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September 14, 2016
Is your midstream company missing out on potential procurement savings?
By: Jeffrey Miers

As the midstream energy industry continues to press forward into the headwinds of decreased drilling and declining production, operators are compelled to continue driving down costs. Opportunities can be found in tighter management of procurement and supply chains that drive day-to-day operations as well as large capital programs.

Effectively managing procurement can not only deliver cost savings but also potential benefits ranging from 6 percent to 12 percent savings of total spend under management. This applies equally to ongoing spend as well as spend on equipment, materials and services for capital programs. To achieve this objective, midstream companies need to address several barriers, described below, along with suggested solutions.

Savings are not the only advantage. In the case of sourcing materials and services for capital projects, better management of capital spend not only drives down cost but also can help reduce the risk of major projects falling behind schedule, which can result in millions in lost revenues due to delayed go-live dates.

Problem: Limited reach limits opportunities. Lack of trust in procurement’s capabilities can result in up to 60 percent of spend remaining off-limits. For example, the team that purchases office supplies may have limited capabilities to negotiate IT services.

Solution: Increase trust with dedicated category specialists. Category specialists with a strong understanding of the market have an information advantage that enables them to drive greater savings through fact-based negotiations. Set goals to earn access to 90 percent of indirect spend, 100 percent of direct spend and 80 percent of capital spend.

Problem: Insufficient information to negotiate.If a company sources travel only once every two years, market knowledge likely will be outdated in the next negotiation cycle.

Solution: Build market intelligence to drive greater savings. Levelling the playing field requires access to real-time intelligence on supply, demand, pricing, and recommended best-in-class terms and conditions. Armed with such intelligence, companies can seek to double the savings over firms lacking such knowledge. Many buyers may be all too happy with a 10 percent discount off list price, but peers with greater access to market intelligence might be able to pay 30 percent less.

Problem: Ineffective procurement infrastructure. Most midstream companies lack a solid structure supported by technology that assists category specialists and is inflexible to accommodate ebbs and flows in volume.

Solution: Increase effectiveness with a scalable procurement infrastructure supported by technology. Companies benefit from systematic collection and use of market intelligence from end to end. A best-in-class infrastructure supports on-demand category specialists focused on specific areas of spend, and has the ability to scale to handle variabilities in spend and project volume.

Problem: Lack of follow-through. Negotiated savings are wonderful. Unfortunately, almost half of savings disappear between contract signing and payment. Many expected savings vanish because of failure to monitor suppliers’ compliance to contracts.

Solution: Boost savings with a disciplined, end-to-end process. By tracking spend as it occurs at the line-item level, companies can check the accuracy of pricing, hold suppliers to contractual terms and determine when maverick purchases occur. A contract compliance dashboard enabled by analytics helps to mitigate savings leakage. By detecting issues in near real time, procurement can promptly stop noncompliant transactions.

Managed service approach

If midstream companies lack sufficient resources in-house, they may turn to a managed service provider to supplement their capabilities with greater market intelligence and category specialists. This approach can help companies realize savings ranging from 6 percent to 12 percent of spend under management.

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