1504 CIPS Qatar IDH

ArcBlue www.arcblueglobal.com @arcbluegobal
Procurement and the $60 barrel
CIPS Qatar Branch, 28 April 2015
Ian Heptinstall
ArcBlue Middle East

© ArcBlue Middle East – part of PMMS Consulting Group, operating in association with The Links Group2
ArcBlue www.arcblueglobal.com @arcbluegobal
Procurement and the $60 barrel
CIPS Qatar Branch, 28 April 2015
Ian Heptinstall
ArcBlue Middle East
Slides plus notes from a
presentation made by Ian
Heptinstall at the CIPS Qatar
Branch event in April 2015.
Where the slide does not give
much information by itself, these
additional notes have been added
with the key points made in the
presentation

2
Oh no,
$60 a barrel
The media is telling us about the
problems cause by the dramatic
fall in oil price over the past year.
With the GCC economy so reliant
on the Oil & Gas industry, Mike
Anwana (CIPS Qatar branch
committee member) asked me to
present some ideas about what we
in procurement and supply chain
can do to help resolve the issues
caused.
I hope they stimulate a great
discussion and debate.

5
Party-Party…$60 a barrel
$60 oil is not a problem it is an
opportunity.
The industry has suffered from a
decade of “spend-spend-spend”.
Production was the issue, and
value-for-money was ignored.
Now at least there is a narrow
window of opportunity where
senior executives will be interested
in ideas that can maintain business
volumes, reduce risks, at lower
business costs.
This is our day….

6
This is our day….
A once-in-your-career chance to
be listened to and to act quickly.
The chance for procurement to
step up to the plate.
In this short presentation I will
share some ideas that you might
be able to use to make a quick
impact. They are based on real
situations I have seen in Oil and
Gas companies over the past few
years.
They are not textbook theories

• Nothing
– Providing you are already doing “good procurement”
– We should always have been looking to get maximum
business benefit, at acceptable risk, without wasting
money
• Nothing except take the opportunity
• The keys of “good procurement”
– One size doesn’t fit all
– Choosing the right tool for the job
– Use the right mix of collaboration AND competition
• Ideas for Quick Wins
What should we do differently in this
new era of the $60/barrel?

http://www.macrotrends.net/1369/crude-oil-price-history-chart
This chart surprised me, because I
had been conditioned that $60 a
barrel was really low. It shows the
oil price (in 2015 values) over the
past 60+ years.
• Oil has never sustained >$60 for
more than 10 years
• In the past 45 years oil has been
below $60 more than it has
been above
In the early 90’s the Oil industry,
through the CRINE initiative in the
UK (LOGIC is its successor),
responded to the dramatic fall
in oil price (down to $21 in today’s money) by learning how to make new platforms 30%
cheaper to build and 50% cheaper to operate.
The graph from the Wall St Journal, indicated a problem well before the price crash, with
falling return on capital, despite record high prices.

8
We already have all the tools in
our “procurement toolkit” to
support the oil and gas industry,
and the GCC economies that rely
on income from oil.
We don’t need any new tricks to
make a significant, fast impact.
The suggestions I have are all
proven, text-book procurement.
They have been used thousands of
times, over many decades, to
deliver millions in fast savings.

NUISANCE
DEVELOP
PROBLEM
CORE
AT THE HEART OF YOUR
BUSINESS
FUTURE POTENTIAL
VALUE BEYOND TURNOVER
SOMETHING MUST
BE DONE
MAKE ATTRACTIVE
OR GET RID
ATTRACTIVENESS
SALES INCOME
MARKETRISK
SPEND
TACTICAL
ACQUISITION
STRATEGIC
SECURITY
TACTICAL
PROFIT
STRATEGIC
CRITICAL
COLLABORATE
MUTUAL DEPENDENCY
ENSURE SUPPLY
MAXIMISE COMMERCIAL
ADVANTAGE
MINIMISE EFFORT
Price
11
MARGIN
COST
Supply Positioning (Kraljic) tells us
to focus and prioritise our
attentions, and that one-size
doesn’t fit all.
Supplier Preferencing reminds us
that if we are hard to deal with as
a customer, we increase risk and
increase price. The GCC is not an
easy region to be a supplier. Oil &
Gas is not an easy industry to work
with as a supplier.
The other images highlight risk &
vulnerability management,
contracting & contract
management, and price
management.

Growing from Adversity
CRINE
Here are four diverse examples of
significant, step-change improvements
in supply chain performance that were
driven by adversity – a problem that
couldn’t be overcome by continuing
“business as usual”, or bullying
suppliers.
• CRINE has already been mentioned
• In Japan the largest government
ministry persuaded the
construction industry to manage
projects differently, and delivered
more projects, with a lower budget,
whilst allowing contractors to make
profit
• Zara couldn’t buy like the big
retailers, so developed a better
supply chain based on speed, not
low unit price. Founder Amancio
Ortega is 4th richest person in the
world now
• On the Gulf of Mexico disaster in 2010, BP sent
experts into its suppliers to help them produce
more urgently-needed equipment. Suppliers
increased capacity by 100, 200, 300%+ within days,
and at almost no cost. Oh, and saving $200M

© PMMS Middle East – part of PMMS Consulting Group, operating in association with The Links Group11
So what to do?.....

Some ides for quick-wins
Check your current deals
Are you paying extra for things included? Are variations
& day-works out of control? Have prices been updated
as indexes fall?
Talk to you major suppliers
“to” them, not “at” them!! Ask for ideas – and listen to
the answers. This sounds simple, but isn’t due to ... see
next slide
Move your stock
Most businesses have poor stock management.
Too much of some sku’s, not enough of others.
Identify & get rid of excess stock. Replenish in
small volumes & abolish the idea of EOQ
Speed your selection
If you want to excite bidders, and really take
advantage of a buyers market, you need to be
fleet of foot. If you want to take months to make
a decision, don’t bitch and moan about high
prices!!
Compete & Collaborate
Neither is “better” – both are great tools. Which ever
one you are using, just get better at it, and your deals
will improve.
Manage Risk
That doesn’t mean pass it down to suppliers. Many
risks are best managed and retained by the client.
Don’t “fix-price” everything!

14
Trust me, I’m a buyer
I said there was a catch to doing
these things quickly.
Most suppliers don’t trust buyers.
Far too many buyers believe lies
are a great negotiation technique.
This will be your biggest challenge
when you sit down and talk with
your suppliers, and ask for ideas
how you can reduce cost without
just squeezing their margin.
If they don’t trust that you will act
honourably with what they tell
you, you will not get the truth.

If you push risk down to suppliers,
and expect them to “really suffer”
if they let you down, then the odds
are you are paying much more than
you need to.
This can be proven mathematically.
If pushing risk, and the
responsibility for the inherent
uncertainties of life, down the
supply chain was efficient, then the
whole insurance industry wouldn’t
exist. It does exactly the opposite.
Risk is best managed (and
minimised in total) at the aggregate
level – and in our world, this means
with the ultimate customer.
In practice this means not fixing all
your prices if you want savings.
15
Managing Risk
v
Offloading it

Competition & collaboration are
the two general ways we manage
supplier price.
Competition attacks their margin &
supplier and buyer pull in opposite
directions. The stronger “wins”
Collaboration attacks cost, and
supplier & buyer attack it together.
Both “win”
Given cost is usually much bigger
than margin, and a lot of cost is
driven by the customer and their
specification, it is a great place to
start looking for quick-win savings.
turn need trust
The only problem is it requires collaboration, which in
Price
MARGIN
COST

Collaboration in practice
This sums up collaboration.
Suppliers are not your
enemy, they are on your side.
Do you think the side winning the
soccer World Cup motivates
players by threatening to kill those
who miss tackles or don’t score
goals?
But many of us seem to believe
that you have to do this to
motivate a supplier to perform on
“our team”.
Both cant be logically correct….

• CapEx Programme Reduced by 10-15%
• Then do the same projects, just better
– Contract – Project Alliancing
– Management - CCPM
Project Alliancing
I want to finish with a topic that,
whilst powerful and simple in
concept, is not easy to apply.
However, if your organisation
wants to reduce its capex
programme by 15%,without
cutting any projects, this might just
be a key part of the answer…
I think alliancing was developed by
Oil & Gas in the UK in the early 90’s
(part of CRINE which took 30% out
of the cost of projects).
The alliance is a collaborative
project team (also called Integrated
Project Delivery (IPD) team).
The team undertakes to deliver the
whole project. All team members
share in the risks and rewards of
success

Project Collaboration Case Study
+25% Profit
+30%
Satisfaction
-10% Cost
-20% Time
-65% Changes
-83% Claims
-99.8% LTA
In the USA, the CII studied over
200 projects.
Those using collaboration
delivered these results compared
to more traditional procurement
routes.

Best of Both Worlds
Collaborative Team, Competitive
Selection
A challenging project
A history of poor project performance
Urgent business need
Aware of claimed success from CRINE in the O&G industry
CRINE in Oil & Gas focused on
mega-projects.
This case study from the UK
applied the idea of Project
Alliancing, along with some of the
other ideas I gave earlier in the
presentation at a much smaller
scale.
This project for the speciality
chemical company Rohm & Haas
has a total value of about $20M at
2015 values.
It won the Teesside Business
Award for Supply Chain Excellence
in 1999, and I had the privilege of
working on the team.

Integrated Project Team
Alliance Contract
Rohm & Haas “Fix 7” Project
Project Alliance
3-company contract
Reduced waste & “policing”
Difficult Goals
Client
EPCM
Construct
Suppliers
Sub-
contractors
Client
EPCM Construct
Suppliers
Sub-
contractors
Traditional
Approach
The IPD team involved
• Client
• Engineering & Procurement
partner
• Construction & Construction
Management partner
There was 1 contract with 3 parties
Some features…
• No client project manager – the
alliance supplier members
managed the whole project
• No-blame culture & contract
• Investment in cross-company
team building, at all levels
• Almost no time spent on claims,
variations & contractual
arguments
• Final account agreed in 1 hour

• 4 week selection for $9M construction work
• RFP was 3 pages
• Payment
– Cost + Fixed Fee + Performance Fee
Rohm & Haas “Fix 7” Project
Contin.y
Constr
EPCM
Cost
FF 1
PF 1
FF 2
PF 2
FF 1
PF 1
FF 2
PF 2
Safety
Schedule
Shutdown
Cost
Behaviour
Selecting the construction partner
took not only 4 weeks, but went
through 3 stages (8 on the long-
list, down to 5, with final short-list
of 2) in this period.
RFP was 3 pages because it
focussed on the key competences
and experiences looked for. Since
the detail of the project design was
the same for all bidders, it was not
part of the decision
The fee was based on the CFV
method. See our paper on this at:
http://profitableprojects.org/wp-
content/uploads/2014/11/CFV-
Fee-Pricing.pdf
Results: Clients got a difficult, high risk project, on time
& under budget – a first on that site. Supply partners
made good profit without taking unreasonable risks.

• A collaborative project team is a pre-requisite to a successful
project.
– Project Alliancing forms a collaborative team across the main
companies involved in a project.
• But it by itself is not sufficient.
– The team needs “to do projects better”.
– One great method to deliver benefits from a collaborative project
team is a planning & control method known as CCPM (Critical Chain
Project Management). Typically projects are 30% faster, and use 30%
less resource.
• Combining CCPM & Project Alliancing is an approach to
procuring and managing capex & construction projects that
we have called Profitable Projects.
– Simple in concept, but not easy to apply because it involves
changing from the “conventional ways”.
• Combining proven innovations, to deliver projects
• On-time faster, On-budget for less. Without compromising
scope or adding risk
Profitable Projects

• Existing Suppliers
– Audit contracts & compliance
– Ask them for help
– Offer stability & longevity
– Use supply-demand. Why not buy now, when no one else is?
• Housekeeping
– Stock & Inventory
• Selection Processes
– Weeks not months
– Pages not binders
– Teams not Sequences
• Get better at Collaboration & Competition
– Auctions. If you’re using them at all, you are wasting time & money
– Partnerships
• Retain Risk
• Don’t add long-term risk
Sustainable Quick Wins - summary

Any…
questions ?
comments ?
arguments ?
Thank you

Before moving into procurement, Ian worked in the
chemical industry as an engineer and project manager,
having graduated in Engineering & Management from
Imperial College London, in 1985
He worked in project management and procurement roles
in ICI, Eutech, GlaxoSmithKline, and NG Bailey. As a
consultant he has worked all over the world both with
ArcBlue/PMMS, and with REL (Hackett).
He moved to Dubai in January 2013 to establish a new office
for ArcBlue (then PMMS). His initial focus was delivering
training on behalf of CIPS in the MENA region. He is now
building on this to expand the business into broader
consulting and advisory work, in particular helping clients
reduce the duration and cost of major capex projects.
Ian Heptinstall
+971 56 172 0049
+44 7807 848688
Ian.heptinstall@arcblueglobal.com
Ian Heptinstall
MD – ArcBlue Middle East

Global Procurement Leadership
since 1978
UK, UAE, Turkey, Canada, USA, South Africa, Singapore, Hong Kong, Australia, New Zealand, Japan
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