Case Study: Energy Supply Chain Transformation

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The procurement job function is in transition. Over the last 20 years, we’ve seen procurement elevated from a transactional role to a strategic value contributor. With that change in role, the pressures on procurement to continuously improve, lower costs, and drive competitive advantage have grown dramatically. Under this new pressure, procurement teams are adapting a more strategic framework for managing supplier relationships. Best in class procurement teams are tracking supplier input costs to achieve cost savings. As companies strive to quantify supplier input costs, IHS market insights are there to support their needs.

Energy companies have faced particularly challenging conditions in the last few years. There have been tumultuous conditions both on the oil price side—where prices have been extremely volatile—and on the production side, where unconventional drilling and a number of new production methods are transforming supply chains for some energy companies. These forces are coming together to create an interesting set of challenges for energy companies that for years enjoyed an era of high crude oil prices and relatively low operating costs.

In assessing the impact of price swings, unconventional drilling practices, and other developments on the energy industry, it’s clear that even during years marked by revenue expansion, owners and operators have experienced margin contraction. This is taking place because as costs continue to grow, they’re doing so in a way that outpaces revenue growth. Since the fourth quarter of 2004, upstream capital costs have risen by 115 percent, but industrial commodity prices during that time have only risen by less than 10 percent. This is partly reflective of rising energy demand and regulatory impositions, but also, and more importantly, loose cost control practices.

A major oil and gas field service company recently underwent a major supply chain transformation in an effort to mitigate the risk imposed by these market conditions. Supply chain leaders within the organization recognized that past performance had not driven the sort of cost savings the company needed to achieve in order to remain competitive. The procurement objective was to achieve better cost performance by transitioning the team from a “three bids and a buy” culture, to one reliant on informed category managers that set global strategies for the buyers and project teams.

There were four main ingredients in this transformation—talent upgrade, more contemporary sourcing process, better tools, and a rigorous program to analyze and anticipate supply markets. IHS was the most prominent, durable pillar in their supply market capability. Their analysts use the IHS Pricing & Purchasing forecasts, along with industry insights, to understand supply market trends and likely inflection points. These services became so ingrained in their habits, that they wrote IHS into sourcing procedures. Their category and project teams were able to access regular consistent forecasts for thousands of spend line items through the IHS portal. The category managers became supply base experts through partnership with IHS. IHS still provides regularly updated historic and forecasts data for key costs and prices, detailed cost models for key procurement areas, and valuable written analysis to this client. However, the most important part of IHS’ support of this business transformation comes through its analysts. IHS analysts became a functioning extension of the company procurement team, offering training, advice, and support for critical business decisions.

The company’s supply chain transformation was driven by this partnership. Regarding the engagement, the head of purchasing stated: “Our successful supply chain transformation was directly linked to better supply market data and external analysis. Our IHS subscription allowed us to shape supply strategies and negotiations with confidence and insight...which led to value creation.” Their IHS subscription allowed them to shape supply strategies and negotiations with confidence and insight, which delivered tremendous value in savings, supply continuity, and customer credibility. While improvement remains continuous, the supply chain team met its objective of elevating procurement practices from a “three bids and a buy” culture, to one of strategic support and value add for the business. ■

Procurement Peer Review: Benchmarking Your Procurement Practices

Concessions should be dominating your supplier negotiations given the recent unwinding in commodity prices. However, many supply chain leaders lack confidence in their teams’ ability to capture those cost savings. Buyers need to be closely evaluating their suppliers’ cost structures to achieve significant cost savings.

In a recent study co-authored by IHS and Supply Chain Management Review, more than 240 leading supply chain executives provided insights on the efficacy of their procurement and sourcing operations. We’ve leveraged this research, alongside regular polling of our client base to provide a brief review of challenges and best practices in Procurement Excellence.

Best in Class companies are more likely to centralize their procurement operations as well as allocate the necessary funding and resources allowing for greater procurement efficiencies. Best in Class companies are four times more likely to have a Procurement Excellence program in place.

Further, they place greater importance on key performance indicators such as cycle times, warehouse costs, and environmental or green initiatives.

Effectively leveraging a highly proficient procurement function within their operational excellence platform, companies are realizing:

  • cost savings
  • better decision-making and negotiating through the use of current and more accurate data
  • upgraded workforce optimization; and
  • improved planning and execution of risk mitigation.

In practicing key operational and performance methodologies such as Procurement and Operational Excellence programs, organizations are well-equipped to address and, subsequently, hit performance goals. 

So, how does one elevate performance? We asked our client base how they will capitalize on falling material costs, and the overwhelming response was by improving access to market intelligence and cost insights.