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FeedsHome: Issue 3 2009 › Cover Story › Chain of momentum
Chain of momentum
06/03/2009 | Channel: Manufacturing, Support Services, Subsea, Exploration & Production, Equipment
Professor Alan Braithwaite of LCP Consulting and Cranfield School of Management looks at the oil and gas industry, and the world of extreme supply chains
‘Extreme’ has become the buzzword for dangerous sports and activities; mountaineering, avalanche snowboarding and surfing are among the most dangerous
competitive and adrenalin filled activities. In the world of supply chains, oil and gas is the ultimate ‘extreme’ activity. It is important to understand why, what we can learn from the skills required to run oil and gas supply chains, and ask what the oil and gas industry might take from best practice in other sectors to make its supply chains better.
Oil and gas exploration and production has an image of a business lead by hard driving people, working in increasingly inhospitable places such as the oceans, deserts and the tundra. We see them as being highly paid for the risks they take.
The idea of ‘peak oil’ says that production and consumption will outpace discovery by 2015. Regardless of whether this is right or wrong, the implication is that we will look for and produce oil in ever more difficult places in the next twenty to fifty years. At present the most extreme places are the tundra of Siberia and deep offshore West Africa.
It costs a lot to work in such places, is obviously dangerous, and is generally not a comfortable place to be. We see that on the television from time to time. However, the way in which people are supplied to do that difficult work is largely ignored in the commentary and image of the industry.
Classifying the logistics and supply chain challenge to serve these difficult places starts to identify a range of supply chains sitting behind the cutting edge of the operation. The breadth of this classification is the first pointer to their ‘extreme’ nature. Exploration requires heavy equipment in the form of rigs, together with large quantities of drilling bits and steel, valves and the associated chemicals, electronic equipment and consumables. But the supply chain does not stop with equipment and operational consumables; the people have to get in and out, be fed, accommodated and serviced. In production, the supply chains move through set up to operation where large amounts of capital equipment needs to be brought in and then sophisticated pipelines or vessels with their associated production equipment are installed or scheduled. Even in production there are people to ferry in and out, and look after while they are on site.
The key point about this classification is that it is so wide. There is not just one supply chain in the oil and gas industry, there are many. They have different characteristics from huge single items of equipment to the many and varied smaller items and consumables; and then of course there are the people themselves.
It is clear from this simple summary that oil and gas ‘extreme’ supply chains are not simple and require a range of skills to make them happen. Looking at the costs behind these complex, remote and harsh operations identifies that opportunity cost is a major driver of behaviour. The cost of running the location and its people is so high that the opportunity cost of supply chain failure, if exploration or production is held up, will always be the dominant issue in setting supply chain priorities. Indeed logistics and supply chain costs for all the peripherals that are essential for continuity are such a small part of the total game, the maxim is that ‘they must never cause a failure or delay’.
For exploration, this gets yet more extreme as the supply chain is not repetitive; it is not trying to do the same things during its life. At the start there are the bulk moves and heavy lifts. During development the requirements for steel, consumables and specialist equipment and people vary as the work proceeds. And you cannot just go down the road and buy what you want; there is no one there and the specifications are particular.
So the logistics for the supply chain is long and subject to major physical difficulties, disruption and delay. ‘Complete on time’ means just that; the room for error is small as a delay or disruption can carry a huge cost penalty while expensive people and equipment are idle.
It all starts with the specifications, which are designed to minimise any potential for failure. To most of us steel pipe is a commodity but in the oil industry the requirements are so specific there are just a few plants in the world that can produce them. The same is true for apparently normal chemicals and cement where particle size can impact pumps and cause downtime if they are out of spec.
As a result, oil and gas supply chains start in places far away from the eventual activity, being handled by people that have no tangible experience of what actually has to be overcome. Supply, inventory and logistics has to cope with a vast range of products which are not homogeneous and which have different degrees of demand predictability and supply urgency to the sharp end in the world’s most difficult places. Finally, the lack of predictability means that the logistics to support the work cannot be turned into a regular service as you might find supplying a supermarket chain. Everything is customised to the geography, the specifics of the location, the stage of exploration or production; the emphasis is always on keeping the operation running. As a result inventories are high, logistics services are premium and every operator will try to protect the integrity of their own chains.
A whole range of support services are in place for the industry including specialist shipping in the form of support vessels and barges, highly expert freight forwarding that understands and can deal with the exceptional market demands and courier services. These providers are effectively syndicators as they serve many of the operators and their contractors. They provide some ‘economies of scale’ as different customers can connect with their assets, but they too have to invest in the spare capacity to meet the demand volatility.
Oil and gas extreme supply chains are therefore characterised by their physical difficulty, specification detail, lack of homogeneity, ultra demanding service and difficulty in finding economies of scale. What we can learn from the skills required in running these supply chains? The immediate answer is its clarity of goal setting; the cost of supply chain failure is well understood (and rather large) and everything is built around that understanding. The services and inventory are designed, planned and executed to meet the goal. Attempts to cut costs have often resulted in disruptions and costs beyond the saving. In the normal world, the learning from this focus could be carried through to more structured risk management, rather than just pushing the cost cutting button. Too often we hear about supply chain services failing as a result of design, planning and execution failings; occasionally these make the headlines because of associated profit warnings. A thorough risk assessment, with a clear definition of the opportunity cost of failure, would almost always elicit the hazards ahead and prompt a slightly different approach.
Our final question is can the oil and gas industry take anything from best practice in other sectors to make their chains better? The obvious answers relate to material specification and supply chain design and organisation. Based on our experience at LCP, materials can easily be over-specified or simply over complicated. The sort of value engineering that is applied by many global engineering companies could improve the cost base. Simplification of the range has a knock-on effect on the inventory levels as stock cover and rate of usage are closely correlated. This stock management skill is widely applied by major retailers with chains being streamed by both lead-time and rate of sale. Segmenting supply chains by their underlying characteristics is usually accompanied by an increased level of network centralisation and coordination with more emphasis on forecasting and inventory planning. This has been historically difficult in oil and gas because of the lack of visibility in these extended and difficult chains. But now with satellite communications and web based systems there is a major and achievable potential for improvement in economic efficiency. The challenge in making such a change is one of trust between the operators at the sharp end goaled on operational time and those who could threaten it by supply chain failure as they focus on efficiency. This is the classic supply chain tension in the search for excellence – oil and gas has yet to fully face those choices. Perhaps with the oil price falling, the platform is there for such an effort in the future.
LCP Consulting
LCP Consulting is a leading specialist in customer-driven supply chain management. With over 20 years’ experience the company identifies where supply chains make major contributions to how businesses operate profitably and compete effectively, and supports business reviews and re-designs, and implements changes to end-to-end operations.
competitive and adrenalin filled activities. In the world of supply chains, oil and gas is the ultimate ‘extreme’ activity. It is important to understand why, what we can learn from the skills required to run oil and gas supply chains, and ask what the oil and gas industry might take from best practice in other sectors to make its supply chains better.
Oil and gas exploration and production has an image of a business lead by hard driving people, working in increasingly inhospitable places such as the oceans, deserts and the tundra. We see them as being highly paid for the risks they take.
The idea of ‘peak oil’ says that production and consumption will outpace discovery by 2015. Regardless of whether this is right or wrong, the implication is that we will look for and produce oil in ever more difficult places in the next twenty to fifty years. At present the most extreme places are the tundra of Siberia and deep offshore West Africa.
It costs a lot to work in such places, is obviously dangerous, and is generally not a comfortable place to be. We see that on the television from time to time. However, the way in which people are supplied to do that difficult work is largely ignored in the commentary and image of the industry.
Classifying the logistics and supply chain challenge to serve these difficult places starts to identify a range of supply chains sitting behind the cutting edge of the operation. The breadth of this classification is the first pointer to their ‘extreme’ nature. Exploration requires heavy equipment in the form of rigs, together with large quantities of drilling bits and steel, valves and the associated chemicals, electronic equipment and consumables. But the supply chain does not stop with equipment and operational consumables; the people have to get in and out, be fed, accommodated and serviced. In production, the supply chains move through set up to operation where large amounts of capital equipment needs to be brought in and then sophisticated pipelines or vessels with their associated production equipment are installed or scheduled. Even in production there are people to ferry in and out, and look after while they are on site.
The key point about this classification is that it is so wide. There is not just one supply chain in the oil and gas industry, there are many. They have different characteristics from huge single items of equipment to the many and varied smaller items and consumables; and then of course there are the people themselves.
It is clear from this simple summary that oil and gas ‘extreme’ supply chains are not simple and require a range of skills to make them happen. Looking at the costs behind these complex, remote and harsh operations identifies that opportunity cost is a major driver of behaviour. The cost of running the location and its people is so high that the opportunity cost of supply chain failure, if exploration or production is held up, will always be the dominant issue in setting supply chain priorities. Indeed logistics and supply chain costs for all the peripherals that are essential for continuity are such a small part of the total game, the maxim is that ‘they must never cause a failure or delay’.
For exploration, this gets yet more extreme as the supply chain is not repetitive; it is not trying to do the same things during its life. At the start there are the bulk moves and heavy lifts. During development the requirements for steel, consumables and specialist equipment and people vary as the work proceeds. And you cannot just go down the road and buy what you want; there is no one there and the specifications are particular.
So the logistics for the supply chain is long and subject to major physical difficulties, disruption and delay. ‘Complete on time’ means just that; the room for error is small as a delay or disruption can carry a huge cost penalty while expensive people and equipment are idle.
It all starts with the specifications, which are designed to minimise any potential for failure. To most of us steel pipe is a commodity but in the oil industry the requirements are so specific there are just a few plants in the world that can produce them. The same is true for apparently normal chemicals and cement where particle size can impact pumps and cause downtime if they are out of spec.
As a result, oil and gas supply chains start in places far away from the eventual activity, being handled by people that have no tangible experience of what actually has to be overcome. Supply, inventory and logistics has to cope with a vast range of products which are not homogeneous and which have different degrees of demand predictability and supply urgency to the sharp end in the world’s most difficult places. Finally, the lack of predictability means that the logistics to support the work cannot be turned into a regular service as you might find supplying a supermarket chain. Everything is customised to the geography, the specifics of the location, the stage of exploration or production; the emphasis is always on keeping the operation running. As a result inventories are high, logistics services are premium and every operator will try to protect the integrity of their own chains.
A whole range of support services are in place for the industry including specialist shipping in the form of support vessels and barges, highly expert freight forwarding that understands and can deal with the exceptional market demands and courier services. These providers are effectively syndicators as they serve many of the operators and their contractors. They provide some ‘economies of scale’ as different customers can connect with their assets, but they too have to invest in the spare capacity to meet the demand volatility.
Oil and gas extreme supply chains are therefore characterised by their physical difficulty, specification detail, lack of homogeneity, ultra demanding service and difficulty in finding economies of scale. What we can learn from the skills required in running these supply chains? The immediate answer is its clarity of goal setting; the cost of supply chain failure is well understood (and rather large) and everything is built around that understanding. The services and inventory are designed, planned and executed to meet the goal. Attempts to cut costs have often resulted in disruptions and costs beyond the saving. In the normal world, the learning from this focus could be carried through to more structured risk management, rather than just pushing the cost cutting button. Too often we hear about supply chain services failing as a result of design, planning and execution failings; occasionally these make the headlines because of associated profit warnings. A thorough risk assessment, with a clear definition of the opportunity cost of failure, would almost always elicit the hazards ahead and prompt a slightly different approach.
Our final question is can the oil and gas industry take anything from best practice in other sectors to make their chains better? The obvious answers relate to material specification and supply chain design and organisation. Based on our experience at LCP, materials can easily be over-specified or simply over complicated. The sort of value engineering that is applied by many global engineering companies could improve the cost base. Simplification of the range has a knock-on effect on the inventory levels as stock cover and rate of usage are closely correlated. This stock management skill is widely applied by major retailers with chains being streamed by both lead-time and rate of sale. Segmenting supply chains by their underlying characteristics is usually accompanied by an increased level of network centralisation and coordination with more emphasis on forecasting and inventory planning. This has been historically difficult in oil and gas because of the lack of visibility in these extended and difficult chains. But now with satellite communications and web based systems there is a major and achievable potential for improvement in economic efficiency. The challenge in making such a change is one of trust between the operators at the sharp end goaled on operational time and those who could threaten it by supply chain failure as they focus on efficiency. This is the classic supply chain tension in the search for excellence – oil and gas has yet to fully face those choices. Perhaps with the oil price falling, the platform is there for such an effort in the future.
LCP Consulting
LCP Consulting is a leading specialist in customer-driven supply chain management. With over 20 years’ experience the company identifies where supply chains make major contributions to how businesses operate profitably and compete effectively, and supports business reviews and re-designs, and implements changes to end-to-end operations.
