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Procurement and the $60 barrel
CIPS Qatar Branch, 28 April 2015
Ian Heptinstall
ArcBlue Middle East
© ArcBlue Middle East – part of PMMS Consulting Group, operating in association with The Links Group2
ArcBlue www.arcblueglobal.com @arcbluegobal
Procurement and the $60 barrel
CIPS Qatar Branch, 28 April 2015
Ian Heptinstall
ArcBlue Middle East
Slides plus notes from a presentation made by Ian Heptinstall at the CIPS Qatar Branch event in April 2015.
Where the slide does not give much information by itself, these additional notes have been added with the key points made in the presentation
© ArcBlue Middle East – part of PMMS Consulting Group, operating in association with The Links Group3
2
Oh no,
$60 a barrel
The media is telling us about the problems cause by the dramatic fall in oil price over the past year.
With the GCC economy so reliant on the Oil & Gas industry, Mike Anwana (CIPS Qatar branch committee member) asked me to present some ideas about what we in procurement and supply chain can do to help resolve the issues caused.
I hope they stimulate a great discussion and debate.
5
Party-Party…$60 a barrel
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$60 oil is not a problem it is an opportunity.
The industry has suffered from a decade of “spend-spend-spend”. Production was the issue, and value-for-money was ignored.
Now at least there is a narrow window of opportunity where senior executives will be interested in ideas that can maintain business volumes, reduce risks, at lower business costs.
This is our day….
6
© ArcBlue Middle East – part of PMMS Consulting Group, operating in association with The Links Group5
This is our day….
A once-in-your-career chance to be listened to and to act quickly.
The chance for procurement to step up to the plate.
In this short presentation I will share some ideas that you might be able to use to make a quick impact. They are based on real situations I have seen in Oil and Gas companies over the past few years.
They are not textbook theories
• Nothing
– Providing you are already doing “good procurement”
– We should always have been looking to get maximum
business benefit, at acceptable risk, without wasting
money
• Nothing except take the opportunity
• The keys of “good procurement”
– One size doesn’t fit all
– Choosing the right tool for the job
– Use the right mix of collaboration AND competition
• Ideas for Quick Wins
© ArcBlue Middle East – part of PMMS Consulting Group, operating in association with The Links Group6
What should we do differently in this
new era of the $60/barrel?
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http://www.macrotrends.net/1369/crude-oil-price-history-chart
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This chart surprised me, because I had been conditioned that $60 a barrel was really low. It shows the oil price (in 2015 values) over the past 60+ years.• Oil has never sustained >$60 for
more than 10 years• In the past 45 years oil has been
below $60 more than it has been above
In the early 90’s the Oil industry, through the CRINE initiative in the UK (LOGIC is its successor), responded to the dramatic fall in oil price (down to $21 in today’s money) by learning how to make new platforms 30% cheaper to build and 50% cheaper to operate.The graph from the Wall St Journal, indicated a problem well before the price crash, with falling return on capital, despite record high prices.
8
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We already have all the tools in our “procurement toolkit” to support the oil and gas industry, and the GCC economies that rely on income from oil.
We don’t need any new tricks to make a significant, fast impact.
The suggestions I have are all proven, text-book procurement.
They have been used thousands of times, over many decades, to deliver millions in fast savings.
© ArcBlue Middle East – part of PMMS Consulting Group, operating in association with The Links Group10
NUISANCE
DEVELOP
PROBLEM
CORE
AT THE HEART OF YOUR BUSINESS
FUTURE POTENTIALVALUE BEYOND TURNOVER
SOMETHING MUSTBE DONE
MAKE ATTRACTIVEOR GET RIDA
TTR
AC
TIV
ENES
S
SALES INCOME
MA
RK
ET R
ISK
SPEND
TACTICAL ACQUISITION
STRATEGIC SECURITY
TACTICAL PROFIT
STRATEGICCRITICAL
COLLABORATEMUTUAL DEPENDENCY
ENSURE SUPPLY
MAXIMISE COMMERCIALADVANTAGE
MINIMISE EFFORT
Price
11
MARGIN
COST
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Supply Positioning (Kraljic) tells us to focus and prioritise our attentions, and that one-size doesn’t fit all.
Supplier Preferencing reminds us that if we are hard to deal with as a customer, we increase risk and increase price. The GCC is not an easy region to be a supplier. Oil & Gas is not an easy industry to work with as a supplier.
The other images highlight risk & vulnerability management, contracting & contract management, and price management.
© ArcBlue Middle East – part of PMMS Consulting Group, operating in association with The Links Group10
Growing from Adversity
CRINE
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Here are four diverse examples of significant, step-change improvements in supply chain performance that were driven by adversity – a problem that couldn’t be overcome by continuing “business as usual”, or bullying suppliers.• CRINE has already been mentioned• In Japan the largest government
ministry persuaded the construction industry to manage projects differently, and delivered more projects, with a lower budget, whilst allowing contractors to make profit
• Zara couldn’t buy like the big retailers, so developed a better supply chain based on speed, not low unit price. Founder AmancioOrtega is 4th richest person in the world now
• On the Gulf of Mexico disaster in 2010, BP sent experts into its suppliers to help them produce more urgently-needed equipment. Suppliers increased capacity by 100, 200, 300%+ within days, and at almost no cost. Oh, and saving $200M
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So what to do?.....
© PMMS Middle East – part of PMMS Consulting Group, operating in association with The Links Group12
Some ides for quick-wins
Check your current dealsAre you paying extra for things included? Are variations & day-works out of control? Have prices been updated as indexes fall?
Talk to you major suppliers“to” them, not “at” them!! Ask for ideas – and listen to the answers. This sounds simple, but isn’t due to ... see next slide
Move your stockMost businesses have poor stock management. Too much of some sku’s, not enough of others. Identify & get rid of excess stock. Replenish in small volumes & abolish the idea of EOQ
Speed your selectionIf you want to excite bidders, and really take advantage of a buyers market, you need to be fleet of foot. If you want to take months to make a decision, don’t bitch and moan about high prices!!
Compete & CollaborateNeither is “better” – both are great tools. Which ever one you are using, just get better at it, and your deals will improve.
Manage RiskThat doesn’t mean pass it down to suppliers. Many risks are best managed and retained by the client. Don’t “fix-price” everything!
14
Trust me, I’m a buyer
© ArcBlue Middle East – part of PMMS Consulting Group, operating in association with The Links Group13
I said there was a catch to doing these things quickly.
Most suppliers don’t trust buyers. Far too many buyers believe lies are a great negotiation technique.
This will be your biggest challenge when you sit down and talk with your suppliers, and ask for ideas how you can reduce cost without just squeezing their margin.
If they don’t trust that you will act honourably with what they tell you, you will not get the truth.
© ArcBlue Middle East – part of PMMS Consulting Group, operating in association with The Links Group14
If you push risk down to suppliers, and expect them to “really suffer” if they let you down, then the odds are you are paying much more than you need to.
This can be proven mathematically. If pushing risk, and the responsibility for the inherent uncertainties of life, down the supply chain was efficient, then the whole insurance industry wouldn’t exist. It does exactly the opposite.
Risk is best managed (and minimised in total) at the aggregate level – and in our world, this means with the ultimate customer.
In practice this means not fixing all your prices if you want savings.
15
Managing Risk v
Offloading it
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Competition & collaboration are the two general ways we manage supplier price.
Competition attacks their margin & supplier and buyer pull in opposite directions. The stronger “wins”
Collaboration attacks cost, and supplier & buyer attack it together. Both “win”
Given cost is usually much bigger than margin, and a lot of cost is driven by the customer and their specification, it is a great place to start looking for quick-win savings.turn need trust
The only problem is it requires collaboration, which in
Price
MARGIN
COST
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Collaboration in practice
This sums up collaboration.
Suppliers are not your enemy, they are on your side.
Do you think the side winning the soccer World Cup motivates players by threatening to kill those who miss tackles or don’t score goals?
But many of us seem to believe that you have to do this to motivate a supplier to perform on “our team”.
Both cant be logically correct….
• CapEx Programme Reduced by 10-15%
• Then do the same projects, just better
– Contract – Project Alliancing
– Management - CCPM
© ArcBlue Middle East – part of PMMS Consulting Group, operating in association with The Links Group17
Project Alliancing
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I want to finish with a topic that, whilst powerful and simple in concept, is not easy to apply.
However, if your organisation wants to reduce its capex programme by 15%,without cutting any projects, this might just be a key part of the answer…
I think alliancing was developed by Oil & Gas in the UK in the early 90’s (part of CRINE which took 30% out of the cost of projects).
The alliance is a collaborative project team (also called Integrated Project Delivery (IPD) team).
The team undertakes to deliver the whole project. All team members share in the risks and rewards of success
Project Collaboration Case Study
+25% Profit
+30%Satisfaction
-10% Cost
-20% Time
-65% Changes
-83% Claims
-99.8% LTA
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In the USA, the CII studied over 200 projects.
Those using collaboration delivered these results compared to more traditional procurement routes.
Best of Both Worlds
Collaborative Team, Competitive
Selection
A challenging projectA history of poor project performanceUrgent business needAware of claimed success from CRINE in the O&G industry
© ArcBlue Middle East – part of PMMS Consulting Group, operating in association with The Links Group19
CRINE in Oil & Gas focused on mega-projects.This case study from the UK applied the idea of Project Alliancing, along with some of the other ideas I gave earlier in the presentation at a much smaller scale.
This project for the speciality chemical company Rohm & Haas has a total value of about $20M at 2015 values.
It won the Teesside Business Award for Supply Chain Excellence in 1999, and I had the privilege of working on the team.
Integrated Project Team
Alliance Contract
Project Collaboration Case Study
Rohm & Haas “Fix 7” Project
Project Alliance3-company contractReduced waste & “policing”Difficult Goals
Client
EPCM
Construct
SuppliersSub-
contractors
Client
EPCM Construct
SuppliersSub-
contractors
Traditional Approach
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The IPD team involved• Client• Engineering & Procurement
partner• Construction & Construction
Management partner
There was 1 contract with 3 partiesSome features…• No client project manager – the
alliance supplier members managed the whole project
• No-blame culture & contract• Investment in cross-company
team building, at all levels• Almost no time spent on claims,
variations & contractual arguments
• Final account agreed in 1 hour
• 4 week selection for $9M construction work
• RFP was 3 pages
• Payment
– Cost + Fixed Fee + Performance Fee
Project Collaboration Case Study
Rohm & Haas “Fix 7” Project
Contin.y
Constr
EPCM
Cost
FF 1
PF 1
FF 2
PF 2
FF 1
PF 1
FF 2
PF 2
SafetyScheduleShutdownCostBehaviour
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Selecting the construction partner took not only 4 weeks, but went through 3 stages (8 on the long-list, down to 5, with final short-list of 2) in this period.
RFP was 3 pages because it focussed on the key competences and experiences looked for. Since the detail of the project design was the same for all bidders, it was not part of the decision
The fee was based on the CFV method. See our paper on this at: http://profitableprojects.org/wp-content/uploads/2014/11/CFV-Fee-Pricing.pdf
Results: Clients got a difficult, high risk project, on time & under budget – a first on that site. Supply partners made good profit without taking unreasonable risks.
• A collaborative project team is a pre-requisite to a successful project.
– Project Alliancing forms a collaborative team across the main companies involved in a project.
• But it by itself is not sufficient.
– The team needs “to do projects better”.– One great method to deliver benefits from a collaborative project
team is a planning & control method known as CCPM (Critical Chain Project Management). Typically projects are 30% faster, and use 30% less resource.
• Combining CCPM & Project Alliancing is an approach to procuring and managing capex & construction projects that we have called Profitable Projects.
– Simple in concept, but not easy to apply because it involves changing from the “conventional ways”.
• Combining proven innovations, to deliver projects
• On-time faster, On-budget for less. Without compromising scope or adding risk
© ArcBlue Middle East – part of PMMS Consulting Group, operating in association with The Links Group22
Profitable Projects
• Existing Suppliers– Audit contracts & compliance
– Ask them for help
– Offer stability & longevity
– Use supply-demand. Why not buy now, when no one else is?
• Housekeeping– Stock & Inventory
• Selection Processes– Weeks not months
– Pages not binders
– Teams not Sequences
• Get better at Collaboration & Competition– Auctions. If you’re using them at all, you are wasting time & money
– Partnerships
• Retain Risk
• Don’t add long-term risk
© ArcBlue Middle East – part of PMMS Consulting Group, operating in association with The Links Group23
Sustainable Quick Wins - summary
Any…
questions ?
comments ?
arguments ?
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Thank you
Before moving into procurement, Ian worked in the
chemical industry as an engineer and project manager,
having graduated in Engineering & Management from
Imperial College London, in 1985
He worked in project management and procurement roles
in ICI, Eutech, GlaxoSmithKline, and NG Bailey. As a
consultant he has worked all over the world both with
ArcBlue/PMMS, and with REL (Hackett).
He moved to Dubai in January 2013 to establish a new office
for ArcBlue (then PMMS). His initial focus was delivering
training on behalf of CIPS in the MENA region. He is now
building on this to expand the business into broader
consulting and advisory work, in particular helping clients
reduce the duration and cost of major capex projects.
© PMMS Middle East – part of PMMS Consulting Group, operating in association with The Links Group25
Ian Heptinstall
+971 56 172 0049+44 7807 848688
Ian HeptinstallMD – ArcBlue Middle East
Global Procurement Leadership
since 1978
UK, UAE, Turkey, Canada, USA, South Africa, Singapore, Hong Kong, Australia, New Zealand, Japan
“The change in our category manager’s capability and performance over a 6 month period exceeded our best expectations.”
CEO global retail
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