Customer-Anchored Supply Chains

download as a pdf

First, kudos to Steve Banker for having the courage to write and publish what many of us in the oilfield services and upstream oil and gas sector have, at best, only whispered quietly to each other. While the industry has had spectacular achievements, applying technology to extract oil and gas from rocks buried thousands of feet in the earth, the supply chains that support the effort seem dysfunctional, immature and inefficient, even to many veterans of the oil patch.

We agree with the author that, “the industry does attain fairly high service levels” and that those high service levels are necessary given the economics of well construction and maintaining oil and gas production. Sadly, we also agree that the achievement has more to do with brute force rather than finesse or supply chain science. Participants in the supply chain have put in place multiple layers of inventory to support the high service levels required by their customers in the face of unpredictable demand and long lead times. While each player has worked diligently to optimize their own piece of the supply chain, when you put all the suboptimal pieces together, the result may very well be “The Worst Supply Chain in North America.”

Us and Them

Our poor performance is due, in part, to a very real lack of affinity between the players in the supply chain. Many participants, from the oil and gas company to the service company to their suppliers, views the supply chain as having two pieces, dividing their view of the supply chain into “us” and “them.” Mutual trust is low and communication is therefore guarded. Due dates are padded to compensate for uncertainty in demand and unreliability of delivery. “Just-in-case” inventory becomes the dominant fulfillment strategy. Customers demand pricing concessions but do not recognize the need to share the forecast with their suppliers – sharing that information would help their suppliers operate more efficiently and lower costs. Suppliers react to the pricing pressure with service-endangering cost cutting to preserve their margins. Every player in the supply chain is “optimized” but overall, the extended supply chain fails to deliver.

The Customer-Anchored Supply Chain

We believe the only real solution for the industry is to break the paradigm of “us and them.” Each participant – E&P company, oilfield service company and supplier – must “own” the total supply chain. Individually, we each must recognize that the supply chain that we “own” includes our customer’s customer and our supplier’s supplier (see APICS SCC SCOR model). When we do this, we will find that our goals will align with our immediate customer – we will both strive to satisfy the same customer. Consider, for example, the potato chip manufacturer. Their customer is the grocery store and their customer’s customer is the consumer. By recognizing their customer’s customer is the consumer, the potato chip manufacturer aligns goals with the grocery store. There is alignment because both the potato chip manufacturer and the grocery store want us, the consumers, to buy their potato chips. That is why the manufacturer provides ways to increase demand with sales and promotions in the store. Likewise, in the oil patch, each participant in the supply chain must anchor themselves in their customer’s customer to drive supply chain excellence.

Similarly, if each participant in the OFS supply chain aligns with their suppliers and their supplier’s supplier we would recognize the need to share forecasts – forecasts that would drive S&OP processes across the supply chain and start to build a more efficient and effective industry supply chain model. With this model comes an opportunity to lower costs, lower prices and maintain or improve margins. For each participant the path from the worst to the best supply chain starts with implementing a Customer-Anchored Supply Chain©.

Some will argue that oilfield technology drives complexity challenges that are unique to our industry. We disagree. Every industry has to deal with issues of increasing complexity. Consider two examples: Unsatisfied with simply flipping a switch to turn on lights, we can now turn our lights on and off from anywhere in the world — as long as we have an Internet connection. Our cars can sense objects behind us or in front of us and automatically apply brakes to keep our loved ones safe. These and other innovations increase the complexity of almost every product in every industry. What makes the OFS industry unique is the extraordinary low volumes of complex technology we must supply for any given well anywhere in world.

Most wells are engineered to order to address unique combinations of reservoir characteristics such as pressure, temperature, fluid chemistry, and production volumes. Customer preference also plays a part in driving unique engineered solutions, as do innovation, competitive forces, and demands for local content.

The temptation to raise the banner of standardization is real, but results are elusive. In many cases the customization and innovation offered by OFS competitors in a custom well design that could be shown to provide marginally better performance as compared to the company’s standard well. With production measured in thousands of barrels per day, even the smallest cost savings or production increase can be important to the reservoir owner, particularly when improvement is measured in pennies per barrel.

We believe the better approach for OFS supply chains is to deal with the complexity head on. Complexity isn’t the enemy. Customers are willing to pay for demonstrated performance improvement. The challenge is how to deal with complexity and to offer the customer exactly what they want, when they want it, at an economically viable price, and at a superior margin. Other industries can show us the way. The computer industry for example has mastered mass customization. We can order from an unlimited variety of options from a manufacturer’s websites and computers that are assembled halfway around the world from standard components. Even when the extended lead-time is measured in months or years, we are able to get exactly the computer we want within days. We believe there is much to learn from applying other industries approach to OFS standardization.

On one of his trips to America, Shigeo Shingo reported discovering the two most powerful words in English, at least the two most powerful words in English when it came to business. The first word was powerful enough to describe all the causes of every problem you could encounter on the shop floor. The other word was equally powerful – it describes all potential solutions.

The two words were various and appropriate.

Mr. Shingo was on a gemba walk, a walk on the shop floor, and asked, “What is wrong with this process?” “Why, there are various things wrong with this process,” came the reply. So, Mr. Shingo asked, “And what are you doing to address the problem?” With pride the answer came back, “We are taking appropriate measures.” It shouldn’t surprise you to hear that Mr. Shingo did not accept either answer and dug deeper to understand the problem, its root causes, and solutions.

So what is wrong with various? We can’t possibly solve a problem unless we truly understand it. The more complicated the problem, the more important is to determine the root causes. We need to dig in, get the data, ask 5-Whys, develop hypotheses, test them, and then rank the potential causes. Only when we can get past various and enumerate, with some degree of confidence, most of the root causes of the problem can we move to the correct solutions. And not appropriate solutions but specific solutions, specific solutions driven by what we learned about the possible root causes.

If we accept various and appropriate as answers to the questions we pose to our teams we lose an opportunity to teach and lead and help our team learn. Regardless of the role we play – executive, manager, supervisors or team members – we should not let our team escape real sustainable problem solving by accepting various and appropriate as answers to our questions. We need to make sure the team is focused on understanding the problems we face in detail and then implementing the right solution.

Don’t accept either word as an acceptable answer. Treat them as red flags or better yet as a cry for help. This is not showing a lack of respect or lack of trust. It is demonstrating leadership. Our teams are not going to solve the problem if we can’t get past various and appropriate. Lead the way to correct problem diagnosis and implementing solutions that will drive results!

I must give full credit for this observation to Shigeo Shingo. Those readers with a background in manufacturing or supply chain or Lean Six Sigma will recognize the name. Mr. Shingo was a colleague of Taiichi Ohno, the founder of the Toyota Production System and a leading industrial engineer of the 20th century. While Mr. Shingo made the observations that led to this discussion in reference to a production problem, in my experience this wisdom is applicable to almost every business discipline.