April 2020

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Supply Chain: Thinking outside the box: Unconventional supply chain planning

When you think of your supply chain, what do you consider? For a traditional downstream refiner, you may include pipeline, truck, rail and vessel logistics. Where inventory is stored is another consideration.

Long, P., Opportune LLP

When you think of your supply chain, what do you consider? For a traditional downstream refiner, you may include pipeline, truck, rail and vessel logistics. Where inventory is stored is another consideration. Do you have a picture of how your assets relate to one another? Do you know your daily inventory? Does this information provide insight into planning, forecasting and understanding bottlenecks? Is there more that you are missing?

If the answer is, “No,” to some or all of these questions, then getting a deeper understanding and comprehensive 360° view of your entire supply chain is essential and requires thinking outside the box to drive operational efficiencies and profitability.

Using trucks as an example, a traditional supply chain view may count only trucks and racks. For some, that is enough to get the “big picture.” However, why is the throughput what it is? Dive deeper and determine the speed of the process for metered vs. weighing of the trucks. Examine configurations of the rack, egress points and exits. Determine if congestion exists as a result of traffic patterns. Understand the seasonality of liftings and the different congestion patterns that exist throughout the day.

Like trucks, it is easy to count railcars and then calculate the number of turns in a journey between origin and destination and arrive at an average per month. It is necessary to go beyond the basics and truly understand the operations. Rail bottlenecks manifest as a result of track configuration. Loop track differs considerably from space-constrained sidings. Depending on products transported and sizes of railcars, they may require different hoses at the racks. Track and measure the speed at which crews turn the railcar from hoses-on to hoses-off, load complete. Gauge traffic within the railyard so that time is not unnecessarily eaten by inefficiencies in coupling cars together. Look beyond just basic constructive placement at the boundary of the yard. Track the macro picture of the journey of the railcar to determine the hand-offs and exchanges between long-haul and short-haul carriers. Learn what optionality your contract has to control the transit time. Sometimes, a longer route might yield a shorter travel time, especially if choke points are avoided.

For vessels, timing is everything. By nature, more events are tracked in the lifecycle of a vessel; however, examining the events systematically to optimize their supply chain is rare. Events between the notice of readiness (NOR) and the completion of discharge (COD) can illustrate and highlight bottlenecks.

When an NOR has been given and a vessel is ready to dock, the bottleneck might be the availability of specialized tugs for assisting vessels. Do personnel shifts allow and overlap with the busiest traffic times? Once docked, the supply chain extends to the hoses to connect the vessels to onshore tanks. Track and measure the configurations and schedules efficiently. Ensure that the shortest path is being taken while balancing the quality of the product in the lines.

In other words, balance the speed to discharge into tanks or the load-out of tanks with accuracy to maintain purity of product and avoid accidental contamination of batches in moving products between line segments. Measure and track seasonality and weather patterns and their effect on loading/unloading of vessels. It may surprise you that a weather condition like fog might not be a limiting factor. Instead, delays and inefficiencies might lurk elsewhere once the vessel is docked and either loading or unloading. Avoid unnecessary demurrage by thinking through the entirety of the discharge/load business process. Avoid being caught unaware in any time delay that dramatically increases demurrage fees.

Lastly, the supply chain extends to the tank farm and the tracking of inventory. Determine if tanks utilize gauges or meters—the former is cheaper and more pervasive than the latter. However, the level of accuracy of gauges differs from meters. Understand the limitations. Be vigilant for calibration issues, strapping table issues or other technology errors that could prevent consistent readings. Set up operations to measure the end-of-day inventory, as well as the flows for up and down gauges. Combine the data to gain a clearer understanding of the true book-to-physical reconciliation.

These questions around specific logistics are important to consider for the full effect of the physical supply chain. While it is easy to count vehicles, vessels and railcars, the tracking of the ancillary processes for these modes of transportation are often lost. Management teams tend to take a simplistic view of per-unit volumes and per-unit costs, ignoring some of the more important aspects of the full business process that contribute to slowdowns and/or bottlenecks. For example, with vessels, while docks and berths may be available, the hose configuration to reach receiving tanks may be a limiting factor. Additionally, harbor configuration and proximity to busy ports and other shipping lanes may take a toll on throughput. Likewise, railcars can experience bottlenecks in transit when switching between carriers. Are you able to track and monitor the transit?

Levers of control: Getting back in the driver’s seat

Downstream refiners do not have to be victims to logistics companies and completely dependent on small morsels of information about their cargoes. Typically, the outside world will provide small transactional information about how products move via truck, rail, pipe, vessel, etc. For any organization, this can be “death by 10,000 cuts.” Very few people have the time to parse small bits of information to see the larger trends. More times than not, companies have just enough time and resources to keep up with the transactional accounting that accompany the movements—anything else is gravy on top.

Despite the myriad of data and onslaught of information, refineries do not need to invest in large enterprise resource planning (ERP) systems to track their inventory. Practical solutions abound that can fit varying business scenarios. For example, a refiner must set up processes for properly inbounding information and data. Then, with the right structure and thoughtfulness, a custom inventory solution can be created—even in something as simple as Excel—to track the book and physical inventory. Naturally, the more “evolved” systems are, the better the layer of business intelligence will be on top of the base reporting. The power is in leveraging real-world events that drive how the data is consumed and how it is modeled to provide the best available information for actionable insights.

Refineries also may want to “pick their battles” and focus on critical junctions or logistical nodes to manage the complexity of logistics. If supply chain bottlenecks are known, then attention can be directed to improve overall efficiency.

Solutions to these issues vary from manually tracking transit at critical waypoints and gauging timing based on when those waypoints are passed, to full integration with specialized systems. While there is no one-stop-shop solution for all companies, a refiner must examine its strengths and weaknesses and determine its competency levels in monitoring its supply chain. If the company possesses specialized skills, it may get away with less integration and specialized systems than another company that is managing in a less technical way.

Lever of control: did someone say pricing?

Another lever of control is the use of pricing and contract negotiation. Contracts can be negotiated so that all parties are incentivized to optimize the supply chain and not waste valuable time. Understand whether you have operational control over the route. Increasing the total distance for a route might be the best option if it avoids peak rush hours and heavy congestion. Pricing can also have a powerful effect on adjusting behavior. Discount pricing programs throughout the day can drive liftings to off-peak hours. Encouraging personnel to lift refined products during less busy times will help with ratable draws on the inventory and spur more consistent tracking. 

Mechanisms for course correction

You can monitor only what you can measure, so it is imperative to track inventory in enough detail to allow for course corrections and for understanding the business. It is not enough to take a simple end-of-day reading on all tanks and delivery points. This does not provide a level of detail as to the activity transpiring throughout the day. Yes, this can be determined from one day to the next—the volume has either increased or decreased. However, the critical answer is finding out, “Why?” How is the inventory movement linked to commercial strategies and modeling? How does commercial activity and pricing drive demand? Is there control? Are some products more elastic than others in demand? Do you have a captive market that is relatively insensitive to pricing changes? Does the demand fluctuate seasonally or throughout the day within specific hours? Are certain modes of transportation used more than others? Does the tracking of inventory allow you to optimize? Is there more than one way to get product to market, assuming you do not buy delivered and sell free on board (FOB)?

The constant theme is to track inventory in a meaningful way that colorfully describes the activities at each inventory point, mode of transportation and asset, and compare them against daily physical readings. Often, these discrepancies will be revealing. Consistent imbalances are systematic of issues with technology and require work orders. Remember: if you cannot measure it, you cannot track and manage the issue. Also, remember that you do not need a massive ERP to track inventory. Customize something that is practical and right for both the business and culture.

Don’t forget the human component

Companies typically stop with assets when it comes to planning and forecasting. However, speed of business can be limited based on the ability of an organization to process the flow of a deal or cargo. Are enough schedulers available to handle the complexity of the movements? Is anyone looking at optimization? Does staffing allow only for the basics of scheduling? What manual/automated solutions exist to bring bill of ladings (BOLs) or prices into the organizational actuals? Is there a delay in management reporting as a result of inputting data on a consistent basis? Is the back office overwhelmed with matching and processing AR/AP?

It is easy to forget the human component and continue to pile on work without consideration for the burden and time delays invoked on groups. Crafting a viable solution that is fit-for-purpose for the organization is paramount. Digital transformation can help, so long as the technology is adequately embedded within the processes and culture. Do not introduce technology for the sake of technology without considering if it is truly helping the situation. Lean on experts in the organization and those that have worked around it for many years to craft the right mix of technical solutions that provide the right amount of actionable insight. HP

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