SUPPLY CHAIN MANAGEMENT The Oil and Gas Value Chain

1. SUPPLY CHAIN MANAGEMENTThe Oil and Gas Value Chain MDPI/GIG Oil and Gas Training

2. Course Objectives • Demonstrate the linkages between theoretical concepts and real life supply chain management practice • Use SCM theory, concepts and analytical tools to analyze the case studies of sufficient complexity to require judgment and synthesis • Critically evaluate current application of strategic SCM leading to a demonstration of independent practical knowledge in the area. • Assess and evaluate strategic concepts and future trends in SCM MDPI/GIG Oil and Gas Training

3. Intro to Supply Chain In the last 2 decades, there has been a revolution in the way business is conducted. The globalization, rapid change in technology and continual uncertainties in the marketplace requires a greater flexibility and managers who make decisions on short notice. At the same time, customers now require quicker delivery, more sophisticated products and indeed generally demanding. MDPI/GIG Oil and Gas Training

4. Intro to Supply Chain Cont. Companies have therefore turned to global sources for their supplies for more effective and efficient ways of co-coordinating the flow of materials in and out of the organisation to survive in this competitive business world. With the huge investments made on purchasing and SC activities within an organization, no organization can afford to ignore it eg manufacturing sector spends over 55% of its revenue on the purchase activities. MDPI/GIG Oil and Gas Training

5. Intro to Supply Chain Cont.. • A supply chain is a network of facilities, functions and activities that are involved in fulfilling customer demand. It covers the: • Procurement of materials • Transformation of these materials into intermediate and finished products • Distribution of these finished products to customers. MDPI/GIG Oil and Gas Training

6. Intro to Supply Chain Cont… • Supply chain spans across: • Movement and storage of raw materials • Work-in-process inventory • Finished goods from point of origin to point of consumption. • The facilities include: warehousing, factories, processing centres, distribution centres, retail outlets, and offices. • The functions covers: forecasting, purchasing, inventory management, information management, quality assurance, scheduling, production, distribution, delivery and customer service. MDPI/GIG Oil and Gas Training

7. The Evolution and Development of Purchasing and SCM • The term SCM rose to prominence in the late 90’s. • According to Monczka et al, purchasing has gone through 7 periods of development including, • the Early years (1850-1900) • Growth of Purchasing Fundamental (1900-1939) • The war years-(1940-1946) • The quite years-(1947-mid 60’s) • The materials management Comes of Age (mid 60’s-Late 70’s) • The global era (late 70’s to 1999) • Integrated Supply Chain Management-(2000 and beyond) MDPI/GIG Oil and Gas Training

8. The evolution and development of Purchasing and SCM Cont. • Early years (1850-1900) • During this era of the growth of the textile industry • Purchasing function was handled by the selling agents who were also responsible for the output, quality and style of the textile • Growth of Purchasing Fundamentals (1900-1939) • Information and articles on purchasing started being published; awareness creation • It was also an era where attention was drawn to having qualified purchasing personnel to handle the purchasing function. • The war years-(1940-1946) • The emphasis was on obtaining materials for the war. • Hence a lot of activity went on in the supply function to support the war effort. MDPI/GIG Oil and Gas Training

9. The evolution and development of Purchasing and SCM Cont.. • The quite years-(1947-mid 60’s) • The interest and attention in purchasing started waning as it was not considered important to the main stream issues confronting organisations. • The emphasis was on marketing and finance and how it contribute to satisfying the consumer and the growing industrial market. • The materials management Comes of Age (mid 60’s-Late 70’s) • Growth of mat mgt concept which combined the function of purchasing, inventory control, stores under one individual. • Emphasis was on multiple buying and relationship was at arms length • Price competition was a major factor in determining the supply contracts MDPI/GIG Oil and Gas Training

10. The Evolution and Development of Purchasing and SCM Cont… • The global era (late 70’s to 1999) • Competition became intense • Global firms captured world market share • Technological changes was unprecedentedeg the Enterprise Resource Planning (ERP) and Electronic Data Interchange (EDI) systems were developed. • Ability to coordinate purchasing activity world wide using the internet was prominent MDPI/GIG Oil and Gas Training

11. The Evolution and Development of Purchasing and SCM Cont…. • Integrated Supply Chain Management-(2000 and beyond) • Emphasis is now on quality and the important role of suppliers • Is a performance driven era. • A shift in supplier’s relationship from adversarial to cooperative approach. • The strategy now is on supplier development and improvement, early supplier involvement in product design, cross functional teams, total cost supplier selection, long term relationship, strategic cost management and integrated internet linkages and shared data bases. • The role of purchasing is being reshaped in response to the current challenges • The overall importance of purchasing process is increasing MDPI/GIG Oil and Gas Training

12. Definitions of Supply Chain • Supply chain coordinates: • Systems • Activities • information and • Resources involved in moving goods or services from supplier to customer. • The entities of a supply chain typically consist of manufacturers, service providers, distributors, and retail outlets. MDPI/GIG Oil and Gas Training

13. Definitions of SC Cont. There was the need for a mechanism through which these different functions can be integrated together. Hence the birth of the Supply Chain and Supply Chain Management which is a strategy through which such an integration can be achieved. MDPI/GIG Oil and Gas Training

14. Definitions of SC Cont Supply chain is a network of autonomous or semi-autonomous business entities collectively responsible for procurement, manufacturing, and distribution activities associated with one or more families of related products. {Jayashankar et al} MDPI/GIG Oil and Gas Training

15. Definitions of SC Cont.. • According to Martin (1992) it is “the network of organisations that are involved through the upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hand of the ultimate customer”. • The coordination within the entire chain is therefore very important. The supply chain according to Martin covers activities on the business process, procurement, production, inventory carrying, storage, handling and distribution within an organisation. MDPI/GIG Oil and Gas Training

16. Definitions of SC Cont… Supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. {Ganeshan and Harrison} MDPI/GIG Oil and Gas Training

17. Definitions of Supply Chain • Monczka et al (2002) defines the SC as encompassing all activities associated with the flow and transformation of goods from raw material stage, through to end users, as well as the associated information flow. Material and information flows both up and down the supply chain. It also includes systems mgt, operations and assembly, purchasing, production scheduling, order processing, inventory mgt, transportation, warehousing and customer service. • They further state that SC are essentially a series of linked suppliers and customers; every customer is in turn a supplier to the next downstream organization until a finished product reaches the ultimate end user. • SCM is the integration of these activities through improved supply chain relationships to achieve a sustainable competitive advantage MDPI/GIG Oil and Gas Training

18. Definitions of Supply Chain Mgt. SCM is 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 (Mentzer et al, 2001). MDPI/GIG Oil and Gas Training

19. Definitions of Supply Chain Mgt. Supply chain management is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers (Harland, 1996). SCM is the integration of key business processes across the supply chain for the purpose of adding value for customers and stakeholders (Lambert, 2008). MDPI/GIG Oil and Gas Training

20. Definitions of Supply Chain Cont.. SCM is a network of facilities that procure raw materials, transform them into intermediate goods and then final products, and deliver the products to customers through a distribution system. {Lee and Billington} MDPI/GIG Oil and Gas Training

21. Activities within the Supply Chain The complexity of the supply chain may vary from industry to industry and firm to firm. Some are complex whilst others may be very simple. A simple supply chain is where raw material is procured from vendors, transformed into finished goods in a single step, and then transported to distribution centers, and ultimately, customers. MDPI/GIG Oil and Gas Training

22. Activities within the Supply Chain The simple supply chain is be made up of several elements that are linked by the movement of products along it. In its simplest form, a supply chain is composed of a company and the suppliers and customers of that company. MDPI/GIG Oil and Gas Training

23. Activities within the Supply Chain Cont. • In the more complex SC, the flow of materials involves various modes of transportation and bill of materials until it gets to the final consumer. • Complex supply chains have 3 additional types of participants: • The supplier’s supplier or the ultimate supplier at the beginning of an extended supply chain. • The customer’s customer or ultimate customer at the end of an extended supply chain. • The service providers including logistics, distributors or wholesalers, retailers, finance, marketing, and information technology. MDPI/GIG Oil and Gas Training

24. Activities within the Supply Chain Cont. • Traditionally, marketing, distribution, planning, manufacturing, and the purchasing departments along the supply chain operated independently. • Each of these organizations have their own objectives and these may be conflicting eg • Marketing wants to meet high customer service and maximum profit. • Manufacturing would like to maximize throughput and lower costs with little consideration for the impact on inventory levels and distribution/storage capabilities. • Purchasing contracts are often negotiated with only based on historical buying patterns This resulted in not having many disjointed plans within each organization. MDPI/GIG Oil and Gas Training

25. An Example of a Supply Chain MDPI/GIG Oil and Gas Training

26. Upstream Downstream Suppliers Pre-assembly Manfr Plants Warehouses Customers An Example of a Supply Chain by Siddhartha Maheshwary . MDPI/GIG Oil and Gas Training

27. Supply Chain Activities and Functions Supplier Manufacturer Distributor Retailer Customer Consists of all parties involved, directly or indirectly, in fulfilling a customer request MDPI/GIG Oil and Gas Training

28. Supply Chain Activities and Functions Cont. Oil Company Contractor Oil Trading Company Oil Marketing Company Customer Oil Company Oil Trading Company Bulk Distribution Company Oil Marketing Company Customer Contractor Oil Company Oil Trading Company Bulk Distribution Company Customer Downstream Upstream MDPI/GIG Oil and Gas Training

29. Question? What are the main activities performed within the supply chain system? MDPI/GIG Oil and Gas Training

30. Supply Chain Activities and Functions Customer Planning Purchasing Suppliers Inventory Production Transportation and distribution Technology MDPI/GIG Oil and Gas Training

31. Activities within the Supply Chain Customer The customer is the driving element in the supply chain system. The customer starts the chain of events when they decide to purchase The sales department of the company enters the order for a quantity to be delivered on a specific date. If the product has to be manufactured, the sales order will include a requirement that needs to be fulfilled by the production facility. MDPI/GIG Oil and Gas Training

32. Activities within the Supply Chain Cont. Planning: With the requirement triggered by the customer’s sales order, Marketing will combine this with other orders and forecast the quantities and timing of customer demand. A production plan to produce the item to fulfil the customer’s orders is created. If the products are to be manufactured, the company will refer to purchasing to purchase the raw materials needed. MDPI/GIG Oil and Gas Training

33. Activities within the Supply Chain Cont.. Purchasing: Purchasing is the link between an organization and its suppliers. It is responsible for obtaining goods and/or services that will be used to produce the goods or services that for the organization’s customers. Purchasing selects suppliers, negotiates contracts, establishes alliances, It acts as liaison between suppliers and various internal departments to deliver the necessary raw materials to the manufacturing site on the required date. MDPI/GIG Oil and Gas Training

34. Activities within the Supply Chain Suppliers This is made up of one or more suppliers, who are capable of delivering the products required It is essential that the planning and execution be carefully coordinated between suppliers. Where suppliers are located can be important, as can location of processing facilities. Nearness to market, nearness to sources of supply, or nearness to both may be critical. The delivery time and cost also affect the final goods offered to the customer. MDPI/GIG Oil and Gas Training

35. Activities within the Supply Chain Cont. • Inventory • Balance in inventory level is the main objective of an efficient supply chain • Note that too little causes delays and disrupts schedules, but too much adds unnecessary costs and limits flexibility. • Raw materials received from the suppliers are checked for quality and accuracy and moved into the warehouse. • The raw materials are stored until they are required by the production/sales department. • The supplier sends an invoice to the company for the items they delivered. MDPI/GIG Oil and Gas Training

36. Activities within the Supply Chain Cont.. Production: Based on a production plan, the raw materials are moved from inventory to the production area. The finished products ordered by the customer are manufactured using the raw materials purchased from suppliers. Manufactured items are tested returned back into the warehouse for storage prior to delivery to the customer. MDPI/GIG Oil and Gas Training

37. Activities within the Supply Chain Cont… Transportation/Distribution • Transportation and distribution decisions focus on what customers want, when they want it, and how much is needed. • Distribution decisions are influenced by transportation cost and delivery times, as this costs forms a significant portion of total cost. • Shipping alternatives too are closely tied to production and inventory decisions. Eg air/sea shipment/rail etc • Distribution decisions must also take into account capacity and quality issues. • When the finished product arrives in the warehouse, the shipping department determines the most efficient method to ship the products so that they are delivered on or before the date specified by the customer. MDPI/GIG Oil and Gas Training

38. Activities within the Supply Chain Cont…. Technology The backbone for many large companies has been the vastly expensive Enterprise Resource Planning (ERP) systems like SAP, SUN and ORACLE. Most businesses take advantage of Web-based software and Internet communications. Instant communication between vendors and customers allows for timely updates of information, and this has become key in the management of the supply chain. MDPI/GIG Oil and Gas Training

39. Dynamics of Purchasing and Supply Management • It must however be noted that not all organizations operate in the same way and hence we cannot prescribe the same treatment to each one of them • There are some basic characteristics that allow for differentiated perspective and these are: • Primary function of the organization • Size • Complexity in relation to its geographical and/or product spread • Type of Ownership • Mode of operation MDPI/GIG Oil and Gas Training

40. Dynamics of Purchasing and Supply Management Cont. Primary function of the organization • Primary Sector • Deals with the extracting products in their natural state. • The preoccupation of purchasing and supply will be on the purchase of capital equipments and MRO supplies • Secondary Sector • Deals with the manufacturing sector ie processing, shaping transforming, assembling of parts into finished products • The preoccupation of purchasing and supply will be on the purchase of necessary input into the manufacturing stage and the purchase of capital equipment • There would be an interest into factory lay out • Planning, ordering of materials and stocking MDPI/GIG Oil and Gas Training

41. Dynamics of purchasing and supply management Cont.. Primary function of the organization • Tertiary • Deals with the wholesalers and retail sectors • The preoccupation of purchasing and supply will be to buy and restock for sale to the final consumer when required • Tertiary - • Deals with the Service providers sector ie banking, transporters, educational sector • The preoccupation of purchasing and supply will be on the purchase of capital equipment and consumables MDPI/GIG Oil and Gas Training

42. Dynamics of Purchasing and Supply Management Cont… • The type of supply chain system put in place is depends on the capital employed or value of sales and the level of purchasing expenditure • The supply chain and purchasing function in large organizations may play a more prominent role even at management level such as shaping decisions within an organization. • The number and status of employees depends on the size of the supply chain. • A small size means less influence. MDPI/GIG Oil and Gas Training

43. Dynamics of Purchasing and Supply Management Complexity in relation to its geographical and/or product spread • The more wide spread the organization is in terms of its products and geographical locations the more complex its SC mgt becomes Type of Ownership • Public ownership imposes the obligations with regards to public accountability which in turn leads to a set of proscribed methods and approaches towards running the purchasing and SC function • National legal requirements, govt polices and value for money are key • The private sector on the other hand can come up with its own set of rules Market or non market mode of operation • Those operating in the market sell their goods for profit and that affects the way they do their SC • Since profit is the motive it would affect what they do and this may now be so much for the non-market mode of operation. MDPI/GIG Oil and Gas Training

44. The Need for Supply Chain Management Improve operations of the company • During the last decade, many organizations adopted practices such as lean production and total quality management (TQM). • As a result, they were able to achieve improved quality while wringing much of the excess costs out of their systems. • Although there is still room for improvement, for many organizations, the major gains have been realized. • The opportunity now lies largely with procurement, distribution, and logistics – the supply chain. MDPI/GIG Oil and Gas Training

45. The Need for Supply Chain Management Cont. Increasing levels of outsourcing. Organizations are increasing their levels of outsourcing, buying goods or services instead of producing or providing them themselves. As outsourcing increases, organizations are spending increasing amounts on supply-related activities (wrapping, packaging, moving, loading and unloading, and sorting). A significant amount of the cost and time spent on these and other related activities may be unnecessary. MDPI/GIG Oil and Gas Training

46. The Need for Supply Chain Management Cont. Increasing globalization • Increasing globalization has expanded the physical length of supply chains. • A global supply chain increases the challenges of managing a supply chain. Global sources of supplies’ means longer lead times and greater opportunities for disruption of deliveries for the companies. • Other factors that need to be taken care of include currency differences and monetary fluctuations, as well as language and cultural differences. Increasing importance of e-business. • Technological advancement and the increasing importance of e-business has added new dimensions to the business of buying and selling and this has as well presented new challenges. MDPI/GIG Oil and Gas Training

47. The Need for Supply Chain Management Cont… The complexity of supply chains. • Supply chains are complex; they are dynamic, and they have many inherent uncertainties that can adversely affect the supply chain, such as inaccurate forecasts and difficulties in forecasting over short time horizons, late deliveries, substandard quality, equipment breakdowns, and cancelled or changed orders. • All these means there is the need for the supply chain system The need to manage inventories. • Inventories play a major role in the success or failure of a supply chain, so it is important to coordinate inventory levels throughout a supply chain. • Shortages can severely disrupt the timely flow of work and have far-reaching impacts, while excess inventories add unnecessary costs. • It would not be unusual to find inventory shortages in some parts of a supply chain and excess inventories in other parts of the same supply chain. MDPI/GIG Oil and Gas Training

48. The Need for Supply Chain Management… Increasing transportation costs. • Transportation costs are increasing because of the need to get to the customer fast, there is therefore the need for such cost to be carefully managed. Competitive pressures. • Competitive pressures have led to an increasing number of new products, shorter product development cycles, and increased demand for customization. • In some industries, eg consumer electronics, product life cycles are relatively short. • Added to this are adoption of quick-response strategies and efforts to reduce lead times to satisfy the consumer. MDPI/GIG Oil and Gas Training

49. The Need for Supply Chain Management Cont… Demanding market The more demanding market and an expansion of range of categories and products demanded by consumers makes it difficult to ignore the supply chain. This factor has been worsened by the uncertain and less predictable nature of the markets. MDPI/GIG Oil and Gas Training

50. Challenges of Supply Chain Management Maximizing the benefits derived from the Supply Chain • The efficient supply chain must maximize shareholder and customer value. • This may be achieved by fully • integrating all members of the supply chain • collaboratively balancing resources of chain members • Maximizing the speed of information transfer • Minimizing the response time. • Inspite of all these the supply chain management faces some challenges MDPI/GIG Oil and Gas Training