As oil and gas companies scrutinize budgets in search of ways to reduce spending as costs rise, money could be seeping from one often overlooked area: materials management.

The series of activities that includes planning and ordering materials as well as getting the items to the field, accounting for any returns, and keeping accurate tabs on inventory is an area in which the energy industry trails others.

“Within the oil and gas sector, materials management is a discipline that is very immature, and it’s not something that’s been consistently looked at or well managed,” Pete Domanko, advisory director for PwC’s energy practice, said during a webcast this week. “There is a lot of money at stake, and there is a lot of money being wasted.”

Proper procedures are not well defined, and there is unclear ownership of items in inventory. There may have been items set up in inventory five to 10 years ago, but today no one knows who owns it or who decides whether such materials remain in inventory, Domanko continued.

In some instances, he added, when projects are completed, some inventory is leftover or forgotten about. In other cases, it may take a long time to find materials at a job site and start field work, leading to productivity issues and eventually time and money. In addition, unclear or outdated warehouse management strategies are present – facilities may be too small or too far away or it is unknown how much space is actually being used. There is also a lack of accountability and ownership.

With rapid growth prevalent, particularly onshore US, and a push toward more production, materials management becomes even more challenging.

“The planning for materials is kind of ad hoc. It’s done by people in the field who are also trying to manage a dozen other activities,” Domanko said. “There is very little planning for materials, which manifests itself in over ordering, duplicate ordering, or poor coordination of deliveries and movement of materials in the field, which causes significant problems and will lead to a lot of the leftover and abandoned inventory.”

But the symptoms indicating materials management problems are often overlooked, Kimberly Gustafson, of PwC’s energy operations practice, pointed out.

If this sounds familiar, she said, there are problems.

There are unused materials from projects building up in yards. At the end of projects, there are leftover materials – either left on site, in somebody’s truck, or in a nearby laydown yard. Work has to be rescheduled because there are missing or incorrect materials. Projects materials are not kitted or staged but randomly dispersed throughout warehouses and laydown yards. There is no process to verify materials are available.

Material and equipment costs have spiked as a percentage of project costs, or there are multiple entries for the same material in the system and you hear comments such as it is too difficult to find the right material in the system so the supplier is called or more products are ordered. Or the responsibility for ordering and managing materials is unclear.

“These are just a few. There are many more,” Gustafson said. “These tend to be very common indicators that there is an issue that is most likely costing significant money and productivity.”

To help solve these problems, the two offered some advice. Start by identifying leftover project materials and have amnesty, allowing everyone to bring in leftovers, triage these items, and determine whether such materials can be put into inventory, returned to a vendor, or disposed of, Domanko said.

Then, review the inventory and optimize the amount of materials based on actual production or reliability requirements in the field, he continued, noting there are third-party tools to help.

Once unused or nonmoving inventory is sorted out, determine how much warehouse space is actually being used. “By eliminating this excess you can derive some cost savings from freeing up space,” he said. “By cleaning up the mess and getting some value out of it, you get some short-term wins [and] some short-term gains that can help build the momentum to do the bigger fixes.”

The bigger fixes involve getting away from looking at materials management in silos or operating with views that planning is done by one group, purchasing is done by another group, and receiving by another, Domanko said. The right governance and operating model must be established as well as the right interfaces between those groups.

Once processes are established, execute appropriate systems and data improvements and make sure master data are clean. Other solutions include having performance indicators in place and holding people accountable.

“The amount of impact that materials and equipment have on the overall project schedule is significant, and not having those in the right place at the right time to meet schedule requirements can have big effects in terms of meeting the schedule and cost consideration,” Domanko said.

Contact the author, Velda Addison, at vaddison@hartenergy.com.

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