Commentary | 3PL Line

Improving Efficiencies and Costs in the Energy Supply Chain

Tags: 3PL, Specialized Logistics

Ed Smith, Vice President Business Development, Exel Supply Chain Americas, 614-865-8500

Maintenance, logistics, and materials management professionals in upstream and downstream production are facing challenging times. Price volatility and increasing operating costs are causing energy companies to scrutinize sourcing strategies and the costs associated with vendor managed inventory (VMI), consignment, and integrated supplier programs.

Additionally, more difficult oil and gas extraction methods such as tar sands extraction and hydraulic fracturing require large capital investments in order to maintain adequate reserves and meet the increasing need for energy. On top of these added complexities and expenses, safety regulations have become more stringent, driving up production and personnel costs.

Energy companies have responded to the escalating cost of doing business by looking for savings in the indirect material supply chain. Unfortunately, cutting costs can defeat efforts to develop a more efficient indirect material supply chain that meets changing marketplace requirements. As a result, companies are struggling to optimize maintenance, repair, and operations (MRO) functions. In order to achieve performance goals, improve productivity, and make sound business decisions, it is critical that companies have robust and timely information.

In the MRO industry, three trends address the increased pressure to gather this vital information:

  1. Critical KPIs for materials management. Today, few organizations have robust visibility into the components of their materials management performance and MRO spend. Because discreet supply chain nodes are not fully controlled and measured by product, it is challenging to isolate end-to-end cost management and performance improvements. To truly understand how efficiently or inefficiently an indirect supply chain is working, companies need a big-picture view of its processes and costs. Having the right metrics in place can track and provide the depth and breadth of data needed to manage the indirect materials supply chain. Comprehensive key performance indicators (KPIs) serve to establish cost-effectiveness and identify areas for improvement in productivity. For a more robust tracking and panoramic supply chain view, a 3PL can provide Level 1 KPIs (such as total inventory value and inventory accuracy), plus those that demonstrate a more integrated supply chain management perspective (such as warehouse productivity, stock outs, and receiving/shipping accuracy).
  2. C-level focus on supply chain. MRO has great potential to contribute to business goals. Since significant cost savings can typically be found in the indirect material supply chain, C-level awareness and focus on this part of the business is growing. In order to pave the way for that success, the need to identify and eliminate waste, improve supply chain productivity and standardize effective processes across sites has become vital.
  3. Drive for external expertise. Projects in the energy industry now involve cross-border supply chains, work in remote sites, and the use of unconventional extraction methods. As a result of the evolving business environment in the gas and oil sector, many companies are realizing they do not have adequate MRO expertise to accommodate the increased expectations. One approach to address these challenges involves hiring people with extensive MRO oversight skills, or investing the time in training current employees in a range of specific disciplines.

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Capital projects such as well completions, small and large construction, pipeline expansions, and other projects involve significant amounts of high-value materials being direct-charged in a non-stock status. Energy companies are recognizing that material stewardship and preservation in these environments can significantly reduce over-buying, expedited transportation, and wasted downtime at the job site.

Having a partner that can help manage the paperwork and materials process, allows companies to eliminate the need to reorder lost materials that can delay projects. Many companies will compensate for lost parts by overbuying by as much as 20 percent to ensure they have the inventory when they are ready for the part. Particularly in emerging markets, it is critical to have a partner that can take control of the paperwork, manage material effectively to new sites, and understand the local environment.

Dealing with the ever-increasing internal and external pressures to meet both business goals and regulations, many oil and gas professionals are choosing to outsource areas of the supply chain to third-party logistics providers that have the expertise to offer custom solutions based on best practices.

As the energy industry moves into its next phase of development, a company needs full confidence that its partner will be able to provide the support and expertise in indirect material supply chain management.