Case Study

Supply Chain Characteristics of the Petroleum Industry: The Indian Context

Siddharth Varma*. Subhash Wadhuia** andSG Deshtnukh*** The process industry forms an important component of the Indian economy. The petroleum industry in particular plays an important role in the economic development of the country. After liberalization of this industry, performance of its supply chain has become all the more important. This paper looks at the importance of supply chain management in the process industry and further tries to distinguish the petroleum industry from normal discrete manufacturing industry. The unique features of petroleum industry call for a special treatment of the supply chain. This paper further tries to identify the non-value added activities in the petroleum industry, lohich makes it inefficient, and suggests some mechanisms, which could help in improving the supply chain performance.

The process industry in India is a vital component of the rapidly growing Indian economy. It consists of industries like basic chemicals, petrochemicals, petroleum, fertilizers, pesticides, etc. Among the process industries, the petroleum industry holds critical importance with both industry and transportation depending upon it. In order to understand the level
*

of demand for petroleum products in India, in a global perspective a comparison of per capita consumption ^f petroleum products in the various ^^^^.s of the world has been presented jn Table 1. With the per capita consumption level in India being only about 60% of that in China, a strong growth potential exists in India, given particularly a large population base of over a billion.

Vice-President, Academic Administration, University of Petroleum &. Energy Studies, New Delhi, India. E-mail: sid38in@yahoo.co.in * * Professor; Department of Mechanical Engineering, Indian Institute of Technology, Hauz Khas, New Delhi, India. E-mail: swadhwa@mech.iitd.emt.in *** Professoi; Department of Mechanical Engineering, Indian Institute of Technology, Hauz Khas, New Delhi, India. E-mail: sgdeshmukh2003@yahoo.co.in

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Table 1: Per Capita Consumption of Petroleum Products

Country Per Capita Consumption (in kg per annum)

paper attempts t o enhance the understanding of the petroleum industry supply chain. The paper has the following objectives: Understanding the importance of supply chain management in the petroleum industry. Identifying distinguishing features of the petroleum industry supply chain vis-i-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.

India China North America World average

98 165 2,610 585

Source: www.ril.com

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 limited freedom to revise the prices of motor spirit and High Speed Diesel (HSD). The NELP (New Exploration and Licensing Policy) has been put into place and more and more international operators are considering investing in India. 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. The Petroleum, Oil and Lubricants (POL), product consumption is slated to touch 155 Million Metric Tonnes (MMT) by 2006-2007 and 200 MMT by the year 2010 (HPCLs perspective plan: Vision 2020). Petrochemical industry in India employs around 40,000 people directly and around 4 lakh indirectly. This sector caters to a whole host of industries like oil, gas, plastics, agro chemicals, Pharmaceuticals, clothing, housing, transportation, communication, healthcare, etc.

CONCEPT OF SUPPLY CHAIN MANAGEMENT

The Supply Chain Council defines a supply chain as a "collection of activities a company uses to plan, source, make and deliver a product or service". Supply chain management aims at managing the activities in the supply chain to improve profitability for the organization. Supply chain management as a new business paradigm was motivated by the interest in integrating procurement, manufacturing and distribution activitiesintegration made possible by advances in IT (Shapiro, 2004). SCM is more than a simple tool to evaluate and optimize a supply chain; it is a complex, structured business relationship model. It takes into consideration all aspects of the events required to produce the company's product in the most efficient and cost

OBJECTIVES OF THE PAPER

Very limited literature is available on petroleum industry supply chains. This

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SUPPLY CHAIN CHARACTERISTICS OF THE PETROLEUM INDUSTRY: THE INDIAN CONTEXT effective manner possible (Quiett, 2002). According to Mohanty and Deshmukh, (2005), another very comprehensive definition of supply chain management is that it is a loop : It starts with customer and ends with customer. Through the loop flow all materials, finished goods, information and transactions. It requires looking at business as one continuous, seamless process. This process absorbs distinct functions such as forecasting, purchasing, manufacturing, distribution, sales and marketing into a continuous business transaction. to their bottomline. This is particularly important in case of the petroleum industry, which is organized around highly specialized business processes that encourages fragmentation (Schwartz, 2000). Chemical supply chains are typically non-linear in nature. These are complex webs of supply and demand, driven by both long-standing relationships and cost pressures. Supply chain optimization at a strategic and operational level is a value creating opportunity for chemical companies and a potential source of competitive advantage (Tomkins, 2003). The same holds true for petroleum companies, which are also very complex, and supply and demand are affected by relationships and cost pressures. The petroleum industry supply chain is schematically shown in Figure 1.

IMPORTANCE OF SUPPLY CHAIN MANAGEMENT IN THE PETROLEUM INDUSTRY

All process industries are asset intensive and so is the petroleum industry. Since 1994, the average industrial profit margin, according to Standard & Poor's, has been 14.2%. For the same period, oil companies have earned just 7.2% (Schwartz, 2000). In case of chemical companies, the supply chain can account for up to 70% of the company's overall costs (Vlasimsky, 2003). Therefore, if companies can bring about substantial improvement in their supply chain performance, it can be a big boost

UNIQUE FEATURES OF THE PETROLEUM INDUSTRY SUPPLY CHAIN

The petroleum industry has certain distinguishing features, which differentiate it from the supply chains manufacturing units of product. These features are discussed below: Raw Material Supplies: As compared to the rest of the industry, process industry has a rather limited choice of suppliers for raw material. Supplies in petroleum industry are dominated by

Figure 1: Schematic Diagram of Petroleum Supply Chain

Crude Supplier

Port

Refinery

Storage Installation

Retail Outlet

Customer

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SOUTH ASIAN JOURNAL OF MANAGEMENT cartels. It is a sellers market as far as supply of raw material is concerned. This puts manufacturers at the mercy of the suppliers to a large extent. Moreover, international pressures may further increase uncertainty about raw material supplies. Raw Material Prices: Raw material prices in the process industry are highly unstable and fluctuating on weekly or even daily basis. In contrast, the manufacturing sector enjoys rather stable prices of raw material. Fluctuating raw material prices directly affect the supply chain costs and prices of final product. Moreover, fluctuations in prices of crude oil may take a long time to finally manifest as increase in price of the finished product because it may take several weeks before the oil tanker reaches the shores for unloading. Prices are affected by trading considerationspolitical stability, OPEC rulings and terrorism. Often prices are affected by what traders believe will happen in the future. The rise in crude prices in the international market is an example of this mentality. There has been a general insecurity of crude supplies whereas no such thing has actually happened. Non-discrete Inventory: Inventory does not exist as discrete packages. Inventory is not packaged and typical techniques for tracking inventory, such as Stock Keeping Unit (SKU) or part numbers, bar codes, radio frequency do not yet apply to crude or refined products. Products like petrol, diesel and kerosene are measured in kilolitres whereas products like natural gas are measured in cubic metres.

Reverse Production Flow: Compared with other industries, 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. On the other hand, in other industries several components are assembled to form a single unit of product. For example, an automobile may be made by assembling thousands of smaller parts. High Transportation Costs: In the process industry supply chain, percentage of transportation cost is very high. Transportation costs for chemicals may be as high as 80% of the product cost. This makes it critical for chemical companies to bring transportation costs under control (Andel, 1998). In the petroleum industry too, transportation costs occupies a sizeable portion of total cost of the product. There are various means of transportation: ships, railway wagons, road tankers and pipelines. In the petroleum industry, transportation costs about 20% of the production cost. Manufacturing Process and Capacity Flexibility: The manufacturing process in the petroleum industry, as in any other process industry, is continuous and cannot be stopped at will as in case of discrete manufacturing. Process industry being continuous in operation is less flexible. The refineries need to run twenty four hours in a day, seven days in a week with hardly any scope of changing capacity in the short-term. As a result, refineries are marked with high capacity utilization. In contrast, discrete manufacturing industry is in a better position to change output by reducing number of hours of operation or by resorting to overtime.

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SUPPLY CHAIN CHARACrrERISTICS OF THE PETROLEUM INDUSTRY: THE INDIAN CONTEXT Length of Supply Chain: The product. This makes material petroleum industry has a long supply requirement planning in the latter case chain commencing from the dispatch more tedious. of crude by ship from a supplying Integration of Supply Chain country, which may take several weeks Partners: Integration of suppliers as to reach the Indian shores. During this well as customers and distributors is long supply chain petroleum is traded more difficult in the petroleum several times. Unlike other supply industry supply chain. Cost pressures chains, the supply chain path from are the driving force in the supply crude oil to the consumer is extremely chain. A silo mentality exists not only complex, and the linkages between across the supply chain but also within raw crude and consumer must be the functions of an organization. managed over many weeks Risk of Product Contamination / (www.CRMBuyer.com, 07/05/04). Adulteration: The finished products Postponement: Postponement can be like petrol and diesel in the petroleum used as an effective strategy to provide industry are at higher risk of mass customization and also to keep contamination/ adulteration. For inventory under control by the example, kerosene is easily miscible manufacturing sector. However, in case with diesel and hence, diesel can easily of the petroleum industry, the product be adulterated with kerosene. As is generally not suitable for kerosene is cheaper than diesel, this postponement, as any processing at a can give huge financial losses to the later stage in the downstream supply oil companies while at the same time chain seems difficult if not impossible. providing the customer with impure Moreover, the product is highly product. This makes it necessary to standardized with little scope of perform quality checks at various product variety. This becomes a vicious stages. For example, for petroleum cycle, high standardization products, quality check would be discourages postponement and absence required at the following stages: of postponement encourages production of highly standardized - Dispatch at the refinery. product. - Receipt at the storage installation. Material Requirement Planning: - During receipt and storage at the Process industries have very few retail outlet. ingredients as raw materials. In the The rest of the manufacturing industry petroleum industry, the major raw is not prone to such risk. material is crude oil. Hence, there is hardly any requirement for material Information Strategy: Traditionally, the process industry has been a laggard requirement planning. O n the other at utilizing information technology as hand, discrete manufacturing compared to its counterparts in the industries, e.g., the automobile manufacturing sector. Lately, however, industry have hundreds of components companies have started using ERP for going into the final assembly of the
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internal integration and B2B exchanges for trading purposes. Needless to say, visibility across the supply chain is low. The option to trade or exchange crudes, intermediates and products at key points along the chain means that companies have to balance a series of complex and interlinked economic decisions to maximize their margins. The use of iriformation technology can be of great help in this case. Flexibility: Process industry supply chains are highly inflexible both in terms of volumes handled and in terms of product variation/customization. Transportation is in bulk as transportation costs represent a large percentage of total production cost. Hence, small volumes for distribution are impractical from a financial point of view. Products being highly standardized on account of continuous production at the plant, there is not much scope for product variation. Neither is there any flexibility in transportation as the tankers and equipment used for one product cannot be used for another for fear of contamination. Agility of Supply Chain: Process industry supply chain is slow to respond to environmental changes. The petroleum supply chain is a good example of this. This is because of various reasons as below: Length of supply chain is large. Petroleum industry suffers from silo mentality with little information sharing between departments. Complexity of the supply chain makes decision making an equally complex exercise.

Inventory Carrying Costs: In the petroleum industry, inventory holding costs are very high for various reasons. First of all, the product is moved in bulk whether it is raw material or finished product. For example, petrol or diesel is moved from refinery to the storage installations in rail wagons or through pipelines. Thus, inventory moved is in massive amounts. Secondly, commodities like petroleum are critical to the economic activity of any country and so it becomes imperative to maintain adequate stocks. Thirdly, visibility in the supply chain is lower than in case of other products. Finally, the long supply chain also gives rise to increased inventory holding costs in the supply chain. Thus, the petroleum industry is stuck with high inventory carrying costs. Physical Risks: The petroleum industry is prone to higher physical risks. This is because it often deals with high temperature, pressures or inflammable material. Risk management costs are, therefore, higher in the petroleum industry supply chain. This could be in the form of insurance costs or costs incurred in the form of safety measures like maintaining safety distances or having fire fighting facilities. Type of Supply Chain Reqviired: The petroleum industry deals with highly standardized products, which have very long product life cycles. In fact, several products like petrol and diesel at the moment show no signs of reaching the decline stage. These are highly functional products. According to Marshall Fisher's categorization, functional products require efficient supply chains. No wonder that the focus of supply chain in this industry has always been efficiency. However, the petroleum

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SUPPLY CHAIN CHARACTERISTICS OF THE PETROLEUM INDUSTRY: THE INDIAN CONTEXT industry supply chain is full of uncertainty regarding supply of raw materials and decision-making is very complex. Manufacturing decisions may be influenced by operating efficiencies, transportation costs and production schedules. In such a case, what is required is a supply chain that is able to adjust itself to the changing environment. In other words, an Adaptive Supply Chain (ASC) is required. Major strategic decisions in the process industry, supply chain could be regarding what products to be manufactured for which markets and customers or about using assets for minimizing cost of product. At the operational level, decisions could be regarding what assets to be used for making a particular product, minimum inventory requirements to maintain a particular service level or transport routes to minimize cost while maintaining delivery promises. In order to take these decisions, immediate access to detailed information about balance between supply and demand is required. Adaptive supply chains help companies focus on four key elements (Tomkins, 2003): 1. Process: Design and alignment of processes, which drive supply chain management. 2. People: Communication and change management to transform the organization. 3. Technology: Real time connectivity and the use of best in class applications. 4- Performance Management: Integrated and holistic performance metrics supported by decision management tools. Criticality of Supply: Supply of petroleum products is critical in nature. Any failure to supply can paralyze the economic activity of tbe country. Needless to say, there is a lot of pressure on the oil companies to maintain continuous supply of finished products. Tbis further leads to increased inventory holding costs. As per international normis (Intemational Energy Agency), storage of 90 days of net oil imports cover is required to be maintained. Tbese stocks could either be of crude oil or products or a mix of crude oil and products. The stockholding may be through commercial storage, government stocks or stocks held through specified agencies. A summary ofthe factors differentiating tbe process industry supply chain from tbe regular manufacturing supply chain is given in Table 2.

Table 2: Differences between Petroleum Supply Chain and Manufacturing Supply Chain
S. No.
1. 2. 3. 4.

Attribute
Stability/ predictabi 1 ity of raw material supplies Raw material prices Type of inventory Production flow

Other Manufacturing Supply Chain

High Stable Discrete Several items assembled to product

Petroleum Supply Chain

Low due to international pressures. Unstable and often fluctuating. Non discrete/bulk Single raw material form processed into several products (Gond...)

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Table 2: Differences between Petroleum Supply Chain and Manufacturing Supply Chain
S. No.
5. 6. 7. 8, 9. 10.

(Contd...)

Attribute
Transportation costs Manufacturing process and capacity flexibility Length of supply chain Postponement Material requirement planning Integration of supply chain partners

Other Manufacturing Supply Chain

Low Discrete manufacturing with lot of flexibility Relatively short Much easier Tedious More commonly found High

Petroleum Supply Chain

Continuous with very little flexibility Much longer Very difficult Very simple Difficult to achieve

n.
12. 13. 14. 15. 16. 17. 18,

Risk of contamination Use of IT Flexibility Agility Inyentory carrying costs Physical risks Required supply chain Criticality of supply

Low Extensive More commonly found Easier to achieve Lower Lower Efficient or responsive Low

High Laggards Very difficult Not agile Very high Very high due to nature of product Adaptive supply chain Extremely high

THE PETROLEUM SUPPLY CHAIN IN INDIA

The petroleum supply chain starts with the sourcing of crude oil. India's crude oil requirements are met largely through imports. India imports 70% of its requirement of crude petroleum. The increasing crude prices have adversely affected the petroleum industry with state owned oil companies reporting losses since market prices of petroleum products in India still do not reflect the crude prices. The fluctuating prices of crude from August 2005 to August 2006 have been graphically depicted in Figure 2. Price of crude, which was close to US$60 per barrel in August 2005 reached US$78 per barrel in August 2006.
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Figure 2: Fluctuating Prices of Brent Crude during August 2005-August 2006

Source: www.infraline.com

Presently, 67% of India's crude oil imports come from the Middle East region and in the event of any difficulties in the Middle East, crude oil imports would be affected. To safeguard against such

SUPPLY CHAIN CHARACTERISTICS OF THE PETROLEUM INDUSTRY: THE INDIAN CONTEXT disruptions, strategic reserves of crude oil need to be built up in the country. Tbis is also in line witb tbe international practice followed by various import-dependent countries, including, USA, Japan, Germany and Soutb Korea (source: www.infraline.com). Storage capacity of crude oil and major products is given in Table 3. of tbe 10* Five Year Plan, it is expected to reacb 141.7 MMTPA (source: Economic survey of India, 2005). Tbe growtb of petroleum production in tbe previous years is given in Table 4. Wbile India imports 70% of its crude requirements, it is not only self-sufficient in refined petroleum products but also bas an exportable surplus of sucb products.

Table 3: Storage Capacity of Crude and Major Products in India

Storage Capacity 2004-05 Storage Capacity of Crude Oil and Major Products with Oil Companies: Crude oil Weighted average for major products Total 24 days 36 days 60 days 33 days 50 days 83 days Consumption Basis Ne t Import Basis

Projections by the end of the lO"* Five Year Plan (2006-07) Storage Capacity: (i) With oil companies (both crude oil and products) (ii) Proposed strategic crude oil storage of 5 MMT* Total 47 days 14 days 61 days 72 days 19 days 91 days

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

Tbe crude from indigenous as well as otber sources is pumped to tbe refineries tbrougb pipelines wbere it is processed tbrougb fractional distillation. Tbe crude on fractional distillation gives numerous products ranging from petrol and diesel to LPG and bitumen. Witb 18 refineries in tbe country (17 in tbe public sector and one in tbe private), tbe refining capacity since April 1, 2002, bas increased from 114.67 MMT per annum (MMTPA) to 127.37 MMTPA as on October 1, 2004. By tbe end

Table 4: Production of Petroleum Products

Year

Production Production Growth Rate (percentage) (MMT) 104.3 108.7 117.6 91.3 4.8 7.4 8.2 6.4

2001-02 2002-03 ~~2003-04 2004-05

(April-Dec 2004)

Source: Economic Survey of India 2005.

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SOUTH ASIAN JOURNAL OF MANAGEMENT The finished product is transported from the refineries to the installations through pipelines or railway tank wagons. From the installations the finished product is further distributed to retail outlets for sale to customers. Transportation costs in India account for about 20% to 25% of the total cost of the product. Table 5 shows the share of various modes of

demand for petroleum products is ever increasing. In order to cope with this demand, refineries in India are run at full capacity. Some data pertaining to capacity utilization of refineries in India is given in Table 6. A constant supply of petroleum products is required for the growing

Table 5: Share of Various Modes of Transport in Petroleum Sector in India

Mode

Unit MMT

1993-94 15.3 25.2 26.1 42.9 14.5 23.8 4.9 8.1

1994-95 17.9 27.3 28.1 42.9 14.9 22.8 4.6 7.0

1995-96 22.2 30.3 29.3 40.4 15.5 21.4 5.5 7.6

1996-97 23.1 29.9 29.1 37.7 19.2 24.9 5.8 7.5

1997-98 22.2 26.4 31.8 37.7 21.1 25.1 9.2 10.9

1998-99 25.4 28.0 33.2 36.5 23.9 26.3 8.3 9.2

Road %

MMT
Rail %

MMT
Pipelines
7o

MMT
Coastal %

Source: Workshop on Transportation of Dangerous Goods, October 18, 2001, New Delhi.

transportation in movement of petroleum products in India. In developed countries, pipeline transportation accounts for about 50% to 60% of the total volume transported. However, it is evident from table 5 that share of pipeline transportation is much less in India. Currently in India, the share of railways is about 40%, the share of road transportation is about 18% and the share of coastal transportation is about 12%. Pipelines account for about 30% of the share. Petroleum industry being a process industry, has little scope of flexibility in term of capacity utilization. Moreover,

Table 6: Percentage Utilization of Refineries in India

Company Percentage Utilization of Installed Capacity (January 2005) 87.3 113.9 105.6 140.3

Indian Oil Corporation Ltd. Hindustan Petroleum Corporation Ltd. Bharat Petroleum Corporation Ltd. Reliance Petroleum Ltd.

Source: www.infraline.com

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SUPPLY CHAIN CHARACTERISTICS OF THE PETROLEUM INDUSTRY: THE INDIAN CONTEXT economy of India. There is a strong governmental pressure to maintain this supply. Due to criticality of supply and length of the supply chain, a large inventory is required to be kept by the OMCs (Oil Marketing Companies) in India. Inventories of major petroleum products in India as on September 1, 2006 are given in Table 7. The inventory holding cost of just these tbree products will go into millions of Rupees.
Table 7: Inventory of Major Petroleum Products in India as on September 1,2006
Product MS (petrol) HSD (diesel) SKO (kerosene) Inventory (TMT) 727 Inventory Cover (Days) 44 35 30

Contamination of product is a major problem in the country. In India, kerosene is available at a price much lesser price than that of diesel or kerosene. Kerosene can easily be mixed with petrol and diesel without any visible change in the product. Hence, adulteration of diesel/petrol with kerosene is a common problem. In India adulteration of petrol and diesel is a big ticket scam that involves an annual recurring loss of at least Rs. 10,000 cr to the exchequer (Ramchandran, 2005). Since the petroleum industry is dealing with highly flammable products, risk management costs are high. Risk management cost is further aggravated by the huge inventories in the supply chain. The company-wise details of total sum insured and premium paid by the six major Oil PSUs during the last few years are given in Table 8.

2750
727
New Delhi.

Source: Petroleum Planning & Analysis Cell,

Table 8: Insurance Premiums Paid by Major Oil Companies in India

2001-02
Company Sum Insured

(Rs. in cr)
2004-05 Sum Insured 71,545 Premium Paid 44 5 22 84 30 17 302

2002-03 Sum Insured 69,095 1,829 6,238 73,059 34,486 10,230 4,397 Premium Paid 254 3 19 83 46 25 460

2003-04 Sum Insured 68,400 3,788 10,023 79,246 36,092 12,780 2,10,329 Premium Paid 202 2 21 88 42 24 379

Premium Paid 127 3 16 73 40 15 274

ONGC OIL GAIL IOC HPCL BPCL Total

68,775 1,391 7,523 60,103 29,144 9,365 1,76,301

4,020
10,681 96,572 39,396 13,510 2,35,724

Source: www.infraline.com

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The oil marketing companies in India to port congestion, these cargo ships have been slow in adopting IT for effective have to often wait at the harbor before supply chain management. Bharat they can unload the crude. This Petroleum Corporation Limited (BPCL) waiting leads to increase in inventory was amongst the earliest of the energy holding within the supply chain. companies to implement an ERP system. Moreover, demurrage is required to be Whilst there had been some attempts by paid to the shipping company if the other organizations to implement EKP, it unloading has not been done within was the first time that ERP was the stipulated time. encompassing the entire operation of an Waiting may also occur while finished integrated downstream oil marketing product is sent to storage installations company involving over 200 locations by rail. T h e tank storage at the across the country. BPCL initiated it installation at that point of time may towards the end of 1996 with the help of not be able to accommodate the Arthur D' Little Inc., which suggested incoming load. This may again lead to formation of SBUs. This change payment of demurrage to the railways. necessitated effective integration, which could only be brought about by Additional Quality Checks: Owing to implementing ERP. The estimated the nature ofthe product, adulteration quantitative benefits of implementing usually happens in case of petroleum ERP in BPCL came to Rs. 42 cr per year products like petrol and diesel. Hence, (Kaul, 2006). quality checks are required not only NON-VALUE ADDED ACTIVITIES IN THE PETROLEUM SUPPLY CHAIN The just in time philosophy in production identifies seven prominent types of wastes. These are: overproduction, waiting, transportation, inventory, processing, motion and production defects. The Indian petroleum industry is stuck with some of these wastes or non-value added activities, which reduce its efficiency. These are: Waiting: Crude oil is often imported, as India is unable to satisfy the demand for crude oil through indigenous production. This crude is transported in cargo ships, which are to be unloaded at the port. As compared to other intemational ports, Indian ports are unable to handle much traffic. Due
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before dispatch from the refinery but also after receipt at the storage installation. Adulteration is also possible in transit from storage installation to the retail outlet. Thus, some sort of testing is required to be done at the retail outlet. In fact, after the product has been unloaded at the retail outlet, there is the possibility of the retail outlet owner adulterating the product with cheaper products like kerosene. Till date, this adulteration has not been checked effectively. Use of common pipeline for transporting different products leads to a small portion of product being "degraded". Again testing needs to be done after product is received through pipeline also. Holding of Huge Inventories: Process

industries by the very nature of the

SUPPLY CHAIN CHARACTERISTICS OF THE PETROLEUM INDUSTRY: THE INDIAN CONTEXT production, work continuously and inventory is being built up continuously. As a result, product is made to stock and mammoth inventories are being kept at refineries and at storage installations. In transit, inventories are also huge. T h e inventories throughout the supp'ly chain add up to a massive amount. Moreover, 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: Over production is also one of the wastes identified by Just in Time QYT) systems. The ideal lot size in JIT is one. This minimizes inventory investment and shortens lead times. In contrast, process industries like petroleum industries have continuous process plants, which need a continuous supply of feed stock, resulting in the production of several downstream products, some of which may not have an immediate market requirement. There is 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. For the petroleum industry it is critical due to the following reasons: The chemical industry in general and petroleum industry in particular has global markets and suppliers/ supply chain partners who are widely dispersed geographically. In such a case, timely flow of accurate information can affect performance of the supply chain to a large extent. Companies rely on accurate forecasting of demand, but in most cases are disconnected from actual demand. In most instances, this process can be described as anything but closed loop. Integration of demand chain information is critical to success or failure of any SCM strategy (Brandon, 2002). Often the process industries may make a wrong product, at the wrong time and at the wrong place. 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 modeling, design and monitoring of engineering assets with scheduling, supply chain, trading a fulfillment via multiple flows of information between stages in life cycle of products, bringing huge efficiencies. By introducing visibility in the supply chain the optimized enterprise can extract further efficiencies through the use ofthe Intemet (Adshead, 2002). Timely and accurate information is more important to shareholder value than simple physical assets. The flow of information represents the key to customer-segmentation

ROLE OF INFORMATION TECHNOLOGY IN THE PETROLEUM INDUSTRY SUPPLY CHAIN

Information sharing is essential to any successful supply chain management. Use of IT can make economic contribution to the whole supply chain. It important to use appropriate information technology.
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strategies and effective demand management, which will lead to increased top line revenues and reduced cost of sales (Brandon, 2002).

IMPROVING PERFORMANCE OF THE PETROLEUM SUPPLY CHAIN: SOME SUGGESTIONS

Though the petroleum supply chain is inherently different and handling it, will never be as easy as handling the supply chain of discretely manufactured products, there are a few steps, which could alleviate the situation to a large extent. These are discussed below: Raw Material Supplies: Since India is dependent upon imported crude for a major part of our requirements, the government should consider formulating a long term arrangement with some ofthe oil producing nations. This calls for strategic policy formulation and political will. Moreover, in order to take care of price fluctuations, the government should allow the petroleum companies to use hedging as a tool for finalizing deals involving purchase of crude oil. Transportation Costs: Pipeline transportation presents a cost effective way of moving petroleum products over long distances, provided these are properly utilized. In India, use of pipelines is limited as compared to developed nations. This is due to absence of an extensive network of pipelines. The petroleum companies need to aggressively initiate projects for laying pipelines to reduce transportation costs. Product Contamination: Product contamination generally occurs at the

retail outlets. Often kerosene is mixed with either petrol or diesel, as the price of kerosene is lesser than either of the other two fuels. By formulating a pricing scheme, which does not allow kerosene to be available in the open market at cheap rates, this problem could largely be avoided. Moreover, oil companies need to implement quality checks at the retail outlets more strictly. Length of Supply Chain: As mentioned earlier, the length of the supply chain is a long one and can extend up to months if the crude is being imported. The congested ports of India further aggravate the problem. There could be some relief, if government improved facilities at the ports and enhanced their capacity, so that more tankers could berth at the harbour, which could get rid of avoidable delays in unloading tankers carrying crude oil. Inventory Carrying Costs: As already mentioned, it is the govemment policy to carry huge inventories of crude and petroleum products. The govemment should aim at reducing the minimum safety stock, which oil companies are supposed to keep. With a reliable transportation system in place and quick information exchange, this problem can be tackled. Oil exploration for sourcing indigenous crude must be encouraged as dependence on imported crude leads to higher safety stocks, which increases inventory carrying costs. The govemment has already taken steps in this direction by announcing the New Exploration and Licensing Policy

SUPPLY CHAIN CHARACTERISTICS OF THE PETROLEUM INDUSTRY: THE INDIAN CONTEXT literature revolves around improvement in sharing of information. Visibility in the supply chain seems to be a prominent issue and process optimization of each individual enterprise is a key challenge Integration of Supply Chain for the IT function. Even though Partners: Information technology is a petroleum industry deals with massprerequisite for effective supply chain produced standardized products, an management. The importance of this efficient supply chain is just not enough. has already been discussed in the The answer lies in adaptive supply chains, preceding paragraphs. Oil companies which make a more holistic approach to should aggressively use information supply chain optimization (Tomkins, 2003). technology to integrate suppliers and Collaborative commerce is emerging as an customers. Effective use of ERP can attractive and potentially significant means of decreasing costs and increasing revenues help in this regard. (Challener, 2003). In the near term, process CONCLUSION oriented firms can use several methods to It is amply clear that the petroleum turn traditional MRP systems into industry supply chain has certain peculiar capacitated MRP systems (Schuster et al., characteristics, which make it different 2000). Driven by e-commerce, the from other manufacturing sector supply chemical industry is expanding beyond chains. These peculiarities make supply serving its traditional business channels, chain management in the petroleum to take advantage of emerging industry a challenging task. It is also intermediary channels (Eckstut and evident that lot of scope exists in Boulanger, 2000). improving supply chain management in There does not seem to be much work the petroleum industry. T h e Indian petroleum industry, which is a good done on performance evaluation of example, was in the shackles of petroleum industry supply chain. government control for several decades. Considering the old adage, only those Since liberalization, the industry has things are done which can be measured, it limited freedom but at the same time it is is important that a way of measuring supply vulnerable to competition. It needs to chain performance specifically for the focus on improving the performance of its petroleum industry be formulated. This is supply chain if it has to survive the more justified considering the differences onslaught of competition from between the petroleum industry supply multinational corporations. chain and the discrete manufacturing The number of published literature on supply chains. In the Indian context, process industry supply chain management liberalization of the petroleum industry is scarce, more so in case of petroleum makes it all the more important to focus supply chain. Much of the available on improving supply chain performance. (NELP I V ) . Use of information technology will bring about visibility in the supply chain and will help in reducing safety stocks and inventory carrying costs.
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11. Mohanty R P and Deshmukh S G (2005), "Supply Chain Management: Theories and Practices", Biztantra, Delhi, pp. 14. 12. Quiett William Frank (2002), "Embracing Supply Chain Management", Supply Chain Management Review, pp. 40-47. 13. Ramchandran Rajesh (2005), "Impure for Sure", Outlook (April 4), pp. 18-22. 14. Schuster Edmund W, Allen Stuart J and D'ltri Michael P (2000), "Capacitated Materials Requirement Planning and its Application in the Process Industry", Journal of Business Logistics, Vol. 21, No. 1, pp. 169-187. 15. Schwartz Beth (2000), "The Crude Supply Chain", Transportation and Distribution, Vol. 4 1 , No. 8, pp.49-52. 16. Shapiro Jeremy F (2004), "Strategic Planning: Now More Important than Ever", Supply Chain Management Review, pp. 13-14. 17. Tomkins Andy (2003), "Chain Challenge", European Chemical News (December 23-January 12), pp. 19-21. 18. Vlasimsky Stan (2003), "Supply Chain Management: Changing the Status Quo in Chemicals", Chemical
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