Supply chain management

The Situation

With a land base of over five million acres, our client, one of Canada’s largest oil and natural gas producers, was experiencing very challenging market conditions and operational challenges. They were focused on growing production per share, cash flow per share, and maximising efficiency of capital programs and efficiency of production. Their strategic supply chain initiatives target was in excess of $100 million in annual cost savings to help achieve these goals.

During an analysis of potential opportunities within CAPEX and OPEX spend, it was clear that there had been a proliferation of account categories aligned with inconsistent invoice coding, making spend analysis and control of spend increasingly difficult. These issues were further compounded by the fact that it was distributed across 29 summary spend categories, with over 90 % in the top 14 categories. We also found vendor proliferation, given the lack of required robust processes, controls and visibility for adding new vendors. Transactional analysis showed that many small- value transactions and infrequently used vendors added considerable workload to an already inefficient system.

Additionally, at the onset of the project, we discovered that less than 10% of the overall spend was actively managed under the procurement organisation.

Approach

The supply chain management project focused on these driving issues:

• Cost reduction: Focusing on CAPEX/OPEX, reducing category-targeted procurement spend
• Inventory and warehouse management had no system of record, consistent processes or organisation to manage uninstalled assets across the enterprise
• Logistics management and optimisation had widely varying contractual rate structures at the field level with systematic approach for evaluating the efficiency of a load or unload
• ADP open invoice implementation: manual and labour-intensive invoicing process. Our client remained one of the very few oil and gas organisations in the Calgary area to still process invoices manually. Total process cycle time was approximately 30-plus days and requireed multiple touch points by various internal and external groups.

A prioritised list of high impact cost-saving opportunities was established and strategies put in place for execution. All priority opportunities were successfully delivered via a variety of methods (bids, negotiations, tiered volume discounts, VRRR [vendor rate reduction letter]) and annual savings were in excess of $50 million. Additionally, key opportunity areas of future project workstreams were identified to include strategic procurement teams (CAPEX/ OPEX), establishment of a logistics team and a warehousing and inventory team, ADP open invoice implementation, and a cost recovery initiative. All opportunity areas had hard dollar savings attached.

In addition, renewed focus was put on procurement processes and policies around supplier bid management, contract management, spend authorisation and approval management.

Strategic sourcing teams (category specific) focused on cost savings around primary areas of logistics, construction, drilling and completions (CDC), contract services and labour, and chemicals. Additionally, supplier scorecards were implemented and a disciplined communication plan was set up. The keys to maximising savings were dedicated cross-functional teams (corporate and field), strategically aligned long-term goals, and a standardised strategic sourcing methodology and documentation process.

Results

• Mid-project savings in excess of $30 million
• Identified over $20 million in potential cost recovery opportunity
• Logistics group established
• Inventory and warehouse management team established
• ADP implementation utilising the PriceBooks function achieved client value on two fronts: invoice accuracy verification and associated savings and business process simplification
  1. Invoice accuracy verification is a process that checks supplier invoice charges against established rates. The audit found that, on average, the client was being overcharged by 10 % for all invoices. By implementing PriceBooks within the first year, a savings of $8.4 million was recognised.
  2.  Business process simplification was measured in a reduction of resources from nine full time employees, to five for the same level of invoice value.
• Strategic sourcing efforts resulted in annualised savings of $14.6 million in OPEX spend through negotiations with suppliers identified to be critical to long-term operations. Additional value was realised in reducing the supply base by 36 % through the negotiation process (sorting out suppliers who no longer provided value to the organisation).
• Aging inventory and non-utilised assets were identified, categorised by value, and a process established to divest and sell off at current market value. The actions within the first six months realised $3.7 million in sales of otherwise forgotten, non-valued material. An additional $3 million in sales was expected by the end of financial year.