HPCL - SUPPLY AND DISTRIBUTION AT DEVANGONTHI TERMINAL

Table of ContentsIntroduction2Marketing Network:2Products and services:2International Trade3Retail Outlets:3Production strategy:3Operations and Distribution4Methodology5Supply Chain of HPCL6Macro level analysis of the petroleum industry6The Bangalore Region Central Distribution Centre6Operations7Sourcing and Inventory Policy8Sales and Distribution8Information Technology9Analysis of Supply Chain9Recommendations11References11

IntroductionHindustan Petroleum Corporation Limited is a Government of India Enterprise headquartered in Mumbai. HPCL operates 2 major refineries producing a wide variety of petroleum fuels & specialties, one in Mumbai on the West Coast with a capacity of 6.5 Million Metric Tonnes Per Annum (MMTPA) and the other in Vishakapatnam on the East Coast with a capacity of 8.3 MMTPA. Also, HPCL owns a equity stake of 16.95% in Mangalore Refinery & Petrochemicals Limited, a state of the art refinery at Mangalore with a capacity of 15MMTPA. Further HPCL has constructed a 9MMTPA refinery at Bhatinda, Punjab along with Mittal Energy Investment Pte Ltd. HPCL also owns and operates the largest Lube Oil refinery in India with a capacity of 335TMT which accounts for over 40% of Indias total Lube Oil base production.Marketing NetworkHPCLs marketing network consists of 13 Zonal offices in major cities and 101 regional offices facilitated by a supply and distribution infrastructure comprising of Terminals, pipeline networks, Aviation Service Stations, LPG Bottling plants, Inland relay depots & Retail outlets, Lube and LPG Distributorships.Products and servicesRefineries: Value added products like petrol, diesel, kerosene, LPG, Naphtha and many other products are obtained from crude petroleum oil through refining. HPCL also upgrades the crude oil petroleum to other value added products like lubricants, specialities and greases. The product handling facilities in the refineries are completely automated and also they produce green fuels like unleaded fuel and low sulphur diesel.Aviation: HPCL has been providing aviation refuelling services at various airports in India through separate business unit- HP Aviation. There are 34 Aviation service facilities across India.Bulk Fuel and specialities/ direct sales: This particular unit caters to marketing of bulk fuels and petroleum products directly to the industrial consumers like power plants, chemicals, fertilizers, railways, shipping companies and airlines. This unit is also involved in the export business of bulk fuels and finished products.LPG: The LPG brand of HPCL is known to be HP Gas. There are 44 bottling plants across India with a total capacity of 3610 TMTPA.HP Lubes: It is an integral part of HPCL. It produces lubricants.International TradeThe activities of this unit are crude oil imports, Petroleum products imports or exports, shipping, production planning for refineries, supplies for domestic markets, product exchange with other Indian oil companies and Oil price risk management.Retail OutletsThe HPCL retail outlets are the units which serves the purpose of consumers by providing products mainly Auto LPG, CNG, PDS Kerosene (SKO), power, turbo jet.

Production strategyA very high importance is given by the government to the conservation of petroleum products in order to reduce the gap between growing demand and indigenous supply of crude oil.Regular tensions in the Middle East and heavy import bill are reasons to give importance to conservation and sparing use of petroleum products. Accordingly strategic locations are to be chosen to store this crude oil and refine it. Mumbai plant has enough capacity to store the raw materials and finished products as well. Shipment of raw materials takes place every 15 days but production is a continuous process.Various products of HPCL are: Petrol High Speed Diesel Furnace oil Light Diesel oil Aviation Turbine Fuel NapthaIt also owns and operates a large product supply and distribution network throughout the country. HPCL has a well-established countrywide marketing network including zonal and regional offices, terminals, depots, LPG bottling plants, aviation service stations', retail outlets, and product pipelines.Operations and DistributionOperations & Distribution Department is the backbone of the corporation as it is this Department that ensures product delivery to customers through a vast network of terminals and depots which store and supply fuel. The aim of the department is to have a Safety first approach and follow safe practices at all times. The Department strives to proactively conduct our business in an ethical and transparent manner to meet the market demand through state of the art infrastructure, with a belief that if safe practices are followed, customer satisfaction, market share, profit etc. follows automatically.The operating environment for the energy industry continues to be challenging. The entry of new players, surge in global demand & prices, reduced operating margins, fluctuating supplies and recently announced partial deregulation of petroleum prices viz. Petrol, Diesel etc have been made the India petro retailing highly competitive and dynamic. To achieve sustained competitive advantage, oil companies are leveraging technologies and adapting innovating methods to achieve operational excellence, sustain performance and drive results. View this; O&D Department has also launched number of e-initiatives like IMS, VMS, TAS, Primary Distribution Tool for product placement etc. during past few years.Towards the endeavour of conservation of petroleum products and carry out environmental operations, O&D Department is developing bottom loading of tank trucks with vapour recovery system. Accordingly pilot project of vapour recovery system has been completed at Loni Terminal. A key focus area during the last year was to enhance the green scaping at various storage locations. To enhance safety & security of terminals/Depots, ensuring delivery of quality Product and optimising the total delivered cost of products at retail outlets. This department is going to face these challenges by leveraging technology and committing itself to excellence.The Value Chain:EXPLORATIONIMPORTSREFININGPRODUCT MOVEMENTSTORAGE & DISTRIBUTIONPRODUCT MOVEMENTRETAILINGCONSUMERSTERMINALS/DEPOTS/BOTTLING PLANTSRETAIL OUTLETS / DISTRIBUTORSHIP / DIRECT SALES

The value chain starts from the exploration and import of crude petroleum oil to final products to the end customers. Firstly, the crude oil is explored by companies like ONGC, Oil India Limited or is imported as per demand at the macro level and supplied to different refineries across the country. At this level, the crude oil is refined and upgraded to various finished products like petrol, diesel, lube oil, kerosene, wax etc. These finished products are then shipped to various terminals in the supply and distribution network through pipelines and wagons. From the terminals/ distribution centres the products are shipped to various retail outlets or directly sold to different industries in bulk through trucks or wagons. Finally, it is served to the end customers from the retail outlets.

Methodology

Our objective in doing the project was to do an in depth study of how the supply chain for retail sales and distribution of HPCL functions for a city like Bangalore and provide our recommendations to the process. We began by contacting the HR department of HPCL regarding our project who directed us the the HPCL distribution center at devangonthi. We visited the HPCL terminal there and obtained to understand operations and supply chain of the terminal although they refused to provide us sales data due to privacy issues. We simultaneously conducted our study into how the sales and distribution of petroleum products in the retail sector is conducted and gathered data available in the public domain to assist in our analysis. Supply Chain of HPCL

Of the different units of HPCLs marketing division discussed above, we will do an in-depth analysis of the oil department. In todays lifestyle, petroleum products such as diesel and petrol are considered as a basic requirement just like food for households and it holds doubly true for many industries. This implies that the primary strategic goal for a supply chain for distributing these petroleum products should be to maintain 100% service level, as even minute stock outs can cause severe losses and inconvenience to the customers. This is one of the chief reasons that the whole process is highly regulated and monitored by the ministry of petroleum. Till some time back regulations on prices were put in place by the government. However, due to increase in debt and other limitations, regulations are now curbed, making the industry more competitive. To understand the supply chain, we must first have a basic idea on the demand and supply of these petroleum products at the macro level.Macro level analysis of the petroleum industryDemand of Petroleum products has been rising at a steady rate year on year. The ministry of petroleum forecasts the aggregate demand for petroleum product in the country in association with the various players in the distribution side like BPCL, IOCL etc. The main factors affecting this demand are:a. Growth in the automobile industry.b. Growth in industries using petroleum products.The production rate being constant, MOP estimates the amount of petroleum product to be imported and accordingly the annual budget is determined. Similarly, region wise and then state wise demand is estimated.The Bangalore Region Central Distribution CentreFor our project we mapped the supply chain activities and operations at the Bangalore RO CDC of HPCL. These CDCs are named as terminals, depots or bottling plant based on its capacity and the extent of operation. The Bangalore region CDC is located in Devangonthi and is named Devangonthi Terminal. This terminal handles four products MS (Petrol), SKO (kerosene), HSD (Diesel) and ATF (Aviation fuel). It has a storage capacity of 60000 KL out of which 26000KL is for HSD, 4000KL for SKO, 10000KL for MS and 20000KL for ATF. However, capacity for each product can be adjusted against another as the need may be. The terminal caters to the requirements of 243 Retail Outlets in the Bangalore region. There are three types of Retail Outlets a) Franchisee owned retail outlets where HPCL just provides the supply b) HPCL owned retail outlets but operations managed by franchisee owners c) Retail outlets owned and managed by HPCL. A perspective on the operations of the Terminal can be gained by the fact that this is one of the three terminals of HPCL which cater to the requirements of all HPCL retail outlets in the state of Karnataka.Operations The industry operates in a constant supply and stable demand on an aggregate level. However, fluctuations are observed at the micro level and the operations are managed to negate any effect of such fluctuations. Retail outlets forecast their quarterly demand based on factors such as:a. Past sales datab. Growth in the automobile marketc. Growth in industryd. Changes in neighborhoodThe forecasted demand of all the retail outlets in a region are gathered in the respective regional office. This demand is then passed onto the respective regional terminal which in turn is passed on to the supplying refinery.After the demand is forecasted, the retail outlets place their orders to their respective sales officers according to their inventory policy. Generally, all retail outlets follow periodic inventory policy and the order up to level is determined by their capacity. Fluctuation in demand from retailers on a daily basis is controlled by diverting product movement from one outlet to another. The diverting system is based on the fact that the aggregate demand in the region will remain constant and true to the forecasted value and individual fluctuations will smooth itself out over the timeframe of a quarter.Sourcing and Inventory PolicyDevangonthi terminal, Bangalore sources its product from Mangalore Refinery and Petrochemical limited. The product is either sourced via pipelines or via rail wagons in the most cost effective form.The terminal maintains a minimum stock level of 12000KL and the lead time for product sourcing is 48hrs. A periodic review system for inventory is followed and is reviewed on a daily basis. The order up to quantity is decided by the terminal in charge with the help of Honeywell ERP system so as to maintain 12000KL at any point of time. At the sourcing side, refinery assigns an average daily supply to the terminal based on the demand forecasted. However, fluctuations, if any are managed by diversification of product movement from one terminal to another.Uncertainties on the supply side might occur due to breakdown in the plant, rejection of batch due to contamination or breakdown in the pipelines. As maintaining high service level is the primary goal, in such cases the terminal has the understanding with other terminals and even other suppliers like IOCL, BPCL, SHELL for sourcing its product. Sales and DistributionThere are two types of sales from the Devangonthi terminal retail and direct sales. Direct sales represent a small portion of sales which are bulk sales to clients like industries and factories etc. Devangonthi terminal is responsible for direct sales in a region encompassing an area of 300km from its location. The demand from direct sales is constant as this is fixed during signing of contract.Retail sales contribute to bulk of the sales. Devangonthi terminal caters to the need of 243 retail outlets (franchise owned, franchisee managed and HPCL owned and managed). The terminal delivers its product to retails outlets in a region of 150 KM and promises a lead time of 24 hours. This terminal currently has an average sale of 2000 KL of petroleum product everyday which is an aggregate of all the four types of products mentioned in the first section.Transportation to retail outlets are carried by tank trucks of capacities 12KL, 20KL and 30KL. HPCL outsources the delivery to fleet owners on a contractual basis. However, in certain specific cases, HPCL has its own fleet of tank trucks to supply its high throughput retail outlets. On an average 120 tank trucks are loaded on a daily basis, however the terminal can load up to 170 trucks a day. The terminal has a capacity to load 10 tank trucks simultaneously and each such batch is loaded in 30-45 minutes. The terminal operates from 7 A.M. in the morning till 5 P.M. in the evening. These gives a maximum capacity of 150-170 truckloads of deliveries per day which comfortably leaves a buffer over the average demand to handle any fluctuations. The schedule of deliveries for each trucks is managed by the ERP system of HPCL which ensures that each truck is utilized optimally and each truck has travelled equal distance in the course of a quarter. This leads to transparency in the system and reduces scope for corruption.Information TechnologyHPCL has an ERP system set up of JD Edwards. However, Honeywells Supply and Distribution (SAND) tool is used to maintain its supply chain operations. The chief objectives of this system as given in their report are a) Cost savings by reduction in distribution and inventory related expenditures b) Improvement in operational efficiency by reducing unplanned shipments c) Better visibility of distribution network d) Better utilization of transport resources e) Better service levels by managing inventory at demand and storage locations f) Better support production and sourcing planning g) Reducing the need for frequent troubleshooting across the network Honeywell system is not equipped enough to handle the robustness and complexity in operations of HPCL. However, it serves its purpose by assisting in certain decisions such as optimal linkages based on global optimization, suggests the quantity to be uplifted from each source and the preferable modes of transport on each route. It also measures the fleet utilization and closing inventory, and indicates the constrained resources which, if addressed, can improve the plan.

Analysis of Supply Chain

The supply chain of HPCL is designed so as to maintain a near 100% service level while hedging for supply side uncertainties. Unlike other industries, here the demand is basically stable with minimal uncertainty. Though, minor seasonal fluctuations are observed, they can easily be predicted. In some cases the demand shifts from one retail outlet to another (increase in highway traffic during holidays) which is managed by diverting product movement. If we see the strategic fit, then from the graph below we should be able to have an extremely efficient supply chain and we should be at point 1 in the graph.

The issue with the system is the requirement of 100% service level and at the same time manage for uncertainty in the supply side. This can manifest due to multiple factors like a) Breakdown of service in refineries.b) Breakdown in transportation.c) Bad batch of product, especially in products like Aviation Turbine Fuel which is highly quality conscious.d) Macroeconomic factors hampering imports.In order to hedge for these factors the terminals have adopted the following steps a) The terminal run at extremely low capacity and maintains a very high inventory level. Though the lead time for delivery is 2 days and demand is extremely stable, the terminal at any point has an average in hand inventory of 6 days.b) Although there is a primary sourcing supply, the terminal keep the option of sourcing from multiple points in times of emergency like sourcing from other terminals, from other companies or from other refineries.c) Though one terminal has the capacity to serve the entire Karnataka region, three terminals are set up to ensure no stock out in case of breakdown of any one terminal.d) Three terminals are set up in Karnataka region to decrease the lead time for supply, thereby improving service level.Recommendations

As discussed from our analysis, the operations of the terminals can be improved and made more profitable by focusing on two aspects a) Reducing operational expenses The chief driver of costs in the system is the holding cost due to high inventory level. To reduce the inventory level, we have to reduce the uncertainty in the supply side in case of breakdowns. In case there is any breakdown in the refinery we should have infrastructure in place to source material from the Mumbai or the Vizag refinery in the form of dedicated wagons. The decision will depend on the cost analysis of setting up such infrastructure against the improvement in inventory levels.Marginal increase in operational expenses can also be achieved by better leveraging IT to gather POS data from retail outlets and analyzing them to predict demand more accurately and automating the IT ordering process. This can lead to reduction in cost due to less labor requirements. But as the demand is already very stable, it has to be checked if the marginal benefit is appropriate for the investment required.b) Increasing utilization As of now the system has huge capacity unused which was created keeping in mind the future demand and increasing sales by setting up new retail outlets and aggressively marketing can help us get more customers and increase sales. Although increasing sales will be accompanied by increase in inventory costs which should be factored into the cost analysis to obtain the optimum sales level.

References

1. Details Of The Dealership Of Hpcl, South Central Zone , Karnataka, Obtained From Http://Www.Hindustanpetroleum.Com/.2. Indian Petroleum & Natural Gas Statistics 2012-13 Report 3. Supply Chain Management, 5th edition, Sunil Chopra, Peter Meindl, D.V.Karla4. HPCL Improves Distribution Efficiency with Honeywells Supply Chain Solution Report.12 | Page