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Case study for British Petroleum.

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bp case study

  1. 1. ETIZAZ SHAHBP Case StudyThe intent of this case is to reduce the variation in the way Category Management takes place across thecompany. Considering the locations of suppliers these variations may occur because of differentenvironment, work culture and mode of transportation.Q1: KEY COMPONENTS FOR DEVELOPING MARKET SECTOR STRATEGY FOR OCTG:Many organizations make competitive advantage upon other competitors just by selecting the suppliersthose who join hands in the success of the organization so while developing strategy for this categorywe should think about some factors. 1. What are the requirements of the customer (BP) and expectations from the supplier? 2. The potential of the supplier; is the supplier is capable to fulfill the requirement of such kind a big organization? 3. How procurement would be possible on time and cost effective? 4. If suppliers are from different areas then strategy should be in a way that it should consider differences among the suppliers and strategy should facilitate the suppliers also for good cooperative environment where the quality and customer satisfaction should become the first priority of the supplier. 5. Now a day, there is always a long discussion about the number of the suppliers, weather a company should have single sources or multiple sources, but risks and benefits are connected with both of categories. A little description of both categories is entitled below: Single versus Multiple Sources: Much debate has taken place concerning the number of suppliers a firm should use. One side of the debate is the multi-source side. This involves the use of two or more suppliers .The other side is the single source policy, in which only one supplier is used to supply a particular product. 1
  2. 2. ETIZAZ SHAHA. Advantages of Single Sourcing:a) With certainty of large volumes the supplier can enjoy lower costs/unit and increased corporation and communication to produce win-win relationship between buyer and seller.b) With contract guarantee, the supplier is more willing to invest in new equipment or changing its business/ operating methods to accommodate buyer.c) Accelerating learning curve.d) Engineers and production people from both firms can work together to improve product quality and productivity.e) Less people required to communicate with suppliers.B. Advantages of Multiple Sourcing:a) Competition among suppliers benefits the buyer.b) Supply of the product is ensured.c) Lower cost in competition (the sense of competition is very root of American thought as competition is the basis for capitalism and is the backbone of Western economic theory).d) Undisrupted supply of the parts.e) Improved market intelligence and improved supplier appraisal effectiveness.Many people believe if single sourcing works in Japan so it can work here. This perception is trueabout many automobile manufacturers in Japan but for high-tech items that require large R&Dexpenditures or complex parts that require major equipment investment. However, it is not the casewith the simpler parts.6. For me I will search for supplier, working or had worked previously with any oil and gas company (cost will go down when a supplier is working on modules with other companies as well and is not producing only for BP, this supplier will be flexible in dealing and has experience and may be can take back unused products or hold the inventory back). 2
  3. 3. ETIZAZ SHAHQ2: DEVELOPING A STRATEGIC SOURCING PLAN:RFP, RFI and Approach the Market place etc are considered as sourcing strategies. The most importantfactor is the understanding of the supplier about the customer requirements so that supplier canprovide the comprehensive and exact details about his product and expertise.Major requirements of the strategic sourcing plan are as follows: 1. A complete understanding of corporate strategies and marketing plans in order to provide well – integrated purchasing systems. 2. An extensive evaluation / study of current suppliers, how performance is measured and the expectations of the suppliers relative to the industry. 3. Study of the degree of global purchasing opportunities. 4. Identification of total costs associated with current purchasing department / function, budgets, staffing and so forth.Management must device a data collection system in order to provide data to the four issues givenabove.Criteria for Supplier Evaluation: There are two main categories of supplier evaluation: 1. The Process Based EvaluationIt is as assessment of the supplier’s production or service process. Typically, the buyer will conduct anaudit at the supplier’s site to assess the level of capability in the supplier’s site to assess the level ofcapability in the supplier’s system. Process flow charts can be developed to identify the non- value-added activities that should be eliminated to improve the business efficiency. In addition large buyingorganizations increasingly are demanding that their suppliers become certified through third partyorganization such as ISO 9001-2008 certification or Malcolm Baldrige National Quality Awards. 3
  4. 4. ETIZAZ SHAH 2. The Performance Based Evaluation:It is an assessment of the supplier’s actual performance on a variety of criteria, such as deliveryreliability, cost and quality defect rate. It is a more tactical assessment and measures the day-to-dayperformance of the supplying firm; hence, it is after the fact evaluation. The performance basedevaluation, perhaps since objective data are readily available and easier to measure.Following are three performance based supplier’s evaluation systems. a) Categorical Method b) Cost-Ratio Method c) Linear Averaging MethodIn general, the guiding factors in determining which system is best are ease of implementation andoverall reliability of the system. a) Categorical Method:The categorical method involves categorizing each supplier’s performance in specific areas as defined bya list of relevant performance variables. The buyer develops a list of performance factors for eachsupplier and keeps tracks of each area by assigning a “grade” in simple terms, such as “good”, “neutral”and “unsatisfactory”. At frequent meetings between the buying organization and supplier, the buyer willthen inform the supplier of its performance.Supplier Cost Production quality Speed TotalA Good(+) Unsatisfactory(-) Neutral(0) 0B Neutral(0) Good(+) Good(+) ++C Neutral(0) Unsatisfactory(-) Neutral(0) -The categorical method is a simple and informal system in the sense that detailed performanceachievements or short comings are not measured.The advantages associated with implementing this sort of an evaluation program are that it can beimplemented almost immediately and is least expensive of the three evaluation methods discussedhere. The method’s major disadvantage is its dependence on the judgment of its users. The system is 4
  5. 5. ETIZAZ SHAHlargely dependent on the memories of personnel to explain what “unsatisfactory” or “good” means,with this method, there is no concrete supporting data. b) Cost-Ratio Method:The Cost-ratio method evaluates supplier performance by using standard cost analysis. The total cost ofeach purchase is calculated as its selling price plus the buyer’s internal opportunity costs associated withthe quality, delivery and service elements of the purchase. Calculation involves a 4-step approach.1st: Determine the internal costs associated with quality, delivery and service.2nd: Each is converted to a cost ratio, which expresses the cost as a % of the value of the purchase.An example of quality cost ratio is shown in the table.SUPPLIER; AA elements CostsPlant visits $200Sample approval $25Incoming inspection $75Reworking costs $225Paperwork inaccuracies $100Lost time due to rejected parts $375Total additional quality costs $1000Total value of purchase $100,000Quality cost ratio (Total quality cost/ Total purchase) 1%3rd: Sum the three individual cost ratios (quality, delivery & services) to obtain an overall cost ratio.4th: The overall cost ratio is applied to the supplier’s quoted unit prices to obtain the net adjusted costfigures.Company Cost ratio Delivery Service cost Total Quoted NetAA 1% 3% -1% 3% $86.25 $88.84BB 2% 2% 3% 7% $83.24 $89.08CC 3% 1% 6% 10% $85.10 $93.61DD 2% 1% 2% 5% $85.00 $89.25The net adjusted figure is used as the basis for performance comparison among other suppliers. Thebest supplier is selected as the one with the lowest net adjusted cost. The advantages associated with 5
  6. 6. ETIZAZ SHAHcost ratio method are that the results are cost oriented. However, the associated cost must be known.Moreover, this method doesn’t take into account other aspects of the supplier performance.A hybrid of cost ratio method is “Total cost-of-ownership rating”, developed by director of thecorporate purchasing of Sun Microsystems. It includes 5 performance factors; quality (30points Max),delivery (25), technology (20), price (15) and service (10). A perfect supplier would receive score of 100. c) Linear Averaging:The linear averaging method is the most commonly used evaluation method. Specific quantitativeperformance factors are used to evaluate supplier performance. The most commonly used factors ingoods purchases are quality, service (delivery) and price, although anyone of the factors named may begiven more weight than the others.An example of linear averaging method follows: 1. Assign appropriate weights to each performance factors, such that the total weights of each factor add up to 100. 2. After assigning weights, the individual performance factor ratings are determined. 3. Multiply each performance factor rating by its respective weight as a percentage. 4. The results from step three are added to give a numerical rating for each supplier. Supplier 1 Supplier 2Quality(weight= 50)Acceptable lots 50 35Total lots received 58 40Utility rating 86.2 87.5Service(weight=25)On-time deliveries 52 38Total lots received 58 40Service rating 86.2 87.5Price(weight= 15)Lowest price $75 $75Price submitted $75 $82Price rating 100 91.5Total performance rating 89.8 90.7 89.8= (0.5x80.2) + (0.35x89.7) + (0.15x100) 6
  7. 7. ETIZAZ SHAHIn this situation, supplier 2 is the more satisfactory supplier. The advantage of this type of system is thatit is relatively easy to implement once all the performance factors and their weights have beendetermined. Another advantage is that this system provides the buyer with a great deal of flexibility indetermining the performance factors to be measured.Finally these types of systems produce reliable data and are relatively inexpensive to implement. InOCTG category most important aspect is the associated costs like handling, setup, warehouse andtransportation costs are concerned, so the evaluation criteria emphasizing cost should be adopted.Q3: STRETGIC SUPPLIER RELATIONSHIP MANAGEMENT:Major issue in supply chain relationship is maintaining success after the contract because before thecontract each supplier show complete credibility and interest but after getting assurance their interestin customer satisfaction looses and quality control doesn’t remain the priority.Following steps should be taken seriously to manage successful supplier relationship. 1. Key Contact Person:For each strategic supplier, a key contact within the BP must be established to ensure that relationshipis being properly managed. This person is the individual within BP that others in BP should contact forinformation about specific supplier. It is possible that each functional manager in BP will be an “owner“for a specific strategic supplier relationship. So BP has not to worry about that they have to hire a newperson for this post. 2. Supplier Profiles:Relationship with strategic supplier should be managed carefully and closely. One thing to keep up onthe supplier is to compile suppler profiles by BP. These file should have items such as key managementcontacts, a company overview, SWAT (strength, weakness, opportunity & threats), analysis, informationabout current contracts, “owners” of the relationship within BP and organizational chart. 7
  8. 8. ETIZAZ SHAH 3. Supplier Performance Review:BP should have various review categories that are used in order to fully assess their strategic suppliers.Quality is a very important review category. BP should require their suppliers to meet or exceed theirperformance standards and proactively initiate quality process improvements. Customer service shouldbe proactive and flexible and delivery performance needs to be optimized. The most important attributeshould be high quality and on time delivery. 4. Technology and Innovation:These are also important in order to stay a head or at pace with competitors and help keep BP at thetop of this field. 5. Cost Reduction and Continuous Process Improvement: These two aspects are necessary in order to keep costs down and create trust with strategic supplier. 6. Employ Safety and Well Fare Program: Each strategic supplier should also have formal environment, health, operational and safety program.In addition they should put forth the effort to reduce, reuse and recycle when possible.DRIVE VALUEWhen the contract is signed to continue to drive value BP should keep their suppliers evaluated. Onevery useful process to evaluate the suppliers is “SRM SCORING SYSTEM”.SRM Scoring System:The scoring system for each strategic supplier should be done on a scale from 0.0 to 4.0 where 4.0 is thehighest possible score, meaning there are 4 different ratings that range from exceptional tounexceptional. The weaker the score, the more often the strategic supplier should be evaluated.Score range Rating of supplier Evaluation period2.5-4.0 Exceptional & very good Annual evaluation1.5-2.49 Good Semiannual evaluation1.0-1.49 Marginal Every quarter0.0-0.99 Unexceptional Develop a new source 8
  9. 9. ETIZAZ SHAHFulfill Suppliers Expectation:The supplier’s perceptions of buyer-supplier relationship and supplier commitment to the buying firmwere tested in a study by Prahinski and Benton. Implications for business managers were drawn fromthe research and given below.For the buying firm manager, specific communication strategies should be designed into the SDP efforts.The program should be formulized with routine communications; incorporate supplier training,education and site visits to aiding learning process; and provide opportunities for feedback to clarifyprogram objectives and improved suggestions.Finally, when SDPs are implemented, the supply firm can take advantage of the learning opportunitiesand improve its overall performance with the buying firm and other customers.Supply Chain Relationship Quality:In dynamic business- to- business environment, maintain a competitive advantage is a major survivalfactor. The advent of supply chain management has led to a more complicated operating environment.Not only does the individual firm have to maintain its competitive edge; the entire supply chain must becompetitive. Supply chain relationship quality indexing can be used to drive continuous improvement incompetitive supply chains. It is methodology that may provide the manufacturer with informationneeded to make the hard decisions about balancing the needs of the buying organization and needs ofthe supply chain itself.Supplier NOT Satisfying the Required Standards:When a supplier is unable to conform to BP’s expectations, BP’s manager must determine the mostappropriate action to resolve the issue to maintain the working relationship. The manager must find away to communicate the problem and motivate the supplier to change the results. BP must develop asupplier evaluation and report card, and communicate the results to its suppliers with a hope andexpectations of improved performance. 9
  10. 10. ETIZAZ SHAHSuggestions:Considering the case study provided by BP, I will suggest adopting the same way as Delta Airline. Theyhave planned to buy an oil refinery to refine the crude oil for their airplanes that will save millions ofdollars. Some analysts claimed that this will divert their attention from the core business but Deltaclaimed it to be a successful decision as the refinery would be handled by an expert association andwould produce products for commercial purpose as well. BP should do the same thing by buying ordeveloping its own OCTG facility. This facility will not only fulfill BP’s requirements while BP can be asupplier of these products to other companies as well and BP will get a competitive advantage upon itscompetitors by becoming nearly the first company owing its own OCTG facility. The major issue ofinventory associated costs, holding inventory back will also be resolved. Costs to facilitate the suppliersand quality concerns will decrease.If buying its own OCTG facility is not possible for BP then BP should introduce cross docking, means leanand JIT operation in which the inventory comes and dispatched as the same time to the required area,by doing this usage of the ware house becomes so low and all the costs associated with ware house willgo dramatically down.REFERENCESBenton, W. C. (2010). Purchasing and supply chain management. Boston: McGraw-Hill Irwin.Chopra, S. &Meindl, P. (2013).Supply chain management: Strategy, planning, and operation. Boston:Pearson.Nelson, D., Moody, P. E., &Stegner, J. (2001).The purchasing machine: How the top ten companies usebest practices to manage their supply chains. New York: Free Press. 10

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