Headquarters [world wide web] www.aspentech.com worldwide headquarters Aspen Technology, Inc. Ten Canal Park Cambridge, MA 02141-2201 USA [phone] +1 617 949 1000 [fax] +1 617 949 1030 [e-mail] info@aspentech.com Enterprise in the Petroleum Industry Can it really add value to my business? The petroleum business is very asset intensive, with multiple islands of independent business units competing for profitability. This internal competition drives profit out of the system and hinders enterprise potential. For decades, the solution to this problem was beyond the reach of petroleum executives. Today, real-time Value Chain Management that unites the business objectives of interdependent silos and their trading partners is not only possible, it is a reality. T A B L E O F C O N T E N T S houston office AspenTechnology, Inc. 1293 Eldridge Parkway Houston, TX 77077 USA [phone] + 1 281 584 1000 [fax] + 1 281 584 4329 [e-mail] info@aspentech.com europe/middle east/africa headquarters AspenTech Europe SA/NV Avenue Reine Astrid 92 1310 La Hulpe BELGIUM [phone] +32 2 701 94 50 [fax] +32 2 701 95 00 [e-mail] ATE_info@aspentech.com 2 5 8 10 11 12 Unique Petroleum Industry Issues Effective Value Chain Management Provides a Powerful Alternative to Limited Silo Strategy How AspenTech Delivers Value Chain Management and Profit What s the Potential for Your Particular Company? Examples of Value Chain Management About AspenTech asia headquarters AspenTech Asia Ltd. Room 32, 8th floor Bank of America Tower 12 Harcourt Road Central HONG KONG [phone] +852 2584 6162 [fax] +852 2584 6172 [e-mail] info@aspentech.com japan headquarters AspenTech Japan Co., Ltd. Kojimachi Shimura Bldg. 1-5, Kojimachi 4-chome, Chiyoda-ku Tokyo 102-0083 JAPAN [phone] +81 3 3262 1710 [fax] +81 3 3262 1765 [e-mail] info@aspentech.com The new leaders in the petroleum industry will be the companies that align their people, technology, plants and business processes to effectively manage their value chain and achieve Profit integration, automation and optimization of the principal means of creating value by doing business. Petroleum companies must develop these competencies to effectively manage their value chain and to stay competitive in a tough economy. These competencies are not built overnight. Companies that are building a value chain based profit-focused strategy and infrastructure now will be in the best position to succeed. Copyright 2002. AspenTech, Aspen ProfitAdvantage, Aspen Capable-to-Promise, Aspen Sell, Aspen MIMI, and the aspen leaf logo are trademarks or registered trademarks of Aspen Technology, Inc., Cambridge, Massachusetts USA. All rights reserved. All other brand and product names are trademarks or registered trademarks of their respective companies.
Unique Petroleum Industry Issues Dependence on Petroleum Continues Petroleum is the second largest consumable on the planet second only to water. As a society, we depend more on petroleum than any other natural resource for the comforts and conveniences of our modern world. Petroleum provides fuel for our transportation, lubricants for our engines, temperature control for our homes, base components for the manufacture of foodstuffs, fertilizers, medicines, plastics, building materials, and cloth. The increasing reliance on petroleum is motivating industry business leaders to find better ways to secure, process, and deliver petroleum products, while maximizing margins, minimizing waste, and improving overall corporate profitability within the constraints set by prevailing societal and environmental pressures. Silos Complicate the Supply Chain In some ways, the petroleum supply chain is like supply chains in other industries in that it has the same source, make, deliver paradigm. However, it is significantly more complex than any discrete supply chain. The petroleum business involves many interdependent operations, beginning with the search for oil and gas and extending to the delivery of finished products, with incredibly complex manufacturing processes in the middle. Each of these operations has developed into separate business units, each with its unique objectives and demands. Often, the business units operate independently, unaware of the constraints and opportunities of the other business units, often at odds with the overall corporate objectives. Although certain business units may be operating at maximum margin, overall corporate profitability may be suffering. This is the most significant opportunity for today s industry leaders finding ways to break down the walls between operating units and maximizing margins. Silos Present Opportunities Exploration and Production Silo This silo combines skill and technology with luck to initially find and then to manage reservoir assets with the goal of extending the asset lifecycle. Logistics in this market require a keen understanding of the demands and limitations of physical equipment as well as crude oil characteristics so that long delivery times are met without complication. Unlike discrete manufacturing, petroleum manufacturing does not start with a bill of materials. Feedstocks and intermediates can come from a number of different sources with significantly different qualities, and yet be processed and combined to form precise products, meeting all regulatory specifications as well as shipping times. Manufacturing Silo Within the manufacturing process, multiple operational decisions need to be made daily, selecting appropriate operating modes and processing sequences to make sure products are ready for shipment when needed. Without understanding the limitations of this critical function, supply chain decisions and objectives can be misaligned and ineffective. In addition, most petroleum companies transfer intermediate and blend stock streams between manufacturing locations. The decisions concerning the best economic dispositions of these streams are influenced by multiple factors including operating efficiencies, transportation costs and production schedules. Engineering Silo The design and engineering function is required to improve and enhance operations amidst increasingly aggressive and arduous legislation. This requires better understanding of how the manufacturing facility performs and what technologies are available to improve performance. In addition, design strategies may require closer cooperation not only between different silos (such as 2
Exploration and Production, Manufacturing, Retail Marketing, etc.) but also between different industries (e.g. Petroleum, Automotive and Aeronautical, etc). Wholesale and Retail Silos The wholesale and retail activities in the petroleum supply chain are unique. For example, at any one time, 50 million gallons or more of fuel products from a given refinery (roughly a week s production for a large plant) may be in transit between the refinery and primary terminals. This transportation can take place on pipelines, barges, or trucks. In many cases, terminals also have warehouse facilities for storing packaged products like lubes and waxes. To make effective decisions, management should know the inventory positions of their organization and the status of shipments in real-time as well as how the inventories and shipments should change to meet projected demand. How Has Success Been Defined Until Now? Until now, success has been measured by whether individual silos made a profit. Since the least-cost player dominates the commodity market, the way to more profit has been minimizing costs, which has become the silo s primary focus. Almost every conceivable measure to lower costs has been implemented. Reductions have been made relentlessly in fixed costs, corporate overheads and working capital. While corporate reporting mechanisms have been streamlined and corporate tracking systems enhanced, silos have continued to operate haphazardly. ERP (Enterprise Resource Planning) systems have been widely implemented within the last decade with the aim of reducing costs still further, but most have yet to deliver the returns promised. Constraints of Silo Thinking The individual silo is constrained by thinking purely within the confines of its own profitability. Operations and inventory management become matters of short-term operational tactics rather than strategy. Silos build buffer inventory to control the peaks and troughs at the interfaces and significantly alter operational plans due to unanticipated changes in another silo. Annual optimization plans are never revised to meet the short-term needs of the overall business, yet do it faster becomes a business objective. And doing the wrong thing faster is guaranteed to lose money faster. The business becomes focused on so-called strategic indicators, such as head-count, working capital and raw transportation costs. Such an environment fails the customer and the company. The customer receives falling levels of service. The company misses the opportunities for supply and operational synergies, has higher working capital than it needs, higher general transport and replenishment costs and poorly distributed inventory. Inevitably, managers spend their time fire-fighting as they try to cope with the impossible. Flawed Industry Assumptions These include: Internal competition automatically generates efficiencies and greater profits No intra-company synergies exist Overall company profit is maximized by maximizing the profits of the different silos; and, finally, Boundary commodity markets are infinitely flexible with the commodity market able to absorb all sales and supply all needs without affecting price. Why are these assumptions flawed? Because today s markets are dynamic and, in some geographies, there is a significant oversupply of product. 3
Commodity Markets The Profit Sink By their very nature, commodity markets drain corporate profitability and resources. They are extremely volatile, with prices moving dramatically and on short notice. Calculation of transfer prices alone creates friction between silos. Commodity markets are low margin and constrained by the difference between wellhead cost and pump price. In an over-supplied market, competition is entirely cost-based, with the least-cost supplier winning and determining the prices for the market overall. There are no customers in the normal sense; there is only The Market. In the long term, competitors are taking part in a zero-sum game, spending money to maintain a largely artificial market where every barrel of crude is traded around four times between the well and the refinery. 4
Effective Value Chain Management Provides a Powerful Alternative to Limited Silo Strategy To maintain the petroleum industry s historical position as a leader and trendsetter in worldwide business, companies must manage their value chain efficiently and effectively to further their profit optimization efforts. At the heart of value chain efficiency are two components: The time to the right (most profitable) decision, and the time to the right (on-time, on-quality) execution strategy. Generate most-profitable decisions quickly To make and execute good (most-profitable) decisions, it is critical to collect supply and demand data and aggregate the data. Inefficiencies in the collection and aggregation of data lead to delays in the time to right decision. A very critical need is the availability of real-time information from refineries and the rest of the value chain. Without detailed real-time data you cannot make the right decisions. Analyze, model and make the right decisions. Difficulties in accurately representing the complexities of the business in software can lead to non-optimal decisions. For example, the following need to be taken into account: Raw materials are interchangeable, but have different impacts on manufacturing performance Order profitability is often dependent on the manufacturing sequence Economic impact of co- and by- products complicate production planning Requirement to comply with environmental legislation Competitors may compete through exchange agreements Transportation logistics are complex Execute decisions in real-time with flexibility Execute effectively. Once a profitable decision has been reached, companies must have the ability to execute on that decision (otherwise the decision has no value). Companies must have the confidence that a decision, once made, will be executed as planned. Furthermore companies must have the confidence that materials; logistics and distribution assets; manufacturing assets; people; systems and business processes are aligned to carry out the decision. How Are Industry Leaders Improving Business Performance? Business leaders are using a variety of strategies to improve their business performance. These include: Innovation Develop custom or configured products and services while reducing time-to-market. Understand the requirements of the market and the capabilities of co-operating industries that are vital in this process. Develop close cooperation between the petroleum and automotive industries to develop truly innovative approaches to meeting legislative requirements. Collaboration Actively involve customers, suppliers and partners to help improve value creation across the extended supply chain, in process engineering/innovation and manufacturing. Integration Creating more agile and responsive business processes both internally and between trading partners to eliminate delays, costs, and dramatically improving the organizational and network efficiency. (The result will be the removal of commodity markets in the petroleum industry with the associated requirement of changing the measures of success within the industry.) Automation Extend beyond the effective automation of the manufacturing or refining assets and integration of those systems with the Enterprise Resource Planning systems to automate the business processes both internally and between trading partners. This automation will improve performance, enhance information quality and accelerate information flow. 5
Enable the enterprise to operate at global optimal performance levels as opposed to a series of local optima within the silos (which may not represent the best performance for the business as a whole). What Petroleum Companies Now Need Integrated information systems that allow them to view the actual capabilities of their plants in real-time, together with financial performance data Integrated internal business processes, supported by accurate and current information, that facilitate rapid decision-making throughout the value chain Internal and external business processes that are integrated with their partners business processes to facilitate agile, responsive and reliable interactions with value chain members Closer co-operation between downstream and partner industries to ensure effective and efficient innovation to meet market demands, legislative requirements and corporate profitability targets. Why Integrated Systems and Business Processes are Essential for Success To be successful, integrated systems, business processes, and collaboration have become essential. The following section explains how these factors will ensure agility and responsiveness and help companies determine how prospective deals will impact revenue, de-bottleneck information to allow faster decision-making, and foster collaboration. Integrated Manufacturing Systems Ensure Agility and Responsiveness Out of date or incorrect data and information has and does render petroleum companies ineffective. To make effective decisions in real-time, refiners must know the actual capabilities of their refineries in real-time so they can rapidly and profitably respond to the increasing demands of their customers. Manufacturing data must be consistent and readily accessible to all players in the enterprise value chain. Effective and efficient provision of this accuracy and accessibility requires integrated, sophisticated manufacturing solutions that are based on precise, consistent physical and financial models of the refinery. For example, if a wholesale trader does not understand the complexities and costs a refiner faces in the transition from one grade of gasoline to another, the trader may not accurately schedule or value a shipment. This means that when a customer calls to request a special gasoline shipment, the manufacturer cannot confidently determine whether it would be profitable to alter the production schedule to accommodate the customer s request. Now, in order to remain competitive, this intelligence will be critical. Tightly Integrating Manufacturing and Supply Chain Reveals Impact on Revenue Can you rapidly process customer orders, promise delivery dates in real-time, provide key manufacturing information, and know if you are impacting revenue if your extended supply chain system is not tightly integrated with your manufacturing execution system? No. When manufacturing and the extended supply chain are synchronized, a synergistic environment is formed. The enterprise operates closer to its economic and physical constraints, where it operates most profitably and takes advantage of opportunities presented in the marketplace. Other positive results are product customization and higher levels of customer service. 6
De-Bottlenecking Information Allows Faster Decision-making Some of the largest barriers toward improved business processes arise when silos in companies restrict the flow of information and form bottlenecks. If companies are unwilling or unable to share critical information, both internally and externally with business partners, and obtain information instantaneously, they are restricting their ability to compete successfully. ERP systems have improved data quality and availability, but they do not provide the tight links with manufacturing and external systems and processes required in the petroleum sector. Gaps between ERP, refinery systems and trading partners must be bridged to allow for the efficient flow and use of information across the value chain. Why Internal Business Processes Must Be Integrated First If petroleum companies attempt to knit their external customer and partner processes together using current technology without first integrating their own internal business processes across multiple business units or refineries, they set themselves up for disaster. For example, if customer service is considered a business process, and a manufacturer is organized around five product categories, each with its own customer service organization, it will be very difficult for that manufacturer to offer integrated and unified value-added services to meet customers expectations. To prepare, petroleum enterprises must organize themselves primarily around business processes, rather than product lines, business units or refineries. Their business partners will expect to interact with them in this way. Integrating Systems and Business Processes with Key Partners Fosters Collaboration Integrating business processes between companies will break down the barriers between organizations where power and decision-making are more dispersed. This may prove to be as difficult as implementing ERP. To succeed, manufacturers will need to utilize industry expertise and business process automation software that facilitates inter-company business process integration and collaboration. 7
How AspenTech Delivers Value Chain Management and Profit AspenTech Profit Advantage offers the first real-time value chain management for the petroleum industry that stretches across the enterprise to link strategic vendors, trading partners and customers. Profit Advantage, an integrated solution for optimization and automation of the entire supply chain, helps you identify key opportunities for profit improvement. The typical potential economic value delivered by an AspenTech ProfitAdvantage solution ranges from $40 million USD for individual refineries to over a billion for integrated oil majors annually. The time to payback from AspenTech ProfitAdvantage is typically six to nine months. The integrated solution delivers value by uniting planning and scheduling at the refinery with the distribution of products to retail customers. Value Chain Profit Opportunities Petroleum manufacturers have three levers for improving profitability, namely, Increase revenue Reduce costs Improve capital efficiency AspenTech can provide solutions to dramatically improve results across all these levers. Increase Revenue AspenTech solutions can help increase revenue by as much as 3 5 percent by providing the following features: Capability to increase production volumes with minor capital investment, via reduction of down time and increased throughput Capability to increase overall average sales prices via increases in yields of most valuable products (reductions in lower price or second-quality products), optimization of the customerproduct mix, and, increased product quality and consistency, which in some cases, can lead to higher prices Increase customer retention and provide differentiating customer services, leading to increased market shares. This is done via improvements in the customer exception process, greater product consistency and in better supply chain management, leading to more reliable delivery Convert more inquiries to orders via Capable-to-Promise technologies Respond more rapidly and effectively to un-anticipated opportunities, such as emergency customer orders to customer request for customization Reduce overall costs AspenTech solutions can help reduce material and production costs by as much as 5-10 percent by providing the following features: Improving overall yields while reducing energy consumption Reducing losses via more accurate material balances Reducing average acquisition prices via better collaborative forecasting which reduces expediting charges Take advantage of spot opportunities to buy, for example, distressed cargoes, by quickly evaluating the cargo and establishing the right bid price Reduce energy costs via more efficient production and better engineering Reduce logistics and transportation costs via: 8
More accurate demand forecasting, planning and scheduling which reduces expediting charges Better logistics management Better multi-site system planning and scheduling Optimize the sourcing of product to customers (make versus buy versus trade/swap decisions) to reduce overall cost-of-goods sold Increase productivity of staff across the supply chain and in production operations Improve Capital Efficiency AspenTech ProfitAdvantage solutions can improve capital efficiency via: Increased inventory turns 10-30 percent Decreased capital expenditures on average by 15 percent These efficiencies are achieved through: Significantly reducing the working capital though better inventory management. These benefits come from better inventory visibility in the planning and management function; collaborative planning with customers and suppliers and smart Vendor Managed Inventory (VMI) solutions. Capital expenses can be dramatically reduced with our Asset and Production offerings. AspenTech solutions can lower the costs of a capacity expansion or a new product rollout by finding lower cost design points for the manufacturing asset. On an average, the use of AspenTech s modern design tools enable 20 percent project cost savings. Leveraging our concurrent engineering solutions has an additional 5 percent project cost reduction. Extensive re-use of information captured in models created with our solution allows additional 5 percent savings. Our solutions improve production and logistics efficiency and defer the need for future capital projects. Our de-bottlenecking solutions help squeeze most out of existing capital assets. Our experience has shown 3 to 5 percent capacity improvements through on-line optimization of large plants already well operated while minimum investments can result into 30 percent or more capacity increases or 30 percent or more utility cost reductions. AspenTech ProfitAdvantage provides value chain profit maximization opportunities across the entire Petroleum value chain. Buy-side Marketplaces Logistics Providers Value Chain Planning Value Chain Planning Supply-side Production Demand-sde Supply-side SUPPLIERS Production Demand-sde Supply-side CUSTOMERS Production Demand-sde Asset EXECUTION Asset Engineering & Construction Firms Sell-side Marketplaces Supply-side solutions reduce raw material costs, providing the intelligence needed to select the right raw materials at the right price, time and place, and from the right supplier. With this information, doors to effective collaboration opportunities with value chain partners open wide. Production is by far the most critical part of the Petroleum business. AspenTech s Plantelligence Production solutions streamline production, minimize plan deviation, and accommodate plan revision in real-time based on actual asset performance. 9
AspenTech s Demand-side solutions allow you to collaborate with logistics providers and key functions in your own company s supply chain to more accurately determine product availability and improve your response to customer needs. AspenTech s Value Chain Planning solutions help petroleum companies improve supply chain agility through real-time collaborative planning and forecasting. Asset solutions improve capital efficiency through collaborative engineering, design and construction. What s the Potential for Your Particular Company? Ask AspenTech to determine whether there are tens, maybe hundreds, of millions of dollars trapped in your corporation s manufacturing, supply chain and innovation facilities. Here s how we do it. The Aspen Value Process Is a Fast, Reliable Method of Analysis With our Aspen Value Process (AVP), results can be obtained in a matter of months. AVP enables rapid identification of business improvement and profit enhancement initiatives and systematically achieves immediate returns while creating new opportunities for improvement. AVP Roadmap Minimizes Organizational Disruptions Through a process of collaborative discovery, we ensure the focus stays on the bottom line results and that organizational imperatives are considered. The AVP methodology has been developed to ensure a smooth transition into implementation, and effective control of new systems and processes. The roadmap highlights the value proposition and creates a robust implementation plan, with all the technical and human factors incorporated. We minimize organizational disruptions and ensure a speedy implementation and go live process. Technology Acceptance Is Key AspenTech consultants help you through the challenges of technology acceptance. Unlike point solution providers, our business consultants have years of process industry expertise and will guide you through the methodology. The result will produce an initial implementation plan and a clear vision of the future state of the business processes that utilize our advanced technologies. The methodology then guides you through the subsequent phases of implementation and helps you establish new levels of performance to help you achieve competitive advantage for your organization. 10
Examples of Value Creation Across the Extended Enterprise Below are examples that show where integrated business process solutions create new business value by implementing integrated solutions and optimization across the extended enterprise, supply chain, product and process engineering/innovation, and manufacturing. Integrating Advanced Planning and Scheduling with Refinery Refinery planning and scheduling models can be integrated with plant and online unit optimizers. This ties consistent, accurate, integrated business decisions across the enterprise. A consistent understanding of true refinery capacity and true constraints across the refinery results in a level of agility in business decision-making that was not previously possible. This allows the planners to develop production plans to run the refineries at their most profitable constraints and with a high degree of confidence that operations will be able to meet the plan. Integrating Process Engineering with Refinery Engineering models initially used to design the refinery, can later be used for trouble-shooting, capacity expansion design, online process analysis, and decision-support/optimization. This saves effort and results in higher quality, faster refinery solutions. Integrating Process Engineering with esupply Chain Planning and As previously discussed, petroleum manufacturing processes can be very complex, involving multiple unit operations to produce one gallon of finished product. An understanding of supply chain planning/scheduling options during the design stage can result in engineering models that better reflect the manufacturing and extended supply chain capabilities. Integrating Actual Performance with your ERP System AspenTech s Value Chain Management and Profit solutions add dramatic business value to ERP implementations by providing deep integration with manufacturing facilities and global supply chain planning and optimization across the enterprise. ERP systems provide the integration backbone for business information. AspenTech provides the integration backbone for enterprise performance information. Together with ERP, integrated solutions from AspenTech improve supply chain visibility, enhance decision support and provide better quality data across the enterprise. The most significant opportunities for business performance improvement through ERP-to-Enterprise system integration include: Production Planning planning and optimizing specific production orders, based on a clear picture of enterprise capacities, constraints and throughput. Material Requirements Planning by using accurate inventory levels of crude, products and intermediates. Quality Management by capturing quality and certification requirements for both crude and products, and generating certificates of quality for products. Plant Maintenance by utilizing asset management solutions that involve identification of equipment in need of repair/re-calibration and the automatic generation of work orders within the maintenance system. Working together with ERP, Enterprise delivers an accurate picture of the complete manufacturing environment, the supply chain, and business/financial data, making investments in ERP more valuable. 11
About AspenTech Aspen Technology, Inc. is a leading supplier of integrated software and solutions to the process industries. The company's Aspen ProfitAdvantage solution enables companies to identify and maximize profit opportunities throughout their entire value chain from the supply of raw materials, through the production of goods, to the delivery of final products to customers. The Aspen ProfitAdvantage solution encompasses engineering, manufacturing, supply chain and e-business collaboration technologies, providing the tools that enable manufacturers to design, optimize and execute business processes in real time. Over 1,200 leading process companies already rely on AspenTech's 21 years of process industry experience to increase revenues, reduce costs and improve capital efficiency. AspenTech's customers include: Air Liquide, AstraZeneca, Bayer, BASF, BP, Chevron, Dow Chemical, DuPont, ExxonMobil, GlaxoSmithKline, Lyondell Equistar, Merck, Mitsubishi Chemical and Unilever. For more information, visit http://www.aspentech.com. WP 204 4/02 12