The non-hydrocarbon supply chain for oil and gas companies: Finding opportunities for high performance

Oil and gas companies operate in complex environments where they face the challenges of working globally, contending with dynamic demand and supply balances for their products, and maintaining a relentless focus on return on capital employed. In this environment, the supply chain plays a critical role.

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However, energy companies need to focus not only on their product supply chains, but also on the non-hydro-carbon supply chains that handle the parts, materials and services required to run the business. After all, the non-hydrocarbon supply chain is critical to delivering the equipment and services required to find, produce, refine and market oil and gas.

Accenture has observed that industry executives view their supply chain as strategically important, and in gen-eral, they are fairly satisfied with their supply chain management capabili-ties. However, despite that satisfac-tion, they acknowledge some impor-tant shortcomings in supply chain operations. Based on Accenture's industry experience, High Performance Business research and a recent survey of oil and gas company executives, we believe that the industry is missing a number of clear opportunities to drive significant improvements in the non-hydrocarbon supply chain.

In reality, the industrys non-hydrocar-bon supply chain practices lag behind those of some other industries that are widely using advanced techniques for inventory management, supplier management and collaboration. Oil and gas companies can learn from those industries experiences, and with relatively little risk, draw on leading, proven practices to drive solid busi-ness benefits, including improved service to internal customers and reduced costs.

Indeed, such improvements can have a wide-ranging impact. Accentures research has found that effective supply chain management can play an important role in helping compa-nies build distinctive capabilities that differentiate them in the market-placeone of the three fundamental building blocks of the high-per-formance business. (The other two are market focus and position, and performance anatomy). Our research has also found a clear link between supply chain excellence and superior financial results: In this research, companies with strong supply chain performance were found to have a market capitalization compound annual growth rate premium of 7 to 26 percentage points above their industry average.

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4Oil and gas companies are quite diverse, of course, and supply chain practices vary from company to company. Even so, Accenture sees six areas where improvements to the supply chain can be especially rewarding for oil and gas companies. We recommend that companies focus their efforts in these areas to achieve lasting results and use the supply chain to help drive high performance:

ConductingeffectivedemandplanningManagingpost-contractdeliveryPlanningandmanagingthemovementofmaterialsMeasuringandmanagingperformanceUsingtargetedtechnologyNurturingsupplychaintalent

Where the opportunities lie

Conductingeffectivedemand planning Effective planning is a critical founda-tion for improvements in the supply chain. It is the key to better visibility into future requirements, which in turn helps ensure continuity of supply and the ability to leverage demand where scale is advantageous. At many companies, however, effective demand planning is being used only in limited areas, and executives often say that their demand-planning capabilities have not met their expectations. As a result, many in the industry are in the early stages of initiatives to improve demand planning.

Oil and gas companies are often using demand planning in selected areas, such as repetitive operational or maintenance requirements, or for long-lead-time capital equip-ment that requires careful planning to avoid project delays. Beyond that,

there is limited or no aggregate plan-ning of requirements, in large part because internal customers are not linked in to any structured planning process. This incomplete approach tends to place the supply chain func-tion at a disadvantage; the function cannot effectively engage with the supply markets to manage the effi-cient and cost-effective fulfillment of requirements. Thus, unanticipated demand leads to premium costs for overtime, rushed orders and hotshot delivery, as well as potential downtime and lost production. Whats more, without this visibility, large compa-nies with dispersed operations may find that they are unknowingly bid-ding against themselves for limited supplier capacity. For example, in the late 1990s, Accenture worked with an international oil company that had two business units competing for the same production slot at a large gas turbine manufacturerdriving prices up for both units.

The cost of poor demand planning is difficult to quantify. In fact, there are few effective metrics to track how well it is performed and the benefits it achieves.Consequently,executivesarecautious about investing money and resources to improve the capability. Yet, to rush the delivery of materials or equipment, companies routinely incur premium costs, overtime charges and expedited freight chargescharges buried in operating costs. To improve that situation, oil and gas companies can learn from other industries. In some sectors, the benefits of planning are similar, and companies recognize that poor planning leads to direct revenue loss. In the chemicals and industrial equipment industries, for example, the leading players have developed robust sales and operations planning processes enabled by specific information technology.

5Oil and gas companies can start improvement efforts in areas as routine as maintenance, repair and operations(MRO)materials,forwhichsolid solutions are available off the shelf. The opportunity here is signifi-cant.Mostcompaniesintheenergyindustry have inadequate or no tech-nology for forecasting demand based on historical usage and scheduled maintenance work. As a result, they may be carrying the wrong inventory in the wrong place to meet internal customers' needs.

Companiesshouldalsoconsiderincreasing the frequency of plan updatesassuming that plans exist in the first place. Indeed, it is not unusual to find oil and gas companies updating demand plans on a quarterly, or even less frequent, basis.Consequently,itisdifficulttoreact to changes and problems in a timely manner.

6Managingpost-contract deliveryTo complete projects and support operations, the oil and gas industry is highly dependent on suppliers to pro-vide complex services. Even so, con-tract management and supplier man-agement processes are often weak. As a consequence, oil and gas companies are taking on risks that should be carried by the suppliers. They are also doing a poor job improving supplier performance, even though it directly links to their own goals of operational excellence. To their credit, industry executives recognize that the abil-ity to manage suppliers and internal processes to execute on delivery is essential. Even better, they report that they are working to improve their capabilities on that front.

One commonly used method for improving supplier management is supplier scorecarding. Although Accenture has found that leading oil and gas companies are managing 80 percent or more of their spend through the scorecarding of top sup-pliers, the next step for these compa-nies needs to be the development and implementation of robust contractor performance management programs that measure contractor and internal performance. Such programs would help ensure that contractors fulfill their obligations in terms of safety, training, equipment and staffing requirements, and that the customer is providing appropriate support (for example, permits available as needed, job schedule stability and materials available at the work site).

However, many other companies are having less success, or are not yet using supplier scorecards at all. A major issue is that the technology tools needed to enable performance tracking and reporting are still lack-ing in functionality and flexibility; consequently, implementing sustain-able processes is problematic. Other

industriesautomotive and high tech, among othersroutinely use advanced techniques such as proactive invest-ment in supplier development, sup-plier training and supplier integration. Oil and gas companies have taken this approach in developing coun-tries where such activity is needed to maintain their license to operate. Otherwise, however, the industry tends to wait for suppliers to develop their capabilities without assistance.

In terms of contract management, we have seen many operators with over one-third of their contracts out of compliance with established contrac-tors, which of course makes it difficult to ensure that the right price is being paid to the right suppliers. By bring-ing more spend onto procurement systems, energy companies have the opportunity to improve measurement of price and supplier compliance. Currently,manyintheindustrydonottrack these statistics, which hampers improvementefforts.Compliancechallenges also include adhering to internal approval and authorization levels and managing to the approved contract value and period. Although technology solutions are key to provid-ing the visibility necessary to establish control, current solutions lack the right functionality for the industry.

As a part of the implementation of e-procurement systems, companies should continue to strengthen their internal ability to audit contract integritytesting for compliance with pricing and procedures, as well as for execution in accordance with terms.

Planning and managing the movement of materialsFrom the customers perspective, the supply chain function is assessed in large part on the successful delivery of materials and services when sched-uled. Doing so is essential not only for schedule compliance, but also for

productivity, cost management and the maximizing of uptime for operating assets.

The high availability of critical spare parts is essential to minimize unplanned downtime. Thus, oil and gas companies tend to avoid costly and risky stockouts by carrying excess inventorywhich also ties up capital and increases writeoffs. Typically, how-ever, the documentation to identify critical equipment and related critical sparesthrough bills of materials, for exampleis inadequate. Whats more, part-numbering systems are often inconsistent, making it highly difficult for these companies to hit fulfillment levels.

Compoundingtheproblemisthefactthat the planning models used to help make inventory deployment decisions in much of the industry do not enable the more agile management of inven-tory. Often, inventory levels are set based largely on historical usage, with little statistical technique applied to the planning process and little inte-gration with the demand plan, if one exists. As a result, it is not unusual tofindinventorylevelsbySKUthatdo not support targeted service lev-els. Here, oil and gas companies have the opportunity to learn from the industrial equipment and automotive industries. In those sectors, sophisti-cated technologies and practices have enabled companies to manage spare parts with high levels of availability and minimized inventorywith the incentive of running a high-margin business.

In moving materials to the work site, many oil and gas companies rely on the expertise of third-party logis-tics providers (3PLs) for aspects of transportation sourcing, planning and execution. While 3PLs can be use-ful, companies should retain enough logistics knowledge in-house to man-age the 3PL relationship. In this area, the industry faces unique challenges: In the upstream segment, long supply

chains into remote locations and lack of predictability about when materials will be needed make good tracking and visibility essential. Otherwise, internal customers spend a signifi-cant amount of time following up on items to ensure that materials will be available as needed or reschedul-ing work if materials are delayed. In the downstream segment, companies often need to bring a combination of materials together to the same loca-tion at the same time in the most efficientmanner.Usingotherindustrysolutions, such as cross-docking and direct delivery, can address thisbut only if they are coordinated effec-tively and have clear ownership. Here, good process design and implementa-tion can be especially useful.

Measuringand managing performanceBeing able to track performance is fundamental to managing and improving the supply chain. Oil and gas companies have a variety of met-rics and key performance indicators (KPIs) that they use to track activities in various supply chain functions. However, because their processes and systems are often inconsistent across businesses and locations, many companies are still using metrics that are tactical and difficult to compare acrosslocations.Unlikesupplychainfunctions that serve external custom-ers and have a clear focus on custom-er service, these functions are serving internal customers and have not matured to the point that they have deployed effective service-oriented metrics. Thus, companies would do well to include service level agree-ments in their business interlock plan-ning process with internal customers to manage expectations and delivery.

Meanwhile,themetricsthatareinplace are often not well aligned with strategic priorities. For example, in the area of contract management, executives cite improved contract

integrity as a key goalbut relatively few have implemented contract accuracy as a KPI. Similarly, when it comes to procurement in support of capital projects, companies typically track total cost savings and budgeted versusactualspending.Relativelyfew,however, use metricssuch as percentage of capital projects that employ a rigorous sourcing process or the extent to which capital projects have experienced delays due to material or service availability issuesto drive action and improvements.

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8Usingtargeted technologyDespite the scale and complexity involved in the non-hydrocarbon supply chain, oil and gas companies have tended to rely on their com-panies enterprise resource planning (ERP)systems,ratherthanseekingtocomplement their companies enter-prisewide systems with targeted point solutions to help them operate and managethesupplychain.ThoughERPsystems can provide a range of robust tools, in general, these tools have been developed as a component of the overall system and are designed to support multiple industries.

In the energy industry, more targeted tools may be required in many areas for achieving high performance from the non-hydrocarbon supply chain:Inventorymanagementtheeffec-

tive deployment of planning and forecasting tools that analyze prior

usage and forecast demand against set parameters such as minimum/maximum levels, reorder points and lead times for items carried to meet maintenance requirements.

Contractmanagementtheabilityto support staff responsible for the large numbers of complex services contracts that are managed across business units.

Contractorperformancemanage-mentespecially for complex services provided across multiple locations with minimal involvement from supply chain personnel.

Masterdatamanagementin particular where various parts of the business are using different part-numbering taxonomies, often as a result of past mergers.

Demandforecastingenablingarepeatable, robust and sustainable process to gather, analyze and disseminate forward-looking information on business require-ments for materials and services.

Other industries that depend on a competitive supply chain have typically invested in implementing a range of best-of-breed solutions to support their supply chains. Oil and gas companies can benefit from this approach to achieve high performance.

NurturingsupplychaintalentAs oil and gas companies experience significant growth in upstream operations, an aging workforce and growing skills shortages are creating challenges across functional areasincluding supply chain operations.Meanwhile,newerentrants in the industry are exacer-bating these challenges by recruiting experienced executives from larger companies. Some companies are responding by increasing their invest-ment in the training and develop-ment of supply chain professionals. However, given the scale of the workforce issues involved, talent management capabilities in the indus-try are not where they should be.

Often, training is defined by each individual unit rather than coordi-nated centrally, which means there is no consistent understanding of the

function. Thus, as staff members are transferred, they have to deal with different processes, procedures and even terminology. Some companies provide formal training for supply chain professionals; leading practices in the industry go further to include cross-functional training and certifica-tion programsfrom computer-based training to masters-level qualifica-tions. Such development opportuni-ties can also be helpful in attracting talent.

To continue improvements on the tal-ent front, companies should consider establishing a common supply chain curriculum and creating supply chain centers of excellence. These centers should be responsible for gathering and transferring leading practices, holding regularly scheduled supply chain peer-review sessions in the business units, and embedding leading practices into standard supply chain procedures.

Training alone will not be sufficientmaking recruiting essential to build-ingthetalentpool.Recruitingshouldselectively introduce experienced sup-ply chain executives from other indus-tries to bring a range of capabilities that supplement (rather than replace) the oil and gas knowledge already in place.Recruitingfromthesupplybaseand from industries such as automo-tive and high technology will help oil and gas companies address their talent challenges.

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Overall, oil and gas companies are managing the non-hydrocarbon supply chain to build new projects, maintain operations and support their internal customers. However, most have not yet developed more advanced capabilities, which are familiar in other industries and include demand planning, supplier and contract management and inventory management. These are key ingredients in the efficient and effective execution of supply chain activities.

The ripple effect of improvement

There is considerable room to improve. Fortunately, in many of the areas where the industry lags behind other industries, improvements are likely to not only generate clear, measurable benefits in their own right, but also to have something of a ripple effect throughout the organization. Better planning and inventory management, for example, will help companies do a better job maintaining equipment uptime and reliable operations, thereby support-ing improved productivity from main-tenance and operations. Improved category management and supplier management processes, along with increased automation of transaction processing, are likely to yield better compliance, help preserve sourcing savings and enable the identification of secondary saving opportunities.

Often, such initiatives can be largely self-funding.

To be sure, there are a number of supply chain challenges facing the industry. But within those challenges lies opportunityand a chance to focus improvement efforts on changes that will deliver solid results and support the companys ongoing journey to high performance.

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About the authorNiulBurton,Executivedirector-ManagementConsulting&IntegratedMarkets,SupplyChain Mr.Burtonhas20yearsof experience working in and consulting to the oil and gas industry on supply chain matters. He started his career with BP International as a materials coordinatorintheNetherlands,andmore recently has worked with oil andgasclientsintheUnitedStates,Europe,RussiaandNigeria.He coordinates Accentures supply chain work for oil and gas clients globally. Mr.Burtoncanbereached at niul.a.burton@accenture.com.

Contact usTo learn more about how Accenture can help your energy company on its journey to high performance, visit us at www.accenture.com or call us at +1 312 737 7909, or toll-free in theUnitedStatesandCanadaat +1 888 688 7909.

About Accenture Accenture is a global management consulting, technology services and outsourcingcompany.Combiningunparalleled experience, comprehen-sive capabilities across all industries and business functions, and extensive research on the worlds most success-ful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With more than 186,000 people serving clients in over 120 countries, the company generated net revenuesofUS$23.39billionforthefiscal year ended Aug. 31, 2008. Its home page is www.accenture.com.