Customer-Anchored Supply Chains: An Executive’S Guide to Building Competitive Advantage in the Oil Patch

By Gary Flaharty and Noman Waheed

Customer-Anchored Supply Chains introduces oilfield service executives to the twin concepts of customer-anchored supply chains and customer-applications as important concepts for setting supply-chain strategy to build sustainable competitive advantage. Written for the executive responsible for leading the supply chain organization, Customer-Anchored Supply Chains presents leading practices for supply chain, proven in many other industries, in straightforward terms, showing the applicability to the oilfield service industry.

The Customer-Anchored Supply Chain:

Takes ownership for the broad supply chain from its suppliers suppliers to its customers customers.

Segments its business by customer-application to focus its efforts on providing the products and services its customers value as captured in critical success factors.

Sets its strategic goals to simultaneously achieve supply-chain imperatives (HS&E and quality), shareholder-driven goals, and customer-anchoring goals.

Drives customer requirements deep into the sales and operations planning, manufacturing, and procurement processes.

Implements supply-chain initiatives to tighten the links in the supply chain value stream to deliver the products and services the customer wants in short lead times, at the lowest cost and with less inventory.

Delivers on the promise of building sustainable competitive advantage.

• Language: English
• Publisher: Archway Publishing
• Release date: Jun 29, 2015
• ISBN: 9781480818774

Gary Flaharty

Gary Flaharty worked at Baker Hughes for 33 years, including 3 years as vice president of materials and 15 years as vice president of investor relations prior to founding SCLinx. He earned bachelor’s degrees in computer science and mathematics and an MBA in operations management and management information systems from the University of Houston. He lives in Houston with his wife, Kim. Noman Waheed worked as a strategy consultant at Accenture for 20 years and 2 years as a vice president of sales and operations planning at Baker Hughes. He has extensive experience transforming Fortune 100 companies’ supply chains and has a passion for the energy sector. Noman earned a bachelor’s degree in electrical engineering and master’s degrees in electrical engineering and computer science from the University of Illinois. He lives in Houston.

Book preview

Section 1

Introducing the Customer-Anchored Supply Chain

As executives, sometimes our knowledge and our experiences betray us. We think we know. We are expected to know. It would be embarrassing to admit that we do not know. So we do not ask.

In this section, we want to encourage supply-chain executives to ask and listen. We want you to be as good as your direct customer at understanding and being able to articulate what their customer needs to succeed. And we want you to be as good as your supplier at understanding and being able to articulate what their supplier needs for them to succeed. This is the lens through which supply-chain strategic goals should be set to achieve competitive advantage.

A customer-anchored supply chain’s strategic goals can be classified into three broad categories: supply-chain imperatives, which must be addressed, internal goals that drive performance for the shareholders, and external goals that drive competitive advantage.

Every supply chain’s imperative goals are health, safety, and environment (HS&E), as well as quality. These imperative goals always take precedence over external and internal goals. No company should ever knowingly allow anybody to get hurt or damage the environment, and every supply chain should strive to manufacture a quality product.

A company’s shareholders or owners drive internal goals. They expect the firm to be good stewards of the capital they invest in it, show a return on that capital, generate positive cash flow, and maintain a profit margin for the business.

Section 1 is about customers and their satisfaction. We introduce the concept of segmenting the firms business into customer-applications and using customer-anchoring statements to document the critical success factors that drive customer satisfaction and build competitive advantage. When a firm’s customers recognize that it is consistently delivering superior performance based on the critical success factors, competitive advantage is built and rewarded.

A supply chain’s initiatives should be designed to efficiently use its resources to achieve the supply-chain imperatives, reward shareholders, and please customers. The initiatives should stretch the management team to perform, but they must also remain realistic in terms of the resources available to the supply chain. The customer-anchored supply chain sets its strategic goals with these critical success factors in mind, and in time, it will deliver on the promise of a supply chain that creates competitive advantage.

1

Customer-Anchored Supply Chains

Setting a Supply Chain’s Strategic Goals

We begin with the end in sight. To create a supply chain that delivers competitive advantage, the company must first set its strategic goals, with a sharp focus on satisfying the customer. The first step in the process of delivering on the promise of competitive advantage is listening to the voice of the customer. As a company listens, it will

• identify the unique market segments or customer-applications that the company’s supply-chain operations serves;

• understand what each customer-application requires from the supply-chain operation by focusing on my customers and my customers’ customers;

• document the critical success factors in customer-anchoring statements; and

• systematically design and implement a supply chain that meets or exceeds those critical success factors.

A supply chain that intentionally works to identify and satisfy customer-identified critical success factors to build competitive advantage is a customer-anchored supply chain.

Identifying Unique Customer-Applications

Most firms serve more than one market and have more than one customer. Documenting the needs of each customer in each market would be laborious. Developing and implementing a supply-chain operation tailored to each customer in each market would be difficult and tedious at best, if not impossible. To enable analysis and planning, companies should group customers and the activities the company’s products and services support, to create no more than ten unique customer-applications. In total, the customer-applications should comprise at least eighty percent of the firm’s business.

In the oil patch, the term market tends to imply a geographic dimension. By introducing the word application, we wish to stress that geography may or may not be an important dimension to defining the buying behavior associated with each customer-application.

An application is comprised of the activities and products required to construct some portion of a wellbore in a given type of reservoir. While each wellbore may seem unique, wellbores can also be combined into groups that share similar requirements.

An application is comprised of the activities and products required to construct some portion of the wellbore in a given type of reservoir. While each wellbore may seem unique, wellbores can also be combined into groups that share similar requirements. The grouping is in part dependent on the products and services a firm offers. For example, for some companies, there will be no distinction between unconventional oil and unconventional gas. For other firms, unconventional oil and unconventional gas may drive distinctly different sets of a firm’s products and services.

Customers exhibiting similar buying behavior should be mapped to the same customer categories. The categories are not universal and will depend on the buying behavior that each firm perceives customers demonstrate for their particular products and services. Categorization is based primarily on procurement practices. A company may choose to group Saudi Aramco, Statoil, and Petrobras with BP, ExxonMobil, and Royal Dutch Shell if the customers demonstrate similar buying behaviors. Again, setting categories by buying behavior will differ from firm to firm. For example, for a given firm, there may be significant differences in how customers purchase high technology products and no significant differences in how they purchase commodity products.

In another case, the unique buying behaviors of national oil companies (NOCs), such as Pemex or PDVSA, the national oil companies of Mexico and Venezuela, may require that they are assigned to a customer group of one. Requirements for local content may be a driver that forces us to recognize different customer groups. Buying behavior may be driven in part by the application or by geography.

Last, note that for some companies—large multinational oil and gas companies, for example—buying practices within the company may vary significantly by geographic location or application.

Table 1. Customers and Applications

We define a customer-application as a group of customers with similar buying behavior participating in an application with similar requirements. Depending on the firm’s perception of customer buying behaviors, each of the following could be an example of a customer-application:

• Majors and NOCs in deepwater

• Independents in heavy oil

• PDVSA in heavy oil

• Independents in unconventional gas

• Majors in unconventional gas

A customer-application is a group of customers with similar buying behavior participating in an application with similar requirements.

Note that most customers participate in more than one customer-application, such as BP in majors and NOCs in deepwater and BP in majors in unconventional gas. Likewise, for a given application, there could be more than one customer-application, such as independents in heavy oil and PDVSA in heavy oil.

Why Customer-Applications?

Customer-applications set the foundation of the customer-anchored supply chain. They help organize the market into segments with similar strategic requirements. When a company segments its markets by product line, geography, or manufacturing and procurement resources, the customer’s needs are too diverse and complex to be discerned. Segmenting by customer-application is necessary to simplify and focus strategy development activities. When a company segments its markets by customer-application, it can articulate the needs of each customer-application and formulate strategies to develop competitive advantage. Without this segmentation and simplification, the company cannot develop supply chain strategies that support the diverse customer base it serves.

Understanding Each Customer-Application’s Requirements

The second step in the process of anchoring the supply chain is determining the needs of each identified customer-application. To anchor the supply chain, the firm must take a holistic approach to understanding the total supply chain it operates in. Every organization is a participant in many supply chains including the broad energy supply chain. Every oil or gas company, oil service company, or supplier to an oil service company is part of the same broad energy supply chain. Unfortunately, individual firms in the energy supply chain tend to take a narrow view, focusing only on the sections of the supply chain they influence. It helps them make sense of the arena in which they operate.

Unfortunately, the view they take can be so narrow that they lose perspective of the whole. Peering through this small window, they see three entities: their customer (my customer), whose requirements they will try to satisfy as best as they understand them; their organization; and their supply chain. They lose sight of the big picture and tend to focus on what they do—us—and what their supply chain does—them. This limits their ability to align for superior performance.

To anchor the supply chain, a company must take a holistic approach to understanding the total supply chain.

Illustration 2 shows this narrow perspective:

701452002B.jpg

Illustration 2. Us and Them

From a narrow perspective, that is our firm in the center—us. We receive orders from our immediate customer and supply them with products and services. In turn, we send orders to our suppliers—them—and they supply products and services (raw materials, components, and services) to us.

Participants in the supply chain focus on what they can do to improve operations, but they sense they are not aligned with their customers and wish their suppliers could be more supportive. This is the us-them mind-set.

To be fair, you may have to listen for clues to tell you that the us-them mind-set has taken root. In table 2, the language used to describe the supply chain is a telltale giveaway. Many participants in the supply chain understand everything downstream of them as the supply chain. A few recognize that they are part of the broader energy supply chain, and still fewer recognize that their customer is also part of the same supply chain.

Taking a more holistic view of the supply chain lends perspective. We now see our operations as the center of a supply chain extending from my suppliers’ suppliers to my customers’ customers. Seeing the whole, we take ownership for how it works from suppliers’ suppliers to customers’ customers.

The customer-anchored supply chain takes ownership for the whole supply chain — from its suppliers’ suppliers to its customers’ customers.

Table 2. Us and Them

What My Customers’ Customers Want

There are barriers that a company must hurdle to align its supply chain with its customers.

Executives need to overcome the notion that they already know what their immediate customers want. Past experiences become a filter that can distort the lens through which an executive sees the customer.

701452003B.jpg

Illustration 3. A More Holistic View of the Supply Chain

Executives need to overcome the notion that they already know what their immediate customers want. Fellow executives, our experiences become a filter that can distort the lens through which we see the customer. For example:

• Sales and field operations once, or repeatedly, took supply-chain operations to task over the total shipment level, teaching supply chain over the years that shipment performance, measured in financial terms, must be the most important performance measure. Looking at the customer through this lens, supply chain sets performance incentives on making the shipping plan and measuring past due in financial terms. Supply-chain operations know this is what the customer wants and no longer ask if they are satisfying their needs. The customer is frustrated as inventories grow with record shipments, measured in financial terms, while sales are increasingly delayed by the low-value, past due parts that are required to complete large orders.

• Over the past few years, the company was focused on margin improvement. Does that mean that margin improvement is the most important measure for supply chain this year? Is it more important than lead-time reduction or improving delivery reliability? Again, supply-chain manufacturing and procurement operations know that margin is the most important and fail to discern that the trade-offs to improve margin have turned lead-time performance and delivery reliability into competitive disadvantages. The customer is frustrated as sales opportunities disappear due to poor delivery. Likewise, supply chain manufacturing and procurement believe the work they did to lower costs is under appreciated by sales and field operations.

Sales and field operations also have filters that color their perception of supply-chain operations. Sales and field operations provide the information they think the supply chain needs but may filter out relevant information. For example, if trust is low, they certainly will not share how much they pad order delivery requests and may not even admit that they pad delivery requests at all!

One way to break down these barriers is to have a discussion with your customers about what makes them successful with their customers (my customers’ customers). Engage with your customers to come up with a comprehensive understanding of what critical success factors make them successful. Test it with a few choice interviews with their customers. Ask if you can tag along on a few customer calls when supply-chain performance is an issue and build a relationship with a few customers. Since you have organized them by customer-application, it will not take many interviews to confirm that you have identified the right critical success factors.

Our goal is not for you to bypass your customers by having direct communication with their customers—that undermines the authority they need to do their day job. Our objective is for you to understand what your customers’ customers want in enough detail so that you can sit down with your customers and create a supply chain with the right organization and balanced KPIs that will meet your customers’ customers’