RESILIENCE EFFICIENCY TO - JULY 2020 - Boston Consulting Group
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EFFICIENCY TO RESILIENCE BUILDING CAPABILITIES IN THE OIL AND GAS SUPPLY CHAIN FOR AN UNCERTAIN WORLD JULY 2020
2| Indian Oil Corporation Limited . The Boston Consulting Group
CONTENTS
Executive summary 4
Changing world - Increasing uncertainty
and new challenges 6
Downstream oil and gas supply chain -
Specific vulnerabilities 11
Case for change - Advantage
in adversity 12
How to build a more resilient supply chain 13
Efficiency to resilience |3
1 Executive summary
In a rapidly changing world, supply chains Changing world - new risks and
are faced with an ever-expanding set of
global challenges that have increased the
challenges
surface area and magnitude of supply Downstream oil and gas supply chains in
chain risks. The ongoing COVID-19 crisis India are faced with increasing complexity
has only served to compound the impact and uncertainty, driven by four key trends:
of such supply chain vulnerabilities that ■ Significant volatility in commodity
many companies face. Downstream oil pricing and supply demand dynamics
and gas supply chains, in particular, face
■ Unprecedented rise in climate change
unprecedented disruptions arising from
related impacts
structural complexities and a changing
ecosystem. ■ Structural shifts and disruptions in the
logistics sector
Hence supply chain management today is ■ Likelihood of clean energy transition
faced with the burning need to reimagine and changing customer expectations
itself to build resilience to be able to
withstand the disruptive forces that are
increasingly affecting operations. Beyond Guidelines for success
mitigating impacts from crises, companies
can foster supply chain resilience as a key Companies can build resilient supply chains
through a combination of three central
competitive advantage.
pillars and three enablers supported by an
overall strategic vision.
4| Indian Oil Corporation Limited . The Boston Consulting Group
Strategic vision Introduction tools onto today’s approaches. It requires
a fundamentally different mental model
Resilience as uncertainty advantage, The COVID-19 outbreak has caused significant of supply chain management — one
in sync with the overall business disruption to a gamut of industries, and oil that embraces complexity, uncertainty,
strategy and gas is no exception. Indian oil demand, interdependence, systems thinking, and
collapsed by ~60% in April and May compared a multi-timescale perspective.
to last year due to the lockdown, exerting
Many supply chain managers
Central pillars considerable downward pressure on refiners’
already undertake some form of risk
margins. Coupled with concerns around the
■ Diversification of geographic management; but the degree of
tenability of the OPEC+ deal, price forecasts
foot print of asset base sophistication and professionalism
for FY20-21 remain highly uncertain with no
■ Customised trade-off between varies widely. Mostly companies follow a
clear picture of the extent of recession and the
resilience and efficiency based reactive approach in responding to supply
pace of demand recovery. The COVID-19 crisis
on customer needs chain disruptions. On a regular basis,
has brought into sharp focus the increasingly
they monitor and implement strategies
■ Robust early warning systems uncertain business environment that oil and
to minimize exposure to the most
and SOPs for response gas companies continually face. The question is:
relevant, known risks, such as supplier
beyond the here and now, how can oil and gas
disruptions or regulatory changes.
companies better prepare to thrive in the ‘new
Enablers normal’ from a supply chain standpoint? We
However, resilience must also deal with
unidentified risks: it must consider the
■ Building resilience in business believe, the answer lies in building risk-resilient
various adaptations and transformations
partners through investment in supply chains while maintaining focus on cost-
that supply chains need to make in order
capabilities efficiency.
to absorb environmental stress and even
■ Leveraging advanced analytics We can effectively define supply chain resilience turn it to advantage.
capabilities for improved as the ability to absorb and mitigate impact from
uncertainty prediction exposure to risks and vulnerabilities and the
■ Fostering cross functional adaptability to thrive in altered circumstances
Supply chain resilience is the ability
collaboration backed by an agile enabled by agile decision making and pro-active
to absorb and mitigate impact from
organisation risk management. Managing for resilience
exposure to risks and vulnerabilities
requires more than just grafting new ideas or
and the adaptability to thrive in
altered circumstances
Efficiency to resilience |5Changing world - Increasing
2
uncertainty and new challenges
The Indian oil and gas downstream returning to 85% and 82% respectively
■ Storage implications – Oversupply,
ecosystem is changing rapidly under of last year’s levels in the same month.
coupled with a sharp decline in oil
the influence of global and domestic Aviation fuel demand will continue to demand due to travel bans, led to an
trends. The complexity and magnitude of suffer for two more years as global air unprecedented build-up of storage
uncertainty that supply chains are facing travel, especially business travel will be untill May 2020. Storage capacity was
today are far higher than at any point in the slowest to normalize. expected to run out by the end of
time previously. There are four key trends ■ Re-emergence of OPEC+ as a June 2020 if further production cuts
that need to be taken note of: stabilizing force – The OPEC+ were not implemented. However, EIA
members’ decision to cut supply by now expects global oil inventories will
Significant volatility in commodity over 10% in April and May and growing begin declining in June due to sharper
pricing and supply demand dynamics evidence that they are able to honour declines in global oil production and
■ West Texas Intermediate futures their commitments has played a major
traded negative due to demand role in stabilizing oil prices in the
shock and excess supply – Oil prices medium term and may well prove to be
are expected to remain at around $ 30- the single largest factor in restoring the
$40/bbl through 2020 and 2021 with industry’s fortunes. Further, US backing
global oil demand expected to drop by of the deal could herald a new era of
8.1 mbpd as per the IEA in 2020. The co-operation between the largest oil
demand is expected to recover by 5.7 producers.
mbpd in 2021. ■ Liquidity concerns in oil producing
■ Demand recovery patterns will vary countries - Countries heavily reliant
across product segments – While on oil exports such as Algeria, Nigeria,
gasoline demand is expected to recover Mexico and Venezuela among
fastest as the lockdown eases and others are facing a severe balance of
commuters avoid public transportation, payments crisis. They are also facing
diesel will have a slower recovery as severe liquidity issues and are resorting
industrial activity and trucking demand to emergency measures like currency
will continue to remain depressed. devaluation and sharp increases in
This is borne out by petrol and diesel borrowing to manage fiscal pressure
consumption in India in June 2020 (Exhibit 1).
6| Indian Oil Corporation Limited . The Boston Consulting GroupExhibit 1: Fiscal pressure will be difficult for
small OPEC producers to manage in 2020
Proportion of revenue from hydrocarbons (%)
More fiscal pressure
100
Libya
Venezuela Iraq
Kuwait
Outliers due to
Oman government
Qatar inability to meet
Saudi Arabia budgeted spending
Angola commitments
Nigeria UAE
50
Malaysia
Algeria
Russia
Iran
Relying on
borrowing
and reserves
to withstand Mexico
impact in short- Indonesia
to-medium term
Less fiscal pressure
0
-30 -20 -10 0 10 20 30
Fiscal balance (% of GDP @ $64/b)
Source: EIU; IMF; BCG Center for Energy Impact
Efficiency to resilience |7Changing world - Increasing uncertainty and new challenges
higher than expected demand. EIA
expects that global liquid fuel inventories
will fall at an average rate of 2.5 million
barrels per day from June 2020 through
the end of 2021 (Exhibit 2).
Exhibit 2: Global oil inventories expected to ■ Significant erosion of market cap for
decline from June after demand recovery service companies – Market capitalization
in 2020 of the top three oilfield
Million barrels / day equipment and services companies
120 — Schlumberger, Baker Hughes and
Total Supply Total Demand Halliburton — declined by ~25% in June
as compared to March. This could lead to
Forecast
110 consolidation and asset liquidation.
■ MSMEs in oil and gas sector at risk of
100.1 101.0 shutting down – A survey conducted in
100 98.6 mid-May by the All India Manufacturers’
98.9
Organisation revealed that about 35% of
not to scale
MSME’s started winding up operations as
90
they saw no chance of recovery in the wake
of the COVID-19 outbreak. This could lead
to increased dependence on imports for
80 oil and gas companies as machinery and
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 equipment manufacturers who provide
key inputs become insolvent.
Change in inventories ■ Collapse in upstream oil investment – IEA
8.7
estimates global upstream investment
6.3 will fall to its lowest in 2020 since 2005.
According to Bernstein, non-OPEC
Implied stock build supply may peak in 2025 at around last
year’s level. Seven major oil companies
1.2 0.9 0.8 plan to cut capital spending by $ 40 bn
in 2020 and $150 bn in 2021 (Exhibit 3).
-0.3 This could impact oil prices in the long
-1.8 term due to reduced ability to increase
Implied stock draw -2.3 -2.3
-3.0 -3.1 -2.7 supply once the demand comes back.
In India as well, the top three oil marketing
2019 2020 2021
companies (Indian Oil, Bharat Petroleum
Source : Short-term energy outlook, June 2020, EIA and Hindustan Petroleum) are expected
to cut cumulative capex by around 30%
over FY21-FY22 compared to pre-COVID
8| Indian Oil Corporation Limited . The Boston Consulting Groupestimates, as per Fitch Ratings. ONGC
too has announced a capex cut of 15% Exhibit 3: Investment cuts in oil supply could impact long term prices
for FY21 due to the prevailing low crude All figures are in USD Bn
prices scenario, as per a report published
in Business Standard
Upstream capex cutdown by 20-30% in coming years
■ Shale firms in US are also significantly at -17%
risk – With breakeven shale price > $40/bbl, 662
627 -20%
the US shale oil industry is expected to see -26% 596 -26%
a wave of bankruptcies and restructurings. 573 537 -28% 546
Already 17 smaller US oil and gas producers 499
have filed for bankruptcy this year and the 440
number could rise to 70+ by the end of 397
385
2020, as per Rystad.
Unprecedented rise in climate change
related impacts
■ Climate related disruptions have increased
significantly in frequency and impact in
the last five years (Exhibit 4).
2020 2021 2022 2023 2024
■ Financial impact on supply chains has also
been rising steadily.
■ India is particularly vulnerable with 35 mn Oil majors have slashed capex by 22% from pre-COVID levels
people in low lying coastal areas estimated
to be impacted by rising sea levels by 2050, Pre covid
according to research by Climate Central. Post covid
-27%
Logistics sector undergoing transformational
change -30%
-20%
Move towards formalisation in a highly -30% -18%
fragmented industry due to introduction of -25%
GST - -19%
-15% -31%
■ Around 90% of traditional industry
segments such as warehousing and
road transport are unorganized as per
BOBCAPS research. Saudi Exxon- Indian
Chevron BP Shell Equinor Total ONGC
■ The top 10 listed logistics players in the Aramco Mobil NOC’s
country cumulatively account for ~5% of
Source : Rystad Energy, OGJ
the total industry share. Note: Indian NOC’s refers to Indian Oil, Bharat Petroleum and Hindustan Petroleum
■ Implementation of GST and e-way bill
has tilted the balance towards organized Efficiency to resilience |9
players.Changing world - Increasing uncertainty and new challenges
Emergence of new-age, service oriented
business models such as 3PL, express
as compared to traditional execution
focused asset-heavy models (plain vanilla
Exhibit 4: Pace of natural disasters and their cost rising: $660B transportation and warehousing) :
damage from more than 2,300 extreme weather events (2017-2019) ■ 3PL industry currently estimated at INR
45,000 – 48,000 Cr is expected to grow at
Number of events 1980–2019
17-18% CAGR untill FY22 driven by evolving
Climatological events (Extreme temperature, drought, forest fire) supply chain practices and enabling
Hydrological events (Flood, mass movement) regulations as per BOBCAPS research
Metrological events (Troppical storm, extratropical storm, convective storm, local storm)
■ India’s 3PL spend as a proportion of its total
Geophysical even (Earthquake,tsunami, volcanic activity) 829 logistics spend at 4.5% is much below global
820
standards indicating ample headroom for
716
growth
552 ■ Oil and gas companies’ traditional reliance
475 505
432 on unorganized transporters is being
387
287 challenged and opportunities are arising to
268
leverage these new partnerships.
Increased competition, clean energy
transition and changing customer
1980 1985 1990 1995 2000 2005 2010 2015 2019 expectations
■ Increased competition: The market share
Overall & insured losses 1980-2019 ($B) of private players has increased to ~10%.
Reliance, Nayara and Shell are looking to
Uninsured losses
282 increase their retail outlet network.
Insured losses
224 239 ■ Impact of climate change: Globally, oil
demand could decline by 30% by 2040
167 160 150 under the 2° C scenario, which is the Paris
120 climate accord’s acceptable temperature
75 94 rise limit, as per IEA estimates.
69
■ Changing customer expectations: Digitally
mature retail customers’ demanding
convenience and flexibility has led to the
1980 1985 1990 1995 2000 2005 2010 2015 2019 emergence of doorstep refueling startups
These long term trends merit a relook at the
Source: Munich RE – NatCatSERVICE – Accessed 2020
supply chain priorities in order to be able to
navigate successfully the challenges and
10 | Indian Oil Corporation Limited . The Boston Consulting Group uncertainties that lie ahead.Downstream oil and gas supply
3
chain - Specific vulnerabilities
The oil and gas industry is involved in a ■ High cost of disruptions: Oil and gas
global supply chain that involves domestic companies face extreme financial
and international transportation; ordering vulnerabilities from any pipeline
and inventory visibility and control; materials leakages or disruptions. For example,
handling; import/export facilitation; and the GAIL pipeline explosion in Andhra
information technology. The unique Pradesh in 2014 led to a 5% reduction in
structural challenges that make oil and ONGC’s annual gas output compared
gas supply chains fundamentally more to the previous year and approximately
susceptible to disruptions are: 500 Cr in EBITDA losses. Twenty
■ Unparalleled exposure to natural two people lost their lives in the fire
elements: Oil Marketing Companies’ following the explosion.
tanker trucks operate in temperatures ■ Limited ease of adjustment due to
ranging from 50 degrees celsius in fixed nature of assets: The capital
summer to minus 20 degrees celsius intensive nature of assets in the oil and
in winter. Naturally, it puts unparalleled gas industry increases the challenge in
strain on the logistics infrastructure. implementing resilience improvement
■ Difficulty in end-to-end tracking measures. For example, compared to
due to vast area of operation: Indian the apparel industry that can easily
Oil operates a cross-country pipeline shift its supplier base from say, Europe
network of 14,670 kms and its 50,000 to South East Asia, sourcing contracts,
strong tanker fleet ensures delivery port locations, terminals, pipelines and
to over 50,000 customer touchpoints. even contracts with transporters for
Maintaining end-to-end visibility of its an oil and gas player are long-term in
supply chain presents unique challenges nature with low maneuverability. This
given the sheer expanse of its network. further restricts the scope of response
strategies to any disruption.
■ Hazardous nature of products
transported: The extent of environmental Hence, oil and gas companies with
damage and impact on human lives and winning aspirations need to reform
livelihoods from a pipeline leakage are their supply chain priorities to focus on
far greater than the impact of disruption building resilience without losing focus on
in other industries. efficiency.
Efficiency to resilience | 11Case for change -
4
Advantage in Adversity
Oil and gas supply chains today face benefits of this could be substantial for oil companies that prepared early and with a
unprecedented disruptions arising from and gas companies: long-term perspective (resilients) significantly
immediate shocks and long term structural Higher financial returns during periods outperformed their peers during the 2008
shifts. In this context, organizations need of crisis - Resilience combined with cost global financial crisis (Exhibit 5). With refiners’
a reformed approach to balance the leadership, will become a key competitive margins under pressure during periods of
competing priorities of building resilience advantage in uncertain times. According to crisis, the companies most likely to emerge
while maintaining cost-efficiency. The research by the BCG Henderson Institute, in reasonable shape will be the ones that are
able to reduce their operating expenses and
introduce new technologies to cut costs.
Exhibit 5: Resilient companies performed
Hence companies need to look at resilience
better during the ‘07-09 downturn building as an uncertainty advantage rather
Performance during 2007-09 downturn by strategic orientation, using NLP than an impediment to efficiency.
First mover advantage to new business
opportunities – Having a resilience building
Average TSR outperformance1 Average revenue growth mindset can open up new business
opportunities in asset-backed oil trading and
Resilients2 Resilients2 new go-to-market models such as doorstep
refueling. The COVID-19 oil price shock is a
1.4% 4.2% clear illustration of how Indian downstream
oil companies could have amplified their
gains from the sharp decline in crude prices
had they invested in acquiring strong trading
capabilities and in building up storage. In an
average year it is estimated that the added
-0.9% 0.3%
value of trading on refining can be over $1
bn when aggregated across India’s major
Non-resilients2 Non-resilients2 refineries, and in extreme years, this value
1. Annualized TSR compared to average of large companies in same sector during 2007-09 period 2. Resilience
can easily double. Supply chain agility is also
orientation score determined by BHI proprietary NLP analysis of mgmt. discussion in companies’ 10-K SEC filings; a prerequisite for participating in emerging
Resilience or non-resilience orientation based on whether average score during the downturn period is above or delivery models such as doorstep refueling
below average across all large companies. Note: Statistically significant relationship between long-term orientation
and TSR and growth (pHow to build a more resilient
5
supply chain
In light of the increasing business complexity capability structure: product development process. This helps
and growing overall uncertainty, establishing identify risk trade-offs in the early design
a systematic supply chain risk management ■ Product resiliency – Scorecards are
developed to identify and “de-risk” single and development phases of Cisco’s
approach becomes more and more relevant. products. Resiliency scores have become
sourced and other risk components
Based on our experience, we suggest a mandatory criteria in product launch
to drive resiliency upstream in the
comprehensive framework (Exhibit 6), for gating process.
achieving resilience in supply chains that can
be tailored to a company’s need, based on Exhibit 6: Framework for creating supply chain resilience with efficiency
their individual starting position.
1
1. Elevate resilience as a supply
Strategic vision
chain strategic priority Resilience as uncertainty advantage Core to company’s strategy
Companies need to recognize supply 2 3 4
chain risk management i.e. systematic risk Diversify geographic Robust early warning
assessment and mitigation methodology, footprint of SC asset Customized trade-off systems & SOP for
as a core competency of the overall supply base basis customer needs response
chain management philosophy. Alignment Assess asset’s criticality Identify competitive Develop communication
of the supply chain priorities – cost efficiency; to revenue and design priorities basis product channels with partners
resilience; access; and service levels – with the Primary redundancies/backup category and match for faster threat detection
business focus areas is critical. Levers options for high-risk those with supply with well defined
suppliers, mfg. sites, WH’s chain capabilities escalation matrix
Practical applications Invest in building resilience in business partners
5 Invest in upgrading supplier’s risk management & early detection
CISCO – Embedding end-to-end resilience capabilities to serve as key competitive advantage during crisis
in supply chain design
Embed risk & demand analytics capabilities for better prediction of
Cisco’s sophisticated risk management 6 uncertaintyMove from visibility and monitoring to
practices are designed to proactively embed scenario modelling and decision support
end-to-end resiliency in the supply chain to
improve overall time-to-recovery during a Enablers Foster cross functional collaboration backed by agile organization
disruption (Exhibit 7). The supply chain risk 7 Collaboration between sales, mfg, ops, logistics &
SME’s backed by senior mgmt buy-in
management team’s four key processes
extend across the entire organizational and Source : BCG analysis
Efficiency to resilience | 13How to build a more resilient supply chain
Exhibit 7: CISCO has embedded end-to-end resiliency into supply chain
Risk management process spanning entire value chain
Customer &
Innovation Plan Source Quality Make Delivery
Field support
Perfect Global Global sup- Technology & Manufactur- Logistics Customer
operations planning & port manage- Quality ing opera- operations
fullfillment ment tions
Product Resilency Supply chain Resilency
Incident Management
Business Continuity Planning
Unique resilience metric for transparent monitoring
Very Resilient
Index catagories Key metrics
10
9 Component Single sourced, Component supplier TTR1,
30%
8 Resilency End of life parts
7
Supplier Supplier Financial Health, Supplier BCP compliance,
6 20% Non PSL and new suppliers
Resilency
5
4 Manufacturing Dual manufacturing sites, Qualified
3 Resilency 30% alternate sites, Manufacturing TTR1
2
1 Test equipment TTR1
Test Resilency 20%
0
Not Resilient
Source : Supply Chain Risk Management at Cisco: Embedding End-to-End Resiliency into the Supply Chain - Submission for ISM 2012
Award for Excellence in Supply Management Authors – John O’ Connor, James B. Steele, Kristina Scott CISCO
1. TTR - Time-to-recover
14 | Indian Oil Corporation Limited . The Boston Consulting Group■ Supply chain resiliency – Aims to assess availability of alternate power supplies and Business continuity planning (BCP) is
and improve resiliency across Cisco’s estimated time-to-recover. This creates an essential part of Indian Oil’s annual
supply base, manufacturing and test resiliency visibility into more than 1000+ strategic planning exercise. Due to the
equipment partners. A unique resiliency supply chain nodes in over 50 countries. robustness of its BCP, the company could
index score is calculated for the top ■ Supply chain incident management respond much faster and resolutely during
100 products by revenue and reported - A process for monitoring worldwide the COVID lockdown period. In the midst
semiannually to senior management events on a 24/7 basis, identifying and of the nationwide lockdown, Indian Oil
and works to identify and mitigate any escalating any incident of concern, worked with critical stakeholders including
circumstances that could limit these assessing impact and organizing a cross- crude suppliers, shipping companies, port
products from recovering in X weeks functional response team to mitigate the authorities, OEMs, transporters, dealers,
from a major disruption. risk to resolution. The crisis management state and central administration to ensure
■ Business continuity planning - A dashboard and a robust set of crisis operational continuity. This ensures that the
semiannual process, enabled by a unique playbooks enable response to any event company can serve customers even under
web-based tool to engage all critical within a two hour timeframe. extremely uncertain environments be it
supply chain partners in providing Cisco natural calamities or operational hazards-
Indian Oil – Robust business continuity making it the preferred fuel supplier to Indian
with over 36 resiliency data points such planning for seamless customer service
as emergency contact information, Defence forces.
Efficiency to resilience | 152. Diversify the geographic
footprint of the supply chain
asset base
The focus on lean, global networks to final packaging of the product closer to increased dual sourcing for key
achieve efficiency has led to companies the market. This higher cost alternative components and was able to recover from
sourcing a disproportionately large share is to be used only in the case of a supply the Japan earthquake of 2016 in two weeks
of raw materials/components from a single disruption. as compared to six weeks in 2011.
supplier. This in turn leads to high risk Toyota – Building redundancies for risk
of disruption if the supplier is impacted mitigation
due to natural disasters or economic
vulnerabilities. In order to build resilience, Toyota too has developed alternate
companies need to have multiple suppliers production facilities for its suppliers,
with built-in capacity buffering to hedge
against such eventualities.
Implications for oil and
Practical applications gas companies in India
PepsiCo – Supply chain design with
contingencies Companies should evaluate the risk exposure terminals) that face risks that are similar
that they face due to close interlinkages with in nature to those faced by coastal
The PepsiCo coconut water supply chain
global supply chains. For example, imports locations, being prone to floods and
starts with growers in Philippines and of crude, LPG and high-value machinery and cyclones
Indonesia; uses copackers in Asia and in equipment are common. Even domestically,
the United States imports goods through Companies should also optimize their
we should take a closer look at the extent sourcing mix between long term contracts
ports in California and New York; provides of risk exposure that each supply point and the spot markets to balance flexibility
first line storage in warehouses near the faces and pursue diversification for effective and cost efficiency.
ports; and then redistributes the goods mitigation. Companies need to identify
to other distribution centers across North To build resilience in secondary logistics, it is
potential areas of risk concentration due to: critical to
America based on demand. Typhoons and
tsunamis are a common occurrence in the ■ A high proportion of imports coming ■ Optimize the balance between transport
coconut growing region. To build resilience from geographically contiguous modes (rail, road and coastal)
against natural calamities, PepsiCo uses countries prone to climate disruptions or ■ Deploy a mix of transporters in terms
three copackers in South East Asia located geo-political unrest of financial strength, fleet sizes and
geographically apart so that the chances ■ Supply points (refineries / storage capacities
of all three getting impacted at the same
time are minimized. There are additional
copackers in the US as well to enable the
16 | Indian Oil Corporation Limited . The Boston Consulting GroupCoconut farms destroyed by Typhoon Haiyan in Philippines
Image source : https://digital.hbs.edu
Efficiency to resilience | 17How to build a more resilient supply chain
3. Customised trade-off On the other hand, price competitiveness was that, for simple routers, Cisco needed a tightly
critical for Cisco’s simple routers. The demand coupled system and a streamlined supply
between resilience and for those products was more stable and did not chain.
efficiency based on require customization. More standardization Cisco traded higher efficiency for higher
customer needs meant that the supply chain could be vulnerability in its simple router supply chain
designed to maximize cost efficiency, based whereas it prioritized resilience and flexibility
Supply chain mangers need to follow
on economies of scale, with products sourced in the supply chain for specialized routers in
a systematic approach to match the
from the lowest cost factories. This suggested line with market demands.
competitive priorities of particular product
categories with their supply chain
capabilities. The trade-off between investing Implications for oil and
in resilience versus taking the risk of being
gas companies in India
hit when unprepared needs to be quantified.
This will depend upon the likelihood of Similarly, O&G companies should create a single source of supply is the disrupted
occurrence, the magnitude of impact systematic process to maintain the balance terminal will face a major shortage.
and the ability to mitigate the disruption. between resilience and efficiency in supply Careful consideration of such tradeoffs will
Determining whether cost or response time chains, based on the interplay of product lead to more informed decision making. By
is more essential for the product is important. segment and market demand characteristics. applying the risk management lens, O&G
For example, the demand for MS/HSD in companies can limit risks from disruption
Practical applications micro market A could be stable due to a very while optimizing the storage terminal
high market share. In micro market B, there footprint. Consider a scenario where Terminal
CISCO – Matching product priorities with might be high demand variation due to A is linked to two refineries through pipelines
supply chain capabilities competitive forces at play. Hence, the supply besides having road, rail and sea connectivity
chain catering to A could focus more on cost courtesy its coastal location whereas an
Customers of Cisco’s optical services routers, efficiency whereas that servicing B should inland storage facility B is linked to one
value short lead times and quick responses to have greater focus on resilience. refinery with no backup storage facility in
service calls, based on product customization O&G companies should explicitly evaluate the near vicinity. For Terminal B, the focus
and differentiation, more than low cost. the risk exposures and vulnerabilities that should be more on building resiliency though
This calls for a responsive supply chain to different product segments face from a buffer storage capacity and more frequent
minimize stockouts and maintain high disruption. For instance, the risk of disruption replenishment as compared to Terminal A.
service levels. To improve the resilience of its from a breakdown in a particular storage In summary, O&G companies need to
optical router supply chain, Cisco converted terminal is relatively lower for aviation fuel carry out a segment-wise evaluation of the
its global “lean supply chain” to a system in having lower volumes, higher safety stock likelihood of disruption, the magnitude of
which the products are mainly configured to levels and alternate ways to service the the exposure and the ability to withstand the
order from partially assembled components, demand from nearby terminals. Whereas, a disruption and accordingly decide the supply
thereby enabling flexibility. high number of MS/HSD retail outlets whose chain priorities.
18 | Indian Oil Corporation Limited . The Boston Consulting Group4. Robust early warning Wilbur Curtis– AI based real-time risk notifications on impending risks based on
monitoring the level of urgency. It allowed for drilling
systems and SOPs for down into the second and third tiers of the
Similarly, Wilbur Curtis, the world’s leading
response supply chain to better anticipate emergent
supplier of commercial beverage systems,
Perhaps the most critical aspect of building partnered with RiskMethods, a provider of risks even before they hit the tier 1 suppliers.
resilience is to have robust early warning supply chain risk management software Courtesy the alerts that the software threw
systems to proactively detect disruptions. to automate its approach of managing up, they were able to speed up delivery of
Real-time visibility of supply chain nodes risk. Through AI based web monitoring a shipment from a supplier in Taiwan and
creates the ability to produce immediate of supplier financials, order volumes and got the items out of the country before a
insights that can reduce reaction times values and impending natural calamities, major typhoon crippled the area where
from days or weeks to just hours or minutes Wilbur Curtis was able to keep track of the supplier was located.leveraging UAV,
in case of a disruption. all risk related information and receive GIS and IPS technology for automated
fault detection
Practical applications
PepsiCo – Early stress detection in suppliers
PepsiCo worked with suppliers to improve Implications for oil and
communications and data quality around gas companies in India
possible disruptions. Copackers in their
coconut water supply chain report weekly O&G companies can deploy various AI
on how many cases of each SKU they have enabled intelligent monitoring systems
produced, whether they have enough raw across the value chain
material to continue scheduled production,
and provide reason codes associated ■ Intelligent sensor based pipeline
with any failures to produce what they monitoring system for leakage
had committed. Routine checkpoints are prediction
established and on-site contacts identified ■ Drone-based inspection of assets
to ensure there is regular communication — columns, vessels and tanks — in
between the supply chain organization depots, leveraging UAV, GIS and
and the supplier base. This requires active IPS technology for automated fault
collaboration with partners and fostering detection
an atmosphere of trust through investing
in partner’s capabilities.
Efficiency to resilience | 19How to build a more resilient supply chain Implications for oil and
gas companies in India
5. Invest in building resilience in O&G companies should adopt a holistic
business partners approach in partnering with supply chain
partners (dealers, transporters, suppliers)
Given the complexity of supply chains today they meet with high-risk suppliers to make through
with suppliers spread across geographies, sure that project plans are implemented
companies need to recognize the and resource needs are met. ■ Partner financial health monitoring
importance of building resilience in their – Regular review of partner financials,
In the two years since launch, they have order volumes and values to determine
suppliers and transporters as well as a single
been able to reduce the number of high- the relative importance of the stability of
disruption to their operations could upset
risk projects by 50% and expect to have 90% the partner’s operations and for critical
business continuity.
reduction by the year end. partners, extend support in times of
Practical applications ON Semiconductor – Mitigating supplier crisis
disruptions through detailed risk ■ Monthly/quarterly risk management
Zimmer Biomet – Collaborating with mapping review and linkage with incentive
suppliers through a continual risk ON Semiconductor works with 16,000 structure – Map all partners on the 2X2
management program suppliers for its manufacturing operations matrix of criticality and vulnerability to
Zimmer Biomet, the world’s second largest located in nine countries. The top suppliers identify critical high-risk groups. Work
orthopedic company, recognized this and in terms of revenue contribution with with dealers and transporters to identify
instituted a continual formal Supplier Risk no backup plan and no dual sources are their key sources of risk and their level
Management program. The categories that identified. They employ accountants from of preparedness. Help them to improve
Zimmer Biomet focus on in their program insurance company FM Global that work their risk resilience by instituting a
with these suppliers, go through their risk management program, sharing
are single and sole-source supplier risk,
entire business model in detail and identify best practices and extending financial
business continuity risk and financial
the key source of risks and their current support if needed. For example, top
risk. They focus on third-party suppliers
level of preparedness. They go down two- transporters in terms of volumes should
worldwide that produce critical products in
to-five levels below the primary supplier be assigned a risk resiliency score based
all business segments, and they rank their
to identify potential threats and work with on the maintenance quality of their fleet,
priorities based on risk to revenue.
them to mitigate that exposure. Says, Bret experience of drivers, safety features of
The process begins with a questionnaire the tanker truck etc. If the transporter’s
Ahnell from FM Global,
to determine how the supplier is currently score is below the threshold, the
handling risk management. If a plan is “ If you don’t know anything, you are company should advise and support the
already in place, Zimmer Biomet will advise putting a lot of eggs in one basket and partner with measures to improve upon
on ways to evolve or reinforce it. If no plan putting yourself at a great deal of risk. the same. Rigorous reviews should be
is in place, they work with the supplier to That’s not where you want to be.” conducted with transporters to ensure
put best practices into place and formalize They also help suppliers secure funding that risk mitigation measures have been
their program, either directly or by referring from their insurer, to minimize the costs implemented. The incentive payout to
them to additional resources. Each month, associated with making changes. the partners should also incorporate an
element of risk resilience.
20 | Indian Oil Corporation Limited . The Boston Consulting GroupExhibit 8: HP’s risk modeling platform for awareness, impact
assessment and rapid response
6. Embed robust risk analytics
capabilities for better
uncertainty prediction
Most companies have invested in ERP tools
and IT systems to collect operational and
performance data from multiple sources.
However, merely using the data for
building dashboards for visualization and
awareness is not enough. To build resilience Risk Threat alert Risk impact Response
in supply chains through better and faster visualisation generation modeling Optimization
decisions in the times of crisis, companies
need to develop advanced analytics Visualizing global Auto notifications Quantifying issue Prioritization
capabilities that can generate actionable risks in a single generated if impact through among response
insights from the data through scenario interface using threshold trigger simulation engine options through
characterization and impact assessment. weather data, for escalation is e.g. TAT/inventory online modelling
This will enable not just rapid response in other disruptions - breached impact from LI of mitigation
times of crisis, but also enable supply chain port strike battery cargo ban impact
managers to proactively identify points in
the supply chain where disruptions are
expected to occur. Additionally, companies
can also use the insights to become more
customer-centric in their approach by
identifying changes in demand pattern
and new customer requirements.
Visualizing Global Risks In A Single Interface Threat Alert Mobilizes Organization To Action Modeling Step 1: Evaluate The Impact Modeling Step 2: Mitigate The Risk
Enabling Advanced Awareness & Rapid Respond
What Does Losing Air Transit Modes Mean To Inventory Performance Predictive Modeling Tools Help Create Better Solutions For Disruptive Events
Practical applications Threat
Awareness feed
Supplier Kitter Regional DC Customer Supplier
Relax
Constraints
Kitter Regional DC
-30%
ReductionCustomer
in system
buffer units versus basic
+525% +400% +525% +400% No Air scenario
Average Average Average Average
Lead Time Lead Time Lead Time Lead Time
Increase Increase Increase Increase -13%
Hewlett Packard – Leveraging analytics for
Lead Time Coverage Lead Time Coverage
Reduction in system
+4% +90% -73% +10% buffer units versus
Average Average Average Average Baseline scenario
Buffer Buffer Buffer Buffer
supply chain awareness and response
Increase Increase Increase¹ Increase¹
11 28 30 31 ¹Compared to no-air scenario with kitter constrained to offer immediate availability.
HP’s predictive risk modeling platform
demonstrates the power of advanced Source : Always On: HP Supply Chain Risk Management Processes & Analytics – HP Business continuity
planning September 2018 Authors – Travis Parker & Trace White
analytics capabilities for achieving
resilience across its global supply chain
comprising 110 manufacturing sites and
145 distribution centers (Exhibit 8). Their
Efficiency to resilience | 21How to build a more resilient supply chain
business continuity planning platform is a ■ Response optimization – Rapid
centralized node for prioritization among multiple response
■ Risk visualization – For visualizing options based upon objectives
global risks in a single interface by and constraints through predictive
consuming threat awareness feeds modelling
(weather patterns, change in trade This has resulted in a 96% reduction in
terms) with severity status highlighted their threat characterization times from
based on anticipated impact >1 day to 1 hour leading to consistency in
■ Threat alert generation – Auto customer service levels. OTIF variance of
notifications generated with details of only 14% has been maintained through
the contact person e.g. the site manager multiple disruptions such as port strikes,
if the threshold trigger for escalation is earthquakes, flooding, etc.
breached
■ Risk impact modeling – Quantification Implications for oil and
of impact on lead-times and inventory gas companies in India
buffers due to disruptions through
a simulation engine. For example, O&G companies can share information
evaluation of impact on inventory and with dealers about the exact transit status
lead time due to lithium batteries being of deliveries. Likewise, dealers can share
banned as cargo on passenger planes information with suppliers about their
inventory levels. As demand rebounds
post the COVID-19 crisis, companies can
model the differential demand growth
trajectories across RO’s based on the
extent of lockdown restrictions uplifted,
the base demand etc.
22 | Indian Oil Corporation Limited . The Boston Consulting Group7. Foster cross functional “At the end of the day, what allows Walmart a risk event occurs, and work harmoniously
to be prepared to respond to disasters towards a rapid resolution
collaboration backed by is our agile governance structure. In an
agile organization emergency, our people don’t have to make
Implications for oil and
Supply chain resilience needs a risk-awareness a request up through the system because
we’ve trained and empowered them to
gas companies in India
culture of transparency, empowerment
and cross-functional coordination with make their own decisions; we know they’re Given the hazardous nature of products
strong senior management backing in going to do what’s right during a disaster.” transported and the high costs associated
order to flourish. Building resilience is not with disruptions, O&G companies should
only a matter of awareness, but of setting Cisco – Fostering a risk management setup a central emergency response
an intent across the organization, clearly mindset across the organisation disaster management office comprising
communicating to the entire workforce, A critical success factor behind Cisco’s supply meteorologists, fire experts, and operations,
and taking tangible action to address the chain risk management program has been logistics and marketing representatives to
immediate and long-term risks. senior management support and buy- respond swiftly to any crisis with clearly
in. Cisco’s product resiliency index scores defined SOPs, roles and responsibilities
are published across the organization and and delegation of authority. There should
Practical applications
reported semiannually by general managers be a clearly defined action plan with well
to BU heads. That senior level interest has led to defined timelines to respond effectively to
Walmart – Co-ordinated crisis response the disruption be it a natural disaster or
through collaboration business-unit-to-business-unit comparisons
of risk vulnerability, which has led to internal operational turmoils such as a pipeline
Walmart established their global emergency competition, which, in turn, is driving down leakage, fire in a terminal or economic stress
operations center (EOC) to function as the risk quotients across all business units. such as large section of transporters facing
centralized node for crisis response. It brings financial distress.
Cisco provided product designers with clear
together experts from diverse disciplines such and objective information about new designs As the world continues to grapple with the
as operations, transportation, merchandising, and suggested remediation steps to derisk challenges caused by COVID-19, we could start
logistics along with meteorologists, for the design instead of giving them a blanket to see discontinuous shifts and a “next normal”
developing a coordinated mitigation strategy mandate. This led to high acceptance and beyond the recovery for supply chains. Rather
against disruptions. During a disaster, they helped ensure that designers think about than wait, oil and gas companies should use the
work closely with the local stores and field resiliency as a product attribute rather than crisis as a catalyst for recalibrating their supply
divisions to ensure emergency demand as the concern of operations executives. chain priorities and embed resiliency as one
replenishment and transportation. From Cisco’s product development teams and of the key tenets. Unpredictability stemming
tracking demand patterns through social commodity management teams worked from economic, political and climatic shifts is
together to develop resiliency plans such unlikely to decrease anytime soon. Efficiency
media to working with power companies
as specifying alternate components in a bill alone cannot cope with this reality. Oil and gas
to proactively deploy generators in areas
of materials or creating buffer stocks of key companies with winning aspirations should
of sustained power failure, the EOC is a take a proactive approach and invest in supply
prime example of how cross-functional components in order to mitigate risk. This
culture of openness has helped create an chain resiliency and continuity today so that
collaboration can foster resilience and agility they are better prepared to manage inevitable
during a crisis. Says Mark Cooper, Senior ownership environment, where warning
signs of internal and external risks are openly future disruptions.
Director of Global Emergency Management
voiced and employees feel responsible for
at Walmart.
the outcomes of actions and decisions when
Efficiency to resilience | 23Demonstration of Indian
AWS - Commitment to serve customer
Oil’s supply chain resilience
needs in harsh weather over inhospitable
terrain
As an annual exercise, Indian Oil carries out
advanced winter stocking (AWS) during the
months of May-October to ensure supplies
to the remote trans-Himalayan territories
of Ladakh, Sikkim and Kinnaur. This activity involves clockwork co-
ordination among personnel and processes at Indian Oil’s refineries,
storage terminals and depots, and transporters and customers,
including the Army. The components in the supply chain that
enable Indian Oil to achieve the unique feat of transporting 140 TKL
of petroleum products and 33k tonnes of LPG over two of the world’s
highest passes include:
■ Special tankage of 400 KL winter grade HSD having pour point
less than minus 30 degrees celsius is created at the Leh depot to
cater to Army demand during winter
■ Days available from a location is considered from the date of
start of loading from that location till target date of completion
Erecting of Naphtha Splitter Column
■ Day-wise monitoring of dispatches from each location for at Barauni Refinery
comparing with the prorated days available
BS-IV to BS-VI transition – Seamlessly powering India’s
cleaner fuel revolution
Nothing demonstrates the agility and resilience of Indian
Oil’s supply chain better than the smooth pan India roll out
of BS-VI-grade auto fuels in a record time of three years. This
project required upgradation of the 11 refineries, revamp of the
entire downstream infrastructure of 119 terminals, 14000KM
of pipelines, creating SOP, training people and instituting a
robust monitoring system for project execution. The strategies
that Indian Oil used to navigate the multiple challenges and
roadblocks that came in the way demonstrate the practical
Indian Oil Tanker Trucks crossing the
application of various elements of the supply chain resilience
~13,000 ft Rohtang Pass in May
model, namely
24 | Indian Oil Corporation Limited . The Boston Consulting Group■ Robust monitoring systems and SOP
for response – A detailed tank by tank
conversion plan was prepared with
centralized monitoring. Vendor failure risk Dedicated crew members – the backbone of
Indian Oil’s resilient supply chain during the COVID-19 crisis
was mitigated through a robust selection
process and by working with multiple
vendors COVID-19 pandemic – Keeping the ■ Strict enforcement of safety
wheels of the nation running during measures among truck crew and
■ Partnership mindset in dealing with
crisis support staff including distribution
vendors and suppliers – Coordinating
Ability to ensure the smooth and of personal protective equipment
with international equipment suppliers
to ensure timely deliveries and working uninterrupted supply of POL and ■ GPS-enabled vehicle tracking
with domestic vendors to surmount LPG for households and emergency system enabling real-time
contracting challenges arising from GST services during the lockdown optimization of transport routes
implementation demonstrates that Indian Oil has To manage the unprecedented buildup
imbibed supply chain resilience as of inventory during the COVID-19 crisis,
■ Agile decision making – Power of attorney
a key strategic priority. The primary Indian Oil converted all their time
was given to the project management
contributing factors behind Indian chartered vessels to floating storage
consultant to take decisions upto a certain
Oil’s ability to overcome the many units, turned around the under-
financial amount. This shortened the
challenges faced during COVID are: maintenance storage units, and used
decision-making process and resulted in
faster execution of the work ■ Dedicated fuel transporters hospitality storage besides exporting
and gritty crew members with surplus products. Such agile and
■ Project management excellence – The
unmatched work ethic decentralized decision making allowed
lighthouse model of piloting, learning
■ Outreach and coordination with Indian Oil to continue running their
and scaling up was followed. The NCR
central and local government ref ineries even during the lockdown.
pilot model was replicated pan India. This
allowed sufficient time for learning and officials for timely transport permits
validation to minimize failures
Efficiency to resilience | 25About Indian Oil
Indian Oil Corporation Limited (Indian Oil) is India’s
flagship National Oil Company. It is a diversified energy About BCG
major with presence across the entire hydrocarbon
value chain from refining, pipeline transportation & The Boston Consulting Group (BCG) is a global
marketing, to exploration & production of crude oil & management consulting firm and the world’s
gas, petrochemicals, gas marketing, alternative energy leading advisor on business strategy. We partner
sources and globalisation of downstream operations. with clients from the private, public, and not-
for-profit sectors in all regions to identify their
Indian Oil is the market leader in Indian Petroleum highest-value opportunities, address their most
sector with 44% market share. On an average the critical challenges, and transform their enterprises.
company serves 23 million customers on a daily basis Our customized approach combines deep insight
through 50000+ customer touch points. Indian Oil into the dynamics of companies and markets
group has consolidated revenues of $ 77.5 Billion and with close collaboration at all levels of the client
as per Fortune 500 rankings the company ranks 117th organization. This ensures that our clients achieve
globally and 2nd in India. sustainable competitive advantage, build more
The company has global footprints in countries like capable organisations, and secure lasting results.
Sri Lanka, Bangladesh, Mauritius, the UAE, Sweden, Founded in 1963, BCG is a private company with
Singapore, Canada, Russia, USA and The Netherlands more than 90 offices in over 50 countries. For more
information, please visit bcg.com.
26 | Indian Oil Corporation Limited . The Boston Consulting GroupAbout the Authors
Anirban Mukherjee is a Managing Director and Partner in the New Delhi office of Boston Consulting Group.
Dr. Rahool S. Pai Panandiker is a Managing Director and Partner in the Mumbai office of Boston Consulting Group.
Rajarshi Bhattacharyya is a Principal in the Mumbai office of Boston Consulting Group and a core member of the
Energy practice in India. Sarajeet Kanungo is a Consultant in the Mumbai office of Boston Consulting Group.
Acknowledgments
This report is authored by the Boston Consulting Group (BCG) with support from Indian Oil Corporation Limited.
We would like to thank Rakesh Sehgal, Executive Director, Supplies, Debabrata Das and Anshu Mahajan from the
Indian Oil team for their support and guidance in the development of this report. We would also like to acknowledge
the contribution of our colleague Sonal Tripathy for her assistance in developing the report. The authors also thank
Jamshed Daruwalla, Pradeep Hire and Vijay Kathiresan for their contribution towards the design and production of
this report.
For Further Contact
If you would like to discuss this report, please contact one of the authors.
Rajarshi Bhattacharyya Anirban Mukherjee Dr. Rahool S. Pai Panandiker
Principal Managing Director and Partner Managing Director and Partner
BCG Mumbai BCG New Delhi BCG Mumbai
+91 22 6749 7570 +91 124 459 7014 +91 22 6749 7143
Bhattacharyya.Rajarshi@bcg.com Mukherjee.Anirban@bcg.com Panandiker.Rahool@bcg.com
Efficiency to resilience | 2728 | Indian Oil Corporation Limited . The Boston Consulting Group
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