Scm in Petroleum Industry

5215 Words Nov 16th, 2010 21 Pages
International Journal of Global Logistics & Supply Chain Management. Vol. 1, No. 2, 1 November 2006, 90 – 97.

Supply Chain Management in the Petroleum Industry: Challenges and Opportunities
RAED HUSSAIN
Department of Quantitative Methods & Information Systems, Kuwait University, Kuwait

TIRAVAT ASSAVAPOKEE
Department of Industrial Engineering, University of Houston, Texas, U.S.A.

BASHEER KHUMAWALA
Department of Decision and Information Sciences, University of Houston, Texas, U.S.A.

Supply chain management in the petroleum industry contains various challenges, specifically in the logistics area, that are not present in most other industries. These logistical challenges are a major influence on the cost of oil and its derivatives.
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Opening new production sites or distribution centers closer to dispersed customers is one way to reduce the lead time and transportation costs. However, the acquisition of such facilities in the oil and petrochemical industries, if feasible, is typically very costly and often results in higher inventory and operating costs (Hebert, 2004). Red Cavaney, president of the American Petroleum Institute, said “Most companies are unlikely to undertake the significant investment needed to even begin the process” (Hebert, 2004) These factors are pushing oil and petrochemicals companies to either absorb the increase in costs or pass the costs on to customers who are already facing increasing prices. Companies therefore have recognized that improved supply chain efficiencies represent a huge area for cost savings, specifically in the logistics area; they are estimated to be an average between 10 and 20 percent of revenues (Hamilton, 2003). Also, companies believe that the supply chain in which they participate as customers and suppliers is what creates competition rather than individual companies (Whitfield, 2004; Lange, 2004; Morton, 2003; Bianchi, 2003; Collins, 1999; Coia, 1999). Despite the importance of the petroleum industry in our daily life and the operational challenges it involves, unfortunately the topic has received very little attention in operations and supply chain management literature. The objective of this