Executive viewpoint
The Oil and Gas industry, more than ever, seeks lower total cost of ownership (TCO) to sustain positive cash flow, improve profitability and enhance investment capacity. Today’s market is driven by two trends: 1) A quest for more cost-effective solutions in a context of low oil prices, shorter market visibility and greater financial pressure; and 2) Considerable technical challenge to retrieve harder-to-get oil and gas reserves, in ever-greater depths and tougher environments.
Our leadership challenge is to create and sustain the environment for our employees to achieve these goals in turbulent times.
As normally occurs in severe downturns, supply chain management’s top priority is to seek the best prices from all vendors. For operators, improving balance sheets in the short-term is critical, and little attention is given to more profound, sustainable solutions. Vendors, desperate to survive, often operate at a loss in an effort to retain market share. Everyone knows it is unsustainable, as a healthy supply base, with sufficient margins to reinvest and return a minimum cost of capital, is necessary for long-term industry success. As soon as the sky clears again, the cycle repeats itself with prices quickly soaring on all fronts. Surprisingly, senior management knows this perfectly well, and publicly agrees that the industry must revisit its practices in depth.
Despite the blinding and immediate financial pressures, it is time to start reinventing the future of our industry. We must revisit our businesses with a systems thinking approach. The undiscovered efficiencies at stake provide far more long-term profits (and lower TCO) than any short-term price concessions. The key words are well-known: true partnerships along the value chain, early engagement and trust. The latter is the most important, and requires a vision and commitment to the big picture.
In our experience, many firms often have a poor view of their TCO in a company-wide holistic manner. Supply chain teams oversee the purchasing, Operations is handed the consumption and implementation responsibilities, and Finance is left to manage the cash. These overlapping and, many times, conflicting department goals, make engaging in a new partnerships with suppliers a practice that can only happen under the strong leadership of senior management.
Considering the entire value chain—inside and outside the company—as a single entity, ripe for waste reduction, is the first step in realizing long-term gains “beyond price.” Focus shifts from utilizing many vendors who compete on price and technical competence, to trusting and sharing with select suppliers, who are experts in working together to extract efficiencies. This often requires rethinking of purchasing practices. Values more important to long-term viability—such as trust, common vision and innovative ability—begin to take precedence in sourcing strategies. Service performance becomes equally or more critical than product attributes. At Vallourec, our best success stories came from deep partnerships with experts along the supply chain, who achieved sustained value through new ideas and continuous improvements.
Lean management is a framework for building these partnerships and finding efficiencies. Our industry is significantly less mature in lean practices than some other industries, such as automotive or electronics. There are great opportunities to those who commit to the methods, are willing to learn from beyond their walls, and find ways to apply a continuous improvement mindset to their specific circumstances.
The true power of lean management is in its cultural mindset. The basic concept is to reduce or eliminate waste from all aspects of the business, whether operational or administrative. Not only does it reduce costs, but it improves lead time, enhances communication, creates system flexibility and builds robust systems. As an added benefit, it demonstrably enhances safety of operations. Harnessing the lean philosophy is a true cultural change that requires time (one doesn’t grow carrots faster by pulling on their leaves) and full engagement of top management. It is a long journey, but worth the effort, with some industries decades into the lean effort. Vallourec has used lean concepts for a long time, but a recent, robust initiative already delivers excellent results. It has become a cornerstone of our strategy.
The last, and the most important, piece of this puzzle is employee empowerment. The most significant source of waste in business is employees’ unused skills and talents. Those who are empowering their teams and utilizing their human assets most effectively will be at a competitive advantage. In today’s world, the pace of change is staggering. Our business environment is permanently evolving, with technologies enabling options we would not have thought possible only a few years ago. A learning organization can be technically adept, highly creative and thoroughly attuned to the use of these technologies. This type of dexterity has facilitated a “multiplier” effect on the number of initiatives that a company can simultaneously address. Empowering each individual to make the whole organization more agile, more adaptive to the challenges of today and tomorrow, is a necessary step in the lean journey. Above all, at Vallourec, we believe that it is a great way to grow our talents and instill a tremendous pride in a job well done.
Now is the time to shift from price reduction discussions to TCO, and enter into exclusive and strategic partnerships along the supply chain. New ways of doing business must be invented that will allow our industry to return to profits, even with oil at $40 or $50/bbl. This will only come through executive management’s vision and personal engagement. At Vallourec, we are living this commitment and look forward to joining with our customers on this quest. 
