Beyond the hype, supply chain management offers potential gains.

One of the latest business practices to be hyped as the savior of the oil and gas industry for the millennium is supply chain management (SCM).
The term has been much quoted in the business press and has even started appearing in mission statements. But despite all the hype, not everyone within the industry is completely aware of what SCM involves and what it means to their organization.
SCM can be defined as the chain of parties involved in adding value to a product or service, from conceptual design to end use, and includes all internal and external processes (Figure1).
An effective supply chain takes the end-user requirement and passes this down the chain with the aim of minimizing costs to processes that add value. Any process that fails to provide added value to the end user should be closely reviewed and potentially removed.
Theory into practice
With the aim of reducing and controlling costs along the chain, the first step to implementing SCM should be identifying the position of a product or service in the chain.
A service provider's key requirement is to satisfy the client's demands by providing a suite of quality, proven products. To maximize efficiency, the service provider must understand its position in the chain and focus its efforts on core activities.
The second step should be to ensure that the same value-added checks are being carried out within the company's internal supply chain. Without an efficient internal supply chain system, the service provider is less likely to optimize its performance in an external supply chain.
Clearly, the internal supply chain includes all the facets of the business. Therefore, management of the supplier base and materials must be conducted within a single strategy in order to satisfy internal departments and ultimately the external client.
Having identified its position in the chain and the process required to satisfy demand from the client, the service provider next should undertake an analysis of the products being sourced and the vendors chosen to meet client demand.
It might turn out that the service company has a range of suppliers but no long-term commitment to any of them. In many cases, suppliers have neither measured the performance of their vendors nor analyzed their spending patterns with those vendors. In one case, an investigation showed a service company had 197 vendors and it spent 94% of its money with only 10 of those vendors.
By collecting and analyzing information specific to its business and applying the main tools of that business - partnerships, just-in-time delivery, relationship management and total quality management - the company can narrow the task to modifying theories of good business practice to fit the dynamic demands of the oil industry.
All service companies are restricted by their finite resources, so the strategic plan should be set against well-practiced principles (Table 1).
Historically, partnerships in the oil service industry have been Orwellian in nature; that is, some partners are more equal than others. In fairness, the buyer will always enjoy the driving role in any partnership.
Why adopt SCM?
One service provider in the late 1990s had several vendor quality control and delivery issues. Individual complaints often led to a debate as to who told who what and when.
The accepted norm was to fast-track each project in and out, as and when demanded by the client base. Some technical efforts had been made to standardize the most common subcomponents, but these typically had been done internally, without vendor buy-in to the goal.
Those in the service industry regularly source from the same original equipment manufacturers (OEMs) as their competitors, and historically the focus has been on negotiating the best price to meet the required lead time. The quality aspect was specified in the tender from the buyer and then supplied as per the actual required application. Sharing of applications knowledge was discouraged in the fear that it would be passed onto the competition.
The key to success here is commitment, both in terms of relationship and if required legally. Almost all vendors will see the benefit of adopting a mutual approach, via clearer specifications and manufacturing quality control plans that they were able to contribute toward. In addition, successful application will lead to cost reduction for both parties and assist in winning more business from the end client base.
Another shift in culture is the positive promotion of nonconformance reports. These historically had been viewed as a measure of failure. As part of a joint plan, these should be viewed as markers for analysis and future improvement to the process.
This process requires constant management, and the benefits may not be instantaneous; most relationships take time to mature and require mutual trust. Some sectors of the service industry still view this as "soft" management and prefer to deal with issues as they arise. Unfortunately, the bugs in the system can only be corrected if they are reported. Senior management, therefore, must ensure that internal personnel and vendors are clear that they will encourage the reporting of all process failures. This in itself is a quantum leap, and without the culture shift, long-term benefits are doubtful.
Case study
Rockbestos Surprenant Cable Corp., a potential new vendor for instrument cable for a service provider, was established as a pilot for the SCM strategy to monitor initial progress.
After agreeing on prices across the range of products, the service provider started to concentrate on the joint quality plan. To complete the plan, it was necessary to pull in technical and quality-assurance resources from both organizations. Everybody involved needed to understand the entire process, from procurement of raw materials to installation of the cable offshore.
Over a string of site visits, the participating companies agreed on an outline of each individual process. They removed unnecessary processes and added operational requirements. For example, standardizing drum sizes meant the service provider could avoid the use of various-sized spooling machines during operations.
In addition, each requirement is made to order to a defined well depth. This negates the requirement for the supply of stock lengths that would involve wastage in terms of overages, discarded as off cuts. The end user, therefore, is no longer required to pay for a percentage of scrap. Thus Rockbestos can hold raw materials in the knowledge that the service company has only a small range of known specifications. With shared monthly forecasts, it is able to procure commodities on the futures market with a much reduced element of risk. This leads to reduced lead times and controlled costs, to the ultimate benefit of everyone in the supply chain.
The completed plan is specified on each order placed with Rockbestos. The plan is subject to Rockbestos' internal audits and annual audit by the service provider.
Using statistical process controlling and as this agreement matures, the service provider will review some processes that have measured a 100% success rate. Measured statistics would dictate that any quality control process with no failures during a year could be reduced to a percentage check. This, in turn, would reduce the service provider's internal costs and enable it to hold or reduce costs up the supply chain.
Conversely, if any manufacturing process highlights a problem area, where defects are found repeatedly, this trend and area should be mutually reviewed. The root problem may require an overhaul of the procedure or base design and specification changes from the buyer. The important thing is to ensure that the percentage rejects are not accepted as the norm and simply "costed" into the price and lead time. This understanding will ensure the OEM (Rockbestos) and the buyer or service company will remain competitive, and this in turn will be passed to the oil and gas producer.
The pilot scheme is more than a year old and has proved successful for both companies. Similar plans have followed for other core vendors to the service provider. Those plans are at various stages of maturity.
Initial results for the service provider after 18 months have shown:
• a reduced vendor base;
• procurement concentration on core vendors;
• key performance indicators in place;
• real cost savings set against rising raw material costs; and
• reduced stock levels.
The service provider plans to spread this strategy through all of its core vendors. Once in place, major changes will be seen for the provider, not only in terms of cost, but also for the procurement personnel whose roles will be based on relationship management and measurement, not the haggling of prices and dictation of unreasonable lead times.
End user benefit
Most oil- and gas-producing companies have embraced the SCM concept and understand the benefits to be gained. However, if SCM has to be driven down by the client base, it can become a daunting and often misunderstood requirement. Where the service company takes the process onboard as part of its own strategy and then works it through with its own supply chain, benefits are more likely. The service company will, in general, be the buyer of manufactured goods from an OEM. This relationship is critical in driving cost out of the system and concentrating on value-added activities. The oil and gas producer is more involved in buying packaged equipment and services, where the engineering knowledge of the application is the most critical link.
The end user, therefore, can obtain benefit from the knowledge that the bundled set of equipment is being provided through a managed, controlled and understood supply chain. In the long term, this will ensure cost and lead times are controlled without compromising quality. SCM can work in the oil service industry, and its enhancement will benefit all participants in the supply chain - clients and vendors - for the foreseeable future.

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