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Supply Chain Characteristics of the

Petroleum Industry: The Indian Context
South Asian Journal of Management, Apr-Jun 2007 by Varma,
Siddharth, Wadhwa, Subhash, Deshmukh, S G
The process industry forms an important component of the Indian economy. The petroleum
industry in particular plays an important role in the economic development of the country. After
liberalization of this industry, performance of its supply chain has become all the more important.
This paper looks at the importance of supply chain management in the process industry and
further tries to distinguish the petroleum industry from normal discrete manufacturing industry.
The unique features of petroleum industry call for a special treatment of the supply chain. This
paper further tries to identify the non-value added activities in the petroleum industry, which
makes it inefficient, and suggests some mechanisms, which could help in improving the supply
chain performance.

INTRODUCTION

The process industry in India is a vital component of the rapidly growing Indian economy. It
consists of industries like basic chemicals, petrochemicals, petroleum, fertilizers, pesticides, etc.
Among the process industries, the petroleum industry holds critical importance with both industry
and transportation depending upon it. In order to understand the level 0^ demand for petroleum
products in India, in a global perspective a comparison of per capita consumption of petroleum
products in the various parts of the world has been presented jn Table 1. With the per capita
consumption level in India being only about 60% of that in China, a strong growth potential exists
in India, given particularly a large population base of Over a billion.

The petroleum industry traditionally had prices decided by the Government of India. Effective
from August 1, 2004, the Government put in a revised methodology allowing oil companies limited
freedom to revise the prices of motor spirit and High Speed Diesel (HSD). The NELP (New
Exploration and Licensing Policy) has been put into place and more and more international
operators are considering investing in India.

The total investment estimated in the petroleum sector from 1995 till 2010, is expected to be Rs.

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Supply Chain Characteristics of the Petroleum Industry: The Indian Context... http://findarticles.com/p/articles/mi_qa5483/is_200704/ai_n21295051/

4,32,000 cr (US$120 bn), out of which Rs. 2,58,000 cr (US$80 bn), are for the upstream sector
alone. The Petroleum, Oil and Lubricants (POL), product consumption is slated to touch 155
Million Metric Tonnes (MMT) by 2006-2007 and 200 MMT by the year 2010 (HPCLs perspective
plan: Vision 2020).

Petrochemical industry in India employs around 40,000 people directly and around 4 lakh
indirectly. This sector caters to a whole host of industries like oil, gas, plastics, agro chemicals,
pharmaceuticals, clothing, housing, transportation, communication, healthcare, etc.

OBJECTIVES OF THE PAPER

Very limited literature is available on petroleum industry supply chains. This paper attempts to
enhance the understanding of the petroleum industry supply chain. The paper has the following
objectives:

* Understanding the importance of supply chain management in the petroleum industry.

* Identifying distinguishing features of the petroleum industry supply chain vis-�-vis discrete
manufacturing supply chains.

* Discussing the petroleum supply chain in India.

* Identifying non-value added activities in the petroleum supply chain.

* Discussing the role of information technology in revamping the petroleum industry supply chain.

CONCEPT OF SUPPLY CHAIN MANAGEMENT

The Supply Chain Council defines a supply chain as a "collection of activities a company uses to
plan, source, make and deliver a product or service". Supply chain management aims at managing
the activities in the supply chain to improve profitability for the organization. Supply chain
management as a new business paradigm was motivated by the interest in integrating procurement,
manufacturing and distribution activities-integration made possible by advances in IT (Shapiro,
2004). SCM is more than a simple tool to evaluate and optimize a supply chain; it is a complex,
structured business relationship model. It takes into consideration all aspects of the events
required to produce the company's product in the most efficient and cost effective manner possible
(Quiett, 2002). According to Mohanty and Deshmukh, (2005), another very comprehensive
definition of supply chain management is that it is a loop :

* It starts with customer and ends with customer.

* Through the loop flow all materials, finished goods, information and transactions.

* It requires looking at business as one continuous, seamless process.

This process absorbs distinct functions such as forecasting, purchasing, manufacturing,

distribution, sales and marketing into a continuous business transaction.

IMPORTANCE OF SUPPLY CHAIN MANAGEMENT IN THE PETROLEUM INDUSTRY

All process industries are asset intensive and so is the petroleum industry. Since 1994, the average
industrial profit margin, according to Standard & Poor's, has been 14.2%. For the same period, oil

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Supply Chain Characteristics of the Petroleum Industry: The Indian Context... http://findarticles.com/p/articles/mi_qa5483/is_200704/ai_n21295051/

companies have earned just 7.2% (Schwartz, 2000). In case of chemical companies, the supply
chain can account for up to 70% of the company's overall costs (Vlasimsky, 2003). Therefore, if
companies can bring about substantial improvement in their supply chain performance, it can be a
big boost to their bottomline. This is particularly important in case of the petroleum industry,
which is organized around highly specialized business processes that encourages fragmentation
(Schwartz, 2000). Chemical supply chains are typically non-linear in nature. These are complex
webs of supply and demand, driven by both long-standing relationships and cost pressures. Supply
chain optimization at a strategic and operational level is a value creating opportunity for chemical
companies and a potential source of competitive advantage (Tomkins, 2003). The same holds true
for petroleum companies, which are also very complex, and supply and demand are affected by
relationships and cost pressures. The petroleum industry supply chain is schematically shown in
Figure 1 .

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