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

2. INTRODUCTION
• The petroleum industry
plays an important role in
the economic development
of the country
• Performance of its supply
chain has become very
important

3. INTRODUCTION (contd.)
• The petroleum industry traditionally had prices
decided by the Government of India.
• Effective from August 1, 2004, the Government put in a
revised methodology allowing oil companies to revise
the prices of motor spirit and High Speed Diesel (HSD).
• The total investment estimated in the petroleum sector
from 1995 till 2010, is expected to be Rs. 4,32,000 cr
(US$120 bn), out of which Rs. 2,58,000 cr (US$80 bn),
are for the upstream sector alone
• Petrochemical industry in India employs around 40,000
people directly and around 4 lakh indirectly

4. OBJECTIVES
• Understanding the importance of supply chain management in
the petroleum industry.
• Identifying distinguishing features of the petroleum industry
supply chain vis-à-vis discrete manufacturing supply chains.
• Discussing the petroleum supply chain in India.
• Identifying non-value added activities in the petroleum supply
chain.
• Discussing the role of information technology in revamping the
petroleum industry supply chain.

5. SUPPLY CHAIN IN PETROLEUM
INDUSTRY
Crude
Purchase
Retailing /
Consumer
(Demand Centre)
Crude
Storage
Product
Transptn/Distribution
(Tanker/PL/Rail/Road)
Mktg Product
Storage
(Terminal/ Depot/ Port)
Refining
Supply Planning
Distribution Planning
Crude
Transptn.
(Tanker/PL)

6. DIFFERENT STAGES IN PETROLEUM
SUPPLY CHAIN
Exploration → Production → Refining → Marketing →
Consumer
• Exploration: Seismic, geophysical and geological
operations
• Production: Drilling, reservoir, production and facilities
engineering.
• Refining : complex operation and its output is the input
to marketing.
• Marketing : The retail sale of gasoline, engine oil and
other refined products.

7. IMPORTANCE OF SUPPLY CHAIN
IN PETROLEUM INDUSTRY
•Petroleum industry is highly asset intensive
•Like other chemical companies supply chain can
account for upto 70% of overall cost .
•Highly specialized business processes encourages
fragmentation.
•Chemical supply chains are typically non-linear in
nature
• Supply chain optimization at a strategic and
operational level is a value creating opportunity for
chemical companies and a potential source of
competitive advantage

8. Petroleum Supply Chain In India
Upstream
Exploration & Production
Ministry of Petroleum & Natural Gas
Downstream
Refining & Marketing
Industry Bodies
ONGC
Oil India
Limited
OVL
Pvt E&P
Cos.
CPCL, BRPL NRL
Hindustan
Petroleum
Reliance
Industries
Ltd.
• Petroleum
Planning &
Analysis Cell
• Centre for High
Technology
• PCRA
• PetroFed
• Oil Industry Safety
Directorate
• Petroleum India
International
• Engineers India
Limited
• Director General
of Hydrocarbon
IndianOil Bharat
Petroleum
MRPL

9. UPSTREAM SUPPLY CHAIN
• Acquisition of crude oil.
• Operations – Exploration ,Forecasting ,
Production .
• Logistics management - Delivering crude oil
from remotely located oil wells to refineries

10. DOWN STREAM SUPPLY CHAIN
• Refinery- The crude oil is manufactured into
the consumable products that are the
specialty of refineries and petrochemical
companies.
• Processes - forecasting, production, and the
logistics management of delivering the crude
oil derivatives to customers around the globe.

11. PETROLEUM FINISHED PRODUCTS IN
INDIA

12. OBJECTIVES OF A SUCCESSFUL SUPPLY
CHAIN IN PETROLEUM
• Minimization of material procurement
• Maximization of manufacturing capacity and sales
• Meet demand numbers
• Respond quickly to market opportunity by purchasing
the production shortfall from other players
• Objective of each production unit would be to
maximize the throughput and its margin
• Procurement would purchase the feedstock with not
the best yields at lowest cost

13. SUPPLY CHAIN STRATEGIES
• Planning
– Which feed stock to buy
– Where to process
– How much to buy readymade and how much to
make
– What to make and where
– How to transport

14. SUPPLY CHAIN STRATEGIES CONTD.
• Scheduling
– When and in what order feedstock should arrive
at manufacturing facility
– When and in what sequence or modes to run the
equipments
– Which orders to meet and what dates to promise

15. SUPPLY CHAIN STRATEGIES CONTD.
• Demand planning: For demand forecasting and aggregation of the
final demand numbers based on requirements of supply chain
• Integrated Planning: Planning for the complete supply chain of the
customer based on demand numbers
• Distribution Planning: Generating operational plans for distribution
• Production Planning: Generating operational plans for production.
These modules are supported by various enablers that facilitate planning
activity that include:
• (1) Supply Chain Database (SCD)
• (2) Geographical Information System (GIS)
• (3)Data Interfaces

16. • The demand numbers are fed to an integrated planning module that
contains representation of supply, production and distribution facilities
• The production and the Supply and Distribution (S&D) structure forms the
basis on which the optimised plan for the entire organisation is generated
• This corporate plan is communicated to distribution modules and the
production planning modules to generate operational plans
• The optimised plan for the entire corporation is also used as a basis for
feedstock selection runs.
• GIS can be used to obtain the distances between locations, which are used
as a basis for freight calculation
SUPPLY CHAIN PLANNING SOLUTION

17. UNIQUE FEATURES OF THE
PETROLEUM INDUSTRY SUPPLY CHAIN
• Raw Material Supplies:
Process industry has limited choice of suppliers for
raw material
Supplies in petroleum industry are dominated by
cartels
It is a sellers market wrt supply of raw material
• Raw Material Prices:
Raw material prices are highly unstable and
fluctuating on weekly or even daily basis
Fluctuating prices directly affect the supply chain costs
and prices of final product

18. UNIQUE FEATURES OF THE
PETROLEUM INDUSTRY SUPPLY CHAIN
• Reverse Production Flow:
The production flow is reversed in petroleum industry.
In downstream petroleum companies, inventory starts
from one product, i.e., crude and creates many
products like petrol, diesel, naphtha, bitumen, etc
• High Transportation Costs :
Transportation costs about 20% of the production
cost.
• Length of Supply Chain:
Very Complex and lengthy supply chain

19. UNIQUE FEATURES OF THE
PETROLEUM INDUSTRY SUPPLY CHAIN
• Integration of Supply Chain Partners :
 Integration of suppliers as well as customers and
distributors is difficult
Cost pressures are the driving force in the supply
chain.
• Flexibility :
Supply chains are highly inflexible both in terms of
volumes handled and in terms of product
variation/customization.

20. FUNCTIONS OF SUPPLY CHAIN DB
• SCD provides distribution related inputs to both
Integrated Planning and Distribution Planning models
and has these following functions:
– Temporal integration: Data for yearly and quarterly
models available in one place and can be rolled up or
down as per requirement.
– Hierarchical integration: Aggregation for integrated model
is done based on detailed data available for operational
distribution models
– Calculations: Final linkage costs are calculated using tax
logic, current prices, distances and freight rates.

21. NON-VALUE ADDED ACTIVITIES IN
THE PETROLEUM SUPPLY CHAIN
• Waiting:
– Crude oil is often imported.
– Cargo ships have to often wait at the harbour before they can unload
the crude.
– Waiting leads to increase in inventory holding within the supply chain.
– Occur while finished product is sent to storage installations by rail
• Additional Quality Checks:
– Adulteration usually happens in case of petroleum products like petrol
and diesel
– Adulteration is also possible in transit from storage installation to the
retail outlet
– Use of common pipeline for transporting different products leads to a
small portion of product being "degraded“.
– Testing of the product is required at various times.

22. NON-VALUE ADDED ACTIVITIES IN
THE PETROLEUM SUPPLY CHAIN
• Holding of Huge Inventories:
– Product is made to stock and mammoth inventories are being kept at
refineries and at storage installations
– In Transit inventories
– Information on demand and supply is not very clear and there is lack
of visibility that adds up to increased safety stock requirements both
for raw material and finished product
• Over Production:
– continuous process plants
– continuous supply of feed stock, resulting in the production of several
downstream products
– inflexibility in capacity, as these plants have to run continuously all the
time
– This increases inventories of finished product and results in inefficient
use of capital.

23. ROLE OF INFORMATION TECHNOLOGY
IN THE PETROLEUM INDUSTRY
• Timely flow of accurate information can affect performance
of the supply chain to a large extent.
• Integration of demand chain information
• Hence process optimization is the key task for the
Information Technologies function of process industries and
currently seems to be a huge challenge
• It is a method that unites the modelling, designing and
monitoring of engineering assets with scheduling, supply
chain, trading a fulfilment via multiple flows of information
between stages in life cycle of products, bringing huge
efficiencies
• Customer-segmentation strategies and effective demand
management, will lead to increased top line revenues and
reduced cost of sales.

24. SUGGESTIONS
• Raw Material Supplies:
Formulating a long term agreement with some of the oil
producing nations and in order to take care of price
fluctuations
Government should allow the petroleum companies to
use hedging for finalizing deals involving purchase of
crude oil.
• Transportation Costs:
Use of Pipeline transportation
• Length of Supply Chain:
Facilities at the ports should be improved and their
capacity to be increased so that more tankers could
berth at the harbour

25. SUGGESTIONS (Contd.)
• Inventory Carrying Costs:
Use of a reliable transportation system and quick
information exchange can reduce carrying costs
Government should aim at reducing the minimum
safety stock, which oil companies are supposed to
keep
• Integration of Supply Chain Partners:
 Oil companies should aggressively use information
technology to integrate suppliers and customers.
Effective use of ERP can help in this regard.