SUPPLY CHAIN MANAGEMENT AT A GLOBAL LEVEL A CHALLENGE AND AN OPPORTUNITY FOR A LEADING OILFIELD SERVICE COMPANY. Amaar Saeed Khan

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1 SUPPLY CHAIN MANAGEMENT AT A GLOBAL LEVEL A CHALLENGE AND AN OPPORTUNITY FOR A LEADING OILFIELD SERVICE COMPANY Amaar Saeed Khan EXECUTIVE SUMMARY: Due to the complex nature of the oil and gas industry, it offers a classic model for control and management implications of utilizing complex oil & gas supply chains (SC). The industry is spread across the globe in various geographic regions to tap the oil and gas reserves; as a result various oilfield service companies are increasing their international footprint in order to support these worldwide operations. The conventional business cycle in the oil and gas industry starts at the exploration phase and passes through various phases before it reaches the final consumer. The interface between various phases can represent a different company where the output of one is the input for the other. In this regard the efficiency of a supply chain can be pivotal to the success of any company therefore it is of essence that these supply chains are very well managed and controlled. This report looks at the Supply Chain Management (SCM) of one of the leading oilfield service company by analyzing the challenge of managing supply chain spread over various geographic regions. The main emphasis of the report is on the need for supply chain management as a well integrated and coordinated system to support the worldwide supply chain management operations more efficiently. The report recommends a systematic approach towards the SCM based on the framework of a management system,which will improve control and management practices across the SC. The author is a Student of M.SC in International Oil & Gas Management at CEPMLP. He holds a BE degree in Civil Engineering from National University of Sciences & Technology, Pakistan and an MSC in Oil & Gas Technology from Aalborg University Denmark. He works with Schlumberger as a project engineer for BP, based in Cairo Egypt. amaarkhan@hotmail.com i

2 TERMS OF REFERENCE: Prepare a critical management report for the senior strategy management of an energy or mining organization of our choice. The aim of the report should be on the management and control implications in utilizing complex supply chains. The report should focus its analysis upon the contemporary management and control practices and related consequences; finally providing some recommendations based on the analysis, to be considered by the organization s senior strategy management. The report should present a critical and informed discussion underpinned by appropriate literatures. ii P a g e

3 TABLE OF CONTENTS 1. INTRODUCTION SUPPLY CHAIN MANAGEMENT AT SCHLUMBERGER SUPPLY CHAIN MANAGEMENT ANALYSIS SCHLUMBERGER SCM SYSTEM SOLUTION APPROACH ADVANTAGES OF SCM SYSTEM RECOMMENDATIONS.. 7 BIBLIOGRAPHY iii P a g e

4 1. Introduction Based on the annual energy outlook (IEA 2009), there are still enough oil and gas reserves left in the world which would be able to meet the world production demand for a considerable amount of time to come. In this regard one of the main challenges being faced by the oilfield industry is to tap the existing oil and gas reserves and deliver the products to its users at the lowest possible cost which cannot be achieved without an efficient and solid SC under an effective management. As various organizations in the world experience growth and have established worldwide supply chain teams very few among these manage to have a culture of productivity, discipline, efficiency and ultimate satisfaction; Schlumberger is one of them. It is the world's leading oilfield service company supplying technology, information solutions and integrated project management for various oilfield operations. As of today the company employs more than 77,000 employees of 140 different nationalities with operations spread over 80 different countries in the world. Schlumberger manages its business through 33 Geo-Market regions, which are grouped into four geographic areas: North America, Latin America, Europe & Africa and Middle East & Asia (Schlumberger global website). The Geo-Market structure offers customers a single point of contact at the local level for operations and brings together geographically focused teams to meet local needs and deliver customized solutions. Due to the rapidly evolving business environment of the oilfield industry and the company s international footprint spanning over 80 different countries, in order to maintain its leading position, Schlumberger is faced with certain challenges revolving around management and control of its supply chain at the global level. These challenges could be divided in two broad categories one being the issue of cost control which is a very important aspect of any supply chain especially in the current times of economic uncertainty and the second being the need for a common structure and implementation across the organization based on a framework which provides a systematic approach for the management team, enabling them to overcome the contemporary management challenges like chaos, change and physical control issues regarding supply chain management (SCM), spread across different geographic regions. Because of the size and complexity of the global operations and the implications associated with the inappropriate handling of the complex supply chain, the report would focus on the output driven control system and its management, to be more specific this report concerns the physical organization of resources but will not consider the control mechanisms used in managing the knowledge worker. The main focus will remain the implications of control and management regarding 1

5 handling such complex supply chains by addressing the challenges mentioned above and also includes some recommendations for consideration by the organization s senior management. 2. Supply Chain Management at Schlumberger Exploration Phase Production Refining Marketing Consumer In the oil and gas industry the typical business cycle starts at the exploration phase and then moves on through various phases shown above until the final product reaches the consumer. These different phases also represent the interface between various companies and the materials that flow through these links, based on the nature of various operations ranging from seismic and geophysical surveys, drilling and reservoir production, refining processes and marketing of the final products. Each stage of the link can represent a separate company but the common objective throughout the link is to provide the final product to the customers at the least possible cost. Besides this long term planning is at the core of the industry because of the cost implications associated with time dependant nature of the oilfield business. The profile of Schlumberger revolves around exploration and production operations where most of the activities are repetitive. Hence it is very important to ensure that each component in the supply chain responds quickly in terms of material needs and should have reliable suppliers because the variability and uncertainty related to demand and supply within SCM is one of the major problems (Ho, 2002). In order to overcome these issues Schlumberger is vertically integrated backwards to the extent that it produces some of its materials used for equipment for various exploration and production operations, through in-house production in various manufacturing centers in different geographic areas. As a result Schlumberger has both internal and external customers. This vertical integration results in reduced inventories, less quality checks and other non-productive activities. As all these resources like materials, equipment, technology, labor and certain other assets flow through various geographic boundaries spanning from North America to the Far East it requires an effective management and control across the supply chain which requires the SCM to be a well integrated and coordinated system as defined by (Forrester 1958,1961) because timely delivery of these resources is of the essence because the output of one activity is the input for the second phase of activity and the cost implications associated with the nature of the business in terms of rig downtimes could be enormous. Besides this the supply chain at Schlumbeger gains more complexity because of the involvement of various cultural backgrounds and work ethics across various geographic regions but we would not go into the details of the cultural aspects of the supply chain 2 P a g e

6 management but would keep it at a generalized level for the purpose of this report. The complexities associated with such a SC cannot be handled through contemporary management and control practices. There are certain issues shown below, which needs to be addressed properly in order to have an efficient SC which produces profitable results, these are: Need for a single management in order to improve the physical promoting harmonization within SC across areas and functions reducing the complications based on different operating cultures. Need for SCM as a well integrated and coordinated system as defined by (Forrester 1958, 1961), to handle the worldwide operations. Need for the management to have a better control across the SC which would help in reducing the overall cost. In order to address these issues we need to look at the theory of SCM in the light of some meta analysis, in the following chapter. 3. Supply Chain Management Analysis There seems to be little consensus on the definition of SCM. Kathawala and Abdou (2003) conclude that SCM has been poorly defined and there is some degree of variability in people s mind about what is meant by SCM. However Mentzer et al (2001) attempted to overcome this issue by defining SCM broadly which is not confined to any single area or discipline. We would use this definition for the purpose of this report because it closely represents the concept of SC in Schlumberger: Supply chain management is defined as the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole. From this definition we can observe that the emphasis is not on simply minimizing cost or reducing inventories but rather on taking a systems approach to supply chain management as explained by Simchi-Levi. et al (2003). They argue that efficient integration between various components of a supply chain i.e. suppliers, manufacturer s, warehouses and stores is very important. The main challenge being the coordination of activities across the supply chain so that the organization can improve performance: reduce cost, increase service level, reduce the 3 P a g e

7 bullwhip effect which is based on demand amplification (Forrester 1961), better use of its resources, and respond effectively to changes in the market. The complex nature of the oilfield supply chain and the contemporary business environments consists of high levels of uncertainty and complexity in terms of what methods and balance of practices should be considered in controlling and managing such international supply chains. Whether it is inventory management or reduction in lead times across the various functions of supply chain, control plays a very important role when it comes to implementing the plan or a system because planning and operational controls remain significant responsibilities of management but for SCM, it is fundamental and is considered as a key activity of management Boddy (2008). Now lets look at the type of control which will be suitable for this application as Rollinson (2005) makes the distinction between choice of control mechanisms through output and input controls where output controls revolve around traditional models of management based on performance, specifying desired results, allocating individual worker responsibility for achieving specified tasks and monitoring worker achievements on the other hand input controls are about using organizational culture based on common beliefs and values such as innovation in the case of Schlumberger. But the control mechanism being used also depends upon the subjects i.e. highly skilled knowledge workers or day to day operators. However it will be very difficult to apply a specific type of control mechanism when it comes to managing international value chains similar to Schlumberger s because in some cases input controls would be better suited because it will help in achieving the common goal by improving the overall efficiency of the supply chain whereas output controls would be more effective in case of physical management of resources like inventories and allocation of various financial assets, as output controls will restrict the abuse of these resources flowing within the value chains. In knowledge-intensive industries output controls are problematic but desirable which requires a sophisticated balance of formal output controls and input controls keeping in view the worker requirements of knowledge intensive worker (Alvesson, 2004). As expressed earlier this report focuses on the physical related to the control of organizational resources, in which case the solution lies in developing an integrated SCM system based on the systems approach where control, planning and management is fundamental dimension of achieving organisational goals through better coordination of resources within the integrated supply chain. The supply chain management system which can satisfy the solution above would require a high degree of innovation, which makes traditional management practices such as standardization, routinization and supervision difficult to apply, they are used more flexibly (Alvesson, 2004), 4 P a g e

8 especially in case of handling knowledge intensive workers playing individual roles in such a complex supply chain. 4. Schlumberger SCM System Solution Approach As stated earlier the solution to the challenges faced by Schlumberger today in managing its global supply chain exists in integrating all the SC functions in one system under the umbrella of management and control. The success of this management system would be based on the role of management, processes and people. So what is this management system? In simple words, it is a well organized, integrated and adequately documented process, in the form of standards and procedures that describes how a company or function will achieve its objectives. But it is not a completely IT based system based on inputs but will have room for the management through increased interaction with the people involved down the supply chain. This management system did not come out of the blues but it will be derived from the Schlumberger quality, health, safety & environment (QHSE) management system as shown in Fig-1. Despite its name this management system will not be purely an IT application, it will be the framework of processes and procedures used to ensure that the SC organization can fulfill all tasks required to achieve the goal by equipping the users with updated resources which will facilitate the day to day work and at the same time will have the appropriate controls for effective management. 5 P a g e

9 Figure 1- Schlumberger QHSE Management System This figure represents the eight inter related components of the management system. All of the supply chain management system processes, documents and practices fall into one of the eight interrelated components of this system. The organized framework of the management system will allow all existing SC guidelines, procedures, standards and practices to be structured in a single coherent structure. It will promote harmonization across the different areas and functions. This will be improving the use of knowledge by building upon existing knowledge and giving critical considerations for operational control, level of risk and uncertainty in the international supply chain. This system will ensure involvement and participation from the lower level people in the SC organization as well, which will promote accountability in terms of inventory management leading to effective cost control Advantages of Supply Chain Management System: We can expect several benefits to flow from this management system: Meets the need for a common structure within Schlumberger SC. Improved efficiency of SC by documenting how processes, procedures, practices must be completed, and all employees will become more proficient and efficient. Will improve control and effective management throughout the supply chain ultimately leading to improved performance. With the help of this system the performance of the supply chain can be measured which will provide incentives for improving the supply chain, thus removing dependency on individual decision makers and ensuring participation from all levels within the supply chain. In this way situational expertise in SCM will develop carrying more authority than formal position as Lowendahl (1997) argues that expertise is multidimensional and not linked to seniority and administration experience, in this way operational authority may be unrelated to hierarchical position, as opposite to the traditional management practices. 6 P a g e

10 5. Recommendations The following recommendations are made on the basis of the analysis above: 1. The various supply chain components like suppliers, manufacturers, warehouses and stores should be integrated in a single system, which makes supply chain management more effective. 2. The supply chain business in Schlumberger should be approached in a more systematic manner based on integrated and documented processes. 3. The team involved in the operational side on handling the supply chain should be highly skilled in supply chain management function based on situational experience as opposite to the company s hierarchy positions. 4. The managers handling the supply chain operations should be committed and accountable and should not rely purely on procedures and standards, which can be achieved by closely interacting with the supply chain operational team. 5. The proposed management system should attempt to not only manage the issues associated with the physical management of the products and resources but also address the contribution of knowledge management of highly skilled professions in the supply chain function. 7 P a g e

11 BIBLIOGRAPHY BOOKS: Alvesson, M., Knowledge Work and Knowledge-Intensive Firms (Oxford, United Kingdon: Oxford University Press, 2004). Boddy, D., Management: An Introduction (Harlow, United Kingdom: FT Prentice Hall, 2008). Forrester, J.W., Industrial Dynamics (Cambridge, United Kingdom: MIT Press, 1961). Lowendahl, B., Strategic Management in Professional Service Firms (Copenhagen, Denmark: Copenhagen Business School Press, 1997). Rollinson, D., Organisational Behaviour and Analysis: An integrated Approach (Harlow, United Kingdom: Pearson, 2005). Simchi-Levi, David.,Kaminsky, Philip., Managing the Supply Chain (USA: McGraw- Hill Professional, 2004). ARTICLES: Christopher M. Chima (2007), Supply Chain Management Issues in the Oil & Gas industry. Journal of Business & Economic Research, Vol. 05 No. 6, pp Forrester, J.W. (1958), Industrial Dynamics: A Major Breakthrough for Decision Makers. Harvard Business Review, 26(4), pp Ho, D.C.K. (2002), Empirical research on supply chain management: a critical review and recommendations, International Journal of Production Research, Vol. 40 No. 17, pp Kathawala, Y.K. and Abdou, K. (2003), Supply chain evaluation in the service industry: a framework development compared to manufacturing, Managerial Auditing Journal, Vol. 18 No. 2, pp Mentzer, J.T., DeWitt, W., Keebler, J.S., Min, S., Nix, N.W., Smith, C.D. and Zacharia, Z.G. (2001), Defining supply chain management, Journal of Business Logistics, Vol. 22 No. 2, pp INTERNET: Schlumberger global website: (Last Visited 19-Jan-2010) International Energy Agency (IEA Outlook 2009) Website: (Last Visited 25-Jan-2010) 8 P a g e