IMRC 2008

B K Datta
BPCL

BPCL Supply Chain Optimisation: Building a New Approach

harat Petroleum Corporation Ltd (BPCL), a Navaratna public sector undertaking (PSU)1 oil company that is also among the Fortune 500 companies, formed a Supply Chain Optimisation (SCO) department in November 2006. The strategic intent behind this has been to maximise benefits for the overall corporation, improve dynamic capability and become more competitive in the total business process chain. Prior to the formation of the SCO, BPCL, like most other similar organisations, had been organised in functional business units, thereby creating centres of technical excellence, but failing to leverage opportunities to maximise corporation benefit. In instituting the SCO group, a move towards driving maximum overall benefit at minimal disruption to the corporation and retaining technical excellence, BPCL has been a pioneer in its field and across industries.

Abstract
Bharat Petroleum Corporation Ltd, a Fortune 500 company, formed a Supply Chain Optimisation (SCO) department with the strategic intent to maximise benefits for the overall corporation, and improve dynamic capability and competitiveness in the business process chain. Presented in the IMR Conference 2008, this practitioner paper describes the six core business processes, their linkages, and the SCO operating model, while focussing on the key practices that drive success in a highly complex environment.
IIMB Management Review, June 2009

Background
The objectives of the SCO are four fold: The prime objective is to maximise Net Corporate Realisation (NCR), to create real bottom-line impact, as opposed to functions driving individual goals. NCR, designed to be a holistic profit measure, is
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defined as: Sales realisation less cost of landed crude, marketing cost, logistics cost and credit cost. To support the internal supply chain processes across business units, ensuring that they work smoothly. To support integration hassles between planning and execution. To ensure joint agreement on all plans to ensure feasible schedules, and linkage to the overall goals. The SCO is therefore the only unit that wears the CEOs lens and hence occupies a critical place in the organisation, reporting directly to the Chairman. All other business units (such as individual Refineries, Retail Sales, Industrial and Commercial Product Sales, Aviation, Lubricants and LPG) report to functional heads (who are Board Members), who in turn report to the Chairman.

a monthly and quarterly rolling basis. It is developed in conjunction with BPCLs three refineriesMumbai, Kochi and Numaligarh (Assam)to appropriately meet market demand in different locations such that overall economic benefit to the corporation is maximised. Product Exchange Plan: Given BPCLs production shortfall of 5 million MTs per annum (vis a vis its market demand), the SCO drives the creation of a Product Exchange Plan, to enable it to meet the demand for its highly marketable products. This is done through buys from standalone refineries, private companies and through certain exchange programmes with PSU companies. Distribution Plan: The distribution plan is created to seamlessly interface with the refinery plans, crude plans, and the marketing/demand plans. Inventory Management: The SCO also sets location wise inventory norms using statistical tools, and drives optimal levels of inventory and release of blocked working capital.

Core Supply Chain Processes

With the stated objectives in mind, the SCO is designed to look after the six core supply chain processes in a seamless and optimal fashion, spanning different functions and business units. These core processes are described below. Demand Planning and Review: This includes demand planning and review for a large product basket with different grades of products, having different demands, regulatory and pricing constraints, and varying levels of profitabilityMS, HSD, LPG, SKO, Furnace Oil, Naptha, LSHS, Bitumen, other Diesel Oils, MTO, Aromatics, ATF and others. Five different Marketing Strategic Business Units (SBUs) sell these products. Crude Selection, Evaluation and Nomination: This includes defining the basis for selection of crudes, evaluating different term and spot crudes, and actually defining/developing the crude basket to optimise overall profitability, on an annual, quarterly rolling and a monthly basis. This is done in conjunction with the International Trade (IT) division, which actually executes the planned crude procurement. The plan is carefully created so that both the refinery availability and the market demand are taken into consideration, with scenarios of minimum and maximum demand created. The objective function in evaluation/selection/nomination is always to drive the highest corporate realisation and not merely refinery margin or crude landed cost. Refinery Planning and Review: This involves rigorous planning and review of the refinery production plan on
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SCO Processes
In meeting its stated objectives, the SCO encounters four fundamental sets of complexities. Firstly, it operates in a global contextboth on the supply side, and at the marketing end. Crude selection and supply is the international arm of the business, and the supply chain needs to drive decisions on exports/imports vs domestic sales of different products. This entails careful orchestration and planning to ensure seamless execution across domestic and international related activities. Secondly, the SCO has recognised that it operates as a matrix organisation, for several reasons. Fundamentally, it requires working across several different business units. All its key processes cut across a combination of different business units (Exhibit 1). Working in a matrix has three key implications that the SCO has had the foresight to recognise (Exhibit 2). Interactions move from traditional vertical command-andcontrol to more horizontal interactions requiring collaboration. The SCO and other units now have accountability for the overall Net Corporate Realisation, with actual control over all the resources that govern NCR. Moreover, the focus of the business has now changed from individual business line focus to overall corporation benefit.
BPCL Supply Chain Optimisation: Building a New Approach

Exhibit 1 Supply Chain Optimisation Processes: Cutting across Different Business Units

Customers & End Consumers: Auto/fleet owners, Households, Industrial units, Aviation companies Channel : Retail, LPG distributors, SKO dealers, Direct sales Core Business Processes
SCO Driven Processes

Business Units [x indicates units which processes cut across] Refinery x x x x x x x IT, Ship x x x x x x x x x Log. x x Mktg x x x SCO x x x x x x x

Enabling Business Processes HR Finance IT Others

Planning Demand Demand planning Refinery planning Crude purchase Crude evaluation Product exchange Inventory mgmt Review Creating Demand Retail I&C LPG, Lubes, Aviation Meeting Demand Production Crude purchase Logistics

x x x

x x x x

Note : Marketing indudes Retail sales, Industrial & Commercial product sales, Aviation, Lubricants; IT = International Trade

The third fundamental set of complexities that the SCO encounters is the need to drive value creation for the entire corporation, by creating a sense of passion for the overall company goal among the different units and enabling them to wear the overall corporation lens. This creates complexity of an order of magnitude as different units have differing goals (Exhibit 3). It involves a fundamental

shift in mindset away from individual business unit goals. Fourthly, short-term vs long-term implications of decisions need to be balanced, sometimes requiring a strategic view to be taken. For example, the SCO needs to shape the defining and prioritising of key vs non-key customers, analyse and lay out profit trade offs in service levels decisions to key customers, etc.

Exhibit 2 Key Implications of Working in a Matrix

Interactions, agendas

Vertical interactions Own agendas

Horizontal interactions Multiple agendas

Accountability

With resource control

Minus resource control

Focus

Individual focus

Overall corporation focus

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Exhibit 3 Conflicting Goals of Units and Supply Chain Optimisations Role in Driving Overall Goal
SCO Refinery International Trade (Crude Procurement) Industrial Product Sales

NCR maximisation for overall corporation benefit (bottom-line impact)

GRM (external metric) Select sour crude (in one case)

Earnings/savings from shipping etc E g 1 cr saving from loading 7 days late (as quote on 2nd lower than 7 days before) Vs 9 cr loss due to impact on refinery from 7 day delay

I & C business volumes E g Need to discount to be competitive

Impact of decisions

Maximise corporation benefit

Vs Select sweet crude to maximise profitable products (in another case)

Vs Need to recover freight Vs Opportunity impact

SCO maximises overall economic benefit (NCR) for the corporation

Four Pronged Strategy

To manage the complexities described above, the SCO has put in place a four pronged strategy (Exhibit 4), which has already begun to drive the success of this transformation. This encompasses four key elements: Technology (use of leading edge tools/solutions); clearly spelt out Business Processes cutting across units; People (selection and development); and Integration (driving reliability and

consistency). Surrounding these is the creation of a line of sight between units to the overall company goali e, enabling different units to understand the impact of their plans or decisions on the NCR.

Technology
The SCO has invested in developing and rolling out sophisticated, industry-proven tools which are widely used in the World Prime Petroleum Sector (comprising

Exhibit 4 Four Pronged Strategy to Manage Attendant Complexities of Supply Chain

Seamless integrated business processes Clearly documented and communicated

Use of industry proven solution/tools Business Process Technology Linkage of modules across units

Line of Sight Selection for a matrix Capability development - (technical and behavioural) People Integration Reliable, consistent, integrated and timely information through supporting processes - MIS/information flows - Meetings and forums

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BPCL Supply Chain Optimisation: Building a New Approach

companies such as BP, Shell, Exxon Mobil and so on). A sophisticated linear programming (LP) tool, Process Industry Modelling System (PIMS) from Aspentech, with additional modules (such as P-PIMS, M-PIMS, Crude Assay Database Application and Crude Manager from M/s Spiral Soft, UK) was invested in, to optimise the operation and design of refineries. PIMS is a flexible and easy to use productivity tool for economic planning in the process industries, and is used for a wide variety of short term and strategic planning purposes2 (Exhibit 5). The system includes a comprehensive library of plant operation process sub-models matching the actual plan operating data and is expected to result in improved profitability of the site as well as the corporation, better utilisation of installed assets, and minimisation of quality give away. The LP model is configured with 65 tables consisting of refinery units, product specification, blend mix, crude oil axis, marketing demands, crude and product prices, crude oil availability etc. Thus, this model is a good representation of what the refinery would yield on the specified crude feed ahead of time. With this tool, several case files are built and runs are exercised and analysed by the planners for optimum crude mix and product slate across individual refineries. The output also provides marginal values, i e, the additional gain/loss on incremental crude oil processing or production/evacuation of a product. Armed with this analysis, decisions with respect to increase/decrease of crude oil processing, product slates, debottlenecking of units and new pricing of products are effectively taken.

Business Processes
On the business process front, the SCO has holistically and seamlessly defined the integrated business process, encompassing the six different elements described earlier, namely: Demand planning and review; Crude selection, evaluation, and nomination; Refinery planning and review; Product exchange; Distribution; and Inventory Management. One of the SCOs first initiatives was to successfully put in place a detailed integrated business process manual covering the six different processes, key role-holders for sub-processes within each process, their touch points with other units, and key points of sign off. In order to do so, the SCO took inputs from all business units and released it as a controlled business process document in June 2007 after obtaining approval and sign off from all heads of Business Units and the International Trade department. This business process manual formed the foundation of the SCOs successful launch, with different business units gaining clarity and voicing their commitment to following these processes, as defined. Some applications of concepts into development of the business process manual are illustrated below. All activities of the SCO are drawn, to the extent possible, from the 3-month rolling numbers (taking sales aspiration into consideration) of all Business Units with minimum and maximum values. Demand Planning and Review - The group runs a time series demand forecasting

Exhibit 5 A Sophisticated Linear Programming Tool to Drive Profit Maximisation

Input

Output

Crude oil availability

Refinery units Product specifications Blend mix Crude oil assays Optimum crude mix and product slate

Crude and product prices

Constraints Crude and product prices Crude and product prices

Objective function: Maximise NCR

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model, and through collaborative discussions among the regions, headquarters and SCO, comes to a consensus value of finalised demand. Over a period, the SCO has made continuous improvements in this model as well, such as changing the historical 36 months data to 24 months data and also changing the focus from individual locations to major depot locations for the purposes of discussion3. This philosophy of continuous improvement has again driven higher levels of accuracy. Crude selection, evaluation and nomination - The crude selection/annual term contract planning work starts six months prior to the year beginning, through application of the linear programming based PIMS model. Appropriate case files are generated for minimum/maximum demand of products, taking into consideration the term crude oils available, and historical 18/12/6 months price4 for crude oil and product prices. Robustness of the crude oil selection is checked for various other constraints like different pricing basis of historical and forward prices, different prices of Brent Dubai crude differentials (+/- different sigma values), different demand scenarios, availability of term and spot crude oil, optimum term-spot ratio, and long term strategy of crude oil sourcing, shipping strategy etc. Finally, through internal discussions and approval processes along with the International Trade department, it proceeds for Board approval. - The spot crude selection takes place based on the three month production plan, the gap with term crude availability and as a function of the type of crude High Sulphur, Low Sulphur, short haul and long haul. The exercise starts for month M+3 or M+2 where M is the month of operation. The crude evaluation and its selection takes place not on the refinery gross margin but on the net corporate revenue realisation on a forward pricing concept considering the product demand plan for minimum (fixed demand) and maximum (aspirational) value. - Crude nomination is also worked out taking into consideration the right crude mix which will not only meet the refinery plan availability but also the market demand where the objective function is always for highest corporate realisation. This is also done on PIMS, the linear programming model.
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Refinery Planning and Review - The refinery plan, using PIMS, is seamlessly linked to the crude procurement plan, and is also being linked to other subsequent plans developed (distribution, inventory and exchange plans). Product Exchange Plan - To meet the production shortfall of its marketable products, BPCL creates the products buys from standalone refineries, private entities or through the product exchange plan wherein it has exchange programmes with other PSU oil companies. - Sometimes, import and export decisions are made based on the product economy and excess availability, to fill gaps. - The exchange plan is always value based, with a focus on consolidation of BPCLs strengths and protection of its weaknesses. Distribution Plan - The Distribution Plan is created with a robust Distribution Plan Optimisation model (DPO). It is used to support optimisation of the logistics network. - This is architecturally being linked up with the PIMS model in order to bring about seamless planning. - Optimal modes of transport are chosen from among shipping, road, rail and pipeline, so as to minimise total delivered/placement cost and maximise utilisation of own pipelines. Inventory Management - The SCO uses statistical inventory modelling tools for fixing the inventory norms, taking into consideration the lead time variability, demand variability, safety stock level etc. - Every fortnight the inventory is reviewed with logistics for corrective action.

People
On the people front, the SCO has laid strong emphasis on people, their knowledge and capability building, right from the initial stages. The SCO has also recognised that what it takes to succeed in a matrix (that is in collaborative roles) is fundamentally different from what it takes to be successful in an operational role. At the very outset, therefore, while selecting the team, the SCO defined the
BPCL Supply Chain Optimisation: Building a New Approach

competencies required in a matrix. The internal note put up for nomination of candidates to be a part of the SCO team first laid out five critical matrix competencies, followed by other technical/operational competencies. These matrix competencies included a passion for the overall company goal, strong analytical skills to enable identification of linkages and implications across different business units, initiative, ability to manage ambiguity and complexity, and ability to inspire trust, build networks and establish positive working relationships with internal and external customers. Each SCO candidate, across all levels, was personally interviewed and handpicked by the head of the business unit, to ensure a fit in the new way of working. Further, the SCO has been steadily investing in training and capability development. On the technical side, it has continually rolled out training modules on PIMS and advanced versions, by Aspen. Similarly, the SCO has been investing in building the analytical capability of its entire team, through workshops conducted by the managementconsulting firm, the Hay Group. With the same partner, it has also rolled out different programmes to enhance the development of the softer skills required for successful working in a matrix.

The Retro Review, where, led by SCO analysis, variance (planned vs actual) is discussed, spanning performance of all the units. This allows for sharing of best practices/ learnings, and ensures improvement in future performance. Along with these forums, in-depth one-on-one meetings are conducted with each business unit throughout the month. On SCO initiative, these three forums have become an institution, with representatives from each of the different units unfailingly attending each session, contributing to animated debates, and closing with mutual agreement on the way forward. These forums, complemented by defined MIS/information flows, together work towards creating reliable, consistent, integrated, and timely information across the organisation. Lastly, the SCO has laid the foundation for creating a Line of Sight between individual units and the overall company goal. By allowing units visibility of their contribution toward the NCR or an understanding of the impact of their decisions on NCR, the SCO has started to transform the individual units thinking to meet the initial stated objectives, even in the face of conflicting goals.

The SCO has put in place two key sets of enabling processes: MIS and information flows by different units have been defined, and three key forums have been instituted which act as the centres of decision-making and review every monththe Supply Chain Council, the Pre-Supply Chain Council and the Retro Review.

Impact of the SCO

Integration

The SCO has put in place two key sets of enabling processes. Firstly, MIS and information flows by different units have been defined. These are tightly integrated and coupled with the industry-proven tools and modules that the SCO has invested in, allowing for consistent, integrated and timely information flow. Secondly, the SCO has instituted three key forums, which act as the centres of decision-making and review every month: The Supply Chain Council, where plans are finalised for the upcoming month/quarter. The Pre-Supply Chain Council, which acts as a preceding meeting to the Supply Chain Council, allowing for any clarifications/rework before plans are finalised.
IIMB Management Review, June 2009

The SCOs business model has had all the initial signs of success, in the highly complex role it performs. In a relatively short span of time, it has created a radical shift in thinkingfrom individual business unit performance to maximising overall company profit (NCR). It has also begun to change the mindset and working of the corporation to more collaboration based, yet very analytically backed decision making. As a result, the SCO has driven several decisions and actions, which have already resulted in meaningful bottom line impact. To highlight some of these: Increased sales of products with a higher marginal contribution to profit (e g, bitumen). Discontinuation or minimisation of products with a lower or negative marginal contribution to profit
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(e g, furnace oil, light diesel oil, etc). Reduction of variance between planned and actuals, in key products such as high speed diesel, which contribute a major share of the product portfolio. Choice and mix of crude changed even at a granular level to maximise profit. E g, ratio of Arab Heavy and Light crude oil has been changed in the Arab mix to drive value maximisation. Some spot crudes have been moved to term contracts, while other spot procurements have been made more competitive. The overall crude basket has been widened. These actions have resulted in strong bottom-line savings which are as follows: - Dead stock has been reduced with a move to matching international levels. - Production gaps have been met through balanced imports and product exchanges. - Usage of own pipeline with better planning has started resulting in logistics cost savings. - New business from key industrial customers (where pricing is negotiated individually) was secured using the NCR algorithmto ensure that sales were profitable. - Pricing of certain unregulated products was revised to drive improved profit. The SCO is not just a pioneer in its field, but, by demonstrating quick results has also shown a way to successfully handle the greatest of business complexities. Going forward, in keeping with its philosophy of

continuous performance improvement, the SCO is charting out its plan for the corporation in the next phase of its journey.

References and Notes

1 A Navaratna PSU is a Public Service Undertaking (PSU) that has been granted Navaratna status by the Indian Department of Public Enterprise. To be qualified as a Navaratna, the company must obtain a score of 60 points (out of a maximum of 100) on six parameters which include net profit to net worth, total manpower cost to total cost of production or cost of services, Profit Before Depreciation, Interest and Taxes (PBDIT) to capital employed, Profit Before Interest and Tax (PBIT) to turnover, Earning per share (EPS) and inter-sectoral performance. Additionally, a company must first be a Miniratna and must have four independent directors on its board before it can be made a Navaratna. The Navaratna status will empower a company to invest up to Rs 1000 cr or 15% of their net worth on a single project without seeking government approval. In a year, these companies can spend up to 30% of their net worth not exceeding Rs 1000 cr. They will also have the freedom to enter joint ventures, form alliances and float subsidiaries abroad. 2 E g, the evaluation of alternative feedstocks, optimisation of product slates, evaluation of grass root opportunities or expansions, and many others. 3 This initiative was in conjunction with the SCMC at IIMB, and the Hay Group, India. 4 It is the landed crude price at BPCL averaged over 18/12/6 months divided by the actual crude price or averaged over metric ton.

B K Datta is Executive Director (Supply Chain Optimisation), Bharat Petroleum Corporation Ltd, Mumbai. dattabk@bharatpetroleum.in

Reprint No 09202

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BPCL Supply Chain Optimisation: Building a New Approach