Fuel for thought

Oil companies increasingly see fuels supply chain optimisation as an urgent priority. They operate most profitably when inventory strategies and distr...

Freddie Pierce
|Mar 15|magazine18 min read

Oil companies increasingly see fuels supply chain optimisation as an urgent priority. They operate most profitably when inventory strategies and distribution align with market demand. This can be challenging due to the complex petroleum supply chain, characterized by many entry and exit points, moving parts and chances to buy, make or trade.

In the past, poor interaction and limited visibility across the chain have typically led to excess or scarce inventory, supply disruptions, high distribution costs and increased overheads. Together, these factors have had a significant impact on already low retail fuels margins.

To add to the challenges, today’s complex downstream environment has been rendered still more unpredictable by recent fuel price volatility. In addition, organizations are having to manage a growing weight of legislation in the sector, with the new regulatory framework for Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), adopted by the European Union in December 2006, a key example.

This combination of factors makes oil companies and other fuels retailers, more dependent than ever on high quality solutions capable of delivering optimal order generation, reducing transportation costs, managing inventories and simplifying fleet management. Flexibility is often the single most important characteristic of such solutions, primarily because they have to be capable of managing a diverse range of potential situations, whilst maintaining a forward planning horizon, and staying as close to “real time” as possible.

Many systems in this area have different tools for order generation and scheduling optimization.

Once generated, orders are simply downloaded as ‘fixed packets’ to a separate optimiser system. This approach is not flexible enough to match orders efficiently to individual trucks to maintain lowest cost per volume to deliver, and maximum utilization of on-duty truck hours.

In contrast, solutions that combine order generation and scheduling functionality in one tool are able to re-forecast orders to best match trucks, to reduce cost per volume delivered and maximize asset utilization. By so doing, they help companies operating in this sector to achieve the business agility they need to develop and maintain their competitive edge.

Such solutions also need to fit seamlessly within the overall fuels value chain. To help deliver ease of use to customers, the business processes of providers and clients need to be closely matched, and the provider systems’ ‘retail frontends’ linked up across an integrated petroleum supply chain with the clients’ back of fice financial and resource planning systems.

Solutions also need to have sufficient flexibility to manage different types of contract. Some companies still maintain ownership of an entire fleet of trucks. However, across the industry there is a growing trend towards partial or complete use of carrier trucks.

Within this latter approach, various cost models might apply, covering cost per hour, cost per kilometer, cost by volume, or any combination of these approaches. Again, fleet optimization solutions need to be able to handle all of these forms of truck contracts.

Solutions also need to be able to manage the particular requirements of different geographies or regions. The industry trends affecting this sector in the United States are currently very different from those impacting on the European marketplace.

In the US, there is a move away from company owned stations, with many of the leading oil companies divesting assets and migrating to a place-order business approach. In Europe, the picture is more confused. Some companies are consolidating and pushing for more control over the fuels value chain, while others are opting for the US model of divesting assets.

AspenTech’s solutions are able to handle such challenges because they leverage the company’s integrated, world-class network optimization to identify the most profitable distribution, exchange, and inventory plan.

In view of the diversity that characterizes the sector, it is important that retail solutions can manage a broad range of scenarios and support a best practice approach in each. Ideally they should be capable of generating orders for company-owned stations based on daily inventory positions, but also to mix customer-placed orders with vendor managed inventory (VMI) orders and still generate an optimum schedule.

Inventory management is another area where flexible systems are important. The best solutions use proportional algorithms. In other words, they look to keep inventories in proportion to product sales. As a result, the customer retains greater quantities of fast-moving products and smaller volumes of slow-moving ones. This approach not only minimises working capital required but also gives fuels retailers maximum flexibility by widening delivery windows.

Of course, requirements vary widely across the sector. Some companies want to keep stock levels as low as possible, while others operate on a ‘keep full’ basis. The supermarket model fits particularly well with the current price volatility. Because supermarkets can free market purchase, they tend to play the “inventory game”. When product prices are low, they ‘pump up’ the inventory. When prices are higher, they let the tanks run dry, even to the point of “run-out” if needed.

At AspenTech, we are aware of all the different ways that companies run their inventory model. And we can adjust our products to allow them to do this to the optimum effect.

The Aspen Fleet Optimizer solution allows organizations to meet this requirement by incorporating Automated Stock Replenishment (ASR) and Resource Scheduling Optimization (RSO) for automated demand forecast management, replenishments plans, and delivery execution.

Such optimization tools can work in isolation. However, maximum benefit is achieved only if these tools are used in an integrated fashion with the company ERP system, site based tank gauging systems (ATG), terminal automation systems (TAS) and on-board computers (OBC). This allows for optimal levels of automation, reliability, availability, enterprise wide visibility and maximum use of a company’s IT infrastructure.

Successful implementations of this kind of technology need to be linked to high quality consulting at the front-end. Providers need to ask their customers – how can you best use the tool to match your corporate and strategic objectives?

To achieve this, providers must not just work with end-users of the software but also with senior management.

Users will necessarily have a short-term view. They will invariably be concentrating on the immediate scheduling environment – typically over the next one to two days.

The senior management team will be more focused on long-term objectives and will typically have an in-depth strategy in mind. They may be moving away from company-owned stations, for example, or changing the structure of their truck fleet, investing or divesting terminal assets. From the solution provider’s perspective, the secret is to strike a balance between the needs of these two key stakeholders.

There is an obvious requirement to maintain a powerful and user-friendly tool but the solution must also be flexible enough to accommodate changing corporate strategies.

Conditions across the integrated petroleum supply chain are changing all the time. Fuel prices are volatile, fuels retailers’ approaches to diverse market and user requirements often deviate widely within the same organization. It is hardly surprising, therefore, that flexibility is the key attribute of software solutions in this sector and looks likely to remain so for the foreseeable future.

Edited by Ellie Duncan