The Mechanic, A Broken Pump and 5 O-Rings | Part 2 of 9
Part 1: A Paradox of Purchasing in Oil and Gas
Let’s say you’re a mechanic, a pump breaks and you need 5 O-rings to fix it.
A few thoughts come to mind:
How do I get it?
Do we already have this material in stock so we don’t need to buy it?
If I need to order it, when will it come in and where will I pick it up?
To do your job, you know one thing for certain, “until I have these O-rings, I can’t fix the pump.”
In most instances, you’ll drop by the warehouse and see if they have it in stock.
If they have it, great, you’re good to go. If not, the SOP’s likely require that you submit a purchase request to the buyer. This request will require approval of some form or another.
Therein lies a tricky part of the purchasing function because this step in the process of asking for approval,“works” all the time; just not in the way it should
Materials are approved, ordered and received.
The mechanic fixes the pump, right?
Yep.
The trouble we’ve found however (regardless of the size and sophistication of the producer) is that the underlying approval process itself is fundamentally flawed and it’s costing producers dearly.
To complicate matters, fixing this flaw systematically has been complex because of the inherently fragmented nature of the people, process, and technology supporting the purchasing team.
The end result: A lack of optimized spend and tying up cash flows that could be put to better use.
We’ll dig into this “hidden” flaw and its front-line and organizational implications in greater depth in part 5 of this newsletter series, but for now, the one element to consider that is routinely overlooked within the purchasing operations of O&G producers is ..
“What Is Actually Being Approved?”
Approving the purchasing of parts to fix a broken pump is easy.
Having the data and the insights necessary to know that what you’ve approved is the best decision in terms of timing, cost, and safety, is another story altogether.
And it’s being overlooked.
Think about it. A pump broke. The mechanic needs 5 O-rings.
What is a supervisor/approver supposed to say when asked for their approval?
“Nope. You don’t need 5 O-rings. That pump you think is broken can act up at times. It’ll get cranking again at some point.”
… Said no supervisor/approver to their talented mechanic ever.
This example surrounding the concept of “approval” is noteworthy because it exists in every purchasing program, at every producer and plays a key role in the paradox of purchasing in oil and gas …
The urgent need to revisit workflows and technology to get a handle on the current state of operations.
Determining if the business process layer requires all of the steps it contains in the first place.
Does an opportunity exist to automate the decision making criteria and remove all manual intervention and guesswork?
In this example (and countless others), the approval process is worthy of a closer look, because the business outcome is almost always the same.
A mechanic submits a request to a buyer.
The buyer (through no fault of their own) has no real context if the 5 O-rings are needed to be ordered at all. It’s not their job to have a real time understanding of inventory, or jobs and parts already allocated. Buying is their job.
So, the buyer says “Let me ask your Supervisor.”
In the end if you’re the mechanic, whether you ask a supervisor directly, or follow SOP and the buyer asks for supervisors approval, the supervisor is bound to say “yes.”
Hmm…
Make no mistake, approvals are certainly necessary in purchasing; but so is technology that streamlines processes and ensures data integrity so the right parts are approved, at the right time, by the right person, for the right reason.
Without this layer of business intelligence in place to support your disparate purchasing stakeholders, how does the person responsible for approving the 5 O-rings make a well informed decision?
This is no small matter.
For Producers who purchase $10, $20, $50M and more worth of materials, the inability to answer this question in an automated, collaborative, visible, and reliable manner quickly becomes very costly. Without an open feedback loop that ensures timely and strategic ordering, we estimate that operators are looking at –
5% of total materials placed being unnecessary at that time of order (on the very low end).
And 30% or more (on the high end).
Regardless of operator size, the math adds up real quickly and its impact on overall OPEX is significant.
Now, consider this:
These estimated percentages are representative of just one area of purchasing where improperly timed spend demonstrates the need for an integrated, transparent, systems-driven purchasing function.
There are many others.
“Wait. Can’t These Approvals Be Done Systematically Today?”
Sure. They most certainly can. We’ve seen this countless times.
Unfortunately, the system in question is typically a single spreadsheet that is manually updated by multiple stakeholders.
Considering this usability, what are the odds that this spreadsheet is most accurate and up to date source of inventory truth?
The spreadsheets we’ve seen being used in many producer’s purchasing programs are entirely reliant upon manual intervention for data capture.
There’s a better, modern way to make this happen.
Implement a process which optimizes the purchasing team’s responsiveness and performance, while elevating the department to a far higher state of cost discipline.
Aligning purchasing, with modern O&G producers imperative to optimize operational profitability, regardless of the price of oil.
In Part 3 of this Purchasing deep dive series, we’ll continue this discussion by digging into another aspect of this process with profound cost implications by answering the question:
“Hey, Where Are The 5 O-rings I ordered?”
In doing so, we will explore what the warehouse management function really faces in order to address this request accurately and in a timely manner.
We will peel back another layer in the costly purchasing paradox across the aisles and bins within producers warehouses.
Along with 5 critical areas of opportunity for warehouse management to add tremendous value to their organization, while bolstering their career trajectory.
Stay tuned…
Regards,
Michael D’Iorio
TRUApp Energy
Editor, Modern Oil Field Management