LOGISTICS AND SUPPLY CHAIN MANAGEMENT IN THE OIL & GAS INDUSTRY
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There is continued struggle by the oil and gas industry to find a complicated balance between the rising global demand or diminishing resources and maintenance of manageable operating and distribution costs. This coupled with recent economic downturn has made oil and gas industry to experience a challenge in controlling costs. This has therefore presented service providers in this industry to offer industry specific outsourcing solutions basically across the entire value chain. Even though mergers and consolidation still continues, oil and gas management, in a bid to recover their base lines have used other approaches such as business process outsourcing in their operational mix (Batson 2012). This reorientation has been greatly necessitated by the fact that operational processes have progressively become more complicated and more costly especially in terms of managing numerous business functions (Mangan, Lalwani & Butcher, 2008; 66). Businesses have therefore handed parts of their core work, for instance, engineering services to outside service providers. However, they have maintained sensitive parts such as accounting and finance. This report investigates the extent of outsourcing, why oil and gas operators use outsourcing, the option to manage supply chain and logistical operations, and decisions regarding outsourcing and in sourcing from strategic and operational perspective.
The Current Major Outsourcing Deals
By meeting more than two-thirds of the world’s energy demand, oil and gas industry is arguably the world’s most important sector. Given the large scale global operations, oil and gas companies basically represent a significant portion of the world’s economy. According to a list released by Fortune in 2009, oil and gas companies ranked seven out of ten top positions. In order to maintain high performance and maximize their efficiency taking their large in consideration, oil and gas companies have entered into many outsourcing deals. The IT infrastructure service deal between Shell and EDS is one example of such mega outsourcing transactions. This deal costs US$1 billion in total. In addition, PWC and Kuwait Petroleum Corporation have entered into a five year outsourcing deal in September 2008 to manage the supply and logistics support on behalf of the corporation (Milberg, William & Winkler, 2013; 212).
Key Industry Challenges
Oil and gas industry faces several challenges. Issues faced by the industry include high volatility of the price of oil products, talent shortage, aging infrastructure, and compliance requirements that change constantly. Others challenges that relate to broader macro economy include low reserves, rising consumption and declining production (Giunipero & Eltantawy, 2004; 700).
1. Uncertain Energy Policy
Oil and gas companies face uncertain energy policies particularly those relating to how overseas businesses are conducted hence complicating matters for them energy companies are required to be global in their execution despite their inflexible and less automated processes. These companies therefore face huge risks when they try to make operational changes because the costs are high (Bidgoli 2003; 530-31).
2. Aging Oil and Gas Infrastructure
Oil and gas industry relies heavily on large volumes of physical assets like IT systems, refineries, and drilling rigs. These physical assets are not easily changed owing to their complexity and enormous size hence subject to wear and rear (Collier & Evans 2010). This therefore poses a great challenge on the companies as they urgently need to replace them with newer asset components.
3. Volatility of Oil and Gas Prices
Management of these companies find it very difficult to manage their profitability targets and forecast sales values because of the constant fluctuation of oil and gas prices basically in the global market. Trends in oil prices have become harder to predict because supply and demand can no longer explain them (Barrar & Gervais 2006). Further, increasing speculative behaviors by hedge funds and investment banks outside energy industry has also made them harder to predict.
4. Talent Shortage
Oil and gas companies are experiencing huge skill gap in their human capital requirements basically due to imminent retirement of some of their workforce, relatively unskilled labour supply and limited educational opportunities. This condition has necessitated them to increasingly invest in the knowledge management and training hence transferring knowledge to the younger generations that enter the industry. The greatest challenge is the lack of interest in the industry by the younger workforce (Coyle et al., 2013; 71).In order to address these challenges, oil and gas companies have managed to outsource a significant amount of their value chain. Outsourcing provides the following benefits.
Advantages of Outsourcing/Benefits of Outsourcing
1. Stronger Focus on their Core Competencies
By outsourcing significant amount of their value chain and logistics, the company’s management is able to focus on the strategic decision making because they have more energy, time and efforts. They are therefore able to add value to their projects through forecasting, analysis, budgeting and strategic planning (Collier, at el., 2012; 231). In addition, they are able to re-evaluate and reengineer outdated business processes because they have enough objectivity, time and focus. Outsourcing is very relevant to the oil and gas industry because they considerable time is needed in the company’s strategic exploration initiatives. Further, outsourcing enables the companies to avoid some cots which may be associated with the physical assets hence reducing distractions from the core competencies (Slack, Chambers & Johnston, 2013).
2. Minimal Overall Costs and Cost Reduction
Outsourcing enables the companies to use the knowledge, expertise and connections of a professional organization hence reducing its overall expenses. This organization work on logistics together with other resource providers in a way that enables them to come up with a plan that is most cost-effective as possible. The changes necessary to achieve this includes better management of inventory, transportation optimization and by obtaining less expensive materials for the company. The company’s savings are boosted more should the organization decide to go offshore (Jacoby 2012; 99).
3. Increased Access to New Technologies and Talent Pool
The challenge of talent shortage and diminishing talent shortages experienced by oil and gas industry is overcome by outsourcing particularly offshoring. Offshoring offers the methodologies, proficiency, tools and solutions that are required by the unique and evolving requirements of an upstream company (Giunipero & Eltantawy, 2004; 692). Outsourcing therefore enables these companies to access the required labour pool at a lower and reduced cost.
4. More Flexibility
By outsourcing, companies are able to have access to the resources of the third party organization which help it create a more extensive infrastructure. Outsourcing supply chain management gives a company an opportunity to pick and select the organization to work with hence able to make its adjustments along the way with ease thus, increasing the overall efficiency of the company (Bozarth & Handfield 2013). A right choice of the organization reduces stress, makes life easier and gets more things done. Further, it raises customer satisfaction, fuel growth and drive high profit margins for the company.
5. Improved Regulatory Compliance and Conformity
Oil and gas firms face substantial compliance and organizational burden as a result strict government laws and complex business planning. By offshoring, oil and gas firms are able to access specialists having more exhaustive knowledge to handle the complex tax systems, industry standards and reporting policies (Gadde, HaKansson & Persson 2010; 185). Outsourcing brings about scale and leverage. It involves the use of global network to deliver services.
6. Meet Customer Demand
Companies may plateau due to insufficient or lack of resources thus being able to supply its customers with a finite volume of products. When this case happens, the growth and building of the company’s brand equity can be nearly impossible (Close 2006). However, outsourcing can help in this department simply because a third party organization will take the necessary steps t acquire or obtain the needed number or quantity of products to the company’s customers. Outsourcing therefore acts as a catalyst for major growth hence propelling the business into the future. In addition, they are able to provide constant coverage for their consumers who actually require 24-hour support, particularly when other competitors (foreign and domestic) are also doing the same.
The Better Option for Managing the Supply Chain and Logistical Operations
According to me outsourcing proves to be the best option for managing the supply chain and logistical operations even though currently, many companies are shifting to in-sourcing. Many firms argue that cost reductions would not be actually experienced if outsourcing is used however, if well managed, cost reductions would be realized (Oshri, Kotlarsky & Willcocks, 2011; 58-60). Outsourcing being a strategic partnership requires that all parties work for common objective basically with mutual interest. The parties should establish transparency by disclosing all the required information to one another. This will ensure that costs are reduced, for instance, CAPGEMINI 2010 report reveals that companies that outsourced reported 11 percent reduction in inventory, 25 percent reduction in the deployed capital and 15 percent cost savings (Flynn, Morita & Machuca, 2011; 253). This disputes the claims that outsourcing does not lead to cost reductions.
However, some argue that logistical operations are too important to be outsourced. Logistic function has some activities that are mundane in nature. These ones can be outsourced so that logistics or supply chain manger can be allowed to focus on activities that add value rather than day-to-day routine functions. It is therefore necessary to develop an outsourcing strategy to enable identify those activities that are not core. A SWOT analysis should also be developed so that weaknesses and threats of outsourcing can be understood. In my opinion, warehousing and transportation are non-core functions and should therefore be outsourced so that costs can be saved (Jenster, Pedersen & Plackett 2005; 62). It would be close to impossible, in the current economic conditions, to develop infrastructure globally. Thus, it is advisable for companies to form strategic alliances and partnerships through outsourcing to expand globally and save cost at the same time.
A proposition that control over outsourced activities or functions would diminish is a myth according to me. Even though it is true that a shipper may lack transactional control, overall control may not diminish because the responsibility lies with them. Just like in-sourcing, outsourcing safeguards control. This is true because it is the transactional operations that are outsourced and not control (Cinquini, Di-Minin & Varaldo 2012; 77). Companies in this industry may not lose control because the shippers are in a position to develop and regularly monitor the key performance indices (KPIs) for all the outsourced functions and activities.
It is argued that logistics is a firm’s core competency and should therefore be in-sourced instead of outsourcing it because core competencies are managed internally. However, when this operation function is maintained at higher levels, the organization maintains a high cost infrastructure compared to when it is outsourced (Barrar & Gervais 2006; 54). In addition, rapid globalization demands that organizations form strategic alliances to be able to compete in a global platform. In my opinion, logistics being a core competency is myth and it should therefore be outsourced so that costs can be reduced.
The essay established that increasing need for globalization coupled with key industry challenges have necessitated companies in the oil and gas industry to outsource parts of their core work and the non-core functions to outside service providers. The expansion of logistics landscape has presented the companies with more opportunities to get more value than before particularly from their supply chain operations. A firm begins by analysing their requirements and expectations then selecting the right outside service provider to meet their customer demands, reduce costs, access new technologies and talent pools and focus on their core competencies to be able to add value to their projects. Further, it optimizes total value that is provided to the oil and gas industry because they integrate with the core business in a manner that maximizes the overall benefit to the organization.
Top of Form
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