Since the term “supply chain” was coined almost 40 years ago, the goal has arguably stayed the same: to optimize the flow of goods, information, and people. Supply chain professionals have been focused on reducing costs; doing more with less.
How oil and gas companies optimize and run their supply chains have been and will still be a function of the current technological advances, best operational practices, and the latest management thinking.
Managing supply chain through the lens of KPIs
Historically the supply chain has been managed through the lens of Key Performance Indicators (KPI). Those KPIs allow supply chain managers to evaluate the health of critical functions such as planning and forecasting, sourcing and procurement, and logistics and distribution, for example. While KPIs are necessary to assess performance, there are several challenges with their use – they are backward looking:
KPIs are used to monitor the past and are not predictors of future performance.
KPIs are good at measuring functions within supply chain but are challenged when it comes to managing the end-to-end integrated supply chain proactively.
KPIs are mostly focused on the traditional cost components and not tailored to leverage the supply chain as a catalyst for profitable growth.
Complexity is unprecedented – Introducing Key Performance Predictors (KPPs)
Today’s business and geopolitical environments are affecting the oil and gas supply chains in unusual ways—the pace of activities is faster than ever, the interdependencies of the companies are not only difficult to trace but also behave in a non-linear fashion (i.e., inputs don’t always translate to direct and immediately correlated outputs).
Still, many managers keep planning and executing their supply chains in a reactive, linear fashion; thus, the never-ending “firefighting drill” that many teams report. Here are some examples where KPPs can help you:
- Predict future performance: The account payable department of a company, trying to improve on-time payments to its suppliers, expands its understanding of how other upstream activities are interconnected and affecting the on-time payment KPI. The company is then able to spot and start collecting data of upstream operations, in engineering and design, driving and predicting the likelihood of on-time payments to suppliers, weeks in advance.
- Managing the end-to-end integrated supply chain: A company implements a control tower, enabling full visibility into the supply chain. KPPs from critical suppliers are used to monitor and anticipate potential supply disruptions. The supply chain manager can proactively communicate with the vendor as soon as the KPP flags a warning. Supply chain actively communicates with operations and make the necessary adjustment to keep running the operations, while minimizing disruptions.
- Enabling profitable growth: With the direct impact of the supply chain function in the company’s working capital, the supply chain team goes beyond measuring inventory turns and maps all the direct and indirect activities that influence inventory. The supply chain team gets immediate visibility to the data at the point of sale (PoS) and manages to predict demand fluctuations with a higher accuracy. The manager minimizes inventory oscillations, saving millions of dollars from unnecessary tied-up cash on the inventory while providing higher service levels.
What energy companies could start doing today
The aim is to have metrics that cascade from the essential matters the CEO is responsible for at the company level, down to the business unit and departments, to the teams within them and the people responsible for each role.
There is no single way to figure out what data should be captured to provide a prediction for a given outcome, but the following steps offer a proven approach once you know the question you are looking to answer.
- The process “trigger” is usually a right place to start collecting data. Be systematic and strategic in the data you decide to collect, time and resources are limited, do small quick experiments and adjust accordingly
- The best predictors are usually a combination of KPPs (variables), iterate and find the balance - too many KPPs will create statistical noise, too few will generate bias. Finding the right ones require experimentation
- When the circumstances or goals change, most likely you will need to find new KPPs.
KPIs are not going anywhere. At the same time, the current complexities, nonlinearities, and interdependencies of today’s oil and gas companies are just bound to increase. This increasing complexity will require managers to incorporate the use of KPPs to anticipate and monitor integrated end-to-end supply chain outcomes and leverage the supply chain as a catalyst for profitable growth.
Oil and gas companies that adopt this approach will be able to reap the benefits of improved performance, proactive planning, and anticipation of challenges. Companies that don’t are destined to live in the never-ending “firefighting drill.”