Basic Principles of Supply Chain in Oil Industry

In this article, I have elucidated fundamental supply chain concepts and their relevance within the context of the oil industry. Subsequent articles in this series will delve deeper into the pivotal role of data analytics in oil industry supply chain management. These forthcoming articles will comprehensively examine how data analytics can impact various aspects of supply chain management, encompassing areas such as (Demand Forecasting, Inventory Management, Supplier Performance, Route Optimization, Risk Management, Quality Control, Demand-Driven Supply Chains, and Cost Reduction).

Introduction:

Supply Chain Management (SCM) is the strategic planning, implementation, and control of a complex network of activities, resources, and relationships spanning from raw material suppliers to end customers. It involves the efficient integration of procurement, production, distribution, and logistics processes, with a focus on optimizing cost, quality, delivery, and responsiveness. SCM seeks to enhance supply chain resilience, agility, and sustainability through data-driven decision-making, collaborative partnerships, and the adoption of technology-driven solutions. Its ultimate goal is to create value for organizations and their stakeholders by ensuring seamless, efficient, and reliable flow of goods, services, and information across the entire supply chain.

In order to gain a deeper insight into how a company establishes a competitive edge and generates value for its shareholders, it is advantageous to deconstruct the corporate system into a sequence of value-generating processes known as the value chain (Porter, 2004). The value chain represents the overall value and encompasses value-related tasks and the profit margin. Value-related tasks denote the physically and technologically distinctive activities undertaken by a company such as inbound logistics, operations, outbound logistics, marketing, and sales. These serve as the foundational elements for crafting a product that holds significance for its customer base. The margin signifies the gap between the total value and the combined cost associated with executing these value-related tasks.

SCM in Oil industry:

In the oil industry, several notable quotes emphasize the significance of supply chain management:

• Werner Paratorius, president of BASF's petrochemicals division, asserted that "Supply chain management is the backbone of a business where logistics costs can be greater than manufacturing costs" (Whitfield, 2004, p. R12).
• Steve Welsh, a managing director at the University of Oxford's College of Petroleum and Energy Studies, remarked that the oil and petrochemical sector's understanding of supply chain dynamics is still evolving (Schwartz, 2000).

In the realm of oil company supply chain management, cost reduction and profit augmentation hinge primarily on a set of critical factors: (1) demand management, (2) efficient distribution of petroleum products among customers, (3) enhanced transportation scheduling, (4) warehouse management, and (5) the timeline of information. Yet, the true efficacy of supply chain management lies not in treating these elements in isolation but rather as an integrated process.

Notably, the oil industry frequently grapples with substantial lead times, often spanning several weeks from the point of shipment to the ultimate destination. For instance, the journey of Persian Gulf oil to the United States takes approximately five weeks, followed by an additional three weeks for processing and delivery (Schwartz, 2000).

One approach to mitigate these lead times and transportation expenses involves establishing new production facilities or distribution centers closer to geographically dispersed customers. However, it is important to acknowledge that such acquisitions within the oil and petrochemical sectors, while potentially advantageous, typically incur substantial costs and can lead to increased inventory and operational expenditures (Hebert, 2004).

Research about SCM in Oil industry:

1. Lisitsa et al. (2019) [3] addressed the primary challenge in the oil industry, which is cost minimization in the production and delivery of finished products to consumers. They emphasized the interconnectedness of companies with their upstream suppliers and downstream distributors in terms of material, information, and capital flow through the supply chain. Their article focused on two key aspects: (1) the logistics chain within the oil industry and the necessity of implementing a supply chain management system, and (2) the opportunities offered by SCM systems.
2. Hussain et al. (2006) [4] discussed logistical challenges in the oil and gas industry, highlighting the practice of systematic cooperative reciprocal barter, commonly known as swaps, introduced by Haberman in 2002. They noted that oil industry companies took outsourcing a step further by collaborating with competitors to find shared solutions to supply chain challenges.
3. Chima et al. (2007) [5] pointed out that the oil industry operates within a global supply chain encompassing domestic and international transportation, ordering and inventory management, materials handling, and information technology. They highlighted the oil industry as an ideal model for implementing supply chain management techniques, emphasizing its application in upstream, midstream, and downstream operations.

References:

1. Chima, C.M., 2007. Supply-chain management issues in the oil and gas industry.?Journal of business & economics research (JBER),?5(6).
2. Hebert, H. (2004, July 28th). Oil industry not building new plants. Arizona Daily Star. Tucson, Arizona.
3. Hussain, R.A.E.D., Assavapokee, T.I.R.A.V.A.T. and Khumawala, B.A.S.H.E.E.R., 2006. Supply chain management in the petroleum industry: challenges and opportunities.?International Journal of Global Logistics & Supply Chain Management,?1(2), pp.90-97.
4. Lisitsa, S., Levina, A. and Lepekhin, A., 2019. Supply-chain management in the oil industry. In?E3S Web of Conferences?(Vol. 110, p. 02061). EDP Sciences.
5. Schwartz, B. (2000, August). The crude supply chain. Transportation & Distribution, 41, 8.
6. Whitfield, M. (2004, Sep 20 – Sep 26). A stronger link. European Chemical News, 81, 2116, R12.