For More Information Contact: Andrew Muras; andrew.muras@baesystems.

com; 817-481-2997

The ABCs of Activity Based Management (ABM) in the Petroleum Industry

Andrew D. Muras MEVATEC Corporation Dennis D. Calhoun CITGO Petroleum Corporation W. Steven Stripling MEVATEC Corporation

Petroleum Accounting and Financial Management Journal, Summer 2000, Institute for Petroleum Accounting

The ABCs of ABM in the Petroleum Industry

MEVATEC Corp

Abstract As margins have decreased in the petroleum industry, pressures have mounted to cut costs and increase efficiencies, both in Shared Service/Overhead organizations and in Operating Business Units. A key issue, particularly within Shared Services, is whether to outsource or not to outsource. This theme is joined by the Business Units demand for lower overhead costs while busily finding ways to lower their own cost structures. There exists a tool rooted in common sense and cost accounting principles that provides a fresh perspective on cost control, process improvement, Shared Service Management (e.g., Service Level Agreements), and Outsourcing Analysis for even the most experienced Shared Service or Business Unit Managers. This tool is Activity Based Management (ABM). This paper will examine the basics of ABM and discuss insights and lessons learned from applications in Shared Services and operating environments within the petroleum industry.

Introduction to ABM The ABCs of ABM can best be described by a review of the model shown in Figure 1. This model, known as The ABM Cross, was developed by the Consortium for Advanced Manufacturing International (CAM-I) to assist managers in developing more accurate product costing than current financial accounting methodologies could deliver and to quantify methods of achieving tangible process improvements. ABM techniques are widely applicable, ranging from production and maintenance environments to information technology and service units. By generating realistic costs of processes, products and improvement initiatives, ABM provides managers with the data needed to make informed business decisions. The ABM Model begins with resources, or the elements allowing work to occur, i.e., salaries & benefits, office space, travel, computer expenses, etc. Each resource is then traced to an activity (i.e., the work performed) based on how the activity uses that resource. For most groups, this

Figure 1 - The CAM-I Cross of Activity Based Management

Resources

Cost Assignment View Activity Based Costing (ABC)

Cost Drivers

Activities

Outputs and Performance Measures

Services, Products, or Customers

Process View Activity Based Management (ABM)

The ABCs of ABM in the Petroleum Industry

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will be less than fifteen unique activities. Of course, many tasks may be involved in each activity, but a successful ABM application should focus at the activity level to avoid unnecessary complexity. Once the activity is costed, it is then traced to cost out products, services or customers, depending on the nature of the departments work and the information the manager wishes to analyze. This vertical axis is referred to as the Cost View or ABC (Activity Based Costing) of ABM. ABC is sufficient if the goal of the analysis is to provide accurate activity, product or service costing, i.e., costs of delivering barrels, customer/contract profitability analysis, etc. However, if the goal is improved cost performance or process improvement, then the horizontal axis, or process view, must be included. In the process view, each activity is analyzed to identify and quantify its cost drivers or the root causes that require an activity or task be performed. This analysis is performed through standard investigation techniques: Why tree, affinity diagrams, flow-charting, etc. Once cost drivers are quantified, determinations can be made on the value of that particular activity and task. To promote process improvement, one must change work processes and dedicate more resources to value-added work while eliminating resources assigned to non-value added work. Each activity also includes an output and therefore a performance measure. These outputs and performance measures can often provide a valuable indicator of success in eliminating non-value-added activities.

The bulk of this article will address specific applications of ABM, both product costing and process improvement initiatives, within typical Shared Service departments and operational units in the petroleum industry. The goal is to provide insights and initial roadmaps to performing successful ABM initiatives. ABM in Shared Services An ABM study of Shared Services can include areas such as accounting, budgeting and planning/economics, information technology, tax, administrative services, and pricing departments. Typically, these areas are viewed as overhead expenses absorbed through daily operations. However, Shared Services provide important support functions for customers both within and outside the organization. Operations managers want to know why they are charged certain amounts from Shared Services departments and what value they are receiving for these charges. Similarly, Shared Services managers want to know how their budget resources are spent in providing a service. By knowing specifically where and how the resource dollars are being spent through an ABM study, a Shared Services manager has more information to make better decisions on manpower/budget requirements, process improvement initiatives or creating service level agreements. The ABM information can also be valuable in determining price structures and profitability margins and whether the return on products is meeting the investment made by the corporation.

The ABCs of ABM in the Petroleum Industry

MEVATEC Corp

Accounting ABM studies in Accounting organizations can be organized by the different types of accounting processes. For example, accounting movements or transactions generally include exchanges, terminal reconciliations or bulk product/crude movements. The types of accounting functions performed may include truck or bulk moves, shared terminals, corporate-owned terminals, or pipeline/intransit. The ABM study determines what it costs to perform accounting functions (including outputs per unit cost) and then traces these costs to the types of reconciliation by region, customer/contract or product types. Example activities may include performing reconciliations, resolving discrepancies or rejected transactions, and paying invoices, etc. Cost drivers that create bottlenecks, delays, or duplication of efforts within the activities may include driver errors, missing tickets (bills of lading), duplicate tickets, discrepancies or rejected transactions. Other cost drivers causing inefficiencies might include manual processes, training issues, system issues (system causing problems, system shortfalls or integration problems during processing), pricing errors, and system input errors. Once the activities and cost drivers have been quantified, one can determine how to streamline or eliminate specific activities or tasks considered non-value, by the type of movement and transaction, by region or by customer/partner. Within the three different types of movements (exchanges, terminal reconciliations, and bulk movements) the cost difference can be demonstrated between each type of transaction within each type of movement (See Figure 2). Further analysis determines why it is more expensive to perform one type of reconciliation versus another within each type of movement. In the Bulk Movement example, the reason for the disparity in unit cost with Aviation may be due to the lack of electronic data feed capabilities. A manager can now see which reconciliations may need to be streamlined or reviewed for process improvements.

Exchange Accounting
Type Reconciliation Balance Exchanges Manual Balance Exchanges - Automated Annual Cost $ 175,000 $ 102,000 Unit Cost $ 0.10 per Transaction $ 0.03 per Transaction

Terminal Accounting
Type Reconciliation Shared Terminal Pipeline/In-Transit Corporate Owned Totals Annual Cost $ 320,000 $ 115,000 $ 75,000 $ 510,000 Unit Cost $ 0.25 per Transaction $ 0.15 per Transaction $ 0.75 per Transaction

Bulk Movement Accounting

Reconciliation Supply - Bulk Supply - Aviation Supply - Commercial Subsidiary - Partnership Totals Annual Cost $ 400,000 75,000 50,000 35,000 $ 840,000 Unit Cost $ 8.50 per Transaction $ 13.00 per Transaction $ 8.15 per Transaction $ 8.75 per Transaction $ 8.85 per Transaction

Figure 2 Transaction Product Costing

The ABCs of ABM in the Petroleum Industry

MEVATEC Corp

In reviewing ABC results for each region, partner, or contract, best practices can be identified. A benchmark of baseline costs can then be established and used for comparative purposes in the future. Costing the different types of reconciliations offers valuable insight into possible changes in the way a contract is performed (e.g., converting an exchange contract to a purchase or sales contract) and can quantify the effects of manual versus automated processes. Figure 3 shows other examples of typical results. When dealing with larger volumes of a product, specific costs can be identified and traced to the transportation of crude oil,

feedstocks, petrochemicals, industrial products, and asphalt. An example ABC analysis in the transportation of crude could involve a cost per barrel comparison between contract crude versus spot crude, such as is shown in Figure 4. This result may be a surprise if the organizations strategy is to perform under a contract method rather than a spot method. The cost difference between contract crude and noncontract crude could be due to the complexity of the pricing formulas associated with contracts, which increases the amount of time and manual calculations spent processing the transactions.

Resources
SE NE SW NW Totals $ 300,000 165,000 125,000 250,000 $ 840,000

By Region Transactions
2,200,000 1,300,000 1,000,000 1,750,000 6,250,000

Unit Cost by Region

$ $ $ $ $ 7.33 7.87 8.00 7.00 7.44

By Partner
Partner Partner 1 Partner 2 Partner 3 Partner 4 Partner 5 Total Cost $ 75,000 $ 55,000 $ 44,000 $ 23,000 $ 35,000 # Transactions 780,000 475,000 525,000 425,000 220,000 $ 0.09 $ 0.11 $ 0.08 $ 0.05 $ 0.15 Unit Cost Automated Manual Automated Automated Manual

By Contract
Partner Contract # Contract # Contract # Contract # Contract # Total Cost $ 25,000 $ 21,000 $ 14,000 $ 11,000 $ 9,500 # Transactions 500,000 325,000 225,000 300,000 100,000 $ 0.05 $ 0.06 $ 0.06 $ 0.03 $ 0.09 Unit Cost Automated Manual Automated Automated Manual

Figure 3 Additional Product Costing Results

Contract versus Non-Contract (Spot) Total Barrel Volumes Crude Oil Type Contract 90,000,000 Spot 285,000,000

Total Cost $ 135,500 $ 201,000

Per Barrel Cost $ 0.00151 $ 0.00071

Figure 4

The ABCs of ABM in the Petroleum Industry

MEVATEC Corp

Other comparisons may include differences among various refineries involving multiple types of products. An example of the purchase and sale of industrial products among three refineries is shown in Figure 5. By analyzing these results, management can develop best practices among refineries to reduce or eliminate non-value added steps, establish better coordination and provide more consistent reporting formats in the refineries accounting processes. This saves resources, at both the refinery level and in Shared Services accounting, that can be applied towards enhancing system reporting or data transmission capabilities. Analyzing discrepancies or rejects can prove to be valuable if there is a high percentage of errors. If a sizable portion of

departments resources is spent correcting rejects, then a more thorough investigation of those rejects is required to discover the types of errors, root causes, and how the rejects affect the overall process. Figure 6 gives examples of different types of errors or rejects. Identifying the types of errors and quantities aids in quantifying their effect on costs. Analyzing these errors highlights system shortfalls or lack of capturing required input data within the accounting system. The analysis can also indicate integration problems between standalone/legacy systems and the organizations accounting system. Problems can be hidden in many places throughout the company, but will almost always surface in the ABM numbers.

Industrial Products Refinery #1

Monthly Type of Monthly Percentage Total Cost Per Barrels Movement Output of Total Resources Barrel 20,400,000 Sales 30 59% $ 13,338 0.0007 6,240,000 Purchases 21 41% $ 9,336 0.0015 Total $ 22,674 Monthly Type of Monthly Percentage Total Cost Per Barrels Movement Output of Total Resources Barrel 14,400,000 Sales 50 50% $ 22,007 0.0015 5,820,000 Purchases 50 50% $ 22,007 0.0038 Total $ 44,014 Monthly Type of Monthly Percentage Total Barrels Movement Output of Total Resources 5,868,000 Sales 32 50% $ 21,325 6,420,000 Purchases 32 50% $ 21,325 Total $ 42,650 Cost Per Barrel 0.0036 0.0033

Industrial Products Refinery #2

Industrial Products Refinery #3

Figure 5 Industrial Products Comparisons

The ABCs of ABM in the Petroleum Industry

Figure 6 - Invoice Error

MEVATEC Corp

18% Dupe Bill Tax Ship To (Customer) Ship To (Destination) Volume Gross/Net Not A Comp Load All Other Material Freight Ship Date 3% 3% 3% 2% 1% 1% 7% 13% 16% 17% 17%

Accounting areas are generally at the end of the chain of supply; therefore, cost drivers affecting accounting usually result from front-end users and data input. Errors can be caused by lack of system knowledge and functionality, bad processes, duplication of effort in reconciliations, system integration issues, errors in pricing and pricing formulas, driver errors, and lack of inventory control, etc. These problems can be tracked to the source or root cause and to other areas and their managers. By involving all areas of the organization, managers can see the overall effect that the cost driver has to the cost of that product, the customer, and to the bottom line of the corporation. Recommendations to improve accounting functions typically include: Automating data feeds from operating units, partnerships, terminals, etc. Exploring synergies with other accounting departments. Increasing accounting system training for frontend users (e.g., schedulers/traders) or making system input screens user-friendly. Reducing or eliminating some reconciliations.

Improving/enhancing system integration of stand-alone systems with the organizations accounting system. Developing best practices in performing reconciliations for different types of regions, partners, contracts, etc. Creating tracking mechanisms for transaction errors or rejects (e.g., track type, date, occurrences, etc.) Creating action plans to improve identified accounting system process issues. Reducing pricing errors by studying pricing area for input and formula procedures.

Pricing A typical pricing department performs price analyses and determines price changes to gasoline/diesel products and lubricants. These determinations are normally based on information obtained from internal accounting systems, outside market calls, historical lifting performances, competitor information, and exchange rates. Most pricing areas are on a critical path in capturing all necessary information and making pricing decisions by a certain time

The ABCs of ABM in the Petroleum Industry

MEVATEC Corp

each day. This time criticality causes stress to the entire pricing process. Important aspects in this process are the reliability, timeliness and accuracy of the information used to make pricing decisions, including the path in obtaining/researching this information and the effectiveness of pricing managers in determining quality prices. One question is whether there are any meaningful performance measurements in place to ensure the value of these prices? Improving the receipt and timing of the information needed to make pricing decisions has a positive effect on the actual price change and ultimately, the bottom line. Allowing more time on the analysis and less time accumulating information can also have a large impact to profit margins, especially in tight market conditions. In the pricing department, managers may want to know how much of their budget is expended in the various types of pricing methods used in the organization. Example activities include performing price analysis, investigating and reviewing allocations, reviewing liftings, processing and pricing bulk sales, investigating terminal outages, or administering formula pricing. Costing the activities provides a snap shot of where the department is

spending their time and resources, and if the priority of these activities meet departmental objectives. Often such analysis finds that lower priority activities are absorbing most of the resources, prompting such questions as: Why is this happening? How can we reduce the time and resources spent on these activities without service suffering? How do we get back to doing the more important activities? Using ABM to identify the root causes or cost drivers affecting the departments activities forces answers to these questions. ABM results from pricing can show the process costs of various pricing methods. The analysis allows a manager to identify areas of potential profitability, as well as other areas that require further review to see if any loss of margins was absorbed through other purchases of products. An example of costing different types of pricing is shown in Figure 7, leading to the question of why formula bulk rack pricing is so high in comparison to other type pricing methods. If an organization had similar breakdowns for other areas that affect pricing, such as marketing, supply, sales, and financial services, it could determine if process costs were exceeding profit margins.

Figure 7 - Cost per Gallon by Pricing Type

0.12 0.10 0.08 0.06 0.04 0.02 0.00 Branded Rack Branded Formula Unbranded Rack 0.021 0.050 0.092

0.112

0.081

0.032

Formula Bulk Rack

Normal Rack

Bulk Sales

The ABCs of ABM in the Petroleum Industry

MEVATEC Corp

Additional analysis can reveal the comparison between the resources used by each pricing method versus the volumes they represent (see Figure 8). Those pricing methods in which resources are greater than the volume could possibly indicate nonprofitability or the need for process reengineering. Further analysis can identify the costs for specific customers, which is helpful in developing service level agreements, new pricing models, or aid in simply reducing unprofitable customers. Recommendations for possible improvements in the pricing area may include: Standardize procedures in performing price analysis for similar products/conditions. Establish performance measures to

Determine the effectiveness of pricing mangers or results by region. Expediting research time and easing time pressure on input personnel to improve performance and accuracy. This often includes system enhancements for rapid/ consolidated information gathering and improved interfaces with a supply group. Eliminate or streamline some pricing structures, including scrutinizing customers who require special handling to ensure adequate profitability. Coordinate with other departments to help identify recurring customer data problems both pricing and accounting will benefit from fewer front-end errors and corrections.

Figure 8 - Volume & Cost

8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 Branded Rack $1,350,000 7,200,000 Branded Formula $225,000 696,000 Unbranded Rack $335,000 235,000 Formula Bulk Rack $485,000 401,835 Normal Rack $1,200,000 1,775,000 Bulk $135,000 418,320

Series2 Series1

The ABCs of ABM in the Petroleum Industry

MEVATEC Corp

Budget & Planning/Economics Budgeting and Planning departments typically produce financial data and management tools for strategic planning and other management initiatives. However, most corporations have no idea of the resources spent in producing this data. ABM allows these departments to show the full cost of producing such products as operating and capital budgets, long-range plans, and Balanced Scorecard reports. These costs provide a baseline to measure each years progress in streamlining processes or reducing the volume and cost of specific products. In addition, cost drivers that increase costs can be quantified, including mid-stream schedule revisions, lack of managerial commitment to change and budget initiatives, and inconsistent corporate allocations methodologies. Figure 9 has examples of costed products for budget and planning/economic departments that can help managers determine if their departments are working on the correct activities and products. The figure also shows examples of the total cost when expanded to include the entire organization This data identifies what most are intuitively aware of the cost of producing some products requested by management are much higher than the Budgeting and Planning department costs alone. Capturing this data allows management to see these total dollars consumed and thus start focusing on reducing requirements or streamlining bottlenecks. Recommended improvements for this area can include: Standardize planning cycles, as schedule revisions create rework and delays. Eliminate reports or reduce the frequency of reporting Develop specific guidelines and timely communications with Business Units, Refineries, etc. to clarify benefits and performance measures for all products. Improve education, communication, priority setting, and interaction with Business Units, Refineries, and Executive Management.

Product Business Inputs Operating budget Long Rang Plan BU Reporting Bal Scorecard Earning Analysis Capital Budget Forecasts Capital Projects Monthly Reports TOTAL

Departmental Cost $ 500,000 200,000 271,000 198,000 147,000 126,000 108,000 51,000 71,000 30,000 $ 1,702,000

Addl CorpWide Costs $ 159,890 337,000 244,740 283,875 153,800 165,490 112,300 147,150 107,800 110,679 $ 1,822,724

TOTAL COSTS $ 659,890 537,000 515,740 481,875 300,800 291,490 220,300 198,150 178,800 140,679 $ 3,524,724

Figure 9 Department and Corporation Process Costs

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The ABCs of ABM in the Petroleum Industry ABM in Operational Business Units ABM in operational Business Unit areas requires a different emphasis than those in Shared Services and similar overhead support areas. First, much of the cost within these areas is not personnelrelated as in Shared Services functions and instead includes categories such as energy, materials, depreciation, chemicals, fees and taxes. Unfortunately, accounting records on how to apply these costs to specific activities, equipment or locations are often inaccurate or out-dated. Therefore analytical assumptions are required to correctly trace how the resources are consumed. Second, analyses must account for both people-related and process-related work to correctly trace costs to products, processes or services and to ensure that activities are not over-costed. Third, improvements are not solely related to processes and activities, but often include initiatives on equipment use, sales strategies and capacity rates. Fourth, processes and activities should be split between maintenance, operations and support staff. Following include examples of ABM analyses for a typical pipeline business unit. Pipeline Operations and Maintenance Pipelines provide an economical method of transporting finished products or crude to various stations. However, current product accounting systems often miscalculate the total and variable costs of delivering barrels to a particular location.

MEVATEC Corp These errors are often caused by inconsistent allocations of such resources as power and maintenance labor and incorrect or outdated depreciation schedules. In addition, some resources are often lumped into cost centers more for expediency than for considering where the actual work is performed. Such product costing errors can influence business and pricing decisions. ABM Pipeline studies provide accurate product costs and an improved understanding of maintenance/operations activities on specific pipeline segments and stations to help lower controllable costs. The analysis must account for the following: A large percentage of costs are non-controllable, usually 65 70% (See Figure 10). Resources such as depreciation can be traced either on actuals, estimated value or on miles, or a combination of both, along with correction factors for segments with multiple or parallel lines. Tracing specific resources based on barrel-miles (i.e., the number of barrels pumped over a certain distance) is more accurate than some estimates of actual usage. Process improvements and cost savings cannot jeopardize safety or environmental considerations Operations and Maintenance activities must be considered independently, with many Operations activities being eliminated through automation.

Figure 10: Sample Pipe line Resources

Depreciation 11% Control Center 5% T axes/Fees 28% Wages Materials 8% 6% Consulting Services 16% Power&DRA 21%

Mgmt Fees & Misc Costs 5%

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The ABCs of ABM in the Petroleum Industry ABC product costing results can factor in tariff charges and thus show profitability of delivering barrels to various locations. Figure 11 shows an example for a product pipeline along with a comparison of data available from the current accounting system. Although most current accounting product costing schemes show that all delivery points are profitable, some management and operations personnel inherently feel that certain segments are probably not profitable. By showing some of the unprofitable segments, potential improvement opportunities such as proposed tariff changes, additional barrel throughput (if not capacity constrained) and the addition

MEVATEC Corp of automation can be considered and quantified. Although incremental costing is often used for business cases, true costs, both incremental and fixed, and projected returns must be understood to make profitable business decisions. ABC product costing can also be used to help determine the costs of excess capacity - since variable costs in a pipeline are low compared with the fixed investment. Figure 12 shows an example of the margin gains from running at higher capacities, thus providing data that can be used in developing operational plans, expanded marketing and pricing decisions or the addition of drag reducing agents (DRA).

Pipeline Section

A to B B to C B to D A to E E to F F to G G to H H to I

ABC Accounting Total System Cost Total Cost /BBL /BBL 3.90 4.10 8.01 17.00 4.54 9.56 12.51 17.53 35.34 5.80 10.30 6.20 8.50 12.10 21.30 25.90

Tariff /BBL

Profit /BBL ABC 6.50 2.39 -3.50 5.86 2.74 2.29 10.67 -5.64

Profit /BBL Acctg 6.30 4.60 3.20 4.20 3.80 2.70 6.90 3.80

ABC Variable Cost 0.0123 0.0297 0.0412 0.0198 0.0355 0.0399 0.0436 0.0735

10.4 10.4 13.5 10.4 12.3 14.8 28.2 29.7

Current System Variable Cost 0.0396 0.0411 0.0422 0.0478 0.0566 0.0594 0.0655 0.0721

Figure 11: Sample Product Costing ABC versus typical accounting costs

Figure 12: Incremental Margin per Barrel

11

/BBL

10 9 8 7

60%

70%

80% Average Capacity

90%

100%

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The ABCs of ABM in the Petroleum Industry In addition to product costs, ABM provides analytical results associated with operating and maintaining a pipeline. Management can use these results to review why costs per BBL or costs per mile are different among different pipelines, pipeline segments or office locations, and begin quantifying efficiencies of operational and maintenance process changes. Management is also alerted to the costs of maintaining unused or closed lines, which can have similar costs to operational lines when located in suburban areas. Figure 13 provides sample analyses that can be used to show both current costs and future costs as process improvements are implemented. Example process improvement initiatives include: better use of contractors to reduce windshield time (i.e., the time spent driving to jobs - which can easily account for up to 20% of personnel time), more efficient operation of pumps to lower overall operating costs, quantifying the cost of maintaining specific trouble-some equipment or line segments, moving from pure reactive maintenance to more preventive/predictive activities, and sharing of skills with other company locations. Pipeline Control Center Operations Since a Pipeline and its Control Center are closely linked, full product costing and

MEVATEC Corp process improvement initiatives should include ABM studies of both areas. In particular, the Control Centers operating procedures are often a significant influence to pipeline controllable costs. Such influences that might increase pipeline costs include inefficient operation of pumps and valves to satisfy terminal/station needs and performing special tasks to meet individual customer requirements. Therefore identifying significant operational changes and process improvements to reduce overall pipeline costs should be a coordinated effort between the Control Center and Pipeline personnel. In addition, when developing ABM costing results and process improvement potential for a Control Center, the analysis should account for the following: Resources for both personnel and consoles (hardware, software, communications and support) play a significant role in the total cost Workload is important, as a control center must staff for peak loading in addition to average loading Incremental savings are difficult to implement because of the nature of 24x7 shift work.

M aintenance Costs/ Equipment Type

% of 100

% of Total Time Spent per Activity Locations A, B, and C

30.0 20.0 10.0 0.0
Tr an In sm sp ix ec tE qu Pl ip an m ne en d t M ain ten an Eq ce ui pm en tF ai M lu ar re ki s ng Pi pe lin M es ai nt ai n G ro un ds D oc s/P Co er or m di its na te Co Su nt ra pe ... rv isi ng an d M gm M t aj or Pr oj ec ts

Metering 15% ROW 25% Tank Farm 12%

Pipeline 13% Pump Stations 35%

Figure 13: Sample Pipeline Operating Maintenance Cost

Lo ad

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The ABCs of ABM in the Petroleum Industry ABC costs for a Control Center can be traced to multiple product cost categories. First, since Control Centers often control multiple pipelines, costs can be traced based on supporting individual pipelines. Tracing of costs to pipelines is influenced by workload requirements, special pipeline operating requirements and the type of automation at stations and terminals. Such tracing usually shows a different level of costs traced to individual pipelines than previous accounting allocations since ABC allocations are based on actual activity usage. This cost data helps quantify payoffs of automation and the addition of specific console operator data screens. Second, Control Center costs can be traced to specific pipeline segments, thus completing the total delivery costs per station. Third, Control Center costs can be traced to individual customers/shippers to quantify how their special needs (e.g., batch splitting) affect overall costs. Example results in Figure 14 allow management to enter discussions with problem customers/ shippers, develop new procedures to prevent special requirements, or implement additional charges for specialized activities. Control Center ABC results impact pipeline profitability through the following: Developing procedures or processes to reduce special customer requirements Using standard operating/control procedures (working with insight
Pipeline A ABC XYZ DEF B LMN ABC OPQ .030 .102 .088 .056 Highest Cost Shippers $s Per Barrel .017 .095 .081 .045

MEVATEC Corp from pipeline maintenance personnel) that maximizes the efficiency of pumps and other equipment when not in a max flow rate requirement. Identifying root causes of pipeline downtime and troublesome equipment. Reducing Control Center internal costs and allocations to the pipeline. Process improvement initiatives within the Control Center itself can only show significant savings through two areas. The first is in reducing the cost of console hardware, software and maintenance support. The advent of PC-based systems can sometimes allow rapid migration from a current control system along with the potential for substantially reducing overall maintenance and support costs. The second savings area can be accomplished through eliminating an entire console, along with the associated operator shift. However, eliminating a console requires substantial effort. In addition to performing operator loading studies, one must eliminate or improve operator activities, such as reducing manual calculating and reporting activities, implementing screens for automated reading of trends and eliminating duplication with field activities (e.g., reporting call outs/line locates, ticket generation/verification, etc.).

Comments Average Control Center Cost Low Volume high #s of calls Batch Splitting below minimum Line washes required Average CC Cost minimal automation Batch Splitting, line washing Low Volume high #s of calls Constant monitoring for notification

Figure 14: Product Costs traced to individual pipelines and shippers

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The ABCs of ABM in the Petroleum Industry Keys to Success Having examined a wide variety of departments and business units in the petroleum industry, several keys to success are evident. Approach ABM by departments and not by process if improvement is the goal. This may seem counterintuitive, but in most organizations there is no process owner with clear accountabilities. Therefore, implementations of even the best ideas and improvements fail. Approaching ABM process improvement by department uncovers snake trails - areas where the root causes of non-value added work reside in another department. This forms a target of opportunity. It is easier to get two departments to work together on a solution than trying to solve a process issue with no owner. In addition, process costing across the organization is not lost, but instead can be developed by combining departmental results. With the move toward integrated financial management software solutions such as SAP, organizations are now seeing product and unit cost data. This data may be suspect in terms of accurately representing true product costs. In most cases product costing is based upon financial accounting cost centers, which may not reflect all associated costs or the correct allocations. Most organizations have been through numerous downsizings and

MEVATEC Corp

re-engineering exercises. ABM, by providing a new view of the organization, often uncovers Slow Fat Rabbits those areas and activities that are relatively easy to eliminate. However, in most cases the work of process improvement resembles the death of one thousand cuts multiple nonvalue-added improvement potential is seen in many activities. When examining numerous departments, these small opportunities can add up quickly to the six and seven figure range. Sustainable ABM efforts are built one group and one success at a time. Let the word spread of this common sense approach to performance improvement. Success breeds success because managers begin to see ABM as a reliable method to improve performance. In the beginning, take advantage of outside ABM expertise and find a consultant who will not only help with the ABM methodology but will also train company personnel and department managers on how to use this technique as the method of continuous performance improvement. Operating in a Shared Services environment in which most performance improvement has already been captured, ABM still provides an excellent and rapid basis for the development of performance-based Shared Service agreements.

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The ABCs of ABM in the Petroleum Industry

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ABM pays even when using a consultant. Using a voluntary approach with no top-down directive of cost reduction targets, a recovery of 25-35% of the identified non-value-added found can be expected. This equates to a 10 to 1 return of the cost impact of implementing ABM within two years (see Figure 15). The ABCs of ABM are as easy as 12-3:

1. ABM is a common-sense approach to Service Level Agreements and Performance Improvement. 2. ABM can develop more accurate product costing to facilitate business decisions. 3. Participants in the process develop an improved understanding of how their department performance impacts the whole organization.

30+ to 1

15 to 1

3 to 1 ABM Costs 10% V a lue C a p ture 50% V a lue C a p ture F ull NVA V a lue C a p ture

Figure 15: ABM Return on Investment

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