Considering Refinery Giveaways
Refineries focus on maximizing per-barrel profit margins by changing crude slates and unit operations to maximize the market value of finished products. However, emphasizing these major strategic priorities understates the impact of unit operations and margin incentives as well as potential areas of quality giveaway.
Quality giveaway can be defined as any time a refinery produces a product of higher value than what is specified (i.e. what the market is willing to pay). The variance between actual product results and specified product results represents giveaway. This giveaway causes margin erosion on gasoline, distillate, and heavy oil sales. These giveaways are translated onto the refinery’s income statement through various forms of opportunity costs.
For gasoline blending, typical considerations for operational metrics are octane giveaway and volatility giveaway (which includes T50, Reid Vapour Pressure, and Vapour/Liquid ratio considerations). It’s important to note that an octane giveaway reduction doesn’t necessarily translate into a direct profit/loss impact. Rather, it is expressed through a higher octane pool that allows a refinery to blend more premium gasoline or sell more high-octane component inventory. Additionally, volatility giveaway reflects a consideration for the opportunity cost of not using butane as a blending component. Since butane is a low cost gasoline blending component, it is typically advantageous to use as much of it as possible to decrease a refinery’s cost per blend.
Distillate blending focuses on specifications such as sulfur, flash, pour, or cloud point giveaways, all of which impact the actual severity of diesel-producing units (the main one being a refinery’s diesel hydrotreaters). Reducing the giveaways allows refineries to either increase the severity, which increases capability of processing lower quality feedstock (such as light cycle oil), or increasing the unit runlength to pair with upstream units. Overall, there are several benefits associated with focusing specifically on sulfur giveaway:
- Runlength or severity increase
- Reduced catalyst deactivation
- Reduction in hydrogen and hydraulic pressure
- Lower fuel gas consumption, which lowers energy expenses
Heavy oils are the bottom-of-the-barrel products and are typically traded based off of a sulfur marker or viscosity (keep in mind that viscosity is a logarithmic formula and experiences diminishing returns with blending). Refineries can evaluate themselves via API gravity, viscosity, or sulfur giveaways as these are typically their key specifications. However, if your refinery is not held to a specification, there is an opportunity to evaluate yourself on a per-barrel margin. Although LCO, ICO, and diesel have gasoline and diesel opportunity costs associated with them and may not be the typical refinery cutterstock, they may increase a refinery’s per-barrel margin based on gasoline, diesel, and heavy oil market values. Additionally, it is also important to consider that each cutterstock has different compression benefits on viscosity, which is the key specification in some markets.
Based on my humble experience, refineries typically focus on octane giveaway and ignore the other dimensions of giveaway. Although octane giveaway is an important metric, quality giveaway may occur across all products and have a considerable impact on refinery margins. Based on our previous experience, a typical 150,000 bpd refinery may experience +$30 million in giveaway for gasoline, distillate, and heavy oils.
By: Peter Hryniak
Why Your Middle Management is so Desperate for Training
Have you noticed the many articles about “what makes good management” published on LinkedIn every day? Did you ever wonder why so many people thought it was relevant to share third-party tips about good managerial practices with their network? I have wondered about this multiple times, which leads to my next question: how many managers do you know have received formal management training when inducted into their role? My guess: not many.
Individuals are most frequently selected for managerial positions based on their experience and knowledge base. However, does their knowledge base make them good managers? Sorry, this one was rhetorical: the answer is no. Now, I do not doubt that most of these freshly-appointed managers do in fact have both the skills and experience to be great; however, you will find that most of them are missing some much-needed insight into where their value-addition truly lies: driving performance improvement.
Because they do not have full visibility over the end-to-end process, many managers miss out on opportunities to ease some of their team’s frustrations and cut overall inefficiencies. Simply put, if you do not truly know what your initial supply is and what your output is destined for, you are potentially missing out on chances to best allocate your resources to optimize your input-to-output ratio. Additionally, management frequently lacks efficient tools and meaningful indicators to track variations in performance, help identify root cause for these variations, and drive action to alleviate the main barriers. These in turn hinder continuous improvement and individual growth as gaps in skillsets cannot be identified and addressed in a timely manner. Finally, managers often demonstrate misconceptions regarding “in-scope” behaviours. It is, for instance, very common for a manager to perceive fire-fighting or customer issue resolution as “active” management when these are really “reactive” management activities that could be mitigated through stronger proactive barriers identification and removal, or performance review.
Because we understand that a high-performing middle management is a must-have for any successful operational efficiency project and for a sustainable and continuous-improvement mindset, we work to provide the necessary processes, system tools, and management training to assess and help develop our client’s managerial force throughout our program.
By: Adeline Bibet
Crude Inventory Classifications
Capital can take many forms in a refinery. One type of capital outlay sometimes overlooked in a casual consideration is the total stock of hydrocarbons stored in tanks, unit fills, line fills, rolling stock (rail storage), and so on. Larger sized refineries can have anywhere from five to ten million or more barrels on hand at any time. Larger complex facilities with larger tank farms can store upwards to $1 billion of hydrocarbon product. This multi-part series explores the roles crude inventory plays operationally, financially, and strategically in the business of a refinery.
Given any tank that feeds a unit, there are certain characteristics. Even though there is only one material in the tank, schedulers, traders, and operators will know that there are actually different categories of that material. For instance, at the bottom, there is a “bare minimum” amount that cannot be drawn out of the tank for use. This is usually due to the physical location of the suction pipe or trough. That amount of material is called unusable. Using a little imagination, consider this unusable layer at the bottom of the tank (it actually is down there). Continuing with our imagination, consider a layer on top of that called “safety stock.” This material must always be on hand as it is required to safely shut down a unit or put a unit in recycle mode. This amount could vary, depending on the specific unit, and other dependent downstream units. Imagine a third layer on top of the unusable and safety stock – called “working stock.” This is the amount of crude that is available for feed to the crude unit. Do not assume this third layer fills the rest of the tank. After all, crude is not free, and given a lot of parameters, there is probably a correct level of working stock that meets all criteria, and limits the capital outlay to that point, and not beyond. This is usually expressed in “days inventory on-hand.” This is often a metric to quickly ascertain risk when considering the possibility of running out of crude. So maybe we are spending too much to avoid something bad that might happen. This will be discussed in a later part of this series.
Continuing, we have now identified three layers of inventory: unusable, safety stock, and working stock. There is a fourth and final layer – called “economic stock.” Economic stock is inventory in excess of the previous three mentioned which is purchased due to the suggested financial benefit of adding stock beyond what is needed. Some examples include distressed cargos or trades from neighboring facilities to adjust for upsets and unexpected inventory levels. Also, sometimes market conditions (such as a contango market) warrant purchasing economic stock.
With this basic understanding of inventory classifications, we will continue in the next part of this series to consider scheduling and the impact of scheduling on crude inventories.
By: Gil Moore
Keeping your Social Media Profiles Employer-Friendly
Are employers checking your social media profiles? Yes! It is said that 93% of recruiters check a candidate’s social media profile as part of their screening process, and don’t think your current employer isn’t watching too. With social media becoming engrained into our daily lives, it is easy to get caught up in the fun of it. From the growing selfie stick phenomenon to people tagging you in unprofessional pictures, it can be a bit of a chore keeping your profiles employer-friendly. It is, of course, your prerogative to post what you wish online. However, the fact remains that your employer or potential employer is likely checking your profile(s). So what are some guidelines to ensure your social media presence is employer-friendly?
- When changing your profile picture, assume that potential employer’s will be checking this. If you are questioning whether your picture is pushing the limits of professionalism or not, odds are you should put something else up. When it comes to LinkedIn in particular, your profile picture should mimic a corporate headshot and, depending on your industry, be taken in business professional wear. It is surprising how many selfies make their way onto professional platforms such as LinkedIn.
- Make it a habit to revisit your privacy settings. Social media platforms are constantly changing their privacy settings and are often making it easier for outsiders to get a preview of your personal life.
- Everyone is entitled to their opinion; however, it is a best practice not to post anything you wouldn’t want your employer or potential employer to read. Do not mention anything negative about your employer or the clients you are working with. Also refrain from commenting on topics that could make you appear to be a risky hire. These topics can range from discussing excessive drinking to posting offensive jokes. While not commenting on these topics may come across as common sense, this mistake is surprisingly common.
- Do a Google search of your name and see what others can see. You may be surprised to find out what photos of you are floating around.
- It is a good idea to engage in industry related discussions and sharing information that your career network will value. You may even want to dedicate one of your social media profiles strictly for industry related content. This will allow you to build your own personal brand and recruitment teams loves this!
- Always double check anything you post for grammar and spelling errors. If you make an error, odds are recruitment teams will notice.
- Not only are recruitment teams checking your profile, your current employer may be doing the same. Be careful not to post personal content during work hours or even when calling in sick.
Overall, a little bit of common sense coupled with awareness of common social media blunders should keep you safe. Remember, it is all about building your personal brand and this now applies to online as well as offline. By: Jen Narayan
Growth through Mentorship
There is an old Latin proverb that states, “By learning you will teach; by teaching you will learn”. This proverb quite succinctly captures the value of teaching, but with the ever-expanding workweek, is it really worth taking the time to pass on knowledge one-to-one? Both from an organizational and personal development perspective, the answer is yes.
Tactically, a great way to continue to teach as a professional is through mentorship within your organization. The benefits of having access to a mentor are well established, and young professionals gravitate towards organizations with established mentorship programs; however, there are more personal reasons for becoming a mentor. One of the greatest benefits of mentoring is that by teaching your mentee, you will actually force yourself to better learn your craft. Another advantage to mentorship is that it provides a chance for you to learn to navigate your organization. As you help your mentee to grow within the organization, you will undoubtedly need to reach out to colleagues and will have the opportunity to make new connections and expand your own network. A third benefit that mentorship provides is an opportunity for reflection. By working with a mentee you are able to see your career and accomplishments through a new looking glass. Mentoring can give you a fresh perspective on all the incremental improvements you have made throughout your career. With all the benefits associated with mentoring, it’s hard to see why there aren’t more seasoned professionals looking for a new mentee!
By: Skye Lee
Achieving Sustainable Engagement Results
One of the key focuses of all our engagements is creating sustainability of implemented changes and achieved operational improvements. In a typical engagement, the last third of the engagement’s overall schedule is dedicated to designing and installing tools and behavioral expectations to facilitate sustainable results within the client organization, even after the engagement has concluded.
We need to clearly understand what “sustainable results” mean, and the pitfalls on the road to achieving sustainable engagement results. Particularly, we must distinguish between “sustainable actions” and “sustainable behavior”. It is relatively easy to achieve sustainable actions, i.e. regular usage by the client personnel of various tools, reports, meetings, and dashboards that have been developed in the course of the engagement. This will definitely provide better visibility into operational results, or areas that require attention by management, etc. However, sustainable actions alone will not reap full benefits of all the changes that were implemented in the engagement if corresponding changes in behavior are not motivated and nurtured. Sustainable behavior, on the other hand, penetrates the client organization with a continuous improvement mindset and motivates proactive search for further improvements in the organization.
Therefore, we must start thinking “sustainable behavior” from the first week of the engagement in order to ensure that the engagement results are not lost in time, and that the client receives maximum return on investment from the engagement.
In the end, this is what the client expects from us, isn’t it?
By: Anas Dabbakh
Crude Prices Increasing the Focus on Hydrocarbon Loss Control
With declining crude prices putting pressure on refineries, we are seeing a larger-than-average number of refineries choosing to shut down operations, especially those with slimmer margins. What is interesting; however, is that crude demand is remaining relatively constant, and the remaining refineries are showing a consistent volume of crude throughput.
These refineries are not; however, exempt from the pressure of the lower crude prices, and are seeing a decline in their margins as a result. While both their revenues and variable costs are declining together, a stable fixed cost is causing many refineries to look at areas for improvement that had been previously ignored.
When determining areas to help their overall profitability, refineries can look to either their revenues or costs. With revenues heavily influenced by market conditions, costs are now the focus of potential margin improvements, specifically the per barrel variable costs.
In the past, the opportunity to reduce variable costs on a per-barrel scale was relatively small. However, as the price of raw inputs and finished products declines, that percentage of recoverable variable cost becomes larger in relation to the costs of a refinery as a whole. While the overall dollar amount might remain lower than previously available, hydrocarbon loss recovery, on a percentage basis, is becoming more and more appealing the further crude prices drop.
Refineries who are worried about their margins being pressured by declining crude prices should now, more than ever, be considering improvements to their hydrocarbon loss recovery initiatives.
By: Karl Van Dam
Potential Growth through Stronger Sales Teams
POP QUIZ. How much time does your sales force spend actively selling?
- 5%
- 17%
- 19%
- 29%
It may be surprising, but many sales teams only spend 5% of their time actively selling to their company’s current and prospective clients. The room for both productivity improvement and performance improvement is huge and can be reconciled against specific lines in your income statement.
We have found that substantial amounts of a sales teams’ time is spent on administration, relationship building, and necessary travel – these areas are represented by the other percentages listed above. That leaves the final 30% of their time for different opportunities. Is your sales team achieving optimal quantity, qualification, and quality of sales visits to customers? Or, are they bogged down with systems, tools, and processes that could use some fine tuning?
Imagine if you could increase the number of calls that each individual representative is making by only 2 per week. How could that affect your bottom line figures? Here at Trindent Consulting, we are experts in the field of sales force productivity. If your teams are not positioned to achieve your corporate goals, or if they are simply falling short on execution, give us a call. We can change the numbers.
By: Sally Ryberg
Cross-Cultural Relationship Building
As globalization continues to eradicate boundaries between businesses, competition accrues and the need to differentiate service offerings becomes increasingly important. The potential success of business partnerships are no longer simply evaluated by the quantitative value associated to the offering, but by the relationship built around the offered service. That being said, understanding the stages of relationship building are vital and must be kept top of mind from the first meeting onwards. For business travelers, there has never been a more important time to truly understand the culture and norms of our clients around the world.
That introductory handshake is the first physical interaction with the client, or potential client, and is certainly one of the key moments in a new relationship. Forbes magazine author Carol Kinsey Groman discusses that the first seven seconds when meeting someone are ultimately the most important, as the brain computes thousands of decisions at lightning speed to interoperate the person in question. Therefore, as the business world enters new global markets, understanding the key differences in various cultures is integral to ensuring that those crucial seven seconds contribute to the foundation of a long and prosperous business relationship.
In North America, we’re accustomed to simply looking each other in the eyes and exchanging a firm, but not too firm, handshake over simple small talk to the likes of “how are you?” and “nice to meet you”. However, bring that same custom to another continent and you may not be as well received. For example, in most West African countries, when meeting someone for the first time, it’s common practise to shake hands while going in for a pat on the back. As you step back, hands still interlocked, you hold your fingers and allow them to snap off each other. According to locals, this form of greeting shows comfort and instills comradery from the first meeting. Instead of discussing small talk, it’s completely acceptable and even expected to immediately inquire about family and health, where this might be seen as a more private conversation to us in the US and Canada.
In Asia, the norm is quite contrasted as greetings are much more formal. Presenting your business card with a bow is a standard way to show respect for the recipient. Where we might be used to simply passing over a business card between two fingers, it is important to present the “name card”, as it is commonly referred to in Asia, with two hands - name facing the recipient and easy to read.
In the Middle East, when shaking hands, you’ll find your hands locked for minutes until your initial introductions and some small talk have ended. Assuming you hit it off the first time around, it is not uncommon to hold each other’s shoulders while kissing each cheek side to side on the next meeting.
An increasing number of firms are beginning to emphasize the importance of their employees learning their clients’ culture before stepping into a meeting, sales pitch, etc. They are taking time, training sessions, culture calls, to build a strategic combination of understanding their clients’ needs as well as their cultural norms to further develop their business relationship. World markets have incredible opportunity and understanding the client’s business is certainly essential to forming a partnership. However, it’s the relationships that are developed and fostered that will allow cross cultural businesses to work together for years to come.
By: Jordan de Lima
Squeezing out Waste in the US Medical Devices Industry
Medical devices companies are in for a gut-wrenching transition over the next five years. While many companies have enjoyed gross margins in excess of 70% and a relatively static and complacent competitive environment over the past two decades, it seems that the industry is in for a pronounced shift.
Average selling prices (ASP) are being compressed due to hospital procurement initiatives. FDA and other industry-specific regulatory requirements have steadily increased. The market is litigious and fraught with every type of business risk imaginable.
Necessity is the mother of invention. It’s also the prime driver of step-change improvement in any business. Many devices companies are examining their position in the marketplace and realizing that the ‘true’ cost of their products as viewed from their customers’ eyes is grossly inflated by parties and process steps that add little to no value. These inefficiencies will in all likelihood be squeezed out of existence.
Remarkably the implants, instrumentation, devices, surgical expertise, and the hospital footprint required are only a fraction of the total cost of any procedure. From my own experiences in the industry over the last twelve years, there are a long list of inefficiencies that drive up the cost of a medical procedure in the US health care system. Here are five of the most pervasive wastes:
- Forecasting Waste – Many devices companies have inaccurate demand planning habits and forecasts. They manufacture more implants, components and instruments than they need to. Often under the guise of ambitious product development and marketing initiatives, sometimes new products and revisions are a bust before they even hit the market. Many firms build the cost of failures into the successful products in their portfolios. The new reality will be for devices companies to achieve an average forecast accuracy that is 98% or above.
- Supply Chain Waste – Often the device or some of the ancillary surgical components will expire or become obsolete in the supply chain. In some cases, shipments to end-user locations may be 10-12% higher than sales due to shrink. In practical terms, there are relatively few ways to drive financial accountability for losses to the surgeon or hospital system, because surgeons will dump the manufacturer in favor of another with looser terms and conditions. Companies that manage shrink, inaccurate inventory, obsolescence and expiry-based wastes down to near-zero will compete well in the new health care environment.
- Moral Hazard Waste – Hospitals and distributors like to hold massive levels of inventory on consignment basis, because they do not bear the cost of the inventory. This means that valuable devices sit idle on the shelves and result in poor overall inventory availability, and asset utilization. The manufacturer bears the cost of the device and the kitting required to perform the surgery, while there are relatively little repercussions for poor inventory utilization on the part of the consignee. Companies that seek and eliminate moral hazard will have an advantage against their peers.
- Distribution Waste – Up to 20% of the cost of a surgery is paid in the form of a commission to a sales rep or distributor who holds a close relationship with the surgeon. The market has already begun to eliminate these ‘middleman’ relationships through more stringent purchasing practices. Companies that explore direct selling relationships with lower cost of sales will be more efficient players than those that are shackled to antiquated go-to-market strategies.
- Transportation Waste – It is customary for the manufacturer to bear the cost of shipping or freight to the point of surgery. However, last-minute ordering and reactive planning on the part of the surgeon’s administrative team will often express itself in terms of overnight, next-day air freight charges which can be 10-15 times the cost of a proactive shipment made through a less expensive mode of transportation. Disciplined freight and transportation cost management will give forward-thinking manufacturers a leg-up on the competition.
Medical devices companies should take stock of the changes that are likely to occur in the industry. In much the same circumstance that Blockbuster perished when Netflix turned the home movie industry on its head, medical devices companies need to reassess their processes, systems and behaviors for the potentially devastating shift that is already underway.
By: Adrian Travis