Author: Vinodkumar Raghothamarao, Director Consulting, Energy Wide Perspectives & Strategy, IHS Markit EMEA
Oil and Gas companies operate in dynamic and complex environments, where they face constant challenges especially in terms of supply and demand. Now, with the oil prices at historic lows, and with no signs of early recovery, the time has come to evaluate the supply chain and procurement techniques and costs. Oil and gas companies need to focus not only on their product supply chains, but also on the non-hydrocarbon supply chains that handle the parts, materials and services required to run the business. The non-hydrocarbon supply chain is very critical to deliver the equipment and services required to find, extract, refine and finally market the oil and gas. Procurement and supply chain strategies are set to be in the forefront of critical issues plaguing oil and gas companies especially with the current downward spiral of oil prices.
To achieve significant increase in the profit margin, oil and gas companies should look at the following supply chain and procurement opportunities in order to deliver better supply chain value:
- Supply Chain Market Intelligence
- Supplier Relationship Management
- Supply Chain Solutions, & Technology
Supply Chain Market Intelligence – SCM Intelligence is the process of acquiring and analysing information in order to understand the present and future market; support current and future sourcing and market sector strategy execution; and enable the business to better anticipate changes in the external marketplace and react before others do. Effective supply chain market intelligence helps oil and gas companies deal with strategic supply chain challenges such as constrained capacity, infrastructure and volatile markets. It also helps companies make the right decisions about which markets to buy from, how to determine the right price to pay and what benchmarks and targets will provide the right competitive edge.
Supplier Relationship Management – The oil and gas industry is heavily dependent on suppliers to provide complex services and critical equipment to support on-going projects and operations. To improve supplier relationship management, the companies should adopt a method of supplier benchmarking. Oil and gas companies need to measure the robustness and performance of different contractors for various spend categories, and constantly seek dialogue with them so that the suppliers are in unison with the necessary obligations in terms of safety, training, equipment and staffing requirements.
Supply Chain Solutions – Another supply chain solution that can help the oil and gas company in pricing negotiations is the use of the Should-Cost model, and in addition, the Total Cost of Ownership (TCO) model. In the former, the total acquisition cost for a particular equipment or service is arrived at by taking into account the design cost, supplier operating cost, supplier margin, and transaction and acquisition costs. The Should-Cost model for different spend categories will empower oil and gas companies to effectively negotiate contract terms and conditions with the suppliers. In the case of the TCO approach (more suitable for long lead and critical capital intensive equipment), the different costs including the acquisition costs, and operation and maintenance costs are arrived at before choosing the right supplier at the competitive price.
Modern supply chain solutions should cater for inventory management; demand forecasting, contractor management, master data management and e-procurement. Demand forecasting/planning coupled with inventory management and e-procurement form the crux of the oil and gas supply chain strategy. Oil and gas focused supply chain technology solutions have completely revolutionized the way supply chain planning is being carried out in different industries. There has been a paradigm shift in the way oil and gas companies have embraced e-procurement or shown interest in e-procurement systems.
How to implement best in class supply chain practices?
The IOCs/NOCs to improve and deploy best in class supply chain practices can adapt and/or implement some of the practical measures listed below:
- Understand the “total value” of major spend categories. This requires thoroughly identifying costs and options across the supply chain for each category and determining appropriate interventions (e.g., seeking new supplier, changing specifications, altering contract terms)
- Build custom fit procurement processes that provide better clarity, engage suppliers early in the process. Moreover follow through to execution and into operations
- Manage risks across the entire spending portfolio—not just within individual projects or commodities, or splitting capital from operations spend
- Proactively manage the supply base, select relevant suppliers, focus on alignment and sustainability (i.e., dynamic relationships), and ensure company ownership and accountability is clear to suppliers
- Institutionalize the capabilities required for supporting procurement and supply chain activities. Today, these scarce skills are at a premium. In the next few years, it will be just as important to cultivate the right talent here as it will in the most critical technical and operational areas
Going forward, we realize that even though some of the supply chain best practices have trickled through the oil and gas industry, there is always still scope for further improvement. Better demand planning and optimized inventory management will help oil and gas companies maintain oil and gas equipment uptime and hence benefit from improved productivity. Improved spend category management and collaborative supplier relationship management coupled with increased automation of transaction processing, will lead to sourcing savings and identification of secondary saving opportunities. Effective deployment of supply chain best practices is the way forward in 2017 for the oil and gas companies to reduce costs in this era of low oil prices and to focus on oil and gas production and exploration in the most optimized way.
IHS Markit is supply chain market intelligence and supply chain consulting for the energy industry, read more HERE.