Coastal Logistics., Inc. -Establishing Third Party Logistics ServicesByE.Powell Robinson, Jr.Associate ProfessorandAnthony D. RossAssistant Professorof:TexasA&MUniversityLOGISTICSCASESTUDYDEVELOPEDFOR:COUNCILOFLOGISTICS MANAGEMENT
COASTALLOGISTICS INC.,-ESTABLISHING THIRDPARTY LOGISTICSSERVICESABSTRACTThis case places the reader in the middle of startup operations at Coastal Logistics Inc.(CLI), a provider of logistics services to offshore petroleum platform operators in the Gulf ofMexico. Where traditionally, each petroleum company provides logistics services in-house, CLIproposes to establish itself as a third party logistics services provider.CLI claims that byconsolidating logistics operations for multiple petroleum firms, it can lower logistics costs through‘resource sharing'.The case challenges the reader to evaluate the economic feasibility of theresource sharing concept, determine whether CLI should proceed with plans to establish itself as amajor logistics service provider in the Gulf of Mexico, and to establish an implementation plan,should CLI decide to pursue this new venture.2
PROBLEMDEFINITIONJoe Ross, director of business development for Coastal Logistics Inc. (CLI), looked up fromthe cargo manifest when he heard Miss Ellie sound off, announcing her departure for the EugeneIsland Area of the Gulf of Mexico. Several members of Affiliated Oil Company's (AOC) logisticsstaff had just left Joe's temporary office at the Morgan City shore base. For most of the aftemoon,and well into the night, they had explored a proposal that would, with AOC's help, establish CLI asa third party provider of marine logistics services in the Gulf. The proposal represented a radicaldeparture from AOC's current logistics strategy of servicing its own platforms. Not only did theproposal call for the transfer of AOC's logistics assets to CLI, but it would create a new philosophyfor logistics operations. Joe knew that by the time Miss Ellie returned from her three-day deliveryroute, he would have either clenched the deal, and be celebrating with a large bowl of gumbo at thCrawfish Cavern, or be on his way back to corporate offices in Cleveland.Joe returned his attention to Miss Ellie's cargo manifest.On this route, she utilized 55% ofher outbound deck space and 30 % of her bulk cargo capacity. These load factors were typical ofsupply boats operating in the Gulf of Mexico, and played a key role in CLI's proposal to establishitself as a third party supplier of logistics services in the region. Joe poured himself another cup ofcoffee and settled in among the stacks of manifests, maps, boat routes, and other operational dataIt was going to be a long night, but by tomorrow afternoon's meeting he had to clearly demonstratethe economic benefits of asset sharing and come up with an implementation plan for establishingCLI as a logistics service provider, Joe knew that, although they all agreed in principle, this wouldbe his best chance to convince AOC's logistic team that the numbers were right and that it could bepulledoff.Hecouldn'taffordtoblow it.M
COMPANY OVERVIEWCOMPANY OVERVIEWCOMPANY OVERVIEWCOMPANYOVERVIEWThe offshore oil industry is composed of several major oil companies, such as AOC, and amultitude of smaller, independent operators. Once an oil field is targeted for development, the oilcompany identifies exploration driling sites, ofen 20-100 nautical miles from shore, and constructsdrilling platforms. If exploration activities are successful, the platform is converted into aproduction platform to extract crude oil and natural gas. Otherwise, the platform is moved toanothersitetocontinueexplorationLike its competitors, AOC traditionally focused on exploration and production activities,paying little attention to operating costs. However, flat oil prices since the 1986 crash and rapidcost increases since 1990 pushed the need to control operating costs to the forefront.Logisticscosts account for approximately 16 percent of total operating costs,making this a significant areafor generating cost savings. In 1996 AOC spent $1.0 million for shore base operations and S12milion for boat operations at its Morgan City shore base alone. In addition, a slight upwardfluctuation in oil prices had sparked exploration and production activity, increasing demand for thealready scarce marine logistics assets. Boat lease costs had risen two to three hundred percent from1993to1996In the early 1990's, Aberdeen Service Co. Ltd., established third-party contract logisticsservices (CLS) for petroleum platform operators in the North Sea and demonstrated its potentialeconomic benefit to the industry. CLS transfers responsibility for the provision of logistics supportfrom the oil company to a logistics specialist. This permits the oil company to focus managementenergy and capital investment on core exploration and production business activities.Thecontractor manages the logistics resources, which are shared across its customer base, with a focus4
on reducing the total logistics costs of each participating oil company. CLS applications byAberdeen Service Co. Ltd., yielded logistics cost reductions of approximately 30 percent equatingto a 12 percent increase in profit margins for the participating oil firms. These benefits werederived from the release of working capital, economies of scale, better resource utilization andimproved management position. While some of these benefits could be derived individually byany oil company, the balance of savings could not have been achieved without the drive to attainsynergy and economies of scale with other oil companies.Given the constraints on competition,and anti-trust law which hampers resource sharing agreements among major oil companies, relyingon a third party to provide logistics services is one way to unlock these potential benefits.In early 1996, Coastal Logistics Inc., was formed as a joint venture to explore opportunitiesfor establishing logistics services to support offshore petroleum exploration and productionoperations in the Gulf of Mexico. Both of CLI's parents had established records in the offshorepetroleum industry, and viewed the Gulf of Mexico as a fertile area for applying the 'resourcesharing' concept that was successfully implemented in the North Sea. CLI's long term vision wasto become the ‘UPS of the Gulf. In order to attain this objective, CLI would attempt to establishshore base operations in all of the major ports in the Gulf of Mexico.CLI started operations with a bare bones management staff consisting of a president,logistics and information systems director, systems analyst, and marketing director. Otherpersonnel would be added as needed. The firmn would draw upon its parents for softwaredevelopment and technical support during its startup years. The parent companies established aboard of directors consisting of representatives of each parent fim to monitor CLI's progress.Theboard expected CLI to show a profit within three years. CLI immediately began promoting the‘Shared Resources'concept at industry trade shows and contacted platfom operators. At the same5
time, they began the development of a geographic information system (GIS) based softwareprogram titled "Integrated Logistics Management System" (ILMS) for managing shore bases andmarine vessels. ILMS would be a critical component for integrating both the information andphysical flows associated with establishing coordinated logistic services.AOC expressed early interest in the shared resource concept and met with CLI'smanagement several times to explore its potential benefits and how it might be implemented.Where traditionally each oil company provided its own logistics services at low capacity utilization,CLI proposed that AOC turn over its shore bases and marine assets to CLI. In tum, CLI would usethese assets to provide logistics services for AOC and other platform operators in the region. Thiswould expand the customer base using the assets and lower the logistics costs. CLI and theplatform operators would share the logistics savings associated with the increased efficiencies. Inaddition, the oil companies would be relieved from managing their own logistics activities,permitting them to focus on their core competencies in exploration and production.The proposalfollowed the general concepts implemented by Aberdeen Service Company Ltd. in the North Sea.By mid 1996, AOC and CLI formed a research team to validate the economic feasibility ofthe resource sharing concepts. At their first meeting, the team decided to study the shore baseoperations in Morgan City, Louisiana as a test case. In addition to AOC, several other major andindependent platform operators maintained shore bases there and had expressed an interest in theproject. In particular, two independent operators, Petroleum Resources (PR) and Gulf EnergyInc.(GEI), had previously contacted CLI about the need to lower their logistics costs andencouraged CLI to establish third party operations in their production areas: Both firms pledged toparticipate in the task force's feasibility study.6
BUSINESS SITUATION: LOGISTICS ACTIVITIES IN MORGAN CITYFigure 1 shows the geographic area served by the Morgan City shore bases and the mannedproduction platforms operated by AOC, PR and GEI. The platforms represent less than fivepercent of the total number of production platforms in the region. Each oil platform is identifiedwith a geographic area prefix and a sequence number. In addition to production platforms, eachfirm operates several drilling platforms that are not identified in Figure 1.Production platforms are either manned or unmanned. Manned platforms are staffed by acrew size ranging from 2 to 10 workers.The platform crew provides all the activities necessary toextract oil and gas from the ground and route it to onshore facilities for processing.These activitiesinclude controlling the production processes and maintaining capital intensive productionequipment. Unmanned platforms are serviced from the nearest manned platform.Platfom crewswork a variety of shift schedules. A typical work shift is 7 days on and 7 days off working 12 hoursper day. Crew changes are performed by helicopter or boat shuttle to and from the shore base.Production platforms generate demand for a variety of products. These include potablewater, fuel, lubricants, equipment, spare parts, and groceries, among others.Due to the limitedstorage space on the platform, weekly replenishments of many items are necessary. In addition,emergency shipments of spare parts are sometimes required. All production byproducts (e.g., usedparts, trash and broken tools) are transported back to the shore base for disposal. Table 1 providesthe boat cargo capacities needed to support the average weekly requirements of AOC's, PR's andGEI's production platforms. The data indicates the square feet of outbound boat deck spacerequired for platform delivery, inbound deck space required for returning byproducts to the shorebase, and the outbound bulk capacities required for the delivery of potable water and diesel fuel tothe platforms. In the table, outbound refers to shipments originating at the shore base, and inbound7
refers to shipments originating at the platfoms.Delivery requirements vary among platformsdepending on the number ofunmanned plaoms supported, the crew size, equipment age, whetheror not the platform is equipped with a water maker, and whether the platform is fueled by naturalgas extracted during production or diesel fuel that must be delivered from shore.The manned platform supervisor schedules and coordinates all production and maintenanceactivities for his platform group. He identifies demand requirements, places replenishment orderswith onshore vendors, and schedules product deliveries with the onshore boat dispatcher.Onshore facilities consist of boat docks, warehouses, boat loading and unloadingequipment, and administrative offices. Shore base staff includes a supervisor, logistics coordinator,2-3 dispatchers, several yard workers, and secretarial staff. The shore base dispatcher is theprimary interface with the platforms. He receives land-based shipments destined for the platforms,stages them by destination platfom in the shore base warehouse, and coordinates their shipment tothe platform. AOC provides complete onshore logistics activities for their platforms.However,intermediate sized firms typically just maintain a shore base office and lease dock space,warehousing, and loading/unloading services from larger operators. The smaller operators oftenbuydock services as needed.Two main categories ofboats, crew boats and supply boats, provide logistics services to theplatforms. Both boat types are equipped to handle a variety of cargo characteristics. Boats containbulk storage tanks for hauling potable water, fuel, and drlling mud; open deck space fortransporting drlling pipe, large equipment and tools; and enclosed cargo bins for shippinggroceries, small parts and tools. Crew boats are smaller than supply boats with an average deckspace of 1,450 square feet of cargo space. However, they are faster and bun less fuel per unitdistance traveled. Crew boats are primarily used to support production platforms and run regularly8
scheduled routes. Each route typically serves from 1 to 6 platforms depending upon the volumedemanded by each platform, their distance from the shore base, and the capacity of the deliveryvessel. Emergency deliveries to platforms occur as needed. Supply boats average 3,300 square feetof cargo deck space. Due to their large capacity and relatively slow speed, they are primarily usedto support drilling platforms. It takes approximately two dedicated supply boats and 1.25 crewboats to support a drlling platformEach platform is equipped with cranes for loading/unloading cargo. The boats have pumpsfor unloading liquid bulk products. Boats are capable of loading and unloading cargo 24 hours aday depending upon the crew's familiarity with the platform, weather conditions, and platformdocking facilities.When possible, deliveries are scheduled to occur during daylight hours. Boatcrews consist of a captain, first mate, and deck hands. Typical crew size is four to six men. Boatcrews operate a variety of work shifts with routes lasting up to two weeks in duration.Typicalroutes last one to three days. Most oil companies acquire boats through long-term leases, whichinclude boat maintenance and crew costs. However, for emergencies and one-time needs, boats canbe leased by the day at the 'spot' rate. The spot rate is a function of boat availability and demand.The spot rate is typically twice the long-term lease daily rate. Due to a decline in ship buildingactivity in the late 1980s and early 1990s boat supply in the late 1990s is tight. Current lead timesto obtain a long-term boat lease average 24 months. Table 2 provides typical operatingcharacteristics and lease rates for the 135 foot crew boats and 180 foot supply boats operating out ofMorgan City shorebases.A delivery route begins at the shore base when the boat is loaded. Bulk cargo such aspotable water, fuel, and drlling mud are pumped into the boat's storage tanks at dedicated loadingfacilities. These bulk liquid items are stored in large compartmentalized tanks in the vessel's hul.6
Other materials such as pipe, drlling bits, and production equipment are loaded onto the boat'sdeck at the shore base with cranes. Upon release by the dispatcher, the boat travels down the riverto the inter-coastal sea buoy where it begins its delivery route. The sea buoy is approximatelyforty-two miles and 2.5 hours transit time from the Morgan City Pass shore base. The deliveryroute follows a specified sequence of platform deliveries. After making its last delivery, the boatreturns to the sea buoy, and then goes back up river to the shore base, where it unloads the materialreturnedfromtheplatforms.ANALYSIS:THEBENCHMARKSTUDYThe first task of the research team was to document the current logistics procedures andcosts of AOC, PR and GEI to provide a benchmark for comparison.The research team directed itsefforts on the delivery system for the production platforms. The team identified two major costcategories: delivery route costs and shore base operating costs. It then devised a strategy to collectthe relevant data from the firms. In order to gather boat costs and operating data, each boat captainfilled in a daily Boat Log that documented the boat's activities over a 24-hour period. The boatlogs were kept over a two-month period.The boat logs captured data on boat loading andunloading times, running time, standby time at platforms and shore bases, down time for repairs,and inclement weather standby times. Additionally, the logs tracked all diesel fuel and lubricantusage. This enabled fuel consumption while running, and consumption while on standby to becalculated. Using the boat logs, average utilization rates for the delivery boats were computed.The summarized data is presented in Table 3.10