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Supply Chain Practices in the Petroleum Downstream
by
Fidel Santos Manzano
Engineering DegreeUniversidad Pontificia Comillas Icai-Icade Madrid and Ecole Centrale Paris
MSc Economics and ManagementIFP School-Enspm
Submitted to the Engineering Systems Division in Partial Fulfillment of theRequirements for the Degree of
The author hereby grants to MIT permission to reproduce and todistribute publicly paper and electronic copies of this thesis document in whole or in part.
Signature of Author ................... ...........................
/ Engineering Systems Division/ ~-'May 2005
Certified by ............................................... ... ................Dr. Lawrence Lapide
Research Director, MIT CTLThesy Supervisor
Accepted by ...................................... .................. Yossi Sheffi
Professor of Civil and Environmental EngineeringProfessor of Engineering Systems
Director, MIT Center for Transportation and Logistics
BARKER
Supply Chain Practices in the Petroleum Downstream
by
Fidel Santos Manzano
Submitted to the Engineering Systems Division
on May 6, 2005 in Partial Fulfillment of the
Requirements for the Degree of Master of Engineering in
Logistics
Abstract
This thesis studies current supply chain practices in the petroleum downstream industry,
using ExxonMobil as a case study. Based on the analysis of the literature and the interaction with
industry experts, this work describes the main supply chain issues and challenges in the
downstream sector. Moreover, supply chain strategies used by different players in the industry
are studied, analyzing in particular the progressive but slow shift of the industry towards a
holistic supply chain view. Finally, ExxonMobil operations are used as an illustration of several
of the aspects of the previous general analysis.
Advisor: Dr. Lawrence Lapide (Research Director, MIT CTL)
ii
AcknowledgermentsI would like to thank all the MLOG class of 2005 and the rest of the people that made this
year in Cambridge a wonderful learning experience. I would like also to thank Dr. Lawrence
Lapide for his availability and especially his patient and insightful help in the development of
this thesis.
Finally, I am also grateful to the persons involved in the network of the Supply Chain
2020 Project that have actively collaborated with this thesis: Bruce Logan (AspenTech),
Malavika Melkote (i2 Technologies), Andy Ott (UPS Supply Chain Solutions) and Parrish Potts
(Accenture).
DedicationTo my family.
iii
Biographical NoteFidel Santos Manzano obtained engineering degrees from Universidad Pontificia
Comillas and Ecole Centrale Paris. He completed a Masters in Economics and Management at
the IFP School - ENSPM and has worked during five years in the energy industry.
iv
Table of Contents
Abstract .............................................................................................................................. ii
Acknow ledgem ents ......................................................................................................... iii
Dedication ......................................................................................................................... iii
Biographical Note ........................................................................................................ iv
Table of Contents........................................................................................................ v
List of Tables ................................................................................................................... vii
List of Figures ................................................................................................................ viii
1 Introduction .......................................................................................................... I1.1 Purpose of this thesis ....................................................................................... 11.2 Research methodology ................................................................................. 2
2 Literature Review .................................................................................................. 32.1 Supply Chain 2020 ...................................................................................... 32.2 Petroleum downstream industry ................................................................... 32.3 ExxonM obil .................................................................................................. 5
3 Industry O verview .................................................................................................. 63.1 Products and services .................................................................................. 8
3.1.1 Products ..................................................................................................... 83.1.2 M anufacturing processes ............................................................................ 11
3.1.2.2 Conversion ............................................................................................ 133.1.2.3 Final treatment and blending...................................................................... 14
3.1.5 Distribution and marketing ......................................................................... 17
3.2 Historical revenues, operating margins, and employees................................... 183.3 Evolution of top 5 companies in it ................................................................... 19
3.4 Customer segments and sales channels............................................................ 203.5 Industry & supply chain structure ................................................................... 22
3.6 Trends and industry drivers .............................................................................. 243.7 Supply chain challenges and opportunities..................................................... 26
4 ExxonM obil position in the industry................................................................ 304.1 Historical company revenues, operating margins, and employees ................. 324.2 Business units.......................................................................................................324.3 Products and services ...................................................................................... 334.4 Sales channels and customer segments ........................................................... 354.5 Top competitors and positioning against them over time................................. 35
V
5 ExxonMobil's Main Issues in Downstream Supply Chain............... 385.1 Analysis of downstream supply chain strategy................................................. 385.2 Porterfivejforces analysis in the case offuel retailing ..................................... 38
5.2.1 Threats of entry .................................................................................................... 415.2.2 Power of buyers .............................................................................................. 425.2.3 Power of suppliers ............................................................................................ 425.2.4 Threat of substitutes........................................................................................ 435.2.5 Competitive rivalry .......................................................................................... 445.2.6 Conclusions of Porter'sflive/brces analysis ................................................... 46
As stated before, the petroleum downstream industry serves basically two types of
customers:
" Wholesale customers, composed by petrochemical facilities, power plants, big
fuel consumers (airlines, shipping companies) and other industrial customers.
" Retail customers, who use the fuels essentially for transportation and domestic
heating.
In the case of fuel retailing, the main channel is the network of service stations. A first
categorization for different types of gas stations is branded or non-branded, depending on
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. .. . .. ...... ... ....... ............
whether the gas station is using the brand image of one of the major integrated oil companies or
not. Additionally, we could classify the types of branded gas stations in five categories
depending on the different combinations of the ownership of the physical assets and the
management of the actual operations:
" CoCo - Company Owned Company Operated. These are the gas stations where
the oil company (usually a major oil company) owns the assets and controls the
operations through its own employees.
" CoDo - Company Owned Dealer Operated. In this case, the oil company is the
owner of the gas station assets, but the operations are delegated to another entity
through some kind of contract.
" DoDo - Dealer Owned Dealer Operated. Here the oil company may just decide to
offer the brand and operate the gas stations through franchises.
" DoCo - Dealer Owner Company Operated. Similarly, the owner may ask an oil
company to run the operations of its assets.
" Independent - The owner of the gas station has no link with any oil company.
The oil companies try to differentiate their gas stations by offering mainly two kinds of
focuses:
* Service-focused: offering premium services (e.g., high quality convenience stores,
mechanical repairing) or products (e.g., gasoline with high performance additives)
and loyalty programs
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* Price-competitive (e.g., hypermarkets): in this case the main competitive
advantage is low price in the fuel and the focus is on maintaining operating costs
as reduced as possible.
3.5 Industry & supply chain structure
The downstream petroleum supply chain can be characterized as a global supply-driven
structure with the main following actors:
* Suppliers of crude oil: as a natural resource the crude oil is located in certain areas
of the World that usually are far from the main consuming countries, mostly the
OECD (Organisation for Economic Co-operation and Development) members.
An important part of the crude oil supply and reserves is concentrated in the hands
of a cartel: OPEC (Organization of Petroleum Exporting Countries).
Thousand million barrels
Middle East726.6
Africa S & Cent. America Europe & EurasiaAsia Pacific NorthAmerica 101.8 102.2 105.9
477 636
Figure 5 - Proven oil reserves (Source: BP Statistical Review of World Energy 2004)
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-- -- - --__ -_- -___- . ....
M iion barrels daily80
50
40-
30-
26
10
0 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03North America a S. & Cent. America a Europe & Eurasia a Middle East Africa w Asia Pacific
Oil production rose sharply in 2003, despite supply disruptions in Venezuela and Iraq, as the rest of OPEC increased
production by almost 12%.
Figure 6 - Oil production by area (Source: BP Statistical Review of World Energy 2004)
* Refiners: with plants located all over the world and closer to final consumers. The
main reason for this fact is the economies of scale of transporting crude oil in big
supertankers versus transporting the final product in smaller lots, and the strategic
value of the refining assets. This latter fact makes governments prefer having
some of the refinery operations in their territories.
* Consumers: as stated before they are divided into small consumers (e.g., car
owners buying gasoline) and wholesale consumers (e.g., power stations using
heavy oil, petrochemicals plants receiving feedstock).
These actors are involved in the main activities that configure the downstream supply
" Mobil: "performance" brand aimed at convenience-oriented consumers
Moreover, the different brands offer geographical complementarity as they have been
used in different markets for many years:
" Mobil: well established in Asia and US
" Esso: well known in Europe and Latin America
" Exxon: widely established in the US
The products are manufactured in the same refineries and distributed using the same
channels and the differentiation usually comes in the "last mile" of the distribution systems
through the incorporation of additives to the basic fuels. Therefore, from a point of view of
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supply chain management, this strategy allows ExxonMobil to take advantage of the structure of
the market, proposing a diversified fuel retailing offer without duplicating the logistics network.
5.2.6 Conclusions of Porter's five forces analysis
The rivalry in fuel retailing is progressively increasing in some markets and the
traditional barriers to entry are progressively being softened even if it is not probable that they
will be completely removed. Fuel supply is strategic and highly political. Additionally, fuel taxes
are an important part of the budget in many countries. All these factors provide an incentive for
strong government regulations.
However, the trend of the competitive landscape during the last years has been towards
increased rivalry and decreased barriers. The results have been a mature industry offering flat or
even diminishing returns for some companies.
Finally, we would highlight that ExxonMobil's global downstream strategy is consistent
with the previous analysis. Fuel retailing operations are part of the downstream operations of the
company, and therefore are not seen as one of the major strategic priorities. However, they are
valuable as a way of achieving vertical integration and generating cash for other activities.
Moreover, the brand-segmented network of gas stations reinforces the company's image to the
consumers.
Fuel retailing operations are therefore aligned with the global ExxonMobil downstream
supply chain strategy, focused on costs reduction and efficiency gains, and a careful selection of
new investments.
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6 Conclusions
We would like to conclude this study with a summary of the analysis of the petroleum
downstream supply chain.
First, we would highlight that this industry is confronted with an extremely challenging
and highly volatile environment. The traditional silos approach prevalent in the industry has
generated local suboptimal structures in the downstream supply chain. Even if much
advancement has been made in the development of a true supply chain management culture,
there is still much room for improvement. The industry cannot only rely on technology
investments even if they are a basic condition of success. A more develop "pull" paradigm
leading to more demand-driven operations will be needed to achieve significant profitability
gains from supply chain enhancements.
Following this route, the industry will need to carefully align the supply chain structures
and processes with the overall company strategy. As par of these efforts, a successful supply
chain strategy development will need to carefully establish plans for process re-engineering,
change management, and information technologies design and implementation (Lewin, 2003).
The actual progress will be dependent on a combination of the mentioned business
process improvements and the channeling of existing expertise of industry professionals into a
common effort for value creation.
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Finally, we would like to suggest further areas that could be studied in more depth in this
field:
" What are the change management tools that could be used to achieve the cultural
change and the new supply chain paradigm shift in the petroleum downstream
industry
" A detailed analysis of how the different software providers have dealt with the
supply chain challenges described in the previous sections
" What best practices of other industries could be profitably adopted by the
petroleum downstream and how they could be implemented
48
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