Column: Drilling into supply chain efficiencies

FROM THE MM&D MAY/JUNE 2012 PRINT EDITION:

Companies in the energy, utilities and mining fields are juggling increasingly complex demands in their supply chains as they struggle to support growth, compete for resources, secure supply and recruit and retain talent.

The prairie provinces are seeing increases in capital investment across these sectors, driven by the commodity crisis (with the exception of gas). Projects are underway to increase extraction capacity in Alberta’s oil sands and its conventional resource plays. In the utilities marketplace, the expansion of transmission and other generation assets is driving growth. In mining, investment in new mines in Saskatchewan for resources like uranium and potash is growing.

That macro impact is driving those industries and activities to rely heavily on their supply chains to deliver results. Organizations must be innovative and creative in dealing with the challenges of increased demands and tight supply for their resources—whether those resources are equipment or people.

Managing growth

As an example, we have a client who went from drilling 30 wells to 200 wells over the course of one year. In cases like this, there’s an opportunity for these organizations to become a lot more strategic in the way they access their supply markets. This type of challenge is certainly familiar to many working in Alberta, and although it can be difficult to manage growth effectively, those who do it well can showcase supply chain management as value-added strategic parts of their organizations, rather than just being about transaction fulfilment.

The key to excelling at supply chain management during a major expansion is twofold: supplier selection is important, and so is your management of execution performance. It’s vital to ensure that you have the appropriate skill set as well as the internal capability to drive performance, particularly when working with new suppliers. Given the fact that the market is tight overall, the best suppliers are able to demand increased rates for their services.

The challenge for companies working under aggressive growth conditions is to find a way to standardize some processes so they can handle the necessary supply chain activity and provide a level of stability and consistency in what they’re doing. If you’re suddenly bringing a much larger quantity of supplies to your remote drilling area, there are significant implications around logistics and inventory management. This can produce considerable health, safety and environmental (HSE) risks, so oil and gas companies expanding capital investment projects should be really focused on how they can apply Lean techniques to identify and reduce waste and cost while improving safety.

If you’re a supplier in the oil and gas market, it’s critical to have a strong service and safety focus so that you are able to respond effectively in an industry that is still very reactive. From a cost perspective, succeeding is mostly about the ability to deliver value through the use of innovative technologies or processes that drive improved performance and productivity for the operator.

Cultivating and retaining talent

Another area where there is a palpable challenge in the Alberta marketplace is in its labour supply. As organizations are seeing that there’s an opportunity here that they’re missing out on, people are hiring and expanding their supply chain functions in a tight resource marketplace.

In some cases, companies are moving their supply chain groups to other locations (from Calgary to Houston, for example) where there’s a greater talent pool and where people won’t be poached by competitors at the rate that they are in Calgary.

There is a way to develop and retain talent: evaluate your resources and people then create training and development plans to support your staff.

Navigating risks

Risks can be difficult to identify since they can range from the catastrophic (the tsunami in Japan where supply chains that extended into Asia experienced delay and disruption), to the geopolitical (blocked transportation in the Suez Canal and throughout the Middle East thanks to the Arab Spring), to the banal—one oil and gas company had modules fabricated overseas and shipped to its site in big trucks, without taking into account the width of certain roads. Cue Plan B.

Companies should develop formal risk management programs to identify and manage inherent supply chain risks. These can include supplier qualification processes, formal risk review and management meetings with high risk suppliers, and setting out clear accountability within your contracts.

A major supply chain risk is security of supply, so integrate your supply chain group with long-term business planning processes in order to understand forward demand for key categories.

Strive to improve the use of marketplace research and technology to provide real-time risk information as it applies to the commercial, operational, and HSE aspects of your projects.

Summary

Given the tight timelines, massive outlays in capital expenditure, and the level of competition, it’s imperative that companies focus on getting the most out of their supply chains. It’s no easy feat, but pulling it off can have significant effects on the bottom line.

James McLean is partner, operations and supply chain group, PwC Alberta. MM&D