The downstream oil and gas value chain is a complex undertaking, starting from the oil fields to the refineries to distribution of products to the end retail and commercial customers. The use of digital technologies and a Business 4.0 framework can help orchestrate the smooth execution of the Supply Chain.
The ability to optimize the end-to-end value chain is a key success factor for businesses to protect margins and to remain competitive. As in any industry, efficient Supply Chain planning and execution are two of the critical components to achieve overall enterprise efficiency.
However, inventory management is a key challenge in the downstream supply chain, especially with the siloed nature of the operations. Multiple entities managing inventory with conflicting KPI’s often results in sub-optimised decision making that erodes enterprise value. Along the supply chain, inventory planning at the refineries differs from the planning at the depots. This is due to the presence of the push- pull boundary at the refinery as they are asset intensive and operate at maximum efficiency in order to reduce the unit cost and cost of downtime.
As a result of the refinery operations, products are continuously produced and must be periodically removed from the refinery to avoid tank top situations. The rate of product removal from the refinery is a function of the demand pull from further down the supply chain in conjunction with the mode of bulk transportation chosen (pipelines, ships, trains etc.) to move the products to depots or to export customers. Sizing of storage infrastructure and manpower planning are also influenced by the inventory strategy.
The whole planning process is further complicated by the commodity nature of the business where the price of the product fluctuates on a daily basis. A sudden increase or drop in market prices can impact the value of inventory held and significantly impacts the company’s financials.
The Oil & Gas Industry Inventory Value Chain
Hence effectively planning inventory levels in the downstream supply chain is a short to midterm horizon problem encompassing demand forecasting, maintaining refinery efficiency, transportation planning, and the market outlook of prices. Due to the many variables and moving pieces, many companies choose to operate on a supply push model rather than on a demand driven model while trying to operationally manage and mitigate the effect of the resulting inventory variations. This is often done at the cost of transportation between the refineries and depots, resulting in high logistics expense resulting in counter-productive operations from the aspect of managing inventory and replenishment.
Instead of relying on a push model, companies must look to incorporate demand forecasts into an inventory model. By trading off on demand, inventory holding costs and transportation cost with rolling targets should be arrived at rather than having fixed targets throughout the year. This will streamline the logistics operations and minimizing the transportation costs which can be reflected in the end product pricing. Any excess production can also be disposed out of the system in a planned manner. Further, having a view of the planned inventory in the system can help in mitigating some of the price exposure risks via trading instruments.
To successfully plan and execute this strategy, Oil & Gas companies must look towards the “new oil” i.e. towards data and data enabled decision making. Historically the downstream segments of O&G companies have lagged in adopting digital technologies but are beginning to invest in creating the necessary platforms to create a strategic advantage. To aid in this journey, companies must incorporate multiple technology pillars to leverage Business 4.0 behaviours to achieve the desired results.
- The first challenge for the companies to overcome is lack of visibility of information across the supply chain and integration among entities. Lack of collaboration and poor coordination amongst various operating entities is a key symptom of the lack of information visibility. Companies must invest in infrastructure and systems to ensure that there is transparency of information of demand, inventory, and sales across the E2E value chain. This will help reduce the bull whip effect and mistrust among the various entities.
- Second is to incorporate the available data and information into analytics models. Scientific demand and sales forecast models must be used to predict demand and sales patterns. Algorithms for vessel and pipeline scheduling can help optimize shipments and drive down distribution costs. Formal inventory management models and statistics must be used rather than react using gut feeling and market sentiments. Also, additional components like “what if” analysis should be incorporated into the models to determine the impact of any decisions across the E2E supply chain.
- Third, the companies need to incorporate automation in their processes to eliminate routine and manual tasks and streamline operations. Simple automation such as using sensors, automatic tank gauging systems, and fleet telematics can dramatically improve data availability, accuracy, and provide a clear enterprise view of the inventory.
- In addition to providing technology based improvements, organisations must also ensure that the end to end inventory management is integrated trough a consistent framework of processes with shared KPI’s across the entities with standardised inputs and outputs. To engender collaboration between entities, interdependencies between KPIs must be recognised while making decisions and appropriate trade-offs.
- Finally, due to the volatile nature of oil prices, risk mitigation measures are an important strategy as a part of inventory management. Hospitality agreements and shared services are an option to lower operating costs and negating the risk of uncertainties of supply and market. Risk management through the use of hedging is another strategy that can be incorporated.
By embracing the above changes in processes and technology, not only will the inventory management function of the organization be streamlined, it will embody many of the behaviours of organizations that have successfully adopted the Business 4.0 framework to create exponential customer value and leverage the available ecosystem.