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Establishing a risk reduction model for the inbound supply chain in an oil 
refinery 
 
 
 
 
 
 
HC Swanepoel 
10652094 
 
 
 
 
 
 
Mini-dissertation submitted in partial fulfilment of the requirements for the degree 
Masters in Business Administration at the Potchefstroom Campus of the North-
West University. 
 
 
 
 
 
 
 
Study Leader: Johan Jordaan 
May 2011 
 
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ACKNOWLEDGEMENT 
 
I would like to thank the Lord for giving me the strength to cope with the 
challenges in my career and personal life while studying towards my MBA. 
 
I wish to express my gratitude to the following persons who made it possible, and 
supported me, to complete this dissertation: 
 
To my study leader, Johan Jordaan, for his support and input to this work. 
 
To Natref, my employer, for allowing me to complete this dissertation on a part-
time basis and funding of the associated costs. 
 
To Joe Janse van Rensburg, my colleague and friend, for his guidance and 
assistance through the whole mini-dissertation; thanks for all your support.  
 
A special thanks to all my friends, especially Lynette Berger, Phyllis Jackson, 
Clarie van Schalkwyk and Deon Pretorius, for their patience with me and their 
emotional support throughout this dissertation.  
 
To my mom and dad who supported me all the way. It is in times like these that 
families are put to test and it is wonderful to know that my family will always stand 
by me. 
 
And lastly to all my study group members “Team Prozac – Annalie and David 
Huxham, Louis Keulder and Abel da Fonseca” – without you guys I would not 
have made it this far. 
 
I dedicate this dissertation to you 
 
 
“Every great dream begins with a dreamer. 
Always remember, you have within you the Strength, 
the Patience, and the Passion to reach 
for the STARS to change the world” 
Harriet Tubman 
 
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ABSTRACT 
 
Companies are in business to make money; money is not there just to be taken. 
The drive should be on Cash Focus and Project Excellence, the ultimate goal and 
first price is always to grow stakeholder value sustainability. To be able to achieve 
just that, the focus should be on: 
- Operations excellence 
- Functional excellence 
- Capital excellence 
- Value-driven leadership 
 
The mission of the oil refinery is to refine crude oil utilising high conversion 
capability, generating sustainable financial growth and delivering a competitive 
return on investment, while focusing on sustainable profitability, costs, efficiency, 
reliability and flexibility. How does the supply chain function fit into all of this and 
what is their role to play? 
 
The objective of any supply chain function should be to support the company’s 
vision and strategic objectives and by means of risk reduction strategies ensure 
that the risks that the oil refinery is exposed to in the supply chain function are 
identified and managed to acceptable levels. Due to the major impact of supply 
chain activities on a business, a combined programme and project approach 
should be followed, which will include the understanding of the potential reward, 
vision clarity, management support, will grow internal ownership and 
accountability, training, communication and a formal change management 
programme. 
 
The purpose of this study was to determine whether there is an existing risk 
reduction model within the inbound supply chain within the oil refining process. A 
literature and empirical study was conducted and the conclusion was made that 
although a risk management framework and processes exist within the 
operational and maintenance functions, it was not evident in the supply chain 
function. The supply chain function, together with the operations function 
(maintenance and plant reliability), is about understanding risk created within 
Develop and empower their people 
 
Continuously improve and grow existing 
asset base 
 
Deliver on transformation agenda 
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equipment and supporting the maintenance strategies by implementing sourcing 
strategies that will contribute to ensuring the effective supply of materials and 
services. 
 
During the literature study, three models were discussed, namely: 
- The Deloitte Touche Tohmatsu model of Understanding Risk and the value of 
Flexibility; 
- The KPMG Methodology for Implementing Risk Management; and 
- The Supply Chain Operations Reference model for Business Process Re-
engineering. 
The recommendation was made that all three models are combined and 
proposed to implement as a supply chain risk reduction model with potential risk 
reduction strategies. 
 
Why would any company want to manage and mitigate risk? It links strategic 
objectives to risks and controls in order to improve corporate performance, 
increase transparency, provide an early warning system and enhance business 
sustainability. Once the top risks have been selected, an appropriate risk strategy 
is defined to optimally manage these risks to enhance and safeguard the 
company’s performance and value. The steps recommended to be followed by 
the combined and proposed risk reduction model are: 
Step 1 All role-players should understand where the supply chain function fits 
into the business and what its reason for existence is. 
Step 2 Understanding the impact of macro-environmental factors on the supply 
chain. 
Step 3 Implementing the proposed risk management framework for supply 
chain 
Phase 1 Planning and establishing context of risk management 
process 
Phase 2 Risk identification and risk exploration 
Phase 3 Risk assessment and risk treatment 
Phase 4 Implementation, monitoring and review 
Phase 5 Risk reporting and communication 
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Step 4 Establishing sustainable business processes to support the supply    
chain strategies and the risk management framework 
Step 5 Implementing performance measurement and reporting processes 
Step 6 Proper training and awareness should be given to all parties involved 
 
The biggest barriers for modifying a supply chain system within a company are 
internally and people related. Decision-making must become fact based and 
because companies depend on the measurement and analysis of performance, 
measurements must derive from the company’s strategy and provide critical data 
and information about key processes, outputs and results. Sustainable business 
processes will link continuous management activities together, which will 
contribute to an overall outcome. Implementing a pro-active risk management 
system will assist in the efficient management of the business risk, which can 
then lead to constituting value in the business.  
 
To be able to function within all the ongoing changes occurring all the time, it 
requires balancing multiple links concurrently to have an effective supply chain 
function as a result. With the unpredictability in the supply chain, comes 
increased risk, which may result in disruptions to the supply chain. These 
disruptions may be unexpected and statistically rare, but they must be 
understood, identified and managed. 
 
For any business, it is first prize to have a risk reduction model in place that can 
prevent or mitigate a risk before it can actually happen. 
 
 
 
 
 
 
 
 
 
 
 
 
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TABLE OF CONTENTS 
 
CHAPTER 1: NATURE AND SCOPE OF STUDY 
 
1.1  Introduction        15  
1.2  Background to the study      15 
1.3  Problem statement       17 
1.4  Objectives of the study 
1.4.1  Primary objective       17 
1.4.2  Secondary objective      17 
1.5  Scope of the study        
1.5.1  Field of study       18 
1.5.2  Geographical scope       18 
1.6  Research methodology 
1.6.1  Literature study       18 
1.6.2  Empirical study       19 
1.7  Limitations of the study 
1.7.1  Limited time to complete the study    19 
1.7.2  Limited geographical scope of the study    19 
 
CHAPTER 2: LITERATURE REVIEW ON EXISTING MODELS OF SUPPLY 
CHAIN RISK REDUCTION 
2.1  Introduction        20 
2.2  What is risk?        21 
2.3  Why risk reduction?       26 
2.4  Risk models 
2.4.1  Deloitte Touche Tohmatsu Model of Understanding Risk 28 
2.4.1.1 Network flexibility       30 
2.4.1.2 Reducing lead times      30 
2.4.1.3 Frequently rebalancing supply chain tactics   31 
2.4.1.4 Process flexibility       31 
2.4.2  KPMG Methodology for Implementing Risk Management 32 
2.4.2.1 Planning        33 
2.4.2.2 Risk identification and assessment    34 
2.4.2.3 Risk management process      36 
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2.4.2.4 Implementation       38 
2.5  Supply chain planning      39 
2.6  Decision-making as a means to manage risk   41 
2.7  Business processes       43 
2.8  Value of risk management      44 
2.9  Supply Chain Operations Reference Model (SCOR)  45 
2.10  Conclusion        53 
 
CHAPTER 3: OVERVIEW OF CHALLENGES AND RISKS WITHIN THE 
SUPPLY CHAIN PROCESS IN AN OIL REFINING PROCESS 
3.1  Introduction        55 
3.2  Types of manufacturing process     55 
3.2.1  The oil refining process      55 
3.3 Roles and responsibilities of operations, maintenance and  
supply chain functions within the oil refining process   
3.3.1  Role of the operations function      58 
3.3.2  Role of the maintenance function      59 
3.3.3  Role of the supply chain function      60 
3.3.3.1 Quality        61 
3.3.3.2 Service delivery       61 
3.3.3.3 Cost or price        62 
3.3.3.4 Flexibility        62 
3.4 The process used by the operations and maintenance  
functions to identify the risk for all equipment in the  
different main streams      63 
3.4.1  Plant risk impact analysis      63 
3.4.2 The strategy followed by the supply chain function to  
understand, support and mitigate the risk created  69 
3.5 Replenishment strategy setup in the supply chain  
function in support of the operations and maintenance 
functions         
3.5.1 Register new material commodity     74 
3.5.2 Evaluation criteria for existing stock commodities  76 
3.5.3 Risk profile of equipment      78 
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3.5.4 Procurement strategy for material     84 
3.5.5 Demand for material      86 
3.5.6 Recommendation       87 
3.5.7 Sourcing strategy       89 
3.5.8 Recommended warehouse     94 
3.5.9 Approval end-user       95 
3.6 Supply chain infrastructure      97 
3.7 Governance and legislation     99 
3.8 Conclusion        101 
 
CHAPTER 4: CONCLUSIONS AND RECOMMENDATIONS 
4.1 Introduction        102 
4.2 Conclusions from the literature and empirical studies   
4.2.1 The importance of a risk reduction model for risk management and 
strategies within the supply chain function   103 
4.2.2 Challenges and risks within the operational, maintenance and 
supply chain functions within the oil refining process  107 
4.2.2.1 The main purpose of the operational function within the oil refining 
process and the possible risks it may encounter  107 
4.2.2.2 The main purpose of the maintenance function within the oil refining 
process and the possible risks it may encounter  108 
4.2.2.3 The main purpose of the supply chain function within the oil refining 
process and the possible risks it may encounter  109 
4.2.2.4 The impact of new and current projects on the replenishment 
strategy within the supply chain function    110 
4.2.2.5 The replenishment strategy within the supply chain function in 
support of the operational and maintenance strategies 111 
4.2.2.6 The infrastructure within the supply chain function in support of the 
operational and maintenance strategies    115 
4.2.2.7 Governance and legislation within the supply chain function in the 
oil refining process       116 
4.3 Recommendations with regard to the importance of having a risk 
reduction model in place within the operations function to mitigate 
risks             116 
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4.4 Recommendations with regard to the importance of having a risk 
reduction model in place within the maintenance function to mitigate 
risks                     118 
4.5 Recommendations with regard to the importance of having a risk 
reduction model in place within the supply chain function to mitigate 
risks            121 
4.5.1 The impact of new and current projects    121 
4.5.2 Supply chain infrastructure      122 
4.5.3 Sourcing strategies and price containment   123 
4.5.4 Supply chain responsiveness     124 
4.5.5 Changed or new legislation     124 
4.5.6 Global skills shortage      125 
4.6 Discussion of proposed risk reduction model within the inbound 
supply chain to manage and mitigate risk within the oil refining 
process        127 
4.7 Value adding role of proposed model    147 
4.8 Recommendations for future research    148 
 
5. REFERENCES        150 
6. ANNEXURES                 155 
         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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LIST OF FIGURES 
Figure 1.1  Focus of indirect and direct supply chains        16 
Figure 2.1  Various factors contributing to overall supply chain risk      22    
Figure 2.2  Risk and flexibility vessels           29  
Figure 2.3  Lead time reduction            31 
Figure 2.4  Example of a risk management framework           32 
Figure 2.5  Example of a risk model           35 
Figure 2.6  Example of a risk map            36 
Figure 2.7  Example of an action plan           37 
Figure 2.8  Example of a reporting template          38 
Figure 2.9  Pro-active risk management model         45 
Figure 2.10  SCOR is based on five distinct management processes    48 
Figure 2.11  Four levels of process detail          49 
Figure 2.12  “Chain” of source, make, and deliver execution process    50  
Figure 2.13  Execution process            51   
Figure 2.14  Example of configuring supply chain threads        51 
Figure 2.15  Example in a classic logistics world         52 
Figure 2.16  Effective supply chain management         53 
Figure 3.1  Correlation of the product and process                               56  
Figure 3.2  Diagram of a typical oil refinery          57      
Figure 3.3  Example of oil refining process          58   
Figure 3.4  Good maintenance and reliability strategy        60 
Figure 3.5  Focus of indirect and direct supply chains                          62  
Figure 3.6  Refinery top 20 risks           66 
Figure 3.7  Debutaniser system            68  
Figure 3.8  Equipment J17010A&B           70  
Figure 3.9  Double mechanical seal           71  
Figure 3.10  Bill of Material Equipment J17010A&B         75  
Figure 3.11  Stock volume trends           77 
Figure 3.12  Recommended spare parts          87  
Figure 3.13  Sourcing / Purchasing – System design matrix        90  
Figure 3.14  Kraljic purchasing strategic Mx          92  
Figure 3.15  Material demand flow           96 
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Figure 4.1  SAMI asset health care triangle       120 
Figure 4.2  Example of STAR work management process     120 
Figure 4.3  External and internal vulnerability drivers     129 
Figure 4.4  Proposed supply chain risk reduction model     130 
Figure 4.5  Proposed risk management phases      135 
Figure 4.6  Example of a risk model        138 
Figure 4.7  Example of a risk matrix        139 
Figure 4.8  Risk matrix impact scales        140  
Figure 4.9  Example of an action plan        142 
Figure 4.10  SCOR process reference model       146 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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LIST OF TABLES 
Table 2.1  Supply chain risk categories                     23 
Table 2.2  Supply chain failure modes           25 
Table 2.3 Summary of a list of principle activities of risk management 
project              39 
Table 3.1  Risk nr.5 PHR top 20 risks identified for the oil refinery       67 
Table 3.2  MTBF Equipment J17010A           81 
Table 4.1  Example of a BDI Model          117 
Table 4.2  Example of supply chain SWOT analysis                 136 
Table 4.3  Example generic list of possible risks within supplu chain 137 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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LIST OF ANNEXURES 
Annexure 1 SPIR flow diagram and SPIR form         155 
Annexure 2 MRP evaluation document for existing and new commodities     156 
Annexure 3 SAMI managing system mode          161 
Annexure 4 Asset performance tool system          162 
Annexure 5 Existing risk management process in operational function      164
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
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LIST OF ABBREVIATIONS 
API  American Petroleum Institute 
APT  Asset Performance Tool 
ATP  Available To Promise 
BBBEE Broad Based Black Economic Empowerment 
BDI  Business Development and Implementation 
BOM  Bill Of Material 
EE  Employment Equity 
FR  Failure Rate 
HAZOP Hazardous and Operability Study 
HSE  Health, Safety and Equipment 
ICS  Internal Control System 
JV  Joint Venture 
MOC  Management of Change 
MRP  Material Requirement Planner 
MTBF  Mean Time Between Failure 
OEM  Operations Equipment Maintenance 
PHR  Process Hazard Review 
PMG  Performance Measurement Group 
R&D  Research & Development 
RFQ  Request for Quotation 
ROIC  Return on Investment Capital 
RTS  Return to Store 
SAMI  Strategic Asset Management Intelligence 
SAP  ERP Business System 
SCM  Supply Chain Management 
SCOR  Supply Chain Operations Reference Model 
SPIR  Spare Parts Interchangeability Record 
STAR  Work Management Process 
SWOT Strengths, Weaknesses, Opportunities, Threats 
TPY  Total Product Yield 
WBS  Work Breakdown Structure 
 
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CHAPTER 1 
NATURE AND SCOPE OF STUDY 
 
1.1 INTRODUCTION 
Effective supply chain planning is one of the critical ingredients for effective 
supply chain management. Jacobs (2009:358) defines supply chain management 
as an application of a total system’s approach to managing the entire flow of 
information, materials and services from raw material suppliers through factories 
and warehouses to the end customer. Waller (2003:521) noted the concept of 
supply chain management as being the integrated process operations network in 
place to provide tangible goods or services to a client. In manufacturing, it is the 
linkage for the physical movement of all materials from suppliers, through 
transformation, to finished goods to the customers. Many companies are 
achieving significant competitive advantage by the way they configure and 
manage their supply chain operations. Supply chain planning processes translate 
the supply chain strategy into plans that direct the supply chain operations (to 
manage the flow of materials, products, information and funds). These supply 
chain planning processes span over long-, medium- and short-term time horizons. 
They balance the market demand requirements with supply resources (taking into 
account agreements, capacity, availability, efficiency, service level and 
profitability) and establish/communicate plans for the whole supply chain. 
 
Companies with mature supply chain planning processes are far more profitable, 
hold much less inventory and have superior delivery performance compared to 
their less advanced competitors. Large-scale integrated petrochemical companies 
pose some very specific supply chain planning challenges and risks. This 
dissertation aims to address the most pertinent of these challenges and risks. 
 
1.2 BACKGROUND 
The purpose of supply chain management and planning is: 
- to plan for the fulfilment of the needs of the customer along the key 
business processes; 
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- to co-ordinate the fulfilment of the needs of the customer by managing 
material, information and financial flows; 
- to enable the supply chains to function as a single synchronised network 
via cross-functional integration; and 
- to ultimately improve the competitiveness of the supply chain network as a 
whole. 
 
For the purpose of this dissertation, the focus will be on the inbound supply chain 
and the ultimate support it gives to the maintenance and operations functions 
within the business process. The maintenance and supply chain functions form 
part of the inbound indirect supply chain, which provides the necessary support to 
the direct supply chain, which is responsible for managing manufacturing, 
operations and ensuring plant reliability (refer Figure 1.1).  
 
Figure 1.1  Focus of inbound indirect and direct supply chains 
 
Source: Adapted from i2 Technologies (2001) 
 
Key issues influencing supply chain management and planning that will be dealt 
with in the dissertation, are the following: 
- The impact of current and new projects; 
- Supply chain infrastructure; 
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- Sourcing strategies and price containment; 
- Supply chain responsiveness; 
- Changed or new legislation; and 
- Global skills shortages. 
 
At the end of the day, the whole strategy should be about how well the risk is 
managed in the inbound supply chain planning and decision processes and the 
focus should be on quality, service and cost. Supply chain mastery will become 
the decisive factor in most battles for consumer market share. The most 
progressive companies will move from an internally focused cost reduction 
strategy to an externally focused revenue enhancement strategy (Taylor & 
Terhune, 2000:42). 
 
1.3. PROBLEM STATEMENT 
An opportunity exists to contribute to a risk reduction model in the inbound supply 
chain within an oil refining process. This dissertation will aim to understand how 
the inbound supply chain fits into the business processes and identify what the 
business risks are in the oil refining process. A theoretical inbound supply chain 
risk reduction model will be developed, if need be, that could be applied by 
companies in the petrochemical industry. The ultimate aim is to create a 
sustainable competitive advantage for the company in the market it operates in. 
 
1.4 OBJECTIVES OF THE STUDY 
1.4.1 Primary objective 
The primary objective of this dissertation is to develop an inbound supply 
chain risk reduction model that will effectively support the maintenance and 
operations functions within the business process. 
 
1.4.2 Secondary objectives 
From the above primary objective, the study aims to reach certain 
secondary objectives, which include: 
- To identify the risks and gaps within the inbound supply chain to 
function effectively; 
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- To define the inbound supply chain, maintenance and operations 
functions within an oil refining process; 
- To gain insight into the inbound supply chain; 
- To identify the key performance indicators to be able to measure the 
inbound supply chain effectively; and  
- To identify and describe the elements required for an effective inbound 
supply chain. 
 
1.5 SCOPE OF STUDY 
1.5.1 Field of study 
 This dissertation is focused on inbound supply chain planning and risk 
reduction processes relevant to the petrochemical industry. Large-scale 
petrochemical companies in South Africa are the prime focus. The 
framework developed within this dissertation could also be applied to small 
and medium-sized chemical companies. 
 
1.5.2 Geographical scope 
 The study will primarily focus on a petrochemical company in South Africa. 
Although the company is relatively small, their unique challenges are 
significant. The resulting framework for this dissertation could also be 
applied to small and medium-sized organisations, although they might not 
be faced with the same complexities than that of a large-scale 
petrochemical company. 
 
1.6 RESEARCH METHODOLOGY 
1.6.1 Literature study   
 A proper literature study will be conducted. The aim of the study is to lay 
the theoretical foundation and better understand inbound supply chain and 
supply chain risk management approaches. 
 
1.6.2 Empirical study 
An empirical study will be performed to gather data to address the problem 
statement and the study objectives. The following aspects will be taken 
into account during the empirical research: 
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- Data collection and analysis 
Open-ended questions will be included in order to obtain better 
recommendations, and to assess the level of advancement in identifying 
planning processes along relevant different supply chain dimensions. 
These findings will be analysed and conclusions and recommendations 
will be made to achieve the objectives of the research. 
- Semi-structured interviews 
Interviews will be conducted with identified stakeholders to clarify the 
best practice, concepts and approaches. 
 
1.7 LIMITATIONS OF THE STUDY 
The following aspects have been identified as limitations to the study: 
 
1.7.1 Limited time to complete the study 
The study will be done over a period of nine months during the 2010 
calendar year. 
 
1.7.2 Limited geographical scope of the study 
It would have been advantageous if the study and benchmarking could 
have been done against the backdrop of international petrochemical 
companies. Assumptions will have to be made, because we will be 
measured against ourselves and other petrochemical companies within 
South Africa. 
 
 
 
 
 
 
 
 
 
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CHAPTER 2 
LITERATURE REVIEW ON EXISTING MODELS OF SUPPLY CHAIN RISK 
REDUCTION 
 
2.1 INTRODUCTION 
Supply chain management has always been treated as a small office, non-core 
function managing the logistics of supply chains. Today, environmental and social 
transparency across the supply chain delivers significant value to their 
companies. According to Business for Social Responsibility (BSR, 2007:3), a new 
era is unfolding in supply chain management.  
 
The success of a business is no longer determined only by customer loyalty and 
shareholders’ value; it is all about being shaped by external pressure from the 
investment community, business partners, civil society, governments, the media 
and consumers. To respond to stakeholder expectations and to meet the 
increasing regulatory requirements, companies are required to be transparent 
about their supply chain practices. By gaining visibility and control over their 
supply base, companies are in a position to align supplier performance and 
capabilities with their own corporate objectives (BSR, 2007:3). 
 
The question to be asked is what makes supply chain management difficult? 
According to Simchi-Levi and Kaminsky (2008:2), reasons can be related to the 
following observations: 
Supply chain strategies cannot be determined in isolation, they are directly 
affected by the value chain. 
New products get developed every day to keep up with continuously changing 
environments. It is essential that all supply chain strategies should align with 
organisation-specific goals at all times, for example an increase in profit and 
market maximisation. 
It is challenging to design and operate a supply chain so that total system-
wide costs are minimised, and system-wide service levels are maintained. 
The difficulty to operate a single facility is experienced frequently while the focus 
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is constantly on cost minimisation and maintaining service levels. The process to 
find a system-wide strategy is known as global optimisation. 
Uncertainty and risk are inherent in every supply chain. 
When developing supply chains and the management thereof, the focus must 
always be on eliminating as much uncertainty and risk as possible as well as 
dealing effectively with the uncertainty and risk that remain. Industry trends, 
outsourcing of functions, off-shoring and lean manufacturing that focus on 
reducing supply chain costs increase the level of risk in the supply chain. 
 
For the purpose of this study, the focus will be on “uncertainty and risk”. This 
chapter focuses on literature that captures the different views on what the 
experts’ understanding of risk is, what possible risk reduction models and 
methods can be applied within the supply chain to manage uncertainties and 
risks, and how all of this fits into business planning and processes. 
  
2.2 What is risk? 
According to Artbrant (quoted by Kersten et al., 2006:74) there is a very close 
relationship between all the important parties contributing to the supply chain. Any 
deviation, sub-standard performance or non-performance from any of the role-
players will have an impact on the other role-players. For example the domino 
effect, where when one system fails to perform, the others will soon follow, 
because all of the systems are integrated and interdependent. 
According to Holton (quoted by Rao et al. 2004:97-123), a situation is risky when 
it is opened up to two essential components: exposure to an event and the 
uncertainty of possible outcomes. Both the two components must be present to 
cause a risky situation. When you are dealing with a situation that has a certain 
outcome, how negative it might be, the situation is not risky. However, when you 
deal with a situation where the outcome is unknown, then it becomes risky. 
Rao and Goldsby (2009:97-123) identified five sets of different factors with their 
risks that contribute towards the “overall” supply chain risk (refer Figure 2.1). 
a) Environmental risk 
b) Industry risk 
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c) Company risk 
d) Problem-specific risk 
e) Decision-maker risk 
Figure 2.1 Various factors contributing to overall supply chain risk  
 
Source: Rao and Goldsby (2009:97-123) 
According to Deleris and Erhun (quoted in IBM Global Business Services White 
Paper, 2008:6), Table 2.1 summarises supply chain risk categories and examples 
companies need to consider as a starting point to guide organisations in an initial 
assessment of their supply chain. 
 
All of the categories mentioned in Table 2.1 can have a great impact on any 
supply chain function if the possible risk that might occur in each of the above 
mentioned categories is not properly managed, mitigated or illuminated. For the 
purpose of this study, possible risks in all of these areas might be identified. 
 
 
 
 
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Table 2.1 Supply chain risk categories, with examples 
Category Examples 
Operational / 
Technological 
Forecast errors, material shortages, capacity constraints, quality 
problems, machine failure / downtime, software failure, imperfect yields, 
efficiency, process / product changes, property losses (theft, accidents), 
transportation risks (delays, damage from handling), storage risks 
(incomplete customer order, insufficient holding space), budget 
overrun, contract terms (minimum and maximum limit orders, 
communication / IT disruptions 
Social Labour shortages, loss of key personnel, strikes, accidents, 
absenteeism, human errors, company errors, union / labour relations, 
negative media coverage, perceived quality, coincidence of problems 
with holidays, fraud, sabotage, acts of terrorism, decreased labour 
productivity   
Natural / Hazard Fire, severe thunderstorm, flood, monsoon, blizzard, ice storm, drought, 
heat wave, tornado, hurricane, earthquake, tsunami, avalanche  
Economy / 
Competition 
Interest rate fluctuation, exchange rate fluctuation, commodity price, 
price and incentive wars, bankruptcy of partners, stock market collapse, 
global economic recession 
Legal / Political Liabilities, lawsuits, governmental incentives / restrictions, new 
regulations, lobbying from customer groups, instability overseas, war, 
tax structures, customer risks (inspection delay, missing data on 
documentation) 
Source: Adapted from Deleris and Erhun (2007) 
Typical examples in the market where risk had an impact on the company’s 
supply chain: 
a) Supplier issues caused Boeing to lose $2.6B in 1997 because of raw 
material and part shortages. 
Supplier issues caused the Refinery to lose >R650k because of equipment 
supplied by a sub-agent who was under specification.  
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b) Transportation plays a very critical role in any supply chain, especially if 
the company relies on just-in-time supply. In 2002, there was a shutdown 
of all the West Coast ports, most of the dockworkers striked at that stage 
and manufacturers had to incur high costs because a lot of material had to 
be flown in. 
 In the beginning of 2010, there was a volcano in Iceland, which had an 
outburst. The volcano ash covered the air in Western Europe, which 
delayed flights with material to be delivered to us by more than a week. 
Fortunately, the order was placed in advance and delivery was still in time 
to the refinery.  
c) When material is needed from overseas companies, cross-border 
problems can cause vulnerability in the supply chain. There might be 
delays in inspections at customs or border closure might take place. The 
9/11 terrorist attack caused trucks full of parts to queue at the US-
Canadian border. 
 A valve was ordered by the refinery from an overseas supplier in Germany. 
There were no direct flights and the plane had to land in Portugal, where 
the valve was then put on a wrong plane. The delivery had to be sent back 
to Germany again, after which it was delivered to South Africa. The 
delivery was in time, but if not, it could have been disastrous. 
d) Supply chain visibility and non-compliance caused a lot of problems in 
2007 for the toy maker Mattel. A large number of toys had to be withdrawn 
from the market because of lead in the paint that was used by a sub-
contractor to paint the toys. 
 An order was placed well in advance with a local company to build a heat 
exchanger. As per schedule it would have been delivered two months 
before the actual equipment had to be used. The supplier made use of 
sub-contractors to drill holes, which was wrongly done. The current 
situation is that it might be delivered late. 
e) A problem in Nike’s demand planning software resulted in a $100 million 
sales loss. Information technology plays a very important role in 
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coordinating and linking supply chain functions. IT systems are becoming 
the core of many companies and when they become unreliable, the 
consequences can be catastrophic. 
 The refinery’s production planning system failed approximately 6 years 
ago. The impact of the failure was slower movement of products out of the 
plant, and the yield of the plant was negatively affected because of the 
slow reaction time. The throughput was negatively affected by 20%. 
An important fact that companies must not lose sight of is that “smaller risks” can 
also hurt them as much as any extraordinary event. These “smaller risks” can 
lead to losing important customers or not having stock if they take place too 
regularly. The MIT research group on “Supply Chain response to Global 
Terrorism” (2003) has indicated that companies in most instances rather focus on 
the symptom than the problem, which then causes them not to be able to prepare 
against the risk. The research group distinguished between six different types of 
failure modes (refer Table 2.2) that cause risk in supply, transportation, facilities, 
freight breaches, communications and demand. 
Table 2.2 Supply chain failure modes 
Failure mode Examples 
Disruption in supply Delay or unavailability of materials from suppliers, leading to a shortage of inputs that could paralyse 
the activity of the company 
Disruption in 
transportation 
Delay or unavailability of the transportation infrastructure, leading to the impossibility to move goods, 
either inbound or outbound 
Disruption at facilities Delay or unavailability of plants, warehouses and office buildings, hampering the ability to continue 
operations 
Freight breaches Violation of the integrity of cargos and products, leading to the loss or adulteration of goods (can be 
due to either theft or tampering with criminal intent) 
Disruption in 
communications 
Delay or unavailability of the information and communication infrastructure, either within or outside the 
company, leading to the inability to coordinate operations and execute transactions 
 
Disruption in demand 
Delay or disruption downstream can lead to the loss of demand, temporarily or permanently, thus 
affecting all the companies upstream 
Source: Sheffi, Rice, Fleck and Caniato (2003) 
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2.3 Why risk reduction?  
The ultimate reason why any company would need to reduce risk as far as 
possible is to limit the potential damage caused when a risk does take place. By 
being proactive at all times and having early warning systems installed, the 
company will possibly succeed in avoiding or reducing the possible risk. If the 
company did not succeed in avoiding the risk, the company must try to position 
itself in such a way that they will be able to transfer the potential impact of the risk 
to another company, for example to an insurance company. Strategies and 
processes to reduce supply chain risks must form part of any supply chain 
management system. The main reason for putting energy and effort into 
implementing effective and efficient strategies and processes is to increase 
resilience and efficiency.  
 
According to Vinod Lall (2010:1), these strategies and processes can include 
supply management, demand management, product management, and 
information management. The task of managing supply chain risk is difficult 
because processes and strategies that mitigate one risk element can end up 
aggravating another.  
 
Supply management 
The main reason for focussing on supply management is because in this area 
risks are appearing on the inbound supply chain. By not managing this properly, 
disruptions in the availability of product or transportation delays from the supplier 
to the company may occur. Companies should have their focus on building a web 
of internal and external sources. It is of utmost importance for the company to be 
very selective in building a strong web of vendors and closely managing the 
vendor network. Another important aspect under supply management is the 
development of a profile of their suppliers as this will assist them in having a more 
complete picture. The profile should basically include the total number of 
suppliers, their BBBEE status, the location and diversity of each, and the flexibility 
in the volume and variety of supplier capacities. All of the information will help 
companies to identify vulnerabilities in their supply chains so they can strategise, 
create contingency plans, conduct trade-off analyses of issues such as single 
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sourcing, and if needed, identify and line up backup sources. Holding reserves of 
inventory and capacity is another option to reduce risk in the supply chain. This 
might be a solution, but it will hurt the bottom line and increase costs if not 
properly analysed and managed. 
  
Demand management 
These risks are more downstream, and are on the demand outbound side of the 
supply chain. If there is a sudden increase in customer demand without notifying 
the relevant people in time, the consequence can be running out on safety and 
emergency stocks. The stock-outs will result in an increase in back orders and 
will put pressure on expediting. The opposite will also have an effect on the 
company. If there is a decrease in customer demand, the holding cost of 
inventory increases, which leads to price reductions. Strategic plans to manage 
demand will focus on product pricing, while tactical plans are used to shift 
demand across time, across markets and across products.  
 
Product management 
It is important for any company to develop profiles of their products, processes 
and services. This will give an idea as to whether there is a good mix of products 
and services and if there are risks associated with the processes. 
 
Information management 
Most companies are becoming very reliant on information technology. These 
tools can be use to understand what the risk is and by providing visibility into 
planned events and warnings for unplanned events can help to manage the risk 
in the entire supply chain. The use of reliable data and measures on inventory, 
demand, forecasts, production and shipment plans, work in process, process 
yields, capacities and backlogs can assist in offering the company more 
opportunities to all parties to respond quickly to sudden changes in the supply 
chain. This requires the implementation of information technology solutions that 
interface business data and processes end to end. 
 
 
 
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2.4 Risk models 
For the purpose of this literature study, the focus will be on the following three 
models: 
- The Deloitte Touche Tohmatsu model of Understanding Risk and the value 
of Flexibility; 
- The KPMG Methodology for Implementing Risk Management; and 
- The Supply Chain Operations Reference Model for Business Process Re-
engineering. 
 
 2.4.1 Deloitte Touche Tohmatsu model of understanding Risk and the 
value of Flexibility. How to reduce risk and enhance flexibility in the supply 
chain? 
Deloitte Touche Tohmatsu’s (2009:5) viewpoint is on understanding how risk 
affects supply chain performance and how this impact can be reversed by 
balancing or offsetting risks with supply chain flexibility. There are two potential 
strategies: 
• Managing and reducing supply chain risk, e.g. 
• starting a formal supplier risk management programme 
• increasing demand planning accuracy 
• Managing and enhancing supply chain flexibility, e.g. 
• investing in additional tooling and assets to enhance mix flexibility of 
a product line 
• fine tuning deployment tactics at a more granular level, and doing it 
more frequently 
In the current uncertain times, managing the supply chain is all about managing 
the company’s cash with a strong focus on inventories and cost reduction in the 
business. Companies should focus on increasing their levels of integration and 
the globalisation of the supply chain. This provides an opportunity to take 
advantage of consolidated services and synergies, to drive out redundancy and 
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increase efficiency. More integrated supply chain structures are more capable of 
leveraging network flexibility potential. 
 
Supply chain volatility, market demand, fluctuations of commodity prices, supplier 
risk, currency exchange and competition all contribute to the daily uncertainties 
and create risks within the supply chain.  Supply chain risk can, for example, be 
reduced by reducing lead times, managing supplier risk and aligning processes 
(refer Figure 2.2). 
 
Figure 2.2 Risk and flexibility communicating vessels 
 
Source: Deloitte Touche Tohmatsu (2009)  
 
Supply chain flexibility enhancement can be achieved by multi-scenario planning 
and volume flexibility. The bottom line is that these practices mitigate business 
risk, enhance flexibility and therefore increase the value of the company. By 
managing risk and enhancing supply chain flexibility, there is a clear opportunity 
for companies to win in the current uncertain environment, and to sustain their 
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supply chains as a critical asset and differentiating factor for success towards the 
future. 
 
2.4.1.1 Network flexibility 
At the level of the supply chain network, it is about making the hidden flexibility 
visible, which can include alternative sources of supply, alternative locations to 
manufacture and to deliver. Supply chain integration promotes more optimal and 
faster decision-making by leveraging the hidden network flexibility. This might 
require a redesign of the business model; it might be complex, but it is often less 
expensive than building additional flexibility within the walls of individual 
operational facilities in response to market demand, supplier risk, currency 
exchange and commodity price volatility. 
 
2.4.1.2 Reducing lead times 
Flexibility can be enhanced by investing in additional tooling or assets to enhance 
product mix flexibility on existing manufacturing assets, by negotiating more 
flexible labour or supplier agreements, or by investing in lead time reduction 
efforts. Reducing supply chain lead times through enterprise lean six sigma 
efforts for instance, very often allows moving the push-pull boundary in the supply 
chain, physically to more upstream levels. This typically results in a situation 
where a relatively larger part of the supply chain can be planned against company 
orders instead of uncertain forecasts. At the same time, decisions in the supply 
chain that need to be taken based on uncertain forecasts can be delayed to a 
later point in time when the quality of the forecasts is typically higher. Lead time 
reduction is a powerful lever to reduce risk and rigidity in supply chains and to 
make them more flexible and responsive. 
 
 
 
 
 
 
 
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Figure 2.3  Lead time reduction 
 
Source: Deloitte Touche Tohmatsu (2009)  
 
2.4.1.3 Frequently rebalancing supply chain tactics 
Another way to reduce risk is to rebalance the supply chain tactics more 
frequently at the level of planning and portfolio policies. For example, a lot of 
supply chains currently have more fat built into their capacity, which can be used 
as a buffer for (demand or supply) uncertainty rather than using inventory for this 
purpose. This requires taking a more frequent view at planning and service 
offering policies and to rebalance them more regularly in order to trade excess 
inventory for slack capacity and release cash out of the supply chain. In a volatile 
supply chain environment, regular alignment of planning and service offering 
policies reduces the risk of experiencing service problems and of carrying excess 
inventory. 
 
2.4.1.4 Process flexibility 
Supply chain management processes also have a high potential of contributing to 
either risk reduction or enhancing flexibility in the business. Cash is king – the 
importance of an effective supply and operational process is very high. In times of 
uncertainty, practices that can improve the value of the supply and operational 
process are: 
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- increasing the frequency, 
-   doing mid-cycle sensitivity checks, 
- accelerating the supply and operational process, 
- developing multiple demand / supply scenarios, 
- more pro-activeness and collaboration with customers and suppliers, and 
- the incorporation of risk factors. 
 
2.4.2 KPMG Methodology for Implementing Risk Management 
Why would any company want to manage possible risk? It links strategic 
objectives to risks and controls in order to improve corporate performance, 
increases transparency, provides an early warning system and enhances 
business sustainability. 
 
Figure 2.4 Example of a risk management framework 
 
 
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Source: KPMG Holding Ltd. (2008) 
 
When implementing a thorough risk management framework, it would focus on 
the following phases: 
 
2.4.2.1 Planning 
During the planning phase, information and documentation related to risk 
identification are analysed, assessed and / or managed. Another aspect that 
needs to be identified is the desired state of the risk management in the 
company. Where does the company want and need to be with risk management? 
Prior to the planning phase, it is important to know what already exists with regard 
to risk management and to define the primary objectives of risk management. 
Aspects such as the following are discussed: 
1. How is the company organised? 
2. What management tools are used? 
3. Has management performed a risk assessment in the past? 
4. How were the most significant risks identified, managed and documented? 
5. What is the IT landscape and how do IT related risks influence the risk 
assessment? 
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Based on the outcome of the analysis, the company is benchmarked against 
better practice and makes a preliminary decision about the desired state of its 
risk management. The high-level reporting requirements are aligned with the 
desired state. There is a need to develop common risk management language for 
the company right at the beginning. The definitions and terms used for risk 
management need to be defined. With regard to the scope of the project, it must 
be clear which areas, entities etc. should be covered by the risk management. It 
is advisable to initially focus on the most important areas. The scope is to be 
reviewed and updated on an annual basis. 
 
The risk management project is dependent on the support from senior 
management and board members. Without such support, the project can face 
delays and even failure. Therefore, the project sponsor needs to be defined right 
at the start of the project. The project sponsor could be a member of the 
executive management, the steering committee or the audit committee based on 
the company’s setup and should be in a position to promote the project against 
any possible impediments. Roles and responsibilities are defined and allocated 
to employees. One employee can take over more than one role, depending on 
the complexity and the size of the company. The project structure and the key 
team members are defined based on the roles and considering the resources 
available. Planning is set up and milestones are defined to achieve the desired 
state of risk management. This planning should not be seen as final, but rather as 
an iteration, as it will be updated and further detailed throughout the next phases. 
 
2.4.2.2 Risk identification and assessment 
Risks are identified and categorised. These risks are assessed and prioritised 
with the focus on defining the top risks the company faces. Considering the 
limited amount of resources available within a company, it is important to focus on 
the most important risks and to use the resources efficiently to manage these top 
risks to achieve maximum value. The risk assessment is therefore one of the 
most important and critical parts of the risk management process as it sets the 
tone and focus for the whole risk management setup in the company. The risk 
identification begins with a SWOT analysis (Strengths, Weaknesses, 
Opportunities, and Threats) in a workshop supplemented by interviews with key 
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members of the company. The SWOT analysis is a simple tool, but it is very 
beneficial in creating awareness and providing focus regarding the key issues 
linked to the company’s strategic objectives. The aim of any SWOT analysis is to 
identify the key internal and external factors that affect the company’s 
performance and value. 
 
The information gained from workshops and interviews in combination with 
benchmarking analysis and other publicly and privately available data helps to 
create a database of all relevant risk information in the form of a master risk list 
generally called a risk catalogue. The risks are categorised in order to allocate the 
risks to the right dimension of the risk model (see Figure 2.5). Companies can 
create a categorisation that reflects their existing business and that is aligned to 
the already operational framework, for example for the internal control system 
(ICS). 
 
Figure 2.5 Example of a risk model 
 
Source: KPMG Holdings Ltd. (2008)  
 
Once the risk catalogue is defined, a high-level risk assessment is carried out 
for all risks identified. The assessment is usually done on the following two 
dimensions: 
Probability is the likelihood of occurrence of the risk. It is common that a three-
year timeframe is considered for the probability approximation. If a company has 
a strategic planning cycle, that timeframe is generally applied. 
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Impact is the effect that an event might have on the company if it occurs. 
Generally, a financial value of the impact is considered. Since it is not easy to 
quantify many of the risks only on a financial basis, risks can also be evaluated 
on the basis of other qualitative criteria, such as reputation damage, regulatory 
compliance, health and safety benchmarks or management effort required to 
control the situation once the risk occurs. The results of the risk assessment are 
illustrated in the form of a risk map (see Figure 2.6). The top risks are selected 
considering both dimensions: probability and impact. As a rule of thumb, 
companies often focus on approximately 10 top risks. 
 
Figure 2.6  Example of a risk map 
 
Source: KPMG Holdings Ltd. (2008) 
 
 
2.4.2.3 Risk management process 
The top risks identified above are analysed in more detail. Appropriate risk 
strategies and necessary actions are defined and agreed upon. In addition, the 
desired state of the risk management process is defined more precisely. Once the 
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top risks have been selected, an appropriate risk strategy is defined to optimally 
manage these risks to enhance and safeguard the company’s performance and 
value. The top risks are analysed in detail to support the decision process and 
are discussed in workshops to create a dialogue among different functions 
leading to a common understanding of the risks. The risks are allocated to risk 
owners who need to monitor their risks. Risk strategies are defined for all top 
risks, which include “accept”, “mitigate”, “avoid” or “transfer” the risks and 
continuous monitoring. Often a combination of several risk strategies is agreed 
upon and transferred to action plans. Figure 2.7 shows an example of a risk 
action plan for one of the top risks. 
 
Figure 2.7  Example of an action plan 
 
Source: KPMG Holdings Ltd. (2008)  
 
2.4.2.4 Implementation 
Relevant policies and guidelines are set up. The risk management system is put 
into practice and the proper implementation is monitored. Policies and 
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guidelines are framed to summarise all key decisions and processes developed 
during the project period. These documents are approved by the board of 
directors and executive management stating the “tone at the top” and providing 
the members of the company with a road map supporting them in carrying out 
their risk management responsibilities. 
The actions and the additional aspects of the risk management system as 
defined in phase 3 are implemented. One of the key elements is to ensure 
continuous monitoring. The risk owners are responsible for periodic reporting 
regarding the status of the defined actions and the development of the risks. A 
summary of all risks together with the status of the defined actions is periodically 
presented to the board of directors and executive management as outlined in 
Figure 2.8 
 
Figure 2.8 Example of a reporting template 
 
Source: KPMG Holdings Ltd. (2008)  
 
Risk management should be a pivot between internal controls and other 
assurance functions, such as an internal audit. One of the key success factors to 
a sustainable risk management programme is its integration into the overall 
corporate governance of the company. Risks are derived from the company‘s 
strategy and linked to the internal controls that are in place or are to be 
implemented to manage the risks. The various assurance functions of the 
company are coordinated such that adequate risk monitoring can be most 
effectively ensured. A continuous communication and feedback loop among the 
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various functions closes the circle. Table 2.3 lists the principal activities, results 
and success factors of the individual phases of a risk management project. 
 
Table 2.3 Summary of a list of principle activities of risk management project 
 
Source: KPMG Holdings Ltd. (2008)  
 
2.5 Supply chain planning  
Supply chain planning is becoming a key differentiator for companies in an 
increasingly competitive global environment (Shen, Lee & Van Buskirk, 2001:68). 
Koutsoukis et al. (2000:657) indicated that strategic planning and the operational 
management of supply chains are two leading decision problems in supply chain 
management. According to Mulani (2001:27), advanced planning has now gone 
well beyond the factory and into the supply chain. Companies now use integrated 
planning processes for the sole purpose of building a master plan for 
procurement and supply.  
 
The benefits of adopting supply chain management and advanced planning 
cannot be achieved by one company alone, due to companies focusing on their 
own core competencies. This brought about new challenges for the integration of 
legally separate companies and the coordination of material, information and 
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financial flows not experienced in this magnitude before. To a large extent, this 
then encompasses the new supply chain management philosophy. (Stadtler & 
Kilger, 2000:1). The oil refinery used in this study is a good example of legally 
separate companies forming a joint venture (JV) with two other oil refineries, 
nationally and internationally based. Negotiating one group contract for specific 
commodities helps all parties of the JV to ensure material as and when needed at 
the most cost effective price. Economies of scale would play a very important 
role; the buying power is much more than where three companies would have 
tried to negotiate three different contracts. 
According to the results of a supply chain benchmarking study conducted by The 
Performance Measurement Group (PMG), well-developed supply chain planning 
processes are critical for achieving a competitive advantage (Wawszczak, 2003). 
The study shows that companies with mature planning practices are 38% more 
profitable than average companies, have 22% lower levels of inventory and have 
10% greater delivery performance. The companies that combine mature planning 
processes with advanced planning systems gain added performance 
improvements (including 27% greater profitability).  
“Planning drives the supply chain. It orchestrates the flow of materials and 
resources, getting them to the right location at the right time, in the right 
sequence. Effective planning balances demand and supply, internal and external 
objectives, all in a constantly changing environment. Mastering supply chain 
planning can provide a major competitive advantage” (Ribbers 1994:26).  
The removal of national barriers to international trade, combined with the 
increased sophistication of the customer, means that companies do not have a 
choice anymore but to integrate. The potential benefits of full integration have not 
yet all been achieved. The biggest barriers to modifying a company’s logistics 
systems are internal and people related. The change process is left unmanaged 
ten times out of ten. The principal source of resistance to change is employee 
attitude (Ribbers, 1994:26).  
The chemical industry is still faced with the required shift in their supply chain 
focus from integrating internally to integrating across overall enterprises and from 
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suppliers to end-customers (Boulanger & Eckstut, 2000:11). Although companies 
believe that SCM can help their competitive drive, they recognise the tension that 
exists between SCM’s competitive enhancement potential and the inherent 
difficulty of collaboration. Establishing seamless processes that bridge company 
boundaries are an appropriate goal, but establishing them is anything but easy 
(Fawcett & Magnan, 2002:360).  
 
2.6 Decision-making as a means to manage risk 
 
It is no longer appropriate to base decisions and actions only on prior experiences 
and assumptions. Decision-making must become fact based. Measurements 
must be across company boundaries and should provide information on overall 
supply chain performance (Vakurka & Lummus, 2003:55). Because companies 
depend on the measurement and analysis of performance, measurements must 
derive from the company’s strategy and provide critical data and information 
about key processes, outputs and results. Supply chains need to share and take 
action on data and information, not assumptions and emotions. Performance 
analysis and problem-solving must be based on reliable and relevant information.  
According to Pienaar (2005:71), the decision-making process should assure that 
decisions reached are quantitatively sound and did consider the various tradeoffs 
(costs & service) and coordination involved.  
King and Wright (2002:24) state that broken supply chains are cemented together 
with stock so that the cracks do not show. Fundamental structural problems are 
thus avoided. The point of fracture of most supply chains is the connection 
between demand management and supply management.  
Long- and short-term tactical supply chain planning has thus far mainly been 
ignored by managers and consultants (Shapiro, 2001:43). According to Bramel 
and Simchi-Levis (1997:7), managers and consultants typically resort to one of 
the following for solutions:  
•  People tend to repeat what has worked in the past;  
•  Use the "rule of thumb"; and  
•  Apply the experience and intuition of logistics experts and consultants.  
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Sophisticated decision support systems are now available to optimise logistics 
and supply chain strategic decisions. These systems apply techniques that have 
been developed in the operations research and management science research 
communities. An increasing number of managers in a wide range of companies 
are seeking to manage their supply chains based on facts, that is, data and 
proper analytical methods (Shapiro, 2001:25).  
As supply chains develop over time and integrating processes become 
prominent, decision-making and a pro-active approach with longer time horizons 
become the norm for excellence.  
 
The logical steps in decision-making can also be viewed to comprise the following 
to summarise the interaction between information systems and decision 
modelling (Koutsoukis et al., 2000:642):  
a) Data (-base) modelling involves defining relationships between data items 
leading to a relational data model, or identifying categories that are then used to 
define multidimensional tables, leading to a multidimensional database.  
b) Decision modelling involves the development of models that are used for 
decision-making (not only linear, nonlinear, or discrete optimisation models, but 
also simulation, cluster analysis, costing, data mining and other analytical 
models).  
c) Model analysis and investigation involve descriptive analysis of the results; this 
leads to insight and knowledge with regard to a given decision problem.  
A mix of optimisation techniques, common sense, business best practices, and 
political savvy is required to develop and implement a workable solution. There 
are typically many common sense, best practices and political savvy to go around 
in most companies. What is often lacking, is the analytical resources required to 
model and solve logistical problems (Frazelle, 2002:15).  
Business will not continue to succeed or prosper unless it continues to offer good 
customer service in the form of accurate delivery commitments and supply chain 
streamlining. In a complex environment, these tasks cannot be executed 
successfully without optimisation engines (proper analytical tools) to enable them 
(Peterson, 1999:2). Quantitative models provide companies with decision support 
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as well as insight for the better management of supply chains (Keskinocak & 
Tayur, 2001:70).  
But how does this apply to the decisions that need to be made in the supply 
chain? Supply chain management is about, “Getting the right product, at the right 
place at the right time”. Supply chain planning decisions are about determining, 
“Which is the right product, where is the right place, and when is the right time?” 
(Stemmet, 2002:4). This will be discussed in more detail in the empirical study. 
 
2.7 Business processes 
Processes can be regarded or defined as a series of linked, continuous and 
managed activities that contribute to an overall outcome (Manrodt & Fitzgerald, 
2001:110). Each process has a specific starting and ending point and goes 
beyond functional boundaries within a company. A business process can also be 
viewed as a series of actions directed towards a particular goal (Microsoft Encarta 
Reference Library, 2002). For two companies to send information back and forth 
and do business, they need to have a common understanding of their own and 
each others’ processes (Hill Jr., 2000:62). This principle plays a vital role in 
integrating supply chains.  
Francis (2004:3) indicated the following benefits when focussing on the process. 
It helps to:  
- manage the business (through visibility of how work actually gets done)  
 - compete more effectively (the knobs and levers are explicit)  
 - create real improvements (not just move bottlenecks around)  
-  improve multiple areas (performance measures are controlled   
independently)  
- improve coordination between teams (visibility of relationships and 
consequences)  
- streamline and accelerate business change (rather than silos of change 
with an unpredictable approach)  
  
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 2.8 Value of risk management 
 When a business has a proactive risk management system in place, it will assist 
in the efficient management of the business risk, which can then lead to the 
constitution of value in the following areas of the business (Smith and Merritt et al. 
2002): 
 2.8.1 Compliance and prevention 
 - avoid crises in own organisation 
 - avoid crises in other organisations 
 - comply with corporate governance 
 - avoid personal liability failure 
2.8.2 Operating performance 
 - understand full range of risks facing the organisation 
 - evaluate business strategy risks 
 - achieve best practices 
2.8.3 Corporate reputation 
 - protection of corporate reputation 
2.8.4 Shareholder value enhancement 
 - enhance capital allocation 
 - improve returns through value-based management 
 According to Smith and Merritt (2002), proactive risk management evaluates the 
probability of risk occurring, risk event drivers, risk events, the probability of 
impact and the impact drivers prior to the risk actually taking place.  For any 
business this is the ultimate first prize – to have a model in place that can prevent 
or mitigate the risk before it can actually happen 
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Figure 2.9 Pro-active risk management 
 
 
  
  
  
 
 
 
 
 
 Source: Smith and Merritt (2002) 
  
2.9 Supply Chain Operations Reference model (SCOR) 
How do we put all of the above together? How do we take the current situation in 
the company and get to where we want to be and make sure we stay there? Such 
a model referred to in the literature is called the Supply Chain Operations 
Reference model, in short called SCOR, a registered trademark in the United 
States and Europe, developed and endorsed by the Supply Chain Council.  
According to the Supply Chain Council (2005:1), a process reference model 
integrates the well-known concepts of business process reengineering, 
benchmarking, and process measurement into a cross-functional framework. 
SCOR is a process reference model designed for effective communication among 
supply chain partners. A standard language helps management to focus on 
management issues. As an industry standard, SCOR helps management focus 
Probability 
of risk 
occurring 
 
Risk event 
drivers 
 
 
Risk event 
Probability 
of  
impact 
 
 
Impact 
 
Impact 
drivers 
 
 
Losses 
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across inter-company supply chains. SCOR is used to describe, measure and 
evaluate supply chain configurations. 
• Describe: Standard SCOR process definitions allow virtually any supply chain 
to be configured. 
• Measure: Standard SCOR metrics enable the measurement and benchmarking 
of supply chain performance. 
• Evaluate: Supply chain configurations may be evaluated to support continuous 
improvement and strategic planning. 
 
According to the Supply Chain Council (2005:1), a process reference model 
contains: 
• Standard descriptions of management processes; 
• A framework of relationships among the standard processes; 
• Standard metrics to measure process performance; 
• Management practices that produce best-in-class performance; and 
• Standard alignment of features and functionality. 
 
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Once a complex management process is captured in a standard process 
reference model form, it can be: 
• Implemented purposefully to achieve competitive advantage; 
• Described unambiguously and communicated; 
• Measured, managed and controlled; and 
• Tuned and re-tuned to a specific purpose. 
 
The Boundaries of any model must be carefully defined.From your supplier’s 
supplier to your customer’s customer. 
SCOR spans: 
• All customer interactions, from order entry through paid invoice; 
• All product (physical material and service) transactions, from your supplier’s 
supplier to your customer’s customer, including equipment, supplies, spare parts, 
bulk product, software, etc; 
• All market interactions, from the understanding of aggregate demand to the 
fulfilment of each order, SCOR does not attempt to describe every business 
process or activity, including: 

 Sales and marketing (demand generation) 

 Research and technology development 

 Product development 

 Some elements of post-delivery customer support. 
 
Links can be made to processes not included within the model’s scope, such as 
product development, and some are noted in SCOR. 
 
SCOR assumes but does not explicitly address training, quality, information 
technology (IT) and administration (non SCM). 
 
 
 
 
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Figure 2.10 SCOR is based on five distinct management processes, namely: 
 
Source: Supply-Chain Council, (2005) 
 
According to the Supply Chain Council (2005:6), SCOR contains four levels of 
process detail (refer Figure 2.11) 
 
 
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Figure 2.11 Four levels of process detail 
 
Source: Supply-Chain Council, (2005) 
 
Level 1 entails the definitions of each of the five core management processes, on 
which SCOR is based, as well as Level 1, high-level measures that may cross 
multiple SCOR processes. Level 1 metrics do not necessarily relate to the SCOR 
Level 1 process (Plan, Source, Make, Deliver, Return). 
Level 2 is a further description of each SCOR process by process type as well as 
a tool kit to enable the process. 
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Level 3 presents detailed process element information for each Level 2 Category, 
namely process flow, inputs and outputs, source of inputs, and output destination.  
 Level 4 is where the implementation of supply chain management practices 
within the company occurs. 
According to the Supply Chain Council (2005:13), within a process reference 
model, the concept of “configurability” should also be understood. A supply chain 
configuration is driven by: 
• Plan levels of aggregation and information sources 
• Source locations and products 
• Make production sites and methods 
• Deliver channels, inventory deployment and products 
• Return locations and methods 
 
SCOR must accurately reflect how a supply chain’s configuration impacts 
management processes and practices (refer Figure 2.12). 
 
Figure 2.12 “Chain” of Source, Make, and Deliver execution processes 
 
Source: Supply-Chain Council, (2005) 
 
Each intersection of two execution processes (Source-Make-Deliver) is a “link” in 
the supply chain (refer Figure 2.13): 
• Execution processes transform or transport materials and/or products. 
• Each process is a customer of the previous process and a supplier to the 
next. 
Planning processes manage these customer-supplier links: 
• Planning processes thus “balance” the supply chain 
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• Every link requires an occurrence of a plan process category. 
 
Figure 2.13 Execution process 
 
Source: Supply-Chain Council, (2005) 
 
Also to focus on, according to the Supply Chain Council (2005:17), is the 
configuration of supply chain threads. What does this mean? Configuring a supply 
chain “thread” illustrates how SCOR configurations are done. Each thread can be 
used to describe, measure and evaluate supply chain configurations (refer Figure 
2.14). 
 
Figure 2.14 Example of configuring supply chain threads 
 
 
Source: Supply-Chain Council, (2005) 
 
 
 
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How would you go about configuring the supply chain threads? 
a) Select the business entity to be modelled (geography, product set, 
organisation). 
b) Illustrate the physical locations of: 
• Production facilities (Make)  
• Distribution activities (Deliver) 
• Sourcing activities (Source) 
c) Illustrate primary point-to-point material flows using “solid line” arrows. 
d) Place the most appropriate Level 2 execution process categories to 
describe activities at each location. 
e) Describe each distinct supply chain “thread” 
• A supply chain thread ties together the set of Source-Make-Deliver 
supply chain processes that a given product family flows through. 
• Develop each thread separately to understand common, and distinct, 
execution and return process categories. 
• Consider end-to-end threads in the inter-company case. 
f) Place planning process categories, using dashed lines to show links with 
execution processes. 
g) Place P1, if appropriate. 
• P1 – Plan supply chain aggregates outputs from P2, P3, and P4. 
 
A change in a supply chain often “ripples” through each linkage, affecting other 
areas (refer Figure 2.15) 
 
Figure 2.15 Example in a classic logistics world 
 
Source: Supply-Chain Council, (2005) 
 
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The impact of a change can be felt both up and down the supply chain: 
• A change in supply caused by a “production planner” may affect a 
“materials planner” and an “inventory planner”. 
• Furthermore, such a change may affect both your customer’s and 
supplier’s supply chain planning. 
 
Figure 2.16 Effective supply chain management 
 
Source: Supply-Chain Council, (2005) 
 
It requires balancing multiple links concurrently to have an Effective Supply Chain 
management as a result  within all the ongoing changes happening all the time ( 
refer figure 2.16). 
 
2.10 Conclusion 
With the unpredictability in the supply chain, market demand, commodity price, 
supplier risk, currency exchange and competitive action comes increased risk, 
which may result in disruptions to the supply chain. These disruptions may be 
unexpected and statistically rare, but they must be understood, identified and 
managed. 
 
To understand, identify and be able to manage risk, the focus in this chapter was 
on the Deloitte Touche Model of Understanding Risk and the value of Flexibility, 
the KPMG Methodology for Implementing Risk Management and the Supply 
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Chain Operations Reference Model (SCOR). The purpose of Chapter 3 will be to 
identify the risk within the supply chain in and oil refining process. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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CHAPTER 3 
OVERVIEW OF CHALLENGES AND RISKS WITHIN THE SUPPLY CHAIN 
PROCESS IN AN OIL REFINING PROCESS 
 
3.1 INTRODUCTION 
According to Johan Dique (2010:2), some of the reasons why businesses fail are 
because of wrong strategies, A LACK IN RISK MANAGEMENT, poor 
management, lack of leadership, etc. The list gets longer and longer. Again what 
is evident is that a lack in risk management is one of the main factors contributing 
to the failure. 
 
The focus of this chapter is to explain what operational types and processes are 
used within operations and what roles the operations, maintenance and supply 
chain functions play within these processes. Furthermore, the focus is on 
understanding the purpose of the equipment used in the process and the risk 
identified when the equipment fails. Understanding these risks and the impact 
they might have on the oil refinery will assist all parties involved to be able to 
develop and implement sourcing and maintenance strategies to mitigate and 
manage the risk. 
 
3.2 Types of manufacturing processes 
Products are manufactured through a number of different manufacturing 
processes, as indicated in Figure 3.1 (Waller, 1999:167). These manufacturing 
processes differ largely due to their flexibility, product volume and unit cost. The 
various manufacturing processes are: 
- Job shop 
- Assembly line 
- Batch and campaign process 
- Continuous flow 
 
An oil refinery will typically find itself in the D4 group, which is a continuous flow 
with very high volume per time period, standard products (commodities) and few 
types (indistinguishable). 
 
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Figure 3.1  Correlation of the product and the process 
 
Source: Waller (1999:167) 
 
3.2.1 The oil refining process 
The oil refining process uses a multi-stream process with internal buffering (refer  
Buffering refers to a storage facility between streams where the output of a 
stream is placed prior to being used in a downstream. The plant is made up of 
multi-streams, which are a whole range of individual interrelated streams, each 
performing a specific process. If any part fails to perform, for whatever reason, 
the overall plant will fail and come to a standstill. For a refinery, the 
production loss can be disastrous. 
 
 
 
 
 
 
 
 
 
 
 
A1 
B2 
C3 
D4 
Product 
Characteristics 
Process 
Characteristics 
A B C D 
•Low volume per       
time period 
•Non-standard 
products (unique) 
•Many types of 
different products 
 
•High volume 
per time period 
•Some similar 
products 
•Many product 
types 
•High volume 
per time period 
•Similar 
products 
•Very high 
volume per time 
period 
•Standard 
products 
(Commodities) 
•Few types 
(Indistinguishabl
Flexibility 
Rigidity 
Low unit cost High unit cost 
1 
2 
4 
3 
Functional layout 
(Job Shop) 
Predominant 
batch or lot 
Some 
assembly 
lines 
Predominant 
assembly 
lines 
(Bottling) 
Some batch 
Completely 
continuous 
flow (oft n 
foods) 
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Figure 3.2 Diagram for a typical oil refinery 
 
Source: Douglas (1988)  
 
3.3 ROLES AND RESPONSIBILITIES OF OPERATIONS, MAINTENANCE 
AND THE SUPPLY CHAIN FUNCTIONS WITHIN THE OIL REFINING 
PROCESS 
For the purpose of this study, the focus will be on an oil refinery in the 
petrochemical industry. The petroleum industry is organised into several 
businesses along the supply chain: crude oil acquisition and trading, refining, 
wholesale supply, trading and distribution, and retail marketing and distribution. 
We will be focus on a production facility in an oil refinery that buys no raw 
58 of 164 
materials and sells no products. Figure 3.3 is a basic example of the process flow 
from raw material to final product and sales to the customer. 
 
Figure 3.3 Example of oil refinery process 
 
 
 
3.3.1 Role of the operations function  
The operations function within the oil refining process needs to understand the 
type of crude oil that is being used so as to create and plan the most effective 
throughput (Total Product Yield) to create the most value for the shareholders. 
The Total Product Yield (TPY) reflects the value added to each barrel of crude oil 
processed by the refinery and therefore plays a key role in the return on 
investment. A number of parameters impact on the TPY, such as reduction of fuel 
consumed, flare and losses, maximisation of the utilisation of conversion units 
and optimisation of the finished products’ blending, among other parameters. The 
TPY is calculated by the operations function on a monthly basis using data from 
the refinery’s material balance. 
 
Secondly, the operations function also needs to understand the risk that exists 
within the different multi-streams and within the streams the risks within all of the 
equipment because of the different types of equipment used. 
 
 
 
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3.3.2 Role of the maintenance function  
The role of the maintenance function is the understanding of the risk identified 
within all of the equipment and at all times the prevention and avoidance of the 
failure of equipment by implementing maintenance strategies to mitigate the risk. 
If failure cannot be prevented, it can be disruptive, inconvenient, wasteful and 
expensive. If failure on machines and productivity happens frequently, it would 
reduce the plant reliability with an effect on the business’ operational throughput, 
reputation and profitability. The plant downtime will cause the workforce to idle, 
customers might want to go somewhere else because of non-delivery, and in the 
long run, losing customers will lead to profits being turned into losses. 
 
“The objective of maintenance and reliability is to maintain the capability of the 
system.” (Heizer, J. & Render, B. 2008:670). 
 
For any piece of equipment or machine to be reliable and function properly for a 
specific time under certain conditions, proper maintenance must be done as 
planned and when needed. The planned maintenance must at all times include 
activities to keep the system’s equipment in working order. According to Heizer et 
al. (2008:670), the interdependency of operator, machine, and mechanic is a 
hallmark of successful maintenance and reliability. As Figure 3.4 illustrates, it is 
not only good maintenance and reliability procedures that make operations 
successful, but also the involvement of the organisation’s employees as well. 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Figure 3.4 Good maintenance and reliability strategy requires employee 
involvement and good procedures 
 
   Employee involvement 
                                                    Results 
 
 
 
 
 
Maintenance and reliability 
procedures 
 
 
 
 
 
 
Source: Heizer and Render (2008) 
 
3.3.3 Role of the supply chain function  
“At the most fundamental level, operations and supply management is about 
getting work done quickly, efficiently, without error, and at a low cost. Operations 
function refers to the processes that are used to transform the resources 
employed by a firm into products and services desired by customers. Supply 
refers to how materials and services are moved to and from the transformation 
process of a firm.” (Jacobs, et al. 2009:4). 
 
The supply chain function, together with the operations function (maintenance 
and plan reliability), is about understanding the risk created within all of the 
equipment and supports the maintenance strategies to ensure the effective 
supply of material and services. Together they should focus on strategies that are 
developed to set broad policies and plans for using the resources of a company 
to best support the organisation’s long-term competitive strategy. 
Information sharing 
Skills training 
Reward system 
Employee empowerment 
Clean and lubricate 
Monitor and adjust 
Make minor repairs 
Keep computerised records 
 Reduce inventory 
 Improved quality 
 Improved capacity 
 Reputation for 
quality 
 Continuous 
improvement 
 Reduced variability 
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The supply chain function strategy to move materials and services should always 
focus on the following four elements in order to effectively support the 
maintenance strategy: 
• Quality 
• Service 
• Cost 
• Flexibility 
 
It is always about a trade-off and / or balance between the four competitive 
dimensions: 
Cost 
 
 
 
                                Flexibility     Service delivery 
 
 
 
Quality 
 
According to Jacobs et al. (2009: 22-24), these four major competitive dimensions 
form the competitive position of a company. 
3.3.3.1 Quality 
Quality within the supply chain is about getting the right material or 
service as required by the end-users (plant). There are two 
characteristics of a product or service that define quality: design 
quality and process quality. Design quality relates to the set of 
features the product or service contains. The goal in establishing 
the proper level of design quality is to focus on the requirements of 
the customer. Process quality relates directly to the reliability of the 
product or service. The goal of process quality is to produce defect-
free products and services. 
3.3.3.2 Service delivery 
Service delivery within the supply chain is all about systems being in 
place to be able to supply material and services “just in time”. 
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Delivery reliability within the operations and supply chain functions 
is the cornerstone of the company’s strategy and success. 
 
3.3.3.3 Cost or price 
The focus of the supply chain is to deliver the material and services 
in the most cost effective way. This will include buying direct and 
indirect material at the approved quality, service and the best price.  
 
3.3.3.4 Flexibility 
 Flexibility refers to the supply chain’s ability to obtain a wide variety 
of products, material and services for its end users and 
transformation process.  
 
Figure 3.5  Focus of indirect and direct supply chains 
 
Source: Adapted from i2 Technologies (2001) 
 
Within the indirect supply chain is the replenishment strategy to support the 
maintenance strategies. The replenishment strategy is a combination of supply 
(warehouses), demand (buyers) and procurement (contracts). 
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3.4 THE PROCESS USED BY THE OPERATIONS FUNCTION TO IDENTIFY 
THE RISK FOR ALL THE EQUIPMENT IN THE DIFFERENT MULTI-
STREAMS 
 
A process exists to specify steps to ensure that all foreseeable risks on the 
refinery site are proactively identified, mitigated and managed to acceptable 
levels on a continuous basis. The process focuses on: 
- The methodology of performing risk assessments on identified aspects or 
hazards. 
- The process for evaluating the refinery risk levels involved. 
- The ranking of risks to establish priorities for complementing the necessary 
risk control measures that will prevent potential harmful occurrences. 
- The means employed to set realistic and measurable objectives in respect 
of significant risks. 
The process reviews these risks as part of a comprehensive risk management 
programme and, where required, establishes the required risk financing 
structures. 
 
3.4.1 Plant risk impact analysis 
In refineries and processing plants, the enormous amount of piping is more 
complex in distribution than other types of equipment. In general, compared with 
other types of equipment in these industries, more difficulty in inspection planning 
is encountered. However, under-inspection or over-inspection can occur due to 
the lack of jurisdictional requirements on the inspection interval and method for 
piping, or the inspection interval being based only on piping service classifications 
in the existing regulations, such as API 570. This can result in unacceptable risks, 
along with a costly loss in resources. 
 
Currently, the method used by the refinery to do the necessary analysis on the 
plant to identify possible plant risk and the possible impact thereof is called 
Process Hazard Review (PHR). PHR is a hazard identification and risk 
assessment technique originally developed for reviewing existing operations in 
production, storage or transportation. The objective for PHR is to identify 
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significant process-related hazards and to confirm that adequate measures for 
prevention, control and mitigation are in place and being effectively applied. 
The PHR technique was designed to be thorough while optimising the time and 
effort required for busy operations staff. There is considerable time, and hence 
cost, savings for existing processes when compared to other related techniques, 
such as the Hazard and Operability (HAZOP) study. The streamlined review 
methodology utilises the experience gained from the existing operation, rather 
than a new design for which the HAZOP study (Refinery PHR Report (2004:1) 
was developed and remains the preferred methodology. 
PHR concentrates primarily on the potential for loss of containment events and 
subsequent hazards such as fire, explosion, toxic effects or environmental 
impact. The focus of PHR is on significant health, safety and environment (HSE) 
issues, screening out minor safety, operational, equipment damage or quality 
issues. However, this may be changed to focus just on both health and safety, or 
on major accidents to the environment. 
 
PHR provides a structured approach making use of both 'what-if' and 'checklist' 
techniques for hazard identification. It has been used for a wide range of process 
plants, and together with other techniques such as auditing, it is effective for 
plants covered by major hazard legislation (e.g. the major hazards directive 
'Seveso II' in Europe and OSHA 1910 Process Safety Management in USA). This 
is presented in the format of a risk assessment and identifies: 
- a potential hazardous event associated with loss of containment; 
- the causes of the hazardous event; 
- the consequences of the event; 
- details of any safeguards that either reduce the likelihood of the event 
occurring, or mitigate the consequences; 
- details of any concerns/recommendations identified by the PHR team; and 
- a risk ranking for any improvement actions in accordance with the 
refinery’s risk matrix and word models. 
 
The findings from the refinery PHR were prioritised using the refinery’s PHR risk 
matrix (refer figure 3.6). This is a 7X7 matrix. It is frequency ranked from highly 
unlikely at 1/100,000 years (1) to frequently at 10/yr (7). Severity is ranked in 
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accordance with a series of word models covering financial impact, safety and 
health, environmental, or legal impact. For the purpose of this PHR, only the 
safety and health and environmental ranking criteria were used. Safety and health 
were ranked from first aid injury (1) to more than 100 fatalities (7). The risk matrix 
is colour coded into high, medium and low risk bands with a weighted aversion 
towards high consequence events. 
 
The PHR was performed on the whole refinery, which included the Alkylation, 
Butamer, and LPG Merox Plants, Distillate Hydrocracker, Hydrogen Unit, Carbon 
Dioxide Recovery Plants, Fluidised Catalytic Cracker (FCC),  Despatch Area, 
RCD, SRU and Sulphide Plants, Off-site Area, Unifiner and Platformer Area, 
PPU4, Diesel Unifiner, and Utilities.  
 
The PHR findings were presented in the form of a risk assessment and identified: 
- a potential hazardous event associated with loss of containment; 
- the causes of the hazardous event; 
- the consequences of the event; 
- details of any safeguards that either reduce the likelihood of the event 
occurring, or mitigate the consequences; 
- details of any concerns/recommendations identified by the PHR team; and 
- A risk ranking in accordance with the Natred risk matrix and word models. 
 
From the PHR performed on the whole of the refinery, the following risk matrix 
was compiled based on the top 20 risks of the refinery (refer Figure 3.6). For the 
purpose of this study, risk number 5 was identified to demonstrate the supply 
chain strategy supporting operations and maintenance processes (refer Table 
3.1).  
 
Although, for the purpose of this study, we will only focus on risk number 5 to 
explain the process, each of the specific actions listed in the PHR report should 
be addressed by the company.  
 
 
 
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Figure 3.6 Refinery top 20 risks 
Refinery Top 20 Risks           A        B         C 
Im
pa
ct
 
Ca
te
go
ry
 
W
ei
gh
t 
Nu
m
be
r 
Impact 
Severity 
Financial 
Impact 
(R) 
Safety & 
Health Environment
8 9 10 
 
11 12 13 14 A 7 Catastrophic > 500 mil 
More than 
100 
fatalities   
Irreversible 
7 8 9 
 
10 
3 
 
11 
1, 2 12 13 B 6 Very Critical 
100 mil - 
500 mil 
More than 
10 
fatalities 
6 7 8 
 
9 
9, 10, 
11, 12, 
13, 14, 
15, 16, 
17, 18,  
10 
4, 5, 
6, 7 11 12 C 5 Critical 10 - 100 mil 
More than 
one 
fatality 
Very serious 
5 6 7 8 
 
9 
19, 
20 
10 
8 11 D 4 Major 
1 mil - 10 
mil 
One 
fatality 
Serious but 
4 5 6 7 8 
 
9 
 
10 
 
E 3 Medium 
100 000 
K -    1 
mil 
Lost 
workday 
case 
Local level
3 4 5 6 7 
8 
 9 
 
F 2 Minimal 
10 000 K 
-        100 
000 K 
Medical 
treatment/ 
Restricted 
workday 
case 
Minor effects 
boundaries of 
installation
2 3 4 5 6 7 8 G 1 Insignificant 0 - 10 000 K 
First aid/ 
No injury 
Impact within 
boundaries.
1 2 3 4 5 6 7 Weight Number 
N M L K J I H Probability Category 
Highly 
Unlikely Unlikely 
Not 
during 
lifetime 
of 
operation 
(Rare) 
Once in 
operation 
lifetime 
(Low 
Likelihood) 
Once in 
ten 
years 
(Can 
Happen) 
Once 
per 
year 
(Likely) 
More than 
once a year 
(Frequently) 
FREQUENCY INTERVALS 
 
Source: Refinery PHR Report (2004:1), Rev 1 
 
 
A = Insurance 
B = Critical 
C = High 
Maintenance 
 
D =  Consumables 
 
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Table 3.1 Risk nr. 5 PHR top 20 risks identified for refinery 
 
Source: Refinery PHR Report (2004:1), Rev 1 
 
Risk number 5 from the PHR assessment was on equipment J17010 A & B, the 
Debutaniser Product Pumps. The purpose of this piece of equipment in the plant 
is to pump solids from one area of the plant to another area of the plant (refer 
Figure 3.7). If the equipment fails, the impact is critical and it will lead to the 
shutting down of the total plant and potential fatality. The risk that was identified 
was failure of the mechanical seals, which will lead to gas leaks in that specific 
area of the plant where equipment J17010 A & B had been installed.  
 
On the risk matrix, risk number 5 was rated as follows: 
Impact severity  C5 Impact critical 
Frequency / Probability J5 Once in ten years 
Risk value 10 Financial impact can be between R10 million 
to R100 million 
Health and safety More than one fatality 
Environment Very serious long-term reversible impact on 
regional level 
Legal May lose plant operating permit provisionally 
 
 
 
 
 
5. 
 
27. 
J 17010 
A & B 
Debutaniser 
Product Pumps 
 
 
27.1 Seal 
failure 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Solids in the 
liquid being 
pumped, such 
as FeS and 
Hydrates. 
 
 
 
 
 
 
 
 
 
 
Potential 
UVCE 
resulting in 
extensive 
damage to 
plant and 
potential 
fatality. 
 
 
 
 
 
 
 
 
 
Currently only 
single mechanical 
seals in place, but 
project underway 
to replace these 
with double 
mechanical seals 
on pumps with 
high pressure 
alarms on seal 
failure. 
 
Water spray 
deluge system 
installed above 
pumps. 
 
 
 
C5 
 
 
 
 
 
 
 
 
 
 
 
 
 
J5 
 
 
 
 
 
 
 
 
 
 
 
 
10 
 
 
 
 
 
 
 
 
 
 
 
 
Install double 
mechanical seals. 
 
 
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Figure 3.7 Debutaniser system 
 
 
 
Source: Refinery Site Information. AspenTech (2000-2001) 
 
The “Top 20” list approach (Refinery PHR Report (2004:1) is quite old and 
currently the refinery is busy reviewing its risk assessments. It was suggested 
that a good look should be taken at the risks with a fresh eye and to then decide 
what is significant. The “Top 20” philosophy is very flawed because sometimes 
risks that are ignored have the ability to resurface unexpectedly. A better 
approach is that one should look at all the risks and start to work on them on a 
priority basis. The further the risks are to the bottom left-hand corner on the 
matrix, the lower priority they are. The further to the upper right, the higher they 
are. This should eliminate the “Top 20” risk thinking. 
  
 
 
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3.4.2 The strategy followed by the supply chain function to understand, 
support and mitigate the risk created 
As mentioned in section 3.2, together with the operations and maintenance 
functions, the supply chain function must at all times try to prevent and avoid 
failure of equipment. The operations function operates on designed parameters, 
whereas the maintenance function puts strategies in place to assist the 
operations function and to mitigate risks. The supply chain function’s 
responsibility is to support and assist with the mitigation as and when risks do 
occur.  
 
Whenever a problem or potential problem is detected, changes are instituted to 
methods, procedures, work instructions, specifications, standards, modifications 
to equipment or by installing equipment to prevent the recurrence of a specified 
deficiency in the product / service or occurrences that may affect product quality, 
or to correct unsafe or unhealthy conditions. 
 
Although the PHR assessment identifies risks in all areas of safety, health, 
environmental, legal, financial and impact, what role should supply chain’s play? 
As per the risk assessment (refer Table 3.1), the reason for possible failure of 
equipment J17010 A&B, the Debutaniser Product Pump, is that currently only 
single mechanical seals are in place. The recommendation made to reduce the 
risk is to replace these with double mechanical seals on pumps with high 
pressure alarms on seal failure (refer Figure 3.8). If the first mechanical seal fails, 
there is a second seal to prevent any leaks from happening. 
 
What is the strategy followed by supply chain to understand, support and mitigate 
the risk created by the failing of the single mechanical seal? 
There is an existing project spares policy (Refinery Project Spares Policy: 2005) 
within the refinery that provides the necessary guidelines on how to regulate all 
project spares that are part of a specific project and that should become part of 
maintenance spares where a stock evaluation process will be applied. The 
process must include all parties, namely the vendor, the research and 
development supplier, the warehouse, engineering (end user), and commercial 
and financial services. The main aim of the process is to prevent unnecessary 
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investment in stock and manage the risk created from the plant equipment to 
avoid duplications of materials in the material master.  
Figure 3.8  Equipment J17010 A & B 
 
 
Source: Sundyne LMV-322 Pumps Instruction and Operation Manual (2009:6) 
 
The moment the R & D supplier and the refinery decide to embark on a project, 
the R & D supplier starts with a “Request for Quotation” process for the project to 
be able to identify the two- to four-year maintenance spares and equipment 
needed for the project. The R & D supplier must ensure that an agreement exists 
with the vendor to supply maintenance spares.  
Double mechanical seal 
 
 
 
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As soon as an official purchase order has been created by the R&D supplier per 
equipment, the R & D supplier will ensure that the vendor will, within 30 days after 
the main order is placed, supply them with a completed Spare Parts and 
Interchangeability Record (SPIR) (refer to Annexure 1) with all relevant 
information regarding the recommended maintenance spares, including the 
following: 
- Pricing (will act as an official quotation) 
- Lead time for each item 
- Recommended spares 
- Full description of spare parts and equipment 
- The same terms, conditions and clauses will be valid and applicable as for 
the refinery orders 
- The SPIR form shall be submitted to the R & D supplier no later than 30 
days after the main equipment for the project is ordered by the contractor.   
 
As per Figures 3.8 and 3.9, the double mechanical seal was provided with a 
spare list from the supplier, which indicates each individual component the pump 
consists of. Each component is allocated with an individual spare part number for 
future identification, should these parts need replacement. 
 
Figure 3.9  Double mechanical seal 
 
 
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Source: Sundyne LMV-322 Pumps Instruction and Operation Manual (2009:6-2) 
 
The R & D supplier will register the SPIR form and forward a copy of the SPIR 
and the project order to the warehouse within 14 days after delivery, but a 
minimum of six months prior to the delivery of equipment to the site. The R & D 
supplier shall ensure that the SPIR is completed in full (as per procedure 
requirement) and correctly before sending it to the warehouse. With each specific 
project, the R & D supplier shall supply a Work Breakdown Structure Element 
(WBS).  
As soon as the warehouse receives all the SPIRs and a copy of project orders 
from the R & D supplier, the warehouse will register it in the SPIR control register 
to control and keep record of each SPIR. The warehouse must check for 
materials that already exist in the material master to prevent any doubles. The 
existing material number must be applied on the SPIR; these items should not be 
purchased if they are already a stock item. 
 
Where no material numbers exist in the material master, the material requirement 
planner shall, with assistance from the MRP Evaluation Document (Annexure 2) 
and the area engineer, decide on what to stock and what quantities to stock. It is 
of critical importance to do the necessary investigations and calculations before 
buying and increasing your stock.  
 
 Although all new material will be coded according to a standard coding system, 
the MRP controller should try to code as much stock as possible as non-stock, 
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depending on the risk, sourcing strategy and availability. The focus once again 
should always be on preventing unnecessary investment in stock; the risk will 
determine which purchasing strategy to apply per commodity. After the 
warehouse has completed the SPIR list, the plant area engineer is responsible to 
confirm the correctness of the technical data information supplied by the 
warehouse. For each new material commodity, as per the SPIR list, stock 
requests need to be created and approved by the divisional manager.  
 
Finally, purchase requisitions will be created by the warehouse and a copy of 
each SPIR and project order will be sent to demand for placing of a refinery order 
via the computerised system (SAP). On delivery of the goods, the normal receipt 
procedures will be applicable. Engineering and supplier should assist the 
warehouse with final inspection of the goods delivered, if possible or applicable, 
to prevent possible duplications and to create standardisation. Start-up spares 
must be part of maintenance spares and must be taken into account.  
Taking all of the above into account and referring to the risk identification of the 
specific equipment now installed into the plant, how does supply chain on the one 
hand support the operations and maintenance strategy and on the other hand try 
to prevent unnecessary investment in stock, taking into account the risk? 
 
3.5. REPLENISHMENT STRATEGY SET-UP IN SUPPLY CHAIN IN 
SUPPORT OF OPERATIONS AND MAINTENANCE FUNCTIONS 
For all existing and new material created and warehouse movements, the MRP 
controller will apply the MRP Evaluation Document for Existing and New 
Commodities (refer Annexure 2). The main focus of the current replenishment 
strategy within the supply chain function is: 
• To understand the risk the equipment, or any part within, creates when 
failing. 
• The cost associated with the supply of such a part. 
• The availability of the part or any alternative to support and maintain the 
equipment when failing. 
• The usage patterns of such a part and unit of supply. 
 
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 The following logic is followed and questions asked: 
 
Question 1 Register new material commodity 
 
 
Requestor   
JOE SOAP
   Date: 27/08/2010 
 
Signature ________________________________________ 
 
Commodity Number   Date:               
 
Full Description of Commodity 
Seal: Mech 1-1/4 x 1-1/2 T8AB Double / X51F 
Exist
  
New
  
Link to BOM
 
YES NO
 
 
When the stock request form is completed by the requestor, the MRP controller 
and the end user will complete the MRP evaluation document. This enables the 
MRP controller to build up a history base on all material commodities and related 
equipment on the plant. It is critical that a full description is provided to ensure 
that correct material and parts are bought in future. If drawings exist, they should 
also form part of the description. 
 
In both existing and new material commodities, the next important question to ask 
is whether the material commodity has been linked to a Bill of Material (BOM)? All 
spare parts should belong to a piece of equipment in the plant. If not, the question 
should be asked as to whether it should be in the system. If the answer is still 
yes, the end user will compile a BOM from the above spare list received from the 
supplier and capture the information in SAP (refer Figure 3.10).  
 
What is the purpose of a BOM?  
Jacobs et al. (2009:593) noted that the BOM file contains the complete product 
descriptions, listing not only the materials, parts, and components, but also the 
10 - 02 - 171 
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sequence in which the product is created. It contains all the information to identify 
each item and the quantities used per unit of the item of which it is a part (Jacobs,  
Chase, & Aquilano, 2009:593-595). 
 
Figure 3.10  Bill of material for equipment J17010 A&B 
 
 
Important for both warehouse and end user is to at all times keep the information 
on existing BOMs up to date, for the purpose of creating and maintaining a 
catalogue for the ordering of correct materials and quantities to apply Available to 
Promise (ATP) and to be able to do a proper risk assessment for the spares 
linked to a piece of equipment. 
 
Currently, the risks and shortcomings identified from a supply chain point of view 
when the process starts, are: 
- Competency of requestor for registering commodity. The descriptions 
forwarded to the warehouse are not 100% completed or specifications are 
incorrect because the requestor does not understand the material or 
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equipment he / she is working with. The requestor sometimes asks the 
suppliers to send him / her a scope of work / specification, which is then 
captured in the system. The supplier writes the scope of work according to 
his / her specifications, which causes a preferred supplier situation, making 
the supply chain very rigid. This makes it difficult for the supply chain 
function to put proper sourcing strategies in place and this might result in 
duplications of the same material to be kept in the warehouse. 
- Another risk is that the person in the warehouse who receives the request 
to register new commodities does not understand the process. Incorrect 
information is captured, which can cause equipment failure. 
- When new commodities are registered, the check is not done from the 
warehouse to ensure that it is linked to a BOM. After 35 years of existence, 
only 35% of equipment spares are linked to BOMs. 
 
Question 2 Evaluation criteria for existing stock commodities (A) 
 
A. EVALUATION CRITERIA FOR EXISTING STOCK COMMODITIES 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity requires further investigation 
YES
 
NO
 
 
 
          ACTUAL 
 
A.1 Purchase price                                                                    
 
 
A.2 Period not being used   
 
 
 
A.3 Demand patterns 
 
 
 
 
A.4 Current stock levels     Max      Min 
> R5,000 
> 2 Years 
From:     Units / Mth 
To:          Units / Mth 
R 23 459 
3.5 Years 
∆ =    Units / Mth 
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Because of the large quantity of existing active material commodities (±21000) 
currently in SAP, it does not make sense to evaluate each commodity every time 
movement takes place.  
Therefore, if the MRP controller comes across a commodity where the: 
  a) Price > R5,000 or 
  b) Period not being used > 2 years or 
  c) Change in demand patterns  
The question should be asked whether the commodity requires further 
investigation, and whether the current stock levels are still relevant. 
 
The risks pertaining to this part of the evaluation are: 
- The timing and reaction are too long when receiving the request; currently 
it is rather a reactive than a proactive process. 
- The MRP controller spends too much time on non-critical material instead 
of focussing on maintenance and critical stock. The non-critical material 
should be managed through an automatic MRP system.  
This should become part of the MRP controller’s health checks. The evaluation 
process is working, but it should be streamlined again.  
 
Figure 3.11  Stock volume trends 1999-2010 
 
Source: Refinery Stock Maintenance Report (2010) 
 
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As per Figure 3.11 in the past 10 years, stock volumes decreased from 359 817 
units to 180 380 units. This is due to the constant evaluation done when 
movement takes places in stock. 
 
3.5.1 Risk profile of equipment (B) 
As discussed in section 3.5.1, all spare parts with commodity numbers should be 
linked to a BOM, which is linked to existing equipment in the plant. For the 
purpose of this study, we refer back to the risk matrix (refer Figure 3.6) and risk 
number 5 (refer Table 3.1) to demonstrate the determination of the supply chain 
strategy by completing the MRP evaluation document (refer Annexure 2). The 
equipment number in this example is J17010 A/B. 
 
The risk rating (B1) information will be obtained from the PHR assessments done 
on equipment and where the risk is plotted on the risk matrix (refer Figure 3.6). 
 
Question 3 Risk Profile of Equipment 
 
Equipment number J17010A  
 
B.1 Risk rating: 
Consequence  
C5
    Frequency  J5    
 
Financial impact  R10-R100m   
Notice period when needed (MTTR)  
3 Days
 
SHERQ impact       YES    
 
Description  
Fatality
 
 
The importance of capturing this information on the MRP evaluation document is 
that anyone dealing with the commodities relating to this equipment from the 
supply chain will better understand the risk and impact of not having the correct 
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material when needed. This is currently done manually. A priority should be to 
implement this evaluation system electronically to ensure it is in time. 
The second important aspect under the risk profile of the equipment is the 
availability of the equipment (B2).  
 
Question 4 Availability of Equipment 
 
B.2 Availability of equipment 
Equipment required for maintenance   Planned / Breakdown    Anytime  
Number of equipment where commodity is used  2   
Number required for normal operation  1  
Equipment number  
J17010A
  
J17010B
   
Alternative equipment / standby  
Yes
  Equipment number  
J17017A/B
 
 
This information will assist the supply chain to understand when equipment is 
available if maintenance needs to be done and on which other equipment/s the 
relevant material commodity is used. The criticality of the equipment in the plant 
will determine if maintenance can only be done on planned maintenance, i.e. 
every four years for shutdown or is the equipment available anytime? The 
equipment can be removed from the process any time of the day for maintenance 
purposes. 
 
As per the example above, the information indicates that the same commodity is 
used on four different pieces of equipment of which only two of the four pieces of 
equipment are on line. This means that there are two spare pieces of equipment 
currently in the plant. If one of the two that are currently running needs to be 
stopped, there will be no impact on production, because the refinery can switch 
over to one of the surplus pieces of equipment to perform the necessary repairs 
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and then switch back to the equipment being repaired. All the equipment numbers 
are also provided to be able to identify immediately if and when it is necessary to 
stop and switch over.  
 
The third important aspect is the maintenance strategy (B3) to ensure availability 
of equipment J17010A at all times.  
 
Question 5 Maintenance Strategy 
 
B.3 Maintenance strategy 
 
Run to Failure
 
 
Scheduled Maintenance
 
 
Condition Monitoring
 
 
As mentioned in section 3.2, the importance of doing maintenance and having a 
maintenance strategy in place, is to ensure that all activities take place as 
planned to keep a system’s equipment in working order. If proper maintenance 
takes place, it is probable that a machine part or product will function properly for 
a specified time under stated conditions. 
However, because it is the real world and failures and breakages do occur, it is   
important to understand why it does happen. This is a main contributor to 
sustainability and reliability. According to Heizer and Render (2008:672), 
component reliability is often a design or specification issue for which engineering 
design personnel may be responsible. However, supply chain personnel also 
have a role to play in this. Their role is to be able to improve on the quality of 
components of systems by staying aware of products and research in the market 
and doing proper supplier performance evaluations on a regular basis, especially 
the critical suppliers. 
 
According to Heizer and Render (2008:672), the basic unit of measure for 
reliability is the product failure rate (FR). For a refinery company that needs 24/7 
365 days plant reliability, it is essential to often provide failure-rate data. The 
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failure rate measures the percentage of failures among the total amount of 
equipment / part failures, or a number of failures during a certain period of time, 
FR(N). 
        FR(%) = Numbers of failures 
 Number of units tested 
       
FR(N) =  Numbers of failures     
   Number of unit-hours of operation time 
 
The more common terminology used for reliability analysis is mean time 
between failures (MTBF), which is the expected time between a repair and the 
next failure of a part, machine, process or product. 
MTBF =  Numbers of failures     
               Number of unit-hours of operation time 
 
If the failure rate is too high, then the decision will have to be taken to either 
increase the reliability of the individual parts, or the company will have to invest in 
backup parts / equipment to provide redundancy. 
 
The MTBF for equipment J17010A and when the mechanical seal caused the 
failure was calculated as follows, according to history available (refer Table 3.2): 
 
Table 3.2 MTBF equipment J17010A 
Order 
Bas. start 
date Description Days 
11910 1997/01/08 
RECON 1002117;PM 11150;GEARBOX 
COMPLETE   
142321 1999/12/23 REPAIR LEAKING MECHANICAL SEAL 1079 
167021 2000/07/19 REPAIR J17010A MECH SEAL 209 
232666 2002/05/24 REPAIR SEAL 674 
244993 2002/11/05 PLEASE REPAIR SEAL FLUSH LINE(STRAP) 165 
316864 2004/11/06 DISMANTLE & OVERHAUL PUMP 732 
448923 2008/11/27 REPAIR SEAL LEAK ON J17010A 1482 
  
MTBF 723.5 
 
There are generally two types of maintenance:  
Preventative maintenance, which involves routine inspections and servicing, to 
keep facilities in good repair. The intention of preventative maintenance is to build 
a system that will identify potential failures and make changes or repairs that will 
prevent failure. The system should also include the design of technical and 
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human systems that will keep the productive process working with tolerance.  
How does the company get to this point? By understanding the process and 
keeping it working without interruption (Heizer, & Render, 2008:674).  
    
Breakdown maintenance is when individual parts / equipment fail and must be 
repaired on an emergency or priority basis. This is the position that no company 
wants to find itself in, because it is very expensive and the response is reactive 
the whole time (Heizer, & Render, 2008:674). 
 
The maintenance strategy currently applied in the refinery focuses on a planned 
maintenance process. Planned maintenance consists of work identification, 
planning and scheduling, conditioning monitoring, work execution and review, and 
materials management, followed by preventative maintenance. Without these 
very basic layers, asset management has no foundation. According to the 
American Petroleum Institute (API) Standard 610 2004:16, the equipment 
covered by this international standard shall be designed and constructed for a 
minimum service life of 20 years (excluding normal-wear parts) and at least three 
years of uninterrupted operation. It is recognised that these requirements are 
design criteria and that service or duty severity, misoperation or improper 
maintenance can result in a machine failing to meet these criteria. Operations and 
maintenance of the refinery take all of this into account and according to all of the 
information available to them, they will make decisions on what maintenance 
strategies should be applied to the equipment to ensure availability at all times. 
 
According to the third important aspect of the MRP evaluation document, 
maintenance strategy (B3), the basic strategies followed by maintenance are:  
a) Run to failure 
This strategy will be applied to material that can be used until it breaks. 
Referring to the BOM (refer Figure 3.10), the majority of the material 
commodities for equipment J17010A are categorised under this strategy 
because of the availability of the material as well as the surplus equipment 
J17010B also contributes to this decision. Examples of material are the 
washers, gaskets, O-Rings, seals etc. There is time to replace the failed 
material without having any impact on the plant availability. 
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b) Scheduled maintenance 
Some of the parts in the equipment cannot run to failure because of the 
importance the part plays in the equipment. Referring to the BOM (refer 
Figure 3.10), material commodity 10-02-117, Gearbox: Complete 8400 
RPM splined input is one of the commodities where scheduled 
maintenance will take place on the oil and filter. According to the 
operations, equipment and maintenance (OEM) manual, the oil and filter 
need to be replaced every six months. 
 
During the next planned turn-around and inspection (TI) shutdown (± 4 
yearly), the pump will be taken out and sent for reconditioning, where the 
mechanical seals will be replaced. 
  
c) Condition monitoring   
Referring to the BOM (refer Figure 3.10), material commodity 10-02-117, 
Gearbox: Complete 8400 RPM splined input is one of the commodities 
where condition monitoring will be done on the bearings on a weekly basis, 
for example weekly monitoring where a relevant tool will be used to test 
the vibration of the gearbox. Depending on the results, they will be able to 
determine if any replacements need to be done.  
 
The risk the supply chain function faces with the capturing of the risk profile of the 
equipment, is that it gets done properly the first time around, but as time goes on 
and changes happen, there is no proper management of change process in place 
to ensure from a plant point of view that all changed information is communicated 
to the warehouse, For example, when design and strategy changes occur, or 
when there is a breakdown and it happens outside of the strategy, the questions 
are not asked.  
 
 
 
 
 
 
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Question 6 Procurement strategy for material (C)  
C. PROCUREMENT STRATEGY FOR MATERIAL 
Availability of stock:  Off the Shelf  Lead time    Days 
    
Manufacture
 Lead time    Days 
Recondition
 Lead time  5   Days 
The availability of the material in the market plays an important role in 
determining the strategy to procure the relevant material. Can the buyer obtain 
the material? 
- New material off the shelf, readily available? 
- Is there a drawing and can the commodity be manufactured if required? 
- Can the commodity be sent for reconditioning where the current state of 
the commodity is taken and it is reconditioned back to its original state 
instead of buying new material? 
As soon as the supplier(s) has/have been identified, the geographical area also 
plays an important role: 
- Local 
- Overseas 
- Sole 
- Preferred 
 
Supplier    
Rhine Rhure
                                                                        
 
Local
  Lead time    Days 
Overseas
 Lead time  35   Days 
Sole
          Lead time  35   Days    
 
Preferred
         Lead time  35   Days    
Alternative comm available  
YES NO
Commodity number   
 
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 All of the above has an impact on the lead times – how long it will take the buyer 
to get the material delivered to the refinery. In the event of a sole or preferred 
supplier a departmental manager must approve the supplier. 
 
 The example used for the purpose of the study is equipment J17010, which is a 
Debutaniser Overhead Pump and the BOM (refer section 3.10), which is used for 
this study to explain the supply chain strategy and methodology being applied. 
The specific equipment was bought from an overseas supplier that has a branch 
in South Africa, basically for after service support. In most instances, material and 
parts needed for the pump are ordered from overseas. This supplier is also a sole 
supplier and therefore material and parts cannot be bought from any other 
supplier. The lead time for an overseas supplier to deliver is on average 4-6 
weeks, therefore varying between 35 to 42 days 
 
 The risk in this area of the MRP evaluation process is that the current supply 
chain function infrastructure is not suitable to deal with the day-to-day workload to 
be able to put proper procurement strategies in place – normally this gets done by 
a whole project team. The impact of this is resource shortages and existing 
contracts not being maintained and updated. 
 
 Another short-coming is that there are no proper partnership agreements and 
portfolios in place, especially on critical suppliers. Some of the suppliers also find 
it difficult to move from a sales environment to stockholding and warehouse 
functions. For example, when supply chain approaches the supplier to implement 
consignment stock or vendor-held stock, they cannot from their side provide 
consumption reports or MRP reports.  
 
 
 
 
 
 
 
 
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Question 7 Demand for material (D) 
D DEMAND FOR MATERIAL 
Unit of issue   
Each
          Minimum once-off usage  
1
 
Mean time between failure commodity     
24 months
                            
Shelf life     
20 years
                    Criticality A/B/C    
A
  
 
Because of this, in most of the material commodities, one will be kept as a spare 
part in the warehouse. Because of the availability of spare pumps, it is not 
deemed necessary to increase the stock levels. According to the American 
Petroleum Institute (API) Standard 610 2004:16, the equipment covered by this 
international standard will be designed and constructed for a minimum service life 
of 20 years (excluding normal-wear parts) and at least three years of 
uninterrupted operation. Figure 3.12 is the recommendation from API Standard 
610 on how to determine stock levels. 
 
Another option, other than the API Standard 610, that the maintenance 
department uses to determine stock levels is based on the history of failure of the 
equipment and the movement of the material. 
 
The shortcoming in this part of the process is that the unit of issue and unit of 
receiving differ, causing stock differences and making reporting difficult. This 
could lead to the reporting of wrong figures. This should be investigated 
immediately by the warehouse personnel when they come across the problem. 
 
 
 
 
 
 
 
 
 
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Figure 3.12  Recommended spare parts 
 
Source: American Petroleum Institute (API) Standard 610 (2004:85) 
 
Question 8 Recommendation (E) 
 
E RECOMMENDATION 
No Change
  
Redundant
  
No Stock
 
Non Stock
  
Stock New
 
Recon Spares
 
                
Complete
 
Level Change
  Max  Min 
 
Cost Impact
 
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If an evaluation was done on an existing commodity and all aspects were re-
evaluated, then the “No Change” option will be chosen and the MRP evaluation 
document will be filed. It might also be determined through the evaluation that 
because of no movement, the commodity actually became redundant, maybe the 
equipment got replaced by something else or the material and spares are no 
longer needed. The “Redundant” option will be taken and the necessary Disposal 
forms will be completed and approved via the financial department. After 
approval, all the relevant BOMs and Material Master also need to be changed 
accordingly to ensure information is always up to date. The physical material 
needs to be removed from the bin and sent for selling through the disposal 
procedure. 
 
The question can still be asked, even if material was made stock previously, can’t 
it be changed to non-stock. The whole situation might have changed in usage and 
the market and now the opportunity might exist to move it to non-stock.  
 
As per section 3.5.2, if there was a change in the usage patterns then a re-
evaluation will be done by the MRP controller as to why the situation changed. 
The question should be asked if this is only a once-off or was new equipment 
using the same commodity implemented etc. The financial impact should also be 
calculated in the case where the levels should be reduced or increased. 
In the instance where new equipment has been installed with new commodities 
created, taking into account all the relevant information captured regarding the 
equipment, i.e. risk, what it is used for etc., a sourcing strategy needs to be 
developed and implemented. 
 
The recommendation on equipment J17010A will therefore be as follows: 
Scenario 1 Current situation 
Equipment J17010A was identified as one of the top 20 risks in the refinery. The 
critical impact and financial impact (between R10m and R100m) can become a 
reality if the equipment fails. It was identified that the single mechanical seal can 
cause the pump to fail; therefore the recommendation is that the single 
mechanical seal be replaced with a double mechanical seal. Because of the 
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spare capacity in the plant when equipment J17010A fails, the switch-over will be 
to equipment J17010B.  
 
Because of the probability of failure of 24 months (refer to Table 3.2), in the event 
of a failure the usage is one double mechanical seal with a cost implication of 
R4,500 with availability off the shelf within 24 hours. The sourcing strategy would 
be to put a contract in place with the local supplier to keep stock specifically for 
the refinery and with service delivery of 24 hours for when the commodity is 
needed.  
 
Scenario 2 Demonstration of an alternative scenario 
In the event where equipment J17010A was identified as one of the top 20 risks 
of the refinery, but no other equipment is available as spare, then the 
recommendation of the sourcing strategy will be different from scenario 1. The 
scenario will require a proper material sourcing strategy to support and mitigate 
the risk.  
 
The critical impact and financial impact will be the same as Scenario 1 (R10-
R100m), and because of the probability of failure of 24 months (refer to Table 3.2) 
and no back up pump available, the recommendation would therefore be to keep 
stock on site 24/7.  
 
There is no systematic approach from the MRP controller pertaining to the 
recommendations section of the evaluation. Currently, decisions are based on 
experience of people, gut feel, and no proper facts. The risk of this is that when 
an individual leaves, the experience leaves with him / her. Systems are built on 
people and are therefore not sustainable. 
 
3.5.7 Sourcing strategy (F) 
According to Jacobs et al. (2009:374), procurement is responsible for developing 
a strategy for procuring the items that a company needs to acquire. Depending on 
factors such as the cost of the item, volume required, and scarcity, many different 
processes can be used by the company.  
 
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Question 9 Sourcing Strategy 
 
F SOURCING STRATEGY 
Non stock Contract Lead Time Vendor Held Stock Consignment Stock  
  
RFQ
 
Stock  Contract Lead Time Vendor Held Stock   
  
RFQ
 
 
 
 
Figure 3.13 Sourcing / Purchasing – System design matrix / framework 
 
Source: Jacobs, Chase, & Aquilano (2009)  
 
The procurement function focuses on items where there is some type of ongoing 
relationship and there is usually a contract with special pricing, delivery and other 
arrangements designed to coordinate the interaction between the two companies. 
In Figure 3.13, the sourcing / purchasing system design matrix for major types of 
processes can be used: 
a) Request for proposal 
Used for significant purchases where there may be a few prospective 
suppliers. The proposal will list the criteria for that which the company 
wanted done, as well as dates for completion. Suppliers interested in 
performing the work would be required to respond to the proposal by a 
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particular date. The company would select a supplier and execute a 
contract to the purchase. 
 
b) Request for bid and reverse auctions 
Companies often use this approach when they have a set of similar or 
related items that they would like to purchase. The company would 
prepare a document that describes the parts, which includes engineering 
drawings, production schedules and other pertinent details. A site visit is 
arranged to meet with potential bidders and answer questions related to 
the purchase. 
 
c) Electronic catalogue 
This method is designed to reduce transaction costs and make the 
interface between the supplier and the company more efficient.  
 
d) Vendor managed inventory 
This is when the supplier takes full responsibility for a group of items 
needed by a customer. The supplier would monitor inventory levels of the 
items at the customer site and automatically replenish based on usage. 
The process can be very efficient and relieves the customer of the work 
involved in managing the items on a daily basis. 
 
Strategic sourcing looks beyond the traditional transactional view of purchasing. 
Instead, strategic sourcing focuses on all strategies and objectives and translates 
them into actionable strategies that address all elements of the sourcing 
processes. When properly implemented, strategic sourcing will be effective, 
because the company will have: 
- Company-wide purchasing power; 
- Vast majority of purchasing done under contract; 
- Rationalised vendor and part options, managed at a strategic level; 
- Supplier partnerships that reduce inventory levels and speed products and 
services to the market; 
- Efficient processes that reduce transactional costs; and 
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- Better configuration of the value chain with inbound and outbound 
suppliers. 
 
Strategic sourcing is a business optimisation process that highlights, qualifies and 
quantifies the value added resulting from constantly looking for a better way of 
doing things. What would the typical objectives of the strategic sourcing process 
for the refinery be? 
- Establish the refinery as the industry leader in procurement supply 
management practices and processes; 
- Create financial advantage by delivering the lowest total cost and highest 
value for commodities produced; 
- Fully implement financial advantage as an internal metric for commodity 
management; 
- Optimise business, technical and commercial practices; 
- Challenge existing processes continuously for ongoing improvement; 
- Organisation wide networking and relationship building; 
- Tracking and measurement systems with high integrity; and 
- Raise the level of understanding commodities and factors influencing 
them. 
One of the strategies the company is focussing on is the price containment 
strategy. This strategy depends on the volatility of the market factors influencing 
the commodity or service. Secondly, it will depend on the type of supplier being 
used or identified. 
 
 
 
 
 
 
 
 
 
 
 
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Figure 3.14 Kraljic purchasing strategy matrix 
 
 
Source: Caniels and Gelderman (2005) 
 
The four areas that the supply chain focuses on as per the above purchasing 
strategy are: 
a) Strategic suppliers – High spending / Critical to business 
The supply chain strategy that the refinery applies to this category is to 
focus on the top-ten suppliers, for example a supplier that is managing the 
shutdowns, waste management removal supplier, scaffolding suppliers etc. 
b) Critical suppliers / Bottleneck – Lower spending / Critical to business 
Under this category, the suppliers are still critical, but with lower spending. 
Typical contracts that will be put in place will be, for example, licence 
agreements for production-related software etc. 
c) Leverage suppliers – High spending / Not as critical to business 
Two strategies can be applied to leverage suppliers, namely: 
- Annual RFQ process 
 Only one-year contracts are awarded. 
- Term contracts 
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Two- to three-year contracts with spot market price checks are 
advisable. 
Under this category, there are many suppliers available in the market and 
a cost containment strategy will be applied to control prices. A contract will 
be put in place to eliminate the RFQ process, for example bearings, 
gaskets etc. 
d) Spot suppliers – Low spending / Not as critical to business 
Spot purchases can be made via the RFQ process where three quotes 
have been obtained. Because of volumes, as with leverage suppliers, 
short-term contracts can be granted where volume allocation will be based 
on the most beneficial pricing structure. 
 
Contracts will still be the advisable option because of the high volumes; it 
will reduce the workload on the buyer’s side. Examples include stationary, 
cleaning services, safety equipment etc. 
After the sourcing strategy has been determined, the MRP controller will 
recommend which strategy will be best to follow for supporting maintenance to 
have the material available at all times. 
 
In this area, there are lost opportunities on small commodities, because there is 
no system to currently support the workload that needs to be done to perform a 
proper evaluation. There are still opportunities for the bigger commodities. 
 
Question 10 Recommended warehouse 
 
G RECOMMENDED WAREHOUSE 
MRP Contr     
John Smith
  Date: 30/08/2010 
 
Signature  ________________________________________ 
 
All documentation and SPIR forms will be sent back to the area manager, 
engineering and manager supply and demand for the necessary approval. 
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Question 11 Approval end-user 
 
H APPROVAL END-USER 
As per ASAM   
Suzie Browny
  Date: 30/08/2010 
 
Signature ________________________________________ 
 
 
Manager S & D    
Casper Osmond
  Date: 30/08/2010 
 
Signature  ________________________________________ 
 
 
Figure 3.15 is the demand flow process currently applied by the refinery based on 
the information gathered through the MRP evaluation document.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Figure 3.15 Material demand flow 
 
 
Source: Refinery Supply Chain Process (2009) 
 
DIRECT 
PURCHASE ORDER PM & NETWORK  
BOM 
RESERVATION 
COST CENTER 
Requisition 
Manual Release 
Purchase Order 
RFQ 
STOCK 
ISSUE 
Stock 
Reservation 
Non Stock 
Requisition 
MRP 
Automatic  
Release to 
PO from 
Contract 
MANUAL 
RELEASE 
Automatic 
Release to 
PO from 
Contract 
RFQ 
Vendor Held Sock 
Consignment 
Lead-Times 
Warehouse Receipts 
Direct & Non Stock PO 
Verify & deliver to plant 
Stock Verify 
Inspect, 
Put away & 
Capture SAP 
File & Archive 
Material Demand Flow Diagram 
Reconditioning 
Requisition 
Manual Release 
RFQ 
Requisition 
WAREHOUSE 
CCPR 
Notification 
Plant Maintenance 
Work Order 
Standard Task List 
1 
2 
3 
4…… 
Material BOM 
1 
2 
3 
4…… 
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3.6 Supply chain and infrastructure 
According to Simchi-Levi et al. (2008:79), the physical supply chain consists of 
suppliers, plants, warehouses, distribution centres, and retail outlets as well as 
raw materials, work-in-process inventory and finished products that flow between 
the facilities. For the purpose of this study, the focus is only on the inbound 
supply chain, which will include the suppliers, plants and warehouses. 
 
The focus should be on the process by which the company structures and 
manages the supply chain in order to: 
- find the right balance between inventory, transportation and manufacturing 
costs; 
- match supply and demand under uncertainty by positioning and managing 
inventory effectively; and 
- utilise resources effectively by sourcing products from the most appropriate 
manufacturing facility. 
 
According to Simchi-Levi et al. (2008:79), it is useful to divide the network 
planning process into three steps: 
a) Network design 
This includes decisions pertaining to the number, locations and size of 
manufacturing plants and warehouses, the assignment of retail outlets to 
warehouses, and so forth. 
b) Inventory positioning 
This includes identifying stocking points as well as selecting facilities that 
will produce to stock and keep inventory, and facilities that will produce to 
order and keep inventory. 
c) Resource allocation 
Determine whether production and packaging of different products are 
performed at the correct facility. What should the plant’s sourcing 
strategies be? How much capacity should each plant have to meet 
seasonal demand? 
 
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The supply chain infrastructure needs to be re-evaluated on a regular basis due 
to changes in demand patterns, product mix, production processes, sourcing 
strategies, or the cost of running facilities. The focus should be on: 
- Determining the appropriate number of facilities, such as plants and 
warehouses; 
- Determining the location of each facility; 
- Determining the size of each facility; 
- Allocating space for products in each facility; 
- Determining sourcing requirements; and 
- Determining distribution strategies – the allocation of customers to each 
warehouse. 
 
The objective of the above, according to Simchi-Levi et al. (2008:80), is to design 
or reconfigure the logistics network in order to minimise annual system-wide 
costs, including production and purchasing costs, inventory holding costs, facility 
costs, and transportation costs, subject to a variety of service level requirements.   
 
Over the past 10 years, half of the volume of all material was reduced. The 
important focus should be on critical and insurance material and your 
infrastructure strategy should be aligned with that. The reason for having 
warehouses is to have the critical and insurance stock readily available to the 
plant.   
 
Currently, some of the warehouses are full, which can cause a safety risk as well 
as making it difficult to get to the stock when needed to be issued to the plant. 
The reason for shortage of space is because of non-stock items being kept for the 
plant, which was not planned for. Non-stock items have been put there without 
the involvement of the warehouse. This happened because of poor access 
control. In the past, one store master was situated at the bottom warehouses, but 
because of the slow movement of the material and the shortage of resources at 
the main warehouse, the store master was moved back to the main warehouse. 
Because the warehouse is not situated at the entrance gate, it poses another risk. 
When deliveries take place, they should go to the main warehouse. In many 
instances, the supplier delivers directly to the plant, which then results in 
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deliveries not being captured into the system, material not being inspected and 
delivery notes and invoices getting lost, which delays payment to suppliers. 
Another safety risk is that hazard identification in the warehouse environment is 
only performed every three years. If a proper MOC system is not in place when 
new equipment is installed or changes are made to infrastructure, the risk exists 
that the hazard identification list is not updated, which can lead to serious 
accidents or incidents. Another risk currently is that warehouse personnel do not 
completely understand the total business and the impact of their actions on the 
business. Not all of them understand the importance of each part kept as stock 
and the role it plays in the plant. 
 
3.5 Governance / Legislation 
“Corporate Governance is concerned with holding the balance between economic 
and social goals and between individual and communal goals…the aim is to align 
as nearly as possible the interest of individuals, corporations and society.”  
Cadbury (1999) 
 
Corporate Governance in South Africa was implemented by the publication of the 
King Report on Corporate Governance in November 1994 (Executive summary of 
the King Report: 2002). The purpose of the document is: 
- to establish a comprehensive supply chain policy that will promote effective 
and efficient practices and systems; 
- to support the refinery’s vision; 
- to comply with the seven characteristics of corporate governance as 
determined by the King Commission on Governance in South Africa; and 
- to implement, monitor and integrate the day-to-day supply chain activities. 
 
The seven characteristics of good corporate governance as per the King Report 
are: 
 
Discipline 
 
Corporate discipline is a commitment by a company’s senior management to 
adhere to behaviour that is universally recognised and accepted to be correct and 
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proper. This encompasses a company’s awareness of, and commitment to, the 
underlying principles of good governance, particularly at senior management 
level. 
 
Transparency 
Transparency is the ease with which an outsider is able to make a meaningful 
analysis of a company’s actions, its economic fundamentals and the non-financial 
aspects pertinent to that business. This is a measure of how good management is 
at making necessary information available in a candid, accurate and timely 
manner – not only the audit data, but also general reports and press releases. It 
reflects on whether or not investors obtain a true picture of what is happening 
inside the company. 
 
Independence 
Independence is the extent to which mechanisms have been put in place to 
minimise or avoid potential conflicts of interest that may exist, such as dominance 
by a strong chief executive or large shareowner. These mechanisms range from 
the composition of the board, to appointments to committees of the board, and 
external parties such as the auditors. The decisions made, and internal processes 
established, should be objective and not allow for undue influences. 
 
Accountability 
Individuals or groups in a company, who make decisions and take actions on 
specific issues, need to be accountable for their decisions and actions. 
Mechanisms must exist and be effective to allow for accountability. These provide 
investors with the means to query and assess the actions of the board and its 
committees. 
 
Responsibility 
With regard to management, responsibility pertains to behaviour that allows for 
corrective action and for penalising mismanagement. Responsible management 
would, when necessary, put in place what it would take to set the company on the 
right path. While the board is accountable to the company, it must act 
responsively to and with responsibility towards all stakeholders of the company. 
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Fairness 
The systems that exist within the company must be balanced in taking into 
account all those that have an interest in the company and its future. The rights of 
various groups have to be acknowledged and respected. For example, minority 
shareowner interests must receive equal consideration to those of the dominant 
shareowner(s). 
 
Social responsibility 
A well-managed company will be aware of, and respond to, social issues, placing 
a high priority on ethical standards. A good corporate citizen is increasingly seen 
as one that is non-discriminatory, non-exploitative, and responsible with regard to 
environmental and human rights issues. A company is likely to experience 
indirect economic benefits such as improved productivity and corporate reputation 
by taking those factors into consideration. 
 
Supply chain risk management and complying with governance mean taking 
deliberate actions to shift the odds in the refinery’s favour, increasing the odds of 
good outcomes, and reducing the odds of bad outcomes. The focus should 
always firstly be to eliminate risk. If the risk cannot be eliminated it must be 
mitigated. If the risk cannot be eliminated or mitigated, a procedure must be put in 
place to manage the risk. Continuous review should always be done on the 
procedures. 
 
The challenge is the understanding of all the risks within the supply chain 
function.  
 
3.8 Conclusion 
The aim of this empirical research chapter was to determine what risks exist in 
the supply chain function within the oil refining process. To come to a conclusion, 
it was necessary to look at possible risks within the operations and maintenance 
functions, and the supply chain function strategies must be in line with the 
maintenance function strategies. 
 
Conclusions and recommendations will be discussed in Chapter 4. 
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CHAPTER 4 
CONCLUSIONS AND RECOMMENDATIONS 
 
4.1 INTRODUCTION 
This chapter will: 
- provide conclusions from the research; and 
- make recommendations concerning the research. 
 
The aim of this study was to understand how the inbound supply chain fits into 
the business processes and to identify what the business risks are within the 
operational, maintenance and supply chain functions. Furthermore, the aim was 
to determine if there was a proper risk reduction model in place to mitigate risk in 
the inbound supply chain within an oil refining process. To achieve this aim, the 
following objectives were set and met: 
- Firstly, an overview of supply chain management was provided and the 
purpose of the research was established. This was done in Chapter 1 by 
means of a problem statement questioning the opportunity that might exist 
to contribute to a risk reduction model in the inbound supply chain within 
an oil refining process. 
- Secondly, a literature study was done in Chapter 2 where three different 
risk management systems were discussed as well as how risk 
management fits in with the supply chain. The Deloitte Touche Tohmatsu, 
KPMG Holdings Ltd as well as the Supply Chain Operations Reference 
Model Strategies and Methodologies were discussed in detail. 
- Thirdly, in Chapter 3 the results of the empirical research were reflected 
upon in order to determine what the risks are and if risk management does 
take place in the supply chain environment. Operational, maintenance and 
supply chain function processes were interpreted and possible risk factors 
that were regarded as important were identified. 
 
 
 
 
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4.2 CONCLUSIONS FROM LITERATURE AND EMPIRICAL STUDIES 
The following conclusions regarding the research can be drawn: 
- Conclusions with regards to the importance of a Risk Reduction Model for 
risk management and strategies within Supply Chain from the literature 
study. 
- Conclusions with regards to challenges and risks within the Supply Chain 
process within an Oil Refining Process. 
 
4.2.1 The importance of a risk reduction model for risk management and 
strategies within the supply chain  
The following is regarded as the main conclusions with regard to research 
objective 1: 
- Supply chain strategies cannot be determined in isolation; they are directly 
affected by the value chain. All supply chain strategies should align with 
organisation-specific goals at all times (ch.2.1). 
- It is challenging to design and operate a supply chain so that total system-
wide costs are minimised, and system-wide service levels are maintained. 
The process to find is a system-wide strategy is known as global 
optimisation (ch.2.1). 
- Uncertainty and risk are inherent in every supply chain. The focus must 
always on the elimination of as much uncertainty and risk as possible as 
well as dealing effectively with the uncertainty and risk that remain (ch.2.1). 
- A situation is risky when it is opened up two to essential components: 
exposure to an event and the uncertainty of possible outcomes. When you 
are dealing with a situation that has a certain outcome, the situation is not 
risky, but when you deal with a situation where the outcome is unknown, 
then it becomes risky (ch.2.2). 
- Factors contributing to supply chain risk are environmental, industry, 
organisational, problem-specific and decision-maker risks (ch.2.2). 
- Six different types of failure modes that cause risk in supply chains are 
supply, transportation, facilities, freight breaches, communications and 
demand (ch.2.2). 
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- The main reason for putting energy and effort into implementing effective 
and efficient strategies and processes is to increase resilience and 
efficiency (ch.2.3). 
The following conclusions are made from the Deloitte Touche Tohmatsu 
model of understanding Risk and the value of Flexibility: 
- Companies should focus on increasing their levels of integration and 
globalisation of the supply chain (ch.2.2.1). 
- More integrated supply chain structures are more capable to drive out 
redundancy and leverage network flexibility potential (ch.2.2.1). 
- There are two potential strategies, namely managing and reducing supply 
chain risk, and managing and enhancing supply chain flexibility (ch.2.2.1). 
- By managing risk and enhancing supply chain flexibility, there is a clear 
opportunity for organisations to win in the current uncertain environment, 
and sustain their supply chains as a critical asset and differentiating factor 
for success towards the future (ch.2.2.1). 
- Network flexibility is about making the hidden flexibility visible, which can 
include alternative sources of supply, as well as alternative locations to 
manufacture and to deliver (ch.2.2.1). 
- Supply chain integration promotes more optimal and faster decision-
making by leveraging the hidden network flexibility (ch.2.2.1). 
- Flexibility can be enhanced by investing in additional tooling or assets to 
enhance product mix flexibility on existing manufacturing assets, by 
negotiating more flexible labour or supplier agreements, or by investing in 
lead time reduction efforts (ch.2.2.2). 
- Lead time reduction is a powerful lever to reduce risk and rigidity in supply 
chains and to make them more flexible and responsive (ch.2.2.2). 
- In a volatile supply chain environment, regular alignment of planning and 
service offering policies reduces the risk of experiencing service problems 
and of carrying excess inventory (ch2.2.3). 
- Supply chain processes have a high potential of contributing to either 
reducing risk or enhancing flexibility in the business (ch.2.2.4). 
- Practices that can improve the value of supply and operational processes 
are accelerating the supply and operational process, developing multiple 
demand / supply scenarios, more pro-activeness and collaboration with 
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customers and suppliers, as well as the incorporation of risk factors 
(ch.2.2.4). 
 
The following conclusions are made from the KPMG Methodology for 
Implementing Risk Management: 
- Risk management links strategic objectives to risks and controls in order to 
improve corporate performance, increase transparency, provide an early 
warning system and enhance business sustainability (ch.2.5). 
- The KPMG Risk Management Framework includes strategy, development 
and prioritisation of risk categories from company’s key strategic success 
factors (ch.2.5). 
-  The KPMG Risk Management Framework includes risk systematisation, 
and the identification and classification of risks (ch.2.5). 
- The KPMG Risk Management Framework includes assessment and 
measurement, assessment of likelihood and potential impact as well as 
continuous monitoring of the risks using key risk indicators (ch.2.5). 
- The KPMG Risk Management Framework includes reporting, definition of 
reporting lines, structure and format, integration in controlling and reporting 
(ch.2.5). 
- The KPMG Risk Management Framework includes mitigation, as well as 
individual mitigation measurements (ch.2.5). 
- The KPMG Risk Management Framework includes roles and 
responsibilities within the organisation, risk owner, risk controller, and 
internal audit (ch.2.5). 
- The KPMG Risk Management Framework includes internal control, defines 
and assesses internal controls and integrates internal process controls into 
mitigation strategies (ch.2.5). 
- The KPMG Risk Management Framework includes IT systems, the 
definition of IT requirements as well as selection and implementation 
(ch.2.5). 
- When implementing a thorough risk management framework, it would 
focus on planning, risk identification and assessment, the risk 
management process, and implementation (ch.2.5). 
- Risk owners are responsible for periodic reporting (ch.2.5). 
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- Risk management should be a pivot between internal controls and other 
assurance functions, such as internal audit (ch.2.5). 
- Effective supply chain planning balances demand and supply, and internal 
and external objectives, all in a constantly changing environment (ch.2.6). 
- Decision-making must become fact based. It is no longer appropriate to 
base decisions and actions only on prior experiences and assumptions 
(ch.2.7). 
- Supply chain decisions are about determining which the right product is, 
where the right place is and when the right time is (ch.2.7). 
- Benefits when focussing on a process is it helps to manage the business 
compete more effectively, create real improvements, improve multiple 
areas, improve coordination between teams and it streamline and 
accelerate business change (ch.2.8). 
- A business that has a proactive risk management system in place, 
efficiently manage business risk, which can then lead to the constitution of 
value in various areas of business (ch.2.9). 
- Any business should first and foremost have a model in place that can 
prevent or mitigate a risk before it can actually happen (ch.2.9). 
 
The following conclusions are made from the Supply Chain Operations 
Reference Model: 
- SCOR is a process reference model designed for effective communication 
among supply chain partners. A standard language helps management to 
focus on management issues (ch.2.10). 
- SCOR as an industry standard helps management to focus across inter-
company supply chains (ch.2.10). 
- SCOR is used to describe (standard SCOR process definitions allow any 
supply chain to be configured), measure (standard SCOR metrics enable 
measurement and benchmarking of supply chain performance) and 
evaluate (supply chain configurations may be evaluated to support 
continuous improvement and strategic planning) supply chain 
configurations (ch.2.10). 
- SCOR is based on five distinct management processes, namely plan, 
source, make, deliver, and return (ch.2.10.1). 
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- Once a complex management process is captured in a standard process 
reference model form, it can be implemented purposefully to achieve 
competitive advantage; describe clearly and communicated; measured, 
managed and controlled; tuned and re-tuned to a specific purpose 
(ch.2.10). 
  
4.2.2 Challenges and risks within the operational, maintenance and supply 
chain function within an oil refining process 
The following are regarded as the main conclusions with regard to research 
objective 2: 
- Understanding the purpose of the equipment used in the refining processes 
and the risks identified when the equipment fails by all parties involved, will 
assist them to be able to develop and implement maintenance and sourcing 
strategies to mitigate and manage the risks (ch.3.1). 
- The plant is made up of multi-streams with a range of individual interrelated 
streams, each performing a specific process (ch.3.2.1). 
- If any part fails to perform, the overall plant will fail and will come to a 
standstill. The production loss can be disastrous for the plant (ch.3.2.1). 
 
4.2.2.1 The main purpose of the operational function within the oil 
refining process and possible risks it may encounter 
- The operations function within the oil refining process needs to 
understand the type of crude oil that is being used in order to create 
and plan the most effective throughput (Total Product Yield) to 
create the most value for the shareholders (ch.3.3.1). 
- The operations function also needs to understand the risk that 
exists within the different multi-streams and within the streams the 
risks within all of the equipment because of the different types of 
equipment used (ch.3.3.1). 
- The operations function identifies the possible risks within each 
piece of equipment. Failure to do so will lead to no transformation of 
resources into products and services as desired by the customers 
(ch.3.3.1). 
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- Currently, the method used to do the necessary analysis on the 
plant to identify possible plant risk and the possible impact thereof, 
is called Process Hazard Review (PHR) (ch.3.4.1). 
- PHR is a hazard identification and risk assessment technique 
originally developed for reviewing existing operations in production, 
storage or transportation (ch.3.4.1). 
- The objective of PHR is to identify significant process-related 
hazards and to confirm that adequate measures for prevention, 
control and mitigation are in place and are being effectively applied 
(ch.3.4.1). 
- The shortfall of the current method being used is that it is a manual 
process that is outdated and not in time (ch.3.4.1).  
- If the risks are not identified and strategies are not in place, the 
impact will be a failure to transform resources into products and 
services desired by customers (ch.3.4.1). 
- The “Top 20” list approach is something quite old and currently the 
refinery is busy reviewing the risk assessments. It was also the risks 
are re-evaluated closely in order to ascertain their significance 
(ch.3.4.1).  
- The “Top 20” philosophy is very flawed because sometimes risks 
that are ignored can have disastrous results in the future. A better 
approach is that one should look at all the risks and start to work on 
them on a priority basis (ch.3.4.1). 
 
4.2.2.2 The main purpose of the maintenance function within the oil 
refining process and the possible risks it may encounter 
- The role of the maintenance function in support of the operations 
function, is the understanding of the risks identified within each 
piece of equipment as well as the prevention and avoidance of the  
failure of equipment by implementing maintenance strategies to 
manage and mitigate the risks (ch.3.3.2). 
- The objective of maintenance and reliability is to maintain the 
capability of the system (ch.3.3.2). 
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- If failure cannot be prevented, it can be disruptive, inconvenient, 
wasteful and expensive. If failure on machines and productivity 
happens frequently, it would reduce the plant reliability with an 
effect on the business’ operational throughput, reputation and 
profitability (ch.3.3.2). 
- For any piece of equipment or machine to be reliable and to function 
properly for a specific time under certain conditions, proper 
maintenance must be performed as planned and when needed 
(ch.3.3.2). 
- A possible risk if proper maintenance strategies are not in place is 
failure of equipment, which can cause plant instability, which will 
affect operational throughput (ch.3.3.2). 
 
4.2.2.3 The main purpose of the supply chain function within the oil 
refining process and possible risks it may encounter 
- Supply chain management implies getting work done quickly, 
efficiently, without error, and at a low cost (ch.3.3.3). 
- The supply chain function, together with the operations function 
(maintenance and plan reliability), is about understanding risk 
created within each piece of equipment and supports the 
maintenance strategies to ensure the effective supply of material 
and services (ch.3.3.3). 
- The supply chain function strategy to move materials and services 
should always focus on quality, service, cost and flexibility, in order 
to effectively support the maintenance strategy (ch.3.3.3). 
- Quality within the supply chain is about getting the right material or 
service as required by the end-users (plant) (ch.3.3.3.1). 
- Service delivery within the supply chain is all about systems being in 
place to be able to supply material and services “just in time” 
(ch.3.3.3.2). 
- The focus of the supply chain is to deliver the material and services 
in the most cost effective way (ch.3.3.3.3). 
- Flexibility refers to the supply chain’s ability to supply a wide variety 
of products, material and services to its end-users and also refers to 
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a transformation process as and when the need changes 
(ch.3.3.3.4).  
- Within the indirect supply chain is the replenishment strategy to 
support the maintenance strategies. The replenishment strategy is a 
combination of supply (warehouses), demand (buyers) and 
procurement (contracts) (ch.3.3.3.4). 
- The main risk that can occur if the replenishment strategy is not 
aligned with the maintenance and operation function strategies, will 
be failure to deliver on time, sub-standard service delivery, poor 
quality and not at the most cost effective price, unnecessary 
investment in stock, and duplications of material (ch.3.4.2).  
 
4.2.2.4 The impact of new and current projects on the replenishment 
strategy within the supply chain and the oil refining process 
- Proper project / spares policy. Although there is a policy in place, it 
is out-dated and needs to be revised (ch.3.4.2). 
- All parties involved do not understand the content of the policy. The 
APT system is mentioned as a tool that is used to determine stock 
levels to be kept in the warehouse, but the APT system does not 
even currently exist (ch.3.4.2). 
- All parties involved are uncertain as to what the roles and 
responsibilities are as stipulated in the policy. From the first 
planning phase, there should be involvement from the supplier, 
R&D supplier, warehouse, engineering, commercial and financial 
(ch.3.4.2). 
- Agreement with the supplier regarding pricing, lead times, spares, 
terms and conditions. There is no consistency and clarity when it 
comes to supplier selection, evaluation and required induction 
needed when the supplier needs to come to the site (ch.3.4.2). 
- Individual equipment numbers are allocated, but when the start-up 
spares that need to become part of the stock get delivered to the 
warehouse, no proper tagging is done. A tag should be put on each 
piece of material with the project number, equipment number, 
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individual commodity number and the purchase price must be 
captured in the SAP system (ch.3.4.2). 
 
4.2.2.5 The replenishment strategy within the supply chain in support 
of the operational and maintenance strategy and the oil refining 
process 
- The main focus of the current replenishment strategy within the 
supply chain function is understanding the risk the equipment, or 
any part therein, creates when failing; the cost of the supply of such 
a part; the availability of the part or any alternative to support and 
maintain the equipment when failing; and the usage patterns of 
such a part and unit of supply (ch.3.5). 
- For all existing and new material created and warehouse 
movements, the MRP controller applies the MRP evaluation 
document for existing and new commodities (ch.3.5) 
- When the stock request form is completed by the requestor, the 
MRP controller, together with the end-user, completes the MRP 
evaluation document to build up a history base on all material 
commodities and related equipment on the plant. It is critical that a 
full description is provided to ensure that correct material and parts 
are bought in future (ch.3.5.1). 
- The end-user will compile a BOM from the spare list received from 
the supplier and capture the information in SAP (ch.3.5.1). 
- The BOM file contains the complete product descriptions, listing not 
only the materials, parts and components, but also the sequence in 
which the product is created (ch.3.5.1). 
- Shortcomings that exist when registering new equipment can 
include the requestor registering the commodity not being 
competent, and the warehouse person receiving the request does 
not understand the process. The descriptions forwarded to the 
warehouse are not 100% completed, wrong specifications are 
provided, or incorrect information gets captured in the system. The 
risk is that in future when the part needs to be replaced, a wrong 
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part will be replenished, which can cause equipment and plant 
failure (ch.3.5.1). 
- The requestor sometimes asks the Suppliers to send them a scope 
of work / specification, which is then captured in the system. The 
supplier writes the scope of work according to his / her specification, 
which causes a preferred supplier situation, making the supply 
chain very rigid (ch.3.5.1). 
-  Another shortcoming is that currently only 35% of all equipment 
spares are linked to a BOM. The risk is that wrong parts are drawn 
from the warehouse when maintenance needs to be done, which 
results in delays and an increase in Return to Stores (RTS). In the 
event of the wrong material being drawn and not returned within a 
couple of days and new material being ordered, surplus stock can 
be created when the material is RTS. (ch.3.5.1).   
- When material is reviewed for reordering along with the large 
quantity of (± 21000) active commodities, a process of re-evaluation 
is put in place to identify which material could have potential risks 
within the supply chain. The criterion of review is: Price > R5,000 or 
Period not being used > 2 years or Change in demand patterns 
(ch.3.5.2). 
- The shortcoming is the timing and the reaction is too long when 
receiving the request. Currently it is rather a reactive than a 
proactive process. The risk is that not enough stock will be available 
when needed or surplus stock will be in the system, which is money 
going to waste. (ch.3.5.2). 
- The MRP controller spends too much time on non-critical material 
(95%) in stead of focussing on maintenance and critical stock (5%). 
The non-critical material should be managed through an automatic 
MRP system with conditions and health checks in place. (ch.3.5.3).  
- The importance of capturing the risk profile of the equipment on the 
MRP evaluation document is that anyone dealing with the 
commodities relating to this equipment from the supply chain will 
better understand the risk and impact of not having the correct 
material when needed. This is currently done manually. A focus 
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should be to implement this evaluation system electronically to 
ensure it is in time (ch.3.5.3). 
- The second important aspect under the risk profile of the equipment, 
is the availability of the equipment. This information will assist the 
supply chain to understand when equipment is available, if 
maintenance needs to be done and on which other equipment/s the 
relevant material commodity is used (ch.3.5.3). 
- The third important aspect under the risk profile of the equipment is 
the maintenance strategy that is followed to ensure the availability of 
equipment at all times. The importance of doing maintenance and 
having a maintenance strategy in place is to ensure that all activities 
take place as planned to keep a system’s equipment in working order 
(ch.3.5.3). 
- The risk the supply chain function is facing with the capturing of the 
risk profile of the equipment is that when time goes on and changes 
happen, there is no proper management of change process in place, 
which ensures from a plant point of view that all changed information 
is communicated to the warehouse. For example, the design and 
strategies changed or when there is a breakdown and it happened 
outside of the strategy, the questions are not asked. This can again 
result in the buying of wrong parts, which can lead to equipment and 
plant failure and could result in surplus stock (ch.3.5.3). 
- The availability of the material in the market plays an important role 
in determining the strategy to procure the relevant material. Is the 
material directly available off the shelf; is it a part that needs 
manufacturing or can it be reconditioned back to its original state? Is 
the supplier local or overseas, is it a sole or preferred supplier or can 
the market be sourced?  This also plays an important role on the lead 
times (ch.3.5.4). 
- The first shortcoming is that there are no supplier profiles available 
on any of the material kept as stock, especially on the critical 
suppliers. Each buyer has information in his / her own files or 
computers.  
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- A second shortcoming in this area of the MRP evaluation process is 
that the current supply chain function infrastructure is not suitable to 
deal with the day-to-day workload to be able to put proper 
procurement strategies in place. Normally this is performed by a 
whole project team. The impact of this is a resource shortage and 
existing contracts not being maintained and updated (ch.3.5.4). 
- A third shortcoming is that there are no proper partnership 
agreements and portfolios in place, especially on critical suppliers. 
Some of the suppliers also find it difficult to move from a sales 
environment to stockholding and warehouse functions. 
- The risk is that when there are unplanned maintenance jobs to be 
done or breakdowns, whoever needs to deal with the situation runs 
around trying to find the relevant information to solve the problem as 
quick as possible to prevent equipment or plant down time (ch.3.5.4). 
- Demand of material and how much must be kept in stock are based 
on minimum once-off usage, the Mean Time Between Failure 
(MTBF), the shelf life and the criticality of the material (A,B,C) 
(ch.3.5.5). 
- The shortcoming in this part of the process is that the unit of issue 
and unit of receiving differ; this causes stock differences making 
reporting difficult. This could cause the reporting of incorrect figures 
(ch.3.5.5). 
- Secondly, if the information is incorrect, it will impact on the stock 
levels – either surplus or shortage (ch.3.5.5). 
- There is no systematic approach by the MRP controller when it 
comes to the recommendations portion of the evaluation. Currently, 
decisions are based on the experience of people, gut feel, and no 
proper facts. The risk of this is that when the individual leaves, the 
experience leaves with him / her. Systems are built on people and 
are therefore not sustainable (ch.3.5.6). 
- The procurement function is responsible for developing a sourcing 
strategy for procuring the items that a company needs to acquire. 
Depending on such factors as the cost of the item, volume required, 
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and scarcity, many different processes can be used by the company 
(ch.3.5.7). 
- The procurement function focuses on items where there is some type 
of ongoing relationship and there is usually a contract with special 
pricing, delivery and other arrangements designed to coordinate the 
interaction between the two companies (ch.3.5.7.1). 
- One of the strategies the company is focussing on is price 
containment strategy. This strategy depends on the volatility of the 
market factors influencing the commodity or service. Secondly, it will 
depend on the type of supplier being used or identified (3.5.7.2). 
- After the sourcing strategy has been determined, the MRP controller 
will recommend which strategy will be best to follow to support 
maintenance in having the material available at all times (ch.3.5.7.2). 
- In this area, there are lost opportunities on small commodities 
because there is no current system to support the workload that 
needs to be done in order to perform proper evaluation. There are 
still opportunities for the bigger commodities (ch.3.5.7.2). 
 
4.2.2.6 The infrastructure within the supply chain in support of the 
operational and maintenance strategy and the oil refining 
process 
- The focus should be on the process by which the company structures 
and manages the supply chain in order to find the right balance 
between inventory, transportation and manufacturing costs; matches 
supply and demand under uncertainty by positioning and managing 
inventory effectively; utilises resources effectively by sourcing 
products from the most appropriate manufacturing facility (ch.3.6). 
- It is useful to divide the network planning process into network 
design, inventory positioning and resource allocation (ch.3.6). 
- The objective of is to design or reconfigure the logistics network in 
order to minimise annual system-wide cost, including production and 
purchasing costs, inventory holding costs, facility costs, and 
transportation costs, subject to a variety of service-level requirements 
(ch.3.6).   
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- Issues to be dealt with currently are: 1) although stock levels have 
been reduced over the past 10 years, there are still some of the 
warehouses that are full because of non-stock items that are being 
kept; 2) shortage on resources causes non-availability of store 
masters at all times at all the warehouses; 3) warehouse personnel 
do not always understand the impact of their actions on the business 
as well as not fully understanding the importance of each of the parts 
being kept as stock in the warehouse (ch.3.6).  
 
4.2.2.7 The impact of governance and legislation within the supply chain 
in the oil refining process 
- Corporate governance is a document that establishes a 
comprehensive supply chain policy, which will promote effective and 
efficient practices and systems; which will support the refinery’s 
vision; which will comply with the seven characteristics of corporate 
governance as determined by the King Commission on Governance 
in South Africa and which will implement, monitor and integrate the 
day-to-day supply chain activities (ch.3.7). 
- The focus should always firstly be to eliminate risk, and if the risk 
cannot be eliminated illuminated, it must be mitigated. If the risk 
cannot be eliminated or mitigated, a procedure must be put in place 
to manage the risk. Continuous review should always be done on the 
procedures (ch.3.7). 
- The challenge is the understanding of all the risks within the supply 
chain function (ch.3.7).  
 
 
4.3 Recommendations with regard to the importance of having a risk 
reduction model in place within the operations function to mitigate 
risks 
As determined in the empirical study, the operations function within the oil 
refining process identifies the possible risks within each piece of 
equipment. Failure to do so will lead to no transformation of resources into 
products and services taking place as desired by the customers. When 
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new projects have been executed, the Business Development and 
Implementation model (BDI) forms the framework where the business 
focus, idea generations, business definitions, implementations and 
continuous improvement activities are captured into one. The BDI model’s 
relevance to risk can be described as a systematic process consisting of 
seven stages (gates) within a project management model where, during 
each stage, appropriate risk reviews and impact assessment 
methodologies are applied to assess risks. 
 
Before Gate 3 (feasibility) and Gate 4 (basic development), risk 
assessments such as PHA and Hazop are conducted. The purpose is to 
ensure that the design will be within the safety risk parameters for both the 
risks to persons on site as well as any exposure to the community. 
 
Table 4.1 Example of a business development implementation model 
 
 
Idea Packaging 
Pre-
feasibility 
Feasibility 
Basic 
Development 
Execution Start-up Evaluation Operation 
Strategic 
Alignment 
Business 
Planning 
Facility 
Planning 
Project 
Planning 
Provide 
assets 
according 
to Plan 
Safe Start-
up assets 
and systems 
Evaluation 
to ensure 
project 
meets 
objectives 
Optimise by 
guiding 
improvement 
sustainability 
 
 The risk management system currently used includes: 
- Phase 1 Establishing the context and planning  
- Phase 2  Risk identification 
- Phase 3 Risk exploration 
- Phase 4 Risk assessment 
- Phase 5 Risk treatment 
- Phase 6 Monitor and review risks 
- Phase 7 Risk reporting 
 
Idea 
Generation 
Front End Loading Implementation Continuous 
Improvement 
1 2 3 4 5 6 7
Focus: Business Definition Business Establishment Operate Business 
 
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The shortfall of the current method is that it is a manual process, which is 
outdated and not in time. The “Top 20” list approach is quite antiquated 
and currently the refinery is busy reviewing the risk assessments. It was 
suggested that a proper evaluation of the risks should be performed so that 
their significance can be determined. The “Top 20” philosophy is very 
flawed, because sometimes risks that are ignored can cause grave 
problems in future. A better approach is that one should evaluate all risks 
and start to work on them on a priority basis. 
 
A second shortfall is that there is no real system in place where existing 
equipment’s risks get evaluated / re-evaluated. The plant is 35 years old 
and the BDI model was not in place then.  
 
The recommendation therefore is that the models and systems in place are 
sufficient, but the required review cycles should be more regular. This 
should be considered and decided upon by management. 
 
4.4 Recommendations with regard to the importance of having a risk 
reduction model in place within the maintenance function to mitigate 
risks 
As determined in the empirical study, the maintenance function within the 
oil refining process in support of the operations function, needs to 
understand the risk within each piece of equipment identified by the 
operations function. The maintenance function must at all times prevents 
and avoid the failure of equipment by implementing maintenance 
strategies to remove and mitigate the risk. Failure to do so can cause plant 
instability and / or shutdown, which will affect operational throughput. 
  
The current process used by the maintenance function to base their 
strategies on, is Reliability Availability Maintainability (RAM). When new 
projects are executed and spares need to be ordered and decisions need 
to be made as to which of the spares must become part of the stock, the 
interpretation differs from person to person, because this is not a 
standardised systematic approach that is followed. It is a manual process 
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where each person’s view is based on experience and others just on a 
guess. The second shortcoming is that there is no proper MOC in place for 
when new equipment gets installed in the plant or is being removed from 
the plant. When implementing new equipment from projects, the supply 
function only gets involved close to the end, and this has an impact on 
stock holding. 
The recommendation is that the task team that has already started 
benchmarking with other oil refineries to investigate the utilisation of 
Strategic Asset Management Intelligence (SAMI) and Work Management 
Process (also referred to as STAR), to complete the benchmarking as 
soon as possible and to get the work teams started in the implementation 
of changes as and where required. A proper MOC process should be 
followed for each and every change to all parties involved and affected by 
the changes. 
What are the benefits of strategic asset management and why SAMI? 
According to Samicorp (2008:1), SAMI is a process to systematically 
derive the highest value from facility assets, through a consistent 
philosophy, plans and objectives, and cooperative involvement by 
everyone in the plant. Asset management ties business objectives, 
operational readiness and resources to a single view (refer Annexure 3). 
The system must completely align the business plan with plant realities, 
identifying specific equipment conditions and performance gaps to 
overcome in order to achieve the plan. All measures from a corporate 
Return on Invested Capital (ROIC), to plant contribution, to unit production 
rates, to specific equipment’s health requirements, to the supporting 
maintenance strategy, all cascade in alignment (refer Figure 4.1). 
 
 
 
 
 
 
 
 
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Figure 4.1 SAMI asset health care triangle 
 
 Source: Strategic Asset Management Corporation (2008) 
 
The second process currently being investigated is the Work Management 
Process (STAR), which consists of an integrated set of tools and 
procedures designed to assist maintenance leaders in the management of 
work. STAR is used as a vehicle to identify, prioritise, plan, schedule and 
execute work and then give feedback and have work status control. This 
process can assist in the increase of equipment reliability and utilisation of 
maintenance personnel (refer Figure 4.2). 
 
Figure 4.2 Example of STAR work management process 
 
 
 
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The above processes will assist the maintenance function to be able to do 
proper planning and assisting them with putting proper maintenance 
strategies in place to mitigate the risks identified. 
 
4.5 Recommendations with regard to the importance of having a risk 
reduction model in place within the supply chain function to mitigate 
risks 
It was determined in the empirical study that the main purpose of the 
supply chain function is to have a replenishment strategy in place to 
support the maintenance strategies in managing and mitigating the 
identified risks. If the supply chain function is not aligned with the 
maintenance and operation functions, then it will lead to failure to deliver 
on time, sub-standard service delivery, poor quality and not at the most 
cost effective price, unnecessary stock investment and the duplication of 
material. 
 
Key issues identified in Chapter 1, which would have been dealt with in this 
study influencing supply chain management and planning, were the 
following: 
- The impact of current and new projects; 
- Supply chain infrastructure; 
- Sourcing strategies and price containment;  
- Supply chain responsiveness; 
- Changed or new legislation; 
- Global skills shortages. 
 
4.5.1 The impact of current and new projects 
As per the empirical study and conclusions that were made regarding the 
impact of new and current projects, the first problem is a timing issue. The 
supply chain function only becomes part of the process at the end where 
parts are delivered and need to become stock. The importance for the 
supply chain to be involved from the beginning of new projects is that the 
supply chain will understand what the project is about, as well as who is 
responsible for what. Secondly, an important contribution of the Supply 
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Chain to new projects, is not only assisting with the management of stock, 
but also giving advice during the process to standardise equipment and 
parts. For example, the plant might want to bring in Rockwell parts of which 
no stock is kept in the warehouse. At this early stage, the supply chain can 
advise that they have Siemens stock in the warehouse – why not rather 
implement Siemens equipment?  
 
The problem that is experienced with current projects is that when 
equipment is taken out of the process or when risk assessments are 
performed and there are changes to the risks of a specific piece of 
equipment or part, there is no proper MOC performed to notify the 
warehouse that certain spares won’t be used anymore. The end result is 
redundant material being kept in stock holding, which should rather be 
scrapped and sold. This action contributes to stock level optimisation. 
 
The recommendation to manage new and current projects sufficiently by 
everybody involved is to implement the asset performance tool system 
(refer Annexure 4), which will assist the maintenance function in deciding 
on which spares to hold in what numbers, and secondly, it will assist the 
supply chain function in the evaluation and optimisation of inventory and 
purchasing decisions. This is an in-time systematic approach that is 
referred to in the spares policy. 
 
A second recommendation is that all parties involved in projects get proper 
training on the policies and procedures for new and current projects.  
 
Thirdly, there should be a proper MOC process in place for when changes 
take place within the plant or operations. 
 
4.5.2 Supply chain infrastructure 
As per the empirical study and conclusions made, the main risk is access 
control. Because of the shortage of resources and warehouse personnel 
not being situated at each warehouse, unauthorised people access the 
warehouses to dump unwanted material, which causes a safety risk 
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because of untidiness and the warehouses being full. The unauthorised 
access also causes a security risk as material gets removed without proper 
processes being followed, which then leads to a cost to the supply chain 
because of stock not balancing. 
 
The recommendation therefore is that a proper access control system gets 
implemented at all the warehouses. Secondly, a bar coding system that will 
assist with the resource shortage and that will ensure that all transactions 
are done electronically, making the material in time and improving the ATP, 
and not out of time and manually as it is  currently done, needs to be 
implemented.  
 
4.5.3 Sourcing strategies and price containment 
The sourcing strategy is captured in the replenishment strategy of the 
supply chain. As per the empirical study and conclusions made, the main 
focus of the supply chain function should be the understanding of the risk 
the equipment and parts creates when failing, the cost of the supply of 
such a part, the availability of the part or any alternative to support and 
maintain the equipment when failing and the usage patterns of such parts. 
 
The equipment risk is not known or understood by the supply chain. Not all 
relevant information on suppliers is available relating to these parts, as well 
as where and when they are available in the market. Because of resource 
shortages in many instances, the process followed by the supply chain is 
more re-active than pro-active. The supply chain infrastructure is not 
suitable to deal with the day-to-day workload to be able to put proper 
sourcing strategies in place, and existing contracts are not maintained and 
updated. Normally this gets done by a whole project team.  
The recommendation therefore is that a proper supplier portfolio 
management system is implemented. By standardising all the activities 
within the procure-to-pay process for all the buyers, it will be easier for 
anyone when information is needed and the buyer is not available. The risk 
matrix should be discussed with all supply chain personnel for them to 
understand what they need to focus on and why. Regular service level 
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agreement sessions should be held with especially critical suppliers, as 
this will help with the building of ongoing relationships with these suppliers. 
Lastly, as part of a joint venture, the oil refinery should look at getting 
involved and being part of shared services, especially focusing on getting 
as much as 80% of stock on contracts. This will assist with the sourcing 
strategies to be part of group contracts. 
 
4.5.4 Supply chain responsiveness  
The importance of the supply chain function is to focus on quality, service 
and cost. The supply chain function should also focus on getting the right 
material or service delivered at the right time, place and cost. During the 
empirical study and conclusions that were made, it is obvious that the 
supply chain function in many cases reacts on a reactive basis rather than 
being proactive. This is because of resource shortages and people not 
always understanding their environment, the risks they are dealing with 
and the impact of their actions and decisions on the business and what 
risks they need to focus on. 
The recommendation is that all critical and project spares are identified and 
categorised according to A, B or C; A being the most critical to C less 
critical. The benefit from implementing this is that anyone who deals with a 
part categorised as A will know that immediate action should be taken and 
that relevant feedback should be given to all parties involved. The situation 
must be dealt with as soon as possible. 
 
4.5.5 Changed or new legislation 
From the empirical study and conclusions made, governance and 
legislation are important and critical because it assists and guides the 
supply chain function to have effective and efficient practices and systems 
in place to eliminate, mitigate or manage risks. The challenge the supply 
chain function has is that not everybody understands all of the risks. 
 
The recommendation is that sessions should be arranged on a regular 
basis with the group where certain areas of governance and legislation are 
discussed. Secondly, an external expert should come and update the 
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group on changed and new legislation and what the impact thereof is on 
the function. 
 
4.5.6 Global skills shortages 
Sourcing material and services from Europe to other countries are a 
fundamental component in a networked and globalised economy. In the 
empirical study and the conclusions made from the study, it is evident that 
not everybody within the supply chain function has the necessary skills to 
perform to the full. One influencing factor is Employment Equity (EE) and 
the fact that companies have targets to meet every year, and therefore 
sometimes employees get promoted to quickly to achieve these EE 
targets. The impact of this is that the individual never gets the opportunity 
to really grow to his / her full potential within a certain job. This job hopping 
catches up eventually when he / she arrives in a management position 
where he / she cannot cope. Another factor can be that when the 
interviews were held, a wrong candidate for the position was employed, 
trying to fit a square peg into a round circle. The candidate performed very 
well, but without practical testing done it is sometimes possible that the 
person gets appointed because he / she might be well spoken. Another 
factor that can contribute to this is that the individual in the position does 
not really want to be in this field of expertise and therefore the effort put 
into really getting to know the job, and performing well, the right attitude, 
drive and energy are not there. People also leave a company because of 
the way the company manages the employees. Employers might say they 
do talent planning, talent acquisition and talent development, but they are 
not good in managing and developing talent. 
 
A global skills shortage does not necessarily mean that there are large 
numbers of unfilled positions in a particular field. It can mean there is a 
rapid increase in demand for experienced workers with highly specialised 
skills and new workers cannot be trained or up-skilled in time to meet the 
demand before it drops. 
 
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So what can companies do to deal with this world-wide dilemma? 
According to Moad (2010:7), companies need to increase attention to 
clarify business and people strategies, communications and performance 
measurements, as well as employee development with particular focus on 
the latest technologies, problem-solving skills, and change readiness. The 
recommendation is that there is a need currently within the supply chain 
function within the oil refinery to identify coaches and mentors to help the 
employees to move onto the next level, not necessarily the supervisor or 
somebody from the same environment. Secondly, for all the positions 
within the supply chain function, profiles should be written for all the critical 
jobs, do a comparison against the profile of the people currently employed 
and should then determine the gaps. The y should draw up and implement 
a development plan with the employee and agree to the time slots of when 
what needs to be achieved. Regular one-on-one meetings should then 
take place between the line and the individual to assist him / her to achieve 
the goal.   
 
Sirota et al. (2005:4-8) noted that it is up to the employer to develop and 
nurture the company’s relationship with its employees, as well as to keep it 
positive. To maintain the enthusiasm employees initially bring to their jobs, 
management must understand three sets of goals that the great majority of 
workers seek from their work, and then satisfy those goals. If just one of 
the three goals is missing, then it creates less enthusiasm. The three goals 
are: 
- Equity: To be respected and to be treated fairly in areas such as 
pay, benefits and job security. 
- Achievement: To be proud of one’s job, accomplishments and 
employer. 
- Camaraderie: To have good, productive relationships with fellow 
employees. 
Finally, employers have to create a workplace where their people feel good 
about where they are and what they do; they will have to share information 
about the business and offer forms of recognition and remuneration that 
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motivate employees and reward them for the part they play in the 
organisation’s growth and achievements.  
 
4.6 Discussion of the proposed risk reduction model within the inbound 
supply chain to manage and mitigate risk within the oil refining 
process  
It could not be determined during the empirical study whether there is a 
proper risk reduction model or risk framework implemented within the 
supply chain function. There is evidence of a proper framework in place 
within the operational function where risk identification was done on 
equipment and parts within the multi-streams within the oil refining 
process. 
 
As previously discussed, it was determined during the empirical study that 
the main purpose of the supply chain function within the oil refining 
process is to put sourcing strategies in place to support the maintenance 
function to manage and mitigate the risks on the equipment and parts 
identified by the operational function. If the supply chain function does not 
have a proper risk reduction model or risk framework in place, how can 
they successfully provide support to the rest of the company? 
 
Why would the supply chain want to manage their risk? 
Supply chain risk management means taking deliberate actions to shift the 
odds in their favour, increasing the odds of good outcomes, and reducing 
the odds of bad outcomes. 
 
What are the risks the supply chain will encounter if not properly 
managed? 
There is a possibility that internal and external events will negatively affect 
their ability to achieve their supply chain risk management objectives. It 
may be that something good will not happen, or that something bad will 
happen. 
 
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How would the supply chain go about to manage their risk in such a 
way that they and all others get what they want? 
They need to implement risk reduction strategies and a risk management 
process that entails the planning, arranging and controlling of activities and 
resources to minimise the impact of all risks to levels that can be tolerated 
by internal and external shareholders and stakeholders.  
 
The objective of any supply chain management framework should be to 
support the company’s vision and strategic objectives and by means of 
risk reduction strategies ensure that the risks that the oil refinery is 
exposed to in the supply chain are identified and managed to acceptable 
levels. To be able to put risk reduction strategies in place, everybody 
within the supply chain function should understand where they fit into the 
business; what the purpose of the supply chain function is; what strategies 
and processes they must follow to align with the company’s vision and 
strategic objectives; what the internal and external factors that can have 
an influence on the supply chain function are; what the things that can go 
wrong are and what risk reduction strategies must be in place to 
proactively eliminate, mitigate or manage these risks. 
 
During the literature study in Chapter 2, three models were briefly 
discussed: 
- The Deloitte Touche Tohmatsu model of Understanding Risk and the 
value of Flexibility; 
- The KPMG Methodology for Implementing Risk Management; and 
- The Supply Chain Operations Reference Model for Business Process 
Re-engineering. 
The recommendation therefore is to combine all three models into one 
(refer Figure 4.4), which will cover risk understanding and the impact of 
internal and external influences; how to re-engineer business processes; 
the implementation of a proper risk management framework; and finally the 
identification of key strategic focus areas with key performance indicators 
for performance to be measured against.  
 
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Supply chain planning processes balance the market demand 
requirements with supply resources and establish / communicate plans for 
the whole supply chain function, keeping in mind the vulnerability of 
internal and external factors (refer Figure 4.3). 
 
Figure 4.3 External and internal vulnerability drivers 
 
 
Source: Cranfield School of Management (2003) 
 
To be able to function within all the ongoing changes happening all the time within 
these processes, requires balancing multiple links simultaneously to have an 
effective supply chain management as a result. The unpredictability in the supply 
chain leads to increased risk, which may result in disruptions to the supply chain. 
These disruptions may be unexpected and rare, but they must be understood, 
identified and managed. For any business it is most important to have a model in 
place that can prevent or mitigate a risk before it can actually happen.  
 
The proposed supply chain risk reduction model will now be discussed in detail. 
 
 
 
 
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Figure 4.4 Proposed supply chain risk reduction model  
 
 
 
The objective of any supply chain management framework should be to support 
the company’s vision and strategic objectives and by means of risk reduction 
strategies ensure that the risks that the oil refinery is exposed to in the supply 
chain are identified and managed to acceptable levels. Due to the major impact of 
supply chain initiatives on a business, a combined programme and project 
approach should be followed, which will include an understanding of the potential 
reward (business case); vision clarity; management support; internal ownership 
 
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and accountability; training; communication; and a formal change management 
programme.  
 
As recommended in Chapter 4, the following discussion and model are based on 
the combination of the Deloitte Touche Tohmatsu model of Understanding Risk 
and the value of Flexibility; the KPMG Methodology for Implementing Risk 
Management, and the Supply Chain Operations Reference Model  for Business 
Process Re-engineering. 
 
Step 1 Understanding by all role-players of where the supply chain 
function fits into the business and what is its reason for 
existence? 
 
 
It is important that all role-players, especially the people who form part of the 
supply chain function, understand where they fit into the business and the reason 
why such a function is needed. In so many companies, it is the norm that when, 
for example, a person is in charge of purchasing, it is the only role that the person 
will focus on, it does not matter what the person in the office next to him / her 
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does and why. In many instances this is a reason for many problems and causes 
the shortages within the supply chain functions and processes (silo effect). Times 
have changed and the time has come where role-players must understand the 
impact of each of their actions on the business and what the risk will be if they do 
or do not do what they are supposed to do – from the cleaner to the manager.  
 
Throughout the study, it was concluded that the main purpose of the supply chain 
function is to support the maintenance strategies through effective sourcing 
strategies to mitigate the risks identified by the operations function. All processes 
and functions that are part of a company’s value chain contribute to its success or 
failure. These processes and functions do not operate in isolation; no one 
process or function can ensure the supply chain’s success, it must be done 
together. Therefore, the design of the overall supply chain and the role of each 
stage must be aligned with all other functions to be able to support all strategies 
to ensure a strategic fit.    
 
Step 2 Understanding what the impact of macro-environmental factors 
on the supply chain is 
According to LCP Consulting, Cranfield School of Management (2003:9), there 
are many types of risks that can threaten business continuity and organisations 
must have built-in resilience to these at different levels. This means that 
executives planning for and managing vulnerability face a difficult task, since 
problems can appear from many different directions. There are many forms of 
risk, and many theories, too, but only one overriding principle. A risk that is visible 
may (not necessarily can) be managed, minimised and perhaps even eliminated; 
an unseen risk is far more dangerous. External risks are, by definition, potentially 
greater than internal ones – they are not within the focal company’s direct control. 
 
According to Deloitte Touche Tohmatsu (2009:1), the mindset in many 
businesses has changed on very short notice from a quest for growth to a quest 
for cash, operating margin and asset efficiency, in an environment that is exposed 
to significantly higher levels of risk and uncertainty than ever before. The Deloitte 
Touche Tohmatsu Model (refer Figure 2.2) Risk and Flexibility: Communicating 
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Vessels indicated that macro-environmental factors that can have an impact on 
the supply chain are: 
- Supply chain volatility; 
- Market demand; 
- Commodity price; 
- Supplier risk; 
- Currency exchange; and 
- Competitive action. 
These are the types of factors that need to be identified and understood by the 
supply chain to be able to put strategies in place that will pro-actively help to 
mitigate risks. With uncertainty and volatility to stay, using the analogy of the 
communication vessels (refer figure 2.2), the two strategies to use are: 
- Managing and reducing supply chain risk by starting a formal supplier risk 
management programme and increasing demand planning accuracy; and 
- Managing and enhancing supply chain flexibility by enhancing network 
flexibility, reducing lead times, and frequently rebalancing supply chain tactics 
and process flexibility. 
 
There will be more detailed focus later on in this discussion. By managing risk 
and enhancing supply chain flexibility, there is a clear opportunity for businesses 
to win in the current uncertain environment, and to sustain their supply chains as 
a critical asset and differentiating factor for success towards the future. 
 
 
 
 
 
 
 
 
 
 
 
 
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Step 3 Proposed risk management framework for the supply chain 
 
As previously determined in this study, there is no proper risk management 
system within the supply chain function with strategies to manage and mitigate 
these risks. Therefore, deliberate actions need to be taken to put a supply chain 
risk management system in place with an integrated risk management process to 
ensure that all risks that the supply chain function is exposed to are proactively 
identified and managed to acceptable levels on a continuous basis. 
 
According to KPMG Holdings Ltd (2008:2), risk management is a process for 
managing the risks an organisation face; it is not a stand alone function. It is an 
integrated system that links the management of strategic objectives to risks and 
controls in order to improve corporate performance, increase transparency, 
provide an early warning system and enhance business sustainability. This 
system should be integrated down to individual functions such as the supply 
chain. By applying the same model right through, the business will enhance 
consistency and standardisation. 
 
 
 
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Figure 4.5 Proposed risk management phases  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PHASE 1 Planning – establishing the context 
The planning phase deals with the analysis of the information and documentation 
related to risk identification, assessment and / or management. In setting the 
context, thought must be given to the business objectives, the scope and depth of 
the risk management process, and the time horizon to be covered. Objectives for 
the supply chain function can typically be: 
- To consider the consequences of foreseeable significant risky events and 
opportunities on the performance of the company (the Top 20 risks identified); 
- To respond appropriately to internal and external changes in risk perception 
and information; 
- To develop strategic options for eliminating or controlling significant risks and 
their consequences (for example sourcing strategies); and 
- To link these options to the general decision and control framework used by 
the company. 
Based on the insights gained from the analysis, the supply chain function is 
benchmarked against better practice and makes a preliminary decision about the 
desired state of its risk management. With regard to the scope of the project, it 
must be clear which areas should be covered –the most important areas must be 
Phase I 
 
PLANNING 
 
Establish the context 
Phase II 
 
RISK IDENTIFICATION 
 
RISK EXPLORATION 
Phase V 
RISK 
REPORTING 
Phase III 
 
RISK ASSESSMENT 
 
RISK TREATMENT 
Phase IV 
 
IMPLEMENTATION 
 
Monitor and review risks 
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clearly identified. Roles and Responsibilities are defined and allocated to 
employees. It is always very important that everybody knows exactly what they 
are responsible and accountable for. For example, allocating the risk owner, who 
will be involved from the management side, etc.  
 
PHASE 2  Risk identification and risk exploration 
Because of the shortage of the amount of resources available within the supply 
chain function, it is important to focus on the most important risks and use the 
resources efficiently to manage these top risks to achieve maximum value. Risk 
identification is an essential part of the process. Risks that are not identified in 
this phase will be executed from the other phases or process, resulting in these 
risks taking us by surprise and having dire consequences on financial results. 
Risk identification starts with a SWOT analysis (Strengths, Weaknesses, 
Opportunities, Threats), i.e. interviews to be held with key members of the 
organisation. The aim of any SWOT analysis is to identify the key internal and 
external factors that affect the supply chain function’s performance and value. 
 
Table 4.2 Example of a supply chain SWOT analysis  
 
Strengths  
Highly trained and motivated staff 
Established operating procedures 
Stable demand pattern 
Weaknesses  
Large number of suppliers to 
manage 
Poor use of technology 
High labour cost 
Opportunities  
Deploy commodity plans 
Outsourcing 
Partnering with key suppliers 
Threats  
Large fluctuations in material cost 
Lack of competition between 
suppliers 
Material obsolescence 
 
A generic list must be drawn up that will act as a checklist to ensure that all 
possible risks are addressed (refer Table 4.3). 
 
People’s behaviour should be challenged to continuously identify risks and act on 
them immediately. 
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Table 4.3 Example generic list of possible risks within supply chain 
No Risk description 
 
INBOUND RISKS 
 
Sourcing 
1. Failure to meet legislative and environmental requirements and standards. 
2. Purchasing 
- Impact of supply failure on cost 
- Impact of supply failure on SHERQ 
- Impact of supply failure on plant efficiencies 
- Impact of supply and market characteristics 
3. Lack in experience leads to unawareness of commercial risks and exposure. 
4. Failure in quality control systems 
5. Scarcity of supply 
6. Failure to supply on time 
7. Wrong specifications specified 
8. Exposure through contract terms 
 
Supplier relationship 
1. Ensure continuity of supply and sustainable value to minimise exposure before entering 
into contracts 
- Inability to deal with confidentiality agreements 
- Inability to supply maintenance equipment 
- Inability to supply technical support 
- Lack of supplier innovation 
- Limited number of suppliers (sole, monopoly) 
- Political pressure 
- Unreliable supply 
- Failure to maintain quality and quantity levels 
- Inflexible supply 
- Non-conformance to safety standards 
 
Demand 
1. Ignorance of demand forecasting and planning: 
- Failure to identify end-user needs timeously 
- Governance structure ignored in procure of material and services 
- Incorrect handling of invoices and initialising of payments for materials and services 
rendered 
- Inability to understand and meet business requirements 
 
Materials management 
1. No storage and handling procedures in place for all goods and materials 
2. No loss of control measures in place 
3. Failure to meet legislative and environmental requirements 
4. Failure in quality control systems 
5. Failure in SHERQ systems 
6. Lack of risk management 
7. Poor facility design and construction 
8. Lack of proper governance 
 
Inventory management 
1. Wrong quality and quantity control system 
2. Monetary loss due to failure to determine quantity and value of inventory 
3. Lack of proper management practices 
4. Lack in supply chain visibility results in stock shortages / over-stocking 
5. Product shelf life 
6. Needs analysis, time and place maintenance material 
  
 
The purpose of risk exploration is to explore the causes and consequences of 
the identified risks. In the absence of a precise understanding of the cause of a 
138 of 164 
risk, one is unable to implement effective preventative control measures to 
manage the cause. Similarly, in the absence of a precise understanding of the 
nature of the consequences of a risk, one could be unable to accurately measure 
the impact that the risk may have or to implement effective corrective control 
measures to manage the impact. 
 
After all the necessary information has been gained from interviews, in 
combination with benchmarking analysis, a database can be created with all the 
relevant risk information in the form of a master risk catalogue. The risks are 
categorised in order to allocate the risks to the right dimension of the risk model 
(refer Figure 4.6).  
 
Figure 4.6 Example of a risk model 
EXTERNAL RISKS 
Supply chain 
volatility 
Market 
demand 
Commodity 
price 
Supplier risk 
Currency 
exchange 
Competitive 
action 
INTERNAL RISKS 
STRATEGIC 

 Business 
objectives 
OPERATIONAL 
FINANCIAL 

 Commodity 
prices 
Processes Technology Compliance 
 

 Business 
interruption 

 Technological 
know-how 

 Supplier fraud  
 
Management 
information 
 
Human 
Capital 
 

 Budgeting and 
forecasting 
 

 Leadership 

 Skills shortage  
 
Once the risk catalogue is defined, a high-level risk assessment is carried out for 
all risks identified. 
 
 
PHASE 3  Risk assessment and risk treatment 
This phase of the process involves an informed view taken on the likelihood / 
probability of each of the risks occurring within the timeframe, as determined in 
phase 1; and secondly, what impact the risks could have on the company in 
terms of earnings, project schedule and costs, fatalities, reputation, impact on the 
environment and communities, non-compliance with laws and regulations, etc. It 
is important that both quantitative and qualitative factors are considered in 
139 of 164 
assessing the impact of a risk. Appropriate tools and techniques must be used to 
accurately measure the impact of a risk. The deliverable from this phase is the 
plotting of the risks on the risk matrix (refer Figure 4.7). 
 
Figure 4.7 Example of a risk matrix 
 
Source: Oil refinery HIRA risk impact template 
The risk matrix is simply a tool that depicts the risks that have been identified and 
how they have been assessed. It should be used for the following purposes: 
- To rank the risks relative to one another for purposes of deciding which risks 
should take priority for further action; 
- To report risks at different levels within the supply chain function; 
- As an aid to track progress being made to reduce a risk to an acceptable 
level; and 
140 of 164 
- To ensure a high degree of consistency in the assessing and reporting of risks 
within the business. 
Figure 4.8 should be used as a guideline in determining where a risk should be 
plotted on the impact scale of the matrix. 
 
Figure 4.8 Risk matrix impact scales 
 
Source: Oil refinery HIRA risk impact template 
Each consequence on the scale must be considered in isolation when plotting the 
impact. It is incorrect to compare one scale with another. Where a risk has more 
141 of 164 
than one consequence type, the consequence type with the highest impact 
should dictate where the risk is plotted on the matrix. It is recommended that two 
types of risk assessments should be performed on each risk, namely an inherent 
risk assessment and a residual risk assessment.  
 
The inherent risk assessment is an assessment of the level of risk before 
treatment measures have been taken or the effectiveness of existing controls has 
been considered. In other words, this could be considered as the worst case 
scenario. The residual risk assessment is an assessment of the level of risk 
after risk treatment measures have been taken or existing controls were 
considered. 
 
The reasons for assessing each risk at both the inherent and residual levels are 
as follows: 
- It assists in ensuring the integrity of the risk assessment process, for example 
that all risks with high inherent risk levels are adequately considered; 
- To measure the effectiveness of existing and new controls in mitigating the 
risk; and 
- To ensure that resources are first deployed to address those risks with the 
highest value at risk. 
 
After the risk assessment’s top risks are analysed in detail and plotted, an 
appropriate risk strategy is defined to optimally manage these risks to enhance 
and safeguard the company’s performance and value. As a rule of thumb, 
companies often focus on approximately 10 top risks. 
 
The risk treatment phase also addresses those risks that are considered to be at 
an unacceptably high level and that require additional treatment. In determining 
whether a risk is at an acceptable level or not, consideration must also be given 
to whether the risk could potentially be in violation of the code of ethics and 
values of the oil refinery. For those risks that require additional treatment, there 
are three primary risk treatment options, namely risk avoidance, risk reduction 
and risk transfer: 
142 of 164 
- Avoidance implies that a risk is undesirable if, for example, it is off-strategy, 
offers unattractive rewards or the company does not have the capability to 
manage the risk.  
- Reduction is putting in place risk control measures that reduce the likelihood 
and / or the consequences of the risk to acceptable levels. The vast majority 
of the risk treatment options will fall within this category. 
- Transfer includes insurance, contractual or hedging arrangements, or 
transferring the cost of risk to a third party. 
After identifying the risks and analysing them in detail, it is advisable to hold 
workshops among different functions that will help to create a dialogue to assist 
people to come to a common understanding of the risks. The risks are allocated 
to risk owners who need to monitor their risks. Often, a combination of several 
risk strategies is agreed and transferred to action plans (refer Figure 4.9). 
 
Figure 4.9 Example of an action plan 
 
Action Plan 
Risk no. and 
name 1 Commodity not available in the market 
Risk owner Joe Soap    
Risk category External
 
Strategic
 
Operational
 
Financial
 
Risk description Commodity of critical pump not available in market anymore 
Risk drivers/ 
main causes 

 OEM, no alternative suppliers 

 Plant shutdown 
Risk strategy 
Acceptance
 
Mitigation
 
Avoidance
 
Transfer
 

 Build an opportunity to aggressively adopt new strategies and actions to create 
market conducive portfolio 

 Be at the leading edge in developing substitutes and create opportunities 
Effective 
measures already 
in place 
 
Action Responsible Milestone Deadline Status 
Find alternative 
supplier Suzi Kline Portfolio supplier 30.04.2011 Open 
    Started 
    Done 
 
The requirements for establishing a sustainable risk management process are 
defined at the end of this phase. The main aspects include how the 
implementation of the actions should be monitored and what the periodically 
143 of 164 
recurring risk identification and assessment – risk management process – should 
look like in the future. 
 
PHASE 4 Implementation – monitoring and review 
 
Policies and guidelines are written to summarise all the key decisions and 
processes developed during the project period. The actions and any additional 
aspects are implemented. One of the key elements is to ensure continuous 
monitoring. The risk owners are responsible for periodic reporting regarding the 
status of the defined actions and the development of the risks. 
 
Any risk profile changes over time. Risk treatment plans that were once effective 
may become irrelevant; control activities may become less effective or are no 
longer performed; business objectives may change; or regulatory requirements 
may change. This can be due to the arrival of new personnel, changes in 
business direction, and the introduction of new systems. The following monitoring 
mechanisms should be implemented: 
- Monitoring of implementation of risk treatment plans 
Action plans to develop and implement risk treatment plans need to be 
monitored to ensure that the necessary plans are implemented on schedule 
and as intended. This monitoring process should be embedded within the 
normal day-to-day monitoring processes already in place within the business, 
for example departmental meetings. Internal audits should regularly evaluate 
the progress of these action plans as part of their routine audits. 
- Ongoing effectiveness of risk treatment plans 
The effective operation of risk treatment plans must be evaluated on an 
ongoing basis. Each functional area within the business will need to develop 
its own plans as the frequency and scope of these reviews take account of 
legal and regulatory requirements. These will include management reviews, 
and self assessments, etc. 
- Identification and assessment of new emerging risks 
There is a need to regularly review risk profiles to ensure that they remain 
relevant and complete. Each functional area will need to determine the 
144 of 164 
frequency with which the entire risk profile is reviewed to ensure that new 
emerging risks are identified and assessed.  
 
PHASE 5 Risk reporting and communication 
The essence of internal risk reporting and communication is that the right 
people should become aware of risks at the right time. This helps to ensure that 
risk treatment plans are timeously implemented. 
 
Risks at all six levels must be reported internally (formally and informally) at 
different levels within the business. Each business will have to develop its own 
reporting framework, taking into account existing management processes and 
legal and regulatory requirements. 
- Risk & SHE Committee: consider level 1 risks and related risk treatment 
plans; 
- Risk Management Forum: consider level 1, 2 & 3 risks for his / her business; 
- MD: approve the tolerability or otherwise of all level 1, 2 & 3 risks for his / her 
business; and 
- For risk levels 4, 5 & 6, each business will need to develop its own risk 
reporting and governance structures. 
Developing standard templates will enable an effective and efficient risk reporting 
process. 
 
 
 
 
 
 
 
 
 
 
 
 
145 of 164 
Step 4 Business process supporting the supply chain strategies and 
risk management framework 
 
As discussed during the literature review in Chapter 2, a process reference model 
integrates the well-known concepts of business process re-engineering, 
benchmarking, and process measurement into a cross-functional framework. 
SCOR is a process reference model designed for effective communication among 
supply chain partners, and a standard language helps management to focus on 
management issues. As an industry standard, SCOR helps management focus 
across inter-company supply chains. SCOR is used to describe, measure and 
evaluate supply chain configurations; 
• Describe: Standard SCOR process definitions allow virtually any supply chain 
to be configured. 
• Measure: Standard SCOR metrics enable measurement and benchmarking of 
supply chain performance. 
• Evaluate: Supply chain configurations may be evaluated to support continuous 
improvement and strategic planning. 
 
 
 
 
  
146 of 164 
Figure 4.10 SCOR Process Reference Model 
 
Source: Supply-Chain Council, (2005) 
 
According to the Supply Chain Council (2005:1), a process reference model 
contains: 
• standard descriptions of management processes; 
• a framework of relationships among the standard processes; 
• standard metrics to measure process performance; 
• management practices that produce best-in-class performance; and 
• standard alignment to features and functionality. 
 
Once a complex management process is captured in a standard process 
reference model form, it can be: 
• Implemented purposefully to achieve competitive advantage; 
• Described unambiguously and communicated; 
• Measured, managed and controlled; and 
• Tuned and re-tuned to a specific purpose. 
147 of 164 
After revising all the processes and writing them into the “to be” processes, 
proper systems should be put in place to do performance management. 
 
Step 5 Performance measurement and reporting process 
After finalisation and approval of processes and procedures, a proper 
performance management framework should be in place to track the progress 
that is made towards the achievement of the supply chain function’s balance 
score card. Through a process of dialogue and discussion the key strategic focus 
areas must be identified and key performance indicators for each focus area with 
targets for the balance score card must be set and agreed upon. 
 
Typical key strategic focus areas that could be measured against within the 
supply chain function are: 
- Risk management; 
- Stakeholder relationships; 
- Organisation design; 
- People strategies; 
- Supply chain business planning; 
- Operational effectiveness & efficiency; 
- Supply chain design & infrastructure; 
- Sourcing; 
- Inventory; 
- Information and technology management; and 
- Supply chain value proposition. 
 
Figure 9 Example of a template to summarise the key focus area, strategy, 
strategy actions, tools and KPIs 
 
Key focus area 1: Risk management & governance 
Strategic Objective: To ensure that the risks the supply chain function is exposed to are 
managed at acceptable levels 
Strategy Strategic actions 
  
Tools Key performance indicators and targets 
  
 
148 of 164 
Finally, proper training should be given to all involved within the supply chain 
function to ensure that everybody understands and agrees to the document. 
Monthly feedback sessions should be arranged to give feedback and decide on 
the way forward. 
 
4.7 VALUE ADDING ROLE OF PROPOSED MODEL 
Companies are in business to make money; it is all about cash focus and project 
excellence. Why do we need to manage and mitigate risks? It links strategic 
objectives to risks and internal controls to improve corporate performance, 
increase transparency, provide an early warning system and enhance business 
sustainability. This can be achieved by: 
- having proper governance to ensure effective control over companies’ assets 
and resources; 
- through the above principal, stakeholder value can be maximised, resulting in 
the generation of cash through effective business strategies that cover good 
internal controls to manage and mitigate risk or prevent or detect possible 
system failures. 
 
The proposed risk reduction model for the inbound supply chain function is a 
model based on a summary of the understanding of risk and the impact of the 
ongoing changes happening all the time within the internal and external 
environment; effective risk management framework to ensure good controls are in 
place to be able to proactively detect possible risks; and sustainable business 
processes and business strategies defined, understood and implemented, which 
support the business to be able to manage and mitigate risks before they can 
actually happen. 
 
4.8 RECOMMENDATIONS FOR FUTURE RESEARCH 
More detailed research can still be performed related to the following focus areas: 
- Defining appropriate supply chain enabling technologies that can enable 
standardisation, and ERP (Enterprise Resource Planning) consolidation in 
a sheared services environment; 
 
149 of 164 
- Research and develop possibilities to establish, within the project 
execution model, actions and holdings points where supply chain 
involvement is required and needs signoff before the next step in the 
project may continue. These actions and holding points can ensure that 
standardisation and correct procedures are followed, controlled outcome is 
created and effective sourcing strategies are put in place.   
 
- Research and identify material clusters in the business that are in the 95% 
group that have a low risk if the material is not available and have a high 
turn around in usage, which could make a business case to: 
- develop a system that can allow electronic trading with high response 
and support and service direct to the end-user as and when required; 
and 
- Outsource the warehousing function for non-critical materials that are 
±65% of the materials in the warehouse. 
 
This would allow the supply chain the capacity to focus on the high risk 
materials and ensure value adding to its stakeholders. 
 
- Research the operation and maintenance structures, and working 
processes, and develop a point-of-entry system in the supply chain to 
create, align, understand and allow interaction with all stakeholders. 
 
150 of 164 
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Create Main 
 Purchase Order 
per equipment 
Vendor R & D Supplier Warehouse Plant Procurement 
SPIR List & 
Quote valid for 
120 Days 
Register SPIR List 
per equipment 
 and forward to 
Warehouse 
30 Days 
Capture in Register 
& update register  
as work progress 
SAP 
Doubles 
 
Allocate existing 
Comm. nr on SPIR 
YES 
Create and Approve 
Stock Request 
From SPIR List per 
Commodity & Auth. 
Code and create 
new commodity 
Confirm PO Text 
 
Replenish 
 
Order and deliver  as 
per normal procedure 
Lock MRP “PM” 
Startup Spares “V1” 
Supply Startup Spares 
Bin & Capture SAP; 
Receipt, Bin, & V1, 
Create BOM 
MRP/V1 
Supplier maintain 
stock levels Non 
Stock 
Identify stock 
& non stock 
RFQ Process 
for project 
Apply purchasing 
strategy per  
commodity 
NO 
Refinery SPIR Flow Diagram 
6 ANNEXURES 
 
ANNEXURE 1 REFINERY SPIR FLOW DIAGRAM AND SPIR FORM 
156 of 164 
Project name Charge No,:
01 EQUIPMENT DESCRIPTION:
1
MANUFACTURE:                                                                       Tel.:  
02
2 1/ QUOTE IN COLUMN  10 PART IDENTIFICATION NUMBER INTERCHANGEABILITY OF COMP Supplier:                                                                                    Tel:  
Contact person:
03 REMINDER:  ATTACH TO THIS FORM ALL PARTS LISTS, CROSS SECTION
3
                                         DRAWINGS  AND  DATA  SHEETS  RELEVANT TO  EQUIPMENT LISTED  AND 
                                         A  YEAR  2000  CERTIFICATE  FOR  ALL  DATE CONTROL  INSTRUMENTS
SSF Remarks
MANUFACTURING DATA Stock See Note 2
04 DESCRIPTION OF PARTS: Code Above
4 to include all parts recommend. Material
to be stocked for start-up Specification
and 2 years operation
05 5 No. of 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
UNITS  
06
07
08
09
10
11
12
13
14
15
16
17
18 COMPLETED BY: Tel: Date: Print:
19                                                     Sign
22   APPROVED BY:
23
  PROJECT ENGINEER:                        Tel: Date: (Print)
6                                                                                       SIGN
  MAINTENANCE ENGINEER (plant):                        Tel: Date: (Print)
                                                                                        SIGN
MAINTENANCE STRATEGIC CO-ORDINATOR                                                                                             Tel: Date: (Print)
                                                                                      SIGN
COMMERCIAL TECHNICAL SUPPORT                        Tel: Date: (Print)
                                                                                         SIGN
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 IM Part No.Manuf. Drawing Number
Drawing Item 
No.
THE UNDERSIGNED  MUST ENSURE THAT ALL THE RELEVANT INFORMATION REGARDING THERE REQUIREMENTS ARE COMPLETED IN COLUMNS:  1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 13, 14, 15, 16, 15, 16, 17, 18, 19, 25 ,26, 27  &  PROJECT NAME, CHARGE NR, MANUF. & SUPPLIER INFO.
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Rev. No.
157 of 164 
ANNEXURE 2 MRP EVALUATION DOCUMENT FOR EXISTING AND NEW 
COMMODITIES 
 
Requestor                   Date: ____/_____/______ 
 
Signature ________________________________________ 
 
Commodity number   Date:              Date: ____/_____/______ 
 
Full description of commodity 
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________ 
Exist
   
New
  
Link to BOM
   
YES NO
    
 
A. EVALUATION CRITERIA FOR EXISTING STOCK COMMODITIES 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity requires further investigation 
YES
 
NO
 
 
 
 
          ACTUAL 
 
A.1 Purchase price                                                                    
 
 
A.2 Period not being used   
 
 
 
A.3 Demand patterns 
 
 
 
 
A.4 Current stock levels    Max      Min 
> R5,000 
> 2 Years 
From:     Units / Mth 
To:          Units / Mth 
∆ =    Units / Mth 
158 of 164 
B. RISK PROFILE OF EQUIPMENT 
Equipment number    
 
B.1  Risk rating: 
Consequence           Frequency              
 
Financial impact     
 
Notice period when needed (MTTR)   
SHERQ impact       YES   
Description   
 
 
B.2 Availability of equipment 
Equipment required for maintenance        Planned / Breakdown        Anytime  
Number of equipment where commodity is used         
Number required for normal operations    
Equipment number           
Alternative equipment / standby      Equipment number   
 
B.3 Maintenance strategy 
 
Run to Failure
 
 
Scheduled Maintenance
 
 
Condition Monitoring
 
 
159 of 164 
C. PROCUREMENT STRATEGY FOR MATERIAL 
Availability of stock:  Off the Shelf  Lead time    Days 
    
Manufacture
 Lead time    Days 
Recondition
 Lead time    Days 
Supplier                                                                            
 
Local
  Lead time    Days 
Overseas
 Lead time    Days 
Sole
          Lead time    Days                
Alternative commodity available  
YES
 
NO
Commodity number  
 
D DEMAND FOR MATERIAL 
Unit of issue                       Minimum once-off usage   
Mean time between failure commodity                                 
Shelf life                         Criticality A/B/C      
 
 
E RECOMMENDATION 
No Change
  
Redundant
  
No Stock
 
Non Stock
  
Stock New
 
Recon Spares
  
                 
Complete
 
Level Change
  Max  Min 
Cost Impact
 
160 of 164 
F SOURCING STRATEGY 
Non Stock Contract Lead Time Vendor Held Stock Consignment Stock  
  
RFQ
 
Stock  Contract Lead Time Vendor Held Stock   
  
RFQ
 
 
 
G RECOMMENDED WAREHOUSE 
MRP Contr                 Date: ____/_____/______ 
 
Signature  ________________________________________ 
 
 
H APPROVAL END USER 
As per ASAM                 Date: ____/_____/______ 
 
Signature ________________________________________ 
 
 
 
Manager S & D            Date: ____/_____/______ 
 
Signature  ________________________________________ 
 
 
 
 
 
 
 
 
 
 
161 of 164 
ANNEXURE 3 SAMI MANAGING SYSTEM MODEL 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
162 of 164 
ANNEXURE 4  ASSET PERFORMANCE TOOL SYSTEM 
 
 
 
Source: Asset Performance Tools (APT). Decision Support Tools (2007) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
163 of 164 
 
 
Source: Asset Performance Tools (APT). Decision Support Tools (2007) 
164 of 164 
ANNEXURE 5 EXISTING RISK MANAGEMENT PROCESS OPERATIONAL 
FUNCTION