COVID-19 and Low Oil Prices—Critical Supply Chain and Procurement Strategies
With oil prices at historic lows and with COVID-19 supply chain disruptions, the time has come to evaluate supply chain and procurement strategies, sourcing techniques, and costs.
Oil and gas companies operate in dynamic and complex environments where they face constant challenges, especially in terms of supply and demand. Now with oil prices at historic lows and with COVID-19 supply chain disruptions, the time has come to evaluate supply chain and procurement strategies, sourcing techniques, and costs.
Major pandemics like COVID-19 can create significant disruption to the reliable supply of equipment/parts such as valves, turbines, compressors, etc. within the oil and gas value chain. The COVID-19 pandemic is a wakeup call for executives to develop new business strategies in their supply chain designs. Procurement and supply chain strategies will be in the forefront of issues plaguing oil and gas companies, especially with the current downward spiral of oil prices and COVID-19.
Many oil and gas companies worldwide realize that either their suppliers or subsuppliers (tier 2/tier 3 suppliers) are based in affected regions such as China, Italy, South Korea, and Spain. Single sourcing or sourcing everything from one location has led to the current disruption; even though some companies don’t source directly from China, their tier 2/tier 3 suppliers do so. Oil and gas companies should be proactive in developing supply chain resilience and have adequate risk intelligence.
Supplier risk intelligence is the process of acquiring and analyzing supplier risks in order to understand present and future risks, support sourcing and market sector strategy execution, anticipate changes in the external marketplace, and react before others do.
Supply chain mapping is one way to mitigate risks, especially if there is overdependence on one country or a concentration of sourcing from one location. Supply chain mapping involves understanding suppliers’ global sites, local sites, and subcontractors, as well as knowing which components or parts originate or pass through them. Companies who are ahead in supply chain mapping benefit when disruptions happen because they can predict impacts to their supply chain in the short to midterm. When companies know where the disruption will come from and which equipment or parts will be impacted, they have time to execute avoidance and mitigation strategies—like alternative sourcing, strategic inventory allocation, and debottlenecking the supply chain.
To improve and deploy best-in-class supply chain risk mitigation practices, the IOCs/NOCs can implement these measures:
- Understand the critical supply chain of major spend categories. This requires thoroughly identifying costs and sourcing options across the supply chain for each category and determining appropriate interventions (e.g., seeking new suppliers, changing specifications, or altering contract terms).
- Undertake critical and noncritical supply chain bottlenecking assessment. Target for paradigm shifts that could mean identifying alternative suppliers.
- Build custom-fit procurement processes that provide better clarity, engage suppliers early in the process, and follow through to execution and operations.
- Manage risks across the entire spending portfolio—not just within individual projects or commodities or when splitting capital from operations spend.
- Proactively manage the supply base, select relevant suppliers, focus on alignment and sustainability (i.e., dynamic relationships), and ensure that company ownership and accountability is clear to suppliers.
- Institutionalize the capabilities required for supporting procurement and supply chain activities.
While the rethinking of supply chain strategy had already begun for many companies, COVID-19 will accelerate the need to have a decentralized global supply chain. Oil and gas companies can reduce costs with improved supply chain resiliency, collaborative supplier relationship management, and a focus on optimized oil and gas production and exploration. It will be interesting to see how oil and gas companies can effectively manage supplier monitoring systems and adopt better supply chain practices in 2020.