Madras Refineries Case Analysis

Refineries Limited

Madras Refineries Limited produces lube based stock and refines crude oil into petroleum products and sulphur for its only customer Indian Oil Corporation Limited. Their inventory management system is a classic example of Just-in-Time Inventory process on which they base their competitive strategy.

Some of the challenges faced in this industry are mentioned below,

1. It is very critical to maintain sufficient crude stocks throughout the year as refineries cannot operate below a certain throughput. At the same time, it is not advisable to maintain a large crude inventory because of high cost of crude and also the high volatility in crude prices.

2. Maintaining an optimal inventory means less flexibility to accommodate additional stock. For example, whenever a crude tanker arrives, the storage tank should have enough capacity to accommodate the new stock. Also, waiting and demurrage charges incurred if the tanker is made to wait are also very high.

3. There is always the danger of effective storage capacity being reduced by 10 percent due to sludge and other reasons and hence steps have to be taken to minimize this.

4. As refineries cannot function below a minimum crude throughput, occasionally some products may need to be recycled leading to extra cost of refining in case of shortage of crude inventory. Otherwise the plant has to be temporarily shut down and its restarting costs are high. Moreover, the opportunity cost of lost production due to plant shut down are also high considering the high demand for petroleum products.

5. The whole process of production and planning should be dynamic and flexible to accommodate any projected or unforeseen circumstances which might lead to shortage in supply.

6. The demand for different finished products is variable over the year and hence the product mix has to be altered accordingly often resulting in production of low profitable products.

7. The usual problems of interruptions in plant operations due to failures are always looming. In addition to it, there is also planned shutdown of plants for overhaul once in two to three years. These shutdowns may last for 30 to 45 days during which period other plants have to cater to the demand which was hitherto catered to by the shutdown plant.

8. As finished products need to be blended, circulated and tested before pumping into the pipelines for IOCL/BPCL/HPCL, sufficient finished products inventory has to be maintained.

Case Analysis

Process Structure

Performance Assessment

Optimum levels of Inventory is maintained which is seen from the below mentioned facts in the case,

• Being flexible in meeting the challenges of uncertain supplies