How could a petrochemical manufacturer use transportation to increase the efficiency of its

supply chain?

1. Introduction
Although the increasing global demand for oil enable the petrochemical manufacturer to
earn a high profit and increase their market share but in contrary, with the ease of international
trade and inflexibility involved in the petroleum industry has made the supply chain management
more complex and more challenging (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. According to Steve Welsh, a managing director of
the College of Petroleum and Energy Studies at the University of Oxford, the oil and
petrochemical industrys insight into the supply chain is still in its infancy (Schwartz, 2000).
Meanwhile, in order to maximize the profit and meet the global demand, Petrochemical
manufacturer tends to find opportunity and various ways to increase the efficiency of its supply
chain, specifically in its logistics area. Council of Logistics Management (1991) defined that
logistics is part of the supply chain process that plans, implements and controls the efficient,
effective forward and reverse flow and storage of goods, services and related information
between the point of origin and the point of consumption in order to meet customers
requirements. Logistic describes the entire process of materials and products moving into,
through and out of firm. Finally, the supply chain management is somewhat larger than logistics,
and it links logistics more directly with the users total communication network and within the
employees of the companies.

Due to current trend of nationalization, logistical challenges are a major influence on the
cost of oil and its derivative. Werner Paratorius, president of BASFs petrochemical division
(Whitfield, 2004) also agree that the logistics cost can be greater than manufacturing cost.
Therefore, petroleum industry tends to seek for the opportunities for cost saving in logistics.
However, the key element in a logistic chain is transportation system and through the
investigation done by National Council of Physical Distribution Management (NCPDM),
transportation occupies one third to two thirds of the logistics cost. Transportation plays a
connective role from whole production procedures, from manufacturing to delivery to the final
consumers and returns. An effective planning of all these function and sub-functions into a
system of good movement in order to minimize cost and maximize service to the customers. In
short, a good transport system in logistics activities could provide better logistics efficiency,
reduce operation cost, and promote service quality.

2. Analysis and discussion

The supply chain of the petroleum industry is divided into two major segments: The
upstream and downstream supply chains. The upstream supply chain involves the acquisition of
crude oil, the exploration, forecasting, production and logistics management of delivering crude
oil to refineries. The downstream supply chain starts at the refinery where the crude oil is
manufactured into the consumable products which involves the process of forecasting,
production and delivery of the crude oil derivatives to the end customer. The entire process is
shown in Appendix A: The petroleum Supply Chain.

2.1.

Problems

The problems with the petroleum industrys traditional process are as the following;
-

The transportation is more complex than carrying food for the proprietor and it need to
take effect only through highly quality management.

It is difficult for the petrochemical manufacturer to determine the route of transportation

since they have to take into consideration the geography and ensure compliance of the
regulation set by the government. The complexity steps in when different country may
have different set of rules set by the government and the geography area may be affected
by unexpected natural disaster.

Inaccurate in forecasting and the due to the uncertainty in demand, make it difficult for
the petrochemical manufacturer to have a long term planning which cause an increase in
the Cost per volume Delivered (CPVD) due to the poor negotiated freight contracts,
excessive run outs.

Poor infrastructure cause poor transport services and longer lead time.

Traditionally, each operation within the supply chain (both inside and outside of refinery)
was managed and optimized in isolation. It causes the management become complicated
and difficult for the management team to have control over supply chain and cause lost of
revenue at the terminal. It also increase the transportation cost for delivery.

The required cost to integrate the entire supply chain in petrochemical industry is very
high and not affordable by small medium enterprise.

2.2.

Challenges

As mentioned by Jenkins and Wright in 1998, every point in the network, therefore, represents a
major challenge to Petrochemical industries due to the long transportation lead times and the

limitation of modes of transportation. The petrochemical industries are global in nature and as a
result, the products are transferred between locations that are, in many cases, continents apart.
The long distance and slow modes of transportation such as ships, trucks, pipelines, or railroads
induce not only high transportation costs, high inventory carrying costs in terms of safety stock
but also create a long transportation lead times. Very few industries deal with that kind of
complexity in shipping, said Doug Houseman, a senior manager at the consulting firm
Accenture (Morton, 2003, p. 31). Therefore, the great distance of supply chain, not only induce
long lead times to reach the end user location compared to other industries but also hurt
suppliers in terms of service levels and customer in terms of safety stock costs.

So, the

petrochemical manufacturer may face challenges in scheduling thousands of products movement

in nominating vessels, pipelines and inspection to ensure the quality of their service level. In
addition, the uncertainty in demand and supply in petrochemical industries, not only make it
difficult for the petrochemical manufacture to define best mix of make, buy and trade decision,
but also difficulty in executing terms and exchanges deals profitability. Hence, taking into
consideration of the inflexibility involved, meeting the increase of demand and its derivative
while maintaining high service levels and efficiency is a major challenge in the petrochemical
industry.

Since transportation plays a connective role, in order to have a good transportation

system, there must be an integrated process management information systems and information
sharing, organization restructuring and cultural reorientation to integrate planning across the
supply chain from procurement of raw materials to the delivery of the final products are the
determination for a companys success (Ikram, 2004). In order to compete with other competitors

in this competitive world, sophisticated information technology is essential for smooth

information flow and improves companies relationships in supply chain networks (Guimaraes,
Cook, and Natarajan, 2002). Hull in 2011 have develop a data flow diagram (DFD) showed that
using DFD helped to realize the importance of the relationship between scheduling and
dispatching (synchronization). Using DFD to examine the information flow do improve overall
supply chain efficiency since the supply chain structure was greatly reduces. Moreover DFD
developed DFD developed offers a template for modeling any supply chain or logistics activity,
whether it is a push, pull, or a hybrid push/pull system (Hull, 2001).

Meanwhile, sophisticated information technology can be used to track the shipment and
this will provide a security need to the petrochemical manufacturer who dealing with the
hazardous products (Morton, 2003). Another challenge face by the petrochemical industry is the
attitude and anxiety regarding information sharing between supply chain partners. This kind of
collaboration and sharing information although can build a long term relationship but it can
waste opportunities for cost saving. Collaboration, information sharing, and asset optimization
require the greatest mind change because chemical producers would have to work with their
competitors, as well as with other operators in the supply chain, said Phil Browitt, CEO of
AGILITY, a logistics firm (Young, 2005, p. 10). The acquisition of information technology alone
is not sufficient to ensure success if it is not supported by a cultural change.

2.3.

Issues highlighted

From the explanation above, the unprecedented global changes of supply or demand balance
requires excellent Supply Chain Management practices to overcome the organizational barriers.
Since transportation is the biggest challenges face by the petrochemical manufacturer, it is noted
that, the demand for transportation to be safe, efficient and cost effective has given rise to the
increasing use of multiple modes of transportation within the supply chain. To comply with the
era of just-in-time inventory systems, the intermodal transportation system must be responsive to
the customer needs for speed, reliability, security and tracking. Therefore, in order to succeed in
this, there must be a cooperation for all the manufacturer from the same field to provide accurate
and reliable information to determined the best transportation network and grapple with the
replacement of aging transportation infrastructure and the integration of transportation modes
that initially developed in isolation and enjoy its benefits together.

In short, the organization strategy must based on the enterprise strategy instead of individual
market strategy and management, there must be an integrated view of key shared data and
standardization work processes and enabling technology to assist to provide a more accurate data
and improve the tracking system. Perhaps the helps from the government could also be helpful to
improve the transportation infrastructure especially in developed countries.

2.4.

Suggestion

The growth in freight transport due to the worldwide expansion of trade resulted in more
complex trading and much more developed transport network. There are numerous of way by
using transportation to increase the efficiency in the Supply Chain Management of an
organization as discussed below.

2.4.1. Outsourcing

Due to the complexity in the logistics supply network, highlighting the important role of
distribution and transportation to enhance market value of the petroleum to meet customer
demand. By outsourcing the distribution process, this increased flexibility of transportation
operations to cover wider geographical areas, with lower operating cost and better quality of
service. In addition, it is for third parties to function as full service providers to ensure that all
services desired by the petrochemical manufacturer can be supplied at least as completely and
cost effectively outside the organization. Outsourcing solutions may leverage the capabilities of
transport operators, technology service providers and business process managers to deliver a
comprehensive supply chain solution through a centralized point of contact. This not only
reduces cost but the part of complexity is entrusted to the third party provider.

2.4.2. Integration

Today world, it is extremely difficult for a petrochemical industries to focus on supply-side

efficiency alone, they need to use their business strategy to drive them toward integration of their
demand and supply sides to build a platform for achieving a competitive advantage. Hence, the
petrochemical manufacturer tends to took a step further and come out with the idea to collaborate
with competitors to overcome the supply chain method. This form of collaboration is referred to
as systematic cooperative reciprocal barter (also known as Swaps) of supplies, assets, market
share or even the entire business among competitors. (Robert, 1995). Through alliance in their

logistic activities, it helps to reduce the transportation charges. Other than transportation
alliances, there is also alliance of asset which enable the petrochemical manufacturer to find way
to reduce their cost of production when the other party who is supplier willing to lower down the
selling price with the condition, they receive a benefit in return. This is best illustrate in the case
of collaboration between Haldia Petrochemicals Ltd (HPL) and GAIL Ltd. for product swapping
which forced other polymer sellers in eastern and northern India to retreat from the Market and
gained substantial savings on freight cost. These methods indeed provide a win-win situation to
all parties. An interview with supply chain directors in two international petrochemical
companies reveals that the only method use to determine when companies should attempt to
make swap decision are judgmental methods and spreadsheet. As discussed earlier, decision
made in each area may impact other area of logistic, so far, there is no proof that the methods
suggest above will ensure the decision is the best solution to the company. Hence, swaps
between the parties cannot guarantee an optimal solution if there is no accuracy of data to assist
in decision making.

2.4.3. Refinement of Transport and Warehousing Management

Transport and Warehousing Management is refined by optimal use of different transport modes
and with the assistance of Information and Communication Technology (ICT). Since
transportation is the essential link in the domestic and global trading system, increasing use of
multiple modes of transportation within the supply chain will increase the efficiency and drive
cost saving in transportation. The petrochemical manufacturer has to ensure that they will be

using the correct modes of transportation in order to be responsive the customer needs for speed,
reliability, security and tracking. However, Government also play part of the role in developing
systems that balance the safety and security needs of their constituents with business and
consumer objectives. Developments in vehicles, geographic and handling technology will
definitely change in pattern of traffic flows which may shorten the transportation time.

Traditionally, warehousing services between plants and marketing outlets involved separate
transport and merchandising establishments completed the chain with delivery to the consumers.
It is suggest that the manufacturer tends to limit their capability to the production of goods. The
marketing and distribution to other firms despite the fact that each decision made in each area
may impact others activities of the company. Therefore, it is important to have a single,
interdependent system with the closure of many single-user warehouses and an expansion of
consolidation facilities and distribution center for a better transport services.

Meanwhile, ICT will greatly impact transport and warehousing management, with electronic
communication along the supply chain being set for massive growth. It is predicted that the
automatic positioning, navigation systems, real time order processing, routing, scheduling system
will definitely expand. This could also be one of the reasons why many transport companies
invested heavily in track and trace systems to identify the location of any consignment at any
time to improve the visibility of the global supply chain to shippers and their customer.

3. Conclusion

Finally, it is conclude of the used of a good transportation systems may increase the efficiency of
its supply chain.

Firstly, it is important for us to highlight that this industry is confronted with an extremely
challenging and highly volatile environment. Despite the great challenges in the petroleum
industrys supply chain, opportunities for improvements and cost savings do exist along the
supply chain. One major area for improvement is the transportation system. However, the
industry cannot solely rely on transportation alone but other factors such as integrated process
management, information systems and information sharing, organizational restructuring, and
cultural reorientation are equally important.

Therefore, a lot of suggestions of solutions is given by the academician or by the petrochemical

industries where there is no one best solutions which able to assist the petrochemical
manufacturer in long term. The outsource is good for those company who are in the beginning
stage where they do not have any expertise, knowledge and skill person to run the transportation
system, by engaging a third party, they can save time and cost in implementing the entire process
which may not be entirely suitable for the use of the company. Since a good supply chain is the
integration of the entire process, so, outsource may not be the best solution in long term. Hence,

the company may take a step further either to invest in equipment facilities and people to operate
and manage the supply chain itself but this idea may not be realism if the company do not have a
strong financial status. Then, another step to be taken by the company is to take a step further to
decide whether collaboration with any third party is possible. As discussed above, collaboration
does provide a lot of benefits through sharing of data, asset and knowledge and skill to increase
the strength of each element.

Since Transportation makes goods and products movable and provides timely and regional
efficacy to promote value-added under the least cost principle. Transport does affect the
efficiency of the supply chain in petroleum industry since it does influences production and sale.
That is the reason for the petrochemical manufacturer to focus on their transportation in order to
increase the efficiency of their supply chain.

Appendix A

The Petroleum Supply Chain

References:

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2. Collins, T. (1999, September 9). Striking it big together.
3. Ikram, A. (2004, November). Supply chain management in the oil and gas sector.
4. University of Wisconsin-Madison School of Business.
5. Jenkins, G., & Wright, D. (1998). Managing inflexible supply chains.
6. Schwartz, B. (2000, August). The crude supply chain.
7. Fidel Santos Manzano, (2005). Supply Chain Practices in the Petroleum Downstream
8. Lewin, G., 2003, "A customer-led strategy for managing the downstream oil supply
chain",
9. Chopra, Sunil and Peter Meindl. Supply Chain Management. 2 ed. Upper Saddle River:
Pearson Prentice Hall, 2004.
10. Whitfield, M. (2004, Sep 20 Sep 26). A stronger link.

Reports:
1. Article of Managing Risk to avoid supply chain breakdown.
2. What is Supply Chain?