In the past, many oil and gas companies looked at logistics and supply chain management as a necessary evil. This perception is changing dramatically due to an evolution in services designed to offer strategic business value and significant impact on the bottom line.

Freight forwarding has moved from being a mere commodity for the oil and gas industry to being viewed as an essential process that is becoming increasingly complex through innovative technologies, stringent oversight, and multifaceted international agreements. Interruptions in the supply chain can lead to missed deadlines on mission-critical milestones in a drilling or production process. In the end, the impact on E&P operations can be very costly.

Freight forwarding used to be viewed simply as a commodity.

A new approach

Ten years ago, a vast majority of logistics discussions revolved around price. The perception that logistics was a freight forwarding commodity with little to no strategic value led to price shopping for the lowest bid. These days, logistics conversations are beginning to focus on business-critical issues such as cycle times, transit times to rigs, inventory management, contract logistics, and vendor management.

Because of the complexity of running an end-to-end logistics operation in a global market, the industry is shifting to a situation where within three or four years everything that has to do with oil and gas logistics will be completely outsourced.

Several factors are causing this shift. First, oil and gas companies are realizing that cycle times and inventory drive tremendous costs. Since many drilling contractors budget an average of US $500,000 per rig for freight and logistics cost, tightening up supply chains, moving equipment faster, and focusing on inventory control can have a significant impact on the bottom line.

The oil and gas business does not take a holiday break. Operations continue around the globe 24 hours per day, 365 days per year, and there are many instances where emergencies occur and charters are required and parts are received, checked, packed to specification, and on the plane within two to three hours in order to meet the requirements of the customer.

Because of the recent focus on shoring up logistics, energy executives are taking a page from the playbook of cost-conscious retail leaders such as Dell and Walmart that have some of the most innovative and meticulous inventory and supply chain operations in the world. Not surprisingly, energy companies are starting to tap into all sectors – including automotive, retail, and technology – for logistics personnel who may not know the industry but understand how to apply best-in-class methodology to streamline supply chains and save significant costs.

Drilling contractors, service companies, and oil companies are all going after experienced logistics talent from the retail sector. While logistics departments in the oil and gas industry used to be relegated to a subsector of procurement in the purchasing group, the function is now being elevated to a much higher and more strategic level. These personnel are increasingly looking to outsourcers to drive further logistics efficiencies. A combination of logistics experts and seasoned energy industry veterans can create a powerful and strategic outsourced solution.

Another factor in the shift toward more attention to logistics and outsourcers is the increased complexity of managing a global oil and gas logistics operation in the 21st century. Without deep country-by-country experience, navigating a dizzying array of trade regulations can cause costly delays on equipment and parts shipments. Some oil and gas locations are extremely active, and customs procedures continue to be a challenge. Also, compliance with intricate guidelines requires vast experience and dedicated resources around the world to avoid major environmental, safety, and legal snafus.

Add this to trying to manage an increasingly disparate global supplier network, and it is easy to see why oil and gas companies are looking for outsourced alternatives.

Looking outside for help

One CEVA customer builds christmas trees. This company's biggest problem is managing the suppliers of valves, spools, fittings, and pipes. Instead of hiring additional staff dedicated to nothing more than managing vendor relationships and contracts, the company turned the entire supplier management process over to CEVA.

These kinds of solutions are being implemented much more frequently in the industry where before they would never been the considered.

In a complex environment, logistics companies that can provide an intimate knowledge of energy sector issues and a wide array of contract, compliance, transport and inventory services are the ones who will not only succeed but become strategic energy partners. This shift toward outsourced logistics operations is ultimately in the best interests of oil and gas companies by allowing them to focus on their core areas of expertise while optimizing the efficiency of their supply chains.