FINDING THE HIDDEN VALUES REMAINING IN THE OIL AND GAS SUPPLY CHAIN: TECHNIQUES THAT POINT THE

WAY THROUGH HARD TIMES

Charles C. Poirier, Partner CSCs Strategic Services Group O. Oscar Torres, Value Chain Planning Solutions Oracle Corporation

Overview
You dont need us to tell you that these are difficult times for companies in the oil and gas business and the field services industry. We are probably in for a year or more of turbulence, during which companies will struggle to navigate the troubled waters. But there are solutions that can ease the pain and complexity. These solutions can add revenue, cut costs, and increase profits during these challenging circumstances. One aspect of that possibility will come from a renewed focus on the end-to-end logistics that occur from beginning suppliers to delivery of petroleum products to consumers. The leaders are looking to find any values that have been missed particularly in transportation and warehousing. In general, the modern business landscape is marked by increasing levels of global operations and sourcing. While many companies have succeeded in gaining cost savings through these methods, the benefits can quickly erode because of the challenges of managing global logistics. While the world has flattened (as a result of modern IT and the internet), the supply chains which support the flattened world are still three dimensional in their physical construct and complexity. So even when product cost can be reduced by operating and sourcing globally, transportation and logistics costs have been rising as a percentage of cost-ofgoods sold. This has occurred as a result of fluctuating fuel prices, the inherent costs of longer-haul flow of goods and on-going transportation capacity imbalances. And the increasing cost of logistics is not isolated to ocean spanning supply chains but also affects localized regions like North America. The majority of companies continue the pursuit of logistics excellence with the aid of trusted partners or external constituents, including those companies interested in assuming the responsibility for some or all of the process steps. From a modern perspective, these costs are now considered a part of an end-toend supply chain network, and together companies pursue the means to optimize those costs. Technology solutions that make sense for all of the involved parties are at the center of most of the improved methodologies. Impressive gains have been recorded as more companies choose to embark on such efforts.

Purpose
This paper is designed to briefly explore a contemporary approach to a fairly well known and stable business practice, which is the packaging, loading, storing and transferring of goods across an extended supply chain, and to determine if there are values that have not been found. For those enterprises in the oil and gas industry, the chain starts with raw materials such as copper and steel, drilling equipment, mudding, and specialized tools. It extends through manufacture of products necessary to construct drilling rigs, off-shore platforms and a host of facilities in often very inhospitable parts of the planet. It continues through production, transport, and refining until the products are consumed by the people who need fuel and lubricants to keep their trucks and autos running. It certainly includes the products and services brought

to the operating systems by those companies representing the oil and gas field services businesses. Along the way, we see ample opportunity to use the circumstances of difficult economic conditions to drive an organization to find current solutions that help the top (revenues) and bottom (costs/profits) lines of the financial statements.

Current Conditions Demand a Review

With the oil and gas business complexity now including sophisticated exploration and production in often very remote parts of the world, with technology extending to the digital oil field, a host of business partners are necessary for continued success. The supply chain includes multi-tiered suppliers, subcontractors and original equipment manufacturers, out-sourced construction and facilities operations, and state-of-the-art operating techniques. In this environment, logistics excellence brings a new, higher dimension to the opportunities while lowering the risks. It also ushers in the need to consider external partners and network options in a quest to get closer to end-to-end optimized conditions. Entire extended enterprise networks are now analyzed to consider all aspects of transportation, warehousing, delivery and returns. Applying a control tower technique, these analyses are digitally based and include the impact of inventory and the associated carrying costs. Logistics service providers and their customers are now applying performance-based logistics (PBL) so companies pay for results and not activities. Asset utilization is becoming an enterprise effort. From a contemporary view, logistics has become a vital tool in business improvement efforts. The economic downturn, moreover, gives companies a solid reason to develop and implement innovative techniques and solutions.

A Logistics Framework

X Logistics Strategy Process Step Improvement Across Value Chain X Glass Pipeline Global Virtual Manufacturing Cyber Channel Distribution eFulfillment Supply Chain Partnerships Logistics Model (Multi Tier) Warehouse Management Event Management GSP Network Connectivity Total Logistics Costs Virtual Directory Management Simulation Techniques Perfect Orders Global Deliveries

X CPFR Outsourcing Core Competency VMI LLP Network Planning Extranet Systems Dynamic Tactical Planning Decision Support Software

X APS 3PL Customer Satisfaction Systems Rationalization Supplier Integration Logistics Optimization WMS, TMS

X Order Management Inventory Mgmt Support Facilities Service Requriements Capital Investments Cycle Times Calibrate the Beginning

Achieve Logistics Capability

Leverage e-Commerce

Tap Network Opportunities

Build an Advantage

APS Advanced Planning & Scheduling GSP Global Satellite Positioning CPFR Collaborative Planning, Forecasting & Replenishment VMI Vendor-Managed Inventory

3PL Third Party Logistics Provider LLP Lead Logistics Provider WMS Warehouse Management System TMS Transportation Management System

Most of the firms demonstrating logistics excellence apply some form of maturity model or framework, like that suggested in A Logistic Framework. In a step-bystep manner, they progress from creating a sort of internal efficiency to building an advantage with leading practices. Transportation and warehousing head that list, as the total costs of both inbound and outbound deliveries are analyzed to see where efficiencies can be developed as well as what is stored and where to make sure excesses have not been introduced. Asset utilization is part of that analysis, so the best suited party takes ownership and control of equipment and facilities. Distribution is coordinated to meet manufacturing schedules and to match delivery with actual consumption. Tracking of inventory and shipments is online and diversions are made to meet emergency needs. Special shipments can be arranged, accessing virtual networks to find open capacity on transportation equipment. At the manufacturing or transformation site, internal logistics takes place in an optimized manner. Order planning and scheduling are shared with key upstream and downstream partners so all parties are aware of the flows and disruptions that may be part of operations. In the advanced model, the company and its allies add another phase that of service logistics. Now the focus is on customer and end consumer receipt of the flow of goods and services. The model questions how good that receipt has been, and whether there are maintenance needs on the products delivered. Parts and spares logistics could be a part of the model, particularly in industries like automotive and aerospace. Removal and replacement of obsolete or damaged parts may be a requisite feature. Several large carriers have created new businesses to handle the return, refurbishing and re-shipment of computers and high technology equipment and parts.

The Hidden Values

The benefits from executing such a model have been clearly documented. They include: Attaining the highest customer service and satisfaction ratings because the system is reliable and visibility is online and accurate Reducing the need for working capital through lower investments in inventory and capital equipment now shared or outsourced with supply chain partners Streamlining total logistics costs through much greater efficiency in storage, shipment and use of equipment Gaining a better measure of risk management, as the network partners are online working real-time to reduce the aberrations and emergencies that plague supply chains applying contingency plans that work when needed. Developing new revenues as the superior performance leads network partners into non-traditional markets and increases business with existing customers. Bringing greater profits to the operating statement by virtue of being the best and lowest cost network of choice by the best customers A robust, integrated and multi-tier capability is what distinguishes the linked players, as all key members work together online, on a real-time basis to match deliveries with actual demand. Simulation techniques are applied to study, evaluate and test alternative delivery scenarios, and to alert partners of relevant changes occurring within the ecosystem. Tight upward and downward data propagation with regard to plans and changes are an element that brings further advantages.mary

A Look into the Not So Distant Future

A prediction of whats to come will include critical enablers for global enterprises and their logistics networks. And while we frame this as a forward looking view, the time frame is actually in months to years (not years or decades). These enablers come in the form of business process innovations, flexible and business oriented information management (i.e., creative models for information flow and decision-making), financial models which will be tightly integrated to their operational models (and their logistics networks), intelligent and contextualized data streaming in real time from smart devices (GPS, RFID, SCADA) which feed forward-looking planning workflows and business intelligence dashboards, and improved simulation and what-if scenario management capabilities to further empower both logistics practitioners and senior executives.

Conclusion
Logistics is a rapidly maturing business technique, especially as a key element of creating the most effective supply chain network. Most companies progress through five levels of improvement maturity. Models help guide the progress as companies carefully put their internal house in order and then select trusted partners to build advanced systems. Overall logistics costs decline in the process and customer satisfaction increases as the linked partners find the way to best any competing network in meeting actual delivery and replenishment needs.
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