Oilfield services (OFS) companies are being challenged by their customers to cut procurement costs and manage to lower AFE budgets. Many OFS companies are taking a hard look at ways to reduce their costs, from retiring underperforming assets to cutting payroll. Others are trying to implement strategic sourcing programs centered on establishing a centralized procurement organization.
The best long-term investment in cutting costs is to implement a set of fit-for-purpose procurement processes supported by technology as opposed to an entire organization dedicated to strategic sourcing. We don’t believe that an external organization needs to be established specifically to create and enforce purchasing guidelines. We see strategic sourcing at its best when it’s part of everyone’s job—built into the supply chain process and governed by logical rules.
A procurement program that has well-designed processes and is accelerated by the right system can provide:
1. Spend data: A procurement database gives supply chain, finance, and operations visibility into spend analytics and vendor organization. A company can ensure they are not over purchasing or overspending by implementing a system that monitors inventory and vendor pricing per item.
2. Inventory visibility: A cluttered or nonexistent inventory management system makes for messy decision making. Why would you need to buy additional pipe when you know you have a full pipe yard with exactly what you are looking for?
3. Compliance metrics: Cleaning up the organization of suppliers and catalog items will drastically decrease maverick spending (where employees buy unnecessary inventory or overpriced supplies), which is a major issue for OFS companies without an established procurement system.
Why are OFS companies hesitant to put a strong procurement program in place given the benefits? There are many reasons, but often, companies hear the term strategic sourcing organization and want no part of it. Procurement processes designed for your organization will help you receive all the benefits without the excessively complicated governance.
Set high-level rules. The balance between standardizing processes and allowing room for impromptu decisions is difficult to find. Although emergency purchases are necessary on occasion, it’s important to determine limits and guidelines. For example, a purchase order may not be required for field personnel if a gasket blows in the middle of the night. But when the need for additional pipe is known two weeks in advance, the proper sourcing activity will allow the OFS company to receive the lowest possible price for the same item. Clarifying what defines an emergency situation is a critical task.
Create simple, shared processes. Procurement software alone is not a procurement system. To ensure high-level rules of system use are followed, the process must be simple. Employees will work around the process if purchasing common items like sand and casing for drills becomes a burden. A logical process will allow them to see the benefits of the system and comply with protocol.
Train employees. Provide the proper training to field users. From the roustabouts to the production engineers, participation in training is imperative. By giving the field personnel proper training, users will gain confidence in the system, their work, and their role within the company. Confident users make for successful systems. When strategic sourcing becomes everyone’s job, the need for overhead-intensive procurement departments disappears.
Measure compliance. Be sure to set fair standards and enforce the rules. Measure compliance, but do it fairly. If you expect employees to use the system from the field and on the go, give them access through a mobile application. End users can access a procurement database from almost anywhere in the world with advancements in procurement technology.
Trenegy is a non-traditional consulting firm based in Houston, Texas.