In our last post, we covered price variance analysis, and how it allows E&P companies to recognize huge opportunities for price standardization. This post – the 3rd in our Smart Savings Series – covers a different type of internal benchmarking: Supplier Efficiency Analysis. Firms that can identify and minimize service providers’ inefficiencies, as well as their own inefficiencies, typically achieve an additional 5-10% savings across oilfield service (OFS) items like “Rig Operations”. To put that number in perspective, 40% of a typical E&P firm’s spend is on OFS, meaning this analysis can help you achieve enterprise-wide savings of 2-4%, which amounts to $20 - $40 MM of annual savings for each $1 B you spend each year.
What is Supplier Efficiency Analysis?
Put simply, Supplier Efficiency Analysis is a way of comparing the time your OFS providers spend working on your rigs versus the time they spend not working on your rigs, but still charging you for labor and other fees. The chart below depicts a Supplier Efficiency Analysis that PowerAdvocate conducted for an E&P client (actual data has been disguised). It reveals that one of the firm’s suppliers charged a proportionally higher amount for Stand-By Time (SBT) than other suppliers did. By recognizing discrepancies across suppliers, the firm identified savings opportunities of over $60 Million per year.
What Do We Mean by Stand-By Time?
In this analysis, we focus on two types of charges that increase the price of operations without directly contributing to operations. Stand-By Time is one of them, and Per Diem charges is the other. Here are broad definitions of these charges:
Stand-By Time is largely a measure of operator inefficiency, rather than supplier inefficiency. Some Stand-By Time is inevitable, as procedures like pumping cement must be followed by “wait-on” time. However, most of the Stand-By Time you’re charged for can likely be eliminated. For instance, one of your Company Men might consistently direct OFS crews to be onsite long before their services are needed because he is evaluated almost entirely by his ability to keep the rig operational – not by saving money on labor. Thus, comparing OFS vendors across SBT is essentially comparing the relative efficiencies of your Company Men (barring any regional differences that clearly affect needs around Stand-By Time).
Per Diem charges are a bit different. They reflect inefficiencies on the suppliers’ end – though in a remunerative sense. When WTI traded at above $100 per barrel, oilfield services were at their peak of demand, and Per Diem charges consistently ballooned upwards. Now, with the rig count down 35% since October, and WTI below $50, paring back fringe benefits represents a significant savings opportunity.
How Do I Evaluate and Leverage Inefficiencies?
To internally benchmark Stand-By Time and Per Diem, you should evaluate what percentage of your total OFS spend these charges represent across each of your major suppliers. Let’s say that you find Supplier X has proportionally greater Stand-By Time and Per Diem charges than Supplier Y. The first conclusion you can draw based on this information is that your internal operations with Supplier X are relatively less efficient than your operations with other suppliers. The second conclusion is that Supplier X charges a Per Diem premium to its peers.
Once you determine where inefficiencies lie, you can leverage data to drive them back in operational trainings and vendor negotiations. If you’re interested in a more tactical step-by-step guide to conducting Supplier Efficiency Analysis, and to drive back the inefficiencies this analysis reveals, we invite you to read our follow-on post, Tactical Savings Guide – Efficiency Analysis.