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In this guest post, Procurement Leaders invites author Gerard Chick to share his views on what kind of pressure ’cheap’ oil puts on energy sector procurement and what insights that scenario provides for the wider procurement community.
I recently attended a conference in Berlin that focused on the role of procurement in the Oil & Gas sector in this era of oil at $40 a barrel. Much of the discussion focused on the importance of market intelligence, cost models, using the appropriate price indices, negotiating the right contract terms and conditions, and establishing good internal stakeholder relationships.
However it wasn’t too long before the discussion turned to how procurement’s role is markedly different in an era of $40 oil – looking at oil and gas majors in the first instance, but also thinking about the broader inferences across industry.
This dialogue was further clarified in my mind when I reflected on a speaker I had heard in Barcelona from the Oil & Gas sector only a few weeks before. At that event I was totally absorbed by a presentation by Arturo Henriques-Autrey, CPO of PEMEX. Arturo hammered home the importance of procurement in the Oil & Gas industry in Mexico. He drew particular attention to the fact that the industry is being privatised while the doors are being opened to more private companies coming in to Mexico to explore. This, he said, meant that the need for good procurement practice and practitioners will continue to grow.
Meanwhile back in Berlin (and one of the highlights of the event) a discussion ensued around ‘local content’. The discussion, guided by Hana Mahmalgi from Total, turned to economic empowerment as a critical aspect of local content policy and specifically that of developing local supplier capability, particularly in contracting services. This discussion mirrored much of what Arturo had been saying especially the clear need to develop capability, to identify the right skills sets and develop talent to ensure safe, efficient, and profitable operations, when revenue is dropping.
As Bill Le Sage, the recently retired CEO of OFS Portal pointed out CXO’s are far more interested in what procurement can offer them in the current market than when oil is $100 a barrel. The criticality as well as the creativity necessary to find cost savings, and identify opportunities to drive out costs cannot be over emphasised.
Moreover the current climate highlights the fact that the Oil & Gas majors daren’t pursue the traditional approach of demanding price cuts from their suppliers if they are to stay in business. The interdependence between suppliers and service providers and the oil companies is magnified by this and requires something new; and that something is true collaboration with trusted supply partners.
Another of the speakers at the event Fabrizio Guagliardo from ISAB talked about the realities of operations in Sicily working for a Russian owned oil company. He detailed his experience of working with both suppliers and ISAB people. At their meetings they bring data, comparing different operating cost categories, and charts with various cost models, and the cost of their fleet operations relative to other fleets and many other performance metrics. What was interesting was that Fabrizio made it quite clear that pragmatism took centre stage and the masses of data hardly got looked at. He expressed that for procurement right now, they had to take a very practical approach, because these people know the industry inside out. They also know how their organisation makes money. So they strip things down to the core. The fact is they all know they have to save money given the environment and that the need help each other is critical if they are to remain a viable players.
Another interesting discussion focused on safety. In Oil & Gas HSE is number one. Procurement people have to know what can be cut and what cannot so that they do not compromise safety. In the presentation I gave I emphasised that there are two factors that can smash your reputation overnight. One is an adherence to Corporate (Social) Responsibility (CSR) and the other is innovation and/or discontinuous innovation.
Successful procurement professionals have to be brand conscious. Today image in the public eye crucial and your brand and corporate must reflect your strengths, and what you do well. This applies the procurement function too, if you can network within the organisation, influence people towards a solution, lead a team, or even just be known as someone who is a go-to-person and will do what they promise that promotes procurement’s brand.
Ultimately, with all those considerations in focus, procurement needs clarity from the business regarding their role in maintaining a sustainable, safe and productive business. Procurement then needs to deliver on its promise, with aplomb and no excuses – that applies across the board.
Gerard Chick is chief knowledge officer at Optimum Procurement.
His new book, ’The Procurement Value Proposition: The Rise Of Supply Management’ is available from Kogan Page here.