Oil and gas companies are always looking for strategies to improve operational efficiency and reduce expenditures. And this is especially true during a market downturn. The procurement function in oil and gas can play a pivotal role in achieving greater operational and financial efficiency. This blog is the first in a series on procurement optimization for oil and gas companies. While my ultimate goal is to raise awareness of procurement as both a strategy and a potential corporate competency, my objective today is to establish a basic understanding of procurement process optimization as it relates to O&G companies.
Generally speaking, procurement process optimization validates the need for better demand management, better supply management, and better overall risk management, ensuring a complete and accurate picture of spending. Typically, the key business drivers of procurement optimization are cost and risk reduction through standardization of processes, profit growth through cost savings, and better management of existing inventories.
These drivers are applicable to all industries. But as I’ve heard many times from my clients, while the procurement function may be the same in all industries, procurement in O&G is decidedly different–not only because of the uniqueness of our industry’s tangible assets (e.g., rigs, wells, pipelines, separators, etc.) but also because of the intangible assets (e.g., business practices, processes, and organizational structure).
This uniqueness has a direct effect on procurement systems. For instance, some O&G companies show a dysfunctional relationship among core operational units, mainly between operations, supply chain, accounting, and information technology. This latent organizational dysfunction is evidenced by common symptoms: a lack of data sharing across departments, the absence of policies, controls, and standardized business processes, and the absence of utilization and integration of technology. Too often, operational units work within silos, completely independent of each other. These symptoms typically have a negative impact on the effectiveness of the procurement function.
In designing the optimal approach to solving this procurement dilemma, O&G companies should take an integrated approach that focuses on three key components:
- Process – Business processes and controls should be defined and in place to guarantee optimal execution and accountability throughout the enterprise.
- Data – Good data should flow seamlessly between departments and processes without bottlenecks or gaps.
- Technology – Procurement software should be deployed to enable enterprise asset tracking, equipment tracking, cost, budget, and price data integration.
In terms of technology, there are countless solutions that focus on a single element in the procurement process, like asset management, inventory management, or operational equipment management. These technologies solve a portion of the procurement optimization challenge, but many do not provide a complete solution that integrates asset management and accounting. In my experience, the technology component of procurement process optimization should ideally focus on an enterprise asset management (EAM) software solution. An EAM software product is used to operate, maintain and dispose enterprise assets. At the same time, it facilitates integration with existing accounting, financial, and reporting software.
An integrated procurement optimization approach that embraces the EAM technology component guarantees a solid foundation and infrastructure with business process, policies and controls in place. It allows for the transmission and sharing of informational data between business units, and assures better utilization and integration of existing technologies. These operational benefits translate into financial benefits—which is the goal of transforming procurement into a bona fide corporate competency for an O&G company.