Management Strategies Of The Organization Shell In Nigeria: A Procurement Evaluation

Critically investigating the souring methods and suppliers base

Discuss about the Management Strategies Of The Organization Shell In Nigeria.

This report provides a detailed evaluation and analysis of procurement management strategies of the organization Shell in Nigeria. It has been identified that minimization on firm’s supplier strength is often a potential objective of any sort of procurement professional in an emerging professional. As put forward by Yusuf et al. (2014), a supply base is characterized as the proportion of supply network, which is effectively managed by buying a business. This report particularly discusses the sourcing techniques in the supply chain management process. The purpose of the report is to evaluate the current procurement management strategies followed by Shell in Nigeria and develop more useful techniques related to sourcing method and supplier base.

When it comes to supplier base, the business or the organizations must have to be confident that a supplier could manufacture or produce a regular supply of goods and deliver them in a timely manner. An,  Wilhelm and Searcy (2011) particularly mentioned that an interruption of raw materials could be costly, as human resource as well as plant machinery may not be used for an indeterminate time. As put forward by Zhu, Sarkis and Lai (2007), an organization’s sourcing strategy can be characterized by three significant decisions- such as a proper criteria for developing a supplier base, criteria for selecting suppliers who are supposed to receive an order from each supplier selected. As put forward by Gold, Seuring and Beske (2010), quality and delivery are strategically important supplier

The strategy of sourcing involved in corporate field is more crucial or important as the competition in the global environment and rapid technology changes may move faster. As mentioned by Hannevik et al. (2014), supplier management orientation of a firm is usually reflected in its contracting policy for the external purchase. Particularly, in Shell, contracting and procurement provides a wealth of opportunities in their upstream and downstream operation developing relationship with suppliers and supporting the global delivery of services. As Shell operates a global operation, the firm has applied several method of sourcing in supply chain but the idea of minimizing cost is just emerging one. Handfield, Primo and Oliveira (2015) argued that today souring and procurement executives of many global businesses are under a firm pressure to extract cost saving from supply base and at the same time trying to enhance and maintain the quality of service ensuring supply continuity. In the case of Shell in Nigeria, as always is on an aggressive growth path; they make large investment in new and advanced technologies to maximize production, storage and distribution, focusing on increasing their product quality and omitting the environmental hazards.

Strategic Evolution of Sourcing

Notwithstanding, Pagell and Shevchenko (2014) argued that large global organization like Shell and BP (British Petroleum) often face the fluctuation in supply, unpredicted global demand market dynamics as the challenge. However, when it comes to sourcing, Baily (2017) mentioned about the supplier selection which is also a sourcing strategy where the buyer selects products and services from offerings made by the suppliers presently operating in the market. The authors have particularly insisted on the fact that an anti-arm relationship could sustain between the buyer and supplier consisting a low level of collaboration as well as interaction . In the case of Shell, this buyer and supplier relationship requires a pre-set criteria to form because Shell uses a global system to pre-qualify the suppliers informed for the upcoming contacts (Shell.com 2018). It is identified that Shell designs “Supplier Qualification System” (SQS) to gather and stock information on suppliers on suppliers approached to do business with Shell. Nevertheless, this SQS delivers a high-quality as well as streamlined approach to pre-qualification method and make sure that suppliers finish this important evaluation but the organisation makes sure that registration in SQS does not guarantee any business with Shell.

A study performed by Ho et al. (2015), that short-term contract may provide large amount of flexibility and ignore fixed investment; however, it relinquishes development as well as price certainty advantages afforded from long-term contacts. Hence, this evaluation reveals the fact that “short-term contracting” can be treated as ideal under a broad series of conditions. An experimental study provides a survey findings, they observe that management takes the responsibility of forming a long-term contract but it is frequently seen that in short-term contract such ideal buyer-supplier relationship is not unique or rare.

When it comes to sourcing of supplies and supplier selection technique in the same, new-buy situations comes in the middle. Here, Kallestrup et al. (2014) mentioned that supplier selection can only be based on a general assessment of suppliers’ potential because information on past performance may not be available.  Such appraisal stage of the supplier selection technique intends to verify which particular vendors have the capability, commitment and financial viability to warrant the placing of an order to facilitate addition as preferred supplier. According to Saad, Mohamed Udin and Hasnan (2014), some of the factors that should be considered at the time of the appraisal exercise include suppliers’ financial position, standard of quality, customer profile and plans for the future. Hence, the probability of being bought or sold need to be ascertained because this could affect suppliers ‘future plan as well as the priorities. This means that potential provider should not be too much reliant on any customer or stuck to a particular supplier. Another study performed by Rui et al. (2017), mentioned that buying business should also make sure that a potential supplier has adequate contingency or disaster recovery in place to create a strong guarantee security of supply.

New-Buy Situations: Supplier Appraisal

After the new-buy situation, Shell further extends its method to re-buy situation which seems to be little tougher than the process followed in New-Buy Situation (Giannakis and Papadopoulos (2016). According to the supplier selection technique followed by Shell, supplier appraisal is an appropriate types of selection for new-buy situation and as the channel to qualify suppliers as potent to contribute the business with (Shell.com 2018). This is determined on the basis of the evaluation of potential performance. Nonetheless, here Ivanov,  Sokolov and Dolgui (2014) mentioned that if re-purchasing environment resides, estimates and perception could be replaced with solid facts and in such situation supplier selection is particularly based on the evaluation of actual performance recorded in the past phase. Conversely, it is also identified that supplier selection is not done by one single method; keeping the alignment with the market dynamics, Shell pays attention to an emerging categorical method under which a list of relevant performance variables or the factors assessed; here the organisation could assign the performance rating of evaluating attribute in the form of categorical terms –such as good, neutral and poor.  At the time of creating the rating judgment, Shell follows a global industry standard and by making an agreement between different representatives from many functions in the business including procurement, logistics and production.

Even though the above two methods are potent enough to maintain quality in products and transparency in service, there is an extended method called weight –oriented method. Some particular businesses, for example, Unilever, IKEA have been observed to be incorporating this weight oriented technique in which the factors are weighted according to their relative importance and further implemented to performance measure (Rui et al. 2017). This technique particularly identifies that factors are not equally significant but all allocations of weighting may stull e arbitrary.

As put forward by Yusuf et al. (2014), oil and gas organizations tend to run their operation in mostly complex and changing environment where challenges are inevitable, particularly, with respect to supply as well as demand. Here, An, Wilhelm and Searcy (2011) also mentioned that as the oil price is historically low, the business should take time to evaluate procurement method and cost management. With the purpose of making a significant change in the supply chain, the oil and gas giant Shell made a huge transformation in supply chain.  Shell in 2005, used the technique of more upstream and profitable downstream to distil its new strategy (Shell.com 2018). With the help of more upstream initiatives, the petrochemical and energy groups continues the search and recovery of oil and gas. Notwithstanding, oil and gas firms should insist on their product supply chain and the same should also be placed “non-hydrocarbon supply chain” that usually manage materials and parts required to run the business. The author also pointed out the fact that “non-hydrocarbon” supply chain is important and it is highly required to deliver equipment and services needed to discover, and eventually place the product in the market. In a similar way, Shell builds the process of refining and placing the product to market through downstream operation. Shell develops the way it refines and delivers products to customers through downstream operation initiatives. In a shorter sense, it can be ascertained that Shell’s technique means if it increases production, its income could go up (Shell.com 2018). 

Re-Buy Situation: Supplier Evaluation

So, the transformation is the key to understating this strategy. Consequently, the organization is able to restructure its supply chain with many values and goals. These could include standardizing, practicing and technologies, creating stable cash flow and finally putting demand-driven practices. Notwithstanding, Saad et al. (2014) mentioned that in a competitive and dynamic market standardising with a restructure may not be an effective solution for the long-term growth and moreover technology implementation include a huge cost.

 This means that this traditional process of supply chain may not sustain longer because the business today may experience long-lasting volatility, intensified competition as well as the digital disruption, which means that business operation is required to be reliably agile. Major disadvantage of Shell’s current supply chain management was that Shell was utilising third party logistic (3PL) to purchase products; this means it did not have proper command of the procurement process (Shell.com 2018). As the recovery of the strategy, Shell collaborated with Accenture to develop a fourth party logistic which is known as Logistic Management Service. This newly formed LMS supports Shell’s upstream operation which can cover production and projects. Nonetheless, this also falls under the conventional supply chain practices and Ho et al. (2015) mentioned that industry convergence as well as digital business could disrupt this traditional process of supply chain. The business could move from linear process including discrete partners to a more fluid as well as integrated ecosystem where speed and visibility are the keys. However, every business should understand the every disruption is an opportunity in by applying the opportunity, the business can achieve rapid as well as sustainable growth.

The above presented analysis helps to identify the fact that supply chain practices in oil and gas sector lag behind the others in the sector that implements innovative techniques with the inclusion of optimized inventory management, collaborative supplier relationship management. A brief insight is provided in the following about concerning the opportunities and fields in which practices of supply chain can be enhanced among global as well as national O&G organizations.

According to Handfield,  Primo and Oliveira (2015), purchased goods and services which accounts for above 50% of the average oil and gas firm’s total cost. Thus, even 5% reduction in cost of purchase could lead to increment in the profit range for oil and gas business. Therefore, to accomplish this, Shell should particularly focus on the below mentioned opportunities delivering significant supply chain value.

• “Market intelligence of supply chain”
• “Supplier Relation Management”
• Talent and Technology in supply chain

Weight-oriented method

As put forward by Pagell and Shevchenko (2014), the supply chain market intelligence remains the process of obtaining as well as analysing information to gain insight about the present and future market and support current and future sourcing. This may increases the ability of business to make estimation about the changes effectively in the external market and take actions before others make any changes. It can be stated that market intelligence in supply chain conventionally support and oil and gas organizations to handle the supply chain obstacles such as limited capacity, market volatility and infrastructure. This may also help the companies to make appropriate decisions about which market could he appropriate to make purchase from and how to determine appropriate price to pay as well as appropriate benchmarking. This eventually helps to gain competitive advantages.

It is also identified that Royal Dutch Shell is largely reliant on suppliers to deliver tricky services and significant equipment to support the uncompleted projects and organizational operation. On a frequent basis, “supplier relationship management” and “contract management” do not have the ability to reach the mark. Consequently, Shell may have to bear the supplier risk. Thus, to enhance and maintain “supplier relationship management”, business should incorporate a clear technique of supplier benchmarking. The organization should measure the robustness as well as performance of variety of contractors for different spends and categories, which continually rely on dialog with them; thereby, the suppliers remain in agreement with required obligation with respect to safety, training, equipment and staffing requirement.

Another significant technique which could help Shell in making a pricing negotiation is the application of “should-cost” framework as well as “total-cost-ownership” (TCO) framework.  Earlier, the “total acquisition cost” for specific aspect of equipment comes by considering the design cost, operating cost of supplier and supplier margin and the acquisition cost (Handfield, Primo and Oliveira 2015). Hence, the “should-cost” model for variety of spend categories can empower oil and gas business for making the negotiation of contract terms and conditions with the suppliers. However, in the field of TCO approach, different cost, acquisition cost, operation and maintenance cost come before selecting the appropriate supplier at the most reasonable price. Some businesses have incorporated degrees with the inclusion of “should cost” model but others in the field are due to implement major players in the sector. So, it is comprehensive that such field of “supplier relationship management” may require an in-depth analysis.

Although technology is helping oil and gas business in extracting more oil, requirement for incorporation of supply chain and procurement are high to generate and deliver additional value. It is worth mentioning that modern enterprise resource planning (ERP) systems seem to be useful to resolve the stated concerns. Such ERP systems are required to provide information about how inventories are managed, how demands are forecasting and application of e-procurement. Here, the forecast of demand associated with inventory management and e-procurement develop the root of the supply chain strategy of oil and gas.

In this context, Ivanov,  Sokolov and Dolgui  (2014) commented that ERP systems that are associated with oil and gas can revolutionize the way resource planning of business is performed in many nations. It has been found that there have been a significant example of shift aligned with the way oil and gas originations have adopted e-procurement and generate interest in e-procurement technique. In fact, the best in class supply chain techniques and system, without skilled people, standard supply chain practices could be difficult to develop and the business might it difficult to gain the full benefits from the process. Like the other sector, oil and gas is supposed to deal with the efficiency of adequate skills. Some particular measure that can appropriately be incorporated may include training as well as development of talent in supply chain functions and growth of supply platform to brush up the supply chain talent. Thus, to enhance and implement the total value of some major supply chain practices, the organization need to carry out some of the real world measures –such as:

• To figure out the total value of some major investment categories, which may require a thoroughly examined cost and options throughout the supply chain for each of the category and then determination of appropriate interventions like searching new specifications related to the suppliers and alternation of contract terms
• Develop a “custom-fit procurement” process which deliver effective clarity and involve suppliers early in the technique. Both execution and operation should he followed
• The business has to deal with the risks across the entire spending portfolio; hence, the focus should not only be on the individual project
• The organization will have to manage the supply base, choose relevant suppliers and pay attention to alignment and sustainability and finally make sure a business ownership and accountability is transparent to suppliers
• The organization also needs to develop the capabilities required for developing procurement and some activities of supply chain. Presently, such deficiency of skills could remain at a high extent and in the near future, it could be so important to cultivate talent because it remains as the most critical talent and functional areas

Even few important practices of supply chain have delivered disappointing outcome, there is always a scope for further enhancement. According to Yusuf et al. (2014), appropraote planning of demand and customized management of inventories could help businesses to manage oil and gas equipment uptime; here benefits could come from enhanced productivity. As an implication, it is worth mentioning that developing spend category management as well as “collaborative supplier relationship management”, doubled with speedy automation of transaction process leading to sourcing savings and selection of secondary saving scopes.

Conclusion

With the help of transmission in the supply chain, Shell has developed how significant supply chain could be to broader company changes. The restructuring process of supply chain enabled Shell to show “more upstream” and profitable downstream in action. In conclusion, it can be mentioned that oil and gas industry tend to face rapid market dynamics along with changing external forces which have a strong impact on the organizations. Thus, the organization should not rely on one single procedure of procurement; this means that the business should react in accordance to the market needs.

References

An, H., Wilhelm, W.E. and Searcy, S.W., 2011. Biofuel and petroleum-based fuel supply chain research: a literature review. Biomass and Bioenergy, 35(9), pp.3763-3774.

Baily, P., 2017. Procurement. In Contracting for Project Management (pp. 105-116). Routledge.

Giannakis, M. and Papadopoulos, T., 2016. Supply chain sustainability: A risk management approach. International Journal of Production Economics, 171, pp.455-470.

Gold, S., Seuring, S. and Beske, P., 2010. Sustainable supply chain management and inter?organizational resources: a literature review. Corporate social responsibility and environmental management, 17(4), pp.230-245.

Handfield, R.B., Primo, M. and Oliveira, M.P.V.D., 2015. The role of effective relationship management in successful large oil and gas projects: Insights from procurement executives. Journal of Strategic Contracting and Negotiation, 1(1), pp.15-41.

Handfield, R.B., Primo, M. and Oliveira, M.P.V.D., 2015. The role of effective relationship management in successful large oil and gas projects: Insights from procurement executives. Journal of Strategic Contracting and Negotiation, 1(1), pp.15-41.

Hannevik, M.B., Lone, J.A., Bjørklund, R., Bjørkli, C.A. and Hoff, T., 2014. Organizational climate in large-scale projects in the oil and gas industry: A competing values perspective. International Journal of Project Management, 32(4), pp.687-697.

Ho, W., Zheng, T., Yildiz, H. and Talluri, S., 2015. Supply chain risk management: a literature review. International Journal of Production Research, 53(16), pp.5031-5069.

Ivanov, D., Sokolov, B. and Dolgui, A., 2014. The Ripple effect in supply chains: trade-off ‘efficiency-flexibility-resilience’in disruption management. International Journal of Production Research, 52(7), pp.2154-2172.

Kallestrup, K.B., Lynge, L.H., Akkerman, R. and Oddsdottir, T.A., 2014. Decision support in hierarchical planning systems: The case of procurement planning in oil refining industries. Decision Support Systems, 68, pp.49-63.

Pagell, M. and Shevchenko, A., 2014. Why research in sustainable supply chain management should have no future. Journal of supply chain management, 50(1), pp.44-55.

Rui, Z., Li, C., Peng, F., Ling, K., Chen, G., Zhou, X. and Chang, H., 2017. Development of Industry performance metrics for offshore oil and gas project. Journal of Natural Gas Science and Engineering, 39, pp.44-53.

Rui, Z., Peng, F., Ling, K., Chang, H., Chen, G. and Zhou, X., 2017. Investigation into the performance of oil and gas projects. Journal of Natural Gas Science and Engineering, 38, pp.12-20.

Saad, S., Mohamed Udin, Z. and Hasnan, N., 2014. Dynamic supply chain capabilities: A case study in oil and gas industry. International Journal of Supply Chain Management, 3(2).

Shell.com. (2018). Shell for suppliers. [online] Available at: https://www.shell.com/business-customers/shell-for-suppliers.html [Accessed 13 Jul. 2018].

Yusuf, Y.Y., Gunasekaran, A., Musa, A., Dauda, M., El-Berishy, N.M. and Cang, S., 2014. A relational study of supply chain agility, competitiveness and business performance in the oil and gas industry. International Journal of Production Economics, 147, pp.531-543.

Zhu, Q., Sarkis, J. and Lai, K.H., 2007. Initiatives and outcomes of green supply chain management implementation by Chinese manufacturers. Journal of environmental management, 85(1), pp.179-189.