IBP1123_12 DIESEL OIL SAFETY STOCK IN STORAGE AND DISTRIBUTION TERMINALS A CASE STUDY: PORTO VELHO/RO, BRAZIL Rubens

s C. Freitas1, Marcio A. Dagosto2

Copyright 2012, Brazilian Petroleum, Gas and Biofuels Institute - IBP

This Technical Paper was prepared for presentation at the Rio Oi & Gas Expo and Conference 2012, held between September, 17-20, 2012, in Rio de Janeiro. This Technical Paper was selected for presentation by the Technical Committee of the event according to the information contained in the final paper submitted by the author(s). The organizers are not supposed to translate or correct the submitted papers. The material as it is presented, does not necessarily represent Brazilian Petroleum, Gas and Biofuels Institute opinion, or that of its Members or Representatives. Authors consent to the publication of this Technical Paper in the Rio Oil & Gas Expo and Conference 2012 Proceedings.

Abstract
This paper presents a methodology for calculating diesel oil safety stock in distributor terminals located in the northern of Brazil, applied on a case study for terminals in the state of Rondnia. From the mapping of logistic flows related to transport and storage of diesel oil, the risk factors that cause uncertainties in lead time were analyzed and quantified. Through a research conducted among economic agents (producers, distributors and carriers) operating in the region, it was measured the relevance and impact of risk factors on the safety stock in the terminals. The safety stock was calculated by the classical equation of inventories, as well as by the methodology proposed in this paper. The difference between the two methods has unveiled inefficiencies derived from uncertainties in lead time. Recommendations of actions to mitigate the risk factors are included at the end of this paper.

1. Introduction
The northern of Brazil is exposed to cyclical climatic events, in particular, the droughts in the Amazonian rivers, which have strong influence on the regional supply of fuel, by interfering in their logistic flows of transport and storage. These climatic events have unveiled risk factors that are permeated through the whole fuel supply system, which includes the production, transport and storage that precede commercialization. These risks bring uncertainties to the lead time, which consequences are inefficiencies in safety stock management. Sajadieh and Eshghi (2009) evaluated a supply chain model with stochastic lead time and deterministic demand, with the aim of determining the optimal values of reorder point, order quantity and order splitting proportion among suppliers. They found that the reduction in total acquisition cost can be achieved not only through lower prices or better quality, but also by the reduction of uncertainties stemming from lead time, which was defined as the time that elapses from the moment at which it is decided to place an order, until it is physically on the buyer's shelf. The authors divided this time interval into five distinct components: order processing time; transit time to supplier; time at supplier; transportation time; receiving time. Arifoglu and Ozekici (2011) point out that in any inventory system there are several sources of uncertainty, mainly those stemming from the demand. However, they warn that the uncertainties derived from lead time may represent a new paradigm in inventory management. The authors point out that lead time is a relevant issue that should be considered in decisions about inventory management, advocating that, on the presence of random lead time, it is required a deeper research on models for this management. Abginehchi and Farahani (2010) wonder how to maintain the level of service promised to the customer and, at the same time, reduce logistics costs, when lead time has relevant degree of uncertainty. They observe, however, that higher service levels can be achieved, for any safety stock level, when the uncertainty in lead time is diluted among several suppliers. Chandraa and Grabisb (2008) also have addressed the management conflicts between the benefits achieved by reducing lead time and the collateral effects of higher acquisition costs. Gupta et al. (2000) have researched a model to assess the impact on costs when the level of service is increased. They compared production costs with supply channel costs, and have concluded that, for each unit increase in production costs there is a reduction in the supply chain costs around 60%, resulting in a net increase in total costs. These total costs would increase linearly with service level

______________________________ 1 Master, Mechanical Engineer - ANP 2 Ph.D., Mechanical Engineer - Coppe/UFRJ

Rio Oil & Gas Expo and Conference 2012 until this one reach 95%. When service level ranges from 95% to 97%, supply channel costs are reduced, but total costs increase exponentially, making it prohibitively expensive to any wider service level. Tang (2006) argues that robust strategies to mitigate operational risks in the supply chain should include improvements in lead time, which uncertainties, even when the demand is deterministic, may lead to poor results in inventory management. Kull and Closs (2007) address the relationship between supply chain risks and inventory levels, emphasizing the contradictory objectives associated to it. In the mitigation of lead time uncertainties, managers usually increase safety stock level or the replenishment order size, which, in the authors' view, is not always the best strategy, because smaller and more frequent orders, often, may be the safer alternative in inventory management. Narasimhan and Talluri (2009) highlight the managing risks in supply channels as a strategic activity for business. Evaluations of sources and risk magnitudes should be conducted with a focus on business objectives, as well as on the exposure to adverse events, which may materialize into disruptions in the supply chain. The anticipation, identification, classification and assessment of supply chain risks require the application of effective methodologies, before implementing mitigation actions. The conceptual view of risks can be very useful in its identification, in order to formulate preventive strategies. Thus, the development of consistent methodologies is essential for identification and measurement of risks, particularly when the supply channel is subject to random events. FERMA (2003), considering risks as the combination of the probability of an event and its consequences, has standardized procedures for risk management, since its identification and treatment until methodical analysis of past, present and future events, always from the perspective of continuous processes. Thus, using methodologies of analysis and estimations, that identifies the exposure to element of uncertainty, risks are described in a structured format and are estimated (qualitatively or quantitatively) in relation to the probability of their occurrence and impact. The risk assessment ponders impacts (financial, strategic, logistical or regulatory) with probabilities (possible frequency occurrence), which may be identified by various techniques, as questionnaires application, followed by analysis methods of measurement and statistical inferences. Upon completed the analytical process, the estimated risks must be compared, followed by the implementation of control procedures and mitigation actions, highlighting the priorities. Korpela et al. (2002) consider that the logistics flows and the level of service offered to customers are key elements in the management of appropriate levels of safety stocks. If inadequate inventories weaken the promised service level, on the other hand oversized inventories are unfeasible from the perspective of profitability. The authors applied the Analytic Hierarchy Process - AHP to complement the traditional approach to measure safety stocks, based on past performance, taking into account future factors (risks) that could impact in the stability of supply chain This paper aims to present a methodology, complementary to the classical theory of inventory management, to calculate safety stock of diesel oil in distributors' terminal, from the mapping of logistic flows of transport and storage and the analysis and measurement of risk factors, associated to these flows, which cause uncertainties in lead time. A case study of this methodology will be applied to the distributors' terminals located in Porto Velho/RO. In section 2, it will be mapped the logistic flows of transport and storage of diesel oil in the northern, focused in Rondnia. Section 3 will present the calculation of safety stock at diesel oil terminals located in Porto Velho/RO through the traditional approach to inventory management. In section 4, risk factors, whose impact on logistic flows causes uncertainties in lead time, will be quantified according to their relevance and impact on safety stock. Section 5 will show the calculation of the safety stock at diesel oil terminals in Porto Velho/RO, discounting the inefficiencies associated to these risk factors. Ultimately, in section 6, it will be presented a set of recommendations to mitigate risk factors that causes uncertainties in lead time related to logistic flows of diesel oil stored in Porto Velho/RO.

2. Mapping of logistic flows in the transport and storage of diesel oil in the northern: Rondnia's case study
Fuel supply in Brazil is considered a public utility, as determined at 1, article 1, of Law n 9.847/99. Also, as it is stipulated at article 8 of the Petroleum Law (Law n 9.478/97), it is legal competence of ANP (National Agency for Petroleum, Natural Gas and Biofuels) regulate and oversee the national fuel supply, which includes logistic flows of transport and storage of diesel oil in the northern region. Sabb Refinery - REMAN, located in Manaus/AM, owned by Petrobras - Petrleo Brasileiro S.A., is the unique producer of diesel oil installed in the northern region. The production of diesel oil at REMAN is not sufficient to meet all the demand for this fuel in the region. Thus, there is additional supply through transshipment of national production, derived from other Petrobras refineries around the country, as well as from transshipment of imports. In 2010, it was 2

Rio Oil & Gas Expo and Conference 2012 consumed 2.409,6 thousand m of diesel oil in the northern, of which 37.5% produced by REMAN, 54.3% from national production transshipment and 8.2% from import transshipment (ANP, 2012). Diesel oil (production or transshipment) is transferred, via pipelines, from REMAN to five distributor primary terminals, located around the refinery. These terminals have total storage capacity of 65,1 thousand m in 16 tanks of diesel oil. From the primary terminals in Manaus/AM, diesel oil is sold directly to the states of Amazonas and Par or transferred to distributor secondary terminals located in other federal units in the northern (except for the state of Tocantins, which is supplied by the central west region). Regarding the state of Rondnia, object of this paper, diesel oil coming from Manaus/AM reaches Porto Velho/RO by inland waterway transport, via barges along the Madeira River. In Porto Velho/RO, there are five distributor secondary terminals, with total storage capacity of 31,8 thousand m in 12 tanks of diesel oil. From the secondary terminals in Porto Velho/RO, diesel oil is sold to retailers and consumers in the states of Rondnia and Acre (ANP, 2012). In 2011, during two technical meetings coordinated by ANP, one in Manaus/AM and other in Belm/PA, which involved REMAN (producer), distributors and carriers, it were discussed the problems that, from the perspective of these economic agents, have caused abrupt changes in distributor inventories, especially in situations of supply constraints caused by periodic droughts in the Amazon rivers. As a result of these meetings, it was generated a list of nonconformities that, directly or indirectly, resulted in logistical inefficiencies with consequences on safety stocks in terminals. Based on the techniques of the AHP, applied by Korpela et al. (2002) for studies on adjustments of inventory levels, it was mapped, from this list, the logistic flows of transport and storage of diesel oil in the northern, specifically those intended for secondary terminals in Porto Velho/RO. Flows were decomposed into three families: i) supply sources (origin of diesel oil); ii) transport modes (link between origin and destination); iii) terminals (destination of diesel oil). These three families were divided into seven genera and seventeen species, as it is described in the next paragraphs. The family "supply sources", that represents the origin of diesel oil that will be stored in terminals and traded with retailers and consumers, was separated into three genera: i) REMAN - own production; ii) national production transshipment (from other refineries around the country); iii) imports transshipment. The genus REMAN - own production, that represents diesel oil exclusively produced by the refinery in Manaus/AM, was disaggregated into four species: i) scheduled stoppages in the refinery; ii) unplanned stoppages in the refinery; iii) refinery storage capacity; iv) frequency and volume pumped from the refinery to distributor primary terminals. Scheduled stoppages represents preventive maintenance (planned) in the refinery that interrupts the production of diesel oil. Unplanned stoppages represents the corrective maintenance (unplanned) in the refinery that also disrupts the production of diesel oil. Storage capacity represents the volume of diesel oil, produced or from transshipment, which can be stored in the refinery before being pumped to primary terminals. Frequency and volume pumped from the refinery to distributor primary terminals represents the combination of frequency and volume of diesel oil pumped by pipeline to distributor primary terminals in Manaus/AM. The genus national production transshipment, that represents diesel oil produced by other refineries around the country and transferred to REMAN through cabotage, was disaggregated into two species: i) volume and frequency received in the refinery; ii) terminal infrastructure in the refinery. Volume and frequency received represents the combination of frequency and volume of product received by the refinery through cabotage. Terminal infrastructure is the set of facilities available in the refinery terminal for berthing of vessels, such as draft (m), flow (m/h), length (m), size (t), competition for berths, number of lines and equipment. The genus imports transshipment, that represents diesel oil produced abroad, internalized in the country through Itaqui Port (state of Maranho) and also transferred to REMAN through cabotage, was disaggregated into two species: i) conformity (physical and chemical) of diesel oil compared to the specification of ANP; ii) port infrastructure. Conformity of diesel oil compared to the specification of ANP represents the physic-chemical properties, from abroad, in line with the norms of the regulatory agency. Port infrastructure is the set of facilities available in the port for berthing of vessels, such as depth (m), flow (m/h), length (m), size (t), competition for berths, number of lines and equipment. The family "transport modes", that represents the means by which the diesel oil will be transported from distributor primary terminals in Manaus/AM to distributor secondary terminals in Porto Velho/RO, was separated into two genera: i) inland waterway transport; ii) road transport.

Rio Oil & Gas Expo and Conference 2012 The genus inland waterway transport, that represents the predominant mode of transport in the northern to transfer diesel oil from primary terminals to secondary ones through Amazon's rivers (in this case, the Madeira River), was disaggregated into two species: i) volume and frequency received by barges in the terminals; ii) waterway infrastructure. Volume and frequency received by barges in the terminals represents the combination of frequency and volume of product received by the terminal through barges. Waterway infrastructure represents the conditions of the Madeira River in relation to barge navigability. The evaluation parameters of the navigation infrastructure are depth of the river (considering barges with full load capacity), the absence of sand and stone banks, visibility and safety. The genus road transport, that represents the alternative mode of transport to the river, when there are restrictions on the Madeira River navigation, was disaggregated into three species: i) volume and frequency received by trucks in the terminals; ii) road infrastructure; iii) road freight costs. The origin of road transport is the Southeast, for there is no alternative road access (with traffic conditions) to the Madeira River. Volume and frequency received by trucks in the terminals represents the combination of frequency and volume transported by trucks from terminals in the Southeast to secondary terminals in Porto Velho/RO. Road infrastructure represents the traffic conditions on roads along the route, whose evaluation parameters are the roadway, services offered to the driver/truck and safety. Road freight costs represents higher prices of diesel oil due to the additional road freight costs compared to waterway. The family terminals, that represents the distributor's facilities where diesel oil will be stored in Porto Velho/RO, was separated into two genera: i) tanks storage capacity; ii) infrastructure to unload diesel oil into tanks. The genus tanks storage capacity, that represents the total storage volume of diesel oil, in m, that can be stored into tanks on secondary terminals, was disaggregated into two species: i) capacity available to distributor (owner of the terminal); ii) capacity available to other distributors. Capacity available to distributor represents the volume (m) that the distributor can store into tanks to trade with retailers and customers. Capacity available to other distributors represents the volume (m) of idle space into tanks that the distributor (owner of the terminal) may cede to other distributors. The genus infrastructure to unload diesel oil into tanks, that represents the set of equipments (pumps / motors), piping, valves and fittings used to unload the product, coming from both transport modes (inland waterway and road), was disaggregated into two species: i) infrastructure for unloading barges; ii) infrastructure for unloading truck. Both infrastructures are evaluated by the set of equipments (pumps / motors), piping, valves and fittings used to unload the product. The decomposition of logistic flows into families, genera and species are summarized in Table 1, unveiling seventeen risk factors that can impact on safety stock levels of diesel oil in the secondary terminals in Porto Velho/RO. Table 1. Decomposition of logistic flows related to transport and storage of diesel oil in the northern Family Genus REMAN - own production Supply sources National production transshipment Imports transshipment Inland waterway transport Transport modes Road transport Tanks storage capacity Terminals Infrastructure to unload diesel oil into tanks Specie 1- scheduled stoppages in the refinery 2- unplanned stoppages in the refinery 3- refinery storage capacity 4- frequency and volume pumped to distributors 5- volume and frequency received in the refinery 6- terminal infrastructure in the refinery 7- conformity of diesel oil (specification of ANP) 8- port infrastructure 9- volume and frequency received by barges 10- waterway infrastructure 11- volume and frequency received by trucks 12- road infrastructure 13- road freight costs 14- capacity available to distributor - m 15- capacity available to other distributors - m 16- infrastructure for unloading barges 17- infrastructure for unloading truck

In the next section, it will be presented the safety stock calculation based on the traditional approach to inventory management. 4

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3. Safety stock calculation of diesel oil at Porto Velho's terminals - traditional approach
Diesel oil safety stock (SS) at Porto Velho's terminals will be calculated by the classical theory of inventories (Tang, C., 2006), applied when demand meets the tests of normality for temporal series: SS = k x [(L x (D) + (L) x D] (1)

In equation 1, L is the average lead time; L is the lead time standard deviation; D is the average demand; D is the demand standard deviation. The multiplication factor k, in accordance with Gupta et al. (2000), will have simulations for the service levels (SL) of 90% (k = 1,28), 95% (k = 1,64) e 99% (k = 2,33). Diesel oil consumption in Rondnia, in the period from January/2000 to June/2011 (eleven years), was used to testing the normality of these series (ANP, 2012). According to Stevenson (1981), it was applied the technique of series decomposition, using the classic method to evaluate the tendency and seasonal components. In order to identify the tendency, it was calculated the moving average for 12 months (MA12), followed by the calculation of centered moving average (CMA 2x12). Subtracting the centered moving average (tendency) from the original series, it was obtained the series free of tendency (SFT). From the simple averages of the volumes for each period (month/year), it was extracted the seasonal component (seasonality) of the series. Next, it was obtained the estimated series through the sum of SFT and the seasonality. Finally, from the difference between the original and estimated series, it was obtained the residues series. These residues series were submitted to Jarque-Bera (JB) normality test, whose result (JB = 0.63) proved to be favorable to the normality of the residues, which proves that demand is normal. The safety stock calculated to Porto Velho/RO, through the application of equation 1, is summarized in Table 2, in the period from January/10 to June/11, for service level (SL) of 90%, 95% and 99%. Table 2: Diesel oil safety stock (SS) in Porto Velho/RO Safety stock (SS) Month /year Jan/2010 Feb/2010 Mar/2010 Apr/2010 May/2010 Jun/2010 Jul/2010 Aug/2010 Sep/2010 Oct/2010 Nov/2010 Dec/2010 Jan/2011 Feb/2011 Mar/2011 Apr/2011 May/2011 Jun/2011 L (days) 4,89 6,36 11,05 8,69 5,00 3,90 5,43 5,34 7,14 4,64 4,43 3,64 6,53 3,82 4,19 2,95 3,79 5,00 L (days) 13,75 15,07 17,22 17,19 16,00 14,88 16,13 18,50 15,88 14,09 15,57 15,64 18,83 14,80 14,42 13,78 14,31 14,29 D (m/day) 717,54 464,89 366,54 575,56 658,74 881,70 585,04 696,61 546,56 619,89 571,77 553,58 827,24 356,73 610,70 635,65 689,35 745,90 D (m/day) 1.951,99 2.573,23 2.633,05 2.776,35 3.000,26 3.013,05 3.144,75 2.884,72 2.485,52 2.392,77 2.789,93 2.336,82 2.266,48 2.527,00 2.446,87 2.275,50 2.669,11 2.902,78 SL = 90% 12.683,68 21.075,13 37.292,71 31.032,59 19.495,62 15.658,50 22.063,22 20.087,16 22.886,10 14.519,89 16.081,44 11.242,55 19.493,41 12.480,26 13.454,58 9.107,67 13.371,69 18.925,13 SL = 95% 16.250,97 27.002,51 47.781,29 39.760,50 24.978,77 20.062,45 28.268,50 25.736,67 29.322,82 18.603,61 20.604,35 14.404,52 24.975,93 15.990,34 17.238,69 11.669,21 17.132,48 24.247,82 SL = 99% 23.088,27 38.363,33 67.884,39 56.489,01 35.488,13 28.503,35 40.161,95 36.564,90 41.659,86 26.430,74 29.273,25 20.464,96 35.484,09 22.717,98 24.491,55 16.578,81 24.340,65 34.449,64

Lead time data were provided directly by the five distributors (Petrobras Distribuidora S.A., Razen Combustveis S.A., Distribuidora Equador de Produtos de Petrleo Ltda., Atem's Distribuidora de Petrleo Ltda. e Ipiranga Produtos de Petrleo S.A.) that operate the primary terminals in Manaus/AM, from where diesel oil is transferred to five secondary terminals in Porto Velho/RO. For the purposes of safety stock calculation, the secondary terminals were grouped and considered as one single terminal (cluster). As demand adhered to the normality test, the component L x (D) in equation 1 has had little weight on the safety stock calculation. However, in the presence of lead time uncertainties, the component (L) x D has had 5

Rio Oil & Gas Expo and Conference 2012 significant relevance on safety stock, pointing out that lead time may be generating inefficiencies, caused by the impact of risk factors on logistic flows associated to transport and storage of diesel oil between Manaus/AM and Porto Velho/RO. The next section will be dedicated to the measurement of these risk factors.

4. Measurement (relevance and impact) of risk factors on logistic flows

In order to quantify the relevance and impact of risk factors on logistic flows related to transport and storage of diesel oil, between Manaus/AM and Porto Velho/RO, it were elaborated 13 questionnaires (templates are available in the appendix), that later were applied to representatives of producer, distributors and carriers, whose content was based on FERMA (2003) and Korpela et al. (2002), and form was extracted from Malhotra (2001). Applying techniques from Malhotra (2001) - comparative scales with constant sum -, it were designed, initially, eleven questionnaires. The interviewees were asked to quantify, in these questionnaires, the relevance of the seventeen risk factors, previously reported, by distributing 100 points between these factors, in order to reflect the importance (relevance) of each factor (family, genus and specie) on safety stock. The relevance of a factor is directly proportional to the points that it has obtained in the survey. If one factor is irrelevant, it obtains zero points. If one factor is two times more relevant than others, it receives double points. Risk factors bring inefficiencies to the management model of safety stocks represented in equation 1, both because of uncertainties in supply and in demand. Specifically regarding this research, the seventeen risk factors cause a direct impact on logistic flows related to transport and storage of diesel oil. Thus, besides the relevance measured above, it becomes necessary quantifying the impact of these factors on the safety stock. In order to meet this objective, it has been created an indicator named IFR (impact of risk factors), which would represent the quantification of inefficiencies stemming from the risks associated with logistics flows. It should be done, firstly, the distinction between the IFR and the factor k inserted in equation 1. While the latter reflects the assumed risks (probabilities) of occurrence of insufficient inventory during lead time, the first embeds the inefficiencies in logistics flows that overload safety stocks. So, while the factor k, probabilistic, is related to the risk inherent to unforeseen events, such as climate hazards, operational accidents and strikes, among others, the IFR, in turn, refers to the expected events that have failed to materialize to its fullest, due to inefficiencies in the logistics flows. Thus, it was produced the questionnaire 12, in which were inserted eleven impact ranges on safety stock, from 0% to 100%, according to Malhotra (2001) - not comparative scales with continuous classification. The interviewees were asked to quantify, in this questionnaire, for each of the seventeen risk factors, the impact on diesel oil safety stock at distributors' terminals in Porto Velho/RO. Finally, it was designed the questionnaire 13, with the purpose to allocate, throughout the months, the seventeen risk factors, whose relevance and impact had been quantified in the twelve previous questionnaires. In this last questionnaire, the interviewees should assess the influence (weight) of each month of the year, for each of the seventeen risk factors, on the safety stock at distributor terminals in Porto Velho/RO. The set of thirteen questionnaires was applied to nineteen persons (interviewees) at REMAN facilities on March 20, 2012, which accounted for all seven distributors with terminals in Manaus/AM and Porto Velho/RO - the five distributors already mentioned in section 2, besides the distributors Petro Amazon Petrleo da Amaznia Ltda. and PDV Brasil Combustveis e Lubrificantes Ltda. -, eight waterway carriers that operate in the region (including Petrobras Transporte S.A. - Transpetro) and the producer Petrobras/REMAN (the refinery was represented by four persons who consolidated their responses in just one set of questionnaires). Table 3 presents the summary with the profile of the interviewees. Table 3: Profile of the 19 interviewees who answered questionnaires 1 to 13 Profile of interviewees Age Experience working in the segment of fuels Experience working in logistic flows Experience working in logistic flows of fuels Years 50,3 18,2 12,9 11,5 6

Rio Oil & Gas Expo and Conference 2012 The responses to the questionnaires from 1 to 12 is summarized in Table 4, where is showed the relevance and impact (IRF) on the safety stock at terminals in Porto Velho/RO for the seventeen risk factors. The relevance was obtained in the questionnaires 1-11, and the impact in questionnaire 12. According to the survey, waterway infrastructure (specie number 10) is the most relevant risk factor (17.29%), with IRF of 8.11% on the safety stock. This result may be interpreted as: waterway infrastructure, accountable for 17.29% of the risks at terminals in Porto Velho/RO, overloads safety stocks with embedded inefficiencies of 8.11%. Next, on section 5, it will be demonstrated how these inefficiencies will be discounted from the safety stock in terms of volume. Table 4: Relevance and impact (IFR) on the safety stock at terminals in Porto Velho/RO Family relevance (a) Specie relevance (c) (1) 11,90% (2) 23,10% (3) 33,40% (4) 31,60% (5) 50,00% (6) 50,00% (7) 69,60% (8) 30,40% (9) 33,75% (10) 66,25% (11) 32,70% (12) 29,70% (13) 37,70% (14) 56,80% (15) 43,20% (16) 48,80% (17) 51,30% relevance weighted (a x b x c) 1,79% 3,47% 5,01% 4,74% 8,69% 8,69% 4,85% 2,12% 8,81% 17,29% 1,70% 1,54% 1,96% 10,95% 8,33% 4,94% 5,19% 100,0%

Genus relevance (b) REMAN - own production 38,10%

IRF 0,35% 0,37% 1,48% 1,84% 2,61% 2,26% 0,98% 0,79% 3,30% 8,11% 0,28% 0,42% 0,29% 4,57% 2,20% 2,11% 1,38% 33,34%

Supply sources 39,40%

Transport modes 31,30%

National production transshipment 44,10% Imports transshipment 17,70% Inland waterway transport 83,40% Road transport 16,60% Tanks storage capacity 65,60% Infrastructure to unload diesel fuel 34,40%

Terminals 29,40%

However, the risk factors do not impact uniformly, throughout the year, on the safety stock at terminals. According to the responses obtained in the 13th questionnaire, summarized in Table 5, it was possible to allocate the IRF on the safety stock in every month. Table 5: Monthly impact of risk factors (IRF) on the safety stock at terminals in Porto Velho/RO Monthly IRF (%) Risk factors 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Total Jan 0,03 0,13 0,42 0,53 0,93 0,48 0,35 0,23 1,18 2,32 0,04 0,13 0,09 0,98 0,68 0,45 0,42 9,39 Feb 0,05 0,13 0,42 0,79 0,93 0,48 0,35 0,23 1,18 2,32 0,04 0,13 0,09 0,98 0,68 0,45 0,42 9,68 Mar 0,03 0,13 0,32 0,79 0,75 0,48 0,35 0,23 0,94 1,74 0,06 0,13 0,09 0,98 0,68 0,45 0,42 8,57 Apr 0,08 0,18 0,53 0,92 1,12 0,81 0,56 0,34 1,18 1,74 0,11 0,13 0,09 1,31 0,85 0,60 0,42 10,95 May 0,20 0,26 0,95 1,31 1,68 1,13 0,56 0,45 1,41 1,74 0,09 0,13 0,09 1,63 0,85 0,60 0,42 13,51 Jun 0,20 0,26 1,06 1,45 1,68 1,13 0,56 0,45 1,65 2,90 0,11 0,16 0,11 2,28 0,85 0,60 0,53 15,98 Jul 0,25 0,26 1,06 1,45 1,49 1,13 0,56 0,45 2,12 5,21 0,15 0,19 0,13 3,26 1,35 1,05 0,74 20,88 Aug 0,23 0,29 0,95 1,31 1,68 1,13 0,56 0,34 2,59 6,95 0,15 0,19 0,13 2,94 1,52 1,36 0,74 23,07 Sep 0,20 0,29 0,95 1,45 2,05 1,13 0,63 0,51 3,06 8,11 0,19 0,26 0,20 2,94 1,52 1,36 0,85 25,70 Oct 0,20 0,29 0,95 1,58 2,05 1,13 0,63 0,51 3,30 7,53 0,22 0,29 0,22 3,26 1,52 1,36 0,96 25,99 Nov 0,17 0,24 0,74 1,31 1,86 0,81 0,56 0,39 3,06 6,95 0,13 0,19 0,16 2,28 1,18 1,36 0,74 22,15 Dec 0,15 0,24 0,63 1,18 1,30 0,81 0,42 0,34 2,36 5,21 0,11 0,13 0,09 1,31 0,68 1,05 0,53 16,54 7

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Thus, the IRF of 8.11% measured as an inefficiency embedded on the safety stock, related to the waterway infrastructure (risk factor number 10), occurs only in September, while in the months from March to May the IRF is reduced to 1.74%. The total weight of inefficiencies of the IRF (33.34%) on safety stock, monthly, indicates that October is the month with the highest IRF (25.99%) and March with the smallest (8.57%). In the next section, the safety stock of section 3 will be calculated again, discounting the inefficiencies embedded in the IRF, month by month.

5. Safety stock calculation of diesel oil at Porto Velho's terminals - discounting the IRF
The seventeen risk factors are associated, no exceptions, with lead time, and the inefficiencies (impact of risk factors on safety stocks) in lead time are quantified by the total IRF (33,34%), that, later, are allocated monthly (for each month, a specific IRF). Direct application of equation 1 embeds inefficiencies in the safety stock due to past lead time, associated to risk factors studied in section 3. Thus, to expurgate these inefficiencies from safety stock, it was discounted the IRF (IRF + 1%) in equation 1 on the terms related to lead time (average and standard deviation), as shown in the following equation: SS = k x {(L/IFR) x (D) + [(L) / IFR] x D} The new values of safety stock, as presented in Table 6, were calculated with the application of equation 2. Table 6: Diesel oil safety stock (SS) in Porto Velho/RO after discounting the IRF Safety stock (SS) Month L /year (days) Jan/2010 4,89 Feb/2010 6,36 Mar/2010 11,05 Apr/2010 8,69 May/2010 5,00 Jun/2010 3,90 Jul/2010 5,43 Aug/2010 5,34 Sep/2010 7,14 Oct/2010 4,64 Nov/2010 4,43 Dec/2010 3,64 Jan/2011 6,53 Feb/2011 3,82 Mar/2011 4,19 Apr/2011 2,95 May/2011 3,79 Jun/2011 5,00 L (days) 13,75 15,07 17,22 17,19 16,00 14,88 16,13 18,50 15,88 14,09 15,57 15,64 18,83 14,80 14,42 13,78 14,31 14,29 D (m/day) 717,54 464,89 366,54 575,56 658,74 881,70 585,04 696,61 546,56 619,89 571,77 553,58 827,24 356,73 610,70 635,65 689,35 745,90 D (m/day) 1.951,99 2.573,23 2.633,05 2.776,35 3.000,26 3.013,05 3.144,75 2.884,72 2.485,52 2.392,77 2.789,93 2.336,82 2.266,48 2.527,00 2.446,87 2.275,50 2.669,11 2.902,78 SL = 90% 11.634,10 19.226,28 34.353,02 27.984,72 17.209,94 13.584,16 18.287,54 16.390,22 18.241,61 11.587,48 13.212,26 9.696,38 17.874,45 11.389,70 12.418,36 8.258,09 11.829,67 16.364,93 SL = 95% 14.906,19 24.633,67 44.014,80 35.855,42 22.050,23 17.404,70 23.430,91 20.999,97 23.372,06 14.846,46 16.928,20 12.423,49 22.901,63 14.593,05 15.911,03 10.580,67 15.156,76 20.967,56 SL = 99% 21.177,70 34.997,84 62.533,23 50.940,93 31.327,46 24.727,41 33.289,04 29.835,32 33.205,42 21.092,84 24.050,44 17.650,45 32.537,08 20.732,82 22.605,30 15.032,30 21.533,69 29.789,28 (2)

According to Table 7, there was a reduction in safety stock, month by month, in the cluster of Porto Velho/RO, due to the expurgation of inefficiencies associated to IRF. For example, in September/2010, for a service level (SL) of 95%, the safety stock in the cluster would be reduced in 5.950,76 thousand m, if the risk factors that causes lead time uncertainties were totally mitigated. In the last section, it will be proposed a set of recommendations with focus on the mitigation of risk factors, with the objective to diminish/eliminate the inefficiencies associated to lead time, from Manaus/AM to Porto Velho/RO, which has overloaded diesel oil safety stock at Porto Velho's terminals.

6. Recommendations
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Recommendations for mitigation actions, related to the risk factors studied in this paper, are discriminated in Table 8 (in a decreasing relevance's order). The actions are a reference guide that may contribute effectively to the optimization of safety stocks at diesel's terminals in Porto Velho/RO. The stakeholders (Governments and economic agents) responsible for the implementation of these recommendations are also listed in table 8. Table 7: Reduction in diesel oil safety stock (SS) at terminals in Porto Velho/RO Reduction in safety stock (SS) Month /year Jan/2010 Feb/2010 Mar/2010 Apr/2010 May/2010 Jun/2010 Jul/2010 Aug/2010 Sep/2010 Oct/2010 Nov/2010 Dec/2010 Jan/2011 Feb/2011 Mar/2011 Apr/2011 May/2011 Jun/2011 SL = 90% 1.049,58 1.848,85 2.939,70 3.047,87 2.285,69 2.074,34 3.775,68 3.696,94 4.644,50 2.932,41 2.869,18 1.546,17 1.618,96 1.090,56 1.036,22 849,59 1.542,02 2.560,20 SL = 95% 1.344,77 2.368,84 3.766,49 3.905,08 2.928,54 2.657,74 4.837,59 4.736,70 5.950,76 3.757,15 3.676,14 1.981,02 2.074,29 1.397,28 1.327,66 1.088,53 1.975,72 3.280,26 SL = 99% 1.910,56 3.365,49 5.351,17 5.548,08 4.160,67 3.775,94 6.872,91 6.729,58 8.454,43 5.337,90 5.222,81 2.814,50 2.947,01 1.985,16 1.886,25 1.546,51 2.806,96 4.660,36

Table 8: IRF mitigation - recommended actions and responsibilities Risk factors 10 14 9 5 6 15 17 3 16 7 4 2 8 13 1 11 12 Relevance (%) unit cumulative 17,29 17,29 10,95 28,25 8,81 37,06 8,69 45,75 8,69 54,43 8,33 62,77 5,19 67,95 5,01 72,97 4,94 77,90 4,85 82,76 4,74 87,50 3,47 90,97 2,12 93,09 1,96 95,05 1,79 96,83 1,70 98,53 1,54 100,00

Recommended actions Investments in Madeira River infrastructure Investments in terminals Investments in barges and terminals Investments in REMAN Investments in REMAN Investments in terminals Investments in terminals Investments in REMAN and terminals Investments in terminals Investments in REMAN Investments in REMAN Investments in ports Shared information among agents -

Responsibilities Federal and state government Distributors Carriers and distributors Petrobras/REMAN Petrobras/REMAN Distributors Distributors Petrobras and distributors Distributors Petrobras/REMAN Petrobras/REMAN Federal government/private sector Petrobras and distributors -

Six risk factors, which account for 62.77% of total risk associated to logistic flows, in terms of its relevance, could be prioritized in terms of mitigation actions: waterway infrastructure (17,29%), storage capacity available to distributor (10,95%), volume and frequency received in terminals through barges (8,81%), volume and frequency received from transshipment in the refinery (8,69%), infrastructure of the receiving terminal in the refinery (8,69%) and storage capacity available to other distributors (8,33%).

Rio Oil & Gas Expo and Conference 2012 Madeira River's navigability, mainly along the second semester, due to drought, gives rise to rocks and sand banks that prevent or restrict barges navigation in this period of the year. It is the role of Federal and State Governments allocate resources in their budgets to invest in the river infrastructure. The mitigation of this logistic inefficiency must be a government priority, since this river is an important mobility route for people and wealth in the region. The terminals should receive investments from distributors not only to the expansion of diesel oil tanks, but also to improve fuel unloading infrastructure. Waterway carriers, though less demanded in relation to risk factors, need to invest in barges with greater transportation capacity. As REMAN is not self-sufficient in the production of diesel fuel to supply distributors in the northern, Petrobras needs to invest and increase its production, as well as expand its infrastructure of pumping diesel oil to distributors' terminals. Finally, it is up to ANP improve regulatory rules, within its legal competence, to guarantee the supply and logistic flows related to transport and storage of diesel oil in Rondnia. The regulatory agency must mediate between government and private sector, focusing on the mitigation of inefficiencies in logistic flows, preventing not only disruptions of diesel oil supply in some critical periods of the year, but also higher prices. After all, these negative externalities are always passed on to the final consumer.

7. Acknowledgements
We thank the contribution of companies in the survey: Petrobras - Petrleo Brasileiro S.A., Petrobras Distribuidora S.A., Razen Combustveis S.A., Distribuidora Equador de Produtos de Petrleo Ltda., Atem's Distribuidora de Petrleo Ltda., Ipiranga Produtos de Petrleo S.A., Petro Amazon Petrleo da Amaznia Ltda., PDV Brasil Combustveis e Lubrificantes Ltda., Petrobras Transporte S.A. and the waterway carriers that operate in the northern. A thank also to ANP regulators, Bruno Valle de Moura and Diogo Valerio, for precious insights about demand and lead time.

8. References
ABGINEHCHI, S., FARAHANI, R. Z. Modeling and analysis for determining optimal suppliers under stochastic lead times. Applied Mathematical Modelling, 34: 1311-1328, 2010. ARIFOGLU, K., OZEKICI, S. Inventory management with random supply and imperfect information: A hidden Markov model. Int. J. Production Economics, 134: 123-137, 2011. CHANDRA, C., GRABIS, J. Inventory management with variable lead-time dependent procurement cost. Omega, 36: 877-887, 2008. GUPTA, A., MARANAS, C. D., M. MCDONALD, C. M. Mid-term supply chain planning under demand uncertainty: customer demand satisfaction and inventory management. Computers and Chemical Engineering, 24: 2613-2621, 2000. FERMA - Federation of european risk management. Norma de gesto de riscos. In: www.ferma.eu, 2003. KORPELA, J., LEHMUSVAARA, A., KYLHEIKO, K., TUOMINEN., M. Adjusting Safety Stock Requirements with an AHP-based Risk Analysis. Proceedings of the 36th Hawaii International Conference on System Sciences, 2002. KULL, T., CLOSS, D. The risk of second-tier supplier failures in serial supply chains: Implications for order policies and distributor autonomy. European Journal of Operational Research, 186: 1158-1174, 2008. MALHOTRA, N. K. Pesquisa de marketing: uma orientao aplicada. 3 ed., Porto Alegre, Bookman, 2001. NARASIMHAN, R., TALLURI, S. Perspectives on risk management in supply chains. Journal of Operations Management, 27: 114-118, 2009. SAJADIEH, M. S., ESHGHI, K. Sole versus dual sourcing under order dependent lead times and prices. Computers & Operations Research, 36: 3272-3280, 2009. STEVENSON, W. J. Estatstica aplicada administrao. Ed. Harbra, So Paulo, 1981. TANG, C. S. Perspectives in supply chain risk management. Int. J. Production Economics, 103: 451-488, 2006.

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Appendix (13 questionnaires applied to representatives of producer, distributors and carriers)

Questionnaire 1: Below are listed three factors directly related to diesel oil safety stock in distributor terminals. Please allocate 100 points among these factors in order to reflect the relative importance (relevance) of each factor on safety stock: ( ) Supply sources ( ) Transport modes ( ) Terminals Questionnaire 2: Below are listed three items directly associated with diesel oil factor Supply sources that may influence on safety stock level in distributor terminals. Please allocate 100 points among these items in order to reflect the relative importance (relevance) of each item on safety stock: ( ) REMAN own production ( ) National production transshipment ( ) Imports transshipment Questionnaire 3: Below are listed four sub items directly associated with REMAN own production that may influence on safety stock level in distributor terminals. Please allocate 100 points among these sub items in order to reflect the relative importance (relevance) of each sub item on safety stock: ( ) scheduled stoppages in the refinery ( ) unplanned stoppages in the refinery ( ) refinery storage capacity ( ) frequency and volume pumped to distributors Questionnaire 4: Below are listed two sub items directly associated with National production transshipment that may influence on safety stock level in distributor terminals. Please allocate 100 points among these sub items in order to reflect the relative importance (relevance) of each sub item on safety stock: ( ) volume and frequency received in the refinery ( ) terminal infrastructure in the refinery Questionnaire 5: Below are listed two sub items directly associated with Imports transshipment that may influence on safety stock level in distributor terminals. Please allocate 100 points among these sub items in order to reflect the relative importance (relevance) of each sub item on safety stock: ( ) conformity of diesel oil (specification of ANP) ( ) port infrastructure Questionnaire 6: Below are listed two items directly associated with diesel oil factor Transport modes that may influence on safety stock level in distributor terminals. Please allocate 100 points among these items in order to reflect the relative importance (relevance) of each item on safety stock: ( ) Inland waterway transport ( ) Road transport Questionnaire 7: Below are listed two sub items directly associated with Inland waterway transport that may influence on safety stock level in distributor terminals. Please allocate 100 points among these sub items in order to reflect the relative importance (relevance) of each sub item on safety stock: ( ) volume and frequency received by barges ( ) waterway infrastructure Questionnaire 8: Below are listed three sub items directly associated with Road transport that may influence on safety stock level in distributor terminals. Please allocate 100 points among these sub items in order to reflect the relative importance (relevance) of each sub item on safety stock: ( ) volume and frequency received by trucks ( ) road infrastructure ( ) road freight costs Questionnaire 9: Below are listed two items directly associated with diesel oil factor Terminals that may influence on safety stock level in distributor terminals. Please allocate 100 points among these items in order to reflect the relative importance (relevance) of each item on safety stock: ( ) Tanks storage capacity ( ) Infrastructure to unload diesel oil into tanks Questionnaire 10: 11

Rio Oil & Gas Expo and Conference 2012 Below are listed two sub items directly associated with Tanks storage capacity that may influence on safety stock level in distributor terminals. Please allocate 100 points among these sub items in order to reflect the relative importance (relevance) of each sub item on safety stock: ( ) capacity available to distributor - m ( ) capacity available to other distributors - m Questionnaire 11: Below are listed two sub items directly associated with Infrastructure to unload diesel oil into tanks that may influence on safety stock level in distributor terminals. Please allocate 100 points among these sub items in order to reflect the relative importance (relevance) of each sub item on safety stock: ( ) infrastructure for unloading barges ( ) infrastructure for unloading truck Questionnaire 12: Please tick with an X, in the sub items from 1 to 17, the alternative you consider the most prudent to guarantee diesel oil safety stock, in critical moments during the year, in distributor terminals: 1- scheduled stoppages in the refinery 2- unplanned stoppages in the refinery 3- refinery storage capacity 4- frequency and volume pumped to distributors 5- volume and frequency received in the refinery 6- terminal infrastructure in the refinery 7- conformity of diesel oil (specification of ANP) 8- port infrastructure 9- volume and frequency received by barges 10- waterway infrastructure 11- volume and frequency received by trucks 12- road infrastructure 13- road freight costs 14- capacity available to distributor - m 15- capacity available to other distributors - m 16- infrastructure for unloading barges 17- infrastructure for unloading truck

Increase (%) in safety stock

O 1 10 11 20 21 30 31 40 41 50 51 60 61 70 71 80 81 90 91 100

Questionnaire 13: Fill in each empty space with 0 or 1, month by month, considering that 0 means a normal month (no risks) and 1 a critical month, regarding to the risks impact on diesel oil safety stock in distributor terminals: 1- scheduled stoppages in the refinery 2- unplanned stoppages in the refinery 3- refinery storage capacity 4- frequency and volume pumped to distributors 5- volume and frequency received in the refinery 6- terminal infrastructure in the refinery 7- conformity of diesel oil (specification of ANP) 8- port infrastructure 9- volume and frequency received by barges 10- waterway infrastructure 11- volume and frequency received by trucks 12- road infrastructure 13- road freight costs 14- capacity available to distributor - m 15- capacity available to other distributors - m 16- infrastructure for unloading barges 17- infrastructure for unloading truck

Months
J F a e n b M A a p r r M J a u i n J u l A u g S e p O c t N o v D e c

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