The non-hydrocarbon supply

chain for oil and gas companies:

Finding opportunities for high
performance

Oil and gas companies operate in

complex environments where they
face the challenges of working globally,
contending with dynamic demand and
supply balances for their products,
and maintaining a relentless focus on
return on capital employed. In this
environment, the supply chain plays a
critical role.

However, energy 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. After all, the nonhydrocarbon supply chain is critical to
delivering the equipment and services
required to find, produce, refine and
market oil and gas.
Accenture has observed that industry
executives view their supply chain as
strategically important, and in general, they are fairly satisfied with their
supply chain management capabilities. However, despite that satisfaction, they acknowledge some important shortcomings in supply chain
operations. Based on Accenture's
industry experience, High Performance
Business research and a recent survey
of oil and gas company executives, we
believe that the industry is missing a
number of clear opportunities to drive
significant improvements in the nonhydrocarbon supply chain.

In reality, the industrys non-hydrocarbon supply chain practices lag behind

those of some other industries that
are widely using advanced techniques
for inventory management, supplier
management and collaboration. Oil
and gas companies can learn from
those industries experiences, and with
relatively little risk, draw on leading,
proven practices to drive solid business benefits, including improved
service to internal customers and
reduced costs.
Indeed, such improvements can have
a wide-ranging impact. Accentures
research has found that effective
supply chain management can play
an important role in helping companies build distinctive capabilities that
differentiate them in the marketplaceone of the three fundamental
building blocks of the high-performance business. (The other two
are market focus and position, and
performance anatomy). Our research
has also found a clear link between
supply chain excellence and superior
financial results: In this research,
companies with strong supply chain
performance were found to have a
market capitalization compound
annual growth rate premium of 7
to 26 percentage points above their
industry average.

Where the opportunities lie

Oil and gas companies are quite diverse, of course, and
supply chain practices vary from company to company.
Even so, Accenture sees six areas where improvements
to the supply chain can be especially rewarding for oil
and gas companies. We recommend that companies focus
their efforts in these areas to achieve lasting results
and use the supply chain to help drive high performance:
Conducting effective demand planning
Managing post-contract delivery
Planning and managing the movement of materials
Measuring and managing performance
Using targeted technology
Nurturing supply chain talent

Conducting effective
demand planning
Effective planning is a critical foundation for improvements in the supply
chain. It is the key to better visibility
into future requirements, which in
turn helps ensure continuity of supply
and the ability to leverage demand
where scale is advantageous. At many
companies, however, effective demand
planning is being used only in limited
areas, and executives often say that
their demand-planning capabilities
have not met their expectations. As a
result, many in the industry are in the
early stages of initiatives to improve
demand planning.
Oil and gas companies are often
using demand planning in selected
areas, such as repetitive operational
or maintenance requirements, or
for long-lead-time capital equipment that requires careful planning
to avoid project delays. Beyond that,
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there is limited or no aggregate planning of requirements, in large part

because internal customers are not
linked in to any structured planning
process. This incomplete approach
tends to place the supply chain function at a disadvantage; the function
cannot effectively engage with the
supply markets to manage the efficient and cost-effective fulfillment
of requirements. Thus, unanticipated
demand leads to premium costs for
overtime, rushed orders and hotshot
delivery, as well as potential downtime
and lost production. Whats more,
without this visibility, large companies with dispersed operations may
find that they are unknowingly bidding against themselves for limited
supplier capacity. For example, in the
late 1990s, Accenture worked with an
international oil company that had
two business units competing for the
same production slot at a large gas
turbine manufacturerdriving prices
up for both units.

The cost of poor demand planning is

difficult to quantify. In fact, there are
few effective metrics to track how
well it is performed and the benefits it
achieves. Consequently, executives are
cautious about investing money and
resources to improve the capability.
Yet, to rush the delivery of materials
or equipment, companies routinely
incur premium costs, overtime charges
and expedited freight chargescharges
buried in operating costs. To improve
that situation, oil and gas companies
can learn from other industries. In
some sectors, the benefits of planning
are similar, and companies recognize
that poor planning leads to direct
revenue loss. In the chemicals and
industrial equipment industries, for
example, the leading players have
developed robust sales and operations
planning processes enabled by specific
information technology.

Oil and gas companies can start

improvement efforts in areas as
routine as maintenance, repair and
operations (MRO) materials, for which
solid solutions are available off the
shelf. The opportunity here is significant. Most companies in the energy
industry have inadequate or no technology for forecasting demand based
on historical usage and scheduled
maintenance work. As a result, they
may be carrying the wrong inventory
in the wrong place to meet internal
customers' needs.
Companies should also consider
increasing the frequency of plan
updatesassuming that plans exist
in the first place. Indeed, it is not
unusual to find oil and gas
companies updating demand plans
on a quarterly, or even less frequent,
basis. Consequently, it is difficult to
react to changes and problems in a
timely manner.

Managing post-contract
delivery
To complete projects and support
operations, the oil and gas industry is
highly dependent on suppliers to provide complex services. Even so, contract management and supplier management processes are often weak. As
a consequence, oil and gas companies
are taking on risks that should be
carried by the suppliers. They are also
doing a poor job improving supplier
performance, even though it directly
links to their own goals of operational
excellence. To their credit, industry
executives recognize that the ability to manage suppliers and internal
processes to execute on delivery is
essential. Even better, they report that
they are working to improve their
capabilities on that front.
One commonly used method for
improving supplier management
is supplier scorecarding. Although
Accenture has found that leading
oil and gas companies are managing
80 percent or more of their spend
through the scorecarding of top suppliers, the next step for these companies needs to be the development and
implementation of robust contractor
performance management programs
that measure contractor and internal
performance. Such programs would
help ensure that contractors fulfill
their obligations in terms of safety,
training, equipment and staffing
requirements, and that the customer
is providing appropriate support (for
example, permits available as needed,
job schedule stability and materials
available at the work site).
However, many other companies are
having less success, or are not yet
using supplier scorecards at all. A
major issue is that the technology
tools needed to enable performance
tracking and reporting are still lacking in functionality and flexibility;
consequently, implementing sustainable processes is problematic. Other
6

industriesautomotive and high tech,

among othersroutinely use advanced
techniques such as proactive investment in supplier development, supplier training and supplier integration.
Oil and gas companies have taken
this approach in developing countries where such activity is needed to
maintain their license to operate.
Otherwise, however, the industry tends
to wait for suppliers to develop their
capabilities without assistance.
In terms of contract management, we
have seen many operators with over
one-third of their contracts out of
compliance with established contractors, which of course makes it difficult
to ensure that the right price is being
paid to the right suppliers. By bringing more spend onto procurement
systems, energy companies have the
opportunity to improve measurement
of price and supplier compliance.
Currently, many in the industry do not
track these statistics, which hampers
improvement efforts. Compliance
challenges also include adhering to
internal approval and authorization
levels and managing to the approved
contract value and period. Although
technology solutions are key to providing the visibility necessary to establish
control, current solutions lack the
right functionality for the industry.
As a part of the implementation of
e-procurement systems, companies
should continue to strengthen their
internal ability to audit contract
integritytesting for compliance with
pricing and procedures, as well as for
execution in accordance with terms.

Planning and managing

the movement of
materials
From the customers perspective, the
supply chain function is assessed in
large part on the successful delivery of
materials and services when scheduled. Doing so is essential not only
for schedule compliance, but also for

productivity, cost management and the

maximizing of uptime for operating
assets.
The high availability of critical
spare parts is essential to minimize
unplanned downtime. Thus, oil and
gas companies tend to avoid costly
and risky stockouts by carrying excess
inventorywhich also ties up capital
and increases writeoffs. Typically, however, the documentation to identify
critical equipment and related critical
sparesthrough bills of materials, for
exampleis inadequate. Whats more,
part-numbering systems are often
inconsistent, making it highly difficult
for these companies to hit fulfillment
levels.
Compounding the problem is the fact
that the planning models used to help
make inventory deployment decisions
in much of the industry do not enable
the more agile management of inventory. Often, inventory levels are set
based largely on historical usage, with
little statistical technique applied to
the planning process and little integration with the demand plan, if one
exists. As a result, it is not unusual
to find inventory levels by SKU that
do not support targeted service levels. Here, oil and gas companies have
the opportunity to learn from the
industrial equipment and automotive
industries. In those sectors, sophisticated technologies and practices have
enabled companies to manage spare
parts with high levels of availability
and minimized inventorywith the
incentive of running a high-margin
business.
In moving materials to the work site,
many oil and gas companies rely on
the expertise of third-party logistics providers (3PLs) for aspects of
transportation sourcing, planning and
execution. While 3PLs can be useful, companies should retain enough
logistics knowledge in-house to manage the 3PL relationship. In this area,
the industry faces unique challenges:
In the upstream segment, long supply

chains into remote locations and lack

of predictability about when materials
will be needed make good tracking
and visibility essential. Otherwise,
internal customers spend a significant amount of time following up on
items to ensure that materials will
be available as needed or rescheduling work if materials are delayed. In
the downstream segment, companies
often need to bring a combination of
materials together to the same location at the same time in the most
efficient manner. Using other industry
solutions, such as cross-docking and
direct delivery, can address thisbut
only if they are coordinated effectively and have clear ownership. Here,
good process design and implementation can be especially useful.

integrity as a key goalbut relatively

few have implemented contract
accuracy as a KPI. Similarly, when it
comes to procurement in support of
capital projects, companies typically
track total cost savings and budgeted
versus actual spending. Relatively few,
however, use metricssuch as
percentage of capital projects that
employ a rigorous sourcing process or
the extent to which capital projects
have experienced delays due to
material or service availability issues
to drive action and improvements.

Measuring and
managing performance
Being able to track performance is
fundamental to managing and
improving the supply chain. Oil and
gas companies have a variety of metrics and key performance indicators
(KPIs) that they use to track activities
in various supply chain functions.
However, because their processes
and systems are often inconsistent
across businesses and locations, many
companies are still using metrics that
are tactical and difficult to compare
across locations. Unlike supply chain
functions that serve external customers and have a clear focus on customer service, these functions are serving
internal customers and have not
matured to the point that they have
deployed effective service-oriented
metrics. Thus, companies would do
well to include service level agreements in their business interlock planning process with internal customers
to manage expectations and delivery.
Meanwhile, the metrics that are in
place are often not well aligned with
strategic priorities. For example, in
the area of contract management,
executives cite improved contract
7

Using targeted
technology
Despite the scale and complexity
involved in the non-hydrocarbon
supply chain, oil and gas companies
have tended to rely on their companies enterprise resource planning
(ERP) systems, rather than seeking to
complement their companies enterprisewide systems with targeted point
solutions to help them operate and
manage the supply chain. Though ERP
systems can provide a range of robust
tools, in general, these tools have
been developed as a component of
the overall system and are designed
to support multiple industries.
In the energy industry, more targeted
tools may be required in many areas
for achieving high performance from
the non-hydrocarbon supply chain:
Inventory managementthe effective deployment of planning and
forecasting tools that analyze prior

usage and forecast demand against

set parameters such as minimum/
maximum levels, reorder points and
lead times for items carried to meet
maintenance requirements.
Contract managementthe ability
to support staff responsible for the
large numbers of complex services
contracts that are managed across
business units.
Contractor performance managementespecially for complex
services provided across multiple
locations with minimal involvement
from supply chain personnel.
Master data managementin
particular where various parts of
the business are using different
part-numbering taxonomies, often
as a result of past mergers.
Demand forecastingenabling a
repeatable, robust and sustainable
process to gather, analyze and
disseminate forward-looking
information on business requirements for materials and services.

Other industries that depend on a

competitive supply chain have
typically invested in implementing a
range of best-of-breed solutions to
support their supply chains. Oil and
gas companies can benefit from this
approach to achieve high performance.

Nurturing supply chain

talent
As oil and gas companies experience
significant growth in upstream
operations, an aging workforce and
growing skills shortages are
creating challenges across functional
areasincluding supply chain
operations. Meanwhile, newer
entrants in the industry are exacerbating these challenges by recruiting
experienced executives from larger
companies. Some companies are
responding by increasing their investment in the training and development of supply chain professionals.
However, given the scale of the
workforce issues involved, talent
management capabilities in the industry are not where they should be.
Often, training is defined by each
individual unit rather than coordinated centrally, which means there
is no consistent understanding of the

function. Thus, as staff members are

transferred, they have to deal with
different processes, procedures and
even terminology. Some companies
provide formal training for supply
chain professionals; leading practices
in the industry go further to include
cross-functional training and certification programsfrom computer-based
training to masters-level qualifications. Such development opportunities can also be helpful in attracting
talent.

Training alone will not be sufficient

making recruiting essential to building the talent pool. Recruiting should
selectively introduce experienced supply chain executives from other industries to bring a range of capabilities
that supplement (rather than replace)
the oil and gas knowledge already in
place. Recruiting from the supply base
and from industries such as automotive and high technology will help oil
and gas companies address their talent
challenges.

To continue improvements on the talent front, companies should consider

establishing a common supply chain
curriculum and creating supply chain
centers of excellence. These centers
should be responsible for gathering
and transferring leading practices,
holding regularly scheduled supply
chain peer-review sessions in the
business units, and embedding
leading practices into standard
supply chain procedures.

The ripple effect of improvement

Overall, oil and gas companies are managing the
non-hydrocarbon supply chain to build new projects,
maintain operations and support their internal
customers. However, most have not yet developed
more advanced capabilities, which are familiar in other
industries and include demand planning, supplier and
contract management and inventory management.
These are key ingredients in the efficient and effective
execution of supply chain activities.

10

There is considerable room to

improve. Fortunately, in many of the
areas where the industry lags behind
other industries, improvements are
likely to not only generate clear,
measurable benefits in their own
right, but also to have something
of a ripple effect throughout the
organization. Better planning and
inventory management, for example,
will help companies do a better job
maintaining equipment uptime and
reliable operations, thereby supporting improved productivity from maintenance and operations. Improved
category management and supplier
management processes, along with
increased automation of transaction
processing, are likely to yield better
compliance, help preserve sourcing
savings and enable the identification
of secondary saving opportunities.

Often, such initiatives can be largely

self-funding.
To be sure, there are a number of
supply chain challenges facing the
industry. But within those challenges
lies opportunityand a chance to
focus improvement efforts on changes
that will deliver solid results and
support the companys ongoing
journey to high performance.

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About the author

Niul Burton, Executive directorManagement Consulting & Integrated
Markets, Supply Chain
Mr. Burton has 20 years of
experience working in and consulting
to the oil and gas industry on supply
chain matters. He started his career
with BP International as a materials
coordinator in the Netherlands, and
more recently has worked with oil
and gas clients in the United States,
Europe, Russia and Nigeria. He
coordinates Accentures supply chain
work for oil and gas clients globally.
Mr. Burton can be reached
at niul.a.burton@accenture.com.

Copyright 2009 Accenture

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High Performance Delivered
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