Best Path for Oil & Gas Cost Savings

Conventional thinking leads us to protect our strategic supplier relationships and resist the urge to ask for additional concessions during this period of lower oil prices. The thinking goes something like this…”if we are hurting badly due to the low commodity prices of oil, our suppliers will need to feel the hurt as well”. Companies should be strategic in approaching suppliers during current challenging times. There are specific supply chain approaches that should be adopted during the current difficult Oil & Gas environment.
If a supplier is part of the upstream oil production process, the supplier would likely be classified as a “direct” supplier and have a high likelihood of being a strategic supplier. Negotiations with these suppliers should be handled on a quarterly or annual basis to explore innovation, best practices, and quality. These suppliers are managed differently and with a closer business relationship than an “indirect” supplier.

Indirect expenses are common in all businesses regardless of the industry. These indirect expenses (think MRO, supplies, and corporate services) should be reviewed on a regular basis (most likely quarterly) and strategic sourcing (competitive bidding and procurement) methods should be employed. These types of expenses are generally seen and understood by management as overhead and non-strategic spending.

Before sourcing and procurement bids begin, companies should have a supply base rationalization plan in place. What this means is that the goal of conducting sourcing events (competitive bids) is to save money but at the same time a plan should exist to drive the total number of suppliers lower. Reducing the number of suppliers in the indirect expense area will allow you to drive your spending dollars to fewer suppliers which increases your leverage and buying power with each remaining supplier. For example, assume that you have eight different suppliers that perform background checks at your company and your total spending for background checks is $3 million per year spread across these eight suppliers. Through strategic sourcing and cross-department collaboration, if you are able to eliminate five suppliers and drive all of your spending to only three suppliers, your company will be able to negotiate savings and manage services more effectively with the remaining three suppliers.

We do not recommend just calling suppliers and asking for concessions. Such an approach would have very little benefit, if any, for the suppliers (or buyers) in order to create a win-win scenario in the long-term. By employing strategic sourcing best practices and competitive bidding, you should be able to reduce indirect expenses by 10% to 15%. Other examples of indirect expenses include office supplies, MRO parts, security guard services, document destruction services, printing services, promotional items, travel, uniforms, and technology equipment.

Companies that use reverse auctions as part of their strategic sourcing process tend to save more money than companies that do not use reverse auction technology.   Suppliers might be fearful of auctions for a number of reasons. According to Aberdeen Research, the average saved by companies using reverse auction technology was 15% while companies that did not use auctions saved closer to the 10% savings level. Auctions are merely a way to speed up negotiations using an electronic process. The supplier relationships would continue to exist despite supplier claims that the auction eliminates any supplier relationship.

The Purchasing or Procurement department’s experience and personnel should be engaged and should develop a timeline encompassing all sourcing events that they intend to complete in the calendar year. This group of skilled professionals will be able to assess the marketplace dynamics for each area of spend when planning the sourcing event and advise if timing is ideal. This group should be equipped to define the business requirements, evaluation criteria, develop the Request For Proposal (RFP), and negotiate with the suppliers.

Depending upon internal resources, performing an increasing number of sourcing events might takes months from a Procurement group. Supplementing internal resources with external consulting resources could accelerate savings and also provide additional training for internal employees.