Refinery and Petrochemical 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.
Refinery and petrochemical 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.
Refineries and petrochemical supply chain practices in certain geographies clearly lag behind some other industries that use advanced techniques such as optimised inventory management, collaborative supplier relationship management and so on.
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. Thus, even a 5% reduction in purchase costs can result in a significant increase in the profit margin for refinery and petrochemical companies. In order to deliver better supply chain value, refinery and petrochemical companies should look at key areas like Supply Chain Market Intelligence, Materials or Supplier Relationship Management and 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. Having the right 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 refinery and petrochemical industry is heavily dependent on suppliers to provide complex services and critical equipment to support ongoing projects and operations. More often than not, contract management and supplier relationship management are not up to the mark, and as a consequence, the refinery and petrochemical companies take on supplier risks. To improve supplier relationship management, the companies should adopt a method of supplier benchmarking. Refinery and petrochemical 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 and petrochemical companies with non-efficient processes such as non-compliance of contracts with established suppliers.
Another method that can help companies 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 refineries and petrochemical 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 global refineries and petrochemical companies have adopted measures such as the ‘Should-Cost’ and TCO models but these are yet to be adopted by other regional and local players in the oil and gas industry. We realise that this area of supplier relationship management, will need a deeper analysis and smart approach given that local content play a part in determining the right contracting and procurement strategy. Even though the advent of technology has helped operators to find and extract more oil, there is a need to seriously consider supply chain and procurement systems which provide additional real value.
Needless to say, modern enterprise resource planning (ERP) systems are really helpful to address the above mentioned concerns. These ERP systems should cater for inventory management; demand forecasting, contractor management, master data management and e-procurement. Demand forecasting and planning coupled with inventory management and e-procurement form the crux of the oil and gas supply chain strategy. Oil, gas and petrochemicals focused ERP systems, have completely revolutionized the way enterprise resource planning is being carried out in different industries. There has been a paradigm shift in the way companies have embraced e-procurement or shown interest in e-procurement systems.
Even with the best in class supply chain processes and systems, we strongly believe that without the right people, the best in class supply chain practice cannot be sustained nor can the full benefits of supply chain really be enjoyed. As with any other industry, the refinery and petrochemical industries also have to grapple with the shortage of supply chain and procurement talent due to an aging workforce and growing skill shortages. Some of the measures that can be effectively adopted are training and grooming of talent in critical supply chain functions, establishment of supply chain centre of excellence and industry-academia collaboration to nurture supply chain talent.
An effective supply chain strategy can help companies improve their performance and reduce their planning by implementing several simple practical measures.
First of all, companies need to 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, such as seeking new supplier, changing specifications and altering contract terms.
Companies should also build custom fit procurement processes that provide better clarity, engage suppliers early in the process, and follow through to execution and into operations. Risk should be managed across the entire spending portfolio not just within individual projects or commodities, or splitting capital from operations spend.
Companies should also focus on managing their supply base, selecting relevant suppliers, maintaining dynamic relationships through alignment and sustainability, and ensuring company ownership and accountability is clear to suppliers.
Another key step to successful supply chain management is the institutionalisation of 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 realise that even though some of the supply chain best practices have trickled through the upstream and downstream sectors, there is always still scope for further improvement.
Better demand planning and optimised inventory management will help refineries and petrochemical 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. We believe that the deployment of supply chain best practices coupled with the implementation of a strong software solution is the way forward for the refineries and petrochemicals companies to reduce costs and to focus on oil and gas refining and distribution in the most optimised way.
It will be really interesting to see how refineries and petrochemical companies can effectively manage local content sourcing coupled with the adoption of best in class supply chain practice in 2016.
