Supply chain management is very vital in the oil and gas industry. The Global Supply Chain Forum outlined that supply chain management would be incorporating major business processes in all the value chains ranging from the original raw material suppliers to the end consumers of the products manufactured. The stakeholders of the supply chain gain value owing to the top notch products, information and services created by the processes (Lambert & Cooper, 2000). The supply chain is ever changing. This modern era brings in some challenges that need to be considered in order to coordinate the system effectively. In this essay, different parameters and approaches will be evaluated that are an integral part of international supply chain for effective performance in competitive business environment.
Oil & Gas sector is sub-divided in two main sectors called upstream, and downstream. The upstream sector of the value chain is concerned with the exploration and production of crude oil whereas the downstream sector is concerned about the refining, transportation and retailing and so many other operations. It is involved in ensuring that the crude oil gets to the hands of the final consumers who need them. The process cannot be said to be operational if the crude oil does not get safely into the hand of the consumers.
When defining a supply chain within the confines of an enterprise, a tool known as Supply Chain Definition Matrix is leveraged. In addition, this definition matrix, otherwise known as (i/o Matrix) is used in ascertaining the number and size of the supply chains involved in a given enterprise. If a graph is plotted with columns having consumers (output) in a given enterprise and rows having products (input), then the intersection of each of the column and row gives the supply chain.
According to Lambert & Cooper (2000), Supply Chain Management evolved at the onset of 1980s and was proposed by management consultants. Since SCM was introduced till date, various disciplines are widely interested in it. It was initially thought that supply chain management was limited to the organization of the complex processes involved in distribution and manufacturing which goes beyond the confines of a company and brings in customers and suppliers. However, supply chain management now incorporates every business process along the supply chain.
They must have passed through various chains and entities which are responsible in adding values before the product is handed over to the final consumers. More so, exposure to risk in the supply chain has greatly increased owing to some trends in the modern society such as reduction in supply base, globalization and outsourcing. Supply chain is now greatly susceptible to unprepared disruptions. New methods for managing and inspecting the supply chain are being developed by system's thinking which evaluates both the entirety and individual compartments of the supply chain. Soft systems methodology is an energy saving process which is important in energy saving, in various production stages, most especially in the processing of textiles ( Ngai et al. 2012). The experimental study reported can be leveraged in managing oil & gas production and their distribution. This will be essential in providing and supplying resources needed in a global scale as well as ensuring efficient management of resources (Kilponen, 2010).
Since supply chain management is vitally important in the oil & gas industry, it is essential to facilitate and accelerate improvements in this context. With the integration of information technology into the various operational processes of the oil and gas industry, effective supply chain management can be easily achievable.To facilitate and accelerate improvements in the oil and gas supply chain, there are certain factors need to be put into consideration. Completeness is very vital as it ensures that the enough reference data is made available in order to address oil and gas processes and metrics. Standards have to be maintained in the oil and gas industry. It is necessary to provide neutral metrics framework for benchmarking in the oil and gas supply chains. It is also significant to consider the strategy, practices and flows in a given enterprise to accelerate and facilitate supply chain (Supply chain management, 2014).
In addition, planning is vital in the oil and gas supply chain. With effective planning, the supply chain processes can be facilitated and accelerated. However, to make effective planning in the various supply chain, in the industry, it is necessary to use high end software. There are lots of software tools available today for oil and gas supply chain planning and optimization. For instance, the IBM has provided software for oil & gas planning which emphasized and addressed the challenges that affect the planning processes. Such high end software tool also provides a framework for performance management that includes the optimization of various processes in the supply chain. These processes include planning, metrics and reporting.
The performance management framework gives room for the planning of production, revenue, expenses and capital expenditures in various operational centers including the area, field and well levels. Company planning strategies can be reconciled with high end software. This ensures that the every value chain in a given oil and gas company plans with the same financial goals and business objectives. This is not only true for the upstream sector of oil & gas; it is equally true for the downstream sector. The use Information technology in planning of supply chain system, oil & gas industry can focus on other demanding issues in the industry and achieve maximum return on their investments in the process (“White Paper”).
The attributes of supply chains can also be identified with a tool known as supply chain strategy matrix. The features like reliability, responsiveness, flexibility, assets, and cost indicate supply chain strategy in the oil & gas industry and other sectors. Each of these features is vitally important in the definition of supply chain strategy. Reliability looks at how effective, on-time and complete the supply chain. It is usually viewed from the customers' point of view. The customers will always intend a supply chain that should be trusted and reliable. Responsiveness is also examined from the customers’ point of view. The customers will always want to know how long it will take to solve their problems and to meet their needs. Responsiveness must be in place for a realistic supply chain management in oil & gas sector. The supply chain must also be flexible. This simply means that it can adjust with trends and certain variability in order to meet a targeted need at each point in time (Kilponen, 2010).
Cost is vitally important in supply chain. In supply chain strategy, internal supply chain costs are the primary factors to be examined. It is significant to consider the worth of capital investments required for effective operational supply chain. This is where assets come to play in the supply chain strategy. As a matter of fact, to deliver the best customer services in the oil and gas industry, it is vitally important to make the processes more reliable and responsive. The price should also be made optimal and, in fact, the various steps mentioned above should be given primary consideration. Every firm relies on the abilities of their suppliers. Also, besides retailers, other firms relies solely on the abilities of those who will link its products and services to the consumers who need them. The organizations concerned with the production seldom take part in the delivering of their products and services, and they depend on external sources. This simply outlines the internal and external processes have to be effectively managed (Kilponen, 2010).
The supply chain is simply an integration of various processes. The above stated facts clearly paint a picture of the oil and gas supply chain, most especially the upstream segment of the industry. The small and medium enterprises exist in this industrial sector that provides services and technologies which upholds the processes of the main oil companies. To ensure the effectiveness in the oil and gas supply chain, these service providers should be appropriately and effectively managed and integrated as an important part of the supply chain of the main oil companies. To achieve competitive supply chain, it is important for the firms be responsive in the various chains of the industry's supply. Their impacts towards effective performance in the chain are also worthy of note (Taylor, 2011).
There is often a shift in a competitive basis from cost-based to attribute-based in a business framework which has mostly competitions that are not based on price. The shift usually culminates in quality advantages and factors which tend to high customer satisfaction. Organizations in this market framework will strive to offer better quality and improve the values offered to the customers. The organization becomes relevant in a competitive environment by employing these strategies. When customer value is created, the result is an agile supply chain (Taylor, 2011).
Life cycle assessment (LCA) is another view point presented by Matos & Hall (2007) that can be leveraged to improve close-loop supply chains and product design stewardship for effective and competitive performance. Many organizations are now leveraging the “cradle to grave” approach of LCA in order to broaden up and enhance their sustainable developments. This approach spreads out to the entire crannies of the supply chain and it is targeted at the overall analysis and specific impacts made by the firms. The approach becomes theoretically a concise process if the various variables and responsibility bounds are understood.
Ngai et al. (2012) pointed out that a sustainable development innovation is a hydra-headed process. The complexity makes it usual techniques for risk assessment unfit for the processes. This is because great degree of flawed information would be the source of the estimation of probabilities through techniques like cost-benefit analysis, simulations, actuarial sciences and surveys. Managerial knowledge and ability of understanding complexity are immensely important in determining existing limitations. If complexity theory concept is employed in analyzing sustainable development, the outcome will be a fitness landscape which is functions of different parameters linked to sustainability. High sustainable development performance would then become the global peak; however, the principle underscoring is unknown. If the topography of the sustainability landscape is seen as smooth, in other words comprising of independent parameters, the decisions made will not have an impact on the actions or choices. The decision made to reduce various factors such as air emission, the amount of expandable productions, relationship established with the supplier and local communities and so forth. The decisions will simply improve the maintainability efforts of the firms (Maryam et al., 2012; Metcalfe, 2011). .
LCA or any other environmental tool targeting at environmental parameters that are not related to social concerns, the results could be problems or difficulty in achieving the sustainability goals. Cases like the application of LCA in the production of oil from bitumen in the Athabasca Oil Sands, the largest carbon based energy source in Canada and the application of LCA in agricultural biotechnology showed a marked difference between a short-sighted and an integrative landscape model of LCA relevance. Corporations are mostly concerned with managing uncertainty. Lots of resources are channeled towards the conversion of uncertainties into probable factors using high end methods like market surveys, actuarial sciences, simulations and experiments .When both the parameters and probabilities cannot be identified or estimated, the process can be said to be ambiguous.
Leviathan & Warglien (1999) pointed out that cooperation to be made faster and effective for harmonization of behaviors across the organizations. It was also further pointed out that care should be taken to distribute globally improvements. Actors become myopic and only sights illusions when all they consider is the implications of their payoffs to their local actions and do not pay careful consideration on the scope and features of the entire spectrum.
Hertwich et al. (2000) stated that it is possible to tackle problems in LCA in as much as they are in line with the goals. There is a need to coordinate meaningful goals with other social and economic terms, this is mostly pivotal when the study is a part of the sustainable development process. When conducting LCA analyses, known parameters and predictable behaviour probabilities are leveraged (Tukker, 2002). This results to a smooth landscape having lots of parameters but little interactions. A reliability irony is presented by the identification of nontechnical uncertainties and one-sided benchmark. Contrary to this, nontechnical but applicable issues are handled but at the same time, the one-sided characteristics of the approach bring down the reliability of LCA. Some companies have developed their own analytical techniques, having found LCA unsuitable. The decision makers should have substantial confidence and knowledge management to achieve sustainable top performance without cutting short by the simplifications in the processes adhesive with company (Matos & Hall, 2007).
The enhancement of the capability of the industry against its competitors and maintenance of competitive advantage are the strategic impact of knowledge management. Adhering to innovative KM strategy insights, organizations achieve competitive advantage over their competitors by insights provided by adherence to innovative KM strategy. The key responsibility of the top management and scholars relates to the recognition as well as utilization of the available potential and enhancement of the KM for the evaluation of strategic insights adopted by their competitors that have an impact on competitive advantage. The organization ought to adopt innovative KM strategy insight and during its implementation top levels managers should ensure that the same strategy is not being employed by any of the strong rivals. The KM strategy should be unique in terms of its replication and implementation by any other organization (Frank & Andreas, 2011).The organizations strive to utilize their strong potential to achieve and maintain competitive advantage, and focus on the KM strategy that cannot be encrypted and are difficult to imitate (Maryam et al., 2012).
Poor supply chain management brings about lots of impediments and limitation in the oil and gas industry. Profit margin is greatly diminished by poor supply chain management. More so, it draws back the time necessary for the completion of the project and hampers production greatly. Lots of oil and gas enterprises report a number of dangers they encountered as a result of poor supply chain management. These include:
- Increase in supplier price even beyond cost inflation,
- Production rates are slashed down having outdated drilling, completion and other technologies,
Another challenge caused by poor supply chain management is the “bullwhip effect”. This is a condition in which little changes in demand result to increase in oscillation and reverberation in capacity, production and inventory in the supply chain of the industry. This situation accounts for over 10% of the cost of oil.
Both the oil companies and their equipment suppliers face economic inefficiency owing to the bullwhip effect. These economic inefficiencies can be categorized under four subheadings:
- Increased prices: Prices go high during the overheated state of the market but refuse to go down during the recession,
- Excess inventory: During the boom, equipment manufacturers held excess inventory but this took much time to go down during the recession,
- Excess capacity: During the boom, equipment manufacturers invested a lot on capacity but they experienced low or negative ROI on the capacities,
- Unfulfilled demand: As a result of insufficient capacity and prolonged lead time caused by large bottlenecks, part suppliers lost orders that they could not fulfill when it boomed.
The importance of supply chain management in the oil and gas industry cannot be overstated. Supply chain management is also important in other industries; however, it is one of the most important drivers to profitability and growth in the oil and gas industry. Supply chain management involves virtually every value chain of the industry including the upstream, midstream and downstream sectors.
Effective and high level supply chain management has lots of benefits in the oil and gas industry as briefly outlined below:
- Steadier and more profitable capital expansion,
- Higher return on Assets (ROA),
- Higher operating profits,
- Lower operating costs,
- Greater oilfield productivity.
The result of creating value on the performance of businesses was studied in a correlation analysis. The essay outlined that the combined networks of organizations produce increased competitive advantage. It is also debated that individual firms were more concerned with understanding of the trends in the competition than evaluating the competitions between them. In addition, today there is a noticeable increase in intricacy and instability and correspondent reduction in liability. It has never been pertinent to pull the abilities of the entire chain in order to meet the demands of customers. As a result of characteristic unrest in the business sphere, the need for agile chains cannot be overemphasized. The management should be solely concerned with the strategy for competing on the ground of agility. It is the duty of the chain in toto and not that of a branch of it. Agility and flexibility are important for effective performance in this sphere. There are lots of instability in the oil & gas industry. Many researchers claimed that since oil and gas are classified as commodities, their supply chains should be cost-focused.
The oil & gas sector is a dynamic industry and key players in the industry ought to help in ensuring efficiency and innovation that lessen the impact often posed by costly operations. An inference can be drawn by taking a look at the correlation in the variables. Greater agility can be achieved in the supply chain and hence business performance can be enhanced. However, poor supply chain management causes immense menaces in the industry and diminishes profitability. The importance of effective and competitive supply chain management in the industry can never be overstated. These include among so many others steadier prices, higher operating profits and lower operating costs.
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