LOGISTICAL COST OPTIMIZATION THROUGH APPLICATION OF PTP MODEL

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Slide 1: 

Conference on Supply Chain Management and Competitiveness (SCMCC-08) October 18th -19th 2008 Institute of Management Education Sahibabad, Ghaziabad, India

LOGISTICAL COST OPTIMIZATION THROUGH APPLICATION OF PTP MODEL(With special reference to Downstream Petroleum Supply Chain) : 

LOGISTICAL COST OPTIMIZATION THROUGH APPLICATION OF PTP MODEL(With special reference to Downstream Petroleum Supply Chain) Authors   H. M. Jha “Bidyarthi” Professor Department of Business Administration and Research Shri Sant Gajanan Maharaj College of Engineering Shegaon, Maharashtra, INDIA Email; hmjhabidyarthi@rediffmail.com, hmjhabidyarthi@ssgmce.ac.in   And   L. B. Deshmukh Lecturer Department of Business Administration and Research Shri Sant Gajanan Maharaj College of Engineering Shegaon, Maharashtra, INDIA Email: laxmikantd@gmail.com Cell: 9420694924

Contents: : 

Contents: Supply chain defined Logistics decisions Petroleum industry Supply chain features of Indian petroleum industry The petroleum supply chain in india Petroleum value chain and the value search Objectives Constraints Solution aprroaches PTP model Solution algorithms Conclusion

The Supply Chain Defined : 

The Supply Chain Defined A supply chain is an integrated manufacturing process wherein raw materials are converted into final products, then delivered to customers. At its highest level, a supply chain is comprised of two basic, integrated processes: (1) the Production Planning and Inventory Control Process, and (2) the Distribution and Logistics Process.

Slide 5: 

These Processes, illustrated below in Figure 1, provide the basic framework for the conversion and movement of raw materials into final products.

Logistics Decisions : 

Logistics Decisions Source: Logistics Composite Modeling, H. Donald Ratliff, Atlanta,

Petroleum Industry : 

Petroleum Industry Petroleum industry stands in the forefront amongst any of the industries that signifies the logistical requirements most. The relationship between the state of petroleum industry and economic developments of a nation and world as a whole needs no interpretation. The supply chain of the petroleum industry is extremely complex as compared to other Industries.

Petroleum Industry : 

Petroleum Industry The downstream Petroleum Supply chain involves the process of forecasting, production and logistic management of delivering crude oil derivatives to customers around the globe. Supply chain management in petroleum industry contains various challenges specifically in logistics area on downstream side In this paper production transportation linear programming model for downstream petroleum supply chain is considered.

Supply chain features of Indian Petroleum Industry1 : 

Supply chain features of Indian Petroleum Industry1 Raw Material Supplies Raw Material Prices Non-discrete Inventory Reverse Production Flow High Transportation Costs Manufacturing Process and Capacity Flexibility Length of Supply Chain Integration of Supply Chain Partners Risk of Product Contamination / Adulteration Inventory Carrying Costs 1: Supply Chain Characteristics of the Petroleum Industry: The Indian Context South Asian Journal of Management,  Apr-Jun 2007  by Varma, Siddharth,  Wadhwa, Subhash,  Deshmukh, S G

THE PETROLEUM SUPPLY CHAIN IN INDIA : 

THE PETROLEUM SUPPLY CHAIN IN INDIA India imports 70% of its requirement of crude petroleum. Transportation costs in India account for about 20% to 25% of the total cost of the product. Currently in India, the share of railways is about 40%, the share of road transportation is about 18% and the share of coastal transportation is about 12%. Pipelines account for about 30% of the share. In India adulteration of petrol and diesel is a big ticket scam that involves an annual recurring loss of at least Rs. 10,000 cr to the exchequer (Ramchandran, 2005).

Slide 11: 

Petroleum Value Chain and the Value Search Source: Strategic Shift in Indian Downstream Sector Technologies in Supply Chain Management ;August 2005 by:Ashish Gaikwad, Director – Advanced Solutions,Honeywell Asia Pacific

Slide 12: 

Source: Strategic Shift in Indian Downstream Sector Technologies in Supply Chain Management ;August 2005 by:Ashish Gaikwad, Director – Advanced Solutions,Honeywell Asia Pacific

The Objectives: : 

The Objectives: Cost Optimization Improve & Maintain Customer Service Level Integration of different supply chain entities Efficient & effective flows of Goods, Money & Information.

Constraints : 

Constraints The existing refineries (manufacturing facilities) and their product mix assortment. Customer accommodation activities of separate supply depots Limited capital investment for refinery expansion Limited capacity of refinery (supply from refinery) Limited capacity of supply depots Limited capacity of various transportation modes. Dynamic nature of demand

Slide 15: 

The Objective of Cost Optimization have many more constraints. On the basis of situational analysis, it is expected that senior management will place some restrictions on the scope of permissible system modifications. Their nature of such constraints depends upon the specific circumstances of individual firms

Solution Approaches: : 

Solution Approaches: Individual Models for following problems:

Slide 17: 

Linear Programming Models Simulation Models Statistical Models Heuristic Models Information Technology Every approach come with their certain Pros & Cons. One of those is discussed here. i.e. PTP( Linear programming Approach)

PTP Model for Supply Chain Optimization : 

PTP Model for Supply Chain Optimization PTP Model by Dubravko Hunjet, Miroslov Milinovic, Luka Neralic & Lajos Szerovicza; 2002

Slide 19: 

The mathematical formulation (1.1) – (1.6) of the production transportation problem uses the following notations: iindex for refineries (i = 1,2,……,I) jindex of petroleum products’ retailer / petrol pumps (j = 1,2,……,J) tindex for products (t = 1,2,………T) sindex for modes ( s = 1,2,……,Si, i = 1,2,…….,I) cis Variable production costs for mode s at plant i cijtUnit transportation cost for product t from plant i to customer j aitsQuantity of product t produced at plant i by mode s bjtDemand of product t by customer j; uijtA variable denoting amount of product t shipped from plant i to customer j zis A variable denoting the intensity of using s by plant i

Slide 20: 

The objective function implies all variable production costs and transportation costs should be minimized.

Slide 21: 

All customers’ demands for every product will be satisfied because of following Constraint which specify that the amount of each product shipped from every refinery to all retailers can not be greater than quantity produced.

Slide 22: 

Following Constraint means that all refineries should operate in whole planning period and next two constraints are non negativity constraints of all variables.

Slide 23: 

No. of Constraints = JT + IT + I No of variables =IJT + S1 +…….+SI Where J No. of petroleum products’ retailer I index for refineries T index for products (t = 1,2,………T) S index for modes ( s = 1,2,……,Si, i = 1,2,…….,I)

ON SOME OF THE ALGORITHMS FOR SOLVING THE PTP : 

ON SOME OF THE ALGORITHMS FOR SOLVING THE PTP An algorithm based on combination of penalty function method and Frank-Wolfe’s Method was proposed for solving the PTP by Neralic who also introduced the other algorithm based on the augmented Langragian. A similar algorithm was proposed based on Benders decomposition for solving the PTP by Hunjet et al and Neralic et al. An algorithm of parametric decomposition for solving the PTP was proposed by Neralic, Vojvodic-Rosenzweig.

Conclusion: : 

Conclusion: In today’s scenario of sky rocketing prices of crude oil in international market, there is utmost requirement of managerial intervention in compensating the cost of transportations and refining . Through this review paper authors have identified the areas for cost reduction and have suggested application of a tool kwon as PTP (production Transportation Problem) in the downstream environment of petroleum industry which will reduce the total logistical cost of downstream supply chain considering the customer satisfaction as one of its variables in the model. The model assures that the priorities and objectives of oil companies will be fulfilled.

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