I had the opportunity to speak to a group of oil and gas executives at the DHL Global Energy conference this week, held in the Petroleum Club. I was joined by one of my former NC State students, Scott Frahm, who sat in on a few of the presentations. The conference was a great opportunity to interact with logistics and procurement executives in an environment of open dialogue and discussion.
There is no question that the oil and gas sector is under a huge amount of pressure to drive cost savings. Everyone I spoke with talked about the massive layoffs underway in all of the majors, the drop off in volumes, and the escalating cost pressures that everyone is feeling. All of a sudden, everyone is “knocking on the door” of procurement and logistics, asking for cost improvements. Some companies are even sending out “blanket” letters to their entire supply base, demanding 10-15% price reductions on all current products and services.
This approach is clearly misaligned. Most suppliers in today’s markets have single digit profit margins, so demanding double digit price reductions is absurd. However, a number of presentations identified significant opportunities to drive out cost through asset productivity and logistics improvements. As an example, DHL is finding ways to drive up to 30% lower costs through route optimization, cube optimization, and other logistics improvement activities. Routing of express deliveries with one customer produced up to 11% cost savings through global logistics channels. Another example shown involved improved advance planning for rig mobilization / demobilization activities, that could drive significant cost savings through improved uptime and reduced cycle times. Rig data management is an emerging area to keep track of all changes while the rig is in operation, and improve rig productivity and uptime.
These are the types of asset productivity savings that are often left untouched, as procurement goes relentlessly after pricing cuts. What distinguishes these types of savings is that they often are buried in operational costs, and not easily called out on a purchase order. Productivity and logistics savings occur only through improved collaboration with service providers, and attacking costs in a structured and organized fashion that involves studying the problem, collecting data, and driving operational execution of the improved process.
Other presentations at the conference included a discussion of compliance in the global supply chain. Normally considered a “boring” topic, the panel of Compliance Officers at this conference brought this topic to a new level of interest, and was my favorite presentation at the entire conference. The panelists highlighted a number of important examples of the Justice Department and SEC’s efforts to track down instances of Foreign Corrupt Practices Act violations, many of which were unsuccessful due to poor execution. One of the biggest prosecutions involved BHP Billiton’s paying for 60 government officials and their spouses to go to the 2008 Beijing Olympics, for which they were severely penalized. Other examples of “junkets” involving “world tours” for executives in exchange for business were highlighted. One of the common threads in this presentation was the importance of education of personnel in what is appropriate vs. illegal activity in this realm. Many executives are simply naive when it comes to this area. However, they all noted an increasing trend towards greater prosecution of individuals involved in global compliance and import/export violations. They also noted an increasing trend on challenges to identifying local content in many countries such as Brazil.
There was also a very interesting presentation by the DHL Innovation Center, on emerging technologies. The topic of the “internet of things” was introduced, and the opportunities for tracking and managing assets in the supply chain was discussed. The introduction of a technology called the “Scarab”, which monitors a multitude of factors on an individual, including GPS, temperature, UV ray protection, carbon monoxide, heart rate, etc. can be used to monitor workers in the energy industry to reduce liability of the company in oil field workers. There was also an interesting discussion of the “Google glasses” technology being used to drive “visible picks” in warehouses,with bar code scans, voice command, and connectivity. Benefits include handling of items for other tasks, productivity increases from improved speed, satisfied and engaged employees, a reduction in paper, and a reduction in training time. Smart glasses can also be used to do maintenance on vehicles, and utilities are experimenting with them to do X-ray vision when field workers are seeking to locate pipes underground to do drilling accurately. Schlumberger is also using them with oil field workers to do inventory monitoring – the worker uploads a picture of the inventory in the field to connect with a remote technician, who can see what the oil field worker sees, and who can give them guidance on material handling.
The biggest takeaway for me personally was the need for change in the way organizations attack costs in the oil and gas sector, which involve looking at major projects and operational assets, not just price. One executive I interviewed stated this succinctly:
Our existing systems and ways of gathering data and information is adequate for the category management or process – the pre-award work. We can measure what is happening in terms of how much we spend in this category, what business unit level spending we have, what types of things we are buying, and derive “good enough” information to do strategy work and enough consumption information to negotiate volume tenders around the world. But were we fall down – and where we believe 80%+ of our opportunity for continuous improvement exists – is in the brownfield post-award stuff. For example, do we have the information on when we are buying energy – during peak hours or not? How is the service or consumption information being used in real time at the asset to drive savings, and where is the analytics for that?
I believe that before organizations spend a ton of money investing in information dashboards for category managers, they consider the power of working with logistics and supply partners to enable the continuous improvement in oil and gas assets and major projects. A person that owns or manages the supplier contract at the asset has to be able to know what the big commercial levers are. They have to have a way to derive feedback on complex materials and services going on at the asset.
In an era of $40 oil, procurement and logistics managers need to work more closely with their partners like DHL to drive down cost savings. And that is the true test of a partnership – someone who will work with you to adapt to the changing ecosystem, and be there for the long-term to work through the cycles of ups and downs over time. Procurement doesn’t get that yet….maybe this downturn in the oil and gas sector will drive it home.