Cost Insights
by PowerAdvocate

Intelligence for energy companies seeking a data-driven approach to cost management

[O&G Insights Beyond Oil & Gas] SRM Insights That O&G Can Learn from Volkswagen and Zappos

January 16, 2017 at 7:41 PM / by PowerAdvocate

In our 'Beyond Oil & Gas' Series, we're excited to bring you the most valuable insights that O&G Supply Chain folks can take away from industries outside the world of Oil & Gas. In our latest installment, we share how a large online retailer and a car company can offer SRM insights and lessons for O&G firms.

 

In our work with Oil & Gas Supply Chain teams, we consistently hear a tension between two competing goals for supplier relationships:

  1. The need for a tough stance on price and productivity
  2. The desire to build trust over time, identify shared solutions, and secure supply when the market rises once more

We recently came across two stories from outside the world of Oil & Gas that demonstrate two competing approaches to these goals.

In today’s post, we share these instructive case studies as thought pieces on how Oil & Gas teams can successfully navigate the waters of supplier relationships (and where things can go dangerously wrong!). And at the end, we’ll share a few strategies we’ve seen other O&G Supply Chain teams use to resolve similar tensions.


  1. The Competitor Approach

At times, it can be easy for buyers and suppliers to see each other on opposite sides of a zero-sum game around price. But as any O&G Supply Chain team knows, taking that game too far can lead to more harm than good. In one recent case, Volkswagen took that approach too far:

The Buyer: Volkswagen, a German automaker

The Supplier: Prevent, a transmission component supplier

The Relationship Approach: VW had a long-term contract with Prevent, but cancelled the contract before its end date. Prevent asked for money to pay for factory investments it had made for VW, but VW decided to take a hard stance against the request and declined to pay for those investments.

The Outcome: By taking a more aggressive competitor approach and resisting compromise with the supplier, VW caused a production freeze in its German plant after Prevent stopped providing transmission components altogether. Although VW eventually agreed to a deal, the production halt ended up losing more money than VW would have lost from paying for the contracted investments.

What It Means for Oil & Gas: An aggressive approach can be a successful negotiating tactic, but can introduce significant risk to supplier relationships, especially with those who supply heavily engineered equipment or highly technical services. For example, an E&P firm pushing back too hard against a key supplier of rig services may slow necessary workover procedures, resulting in a costly halt of production. A refinery pushing back too hard against a turnaround services provider may cost thousands of dollars by reducing production capacity.

 

  1. The Collaborator Approach

On the opposite end of the spectrum is a more collaborative approach where suppliers and buyers work together as partners to not only identify a fair and balanced price point, but to deliver additional value to each other through a partnership approach.

In one recent case, Zappos.com grew from a startup to a more than $1B retail business within a decade by taking a partnership approach with their vendors:

The Buyer: Zappos.com, online retailer giant

The Supplier: Various consumer goods suppliers

The Relationship Approach: Counter to many retailers’ approaches, Zappos approached their suppliers as business partners. Vendors had full visibility into inventory, sales, profitability, and marketing and merchandizing plans. In fact, the Zappos supplier-buyer mantra was “The Golden Rule,” so Zappos leadership made an extra effort to make vendors feel comfortable with airport shuttles, company tours, gifts, and even an annual “Vendor Appreciation Party.”

The Outcome: Zappos built a wildly successful business by engaging their vendors as business partners who could help plan the business, make sure inventory for popular items was well-stocked, and collaborate on marketing campaigns using their knowledge. By taking a collaborative, partnership approach, Zappos gave retailers full view of the internal side of the Zappos business and empowered them to help Zappos while helping themselves.

What It Means for Oil & Gas: While vendor airport shuttles and company tours are extreme practices, O&G can take a page out of Zappos’ playbook in considering other methods to develop a collaborative SRM strategy.  For instance, working with vendors to improve demand planning and inventory management can improve O&G firms’ access to supply while providing much-needed revenue security for vendors. Similarly, in categories where demand is volatile, strong relationships with vendors can enable Supply Chain teams to secure access to supply in tight markets or emergencies.

 

Tactical Takeaways for O&G Supply Chain Teams

While the worlds of Volkswagen and Zappos are vastly different from the world of Oil & Gas, their contrasting approaches to SRM provide illustrative case studies for thinking through an approach to SRM. Below are a few of the recent strategies we’ve come across from other Oil & Gas teams:

  • Self-reported data from suppliers can be an effective way to negotiate without the antagonism. For instance, requesting an itemized breakdown in an RFP can help encourage buy-in for later conversations around cost structure.
  • Agreed-upon KPI’s can help both O&G Supply Chain teams and suppliers commit to a set of key metrics from the very beginning of any given contract.
  • Driving more spend on contract enables transparency and compliance by providing a mechanism for evaluating the terms governing each purchase.
  • Using index-based contracting can mitigate the difficulty of incessant negotiation and make price adjustments mechanical.
  • Analyzing supplier data to evaluate who the best suppliers are, whether that means the most efficient suppliers who have the lowest $/lateral foot or $/TMD, or suppliers with top spend, enables firms to invest in the most fruitful relationships.

 

Interested in also learning more about automated Supplier Relationship Management, KPI tracking, supplier performance scorecarding, or using data to strengthen your supplier relationships? Contact us here.

 

 

 

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