A White Paper from the North American Leader in Supply Chain Management

Managing Your Indirect Supply Chain

SimPLiFicATiON FOR OPERATiONAL EXcELLENcE
MRO Supply Chain Management Series (Part 3 of 4)

OVERVIEW
This past year contained many exceptional challenges for Maintenance, Repair and Operations (MRO) professionals in the energy industry, and it does not appear to be getting any easier in the years to come. Rising operating costs along with price volatility have forced energy companies to examine sourcing strategies and the costs associated with VMI (vendor managed inventory), consignment and integrated supplier programs. Energy companies have also shifted production to areas that are both remote and unfamiliar. This sourcing transition for both production and supplies has increased the complexity and extended the length of the supply chain. Additionally, the days of producing easy oil are coming to a close. Some estimates suggest that conventional production is declining by ve percent per year. These changes are requiring companies to consider extraction of unconventional oil (Figure 1), such as the Canadian

 Easy oil has disappeared. We need to have larger projects for the more difcult stuff. Having all the proper back-up documents and certications that accompany various equipment thats increased a lot. Again, I would say thats really tied to the increasing complexity of the projects, as the types of materials we use now are very different, with oil sands and offshore, than ten years ago.

Head of Materials Management, Energy, Americas

Figure 1: Comparison of Oil Production Methods: Conventional versus Unconventional

Conventional system

Unconventional shale-gas system

Coalbed methane

Conventional system

Gas Source

Seal Seal

Gas Oil

Sandstone

Tight sand gas

Sou

rce

Reservoir

Gas-rich shale
Source

Seal

Source: http://voiceofmoorecounty.com/2011/12/08/unconventional-energy-resources-a-real-national-treasure/ http://www.nelashale.org/utica_shale.html

tar sands or natural gas sites in politically challenging environments. In addition, hydraulic fracturing of shale rock is becoming more commonplace. Already struggling to adapt to this changing business environment, energy companies face internal pressures to do more with less. Companies have increased the oversight of the indirect material supply chain spend, driven by a belief that this area can produce savings. Meanwhile, stringent regulatory requirements have intensied the already considerable focus on safety and compliance at the sites, resulting in escalating production and personnel costs. These trends are in conict with one another the external environment forces companies to develop a more effective indirect material supply chain and to invest in deepening its expertise, while internal savings targets drive it to reduce spend.

Maintenance, Repair and Operations (MRO) is dened as all indirect material supporting plant, equipment, maintenance activities, and MRO consumables for planned and unplanned routine maintenance, turnarounds, and small capital projects. To assess priorities and concerns in this evolving environment, Exel interviewed industry experts and energy professionals (upstream and downstream) in procurement, supply chain and materials management roles. In four separate reports, Exel will discuss the most salient issues facing the energy industry: 1. Condence through visibility 2. Supply chain performance 3. Supplier and supply chain management 4. Safety and compliance

PART 3 of 4: SiMplifiCation for operational eXCellenCe

Previous papers within this series outline the pressures that oil and gas businesses face in acquiring external expertise for indirect material management. Projects are becoming more complex and supply chains are lengthening as materials are sourced from lower cost markets: this necessitates investment in a more specialized understanding of supply chain management that includes a global perspective of best practices. Therefore, energy businesses often face a choice between investing in the development of in-house supply chain expertise; or partnering with a third party logistics provider (3PL) that will shoulder the burden of end-to-end supply chain management on their behalf. across various vendors, many of whom struggle to integrate the safety culture into their own organization. Finally, customers are concerned that they only have limited visibility of activity across their seller base, which renders optimization of supply chain processes rather difcult. These difculties are not limited to the oil and gas industry. An A.T. Kearney report highlights that few rms track vendor commitments, often because they do not collect the data that would enable them to engage in effective supplier relationship management.1 By contrast, a consolidated vendor base is identied as an important best practice for succeeding with MRO.2 Therefore, companies should partner with 3PLs willing to justify their expertise not only in terms of indirect material management, but how they bring value to client businesses in the context of simplication and reduction of vendor relationships.

 Weve inherited a lot of suppliers that we are currently managing. Now were looking at alternative sources of supply and different ways of managing them.

Category Manager, Oil Rener, Americas 

RATIONALIZATION OF VENDOR BASES

Energy professionals often mention the consolidation of vendor bases when asked to identify one critical challenge that they are currently struggling to overcome. In some cases, legacy relationships have been allowed to continue even as new supply managers take over and add their own vendors to the books. In others, new sites have been acquired which bring with them a long list of vendors who have traditionally understood and served the needs of that location well. Whatever the causes, managing the day-to-day activities of a large group of vendors at each site has become a challenge for busy managers.

Research also shows that there is another dynamic in the mix: a desire to reduce the number of vendors while acquiring more external expertise. However, in energy production and mining (upstream and downstream) supplier management is extremely challenging since materials are frequently sourced from long distances, specic measurements on supplier performance are not readily available and the supply chain does not support point of use replenishment data. Additionally, key supply chain performance measures including material availability/accuracy by the supplier, as well as delivery reliability (right material, right time, right place) are not available due to purchasing terms, VMI arrangements, lack of business processes and IT constraints. These challenges are driving three key reasons for stronger supplier management. First, supply chain managers complain that their time is being consumed with handling multiple dealers thus distracting managers from their day-to-day role. Second, it is challenging for companies to monitor compliance and safety operations standards
1 2

 A challenge for us is the inefciency of dealing with too many suppliers. Thats a key piece for us in terms of simplication.

Procurement Manager, Oil and Gas, Americas 

Indirect procurement: too many missed opportunities, Institute of Supply Management, November 2010 Succeed with MRO outsourcing: Multiple Avenues to MRO Optimization, Everest Group, 2012, p.10

The expansion of projects into unfamiliar markets and onto remote sites adds an additional complexity to supplier management. Whereas in the past the oil and gas industry had pre-dened networks consisting of trusted vendors, work is now taking place in markets where knowledge of supplier capabilities, and understanding of supply chain practices, is limited. Additionally, many remote locations lack the presence of a large vendor base, so companies are left dealing with local vendors who may not have an expertise serving the energy industry. Energy professionals also worry that lengthier and more international supply chains will mean having yet more points of contact to manage. Expansion onto new sites is perceived as a huge task, requiring the transitioning of existing contracting relationships. These pressures of already having multiple vendors and having to acquire even more in new markets are particularly undesirable as they undermine visibility of the entire supply chain and therefore make compliance adherence tricky to manage. Customers speak of a growing trend within their businesses toward simplication reduce the number of sellers so that supplier management may be implemented more effectively. At the same time, rationalization is not a straightforward process as customers realize they need the additional expertise around indirect material management that they do not currently have in-house. The ideal solution for many would be to delegate overall responsibility of vendor management to a 3PL, with the experience and networks to become a partner across multiple jurisdictions.

helping clients achieve their business objectives. First, plans for cost reduction must show how supply chain management will be handled efciently across multiple sites. This will mean acquiring more data on processes and introducing metrics that assess performance of each site.3 Providers will need to be more strategic in terms of supplier management by identifying the most effective partnerships that can balance quality service with coverage. Second, it will be paramount to ensure high standards of compliance and safety across all sites. This means not only training their own staff on critical health, safety, security and environment (HSSE) policies and procedures, but also working with clients to determine how an ongoing focus on safety and security will be observed. This includes clarifying the performance expectations at each site and auditing against those standards to ensure compliance.

 A major cultural challenge is getting our suppliers to conform to a common standard. There is resistance at sites to external advice.

Procurement Manager, Mining, Asia Pacic 

SUPPLY CHAIN EXPERTISE, MERGED WITH INDUSTRY UNDERSTANDING

An increasingly attractive prospect for oil and gas professionals is the idea of working with a third party that is able to combine different types of expertise: not just an understanding of supplier management across many jurisdictions, but also a deep awareness of the specic requirements of organizations in their industry. Customers desire to see evidence of vendors being able to undertake a wide range of supply chain activities from buying materials and inventory management, to transportation and distribution so they can rationalize their vendor base further. In an ideal world, they would begin a relationship with a 3PL in one or two service lines, then gradually expand interaction to cover as many areas as possible so supply chain management is effectively outsourced to a few trusted partners.

STANDARDIZATION ACROSS SITES

A second trend observed is a move toward standardization across different sites. Oil and gas professionals tell us that they are looking for ways to replicate effective processes and introduce best practices from one region to another. The ability to assist in these transitions is a key consideration when deciding with which vendors they should deepen relationships. There are two key criteria companies should seek when choosing a 3PL in order to demonstrate capability of
3

See Part II: Optimization for improved supply chain performance

Currently, however, professionals are understandably reluctant to delegate responsibility for areas that they see as highly specialized to their industry, in case outsourcing results in a slip in HSSE standards or has a negative impact on uptime.

TRUSTED PARTNERS, RATHER THAN MORE PROVIDERS

There are two trends occurring in conict with each other in relation to vendor management in the oil and gas industry. Businesses are moving toward alternate extraction methods in markets and remote sites that

 Supply chain, from manufacturing to receiving, would ideally be done by one outsourcer. That would reduce the efforts we have to make. And then we could concentrate on critical materials.

Supply Chain Manager, Oil and Gas, North America 

require more specialized and external expertise. Simultaneously, they face pressure to reduce supplier spending and struggle managing time-consuming and complicated supplier relationships. At the same time, there is some uncertainty as to whether 3PLs currently have the capabilities to meet client needs. Third party logistics providers are traditionally associated with offering one or two discrete services, even though end-to-end supply chain management is increasingly what is needed. The onus is therefore on 3PLs to show that their expertise can be effectively tailored. Providers that demonstrate an end-to-end offering can better meet the needs of their clients.

 The merging of two functions logistics support and distribution into one entity so that they can provide the whole package, is a challenge that the industry faces.

Procurement Manager, Oil and Gas, North America 

3PLS OFFER ALTERNATIVE SOLUTIONS FOR THE NEW SUPPLY CHAIN

RATIONALIZATION
There is an obvious client need for outsourcing supplier management to a third party, particularly one that would ensure cost effectiveness across all sites. Third party logistics providers can be positioned to transport materials to work sites on behalf of customers at the lowest possible cost and with the highest possible reliability. In some regions, customers are forced to purchase indirect material in bulk from local businesses in order to save on transportation costs and to obtain immediate access. Yet they pay a high premium to transact with local businesses in this way. Outsourcing increases scrutiny on these vendor relationships and should result in better prices, as 3PLs will be able to consolidate delivery. They can therefore source from more cost effective vendors (often at a distance) that have historically looked uncompetitive in comparison with local vendors. Feeding customers the metrics they need to better judge the performance of sellers will also help with vendor rationalization. By introducing evaluation criteria, customers get an overview of the quality of the products supplied, the reliability of supply (for example, paperwork,

Key Vendor Performance Measurement Metrics:

Correct item description Missing PO Shipment overage No recipient listed Duplicate shipment Storage No packing list Wrong product shipped Items not on PO

packaging materials, etc, timeliness and on-time supply, accuracy and safety, which helps them build up a holistic understanding of how well they are being served. Such scrutiny should help terminate contracts with poor performers and have a positive impact on supplier performance overall.

END-TO-END SUPPLY CHAIN MANAGEMENT

Having a 3PL act as a single point of contact for all supplier management brings major advantages. It is inescapable that a fragmented supply chain effectively means no one is responsible for having the overview. Vendors end up controlling discrete parts of the supply chain and have their own objectives no one is focusing on whats best for the site. For instance, there is often a tendency to expedite materials that are urgently required, even though this is extremely expensive. Using a viable 3PL partner enables companies to avoid this, as they would work closely with managers on-site to build existing capacity and avoid premium freight. Suppliers may have their own payroll motivations for when transportation should be scheduled. If they control freight, they may prefer to have no delivery date, which Figure 2: Push vs. Pull diagram

can result in customer warehouses overrunning with materials. The opposite problem can also occur: customers say they are fed up with excuses from traditional suppliers as to why materials have not been delivered on-time, with delays excuses ranging from bad weather and lack of transportation, to failure to send the purchase order. These dynamics are typically based on having either a pull or push supply chain strategy (Figure 2), but by having a capable 3PL these competing objectives can be eliminated. Push supply chain Suppliers will frequently push inventory at their discretion into a producers premises (warehouses, yards, stores) and eventually invoice the material under the VMI arrangement. In this scenario, the producer is subject to heavy expedited freight charges, and material is not properly received, traced, and combined with inventory material for work order kitting.

PUSH
Open PO Invoice

Vendor

Warehouse Yard

Mechanic

PULL
Individual PO Invoice Consumption Analytics

Vendor

Bin

Mechanic

Pull supply chain In this model, a 3PL can provide for the supplier and producer an integrated supply chain model where the supplier is accountable for the on time fulllment of a purchase order based on a delivery date specied in the purchase order. With this supply chain model, the purchase order can also specify an ultimate point of use, and the 3PL can enable supplier notication of ready to ship, consolidated/time sensitive transportation to receiving and staging areas, with nal delivery and material tracking to the point of use. At the same time, partnering with a 3PL is likely to be most effective when customers appreciate the two-way street relationship. As long as 3PLs have the right data from customers on lead times and dates, they can use software to track materials, end-to-end. Suppliers are given a user-friendly online tool to schedule jobs. End-toend traceability shows where an item is picked up, where it goes in the supply chain and where it is eventually delivered. In the event of a delay or issue where materials will not be delivered in time, 3PLs can nd an alternative solution. Through a collaborative planning and execution environment with suppliers, 3PLs free up customer time to focus on other priorities, rather than handling multiple transactions per year. Clients are reassured that one partner has responsibility for the end-to-end supply chain.

Compliance is a key concern for the oil and gas industry which requires that monitoring standards are adhered to among contractors. Drivers must be certied and have all their documentation with them (such as material safety or data sheets) to ensure what is being transported is compliant. Audits should be conducted at cross-docks on the condition of materials. Third party logistics providers take responsibility not only for setting standards but also for monitoring compliance among direct carriers and sub-contractors. If there are multiple failures, it is their duty to escalate appropriately.

CONCLUSION
To be able to provide energy customers with what they need, 3PLs must put forward strategic solutions that simplify processes while also guaranteeing operational excellence. These solutions should reduce spend by sourcing materials more cost effectively, managing customers product deliveries efciently and maintaining visibility of product availability. By implementing an integrated supply chain and supplier management model MRO professionals can achieve a high return on investment as these programs: enable sourcing from any location, remove the ability of the supplier to pick the transportation mode, which impacts cost, and enabling proper receiving and tracking of all material regardless of value. Additionally, the material will be delivered directly to the point of use without the high cost maintenance employee having to leave the work site to gather material. The opportunities and benets of involving a 3PL are considerable, but they need to act as a trusted partner, rather than just another provider. 3PLs can add value by assisting with vendor rationalization, introducing metrics to improve supplier efciency and guaranteeing high standards of compliance at all times. As projects become more complex and the supply chain more fragmented, having a 3PL responsible for the end-to-end supply chain offers energy professionals the crucial advantage of being able to focus their attention on their priorities, reassured that their supply chain is in safe hands.

TRANSPORTATION SOLUTIONS
Companies should seek 3PLs providers that have an innovative approach when constructing transportation solutions to meet the needs of the energy industry. First, strategically located cross-docks should be identied as integration points so that material handling activities (such as receiving and priority sortation) are moved off-site to consolidate orders and reduce the number of trucks on-site. Second, deliveries must be scheduled so that supplies are effectively transported from sellers to cross-docks, and then on to relevant production areas for distribution to end users (for example, warehouses, tool cribs, site stores, etc.) A 3PL provider with these characteristics will be able to dene supplier pick-up and delivery schedules and provide ultimate oversight to the client of how the supply chain ts together.

ABOUT EXEL
Exel is the North American leader in contract logistics, providing customer-focused solutions to a wide range of industries including energy and chemicals, automotive, consumer, retail, engineering and manufacturing, life sciences and healthcare, technology, energy and chemicals. Exels innovative supply chain solutions, skilled people and regional coverage bring together all aspects of contract logistics in addition to a wide range of integrated, value-added and specialist services. Exel is a wholly owned entity of Deutsche Post DHL, the worlds leading logistics group. Web site: www.exel.com Email: consult.americas@exel.com Phone: 800.272.1052 or 614.865.8500

Raising expectations.

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