Supply Chain Management in the Petroleum Industry: Challenges and Opportunities RAED HUSSAIN
Department of Quantitative Methods & Information Systems, Kuwait University, Kuwait
Department of Industrial Engineering, University of Houston, Texas, U.S.A.
Department of Decision and Information Sciences, University of Houston, Texas, U.S.A.
Supply chain management in the petroleum industry contains various challenges, specifically in the logistics area, that are not present in most other industries. These logistical challenges are a major influence on the cost of oil and its derivatives. However, opportunities for cost savings in logistics still do exist. Giant oil and petrochemical companies are undertaking a “swap” practice that saves companies millions of dollars. The objective of this paper is to shed some light on the supply chain challenges and opportunities in the petroleum industry and on swap practices that have long been employed by petroleum industry’s giants around the world, such as BP, BASF, Honeywell, Nova, and much more, yet have long been ignored in the operations management literature. Keywords: Supply Chain Management, Logistics, Petroleum Industry, The Swap Practice 1. Introduction The steadily increasing global demand for oil and its derivatives such as petrochemicals has enabled companies providing these products to reach more customers and increase their market share and profitability. This boom in global demand along with the ease of international trade and the inflexibility1 involved in the petroleum industry’s supply chain has made its management more complex and more challenging (Coia, 1999; Morton, 2003). Despite the importance of supply chain management and its growing complexity, the petroleum industry is still in the development stage of efficiently managing their supply chains. In fact, according to Steve Welsh, a managing director of the College of Petroleum and Energy Studies at the University of Oxford, the oil and petrochemical industry’s insight into the supply chain is still in its infancy (Schwartz, 2000). However, even with the inflexibility and complexity involved in the industry’s supply chain, there is a lot of room for improvement and cost reduction, specifically in its logistics area. Werner Paratorius, president of BASF’s petrochemicals division said “Supply chain management is the backbone of a business where logistics costs can be greater than manufacturing costs” (Whitfield, 2004, p.R12). By the end of 2004, world-wide demand for oil reached 75 million barrels per day and has been projected to increase at a rate of 2 percent per year over the next ten years. For example, China’s demand for energy alone is expected to grow at a rate of 4.5 percent per year for the next five years and reach four million barrels by 2010. However, due to recent political unrest in the Middle East, which is the largest oil producing region, sustainable oil supply has become highly unpredictable. Oil and petrochemicals companies are forced to maintain higher safety stocks and search for alternative sources of supplies (Ikram, 2004). Inflexibility in the supply chain is the constraints involved along the chain, such as long lead-times, manufacturing capacity, and limited means of transportation, that are hard to change. 1
Commodities such as oil, gas, and petrochemicals require specific modes of transportation such as pipelines, vessels or tankers, and railroads. These commodities are produced in specific and limited regions of the world, yet they are demanded all over the globe since they represent an essential source of energy and raw material for a large number of other industries. Several weeks lead-time from the shipping point to the final customers’ location is very common in this type of industry. For example, it takes five weeks for...