Optimizing your energy supply chain requires thinking outside the box to maximize efficiencies and profitability.
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. You may think about where inventory is stored. Do you have a picture of how your assets relate to each other? Do you know your daily inventory? Perhaps…does this information provide insight into planning, forecasting and understanding bottlenecks? Is there more you’re missing? If you answered “no” to some or all the questions above, getting a deeper understanding and comprehensive 360-degree view of your entire supply chain is essential and requires thinking outside the box in order to drive operational efficiencies and profitability.
First, take trucks as an example. A traditional supply chain view may just count trucks and racks. For some that’s enough to get the “big picture”. However, do you know the reasons why the throughput is 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 there is congestion as a result of traffic patterns. Understand the seasonality of liftings and the different congestion patterns that exist throughout the day.
Second, let’s examine railcars. Here, like trucks, it’s 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. 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 actually yield a shorter travel time, especially if you avoid choke points.
For vessels, timing is everything. By nature, more events are tracked in the life cycle of a vessel. However, oftentimes, very few examine the events systematically in order to optimize their supply chain. From the Notice of Readiness (NOR) to the Completion of Discharge (COD), there are events in between to illustrate and highlight bottlenecks.
While a NOR is 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 configuration and schedule efficiently. Ensure the shortest path is being taken while balancing the quality of the product in the lines. In other words, balance speed to discharge into tanks or load-out of tanks with accuracy in maintaining purity of product and avoiding 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, the slowness and inefficiency 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. Don’t get caught unaware in a time delay that runs the demurrage fees skyward.
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 later. 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 a consistency of readings. Set up operations such that you can 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’s easy to count vehicles, vessels and railcars, it’s often lost to track the ancillary processes for these modes of transportation. Management teams tend to take a simplistic view of per-unit volumes and per-unit costs. They ignore some of the more important aspects of the full business process that contribute to slowdowns and/or bottlenecks. For example, with vessels, while there may be plenty of docks and berths, 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 don’t have to be victims to logistics companies and completely dependent on small morsels of information about their cargos. 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 isn’t a 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 there are specialized skills, then the company may get away with less integration and specialized systems vs. someone managing in a less technical way.
Another lever of control is the use of price and negotiation of contracts. Contracts can be negotiated in such a way that all parties are incented to optimize the supply chain and not waste valuable time. Understand if 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. Price can also be powerful to adjust behavior. Discount pricing programs throughout the day can drive liftings to off-peak hours. Encouraging jobbers 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 only monitor what you can measure. Therefore, it is paramount to track inventory in enough detail to allow for course-corrections and to allow for understanding the business. It’s not enough to take a simple end-of-day reading on all tanks and delivery points. This doesn’t provide a level of detail as to the activity transpiring throughout the day. Sure, you can determine that from one day to the next—the volume 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 don’t buy delivered and sell FOB)?
The moral of the story is to track the inventory in a meaningful way that colorfully describes the activities at each inventory point, mode of transportation and asset and comparing it against daily physical readings. Oftentimes, these discrepancies will be telling and 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.
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 there enough schedulers to handle the complexity of the movements? Is anyone looking at optimization? Does staffing only allow for the basics of scheduling? What manual/automated solution exists to bring bill of ladings (BOLs) or prices into the organization 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’s 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 embedded in with the processes and culture. Don’t introduce technology for the sake of technology without considering if it’s truly helping the situation.
Patrick Long is a Director in Opportune’s Process & Technology practice. Patrick has over 20 years of experience in providing clients with energy trading and risk management, packaged software implementation, trading and risk processes and business process automation. Patrick leads the BI initiative within the firm. He focuses on applying BI tools (e.g., Spotfire and Tableau) to client data in order to allow proper insight for management around both upstream and downstream business issues. Prior to joining Opportune, Patrick worked in the energy consulting trading and risk systems practice at Accenture where he managed multiple project teams through the entire process of software selection to successful implementation of trading and risk management systems for energy trading entities.
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