Vendor partnerships key to optimizing supply chain management

Understanding the causes of equipment schedule delay is essential in order to establish plans to mitigate future delays in supply chain activities of major offshore projects.

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Bryan Kendig

SBM Offshore

In 2013, Douglas-Westwood published a study that found 30 of 45 FPSOs installed worldwide between 2008 and 2012 suffered schedule delay. Reasons cited include project complexity, difficult regulatory requirements, an imbalance of risk in favor of project owners at the expense of contractors, organizational learning issues, and supply chain issues. While the author’s company can provide data to illustrate a different, more positive trend, this article is written to address the negative perception of schedule slippage that afflicts the entire industry, including both project owners and contractors. Understanding the causes of equipment schedule delay is essential in order to establish plans to mitigate future delays in supply chain activities of major offshore projects.

Equipment supply chain complexity

The three equipment supply chains that serve the major project sector are segmented to match the main components of the offshore production facility: hull, mooring, and topsides. The vendors to each of these main components exist in different environments. These environments are characterized by differences in the variety of industries served by a vendor’s products, level of customization of a vendor’s products, and the way in which vendors relate to their customers (buyers).

The key message is that the equipment supply chain for manufacturing an offshore oil and gas facility is complex, not simple. This complexity calls for a certain degree of specialization to be present within a supply chain management organization. Specialization enables supply chain management to better anticipate and mitigate the risks that are associated with the complexity.

The equipment supply chain can behave differently depending on whether the buying organization is mainly in the engineering, procurement, and construction (EPC) business or mainly in the production operations business (operator). This can be seen in the behaviors of equipment vendors. For example, when a vendor is bidding to multiple EPC companies, and each EPC is competing for the same project, it is not unusual for the vendor to save significant bidding costs by initially, only lightly reviewing specifications, offering a generic bid to all EPCs. The vendor may then delay a thorough review of the specification until the market reveals the EPC winner. This package bidding model is likely an unintended consequence of the contracting model employed by project owners with their EPCs. It has led vendors to expect that they will be given another chance to bid the project. Such a model can inhibit the vendor’s understanding of the specification requirements, manifesting in a quality, cost, or schedule impact at a later date. It is also detrimental to a front-end engineering and design (FEED) effort that is supposed to result in approval ready, draft purchase orders for packages of equipment.

Supply chain management should develop vendor partnerships. Early vendor involvement, and measuring vendor performance/holding them accountable over the long term, can be more beneficial than risking the accuracy of vendor proposals in the traditional, adversarial bidding process.

Specification development

The amount of time scheduled to advance through the stages of an offshore project development typically ranges from three to seven years. During this period, various EPC companies are engaged to help define the offshore oil and gas facility. The supply chain management within the EPC provider is likely to be engaged throughout various stages. The supply chain team may be called upon to secure firm bids from vendors, including scope, price, and schedule. The bids will be based on specifications, and the specifications will be based on the maturity level of engineering existing at the time. Further, the maturity of engineering will be a function of the maturity of input data made available by the project owner.

The process for specification development can introduce schedule risk to supply chain management. One such risk element, prevalent during later stages of the process, is the risk of receiving an accurate technical specification from the engineering effort in time for the request for quotation (RFQ) that must be sent to vendors. Unfortunately, almost every project has some RFQs that must be issued quickly due to anticipated long manufacturing lead times that could potentially upset the fixed project schedule. In these cases, supply chain management may have no choice but to issue RFQs (and subsequent purchase orders) to secure limited manufacturing slots, while expecting that necessary refinement of the specification will occur after the purchase order award.

In a normal bidding process, technical specifications will be reasonably mature and sufficient for the RFQ. However, even in the normal bidding process, some vendors claim that specifications have become unnecessarily more voluminous and overly complicated. There is some empirical evidence that vendors are struggling to understand specifications. An analysis of schedule slippage among a selection of purchase orders suggests that the vendor’s delay in understanding specification requirements can represent up to ~20% of the reasons associated with delay.

Root causes for failure to understand specifications can be traced to both the vendor and the buyer sides of the supply chain. A vendor cause relates to vendor sales organizations that transpose specification requirements to in-house data sheets, giving the vendor’s manufacturing organization a work instruction according to the vendor’s own standards, but at the expense of having lost in translation some of the client requirements. A buyer cause relates to a specific case in which more than 200 pages of interesting, yet non-essential specifications were included in the RFQ package as zip files, for a simple orifice plate. Later investigation found that the RFQ could have been reduced to a mere few data sheets.

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Reasons for schedule delay. (Courtesy SBM Offshore)

Both project owners and EPC contractors should keep package specifications simple and standardized. Supply chain management (SCM) should work with engineering business partners to ensure that project specifications are simple, fit for purpose, and that they maximize the opportunity for vendors to bid as per vendor standards, as an alternate to the specifying company’s standards. Specific goals for the effort should be to strike out specified items that are clearly not applicable to the subject equipment including: specific clauses, specific requests for documentation, and specific reference standards that are stated within the main specifications.

The industry of manufacturing offshore oil and gas facilities is unique in that it brings together diverse bodies of engineering such as marine/naval architecture, process, mechanical equipment, piping, electrical and instrumentation, automation, and construction. The engineering disciplines will work both independently and collaboratively to produce a listing of materials (equipment list) that will be purchased, inspected, and shipped to a construction yard for assembly into the offshore facility by a construction team. Each discipline is an internal client to the part of the company responsible for managing the company’s supply chain, supply chain management, and each discipline has inherent differences that need to be recognized in order to achieve an accurate, timely RFQ that can be sent to vendors. For example, marine/naval architecture can require use of vendors who are specialized, small companies, and who are asked to participate in a process whereby designs are proven in a gated process. It is important for SCM to recognize the partnership style of relationship that can be required with such vendors, while ensuring that the partnerships honor schedule requirements, and also ensuring that the partnerships do not overstep the boundaries required for a healthy, competitive relationship.

SCM should have early involvement with its internal business partners and with specific, prospective vendors. This involvement may require a level of product or specific supply chain specialization (hull, mooring, topsides) within SCM. Early SCM involvement can help engineers minimize commercial obstacles that can be associated with extremely long specification development periods, and sole source vendor arrangements. Early SCM involvement can also help to recognize and satisfy timing needs of interdependent specification development across the company’s various engineering disciplines (i.e. the dependency that electrical, instrumentation, and automation has on many other disciplines).

Defining equipment packages

Ideally, SCM will have worked as a catalyst with engineering such that engineering produces the equipment list and specifications to enable the RFQ in a timely fashion. However, another step is often taken before the RFQ is issued. SCM will work with engineering management to rationalize the equipment list against the capabilities of the vendors, and the efficiency of managing the various purchase orders that will result from the equipment list. There are different terms used to describe the outcome of this process. One such term is the “package list.” The package list represents a bundling of equipment intended for purchase from a single vendor. It is a key activity to get right because it can make or break the best, most perfect engineering effort. In some companies, the package list not only determines the equipment to be bundled, but it also impacts the listing of vendors who are qualified to bid, the level of equipment inspection, and the personnel resources that will be assigned to manage the package, assuring its cost, schedule, and quality. Transferring an equipment list to a package list requires frequent, healthy exchange between SCM and engineering in order to avoid bundling of packages for administrative convenience at the expense of a vendor’s true ability to provide all elements of the bundle on schedule and on budget.

Perform a sanity check on plans to bundle equipment that will be sourced from a single vendor. Use a system that gathers input from a collection of experts most familiar with the technology and the potential vendors’ current capabilities and current shop capacities (engineering, drafting, machining, assembly, and testing). Make an effort to obtain feedback from someone with construction expertise, especially if a bundled component might be better sourced from a construction yard rather than from a manufacturer.

Risk assessment

Risk assessments within both the EPC contractor and the project owner environments are often “owned” at very high levels within the major project teams, with SCM, among others, taking specific actions to mitigate the risk. This is a good practice, but can be flawed if the ownership of risk assessment is not sufficiently pushed down into the project. When ownership is pushed down into the project organization the assessment of risk becomes more of a continuous assessment rather than a snapshot of risk at a given point in time. In addition, it can drive the correct behaviors within the people who are closest to the point of being able to identify and mitigate the risk. In fact, when risk management is not pushed sufficiently down into the project organization, it may not be apparent to those on the project that everyone should be a risk manager, rather than an incident responder.

Vendor qualification systems can have the same effect as high level risk assessments. They are risk snapshots of the vendor at a specific point in time, but may not be entirely effective at identifying risk changes to the vendor which occur after the snapshot. For example, has the vendor recently decided to sub-contract major components as a result of a “make-buy” decision? If so, what float is in the vendor’s schedule to make repairs resulting from having to “train” a new sub-vendor? Also, many supply chain organizations separate the individuals responsible for “qualifying” the vendor from those who are responsible for managing the vendor during the execution of a purchase order. Again, this is a separation of time and responsibility that can be a threat to the schedule and budget for the equipment package.

Push ownership of risk assessments sufficiently down into the project organization, inclusive of the supply chain organization. Risk assessments within supply chain should not be complex nor require special tools. Addressing basic risk oriented questions about the vendor during specific stages within the procurement process can be sufficient. The key is to recognize the need, and institutionalize a process.

Quality issues

Quality issues abound in the oil and gas equipment industry and their resolution can occupy a lot of time for the supply chain professional, both internally and externally. The following areas should be examined and reviewed closely.

Hazardous area electrical issues. Recent projects have provided quality challenges in terms of package compliance to electrical and hazardous area standards (explosion proof “EX” requirements). Nearly half of quality defects found on equipment packages were related to EX issues. These defects require remediation, and will likely delay the package schedule.

Put additional focus on packages that will require hazardous area certification. Require vendors to incorporate hazardous area inspection within the inspection and test plan. The hazardous area inspection should be performed by a qualified COMPEX (competency in explosion proof) inspector. Also, require the vendor to train shop floor personnel to properly construct a cable gland connection.

Inspection.A typical project might involve more than 500 purchase orders for major equipment. The inspection and test plans associated with these packages might total more than 2,000 inspections to occur at vendor facilities. Independent inspectors reside in various global locations and typically avail themselves to the market via third-party inspections agencies. Both EPC companies and project owners will contract with the third-party agencies, and the agencies will provide much of the inspection man-power for the 2,000-plus inspections. When there are problems, they often can be traced back to a miscommunication (quality of information and timing), mismatch of an inspector’s skill set to the inspection requirement, or a deficiency in upholding a professional responsibility.

The value of using third-party agencies for vendor surveillance, given practical limits on project resources, is undeniable. However, the challenge of thoroughly educating the third parties about the package inspection needs, and instilling just a small sense of “ownership” so the inspector might look beyond what is described in the work order is a major flaw in any process that relies totally upon third-party inspectors.

It is prudent to develop an in-house inspections team. In addition, supplement the in-house team with processes that develop continuous improvement with the third-party inspectors. The positive schedule impact of an in-house inspections team is that the team will minimize the number of quality defects that would otherwise need to be fixed in a construction yard.

Control of vendor and sub-vendor quality.Vendor surveillance involves more than simply inspecting equipment when the EPC contractor or project owner is given notification by the vendor. It is essential to visit the vendor’s workshop in order to positively identify schedule progress, investigate vulnerabilities, and ensure that the vendor has sufficient contingency to deal with unexpected problems.

Frequent factory visits are essential to check progress at both vendor and sub-vendor locations. The person given responsibility for managing the vendor schedule within the EPC or project owner companies should make the visits, and ideally, such visits should not be delegated to others. When done properly, there is no substitute for the value of visiting the vendor and sub-vendors. Also, there is no substitute for the value of knowing what to look for and how to conduct one-self while visiting a vendor factory.

Where there are package schedule delays, a significant number of the delay occurrences are due to quality defects from sub-vendors. An analysis of schedule slippage among a selection of purchase orders suggests that the vendor’s poor control of the sub-vendor can represent up to 15% of the reasons associated with delay. Gathering early intelligence of sub-vendor progress is required.

Ensure that vendor progress reports (including standard templates) provide sufficient visibility of sub-vendor activity. Vendors sub-contract many components. Quality control at the sub-vendor level is often poor, and visibility of sub-vendor problems can arrive late. The person given responsibility for managing the vendor schedule within the EPC or project owner companies should work closely with schedule planners to decompose/analyze vendor schedules and spotlight vulnerabilities before they occur.

Recognize that the person given responsibility for managing the vendor schedule within the EPC or project owner companies may, in fact, need to manage the schedules of multiple, corresponding sub-vendors. Projects need to plan for sufficient numbers of personnel to perform this deep level of vendor/sub-vendor management.

The right people

The final recommendation is arguably the most important, because heeding the other recommendations could be ineffective without the last recommendation. The final recommendation relates to the qualifications of the people who are given responsibility for managing the vendor schedules within the EPC or project owner companies. Those who are most successful in the role do not necessarily have identical backgrounds in terms of roles/industries previously worked, or educational achievement. Rather, the majority of them possess the knowledge, skills and behaviors of good project managers.

Specifically, the following traits are important:

  • Establishes credibility with stakeholders
  • Accepts and continually establishes ownership of the package
  • Completely knowledgeable of the purchase order or contract
  • Influential
  • During negotiations, continually advocates for the buyer organization, but is fair with vendors
  • Maintains healthy relationships at multiple levels within the vendor organization, but maintains professional distance to ensure objectivity
  • Knowledgeable of the package and/or vendor sufficient to anticipate and manage changes
  • Vigilant in regards to questioning the vendor’s schedule
  • Communicates package progress to supporting staff and to the project management team
  • Resilient to handle the high pressure, demanding environment of a major project
  • Inspires others and recognizes their contributions.

It is the author’s hope that the topics presented here will generate discussions and actions that will improve the offshore industry’s reputation for schedule achievement.

Acknowledgment

Based on a paper presented at the Society of Petroleum Engineers Annual Technical Conference and Exhibition held on Sept. 28-30, 2015, in Houston.

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