In a mature oil and gas province such as the North Sea, where operating costs continue to rise, cost control is paramount.
The increasingly technological nature of oil and gas extraction in the North Sea area is further complicated by outside influences such as the prevailing barrel price – bringing into sharp focus the industry’s need to mitigate the costs associated with exploration and production.
Some costs cannot be controlled by the organisation, some can – naturally it is important that businesses focus on the areas of spend where they are masters of their own destiny.
The supply chain is an obvious place to start given that it accounts for a significant percentage of the typical oil and gas company’s cost base.
One specific area within the upstream supply chain which consistently suffers from inefficiency is the offshore returns process. Production, exploration and projects staff are instinctively focussed on getting the job done on time and to budget – less emphasis is often placed on what happens to surplus materials and equipment to be returned onshore.
While improving management of returns processes may not be an obvious place to start to look for cost savings, poor management of the goods returns can in fact amount to significant value leakage.
This manifests itself in numerous ways such as stock piling of goods, poor stock turnover, re-purchasing of items available in stock, additional transportation costs and hire charges for rental equipments that have been incorrectly returned and scrapping of fit-for purpose or repairable equipment.
In Absoft’s experience by optimising the returns process startling savings can be achieved.
As an example, businesses can achieve stock balance sheet reductions of up to 15%, while stock usage can increase by between 5 and 10%. At the same time, rental costs can fall by 5 to 10% indicating improved utilisation rates and increased efficiency in the return of vendor owned equipment.
To get to this stage an organisation must first understand the causes of poor returns management.
As is so often the case, there is not one single root cause. The challenges involved in managing the returns process efficiently are centred on effectively understanding and addressing issues involving process, technology and people.
In the process arena, Absoft frequently finds that documentation of existing processes and procedures is out-of-date and sometimes non-existent. Fundamentally, in many instances there is no commonly agreed and understood returns process.
Turning now to technology, even when we find that the documentation does exist we often discover businesses are struggling with internal IT systems which are simply not up to the job of running an integrated, cost efficient returns process. Different parts of the business in different locations often use disparate IT systems with key tasks carried out off-system in packages such as Excel. Frequently this results in a lack of visibility of accurate, up-to-date information across the organisation.
Process and technology issues contribute to and are exacerbated by failures of coordination between the people involved in the returns process. All too often offshore personnel don’t tell onshore what is to be done with returned goods and the service functions don’t provide offshore sites with accurate information on stocks or goods status because returns aren’t being registered.
Having considered the issues that increase cost– what steps must an organisation take to achieve the cost savings mentioned earlier?
The first step is often justifying that action is required. Absoft has helped many organisations to develop the business case proving that the investment they might choose to make in optimising the returns processes will typically be repaid many times over.
With the project established, the next step is to define an integrated returns process which will support the organisation in managing mobilisation and demobilisation of tools, consumables and vendor items. With all the correct decision making processes and monitoring procedures in place, the business can recover investment costs which otherwise would have been lost in expenditure or write-offs.
Once processes have been defined, and for these to work effectively, it is critical that individuals understand and take ownership of their role in them.
And it is vital that appropriate tools are put in place to support both the efficiency of the new processes, and to enable continual monitoring and reporting.
Integrated enterprise resource planning (ERP) systems, such as SAP, provide one consistent source of information throughout the entire organisation, enabling business processes and increasing efficiency across the board.
The options should be evaluated and, where existing ERP systems are in place, they can be adapted to enable the new business process to be supported and managed in a robust and efficient manner. Reporting tools such as BusinessObjects can be used to monitor the new process. These will allow business users to pinpoint and analyse where improvements have occurred and where further improvements can be achieved.
This culture of continual improvement will benefit the organisation in the short term, and lay the foundation for successful management of the returns process in the long term.
