The Supply Chain Team's Impact on Capital Projects
In industries that are going through a lot of Capital Expenditure investments, including construction of pipelines, LNG facilities, and mining operations, the role of procurement on the success of the organization is somewhat different. The supply chain function impacts a company’s financial performance through improved operations in several areas of the business. Here are some of the areas where procurement has the opportunity to make an impact.
Capital Overruns
When goods and services are not available on time in projects, technical personnel, contractors and employees are not working. Yet the purchasing company continues to pay the bill for these non-productive hours. The key contributing factor to these delivery failures is the poor or inadequate communication, planning, coordination and synchronization of supply chain logistic activities related to project requirements. Another major contributing factor is the lack of understanding of supply constraints early in the projects planning. These constraints drive late changes in the project plan and design that cause delay and inefficient use of project resources. Most projects try to compensate by increasing the volume of goods ordered. This approach does smooth some of the bumps but also leaves a mountain of surplus material to be disposed of at the end of the project. Integration of key suppliers early in the project and through the project combined with a disciplined focus on logistics excellence eliminates these inefficiencies. In one company, application of these strategies in the exploration drilling area cut planning time in half, execution time by 20%, reduced overall costs by over 15% and increased the groups overall success rate. Application of these strategies in the supply and erection of structural steel provided cost savings of over 30%.
Cost of Goods
Supply chain management has a significant impact on the Cost of Goods Sold spend. Integration of suppliers into planning and work practice development allows companies to change or reduce the demand for expensive goods. Being a “Customer of Choice”, leveraging corporate spend in combination with the development of the supply chains ensures that buyers are paying a competitive price for the goods and services we purchase. Development of supply chains will further allow buyers to share with our suppliers in the cost reductions associated with the elimination of inefficiencies.
Asset Utilization
Asset utilization is a measure of how effectively a company utilizes assets in the execution of the capital asset construction project and afterwards, impacting Operating Expense. Supply chain development, logistics excellence and standard processes will ensure that we utilize supply chain assets such as inventory more effectively. It is expected that these strategies sustain a reduction in inventory levels by over 25%.
Cash to Cash
This metric assesses the responsiveness of supply chains to convert purchases into paid for customer requirements. Clearly all the supply chain strategies will affect the responsiveness of supply chains. This responsiveness will allow companies to improve efficiencies in our inventory management, warehouses, procurement and accounts payable transactions.
Return on Capital Employed
This metric is associated with commanding premium prices in an open market through production of the optimal equipment efficiency. Integration of the supply chain plans with the business unit plans ensures a company’s supply community is aligned to effectively reduce capital requirements, reduce variability, improve inventory turns and improve scheduling efficiency. This will lead to improved asset utilization and greater production levels. This strategy of integrating supply chains is critical ensuring capital assets will transition into operational growth requirements for major projects.
An analysis of a large oil and gas company revealed that to improve ROI by 1%, several financial levers had to be concurrently applied: expenses should reduced by 7.5%, production increased by 3%, and capital deployed decreased by 5.5%. These savings are not only possible, but imminently realizable. Our analysis suggested that supply chain could generate $120 to $170 million against current spending managed by SCM groups of $2.3 billion. Further savings could be captured in reduced cost overruns on major projects. Improved supply chain planning and logistics will further reduce inventory and lower operating costs. These improvements translate into a change in COGS and ROCE of 2.5% and 2%. Additional benefits will include improved efficiencies and productivity in manufacturing that is not inclusive in these estimated benefits. The timing associated with complete realization of these benefits was estimated at six to eight years. The primary risk associated is a failure to act quickly to deploy the strategies and practices across business units.
Achieving improvement in capital expenditures will require a rapid execution of supply chain management process design changes for fulfillment across all business units. Moreover, a strong corporate supply chain function is critical to deployment of supply chain strategies. SCM should be proactive in setting annual goals and objectives, implementing supply chain improvement projects, monitoring performance, allocating resources, setting standards of performance, maintaining supply chain structures, driving logistics excellence and developing the skills of professionals working in the function.