A Never Ending Industry Problem
The Oil & Gas Industry has long been characterized by huge “boom or bust” cycles during which many fortunes have been made and lost (see chart below). The industry’s boom or bust personality results in a supply chain that is highly unstable marked by rapid industry expansion and contraction. This instability results in supply chain costs that present huge economic risks to oil & gas companies who prefer to find oil & gas for the least amount of money.
The Oil & Gas Industry operates in remote locations which complicates its manufacturing process . The most favored oil field service companies earn their reputations based on an ability to address complications quickly and reliably. The cost of superior responsiveness comes at a high price invariably passed on to the operator. As industry activity increases tension in the supply chain is magnified causing material price inflation. Operators are constantly looking for ways to reduce these costs (we want cheap oil).
How do I Keep My Costs Down?
An operator’s primary strategy to fight increasing prices is to “rationalize” its vendor list – which in plain english means they fire a bunch of vendors in sight of remaining vendors in order to get price concessions. An operator’s secondary strategy is “synchronization” which means better coordination across the supply chain so as to reduce delay. A heavily relied upon tactic to bolster synchronization in oil & gas has been for service companies to place equipment (i.e. inventory) at customer sites. This means “inventory” is available when needed thus reducing delays.
What Does the Rest of the World Do?
An opportunity exists for the oil industry to use remote communications infrastructure, remote communications devices and mobile process improvement software to exploit weaknesses and cost overruns in its management of operations in remote locations.
Information flow technologies have made it to the oil field in the last several years, but companies have not yet maximized the potential cost savings available with intelligent management of inventories, supplies and people in remote drilling locations. Full exploitation of information flow could result in the kind of cost savings that, for instance, retailers have seen in the smart management of their inventory during demand spikes and troughs.
And in Conclusion
The oil & gas industry has among the least stable supply chains in the world. This attribute is completely at odds with its goal of decreasing finding costs. The ingredients necessary to positively impact this goal through improved supply chain management now exist.