It's been said that all producers have one thing in common, their top three priorities are cost control, cost control and, finally, cost control. All this focus on cost is good, because in a commodity market, producers cannot control the price for which they sell their production. So the only way to positively impact margins is by lowering cost. Right?
Wrong! At least lowering costs can be very wrong when it is applied indiscriminately. Consider this. A company pays rock-bottom prices for a drilling unit, bits, drilling fluid, a logging suite, casing, cementing, perforating and a completion package. Has it done the most it can do to reduce costs? Only if costs are counted irrespective of value.
What if the company paid a 20% premium to get better quality drill bits? If the bits drilled shoe-to-shoe so the average hole section was drilled faster, and the average well was drilled with three bits instead of four, it's worth it to pay more because you get more. But wait. Using that logic, why not buy the absolute "Rolls-Royce" of bits at a 100% premium? The answer is obvious, unless the super bits deliver 101% of added value, they are not worth the price. Put simply, do you need a Rolls-Royce if all you want to do is run down to the grocery store to get a loaf of bread?
Sounds simple when you read it fast, doesn't it? But it's surprising how many companies ignore the value factor when making purchases. True, value can be difficult to quantify sometimes. Vendors sometimes make tall claims in an effort to sell their products or services. Savvy buyers can, and should, demand, "Prove it!"
We are hearing that several leading producers are doing just that. They are boosting the effectiveness of their purchasing departments by augmenting the departments' staffs with experienced engineers or geoscientists, who can recognize true value of technical tools and services when they see it. They can also calculate the net present value of long-term benefits for comparison against price premiums. If the match is positive, they authorize the purchase.
But what about those ubiquitous "gray areas" where the added value is not so clear cut?
Then the companies are using stochastic risk analysis programs to help them make the decisions most likely to turn the greatest profit. Or, they are negotiating incentive contracts with their service providers that apply metrics to performance so bonuses can be paid when expectations are exceeded.
Often, for a relatively small investment in upfront time and effort, huge amounts of value can be taken directly to the bottom line. Some impatient types have told me,
"I don't have time for all that pre-planning work." I say, "Then you don't want to return maximum profitability to your company on that project?" Time spent improving profitability is always time
well spent.
Some say, "You're preaching to the choir." But increasingly these days I find that the choir is out in the field working. There isn't a large staff back at the home office working to squeeze the last drop of value out of every deal. This is why leading companies are coming to realize that they can use efficient software programs to help them calculate EVA (economic value-added), quantify risk and quickly determine in advance the long-term economic effect of decisions. Often, these can be integrated into bid templates so apples-to-apples comparisons can be made of bids as they are received. It is even possible to place a value on intangibles, such as the value of a single-source supplier, or the value of doing business with a long-term, trusted vendor.
Here's a trick I use. When faced with a purchase decision, I ask myself, "If the price asked by the vendors is equal, how would I decide?" That forces me to consider other factors that may bring added value into the mix, and allow me to reach the decision that delivers maximum profitability - right to the bottom line. You can too.

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