Bennett West. Tom Lafferty - Deloitte Consulting LLP
Offshore oil and gas companies wrote the book on how to handle massive risk and how to manage both the human and financial sides of big projects. Today those companies face unprecedented problems in optimizing huge, multiple-business-group projects. Ironically, the common denominator of typical value-eroding practices is that they often come from the actions of the best managers, each trying to ward off or deal with common supply-chain problems in different ways.
Identifying the problem(s)
Deloitte has found three areas of concern that singly or in combination can indicate eroded value driving a lack of confidence in the supply chain. This lack of confidence, coupled with the high cost of operational downtime on a distant offshore rig, can infect the normal procurement process on the parts of many managers. The offshore supply chain is incredibly complex; supply-chain related costs for an integrated oil company in the Gulf of Mexico can be $200 to $400 million annually. Even a modest reduction in these costs through optimization can produce substantial savings. Typical areas of concern include:
• Reserving specific logistics assets, generally one or more vessels, for exclusive use by a particular business group (e.g., Drilling, Production Operations, etc.). By reserving a vessel, a business group “guarantees” that the vessel will be available if and when they need it. They also guarantee it cannot be used for other value-adding purposes such as the transport of materials or equipment across the rig/platform network.
Such reservations can result in under use of vessels and ultimately in the offsetting need for more vessels and higher fleet costs than would be required on a strictly volume basis.
Deloitte recently worked with a super-major in the GoM to identify and to address synchronization problems in its supply chain. Such reservations contributed to a vessel utilization of 45% to 55% – substantially lower than that company’s internal benchmark of 65% to 70% and well below industry best-in-class of nearly 80%.
• Stockpiling materials and equipment. Business groups that lack confidence in the supply chain often build a safety net of supply by ordering more materials than required or by maintaining equipment leases longer than needed. These can negatively drive inventory volumes, cost, and obsolescence (wasted inventory). Deloitte’s experience suggests that 20% to 25% of surplus inventory typically exists in the oil and gas industry supply chain. With material inventory for some of the world’s largest oil and gas companies valued at $1.4 billion to $2.2 billion, even a modest surplus inventory reduction can have sizeable monetary impact.
• Expediting materials and equipment to the rig or platform. Business groups, particularly drilling, often expedite the procurement and transportation of materials or equipment to avoid unexpected issues and to maintain uptime.
However, some business groups rely on expedited procurement and transportation as a stop-gap resolution to problems perceived via work planning processes. This behavior generally increases procurement costs, incurs expedited transportation expenses (i.e., “hot shots”), and lowers transportation utilization.
Deloitte’s experience with several super-majors in the Gulf suggest that “hot shots” typically comprise between 20% and 30% of total voyages while industry best-in-class companies achieve less than 15% “hot-shots.”
Big versus small
A common response to these data is that they must represent smaller companies. The reasoning is that larger companies avoid high-spending overkill simply through economic scale. The reverse is often the case: A small company could not afford asset reservations that held utilization 20% below normal and little more than half of “best in class” performance. Nor could a small company cope with $280 million to $550 million in excess inventory or with roughly double the “best in class” control of “hot-shots.” Large companies with large projects face large downtime penalties. As a result, they often are more likely to buy expensive insurance policies.
Such high-cost, premium-based business strategies are not necessarily a sign of poor managerial judgment. Alert senior management sees it coming and interprets it as a sign that supply-chain complexities are getting overwhelming and that conscientious managers are trying to avert the possibility of offshore downtime – whether occasioned by shortages of items or by transportation mix ups.
Often the supply chain’s lack of transparency – and the resulting loss of confidence in its reliability –makes managers at any level willing to accept price penalties as an insurance premium against uncertainties. Fortunately, companies can build reliability and confidence into the supply chain and can create competitive value by more efficient use of offshore assets.
The synchronization solution
Deloitte has helped many companies – both operators and service providers – deal with massive, multi-sided, offshore-scale problems in ways that create the prized “win-win” situation for all participants. Deloitte’s multi-party synchronization can give all parties – clients on the rig, suppliers on the shore, and transportation providers in between – the perceived and practical assurances that they are part of a system that works.
Synchronization properly implemented inhibits complexities. Asset-reservation disappears. Unnecessary stockpiling and expediting are recognized as outmoded and wasteful. On the positive side, collaborative solutions begin to appear. Advanced technology helps identify and avoid problems.
There will always be risks to be managed in remote areas like offshore rigs. Deloitte’s view of synchronization is based on the following two key dimensions. Because of offshore supply complexity, there is no single-solution. Each project needs to be handled on its own terms.
- Aligning and synchronizing the key processes (e.g., customer demand planning, procurement, supplier management, inventory management, logistics, and transportation, etc.) within the offshore supply chain of each upstream business group
- Aligning and synchronizing processes and assets across the offshore supply chains of all the upstream business groups (i.e., Exploration and Development, Drilling, and Production Operations).
Companies that have aligned and synchronized within and across their supply chains demonstrate excellence in four key attributes that enable and support supply chain synchronization: Collaboration, flexibility, visibility, and technology.
Collaboration
Collaboration is the backbone of a synchronized supply chain.
Several international oil companies have piloted programs in the GoM to implement a single, centrally controlled supply chain. On a basic level, these programs focus on intra-company areas of cooperation where participants have shared interests. But they also have reached beyond collaboration to outsource certain logistics processes to third parties who employ best-in-class processes and technology. In short, they are reaching for a competitive edge in this vital stewardship area.
It has worked. Deloitte’s experience with these international oil companies in the GoM indicates that successful collaborative supply chain model implementation can reduce operating costs an average of 10% to 15% annually per company.
Another group of operators in Indonesia has embraced collaboration through use of supply chain hubs. These hubs can be leveraged to provide service, to avoid run-outs, and to keep expensive inventories off of the operators’ budgets until needed. These hubs are stocked with typical consumable items, not customized, operator-specific items. They are vendor-managed inventories, owned by the supply vendor until purchased/consumed by the operator.
Flexibility
In the prototype offshore supply chain, flexibility is achieved by creating fixed logistics schedules to satisfy routine and ratable demands (including backhauls), and still allow for emergencies. Major planned events (e.g., mud swaps, large pipe spools, etc.) are scheduled to improve vessel utilization. Emergency re-routing criteria assist in decision making on expedited transportation. All of these options are understood and prioritized with weighting in favor of the least-cost approaches for all participants. These are best ways but there are also back-ups built into the system for emergencies.
Flexibility is central to the operations in the offshore supply chain. Many companies do not create planned, ratable schedules nor do they have decision criteria for routing and emergencies. This is the first level of corrective action for improved supply chain performance.
Visibility
Visibility across the supply chain is integral to promoting collaboration and flexibility, and to enabling a synchronized offshore supply chain. Business groups, vendors, and logistics providers share the processes and systems that make visible the material availability, order status, in-transit moves, etc. Visibility in supply chain transactions supports an informed decision process – both physically and psychologically – to manage schedule changes and to reduce the use of costly rush deliveries.
Technology
Technology is more than the Internet connection to the rig. It is also the application of sophisticated modeling techniques, i.e., network optimization versus the standard milk-run approach for the offshore supply chain. It spreads the assurance and integrates vendors and transporters into a total reliability picture. Technology, properly deployed, also encompasses forecasting of tight spots so managers can take steps or make informed judgments to deal with them.
Implementation considerations
- Maintain customer focus - As valuable as synchronization can be, it is valuable only if the upstream business group customer and external partners understand that it works. The Deloitte synchronized offshore supply chain signals to business clients in terms of their KPIs and addresses their internal metrics. For external partners and third parties, the values may be expressed in terms of increased business or exclusivity guarantees based on performance.
- Do not try to synchronize everything - The temptation is to try too much too fast. Offshore operations are complex. It is critical to start with key process points where the most value can be created. The same key-process-point prioritization also is true for transportation assets and offshore destination platforms.
- Create manageable synchronization “sub-projects” - Once major prioritizations are complete, the most successful projects focus on bite-size components attacking each supply chain part sequentially based on its overall importance to performance and economy. Value can be created prior to “full” supply chain synchronization. Each link that is better synchronized creates an additional increment of value for the whole project. Additionally, each synchronization sub-project creates internal credibility, even though each sub-project will, by definition, be relatively modest.
Upstream oil and gas companies can extract value from their offshore supply chains by implementing customer-focused synchronization. The Deloitte prototype synchronized offshore supply chain identifies areas with the most value by promoting alignment and collaboration among upstream business groups and external supply chain partners. It addresses supply chain complexities that foster unprofitable behaviors and erode value. The prototype supply chain view is a flexible solution that aligns assets and capabilities in a mutually agreeable fashion to address the priority needs of all affected upstream business groups. Manageable pilot projects that focus on components of the supply chain rather than the entire supply chain are an option to incrementally work towards a full synchronization.
About the authors
Bennett West is a principal in Deloitte Consulting LLP’s oil and gas practice in Chicago. He is the global leader of the Oil and Gas Supply Chain practice specializing in both upstream and downstream supply chain issues. West has global client experience working with super-majors and national oil companies, including multi-year international assignments. Prior to joining Deloitte, he held a variety of supply-chain positions at Ford Motor Co. and Kraft Foods.
Tom Lafferty is a senior manager with Deloitte Consulting LLP. He has 20 years consulting and industry experience leading strategic projects and large-scale change across the Oil & Gas supply chain. Lafferty has worked with super-majors to improve supply chain performance in both the upstream and downstream segments. Prior to joining Deloitte, he held a variety of positions in refining and marketing with Mobil Oil Corp.
