Could Standardization, Automation / Data Integration for Supplier Registration & Prequalification save the Oil & Gas Industry over a $ Billion?
Before I delve into the actual figures / cost estimations and the challenges faced by Brenda and Bob it is important to first point out the vital importance of Supplier Registration and Prequalification to the Global Oil & Gas Industry.
Most Oil & Gas Operators have pretty good information on the top 15% of their suppliers. However, this may imply that they do not have good information on 85% of their suppliers and very often have little or no knowledge of risks that this lack of information could have on both their business continuity and also their reputation should such risks materialize.
Concern about supply chain risk is growing significantly within the Industry. The risk landscape is evolving as the definition of quality changes from product and service quality to include non-physical attributes such as environmental, social and ethical impacts as well as integrity, security and organizational behavior issues.
In addition, supply chains within the Oil & Gas Industry are becoming more and more complex, and both Operators and Service Companies are increasingly vulnerable to loss of brand reputation and risk of financial loss, resulting from poor supplier performance, environmental impact, natural disasters, cargo and logistical disruptions, counterfeiting incidents, breaches of labor laws, and other factors that have the potential to significantly damage reputation.
For the purpose of prequalification, it is essential that suppliers within the Oil and Gas Industry are able to demonstrate that they possess or have access to, and apply the principles of good governance. These include qualifications, references, technical competence, quality, reliability, corporate social responsibility and environmental and security compliance capabilities, to the extent necessary for them to be accepted as appropriate to supply products, deliver services or undertake works, for a potential buyer.
While the costs of collecting such information are often quite high and also time consuming the alternative of not having this information to hand increases the likelihood of risks to both the supply chain and also to reputation of the buyer organization. As a result, people in procurement and supply chain responsible for this area need to be motivated enough to prioritize it over their other day to day problems associated with buyer supplier relations. And more importantly to keep it up to date by whatever means possible. While this is often a costly and time-consuming exercise it certainly trumps the costs associated with the risks of not having such information.
It’s clear that within the Oil and Gas Industry that Automation of Supplier Registration and Prequalification is the key to reducing this risk while also reducing effort and associated costs
Before we dive into the need for automation of both Supplier Registration and Prequalification in detail, lets first look at the two different perspectives of the problem. The Operator (Buyer view) from Bob and the Service Company (Supplier View) from Brenda.
Bob works in a Procurement role for one of the Major Oil & Gas Operators. Bob and his team operate globally and spend hundreds of thousands of dollars per year (internal effort cost) on gathering, updating and checking of supplier registration and qualification details from thousands of suppliers. The major problem for Bob and his team is in ensuring that the information is gathered in a timely fashion and updated on a regular basis, and with tens of thousands of suppliers that’s a huge task. Often data was last updated years ago and the status of that supplier has now changed and Bobs organization may be exposed to unknown risks.
Due to the extent of the problem, and the effort involved in collecting thousands of supplier profiles and associated prequalification data Bob and team needed to rethink their strategy. A change was needed and this has meant that Bob and team switched to focusing on gathering data just for their top 100 suppliers.
Due to the downturn many of their suppliers went out of business, the vast majority of these were outside the 100 being managed by Bob and team. As a result top management became concerned about their remaining supplier base. However when they approached Bob he only had up to date information on the top 100 representing only 2% of their suppliers. Bob has now been asked management to extend his efforts to cover at least 75% to 80% of the Supply base.
So, over the last year Bob and his team have been looking at ways of streamlining and automation of the Supplier Registration and Prequalification process. Bob and team have made some good progress to date but they are struggling to further minimize the manual effort involved in both collecting, updating and checking the data. No sooner has his team updated a supplier profile than the data is outdated.
After speaking with many of his main suppliers about automating the flow of prequalification data Bob and team realize that one of the main problems is the need for a widely adopted standard for Supplier Registration / Qualification within the industry. Without industry wide adoption of a standard for Supplier Prequalification things are far more time consuming and resource hungry for gathering and maintaining records on thousands of suppliers. Actually,to quote Bob directly:
“Even internally as a global organization we are being told by our suppliers that we are using different supplier qualification templates in different regions, and often due to the need for specific information we even had different supplier qualification templates by Category / Service line as well.”’
On the flip side – Brenda works as a Global Account Director for a Major Oil & Gas Services company and is frustrated that her team are being asked to complete different Supplier qualification forms for each of their 35 major Customers.
Added to this frustration is the fact that quite a few of her global clients (including Bobs Firm) have different variations of the forms for different countries/ geographies Brenda’s company supplies.
A second frustration is that some prequalification forms being completed by Brenda and her team for their clients are even tailored to a particular service or category line, resulting in even more variations of forms to be completed and signed for the same client. The result is that duplicated forms are being filled out by Brenda’s staff resulting in huge inefficiencies and extra cost.
Another problem for Brenda is that some Operators have also asked for assurance and compliance information for her company’s suppliers (tier 2 suppliers) that could directly impact the ongoing supply of her company’s products and services to the Operator.
Other Challenges mentioned during discussions.
During my many conversations with Operators and Service Companies on this subject a number of other challenges came to light. These include:
· Government Regulatory Compliance -Country regulations are now having an influence on the need for collecting country specific data during prequalification from global companies for monitoring adherence with localization initaitives (Local Content)
· Category Specific Prequalification Questions – Many companies have given autonomy to the local technical experts to both devise and add technical related questions to their prequalification templates. In some cases the Local Technical Expert involved in the sourcing is creating a new template from scratch.
These further the case for moving from company specific, localized, or category specific templates to a standardized template that is agreed and maintained by the industry yet easily customizable to cater for both the local and category specific content.
Industry Wide Problem
Whether you are a Buyer of Supplier, an Operator or Service company, a Bob or a Brenda the fault is not an isolated one that can be rectified internally within a single team or even a single organization. This is not a problem that Bob and Brenda can fix on their own. The problem and challenge can only be sorted by the industry coming together and adopting standards that drive automation for Supplier Registration and Prequalification.
When we take into account the overwhelming amount of duplicated effort in the process for registering, qualifying, and requalifying suppliers within the Global Oil and Gas Industry it is apparent that something needs to change to plug this hole. The current process and its inefficiencies need to be both standardized and automated in order to save the Industry billions of dollars over the coming years ahead.
In order to fully understand this problem and its solution more thoroughly we need to look at both the drivers of current inefficiencies, associated costs, as well as potential solutions and their challenges and the resultant benefits of overhauling this process.
In this respect, I have divided the article into 8 main areas of discussion:
1. Data Duplication and associated Inefficiencies
2. Standardization Benefits
3. Automation Benefits
4. Estimation of Industry Costs that could be avoided
5. Industry Initiatives
6. Challenges to Implementation
7. Suggestions on Way Forward Next Steps
Let’s look at the first four of these in more detail and then look at what is happening in both the Oil & Gas Industry and other Industries to overcome this problem and outline some of the challenges that such Industry Initiatives face from the perspective of Standardization, Automation, Technology and overall Data Ownership.
1. Data Duplication and Inefficiencies of Supplier Registration / Qualification
When looking at the Industry as a whole, we all can agree that there is a huge degree of data duplication with the process of supplier registration and qualification. With no automated way at present of submitting data to one source and that source then disseminating it to the other parties that require it the process is riddled with in efficiencies. The problem is compounded by the fact that the data being requested is being demanded at different times and by different parties often working within the same buyer organization. This adds a lot of time and effort to the process.
2. Benefits in Implementing an Industry wide Supplier Registration and Prequalification Data Standard
If the Industry were to fully agree, adopt and implement the requirement to use a standardized template for Supplier Registration and Prequalification the benefits would significantly improve the process.
Key benefits of Standardization would include:
· A single completed template would fulfill the needs of vast majority of Operators when it comes to Supplier Registration and Prequalification.
· Less Confusion around meaning of fields.
· Templates would be easier to complete as familiarity grows.
· Sets up the foundation for easier direct integration with existing systems.
· Offers an easier way to compare data based on predefined and agreed data fields within the Industry.
· Helps Migrate the risks associated with having outdated records and information of suppliers.
3. Benefits in Automation of Supplier Registration and Prequalification Data
One of the major problems and risks to the industry is that people are treating supplier registration and prequalification as an unpleasant and unnecessary additional chore. For most Operators like Bob this means that quite often records are only updated for the top tier suppliers. This is in part due to the time/effort involved and limited resources.. Quite a percentage of the effort and associated cost of Supplier Registration and Qualification resides with the data collection, update and verification of the data supplied. Much of the data needs rekeyed again resulting in double entry, possibly even triple entry. Once a standard industry wide template is in wide use it makes the next stage of automating the process a lot easier. When speaking about automation we mean that the data gets transferred from the suppliers’ system to the operators system either on a regular basis say once a week or Realtime if appropriate.
Key benefits of this automating process would differ slightly based on the type on integration used but significant benefits include:
· Reduced costs and inefficiencies
· Better Quality of data with reduced need to QA/QC on regular basis.
· No more double or triple entry of supplier registration details
· Close to real-time availability of changes in supplier profiles
· Reduced risk of data duplication
· Ability to integrate Prequalification data easier with existing supply chain / ERP and other Supply Chain / Risk Management Systems
It is the Integration / Automation part that would really save time and effort, and obviously cost.
4. The current Cost of Supplier Registration / Prequalification within the entire Industry
Industry insights show that the size of the Global Oil, Gas and Petrochemical Industry is huge and contains over 3000 Operators / Buyers and over 20,000 Suppliers. A total of 23,000 companies of which over 2500 are publicly traded companies. A sanity check on Linkedin shows that there are over almost 49,000 companies in the Oil & Energy Sector.
However, Supplier Prequalification initiatives do not apply to all of the estimated 23,000 Buyers and Suppliers in the industry, in fact lets scale it back significantly as not all of those companies have Supplier Pre-Qualification initiatives in place. Now let’s assume that the scenarios presented above for both Brenda and Bob are onlycommonplace among the majority of the Major Operators and large Service Companies within the entire Industry. If we do a calculation on the basis of a limited number of Operators, say 75 worldwide, and a limited number of suppliers, say 300 worldwide then the current industry spend for supplier registration / qualification / requalification are as around $104 MILLION PER YEAR. Over 10 years and the industry costs are over a billion dollars. See below cost table
Sanity check on the Cost Estimates
As a sanity check on this I asked a number of Operators / Buyers if $277,500 would cover all of their costs involved in Supplier Registration, Prequalification and Requalification, including all staff costs associated with this effort either internally or externally?.
Needless to say, most said I was underestimating this cost, especially on the 1 hour needed to re qualify strategic suppliers. Some even laughed ? with one operator saying my estimates of yearly costs of $210,000 for supplier registration and prequalification would barely cover the costs having a second employee. Others stated that they had entire teams working this challenge. In this respect, we can have faith that our estimated cost per buyer is on the low side. Overall the basis of the $104 million dollars a year in cost to the Industry is well founded, if not on the low side.
Sanity check on Number of Buying Companies.
Checking industry sources, and speaking with industry associations we are pretty confident on the cross check on the Number of Buyers (ie Operators and Suppliers) within the industry and have lowballed the percentage with Supplier Registration and Qualification Programs in place that drive our estimate of the billion-dollar problem faced by the industry over the coming years.
Our costings of the scale of the problem is very conservatively based on a low figure of there being only 375 large entities (75 of which are Buyers and 300 are Suppliers) in the industry with Registration and Prequalification Initiatives in place.
Local Directory Publications specific to Oil and Gas Industry buyers and sellers have well in excess of 10,000 companies per regional publication. One publisher has over 50,000 across multiple directories.
Doing a worldwide search on Linkedin for companies in the Oil & Energy industry shows a result of 45,840 companies / entities. Now this figure from linkedin would include entity from Mom & Pap companies up to Top tier Service Companies and Major Operators.
An additional sanity check occurred during a recent conversation with Chris Welsh, CEO of OFS Portal where he confirmed that the OFS Portal Community alone now has 297 operator agreements and 34 network agreements. Chris estimates that while OFS Portal actively cover the majority of very large Buyers / Operators, there are easily between 2500 and 3500 medium-to-large buyers and sellers operating within the industry. This is well above our 75 Buyers and 300 suppliers used in our cost calculations.
Including Tier 2, 3, 4 Suppliers = Billion Dollar a Year Problem
In fact, let’s remind ourselves that this cost model mockup just assumes that we have Operators and Tier 1 Suppliers, the costs would grow significantly if we took into and account the costs associated with the same registration / qualification process between Tier 1 suppliers and their tier 2 suppliers, and further down the chain to Tier 3, 4 and Tier 5 suppliers. The Multiplier factor alone could bring it up to a 1 Billion Dollar a year potential cost savings for the Global Oil & Gas Industry.
5. Industry Initiatives such as FPAL and the PIDX Supplier Registration and Prequalification Data Standard
So how is the Industry tackling this problem and what Industry backed Initiatives are underway at present. Two Industry led initiatives deserve special mention.
FPAL / Achilles
Set up in 1996, First Point Assessment Limited (FPAL) now run and operated by Achilles is a key tool used by oil and gas companies to identify and select current and potential suppliers when awarding contracts or purchase orders. FPAL although primarily European based model is a really good source of supplier information/ prequalification data and currently matches the needs of over 70 purchasing organizations with the capabilities of over 2,400 suppliers.
The work and effort by FPAL deserves praise and has resulted in a single industry recognized prequalification questionnaire for buyers and sellers operating primarily in the North Sea. The key question here is could this work be combined with other industry Initiatives to become a global Industry Standard.
Established in 2001, ISN® is a global leader in contractor and supplier management. ISNetworld focuses primarily on the collection of HSSE performance and prequalification data in capital-intensive industries. They help manage more than 65,000 contractors and suppliers with operations in over 85 countries. ISNetworld’s audit and evaluation tools help increase transparency and improve the efficiency of the evaluation process for Hiring Clients and contractors.
With the growing importance of HSSE data within the prequalification process ISNetworld seem to be the leading player in collecting such data. If that data could auto-populate the HSSE data requirements on Prequalification Templates this would go a long way towards cost reduction of data collection within the industry.
Another thing I really like here is although most of their client engagements seem to be an individual basis they do however have a working group of 45 of their large clients that actively share data / audit findings. This type of collaborative working approach also results in a reduction of duplicated effort and associated cost for the industry.
PIDX (Petroleum Industry Data Exchange) – Supplier Registration and prequalification Standard
Well this part of the story began a few years ago, when the Petroleum Industry Data Exchange (PIDX) started a working group aimed at tackling this very problem. Last year they published Version 1 of the new Supplier Registration and Prequalification Data Standard. The Standards objective was to define a global standard library for the documenting of supplier registration and prequalification profile data. The PIDX Standard will simplify supplier profile related interactions between buyers and suppliers, reduce bureaucracy, and allow faster responses to data requests such as Requests for Proposals, Quality Surveys, and Audits. The primary objective is to develop a shared library of common data elements, their definitions, and their syntax such that all buyers and suppliers may use them regardless of how data is actually captured or shared.
The Supplier Registration and Prequalification Data Standard may be used to capture data from both current and prospective suppliers to a buyer. The scope of which suppliers would be asked to provide data is left to the buyer to determine based on their business case. Different scopes in use today include:
· Allowing open registration/prequalification of all companies that express an interest in becoming suppliers.
· Registration/prequalification only for invited suppliers
· Registration/prequalification only for suppliers under contract
· Registration/prequalification only for key or high risk suppliers
The Standard is purposely intended to be flexible in order to allow Buyers to make the Standard fit to their own bespoke requirements. The intention is to utilize the Standard as much as possible whilst adding/deleting requirements as deemed appropriate by each Buyer.
The thing I really like about the PIDX Supplier Registration and Prequalification data standard is that it is well thought out and caters for the common problem of both regional differences, and category line differences to the information required for supplier registration and prequalification. It is this flexibility to fit the differing information needs that sets it apart and as a result it should be a fit for all Operators rolling out or improving such initiatives.
While version 1 of the standard has just recently been released (late 2016) this is a significant gamechanger for the industry both in terms of reducing the complexity of supplier registration and prequalification, and in getting the data in a more timely fashion and useable format that promotes automation of data flow.
6. Challenges to Implementation of Supplier Registration and Prequalification Standard
Although organizations such as PIDX have made huge strides recently on the development of the Supplier Registration and Prequalification Standard the key challenges facing the industry are centered around both the adoption and implementation of the standardized template, and secondly and even more importantly, the automation of data collection and integration with current systems. Its only when we have both that we can truly add value and reduce the costs and inefficiencies that exist at present with supplier registration and qualification.
In summary, the main challenges are:
· Getting significant adoption of the standard beyond the core companies involved in the working group. Adoption of the standard by 20 of the top Operator and 25 to 30of the top Service Companies would resulting on the rest following suit.
· Automating the data transfer (XML and API options)
· Getting buy in from Hubs / Networks that operate in this space while avoiding the risk of supplier profiles being sold at high prices on either a per profile or subscription based service.
7. Suggestions on Way Forward
In my opinion, it is worth separating the way forward into two clear objectives, firstly the increased adoption / use of standardized templates and then the actual automation of data gathering and dissemination to the relevant parties.
Increasing acceptance and adoption of the new Standardized Registration Template
The PIDX workgroup responsible for the new Supplier Registration / Qualification Standard need to be congratulated on their efforts in producing a significant piece of work that will start the process for moving the industry to a standardized template for Supplier Registration.
That said this is just the beginning of the journey. From talking with key people involved in the workgroup the main contributors responsible for developing the standard comprise of representatives from a mix of 18 different Major Operators and Suppliers. Although that represents just a small subset of the Industry it’s a great start as it includes many of the top Major Operators that can help drive the standards adoption in the Industry as a whole.
I see the next phase for the group to socialize the standard and get buy-in from a higher percentage of the industry. This should be easily accomplished given that the heavy lifting has already been done by the group. The ROI in implementing a standardized template should be a no brainer for the remaining hundreds of Operator (Buyers) and the thousands of Suppliers frustrated with having to double key that data across multiple Operator systems.
Automating the transfer and management of supplier profile data
So let’s say the standard and its associate template gets major buy in from the majority of Operators and also the top Tier 1 / Tier 2 Service Companies that would be a huge win for the industry but this would only be the starting point in delivering the real ROI and associated savings. What’s going to deliver cost savings and efficiencies and real value add is the automation / integration piece through either XML or APIs.
Now we could start by having a One-to-One automation, ie where suppliers can send data direct to the Operator in the new PIDX Registration & Prequalification Standard template format, similar to how the PIDX e-invoicing currently works. This would probably remain a one-to-one relationship for data transfer and it would bring some inefficiencies and cost reduction to the process. However, it would still mean that there could be multiple profiles for the same supplier across multiple operators, depending on the frequency of update.
It would make far more sense to have an Industry backed and managed Centralized Repository of Supplier Profiles available to all Operators, allowing the buyer access to the most updated version of the profile data. That would mean that all operators would hold the same version of the supplier profile and there could be direct links via the PIDX standard and the Centralized Data Source.
Looking at this in more detail highlights that one of the key barriers is the lack of an independent Industry owned or sponsored organization to store supplier profile data needed for Supplier Registration and Qualification. Presently there are many Private Companies (Hubs / Networks / B2B Providers) with supply chain offerings that if subscribed to give you access to 1000’s of supplier profiles. The problem here is that these private Solution Providers / Networks do not subscribe to storing information in an industry Standard format.
If we had a single Industry backed organization holding the data that would be so much more efficient. That body could then be responsible for disseminating it to the Networks / Hubs it would mean that Operators and Suppliers even if working through the networks would have access to a single version of the latest supplier profile. Once updated any changes / updates to the supplier profile data could be automatically disseminated real-time from the Network to their subscribers.
8. Conclusion / Possible Next Steps
It is great to see the huge steps in Standardizing the Supplier Registration and Prequalification process. Hats off to the PIDX workgroup team on this. A remarkable achievement in such a short space of time. To further advance this great achievement I see the next steps here a threefold approach.
1. The ongoing socializing of the new Template, to get buy in from a higher percentage of Operators / Service Companies, as I mentioned earlier adoption by 20 Operators and 20 to 30 Service Companies would be enough to push the other Operators, Service Companies and Suppliers to using the standard, after all no one wants to be left behind.
2. Engagement with the various Networks / Hubs / Solution providers (e.g Achilles, Ariba,.ISNetworld.etc ) where possible to adopt / integrate and use the new standardized registration and prequalification template.
3. The formulation of Central Data Repository of Supplier Profiles that is Sponsored / Maintained / Owned by the industry for the Industry. Note :There would need to be clear guidelines about data ownership and usage. 3..3.3.
4. Form working group on how such a Centralized Data Source would work in terms of both Network / Hub, and also direct B2B access by both Operators and Suppliers alike.
Exciting and challenging times ahead for the industry but I do believe this can be accomplished over the coming years.
I hope you enjoyed the read and would welcome any feedback / suggestions, affirmations on findings or real-world experiences that you may have.
Thanks and kind regards especially to all those who helped me with my research and validation of assumptions for this article from Operators, Service companies and Industry associations.
Kind regards and thoughts appreciated
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About : Daryl Fullerton
Daryl is a Supplier Performance and Relationship Management Specialist at Outperform SRM. He provides guidance and consultancy on the design, development and Implementation of various Supplier Performance & Relationship Management Systems for Global Oil & Gas Operators and Service Companies across Upstream, Midstream and Downstream Sectors.
Specialism’s include Supplier Performance & Relationship Management, Supplier Risk Management, Supplier Enablement, Operational Risk Management, Contract Compliance Management, Scorecards, KPI’s, P2P Process Automation, PIDX Standards, and Management Information & Reporting Systems.
A keen promoter and believer of the importance and focus on his ‘partnering to solve approach‘ in improving Operator / Supplier Relations in 2015 Daryl was awarded the honor of “Supply Chain Pros to Know” in recognition of the leading supply chain professionals and experts worldwide.
About : OutPerform SRM
OutPerform SRM is a management consulting firm that helps leading Oil & Gas businesses establish value added solutions for effective Supplier Relationship Management (SRM). We help our clients reduce inefficiencies, reduce costs, and make lasting improvements within their Supplier Relationship Management (SRM), Supplier Performance Management (SPM), and many more important business critical Supply Chain Initiatives . Through our hands on experience with Major Oil and Gas Operators over the last 17 years we’ve now built a firm uniquely equipped to this task across all Major Category Lines.
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