Oct-2015

Integration of planning processes

A group was established to integrate management processes across all areas of refinery activity to identify opportunities for increasing product values and margin

M D PAWDE and K VINOD
Hindustan Petroleum Corporation Limited

Article Summary

The competitive landscape of Indian petroleum refining and marketing companies became complex after deregulation due to surplus refining capacity. To position Hindustan Petroleum Corporation Ltd (HPCL) as a dominant player in the Indian energy landscape and accelerate efforts to be ahead of market conditions, the company created a platform for maximising margin from every barrel of crude oil by enhancing the value of products it refines and markets. This article discusses the approach followed in designing and implementing the Integrated Margin Management (IMM) programme and the benefits obtained.

About HPCL
HPCL is a global Fortune 500 company with two refineries (one on the east coast, one on the west coast) with a combined operating capacity of about 300 000 b/d and a marketing presence across the country. The company also owns and operates the largest lube refinery in India, with a capacity of 0.43 million t/y. In addition, HPCL has an inland joint venture refinery in the north with a capacity of 180 000 b/d. The marketing infrastructure covers 46 LPG bottling plants with over 3900 distributors, 35 terminals, and 90 depots for the supply and distribution of products through 
13000 retail outlets, 235 lube distributors and over 34 aviation service stations. The company also owns and operates over 2500 km of product pipeline network for transportation of products across the country.

Concept and objective of Integrated Margin Management
For HPCL, the supply chain consists of feedstock sourcing, refining, distribution, storage and sales. There are multiple levers of value creation across each part of the supply chain. Optimal decisions on each of these levers need cross-functional consideration. In a traditional model of operation, each business unit does the planning for its part of the supply chain and decides on the set of levers related to its business area. In such an approach, all cross-functional considerations may not receive their due weight given the business unit’s primary focus on maximising margin/reducing costs in its leg of the supply chain. A study showed that significant value can be created by ensuring cross-functional decisions for each of these levers.

To realise this latent value, the need was felt to create a single, empowered group called Integrated Margin Management (IMM) with control of cross-functional processes for maximising margin across the value chain, including the interface between the various departments, capturing opportunities and reducing margin leakages by introducing the concept of Net Corporate Realisation (NCR).

The salient functions carried out by the IMM group are:
• A single entity empowered to take a continuous view of profits, and to take all decisions to plan, enhance and deliver NCR
• Collaborative working
o For demand forecasting to ensure optimal supply potential
o Enabling inter-functional and inter-business unit teamwork by ensuring the high visibility of relevant data and providing a neutral forum to deliberate issues
• Analyse the effect of the previous month’s action on NCR and the likely impact of the current month’s decisions, and share the results with the business units
• Inventory balancing across the value chain with adequate systems to manage the exposure of inventory
• Provide a single window to top management to review monthly NCR performance through a single central department.

The various benefits expected from the IMM group were:
• Segregation of planning and execution processes
• Facilitate continuous improvement by challenging and resolving constraints, supported by separation of all planning and execution activities
• Adding accountability by aligning the KPIs of different business units and departments towards the common goal of maximising profit
• Planning and initiating short, medium and long term projects for the corporation.

Nine key, cross-functional processes across annual planning, monthly planning and retroanalysis (backcasting) were identified as the key processes driven by the IMM group to conduct end-to-end supply chain planning and performance backcasting in coordination with the respective business areas. Pilots were rolled out across each of these processes, driven by senior managers as sponsors of the processes. The pilots were 
successful in applying NCR to all cross-functional decisions.

The success of the pilots led to institutionalisation of a formal IMM group, consisting of people from cross-functional backgrounds reporting to the office of the chairman and managing director. Within 180 days, 63 ideas with potential combined annual savings of $198 million were rolled out. Implementation of 18 ideas with a combined annual savings potential of $62 million commenced.

Design of IMM and key processes
The head of the IMM group reports to the chairman and managing director, and the IMM group is responsible for maximising the company’s NCR. It consists of personnel from multiple backgrounds such as refining, distribution, suppliers, trading and finance, all reporting to the head of IMM. The head of planning and distribution leads these activities across the value chain. The head of economic analysis is responsible for retro-analysis and tracks the margin realisation of the plan, identifies leakages of margin, and develops action plans with the business units to plug the leakages. He is also responsible for hedging and risk management. In addition, the IMM group includes the Initiatives Management Office (IMO), which drives margin improvement ideas identified by IMM within the value chain through cross-functional collaboration. These ideas are identified during the planning and backcasting processes.

The team also has a monthly forum with top management to discuss: the performance of NCR; ideas for improving margin; and decisions on key bottleneck areas.

The nine cross-functional processes that form the core of IMM in planning for the supply chain and tracking the NCR are:

1. Annual crude planning: to finalise the optimum crude mix (quantity and grade) to be sourced under term and spot for the year to meet production plans and product requirements for the year. The process generally commences three to four months prior to the beginning of the year and aligns the strategies of business units across the value chain.

HPCL used the Aspen PIMS model for optimisation and crude selection. This model is built in line with refinery configurations and was developed over a period of time to bring accuracy to predictions. Primary unit yield is dependent only on the feed (crude) quality, and thus the yields as well as the properties for various streams from the CDU and VDU for each crude oil are provided as an input to the model. The feed to secondary units – the FCC, CCR, diesel hydrotreater, and so on – is the product streams from the primary units. Depending on the type of crude in the primary units, the product yields and stream properties from the secondary units will change significantly. Delta vectors are built into the model to take care of changes of yield with feed properties for the secondary units.