THE IMPORTANCE OF ADAPTING
AND UPDATING THE NEW SUPPLY CHAIN CAPABILITIES FOR SUSTAINABILITY IN THE
BUSINESS OF SUPPLY EQUIPMENT IN OIL AND GAS INDUSTRIAL PROJECTS
Samsul Rizal
Institute Technology &
Business Jakarta
Abstract
The
supply of equipment in oil and gas industrial projects requires high standards
and specifications due to high requirements of safety and reliability. Delay of
equipment delivery is very sensitive as the impact will be direct to the whole
project, while the delay of project completion will disrupt PSC’s (Partnership
Status Contractor’s) initial production. Ultimately, this would disrupt the oil
and gas production target of the Government of Indonesia. Operational data show
that a lot of delay is caused by the ineffectiveness of supply chain management
at PT AMN. These conditions increased complaints and penalties from customers
while at the same time decreasing the operational efficiency of PT AMN. To
overcome this problem and enhance customer satisfaction it is required to
evaluate the existing supply chain capabilities and then adapt, update, and
develop new supply chain capabilities. Determine new supply chain capabilities
of PT AMN, requires analysis data of PT AMN related to customers' needs,
internal assessment, existing supply chain, check-list supply chain
capabilities, SWOT analysis, five pillars, the landscape of supply chain
technology, game changer and risk management analysis for business sustainability.
In terms of determining supply chain capabilities, PT AMN is categorized as an
Adaptive Initiative or Continuous Improvement Initiative
Keywords: oil and
gas projects, supply of equipments, supply chain
capabilities, business sustainability
Introduction
Investments in the oil and gas industry must be supported
by adequate technical design,
construction, project management, facilities, services, and procurement
of equipment such as centrifugal pumps, gas compressors,
and air compressors (Lin, Zhang, & Gu, 2010). The high safety
standard in the Oil and Gas Industry requires high standards
and specifications of equipment. The regulation
for such requirement is included in the working guidance by BP Migas No: 041 / ptk/
i/ 2011 (Patel,
Salehi, Ahmed, & Teodoriu, 2019).
One of the
companies that provide centrifugal pumps for oil and gas in Indonesia is PT
AMN. PT. AMN is a
private company which was established in October
1986 (Spiegel,
2012). Its main office is
located in Jakarta. Its branch offices are located in Balikpapan - East Kalimantan; Cilacap
- Central Java;
Balongan
- West Java; and Sorong - Papua. PT. AMN is the
legal representative – the
Exclusive Agent /
Distributor of an American Multinational Corporation) for the oil
and gas market in Indonesia.
The key to
success in this market is the ability to understand the requirements of end
users and the development of optimum product solutions in these industries (Tukker,
2015). Manufacturers that offer their best
value-added services will get the most benefits. Furthermore, manufacturers
that anticipate and develop innovative solutions and price competition, that
uniquely satisfy end-user demands and put an extra effort into building lasting
relationships will experience more success in this market (Khan,
2014).
The few improvements of products made
by manufacturers mostly focus on the new development of materials for the
purpose of improving reliability. The major competitive advantage factors in
the market mostly include energy cost savings, value-added services, prompt
delivery, brand image, and price. As said earlier, the production of
oil and gas in Indonesia has experienced declines partly due to the delays in some
of the PSC's initial production (http:// esdm.go.id/ ). This delay in delivery is also experienced by PT.
AMN.
PT AMN is currently facing the following problems:
1. Frequent delays of goods delivery to customers due to ineffective supply
chain at PT. AMN.
2. Increasing complaints and penalties from customers
which reduce the
company’s profit due to the lack of capabilities of the
PT. AMN’s management to provide
accurate information
regarding delivery schedule.
3. The inability to perform local packaging
disrupts the company's operational efficiency.
The objectives of this study are:
1.
To evaluate the effectiveness of existing supply chain
capabilities at PT AMN
2.
To
develop new supply chain capabilities for PT. AMN to minimize complaints and
penalties from customers and to enhance customer satisfaction.
3.
To give suggestions or recommendations for the company to enhance its operational
efficiency.
For the company: This study will
provide an evaluation of PT. AMN’s current supply chain management and try to
develop PT AMN’s new supply chain capabilities, so that the delivery delays and
penalties will be minimized. Ultimately, customer satisfaction and the
company’s profit will be improved.
For academic purposes: This case
study aims to align the best practices in the industry with academic purposes.
The writing of this thesis also aims to contribute to the academic environment
by strengthening theory and application to the actual business.
Literature Review
Supply chain management is a total
system approach as a strategic coordination in terms of the flow of
information, products, and services across the network, from customers, to the
company and to the suppliers (Mello,
Gosling, Naim, Strandhagen, & Brett, 2017). A supply chain consists of two or
more legally separated organizations, being linked by material, information,
and financial flows. These organizations may be firms producing parts,
components, and end products, logistic service providers, and even the
(ultimate) customer himself, a supply chain also incorporates the ultimate customer
(Stadtler,
2014).
(Christopher,
2011) defined supply chain management as
“The Management of upstream and downstream relationships with suppliers and
customers to deliver superior customer value at less cost to the supply chain
as the whole.
The Supply Chain Council summarizes
the concept of supply chain management (SCM) in just five words: plan, source,
make, deliver, and return. This five-word definition has been accepted as the
basic description of what a supply chain looks like and what its core functions
(Evans,
Mason, Zokaei, & Hines, 2007).
The elements of supply chain strategy
are required to be identified in order to know the condition of the supply
chain in a company (Lambert
& Cooper, 2000). As described in Figure 2 below, the
elements of supply chain strategy consist of the customer, internal assessment,
external megatrends, competitors, technology, and risk. All elements will
create a current supply chain strategy. The current / existing supply chain
strategy should be evaluated. The analysis of condition could use a
Strength-Weakness-Opportunity-Threat (SWOT) Analysis, Five
pillar analyses, considering all supply chain megatrends. That analysis will
determine the capabilities of the existing supply chain and as a basis for
developing new supply chain capabilities in that company.
Figure 2: Elements of a Supply Chain Strategy
(Dittmann, 2013)
SWOT analysis is a useful technique
for understanding strengths and weaknesses, and also to identify opportunities
and open against threats from the outside. Strengths and Weaknesses are often
called internal organization factors, while Opportunities and Threats are
generally related to external factors. For this reason, SWOT is sometimes also
called Internal-External Analysis. A list of questions below can be
used as guidance in terms of finding the factors of strength and weakness in the company in taking advantage of opportunities and faced threats (http://www.mindtools.com, 2015)
According to (Dittmann,
2013), five pillars of excellence form the
foundation of the new supply chain agenda, these are certainly not new on the
one hand, but they undergo a rebirth as they are increasingly resonating in the
executive suite and in the boardrooms as a critical driven of supply chain
excellence and shareholder value. Those Five pillars are Talent, Technology,
Internal Collaboration, External Collaboration, and Managing Supply Chain Changes.
Operational efficiency and the
efficient perfect order including cost and inventory can be considered as other
important additional factors. With the efficient perfect order as the
overarching goal, this firm can build a metrics framework (Dittmann,
2013). The Strategy, of course, is nothing
without implementation. Resistance to change, and failure to involve a critical
mass of staff in the process, can undermine the most carefully crafted program
of innovation (Hughes,
Ralf, & Michels, 1998). While Customer Satisfaction can
build ‘Sticky’ Customer Loyalty. Building customer loyalty is hard, but it is
one of the most important things for a business. It can cost more to acquire
new customers than to keep existing customers (Beard,
2013).
Method
This research emphasizes the
assessment of the supply chain at PT AMN. It will be conducted using the
Dittman framework as described in Figure 3 below. The sources of the data can
be classified into two categories, i.e.:
1.
Primary
Data
Primary data represent
"firsthand" raw data and structures, and have yet to receive any type
of meaningful interpretation.
2.
Secondary
Data
Secondary data are historical data structures of
variables previously collected and assembled for some research problem or
opportunity situation other than the current situation.
Interview Method and Guidance for Interview
1. Supply Chain Strategy
Evaluation
The evaluation of the existing supply chain strategy needs to
be done, the company can assess the quality of their
supply chain strategy. List of questions
taken from (Dittmann,
2013).
2.
Supply Chain Capabilities Check List
During the interview to get primary data use the addendum:
Supply Chain Capabilities Check List (Dittmann,
2013).
Results and Discussion
ANALYSIS
- Evaluation of Existing Supply Chain Management
of PT AMN
The
existing supply chain management of PT AMN described in Figure 4 below is adapted
from the Supply
Chain model according to (Stadtler,
2014). There are two flows of movements
from the customer or the end user to PT AMN as a distributor of the Factory /
Manufacturer and vice versa. Those flows of movement are the flow of information
and the flow of goods.
Figure 4: Existing Supply Chain of PT AMN
Analysis Supply Chain Elements: External and Internal of PT AMN
- Customers
1.
Understanding customer’s needs and requirements
The
supply of equipment in oil and gas projects requires high standards and specifications
due to the high safety and reliability requirements of customers.
2. On
time delivery
On-time
delivery is critical and very important for the whole project plan schedule.
The delay of the delivery of equipment is very sensitive as the impact will be
significant to the whole project as the delayed completion of the project will
affect the PSC’s (Partnership Status Contractor’s) initial production.
3. The
cost competitiveness
It is
another important factor to ensure PT AMN’s competitiveness with its
competitors. Although this is not the main factor in the oil and gas industry
if a competitor can also meet the requirements of Health, Environment, Safety,
Quality and Reliability, and Delivery Time required by the customer, then
during bid evaluation, the factor of cost or price will be an important
consideration
- Internal Assessment
1. The Perfect Order Metric of PT AMN
The efficient perfect
order is the goal of PT AMN. The company will build a metrics framework as
illustrated in Figure 5
and the achievement of perfect order of PT AMN is contributed by the entire sub-metrics
factor.
Figure 5: The Chart of Perfect Order
Metric of PT AMN
2. SWOT Analysis
The SWOT analysis of PT
AMN shown in Figure 6 is done by the analysis of secondary data, the perfect
order metric PT AMN, and the analysis of the existing supply chain of PT AMN.
|
Strength |
Weakness |
|
-
PT AMN
has a team of sales, engineering, and service
that performs well -
Have human resources with experience,
expertise, and high
loyalty -
Represent a
well-known brand as
a niche market leader a specific product brings benefits and competitive
advantage to the company (PT AMN) |
-
Have no effective supply chain strategy and
capabilities. -
There’s no alert
system from factory to distributor Continue to customer if there’s an
obstacle or potential delay. -
Lack of capability in local packaging. |
|
Opportunity |
Threat |
|
-
Economic Growth -
Commitment to
project development -
Getting new
businesses and more prospects to respond and solve customer’s problems. |
-
Currency Volatility, customers
insist on price quotations in US dollars, while the factory is from Europe.
This creates uncertainty in contract negotiations, mostly for the factory
from the European country. -
Customer’s low
budget will bring unfair and not apple-to-apple competition. -
Local content requirements by the Government. |
Figure 6: SWOT Analysis of Supply Chain of PTAMN
3. Five Pillar Analysis
The purpose of the five
pillars analysis of PT AMN shown in Figure 7 is to compare the internal supply
chain capabilities with the five pillars of excellence.
Figure 7: Five Pillars Analysis of PT AMN
The markets for products remain
fragmented and highly competitive. The primary competitive drivers are price,
technical expertise, timeliness of delivery, contractual terms, previous
installation history, and reputation for quality and reliability. PT AMN’s main
competitors in the Oil and Gas Industry are Sulzer and KSB. Industries
experiencing slow growth generally tend to have a competitive environment more
heavily influenced by price due to supply outweighing demand, and price competition
tends to be more significant for original equipment orders than aftermarket
services.
1. Political Condition, with the current political condition in
Indonesia, where the presidential system is getting more challenging and disturbance
by Parliaments, this unstable political condition could impact the investment
climate in Indonesia. Potential investors
will “wait and see” which may cause the expected economic growth difficult to
achieve.
2. Bureaucracy / Permit & Regulation, the game changer is strongly related to the
political condition. If the bureaucratic reformation is successful by
governments, it can bring positive impacts such as better climate investment
conditions and it will attract investors to come and invest in Indonesia.
The boosting technology of IT
(Information Technology), seems not to bring awareness to the top management in
terms of utilizing it in getting cheaper, better, and faster related to
existing supply chain strategy/management/system. Top management and some employees find it difficult to move
on in this awareness, in some cases need a person in the internal or external
organization who could challenge, motivate, and drive to utilize IT
(Information Technology) awareness.
Developing a supply chain strategy presents an
invaluable opportunity to address risk within a strategic framework. The risk
comes into focus after the determination of the customer’s need, completion of
the internal best practices evaluation, consideration of supply chain
megatrends, and evaluation of competition and technology. In doing this risk
evaluation, the company strategy team will need to identify the risks,
prioritize them, and finally determine ways to mitigate them.
Addressing Supply Chain Risk at PT
AMN, after process identifying and prioritizing the three various risks, PT AMN
needs to re-assessment the seriousness of the consequences of a delivery delay
of goods to the customer, the worst case it will be blacked list or lose the
existing customer. Based on the data provided, clearly, the frequency of
occurrences is really high, as described in the table performance order. It
should become highly awareness to the Management of PT AMN as the seriousness
of consequences impacted the company's performance overall.
a) Supplier Risk, one of the big risks faced by PT AMN is a delay of delivery
of goods from supplier/factory to PT AMN inbound logistics which will impact
the delay of delivery of goods to customer. This delay caused increasing complaints
from customers and internally brought a significant financial impact to PT AMN,
reducing profit and operational efficiency.
b)
Evaluation
of the Supply Chain Strategy of PT AMN
According to (Dittmann, 2013), a score between 100 to 120 points, means that the
existing supply chain strategy is good to excellent; between 85 to 100 points, means
the company has a reasonable foundation to begin developing a true supply chain
strategy. While for a score below 85, means that the company has a great deal
of work to do to develop the necessary background to implement a supply chain
strategy process. Based on interviews
already done with the Director PT AMN, Expediting Manager of PT AMN, Branch
Manager Balikpapan of PT AMN, and Branch Manager Cilacap of PT AMN. all scores
from them still below 85, means that PT AMN has a lot of homework to develop
better strategic planning process in their existing supply chain management. PT
AMN needs to review and re-evaluate all factors related to its supply chain.
There are no other options that should be taken by PT AMN, except to develop
their new supply chain capabilities and drive to go to an excellent supply
chain.
c)
Analysis
of Supply Chain Capabilities at PT AMN
Based on the result of
interviews with the Director, Expediting Manager, Branch Manager - Balikpapan, and Branch Manager - Cilacap,
and also after a thorough
analysis of supply chain capabilities, it could be identified and
summarized the supply chain capabilities of PT AMN shown in Table 1 below. After
analyzing the data of PT AMN, customer needs, internal assessment, SWOT
analysis, five pillars, the landscape of supply chain technology, existing
supply chain, risk management, and data analysis of supply chain capabilities checklist
of PT AMN, it can be concluded that the current supply chain capabilities of PT
AMN is lower than required for running the business.
PT AMN should have an awareness about their condition, and then determine and
develop a proposed supply chain capability.
Table 1: Summary
Analysis of Existing Supply Chain Capabilities
of PT AMN
d)
Propose
New Supply Chain Capabilities of PT AMN
Based on the Evaluation of
Existing Supply Chain Capabilities of PT AMN above, to strengthen the supply
chain capabilities of PT AMN, the company should develop capabilities in the
following areas:
1. Warehousing
2. Network Optimization
3. Procurement and Vendor Management
4. Organization Design and Metrics
The proposed of new supply chain capabilities of PT
AMN can be seen in Table 2 below.
Table
2: Propose New Supply Chain Capabilities of PT AMN
Related to warehousing capability,
PT AMN urgently needs to build warehouses for doing local packaging. With
regard to enhanced operational efficiency and customer satisfaction, the local
packaging will reduce the cost and sales price, and it will also provide faster
delivery time.
Figure 8 shows
the Proposed Supply Chain to PT AMN.
Figure 8: Proposed New Supply Chain to PT AMN
Related to network optimization,
starting from identification problems, delay of delivery time, and cascades
customer dissatisfaction, network optimization is a must; the company of PT AMN
needs to re-organize by adding a Supply Chain Department in their organization,
the supply chain activity is done by each function department and branch offices
without any pooling and proper managing and coordination.
Related to Procurement and Vendor
Management, PT AMN needs to address supplier on-time delivery. In this case
study, the principal/Manufacturer acts as a supplier. Based on the case and
data analysis, it’s found that there is an information lack that deterring PT
AMN from delivering the goods on time to the customer.
Related to Organization Design and
Metrics, PT AMN should reorganize and provide a Supply Chain department that
can cross functions to all departments related. This kind of arrangement will
create a better environment and support faster decision-making. Currently, the factory or manufacturer provides a Purchase
Order (PO) un-priced copy of their sub-suppliers. The information provided
includes the date of PO, specification, scope of supply, and delivery time.
This kind of information will be
meaningless if there is no monitoring either done by the factory/manufacturer
or by PT AMN. The difficult problem appears if the delays happen from
sub-vendors at the last minute. With that condition, it will be difficult to
take a mitigation plan either by Factory/Manufacturer, PT AMN, or even by
Customers. The impact of this problem can be very significant in the production
of the goods and their delivery time. Based on the experience so far, the
delivery to the customer could be delayed until 3 months or 90 days. Some
projects even have a massive impact on the customer’s whole plan project, and
the loss of customers not only the huge money but also their credibility in
front of their end users.
Conclusion
Delay is one of the critical issues
in the Oil and Gas Industry. The delay of projects will impact the lifting of
oil and gas and the target of production of PSC (Partnership Status Contractor).
PT AMN as one of the stakeholders in the Oil and Gas Industry has contributed
to the whole project performance in the Oil and Gas Industry.
The
following are the conclusions of this thesis: Based on the secondary data, there
are highly frequent delays in goods delivery to customers. Referring to primary
data which is collected by interviews with the Director, Expeditor Manager, and
Branch Managers, it shows that PT AMN didn’t have an effective Supply Chain
strategy. Further, based on the checklist interview for supply chain
capabilities, PT AMN needs to develop its supply chain capabilities. PT AMN
should achieve on-time delivery by overcoming the lack of information with its suppliers
and its sub-suppliers. This is done by focusing on supplier collaboration and
supplier lead time reduction and closely monitoring and updating status during
process manufacturing. The purpose is to prevent any potential delay at the
earliest stage possible and to provide a proper corrective action plan that can
involve customers and suppliers.
Developing new supply chain
capabilities of PT AMN is achieved by revamping the supply chain at PT AMN. In
order to minimize complaints and penalties from customers and to enhance
customer satisfaction, PT AMN needs to focus on the customer by adding the SCM
(Supply Chain Management) Division in the organization. The SCM Division will
take care of and respond proactively to customers, then coordinate across
internal organizational functions such as Project Sales, Engineering, and Service
and Finance divisions. The SCM division will also coordinate with external
parties: Suppliers, Third party logistics, Third party inspectors, etc.
Additionally, the SCM division will also develop Information Technology to
boost the flow of information between PT AMN, suppliers, and sub-suppliers with
an enhanced EDI (Electronic Data Interchange). To enhance operational
efficiency, PT AMN should embrace sustainability as a cost-reduction strategy by
doing local packaging. PT AMN urgently needs to set up a warehouse for doing
local packaging. With regard to enhancing operational efficiency and customer
satisfaction, local packaging will reduce the cost and sales price and at the
same time provide faster delivery time. PT AMN needs to enhance customer satisfaction
by doing a customer satisfaction survey once a project is closed or goods have
been shipped. Here are the benefits that PT AMN will gain by tracking customer
satisfaction: identifying at-risk customers who are unsatisfied and potentially
going to turn to competitors, identifying common problems that are happening
repeatedly, and utilizing this intelligence to proactively prevent problems
happening again which leads to customers’ satisfaction.
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