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Case Study

Sourcing and procurement effectiveness

Refinery at night

A commodity petrochemicals manufacturer struggled to manage sourcing and procurement activities and resources across functions and operations. They decided to conduct an assessment of the sourcing and procurement processes, organisation and total supplier spend to identify improvement opportunities.

The situation

A commodity petrochemicals (olefins, aromatics and surfactants) manufacturer struggled to manage sourcing and procurement activities and resources across functions and operations. Decisions about suppliers were fragmented across facilities, and there was little evidence of effective spending controls.

While executives believed that there were opportunities to improve sourcing and procurement effectiveness, they had very little data with which to size the prize. Ineffective procurement and inventory management resulted in missed production targets, high maintenance costs and low asset effectiveness. And in this highly cyclical business, cash in the bank continued to dwindle every month. Something had to give.

Our approach

Findings

The client decided to conduct an assessment of the sourcing and procurement processes, organization and total supplier spend to identify improvement opportunities. The assessment identified an unclear organizational structure, fragmented purchasing activities and a lack of process controls and discipline. The assessment confirmed that there were significant opportunities to reduce spend across a range of spend categories. The client decided to implement a formal sourcing and procurement program and selected MRO suppliers and contract labor as the two categories for the pilot. There was a $6 million potential benefit from consolidating spend and strategic sourcing in these categories.

The MRO team eliminated over 50% of the MRO suppliers, and the consolidation of spending resulted in savings of $5.2 million.

Actions

A team of procurement, maintenance and operations personnel was formed to conduct the strategic sourcing. The team began with an in-depth review of spend in the MRO and contractor categories. The MRO category team found several hundred suppliers and annual spend of $20.5 million. The contractor category team found 327 suppliers and annual spend of $60.8 million.

After identifying key subcategories, the team identified qualified suppliers and issued RFQs to obtain the suppliers’ pricing. In addition to the strategic sourcing activities, the project team designed and implemented controls around adding suppliers to the vendor master and instituted a formal spend review program to make sure that the company had exhausted all avenues for meeting needs for purchased items before approving additional spending. Simple policies around returning worn-out gloves and drill bits before issuing replacements helped manage overall demand.

Results

The results were dramatic. The controls around the vendor master and the formal spend review process had the desired impact and created a significant reduction in the demand for purchased items and contractors across these categories. The MRO team eliminated over 50% of the MRO suppliers, and the consolidation of spending resulted in savings of $5.2 million. The company was also able to return over $1 million of slow-moving spares to suppliers for credit.

The contractor team consolidated spend with 64 suppliers, resulting in savings of $11.3 million. The focus on eliminating or reducing the use of contractors was well received by the operators and maintenance techs. Against the $6 million savings target for these two categories, the company generated savings of $16.5 million and built a strong sourcing capability.

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