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Case Study

Supply chain management

staff looking at graphs

Advisian provided expertise and support to assist the client in maximizing the efficiency of capital programs and production.

The Situation

With a land base of over five million acres, our client, one of Canada’s largest oil and natural gas producers, is experiencing very challenging market conditions and operational challenges. They are focused on growing production per share, cash flow per share, and maximizing efficiency of capital programs and efficiency of production. Current strategic supply chain initiatives target in excess of $100 million in annual cost savings to help achieve these goals.

During an analysis of potential opportunities within CAPEX and OPEX spend, it was clear that there has been a proliferation of account categories aligned with inconsistent invoice coding, making spend analysis and control of spend increasingly difficult. These issues were further compounded by the fact that it is distributed across 29 summary spend categories, with over 90 percent in the top 14 categories. We also found vendor proliferation, given the lack of required robust processes, controls and visibility for adding new vendors. Transactional analysis showed that many small- value transactions and infrequently used vendors add considerable workload to an already inefficient system.

Additionally, at the onset of the project, we discovered that less than 10% of the overall spend was actively managed under the procurement organization.

Approach

The Supply Chain Management project focused on these driving issues:

  • Cost Reduction: Focusing on CAPEX/OPEX, reduce category-targeted procurement spend
  • Inventory and Warehouse Management has no system of record, consistent processes or organization to manage uninstalled assets across the enterprise
  • Logistics Management and Optimization has widely varying contractual rate structures at the field level with systematic approach for evaluating the efficiency of a load or unload
  • ADP Open Invoice Implementation: manual and labor-intensive invoicing process. Our client remains one of the very few Oil and Gas organizations in the Calgary area to still process invoices manually. Total process cycle time is approximately 30-plus days and requires multiple touch points by various internal and external groups.

A prioritized list of high-impact cost savings opportunities was established and strategies put in place for execution. All priority opportunities were successfully delivered via a variety of methods (bids, negotiations, tiered volume discounts, VRRR [vendor rate reduction letter]) and annual savings was in excess of $50 million. Additionally, key opportunity areas of future project workstreams were identified to include strategic procurement teams (CAPEX/ OPEX), establishment of a logistics team and a warehousing/ inventory team, ADP Open Invoice implementation, and a cost recovery initiative. All opportunity areas had hard dollar savings attached.

In addition, renewed focus will be put on procurement processes and policies around supplier bid management, contract management, spend authorization and approval management.

Strategic Sourcing teams (category specific) will focus on cost savings around primary areas of Logistics, CDC (Construction, Drilling and Completions), Contract Services/Labor and Chemicals. Additionally, supplier scorecards will be implemented and a disciplined communication plan will be set up. The keys to maximizing savings are dedicated cross-functional teams (corporate and field), strategically aligned long-term goals, and a standardized strategic sourcing methodology and documentation process.

Results

  • Mid-project savings in excess of $30 million
  • Identified over $20 million in potential cost recovery opportunity
  • Logistics group established
  • Inventory and Warehouse Management Team established
  • ADP implementation utilizing the PriceBooks function achieved client value on two fronts: invoice accuracy verification and associated savings and business process simplification:
  • Invoice accuracy verification is a process that checks supplier invoice charges against established rates. The audit found that, on average, the client was being overcharged by 10 percent for all invoices. By implementing PriceBooks within the first year, a savings of $8.4 million was recognized.
  •  Business process simplification is measured in a reduction of resources from nine FTEs to five for the same level of invoice value.
  • Strategic sourcing efforts resulted in an annualized savings of $14.6 million in OPEX spend through negotiations with suppliers identified to be critical to long-term operations. Additional value was realized in reducing the supply base by 36 percent through the negotiation process (sorting out suppliers who no longer provide value to the organization).
  • Aging inventory and non-utilized assets were identified, categorized by value, and a process established to divest and sell off at current market value. The actions within the first six months have realized $3.7 million in sales of otherwise forgotten, non-valued material. An additional $3 million in sales is expected by the end of 2016.

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