This post lays out the details behind a tactical execution of Supplier Efficiency Analysis, and provides strategies for driving back inefficiencies both internally, and with OFS vendors. Specifically, it outlines:
- Data requirements: What data do you need access to?
- Steps of the analysis: What are the steps to follow in running the analysis?
- Suggestions on execution: How have we seen other companies actually execute and realize the savings opportunities uncovered by the analysis?
The data requirements to run this analysis are actually quite minimal, and are listed below. However, if you do not have access to all this data, you are not alone…many E&P companies are in the same boat. We can help – just ask us how.
1. Item Descriptions: Ideally, your data is organized into a schema that has item-level detail and includes items like “Stand-By Time”. However, many E&P firms have not yet achieved this level of granularity in their data, so you will likely need to rely on item descriptions. By parsing out descriptions with specific key words, you can isolate charges relevant to this analysis. Below are some real-world examples of the types of descriptions you’ll be interested in:
2. Fully Rolled-Up Supplier Families: Most major E&P firms purchase products and services from both parent companies and their subsidiaries, but fail to fully consolidate supplier families into individual ‘buckets’ of spend. To most effectively evaluate Stand-By and Per Diem charges levied by a given supplier, you need to incorporate that supplier’s ‘family’ spend as well. The chart below depicts a PowerAdvocate client before and after it invested in proper supplier familying.
3. Regional IDs at the Transaction Level: Without a regional ID attached to every OFS transaction, you cannot compare locations across supplier efficiency. Just knowing you’re suppliers or internal operations are inefficient doesn’t help you much; knowing exactly where inefficiencies lie allows you to combat them in a highly targeted way. At the very least, you should have region-level visibility, though optimally you will be able to drill down to specific oil or gas fields, and even formations within those fields. If you can attain regional visibility across transactions to the degree depicted below, you’re in great shape.
How to Run the Analysis and Identify the Savings Opportunity
With the right data quality, executing this analysis is also fairly straightforward. Below are the steps required to identify savings opportunities using Supplier Efficiency Analysis:
- Rank-order your top oilfield services categories (e.g., “Rig Operations,” “Well Services,” etc.).
- For each category, export transactional data for the last 4 quarters. Make sure to include the following data fields: total spend, supplier, item description, and any regional tags you have access to.
- Rank-order your top suppliers within each category (if you’ve consolidated well, there should only be a few).
- Start by addressing Stand-By Time, supplier-by-supplier. First, filter your “Item Description” column by key words indicating that Stand-By Time occurred, and make sure to include all possible variations (e.g., “Stand-By,” “Stanby,” etc.).
- Once you’ve isolated Stand-By Time charges for a given supplier, sum up those charges and divide that number by the sum of your total spend with that supplier within the OFS category you’re analyzing.
- When you’ve repeated this process across all your suppliers and all your OFS categories, you’ll be able to directly benchmark suppliers against each other to see which of them you spend proportionally higher amounts on Stand-By Time with.
- Then, isolate the locations where your suppliers with the highest proportional Stand-By Time charges operate.
- Repeat Steps 4 – 7 with Per Diem charges, which will almost always have some variation of “Per Diem” in their item descriptions.
How to Execute on the Savings Opportunity
While eliminating Stand-By and Per Diem charges entirely isn’t possible, both can be significantly pared back where excess exists. When you’ve determined that a certain location has proportionally higher Stand-By charges, you should devote resources to improve your management of development and production activity there. This would likely entail sitting down with the relevant Company Men and optimizing their direction of OFS labor contractors according to internal Best Practices.
When you’ve determined which vendors charge proportionally higher Per Diem rates – either within specific locations, or across all regions – you can leverage this data to pull back premiums in future negotiations. If you present the most favorable Per Diem rate you receive in every meeting with your OFS suppliers, you should be able to standardize costs across the board to this optimal level.
In conjunction, these strategies should save you tens of millions of dollars every year. Furthermore, Stand-By Time and Per Diem charges are just two of many other inefficiency-laden charges that hurt your bottom line. Conducting the same analyses across Non-Productive Time and Idle Fees, for instance, will likely save you millions more.
Need help accessing the data needed for this (and other) analysis?
Need help running the analysis?
Need help executing supplier negotiations?
We can help – ask us how.
Topics: Cost Reduction, Supplier Efficiency Analysis