Critical Supply Chain and Procurement Strategies in the Era of Oil Price Volatility

Editor’s Note: Vinodkumar Raghothamarao is Director Consulting, Energy Wide Perspectives & Strategy, IHS Markit EMEA

Oil and Gas companies operate in dynamic and complex environments, where they face constant challenges especially in terms of supply and demand. Now with the current volatility in oil prices, the time has come to evaluate the supply chain and procurement techniques and costs.

Oil and gas companies need to focus not only on their product supply chains, but also on the non-hydrocarbon supply chains that handle the parts, materials and services required to run the business. The non-hydrocarbon supply chain is very critical to deliver the equipment and services required to find, extract, refine and finally market the oil and gas. Procurement and supply chain strategies are set to be in the forefront of critical issues plaguing oil and gas companies especially with the current volatility in oil prices.

The arrival of Industry 4.0 is heralding the next era in supply chain management, in which suppliers and customers come together in entirely new ways, erasing organizational boundaries. The traditional linear supply chain is evolving into an integrated value chain of mutually beneficial relationships where suppliers and customers collaborate to achieve efficiencies and lower costs by exchanging information and securely integrating systems and processes. To achieve this, oil and gas companies should look at the following opportunities to deliver better supply chain value:

• Supply Chain Market Intelligence
• Materials/Supplier Relationship Management
• Digital Supply Chain and Procurement 4.0

Supply Chain Market Intelligence is key to any industry and more so for the dynamic oil and gas industry. Effective supply chain market intelligence helps oil and gas companies deal with strategic supply chain challenges such as constrained capacity, infrastructure and volatile markets. It also helps companies make the right decisions about which markets to buy from, how to determine the right price to pay and what benchmarks and targets will provide the right competitive edge.

More than often we have noticed that contract management and supplier relationship management are not up to the mark, and therefore, the oil and gas companies take on supplier risks. To improve supplier relationship management, the companies should adopt a method of supplier benchmarking. For contract management, we have seen some oil and gas companies with non-efficient processes such as non-compliance of contracts with established suppliers.

Even though the advent of technology has helped oil and gas companies to find and extract more oil and gas, there is a need to seriously consider industry leading digital supply chain and Procurement 4.0 solutions. Industry 4.0 creates a disruption and requires oil and gas companies to rethink the way they design their supply chain. Several technologies have emerged that are altering traditional ways of working. Digitizing the supply chain can reduce procurement costs for all purchases of goods and services by 20 percent, reduce supply chain process costs by 50 percent, and increase revenue by 10 percent.

As with any other industry, the oil and gas industry also has to grapple with the shortage of supply chain and procurement talent due to an aging workforce and growing skill shortages. Some of the measures that can be effectively adopted are digital supply chain and procurement 4.0 automation, establishment of supply chain centre of excellence and industry-academia collaboration to nurture supply chain talent.

Going forward, we realize that even though some of the supply chain best practices have trickled through the oil and gas industry, there is always still scope for further improvement. Integrated Planning and Execution with better end to end demand planning and optimized inventory management will help oil and gas companies maintain oil and gas equipment uptime and hence benefit from improved productivity. Improved spend category management and collaborative supplier relationship management coupled with increased automation of transaction processing, will lead to sourcing savings and identification of secondary saving opportunities.

Effective deployment of supply chain best practices and adoption of digital supply chain and Procurement 4.0 is the way forward for the oil and gas companies to reduce costs in this era of volatile oil prices and to focus on oil and gas production and exploration in the most optimized way. It will be really interesting to see how oil and gas companies can effectively manage their supply chain seamlessly coupled with the adoption of best in class supply chain practices in 2019.

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