Oil and gas companies operate in dynamic and complex environments where they face constant challenges, especially in terms of supply and demand. With oil prices at historic lows amid COVID-19 disruptions to the supply chain, the time has come to evaluate supply chain and procurement strategies, sourcing techniques and costs. Major pandemics like COVID-19 can create significant disruptions to the reliable supply of oil and gas equipment and parts, such as valves, turbines, compressors, etc. The COVID-19 pandemic is a wake-up call for C-level executives to develop new business strategies in their future supply chain designs. Procurement and supply chain strategies are set to be at the forefront of critical issues plaguing oil and gas companies as a result of COVID-19.
Many oil and gas companies worldwide have suppliers or sub-suppliers based in affected regions such as China, Italy, South Korea and Spain. Single sourcing, or sourcing everything from one geography or country, has led to disruption. Even if some companies don't source directly from China, their tier two or tier three suppliers often do. Oil and gas companies should be proactive in developing robust supply chain resilience and have adequate supply chain risk intelligence.
Supplier risk intelligence is the process of acquiring and analyzing supplier risks in order to understand present and future risks, support current and future sourcing and market sector strategy execution, and enable the business to better anticipate changes in the external marketplace and react before others do.
Supply chain mapping is one way to mitigate supply chain risks, especially if there is overdependence on one country or concentration of sourcing from one country or geography. Supply chain mapping involves a thorough understanding of suppliers, including their global sites, local sites and subcontractors, as well as knowing which components or parts originate from or pass through them. Companies that use supply chain mapping benefit when disruptions occur, because they can quickly deduce how their supply chain could be impacted in the short- to midterm. When companies have advance knowledge of where a disruption will come from and which equipment or parts will be impacted, they have lead time to execute avoidance and mitigation strategies like alternative sourcing, strategic inventory allocation and debottlenecking the critical supply chain.
To improve and deploy best-in-class supply chain risk mitigation practices, oil companies can adapt by implementing some of these practical measures:
⢠Understand the critical supply chain of major spending categories. This requires thoroughly identifying costs and sourcing options across the supply chain for each category, as well as determining appropriate interventions (e.g., seeking a new supplier, changing specifications, altering contract terms, etc.).
⢠Undertake critical and noncritical supply chain bottlenecking assessments. Target paradigm shifts in the supply chain that could mean identifying alternative suppliers.
⢠Build custom-fit procurement processes that provide better clarity and engage suppliers early in the process. Follow through to execution and into operations.
⢠Manage risks across the entire spending portfolio -- not just within individual projects or commodities, or splitting capital from operations spend.
⢠Proactively manage the supply base, select relevant suppliers, focus on alignment and sustainability (i.e., dynamic relationships), and ensure company ownership and accountability are clear to suppliers.
⢠Institutionalize the capabilities required to support procurement and supply chain activities.
The rethinking of supply chain strategy has already begun for many companies, but COVID-19 will accelerate the need to have a decentralized global supply chain. Improved supply chain resiliency and collaborative supplier relationship management is the way forward for oil and gas companies to reduce costs in this era of low oil prices and to focus on oil and gas production and exploration in the most optimized way. It will be interesting to see how oil and gas companies can effectively manage a robust supplier monitoring system coupled with the adoption of best-in-class supply chain practices in 2020.
For more information, visit www.ihsmarkit.com or email Vinod.Raghothamarao@ihsmarkit.com.
