Operations Management & Project Management in the Energy Industry - A Case study of Shell Chemicals

1. Operations Management
&
Project Management
in the Energy Industry
A Case study of Shell Chemicals
Presented by :
Bhavna Pant

2. Shell Chemicals
• Shell chemicals (companies) operate
around the world, making and
supplying a range of petrochemicals
• Collectively, Shell chemicals
companies number among the largest
petrochemical suppliers in the world.
www.shell.co.uk//introduction.htm

3. What Do Shell Chemicals do?
Shell chemicals
have a global
manufacturing base
They are spread outThey are spread out
all over the worldall over the world
worldworld
Products areProducts are
supplied in bulksupplied in bulk
quantities to largequantities to large
industrialindustrial
customerscustomers..
Robust
Network
shell.com/downstream

4. Operations ManagementOperations Management Involves
Operations Strategy
Process Management
Process strategy/analysis
Capacity analysis/planning
Quality management
Lean systems
Supply Chain Mgmt.
Supply chain dynamics
Inventory management
Decision Making Tools
Operations management is Operations management is
--managing the processes of an managing the processes of an
organization to produce and organization to produce and
distribute products / servicesdistribute products / services..
Entire process dedicated to
the
satisfaction your of customers
..

5. •Inventory is a quantity or store of goods that is held for some purpose
or use.
•Inventory may be kept "in-house," meaning on the premises or nearby
for immediate use; or it may be held in a distant warehouse.
•With the exception of firms utilizing just-in-time methods, more often
than not, the term "inventory" implies a stored quantity of goods that
exceeds what is needed for the firm to function at the current time
(e.g., within the next few hours).
WHAT IS INVENTORY?

6. Inventory Costs
• Amount of inventory to carry depends on its costs
Holding Costs
• – Based on capital invested in inventory
• – Expressed in dollars or percentage of purchase
• price per time period (e.g., $/unit/yr)
Fixed Order Costs
• – Cost of placing an order
• – Not dependent on order size
• – Equivalent to setup cost in production
Shortage Costs
• – Hardest to quantify
• – Derived from desired service level
• • Cost of purchased items (quantity discounts)

7. Inventory Management
What is Inventory Management ?
Inventory Management is part of Supply Chain Management. It is an
attempt to maintain an adequate supply of goods while minimizing
inventory costs.
The rapidly changing needs of customers and resulting margin
reductions are forcing distributors to explore innovative methods to cut
cost, increase customer service, and maximize resource utilization.
The activities of inventory management involves in identifying.
• Inventory requirements
• Setting targets
• Providing replenishment techniques
• Monitoring item usages.
• Reconciling the inventory balances.
• Reporting inventory status.

8. Why Inventory Management?
• Inventory is the largest asset that a distributor has to manage to
maximize return on assets, increase profitability and gain
competitive advantage in the market place.
HOLDING COSTS.
• Holding costs, also called carrying costs, are the costs that result
from maintaining the inventory.
• The firm must pay taxes on the inventory, and opportunity costs
occur from the lost use of the funds that were spent on the
inventory. Also, obsolescence, pilferage (theft), and shrinkage are
problems.

9. MEET DEMAND.
In order for a retailer to stay in business, it must have the products that the customer
wants on hand when the customer wants them. if a good is not in inventory, a sale is
lost forever.
KEEP OPERATIONS RUNNING.
Running out of only one item can prevent a manufacturer from completing the
production of its finished goods.
LEAD TIME.
Lead time is the time that elapses between the placing of an order (either a purchase
order or a production order issued to the shop or the factory floor) and actually
receiving the goods ordered.
If a supplier (an external firm or an internal department or plant) cannot supply the
required goods on demand, then the client firm must keep an inventory of the needed
goods. The longer the lead time, the larger the quantity of goods the firm must carry
in inventory.
Why Inventory Management?Why Inventory Management?

10. HEDGE.
Inventory can also be used as a hedge against price increases and inflation. Salesmen
routinely call purchasing agents shortly before a price increase goes into effect
QUANTITY DISCOUNT.
Often firms are given a price discount when purchasing large quantities of a good. This
also frequently results in inventory in excess of what is currently needed to meet
demand.
SMOOTHING REQUIREMENTS.
Sometimes inventory is used to smooth demand requirements in a market where
demand is somewhat erratic.
Questions
(1) How many should we order? (Lot Sizing)
(2) How often should we order?
Why Inventory Management?Why Inventory Management?

11. Inventory Planning and Demand
Forecasting
• A key to inventory planning is
accurate demand forecasting.
• Demand forecasting is an ongoing
process.
• Min is essentially a "reorder point“
-Reorder point is calculated as the
sum of lead time usage plus safety
stock.
•
• Max is calculated as Min plus Order
Quantity.
• Economic order quantity (EOQ). In
order to minimize total inventory
cost, the firm will order EOQ every
time it places an order
http://readcenter.tamu.edu/pages/inventoryManagement.php

12. Components of Inventory
 Cycle Inventory - inventory that varies with lot size.
(amount)
 Safety Stock - Inventory that protects against
 uncertainty
 Pipeline Inventory - inventory in transit.
 Anticipation Inventory - inventory to meet varying
demand

13. Elements of Inventory Management
• Inventory Monitoring and Balance
Reconciliation Inventory Monitoring involves
activities of monitoring arrival, use, shipment
and disposition of inventory items to ensure the
accuracy of inventory .
• Inventory Reporting Various reports are
indispensable for inventory management.
Reports provide periodical summary of inventory
items and usages.

14. Importance Inventory Management
• Company and suppliers can work together.
• Inventory can be controlled prevent excess
inventory or a stock out.
• Save costs : Costs can be substantial to store and
move inventory.
• Move products and services to customers more
quickly E.g. Just-in-Time inventory, efficient
consumer response(ECR).
• Improving the quality of the product-Coordinated
approach between a company and their suppliers
continuously reduces inventory while also improve
quality.

15. Shell’s Inventory management
• Shell uses a inventory management system
SIMON( Shell Inventory Managed Order Network . It's a
cutting-edge supplier/customer business model
Important Features
• SIMON allows Shell to proactively keep vital inventory on
their customers shelves.
• Automated replenishment system- customer no longer
need to place orders, run out of inventory and build
safety cushions.
• Customers pay only for what they consume.
• Shell remain their sole-source supplier.
Strategic supply chain management: the five disciplines for top
performance Cohen, & Roussel (2005,p.26)

16. Vendor Managed Inventory (VMI)
• It is a business model where the buyer of a product
provides information to a vendor of that product and the
vendor takes full responsibility for maintaining an
agreed inventory of the material, usually at the buyer's
consumption location.
• VMI makes it less likely that a business will
unintentionally become out of stock of a good and
reduces inventory in the supply chain.
• With VMI, the vendor specifies delivery quantities sent to
customers through the distribution channel using data
obtained from Electronic Data Interchange (EDI).

17. Why is Inventory management important for Shell?
• Shell’s customers are mostly large industries .If they run out of an essential
chemical, plant time is lost and so are revenues.
• Most address this issue by maintaining "safety stock" levels. When inventory
starts to get too close to these levels, they reorder.
• They have to be diligent about this practice because a typical resupply order
takes about two weeks from the time the order is placed .
• The chemicals are weighed at the plant, loaded onto railcars and then sent to
the customer, who then weighs the materials at the other end before moving
them into inventory.
• Hence Shell designed Shell Inventory Managed Order Network SIMON which is
based on Vendor Managed Inventory (VMI) business model
Chemicals weighed Loaded into railcars Customers
https://www-304.ibm.com/easyaccess/ukcomms/gclcontent/gcl_xmlid/91467

18. SIMON- How It works
SIMON routinely extracts information about:
 The amount of product consumed in the past 24 hour.
 The amount of new product arrived and was unloaded in the same period.
 Current and anticipated production schedules, and
known changes to those schedules.
Every night information is Sent to Shell
 This information is replicated back to their customer service centre in Houston,
TX.
 A Shell Chemical Account Service Rep (ASR) is automatically presented with a
resupply plan.
 If the plan indicates that stocking levels at the customer site are low
(predetermined trigger points), the ASR fills out an electronic purchase order
and initiates a new shipment to the customer, schedules transport and tracks
the shipment until it has arrived

19. Benefits to Shell Chemicals
 Eliminates expensive excess inventory, which means an
increase in working capital
 Ensures product is on site whenever needed.
 Ensures quicker response times to changing conditions
 Reduces transaction costs (e.g., invoices and data entry)
 Eliminates erratic order patterns.
 Reduces order processing overhead.
 Streamlines financial statements and reconciliation
processes.
https://www-304.ibm.com/easyaccess/ukcomms/gclcontent/gcl_xmlid/91467

20. Benefits For Shell
 The customer is able to access the status of these orders and
shipments.
 Current stock and consumption levels.
 SIMON offers customers a "Reconciliation" tab, which compares
metered and calculated consumption.
 Once a month an invoice is generated. The invoice is based on
consumption figures, not shipments.
 Customer production schedules are used so that they can maintain
an adequate supply of on-site inventory and provide seamless
product availability at the lowest possible cost.
 Achieve customer-driven service levels and provide good customer
service.

21. Impact of using SIMON
• After SIMON was introduced to 23 of Shell’s largest,
most strategic customer. Within 12 months, Shell
experienced a $20 million increase in additional product
sales, and our customers were reporting flexible
acquisition and delivery processes.
• The effects of supplier-managed inventory (SMI) can be
felt up and down the value chain. Most companies are so
wary of running out of stock that they maintain inflated
safety stock levels.
• Maintaining excess inventory is a very costly process. It
eats into working capital.
https://www-304.ibm.com/easyaccess/ukcomms/gclcontent/gcl_xmlid/91467

22. Conclusion
• SIMON simplifies their purchasing
processes and cuts costs from the supply
chain at the same time.
• It cuts administrative cost and safety
cushions stock that result from forecast
uncertainty the solution reduces the total
amount of inventory in the supply chain
and costly simplifies Inventory
Management.

23. • Shell gains an added bonus the solution
can not work if inventory is from different
suppliers customers agree to use Shell as
their exclusive suppliers.
• By offering a value added service and
integrating IT with its customers IT system
Shell is able to forge extremely tight
customer relationship. – Supply chain
driven strategic advantage.
• Shell’s Inventory management system has
helped them to differentiate themselves
and gain competitive advantage.

24.  It makes it a Best in class deliver company- As
it has exceptional order fulfilment process
over all.
 Helps it focus on the higher value segments
of an industry and develop relationship with
priority customers
 All of this results in Financial gain.
https://www-304.ibm.com/easyaccess/ukcomms/gclcontent/gcl_xmlid/91467

25. PROJECT MANAGEMENT
• Project management is a
methodical approach to planning
and guiding project processes
from start to finish.

26. Operations Management and
Project Management
• According to Slack ( 2001)
Operation Management is the set
of activities that create goods and
services through the
transformation of inputs into
outputs.

27. The input-transformation-output model
Transformation
process
Input Output
Goods
and
services
Transformed
resources
Materials
Information
Customers
Transforming
resources
Facilities
Staff
Source: Slack, 2001

28. Transformed resources – The resources that are
treated, transformed or converted in some way. The
transformed resources which operations take in are
usually a mixture of materials, information and
customers.
Transforming resources – the resources that act
upon the transformed resources. Facilities and
staff are the two types of transforming resources.
Facilities include building, equipment, plant and
process Staff includes all those who operate,
maintain, plan and manage the operation.
technology etc.,

29. Value Added
 Samson and Singh ( 2008) suggest that from a
value perspective, value is created when the
value of the outputs is greater than the sum total
of the value of inputs.
 For services, the change would be more at a
personal or even psychological level.
Example
Input: Hungry Customers
Transformation: Well prepared food, well served, good environment
Output: Satisfied customers (value added)

30. Project- Entire Transformation
Process
• A project is defined as a
temporary endeavour, undertaken
to meet unique goals and
objectives, usually to bring about
beneficial change or added value.

31. • Operations management is also defined
as the planning, organising, coordinating
and controlling of transformation of inputs
to outputs.
• Project management : is the discipline of
• planning
• organizing
• managing resources
to bring about the successful completion of
specific project goals and objectives.

32.  An operations manager will be responsible for
numerous projects. These will range from
large capital projects to the installation of new
information systems.
 Effectively managing these projects means
delivering them on time and within budget.
 How successful an operations manager is will
be strongly influenced by their project
management skills.

33. Energy Sector Projects
Oil and gas sector projects today involve:
 Uncertainties and risks
 Restrictions on availability of money
 Skilled people, materials, equipment, and
other key resources.
 Highly capital intensive.
 Long lifecycle projects (i.e., hundreds of millions or billions of
dollars over several years before any revenue is produced)

34. Traditional Approach
• Project initiation
stage;
• Project planning or
design stage;
• Project execution or
production stage;
• Project monitoring
and controlling
systems;
• Project completion

35. Project Initiation
• Develop a Business Case –
• Research the business problem or opportunity
• Identify the alternative solutions available
• Quantify the benefits and costs of each solution
• Recommend a preferred solution
• Identify any risks and issues with implementation
• Present the solution for funding approval
• Undertake a Feasibility Study –
• Review each solution to determine its feasibility
• List any risks and issues with each solution
• Choose a preferred solution for implementation
• Document the results in a feasibility report

36. • Establish the Project Charter-
• Identify the project vision and objectives
• Define the complete scope of the project
• List all of the critical project deliverables
• State the customers and project stakeholders
• List the key roles and their responsibilities
• Document the overall implementation plan
• List any risks, issues and assumptions
• Appoint the Project Team
• Set up the Project Office -Project Management
Office (PMO) *if using

37. Project Planning Steps
• Range estimates of work scope (list of all
the tasks included in a specific company's
contract), activity duration, resource
requirements.
• Calculation of activity durations based on
work scope .The durations for the
various tasks are listed and grouped into
a work breakdown structure.

38. • The logical dependencies between tasks are
defined using an activity network
diagram that enables identification of the
critical path.
• The Resource Critical Path/RCP Calculated
by taking into consideration all schedule
constraints including resource and financing
constraints in both the forward and backward
passes of network analysis.

39. Activity Network
Activity Network diagram displays interdependencies between tasks
through the use of boxes and arrows. Arrows pointing into a task box
come from its predecessor tasks, which must be completed before the
task can start. Arrows pointing out of a task box go to its successor
tasks, which cannot start until at least this task is complete.

40. • Predictions of the probabilities of
achieving user defined target schedules
and costs.
The need is to be able to plan, schedule,
monitor and control the projects while
reflecting these uncertainties, risks, and
restrictions in a practical and realistic
manner in the project plans, schedules,
execution methods, and progress reports.

41. Deepwater Development –
The Zia Subsea Project
• Clear understanding of upfront risks is a
key component of accelerated deepwater
development projects.
• The project team defined and documented
all project risks at the beginning of the
project and used that proactive process to
support project planning and decision-
making.

42. Identification of the critical-path
equipment
• The Zia team used a compressed
development process, targeting the subsea
tree and control system as critical long-lead
items to drive the schedule, while ancillary
components and systems, including umbilical,
flowline, and host platform topsides
modification, proceeded in parallel.
A subsea tree monitors and controls the
production of a subsea well.

43. Major components
• Umbilical: an assembly of steel
tubes and/or thermoplastic
hoses.
• Riser: a pipe or assembly of
pipes used to transfer produced
fluids from the
• Umbilical termination
assembly :It provides the
necessary mechanical, electrical
and hydraulic interfaces for the
jumpers with the remainder of
the subsea equipment
• PLET: Pipeline End Termination
support pipeline connector.
Umbilical
Umbilical
termination
assembly
PLET
www.oceaneering.com

44. Single well tied back via dual flow lines to the
host platform
Electro-hydraulic multiplex umbilical with super duplex stainless steel tubes
Umbilical termination assembly
subsea tree and control system
host platform
www.offshore-mag.com

45. Project Drivers
 Early first oil
 Field-proven technology,
 Operator credibility,
 value-based decision making.
 These project drivers, defined and communicated to the project team
early in the field development process, contributed to effective decision
making throughout all project phases.
 As such, the project was deemed schedule-driven, with capital cost versus
schedule trade-off understood prior to execution.
 To achieve predictable operability and an accelerated project schedule,
the team selected only field-proven technology with previous, successful
deployment in the GoM.

46. Project Execution
• The team acknowledged the benefits of the compressed schedule.
• The project team defined, analyzed, and documented risks and
accelerated schedule, and also developed a plan to mitigate
obstacles.
• The project team incorporated industry best-practices and assigned
experienced personnel to facilitate the accelerated schedule and
modified development process.
• The conventional five-step project management process was used
which included several hold points, often referred to as “gates.”
These checkpoints help to ensure that all critical project issues are
addressed prior to the next phase, minimizing project risk.
• The hold points also trigger a summary of findings, including
decisions that support project cost and schedule updates, with
expenditures typically approved one phase at a time.

47. • The team proceeded with overlapping activities .
• The team sole-sourced the subsea tree and control systems,
allowing associated FEED to begin immediately following team
definition of basic subsea architecture and operating philosophy.
• **FEED - (Front-end engineering design including robust planning
and design early in a project's lifecycle i.e., the front end of a
project, at a time when the ability to influence changes in design is
relatively high and the cost to make those changes is relatively low.)
• While the subsea tree and control system progressed in a definition
(FEED) mode, topsides and pipelines underwent alternative
analysis, as a host facility was not yet selected.
• This out-of-phase progression allowed the team to procure subsea
trees and associated control systems at the completion of the
subsea hardware FEED.

48. • The team awarded umbilical supply and
line pipe while production-handling
agreement (PHA) terms were still being
negotiated and topsides facilities design
was still in the FEED stage.

49. Overlapping Activities
Aggressive Schedule Drivers And Use Of
www.offshore-mag.com/ Effective risk management

50. Conclusion
• The project, executed with a small
company team, achieved first oil within 12
months of project sanction, 7 percent
under the approved budget.
• The project utilized a classic application of
a five-step project management process
• Accelerated project schedule to brought a
deepwater subsea field on-stream in a
cost-effective manner.

51.  The reduced cycle time resulted in improved
project economics for independent operator
Devon Energy Corporation (formerly Ocean
Energy, Inc.).
 A clear, up-front understanding of the risks
involved and the effective management of
those risks for the safe, on-time delivery of a
subsea tieback system facilitated the
accelerated schedule.

52. References
• Slacks Nigel and Lewis Mike, Operations Management, Prentice Hall.
(2002)
• Cohen, & Roussel (2005), Strategic supply chain management: the five
disciplines for top performance
• Offshore- mag, (2005), ‘Effective risk management facilitates
accelerated deepwater development’
URL:
http://www.offshore-mag.com/index/article-
display/223829/articles/offshore/volume-65/issue-3/operations-
management-information/effective-risk-management-facilitates-( 13/07/10)

53. • Wikipedia ‘Project Management’
URL:
http://en.wikipedia.org/wiki/Project_management (13/07/10)
• Syque ‘ Activity Network: How to understand it’
URL:
http://www.syque.com/quality_tools/toolbook/Activity/how.htm (14/07/10)
• Oceaneering ‘Subsea Field Development Hardware’
URL:
http://www.oceaneering.com/subsea-products/subsea-field-development-
hardware/umbilical-connection-systems (13/07/10)
• Managementhelp ‘Inventory Management’
URL:
http://managementhelp.org/ops_mgnt/ops_mgnt.htm (3/07/10)

54. • rigzone.com , ‘How Do Subsea Trees Work?’
URL:
http://www.rigzone.com/training/insight.asp?insight_id=302&c_id=17 (15/07/10)
• Wikipedia , ‘Front-end loading /FEED’
URL:
http://en.wikipedia.org/wiki/Front-end_loading (15/07/10)

55. THANK YOU!
Group Members :