Harvard Case - CaLNG: Peak Shaving to Alleviate a Supply-Demand Bottleneck
"CaLNG: Peak Shaving to Alleviate a Supply-Demand Bottleneck" Harvard business case study is written by Sunil Chopra, Nikolay Osadchiy. It deals with the challenges in the field of Operations Management. The case study is 12 page(s) long and it was first published on : Jul 29, 2021
At Fern Fort University, we recommend CaLNG implement a comprehensive strategy to address its peak shaving challenge. This strategy will focus on optimizing its supply chain, leveraging technology and analytics, and implementing a robust demand forecasting and capacity planning system. This approach will ensure CaLNG can meet peak demand while minimizing operational costs and maximizing efficiency.
2. Background
CaLNG, a leading liquefied natural gas (LNG) terminal, faces a critical challenge: meeting peak demand during the winter months while managing the inherent volatility of the energy market. The case study highlights the company's struggle with limited storage capacity, fluctuating demand, and the need to balance cost optimization with reliable supply.
The main protagonists in this case are CaLNG's management team, tasked with finding a solution to the peak demand problem. They are faced with the need to balance operational efficiency, financial performance, and customer satisfaction in a highly competitive and dynamic market.
3. Analysis of the Case Study
This case study presents a classic example of a supply-demand mismatch in a critical industry. To analyze the situation, we can use the following framework:
Operations Strategy: CaLNG's current operations strategy is focused on maximizing efficiency and minimizing costs. However, this approach fails to account for the inherent volatility of the energy market and the need to adapt to peak demand.
Supply Chain Management: CaLNG's supply chain is characterized by a lack of flexibility and limited storage capacity. This makes it difficult to respond quickly to fluctuations in demand and leads to increased costs during peak periods.
Demand Forecasting: CaLNG's demand forecasting methods are based on historical data and lack the sophistication to accurately predict future demand. This results in inaccurate capacity planning and potential supply shortages.
Capacity Planning: CaLNG's current capacity planning is based on historical demand, which is insufficient to account for the increasing demand and the need for peak shaving. This leads to operational bottlenecks and potential supply disruptions.
Technology and Analytics: CaLNG has not fully leveraged the potential of technology and analytics to improve its operations. This includes using advanced forecasting models, real-time data analysis, and predictive maintenance to optimize its operations.
Financial Performance: CaLNG's current operational model is not financially sustainable in the long term. The company needs to find ways to reduce costs, improve efficiency, and increase profitability.
Customer Satisfaction: CaLNG's customers are increasingly demanding reliable and cost-effective LNG supply. The company needs to find ways to meet these demands while maintaining its competitive edge.
4. Recommendations
To address CaLNG's peak shaving challenge, we recommend the following:
1. Optimize Supply Chain Management:
- Inventory Management: Implement a robust inventory control system using MRP and JIT principles to optimize inventory levels and minimize holding costs.
- Logistics Management: Enhance logistics infrastructure to ensure efficient and timely delivery of LNG to customers. This includes optimizing transportation routes, utilizing queueing theory to manage waiting times, and implementing reverse logistics for efficient handling of returned containers.
- Outsourcing Decisions: Consider strategic outsourcing of non-core activities like transportation and storage to improve flexibility and reduce operational costs.
- Capacity Planning: Implement a dynamic capacity planning system that accounts for seasonal demand fluctuations and utilizes bottleneck analysis to identify and address capacity constraints.
2. Leverage Technology and Analytics:
- Demand Forecasting: Implement advanced forecasting models using statistical process control and operations analytics to predict future demand with greater accuracy.
- Operations Technology Management: Implement an ERP system to integrate operations, finance, and supply chain data for real-time visibility and improved decision-making.
- Digital Transformation: Embrace digital transformation in operations by leveraging Internet of Things (IoT) technology for real-time monitoring of assets and operations.
3. Enhance Operational Efficiency:
- Lean Manufacturing: Implement lean manufacturing principles to identify and eliminate waste in all operational processes.
- Six Sigma: Utilize Six Sigma methodology to improve process efficiency, reduce defects, and minimize operational costs.
- Kaizen: Foster a culture of continuous improvement through Kaizen initiatives, encouraging employees to identify and implement process improvements.
- Process Improvement: Implement process analysis and process design techniques to optimize operational workflows and reduce cycle time.
4. Implement a Robust Risk Management Framework:
- Operations Risk Management: Identify and assess potential risks related to supply chain disruptions, demand volatility, and environmental factors.
- Strategic Planning: Develop a comprehensive strategic plan that considers potential risks and includes contingency plans to mitigate their impact.
- Environmental Sustainability: Implement green operations and sustainable operations practices to minimize environmental impact and comply with regulatory requirements.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies: CaLNG's core competency is in LNG terminal operations. The recommendations focus on strengthening these core competencies by improving efficiency, reducing costs, and enhancing customer satisfaction.
- External Customers: The recommendations prioritize meeting the needs of CaLNG's customers by ensuring reliable supply, competitive pricing, and efficient delivery.
- Competitors: The recommendations address the competitive landscape by focusing on cost optimization, operational efficiency, and customer-centricity.
- Attractiveness: The recommendations are expected to improve CaLNG's profitability by reducing operational costs, increasing efficiency, and expanding market share.
6. Conclusion
By implementing these recommendations, CaLNG can effectively address its peak shaving challenge, improve its operational efficiency, and enhance its financial performance. This will enable the company to maintain its competitive edge in the dynamic LNG market and ensure long-term sustainability.
7. Discussion
Other alternatives not selected include:
- Expanding Storage Capacity: This option would require significant capital investment and may not be financially viable in the short term.
- Acquiring Smaller Terminals: This option could provide access to additional storage capacity but may present logistical and integration challenges.
Risks and Key Assumptions:
- Demand Volatility: The recommendations assume that demand volatility will continue in the future.
- Technology Adoption: The recommendations rely on the successful adoption of new technologies and analytics tools.
- Financial Resources: The recommendations assume that CaLNG has sufficient financial resources to implement the proposed changes.
8. Next Steps
To implement the recommendations, CaLNG should follow these steps:
Phase 1 (Short Term):
- Months 1-3: Conduct a detailed analysis of current operations and identify areas for improvement.
- Months 3-6: Implement a pilot program for demand forecasting and capacity planning using advanced analytics tools.
- Months 6-9: Begin implementing lean manufacturing principles and process improvement initiatives.
Phase 2 (Medium Term):
- Months 9-12: Implement a comprehensive ERP system to integrate operations and supply chain data.
- Months 12-18: Implement a robust risk management framework and develop contingency plans.
- Months 18-24: Evaluate the effectiveness of the implemented changes and make necessary adjustments.
Phase 3 (Long Term):
- Months 24 onwards: Continue to invest in technology and analytics to improve operational efficiency and customer satisfaction.
- Months 24 onwards: Explore opportunities for strategic partnerships and mergers to enhance market position.
By following these steps, CaLNG can successfully implement its peak shaving strategy and achieve its long-term goals.
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Case Description
This case features Isabella Couchet, the chief operations officer of CaLNG, a company that planned to sell liquefied natural gas (LNG) to help California utilities better match supply and demand through peak shaving. The price of natural gas drawn from the California pipeline infrastructure increased with sudden huge demand spikes during the summer and winter peaks, so the ability to use LNG to fulfill demand during peak periods would be a significant financial benefit to utilities. CaLNG planned to receive LNG at its Coos Bay terminal in Oregon and then transport it to California using specialized trailers. It had to design its LNG supply chain while considering the costs of storage facilities and transportation. CaLNG could build a centralized tank farm at Coos Bay and, from there, use a large number of trailers for on-demand delivery. Alternatively, the company could build satellite tanks at utilities, an option that would require fewer trailers because the satellite tanks could be filled during off-peak periods.
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