ERP systems provide efficient supply chain management

It is increasingly important for oil and gas companies to manage and oversee their international supply chain activities in an effective manner to reduce costs as well as to enhance and guarantee efficient operations.

As companies continue to expand globally and operate in more remote locations, the challenges of managing this extended supply chain become increasingly onerous. Companies must cope with the complexities of operating in both local and regional hubs and managing multiple languages and currencies with different legislative and taxation requirements and often very different operating environments.

Five key foundation elements contribute to running an efficient extended international supply chain for an upstream oil and gas company, with important actions and disciplines to be put in place to support each of these: criticality of goods, stocking strategy, sourcing/expediting strategy, returns strategy, and integrated systems strategy.

Criticality of goods

An extended supply chain requires full integration across multiple modules. (Images courtesy of Absoft Ltd.)

Supply chain is a service function, and to be effective it must have some means to understand which goods and services are important to its customers. The supply chain function cannot make that priority/criticality call on its own – it is the customer’s equipment and activities that are safety-critical, production-critical, and time-critical, and defining that criticality is a prerequisite to determine the related criticality of the goods and services that support that equipment and those activities.

As example would be a fire pump on a remote offshore site. The maintenance and operations discipline determine the criticality of that equipment as “high” because of its significance to safety. The designation of the equipment as critical will in turn typically invoke definitions of allowable downtime for that equipment, e.g. “maximum allowable downtime – 24 hours” or “work until fixed.” The implication of this designation is that any materials required for the maintenance or repair of the fire pump must a) be held offshore (shipping the materials from a local or regional warehouse will break the allowable downtime rules) and b) be included in the most rigorous inventory management regime available (stock counting, replenishment parameters).

There are some key analytics/reporting that can provide a health check for this foundation element: amount of equipment with criticality assessment performed, amount of critical equipment with bill of materials/spares list defined, number of materials associated with critical equipment by the physical inventory regime, number of materials associated with critical equipment flagged as critical spares, and stock holdings of materials associated with critical equipment.

Stocking strategy

There also are proactive measures that the supply chain function can undertake for itself based on current inventory data to help it formulate a view on which materials are critical and therefore which should be stocked where and with what stocking parameters.

As an example, assume that an operator’s inventory data capture the numbers of goods issued from stock for use by maintenance or projects and that the operator has captured a unit price for each material. This provides the parameters to calculate “demand value.” Demand value is the result of multiplying the number of issues from stock for an item over a period of time multiplied by the average unit price of that material.

Calculating that demand value figure for each location can lead to some very illuminating results. A typical outcome is that 5% to 10% of the stock materials catalog accounts for 80% of the aggregate demand value across the location inventory.

Related actions to such an analysis would be to compare the results with preexisting stock classifications to ensure that stock count behaviors and stocking parameters are appropriate for each material. For example, for items associated with a critical classification, a stock count may be performed four times a year, while replenishment parameters may be reviewed once a year. Other items might be counted once a year and their replenishment parameters reviewed every two years, and some items may be considered for movement from offshore to a local warehouse or from the local warehouse to the regional warehouse.

One very important caution with regard to the exercise described above is to stress that maintenance, operations, and projects personnel must be involved in this exercise to highlight exceptions where inventory data may not tell the whole story (e.g., irrespective of whether a material was issued in a year, if an item is a critical spare or an item required to maintain critical equipment, it should be classified as critical).

Some key analytics/reporting can provide a health check for this foundation element: demand value analysis, physical inventories by material class, and stock parameters by material class.

Sourcing/expediting strategy

Sourcing strategies in the context of extended international supply chains necessitates and deserves an article of its own. The complexities of doing business in Brazil, West Africa, and other oil and gas provinces are well documented, and the challenges involving local procurement, inventory management, and logistics in these locales are seldom overstated.

That being said, there are some basic principles that apply irrespective of location. Having defined the criticality of goods and the related inventory parameters, (note: non-stock is a valid inventory designation for a material), the operator also has defined what goods need to be procured and held where. This information can help identify the global suppliers who can meet the need for specific categories of materials/services at regional, local, and remote site levels and highlight exceptions that need to be sourced to specific vendors.

Critical goods and services should be established on formal sourcing constructs – contracts, framework agreements, or blanket orders – and should be supported by service legal agreements that relate to delivery performance that respects material criticality.

Expediting strategy should be driven by the same thinking. Not all delivery due dates are equally important. By definition, delivery due dates related to items supporting critical activities tend to be more important than those for rope, soap, and dope.

It is recommended that expediting is executed within the context of the priority of the activity that requested the goods or services. Traffic light reporting of red (late), amber (at risk), and green (on track) should be available, and these analytics/reports must highlight priority one, two, and three and promote priority one activities first.

In addition to these expediting analytics, there are some key analytics/reporting to provide a health check for this foundation element, including contract coverage by material class, material/service spend by category by vendor by location, and vendor performance by delivery due date by material class.

Returns strategy

Unsurprisingly, there is great emphasis for the supply chain function in oil and gas getting the right goods and services to the right place at the right time. This outbound orientation ensures that goods and services are available at the remote site to perform work. However, in recent years there has been a growing recognition that the inbound domain of material returns is also a very important area of the supply chain to manage.

The war stories will be familiar to most supply chain professionals: growing stock holdings, no deck/storage space at remote sites, surplus materials not being reused, no visibility or management of company materials held at third-party sites, scrapping of usable items – the list goes on.

Often subsumed under an overarching investment recovery policy, the processes and procedures that ensure that goods returns are handled efficiently require the definition of a) the scenarios that returns processes must cover (repairs, rentals return, return for reintegration into stock, scrapping, return to vendor, return for holding, etc.); and b) the steps that comprise each of those scenarios and who is accountable for each step.

A major facilitator for effective execution of returns processes is a returns workbench. Such a workbench tracks and reports each material return by its related returns scenario and for each step of the scenario. It supports multiple departments/functions in identifying and executing their specific steps in the returns process and also provides visibility of where blockages and delays are occurring.

For example, finance will use such a workbench to search for materials that are at the stage of a scrapping scenario where financial approval is required. The warehouse manager can use the same workbench to identify and deal with returns that have materials awaiting approval for reintegration into operational stock. Without a workbench, tracking and progressing returns scenarios that typically involve multiple steps and multiple stakeholders – procurement, inventory management, suppliers, and finance – can become a nightmare.

Integrated systems strategy

Enterprise resource planning (ERP) systems such as SAP, where the computerized maintenance management module, the capital projects module, the finance module, and the supply chain module are integrated and all share data, are powerful process engines and datapools that support the workbenches and analytics at the core of this article.

ERP systems offer workbench/analytic capabilities to support operational, tactical, and strategic analytics with strong process support and also offer critical insights into current and potential future performance.