The COVID-19 pandemic has significantly impacted global energy demand, delivering a massive blow to the energy industry in its entirety. Markets have witnessed substantial oversupply, and energy companies have experienced immense supply chain pressure. Subsequently, the future supply chains will have different challenges, and most will require a complete overhaul to lead in the new reality.
Given the current economic downturn, cost reduction is a key imperative for national energy companies. Agendas in this direction are all the more important because they must secure their national economic contribution and fulfill their social mandate. However, a recently conducted survey of national energy companies reveals that most national energy operators in the Middle East have taken only tactical steps to achieve cost reduction. These include asking suppliers for blanket discounts, increasing payment terms, reducing discretionary spending, and delaying payment milestones for ongoing projects.
However, the need of the hour is to pursue long-term, bold, and structural reforms. This becomes especially relevant while considering the current market dynamics. Our study indicates that most regional energy industry service providers will experience cost deflation of 20-30 percent over the next 12 months – with falling commodity prices, salary reductions, and oversupply due to CAPEX cuts and efficiency measures. Therefore, this is indeed the most opportune moment for national energy companies to initiate operational improvements and cost reduction.
Collaborate with suppliers
Supplier collaboration can be a significant source of long-term structural and sustainable savings during the ongoing crisis. Suppliers to the energy industry are under immense financial stress, and squeezing their margins further will not yield results. Hence, supplier collaboration will become fundamental to the success of any cost optimization program, moving forward. Companies must partner with suppliers to evaluate current operating requirements, define new value creation avenues, and unlock lasting supply chain value. Working together with suppliers will also help accelerate innovation and continuous improvements, and supplier relationships developed during crises can result in preferential access to supplier capacities.
One powerful practical implementation of this lever is to schedule joint value workshops to optimize specifications, identify joint processes, and drive collaborative cost reductions. In return, national energy companies may consider signing a long-term contract that offers a continuous stream of revenue to their suppliers. Furthermore, some national energy companies may be able to choose from some of the most competitive but financially distressed domestic suppliers and support them financially based on an exclusive relationship. Such partnerships not only reduce supply costs, but also align well with the social mandate of several national energy companies.
Pursue localization strategies
National energy companies should also support local content and enhance collaboration with in-country suppliers. Localization, especially in the Middle East, was already a hot topic before the outbreak of COVID-19. Supply chain disruptions brought on by the pandemic are providing a new impetus to the localization agenda. Our survey of supply chain executives from national energy companies highlights that around 75 percent of companies are interested in discussing localization strategies for essential items.
However, only 35 percent of survey respondents have initiated steps to localize their supply chains further. Organizations should establish mechanisms to assess local value addition per supplier and identify categories where local content policies will lead to higher value creation and supply chain resilience. Additionally, they should also adjust local content requirements by categories to balance cost optimization pressure with domestic content agenda, define a strategy for collaborating with local suppliers, and develop local content roadmaps to enhance supply chain resilience and local vendor share of total spending.
While crises are well known for causing significant economic pain, they also provide growth opportunities – including identification of value creation avenues. The onus is now on national energy companies to partner with suppliers, driven by a long-term vision for sustained success. Those that flourish during downturns share several common traits – preparation, preemption, growth orientation, and lasting transformation. These same traits will ultimately be influential in organizations collaborating alongside partners as they strive to meet and exceed their goals of supply security, cost efficiency, and supplier innovation.
