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Strategies for Shortages


When her base oil supply lines were cut by Hurricane Rita in fall 2005, Tammi Walts briefly was unable to blend the factory-fill lubricant needed for just-in-time delivery to a U.S. automotive plant. To plug the gap, she picked up the phone and called for an airlift of approved fluids from her parent companys warehouse – from Japan.

The cost was staggering, but Walts, who is vice president of manufacturing at Idemitsu Lubricants America in Jeffersonville, Ind., felt lucky to have that trump card to play when all other options ran out. I cannot shut down my customers plant, she insisted. For months, the Indiana lube plant had to juggle its base oil and additive inventories, she said, which took enormous concentration and teamwork to pull off.

Greg Julian, president of Advanced Lubrication Specialties in Bensalem, Pa., faced the same supply shortages, which beset most of the United States from late 2005 through much of last year. He saw blenders helping each other by sharing inventory when needed, and base oil and additive sellers communicating daily with customers. They did a fabulous job. I really have to commend all of them, he said. They were on the phone with us every day, telling us what they might be able to supply. Were almost back to normal, but our company is still having quite a few meetings to look at supply.

Hurricane Rita shut down 42 percent of U.S. paraffinic base oil capacity for a month, and ExxonMobils giant Beaumont, Texas, plant for three months. Then in early 2006, before the supply chain was fully recharged, a series of refinery accidents sent base oil supply into another tail-spin. Most significantly, Petro-Canadas output was halved from early January to late March after a fire at its Ontario plant, and the Excel Paralubes refinery in Louisiana was knocked out by an explosion on Feb. 1 that took two months to repair.

Those plants are all online and base stock supply today has climbed back into the comfortable range, but the refinery shutdowns, shortages, allocations and force majeure declarations of 2005-2006 are raw in memory. After the hurricanes, the spot market disappeared, and you had to play every card and pull in every favor to get supplied, recalled Julian, who is president of the Independent Lubricant Manufacturers Association; its members supply about 20 to 25 percent of U.S. lubricants demand but dont themselves make base oil. Some independents were hurt, but many had the problems we faced, he observed. A lot of these customers buy a few loads of base oil from several suppliers, so if theyre allocated to 80 percent, 50 percent or 60 percent by one, they may be able to buy stocks from another. Youd get the quantities allocated to you, but no extra barrels.

Making products such as hydraulic oils, tractor fluids and metalworking fluids was no problem, Julian said, because these products rarely have approvals tied to using a specific base stock. But if youre primarily making automotive lubricants, especially API-licensed engine oils, you have a must use base oil, and youre hurt if that stock is in limited supply. In those cases, we delayed our own customers a little until the product was available. We had to revise our normal three-day lead time from order to delivery, to a seven to 14-day lead time. We also do contract-blending work, and in some of those cases the customer supplies the oil; unfortunately they had to wait for their raw materials to reach our facility. Also, API at last did a nice job allowing some variances from its interchange rules.

The Contract Bind

From my companys perspective, we weathered the storm pretty well, Julian continued. Were not a single-source buyer, we use multiple suppliers, so there were still enough vendors to pull from. However, as a general rule ILMA members prefer not to be tied to a ratable contract on base oil, where you have to anticipate a volume and contract for it. Independents have to play heavily in the spot market, because its the only way they can keep a competitive edge on prices.

He sees more blenders now hedging, contracting at least some volume and picking up the rest on the spot markets. We ourselves are taking some contract positions, which might not previously have been the case. Many of the larger ILMA companies now have at least a portion of their business under contract.

Some buy only that way. Texas Refinery Corp. in Fort Worth, Texas, always bought base oil on contract, and rarely took spot barrels. This may be one reason she had little problem getting supplied last year, felt Barbara Main, vice president and purchasing manager there. Others may be doing things differently but were not; we cant because of the approvals we have, like from Mack Truck and Cummins. We must use certain base stocks.

Texas Refinerys materials all arrive by truck, in smaller volumes than railcars. We used to have a rail siding, but the local electric company tore up our rails a few years ago, as part of an EPA-ordered cleanup, Main said. We were the only customer using that spur, so they just informed us, Sorry, were ripping it out. Perhaps this worked to her advantage when supply became tight, she mused. Im such a small user, when suppliers heard I just wanted a truckload, not a whole rail car, theyd usually say, Well, OK.

Most important, we are loyal customers, and the base oil suppliers seem to return that loyalty, Main said. Maybe its just my individual sales representative, not the whole company, but theyre very responsive. And we pay our bills – that seems to go a long way in getting what we need.

She added, Im trying to carry a bit more inventory now. We wont add tanks, but weve got a little extra head-space in the ones we have. Each of our tanks can hold a couple more truckfuls, so we order extra shipments when our supplier goes into turn-around or if it looks like well need a cushion.

A Little Padding

Deeper cushions are also the tactic favored by the base oil buyer for a nationally famous engine oil. We got a reprieve from the hurricanes last year, but I think you saw a lot of building of safety stocks in the first half of the year, then folks living off those stocks in the second half, said this purchaser, who spoke on condition of anonymity. I believe thats going to be routine for years to come, with people building inventory for the first half, and then running it off in the last half to final quarter of the year.

In our case, well build finished product inventories where it makes sense geographically, or in the products that are most at risk. For example, a packaged motor oil that depends on a base oil supplier who is in the Houston or New Orleans area, wed consider to be at risk from hurricanes. So we may build inventories of that packaged product elsewhere in our system, in advance of the hurricane season.

Growmarks Craig Stout, in Council Bluffs, Iowa, said his company last year ran into tightness, but never ran out of product. It also acquired McCollister & Co., a longtime lube blender in Omaha, Neb. We carried some base stocks for customers we had contracted, and McCollister blended using others. The two outfits found their inventories dovetailed neatly, with each one having some base stock types the other needed when supply got tight.

Each also had long-established supplier relations, Stout said. Both Growmark and McCollister werent the type to jump around between suppliers for small savings, and when some suppliers were knocked out, other relationships we had were able to take on our needs. Its just luck that our biggest supplier was not hurt. There were times we got down to the bottom of the tanks, but we did not go on allocation. Today were not keeping any more than we had before, historically.

Other base oil and process oil customers seem more anxious to knit their safety net tighter. After Hurricane Rita, Kip Middendorf, vice president at the contract blender and for-hire storage facility Wolf Lake Terminals in Hammond, Ind., received a gush of inquiries about bulk liquid storage options. We saw a number of companies in a variety of liquid industries seeking to have a safety stock, including Michelin North America, which is a big buyer of process oil which it depends on to supply its 17 North American plants. Theyve established a safety stock here that is out of the hurricane belt and easily accessible. The Chicago market works well for that. We saw quite a few others who came to establish safety supply points, and we picked up a few customers.

However, terminal clients usually must rent the tankage for a full year, not jump in and out on a whim. Some companies justify this by making an out-of-hurricane supply point part of their supply-chain strategy, Middendorf said. Then they do everything they can to tighten the inventory and tighten the supply chain, even more so in the last couple of years. Not simply because of the hurricanes, but because thats the way business is done now. Theyve factored it in to their cost of doing business.

Creating Flexibility

Rather than rent space, others see the benefits of adding tankage. Julian said his company three years ago embarked on a drive that has added 800,000 gallons of storage capacity for raw materials and finished lubricants. The idea was to prepare for growth, but the new tankage provided welcome flexibility during the shortage. Nevertheless, it takes substantial money to add tanks, he said, and smaller companies may not want to put capital into storage tanks.

At Idemitsu Lubricants America, Walts says she normally has five base stocks on hand; last year, all five were short. I had to buy 12 other base stocks, to cover for the five stocks I usually buy but couldnt get enough of. Now for most factory-fill product, I cannot substitute a component, so I had to reserve enough base stock for that production until my supplier could ship again. And you cant mix the alternate base stocks with the specified ones. So I was holding base stock in rail-cars, in tanktrucks, even product tanks. Id hold them in buffer tanks and even in totes.

Juggling all those materials and make-shift storage vessels sounds chaotic, but in 2004 Idemitsu had implemented a new planning software which allows us to see our entire inventory in real time, Walts said. Had we not had 2005 under our belt with that system in operation, we could not have functioned in 06. Meeting twice or more daily, watching every drop in and out of the plant, the purchasing, manufacturing, logistics and sales staff kept all the balls in the air without crashing.

Also, I must say that our base oil suppliers, like Petro-Canada and ConocoPhillips, even when they were under force majeure, went to every length possible to do anything to help us, Walts said. And companies like Valero, Ergon and Penreco also came to our aid with supply when they could, and even though Im not a regular customer they helped us without gouging. I didnt get a discount off the postings, but they didnt try to take advantage of the situation either.

Idemitsu also rolled with the base oil punches – literally. In terms of base oil management, we have always erred on the side of having some railcars here or on the way, she revealed. Even if it means paying some demurrage, we make sure theyre in transit – in the pipeline, so to speak. Normally, I have some cars in transit and a couple here on site. So in total, I normally have four to six weeks inventory thats already no longer at my suppliers refinery. And the year before last, I spent $400,000 to expand the track at our site to hold more rail-cars, so I can have a little of everything on hand.

Every so often our management asks why were paying so much demurrage on rail cars, but we watch the costs very sharply. In our experience – myself and my purchasing manager here, who has 15 years in this business – every 18 months to two years something will happen to shorten supply. Now theres never been anything like Rita, but you never know when there will be a refinery fire, or maybe the railroads shut down a yard, so what used to take seven days to reach you now takes 20 days.

Our management now sees the risk, and they want us to bulk up a little – just not with more tanks, Walts added. So the hurricane justified the need to always have extra product on the rails or in the yard here.

Contingency Plans

Middendorf at Wolf Lake Terminals sees more blenders adding such flexibility to their operation. We are starting to see different companies pulling product from multiple base oil vendors. Where they may have qualified one base oil supplier and one additive supplier like Lubrizol in the past, they now want to have approvals for alternate formulations, using another base stock and a second or third additive company. Theyve had to do the work on the technical side, to formulate flexibility of base oil and additives, but theyre trying to diversify their risk and keep everyone quoting on their business.

Julian agreed. Were putting our eggs into as many baskets as we can, and that includes looking at base stocks from outside of the country. One of our initiatives is to think more globally and learn to look outside the normal box for purchases and opportunities.

Earlier this year, Imperial Oil had a fire, and Chevron did too, pointed out the anonymous base oil buyer. What were seeing is that contingency planning is now unavoidable. Part of that means having redundant backup plans. Were seeing it at all the majors too, theyre doing a bit more planning. They all want to have a plan in place for how to react in case of disaster. None of us want a repeat of last year.

It all boils down to spending time on the phone, on the computer, poring over spreadsheets and sifting the details. No one in the industry has a solution other than elbow grease, he said. Were in close communication with our sales force for their demand projections, with our planning department for their input, and with our manufacturing people for the word on how their operations are running.

Theres no secret here. Just be open, forthright and use day to day common sense within your business, he urged. Maintain close relationships with all the functions in your own business, and work at it. Suppliers may be very good and well intended, but they will always be holding back something. So you better know your own businesss needs and limitations.

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