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Production and Operations Management - Assignment Example

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Production and Operations Management

Relationship between gasoline price and crude oil demand Crude oil is a naturally occurring liquid which mainly contains hydrogen and carbon. Crude oil is the major component in the production of fuel for cars, trucks, trains, boats, and airplanes. In addition, crude oil is also used for wide varieties of other purposes. The fractional distillation of gasoline produces an output known as gasoline. Gasoline is mainly used as fuel in internal combustion engines. Gasoline is traded in regional market; whereas, crude oil is the part of global market. Generally, the price of a commodity increases as demand increases (there are some exceptions to this rule) (Oxford). Since crude oil is a non-renewable energy source, its demand will not fall regardless of its price variation. Hence, when the demand for crude oil increases, its price also increases. Crude oil prices have a direct impact on the gasoline prices as crude is the major raw material used in the production of gasoline and other petroleum products. “Crude oil accounts for 55% of the price of gasoline while distribution and taxes influence the remaining 45 %” (Mazeel, 2010, pp.106-107). To illustrate, one barrel of crude oil contains 42 gallons of oil. If the price for one barrel of crude oil is $75, raw material worth $1.78 is required to produce a gallon of gasoline. This figure does not include transportation and other process charges. In total, when the global demand for crude oil increases, there will be a proportional increase in the retail price of gasoline also. How to keep the price at the pump the same? When the global crude oil production is decreased by 10%, the crude oil supply might fall and this situation would probably result in a rise in crude oil price. Under such circumstances, domestic oil retailers may be forced to raise their prices in order to avoid loss. If Marathon adopts effective business strategies, the company may keep the price at the pump the same without losing profits even in times of a decline in global crude oil production. In order to achieve this goal, the Marathon has to acquire materials at reduced rate by researching different markets because a decrease in cost of production is the most effective method to retain the same prices. In the view of Cox and Brittain (2006) it is advisable for the company to make bulk purchases as this system offers the benefits of cash discounts (p.159). This additionally earned money by way of cash discount may assist the company to keep the oil prices at the pump the same. It is obvious that the bulk purchase increases the inventory for supply; this increased stock may benefit the company to retain prices in the situation of a further reduction in global crude oil production. The Marathon may also connect with other oil corporations to purchase comparable products that provide quantity breaks. It is advisable for the Marathon management to analyze the company’s monthly expenses with previous quarters; this practice would largely assist the company to reduce its operating expenses by averting unnecessary costs such as luxury corporate offices. Finally, the top management may insist the departmental leaders to review their budgeted revenues and expenses and reduce their account payables. These strategies may be helpful for the Marathon Petroleum Corporation to maintain their oil prices stable at the pump. Deepwater drilling and gas ...Show more


Production and Operations Management Marathon Petroleum Corporation: Case Study Production and Operations Management Marathon Petroleum Corporation: Case Study Introduction Marathon Petroleum Corporation (MPC) is the fifth largest US refiner which engages in extensive marketing and transporting operations, and is based in Findlay, Ohio…
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