Operational Management approaches by Shell Company

The chosen company to evaluate the operation management approaches employed in an energy company is Royal Dutch Shell Company. Shell a British-Dutch company that provides oil, gas, petroleum products and renewable source of energy to the world. This company is one of the largest companies around the world that maintains and supplies the world with its fuel, oil and petrochemical products.

The Royal Dutch/Shell Group is the world’s biggest and oldest joint venture, formed in 1907 when the Royal Dutch Petroleum Company and the Shell Transport and Trading Company Ltd of the United Kingdom merged their operations. It operates in over 140 countries, providing fossil fuels and green fuels like Hydrogen fuel cells. Some of the facts related to Shell are: has 102,000 number of employees worldwide, provides 2% of oil worldwide and 3% of gas, has 45,000 service stations, 10 million customers worldwide and one of the top fortune 500 companies.

Shell has five core businesses: exploration and production, gas and power, refining and marketing, chemicals, and trading and shipping.

Source: http://www.annualreview.shell.com/2008/servicepages/downloads/files/entire_shell_review_08.pdf

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Operation management:

Definitions:

“Management Of the conversion process which transforms inputs such as raw materials and labour into outputs in the form of finished goods and services” (Davis, Aquilano & Chase, 1999).

Schroder (2007) defined operation management as: “Operations is responsible for supplying the product or service of the organization. Operations managers make decisions regarding the operations function and its connection with other functions. The operations managers plan and control the production process and its interfaces within the organization and with the external environment” (Schroder, 2007).

Operation management (OM) is basically the set of activities that creates goods and services by transforming input into output. Activities creating goods and services take place in all organization. In manufacturing firms, the production activities that create goods are usually quite obvious. In them we can see the creation of a tangible product such as Sony TV or a ford Taurus.

In organizations that do not create physical products, the production function may be less obvious. It may be “hidden” from the public and even from the customers. An example is the transformation that takes place at a bank, hospital, airline office, or college.

Regardless of whether the end product is a good or service, the production activities that go on in the organization are often referred to as operations or operation management.

Operation management is associated with number of areas linked with an organization as how does the organization establish customer’s requirements, transformation of customer’s requirement in to product and services, what operations systems/ processes are in place to satisfy the product/services requirement of customer, decision associated with capacity planning, inventory, quality of product etc… All these decisions come under the umbrella of operation management.

Identification of Customer Requirements:

We know that the basic existence of an organization depends upon the product or services it provides to the society. However, with the changing consumer taste and the limited lifecycle of products companies must be looking for new product development. It is a company’s life blood. Both profits and growth are affected without aggressive product development. Operation managers give high value to the strong communication between customers, product, processes and suppliers that result in a high success rate for their products.

All companies need to search out their customer’s wants and requirements in order to fill any gaps in the market. A successful market research for new product development comes from knowing what customers value.

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Product decision:

One of the important decisions of operation management is the selection, definition, and design of products.

Heizer and Render (2005, pp-132) discussed the product decision in their work as it concerned with the development and implementation of a product strategy that meets the demands of the marketplace with a competitive advantage that can be achieved via differentiation, low cost, rapid response, or a combination of these.

Product development system:

Product development system may well determine not only product success but also the firm’s future. Product development goes through a series of steps, starting with ideas that may come from either internal or external sources and ending with the evaluation of new products. Heizer and Render (2005, pp-137) considers two tools that are particularly helpful in the early stages of product development are (1) creativity and (2) identifying customer wants.

The former can be addressed via creative, open organizations and brain storming and the second with quality function development.

Organizing for product development:

According Heizer and Render (2005, pp-141), There are different approaches to the product development.

The traditional U.S approach to product development is an organization with distinct departments. These departments are: First research and development department to do the necessary research; then an engineering department to design the product: then a manufacturing engineering department to design a product that can be produced; and finally, a production department that produced the product.

A second and popular approach is to assign a product manager to “champion” the product through the product development system and related organization

The third and perhaps the best, product development approach used in the U.S. is the use of teams. Such teams are known variously as product development teams, design for manufacturability teams, and value engineering teams.

The Japanese bypass the team issue by not subdividing organization into research and development, engineering, production and so forth. Consistent with the Japanese style of group effort and team work, these activities are all in one organization.

Game Changer:

Shell Game changer is an internal shell organization which looks for new and innovative ideas that addresses a demand or significant problem in the energy industry. Game changer helps entrepreneurs to convert ideas into products by sponsoring them. Ideas can range from new oil exploration techniques to improved production tools, or even new form of energy. It provides a sheltered testing zone where an idea is developed, tried and improved upon. It also helps to get it to market.

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Areas of focus are:

Increasing energy production

Carbon management

Energy conversion, storage and distribution

Fuelling transportation

Working of Game changer:

Game Changer screens the novel, early stage idea. If the idea has any potential and game changer agree, it will take it through some important steps and provide the funding and support to get it to proof-of concept. Although game changer grew up on ideas from Shell employees, it also invests in those originating from beyond Shell such as from academics and other entrepreneurs.

Game changer primary criteria:

Novelty – Is the idea truly and fundamentally new and different?

Value – Could the idea create substantial new value if it works?

Credible Plan – Is there a plan to manage primary risks prudently by qualified people?

Game changer process:

The first step in entering the GameChanger process is submission of a short description of the idea through the shell website. A selection panel formed by a group of full-time Shell professionals with diverse backgrounds in the energy industry carries out assessment of all proposals.

They assess the proposal at three different levels [7]:

Pre-Screening:

If a person is an entrepreneur from outside Shell then, after the initial assessment of the idea, a member of the panel will contact the entrepreneur to allocate a Shell technical counterpart to him. This person will then be entrepreneur’s “co-proponent” of the idea and help him through the screening process.

Screening Panel:

The Screening Panel consists of (any) two members of the GameChanger team. They will listen to the presentation of inventor’s idea and ask questions in order to obtain a complete understanding of the proposal. The GameChanger panellists will consider the merits of the proposal and within 48 hours decide if the idea could potentially mature into a GameChanger project. If this is the result, the inventor will then be invited to prepare a more detailed presentation for the Extended Panel.

Extended Panel:

The Extended Panel consists of three members of the GameChanger team and at least three experts who are not members of the GameChanger team. This group will attend the presentation on the inventor’s proposal and work plan. The panellists will ask questions and the experts will give opinions on the merits of the proposal. The GameChanger panel will then come to a decision on whether to go ahead and fund the development of the

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idea. Game changer will strive to communicate this decision to the inventor and the co-proponent within 48 hours.

If funding is awarded, it is often with a time span of 2- 3 years. The inventor will then use the funds to develop the idea in accordance with an agreed plan. At agreed tollgates, progress and continuation are discussed with proponents and panel experts.

Selection Criteria:

GameChanger ideas have the potential to effect a significant improvement in the profitability of a business or open up opportunities for growth. The GameChanger panel funds these projects through to their proof-of-concept stage.

The final step: Going to the market place

If proof-of-concept is reached successfully, GameChanger may also be able to help take the invention a further stage. There are three potential forward paths [7]:

Proprietary -The idea is graduated into Shell’s internal R&D funnel or another Shell business for direct use by Shell.

Licensing -The idea is licensed to an existing technology provider other than Shell. This is usually applied when complementary capabilities are required to further develop and deploy the idea.

Venturing -A new company might be set up to bring the idea to commercial market. In short, once an idea is considered a true GameChanger it will not be shelved and all options will be considered to ensure the GameChanger idea reaches the marketplace.

Before digging deep into the operation management system employed within Shell, we need to first understand the following concepts:

Process:

Process refers to the physical process or facility used to produce the product or service. It includes the type of equipment and technology, process flows, layout of the facility, job design, and workforce policies.

Process strategy:

A process or (transformation) strategy is an organization’s approach to transform resources into goods and services. The objective of the process strategy is to find a way to produce goods and services that meet customers’ requirements and product specification within cost and other managerial constraints.

Virtually every good or service is made by using some variation of one of the four process strategies

Process focus: A production facility organized around processes to facilitate low volumes, high variety production.75% of all global production is devoted to making low volumes, high variety products in places called “job shops”. Such facilities are organized around performing processes. In factory, these processes might be departments devoted to welding, grinding, and painting. In office, the processes might be account payable,

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sales and payroll. Such facilities are process focused in terms of equipment, layout and supervision

Repetitive focus: A product-oriented production process that uses modules (parts or

components of a product previously prepared, often in a continuous process.

It falls between the product and process focuses.

The repetitive process line is the classic assembly line. Widely used in the assembly of

virtually all automobiles and household appliances.

Fast food firms are an example of a repetitive process using modules

Product focus: a facility organized around products; a product oriented, high volume, low variety process.

They are also called continuous process, because they have long continues production runs. Shell uses product focused approach for its oil refinery processes.

Mass customization: rapid, low cost production that caters to constantly changing unique customers desires.Mass customization brings us the variety of products traditionally provided by low volume manufacturer (a process focused) at the cost of standardized high volume (product focused) production.

Operational Systems and Processes at Shell:

Shell is involved in production of many products and services. It claims that

“We provide transport fuel to around 10 million customers each day through our 45,000 service stations worldwide. We are working to deliver cleaner burning and more efficient fuels. Our products and services are also designed to meet the needs of businesses – from the construction industry to aviation, chemicals to shipping.” [1] (Shell.com)

Shell is best known for its service stations and for exploring and producing oil & gas on land and at sea. Shell delivers a vast range of energy solutions and petrochemicals to customers; produce and sell petrochemical building blocks to industrial customers on a global scale; invest in making renewable and lower-carbon energy sources; involved in transporting and trading oil and gas; marketing natural gas; producing and selling fuel for ships and planes and generating electricity and providing energy efficiency advice.

As mentioned earlier, shell is involved in five core businesses and each business involves number of processes within. To limit our scope, we will discuss the oil & gas exploration and production business.

Oil & Gas exploration and production cycle involves oil exploration, drilling, refining and production of petroleum products.

Oil exploration process:

In this phase, the initial step is to find the oil. This is of huge importance and Shell invests a lot of money to use statistical analysis to determine the location of oil. This survey process is known as Seismic Surveying. There are three components in Seismic Surveying:

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A seismic source

Sensors

Recording equipment

During this survey, the scientists create a picture of the rock layer structure beneath the earth and the data collected is carefully examined and interpreted to decide whether to further analysis would be need or to start the exploration process.

Once the location of oil is determined, Shell draw up exploration contracts with the countries within whose boundaries the oil was first established. Once the contracts have been approved and negotiations agreed the company can then start its drilling process.

Drilling process:

Once the oil’s location is identified, the next step is to drill. Well play fundamental role in recovering oil and gas. With the advancement of technology, new drilling techniques and technology has been developed that helped Shell in drilling wells from few metres to more than 10 kilometers. Wells are not only drilled vertically but also horizontally, can turn corners and snake from one pocket of oil to another.

Souce: http://www.shell.com/home/content/innovation/meeting_demand/getting_more/smartfields/smartfields.html

As drilling is vital part during oil extraction process, however the issue of planning and operating of wells is of greater importance. Shell realizes that as part of its operations it needs to research into whether a well would produce oil, gas or both. During the late 90’s Shell introduced “Drilling the Limit” methodology which allowed the company to focus attention on how efficiently wells are planned, drilled and managed as a process. The main reason for introducing such a scheme was to limit costs and reduced to time it take to drill.

Shell also have introduced a Smart Fields® program providing both the knowledge and the control by integrating digital information technology with the latest drilling, seismic and reservoir monitoring techniques.

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Furthermore, Shell has introduced the Enhanced Oil Recovery (EOR) technology to squeeze out the extra oil that would have been left behind in the oil fields due limited access and hard to get them out. Estimation shows that “by recovering just 1% extra throughout the world would equate to 20-30 billion barrels of oil – oil that may have been left behind.” [5] (Shell.com)

Scouce: http://www.shell.com/home/content/innovation/meeting_demand/getting_more/eor_ccs/eor.html

Shell is using three techniques: injecting steam into reservoirs to heat and make the oil more fluid, and ease its flow; injecting gas to push oil out or to thin it, or injecting chemicals that free trapped oil.

Refining process:

Refining is the manufacture of petroleum products from crude oil extracted in the drilling process. Refining process can be classified into three major processes: separation processes, conversion processes and the chemical treatment processes. Refining involves separating crude oil into the desired components depending on the final processes chosen and the available crude oil selected.

Separation Processes:

It’s the first stage of petroleum refining. During this process the crude oil is separated into some of its fractions. This stage involves three separation processes:

Fractional Distillation:

In the process, the crude oil, which is a mixture of many types of hydrocarbons, is boiled and re-condensed to separate the crude oil into components based on ranges of boiling points. The components with low boiling point are evaporated and collected in the upper part of the chamber known as Distillation column, while the component with higher boiling points are heavier and collected in the

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lower part of the distillation column. The components collected at the top of the chamber are known as Liquefied Petroleum Gas (LPG).

Solvent Extraction:

This process involves the separation of oil into parts by adding chemicals to dissolve the unwanted substances to the crude oil. The main solvents used in this process are furfural, phenol and benzene. Refineries use this method to improve the quality of lubricating oils.

Crystallization:

This method is mainly used to remove wax and other semi-solid substances from heavy fractions or components. The components are cooled to a temperature at which them become solidify or crystal. They are then put through a filter that separates the solid.

Conversion Processes:

Petrol is obtained through this process. Conversion process involves to processes: Cracking process and combining process.

Cracking Process:

It involves breaking up of large hydrocarbon molecules into smaller molecules using a combination of heat and catalytic action. These processes not only increase the production of petrol but also improve its quality and results in products like Cat Cracked Gasoline (CCG) etc.

Combining Process:

This process is the opposite of cracking. It combines simple hydrocarbons to form more complex fractions. This process results in different products like LPG, Coke (used to generate steam and electricity).

Chemical Treatment Processes:

Hydrogen Treatment:

This process is used to remove the impurities like sulphur compounds by mixing the components with hydrogen.

Blending:

This is the last stage of refining process. This stage dealt with the mixing of various hydrocarbons, formed in the refining processes, together to make the final product as required by the customer. The final product is tested before sold to the consumer.

Capacity Planning and Inventory Management System:

Inventory represents a major investment for many firms. Inventories are of four types (Heizer, Render 2005)

Raw material and purchased components

Work-in-process (WIP)

Maintenance, repair, and operating (MRO)

Finished goods

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All organizations have some type of inventory planning and control system. In case of physical products, the organization must determine whether to produce goods or purchase them. Once the decision is made, the next step is to forecast demand. Then operation managers determine the inventory necessary to service that demand. Operation manager establish systems for managing inventory.

Vendor Managed Inventory:

VMI is an abbreviation of vendor- managed inventory. Shell offer VMI. Vendor-managed inventory (VMI) is more beneficial for the chemical buyers. In this system supplier warehouses the product till customer uses it. In this way Buyers are able to reduce a large portion of inventory from their books. They also benefit from the reduced paperwork, phoning in product orders and following up to see that they are delivered where and when they’re needed. VMI often results in the development of more efficient inventory and supply management, which can shave significant savings off the total cost. VMI takes inventory out of the production equation for buyers. Buyers no longer have to worry about tank levels or when to schedule new shipments. The supplier handles that. By monitoring the customer’s tank (often using sophisticated telemetry equipment), suppliers know when inventory levels are low. When they reach a certain point, usually agreed upon with the customer, the supplier schedules a delivery and the truck shows up at the customers’ site to replenish the tank.

In November of last year, Shell Chemical Corp., Herndon, Va., went into an agreement with ControlSAT, under which ControlSAT would be Shell’s exclusive telemetry supplier. The agreement has helped the shell a lot because of the compatibility of ControlSAT’s technology to Shell’s Supplier Inventory Management Order Network (SIMON), which was developed by Shell Services, the technology arm of Shell Corp. (Reilly, 2000)

ControlSAT Telemetry system:

ControlSAT, is a technology company that manufactures and markets satellite -based inventory monitoring telemetry systems (system based on cellular and radio wave transmission).

Working of ControlSAT’s System:

Orbocomm Global, L.P., ControlSAT’s parent company, owns a network of 36 del fluorocarbon satellites orbiting the Earth. The satellites are spaced to orbit the polar planes, tropical planes, equatorial plane and about 45 degrees in between, providing total coverage of the Earth. (Reilly, 2000)

ControlSAT installs hardware on customers’ tanks designed to relay inventory data to those satellites. Then, once per day, data is sent via the satellite network to a central monitoring computer, then on to the supplier through a secure Internet link. Data that suppliers receive show their customers’ inventory levels in tanks around the world.

When product inventory levels fall below a certain point, the supplier receives notification to replenish the material in the tanks. In this way, the supplier can proactively

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schedule its own deliveries. With its daily running inventory and materials needs forecast it can streamline supply.

SIMON:

SIMON is a Lotus Notes-based software program that provides process industry suppliers with information and analysis tools. SIMON monitors and tracks inventory and consumption and then generates demand forecasts, minimum inventory requirements and re-supplies schedules. As a result, suppliers benefit from an improved ability to control facility and warehouse costs, increased inventory turns, streamlined administrative processes, and better focus on production capabilities.

Through ControlSAT’s tank telemetry service, the SIMON database automatically incorporates timely, accurate and reliable inventory data without the need for manual intervention.

Before SIMON and the telemetry supplied by ControlSAT, Shell’s inventory monitoring used to require a lot of phone calls, faxes and interaction between the customer and Shell. Any Information related to the customers’ inventory position would be initiated by the customer. Automating the process allowed the supplier to be more proactive in meeting the customers’ needs (in terms of getting the right product in the right location at the right time) and eliminate the need for time spent faxing and phoning in orders, etc.

Shell currently provides the service only to customers that are sole-supplied by Shell, where a very strong business relationship has been developed and where there is a strong, demonstrated opportunity for cost savings through inventory monitoring.

One of Shell’s customers currently using the program agrees that it can save a lot of time in product procurement. Balmoral Marine Inc., a petroleum and industrial gas drilling company based in Houston, Texas, is supplied by Shell and is currently using Shell’s SIMON and ControlSAT’s inventory management systems for supply of a particular resin product. (Reilly, 2000)

Feature of the new system:

Through SIMON, Shell Chemical keeps vital inventory; customers pay upon use for what is consumed.

Shell Chemical is the sole source supplier, tied to a supplier/customer business model.

Customers reduce safety stocks to bare minimums.

Lotus-based SIMON

Extracts data on amount of product consumed in past 24 hours.

Determines the amount of new product that arrived and was unloaded in same period.

Draws information on current and anticipated product schedules.

Compares data against known changes to schedules.

Data is replicated back to central customer service centre for automatic reconciliation with SAP/MRP systems, generating an automatic re-supply plan.

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SIMON Features:

• When plan indicates a stocking level below accepted minimum, electronic purchase order and shipment is initiated.

All information pertaining to status is accessible to customers.

Invoices are issued monthly, based on consumption, not shipments.

Introduced to 23 of the most strategic customers.

Short-term (12 months) results were plus $20 million in product sales.

Customer Benefits:

Eliminates excess safety stock, reducing working capital and carrying costs.

Facilitates timely, low-cost re-synchronization of supply chain.

Ensures product is on site when needed.

Creates shorter response time to changing conditions.

Reduces transaction costs – data entry, invoicing, payables, etc.

Smoothes erratic order patterns.

Reduces order management costs.

Streamlines financial accounting.

Monitoring and Evaluation of Operations at Shell:

Shell has heavily invested in monitoring and evaluation of each of its processes and operations because every process in this business is very much crucial and need careful attention. During the initial stage of oil exploration and production cycle, Shell conducts Seismic Surveying to confirm the presence of oil beds beneath the earth. Otherwise drilling is very much cost intensive process and failure to the initial stage may results in heavy lose to the organization. To determine whether the well would produce oil, gas or both Shell introduced “Drilling the Limit” methodology which allowed the company to focus attention on how efficiently wells are planned, drilled and managed as a process. Significant reduction both in drilling cost and drilling time has been seen over the decades with the introduction of “Drilling the Limit” methodology.

Shell has introduced a Smart Field program which controls the ongoing drilling, seismic and reservoir monitoring from the separate place equipped with information technology.

“…Combined with the experience of geologists, engineers and others, Smart Fields® can help increase the total amount of oil recovered from a field by 10 per cent and gas recovery by 5 per cent, while also boosting the rate of production.” [4] (Shell.com)

Furthermore, Shell has formed a department under the name “Shell Global Solution”. Shell Global Solution provide business and operational consultancy, technical services, catalyst and research& development expertise to its global customers as well as provide its assistance to Shell in many operational areas such as exploration and production, refining, gas and LNG etc.

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Conclusion:

Shell is one of the largest companies around the world that maintains and supplies the world with its fuel, oil and petrochemical products. In this report we tried to explain how Shell establish its customer requirements, its product development decisions, different operational systems involved in oil and gas exploration and production, inventory management systems and monitoring and evaluation strategy by Shell. As Shell is involved in number of businesses (exploration and production, gas and power, refining and marketing, chemicals, and trading and shipping) and each business has number of operations and processes that need to be maintained. To limit the scope of this report, we only focused our study on the oil exploration and production business.