CHALLENGES AND OPPORTUNITIES IN SECONDARY LOGISTICS IN INDIAN PETROLEUM

INDUSTRY
by
Bhuwan C. Joshi* , Binod Kumar Singh** & Saurabh Tiwari**

ABSTRACT
The logistics of petroleum products have been a major contribution to the input cost of petroleum products apart
from raw material and taxes. The primary logistics of an Oil Marketing Company (OMC) involve the movement of
finished products from refinery gate to the storage depot. Pipelines, Railways and Shipping are used for this
movement and pipelines are the most economical and environmentally friendly in the long run. The movement of
product from storage depot to the retailer or the consumer is in the realm of secondary logistics which is more
complicated as the custody of product is transferred from OMC to the transporter and to the retailer before finally
delivering to the consumer. Increasing competition among OMCs, closure of unviable storage points, existing tax
regime are major challenges for secondary logistics. The proposed GST bill, collaboration among OMCs and use of
GPS and Information technology are the opportunities available to test newer optimization models and increase
competitiveness. The factors to be considered in optimizing have been identified from the stakeholders’
perspectives. The foremost being customer perspective, followed by transporters’, dealers’ and environment.
PESTEL and SWOT analysis have been carried out in the context of MS and HSD sold through retail channels. It
can be concluded that the transportation cost of OMCs has ample scope for optimization. OMCs in India can
optimize their secondary logistics operations through the adoption of higher technology and collaboration among the
OMCs and use of flexible transportation models and re-alignment of markets.

* Ph.D. Scholar,CoMES, UPES,Dehradun

** Faculty, CoMES, UPES, Dehradun
 1. INTRODUCTION
Petroleum Industry is marked by the huge spatial demand and supply gaps. The mother of all petroleum products,
the crude, occurs in abundance in the areas where the demand is not high, so is transported to huge distances where
it is refined and converted to consumable products. Consequently the logistics cost becomes quite significant.
India, being an importer of about 80% of its crude requirements, does not have control over prices of raw materials.
Duties and taxes are sovereign functions and oil industry can do little to influence it. The other major expenses are
Operating and transportation expenses which are controllable and have a sizable contribution to expenses in the oil
industry running on low margins. The Oil Marketing Companies (OMCs) are using various models for optimizing
primary logistics. In the past secondary logistics optimization has been limited to supplies from the nearest available
source. With the de-control of MS and HSD pricing, the competition has increased putting pressure on the
transportation which is a significant contributor to the cost apart from the raw material cost and taxes. Secondary
logistics can be key distinguisher in the service delivery of OMCs.
2. CURRENT STATUS OF INDIAN PETROLEUM INDUSTRY
Oil contributes to 28.3 % of the Energy consumption in India, which is second only to coal, the source of 56.5 % of
energy consumption. Natural Gas, hydroelectricity, Renewable and Nuclear Energy had a share of 7.1, 4.6, 2.2 and
1.2 percent respectively in 2014. Out of the total consumption of crude, only 21.4% were indigenous production and
the rest was imported. The installed capacity of the all the 22 refineries in India is 215 MMTPA. In 2014-15, India’s
consumption of refined products was 166 MMT against a production of 221 MMT thereby resulting in a surplus of
54 MMT. While MS is entirely an automotive fuel, HSD uses 70% in transport, 13% in agriculture, 5% in industry
and 4% in power sectors. These two products are sold through 53,418 Retail Outlets of three PSUs and private
marketing companies. These retail outlets are fed by a network of 336 storage depots and terminals spread across the
country as of 01.04.2015.
With the falling of crude prices in the international market the average cost of Indian basket has come down from
$105 per barrel in 2013-14 to $ 84.5 per barrel in 2014-15. This has further come down to $61.32 per barrel up to
31.10.2015. (PPAC, Nov'2015).
India’s downstream petroleum sector is dominated by three public sector oil marketing companies (OMCs). Indian
Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd
(HPCL) are all members of the fortune 500 group of companies. India’s OMCs have been an instrument of
Government of India’s pricing policies to protect the Indian consumers from the fluctuations in the crude prices in
the international market. The huge subsidy burden has now been eased due to the sharp fall in prices of crude oil in
the international market. The prices of MS and HSD have been de-controlled to allow entry of private players
leading to increased level of competition in the industry.
3. GLOBAL SCENARIO OF PETROLEUM INDUSTRY
The geographical distribution of total world production of crude oil during 2013-14 across major regions reveals that
Middle East accounted for the highest share (32.31%), followed by Europe & Eurasia (20.35%), North America
(18.98%), Africa (10.18%), Asia Pacific, (9.48%) and South & Central America (9.10%).India has accounted for
only 1.02% of the world production.
Major region-wise consumption shows that Asia Pacific accounted for the highest share (33.8%) of total world
consumption, followed by North America (24.47%), and Europe & Eurasia (20.99%). African countries accounted
for the lowest share in the world consumption (4.1%). India was the fourth largest consumer of crude oil in the
world and the third largest crude oil consumer in the Asia-Pacific region after China and Japan. (Energy Statistic,
2015)
4. ROLE OF SECONDARY LOGISTICS IN INDIAN PETROLEUM INDUSTRY
Secondary Logistics is essentially the last mile connectivity between the OMCs and the retailer and is accomplished
through road. The mode of transportation is flexible to the extent that the supplies can be made in the remotest parts
of the country. However the tank trucks used in transportation are dedicated to the particular category of products
and cannot be used for other products. For example the tank trucks used for transportation of MS and HSD cannot
be used for black oils. These tank trucks are contracted by the OMCs for the supplies from their storage depots and
are attached to that terminal only. The number of tank trucks and their capacities are fixed. This provides
inflexibility to the system and the seasonal and daily demand fluctuations are to be attenuated by creating storage
tanks both at the depot and retailer end. The tank trucks take supplies from a particular storage depot, deliver to the
retailers or consumers and return back empty to the storage depot. The carriers are paid on the basis of round trip
distance (RTD) travelled during the trip. The secondary logistics involve selection of storage depots for each market,
selection of carriers, number of tank trucks, capacities of tank trucks to be contracted and day to day planning and
scheduling. OMCs make contractual arrangements with the transporters and retailers providing remuneration in the
form of transportation bills and commissions respectively. The transportation bills are paid on the basis of the
quantity of product delivered and distance travelled whereas the dealer commission is on the quantity of the product
sold. The contracts have elaborate provisions to safeguard against malpractices like adulteration, short delivery,
tampering, route deviation, non- delivery etc. by the carrier. The product changes hands from OMC to transporter to
the retailer in the process. The role of secondary logistics is to deliver the right quantity of the product to the retailer
at the right time while maintaining the quality of the product.
5. LITERATURE REVIEW
The relevant government publications and journals have been reviewed. Most of the available literature is an
optimization of primary logistics which covers the movement of crude oil and petroleum product from source to
storage points. Secondary logistics cover the last mile product movement from the storage depots to the retail outlet
and is essentially accomplished through road. The optimization of secondary logistics is the key to the
competitiveness of an Oil Marketing Company (OMC) and involves consideration of all the stakeholder’s
perspectives. The custody of product during primary logistics lies with the OMCs whereas the custody of the
product gets transferred to the transporters and dealers during secondary transportation. The customer service is the
primary objective to be achieved through the channel partners. The objectives of these channel partners have to be
considered and balanced while constructing optimization models for secondary logistics. The statutory compliances,
government regulations, pricing, and tax regime have to be considered while planning secondary distribution of
petroleum products.
Transportation for the petroleum industry covers the movement of crude oil from oil wells to ports to refineries, and
the movement of petroleum products from refineries to the retail outlets (Chandra, 2013). Petroleum products
comprise of Petrol, Diesel, ATF, Naphtha, Fuel Oil, Bitumen, LPG, lubricants and paraffin wax, petroleum coke etc.
The movement of these products from refineries to retail outlets is carried out using the least cost mix of rail, coastal
shipping, roads and pipelines.
Petroleum Product Marketing is a low margin business. This is evident from the Annual reports of three public
sector oil marketing companies of India. IOCL , BPCL and HPCL posted a net profit of Rs 4,912 Cr (IOCL Annual
Report, 2014-15), 5,084 Cr (BPCL Annual Report, 2014-15) and 2,733 Cr (HPCL Annual Report, 2014-15) at the
turnover of Rs 4.5 lac Crore, Rs 2.4 lac Crore and 2.1 lac Crore respectively in the financial year 2014-2015. The
percentages of net profits to turnover are 1.1%, 2.1% and 1.3% for IOCL , BPCL and HPCL respectively.
The cost elements of the petroleum products are as under :
Price of Crude Oil + Refining Cost + Profit + Marketing and Storage Cost + Profit + Distribution Cost + Dealer
Profit + Taxes and Duties
(http://www.theanalytic.co.in/downloadfile/CostofPetrolinIndiaBriefOverview.pdf)
According to BPCL’s annual report for 2013-14 (BPCL Annual Report, 2013-14), the distribution of each Rupee
earned is given as per the following table :
Distribution of Each Rupee Earned Year
2013-14 2012-13
Raw Materials, Purchase of Product for resale and packages 87.43 87.98
Duties, Taxes etc. 4.41 4.58
Transportation 1.64 1.52
Stores and other Operating Expenses 1.96 1.74
Employees’ remuneration and other benefits 1.06 1.1
Interest on Borrowings 0.5 0.72
Depreciation 0.82 0.76
Income Tax 0.69 0.55
Dividend (including Corporate Dividend Tax) 0.52 0.37
Retained Profits 0.97 0.6
(BPCL Annual Report, 2013-14)

The above table shows that raw material and taxes account for more than 90% of expenses. An analysis of the
annual report of all three Oil Marketing Companies (OMCs) in public sector throws an interesting insight into the
transportation expenses in the last three years.
Indian Oil Corporation Ltd (IOCL) is the largest OMC having spent Rs 10,987 Cr on transportation for a total sale
of 76.51 MMT in 2014-15 which is 13% increase over the previous year. The weighted average retail selling price
of HSD have increased by 2% in 2014-15.
Bharat Petroleum Corporation Ltd (BPCL) has spent Rs 5004 Cr in transportation of 36.65 MMT products in 2014-
15 registering a 12 % increase over the last year.
Hindustan Petroleum Corporation Ltd (HPCL) has shown expenses of Rs 4999 Cr for trans-shipping 32 MMT of
product in 2014-15 which is 8% increase over the previous year.
Combining the figures of all three OMCs , the average transportation charges in 2014-15 have increased by 11%
against 3 % increase in sales and 2% increase in RSP of HSD. In other words the oil companies have incurred a loss
of 6% on the transportation charges of Rs 20989 Cr amounting to Rs 1259 Cr.
Similar analysis in 2013-14 shows that there was a 17% rise in transportation cost against 16 % increase in RSP of
HSD and 0.5 % increase in product sales. In 2012-13 there was 17 % increase in transportation cost against 3%
increase in sales and 11% increase in RSP of HSD.
The primary movement of petroleum products, from refineries to storage depots is through pipelines, or coastal
shipping. The secondary movement of petroleum products, i.e. from storage depot to the retail outlet, viz. the last
mile is necessarily through roads, irrespective of the mode used for the primary movement.
Finding options for optimization of the oil supply chain is important because any cost saving means vast amounts of
money for the oil companies, therefore optimization is at the centre of attention in the oil supply chain management
(Gainsborough, 2006). (Hussain, 2006) emphasize that despite the economic importance and the complexity of
supply chain management in the oil industry, oil supply chain optimization is still in its infancy stage.
The increasing level of competition and requirements of high quality increases the complexity of the oil supply
chain which also has a negative effect on the flexibility (Gainsborough, 2006). The long lead time, fixed
manufacturing capacity and limited means of transportation are the major reasons of inflexibility in the supply chain.
The long distances between supply chain partners and the slow means of transportation increase the lead time from
shipping point to the end users. It becomes hard to meet a required service level, but it also could hurt customers
who have to keep costly safety stock (Hussain, 2006). Using reliable transportation mode and placing inventory
closer to the final users enhances the customer satisfaction because faster load time and faster product availability
can be achieved (Hall, 2002).
Jenkins and Wright (1998) suggest focusing on the means of transportation, especially on road transport and its
tankers as well as drivers. It is mostly because they believe these are highly flexible elements of the inflexible oil
supply chain and these could be a good area for optimization and reduce cost. As lead time is long and many
varieties of means of transport is possible, with excellent IT software such as the fleet scheduling package and the
supply chain management model suggested by Jenkins and Wright (1998), optimization can be achieved. These are
cost effective, increase flexibility which contributes to higher customer satisfaction and they also improve planning
and controlling the supply chain (Jenkins, 1998). Not to mention it helps to avoid run outs and retains customers at
the filling station (Balasubramanian, 2002).
Jha and Deshmukh (2009) emphasize that the cost and level of service have to be in centre of the attention. It is also
important in the downstream oil supply chain that the distribution occurs from the refinery or from the storage
facilities. Mode of transportation, fleet size, shipment routes and quantity of the delivered products are the factors
which determine the distribution planning (Jha, 2009). A secure and reliable transportation mode and carrier gives
the ability to position decoupling point which reduces the bullwhip effect, therefore, inventory could be closer to the
customers (Hall, 2002)
The activities that comprise the oil supply chain are divided into three major segments: upstream, midstream, and
downstream. The upstream segment includes the exploration and oil production. The midstream is an intermediate
segment and consists of the refining activity which includes the transportation of oil from the production site to
refineries. The logistical tasks necessary to move the refined products from the refinery to the points of consumption
are in the downstream segment (Leiras, 2006).
Strategic (long-term) planning determines the structure of the supply chain (e.g. facility location).Medium-term
(tactical) planning is concerned with decisions such as the assignment of production targets to facilities and the
transportation from facilities to warehouses to distribution centres. Finally, short-term planning is carried out on a
daily or weekly basis to determine the assignment of tasks to units and the sequencing of tasks in each unit. At the
production level, short-term planning is referred to as scheduling (Sung, 2009). Historically, refinery planning
models for oil industry were based on LP and MILP. The computational and algorithmic complexity of NLP and
MINLP inhibited the model development in this area. The first application is from 1997 however, the applications
of MINLP are still considered a challenge.
The literature on petroleum supply chain optimization can be categorized into upstream , midstream and
downstream. Even the publications in the downstream segment of petroleum supply chain may be bifurcated into
primary and secondary distribution models.
Despite the fact that petroleum refining and petrochemical companies have recently engaged in more integration
projects, relatively little research in the open literature have been reported mostly due to confidentiality reasons.
Such concerns render the development of a systematic framework of network integration and coordination difficult
(K. Al-Qahtani, 2009).
India’s Oil Marketing Companies (OMCs) have carried out the optimization of their supply chains. Indian Oil
Corporation Limited (IOCL) has implemented Honeywell’s Supply Chain Management solution to integrate and
optimize the supply chain of five separate refineries. The results of the optimization were higher margins and
increased profitability. The process involved Crude selection and allocation which takes into account product
demands, refinery capabilities and effect of crudes already procured, Optimal refinery production planning
considering crude assays, unit capacities, product specifications and demands; and feedstock availability, Optimal
distribution planning considering transportation costs, taxes and duties and transportation constraints
(www.honeywell.com, 2005)
Bharat Petroleum Corporation (BPCL) formed Supply Chain Optimisation (SCO) Department in Nov’ 2006 and
launched its initial project CRESCENDO (Crude Refining Supply Chain Network & Depot Optimization). The
OMC started integrating its six core Supply Chain processes, namely Demand Planning, Monthly Distribution Plan,
Inventory Management, Crude Evaluation, Selection & Nomination, Refinery Monthly Plan and Product Exchange
Plan. The company included Distribution optimization in retail logistics based on freight cost and linkages. (Datta,
2008).
6. OBJECTIVES
1. To study the challenges in secondary logistics in the Indian Petroleum industry
2. To explore the factors affecting secondary logistics in the Indian Petroleum industry.
3. PESTEL and SWOT analysis have been carried out in the context of MS and HSD.

7. CHALLENGES IN SECONDARY LOGISTICS IN INDIAN PETROLEUM INDUSTRY

Indian secondary distribution infrastructure has been developed by public sector oil companies over the years,
keeping the storage points as near to the markets as possible. This ensured reliability and availability of product even
in case of input supply disruptions. Now that the inputs to storage depots is largely through pipelines, hence reliable
supplies are available resulting in reduced storage requirements. Even the nearness to markets is not the main
criteria with the development of robust road network in India. However, it is a challenge for Public Sector Oil
Companies to re-align the markets and close the unviable locations.
The movement of MS and HSD from storage depots to the retail outlets is through tank trucks contracted through
public tenders once in three or five years. These contracts are depot specific and any large scale re-alignment of
markets shall require an amendment to the contract conditions and lead to changes in business volume for the
transporters.
There is wide variation in the lot size or the volume of product indented at a time by the dealers. The low selling
dealers find it difficult to indent for full truck loads.
The demand of HSD is seasonal in nature. As the tank trucks contracted at a depot are dedicated with the capacities
of the tank trucks and fleet size determined based on average demand in previous years, the variation in demand
leads to operational constraints in peak season and idling of the fleet in the off season.
The storage depots sell the product to resellers after paying all taxes, including state specific VAT. Hence, each state
is required to have its own storage depot. Moreover the storage depot cannot supply the product to adjoining states
even if it is nearer without incurring additional tax. This leads to inefficient logistics where the product is travelling
longer distances, even if a nearby supply point is available in the adjoining state.
8. FACTORS OF SECONDARY LOGISTICS
The performance of a supply chain can be ascertained from various perspectives. These have been identified as the
Customer, Financial, Internal Business, Innovation and Learning Perspectives. The Customer Perspective involves
Product Quality, Product Service Level, Customer Satisfaction, Responsiveness and Market Reach. The Financial
Perspective means Adherence to Budget, Transportation Costs, Operating Costs, Inventory and Cost Savings. The
Internal Business Perspective caters to Timeliness, Waste Reduction, Accuracy, Utilization of Resources, and
Shipment Visibility. The Innovation & Learning Perspective leads to Automation, Learning and Growth. Out of
these Customer perspective have been found to be the most important, followed by Internal Business, Financial and
Innovation and Learning in descending order of importance (R. P. Mohanty, 2010).
Customer Perspective :
Product Quality :In India the prices of diesel and petrol have been deregulated and have become market-
determined at retail level and at the refinery gate. Deregulation is expected to result in better service delivery on
account of increased competition (Economic Survey of India, 2014-15). The product quality is the foremost hygiene
factor to retain the customer. The logistics of petroleum products have to be foolproof to minimize the chances of
adulteration or short delivery of product. Since the petroleum is a naturally occurring substance, its quality is not
uniform. A range of parameters is specified by various standards to ensure that the quality of the product is
maintained. The logistics of petroleum products have to ensure that the quality of the refined product at refinery gate
is maintained till the product reaches the consumer. The control of OMCs is least during secondary transportation
when the custody is transferred to channel partners.
Location of Retail Outlet : In petroleum retailing, a customer visits the retail outlet en-route to his/ her destination
and location of the retail outlet affects the chances of customer visiting and refuelling at a retail outlet. The location
of retail outlet has significant effect on the choice of the customer. From a logistics point of view the market shall be
fed in such a way that he overall cost of placing the product is minimum.
Service Level : The retail customer is typically a motor vehicle owner, who visits a Retail Outlet of an OMC to
refuel the vehicle. The customer can be further segmented into bike owner, car owner, commercial vehicle owner or
driver. The levels of service expected by each segment are different. However, in general, the customer expects
availability , prompt and accurate delivery of product, availability of toilets, air and water facilities, flexibility in
mode of payments and other add on services. The service level of Retail Outlet is a major differentiating factor for
the customer.
Dealer’s Perspective : The retail outlet dealers in India are affiliated to a single OMC and can have varying
relationships with the OMCs depending on the ownership of land, buildings and facilities. The petroleum being a
low margin business, the dealer would maximise its sale using its superior services as there is no pricing flexibility
available to the dealer. The dealer would like to minimise the operating capital and would expect expeditious
delivery of product whenever a demand is placed. The OMCs also offer credit facilities to select high selling dealers
to encourage them to keep inventory of products. The flow of information regarding product availability, product
quality, Tank Truck loading, availability of balance amount with OMC also enables RO dealer to plan its business
activities optimally. Many of the dealers have their own tank trucks under contract with OMCs and their optimum
utilisation adds to the profitability of the dealer.
Transporter’s Perspective :
Generally, each storage depot of an OMC has a dedicated tank truck fleet under its contract. The optimum utilization
of this fleet is essential from the transporter’s perspective. A well managed transporter can ensure timely delivery of
product while maintaining its quality and quantity. Indian OMCs in the public sector are engaging individual
transporters through public tender. The profitability of transporter shall depend on the maximisation of Kilometres
run by its tank trucks since their capacity is constant and transportation rates are pre-determined through the
contract. The transportation rates are established for distance travelled in kilometres multiplied by the volume
carried by tank truck. However for short distances a minimum rate is fixed or per kilolitre of product supplied. The
transporter is able to offer lower rates at the locations where business volume is more and its fleet is optimally
utilized.
Internal Business Perspective:
Operating Cost Reduction : Operating cost of a storage depot comprised of inventory cost, wages and overtime to
workers, handling losses, power and utilities cost, facility maintenance cost, etc. These costs can be optimised if the
operations are carried out in batches rather than continuous operations where facilities are underutilized.
Financial Perspective : The cost of placing the product in a market has huge impact on the bottom line of the
OMCs. In the primary logistics, the choice of mode of transportation significantly changes the logistics cost whereas
in secondary logistics there is no choice. The objective of reducing the logistics cost has to be balanced with those of
channel partners.
9. OPPORTUNITIES IN SECONDARY LOGISTICS IN INDIAN PETROLEUM INDUSTRY
Increased competition is forcing the OMCs to take drastic measures to optimize their secondary logistics. The
private players are coming up with newer transportation models. The OMCs will emulate and improve upon the
models based on the success of new models.
The competition is indeed heating up. However, there is enough scope for co-operation among the oil companies.
The OMCs may enter into agreements to share their infrastructure leading to saving in capital cost and optimum
utilization of existing infrastructure leading to a win- win situation for both the companies. The future scenario will
be one of intense competition at the customer end and collaboration at the back end. The telecom industry can be
taken as a good example where there is cut-throat competition to woo the customers while sharing the mobile tower
infrastructure.
The GST bill may lead to a tax regime where the entire primary and secondary logistics of petroleum products will
have to be re-worked. This will be a great opportunity for optimization of secondary logistics. Although the
petroleum products are not in the list of GST goods in the current bill ,but there is a high probability of their
inclusion after the success of the first phase. GST will be a huge opportunity for secondary logistics optimization
and re-alignment of markets.
The availability of digital maps, GPS systems on Tank Trucks and tracing of routes from storage depots to the retail
outlets and automation of retail outlets has opened a vast field for analyzing the data available and make logistic
decisions and policies. The secondary logistics being the more complicated will benefit the most with the increase in
objectivity in decision making.
10. PESTEL ANALYSIS
Political:Petroleum products, especially MS , HSD, SKO and LPG are politically sensitive products. The general
public is directly affected by their pricing and Government of India does not have control of the cost of raw material
i.e. crude. Although all these products are distilled from the same crude, their pricing is different based on the
customer segment consuming them. MS is used in two and four wheelers by middle and high income groups. HSD
is used in commercial vehicles and any increase in its price increases all other commodities being transported across
the country. The agriculture sector is a major user of HSD making is more politically sensitive. Currently there is an
increasing trend of using HSD in high end private vehicles inciting a public debate on its pricing. Various
governments have subsidized these fuels when the crude prices were high and now when the crude prices are low,
the taxes and excise have been increased cushioning the effect of variation in crude prices. Improved secondary
logistics will certainly increase the bottom lines of OMCs making them a little more resilient towards input cost
variations.
Economy:OMCs are among the largest commercial concerns in India and a major source of tax revenue for the
central and state governments. The pricing of HSD impacts the price of various commodities as transportation is a
significant factor in the pricing of commodities at the particular location. The MS and HSD have a substantial
impact on inflation. Their weight in WPI is 1.09 % and 4.67 % respectively. An increase in price of MS and HSD by
Rs 1 per litre leads to inflation of 0.02% and 0.07% respectively. (PPAC, Nov'2015)
Social: Consumption of petroleum products is an indicator of social and economic progress of a nation. The bio-
mass or tree wood is the fuel for cooking food in the lowest segments of society who do not have access to coal or
petroleum products. It is still the cheapest available fuel. The firewood needs to be collected from the nearby forest
and is the most primitive fuel. With the restrictions on tree cutting, the next cheapest fuel for domestic and industrial
use is coal. SKO, being highly subsidized fuel, is used by the poor for cooking and lighting purposes. The diversion
of SKO for adulteration and sale in the open market has forced the Government of India to target the subsidy
through direct benefit schemes. This scheme has already been successfully implemented in LPG. However, LPG is
being used by middle class society. Hence the use of petroleum products improves the quality of human life and is
an indicator of the social progress.
Technological:The democratization of GPS and digital technology, the logistics sector has seen a quantum jump in
data acquisition and decision making tools. The information flow among the stakeholders of a company and among
the companies, is leading to informed decisions bringing efficiency in logistics. The secondary logistics being more
complicated than primary logistics as more stakeholders are involved and custody of product changes hands multiple
times, the use of information technology tools will simplify decision making.
Environmental: Optimisation in secondary logistics will certainly reduce carbon emissions with more efficiency in
transportation. The use of higher capacity tank trucks leads to higher fuel efficiency. However the high capacity tank
trucks increase the lot size for the lowest selling retail outlet dealers.
Legal : The petroleum products being inflammable in nature have always risk fire as an occupational hazard. The
Petroleum and Explosive Safety Organization (PESO) is the statutory body issuing licenses for storage and
transportation of hazardous petroleum products under the Indian Petroleum Act 1934.The storage capacities and
infrastructure of storage depots are regulated trough this act. The capacities and tank truck size and fittings are also
covered under the Act. The retail outlets, storage and infrastructure has to meet the requirement of the act and rules
framed under this act.
11. SWOT ANALYSIS
Strength : The downstream Indian Petroleum Industry has the surplus production capacity and has capability to
process a variety of crude available from domestic and international sources. It is earning valuable foreign exchange
from export of refined products in the international market. Out of total exports of $310 b in 2014-15, petroleum
products accounted for $ 47.3 b which is 15.2 % of India’s gross exports. The Indian refineries are capable of
meeting the growth in demand in near future. Hence product availability is an area of strength for the petroleum
industry in India.
Total Petroleum Products Pipeline in India was 12,129 Km long with a capacity of 86.76 MMTPA as on 1st
April’2015 (MOPNG, 2015) The construction new pipelines have not only improved reliability of transportation of
petroleum products but also contributed to reducing carbon emissions and increasing energy efficiency in
transporting petroleum products.
Weakness : Many refineries are inland refineries and hence are unable to export their surplus products. The
evacuation of certain products in periods of low demand becomes a logistics challenge to OMCs. The pipeline
infrastructure is not flexible enough to meet the sudden surge in demand, coupled with the product shortages due to
periodic shutdowns of inland refineries. The other modes i.e. rail and road are incapable of taking the load during
such contingencies.
Opportunity: There is an opportunity for the OMCs to collaborate at the back end to reduce their operating and
logistics expenses and serve the customers better and improve their margins. The secondary logistics have a huge
potential for optimization and has not got its due attention from the oil industry. A model incorporating the
perspectives of all the stakeholders leading to a reduction in the cost of placement of product at retail outlets by
optimization of operating and logistics costs will improve the margins of OMCs.
Threat : The entry of private players in oil marketing may lead to a price war to gain higher market share, thereby
further lowering the marketing margins across the industry. The fluctuations in crude prices in the international
market lead to wide variations in prices of finished products and the OMCs focus are shifted and the savings in
optimization seem marginal as crude constitutes 90% of the input cost of petroleum products.
12. CONCLUSION
It can be concluded that the transportation cost of OMCs has ample scope for optimization. Although each of the
companies has optimization programs for primary logistics, there is ample scope for optimization of secondary
logistics functions not only for increased margins for OMCs but also for enhanced service levels to the customers
and channel partners. The transporters and retail outlet dealers are main channel partners who successively take
custody of product before handing it over to the consumer. Any optimization model has to take their perspectives
into consideration. The business, financial, innovation and learning perspectives need to be balanced, making
optimizing a multi objective function.
Flexible transport contracts and innovative logistics models shall evolve in secondary logistics in OMCs as more
and more data is made available through the adoption of GPS and information technology in decision making. The
raw material cost and taxes being un-controllable costs for the OMCs, they can improve their margins by optimizing
their operations and logistics costs. The primary logistics have already been in focus of companies and is less
complicated as the custody of the product remains with the company. It is a challenge for OMCs in India to optimize
their secondary logistics operations. This can be achieved through adoption of higher technology and collaboration
among the OMCs thereby avoiding duplicity of infrastructure and delivery of better value to the customer. The
development and adoption of flexible transportation models and re-alignment of markets shall go a long way in
improving the secondary logistics of the downstream petroleum industry in India.
The study has been limited to the highest selling petroleum products MS and HSD sold through retail channels of
OMCs which affect the day to day life of the Indian consumers and has a huge impact on the Indian Economy.
13. REFERENCES
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