ILLUSTRATIVE

BPCL SUPPLY CHAIN OPTIMIZATION - BUILDING A NEW APPROACH

B.K. DATTA ED (SCO), BPCL

IMRC, 2008 IIM, BANGALORE

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We have looked at end to end Supply Chain of BPCL

Core focus area We have looked at end to end supply chain in the last nine months Crude/ feedstock supply Refinery production management Pipeline/bar ge/rail/road distribution Depot Secondary management freight Customer management

Crude
purchasing Crude freight cost reduction

Integrated
optimization of all the refineries Buying of products from competitors quality giveaways

Primary
freight Retail LPG I&C Aviation

Depot
rationalisation Inventory management

Secondary
freight cost reduction LPG I&C Aviation

Retail LPG I&C Aviation Lubes

Reduction in

OBJECTIVE OF SUPPLY CHAIN OPTIMIZATION

CEO & Directors

MANUFACTURING

IT&S

MARKETING

MUMBAI REFINERY MR

KOCHI REFINERY KR

NUMALIGARH REFINERY NR

RETAIL & LPG

I& C, AVIATION, LUBES

Design principles

Objective is to maximize BPCL overall contribution - focus on end to end supply chain: no silos Teams works closely with individual business units to come up with tailored solution Focus on quick, near term action .

Driver or Supply Chain Optimization Logic

Core value driver in refinery Drivers of value is Netback Overall optimization requires three actions

Crude cost
(dependant on supply, demand), freight and import tariff

Crude cost Value addition by

refinery Marketing margin Product placement cost Refinery situation

Use LP models such

as PIMS process industry model simulation

Products produced
dependant on refinery configuration

Supply Chain
Optimization Department to optimize based on Crude cost Optimal production Product distribution plan

Configuration
comprising of two or three crude distillation units and downstream facilities Different flexibility in processing crude

Product placement
dependant on marketing margin, logistics cost, customer incentives

Use real price

realized by corporation (netback)

SCO is using PIMS for both refineries to evaluate crude oils which was earlier done on standalone Excel based yields and also for preparation of optimum production plan

Identified seven cross Business Unit Optimization Levers

Reduce variety of crude

Reduce operating complexity

Purchase crude jointly Use existing approach Buy crude for existing throughput cheaper Use D GRM for spot crudes Use forward prices for all crude Modify decision making tools Increase demand forecast accuracy Change term spot crude ratio

Reduce marginal cost

Reduce material cost

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Focus area

Improve net contribution

Be flexible on crude throughput

Use netback prices in the model Increase marginal contribution Relax the constraints on the I&C products

Use netback prices

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Relax I & C constraints

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SCO Objectives

The objective of the group is to maximize Net Corporate Realization (NCR)

To support so that the internal supply chain processes

within the Business units work smoothly Support the integration hassles between planning and execution Joint agreement on all plans to ensure feasible schedules

Six core supply chain processes

SCO Department formed in Nov 2006 As part of Project Destiny initiated Project CRESCENDO (Crude Refining Supply Chain Network & Depot Optimization) EC members decided to start running following 6 core Supply Chain processes as one.

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Demand Planning
and review

6
Inventory Management
set norm, review

5
Monthly Distribution Plan
execute and review

2
Crude Evaluation, Selection & Nomination

3
Refinery Monthly Plan,
execute and review* (crude, product, shipping)

4
Product Exchange Plan,
- execute and review
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Critical processes run by SCO cut across business units

Customers & End Consumers: Auto / fleet owners,
SCO driven - processes Households, industrial units, aviation companies X indicates units which processes cut across Enabling Business Processes Business Units HR
Refinery IT, Ship Log. Mktg SCO

Channel : Retail, LPG Distributors, SKO dealers, Direct Sales

Core Business Processes

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 X X X

X X

X X X X X

X X X

X X X X X X X

Finance

IT

Others

X X X

X X

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

SCO has recognised that it works in a matrix which has three key implications for an organization

Different units with different goals; SCO maximises overall economic benefit
SCO NCR maximisation for overall corporation benefit (bottom-line impact) Refinery International trade (crude procurement) Industrial product sales

GRM (external metric)

Earnings / savings from shipping, etc

I&C business volumes

Select sour crude (in one case)

Eg. 1 Cr savings from loading 7 days late (as quote on 2nd lower than 7 days before)

Eg. Need to discount to be competitive

Impact of decisions

Maximise Corporation benefit

Vs

Vs

Vs

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

9 Cr loss due to impact on refinery from 7 day delay

Need to recover Vs freight Opportunity impact

SCO maximises overall economic benefit (NCR) for the corporation 10

SCOs four pronged strategy to manage attendant complexities and drive successful transformation

Simple Integrated Business Process Clearly documented and communicated Business Process

Technology

Use of Industry proven solution/tools 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 & forums

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PIMS MODEL IS BASED ON LP PRINCIPLES

Input
Crude oil availability PIMS model - Refinery units - Product specifications - Blend mix - Crude oil assays

Output
Optimum crude mix and product slate

Refinery capacity

Demands by Marketing units

Crude and product prices

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SCO Decision Support Tools

PIMS Model Enhancements Streamlined for actual Refinery configurations In Refineries for all CDUs assays are generated and updated. Secondary units yields (delta vectors) updated and tuned Actual ATF processing constraints configured. The PIMS models (MR/KR) updated for all crudes in the BPCL basket. 6 version upgrades for PIMS model so far. Model Audit and assessment arranged and executed with the expert consultation from Aspen (160 man-days) Technology Upgrades (In-house) Migration to Latest Version PIMS 2006.0 Crude Manager- Spiral 3.5 Purchased Crude Oil database for all regions from M/s Chevron and standardized as a reference database in BPCL
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BPCL IS MOVING TO BEST PRACTICE IN DEMAND FORECASTING THROUGH FOUR IMPROVEMENTS

Best practice Forecasting 1 tools

Time series forecasting adjusted for seasonality and

growth

Triggers for local realities to be incorporated at monthly

level

Process

Clear separation between business plan and demand

plan

Demand forecasted for 3 months Time series based forecast at all levels with judgement
input for correction

100% compliance with clear timelines Demand tree available in the system Monthly variance calculated at all levels and reported Sales own forecast

3 Accountability

Central 4 support

Specific support from central group on historical

forecast

Central groups drives consensus between refinery

and supplies
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NEW APPROACH FOR TERM CRUDE PURCHASING

Base case

Objective function Subject to constraints

Maximise NCR

(Product netback)* X (Product

quantity) (Crude quantity) X (Crude cost)

Meet all annual demands

Annual flexible demands as

given by marketing BUs All exports open What has changed?

Annual supply availability HS : LS = constrained by SO2 emission (MR) / Crude sulphur (KR)

Term: Crude availability (grade

and volume) Spot: Crude availability (grade and volume)

ICPM PIMS
model used

Netback prices Flexible

demand

Flexible
Refinery unit availability Other inputs Crude prices

Capacities adjusted for shutdown

plans provided by refinery

Throughput

Average price FOB (historical /

forward) with standard freight assumptions corresponding to specific price period

Product netbacks prices

Netback prices based on RTPs

with marketing margins and costs corresponding to crude price
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NEW APPROACH FOR SPOT CRUDE PURCHASING

Base case

Objective function Subject to constraints

Maximise NCR

(Product netback)* X (Product

quantity) (Crude quantity) X (Crude cost)

Meet monthly demands

Monthly flexible demands as

given by marketing BUs All exports open What has changed?

Term crude availability Spot crude market availability

Term: Quantity and laydays at

the refinery for the month under consideration Spot: Crude types and quantity available in the market

ICPM PIMS
model used

Netback prices Flexible

demand

Flexible
Refinery unit availability Other inputs Crude prices

Capacities adjusted for unit

availability as per refinery

Throughput

Forward FOB corresponding to

month under consideration

Product netbacks prices

Netback prices based on

forward RTPs with marketing margins and costs (logistics, customer incentives) for month under consideration
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NEW APPROACH FOR REFINERY MONTHLY PRODUCTION PLANNING

Base case Maximise NCR

Objective function Subject to constraints

(Product netback)* X (Product

quantity) (Crude quantity) X (Crude cost)

Meet all annual demands

Monthly flexible demands as

given by marketing BUs Black oils and exports open What has changed?

Annual supply availability HS : LS = constrained by SO2 emission (MR) / Crude sulphur (KR)

Crude availability for the month

by type and volume, as derived from laydays and inventory

ICPM PIMS
model used

Netback prices Flexible

demand

Flexible
Refinery unit availability Other inputs Crude prices

Capacities adjusted for unit

constraints provided by refinery

Throughput

Forward crude price estimates

for crudes arriving in the month Actual prices for crudes coming from invetntory RTP estimates using forward crude prices and crack spreads Marketing margins
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Product netbacks prices

Forward netback prices using

Crude Optimisation

Refinery Monthly Plan 1. Inputs on demand 2. IT inputs 3. Refinery Scheduling 4. PPG workings
M1 M2 M3

Spot Crude Valuation

Spot Crude Purchase

Fortnightly plan

F1 F2

Crude Nomination
Cargo nomination Crude blend
Spot/Semi term

Fortnightly plan

F1 F2

Optimal crude mix with PIMS

Move to 4 months Rolling Plan

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Product Exchanges / Distribution Plan

Value Based Product Exchanges Plan - Consolidation of strengths & protecting our weakness on Euro-3 Grades

Movement Plan drawn with overall Corporate interests - Well defined Objective Function of Revenue Maximization - Maximum Utilization of Own Pipelines

Migrating to robust ASPEN DPO Model

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Monthly Product exchange and Distribution Plan

Tentative Distribution Plan (SCO model)

FMDP/Exchanges

Handing over to RHQ for implementation

Final Plan drawn

Plans drawn by RHQ for discussion with Railways/Coastal/Pipeline

Challenge - Reduction of giveaways from BIS

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BPCL PLANS TO MOVE TO BEST PRACTICE IN INVENTORY MANAGEMENT

International practice BPCL - Target

Setting of inventory norms

Statistical basis for setting location

specific inventory norms Cycle stock driven by batch size Safety stock based on variability in demand (e.g., seasonality) and lead time (e.g., disruptions)

Set inventory norms based on

empirical data/ 2 year statistics

Initiate inventory review process

Management of refinery inventory

Separate tank farms for refinery retail inventory system focused

on last mile demand management

Sewree, Manmad and Manglia

tanks for refinery evacuation to be with BPCR

Irumpanam and Karur tanks for

refinery evacuation to be with KRL

Mathura, Mughalsarai and other

NRL storage points to be with NRL

8X7 operations staggered shift

Depot operations for Sundays

PDP for replenishment

Automatic standard replenishment

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Inventory Management

To set location wise inventory norms, using statistical tool Objective to maintain optimal levels of inventory and release blocked working capital Every fortnight, the overall inventory being reviewed with Logistics for taking corrective actions Export plans can be drawn based on the supply demand scenario and the inventory situation.

Challenge Reduction of dead stock

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Monthly Review - SCO receives basic inputs on

Basic inputs
actual demand materialized closing stock details. crude and products tanker status landed cost of crude for the month, demurrage, details on past purchases actual production and crude processed data Intermediate Stocks variation, units on-stream data actual RTPs Movement Under-recoveries Info.

Source
Logistics

IT

Refinery

RHQ

Compare plan vs. actual analysis carried out to capture loss/gain Timely and accurate Input data is important
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SCOs criteria for selecting a team

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SCO has invested in PIMS linear programming technology, with surrounding modules

Crude oil availability Refinery units Product specifications Blend mix Crude oil assays Crude and Product prices

Optimum crude mix and product slate

Constraints

Objective Function = Maximise NCR

Refinery capacity

Demand from Marketing units

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THANK YOU

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C CONCEPT OF NETBACK USED FOR NCR MAXIMISATION

CONCEPTUAL

Overview

Illustration of Netback concept

Netback reflects real

realization Realization includes refinery and marketing margin Costs include logistics cost and customer incentives (if any)

Crude Cost Refinery Config. Tariff Marketing Logistics Protection Margin Cost Marketing Netback Incentives

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CRUDE OIL AVAILABILITY

TABLE BUY TEXT BBH AZL SXP AM3 KU1 BLT MX3 KUW ALS MOH GAS SKR D2I SKI KI2 Bombay high Azeri Lt SLEB Arab mix 60:40 Kuwait BASRAH Arab mix 60:40 Kuwait AL SHAHEEN METHANOL GAS RETURN KERO Diesel import SKO import SKO import 2nd MIN 12.7 6.0 0.0 12.4 4.7 0.0 0.0 0.0 2.7 0.0 0.0 0.0 0.00 0.81 0.52 MAX 12.7 6.0 0.0 12.4 4.7 0.0 0.0 0.0 2.7 99.0 0.1 99.0 0.00 0.81 0.52 COST 35,344 35,387 34,881 30,550 30,115 30,838 31,974 31,461 29,899 18,000 10,434 50,965 48,422 45,629 46,129
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PRODUCTS DEMAND
TABLE PPF LPG HNE LNE LNF RIL HNR M91 M90 LAB KZZ SKR SKO MTO AF1 AF2 AF3 SELL TEXT PP FEEDSTOCK LPG HAN, EXPORT LAN Export LAN, FERTILIZER HAN -RELIANCE HAN - REL- COASTAL Metro Euro-3 MMPL MS Euro-2 LAB RELIANCE PDS Kerosene Return Kero KEROSENE MTO Tier 1 JET FUEL JET FUEL JET FUEL MIN 0.15 0.00 0.00 0.00 0.39 0.32 0.97 1.35 1.94 1.29 2.03 0.00 0.00 0.13 0.81 0.68 0.19 MAX 0.17 99.00 99.00 0.97 0.42 0.35 0.97 1.61 2.26 1.72 2.90 99.00 99.00 0.23 1.13 1.90 0.19 35,351 35,351 43,866 39,889 39,423 36,147
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PRICE 41,098 37,772 37,794 37,794 36,979 38,790 39,580

VPRICE

32,558 32,145 39,662

PRODUCTS SPECIFICATION
ROW NAMES XSPG NSPG NSUL XSUL XMTB *XRVP XRVI XRSH XARO NARO XPAR NPAR *NN+A NROI *NRON *NMON *'NROI *XTEL *NFSH RESEARCH OCTANE LEAD CON g/LT FLASH POINT DEG F 30

TEXT SPECIFIC GRAVITY,MAX SPECIFIC GRAVITY,MIN SULPHUR WT % SULPHUR WT % MTBE % VOL RVP INDEX RVP INDEX RSH Content ppm AROMATIC CON,VOL % MAX AROMATIC CON,VOL % MIN PARAFIN % VOL PARAFIN % VOL MIN (NAP +ARO) % VOL RON INDEX MIN RESEARCH OCTANE

LNH 0.8

LNF 0.7

HNE 0.77 0.7

P95 0.78 0.72

M91 0.78 0.72

M90 0.77 0.71

0.5

0.05

0.05

0.0130

0.0130

0.045

18 37.08

11 20

10 17.783

10 17.78

10 17.78

10 17.8

14

12 14 65

42

42

40 8.23 95.0 85 7.73 0.15 7.81 92.5 81 7.31 0.15 7.46 89.5 81 6.96 0.15

UNITS CAPACITY
TABLE CAPS TEXT CCRT CAT1 CAT2 CAT3 CCR1 CCR9 CCR6 CCR8 CCRB CCD2 CCD3 CFPU CHVU CVDU CCCU CFCC CMT1 CARU CRD truput CDU I CDU II CDU III CDU I LS CDU I LS CDU II LS CDU II HS CDU II HS Like CDU III HS CDU III HS Like HCU LR to Vac CDU LR to Vac NCDU LR intake Cracker FCC MTBE UNIT AROMATICS EXTR. MIN 0.00 10.50 5.50 9.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.20 2.60 0.00 2.50 1.20 0.00 0.00 MAX 99.00 14.00 7.00 17.50 99.00 99.00 99.00 99.00 99.00 99.00 99.00 3.80 5.20 9.30 3.50 2.60 0.07 0.70
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CRUDE AND PRODUCT PRICES

KOCHI REFINERY
Product Name PP FEEDSTOCK LPG DOMESTIC LPG COMMERICIAL LAN, FERTILIZER LOCAL NAPHTHA Metro Euro-3 MMPL MS Euro-2 BENZENE TOLUENE HEX SBP KEROSENE MINERAL TURPENTINE JET FUEL Euro 2 Diesel Euro 3 Diesel NAVY GRADE DIESEL LT DIESEL OIL LOW SUL HVY STK FUEL OIL FO 380 DOM FUEL OIL ADANI BITUMEN 80/100 BITUMEN 60/70 BITUMEN 30/40 SULPHUR Density 18 months Rs/mt 42037.95 35881.00 37722.86 38150.66 40196.96 41044.54 40491.89 52640.00 46652.00 48312.87 48312.87 42094.32 44552.12 44193.53 40271.91 40480.48 40271.91 36428.10 24048.02 23548.02 22897.14 20964.20 28040.00 31600.00 33790.00 14976.00 average Rs/kl

1.411 1.411

29088.97 28697.30

1.285 1.302 1.288 1.21 1.21 1.21 1.172

32758.23 34218.21 34311.75 33282.57 33454.94 33282.57 31082.00

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SCO Models
Model
ICPM (PIMS) MR/KR

Type of review

Key support entity

Refinery Scheduling Refinery technology/ Refinery Scheduling

Output review: Review of product slate Input review: - Crude assay/quality - Unit yeilds - Routing ORION - Crude Scheduling Under Implementation Output review: Review of model forecast accuracy Inventory norm Input review: Inclusion of additional parameters for forecasting Input review: Review of model inputs lead time, batch size, demand variability etc. Distribution optimization Input review: Review of model inputs on LPG freight cost, linkages etc. - Bulk Distribution optimization Input review: Review of model inputs on Retail freight cost, linkages etc. DPO Under Implementation Demand planning

Refinery Scheduling

Retail logistics Business Units Retail logistics

LPG Retail - Logistics SCO

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