Logistics and Supply Chain Management in Oil and Gas Industry

This assignment explores the key principles of logistics and supply chain management within the oil and gas industry, focusing on the core concepts of economies of scale and economies of distance in transportation. It differentiates between these principles, emphasizing their impact on cost per unit of weight and transportation cost per unit of distance, respectively. The assignment then outlines five critical goals for supply chain managers in multinational operations: increasing efficiency, improving customer service, increasing sales, building relationships, and effective use of information technology. Finally, it addresses key decision areas in supply chain management, including location decisions, emphasizing the strategic and operational elements involved. The assignment provides a comprehensive overview of supply chain considerations in the oil and gas sector, highlighting crucial aspects for effective management and operational success.

Running head: LOGISTICS AND SUPPLY CHAIN MANAGEMENT IN OIL AND GAS
MANAGEMENT
Logistics and Supply Chain Management in Oil and Gas Management
Name of the Student
Name of the University
Author’s Note

1LOGISTICS AND SUPPLY CHAIN MANAGEMENT IN OIL AND GAS MANAGEMENT
Table of Contents
Answer to Question 1.................................................................................................................2
Answer to Question 2.................................................................................................................3
Answer to Question 3.................................................................................................................5
References..................................................................................................................................8

2LOGISTICS AND SUPPLY CHAIN MANAGEMENT IN OIL AND GAS MANAGEMENT
Answer to Question 1
Oil and gas industry is considered as one of the major industries all over the world. In
the oil and gas industry, every business organizations are required to take into consideration
the transportation of the oil and gas products. The presence of two transportation principles
can be seen in the oil and gas industry that impact the efficiency of transportation in this
sector; they are Economies of Scale and Economies of Distance; and these two are crucial in
the process of oil and gas management. Now, it needs to be mentioned that there are certain
differences between these two transport principles of economies of scale and economies of
distance. These two are distinguished below.
At the time of distinguishing between the economies of scale and economies of
distance, it is needed to know what they are in the oil and gas management.
Economies of Scale – In transportation, economies of scale is considered as the decrease in
the cost per unit due to the increase in the size of shipment. It implies that the companies can
get the benefit of decreasing the cost per unit of weight when the shipment size increases.
The same concept is applicable in case of the oil and gas companies (Grebitus, Lusk & Nayga
Jr, 2013). For example, in an oil and gas company, truckload shipments of oil utilizing the
capacity of an entire trailer have lower cost per barrel than smaller shipments of oil of that
same company that uses a limited part of the capacity of the vehicle. In this context, it is
needed to consider the aspect that the transportation vehicles with large capacities like water
vehicles and rail are less expensive per unit of weight that the vehicles with smaller capacities
like airplanes and truck (Waldman & Jensen, 2016). One major reason of the existence of
transportation economies of scale is that the fixed costs connected with the transportation a
load is apportioned over the increased weight. In the oil and gas industry, some of the fixed
costs are administration costs related to scheduling, equipment costs, time to position vehicle
for the purpose of loading and unloading and invoicing. These are considered as fixed cost as
they do not change with the shipment size.
Economies of Distance – In the transportation of oil and gas management, economies of
distance is considered as the decrease in the transportation cost per unit of weight due to the
decrease in distance; and the same concept is applicable for oil and gas management. For
example, in an oil and gas company, a shipment of 1500 km will cost the company less to
perform than two shipments of the same weight each moving 750 km. This is considered as a
crucial aspect for the oil and gas companies. In transportation, economies of distance is often

3LOGISTICS AND SUPPLY CHAIN MANAGEMENT IN OIL AND GAS MANAGEMENT
considered as the tapering principles. In this context, it needs to be mentioned that the
concept of economies of distance is same as the concept of economies of scale in oil and gas
companies. On a more specific note, longer distance allows spreading the fixed costs over
more km that lead to the decrease in per km charges (Grebitus, Lusk & Nayga Jr, 2013).
It can be seen from the above discussion that there are certain fundamental differences
exist between the concepts of economies of scale and economies of distance in transportation
in oil and gas management. The first fundamental difference that can be seen between the
economies of scale and economies of distance in oil and gas management is that the first one
deals with cost per unit of weight when the latter one deals with the transportation cost per
unit. It implies that both of these concepts in transportation help the oil and gas companies in
gaining efficiency in two different areas (Holtz-Eakin & Lovely, 2017). The second
difference between these two concepts is that economies of scale decreases the cost per unit
of weigh due to the transportation of more items while economies of distance decreases the
transportation cost of per unit of distance due to the increase in distance (Armstrong & Read,
2014). Along with these differences, there is a major similarity between these two concepts
since both of economies of scale and economies of distance increases the efficiency of the oil
and gas companies that has impact on the oil and gas products (Vieira et al., 2015). For
example, in case an oil and gas company becomes able in achieving both economies of scale
and economies of distance, then it will reflect in the price of their oil and gas products as the
company would be able in gaining the required competitive advantage by lowering their
products price. On the contrary, the price of oil and gas products will increase in case the
company becomes unable to achieve the economies of scale and economies of distance.
Answer to Question 2
In case of supply chain to be operational as well as effective in a multinational
operation, the supply chain mangers are needed to meet certain goals. Five of these goals are
discussed below.
Increase in Efficiency – Increase in efficiency is a major goal that the supply chain
managers are needed to meet for the development of an effective multi-channel logistics
operation. In order to increase efficiency, it is needed for a company to develop cost-effective
transportation rates while ensuring reduction in overheads, total inventory and overall cost
per order processing (Cooper, 2017). Some of the major techniques for improving logistical
efficiency are to work towards the value-added services such as quality inspection; to develop

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transportation integrity in to the warehouse processes; to determine the effective
accommodation of business demands and to take into consideration the fact that whether the
facilities issue are affecting the business operation or not. In addition, the managers are
needed to ensure the aspect of vendor compliance since this is considered as the heart of
efficient multi-channel logistical operation. This requires considering the policies and
procedures of the companies while dealing with the vendors. Lastly, the supply chain
managers are needed to regain control over the retain supply chain since this is essential in
developing multichannel supply chain (Cooper, 2017).
Improvement in Customer Service – Improvement in customer services is regarded as
another major goal for the supply chain managers in order to achieve multichannel logistical
operations. In the direct marketing companies, operational fulfilment has major connection
with marketing and merchandising (Fredendall & Hill, 2016). These three aspects are
considered as crucial for the companies in supply chain management. The fulfilment of both
the inbound and outbound operations is considered as paramount in order to deliver
marketing promises to the customers for getting the delivered shipment in good condition.
For this reason, there must be a balance between direct marketing and cost. This cost includes
different types of costs such as cost to acquire a customer, cost of being on back order, cost of
the gross demand erosion through return from customers and company cancellation. Return is
considered as a major cost that is far more than the process cost of many businesses. In order
to balance these costs, the supply chain managers are needed to ensure the presence of
efficient systems of inbound logistics and vendor compliance mechanism in the first place
(Fredendall & Hill, 2016).
Increase in Sales – Ensuring increase in sales is considered as another crucial goal for the
supply chain managers for developing multichannel logistics operations. Both inbound and
outbound logistics play a crucial role in ensuring increase in sales. In case of inbound
logistics, the supply chain managers are needed to maintain the on-time and on-stock position
through direct promotion and advertised retain product (Christopher, 2016). The absence of
available and reliable merchandise can affect the companies’ sales potentials. For this, it is
needed to ensure that products flow into the logistics pipeline on quickly and safely.
Transportation has a crucial role to play to meet the sales goals and thus, the managers are
needed to ensure effective transportation all the time. At the same time, the logistics to
deliver goods to the customers can affect the sales in case the customers are not satisfied. For

5LOGISTICS AND SUPPLY CHAIN MANAGEMENT IN OIL AND GAS MANAGEMENT
this reason, the supply chain managers are needed to ensure the presence of effective
outbound logistics while keeping the transportation costs under control (Christopher, 2016).
Improvement in Building in Relationship – Effective two-way cooperation between the
carrier and retailer is considered as a key aspect for the success of the execution of overall
logistics. In this context, the measures for success are time in transit, total cost,
responsiveness of the carrier representative and others. The supply chain managers are
needed to address the issue of single-carrier versus multi-carrier (Monczka et al., 2015).
Utilization of a single carrier allows in higher aggregate volume of shipment that can lead to
lower negotiate rates. However, it makes the company dependence on one carrier which can
lead to many issues in the presence of carrier service interruption. The presence of a good
relation between the carrier and the retailer is pivotal to make the activities work and the
supply chain managers are needed to address the inevitable issues. Trust and positive
attitudes have major influence on resolving these issues. The presence of an effective
relationship between the vendors is considered as more than the matters of cost and success
(Monczka et al., 2015).
Information Technology – Effective and efficient use of information technology is
considered as a crucial goal for the supply chain managers in ensuring an effective multi-
channel logistic operation. The supply chain managers are needed to ensure the correct use of
information technology in the areas of integration of partner’s system, implementation of
supply chain improvements and management of necessary IT resources. Many vendors sell
various software systems in order to streamline the process of supply and logistics. Thus, the
IT department is needed to be effective since it is considered as the hub to manage and
control the information resources. The responsibility of the supply chain managers is to
ensure investigating present IT system so that investment can be done in those areas which
are crucial to add value. The IT department refreshes the whole supply chain system (Lotfi et
al., 2013).
Answer to Question 3
The decisions of supply chain can be divided into wide categories which are strategic
and operational. The following discussion shows five areas in supply chain which require
major attention of the supply chain managers and these areas include both strategic and
operational elements.

6LOGISTICS AND SUPPLY CHAIN MANAGEMENT IN OIL AND GAS MANAGEMENT
Location Decision – The natural first choice in supply chain are the geographical assignment
of production facilities, stocking points and sourcing points. The location of the facilities
requires resource commitments for a long-term plan. Thus, the supply chain managers are
needed to decide the size and numbers of the locations along with the possible routes through
which the products will reach to the end customer (Ellram, 2013). These decisions have
major importance for the companies as these help them in accessing the markets and will
impact the revenue, costs and extent of services. These decision are required to be determined
through an optimization routine while considering the aspects like product cost, duties, taxes,
tariffs, distribution costs, local content, production limitation and others. Although this
decision is strategic on primary basis, they have effects on operational level. For example, in
case ABC Ltd. Plans to set a new production facility out of the town, then the supply chain
manager of the firm is needed to take the decision while considering all the required aspects
(Ellram, 2013).
Production Decisions – The strategic decision includes the products that need to be
produced and which plants to be used for producing them, supplier allocation to the plants,
plants to distribution centres and distribution centres to the customer markets. Like above,
these decisions majorly impact revenue, cost and levels of customer services of the
companies. The existence of the facilities is assumed in these decisions, but need to
determine the precise routes from which a product will flow to and from the facilities (Khan,
Jaber & Ahmad, 2014). The capacity of the production facility is considered as another
critical aspect which is dependent on the degree of vertical integration within the company.
The main focus of operational decision is production scheduling in detailed manner. Thus,
the development of the master production schedule, scheduling production on machine and
maintenance of equipment needs to be includes in these decisions. Other factors required to
be concluded are balancing the workload and measures for quality control.
Inventory Decision – This can be considered as the means through which the companies
manage the inventories. The existence of inventory can be seen in every level of supply chain
as either in the forms of raw materials, semi-materials or finished goods. Their existence can
also be seen in-process between the locations (Sarkar, 2013). The main purpose of them is to
safeguard the production process from any anomalies that can be in the supply chain.
Efficient management of supply chain is paramount in supply chain operations because
holding of inventory can cost between 20 to 40 percent of their value (Sarkar, 2013). Since
the senior management sets the goals, it is considered as strategic in nature. This can also be

7LOGISTICS AND SUPPLY CHAIN MANAGEMENT IN OIL AND GAS MANAGEMENT
considered from an operational point of view. The inventory decisions include control
policies, deployment policies, determination of optimum level of control quantities,
determination of safety stock level and stocking location. These are considered as critical as
these are the key factors of level of customer service (Sarkar, 2013).
Transportation Decision – These decisions are considered as more strategic due to their
close relation with the decisions of inventory. The best choice of mode of transportation can
be determined through trading-off the cost of transportation with the inventory’s indirect cost
with the transportation mode (Hugos, 2018). While air shipments are considered as fast and
reliable, there is less warranty of safety and it is expensive at the same time. It may be
cheaper to ship through sea or rail, but they are needed to hold huge amount of inventory to
safeguard against the intrinsic uncertainties connected with them. For this reason, two major
aspects having vital role in these decision are customer service level and geographical
location. Operating efficiency develops effective economic sense as transportation consists of
more than 30 percent of the logistics cost (Hugos, 2018).
Human Resource Decision – The area of human resource is considered as another major
area of decision in supply chain. In this decision area, the supply chain managers are needed
to ensure the inclusion of efficient as well as skilful employees in different section of supply
chain (Jabbour & de Sousa Jabbour, 2016). This will make the supply chain operations of the
companies more efficient in order to achieve the overall supply chain target of the companies.
This is considered as an aspect of operational management within the business organizations.
The success of the supply chain within the organizations largely depends on efficient
employees in the whole supply chain system (Jabbour & de Sousa Jabbour, 2016).

8LOGISTICS AND SUPPLY CHAIN MANAGEMENT IN OIL AND GAS MANAGEMENT
References
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Cooper, R., 2017. Supply chain development for the lean enterprise: interorganizational cost
management. Routledge.
Ellram, L. M. (2013). Offshoring, reshoring and the manufacturing location decision. Journal
of Supply Chain Management, 49(2), 3.
Fredendall, L. D., & Hill, E. (2016). Basics of supply chain management. CRC Press.
Grebitus, C., Lusk, J. L., & Nayga Jr, R. M. (2013). Effect of distance of transportation on
willingness to pay for food. Ecological economics, 88, 67-75.
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willingness to pay for food. Ecological economics, 88, 67-75.
Holtz-Eakin, D., & Lovely, M. E. (2017). Scale economies, returns to variety, and the
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