What do retailers have in common with oil companies? Both leverage the power of supply chain logistics.

Leadership in both the retail and oil and gas industries recognizes the huge amount of capital tied up in inventory. Leaders have fine-tuned the art and science of distribution by reducing their inventory bases to single digits and squeezing more working capital out of the supply chain to divert to more profitable, competitive uses.

New thinking

Converting millions from a cash drain to enterprises with greater value would make any chief executive officer or chief financial officer smile. But one of the world's largest computer companies, rather than resting on its invigorated supply chain laurels, leveraged that success to the next level as a manufacturer.
Once it effectively maximized the internal efficiencies of its own supply chains, the computer company looked beyond immediate items it traditionally controlled and began working with suppliers for external assistance in controlling their inventory. By collaborating with manufacturing suppliers on components, it worked to lower the cost of manufacturing by the suppliers.

Why stick its nose into someone else's yard? By streamlining suppliers' profits, the retail manufacturer positioned itself to buy components at a greatly reduced price which, in turn, further enhanced its competitive edge.

Understand logistics

Oil companies that want to enhance their supply chain logistics success must first understand which parts of the logistics process they believe they can control. That is critical because, based on other industries' supply chain logistics experience, they will discover that what they can both influence and control is much greater than their historical and current perception.

Two examples illustrate the direction that the oil industry is, and more companies within the industry should be, moving. And this is specifically because, not in spite of, oil companies conducting E&P operations not only worldwide but rarely in or near conveniently located industrial cities.
For example, an oil company may be purchasing components from multiple suppliers out of Tulsa, Okla; Houma, La.; and Midland, Texas. Instead of having each supplier ship individually to Houston, Texas, which forces the companies to pay partial bulk rates for small packages, the shipments are consolidated for bulk shipping into Houston. That delivers greater purchasing power in the consolidation of moving cargo.

Second, more oil companies are creating consolidation points much further upstream to enhance shipments' visibility, by utilizing a single logistics provider. For instance, if a company buys from five individual suppliers, typically that would involve five different logistics companies. In attempting to get visibility about shipping status, company personnel would have to log onto five different logistics providers' Web sites, which is not practical or realistic. Using one single-source provider, total "track & trace" capabilities are in place as soon as the order is picked up at the supplier's dock.

Lighten inventories

Few would disagree that running out of spare parts at rig sites is something companies go to extremes to avoid since downtime is too costly. But, with some larger drilling companies carrying as much as tens of millions of dollars in spare parts, this powerful drag on working capital is becoming increasingly more difficult to justify as "business as usual."

The big problem with huge spare parts inventories is that many consist of items that are not capitalized and carried on the balance sheet. By operating similarly to the manufacturing industry's JIT (Just in Time) system, through enhanced logistics, oil companies can lighten the load of large spare inventories that must be stocked on-site.

Solution focus

Another shift in oil industry logistical practices involves moving from a quote orientation to a solution focus. In other words, some companies have become extremely methodical in their purchasing processes, such as the handling of requests for quotes and requests for proposals, toward being more specific about needs and expectations.

Above all, though, many oil companies are moving in this direction without pretending to know all the intricacies of worldwide logistics processes. Instead, the task they are taking is more along these lines: "We have suppliers in five different regions of the world and we need to move supplies to five completely different areas. (To the logistics provider) Show us a proposal that outlines what you believe we should do," rather than employing a historically rigid quote system predicated on specific prices for exact services.

This shift in thinking has occurred generally in the last 5 years in the oilfield services sector. Most oil industry companies have maximized well-site efficiencies and the initiatives they began launching have started to gain traction and pay dividends. As a result, the companies are now looking for service providers to help them move up to the next level in efficiencies.

As this movement progresses, a new phenomenon is taking place with roots in the very definition of a supply chain. In other words, the supply chain's power is as good as the information on which it's based. The only way to effectively furnish that information to supply chain providers is for the companies to literally let the providers into their systems directories. Therefore, the company/provider relationship realistically is becoming a partnership.

Streamlining procurement

As to whether multiple logistics service providers are appropriate, it depends on how streamlined an oilfield company wants its logistics processes. For instance, a logistics provider may be consolidating information from more than 100 suppliers to create one view for an oilfield customer. Typically a company is not adequately staffed in information technology (IT) or purchasing to create the links and pull data from all suppliers from multiple logistics providers.

In contrast, when working with one logistics provider, the company simply tells the provider to download all parts or components orders, along with their status in the supply chain into their inventory management system. That allows them to not only streamline the procurement process and shipment monitoring, but also to relieve them of any associated administrative burdens.

Case history

For oil industry companies wanting to elevate supply chain efficiencies on a more complex level, two well-known oilfield companies are an excellent example. One manufactures primary mechanical components for both land and offshore drilling rigs and the other, specializing in offshore drilling, operates rigs worldwide.

Several years ago, they formed an alliance that allowed each to focus on its core competencies - but it created several supply chain logistics needs. Objectives were to eliminate/reduce redundant processes, leverage the investment in SAP, enhance product standardization efforts by focusing procurement through one avenue, combine consumption to leverage volume purchasing, centralize inventories to reduce capital, and improve freight costs by combining tonnage.

Identified processes on each side of the alliance focused on one company's approvals, purchase order creation, data management, good receipt/expediting (outsourced) and payables/ledger management while also focusing on the other company's order entry, purchasing, good receipt/expediting (outsourced) and billing. In its integral role of tying the companies together, the logistics provider stepped in to provide data hub service and visibility for all orders with multiple origins globally, logistics support ranging from expediting to goods receipt, export consolidation to delivery to supply base, and electronic real-time interface with both companies' SAP systems.

As a result of close coordination and dedication to maximizing the alliance's supply chain logistics, the outcomes more than met expectations. Drilling superintendents now have more time to focus on rig operations and efficiencies, and their buyers are better directed toward contract standardization and joint vendor contract negotiations. On the other side, the rig manufacturer's customer service representatives now manage the supply chains for three times as many rigs and work with both the drilling company and logistics provider to improve delivery schedules and costs.

Best practices

In sharpening the processes of supply chain logistics in the oil industry, it's important to recognize that logistics advances already making their way deeper into the oil industry are not experimental. Rather, they are evolving from industry practices created by well-known companies leveraging knowledge acquired by working with multiple companies over an extended time.

When more oil companies open themselves up to a collaborative process with logistics providers, best practices from other industries can be shared to introduce to, or further enhance, similar supply chain efficiencies within the industry - whether for E&P companies or oilfield service companies.