Oil and gas companies operate in dynamic and complex environments, resulting in constant challenges related to the management of supply and demand. Now, with oil prices at historic lows and disruptions caused by the COVID-19 outbreak, the time has come to evaluate supply-chain and procurement strategies, sourcing techniques and costs.
Pandemics like that of COVID-19 create significant disruption to the flow of oil and gas equipment and parts, including valves, turbines and compressors. The current crisis is a wakeup call for C-level executives to develop new business strategies in future supply-chain designs.
Many oil and gas companies worldwide have suppliers or sub-suppliers (tier 2 or tier 3) based in affected regions such as China, Italy, South Korea and Spain. The decision to source everything from one geography or country has contributed to the current disruption. Even companies that don’t source directly from China might have suppliers up the line that do. Oil and gas companies need to be proactive in developing supply-chain resilience and risk intelligence.
Supplier risk intelligence is the process of analyzing present and future procurement risks, focusing on the execution of market-sector strategy, and enabling the business to better anticipate changes in the external marketplace and react before others do.
Supply-chain-mapping is a way of mitigating the related risks, especially if a company is overly dependent on one country or geography. The process involves a thorough understanding of suppliers, including their global and local sites and subcontractors, and the components originate or pass through each of them. Companies that are ahead in mapping have an advantage when disruptions occur, because they can deduce quickly how their supply chains are likely to be impacted in the short- to mid-term. Armed with this knowledge, they have the necessary lead time to execute avoidance and mitigation strategies, such as alternative sourcing, strategic inventory allocation, and de-bottlenecking the critical supply chain.
National and international oil and gas companies can improve their supply-chain risk mitigation practices by adopting the following practical measures:
The rethinking of supply-chain strategy had already begun prior to the current pandemic, but for many companies COVID-19 will accelerate the need for decentralized global supply chains. Improved supply-chain resiliency and collaborative supplier-relationship management is the way forward for oil and gas companies. The goal is to reduce costs in a time of low oil prices, and focus on exploration and production in the most optimized way.
It will be interesting to see how oil and gas companies can effectively manage their supplier-monitoring systems, as they strive to adopt best-in-class supply-chain practices in 2020 and beyond.
Vinodkumar Raghothamarao is director of consulting for energy wide perspectives and strategy at IHS Markit EMEA.
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