and the consumer ease of

consuming the product will increase.

20

Conflicting areas between channel partners

Since BPC is the single sole distributor in Bangladesh for distributing Diesel & in

fact all petroleum products. In the product flow, the product remains most of the

time of its life with the BPC’s own subsidiary locations. So here is less channel

conflicts can be mentioned. But if we consider subsidiaries as a separate identity

then there is a chance to work on channel conflict.

Though it has 50 distribution centers throughout the country, there is scarcity of

petroleum products in district level areas even. Our diesel resellers like filling

station dealers have been complaining on BPC for high cost involvement in

remote location. Users have to pay extra charge for using diesel in semi urban

locations. It’s a distance based pricing which is not happily accepted by all other

dealers or channel partners since it involves more investment.

Another issue is the dealers or agents in the remote or rural areas. There is bad

practice of taking extra hidden charge from users in some places. Here control is

not that much closely monitored. But these are very sensitive locations for the

survival of our farming industry. This is happening only because of distribution

inefficiency and lack of monitoring efforts.

21

Analysis of the power structure of channel system. A distribution channel is defined as a set of independent organizations

performing all of the functions necessary to make a product available for the

consumers or industrial users. Consideration of the behavioral dynamics of

channel members is clearly established in the marketing channels literature and

in particular issues of power sources, dependence, control, power and conflict

plays a vital role in channel the channel system.

By defining the concept of power with respect to distribution channel, we can

define the power of a channel member is his ability to control the decision

variables in the marketing strategy of another member in a given channel at a

different level of distribution. For this control to qualify as power, it should be

different from the influenced member’s original level of control over his own

marketing strategy. The power of a channel member might be determined from

the level of the power sources.

There are five power sources including reward power, coercive power, legitimate

power referent power and expert power. Our text focus on following power

sources;

Reward Power: Reward power based on one party’s (the source firm) ability to

gives/offers the rewards for other party (the target firm)

Coercive Power: The source firm’s ability to influence unpleasantly for the target

firm, such type of power can be categorized as coercive power

Legitimate Power: Power as legitimating needs to do nothing to secure its will if

people already want to do what is expected of them

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Referent Power: Referent power is defined as results largely from the

influencee’s feelings of identification with the influencer and desire to maintain

similarity with influencer.

Expert Power: Expertise is a means by which the power holder comes to control

specialized information.

In some power relationships, there may be a balance of power which is referred

to as dependency. There is a significant relationship between the dependence of

one channel member on another channel member.

In the distribution channel of fuel industry we have selected Diesel as a product

and to distribute the product only one source is available that is the Government

is the only stake holders in this case. Bangladesh government through the

company Bangladesh Petroleum Corporation (BPC) which is a government-

owned monopoly in Bangladesh deals exclusively in the importation of crude oil

and refined oil, lubricant, refining of crude oil, and distribution and marketing of

fuel oils, lubricants and other petroleum products in the country.

It was established by a Presidential Ordinance in 1976 in compliance to the

Bangladesh Petroleum Act 1974, which vests production, processing, refining

and marketing of petroleum products in the country exclusively with the

government. BPC imports up to 29 million barrels of petroleum products a year,

including 9 million barrels of crude oil, to meet the country's demand, mainly from

Kuwait, Saudi Arabia, India and United Arab Emirates.

There are eight companies operating under BPC: the only oil refinery of the

country, Eastern Refinery Limited (ERL); the three oil distribution and

marketing companies, namely Padma Oil Company Limited, Jamuna Oil Company Limited and Meghna Oil Company Limited; two lubricant blending

plants, namely Eastern Lubricants Blenders Limited and Standard Asiatic Oil

23

Company Limited; one LPG bottling and distribution plant, LP Gas Limited and a

bitumen production company, Asphaltic Bitumen Plant.

But the companies, through filling station dealer, packed point dealer, agent and

LPG dealer provides service (distribution) indirectly. These dealers for their

respective areas consumers, markets petroleum products in the government set

price.

To ensure petroleum products to the filling station dealer, packed point dealer

agents and LPEG delaer and to supervise their operation each company e.g.

Padma, Jamuna and Meghna Oil Company limited has 4 regional offices and in

greater divisional areas has office and have 50 distribution centers in total.

Against the demand of the consumers in advance payment of the price through

invoice they distribute oil from and through the oil dipos.

BPC with the help of its subsidiary companies has developed storage facilities at

different points of the country for fuel oils to ensure timely supply and market

regulation. BPC subsidiaries also use their marketing agents for product

marketing at the local market. The major oil depots are located at Godnail,

(Narayanganj), Daulatpur (Khulna), Fatullah (Narayanganj) and Baghabari

(pabna). Medium-size depots are at Rangpur, Parbatipur (Dinajpur), Bhairab

Bazar, Ashuganj, Srimangal, Dhaka, Chandpur, Barishal and jhalokati. Small

depots are at Chilahati (kurigram), Balasi (Gaibandha), Harian (Rajshahi),

Natore, Sylhet, Brahmanbaria. BPC has developed a storage capacity of 206,000

tons at its central establishments and approximately 688,000 tons at the other

depots of the country.

BPC also currently installing a $132 million pipeline, to be installed by end 2012,

will connect an off-shore mooring point with BPC's depot near the country's main

Chittagong port. It will help reduce unloading time for a tanker to only two days

while it now takes some 11 days. Currently BPC uses smaller vessels to unload

the cargo from oil tankers.

24

Beside these functions as the only channel participant BPC engages in the

following distribution activities

Planning and implementation of petroleum product storage facilities

Building necessary facilities and their extensions for marketing of

petroleum products

Act as managing agent for signing of agreements with firms or companies

for petroleum storage, distribution and marketing in the country

Monitoring, coordination of the subsidiary companies of BPC and any

other functions and responsibilities as directed by the government.

Ensuring the distribution of petroleum throughout the country by the price

set by the government and ensuring quality.

Take necessary steps for ensuring the timely availability of petroleum

products throughout the country through marketing and distribution.

During the dry season in remote areas of the country four regional control

cells are opened for meeting the extra demand and to distribute

accordingly of petroleum products and through the control cell and with

the help of local government monitor the distribution of the petroleum

products and price of the same.

During natural calamities ensure uninterrupted supply of petroleum in the

remotest areas of the country and take necessary steps accordingly.

Distribution of Diesel for irrigation purposes throughout the country

Boro, a rice variety accounts for nearly 50 percent of Bangladesh's annual 27

million tonnes of food production and is grown between January and May. During

the Boro season, 120 million acre rice field in Bangladesh is irrigated by 1.33

million different types of water pumps, among which 87 are diesel operated

requiring 800 million liter diesel per year.

25

The government has formed five-member committees comprising a Union

Parishad member, one representative each of society, non-government

organizations, Agriculture Extension Department and the law enforcement

agency to prepare a list of small and marginal farmers for distribution of cash as

diesel subsidy among the farmers for Boro farming season in each village across

the country. The government has decided to provide Tk 750 crore in subsidy for

diesel procurement by the farmers for irrigation in January. The government will

distribute the subsidy for procurement of diesel among the marginal and small

farmers who own land below 2.50 acres.

Diesel from Assam would be delivered by waterway at Baghabari oil depot in the

country's main boro cropping area, The government approved a proposal for

importing 60,000 tonnes of refined oil from Egypt to meet increased demand

during the irrigation season. More than 1.2 million diesel-operated pumps, 80

percent of all mechanised pumps, consumed nearly 1.7 million litres of diesel

each month for irrigation during the boro season.

State-run Bangladesh Petroleum Corporation (BPC), the sole importer and

distributor of oil, will also buy 1.5 million tonnes of oil products including 900,000

tons of diesels from Kuwait for consumption during January to June per year for

meeting the irrigation demand. Bangladesh annually imports 3.8 million tonnes of

oil including 2.1 million tonnes of diesel. Bangladesh also buys oil from Saudi

Arabia and the United Arab Emirates.

Therefore we can see that the power structure that might be practiced in the

distribution of fuels e.g. diesel is coercive power which the government of

Bangladesh can imply over its wide range of suppliers e.g. through filling station

dealer, packed point dealer, agent and LPG dealer by means of its parent three

company e.g. Padma, Jamuna and Meghna Oil Company in the 4 regional

offices with 50 distribution centers altogether. The power that is used over here is

demand based on the necessity of the public who mostly purchases diesel as a

bare necessity product.

26

Existing strategic alliance in the channel system and possibilities of forming a strategic alliance A strategic alliance is a close, open-ended relationship linking distinct

organizations. Such alliances are usually designed to fill a specific purpose, such

as developing a new product, exploring a new technology, manufacturing more

effectively, or exploiting a market opportunity. Sometimes strategic alliances are

embodied; they are embodied in contracts or business understandings,

embellished, adapted, and cemented as working relationships grow.

Most managers recognize that distributor is the marketer and is therefore in a

position to make or break our product. It is one thing to decide that a strategic

alliance (or a marketing partnership) with a distributor is in order. Merely

announcing to distributors that they have been selected for "partnership" is

unlikely to produce results.

A committed distributor has all of these features:

Expects to continue selling this brand indefinitely.

Intends to invest in its relationship with the manufacturer;

Will make sacrifices (within reason) to maintain and grow the relationship;

Feels an emotional attachment to the manufacturer.

A committed manufacturer is one that feels the same way about the distributor. A

committed distributor exhibits several visible symptoms of its allegiance to the

manufacturer. In particular, distributors place their confidence in manufacturers

whom they see investing in them.

Distributors who see these investments being made greatly increase their

confidence in the manufacturer and their willingness to enter a strategic alliance

with their supplier.

27

Strong alliances bring substantial benefits but at substantial costs. One of these

costs is the flexibility to change your mind and exit the relationship painlessly.

Manufacturers that have carefully selected their distributors will find themselves

far more able to manage the vulnerability that a strategic alliance demands. As

distributor's confidence in its supplier's commitment increases the more the

supplier limits its representation in the distributor's market. Distributing intensively

(blanketing a market with outlets), while it does increase product availability,

reduces the distributor's confidence in the manufacturer, thereby lessening the

distributor's willingness to commit to a strategic alliance.

In other words, exclusive suppliers are not merely responding to manufacturer

pressure or to consumer pull: They are cementing their ties to the manufacturer.

Distributors respond to a manufacturer's efforts to communicate with them.

Communicating with distributors should be distinguished from communicating to

them. It is exchanges of communication that enhance the distributor's

commitment. This means listening, adapting, and acting on the distributor's

impressions. It also means respecting and soliciting distributor opinion and using

it.

Distributors monitor how a supplier treats its other distributors. If a manufacturer

acquires a reputation (rightly or wrongly) for mistreating its resellers, it pays a

price. Distributors, even those who do not themselves feel mistreated, withhold

commitment from these suppliers. Hence, a reputation for fairness in distributor

dealings is an asset in cultivating strategic alliances.

For industrial distributors, the product is paramount. It can be seen, held,

measured, and assessed; it is constant and it is real. It can embody the supplier.

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Many companies are attracted by the lure of strategic alliances, and the logic of

such relationships is especially compelling when the proposed partner is one's

own reseller, the link between a company and its market. But such alliances do

not come free, or even cheap. Corporate pronouncements will not do. To

convince a distributor to become a genuine marketing partner, a manufacturer

must put its resources--and its own commitment--behind its pronouncements.

Distributors will demand our commitment--your reciprocity--before they will

extend theirs.

Ultimately, strategic alliances are based on mutual need. Mutual need, in turn,

creates tension and conflict. But if managed well, such relationships are the basis

for a formidable marketing advantage.

There is NO existing strategic alliance that exists in the channel system of

distribution of diesel. However Bangladesh petroleum Corporation can build its

strategic alliance with Rahimafrooz, one of the largest business groups in

Bangladesh. It consists of nine SBUs and several other affiliations.

Rahimafrooz operates in three broad domains: automotive aftermarket, power

and energy, and retail chain. It sells tyres, batteries, lubricants, emergency power

products, diesel as well as gas generators, lighting products, electrical

accessories, solar systems, energy solutions using compressed natural gas, and

power rectifiers. The Group also runs 'Agora' the first retail chain in Bangladesh.

The Group has strengthened its market leadership at home while reaching out to

international markets. Ranging from automotive aftermarket products, energy

and power solutions, to a retail chain.

Rahimafrooz produces and markets a range of battery products – automotive,

motorcycle, and appliance batteries, Industrial (stationary, deep cycle, traction,

VRLA) batteries, IPS and UPS batteries, and rectifiers. Lucas and Spark are the

leading names in the local battery market while Volta, Optus and Delta batteries

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are fast gaining equity as International brands. The Group’s portfolio includes

international tyre brands Dunlop and Kenda, and its own brand RZ Tyre.

Rahimafrooz is the exclusive franchisee of the full range of lubricant brand

Castrol in Bangladesh.

Through Rahimafrooz IPS, UPS and Voltage Stabiliser, the Company enjoys

clear leadership of the emergency power products market. The Company brings

to Bangladesh leading gas and diesel generator brands – Pramac as well as

Mitsubishi. It also markets home and industrial lighting products from General

Electric USA (GE) and electrical accessories from Hager France.

Rahimafrooz, in 2001, made a breakthrough in the urban lifestyles by launching

the first retail chain in the country – Agora.

Rahimafrooz’s Renewable Energy division has been providing Solar solutions. It

has supplied over 52,000 solar home systems (SHS) to the rural, off-grid areas of

Bangladesh where the national grid cannot reach. The Company has helped light

the darkness by making available the SHS through micro-credit, whereby a

family can pay as low as USD 7.00 per month for lighting up their homes,

workplaces, business, etc. The Company, in recognition of its solar efforts,

received the McGraw-Hill Platt Global Energy Award in 2004 and the Global

Ashden Award in 2006. Rahimafrooz also offers equipments for CNG refuelling,

conversion, conversion centres, and maintenance.

The Group operates a non-profit organization Rural Services Foundation (RSF)

through which the solar home systems reach the customers in the rural areas of

Bangladesh.

Rahimafrooz is also endeavoring into tyre retread, besides manufacturing and

marketing emery cloths and abrasive papers. In a joint venture, the Group has

enterprised into the first ever fibre optical commercial networking backbone in

Bangladesh in the form of Metronet Bangladesh Ltd. (MBL).

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One of the SBUs of Rahiamfrooz Group, Rahimafrooz Renewable Energy Ltd.

distributes solar home systems to underdeveloped rural regions of Bangladesh.

For that, the company received the Ashden Award for Sustainable Energy in

2006.

BPC can form strategic alliance with Rahimafrooz group for distributing its

petroleum products like Diesel through the already existing networks of

suppliers of its energy products e.g. Rahiamfrooz’s energy division which

provides Solar solutions for the rural, off-grid areas of Bangladesh where the

national grid cannot reach. They can also in collaboration with Rahim afrooz

distribute diesel to the farmers to run their irrigation pump during the peak Boro

season.

BPC can also take the advantage of the exiting Rahimafroozs non-profit

organization Rural Services Foundation (RSF) through which the solar home

systems reach the customers in the rural areas of Bangladesh to run the Diesel generators that are required for government emergency power sources in

remotest corner of the county and get county wide coverage .

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Major strengths the closest competitors have in comparison to Diesel Bangladesh, being one of the least developed countries of the world, has

electricity coverage for only 35% of the land. Moreover, at present Bangladesh

can only supply 70% of the total power demand. 86% of the total numbers of

power plants are operated by natural gas, 6% by coal, 4% by hydro power and

4% by oil, which imparts highest risk of severe environmental pollution.

Implementation of Solar Photovoltaic Technology in power generation can

significantly decrease environment pollution in terms of Green House Gas (GHG)

emissions.

RAHIMAFROOZ SOLAR is the pioneer renewable energy solutions provider in

Bangladesh with more than 24 years of experience. Being the most trusted and

admired total solution provider in renewable energy sector, the company is totally

committed to ensure customer satisfaction. Capability of designing and

integrating robust, diversified product and service range made Rahimafrooz Solar

a unique brand.

RRE has launched a solar powered pumping system for water and irrigation

purpose. For an agro-based country like Bangladesh where electricity for

pumping is very scarce, this is the solution which will enable us to save a lot of

energy. The solar pump comprises of the pump, a motor, solar modules, a

control device and piping accessories. RRE is also working on Solar water

Purification for arsenic / saline / other water compositions.

Rahim Afroz Reneable Energy ltd (RRE) has introduced solar-powered irrigation

system in 2004 through converting a 10 HP diesel run irrigation pump to solar

power. Since then hundreds of beneficiaries are enjoying solar based water

pumping service for irrigation and drinking water.

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During the Boro season, 120 million acre rice field in Bangladesh is irrigated by

1.33 million of different types of water pumps, among which 87% are diesel

operated, requiring 800 million liter diesel per year. The government provides

taka 5,400 cash subsidy on diesel operated water pumps. Seasonal crisis and

price volatility of diesel are common hazards that are associated with diesel

pump based irrigation system in

Bangladesh. Bangladesh Agricultural Development Corporation gave Rahim

Afroz the opportunity to demonstrate a large solar power based irrigation scheme

for the Boro season. The system will help save 760 megawatt power and 800

million liter of diesel every year if the conventional power and diesel run irrigation

pumps are converted into solar pumps. Due to technological advancement, the

solar market has grown fast and efficiently for the last few years in Bangladesh.

The number of conventional pumps replaced by solar pumps each year will save

significant amount of fossil fuel consumption as well as the government subsidy

on these which will not recur for the next 20 years.

Green 3-wheeler ready to roll

Bangladesh Solar Energy Society recentle introduced a battery-run three-

wheeler, Borak Super.

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The highly low cost battery-run three-wheeler dubbed as Borak Super gets even

more energy efficient as local entrepreneurs introduced solar panels to partly

power up its rechargeable battery. A solar panel is installed on the roof of the

vehicle to provide about 20 percent recharge for its batteries.

Borak Super ran for a short period of time in the capital. The vehicle is

considered as the most energy efficient and environment friendly that has ever

hit the Dhaka streets. The zero emission three-wheeler consumes electricity

worth around Tk 30 a day. During the day the solar panel keeps on charging the

batteries that will ultimately save 20 percent electricity. With an eight-hour

recharge from a regular power outlet the vehicle can run 120 km at its highest

speed of 40 km per hour. To minimise energy consumption the body was made

with light material.

Eight companies are assembling the three-wheelers locally with parts imported

from China. A large chunk of this electric-solar vehicle is being assembled at

Bangladesh Diesel Plant Ltd (BDPL) in Gazipur. Priced at around Tk 1.2 lakh

each, a total of 100 vehicles have so far been sold in 12 districts. The fare is

almost the same as rickshaws. Daily earning of a driver is about Tk 1500. Borak

has an automatic gearbox and the batteries last for about 18 months if

maintained properly.

It has a huge potential if it gets a little boost from the government. It is eco-

friendly; it saves electricity and is cheap to run. Considering the status of energy

and pollution, it is one of the most viable options.

LCG CNG Liquefied natural gas or LNG is natural gas (Predominantly methane,CH4) that

has been converted temporarily to liquid form for ease of storage or transport.

LNG technology is evolving fast and it may no longer need massive LNG re-

gasification plants and receiving terminals. Much smaller low draft LNG ships and

34

floating LNG terminals are creating revolution in LNG trade. It can be used in

natural gas vehicles, although it is more common to design vehicles to use

compressed natural gas.

In the early 2000s, as more players take part in investment, both in downstream

and upstream, and new technologies are adopted, the prices for construction of

LNG plants, receiving terminals and vessels have fallen, making LNG a more

competitive means of energy distribution. Much of this growth is driven by need

for clean fuel and some substitution effect due to the high price of oil (primarily in

the heating and electricity generation sectors).

Natural gas can be considered as the most environmentally friendly of the fossil

fuels, because it has the lowest CO2 emissions per unit of energy and because it

is suitable for use in high efficiency combined cycle power stations. Because of

the energy required to liquefy and to transport it, the environmental performance

of LNG is inferior to that of natural gas, although in most cases LNG is still

superior to alternatives such as fuel oil/ diesel or coal. This is particularly so in

the case where the source gas would otherwise be flared.

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Possible threats of alternative or breakthrough distribution channel due to the technological advancement. Increasing use of solar panel as an alternative distribution channel Solar panel has been gaining popularity in Bangladesh as an alternative to fuel

consumption. Due to the price hike in fuel price, people have been looking for

alternative sources of fuel in many energy starved regions of Bangladesh.

Rahim Afrooz has already introduced the concept of solar pump in the rural

areas of Bangladesh where it is being used for irrigation purpose. The distribution

system has already been developed to reach the customers in the rural areas

who are in need of such technology as a substitute of fuel. The government has

been emphasizing the development of more advanced technology to expand the

supply and distribution of products that use solar panel.

Solar panel is also a good solution for the crisis of load shedding in Bangladesh.

However, it is a very costly alternative if compared to the usage of diesel for

running generators in the urban and semi urban areas in Bangladesh. Due to

proper research and development of appropriate technologies to market the

products, solar panel still remains a costly alternative for people looking for a

solution for the load shedding in Bangladesh.

On the other hand, Rahim Afrooz is one of the pioneers in providing solar pump

technologies to its valued customers the rural areas for the irrigation purpose.

Due to the severe crisis in the power sector, the rural people are facing great

difficulties in ensuring an efficient irrigation system that requires fuel as resources

to run pump. Now after the availability of solar pump, the rural farmers can easily

irrigate their land without facing difficulties of meeting power crisis.

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Liquefied natural gas or LNG is another possible breakthrough distribution channel. Import of LNG by private sector and utilizing it in energy starved regions is one of

the alternatives to confront immediate requirement of some gas starved region

like Chittagong. Bangladesh is in serious energy crisis. Massive load shedding,

crises of fuel and water supply is practically paralyzing the civic life and posing a

threat to industrial and commercial collapse. The monofuel based power

generation requires some years of extensive exploration and exploitation of

available natural resources to even reduce the deficit and requires huge

investment at every level of energy value chain.

LNG accounted for 7% of the world’s natural gas demand. The global trade in

LNG, which has increased at a rate of 7.4 percent per year over the decade from

1995 to 2005, is expected to continue to grow substantially during next years.

The projected growth in LNG in the base case is expected to increase at 6.7

percent per year from 2005 to 2020. The world-wide interest in using natural gas-

fired combined cycle generating units for electric power generation, coupled with

the inability of North American and North Sea natural gas supplies to meet the

growing demand, substantially broadened the regional markets for LNG. It also

brought new Atlantic Basin and Middle East suppliers into the trade.

LNG is principally used for transporting natural gas to markets, where it is re-

gasified and distributed as pipeline natural gas. LNG offers an energy density

comparable to petrol and diesel fuels and produces less pollution, but its

relatively high cost of production and the need to store it in expensive cryogenic

tanks have prevented its widespread use in commercial applications.

In order to make it much more cost-efficient to transport over long distances

where pipelines do not exist, the volume of LNG is reduced to a great extent

while liquefaction. Where moving natural gas by pipelines is not possible or

economical, it can be transported by specially designed cryogenic sea vessels

37

(LNG carriers) or cryogenic road tankers. The energy density of LNG is 60% of

that of diesel fuel.

How is LNG transported?

The most important infrastructure needed for LNG production and transportation

is an LNG plant consisting of one or more LNG Trains, each of which is an

independent unit for gas liquefaction. LNG is loaded onto ships and delivered to

a re-gasification terminal, where the LNG is reheated and turned into gas. Re-

gasification terminals are usually connected to a storage and pipeline distribution

network to distribute natural gas to local distribution companies or Independent

Power Plants.

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Recommendations Introduction of New Channel Structure:

We highly recommend BPC to introduce a new channel structure through

privatization of the non core activities. It is not possible to transfer all the

activities overnight. However we have many organizations now within the

country that have the expertise in efficient distribution system. BPC can

exist as a regulatory & monitoring organization under whose supervision

channel partners will perform the assigned task.

Strategic Alliances:

To bring overall operational efficiency, BPC can go for strategic alliances

which will increase productivity and also reduce the overall cost. Cost

Strategy should be the focus here to bring out the organization from

financial burden.

Outsourcing Logistics Activities:

Logistics activities can be easily outsourced which will help to reduce cost

& increase service efficiency. All we need here is to develop a strong

monitoring/ Audit cell that will be responsible for close observation of the

logistics partners’ activities.

New alternative environment friendly product introduction:

Promoting alternative resources can be very good option for our petroleum

sector since diesel is becoming expensive day by day. Moreover our

government is also giving huge subsidies to BPC for providing fuels in an

affordable rate. If BPC can bring in alternative resources which can be

produced by using easily available resources with lower cost, then it will

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eventually help the other industries heavily. Especially our farming sector

will be highly benefitted.

Removing Subsidies on fuels can be a motivating factor to increase focus on Cost:

Most of the organizations are resistant to change due to many reasons.

But the core objective is to increase efficiency & making product available

to the user with an affordable price. Government can proactively remove

subsidies on fuels and thus enforce BPC & relevant organizations to work

on reducing cost and increase efficiency.

END

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References

www.bpc.gov.bd/

www.bapex.com.bd/

investing.businessweek.com/research/stocks/private/snapshot.asp

en.wikipedia.org/wiki/Bangladesh_Petroleum_Corporation

www.thefinancialexpress-bd.com/more.php?news_id=81860

www.rahimafrooz.com/.../RahimafroozRenewableEnergyLtd/.../Default.asp

x

www.thedailystar.net/newDesign/news-details.php?nid=133023 –

www.thefinancialexpress-bd.com/2009/06/05/68788.html

en.wikipedia.org/wiki/Channel_conflict

en.wikipedia.org/wiki/Strategic_alliance

www.thecbbc.org/Available%20Joint%20Venture%20Partners.pdf