Special Report: Building oil and gas supply chains
Vinodkumar Raghothamarao, customer engagement manager, Epicor Software Corporation
Oil and gas companies operate in dynamic and complex environments, where they face constant challenges, especially in terms of supply and demand. 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 critical to delivering the equipment and services required to find, extract, refine and market oil and gas. Procurement and supply chain strategies are among the most critical issues facing oil and gas companies. In addition, factors such as oil prices and industry capital spending, among others, are rapidly changing the oil and gas landscape.
It means that international and national oil companies need to reassess the effectiveness of their procurement and supply chain. They will require new, robust strategies that can deal with the complexity of this mid-term business environment. Oil and gas supply chain practices in certain geographies lag behind those of other industries, which use advanced techniques, such as optimised inventory management and collaborative supplier relationship management. There are a number of opportunities and areas where supply chain practices can be improved among IOCs and NOCs.
According to Harvard Business School Review, purchased products and services account for more than 50% of the average oil and gas company’s total costs. Even a 5% reduction in purchase costs can result in a significant increase in companies’ profit margins. There are a number of areas that firms can target to achieve this, including supply chain market intelligence; demand planning; materials or supplier relationship management; supply chain technology; and supply chain talent.
‘Supply chain market intelligence’ is the process of acquiring and analysing information in order to understand the present and future market. It supports current and future sourcing and market sector strategy execution, and enables the business to better anticipate changes in the external marketplace so it can 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 a competitive edge.
Effective demand planning is the next step to improving the supply chain. It is a key factor in determining future requirements, which in turn helps to step up or step down supply, and leverage demand based on scalability. Many of the oil and gas supply chain and procurement executives across the globe agree that challenges arise when their demand-planning measures do not match their forecast expectations. The main reason for this is because it is only being used in selective areas. For example, oil and gas companies may use demand planning in limited areas such as long lead-time capital equipment, but not for other areas of the project, which can cause cost overrun. Beyond that, many oil and gas companies do not use demand planning at all, leading to a situation where internal customers are not linked to any structured planning process.
The oil and gas industry is heavily dependent on suppliers to provide complex services and technical equipment to support ongoing projects and operations. However, contract management and supplier relationship management are not usually at an acceptable level, and as a consequence, the oil and gas companies take on supplier risks. To improve supplier relationship management, companies should adopt a method of supplier benchmarking. Firms 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. When it comes to contract management, too many oil and gas companies are still operating with inefficient processes.