logistics in petroleum and chemical industry

7/29/2019 Logistics in Petroleum and Chemical Industry

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Logistic and Warehouse Management

Assignment

Logistic in Chemical and Petroleum Industry

Submitted to - Submitted by -

Prof. E.Anand 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 globalannual sales of 1871 billion in 2012. The EU remains a leading chemicals productionarea, valued at 449 billion and accounting for 24 per cent of world chemicals production

in 2012. Europes share of the global chemicals production dropped however from 32 to24 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 consumptionlocations are mostly separated. Efficient, competitive and sustainable logistics aretherefore of great importance for its future development. Logistics are typically quite agile,flexible and adjustable and as such, provide opportunities to respond to market changesquickly and effectively.

For the chemical industry the potential from integrated supply chain and logistics, andhence the need for it, is less clear than for other sectors. This is because of the massivescale to which the industry works and the history of functional excellence in

transportation. Some commentators on the industry are already pronouncing integratedlogistics 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 chainmanagement as being an essential ingredient for corporate survival. The fact that supplychain costs are around 50% of corporate value add, and rank the highest of all sectors bythis measure, also supports the view that there is potential in taking a business wide, asagainst a functional, view of the components of the chain.

The challenge in the chemical sector of taking this approach is the high degree offunctional tension between securing low unit costs through economies of scale in plants

and logistics and the basic principle of supply chain management - continuous flow inminimal batch quantities. Changes in network design, customer delivery commitments andmanufacturing to unlock business value will necessarily challenge the status quo ofreported unit costs and commercial operations. But the value of eliminating waste can bemany 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 andmaterials flows in plants has been slow to grasp the principle of organisational processesand logistics flows. But based on the success of such methods in other sectors, this is thefuture; it enables the identification of waste and unnecessary margin erosion across thechain and the functional re-alignment to eliminate it.

The operational menu for world-class attainment is a complex one, involving potentiallymany parallel initiatives. However, the fundamentals behind these initiatives arestraightforward functional excellence, synchronised and cross functional businessprocesses, time compression, information visibility and accuracy, consistent planningthrough the chain, segmentation of the chain by customers and product characteristics, anoptimised network and well defined KPIs.

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

Transporting chemicals are subject to stiff government rules and regulations. From alogistics standpoint, its an industry still basically operating in the dark ages.Transportation management systems (TMS) that provide visibility in the supply chain arenot widely implemented within the chemical industry. The reason: evaluating thecost/benefit tradeoffs of sophisticated transportation technology and the high cost ofbuying and implementing these solutions has far outweighed the savings required to fundthem. Chemical manufacturers, shipping tank-trucks and rail cars full of chemicals, andfew, if any, LTL shipments, are not able to tie substantial, direct, hard-dollar savings to theinvestment in transportation technology. Therefore, chemical transportation managers arelobbying for technology to provide shipment visibility to their customers, as well asimproved transportation controls and reporting, and drive cost savings (2 to 5% versus 15to 25%) to their companies. Previously, they were not able to build a business case thatpaid for itself.The benefits of TMS for chemical manufacturers are automating the entire freightexecution and payment process; centralizing control over transportation, even at remotelocations; the ability to have notification and alerts when primary carriers decline shipmenttenders; the ability to have alerts regarding late pickup and delivery, and other serviceissues; the detailed tracking and reporting of carrier costs and service performance; andstreamlined 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 chainmanagement 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 mentionit.

It is the only way to enable a company to manage its value-add in an integrated way. Thechart 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 thecosts and margin added by the company itself; so it excludes feedstock and materialspurchases.

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Cause and Effect Diagram for Chemical Logistics

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This shows diagrammatic representation of the Downstream SupplyChain. All the important functions in this business are enabled by ITapplications 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 petro-chemical 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 incidents3. Review shipping records to ensure adequate data4. Ensure that proper placarding is maintained for all rail cars5. Ensure that the emergency response plan is correct and updated for plant sites and

transportation related releases6. Implement key training programs7. Ensure that all rail crossings within the plant site are properly marked with warning

signs8. Check to be sure rail lines are dear, switches are aligned properly and car brakes

are released before moving cars9. Have plant personnel closely observe rail crews when they are operating within the

plant site to assure plant and rail safety is maintained10. 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/orcontract outside resources to supplement their own in-house expertise. Firms providinglogistics outsourcing are typically known as third-party logistics providers or 3PLs whilecompanies offering technology tools and professional services for logistics and supplychain optimization are referred to as logistics services providers or LSPs.

Rather than outsource logistics functions, many chemical shippers, today, are maximizingfreight savings in different areas of their organization by combining the tools and servicesof a capable LSP with the experience of their in-house logistics staff (admittedly, thatstaff 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 andfinished goods inventories as well as physical assets related to distribution.

Logistics costs within chemical companies average between 10 and 20 percent ofrevenues. Taking a total supply-chain approach to logistics efforts to balance the trade-offsbetween cost and customer service, companies are saving as much as four percent insales, while improving customer service. This yield is significantly higher than theapproximately five percent in savings in shipping costs promised by many third-partylogistics providers.

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It is, therefore, important to revisit the age-old debate as to whether logistics is a corebusiness function. While chemical companies struggle with their supply chain activities,they are discovering that complete outsourcing can create additional barriers. As thechanging business climate warrants increased responsibilities in security and asset

visibility, chemical companies are finding that many third-party logistics providers aresimply not prepared as their own people to handle these issues along with cost-savinginitiatives. 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 oftheir actions and examine how others have reduced their logistics costs withoutoutsourcing. The following market factors also should be considered:

Implementing staff cuts as a method to reduce costs has slowed in recent years as mostlogistics departments have already been reduced as far as they can go. The dollar impact isusually 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 havea 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 andfreight savings. Additional savings and service improvements are realized in product

visibility, inventory and asset reductions, demand planning, improved procurement andfreight optimization.

To implement a cost-savings logistics program, organizational changes must be madeacross different departments that are often outside of the logistics managers controlincluding sales, purchasing and manufacturing. Logistics outsourcing can add silos thatimpede 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 ChemistryCouncil (ACC) and the Canadian Chemical Producers Association (CCPA) arebroadening their transportation and distribution requirements under the Responsible Carecodes 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 completestatistics are available, $516.2 billion of chemicals were produced in the United States, andcost $33.2 billion to transport from producers to users. Chemicals are also among theUnited States and Canadas 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. In2002, chemical companies placed heavier emphasis on managing products outside thefence line, says Debra Phillips, managing director of Responsible Care for Arlington,Va.-based ACC. Most importantly, the industry put in place a process for qualifyingcarriers, distributors, and other service providers on Responsible Care standards. The

qualifications are scheduled to be completed between 2005 and 2007. The ResponsibleCare codes of management for process safety, health, and environmental compliance werefirst developed by Ottawa-based CCPA in 1978. The ACC quickly adopted them, and bothorganizations have continued to expand and adapt the codes. ACC developedTransportation Community Awareness and Emergency Response (TransCAER)

Drivers

Underlying drivers

Increasing urbanization and higher societal risk aversion in Europe leads to morefocus 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 toensure secure operations at terminals and borders

More creative solutions are required to overcome current challenges related tomoving products.

The business value drivers for chemicals

While the economic significance of SCM for chemicals is now established beyond argumentand the fact that companies with lesser drivers is embracing the idea, the commentary fromHazardous 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 asmooth 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 inherentcapital and operating economics and their great scale.

The preferences of the various elements of the chain in terms of their desire for change aregenerally 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 ofthe chain as it tries to square the circle with customers preferences and powerful costconcentrations Typical /tonne by operational area across the chain 0 50 100 150200 250 Feed stock Inbound materials logistics Materials storage Feedstock inventoryConversion Cost (Manufacturing) Silo Inventory Primary Warehousing Warehouse labourSource of Supply Inventory Primary Transport Secondary Warehouse SecondaryWarehouse Labour Secondary Warehouse Inv Customer Delivery SC Costs are 51% oftotal 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 contextof the imperative for continued functional excellence. Leading exponents of supply chainmanagement express their supply chain vision as a change from a functional to a processview of managing the business. For chemicals this message needs to be modified to a shiftto function AND process.

Typically, for chemicals, those processes will be centred on customer fulfilment, supplychain design and new product introduction; the cross-functional perspectives need to be

managed alongside the conventional functional disciplines of acquire, convert anddistribute.

The aim of this process orientation is to identify and eliminate waste across the chain thatis caused by functional tensions. The diagram identifies the wastes that are regularlyencountered in the chemicals sector and the associated supply chain actions that will assistin eliminating waste and unlocking value.

In the context of the very high share of costs in conversion, the area of manufacturingutilisation and efficiency is a critical success factor. Experience of how the tensions in thechain are managed at the plant often shows that utilisation is eroded due to unscheduledchanges 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 tocustomers and accommodate variety. The effect of limited process integration is alsoexperienced as excess and obsolete inventories. An analysis of the profile of inventory willregularly show that an average Days on Hand of say 30 days will disguise a cover rangefrom 5 days to 24 months; in such a situation the time to make grades with a high coverhas been a waste. For physical logistics, the primary and secondary transportation can begoverned 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 madeto meet customer requirements that have been rushed through manufacturing.

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logistics in petroleum and chemical industry

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