Supply chain management during the crisis

Published: 9 May 2020 - 6:45 a.m.

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 and CoVID 19 supply chain disruptions, the time has come to evaluate supply chain and procurement strategies, sourcing techniques and costs. Major pandemics can create significant disruption to the reliable supply of oil and gas equipment/parts such as valves, turbines, compressors ...etc. The COVID-19 pandemic is a wakeup 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 in the forefront of critical issues plaguing oil and gas companies especially with the current downward spiral of oil prices and CoVID-19.

Many oil and gas companies worldwide realized that either their suppliers or sub-suppliers (tier 2/tier 3 suppliers) are based in the affected regions such as China, Italy, South Korea and Spain. Single sourcing or sourcing everything from one geography or country has led to the current disruption. Even though some companies don’t source directly from China, their tier 2/tier 3 suppliers down the line do so. Oil and Gas companies should be proactive in developing robust supply chain resilience and having adequate supply chain risk intelligence.

Supplier risk intelligence is the process of acquiring and analysing supplier risks in order to understand present and future risks; support current and future sourcing and market sector strategy execution; and to enable the business to better anticipate changes in the external marketplace and react before others do.

Supply chain mapping can mitigate risks especially if there is over dependence on one country or concentration of souring from one country or geography. Supply chain mapping involves thorough understanding of suppliers including their global sites, local sites and subcontractors, as well as knowing which components or part originate or pass through them. Companies who are ahead in supply chain mapping benefit when disruptions happen, because they can deduce quickly how their supply chain could be impacted in the short to midterm. When companies have advance knowledge of where the 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 critical supply chain.

Oil companies looking to improve and deploy best in class supply chain risk mitigation practices can adapt or implement some of the practical measures listed below:

• Understand the critical supply chain of major spend categories. This requires thoroughly identifying costs and sourcing options across the supply chain for each category and determining appropriate interventions (e.g., seeking new supplier, changing specifications, altering contract terms)

• Undertake critical and non-critical supply chain bottlenecking assessment. Target for paradigm shift in the supply chain that could mean identifying alternative suppliers

• Build custom fit procurement processes that provide better clarity, engage suppliers early in the process. Moreover 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 supply base, select relevant suppliers, focus on alignment and sustainability, ensure company ownership and accountability is clear to suppliers

• Institutionalize capabilities required to support procurement and supply chain

Rethinking 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 resilience 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 optimized oil and gas production and exploration. It will be interesting to see how oil and gas companies can effectively manage robust supplier monitoring system coupled with the adoption of best in class supply chain practice in 2020.

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