Optimization of crude procurement and inventory planning in Bharat petroleum corporation limited

Abstract

Introduction: According to an IBEF report, in 2013, India was the fourth largest consume of energy in the world. Of the total energy consumed in India, oil and gas account for ~37% of the share. By FY2016, it is estimated that our oil consumption would reach 4 MBPD, showing a CAGR of ~3% between FY2008-16. At present, domestic oil production accounts for only a fraction of the total demand. It is estimated that by FY2016, domestic oil output will reach 1 MBPD, against the demand of 4 MBPD. For the remaining demand, India needs to import from several oil producing countries, such as OPEC, Africa, Iran and Iraq. Need for the Study: Since India depends on the oil imports for meeting the majority if its oil needs, significant procurement planning is required by oil companies such as BPCL to ensure that crude oil reaches refinery plant on time and the plant does not sit idle. At the same, companies also need to be cognizant of the risks of excess inventory as it will incur inventory holding cost to the company and occupy storage space. With this background, BPCL commissioned a study to explore options to optimize its inventory of crude oil (HS and LS) being imported from different countries. When BPCL orders for crude oil, the supplier has the latitude to ship the oil within a window of approximately one week. Also, each supplier country has different lead time that can very. These two sources of variations can potentially affect the level of inventory at the plant. At present, crude procurement planning is done manually and its performance is measured as Moving Average total inventory in terms of “days cover”. It is believed that effective planning would lead to lower inventory. But there is still a need of establishing the proper norm that can be targeted for better performance. There is also a possibility that some other variable can also reflect the performance other than Moving Average total inventory. Objectives of the Study: 1. Determine the appropriate level of moving average inventory to be maintained at MR and KR. 2. Identify any other KPI that can be used to better reflect and track the performance of the ordering process. 3. Assess the current crude procurement and inventory management and suggest changes, if any.