The State of Strategic Supply Management in the Canadian Oil Industry

I visited Calgary, Alberta this week, and found it to be an odd environment indeed! Oil has leveled off at $60/bbl, major companies have all gone through major budget cuts, have cut headcount and released hundreds of supply chain managers and others to reduce payroll. At the same time, a drive through the streets of Calgary is held up by construction projects at every corner, even though office space downtown is at 11% vacancy, and predicted to reach 17% by the end of the year. This odd combination of headcount reduction in supply chain people (the very people who are most able to drive cost reductions in the supply chain) combined with expansionary economic activities appears very contradictory. To make it even more interesting, the New Democratic Party (a socialist platform) was elected into Alberta’s provincial leadership, and is on the verge of increasing the royalties paid by oil and gas companies to the province, to fund their increased spending on social programs (not to mention the minimum wage to $15).  (How is that going to help in this environment?)

This was the bizarre setting in which I had the opportunity to speak with a number of Chief Procurement and Supply Chain Officers at a number of large oil and gas companies in Calgary. I was interested in learning what they were doing in the face of the oil price challenges, and how they were planning to navigate the difficult times that lay ahead.   Several key themes emerged from the discussion.

First, procurement executives recognize that they are getting more attention than in the past, when oil was $100/bbl. This attention comes with a mandate and more responsibility to take cost out of the supply chain. Some of the organizations have responded by cutting headcount, which in fact may be counterintuitive, particularly if you are cutting procurement people who have the potential to be able to cut major costs in the supply chain! However, some are responding by beefing up their supply chain organizations, recognizing this as a major opportunity to drive change given an executive-level mandate to bring stakeholders in and make them accountable and part of the team.

Second, the theme of using the downturn as an opportunity for change recognizes that there is a need for a new approach to contracting and engaging suppleirs. As one executive noted, “we have gone through and asked for the one time cost savings of 20% – but I know you can only do that once. The real savings are going to occur as we work with suppliers and connect them to our engineering stakeholders, and jointly identify opportunities to take out cost.” Another noted that “Rushing schedules and rushing through contract development is a big part of why we are in the mess we are in. We need to go back and re-think how we write contracts, and who we are writing them with.”

Third, the timing of this emphasizes the shortage of good people. Note that the issue is not people…it is about the RIGHT people. One executive noted that “If I ask my teams to show me their category strategy, and how they are going to manage the top 3 to 5 suppliers in their category, I get nothing. I don’t even know if I can trust the spend numbers they are giving me, because I know there is a lot of leakage going on.” Another noted that “We don’t put the best people into our supply chain organization, as we have convinced ourselves that we are “different” from other industries.” Ray Floyd wrote a book called “Liquid Lean”, where he points out how energy companies need to really re-think this approach, and how they can most certainly apply lean thinking to supply chain and operational problems. One promising approach involves trying to standardize designs for many of our capital projects, to drive to “off the shelf” parts for many of our major Fort McMurray oil sands capital projects. One executive even noted that they were thinking of patenting some of their engineering designs, not so they could become proprietary, but indeed to be able to share them with all of the major oil and gas companies, that would then make them the industry standard and drive down cost while increasing availability and reducing cycle time!

It is these types of controversial but innovative types of activities that will help the industry deal with the new reality of $50 oil. The shale revolution is here to stay – and so people in the Canadian oil industry need to think about the new reality they are in.