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Advanced Solutions in Managing Petroleum Product Distribution
Sundar Venkataraman, Engineering Manager, Advanced Planning and Scheduling Group, Honeywell Process Solutions India Smooth distribution of petroleum products can be streamlined with effective Supply Chain Management (SCM) strategies. However, smooth distribution of petroleum products is not the only purpose of integrating good SCM activities, but it also ensures several advantages such as reduced Crude Cost, Optimum Crude Mix, Minimum Crude Rate, Least Operation Cost, etc. The article provides an insight into the complex Supply Chain Management process, which is extremely crucial for oil and gas companies.

Competitiveness of any manufacturing business involves the need to effectively manage the raw material supply; the ability to optimize processing of the raw materials to produce high quality products and the capability to efficiently distribute the products minimizing costs along the way. When the business is in Oil and Gas and involves exploration, transportation, refining and distribution for an entire country the challenges become quite large and complex. An integrated strategy is needed to “manage” the distribution so that the supplies are evacuated from the source and demand is met at the consuming locations (industrial sites, petrol stations, railway docks, aviation tank farms etc.). A disruption to this supply chain would result in fuel shortages which could cripple the country and its economy. Given that products can be moved by 4 different modes of transport (Ship, Pipeline, Rail and Road), there needs to be a coordinated plan made in advance to fully utilize the installed or leased capacities of each of these transportation modes and meet the demand.

In India, Oil Marketing Companies (all owned by the government) distribute the products from the refineries all the way to sites of consumption using company owned or leased transportation modes (pipelines/trucks). The Oil companies retain the physical product ownership till the secondary depots and the brand till the point of sale. And, it is in their interest to streamline logistics movements to ensure security of supply at the minimum transportation costs. In the event of complete or partial deregulation of petroleum product pricing (especially Petrol and Diesel), private players enter the market which entails market competition. Therefore, supply chain logistics efficiencies will become an even more important factor in achieving cost efficiencies and improving profitability of the enterprise.

In the past and in contemporary times, most of the logistics planning is done on spreadsheets with limited or no consideration of costs and output. With an advanced software solution, one can standardize the planning process and can also capture and minimize the transportation costs involved for serving the same demand. This would help achieve tactical benefits of efficiency (cost savings-transportation and inventory carrying costs) in the distribution supply chain and also help plan strategically for infrastructure improvements like addition of transportation capacities (like pipelines), addition of new tank farm locations etc.

Advanced Solutions for the management of distribution of petroleum products can be software tools for

a. Enabling decision support like deciding optimal sourcing locations for serving a downstream demand during a month (while taking into account all types of industry taxes, distances between locations) or determining how much quantity should move during a month via ship and how much should move via pipeline or rail
b. Directing daily movements of petroleum products in each transportation mode for satisfying operational business needs

While the decision support tools like those in a. take a short to medium term view of the business environment, the solutions like in b. (referred to as scheduling solutions) offer a detailed plan on an immediate to short term view of business operations.

The first step in streamlining the distribution supply chain is to forecast the end user demand by geography and time. This will enable the right set of inputs for other software tools to create the distribution plan and schedule. The next step is to generate the monthly or (weekly) distribution plan using the demand, prices, distances (from a GIS application), taxes and transportation costs for the various modes of transportation, applicable distribution constraints and the supply plan from the refineries. This would be the Master Distribution Plan for the period that will drive the Operational schedule for the company. This can also highlight optimal sources for Product Exchange or Import in cases where a supply shortfall is and end product needs to be imported or procured from another company. The decision variables involved can be understood from the diagram below.

While the plan sets the targets for the rest of the company to follow in execution, it can be supplemented by scheduling tools that help the company implement the plan that was generated. For this purpose, the plan must be provided as a fully selfcontained input to the scheduling tools for a specific time-period of the schedule. The scheduling tool can translate the plan into daily or even shift-wise operation instructions to the execution team. This will enable a closer compliance to the plan and will also give an opportunity to the execution team to highlight deviations from the plan that occurred in execution. Such deviations can be studied by management for better understanding of their business and control over their operations. For some companies, it may be possible to do an integrated plan and schedule in the same step. However, this needs to be closely studied by a supply chain expert prior to the implementation as software tools that exist today, are not designed to model and automatically solve all constraints that could exist within a customer’s business.

Typical benefits of an advanced solution implementation in distribution / logistics are captured below.

The logistics problem faced by Oil companies is similar in nature to the distribution challenges faced in other industries.

However the problem of "Batch" or "Parcel" sizing in distribution is unique to this industry and presents a challenge to standard software tools. Petroleum products can be produced continuously but have to be transported in distinct (by product/ grade), fixed cargo sizes in the different transportation modes (Ships- Compartment Sizes, Pipeline- Min Batch Size, Rail- Wagon size and Trucks-Hold size). Further they also have to be stored in distinct tanks whose storage capacity is fixed by product/grade.

Conventional LP (Linear Programming) and MIP (Mixed Integer Programming) tools are not adept in handling this “Batch/Parcel" sizing in generation of distribution plans/schedule. The situation gets more complicated when “Ullage” or “Available storage space” in tanks needs to be factored in while generating plans/schedules. This is due to the nature of the mathematics involved in the problem. Some of the software vendors have to customize the tool to "fit" the business problem. Another challenge is the demand changes and unpredictability of available transportation capacity when the plan is being implemented. The execution team has to respond to these changes and in doing so, there could be substantial deviations from the original plan (and associated costs).

For technological issues, it is important to analyze and do some pre-work with a domain consultant to design a solution that will be technologically feasible and will deliver business value for the company. During this process, the domain consultant would also look at changes to current planning processes or narrow the scope of the proposed solution and suggest best method and tools that can be followed to derive benefit out of the deployed solution. It is recommended that companies invest upfront time to study the process and constraints and define a scope (taking external help if necessary) before the actual implementation of any tool.

For uncertainties in demand and transportation capacities, companies have in most or all cases used inventory as a buffer at multiple locations. The more the uncertainty, the more the inventory that needs to be carried in the system to buffer against uncertain conditions. This comes at a huge cost and hits the bottom-line of the company. Some companies hedge against this by using some captive markets, contracts or loyalty programs to ensure a steady demand. And others may also use a dedicated fleet to hedge against uncertainty in transportation capacities. In all cases, planning has to be followed by rigorous execution, checking the output vs. plan and closing the gap between plan and actual by correcting the plan and the operational schedule for the next cycle.