Procurement Leaders
Procurement Leaders

Using Supplier Relationship Management to Manage Commodity Volatility

Few companies have found themselves hit by global economic uncertainty quite as hard as those operating in the energy sector. Between January 2014 and January 2015, the price of crude oil plunged from $115/barrel to $46/barrel. It was a staggeringly decline and one that could easily have caught ConocoPhillips cold.

Instead, one of the world’s largest independent exploration and production companies proved its agility to cope with the fallout of reduced prices.

 

It wasn’t easy, but thanks to the company’s supply chain and procurement organisation ConocoPhillips has emerged from this tumultuous period with a sustainable platform to cope with what remains an uncertain future.

 

Indeed, this effort was so successful it was recognised with the award of the procurement excellence trophy at the 2015 Procurement Leaders Asia-Pacific Awards.

 

What goes up must come down

Of course, oil-price volatility isn’t unheard of. Like the booms and busts witnessed in many global economies, energy prices have seesawed in recent decades. But while the 1973 and 1979 oil crises were driven by enormous hikes in the cost of crude, widely as a result of conflict and uncertainty in the Middle East, the 2014/15 crunch resulted in an almost unprecedented price reduction as a result of a number of factors.

 

Foremost among them was declining factory output in China, coupled with ongoing financial uncertainty across Europe and the return of both Algerian and Libyan oil to an already oversupplied marketplace. These factors contributed to create a perfect storm that battered energy companies across the globe.

 

“This time we needed a sustainable cost-reduction plan, we couldn’t just hit the supplier’s margins, we had to do cost modelling of supplier’s costs to ensure the supplier could sustain it too, because we didn’t want to take the effort to contract them and for the supplier to not be able to do the work later,” says John Lim, general manager, supply chain & procurement, Asia-Pacific, Middle East and Africa, ConocoPhillips.

 

Another major issue facing Lim’s organisation was identifying the categories most susceptible to the downward pressures hitting the company’s revenues.

 

“We identified the categories in a smart way because we had to identify where the deflation was happening the fastest,” he says. “For example, the oil price was coming down incredibly quickly so we had to capture anything related to oil.”

 

In order to have an impact, procurement needed to act quickly and collaborate with other areas of the business. With little time to pontificate, action was required – and fast. The result was the implementation of a sustainable cost-reduction project to achieve both short- and long-term results.

 

“Everything happened so quickly,” says Lim. “The whole team came together but it wasn’t just a case of going out to our suppliers with letters and just telling them that ‘you need to drop your prices’. That’s not an effective way of getting the savings we need."

 

He adds: "We had to go and show them how much commodities and their cost of supply had gone down and help some of the suppliers capture their deflation so they would be willing to give the savings back to us. We had to work with the suppliers to show them how they could get those savings.”

 

Lim readily admits it was a fascinating process but it was the speed at which these strategic imperatives were implemented that was most crucial to the business. It was also essential that the demands placed on the supply base were as simple as possible.

 

"We had to work together with suppliers and work down their cost structure and clean up their specification and then standardise that specification so the supplier didn’t have any unnecessary costs of risks to cater for us,” he says.

 

“It was all about understanding costs on both sides and looking where they could be reduced, although everything needed to happen quickly.”

 

Working the solution

Fundamental to the success of the project was the need for ConocoPhillips to ensure its supply base was working closely with the company, rather than against it.

 

From Lim’s perspective, it was important to ensure that costs on both sides were taken into account before a strategy was devised to reduce such these expenses. It was here that previous supplier relationship management successes came to the fore.

 

“When the oil price was more than a $100/barrel, it was important to gain the trust of the suppliers and ensure we were the best customers,” he says. “The reason is that in a resource grab situation, where production lead-time is important, you need to act fast to get that $100 resource out of the ground.

 

“[As a company] We needed to be front of the queue and needed our suppliers to give us the best people to do our work. For a long time we were working on our branding with our suppliers so that ConocoPhillips was the company they could trust to pay them on time and treat them well – that was our philosophy.”

 

Incumbent suppliers were given the chance to prove their worth but those that were either unwilling or unable to improve and collaborate were replaced.

 

“We’ve been working with a lot of our suppliers for a long, long time,” he says. “There’s that trust there and a resilience of supply when it comes to a ‘resource-grab’ situation. Then when it came to this situation, when they knew that we needed to work together to get through the situation, they were very supportive.”

 

Reaping the rewards

ConocoPhillips sustainable cost-reduction plan has been a resounding success. Beyond savings, the profile of Lim’s supply chain organisation has soared, gaining widespread recognition from the business globally. By April 2015, the company had achieved savings of $750m against a target of $1bn. With savings already recognised for 2017, the function is well on the way to exceeding that figure.

 

In addition the company has driven cost reductions across its joint ventures, leveraged trust with its suppliers and re-engineered demand planning. It has also successfully reduced its supply chain transaction costs. All this has been achieved without compromising on the firm’s health and safety, environmental and corporate social responsibility commitments.

 

Perhaps procurement’s contribution was best summarised in an investor call in April 2015, during which one of the firm’s most senior figures said: “Supply chain is a core science in ConocoPhillips. We’ve got a rigorous model that we use that is able to predict both the sensitivity of prices and the lag of time of price changes to changes in the macro environment.”

 

As such, no matter the future of commodity prices, both the company and its suppliers know that they can count on each another to navigate future turmoil.

 


 

About ConocoPhillips

Name of the company

ConocoPhillips

 

Nature of business

The New York-based energy giant is a Fortune 500 company. Currently employing more than 16,000 people in 21 countries, it is the world’s largest independent exploration and production company, based on proved reserves and production of liquids and natural gas.

 

The team

Supply chain is a global-centralised function at ConocoPhillips, with category management and strategic sourcing performed in Singapore for Asia-Pacific. Each business unit within the region has its own supply chain unit. Lim has been the general manager for supply chain and procurement, Asia-Pacific, Middle East and Africa since December 2012. A graduate of the University of Manchester, he has previously worked with Chevron.

 

Revenues

The company’s most recent financial report put revenues for 2014 at $55.5bn.

You must login or register to post a comment.

Procurement Leaders Membership

Join Procurement Leaders to become part of the world’s largest network of procurement professionals and access cutting edge reports / analysis.


Already a member, login for access to the full site.

Become a member Back to resource library
Print
Procurement Leaders Logo

© Sigaria Ltd and its contributors. All rights reserved. www.sigaria.com

Sigaria accepts no responsibility for advice or information contained on this site although every effort is made to ensure its accuracy. Users are advised to seek independent advice from qualified persons before acting upon any such information.