Supply Chain Indian Context

7/30/2019 Supply Chain Indian Context

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Case StudySupply Chain Characteristicsof the Petroleum Industry:The Indian Context

Siddharth Varma*. Subhash Wadhuia** andSG Deshtnukh***

The process industry forms an important compo nent of the Indian econ omy. Thepetroleum ind ustry in particular plays an importan t role in the economic developmentof the country. After liberalization of this industry, performan ce of its supply chainhas becom e all the more important. This paper looks at the importance of supplychain man ageme nt in the process industry and further tries to distinguish thepetroleum industry from norm al discrete manu facturing industry. The unique feature sof petroleum industry call for a special treatment of the supply chain. Th is paperfurther tries to identify the non-value ad ded activities in the petroleum industry,lohich makes it inefficient, and suggests some mechanisms, which cou ld help inimproving the supply chain performance.

of demand for petroleum products inIndia, in a global perspective aTh e process industry in India is a vital comparison of per capita consum ptioncomponent of the rapidly growing Indian ^f petroleum products in the variouseconomy. It consists of industries like basic ^^^^.s of the world has been presentedchemicals, petrochemicals, petroleum, jn Table 1. W ith th e per ca pit afertilizers, pesticides , et c. Am ong the consum ption level in India being onlyprocess industries, the petroleum industry about 60% of that in Chin a, a strongholds critic al imp ort an ce w ith both growth potential exists in India, givenindustry and transpo rtation depending particularly a large population base ofupon it. In order to understand the level over a billion.* Vice-President, Academic Adm inistration, University of Petroleum &. Energy Studies, New D elhi, India.E-mail: [email protected]* * Professor; Departm ent of Me chan ical Engineering, India n Institu te of Technology, Hauz K has, New Delhi,

India. E-mail: sw adhw a@ mech.iitd.emt.in*** Professoi; Dep artm ent of Me chanica l Engineering, Indian Institu te of Technology, Hauz Khas, New D elhi,


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SOUTH ASIAN JOUFINAL OF MANAGEMENT

Table 1 : Per Capita Consumption ofPetroleum ProductsCountryIndiaChinaNorth AmericaW or ld average

Per Capita Consumption(in kg per annum)98

1652,610

585Source: www.ril.com

The petroleum industry traditionallyhad prices decided by the Government ofIndia. Effective from August 1, 2004, theGo vern me nt pu t in a revised methodologyallowing oil companies limited freedom torevise the prices of motor spirit and HighSpeed Diesel (HSD). The NELP (NewExploration and Licensing Policy) hasbeen put into place and more and moreinternational operators are consideringinvesting in India.

The total investment estimated in thepetroleum sector from 1995 till 2010, isexpected to be Rs. 4,32,000 cr (US$120bn) , out of which Rs. 2,58,000 cr (US$80bn) , are for the upstream sector alone.Th e Pe t r o l e u m , O i l a n d Lu b r i c a n t s(POL), product consumption is slated totouch 155 Million Metric Tonnes (MMT)by 2006-2007 and 200 MMT by the year2010 (HPCLs perspective plan: Vision2020).Pe t rochemica l indus t ry in Ind iaemploys around 40,000 people directly andarou nd 4 lakh indirectly. This sector catersto a whole host of industries like oil, gas,plastics, agro chemicals, Pharmaceuticals,c l o t h i n g , h o u s i n g , t r a n s p o r t a t i o n ,communication, healthcare, etc.OBJECTIVES O F T H E PAPERVery limited literature is available onpetroleum industry supply chains. This

p a p e r a t t e m p t s t o e n h a n c e t h eunderstanding of the petroleum industrysupply chain. The paper has the followingobjectives: U n d e r s t a n d i n g t h e i m p o r t a n c e ofs u p p l y c h a i n m a n a g e m e n t i n t h epetroleum industry. Identifying distin guish ing features ofthe petroleum industry supply chainvis-i-vis discrete manu facturing supplychains. Discussing the petrole um supply cha inin India. Identifying non -value added activitiesin the petroleum supply chain. Discussing the role of informa tiontechnology in revamping th e petroleumindustry supply chain.CONC EPT OF SUPPLY C H A INM A N A G E M E N TThe Supply Chain Counci l def ines asupply chain as a "collection of activitiesa company uses to plan, source, make anddeliver a product or service". Supplychain management aims at managing theactivities in the supply chain to improveprofitability for the organization. Supplychain management as a new businessparadigm was motivated by the interesti n i n t e g r a t i n g p r o c u r e m e n t ,m a n u f a c t u r i n g a n d d i s t r i b u t i o nactivitiesintegration made possible byadvances in IT (Shapiro, 2004). SCM ismore than a simple tool to evaluate andoptimize a supply chain; it is a complex,structured business relationship model. Ittakes into consideration all aspects of theevents required to produce the company'sproduct in the most efficient and cost


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SUPPLY CHAIN CHARACTERISTICS OF THE PETROLEUM INDUSTRY:THE INDIAN CONTEXTeffective manner possible (Quiett, 2002).Ac c or d ing to M o h a n t y a n d D e s h m u k h ,( 2 0 0 5 ) , a n o t h e r v e ry c o m p r e h e n s i v edefinition of supply cha in management ist ha t it is a loop : It star ts with customer and ends with

customer. T h r o u g h th e loop flow all mater ia ls ,

f i n i s h e d g o o d s , i n f o r m a t i o n a n dt r a nsa c t ions .

It requires looking a t business as onecontinuous, seamless process.Th is process absorbs dist inct functions

s u c h as f o r e c a s t i n g , p u r c h a s i n g ,m a nuf a c tu r ing , d i s t r ibu t ion , s a l e s a n dm a r k e t i n g i n t o a c o n t i n u o u s b u s i n e s st r a nsa c t ion .IMPORTANCE OF SUPPLYCHA IN MANAGEMENT IN THEPETROLEUM INDUSTRYAll process industries are asset intensiveand so is the petroleum industry. Since1994, the average industrial profit margin,according to Standard & Poor's, has been14.2%. For the same period, oil companieshave earned just 7.2% (Schwartz, 2000).In case of chem ical com panies, the supplychain c an ac cou nt for up to 70% of thecom pany's overall costs (Vlasimsky, 200 3).Therefore, if companies can bring aboutsubstantial improvement in their supplychain performance, it can be a big boost

to their bottomline. This is par t icular lyi m p o r t a n t i n ca s e of t h e p e t r o l e u mindustry, wh ich is organized around highlys p e c i a l i z e d b u s i n e s s p r o c e s s e s t h a te n c o u r a g e s f r a g m e n t a t io n ( S c h w a r t z,2 0 0 0 ) . C h e m i c a l s u p p l y c h a i n s a r etypically non-linear in nature. These arecomplex webs o f supp ly and demand ,driven by both long-standing relationshipsa n d c o s t p r e s s u r e s . S u p p l y c h a i noptimization at a strategic and operation allevel is a value creating opportunity forc h e m i c a l c o m p a n i e s a n d a p o t e n t i a ls o u r c e of c o m p e t i t i v e a d v a n t a g e(Tomkins, 20 03). Th e same holds true forpetroleum companies, which are also verycomplex , and supp ly and demand a r ea f f e c te d b y r e l a t i o n s h i p s a n d c o s tpressures. The petroleum industry supplychain is schematically shown in Figure 1.U NIQ UE FEATURES OF THEPETROLEUM INDUSTRYSUPPLY CHAINT h e p e t r o l e u m i n d u s t r y h a s c e r t a i nd i s t i n g u i s h i n g f e a t u r e s , w h i c hdifferentiate i t f rom the supply chainsm anufac tur ing un i ts o f p rodu ct . The sefeatures are discussed below: Raw M ater ia l Suppl ies : As comparedto the rest of the industry, process

industry has a rather limited choice ofsuppliers for raw material. Supplies inpetroleum industry are dominated byFigure 1 : Schematic Diagram of Petroleum Supply Chain

CrudeSupplier Port RefineryStorageInstal lat ion RetailOu t le t Customer


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SOUTH ASIAN JOURNAL OF MANAGEMENT

cartels. It is a sellers market as far assupply of raw mater ial is concerned.This puts manufacturers at the mercyof the supp l i e r s t o a l a r ge ex ten t .Moreover, international pressures mayfurther increase uncertainty about rawmaterial supplies.

Raw Material Prices: Raw mater ia lprices in the process industry are highlyunstable and fluctuating on weekly ore v e n d a il y b a s i s . I n c o n t r a s t , t h emanuf ac tu r ing sec to r en joys r a the rs t ab le p r i ce s o f r aw ma te r i a l .Fluctuating raw material prices directlyaffect the supply chain costs and pricesof final produ ct. Moreover, fluctuationsin prices of crude oil may take a longtime to finally manifest as increase inprice of the finished product because itmay take several weeks before the oiltanker reaches th e shores for unloading.Pr ices a re a f fec ted by t radingc o n s i d e r a t i o n s p o l i t i c a l s t a b i l i t y ,OPEC rul ings and te r ror i sm. Of tenprices are affected by w ha t t ra de rsbelieve will happen in the future. Therise in crude prices in the internation almarket is an example of this mentality.There has been a general insecurity ofcrude supplies whereas no such thinghas actually happened.

No n-di scre t e Inv ento ry : I n v e n t o r ydoes not exist as discrete packages.Inventory is not packaged and typicaltechniques for tracking inventory, suchas Stock Keeping Unit (SKU) or partnumbers, bar codes, radio frequency donot ye t app ly to c r ude o r r e f inedproducts. Products l ike petrol , dieseland kerosene are measured in kilolitreswhereas products like natural gas aremeasured in cubic metres.

Reverse Production Flow: Comparedwith other industr ies, the productionflow is reversed in petroleum industry.In downstream petroleum companies,inventory starts from one product, i.e.,crude and creates many products likepetrol , diesel , naphtha, bi tumen, e tc .On the other hand, in other industriesseveral components are assembled toform a s ingle uni t of produc t . Forexample, an automobile may be madeby assembling th ous and s of smaller parts. High Transportat ion Costs: In thep r o c e s s i n d u s t r y s u p p l y c h a i n ,percen tage of trans po rtation cost is veryhigh. Transpo rtation costs for chemicalsmay be as high as 80% of the productcost. This makes it critical for chemicalcompanies to bring transportation costsun der control (A nde l , 1998) . In thepetroleum industry too, transportationcosts occupies a sizeable p ortion of totalcost of the product. There are variousmeans of transportation: ships, railwaywagons, road tankers and pipelines. Inthe petroleum industry, transportationcosts about 2 0% of the production cost.

Manufacturing Process and CapacityFlexibility: The manufacturing processin the petroleum industry, as in anyoth er process industry, is continuous andcannot be stopped at will as in case ofdiscrete manufacturing. Process industrybeing continuous in operat ion is lessf lexible . The ref iner ies need to runtwenty four hours in a day, seven daysin a week with hardly any scope ofchanging capacity in the short-term. Asa result, refineries are marked with highcapacity utilization. In con trast, d iscretemanufactur ing industry is in a bet terposition to change output by reducingnumber of hours of opera t ion or byresorting to overtime.


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S U P P L Y C H A I N C H A R A C r r E R I S T I C ST H E I N D I A N Length of Supply Chain: Thepetroleum industry has a long supplychain commencing from the dispatchof c rude by ship from a supplyingcountry, which may take several weeksto reach the I ndian shores. D uring thislong supply chain petroleum is tradedsevera l times. U nlike o ther supplychains , the supply chain path fromcrude oil to the consumer is extremelycomplex, and the l inkages betweenr a w c r u d e and c o n s u m e r m u s t bem a n a g e d o v e r m a n y w e e k s(www.CRMBuyer.com, 07/05/04).

Postponement: Postponement can beused as an effective strategy to providemass customization and also to keepi n v e n t o r y u n d e r c o n t r o l by themanufacturing sector. H owever, in caseof the petroleum industry, the productis genera l ly not s u i t a b l e forpostponement, as any processing at alater stage in the downstream supplychain seems difficult if not impossible.M o r e o v e r , the p r o d u c t is highlys t a n d a r d i z e d w i t h l i t t l e s c o p e ofpr oduct variety. T his becomes a viciousc y c le , h i g h s t a n d a r d i z a t i o ndiscourages postponement and absenceof p o s t p o n e m e n t e n c o u r a g e sp r o d u c t i o n of h i g h l y s t a n d a r d i z e dproduct .

M a t e r i a l R e q u i r e m e n t P l a n n i n g :P r o c e s s i n d u s t r i e s h a v e v e r y fewi n g r ed i en t s as raw m at er i a l s . In thep e t r o l e u m i n d u s t r y , the m ajo r rawmater ial is cr u d e oil. H e n c e , t h e r e ish ar d l y any r e q u i r e m e n t for m at er i a lr eq u i r em en t p l an n i n g . On the o t h erh a n d , d i s c r e t e m a n u f a c t u r i n gi n d u s t r i e s , e.g., the a u t o m o b i l eindustry have hundr eds of componentsgoing into the final assembly of the

OF THE PETROLEUM INDUSTRY:CONT E XTp r o d u c t . T h i s m a k e s m a t e r i a lrequirement planning in the latter casemore tedious.

Integration of Supply ChainPartners: In tegra t ion of suppliers aswell as customers and distributors ismore diff icul t in the p e t r o l e u mindustry supply cha in. C ost pressuresar e the driving force in the supplychain. A silo mentality exists not onlyacross the supply chain but also withinthe functions of an organization. Risk of Product Contaminat ion /Adulteration: The finished products

like petrol and diesel in the petroleumi n d u s t r y are at h i g h e r r i s k ofc o n t a m i n a t i o n / a d u l t e r a t i o n . Forexample, kerosene is easily misciblewith diesel and hence, diesel can easilyb e a d u l t e r a t e d w i t h k e r o s e n e . Askerosene is cheaper than diesel, thiscan give huge financial losses to theoil companies while at the same timeproviding the customer with impureproduct . This makes it necessary top e r f o r m q u a l i t y c h e c k s at v a r i o u sstages . For e x a m p l e , for p e t r o l e u mp r o d u c t s , q u a l i t y c h e c k w o u l d berequired at the following stages:- D ispatch at the refinery.- R eceipt at the storage installation.- D uring receipt and storage at theretail outlet.

T he r est of the manufacturing industryis not prone to such risk. Information Strategy: Traditionally,the process industry has been a laggardat utilizing information technology ascompared to its counterpar ts in themanufacturing sector. Lately, however,

companies have started using ERP for


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internal integration and B2B exchangesfor t rading purposes. Needless to say,visibility across the supply cha in is low.T h e option to trade or exchange crudes,i n t e r m e d i a t e s and p r o d u c t s at keypo in t s a l ong the c ha i n m e a ns t ha tcompanies have to balance a series ofco mplex and i n t e r l in k e d e c o n o m i cdecisions to maximize their margins.T h e use of iriformation technology canbe of great help in this case. Flexibi l i ty: Process indust ry supplychains are highly inflexible bo th in termsof volumes hand led and in t e rms ofp r o d u c t v a r i a t i o n / c u s t o m i z a t i o n .T r a n s p o r t a t i o n is in bu lk ast ransportat ion costs represent a largepercen tag e of to ta l product ion cos t .Hen ce , small volumes for distributionare impractical from a financial pointof v i e w . P r od u c t s be i ng h i gh l ystandardized on account of continuous

product ion at the plant , there is notm u c h s c op e for p r o d u c t v a r i a t i o n .N e i t h e r is t h e r e any f lexibi l i ty int r a n s p o r t a t i o n as the t a n k e r s ande q u i p m e n t u s e d for one p r o d u c tcan n o t be used for anothe r for fear ofco n tamin a t io n . Agility of Supply Chain: Processindustry supply chain is slow to respond

t o e n v i r o n m e n t a l c h a n g e s . Thepe t ro l eum supp ly cha in is a goodexample of th i s . This is because ofvarious reasons as below:- Length of supply chain is large.- Petroleum industry suffers from silomental i ty with l i t t le informationsharing between departments.- Complexi ty of the supply chainmakes decision making an equallycomplex exercise.

I n v e n t o r y C a r r y i n g C o s t s : In thepetroleum industry, inventory holdingcosts are very high for various reasons.First of all, the product is moved in bulkwhether it is raw material or finishedproduct. For example, petrol or diesel ismoved from refinery to the storageinstallations in rail wagons or throughpipelines. Thus, inventory moved is inmassive amounts . Secondly,commodities like petroleum are criticalto the econom ic activity of any countryand so it becomes imperative to m aintainadeq uate stocks. Thirdly, visibility in thesupply chain is lower than in case ofother products. Finally, the long supplychain also gives rise to i nc reasedinventory holding costs in the supplychain. Thus, the petroleum industry isstuck with high inventory carrying costs.

Physical Risk s: Th e petroleum industryis pron e to higher physical risks. This isbecause it often deals with hightemperature, pressures or inflammablematerial. Risk management costs are,therefore , higher in the pet roleumindustry supply chain. This could be inthe form of insurance costs or costsincurred in the form of safety measuresl ike maintaining safety distances orhaving fire fighting facilities. Type of Supply Chain Reqviired: The

petroleum industry deals with highlystandardized products, which have verylong product life cycles. In fact, severalproducts like petrol and diesel at themoment show no signs of reaching thedec l ine s t age . These are highlyfunc t iona l p roduc t s . Ac cord ing toMarshal l Fisher ' s ca tegor iza t ion,functional products require efficientsupply chains. No w onder tha t the focusof supply c hain in this industry has alwaysbeen efficiency. However, the petroleum


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SUPPLY CHAIN CHARACTERISTICS OF THE PETROLEUM INDUSTRY:THE INDIAN CONTEXTindustry supply cha in is full of unc ertain tyregarding supply of raw materials andd e c i s i o n - m a k i n g i s v e r y c o m p l e x .M a n u f a c t u r i n g d e c i s i o n s m a y b einfluenced by op era t ing efficiencies ,t r anspor t a t i on cos t s and p roduc t i onschedu l es . In such a case , wha t i srequired is a supply chain that is able toadjus t i t se l f to the changinge n v i r o n m e n t . I n o t h e r w o r d s , a nA d a p t i v e S u p p l y C h a i n ( A S C ) i srequired. Major strategic decisions in theprocess industry, supply ch ain could ber e g a r d i n g w h a t p r o d u c t s t o b emanufactured for which markets andcus tomers or about us ing asse t s forminimizing cos t of product . At theoperat ional level , decis ions could beregarding what assets to be used formaking a particular product, minimuminventory requirements to maintain apar t i cu lar serv ice level or t ranspor troutes to minimize cost while m aintainin gdelivery promises. In orde r to take thesedecisions, immediate access to detailedin fo rmat ion abou t ba l ance be tweens u p p l y a n d d e m a n d i s r e q u i r e d .Adaptive supply chains help companiesfocus on four key e lements(Tomkins, 2003 ):1. Process: Design and al ignment ofprocesses, which drive supply chain

management .

2. People: Communicat ion and changem a n a g e m e n t t o t r an s f o r m t h eorganizat ion.3 . Technology: Real t ime connectivityand the use of bes t in c lassappl icat ions.4- P e r f o r m a n c e M a n a g e m e n t :Integrated and holistic performancem e t r i c s s u p p o r t e d b y d e c i s i o nmanagement tools .

C r i t i c a l i t y o f S u p p l y : S u p p l y o fpetroleum products is crit ical in nature.Any failure to supply can paralyze thee c o n o m i c a c t i v i t y o f t b e c o u n t r y .Ne edless to say, there is a lot of pressureo n t h e o i l c o m p a n i e s t o m a i n t a i ncontinuous supply of finished products.Tbis further leads to increased inventoryh o l d i n g c o s t s . A s p e r i n t e r n a t i o n a lnormis (Intemational Energy Agency),storage of 90 days of ne t oil imports coveri s r equ i red t o be main t a ined . Tbesestocks could either be of crude oil orpro du cts or a mix of cru de o i l andp r o d u c t s . T h e s t o c k h o l d i n g m a y b et h r o u g h c o m m e r c i a l s t o r a g e ,g o v e r n m e n t s t o c k s o r s t o c k s h e l dthrough specified agencies.A summary ofthe factors differentiatingtbe process industry supply chain from tberegular manu facturing supply chain is given

in Table 2.Table 2 : Differences between Petroleum Supply

Chain and Manufacturing Supply ChainS. No.

1 .2.3.4 .

AttributeStability/ predictabi 1 ity of rawmaterial suppliesRaw material pricesType of inventoryProduction flow

Other ManufacturingSupply ChainHighStableDiscreteSeveral items assembled toproduct

PetroleumSupply Chain

Low due to internationalpressures.Unstable and often fluctuating.N on discrete/bulkSingle raw material formprocessed into several products


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SOUTH ASIAN JOURNALOFMANAGEMENT

Table 2: Differences between Petroleum SupplyChain and Manufacturing Supply Chain (Contd...)S. No.

5.6.7.8,9.

10.

n .12.13.14.15.16.17.18,

AttributeTransp ortation costsMan ufacturing process andcapacity flex ibilityLength of supply chainPostponementMaterial requirement planningIntegration of supplychain partnersRisk of co ntam inationUse of ITFlexibilityAgilityInyentory c arry ing costsPhysical risksRequired supply ch ainCriticality of supply

Other ManufacturingSupply ChainLow

Discrete manufacturing wi thlot of flexib ilityRelatively shortMu ch easierTediousMore commonly found

LowExtensiveMore commonly foundEasier to achieveLowerLowerEfficient or responsiveLow

PetroleumSupply ChainHigh

Continuous with very littleflexibilityMuch longerVery difficultVery simpleDifficult to achieve

HighLaggardsVery difficultNo t agileVery highVery h igh due to nature ofproductAdaptive supply chainExtremely high

THE PETROLEUM SUPPLYCH AIN IN IND IAThe petroleum supply chain starts withthe sourcing of crude oil. India's crudeoil requirements are met largely throughim por t s . Ind ia im por t s 70% of i tsrequirement of c rude pe tro leum. Theincreasing crude prices have adverselyaffected the petroleum industry withs ta te owned o i l companies repor t inglosses since market prices of petroleumproducts in India still do not reflect thecrude prices. The fluctuating prices ofcrude from August 2005 to August 2006have been graphica l ly depic ted inFigure 2. Price of crude, which was closeto US$60 per barrel in August 2005reached US$78 per barrel in August 2006.

Figure 2: Fluctuating Prices of Brent Crudeduring August 2005-August 2006

Source: www.infraline.comPresently, 67% of India's crude oil

imports come from the Middle East regionand in the event of any difficulties in theMiddle East, crude oil imports would beaffec ted . To safeguard a gains t s uch


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SUPPLY CHAIN CHARACTERISTICS OF THE PETROLEUM INDUSTRY:THE INDIAN CONTEXTdisrupt ions, strategic reserves of cru de oilneed to be built up in the co untry. T bis isalso in l ine witb tbe in ternat ional practicefollowed by v a ri o u s i m p o r t - d e p e n d e n tc o u n t r i e s , i n c l u d i n g , U S A , J a p a n ,G e r m a n y a n d S o u t b K o r e a ( s o u r c e :www.infraline.com). Storage capacity ofcrude oil and major products is given inTable 3 .

of tbe 10* Five Year Plan, it is expected t oreacb 141.7 MMTPA (source: Economicsurvey of Ind ia , 2005) . Tbe g rowtb ofpetroleum production in tbe previous yearsis given in Table 4. Wbile India imports70 % of its crude requirements, it is no t onlyself-sufficient in refined petroleum productsbu t also bas an exportable surplus of su cbproducts.

Table 3: Storage Capacity of C rudeand Major Products in India

Storage Capacity Consumption Basis Ne2004-05Storage Capacity of Crude Oil and Major Products with Oil Companies:Crude oi lWeighted average for major productsTotal

24 days36 days60 days

Projections by the end of the lO"* Five Year Plan (2006-07)Storage Capacity:( i) With oil companies (both crudeoil and products)(ii) Proposed strategic crude oilstorage of 5 MMT*Total

47 days14 days61 days

t Import Basis

3350

daysdays

83 days

721991

Source:Commentsof Ministry of Finance and the.PlanningCommission on"Review ofthe Status of Setting up of Strategic Crude Oil Storage", 2005.

daysdays

days

Tbe crude from indigenous as well asotber sources is pumped to tbe refineriestbrougb pipelines wbere it is processedtbrougb fractional distillation. Tbe crudeon fractional distillation gives numerousproducts ranging from petrol and diesel toLPG and b itumen. Wi tb 18 refineries in tbecountry (17 in tbe public sector and one intbe private), tbe refining capacity sinceApril 1, 2002, bas increased from 114.67MMT per annum (MMTPA) to 127.37MM TPA as on October 1, 2004. By tbe end

Table 4: Production ofPetroleum Products

Year

2001-022002-03

~~2003-042004-05

(April-Dec 200 4)

Production(MMT)104.3108.7117.6

91.3

ProductionGrowth Rate (percentage)

4.87.48.26.4

Source: Economic Survey of India 200 5.


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SUPPLY CHAIN CHARACTERISTICS OF THE PETROLEUM INDUSTRY:THE INDIAN CONTEXTe c o n o m y of I n d i a . T h e r e is a s t r o n ggovernmenta l p ressure to main ta in th issupply. D u e t o cr i t ical i ty of supply an dl e n g t h o f t h e s u p p l y c h a i n , a l a rg einven tory is requ i red to be kept by theO M C s (Oi l M a r k e t i n g C o m p a n i e s ) inIn d ia . I n v en to r i e s of majo r p e t ro leu mproducts in India as on September 1, 2006a re g iv en in Tab le 7 . T h e i n v e n t o r yholding cost of just these tbree productswill go into millions of Rupees.

Table 7: Inventory of M ajorPetroleum Products in India as onSeptember 1,2006

ProductMS (petrol)HSD (diesel)SKO (kerosene)

Inventory(TMT)727

2750727

InventoryCover (Days)

443530

Source: Pe troleum Planning & Analysis Cell,New Delhi.

Contamination of product is a majorproblem in the count ry . In India ,kerosene is available at a price muchlesser pr ice than that of diesel orkerosene. Kerosene can easily be mixedwith petrol and diesel without anyvisible change in the product. Hence,ad ul te ra t io n of d iese l /pe t ro l w i thkerosene is a common problem. In Indiaadulteration of petrol and diesel is a bigticket scam that involves an annualrecurring loss of at least Rs. 10,000 crt o t h e e x c h e q u e r ( R a m c h a n d r a n ,2005).

Since the pe t ro leum indust ry i sdealing with highly flammable products,risk management costs are high. Riskmanagement cost is further aggravatedby the huge inventories in the supplychain. The company-wise details of totalsum insured and premium paid by thesix major Oil PSUs during the last fewyears are given in Table 8.Table 8: Insurance Premiums Paid by Major

O il Companies in India (Rs. in cr)Company

O N G COILGAILIO CHPCLBPCLTotal

SumInsured

68,7751,3917,523

60,10329,1449,365

1,76,301

2001-02PremiumPaid

1273

16734015

274

2002-03SumInsured

69,0951,8296,238

73,05934,48610,2304,397

PremiumPaid254

319834625

460

2003-04SumInsured68,4003,788

10,02379,24636,09212,780

2,10,329

PremiumPaid202

221884224

379

2004-05SumInsured71,5454,020

10,68196,57239,39613,510

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The oil marketing companies in Indiahave been slow in adopting IT for effectivesupply chain management. BharatPetroleum Corporation Limited (BPCL)was amongst the earliest of the energycompanies to implement an ERP system.Whilst there had been some attempts byother organizations to implement EKP, itwas the first time that ERP wasencompassing the entire operation of anintegrated downstream oil marketingcompany involving over 200 locationsacross the country. BPCL initiated ittowards the end of 1996 with the help ofArthur D' Little Inc., which suggestedformation of SBUs. This changenecessitated effective integration, whichcould only be brought about byimplem enting ERP. T he estimatedquantitative benefits of implementingERP in BPCL came to Rs. 42 cr per year(Kaul, 2006).NON-VALUE ADD EDAC TIVITIES I N THE PETROLEUMSUPPLY CHAINThe just in time philosophy in productionidentifies seven prominent types of wastes.These are: overproduction, waiting,transportation, inventory, processing,motion and production defects. TheIndian petroleum industry is stuck withsome of these wastes or non-value addedactivities, which reduce its efficiency.These are: Waiting: Crude oil is often imported,as India is unable to satisfy the demandfor crude oil through indigenousproduction. This crude is transportedin cargo ships, which are to beunloaded at the port. As compared toother intemational ports, Indian portsare unable to handle m uch traffic. Due

to port congestion, these cargo shipshave to often w ait at t he harbo r beforet h e y c a n u n l o a d t h e c r u d e . T h i swaiting leads to increase in inventoryh o l d i n g w i t h i n t h e s u p p l y c h a i n .Moreover, demurrage is required to bepaid to the shipping company if theunloading has not been done withinthe stipulated time.Waiting may also occu r w hile finishedproduct is sent to storage installationsby r a i l . T h e t a n k s t o r a g e a t t h einstallation at that point of time mayn o t b e a b l e t o a c c o m m o d a t e t h eincoming load. This may again lead topayment of demurrage to th e railways.

Add itional Quality Checks : Ow ing tothe nature ofthe product, adulterationusually happens in case of petroleumproducts like petrol and diesel. H enc e,quality checks are required not onlybefore dispatch from the refinery butalso a f te r rece ip t a t the s to ragei n s t a l l a t i o n . A d u l t e r a t i o n i s a l s oposs ible in t r ans i t f rom s to rageinstallation to the retail outlet. Thus,some sort of testing is required to bedone at the retail outlet. In fact, afterthe product has been unloaded at theretail outlet, there is the possibility ofthe retail outlet ow ner adulterating th eproduc t with cheaper products l ikekerosene. Till date, this adulterationhas not been checked effectively. Useof common pipeline for transportingdifferent products leads to a smallportion of product being "degraded".Again testing needs to be done afterproduct is received through pipelinealso.

Holding of Huge Inventories: Process


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SUPPLY CHAIN CHARACTERISTICS OF THE PETROLEUM INDUSTRY:THE INDIAN CONTEXTp r o d u c t i o n , w o r k c o n t i n u o u s l y a n di n v e n t o r y i s be ing bu i l t upcontinuously. As a result , product ism a d e t o s t o c k a n d m a m m o t hinventories are bein g kept at refineriesand at storage installations. In transit ,i n v e n t o r i e s a r e a l s o h u g e . T h ei n v e n t o r i e s t h r o u g h o u t t h e s u p p ' l yc h a i n add u p to a massive am ou nt .Moreover, information on dem and andsupply is not very clear and there isl ack o f v i s ib i l i t y t h a t a d d s u p t oi nc reased safety s tock requ i rem entsb o t h for raw mater ia l and f in ishedproduc t .

O v e r P r o d u c t i o n : Over produc t ion isalso one of the wastes ident i f ied byJust in T ime QYT) systems. The ideallo t size in JIT is one. This minimizesinventory investme nt an d shortens leadt imes. In con tras t , process industr iesl ike p e t r o l e u m i n d u s t r i e s h a v econt inuous process plants , which ne eda c o n t i n u o u s s u p p l y o f f e e d s t o c k ,resulting in the production of severaldownstream products, some of whichm ay no t have an imm edia te m arke tr equ i r emen t . There is inflexibility incapacity, as these plants have to runc o n t i n u o u s l y a l l t h e t i m e . T h i si n c r e a s e s i n v e n t o r i e s o f f i n i s h e dproduc t and results in inefficient useof capital .

ROLE OF INFO RM AT IONTECHNOLOGY IN THEPETROLEUM INDUSTRYSUPPLY CHAINInformation sharing is essential to anysuccessful supply chain management. Useof IT can make economic contribution tothe whole supply chain. It important touse appropriate information technology.

For the petroleum industry it is criticaldue to the following reasons: T he chemical industry in general and

petroleum industry in particular hasglobal markets and suppliers/ supplyc h a in p a r tn e r s w h o a r e w id e l ydispersed geographically. In such ac a s e , t imely f low of accura teinformation can affect performance ofthe supply chain to a large extent.

Co m p a n ie s r el y o n a c c u r a t eforecasting of demand, but in mostcases are d isconnec ted f rom ac tuald e m a n d . I n m o s t i n s t a n c e s , t h i sprocess can be described as anythingbut closed loop. Integration of dem andchain information is critical to successor fa i lure of any SCM stra tegy(Brandon, 2002).

Often th e process indu stries may m akea wrong product, at the wrong timeand at the wrong place. Hen ce processoptimization is the key task for theInformation Technologies function ofprocess industries and currently seemsto be a huge challenge. It is a methodthat unites the modeling, design andmonitoring of engineering assets withschedul ing , supply chain , t rading afulf i l lment via mul t ip le f lows ofinformation between stages in life cycleof products, bringing huge efficiencies.By introducing visibility in the supplychain the opt imized ente rpr ise canextract further efficiencies through theuse ofthe Intemet (Adshead, 2002).Timely and accura te information ismore important to shareholder valuethan simple physical assets.

T he flow of information represen ts thek ey t o c u s t o m e r - s e g m e n t a t i o n


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s t r a t e g i e s and e f f e c t i v e d e m a n dm a n a g e m e n t , which wi l l l e ad toi n c r e a s e d top l i n e r e v e n u e s andreduced cost of sales (Brandon, 2002) .

IMPRO VING PERFORMANCE OFTHE PETROLEUM SUPPLYCH AIN: SOME SUGGESTIONSThough the petroleum supply chain isinherently different and handling it, willnever be as easy as handling the supplyc h a i n of d i s c r e t e l y m a n u f a c t u r e dproducts, there are a few steps, whichcould alleviate the si tuat ion to a largeextent. These are discussed below: Raw Material Supplies: Since Indiais dependent upon imported crude fora major part of our requirements, theg o v e r n m e n t s h o u l d c o n s i d e rformulating a long term arrangementwith some ofth e oil producing nation s.This ca l ls for s t ra t eg i c po l i cy

fo rmula t ion and pol i t ica l wi l l .Moreover, in order to take care of pricefluctuations, the government shouldallow the petroleum companies to usehedging as a tool for finalizing dealsinvolving purchase of crude oil. Transportation Costs: Pipelinetransportation presents a cost effective

way of moving petroleum products overlong d is tances , provided these areproper ly u t i l ized . In I n d i a , use ofpipelines is limited as compared todeve loped na t ions . Th i s is due toabsence of an extensive network ofpipelines. The petroleum companiesneed to aggressively initiate projectsfor lay ing p ipe l ines to r e d u c etransportation costs.

Product Contamination: Productcontamination generally occurs at the

retail outlets. Often kerosene is mixedwith either petrol ordiesel, as the priceof kerosene is lesser than either of theo t h e r two fuels . By formula t ing apricing scheme, which does not allowkerosene to be available in the openmarket at cheap rates, this problemcould largely be avoided. Moreover, oilcompanies need to implement qualityc h e c k s at the re t a i l ou t le t s morestrictly.

Length of Supply Chain: Asmentioned earlier, the length of thesupply chain is a long one and canextend up to months if the crude isbeing imported. The congested portsof India further aggravate the problem.T h e r e c o u l d be some relief, ifgovernment improved facilities at theports and enhanced their capacity, sothat more tankers could berth at theharbour , wh ich cou ld get rid ofavoidable delays in unloading tankerscarrying crude oil.

Inventory Carrying Costs: As alreadymentioned, it is the govemment policyto carry huge inventories of crude andpetroleum products. The govemmentshould aim at reducing the minimumsafety stock, which oil companies aresupposed to keep . Wi th a reliablet ransporta t ion sys tem in place andqu ick in fo rma t ion exchange , t h i sp r o b l e m can be t a c k l e d . Oilexplorat ion for sourcing indigenousc r u d e m u s t be e n c o u r a g e d asdependence on imported crude leadsto higher safety stocks, which increasesi n v e n t o r y c a r r y i n g c o s t s . Thegovemment has already taken steps inthis direction by announcing the NewE x p l o r a t i o n and Licensing Pol icy


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SUPPLY CHAIN CHARACTERISTICS OF THE PETROLEUM INDUSTRY:THE INDIAN CONTEXT( N E L P IV). Use of i n f o r m a t i o ntechnology will bring about visibilityin t h e supply chain an d will help inreducing safety stocks an d inventorycarrying costs.

Integration of Supply ChainPartners: Information technology is aprerequisite for effective supply chainmanagement . The importance of thisha s a l ready been d i scussed in thepreceding paragraphs. Oil companiesshould aggressively use informationtechnology to integrate suppliers andcustomers. Effective use of ERP canhelp in this regard.

CONCLUSIONI t is amply c lea r tha t the p e t r o l e u mindustry supply chain h as certain peculiarcharacteris t ics , which make it differentfrom other manufacturing sector supplychains. These peculiarit ies make supplyc h a i n m a n a g e m e n t in the p e t r o l e u mindus t ry a cha l leng ing ta sk . It is alsoe v i d e n t t h a t lot of scope ex is t s inimproving supply chain management int h e p e t r o l e u m i n d u s t r y . The I n d i a np e t r o l e u m in d u s t r y , w h ic h is a goode x a m p l e , was in the s h a c k l e s ofgovernment control for several decades.S ince l ibe ra l iza t ion , the indus t ry haslimited freedom but at the same time it isvulnerable to compe t i t ion . It needs tofocus on improving the performance of itssupp ly cha in if it has to s u r v iv e theo n s l a u g h t of c o m p e t i t i o n f r o mmultinational corporations.

The number of published literature onprocess industry supply chain man agem entis scarce, more so in case of petroleums u p p ly c h a in . M u c h of the ava i lab le

li terature revolves around improvementin sharing of information. Visibility in thesupply chain seems to be a prom inent issuea n d p r o c e s s o p t im iz a t i o n of e a c hindividual enterprise is a key challengefo r the IT f u n c t i o n . E v e n t h o u g hp e t r o l e u m in d u s t r y d e a l s w i th m a s s -p r o d u c e d s t a n d a r d i z e d p r o d u c t s , anefficient supply chain is just not enough.The answer lies inadaptive supply chains,which make a more holistic approach tosupply chain optim ization (Tomkins, 2003 ).Collaborative commerce is emerging as anattractive and potentially significant meansof decreasing costs an d increasing revenues(Challener, 2003). In th e near term , processoriented firms can use several methods tot u r n t r a d i t i o n a l MRP sys tems in tocapacitated M RP systems (Schuster et al.,2 0 0 0 ) . D r i v e n by e - c o m m e r c e , thechemical industry is expanding beyondserving its traditional business channels,t o t a k e a d v a n t a g e of e m e r g i n gi n t e r m e d i a r y c h a n n e l s ( E c k s t u t andBoulanger, 2000).

There does not seem to be much workd o n e on p e r f o r m a n c e e v a l u a t i o n ofp e t r o l e u m in d u s t r y s u p p ly c h a in .Cons ide r ing the old adage, only thosethings are done which can be m easured, itis impo rtant th at a way of measuring supplychain performance specifically for thepetroleum industry be formulated. This ismore justified considering the differencesbe tween the petroleum industry supplyc h a in and the d isc re te manufac tu r ingsupply cha ins . In the I n d i a n c o n t e x t ,liberalization of the petroleum industrymakes it all the more important to focuson improving supply chain performance.


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SOUTH ASIAN JOURNAL OFMANAGEMENT

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Management Review, pp. 40-47.13. R a m c h a n d r a n R a j e s h ( 2 0 0 5 ) ,"Impure for Sure", Outlook (April 4),pp. 18-22.14. Sc hus t e r E dm und W , A l l e n

Stuart J and D'ltri Michael P (2000),"Capacitated Materials RequirementPlanning and its Application in theProcess Industry", Journal of BusinessLogistics, Vol. 21, N o. 1, pp. 169-187.15. Schwartz Beth (2000), "The CrudeSupply Chain", Transportation andDistribution, Vol . 41 , No. 8 ,pp.49-52.16. Shapiro Jeremy F (2004), "StrategicPlanning: Now More Important thanEver", Supply Chain ManagementReview, pp. 13-14.17. T om kins A ndy ( 2003) , "C ha inChallenge", European Chemical News( D e c e m be r 23 - J a nua r y 12 ) ,pp. 19-21.18. Vlas imsky Stan (2003) , "Supply

Chain Management : Changing theStatus Quo in Chemicals", ChemicalMarket Reporter ( N o v e m b e r 1 7 ) ,pp. 29-30.

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