Why large oil companies find implementing supplier management a challenge

In the complex ecosystem of the oil industry, large companies often find themselves grappling with challenges beyond the extraction and distribution of resources. One notable hurdle is the effective management of their extensive supplier networks. Despite their vast resources and capabilities, many large oil companies struggle to grasp the principles of structured and collaborative supplier management even though their activities can be up to 70% outsourced. So, why is this the case?

We've seen from our annual global srm research that whilst many oil companies are interested in implementing supplier management programs, they struggle to get the initiative off the ground or if they do, maintaining it and making it part of corporate culture.

 

Here are a few areas that large oil companies struggle with:

 

• Understanding what Supplier Management actually is

Oil companies are huge and complex organisations that are engineering led, therefore supplier management becomes all about facts and data and typically focuses on supplier contract management. We also see pockets of good supplier performance management (typically in the Wells or high risk areas) but this is not consistently applied across the organisation. What we don’t usually see is a clearly defined program covering contract, performance, relationship, sustainability, innovation and risk. If these things are happening they are typically disconnected.

 

• Boom and bust cycle leading to a short-term cost-cutting mentality

Many oil companies struggle with creating a business case for a supplier management program as they frequently prioritize short-term cost-cutting measures over long-term strategic supplier management initiatives. This narrow focus on immediate savings often results in adversarial relationships with suppliers, as companies push for lower prices without considering the broader implications for quality, reliability, and innovation. Alternatively, during boom times, the oil company is focused on growth and getting things done as quickly as possible, ironically not realising that good supplier management would help both these points in the boom bust cycle.

 

• Legacy Systems and Processes

Many large oil companies operate within legacy systems and processes that have been in place for decades. These systems, while once efficient, may lack the flexibility and agility needed to adapt to modern supplier management practices. As a result, companies find themselves mired in bureaucratic red tape and outdated methodologies that hinder collaboration with suppliers.

 

• Fragmented Supplier Ecosystems

The oil industry relies on a vast network of suppliers, subcontractors, and service providers across the globe. Managing this expansive ecosystem presents a significant challenge, particularly when suppliers operate in diverse geographical locations with varying regulatory requirements and cultural nuances. Large oil companies often struggle to establish a cohesive and consistent approach to relationships with suppliers, leading to inefficiencies and missed opportunities for collaboration.

 

• Lack of Data-driven Insights

Effective supplier management relies on data-driven insights to identify risks, track performance, and drive continuous improvement. However, many large oil companies struggle to harness the vast amounts of data generated throughout their supply chains. Without robust analytics capabilities and real-time visibility into supplier performance, companies find it challenging to make informed decisions and proactively address emerging issues.

 

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• Resistance to Change

Like many established and regulated industries, change in the oil sector is often difficult, especially culturally. Adopting structured and collaborative supplier management practices requires a fundamental shift in mindset and organizational culture – supplier management is a business change program not just another procurement initiative Large companies may face internal resistance from stakeholders accustomed to traditional procurement models, making it difficult to drive meaningful change across the organization.

 

• Complex Regulatory Environment

The oil industry operates within a complex regulatory environment characterized by stringent safety standards, environmental regulations, and geopolitical considerations. Navigating these regulatory requirements adds another layer of complexity to supplier management, as companies must ensure compliance while maintaining operational efficiency and cost-effectiveness.

 

• Imbalance of Power and Negotiating Leverage

The sheer size and dominance of large oil companies in the market can create an imbalance of power in supplier relationships. Suppliers, especially smaller ones, may not perceive large oil companies as "customers of choice" and be unwilling to accommodate their demands. This power imbalance can hinder collaborative efforts and stifle open communication between the parties, leading to transactional rather than strategic relationships.

 

• Supplier Diversity and Innovation

Large oil companies often rely on a diverse array of suppliers to meet their operational needs, ranging from multinational corporations to small and medium-sized enterprises (SMEs). Managing this diverse supplier base poses challenges in terms of consistency, standardization, quality assurance, and innovation. SMEs, despite their agility and innovation potential, may struggle to navigate the complex procurement processes of large oil companies and face barriers to entry.

 

The challenges facing large oil companies in mastering structured and collaborative supplier management are multifaceted and deeply ingrained within the industry's culture and operations. Despite their extensive resources, many struggle to implement and sustain effective supplier management practices. Misunderstanding the breadth of supplier management, they often focus solely on contract oversight, neglecting vital elements like supplier performance, relationships, sustainability, and innovation. The industry's cyclical nature exacerbates the issue, with companies oscillating between short-term cost-cutting measures during downturns and rapid expansion in periods of growth, overlooking the strategic value of robust supplier management practices. Legacy systems, fragmented supplier ecosystems, data limitations, and resistance to change further complicate matters, hindering the harnessing of supplier networks' full potential.

To overcome these challenges, large oil companies must initiate a transformative journey, fostering a culture of collaboration, innovation, and transparency. This entails investing in technology and talent, forging strategic partnerships, and embracing change. By nurturing a proactive approach and committing to continuous improvement, companies can unlock the value of their supplier networks, positioning themselves for sustained growth and resilience amidst dynamic market shifts. The collective effort of leadership, procurement professionals, and supply chain partners is paramount in navigating the complexities of supplier management and charting a course towards long-term success.

 

Benchmark your organisation's supplier management

A must for all organisations managing suppliers critical to the success (or failure) of your organisation. To undertake a free benchmark of your organisation's supplier management capabilities visit www.srmsurvey.com.

 

If you would like to talk about your supplier management, please contact us at enquiries@stateofflux.co.uk. 

 

Author: Joel Saunders is the Commercial Director at State of Flux based in London.