Supply management in Shell: Research on the retail gasoline products

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List of contents

Supply management in Shell 2
1. Introduction 2
2. Product life cycle of retail gasoline products 2
3. Strategic fit of the supply chain 3
3.1 Implied demand uncertainty – low 3
3.1.1 Narrow variety of needed gasoline products 4
3.1.2 Low desired speed of innovation 4
3.1.3 High volume and low margin 4
3.2 Supply chain efficiency and responsiveness – efficient 5
3.2.1 Standardization in tools and facilities 5
3.2.2 Inventory control 5
3.2.3 Transportation 5
3.3 Strategic fit of Shell’s supply chain 6


Supply management in Shell
Research on the retail gasoline products

1. Introduction

Shell is a multinational group of energy and petrochemicals companies hiring more than nine thousands with its business covering over 90 countries or regions (Shell.com 2011). While the group is dealing with a lot of business and products such as natural gas and a range of refined products in the downstream, this study will choose the B2C (business to customer) retail gasoline as the product to be probed into with the help of the tool of strategic fit between the implied demand uncertainty and the supply chain efficiency and responsiveness and this strategic fit is subject to the impacts of the product line cycle of the retail gasoline products.

2. Product life cycle of retail gasoline products

Figure 1.0 A five staged product life cycle
Source: Marketingteacher.com 2011
The product life cycle is the collection of the activities that will take place to the product regardless of which decisions-makers are involved (Emblemsvåg 2003, p.19). A usual product life cycle will include five stages: introduction, growth, maturity, decline and mortality. Though the mortality stage is of no use to the business activities, its existence does complete the product life cycle (Papantoniou 1992, p.145).

According to William M. Pride and O. C. Ferrell (2006, p.295), any product begin with an introduction stage as it begin to show in the market and this stage is featured with low or even negative profit making and a need of large continual investments in R&D (research and development) activities and marketing activities; and in the second stage, the growth, the product sale and profit will both grow largely with increasing market acceptance of the products; and next stage, the maturity stage, the industrial sale and profits will peak and then start to fall, the key features of this stage include experienced customers, company’s actions to generate cash flow and maintaining market share; when the both the profit and sale declines in a rapid speed the product enters the decline stage.

Regarding the retail gasoline products offered by Shell, they are actually in a maturity stage of their product life cycle. First of all, gasoline products are widely accepted and consumed in a world wide scale and customers know them very well; secondly, gasoline products are less innovative than other products such as computer and mobile phone; thirdly, key players in the industry control the market and their major concern is to expand the market share.

3. Strategic fit of the supply chain

3.1 Implied demand uncertainty – low

Implied demand uncertainty as a term refers to the uncertainty that exists due to the portion of demand that the supply chain is required to meet (McDonald, D’Ouville & Liu 1999). Considering the maturity of the gasoline products, there are several factors contributing to the low implied demand uncertainty: narrow variety of needed product, low desired speed of innovation and high volume and low margin.

3.1.1 Narrow variety of needed gasoline products

The gasoline products are quite standard and divided by the octane rating which measures that compression rate of the fuel, and the most frequent used gasoline products are 90 to 97 octane fuel (Hammill 2005, p.21). And because of the standardization of the gasoline products, there is narrow variety of needed product lines. As for Shell, for example in Malaysia, it offers Shell “FuelSave ” which is 95 octane fuel and Shell “V-Power 97”.

3.1.2 Low desired speed of innovation

And because of the fact that gasoline products are functional products that satisfy the basic needs of the customers (Bidgoli 2010, p.105), and because of this nature of the gasoline products it is understandable that there is low desired speed of innovation because the customer needs are well satisfied by the current products. But still the innovation of the products such as the innovation in the formula is welcome by the customers.

3.1.3 High volume and low margin

Fierce competition in the gasoline retail industry like many other similar industries of maturity products has driven down the profit margin while the sale volume is still high. As admitted by Shell, the company’s majority of profit comes from the manufacturing of oil rather than the sale of the gasoline (Shell.com 2011). And the high volume and low margin is also in accordance with the features of a product in the maturity stage of the product life cycle.

3.2 Supply chain efficiency and responsiveness – efficient

Fisher (1997) proposed two distinctive methods toward supply chain design, efficient supply chain and responsive supply chain. The efficient supply chain is designed to manage the good flow to minimize the stocks and achieve highest efficiency of the supply chain while the responsive supply chain is designed in such a way that it will focus on the fast response to the customer needs with volume flexibility. Like many other functional products, Shell has adopted efficient supply chain rather than high responsive supply chain.

3.2.1 Standardization in tools and facilities

With the use of the extensive Materials and Equipment Standards and Code (MESC) catalog, Shell managed to simplify the production procedures and processes by standardizing the production and engineering jobs. And the standardization work also clarifies many confusing issues with the suppliers to smooth the supply chain (Bostonstrategy.com 2010). Besides this the standardization efforts also continue to date by collecting reflections from the suppliers, production partners and customers.

3.2.2 Inventory control

Due to the high sale volume and low selling profits, Shell has invested largely in its inventory control system to make sure that the inventory is sufficient enough to keep the customer demand while at the same time keeps a low inventory volume which is important in an efficient supply chain.

3.2.3 Transportation

There was once a key storage process issue in Shell which increased the lead time it takes for the gasoline products to reach the end users. To solve this problem Shell employ Bertschi to develop a new method to the problem by loading the finished good from the tanks into the tank container 24 hours a day and 7 days a week, and also sites of production were relocated to a better logistically convenient places to smooth the transportation routes (Cetinkaya, Cuthbertson, Ewer, Klaas-Wissing, Piotrowicz & Tyssenp 2011, p203).

3.3 Strategic fit of Shell’s supply chain

Figure 2.0 Cross Zone of Strategic Fit
Source: Coolavenues.com 2011

With the above discusses and analysis, we can see that the Shell’s supply chain strategically fit into the cross zone of strategic fit model as it adopts a low implied demand uncertainty and efficient supply chain mix. Impacted by the gasoline products’ nature of being in the maturity stage of the Product Life Cycle (PLC) and the company’s competitive strategy, it is understandable that the company will source its competitiveness on keeping an efficient supply chain through techniques such as standardization as the demand is rather certain in the market.

Reference

Bidgoli, H. 2010, The handbook of technology management: supply chain management, marketing and advertising and global management. New York: John Wiley & Sons Inc. p. 105

Bostonstrategy.com 2010. 2010 Oil and Gas Supply Chain Award Winners. [online] viewed on: http://www.bostonstrategy.com/aboutus/news.html

Cetinkaya, B., Cuthbertson, R., Ewer, G., Klaas-Wissing, T., Piotrowicz, W. & Tyssenp, C. 2011, Sustainable Supply Chain Management: Practical Ideas for Moving Towards Best Practice. Germany: Springer, p203

Coolavenues.com 2011. Supply Chain Issues in Disaster Management. [online] viewed on: http://www.coolavenues.com/know/ops/madhuker-varun-supply-4.php

Emblemsvåg, J. 2003, Life cycle costing: using activity based costing and mote carlo methods to manage future costs and risks. New Jersey: John Wiley & Sons, Inc. p. 19

Fisher, M. L. 1997. What is the right supply chain for your product? Harvard Business Review (March – April 1997), p. 105 – 116

Hammill, D. 2005, How to power tune jaguar XK, 3.4, 3.8 & 4.2 litre engines. United States: Des Hammill and Veloce Publishing, p. 21

Marketingteacher.com 2011. The Product Life Cycle (PLC). [online] viewed on: http://marketingteacher.com/lesson-store/lesson-plc.html

McDonald, J. F., D’Ouville, E. L. & Liu, L. N. 1999. Economics of urban highway congestion and pricing. AH Dordrecht: Kluwer Academic Publishers Group.

Papantoniou, P. C. 1992, Marketing: The complete awakening. Kuala Lumpur: P. A. S. S. (Private Academic and Scientific Studies Limited) Publications. p. 145

Pride, W. M. and Ferrell, O. C. 2006, Marketing: concepts and strategies. Boston, MA: Houghton Mifflin Company. p. 295

Shell.com 2011. About Shell. [online] viewed on: http://www.shell.com/home/content/aboutshell/

Shell.com 2011 Fuel Pricing? Why does fuel cost this much, and what are we doing to help?
[online] viewed on: http://www.shell.com/home/content/products_services/on_the_road/fuels/fuels_pricin