The Worst Supply Chain in North America

I’ve been doing some research on the unconventional oil supply chain. Unconventional oil includes crude oil from shale and oil sands. I’ve talked to over 20 oil executives and experts about the inbound supply chain that supports oil well production. This is part of the supply chain that the oil industry refers to as “upstream.”

The key players involved in bringing in the sand, piping and casings, production chemicals, and other necessary raw materials are the oilfield services companies. A good argument can be made that the well services industry has the least mature supply chain capabilities of any industry in North America.

The industry does attain fairly high service levels. Not supplying needed materials to an oil field would cost the average owner operator (the oil company) forty thousand dollars per day in lost production per well. But an owner operator may be supplying dozens of wells from an oil field warehouse. If that warehouse runs out of a critical supply, it could cost the company over a million dollars per day. Because of this, a core part of many well service companies’ value proposition is that customers will always have products when they need them.

Well services firms are really very large, global distributors of industrial bulk supplies for oil fields. These companies purchase goods globally from hundreds of suppliers. The goods flow into warehouses where they are treated and their quality is certified, and then they flow out to oil fields all over North America. In many cases the oil fields are in very remote locations served by dirt roads that are not on standard maps. Because these are bulk products, the goods move by ocean and rail, with trucking necessary for last mile deliveries.

This is a supply chain with long lead times. Sand, for example, is used to keep a hydraulic fracture open, during or following a fracturing treatment. Sand of the right quality comes from Wisconsin, but because of demand and train capacity issues, it can actually be quicker to purchase a proppant – a man-made ceramic material – from China or Russia. Chinese proppants ship out of the port of Tianjin and into the port of Seattle to serve North Dakota’s Bakken oil fields; Russian proppants ship from St. Petersburgh to the port of Duluth. It can take 30 days for goods to arrive at port, clear customs, and ship across an ocean; another week to 10 days to secure rail capacity; and up to 10 days to certify the products at the central warehouse in North Dakota. And yet in many cases customers are promised 30-day deliveries.

But these service levels are achieved, in most cases, despite very poor forecast accuracy, and without the use of a Sales & Operations Planning (S&OP) process – which means that the supply chain team never knows when orders will be placed. Not surprisingly this is a supply chain with a lot of inventory and sales people making just-in-case bulk orders for more inventory than is needed. And some firms will tell you that to meet service levels in rush situations, they will use air. But, of course, air is a very expensive way to ship pallets that often weigh over 2,000 pounds.

Not all well services firms lack a S&OP process. I’ve been able to uncover one division of a very large well services firm that is using S&OP. But this firm’s process is at a very low maturity level.

Achieving high service through extremely high inventory levels, means that the inventory carrying costs get passed along to their clients.

oil field

And in fairness to the well services firms, the upstream supply chain capabilities of most of the independent producers they are dealing with are very poor. The owner operator often has outsourced different parts of the production process to different firms, and lacks visibility to a good forecast of what will be produced in the coming days and weeks. If they can’t provide a good forecast to the well service suppliers, it is not surprising that the oilfield suppliers can’t forecast accurately.

Nevertheless, I have never come across a North American industry with such a dysfunctional supply chain.

Comments

  1. Gary Flaherty and Norman Waheed of SCLinx wrote a response but they had trouble logging in. This is what they wrote:

    First, kudos to Steve Banker for having the courage to write and publish what many of us in the oilfield services and upstream oil and gas sector have, at best, only whispered quietly to each other. While the industry While the industry has had spectacular achievements, applying technology to extract oil and gas from rocks buried thousands of feet in the earth, the supply chains that support the effort seem dysfunctional, immature and inefficient, even to many veterans of the oil patch.

    (for the rest of the response go to the weblink below)

    https://www.linkedin.com/pulse/article/20141008162212-16954525-advancing-the-worst-supply-chain-in-north-america?trk=prof-post

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