NATIONAL PETROCHEMICAL & REFINERS ASSOCIATION

1899 L STREET, NW, SUITE 1000

WASHINGTON, DC 20036

MC-02-166

FURTHER INCREASE REFINING MARGINS WITH

SOURCING GOVERNANCE

By

Phillip Coleman
Senior Advisor

Conoco
Houston, TX

Presented at the

NPRA
2002 Annual Refinery & Petrochemical Plant
Maintenance Conference and Exhibition
May 7-10, 2002
San Antonio Convention Center
San Antonio, TX
This paper has been reproduced for the author or authors as a courtesy by the National Petrochemical &
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 Further Increase Refining Margins
with Sourcing Governance

Phillip A. Coleman
Conoco Inc.
May 9, 2002

2002 NPRA Maintenance Conference

What This Presentation Is About

ÿ Size Of The Prize

ÿ Sourcing Governance
ÿ Suppliers’ Strategies
ÿ Refining Climate And Cost Drivers
ÿ Conoco (U.K.) Limited - Case Study

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 Size Of The Prize
Product Category % Total Cost Reduction
ÿ Valves 18-22%
ÿ General MRO 20-23%
ÿ Pumps Compressors 19-22%
ÿ Pipe/Valves/Fittings 12-14%
ÿ Chemicals 12-15%
ÿ Complex Equipment 20-22%
ÿ Computer Hardware 20-23%

2002 NPRA Maintenance Conference

What Is Sourcing Governance

The Structure Of Relationships And How They
Are Managed Between The Organization, The
Procurement Function And Suppliers
ÿ Clear Assignment Of Authority, Accountability And
Responsibilities
ÿ Alignment Of Business And Corporate Sourcing Strategies
ÿ Implementation Of Goals And Processes
ÿ Objective, Leading Metrics
ÿ Mechanism To Evaluate Performance, Modify Strategies

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 Critical Success Factors For
Implementing Sourcing Governance

ÿ Clear, Visible, Consistent, Proactive Leadership

From All Senior Management
ÿ All Functions Actively Involved And Accountable
ÿ Lots Of Functional Interdependence, Collaboration
ÿ No “Vetoes” Permitted

2002 NPRA Maintenance Conference

Sourcing Governance - Enables

Adoption Of Sourcing Best Practices

ÿ Cross-functional Teams
ÿ Leveraging And Convergence
ÿ Key Supplier Relationships
ÿ Performance Management
ÿ Gain Sharing
ÿ Process Centered Focus
ÿ Outsourcing
ÿ Technology Enablers

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 Major Models Of Sourcing Governance

ÿ Fully Decentralized - Autonomous Locations

ÿ Centrally Supported - Small Center Sourcing Group,
Transactional Focus
ÿ Centrally Led - Global Leadership, Locally Delivered
ÿ Fully Centralized - Decisions, Transactions
Controlled From Center

2002 NPRA Maintenance Conference

Sourcing Governance -
Centrally Led Model
Management Leadership
Supply Chain
Decision Board

Operations
Procurement

Supply Chain Company Cross-

Management Suppliers Functional Team
Interface

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 Suppliers’ Strategies

ÿ Significant Consolidation
ÿ Focused On Value Addition
ÿ “High Grading”, Leveraging Customers
ÿ Open To Target Costing
ÿ Open to Gain Sharing

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Refining Business Climate

ÿ Consolidations Creating Larger Refiners

More Locations
Different Cultures
Different Legacy Suppliers
Larger Total Spend
ÿ Constant Margin Pressure
ÿ Sourcing Looked To For Solutions

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 Refining Cost and Value Drivers

ÿ Maintenance Labor Costs

ÿ Materials - Costs And Impacts On Maintenance
ÿ Uptime And Reliability
ÿ Turnarounds
Frequency
Duration
Costs

2002 NPRA Maintenance Conference

Conoco (U.K.) Limited Ops. 1994

ÿ 6 Offshore Platforms, 20+ Unmanned Facilities

ÿ 3 Onshore Warehouses
ÿ Onshore Gas Processing Plant
ÿ Company Valve Technicians
ÿ Two Purchasing Locations, 4 Buyers
ÿ Many People Creating Specifications
ÿ Different Ownership In Properties

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 Valve Inventory Issues

ÿ Large Inventory - $3.7 MM USD

ÿ 4,000 Line Items
ÿ Low Inventory Turn
300+ Different Specifications
Different Ownership Interests In Operations
ÿ Maintenance Cost High Due to Deterioration
ÿ Needed $ For Tools And Overhaul Equipment

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Valve Supply Chain Issues

Internal Supply Chain - Inefficient, Costly
ÿ Many Specifying
ÿ Many Buying
ÿ No Leveraging Of Spend
ÿ 183 Suppliers For Valves, Valve Repair Services
ÿ Many Inventory Sites
ÿ Internal Supply Chain - Long, Costly

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 CUKL’s Goals and Objectives

ÿ Improve Supply Chain And Life Cycle Costs

ÿ Sharply Reduce Supplier Base
ÿ Monetize Inventory
ÿ Improve Response Time
ÿ Eliminate Cost Of Warehouses, Overhaul Equipment
ÿ Product Standardization
ÿ Process Simplification

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SCORE - Contract Elements

ÿ Scope - Valves And Valve Repairs

ÿ Inventory
ÿ Procurement
ÿ Engineering, Project Integration
ÿ Repair Costs, Methods

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 Sourcing Governance Changes-
Impact On CUKL Responsibilities

ÿ Set Performance Operating Parameters, But Do Not

Create Specs. Nor Select Manufacturers
ÿ Do Not Purchase Valves Or Valve Repair Services
ÿ Can No Longer “Touch” Dedicated Inventory
ÿ Supplier Retention Is A Corporate, Not Individual Or
Location Call

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Inventory

ÿ Valve Strategy Established For Each Asset

Maintenance
Criticality Of Valve (Safety and Operations)
Required Spares, Guaranteed Delivery Times
ÿ Purchased All 4,000 Line Item Inventory
Certain Valves Reserved For CUKL Use
Remainder Available For Vendor’s Other Customers

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 Procurement

ÿ Suppliers Reduced From 183 to 6

ÿ SCORE’s Buying Power Lowered Cost
ÿ Rebates Based On Annual Volume
ÿ Supplier Handles All Supply Chain Up To Facility
Receipt

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Engineering and Project Integration

ÿ Valve Specs. Reduced From 300+ to 43

ÿ SCORE Created Common Spec. For Multiple Clients
ÿ Engineering Platform Contractors
Deal Directly With SCORE
No Conoco Involvement Until Approval Step

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 Repair Costs and Methods

ÿ Valves Sent In For Repair

Purchased By Supplier
Repaired By Supplier
Inventoried For Conoco’s Account
No Costs Charged Until Call-off To Location
Repair Costs Fixed- Utilized Matrix

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Financial Benefits

ÿ All Financial Objectives Realized

ÿ 20% Reduction in Total Cost of Valves, Valve Repairs
ÿ No Owned Inventory
ÿ Improved Internal Supply Chain, Life Cycle Costs
Procurement
Warehouse
Inventory Management
Obsolescence
Disposal

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 Operational Benefits

ÿ Maintained Safety Performance

ÿ No Operational Performance Issues
ÿ Significant Financial Benefits
ÿ Access To $150 MM USD Inventory
ÿ Guaranteed Delivery Times
ÿ Standard Specs. Improved Maintenance Efficiency
ÿ Streamlined Process and Improved Metrics

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Contact Information

ÿ Emails
Phil.A.Coleman@Conoco.com
Pacoleman@ev1.net

ÿ Phone –
281-293-1245
281-556-5053

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