Application of Lean Six Sigma to Improve the Fuel Supply Process

Island Petroleum Ltd Profile IPL is a small petroleum

Company operating in Jamaica .

Sells Regular , Premium Gasoline and Diesel.

At its 80 retail stations. Has 110 employees and

contractors .

Has it’s own import terminal in Montego Bay.

Imports fuels from a refinery in Trinidad.

Buys fuel occasionally from local refinery in Kingston.

Introduction: Project Outline

Lean Sigma CharterGeneral Project Information

Project Name Fuel Supply Optimization     

Project Sponsor Island Petroleum Executive Management   

Project Managers Satish Harrylall and Hassan Mohammad   

Email Address Satish.Harrylall@gmail.com & mhass003@fiu.edu

   

Phone Number 954-547-1185   

Process Impacted Inbound Supply Logistics    

Expected Start Date January 31st 2011   

Expected Completion Date

April 27th 2011   

Expected Savings Approximately $800,000 per annum     

Description of Problem, Goals, Objectives, and Deliverables

Problem or Issue

Island Petroleum Limited is concerned about the large variance in its planned Operating Income and its actual Operating Income. The actual Operating Income in 2010 is 7% below plan or $949,000. If IPL continues to operate with these variances it will not be able to meet its shareholders obligations. IPL must evaluate what is causing these variances and address the issues.

Purpose of ProjectTo address management's concern of the large budget variances and improve the profitability of the business, this project aims to measure and analyze the causes of budget variances and profit loss through the use of Lean Sigma tools.

Business Case

Island Petroleum Limited is not meeting its profit objectives in the Jamaica fuel business and the company must make changes in order to remain competitive. IPL has two sources of supply for its fuels. The first and primary source of supply is by importing fuel from a refinery in Trinidad and deliver it into its own fuel terminal located in the North West of Jamaica. The second supplier is a local refinery located in the South East and is owned and operated by the Jamaican government. Although the second supplier is located within Jamaica, the acquisition cost of fuel is greater than bringing the fuel from the supplier in Trinidad.

Goals

The goal of this project is to review the Island Petroleum Limited's supply and distribution strategy to ascertain the root cause of budget variances and profit loss. The project will utilize Lean Sigma tools to find root causes that is contributing to IPL's budget variances including loss of profits.

Expected Deliverables

Project Charter, Supply Chain Activity, Flow Chart, Income Statement Analysis, Pareto Analysis, Cause and Effect Analysis, Root Cause Analysis, Mean, Standard Deviation, Confidence Limit and Project Summary

Definition of Project Scope and Schedule

Within ScopeThis project will focus on Island Petroleum Limited's fuel business in Jamaica and utilize the DMAIC Lean Sigma methodology. However, the main focus of the project will be on the Define, Measure and Analyze phases.

Outside of Scope

The project will not focus on optimizing the Jamaican government refinery since Island Petroleum does not own or operate it. Additionally, there will not be a focus on the Procurement, Marketing and Human Resources aspect of the business. Lastly, the project will not focus on the Improvement and Control aspect of the DMAIC Lean Sigma model due to time limitations.

Tentative Schedule

Key Milestone Start Complet

eForm Project Team / Preliminary Review / Scope

02/08/11   02/08/11

Finalize Project Plan / Charter / Kick Off 02/08/11   02/08/11

Define Phase 02/16/11   02/21/11

Measurement Phase 02/21/11   03/21/11

Analysis Phase 02/28/11   04/17/11

Project Summary Report and Close Out 03/07/11   04/27/11           

Definition of Project Resources

Project Team Satish Harrylall and Hassan Mohammad

Prepared by: Satish Harrylall and Hassan Mohammad Date: January 31, 2011

Problem Statement Island Petroleum Limited is concerned about the large variance in its planned

Operating Income and its actual Operating Income. The actual Operating Income in 2010 is 7% below plan or $949,000. If IPL continues to operate with these variances it will not be able to meet its shareholders obligations. IPL must evaluate what is causing these variances and address the issues.

Project Selection – Pareto Analysis

PLANNED REPLENISHMENT CYCLE TIME ACTIVITIES

Activity Sequence Inventory Replenishment Activities

ActivitiesTime

Hours Days %

1 Order confirmation placed with refinery and ship   336 13.00 54%

3 Ship Sails to Refinery   96 3.50 15%

4 Ship Load at refinery   48 2.00 8%

5 Ship Sails to Jamaica   96 4.00 17%

6 Ship Discharge In Jamaica   36 1.50 6%

Total: 612 24.00 100%

Cause & Effect Analysis – Delay of Shipments

15

Discharging In Jamaica Sailing To Jamaica

Delay of Shipments

Placing Order To Refinery

Lack of training

Supervision

Uncertainty of sales

Ship has to divert

Ship breakdown

Pilot wait time

Tug boats wait time

Loading At Refinery

Contamination of fuel

Congestion at port

Refinery breakdown

Strikes

Congestion at portWeather delays

Resource availability

Preference given to shipper owners other customers

Bad weather

Ship doesn’t arrive in allocated time

Port clearance wait time

Lack of inventory data

StrikesSelecting the shortest and reliable route

Lack of synchronization

Unfavorable handling operation time

Longer fuel pumping & distribution time

Root Cause Analysis: 5-Why“Why do ships arrive late to load?”

Alternative Supply Evaluation

Recommendations