Uncovering hidden cost savings

ANALYZING COSTS

Inevitably, some capital-intensive, complex projects will have to be reduced, deferred, or canceled. And in all probability upstream difficulties will impact downstream. So companies need to take a deeper, closer look at every cost and associated contracting process. Typically, when DHL customers do this, they are surprised to find inefficiencies in their operations and logistics that were tolerable in the high-spending days of the past decade.

Companies can instantly improve cash flow when they uncover wasteful practices - for example, non-standardized assets being sent out into the field just-in-case, or parts and equipment being dispatched by express shipment to then sit in storage unused. Sometimes, addition new equipment is ordered for one project, and yet the same equipment is idle inventory on another project.

But many types of inefficiency appear too difficult or embedded to tackle. In this case, we recommend exploring and embracing the lessons of other industry sectors that have previously had to rationalize cost from the supply chain.

LEARNING FROM OTHER SECTORS

Customers in the automotive and aerospace industries, for example, have achieved better operational maturity by using cloud-based centralized platforms to efficiently collect, centralize, and analyze supply chain data.

Many years ago, DHL's automotive customers successfully eliminated inbound inventory by changing supplier delivery terms and taking full control of the inbound supply chain. This minimized redundant inventory and lowered logistics costs, as companies could then contract better rates for inbound transport and consolidate shipments at origin. Savings amounted to 20% or more in some cases.

In aerospace, spare parts are tracked today on an item level and global visibility is available for parts in transit as well as for inventory. Coordination and visibility happen on a global scale, and parts are stored in a multi-tier network. Stock levels are optimized across all locations simply by centralizing coordination away from the field. Global visibility shortens transit times, making it easier to anticipate bottlenecks and increase asset utilization.

BUILDING VISIBILITY

Clearly, these industries provide useful lessons for oil and gas. We wondered about the status of supply chain visibility in the energy sector, so recently DHL undertook a survey of oil and gas professionals. We found that some 43% of senior logistics managers believe their organizations have insufficient visibility of supply chain arrangements; only 4% claimed complete visibility. Materials tracking and management needs to be widely implemented, with data collected at a central hub, allowing all aspects of the supply chain to be monitored and reported.

Among other key requirements, a single central IT system can provide visibility of all shipments, inventories, and utilization. This allows companies to focus on total landed cost and slash overheads while supply chains become more responsive and efficient. And it allows key metrics, such as time-on-tool and measures of redundant inventory, to be built into the core of business reporting.

CHANGING THE MENTALITY

One barrier specific to the energy sector is the "we've always done it this way" mentality. Traditionally, oil and gas procurement has focused on commoditization - breaking up the supply chain into commoditized elements that can be easily benchmarked and tendered, believing that this drives optimization and cost reduction. But all the evidence suggests that this objective is better served by an end-to-end supply chain management approach supported by strong strategic and tactical data management. It's time to replace longstanding practices (for example, holding safety stock at each point of consumption) with an agile and responsive integrated supply chain that does two things at once: mitigates risk and provides the necessary security.

REDUCING FIRE-FIGHTING

When oil and gas companies make efficient use of data to manage the supply chain on a truly integrated basis, they reduce the level of fire-fighting (addressing the urgent and the unexpected) and increase the planning horizon.

I've seen many positive impacts from this. Companies can now concentrate on consolidating international and domestic shipments, dramatically reducing transportation costs. In the warehouse and yard environment, they can undertake kitting of materials against each maintenance or operations task, ensuring high levels of service delivery. And they can provide all stakeholders with full visibility and traceability of materials across the supply chain. Companies can even give item-level visibility in stock locations as remote as deep water offshore operations in Angola, and integrate with the client ERP system for accounting and asset management purposes.

ADDRESSING FRAGMENTATION

Companies typically balk at the prospect of unbundling logistics from existing sub-contracts. But the reward for addressing fragmentation is supply chain optimization in terms both of service and cost, underpinned by a coherent data strategy. DHL customers that have taken this step now benefit from commonality of standards, systems and processes for HSSE, compliance quality, and service. They can potentially reduce margins on equipment procurement and also minimize waste through sustainable supply chain design, implementation, and operation.

Profound supply chain inefficiencies are typical on projects with long global supply chains, multiple project stages, and many different logistics partners. CAPEX teams may have different working practices and processes to OPEX teams and at handover there is huge risk of excessive materials obsolescence and asset under-utilization, as well as too much time spent re-cataloguing equipment and realigning processes. Once equipment has gone into the field as over-ordered, duplicated, or overpriced inventory, it is very difficult or impossible to retrieve it when challenges such as customs regulations, PSAs (production sharing agreements), or a simple lack of accountability make it too complicated to rectify the situation.

Similarly, time can be lost and substantial handover costs incurred on projects with lengthy, multi-market supply chains using local operators in every market. The solution is to centralize end-to-end under a single company or department to reduce handover overheads, shorten transit times, and generate economies of scale.

Although it may seem too much of a stretch today, it is likely that oil and gas companies will one day share facilities with competitors in the same location and agree to standardize equipment. DHL's recent research found that while only 13% of senior logistics managers in oil and gas companies believe their organizations are currently open to sharing facilities with competitors in order to drive down costs, 74% believe it is something that this industry should be more open to. Sharing facilities would produce considerable savings for the energy industry as a whole because supply bases, laydown yards, and warehouses are very expensive fixed costs to maintain during a downturn in activity.

TRANSFERRING RISK

Another barrier to cost savings is the perception of extra risk when outsourcing the end-to-end supply chain. However, with the right provider, companies neither lose control nor end up paying more. And they gain enormously from a capable partner with integrated data management capabilities - a partner who can provide single point accountability for all logistics activity. For example, the right logistics partner is likely to identify asset constraints early by taking a holistic view across the whole project. However, assuming the risk issue has been addressed, if energy companies really want to maximize cost efficiency they need to address the surprisingly high level of overlapping 'shadow' resources on their projects.

ESTABLISHING A COHERENT DATA STRATEGY

Large capital projects are complicated and involve multiple stakeholders with interdependent schedules and priorities. There is often a significant cost implication for any delay, and high volumes of items must be moved under tight time constraints. With so many people and so many different 'moving parts', it's relatively easy to lose control of equipment and material movements.

So if income is to exceed expenditure in this low oil price environment, my advice is to get a coherent data strategy now. Ensure the right items get to the right location at the right time and at the lowest cost!

ABOUT THE AUTHOR

Steve Harley is president of DHL's energy sector. He works with energy companies to implement integrated, end-to-end supply chain solutions that increase productivity and reduce cost. Harley has been with DHL since 1998, which includes working for more than 20 years in several African countries in procurement, oilfield, and general logistics.