Best Practices in Oil and Gas Supply Chain and Procurement

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, 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.

We have found that oil and gas supply chain practices clearly lag behind (in certain geographies) those of some other industries that use advanced techniques such as optimised inventory management, collaborative supplier relationship management and so on. In this article, we provide a brief insight about the opportunities and areas where supply chain practices can be improved amongst the IOCs/NOCs, and highlights other industries that companies in the oil and gas space can learn from, including improved service to internal customers and reduced costs.

The deployment of supply chain best practices coupled with the implementation of a strong software solution is the way forward for the oil and gas companies to reduce costs and to focus on production and exploration in the most optimized way, says Vinodkumar Raghothamarao, Epicor Software Corporation

According to Harvard Business School Review, purchased products and services account for more than 50 per cent of the average oil and gas company’s total costs. Thus, even a 5 per cent reduction in purchase costs can result in a significant increase in the profit margin for oil and gas companies. To achieve this, oil and gas companies should look at the following opportunities in order to deliver better supply chain value:

• Supply Chain Market Intelligence
• Materials/Supplier Relationship Management
• Supply Chain Talent & Technology

Supply Chain Market 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. Supply Chain Market Intelligence is key to any industry and more so for the dynamic oil and gas industry. 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.

The oil and gas industry is heavily dependent on suppliers to provide complex services and critical equipment to support on-going projects and operations. More than often, contract management and supplier relationship management are not up to the mark, and as a consequence, the oil and gas companies take on supplier risks. 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. For contract management, we have seen some oil and gas companies with non-efficient processes such as non-compliance of contracts with established suppliers. Again, this is an area where Epicor is providing increasing support for clients.

Another method 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. Some of the IOCs have adopted measures such as the Should-Cost and TCO models but these are yet to be adapted by other regional and local players in the oil and gas industry. Epicor realizes that this area of supplier relationship management, especially in the GCC, will need a deeper analysis and smart approach given that local content play a part in determining the right contracting and procurement strategy.