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Case Study-ABC Petroleum Company

ABC Petroleum Company is operating in the domains of refining, storage and


marketing of petroleum products at a global level. They are organized as
different Strategic Business Units which are divided on geographic basis. One of
the SBUs covers the Asia Pacific Regions. The refining and marketing operations
are conducted through a network of refineries, storage points, marketing
terminals and retail outlets. They have their own fleet of ocean tankers that
bring crude oil for their refineries and also another fleet of ocean tankers
which transport the finished petroleum products by sea. Some of the marketing
terminals are located on shore to receive finished products from ocean tankers
and their refineries are all located near ports where the crude oil tankers can
discharge the feedstock for the refineries. Some of the marketing terminals are
located away from the shore/ports and they are called inland storage points.
Petroleum products are transferred from shore-based marketing terminals to
inland storage points by road through road tankers. The retail outlets receive
the products from inland storage points again through tank trucks by road.
ABC Company has six refineries located at the port locations in India,
Singapore, Brunei, Australia, Vietnam and Burma. The refineries are all
different in their configurations even though they produce the same product
mix of Petrol, Diesel Oil, Kerosene and Aviation Turbine Fuel. The cost per
metric tonne of crude processed is different for different refineries. The cost
per metric tonne of crude produced at each of these refineries is expressed in
dollars per metric tonne.
ABC Company also calculates the cost of transportation of crude oil from supply
locations in Saudi Arabaia and Venuzula. The cost of transportation to each of
the refineries from the above supply locations is calculate basis the shipping
rates applicable at London Exchange of Petroleum Transportation and Logistics.
The ocean tankers that carry crude to their refineries are all owned by them
and are treated as assets for the business. However notional calculation of the
freight is done arrive at the cost of the product and which in turn will help
them to arrive at the price at which the products should be marketed at their
retail outlets.
The yield patterns of each refinery are vastly different in the sense that the
amount pf finished product per each metric tonne of crude oil processed by the
refinery is different for different refineries. However the yield patterns are not
fixed and can be changed by additional expense by the refineries. The
additional cost per metric tonne of crude processed is also different for
different refineries whenever money is spent on changing the configuration of
the refinery. Generally configurations are changed when the type of crude oil
to be processed is changed or when the yield patterns are to be changed. Each

refinery has separate tanks for the crude oil and the storage capacity of each
tank is also fixed.
The ocean tankers which are used exclusively for crude oil are scheduled to ply
between the supply locations and receiving refineries based on a plan six
months before. The plan of production of each refinery is finalized on a yearly
basis depending on what products are required in the marketing area which
they are catering to. Based on the annual plan the requirement of quantities of
crude oil is finalized and accordingly contracts with crude oil suppliers are
entered into. After finalizing the crude oil purchase contracts, the ocean
vessels are deployed for receiving crude oil at the shipping port designated in
the purchase contract and then bringing the crude oil to the receiving port
near to the refinery. The crude oil is pumped to the refinery storage tanks
through a pipeline from the receiving port. The parcel size of crude oil that is
brought from the supply location in the ocean vessels is decided based on the
available empty space (in a technical parlance it is called ullage) in the tanks
also.
The ocean vessels are allotted berths at specific times and on specific dates at
the shipping ports. The berths are allotted three months in advance and the
vessels have to report to the shipping port at that time or they will lose their
priority and have to wait for another allotment. Each vessel carries a huge
idling cost and idling cost is considered an expense when calculating the
profitability of each vessel. Hence the operational efficiency of each vessel has
an impact on the profits that the vessel earns and the profits that the company
earns. Similarly the vessels have to book a berth at the receiving port near the
refinery for unloading the crude oil and the vessels have to report to the port
on arrival and be ready to reach the berth as per the allotment. Idling costs at
the receiving port also apply in the same manner as at the shipping location.
Each of the refineries produce the finished product as per the requirements of
the feeding area. The refineries produce the required finished products i.e.
Petrol, Diesel, Kerosene and Aviation Turbine Fuel as per the marketing plan
finalized by the company and pump the products into marketing terminals.
Each refinery has a marketing terminal attached to it and marketing terminal
has separate tankages for the finished products produced by the refinery. The
ullage available in the marketing terminal tanks is conveyed to the refineries
on daily basis and transfers from the refinery take place according to the ullage
available for each finished product.
The inland storage points that do not have rail unloading facility receive
product from marketing terminals by road through tank trucks. The tank trucks
are contracted by the company from private owners at a price negotiated
through a tender. These trucks are on dedicated service for the company and
operate for transporting the product of the company. The company pays them a
minimum mileage and rate for the dedicated service that is provided by the

private owners. The contracts are finalized once in three years through a
process of tendering and negotiations and the process is completed by the
corporate office of the company three months before the earlier contract
expires. These trucks keep ferrying the product continuously between the
marketing terminal and inland storage point.
The marketing terminal supplies finished products to inland storage points by
rail and road. If the Inland storage point has a rail unloading facility, the
railways provide the wagons and finished product is sent to the storage points.
Railways charge differential price for transportation of each product on per
wagon basis. The marketing terminal has to place an indent with railways for
wagons at least 24 hours before the scheduled time of loading. After the indent
is placed, railways provide the wagons for loading at any time convenient for
them. Sometimes railways in some countries divert the tank wagons for
carrying drinking water in times of shortage. In such cases wagons are in short
supply and company has to deploy additional trucks to transport the product by
road.
The retail outlets receive the product from inland storage points by road
through tank Lorries contracted for that purpose. The retail outlets place an
indent for the product at least 24 hours before they go dry of product or their
existing stock becomes zero. The inland storage point fills the tank lorry
designated for supply to the retail outlet and dispatches to the retail outlet.
The tank lorry is expected to come back to the inland storage area after the
product is unloaded into the tanks of the retail outlet for taking up a delivery
to the next destination. The tank Lorries are paid per kilometer traveled by the
truck for a particular destination. There is a differential pricing because some
retail outlets may be located very near to the inland storage point and some
retail outlets may be located at a long distance from the storage point. The
transportation charges payable differ from destination to destination.
Sometimes the trucks are not available for delivery and the storage point hires
a truck on adhoc basis from the market at higher rates and completes the
delivery to the retail outlet. The higher transportation rate paid to the private
owner has an adverse effect on the profit earned by the company.
The retail outlets are provided underground tanks by the company to the retail
outlet. The capacity of each tank is arrived at basis the daily sales by the retail
outlet. The company increases the number of tanks at a retail outlet based on
the increase in the average sales volume over a period of six months. The
company calculates the cost incurred on the capital required as an expense for
the calculation of profit.
The pricing for the product is finalized after arriving at the complete cost
incurred for making the product reach the retail outlet from the source of
crude oil and adding a profit margin. However the retail outlet is in a
competitive market and other companies also operate retail outlets in the

same trading area as the retail outlets of ABC Company. The retail selling price
has to be competitive with other retail outlets so that customers buy the
product from ABC Companys retail outlets. Being a fiercely competitive trade,
the prices change everyday and dynamically changing. The company has to
keep track of the competitors selling prices on a daily basis and accordingly
charge the price for its retail outlets. Further the retail outlet dealers are paid
commission by the company per every unit of product sold from the retail
outlet. The pricing is decided by the company and dealer can not sell at a price
lower than the price dictated by the company. The dealer has to compete in
the market with a selling price decided by the company and also achieve the
desired commission to continue with his livelihood.
The marketing plan for the company is based on the demand projections in the
feeding area that comes under each refinery. The projections of each country
are made one year in advance and accordingly the refineries are asked to
produce. Each country has different demand for each product. The demand
from country to country differs as per the general economic and other factors
prevailing in that country and market. The company does a thorough research
on the factors affecting demand and then decides on the projected demand
and accordingly the whole operations are planned.

Please list down the variables that affect the selling


price of the product using systems thinking and
modelling.