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