Executive Briefings

Warehouse Operations a Special Challenge in Natural Resources

As more companies expand globally, managing inventory in remote locations is becoming increasingly common. Companies with warehouses in remote locations worldwide face numerous challenges when trying to maintain the kind of accurate, real-time inventory information needed to run a profitable business. The situation becomes even more challenging when companies don't have the luxury of operating warehouses in locations that offer an established economic and logistical infrastructure, sophisticated technology and a well-educated workforce. These additional complications create inefficiency that must be recognized and addressed.

The natural resources industry, which includes mining and the oil and gas sectors, frequently faces these issues since they must operate wherever the natural resources are located. In fact, many natural resource companies operate in remote countries where political tensions, restrictions imposed by government partners, low levels of education and skills among workers, lack of technology standards, poor availability and quality of data, extended lead times, inadequate infrastructure, and unusual write-off policies define the business environment.

These challenges, in turn, contribute to a major problem: obsolete and surplus inventory - defined here as maintenance, repairs and operations inventory, such as steel pipes and critical spares. An additional complication is that companies feel it is not in their best interest to inform their business partners (often the host country's government or government-sponsored companies) about surplus or obsolete inventory because the partners would assume ownership of the inventory, per contractual obligations. Companies also worry that revealing the presence of surplus or obsolete inventory would create the perception that they are not managing their investment wisely, which in turn could weaken a relationship that may already be strained. One company, for example, allowed inventory stored outside of a warehouse to be overtaken by jungle growth to avoid designating it as obsolete or surplus.

A recent study managed by BearingPoint reviewed eight oil and gas companies to learn more about the effectiveness of their remote warehouse operations. The study focused on 50 warehouses based in 17 countries throughout Latin America, Africa, Eastern Europe, the Middle East, Asia and Australia. Each warehouse, which contained an average of $50m worth of inventory, supported local activities and was staffed more than 95 percent by the local population. Many of the warehouses were joint ventures with companies sponsored by the host country.

Survey Analysis
Each of the participating warehouses was polled. The survey contained 200 questions designed to gather detailed information about daily warehouse activities such as inventory management, replenishment and investment recovery as well as operations they support in order to standardize the results. The intent of the survey was to provide quantitative data that could be segmented and normalized for comparison. Questions included business environment, scope, budget, production, process, technology and approach topics. To augment this analysis, several proprietary software tools were used to analyze between five and seven years' worth of data from each warehouse's inventory system.

The key findings of the survey are relevant to any company that maintains warehouses in remote or "supply-chain challenged" locations. The first involved a high correlation between production and inventory. For every extra barrel of oil produced per year, the companies had a corresponding increase in inventory in these remote warehouses. One would expect that these locations would reach a point of diminishing returns on inventory levels where production can continue to increase but inventory either stabilizes or diminishes. The data did not support this expectation and would indicate poor process efficiency, a lack of standardization, an inability to leverage inventory size and poor analysis of inventories or spare parts.

Another key finding was the fact that many of the warehouses were not following basic operating principles, such as reviews of inventory turns, ABC analysis, surplus stock, dead/idle stock, minimum/maximum levels, slow-moving inventory, fill rates, accuracy, shrinkage, etc. Fewer than 20 percent of the companies performed basic, commonly accepted warehouse reviews of their inventory on an annual basis.

It also was discovered that warehouse activities were not integrated with operations, engineering or maintenance. In fact, these departments rarely included inventory in their review process, and only minimal efforts were made to interact with the warehouse during the planning phase. Planning and forecast information and maintenance schedules were not being communicated in a timely fashion to the warehouse personnel. This problem was further complicated by the fact that warehouses focused on their own initiatives and metrics and failed to include external influencers on inventory. These behaviors were often reinforced by internally focused departmental goals.

Another observation was the general lack of data availability. Many of the participants were unable to answer such basic questions as size of the warehouse, operating annual budget or inventory turns. This may be the result of data not being migrated during recent enterprise resource planning migrations, key data elements not being utilized, low trust in data quality, lack of access to the data or employees not knowing how to gather or analyze data. Experience in this industry leads to the determination that this problem is the result of senior management's perceptions that inventory is relatively unimportant and offers only a minimal return on investment (especially when compared with the cost of a stock-out). As a result, warehouse employees don't gather and analyze data regularly because it is not perceived as a cost-effective exercise and they do not receive encouragement from senior management. Without inventory data, however, companies can't analyze operations, ensure that the right materials are available at the right time or make decisions about how to improve business processes and overall business performance. Companies thus run the risk of inefficient operations and sub-optimal financial performance. For asset-intensive businesses such as the natural resources industry, that can have a real impact on bottom line performance.

Another key finding was a general reactive attitude towards inventory. Few warehouses were trying to resolve issues proactively by working with other departments to reduce SKUs, address slow-moving inventory or review overall levels for targeted critical commodities. This attitude may also be attributed to the relatively low priority that senior management places on inventory.

There are several low-tech solutions that can have a significant impact on inventory levels and help companies establish the foundation for some of the leading inventory practices and operate more profitably. First, companies should start with the basics by getting their warehouse in order in advance rather than coming in immediately with a huge, expensive system. Given the high percentage of warehouse employees who are from the local communities, many lack a solid understanding of basic warehouse principles. Establishing training and mentor programs and increasing communications with other warehouses are excellent ways to begin improving productivity of the employee base.

Training is Critical
In some situations, simple software tools such as Microsoft Excel and Microsoft Access, used in conjunction with a company's ERP system, can help warehouse employees perform the data analysis needed to track operations and performance. Training will be critical to helping the workforce use these tools more effectively. Most companies are intrigued by promises of inventory optimization and automation tools. Without the fundamentals in place, however, these solutions will probably have only short-lived results and ultimately be unsuccessful.

At the same time, companies should recognize the challenges of these remote environments and the strategic importance of inventory on the overall organization. While companies may attribute their problematic inventory levels to external forces, the companies themselves are also contributing to the problem with their inefficient behaviors and performance metrics. Companies can work within the limitations imposed by their partners, but they must also increase efficiency by becoming more holistic in their thinking.

Part of being more strategic involves making decisions up front, before you bring the inventory into the country. Companies should ask themselves questions such as "How can we establish more efficient processes so that we're leveraging existing inventory? Where can we standardize our equipment? How can we work with suppliers to better understand and plan for part substitutions? How can we create better visibility into existing inventory by implementing a more robust inventory deployment first in the United States or other developed countries and then shipping it to the remote location?" Companies will be able to create more efficient warehouse operations if they integrate their maintenance, capital project expenditures and supply-chain functions (e.g., sourcing and inventory management) with the operations up front. Bringing warehouse employees and suppliers to the table when they are formulating their maintenance strategy will facilitate inventory reductions and improve customer service.

Efforts to leverage existing inventory should be balanced with standardization efforts. Addressing the issue of standards with everyone who has a vested interest (e.g., suppliers, engineers, warehouse employees, etc.) will bolster efforts to increase inventory efficiency (having the right inventory at the right time) and help resolve many of the issues associated with managing current inventory levels.

Technology alone is not the solution. Creating more efficient warehouse operations at remote locations is more of a business process and a strategic behavioral issue than a question of finding one technology that will solve the problem. Technology should instead be expected to play an enabling role.

Peter Buettgen, who has advised Global 2000 companies on supply-chain optimization for more than 16 years, is managing director of BearingPoint's Oil and Gas Supply Chain practice.

Geoffrey Tonini is a senior manager in the same practice. He has more than nine years of supply chain and technology related experience with a focus on the oil and gas and services industries.

As more companies expand globally, managing inventory in remote locations is becoming increasingly common. Companies with warehouses in remote locations worldwide face numerous challenges when trying to maintain the kind of accurate, real-time inventory information needed to run a profitable business. The situation becomes even more challenging when companies don't have the luxury of operating warehouses in locations that offer an established economic and logistical infrastructure, sophisticated technology and a well-educated workforce. These additional complications create inefficiency that must be recognized and addressed.

The natural resources industry, which includes mining and the oil and gas sectors, frequently faces these issues since they must operate wherever the natural resources are located. In fact, many natural resource companies operate in remote countries where political tensions, restrictions imposed by government partners, low levels of education and skills among workers, lack of technology standards, poor availability and quality of data, extended lead times, inadequate infrastructure, and unusual write-off policies define the business environment.

These challenges, in turn, contribute to a major problem: obsolete and surplus inventory - defined here as maintenance, repairs and operations inventory, such as steel pipes and critical spares. An additional complication is that companies feel it is not in their best interest to inform their business partners (often the host country's government or government-sponsored companies) about surplus or obsolete inventory because the partners would assume ownership of the inventory, per contractual obligations. Companies also worry that revealing the presence of surplus or obsolete inventory would create the perception that they are not managing their investment wisely, which in turn could weaken a relationship that may already be strained. One company, for example, allowed inventory stored outside of a warehouse to be overtaken by jungle growth to avoid designating it as obsolete or surplus.

A recent study managed by BearingPoint reviewed eight oil and gas companies to learn more about the effectiveness of their remote warehouse operations. The study focused on 50 warehouses based in 17 countries throughout Latin America, Africa, Eastern Europe, the Middle East, Asia and Australia. Each warehouse, which contained an average of $50m worth of inventory, supported local activities and was staffed more than 95 percent by the local population. Many of the warehouses were joint ventures with companies sponsored by the host country.

Survey Analysis
Each of the participating warehouses was polled. The survey contained 200 questions designed to gather detailed information about daily warehouse activities such as inventory management, replenishment and investment recovery as well as operations they support in order to standardize the results. The intent of the survey was to provide quantitative data that could be segmented and normalized for comparison. Questions included business environment, scope, budget, production, process, technology and approach topics. To augment this analysis, several proprietary software tools were used to analyze between five and seven years' worth of data from each warehouse's inventory system.

The key findings of the survey are relevant to any company that maintains warehouses in remote or "supply-chain challenged" locations. The first involved a high correlation between production and inventory. For every extra barrel of oil produced per year, the companies had a corresponding increase in inventory in these remote warehouses. One would expect that these locations would reach a point of diminishing returns on inventory levels where production can continue to increase but inventory either stabilizes or diminishes. The data did not support this expectation and would indicate poor process efficiency, a lack of standardization, an inability to leverage inventory size and poor analysis of inventories or spare parts.

Another key finding was the fact that many of the warehouses were not following basic operating principles, such as reviews of inventory turns, ABC analysis, surplus stock, dead/idle stock, minimum/maximum levels, slow-moving inventory, fill rates, accuracy, shrinkage, etc. Fewer than 20 percent of the companies performed basic, commonly accepted warehouse reviews of their inventory on an annual basis.

It also was discovered that warehouse activities were not integrated with operations, engineering or maintenance. In fact, these departments rarely included inventory in their review process, and only minimal efforts were made to interact with the warehouse during the planning phase. Planning and forecast information and maintenance schedules were not being communicated in a timely fashion to the warehouse personnel. This problem was further complicated by the fact that warehouses focused on their own initiatives and metrics and failed to include external influencers on inventory. These behaviors were often reinforced by internally focused departmental goals.

Another observation was the general lack of data availability. Many of the participants were unable to answer such basic questions as size of the warehouse, operating annual budget or inventory turns. This may be the result of data not being migrated during recent enterprise resource planning migrations, key data elements not being utilized, low trust in data quality, lack of access to the data or employees not knowing how to gather or analyze data. Experience in this industry leads to the determination that this problem is the result of senior management's perceptions that inventory is relatively unimportant and offers only a minimal return on investment (especially when compared with the cost of a stock-out). As a result, warehouse employees don't gather and analyze data regularly because it is not perceived as a cost-effective exercise and they do not receive encouragement from senior management. Without inventory data, however, companies can't analyze operations, ensure that the right materials are available at the right time or make decisions about how to improve business processes and overall business performance. Companies thus run the risk of inefficient operations and sub-optimal financial performance. For asset-intensive businesses such as the natural resources industry, that can have a real impact on bottom line performance.

Another key finding was a general reactive attitude towards inventory. Few warehouses were trying to resolve issues proactively by working with other departments to reduce SKUs, address slow-moving inventory or review overall levels for targeted critical commodities. This attitude may also be attributed to the relatively low priority that senior management places on inventory.

There are several low-tech solutions that can have a significant impact on inventory levels and help companies establish the foundation for some of the leading inventory practices and operate more profitably. First, companies should start with the basics by getting their warehouse in order in advance rather than coming in immediately with a huge, expensive system. Given the high percentage of warehouse employees who are from the local communities, many lack a solid understanding of basic warehouse principles. Establishing training and mentor programs and increasing communications with other warehouses are excellent ways to begin improving productivity of the employee base.

Training is Critical
In some situations, simple software tools such as Microsoft Excel and Microsoft Access, used in conjunction with a company's ERP system, can help warehouse employees perform the data analysis needed to track operations and performance. Training will be critical to helping the workforce use these tools more effectively. Most companies are intrigued by promises of inventory optimization and automation tools. Without the fundamentals in place, however, these solutions will probably have only short-lived results and ultimately be unsuccessful.

At the same time, companies should recognize the challenges of these remote environments and the strategic importance of inventory on the overall organization. While companies may attribute their problematic inventory levels to external forces, the companies themselves are also contributing to the problem with their inefficient behaviors and performance metrics. Companies can work within the limitations imposed by their partners, but they must also increase efficiency by becoming more holistic in their thinking.

Part of being more strategic involves making decisions up front, before you bring the inventory into the country. Companies should ask themselves questions such as "How can we establish more efficient processes so that we're leveraging existing inventory? Where can we standardize our equipment? How can we work with suppliers to better understand and plan for part substitutions? How can we create better visibility into existing inventory by implementing a more robust inventory deployment first in the United States or other developed countries and then shipping it to the remote location?" Companies will be able to create more efficient warehouse operations if they integrate their maintenance, capital project expenditures and supply-chain functions (e.g., sourcing and inventory management) with the operations up front. Bringing warehouse employees and suppliers to the table when they are formulating their maintenance strategy will facilitate inventory reductions and improve customer service.

Efforts to leverage existing inventory should be balanced with standardization efforts. Addressing the issue of standards with everyone who has a vested interest (e.g., suppliers, engineers, warehouse employees, etc.) will bolster efforts to increase inventory efficiency (having the right inventory at the right time) and help resolve many of the issues associated with managing current inventory levels.

Technology alone is not the solution. Creating more efficient warehouse operations at remote locations is more of a business process and a strategic behavioral issue than a question of finding one technology that will solve the problem. Technology should instead be expected to play an enabling role.

Peter Buettgen, who has advised Global 2000 companies on supply-chain optimization for more than 16 years, is managing director of BearingPoint's Oil and Gas Supply Chain practice.

Geoffrey Tonini is a senior manager in the same practice. He has more than nine years of supply chain and technology related experience with a focus on the oil and gas and services industries.