Logistics in Petroleum and Chemical Industry

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Logistic and Warehouse Management Assignment Logistic in Chemical and Petroleum Industry

Submitted to Prof. E.Anand

Submitted by Hrishikesh Lule - 56 Nibir Mahanta - 63 Pramod Hiremath -71

Kirloskar Institute of Advanced Management Studies, Harihar.
2011-2013
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INTRODUCTION
The chemical industry is an important driver of the global economy, with estimated global annual sales of €1871 billion in 2012. The EU remains a leading chemicals production area, valued at €449 billion and accounting for 24 per cent of world chemicals production in 2012. Europe’s share of the global chemicals production dropped however from 32 to 24 per cent between 2002 and 2012, due to stronger growth in other parts of the world. Logistics are a key aspect of the chemical industry as production and consumption locations are mostly separated. Efficient, competitive and sustainable logistics are therefore of great importance for its future development. Logistics are typically quite agile, flexible and adjustable and as such, provide opportunities to respond to market changes quickly and effectively. For the chemical industry the potential from integrated supply chain and logistics, and hence the need for it, is less clear than for other sectors. This is because of the massive scale to which the industry works and the history of functional excellence in transportation. Some commentators on the industry are already pronouncing integrated logistics as a passing ‘fad’. Yet the business environment of falling prices, poor returns on capital, overcapacity, corporate consolidation and the move to the East are all factors that point to supply chain management as being an essential ingredient for corporate survival. The fact that supply chain costs are around 50% of corporate value add, and rank the highest of all sectors by this measure, also supports the view that there is potential in taking a business wide, as against a functional, view of the components of the chain. The challenge in the chemical sector of taking this approach is the high degree of functional tension between securing low unit costs through economies of scale in plants and logistics and the basic principle of supply chain management - continuous flow in minimal batch quantities. Changes in network design, customer delivery commitments and manufacturing to unlock business value will necessarily challenge the status quo of reported unit costs and commercial operations. But the value of eliminating waste can be many €’0s per tonne and there are few boards that can afford to ignore this opportunity. It is remarkable that an industry that is built around the management of process and materials flows in plants has been slow to grasp the principle of organisational processes and logistics flows. But based on the success of such methods in other sectors, this is the future; it enables the identification of waste and unnecessary margin erosion across the chain and the functional re-alignment to eliminate it. The operational menu for world-class attainment is a complex one, involving potentially many parallel initiatives. However, the fundamentals behind these initiatives are straightforward – functional excellence, synchronised and cross functional business processes, time compression, information visibility and accuracy, consistent planning through the chain, segmentation of the chain by customers and product characteristics, an optimised network and well defined KPIs.

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Securing this world-class vision is like training a champion rowing ‘eight’. It requires all the attributes of training and developing a team including individual excellence. As with professional sport, the rewards at the top can be remarkable.

Transporting chemicals are subject to stiff government rules and regulations. From a logistics standpoint, it’s an industry still basically operating in the dark ages. Transportation management systems (TMS) that provide visibility in the supply chain are not widely implemented within the chemical industry. The reason: evaluating the cost/benefit tradeoffs of sophisticated transportation technology and the high cost of buying and implementing these solutions has far outweighed the savings required to fund them. Chemical manufacturers, shipping tank-trucks and rail cars full of chemicals, and few, if any, LTL shipments, are not able to tie substantial, direct, hard-dollar savings to the investment in transportation technology. Therefore, chemical transportation managers are lobbying for technology to provide shipment visibility to their customers, as well as improved transportation controls and reporting, and drive cost savings (2 to 5% versus 15 to 25%) to their companies. Previously, they were not able to build a business case that paid for itself. The benefits of TMS for chemical manufacturers are automating the entire freight execution and payment process; centralizing control over transportation, even at remote locations; the ability to have notification and alerts when primary carriers decline shipment tenders; the ability to have alerts regarding late pickup and delivery, and other service issues; the detailed tracking and reporting of carrier costs and service performance; and streamlined and centralized load management and freight payment.

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The Relevance of Supply Chain
The capabilities and potential arising from what we are now calling supply chain management inspire all of these companies. It is difficult to pick up the financial pages without finding a reference to the supply chain or an annual report that does not mention it.

It is the only way to enable a company to manage its value-add in an integrated way. The chart below shows just why it must be relevant to the Petroleum and Chemicals sector. These are the sectors with the highest supply chain value-add measured as the % of the costs and margin added by the company itself; so it excludes feedstock and materials purchases.

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Cause and Effect Diagram for Chemical Logistics

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This shows diagrammatic representation of the Downstream Supply Chain. All the important functions in this business are enabled by IT applications which optimise the different portions of the value chain.

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Supply and Distribution options for outbound logistics

Generally refineries are placed near the oil wells and from the refineries the final petrochemical products are transported by the following ways:-

1. Shipping 2. Rail 3. Truck 4. Pipeline

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Some of the best practices in transportation by rail are as under:1. Develop and implement a securement policy that includes pre-loading inspections, post-loading inspections and a corresponding safety checklist. 2. Inspect valves/domes for tightness- This is a leading cause of leaks/spills in rail transportation incidents 3. Review shipping records to ensure adequate data 4. Ensure that proper placarding is maintained for all rail cars 5. Ensure that the emergency response plan is correct and updated for plant sites and transportation related releases 6. Implement key training programs 7. Ensure that all rail crossings within the plant site are properly marked with warning signs 8. Check to be sure rail lines are dear, switches are aligned properly and car brakes are released before moving cars 9. Have plant personnel closely observe rail crews when they are operating within the plant site to assure plant and rail safety is maintained 10. Have a documented routine process for providing feedback to rail careers

Third party Logistics (3PL) Outsourcing vs. Support Resources
Chemical companies, today, have the option to outsource logistics functions and/or contract outside resources to supplement their own in-house expertise. Firms providing logistics outsourcing are typically known as third-party logistics providers or 3PLs while companies offering technology tools and professional services for logistics and supply chain optimization are referred to as logistics services providers or LSPs. Rather than outsource logistics functions, many chemical shippers, today, are maximizing freight savings in different areas of their organization by combining the tools and services of a capable LSP with the experience of their in-house logistics staff (admittedly, that “staff” frequently may be a one-person show). Targeting more than just paid freight costs, these companies are contracting outside resources to support a range of logistics savings programs that involve inbound and outbound traffic, current assets, raw material and finished goods inventories as well as physical assets related to distribution. Logistics costs within chemical companies’
average between 10 and 20 percent of revenues. Taking a total supply-chain approach to logistics efforts to balance the trade-offs between cost and customer service, companies are saving as much as four percent in sales, while improving customer service. This yield is significantly higher than the approximately five percent in savings in shipping costs promised by many third-party logistics providers.

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It is, therefore, important to revisit the age-old debate as to whether logistics is a core business function. While chemical companies struggle with their supply chain activities, they are discovering that complete outsourcing can create additional barriers. As the changing business climate warrants increased responsibilities in security and asset visibility, chemical companies are finding that many third-party logistics providers are simply not prepared as their own people to handle these issues along with cost-saving initiatives. Consequently, for most chemical shippers, logistics is truly a core competency.

Considerations before Outsourcing
Before outsourcing the logistics function, chemical companies should weigh the impact of their actions and examine how others have reduced their logistics costs without outsourcing. The following market factors also should be considered: Implementing staff cuts as a method to reduce costs has slowed in recent years as most logistics departments have already been reduced as far as they can go. The dollar impact is usually near term and the intellectual capital that was once in-house is lost forever. Many 3PLs propose freight rate savings solely based on their larger volumes with carriers. Recent studies, however, have concluded that lane and carrier market intelligence can have a far greater impact on freight negotiations than the size of a pooled freight budget, especially when combined with the availability of online RFQ technology. Supply-chain experts agree that the majority of cost savings go well beyond people and freight savings. Additional savings and service improvements are realized in product visibility, inventory and asset reductions, demand planning, improved procurement and freight optimization. To implement a cost-savings logistics program, organizational changes must be made across different departments that are often outside of the logistics manager’s control including sales, purchasing and manufacturing. Logistics outsourcing can add silos that impede internal collaboration and interaction with external partners.

Emphasis on Safety and Security
Enhancements to chemical producers’ self-imposed mandates for product safety and security in commerce are underway across North America. Both the American Chemistry Council (ACC) and the Canadian Chemical Producers’ Association (CCPA) are broadening their transportation and distribution requirements under the Responsible Care codes of management practice. Chemical production responds well to economies of scale, so logistics is an essential part of the industry. In 2004, the latest year for which complete statistics are available, $516.2 billion of chemicals were produced in the United States, and cost $33.2 billion to transport from producers to users. Chemicals are also among the United States’ and Canada’s top three goods exports each year. Bilateral chemical trade is
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considerable, and the United States is also an important worldwide chemical exporter. “In 2002, chemical companies placed heavier emphasis on managing products outside the fence line,” says Debra Phillips, managing director of Responsible Care for Arlington, Va.-based ACC. Most importantly, the industry put in place a process for qualifying carriers, distributors, and other service providers on Responsible Care standards. The qualifications are scheduled to be completed between 2005 and 2007. The Responsible Care codes of management for process safety, health, and environmental compliance were first developed by Ottawa-based CCPA in 1978. The ACC quickly adopted them, and both organizations have continued to expand and adapt the codes. ACC developed Transportation Community Awareness and Emergency Response (TransCAER)

Drivers
Underlying drivers
 Increasing urbanization and higher societal risk aversion in Europe leads to more focus on safety and environmental problems in urban areas  Terrorism threats lead to stricter security regulations

External Impacts
 Limitations on transportation of hazardous goods in urban areas  Timeframes for transport overnight or during the day  Limitations on routes and modes  Extensive paperwork and time consuming procedures for trucks and containers to ensure secure operations at terminals and borders  More creative solutions are required to overcome current challenges related to moving products.

The business value drivers for chemicals
While the economic significance of SCM for chemicals is now established beyond argument and the fact that companies with lesser drivers is embracing the idea, the commentary from Hazardous Cargo Bulletin implies that SCM is not an applicable model for chemicals. The supply chain concept implies synchronisation of the functional operating cycles to create a smooth and asset free flow of materials. This is rather like a gearbox where, if the gears crash,

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there is noise, heat and potential failure; in supply chains this is represented by inventory, service failure or unplanned costs. The nature of chemicals chains is they contain massive tensions as a result of their inherent capital and operating economics and their great scale. The preferences of the various elements of the chain in terms of their desire for change are generally not aligned to customers as the chart below shows. Manufacturing and suppliers, with their volume processes will always drive for low unit costs and minimum variety to take advantage of long run lengths. Logistic will find itself in tension with the upstream part of the chain as it tries to square the circle with customers’ preferences and powerful cost concentrations Typical €/tonne by operational area across the chain € 0€ 50€ 100€ 150€ 200 € 250 Feed stock Inbound materials logistics Materials storage Feedstock inventory Conversion Cost (Manufacturing) Silo Inventory Primary Warehousing Warehouse labour Source of Supply Inventory Primary Transport Secondary Warehouse Secondary Warehouse Labour Secondary Warehouse Inv Customer Delivery SC Costs are 51% of total added value SC Costs are 51% of total added value

The vision for world-class chemicals chains
So the vision for world-class chemicals chains needs to be clearly articulated in the context of the imperative for continued functional excellence. Leading exponents of supply chain management express their supply chain vision as a change from a functional to a process view of managing the business. For chemicals this message needs to be modified to a shift to ‘function AND process’. Typically, for chemicals, those processes will be centred on customer fulfilment, supply chain design and new product introduction; the cross-functional perspectives need to be managed alongside the conventional functional disciplines of acquire, convert and distribute. The aim of this process orientation is to identify and eliminate waste across the chain that is caused by functional tensions. The diagram identifies the wastes that are regularly encountered in the chemicals sector and the associated supply chain actions that will assist in eliminating waste and unlocking value. In the context of the very high share of costs in conversion, the area of manufacturing utilisation and efficiency is a critical success factor. Experience of how the tensions in the chain are managed at the plant often shows that utilisation is eroded due to unscheduled changes to satisfy demand and that the efficiency declines as a result. This lack of synchronisation causes increased costs as the business fights to maintain service to customers and accommodate variety. The effect of limited process integration is also experienced as excess and obsolete inventories. An analysis of the profile of inventory will regularly show that an average ‘Days on Hand’ of say 30 days will disguise a cover range from 5 days to 24 months; in such a situation the time to make grades with a high cover has been a waste. For physical logistics, the primary and secondary transportation can be governed by the need to move inventory to where it can be stored; this creates double

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handling and empty running as well as emergency shipments when product has to be made to meet customer requirements that have been rushed through manufacturing.

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