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PRESENTED BY
Bhavesh Relan (Roll No. 203 ) Rohit Gupta (Roll No. 204 ) Saket Ranjan (Roll No. 211 ) Surbhi Jaiswal (Roll No. 174) Vipin Rawal (Roll No. 214 )
Flow of Presentation
Problem Statement Introduction Data Envelopment Analysis DEA Implementation Analysis and Implication of Results References
Problem Statement
Analyze the Oil and Gas sector using comparative empirical
measurements of three different companies. Use the nonparametric method of Data Envelopment Analysis (DEA), identifying a frontier on which the relative performance of all utilities in the sample across the selected companies can be compared. Compare efficiencies across ten decision making units (DMUs).
Introduction
The Indian Oil and Gas (O&G) sector is one of the six core industries of India
and contributes over 15 per cent to the Gross Domestic Product (GDP).
The country is the sixth largest consumer of oil in the world and the ninth
Global 500 list and the largest public corporation in India when ranked by revenue.
BPCL has been ranked 225th in the Fortune Global 500 rankings of the world's
DEA
Data envelopment analysis (DEA) is a nonparametric method
in operations research and economics for the estimation of production frontiers. It is used to empirically measure productive efficiency of decision making units. DEA is commonly used in electrical utilities sector for analysing production & cost data. Advantages No need to explicitly specify a mathematical form for the production function Proven to be useful in uncovering relationships that remain hidden for other methodologies Capable of handling multiple inputs and outputs Capable of being used with any input-output measurement The sources of inefficiency can be analysed and quantified for every evaluated unit
Continued..
Disadvantages Results are sensitive to the selection of inputs and outputs. Best specification cannot be tested. The number of efficient firms on the frontier tends to increase with the number of inputs and output variables.
where the analyst doesn't want the frequency of poorly run operations to affect the analysis. DEA has been applied in many situations such as: health care (hospitals, doctors), education (schools, universities), banks, manufacturing, benchmarking. The analyzed data sets vary in size. Some analysts work on problems with as few as 15 or 20 DMUs while others are tackling problems with over 10,000 DMUs.
DEA Models
There are primarily two models: CCR Model Primal CCR Model
The CCR and BCC models both define efficiency as a ratio of weighted outputs over weighted inputs, hence they are often known as ratio models.
Power & fuel form an important part of oil refining companies & hence forms a huge portion of cost structure. Employee Cost Employee cost consists of two components: wages & salaries. Wages is given on per day basis and is basically for contractual employees. Salaries are given on monthly basis and is given to permanent employees Depreciation Depreciation refers to two aspects of the same concept: the decrease in value of assets (fair value depreciation), and the allocation of the cost of assets to periods in which the assets are used Miscellaneous Expenses A miscellaneous expense is a term used in accounting, tax and expense reporting. It is usually a small expense that is not specific to any other category. Depending on the usage, it may contain a variety of different expenses paid by the company or person making the report.
Continued..
Reserves
An "operating reserve" is commonly used to refer to unrestricted cash on hand available to sustain an organization, and nonprofit boards usually specify a target of maintaining several months of operating cash or a percentage of their annual income
Inventories
The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. Capital Work in Progress Material that has entered the production process but is not yet a finished product. Work in progress (WIP) therefore refers to all materials and partly finished products that are at various stages of the production process. WIP excludes inventory of raw materials at the start of the production cycle and finished products inventory at the end of the production cycle.
It the net profit earned by the company after deducting all expenses like interest, depreciation and tax. PAT can be fully retained by a company to be used in the business Sales Turnover Sales turnover represents the value of goods and services provided to customers during a specified time period - usually one year.Sales turnover is the company's total revenue, both the invoice, cash payments and other revenues.
Equity Dividend
A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, it can either re-invest it in the business (called retained earnings), or it can distribute it to shareholders. A corporation may retain a portion of its earnings and pay the remainder as a dividend
Data
DMU Power & Fuel Cost Employee Cost IOCL 3801.74 5322.436 BPCL 716.08 1102 HPCL 921.86 1290.604
7,840.00 11605.75
55,448.75
1,512.34 2154.43
14,552.32
1,895.32 2763.45
12,783.51
56,829.20 13,434.77
1,213.98
15,948.06 1,116.53
397.7
19,454.53 4,444.47
287.83
PAT
Sales Turnover
3954.62
438829.7
1311.27
211973
911.43
178735.5
BPCL is the most efficient organization with HPCL being next at 95.98 % and IOCL at 85. 66 % efficiency.
Employee Cost
Depreciation Miscellaneous Expenses Reserves
3363.85708
4616.42070 6576.40164 44420.98424
1102.00000
1512.34000 2154.43000 14552.32000
929.20584
1275.20432 1816.61428 12270.50879
Inventories
Capital Work in Progress
48681.48323
3408.20993
15948.06000
1116.53000
13447.39604
941.45753
50000
40000
30000
20000
10000
Employee Cost
Depreciation
Miscellaneous Expenses
Reserves
Inventories
PAT
Equity Dividend
Present
Efficient
Continued..
HPCL
25000
20000
15000
10000
5000
Employee Cost
Depreciation
Miscellaneous Expenses
Reserves
Inventories
PAT
Equity Dividend
Present
Efficient
Continued..
The DEA analysis found BPCL to be the most
efficient company with its use of resources and set it up as benchmark for HPCL and IOCL to follow. HPCL at 96% is a close second. However, IOCL at 86% needs to improve and reduce wastages of its resources.
Continued..
The following table gives in detail the improvements that HPCL and IOCL need to make: Input Parameter Power & Fuel Cost Employee Cost Depreciation IOCL (reduction by) HPCL (reduction by) 43% 37% 41% 35% 28% 33%
Miscellaneous Expenses
Reserves Inventories
43%
20% 14%
34%
4% 31%
Capital Work in 75% 79% Progress The table shows that for the two companies, HPCL and IOCL to reach an efficiency level built on the operation model of BPCL, they need to cut down on their expenditures on the various Input parameters/ resource spending.
Continued..
The analysis revealed the Output parameters needed to be increased to achieve the efficiency achieved by BPCL model. The improvements to be expected are as shown. Output Parameter PAT Sales Turnover Equity Dividend HPCL 21% 0% 17% IOCL 1% 47% 0%
The analysis clearly reveals that IOCL being the largest company with Profits almost 2-3 times of the other two companies included in analysis needs to tighten its grips on its spending. The inefficiencies are being hidden by its large profit margin but wise spending can improve its profitability even more as is revealed by the output parameter analyses
References
Prowess Database
(http://www.deafrontier.net/frontierfree.html) IOCL Wikipedia Page http://en.wikipedia.org/wiki/Indian_Oil_Corporati on BPCL Wikipedia Page http://en.wikipedia.org/wiki/Bharat_Petroleum HPCL Wikipedia Page http://en.wikipedia.org/wiki/Hindustan_Petroleum
6.
7.
8.
Load the data in the excel sheet for the DMUs in the required prescribed format Open the add-in by clicking on the extracted DEAFrontierFree.xlam file . Now in add-ins a DEA tab. Click on Envelopment Model. Choose Input oriented and Constant Returns to Scale and click on Ok. Results , Analysis and Suggested Improvements would come as separate sheets showing the DEA result