Coastal Logistics., Inc. -Establishing Third Party Logistics ServicesByE.Powell Robinson, Jr.Associate ProfessorandAnthony D. RossAssistant Professorof:TexasA&MUniversityLOGISTICSCASESTUDYDEVELOPEDFOR:COUNCILOFLOGISTICS MANAGEMENT
COASTALLOGISTICS INC.,-ESTABLISHING THIRDPARTY LOGISTICSSERVICESABSTRACTThis case places the reader in the middle of startup operations at Coastal Logistics Inc.(CLI), a provider of logistics services to offshore petroleum platform operators in the Gulf ofMexico. Where traditionally, each petroleum company provides logistics services in-house, CLIproposes to establish itself as a third party logistics services provider.CLI claims that byconsolidating logistics operations for multiple petroleum firms, it can lower logistics costs through‘resource sharing'.The case challenges the reader to evaluate the economic feasibility of theresource sharing concept, determine whether CLI should proceed with plans to establish itself as amajor logistics service provider in the Gulf of Mexico, and to establish an implementation plan,should CLI decide to pursue this new venture.2
PROBLEMDEFINITIONJoe Ross, director of business development for Coastal Logistics Inc. (CLI), looked up fromthe cargo manifest when he heard Miss Ellie sound off, announcing her departure for the EugeneIsland Area of the Gulf of Mexico. Several members of Affiliated Oil Company's (AOC) logisticsstaff had just left Joe's temporary office at the Morgan City shore base. For most of the aftemoon,and well into the night, they had explored a proposal that would, with AOC's help, establish CLI asa third party provider of marine logistics services in the Gulf. The proposal represented a radicaldeparture from AOC's current logistics strategy of servicing its own platforms. Not only did theproposal call for the transfer of AOC's logistics assets to CLI, but it would create a new philosophyfor logistics operations. Joe knew that by the time Miss Ellie returned from her three-day deliveryroute, he would have either clenched the deal, and be celebrating with a large bowl of gumbo at thCrawfish Cavern, or be on his way back to corporate offices in Cleveland.Joe returned his attention to Miss Ellie's cargo manifest.On this route, she utilized 55% ofher outbound deck space and 30 % of her bulk cargo capacity. These load factors were typical ofsupply boats operating in the Gulf of Mexico, and played a key role in CLI's proposal to establishitself as a third party supplier of logistics services in the region. Joe poured himself another cup ofcoffee and settled in among the stacks of manifests, maps, boat routes, and other operational dataIt was going to be a long night, but by tomorrow afternoon's meeting he had to clearly demonstratethe economic benefits of asset sharing and come up with an implementation plan for establishingCLI as a logistics service provider, Joe knew that, although they all agreed in principle, this wouldbe his best chance to convince AOC's logistic team that the numbers were right and that it could bepulledoff.Hecouldn'taffordtoblow it.M
COMPANY OVERVIEWCOMPANY OVERVIEWCOMPANY OVERVIEWCOMPANYOVERVIEWThe offshore oil industry is composed of several major oil companies, such as AOC, and amultitude of smaller, independent operators. Once an oil field is targeted for development, the oilcompany identifies exploration driling sites, ofen 20-100 nautical miles from shore, and constructsdrilling platforms. If exploration activities are successful, the platform is converted into aproduction platform to extract crude oil and natural gas. Otherwise, the platform is moved toanothersitetocontinueexplorationLike its competitors, AOC traditionally focused on exploration and production activities,paying little attention to operating costs. However, flat oil prices since the 1986 crash and rapidcost increases since 1990 pushed the need to control operating costs to the forefront.Logisticscosts account for approximately 16 percent of total operating costs,making this a significant areafor generating cost savings. In 1996 AOC spent $1.0 million for shore base operations and S12milion for boat operations at its Morgan City shore base alone. In addition, a slight upwardfluctuation in oil prices had sparked exploration and production activity, increasing demand for thealready scarce marine logistics assets. Boat lease costs had risen two to three hundred percent from1993to1996In the early 1990's, Aberdeen Service Co. Ltd., established third-party contract logisticsservices (CLS) for petroleum platform operators in the North Sea and demonstrated its potentialeconomic benefit to the industry. CLS transfers responsibility for the provision of logistics supportfrom the oil company to a logistics specialist. This permits the oil company to focus managementenergy and capital investment on core exploration and production business activities.Thecontractor manages the logistics resources, which are shared across its customer base, with a focus4
on reducing the total logistics costs of each participating oil company. CLS applications byAberdeen Service Co. Ltd., yielded logistics cost reductions of approximately 30 percent equatingto a 12 percent increase in profit margins for the participating oil firms. These benefits werederived from the release of working capital, economies of scale, better resource utilization andimproved management position. While some of these benefits could be derived individually byany oil company, the balance of savings could not have been achieved without the drive to attainsynergy and economies of scale with other oil companies.Given the constraints on competition,and anti-trust law which hampers resource sharing agreements among major oil companies, relyingon a third party to provide logistics services is one way to unlock these potential benefits.In early 1996, Coastal Logistics Inc., was formed as a joint venture to explore opportunitiesfor establishing logistics services to support offshore petroleum exploration and productionoperations in the Gulf of Mexico. Both of CLI's parents had established records in the offshorepetroleum industry, and viewed the Gulf of Mexico as a fertile area for applying the 'resourcesharing' concept that was successfully implemented in the North Sea. CLI's long term vision wasto become the ‘UPS of the Gulf. In order to attain this objective, CLI would attempt to establishshore base operations in all of the major ports in the Gulf of Mexico.CLI started operations with a bare bones management staff consisting of a president,logistics and information systems director, systems analyst, and marketing director. Otherpersonnel would be added as needed. The firmn would draw upon its parents for softwaredevelopment and technical support during its startup years. The parent companies established aboard of directors consisting of representatives of each parent fim to monitor CLI's progress.Theboard expected CLI to show a profit within three years. CLI immediately began promoting the‘Shared Resources'concept at industry trade shows and contacted platfom operators. At the same5