Design a Supply Chain that Thrives Despite Declining Fuel Prices
Recent dips in fuel costs have been good for the American consumer, but lower prices are pushing oil and gas companies to find savings through increased operational efficiency and cost cutting. Cost cutting with suppliers may seem like a natural step, but when the pendulum swings back and oil prices rebound, it is imperative that those supplier relationships remain intact and positive. One common misstep of many businesses, not just the oil and gas industry, is only focusing on operational efficiency in times of economic strife, instead of adopting efficient practices even during a boom.
When organizations assess ways to reduce costs and increase efficiency, supply chain efficiency and operational efficiency are often tackled in two separate buckets. However, these two groups are really very symbiotic in nature. It’s hard to be operationally efficient on the whole if your supply chain is not designed for optimal performance.
Achieving Upstream, Midstream and Downstream Supply Chain Efficiency
When thinking about supply chain efficiency within the oil and gas market, considerations for the tactics to be leveraged can vary depending on industry segment. In the early stages, or the upstream segment, supply chain efficiency relies heavily on the supporting supply chains that service the exploration and production process. Those businesses that provide drilling equipment, downhole lubricants, MRO supplies and other products are an integral part of the upstream segment’s supply chain. Their efficiency (or lack of efficiency) will directly impact the overall cost of operations in the exploration and production process.
Moving one step further down the value chain, the midstream segment distributes its products between the other two segments. Here, operational efficiency depends on the ability to move products in an optimized fashion. This is a complicated process, relying on common carrier pipelines, fleets of owned or leased trucks and vessels, and rail assets to manage the movement of large volumes.
The final step in the oil and gas supply chain is the downstream segment responsible for refining and moving the finished products (gasoline, diesel, motor oils, fuel additives, etc.) to the consumer, which could be an individual car owner fueling up at the local gas station or a large industrial or commercial customer that is consuming large volumes of refined petroleum. In this final segment, the supply chain begins to mimic that of traditional consumer goods supply chains in that that product mix and location mix complexity goes up exponentially and the consumer fluctuations in demand for the products further exacerbates that complexity.
Consumers often think about oil and gas from the view of price per gallon at theconvenience store around the corner. Consumer behavior and the retail side of the chain brings unique challenges, such as projecting demand to align with seasonal factors and conducting vehicle routing to optimize the cost-to-serve. In contrast, the crude oil stage of the product also has its own implications and demands on the network, such as capacity for exploration and production, considerations for mergers and acquisitions, the rationalization/consolidation of assets, etc.
If you connect these three segments of the oil and gas supply chain in order to properly represent the relationship between them, you have yet again driven up the complexity of this extended value chain.
An End-to-End Living Digital Model of the Supply Chain
From raw crude oil to finished products, each stage of the supply chain holds itsown considerations regarding the right supply chain levers to operate, and in order to maximize opportunities for efficiency improvement, oil and gas companies should consider looking at the end-to-end supply chain for a more holistic and inclusive view. Supply chain modeling gives businesses a living, digital view of the end-to-end supply chain for significant improvements in cost, service, risk and sustainability.
By modeling the current state of their supply chain operations, organizations can— sometimes for the first time—get a true look into how their network is functioning. Often just after the initial look, inefficiencies will present themselves. By taking a deeper view, within the risk-free confines of a model, organizations can test out alternative strategies to gauge savings, thus taking into account the wide array of business objectives and goals of disparate groups of stakeholders. This approach can focus on one segment of the business (for example, focusing on operational improvements in the midstream by optimizing the network) or for the holistic supply chain network. Then, when the optimal strategy is identified, companies can deploy these new strategies with greater confidence. Many companies achieve a return on their investment within the span of the first project, with the vast majority of companies netting savings in the millions.
Case Example: Fuel Distributor Supply Chain Design to Model Future Capacity
A leading fuel distributor and supplier to convenience stores and commercial clients was faced with shifting demand of its fuel products due to increased uptake of biofuels, changes in customer preferences, shifting crude prices, and the associated changes in transportation costs and refinery operations. The company needed to analyze the impact of projected future demand patterns for fuels on its terminal infrastructure. Traditionally, the company employed a yearly planning process to forecast demand, product mix changes and supply scenarios. Using paper and spreadsheets to accomplish this task was laborious and not repeatable. It was difficult to keep the data clean and fresh, and the spreadsheets lacked the ability to truly understand the end-to-end value chain and the many constraints within. The company needed a technology platform that had the ability to conduct in-depth sensitivity analysis of alternate potential network structures and policies, but in a way that minimized operational costs while maximizing service to its clients.
This fuel distributor elected to modernize its supply chain design capability, and developed a repeatable and scalable process that could:
- Identify gaps in capacity for serving key customers and product markets
- Show the tipping points for capital investment requirements of its distribution network
- Identify and define storage tank requirements and loading rack configurations at terminals and refineries
- Model sourcing changes and identify impact on capacities of these increased importation changes
- Determine optimal safety stock levels to minimize cost while maintaining service levels
Companies in any of the oil and gas segments can use supply chain design techniques to their advantage, in a low price-per-barrel environment and when demand and prices rise:
- An exploration and production company might use a network model to understand the true total cost of supply from each of its fields, and can make profit-based decisions about which wells should keep operating or be shut down.
- A supplier of production equipment could examine the tradeoff between holding lower inventories of materials and customer service levels.
- A global super-major might look at the sensitivity of its network to pricing and demand in different regions of the world, and use a network model to optimize sourcing of crude and movement of products, considering tax and duty implications of such international movements.
By adopting a supply chain modeling practice and the associated ongoing business processes, organizations will be better positioned to make optimal strategic decisions and gain an edge over their competition, regardless of the current economic climate.