All Set for the Big Fight

January 26, 2002. Connaught Place, Delhi’s central business district, has

been sanitized as a precautionary measure to ensure that the Republic Day

celebrations are carried out with no untoward incident. Offices and shops are

shut on the national holiday. But the quiet holiday for most proves to be a

trying time for a batch of consultants from PricewaterhouseCoopers (PwC) and

some IS officers from Indian Oil Corporation (IOC). The reason–IOC has gone

live on SAP R/3 and the team has to be in the IS center at Barakhamba Road to

monitor the central server, which has to be manned round the clock.

With

a turnover of Rs 1,13,327 crore, Indian Oil Corporation (IOC) is more than twice

the size of India’s IT industry. It is also the only Indian company to figure

in the Fortune 500 list. This public sector monolith currently enjoys a dominant

53% stake in the ‘downstream’ sector (processes like oil extraction and

transfer in pipelines comprise the ‘upstream’ sector; while processes like

oil refining, marketing and distribution comprise the ‘downstream’ sector).

But things are about to change. With the dismantling of the administered pricing

mechanism (APM) on April 1, 2002, the assured returns that PSU majors were so

used to for all these years have come to an end. Besides this, other downstream

marketing players–Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) are

also beginning to get aggressive on the marketing front. With a worldwide fall

in demand, margins in the refining process have been severely eroded. And with

India becoming a net exporter of petroleum products post-Reliance setting up its

Jamnagar refinery in 1999, the scenario becomes grimmer.

Given that most industry analysts expect the glut in demand to continue till

2004, marketing and retailing could yield good margins for oil companies. And

the players concerned are now involved in a mad scramble to differentiate

themselves in terms of product offerings. Already, campaigns like BPCL’s petro-card

and ‘Pure for Sure’ have begun to gather steam.

Deregulation of the downstream sector would throw up several challenges, as

well as opportunities for the players concerned.

Size matters, but for how long?



Everything about Indian Oil Corporation is massive. IOC has 564 offices,

conducts an average of 1.5 million transactions a month, has 92 fuel stations,

71 LPG bottling plants, 3,500 LPG distributors, 7,252 retail outlets, 3,500

kerosene dealers, 2,600 business processes and procures over 187,000 individual

components.

IOC is currently both India’s largest oil refining and marketing company.

IOC has the biggest retail marketing network in India and the largest chunk of

the institutional client market, which includes major clients like Indian

Railways and defense. So far, APM has been a major source of support, and other

than IOC, only BPCL, HPCL and public sector IBP are allowed to market oil.

Following disinvestment by the government, IOC recently acquired IBP. IOC

currently has 7,252 retail outlets, BPCL 4,489, HPCL 4,514, and IBP 1,504.

Private sector refining firms like Reliance Petroleum (RPL) and MRPL sell their

produce through these four PSUs.

IOC has seven refineries, making up a total capacity of 38 million tonnes per

annum (mtpa) out of the country’s total refining capacity of 112 mtpa. Most of

its refineries, however, are old. Only the Mathura refinery (7.5 mtpa, set up in

1982) and the Panipat complex (6 mtpa, set up three years ago) have truly modern

infrastructure. While the older IOC refineries are relatively less complex and

can process just eight to ten types of crude oil, newer refineries like the one

in Mathura process 15-20 varieties of crude oil.

While BPCL and HPCL have fewer refineries, they depend on their marketing

abilities for margins. BPCL and HPCL also have a larger percentage of

company-owned retail outlets, compared to IOC. Post-APM, both HPCL and BPCL to

be put on the block, IOC fears that a significant number of retail outlets could

be poached upon by the competition. In this backdrop, IOC has had no option but

to tighten its belt.

Need for speed



In 1964, the marketing and refining wings of IOC were merged to form a

single entity. With each company continuing with its separate systems, IOC was

saddled with a heterogeneous mix. This resulted in the creation of disparate

islands of information. IOC GM (IT) JK Puri recalls, "Information access

and retrieval was becom

ing such a major problem that we decided to address this issue by undertaking

an information systems re-engineering process. PwC came into the picture here.

Work on a roadmap started in 1997 and it was decided that SAP’s R/3 ERP

package would be deployed.

The project was named ‘Manthan’, after the Hindu mythological tale of

Gods and demons churning oceans to draw nectar. Work on the project began in

October, 1999. Given that nine of the ten top energy companies in the world run

SAP, SAP R/3 was chosen. Besides, SAP’s IS/Oil specifically caters to the

requirements of oil companies.

Given Indian Oil’s gargantuan requirements, this SAP implementation easily

qualifies as Asia’s largest ERP project. The business areas covered with SAP

R/3 include all functions–finance, sales, materials management, maintenance,

human resources, production planning, project management systems, production

planning and quality management. A core team of 140 individuals consisting of

information systems staff (in-house) and consultants from PwC are presently

working on the Rs 350-crore implementation. The first stage of the project

involved mapping 2,600 existing business processes and took eight months to

complete. Says PwC principal consultant Ranchhodrai Yagnik, "While IOC has

a good IS department, there were many challenges involved. The Mathura and

Panipat refineries had different heterogeneous systems in place, including

different e-mail software. Converting data into different formats is the biggest

challenge in the project."

Lack of standardization in the coding structure also made inventory

determination difficult, resulting in tasks being repeated. With APM having been

dismantled from April 1, quick and easy access to information is now critical.

For instance, any change in pricing decisions would need to be immediately

conveyed in real time to all outlets before the competition can take advantage

of the same. Post implementation material processing time should come down. In

case of purchase of consumables, it is expected to come down to 21 days from the

60-day norm followed so far. About 1,87,000 individual materials procured by IOC

have also been coded. This will help standardize purchase processes and assist

in real-time knowledge of inventory positions of any material across the

company.

Despite the number of pricing variables, the implementation is expected to

improve efficiency in product distribution. Explains Yagnik, "Pricing will

be done at a central location. This should eliminate duplication in the existing

system. With the information available online in real-time, the need for this is

obviated. The refinery being the primary price location, the prices for each

destination would vary according to levies and freight. This input will be sent

to the central office, generating prices for other locations at any one place

itself."

Puri adds that the real benefits would be apparent within the next six

months. The first phase of the project is expected to be completed by September,

2002. This would involve 99 of the 564 sites going live. These would include all

regional head offices, refineries, pipelines, R&D centers and the operating

units of state and regional offices.

The R&D center in Faridabad and the IOC training institute in Gurgaon

were the first to go live in August and October, 2001, respectively. The Panipat

and Mathura refineries went live on January 1, 2002. By the end of 2002, all

seven of IOC’s refineries would have gone live. PwC is implementing Phase I of

the project, while the decision on who will implement Phase II is yet to be

taken.

To ensure that the organization always stays connected, given the need for

24x7x365 operation, a hybrid network is being constructed, consisting of VSATs,

leased lines, an ISDN connection, radio links and optic fiber. DoT has allocated

18MHz of space segment (one-fourth transponder on the Ku band) on Insat 3B to

IOC for VSAT connectivity. The centralized server would have its hub at the

Indian Institute of Petroleum (IIPM), Gurgaon and a single VSAT at common

locations. In all, 225 VSATs would be installed in two phases, covering over 400

IOC units. The communication center, which would be the central hub of the

corporate-wide network, would be located at the IIPM campus. The disaster

management site would be situated in Jaipur. Says Suryadipta Dutta of PwC,

"As the systems would always be on, a split-window option is being used for

back-up. About 1Tb to 1.5Tb of data is expected to be generated every

year." IOC decided to go in for a centralized datacenter after due

consideration on the merits of a centralized versus decentralized approach.

A journey full of challenges



But will IOC’s move necessarily translate into an advantage for the

company? With the glut in demand, profits have shifted from refining to

marketing operations. BPCL implemented SAP R/3 in 1999 and has already started

reaping benefits. HPCL has gone in for JD Edwards, while Reliance Petroleum went

in for SAP R/3. The areas where technology will really make an impact on these

downstream companies would be efficient logistics and customer relationship

management. Already, as fuel becomes branded, keeping the existing customer base

intact would be a challenge. Time to implement rollouts, streamlining supply

chains and formulating an efficient customer response might just be key

differentiators in such a scenario.

A major challenge in any implementation is tackling mindset issues. Once all

sites go live by September, 2003, it is expected that about 16,000 of the over

30,000 IOC employees will be using the system. Would being a PSU affect IOC’s

chances of a successful implementation? Anjan Majumdar, executive director, PwC,

and in charge of Project Manthan, explains: "The positive aspect in a PSU

is that once the top management is convinced and committed to an idea, it is

generally carried through the enterprise. Training such a large number of users

(more than 10,000) requires a big effort." Majumdar also talks about

hundreds of workshops being held to identify key performance indicators to map

business processes and evolve a consensus. He adds, "Besides project

management, change management is also very important. It is very important that

the expectations of people are properly met."

Data conversion was another challenge, given the number of disparate legacy

systems in place. Says Yagnik, "In many cases, adequate HR data was not

available. Also, as many sites are yet to go live, merging data from SAP and

non-SAP systems is a big challenge." There’s also realization that just

adopting ERP won’t make a significant difference, especially given that

traditional ERP packages do not encapsulate external collaborative capabilities.

Research firm Gartner mentions the emergence of ERP II with a modular framework.

Asked whether IOC would ultimately have to move to ERP II, Majumdar says,

"When the right time comes, IOC would integrate under mySAP.com and

intensify CRM and SCM processes."

IOC is also finalizing its decision on the purchase of mathematical packages

based on linear-programming to minimize the cost of production, besides

developing a laboratory management information system.

There are some areas where decisions are yet to be taken. Network security is

yet to be addressed. Who will implement Phase II is still to be decided. Any

delays in implementation would lead to cost and project over-runs. Puri counters

this: "A group of service providers would be roped in to replicate existing

solutions across the remaining sites by September, 2003." Also, oil majors

across the globe have gone in for various forms of ERP deployment–therefore,

this might turn out to be a must-have for business.

Amit Sarkar–Dataquest