CHEVRON TEXACO MODERNIZED ITS SUPPLY CHAIN WITH EC TOOLS

THE PROBLEM
ChevronTexaco is the largest U.S. oil company, and it is multinational in nature. Its main business is drilling, refining, trans-
porting, and selling gasoline (oil). In this competitive business, a savings of even a quarter of a penny for each gallon totals
up to millions, and so does the cost. Two problems have plagued the industry: running out of oil when needed at each pump,
and a delivery that is aborted because a tank at the gas station is too full (called retain). Run-outs and retains, known as the
industry’s “twin evils,” have been targets for improvements for years with little success.

Gasoline flows in the supply chain, starting with the upstream, which includes oil hunting, drilling, and so on. Then it is pro-
cessed, and finally it goes to the downstream part, which is the customer-facing part of the chain. The difficulty is to match
the three parts of the chain. ChevronTexaco owns oil fields and refineries, but it also buys crude and refined oil to meet peak
demand. Purchases are of two kinds: those that have long-term contracts and those that are purchased as needed on the spot
market at prevailing prices, which are usually higher than contract purchase prices.

ChevronTexaco acted in the past like a mass-production manufacturing company, just trying to make products and then sell
them (supply-driven strategy). The problem with this strategy is that each time a company makes too much or too little, extra
cost is introduced into the supply chain.

THE SOLUTION
The company decided to change its supply chain business model from one that is supply driven to one that is demand driven.
Namely, instead of worrying about how much oil it would process and then pushing it, the company started worrying about
how much oil its customers wanted. This change required a major transformation in the business and an extensive support
network of information technologies.

To implement the IT support, the company is investing $15 million each year in the United States alone in proprietary supply
chain IT software that can capture data in real time. Each tank in each gas station is equipped with an electronic label moni-
tor that conveys real-time information about the oil level through a cable to the station’s IT-based management system. The
data then travel via a satellite to the primary inventory system at the company’s main office.

There, an advanced, DSS-based planning system processes the data to help with refining, marketing, and logistics decisions.
This DSS includes information collected at trucking and airline companies. Using an ERP and a business planning system,
ChevronTexaco determines how much to refine, how much to buy on spot markets, and when and how much to ship to each
of its retail stations.

The system uses demand forecasting to determine how much oil it will refine on a monthly basis, with weekly and daily
checks. This way, production is matched to customers’ demand. To perform all of these steps, it is necessary to integrate the
supply and demand information systems; this is where the ERP software is useful. Planners at various points across the sup-
ply chain (e.g., refinery, terminal management, station management, transportation, and production) must share data con-
stantly. These data are provided by the various information systems.

Recent IT projects that support the supply chain and extend it globally are NetReady, which enables 150 e-business initia-
tives; Global Information Link (GIL2), which enables connectivity throughout the company; e-Guest, which enables sharing
of information with business partners; and Human Resources Information System.

THE RESULTS
The integrated system that allows data to be shared across the company has improved decision making at every point in the
customer-facing and processing parts of the supply chain, increasing the company’s profits by more than $300 million in
1999 and by more than an additional $100 million in 2000. (The increase resulted from other initiatives also, but it was
mostly due to the change in the supply chain.)

According to Worthen (2002), studies indicate that companies that belong to the top 20 percent in their industries operate
their supply chains twice as efficiently as median companies. The successful companies carry half as much inventory and
can respond to a significant rise in demand (20 percent or higher) twice as fast; they also know how to minimize the number
of deliveries. ChevronTexaco belongs in this category.

Sources: Compiled from Worthen (2002) and ChevronTexaco.com (see “Information Technology,” site accessed May 19,
2003).

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