Strong Link In The Chain | |||
The secret to successful Supply Chain Management (SCM) in TNK-BP has required a 180 degree shift in thinking. In the past five years, the SCM function has guided the company’s procurement systems through a transformation in focus and methodology.
What is Supply Chain Management? A common definition says that SCM is planning and management of all activities involved in sourcing, procurement, logistics of all sorts of goods and related services – from office pens to drilling rigs for an oil company – and close coordination with external partners and internal customers to ensure that the process is smooth and uninterrupted.
Such an integrated approach to managing supply and demand within and across companies is a new phenomenon for Russia, yet to be explored and adopted by many businesses. “You won’t find an exact term for Supply Chain Management in Russian,” says Vladimir Vershinin, Manager, SCM, talking about the innovative nature of changes in this business function at TNK-BP, “What we are doing here is of real value for the Russian oil industry.”
In TNK-BP’s case, the secret to successful Supply Chain Management has required a 180 degree shift in thinking. Short-term planning is being replaced by long-term relationships that the company fosters with its suppliers, working together in a cooperative rather than adversarial manner. Low prices, while still important, have had to cede priority to performance, so suppliers have an incentive to deliver quality.
Key facts about SCM
- $1.5 bn annual materials spend
- $4.5 bn annual services spend
- 85% of spend in Russia
- 20,000 contracts per annum
- 2 mln tons annual cargo delivery
- 440 warehouses cover 180 hectares
In the past five years the SCM function at TNK-BP, has guided the company’s procurement systems through a transformation in focus and methodology.
First up, it was necessary to change the mindset from a view that SCM was simply a function that kept operations supplied with materials, to one seeing SCM as a key contributor to the bottom- line performance of the company. This new role required the SCM team to connect outside markets with internal business needs, identify value drivers in supply chains and manage suppliers and contractors to deliver best value for the company. Such an overhaul in strategy required people with a different set of professional skills and attitudes. It also demanded advanced business processes, logistics, and creative thinking. “We are setting up an SCM organization which we never had before,” says Andrew Alexander, Vice President SCM for Upstream.
The heart of the matter
TNK-BP President and CEO Robert Dudley believes that standardizing the company’s procurement requirements across the board is a high priority. “Standardization is key to being able to develop an SCM system that delivers a combination of quality, higher productivity and lower costs,” he says. “It is always a difficult thing to achieve in an oil company, particularly one spread over a wide geographical area. A company the size of TNK-BP has significant buying power, and if we harness that to our own internal standards, it will lead to better financial results. We have made a lot of progress in that area but still have a long way to go.”
Responding to the challenge, a team of SCM innovators in TNK-BP scoped out the Supply Chain Process Reengineering project (SPR). SPR was introduced in Upstream as of September 1, last year, and by 2009 will be rolled out across the entire organization.
Five years ago each of TNK-BP’s main business streams – Upstream, Downstream and Oil Field Services – operated different computer systems. They extensively used paper and calculators for managing materials. Now, SAP, a shared computer platform, has been implemented across businesses and individual business units for materials and procurement. As a result, the process has become quicker and provides better transparency. Switching to a common electronic platform and eliminating paperwork has had a huge time and cost-saving effect; simultaneously minimizing scope for human error.
Only after meticulous internal analysis and demand assessment, do SCM specialists approach the market for purchases.
A very ambitious next step will be extending SPR to the procurement of services. An integrated system from planning to invoice payment for services will shift into test mode this summer. If successful, insiders say, it will be unique in the global oil and gas industry.
The benefits of SPR are already being felt. According to company estimates, the average time it takes to buy materials and equipment has now been reduced by two thirds. A test case carried out before the SPR launch, showed that the process from ordering a valve to getting it working required 50 signatures along the way.
People needed
Where do you find people capable of continuous innovation in this demanding business area? About 2,000 people, only five of whom are expatriates, are involved in SCM efforts across TNK-BP geographies. There is a centralized team in Moscow which takes care of major procurement tasks like drilling and workover rigs with an annual spend of over $1 billion. Half of the team are professionals who joined the company only recently.
SCM managers talk about the “thirst for learning” and make a point that training has played a big role in reshaping procurement strategies and activities.
More dynamic, highly commercial people are still wanted – and a new set of skills has been developed in-house. Today’s newcomers to SCM are usually people with an engineering or a business degree. A profession in high demand is contract engineers; not very common in Russia.
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Ongoing learning and professional improvement is ensured through a mixed SCM team where international experts work together with Russian colleagues. Additionally, there is an array of training and educational options customized for TNK-BP’s needs.
The company has now developed nine procurement courses together with Accenture. The courses, under the general name “supply training academy” are web-based and run by Accenture. Successful completion of a course entitles a person to a “passport” which qualifies them to do work of that particular nature. This training is so popular that it is oversubscribed by 80%.
SCM team members are also encouraged to pursue SCM training opportunities at Moscow State University and the Chartered Institute of Purchasing and Supply, an international organization based in the UK.
Reaching out beyond its own staff, the company also provides suppliers with staff development opportunities primarily through innovative long-term contracts and a quality management system.
Breakthrough
Only three years ago, procurement orders were placed on an annual basis. “Every year there would be a mad flurry of meetings in October and November, which often started at 10am and went on to 3am the next morning, day after day“, says Bill Sams, until recently head of SCM for the company. Sams recalls: “The aim was to get the cheapest price, and that often meant calling a supplier into the meeting and then beating them down further on price.” However, less than two years after TNK-BP’s inception it became very clear that the low-cost approach only succeeded in getting a supplier to sell cheap; it did not encourage them to worry about quality or performance.
To move away from routine tendering, the company set up multifunctional sector teams to analyze markets and develop strategies for key sectors.
A landmark decision was taken three years ago to move core procurement contracts onto a long-term basis. It soon became very clear that this push to improve quality and reliability was in everyone’s best interests. By sharing in the benefit of predictability and better planning, TNK-BP’s partners have been able to invest in innovations of their own and improve the quality of the goods and services they provide as well as their own health and safety systems.
“Awarding a long-term contract is not the same as awarding a short-term contract but for a longer term. It’s completely different”, says Vershinin, “It allows contractors to invest in technology and HSE. Markets are developed by attracting new entrants. Finally, long-term contracts have helped us to dampen inflation levels”.
Another innovation in supplier relationships is “proactive quality assurance” when company experts go to suppliers to perform technical audits at suppliers’ facilities. “By doing so we ensure that manufacturers have the technical capability to produce quality products. Working together with suppliers we identify their capability gaps and develop corrective actions, says Vershinin. “Proactive quality assurance helps our partners to improve the quality of the goods we purchase“.
Adherence to corporate HSE standards is another requirement for TNK-BP contractors. In this respect, SCM experts emphasise the prequalification process for the company’s contractors, their technical audits and technical capability. One result is that today, all employees at TNK-BP’s operational sites including contractors, have protective clothing and wear hard hats whereas five years ago this was simply not the case.
The new approach was successfully applied first in cooperation with TMK, Russia’s largest pipe manufacturer and then expanded to relationships with contractor companies providing drilling and workover rigs.
Pipe dreams?
Since 2005, TNK-BP has bought more than 25,000 kilometers of metal pipes or “tubulars” as they are called inside the company – enough to build a pipeline from Moscow through the center of the earth to the other side and back again. The company’s largest tubular supplier is Russian company TMK (Pipe Metallurgical Company). Three years ago the two companies signed the first long term contract between a pipe manufacturer and an oil company; with the total value of $500 million. At the end of 2007 the parties extended this contract for another five-year term, and for the amount of $2 billion, (or a fourfold increase on the previous agreement): proof that the relationship approach works well for both companies.
If pipes are the arteries of the oil business, rigs and electric submersible pumps ensure the necessary heartbeat to flow the oil and gas.
Tender call
In late 2007, TNK-BP issued one of the biggest drilling rig tenders in the world. “We went out to tender for 30 drilling rigs. That is unprecedented. Typically people would go for one or maybe two rigs,” says Sams. “Workovers was another massive tender – for 600 workover rigs. We wanted to change from short- term to long-term. We need to do bigger contracts if we are going to improve quality, safety and timely performance.”
Twenty five international and Russian companies submitted bids for drilling and sidetracking rigs and, separately, for workover rigs.
| Coverage by long-term contracts. Upstream critical sectors |
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The total value of long-term contracts awarded exceeded $3 billion. TNK-BP’s own service companies won contracts worth $1 billion of that amount. The average contract term is between three and five years with an option for TNK-BP to extend further – unlike the one-year contracts commonly used today in the Russian industry.
Advanced technology drilling rigs acquired under the tender are already allowing the company to drill highly deviated, step out production wells which are required for TNK-BP’s new developments in East and West Siberia. New workover rigs will facilitate selective use of specialist fishing and well killing services.
New equipment which helps to raise the technical barrier is more expensive and the cost may rise by c. 20%. All decisions whether to acquire new high tech rigs are made in joint consultation between Technology and SCM to ensure productivity benefits justify all up acquisition and operating costs.
ESPs: Increasing run life and productivity
A massive improvement has been made with the process of acquiring electric submersible pumps (ESPs). The pumps are mainly sourced inside Russia. TNK-BP buys 10 times as many ESPs as BP, making it the fourth or fifth biggest user of these pumps worldwide. Some of the company’s wells are 30 years old and the remaining natural reservoir pressure is so low that the only way to produce the remaining oil is to use pumps or other means of artificial lift. The company has about 13,000 ESPs in the ground working, plus some under repair. It buys about 5,000 new ESPs per year for an annual bill of around $150 million. Broadly speaking, more than 70% of TNK-BP’s oil production relies on ESP’s.
In a major shift in thinking, TNK-BP started paying its suppliers for how long these pumps operated smoothly rather than just buying the pumps outright for the lowest cost, which inevitably meant the lowest quality, too. “This revelation resulted in an improvement of 75% in ESP run-life”, says Vershinin. “In other words, when the goals of TNK-BP and its suppliers are aligned, it gives us a 75% performance improvement in the equipment.”
Continuous improvement of SCM efficiency is key to tackling the cost challenge which is emerging as potentially the biggest issue for sustainable production all around the globe. TNK-BP has scored important accomplishments in that area, and has a committed team to build on those successes.
”The supply chain of the industry is struggling to keep up with the pressures of increased activity, longer distances, cumbersome taxation and low predictability in the oil price”, Robert Dudley says – underlining the value of an effective SCM strategy and the availability of good professionals to execute it.
Against the tide
Goods and services exceed $6 billion annually and amount to more than 50% of TNK-BPs total business costs. Ànd they are vulnerable to inflation- currently running at about 8.3% – plus Russian rouble costs strengthening against US dollar income at 2.7% in January-May this year alone. In total, the impact of industry inflation on the market prices of TNK-BP’s basket of goods and services since 2004 has been some $1.8 billion. But the company’s efforts through its SCM strategy have helped mitigate some $400 million of this impact.
TNK-BP’s SCM team has been commended for its achievements in a study by the independent UK-based management consultants Robertson Cox, a recognized leader in measuring SCM perfomance. Out of 19 leading oil and gas companies, TNK-BP ranked second in the SCM league table ahead of international majors BP and Shell.
As Napoleon Bonaparte once said: ”Amateurs discuss tactics; professionals discuss logistics”.
Leading Light
In Russia, TNK-BP has sketched a roadmap for reaching greater efficiencies in Supply Chain Management performance.
In the following interview, Olga Malyshkina, Director, Procurement Department, looks at some of the radical changes that have been introduced.
Q. Can you sum up the achievements of TNK-BP’s Supply Chain Management team?
A. There are several things which never existed before and of which we are proud.
The first is long-term agreements. In the materials area, today more than 50% of our entire spend for goods and services is covered by long-term contracts compared with zero when we started out in 2003.
The one thing we are especially proud of is our pipe agreement with TMK, which is now serving its second term. The first agreement worth about $500 million was made in 2005, and it expired at the end of last year. By mutual agreement with TMK, we renewed it for another five years, for about $2 billion.
It’s bigger scope, bigger money, longer term. The fact that both parties agreed to extend the agreement shows they are happy with it. But it does not work like an automated machine. Both parties have to constantly manage the relationship and keep each other happy all the time.
Q. Where have the big savings been made?
A. We have made big improvements with electric submersible pumps, or ESPs. These represent the second biggest spend in the materials sector, but in terms of the benefits they can bring to the company, ESPs are probably first in importance. Because we have relatively old oil fields, more than 80% of our production relies on artificial lift and ESP’s to recover the remaining oil. What we actually need from them is longer working life and greater productivity. Once you put them in the ground, you want to be sure they run smoothly as long as possible rather than needing constant repairs and maintenance if they frequently break down.
We realized that we need to align our goals with suppliers’ presenting a motivation for a supplier to meet our targets. We now pay a supplier for longer life, not for the pump itself, i.e. we pay for each day the pump operates smoothly. This did not happen quickly. Neither suppliers nor customers in the company were initially ready to accept this, but we are working on it.
Q. How do you get your suppliers to improve their own performance?
A. We help suppliers to develop themselves and to do this we have set up a quality management department. It’s much better to be sure that your manufacturer is using the right materials, equipment, people and processes. So, we do quality management of our suppliers, carry out technical audits – and people engaged in this activity are certified auditors.
No other oil company actually goes and checks the quality of manufacturing of its suppliers. And suppliers usually thank us because for them it is cheaper to fix things on the spot instead of paying fines for defects in materials which are found later in our warehouse.
Plus, we are sharing the company’s expertise with our suppliers. It benefits both parties and provides what we call “proactive quality assurance”.
Strong Link In The Chain (524 KB)