T
he supply chain logistics problemsfacing multi-site refining compa-nies can be complex, involvingmultiple stakeholders and constraintsacross the entire enterprise. The morecomplex the supply chain, the moredifficult it becomes for companies toanswer basic questions, such as whichcrude should they purchase and howshould they transport it? Whichfacilities should process it? What willthe best product slate be? Whichcomponents should they buy and whichshould they make?In many cases, different departmentsor divisions within a company —trading, supply chain planning, refineryplanning, operations and blending toname a few — have a hand in thesedecisions, but communication amongthese entities is not always clear orconsistent, and each may optimise totheir own objectives without regard forothers. The results can drasticallyaffectprofitability.A true solution recognises the broadrange of entities making up the refiningsupply chain and views it as a whole,rather than as individual links. Theresult should be a carefully chore-ographed plan that enables effective,efficient and profitable operationsacross the entire business.
Indian refining infrastructure
Indian Oil Corporation (IOCL) is India’sflagship national oil company. Ranked189th on the Fortune 500 list, IOCL isthe world’s 19th-largest petroleumcompany and has also been recognisedas the top petroleum trading companyamong national oil companies in theAsia-Pacific region.Its size alone is impressive: IOCLaccounts for 56% of the petroleumproducts market share among publiccompanies, 42% of the national refiningcapacity and 69% of downstreampipeline throughput capacity. Thecompany has a countrywide salesnetwork of more than 23000 retailoutlets, including more than 10000petrol/diesel stations, backed by 165bulk storage facilities, 95 aviation fuelstations and 85 LPG bottling plants. Itssubsidiary, IBP Co Ltd, has another 3000retail sales outlets.IOCL operates ten of India’s 18refineries, with a combined ratedcapacity of one million barrels per day.The company also owns and operatesthe country’s largest network of cross-country crude oil and product pipelinesof 7730km, with a combined capacity of 58.62 million tpy.During 2004–05, IOCL sold 50.1million tons of petroleum products,including exports of 1.96 million tons.Seven of its refineries achieved athroughput of 36.63 million tons, andthe pipeline network transported 43.03million tons of crude oil and petroleumproducts.
Challenges
As a leading oil supplier, IOCL has manyroles to fill. It must maintain itsleadership position and meet its visionof being a diversified, integrated energycompany with a strong environmentalconscience and a national role in oilsecurity and public distribution.As the company looked for ways tomaximise profits, one thing was clear: itneeded more visibility into the supplychain and also needed to find ways tooptimise it as a whole.Like many large companies, IOCLmanaged its disparate projects withindifferent departments or divisions acrossthe organisation, and ran intocommunication issues between thosedivisions. As a result, decisions weresometimes based on incomplete data, orthey couldn’t be applied across theentire corporation.“Our challenge was how to plan forthe various possible breaks that couldoccur in the supply chain and how tobest optimize each specific point toincrease our profitability and linkactivities of five separate refineries,” saidUttam Kumar Basu, general manager,optimisation, IOCL.To put the project’s size inperspective, IOCL needed to integrate,view and make decisions based on 80crudes sourced from South America toSouth East Asia, ten refineries and fivedetailed models, along with a largenetwork of 200 depots, 40 terminals, 17pipelines and six transportation modes.With the complexity of the problemwell beyond the realm of a spreadsheet,IOCL realised that it needed anintegrated, multi-plant supply chainmanagement solution.After extensive study of the problem,the company evaluated different supply-chain management solutions to addressthe issues it had identified, and thenresearched how best to implement asolution that would be required tointegrate the refineries’ supply chains.
Solution implementation
IOCL selected Honeywell to provide andimplement the solution. The supplychain management solution consists of an integrated suite of advancedforecasting, planning and schedulingtools to more effectively manage thebroader supply chain. An integratedframework throughout the solutionsupports various modules and state-of-the art tools for a broad range of business decisions. These enable thecompany to monitor the condition of the supply chain in real-time or nearreal-time and provide immediatefeedback and exception notices.Building on and extending several of the system’s core features, the solutionfinally allowed IOCL to “get its arms
Supply chain logisticschallenges
Integrating the complexities of multi-site refinery supply chain logistics using advanced forecasting, planning and scheduling tools gave one refining company the ability to monitor its supply chain in real-time or near real-time
Stephen Clark
Honeywell Process Solutions
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around” a very complex business. Themodels developed with the supply chainmanagement solution covered IOCL’sentire supply chain, from crude pur-chase to finished product distribution,including demand, refinery processmodels, blending models and distri-bution system models.Web-based supply chain applicationsdynamically model the supply chain,enabling immediate knowledgecollaboration and extending visibilityacross and down into the enterprise.The solution combines the newvisibility with advanced executionsolutions, allowing the right decisionsto be made more quickly and moreoften while minimising disruptions. Theresult is substantial improvement inprofitability through measurableinventory and product cost reductions,faster reaction to market opportunities,improved customer relations andstronger collaboration with suppliersand customers. The solution consists of the following modules:—Demand planning to accuratelyforecast demand and aggregate demandnumbers—Integrated planning (multi-plant)covering the refining supply chain—Distribution planning to generateoptimal feedstock allocation andproduct distribution plans—Refinery production planning togenerate individual optimised refineryoperations plans.
Demand planning
To make IOCL’s supply chain moreresponsive to demand, the solution isdemand-driven. The demand-planningmodule takes into account such thingsas forecast sales of finished product,contractual production obligations andreal-time market pricing and trends,allowing IOCL to take advantage of profitable opportunities in real-time.Aggregated demand numbers from thedemand-planning module are thenuploaded to the supply chain database,which is the repository for all logistics-related data. From there, the data isincorporated into the integratedplanning model.The integrated planning model isactually an aggregation of refinery,distribution and demand sub-models,each requiring large amounts of data.The model also contains the details of each refinery configuration, so that therefinery and overall supply-and-demandinfrastructures form the basis on whichthe optimised plan for the entire supplychain is generated. This “corporate” planis communicated to the distribution andrefinery models, which then generateoperational plans that adhere to thecorporate objectives. The corporate planalso forms the basis for crude selection,including consideration of distance andfreight costs between locations.
Refinery planning model
The proprietary Honeywell Refinery andPetrochemical Modeling System (RPMS)contains integrated planning features,cost-effective implementation andinvestment modelling capabilities. Italso incorporates data from the crudeassay database and Honeywell’sASSAY2000 software into the overallsolution.A third-party crude assay databasesupplies crude properties (yield andquality of standard cuts) and providescrude assay updates every quarter in textformat. Using an interface utility, thisquality data is converted to an XMLformat file that is used by ASSAY2000 torecut the assay into tower-specific cuts,which can then be used by the RPMSmodel. The result is yield qualityinformation for each crude type that isspecific to the physical configuration of the IOCL refineries. The refinery LPmodels then use the output (crude andvacuum unit yield vectors andproperties) to generate the operatingplans for each plant.Each of the refinery models includesthe major process units, blends,inventories and stream routings thathave a significant impact on refineryeconomics during optimisation. Theoptimisation is also subject to variouseconomically significant refineryconstraints, such as capacity constraintson major units, quality constraints onproducts and unit feeds, environmentalconstraints and evacuation constraints.These refinery models, along with thecrude assay data, are directly embeddedinto the integrated planning model,with supply and distribution structureobtained from the supply chaindatabase. This design allows theflexibility to model greater detail in thedistribution models than is requiredmerely from the perspective of corporate-wide optimisation.
Supply chain database
As mentioned before, the supply chaindatabase is the repository for alllogistics-related data. This includesstatic data such as operating modes,terminal/depot configuration andlinkages, as well as dynamic data such asdemand, market prices, linkage costsbased on freight, duties and taxes, crudeavailability and crude costs. Thedatabase has the following functions:—
Temporal integration
Data foryearly and quarterly models areavailable in one place and can be rolledup or down as needed—
Hierarchical integration
Aggrega-tion for the integrated model is based ondetailed data available for operationaldistribution models—
Calculations
Final linkage costs arecalculated using tax logic, current prices,distances and freight rates—The supply chain database alsoprovides distribution-related inputs toboth the integrated planning anddistribution planning models.IOCL and Honeywell used cross-functional teams staffed from bothorganisations through each stage of theproject: consultation, implementationand support. By using the appropriateexperts for each specific phase, IOCL wasable to expedite the implementationprocess — the project’s effectiveness wasevident as early as a few weeks into theproject. Ultimately, using a three-phasedapproach to implementation consistingof consulting, model prototyping anddevelopment and support, the fiverefineries were fully integrated in onlyten months.The consulting phase of theimplementation began by mappingIOCL work practices around planningand supply chain management. Themain task in this phase consisted of interviewing the extensive groups of people across the company’s numerouslocations, whose job functions insomeway touched or were touchedbythe supply chain managementfunction. The primary deliverable of thisphase was the functional design of theoverall solution, which consisted of two parts:—Specifications for the models andsoftware previously described—“To-be” processes described in use-case narratives. These were based onbest practices and technology available.
Model prototyping anddevelopment
The project includes some of the largestmodels of this type in use anywhere inthe world today. To achieve success, theimplementation required that proto-types for each model be developed. Asthe prototyping occurred, user evalua-tion and feedback was collected at eachstage and incorporated back into themodels. This real-time, ongoingcollaboration with the users resulted in
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fine-tuned models that accuratelyreflected the IOCL environment. In thefinal steps of this phase, each of thevarious models and software underwentrigorous performance testing, firstindividually then finally in the inte-grated planning model environment.Supply chains are dynamic, ever-changing entities, as market conditions,physical configurations and businessobjectives evolve. Understanding this,IOCL and Honeywell made acommitment to work together tomaintain and grow the solution over thelong term to meet future needs andchallenges. In keeping with thisobjective, Honeywell worked closelywith IOCL throughout the project tobenchmark the complete planningprocess. Under the long-term supportagreement, Honeywell consultants payregular visits to IOCL sites to ensure thenew system is performing to theexpectations of IOCL and that thebenefits are being realised andsustained. The result is a dynamic,flexible solution that grows and changeswith IOCL’s business.
Benefits
The investment modelling capabilitiesof the solution also provide a uniqueopportunity for IOCL to look at everyinvestment as a capital expenditure andmake decisions based on sophisticatedinvestment analysis. After just fourmonths of using the integrated plan-ning model, the company experienced aparadigm shift in how it evaluates andapproves these expenditures. Any suchexpenditure is now validated using theintegrated planning model as a requiredstep in the evaluation, prior to anyapprovals being considered.This evaluation capability extends toother areas as well. The marketingdivision, for example, uses the model todetermine whether to buy productionfrom other refineries in order to meetdemand numbers or to changeproduction within the IOCL supplychain instead. Likewise, as the refineriesattempt to maximise throughput andmargin, the crude trading group may bemaking their purchases based mainly onwhich crude seems to be the best dealfrom a trader’s perspective. With themodel in place, traders now buy crudethat will be the best deal for the entiresupply chain.The integrated planning approachutilises the synergies that exist betweenthese functions to maximise corporateprofit rather than the profit of standalone areas of the business. Andgiven the large volumes of feedstock,components and finished productsinvolved, even small percentagechanges can translate into hugebenefits. The integrated approachconsiders everything and makes the bestchoices for overall performance. Thefollowing typical factors cansignificantly affect the bottom line:—Product demand—Product prices realisable at themarket level—Logistic costs for crudes and products—Differentials in prices of marketcrudes—Inter-refinery interactions formeeting the demand—Evaluation of exchanges, purchases,imports and export options—Interaction with crudes alreadyprocured—Interaction among refineries forcrude allocation, encompassingconstraints of common pipeline—Refinery configuration, flexibilityand constraints—Shutdown schedules and availabilityof process units at refineries.With an integrated view, each of these and their relation to the others isconsidered in the final solution.
Benefits summary
IOCL has also seen numerous tangiblebenefits from the project, including:—Higher margins and increasedprofitability—Crude selection and allocation, whichtakes into account product demands,refinery capabilities and the effect of crudes already in the supply chain—Refinery production planning thatincludes crude assays, unit capacities,product specifications and demands, aswell as feedstock availability—Distribution planning that includestransportation costs, taxes and duties, aswell as transportation constraints—Improved visibility into the supplychain process across the five refineries—Improved investment analysis for allcapital expenditures—Business analysis capabilities thatenable strategies to meet future scenarios;ie, specification changes, supply/distribution infrastructure changes andcompetitive landscape changes—Faster, more effective decisionmaking on exchange strategies, importsand exports—Improved response and executioncapability.
Lessons learned
A successful implementation of thismagnitude needs more than justtechnical competence and perseveranceof the team. It requires excellent project,people and “change management”skills. It also needs changes in organisa-tion and organisational thinking,which, as many companies know, canbe as big an accomplishment as thetechnical project itself.
Change management:
—Support from top management andhigh-level sponsors who believed in theend goal and could help make it happen—Employee buy-in, which is criticalfor a project as daunting as this one—Identification of process championsand early involvement of end users—Establishment of a good foundation,performing “as-is” and “to-be” analysis—Ensuring all processes had owners.
Project management:
—Implementers concentrated on high-value areas and avoided getting lost indetails—The company selected a partner toprovide the solution and made sure thatpartner was as committed to the projectas IOCL was—The company measured andreported benefits—IOCL followed recognised andstandard project management bestpractices.
People management:
—The needed resources for the life of the project were identified andcommitted—The teams ensured the identifiedresources had or could quickly developthe required skills—Role and organisation issues wereaddressed early in the project—The company rewarded itschampions throughout the project;when people did a good job, they wererecognised.For IOCL, the next logical step is toconsolidate the gains it has made so far.The early plan is to enhance the solutionto include select applications in thescheduling and MES domain. Thecorporate-wide plan generated by theintegrated planning model would thenbe implemented through a hierarchy of planning and scheduling models andMES applications.
In closing
Supply chain projects in the refiningbusiness are at best intimidating and atworst disastrous. They are alsonecessary. In today’s refining market,
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