Making the Curve in the Logistics Outsourcing Business | Article

Truck on a Highway CurveCompanies in the oil and gas business have seemingly always had to buckleup and hold on tight while maneuvering over the rocky roads and sharp turns that make up the often unstable industry. But companies are doing well these days, due in large part to changes in the way they are handling their logistics operations. Oil and gas companies are implementing new information technologies (IT) and are integrating their already-existing systems, which enables them to manage their inventory better and reduce product delivery time. Currently, the stability of the industry is in check and has been for the better part of seven years now.

Consumers are reaping the benefits of the lowest gas prices in years. Customers have seen a drop from an average high of $1.41 per gallon in 1981 to today’s average of $1.02 per gallon. If you factor in inflation, prices have been basically cut in half since 1981. According to Scott Shemwell, director of oil and gas at MCI Systemhouse, the sharp decline in pump prices is due in large part to the saturation of crude oil in the market. Third world societies have overproduced oil because they have become dependent on the hard currency that oil and gas can harvest. Also, the demand for crude oil on a world-wide basis is down because of the Asian crisis. Considering that about half of every dollar consumers spend on gas goes to taxes, the oil and gas industry is operating on a net revenue of about 50 cents per gallon. So how is the industry making any money?

“Companies have been able to make as little money as they have because they are able to manage their companies very efficiently,” Shemwell says. “The oil and gas companies, and the service companies that manage the field operations — the pipelines, the refineries, and even the retail gas pumps have all undergone substantial changes in the way they do business. If these firms had not made great strides in their ability to manage their logistics and their supply chain, they would be out of business and the cost of gasoline would be substantially higher.”

Providing Systems That Rev-up Operations

MCI Systemhouse’s forte from a systems integration perspective, according to Shemwell, is merging systems together that were developed at different points in time and have different architectural elements, but the company also provides systems that support every aspect of the logistics process, from field operations to the management of inventory – all the way down to the point of sale. Through this technology, the companies are able to run more efficiently which, in turn, allows them to save money and remain competitive. And consumers are able to continue to fill up old Betsy with inexpensive gasoline.

The money that oil and gas companies save comes two-fold. After a company has recovered the financial resources it takes to implement a system, a company will first experience a direct-cost savings. Businesses will be able to manage the logistics process more efficiently and more effectively, Shemwell points out. So in effect, inventory is reduced and the enterprise runs on better and more timely information. But there is a larger savings that is harder to quantify, and that is the reduction of cycle time.

“No one wants to have raw material or inventory on the shelf any longer than they have to; so if you reduce cycle time you experience a larger cost savings,” Shemwell says. “These savings can be quite large and sustained over a long period of time. People will forget that it used to cost ‘X’ amount of money to do business and now it only costs us ‘Y’ amount, but they never forget the speed with which operations take place.”

Engine Failure

Though some companies have the option of setting the cruise control and are now able to relax a bit due to these new technologies, not everyone has made it around the curve. Failures, for the most part, have been because of a company’s inability to adapt to new technologies. In the early ’90s many of the companies in the oil and gas industry found the technology changes brutal, Shemwell says. Many businesses were unable to make the transition and ended up being acquired by other companies. The biggest challenge for these companies, and what still is for some, Shemwell notes, is the adaptation by a company to the new resources.

“The technology can be molded to meet a lot of diverse needs, but if a company can’t come to grips with the changes that need to be made, no amount of money, time or effort will make it work as it should,” he says. “Those companies that don’t have good change management processes as part of the transition will not be as successful as those that see the management change is critical.”

Shemwell believes the common denominator is having a strong CEO that is really driving this change, and a strong management team that has bought into the idea of change. “The chances of success are greatly diminished if top executives just delegate it down to a lower-level management team to go and fix it, while life at the top remains the same,” he says.

Shemwell expects the process of integrating current systems and implementing entirely new systems to accelerate within all industries, including the oil and gas industry, over the next couple of years.

“Over the last five years the vendor and customer have learned how to do it together,” he says. ” Now, with the lower cost of hardware, the increase in the size of the bandwidth in telecommunications, readily-available software, and an increasing knowledge and understanding by the major players of the necessity of such systems, we will see an even more aggressive change. The next two years will be even more dynamic then the last five years.”

Lessons from the Outsourcing Primer:

  • After a company has recovered the financial resources it takes to implement an IT system, it will experience a direct cost savings because the business will run more efficiently and effectively.
  • A company will also save money by reducing cycle time.
  • A company’s employees must adapt to the new technologies in order for the outsourcing venture to work.
  • The CEO must drive the change for the process to be effective.
  • The implementation of new IT systems and the integration of current systems will accelerate in the next few years.

Post a Comment

Your email address will not be published.

( required )

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>