Challenges In Oil And Gas For Procurement Leaders

Craig Kindleman and David Shimbo

As a chief procurement officer, you know you need to get the best bang for your buck in buying equipment at the highest discount and the best terms and conditions for maintenance and service.

You have complex long- and short-term contracts, which have special rules and regulations. And you are responsible for making sure that your company negotiates fair and compliant pricing around the globe.

In this blog, we’ll show you how to get the most out of your suppliers, how your obsession with the customer is not unwarranted, and how to create your roadmap to organizational change. But first, let’s look at some essential traits.

The essential traits of effective oil and gas procurement leaders

  • Acquire capabilities: Successful oil and gas procurement leaders have aligned their procurement processes with oilfield and refinery operations, including capital projects, upstream operations, maintenance, and overall field operations.
  • Challenge everything: Effective leaders have accepted digital innovation when it truly increases productivity, reduces operating costs, or improves procurement processes.
  • Be quick and data-driven: They are using new technologies such as the Internet of Things (IoT) and enterprise mobility to provide real-time inventory and one-touch procurement in the oilfield.

As James McQuivey of Forrester Research observes:

“You always knew digital was going to change things, but you didn’t realize how close to home it would hit. In every industry, digital competitors are taking advantage of new platforms, tools, and relationships to undercut competitors, get closer to customers, and disrupt the usual ways of doing business. The only way to compete is to evolve.”

Benefits of strategic procurement

Throughout our years in this industry, we’ve helped oil and gas customers achieve significant success, including:

  • Cost savings: 4%-13% reduction in unit price
  • Cash flow and spend management:
    • 1-4 days improvement in days payable outstanding (DPO)
    • 85%-90% more spend under discount
  • 38% increase in contract compliance
  • 1-3 days reduction in inventory carry

Source: SAP Performance Benchmarking

Procurement – strategic oil and gas dashboard

One of the exciting parts of our job is when we are able to help strategic decision-makers perform their jobs more efficiently. When we get the chance to work with CPOs, we’ve found that their attention typically focuses on the following:

  • Enterprise visibility of sourcing from suppliers
    • Supplier discovery, registration, onboarding, and scorecards for upstream and downstream vendors
    • Analytics for authorization of expenditure (AFEs) and capital projects
    • Streamlined contract workflow, lifecycle, management, repository, and history
  • High-volume procurement and supply chain accuracy
    • Replenishment of material requirements planning (MRP) and buying guides
    • Electronic POs and three-party buys
    • Inventory and quality collaboration during 24×7 field operations
  • Advanced payment and invoice methods
    • Automated POs, PO-Flip, and digital invoice screening and management
    • Terms management and DPO extension, supply chain financing, and advance electronic payment

Procurement capability roadmap

The roadmap to organizational change isn’t always smooth. But the good news is that it’s generally pretty straightforward:

  • Spend visibility: Enable reporting functionality that gives visibility into planned and actual figures by supplier, material, geography, and other company-specific dimensions.
  • Supplier management and vendor contract pricing: Provide a supplier portal for the supplier onboarding process and supplier self-service management of profile information. Bring together supplier information including certifications, blacklist and whitelist, financial data, and performance scorecards. Implement standard pricing conditions to derive net price and leverage a commodity procurement solution. Automate processes to calculate escalation and de-escalation of pricing adjustments.
  • Dynamic discounting: Discount dynamically for suppliers who wish to be paid ahead of contractual terms at a discounted price. Enable a trusted set of suppliers to access the portal and be given an option for early payment at a reduced price.
  • Supplier network automation: Automate purchase order and invoice communication with your supply base. Use a comprehensive supplier portal with invoice-entry capabilities and PO-Flip feature. Reduce costly manual payment process and risk for potential duplicate vendor payments.
  • Transportation management: Enhance transportation planning capabilities and use better analytics to support transportation, route, and freight management. Track shipments in real time, proactively identify supply chain disruption, and implement robust warehouse capabilities.

Large multinational oil and gas companies with global integration of finance and procurement

These large multinational oil companies have operations in North America, the Middle East, Africa, and Latin America. They are fully integrated operating companies managing procurement from upstream, midstream, and downstream.

The oil price crash from 2015 has been followed by a rapid increase in oil prices and aggressive expanded growth in upstream production operations and pipeline expansion in North America. These companies realigned their procurement strategy to focus on improving procurement business processes and optimizing their preferred-vendor supply chain.

Their objectives were to reduce high operating costs in upstream and downstream and to overcome a lack of visibility into their procurement processes. They were also having trouble with integrating corporate accounting, and they were using manual order confirmations.

The multinationals gained tight global integration of finance and procurement and improved their business processes with clear audit trails. And they increased the visibility of procurement processes with KPIs and reduced manual data input.

A strategic weapon

Few companies have made procurement a strategic weapon. But when you look at how uniquely positioned the procurement function is to address all spend categories, suppliers, and processes, it’s an idea whose time has come.

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Craig Kindleman

About Craig Kindleman

Craig Kindleman is a senior director in the Oil and Gas Industry business unit at SAP. He advises customer executive teams and leads priority shareholder value initiatives for the oil and gas industry at SAP. Craig has acquired vast knowledge in operations, asset management, marketing, and technology – all based on his experience designing global initiatives for multinational businesses and specializing in high-impact projects.

David Shimbo

About David Shimbo

David Shimbo is responsible for business development and value creation for energy and natural resources accounts at SAP. With a focus on upstream, midstream, and downstream oil companies and oilfield service businesses, he has deep expertise with upstream financials, asset management, maintenance, operational analytics, business case modeling, and benefits quantification. David has oil and gas industry experience with Exxon, BP, and Halliburton and technology experience with IBM, Oracle, and two startups. David is determined to make all SAP projects related to increasing productivity and reducing operating costs.