Every industry the world over has implemented some form of “supply chain management” to “reduce inventory costs”.  This is occasionally a great idea.  More often it is horrible.

I graduated from what is now the Sam Walton School of Business at the University of Arkansas in 1980.  It was impossible to participate in that program at that time without learning about Wal-Mart’s fantastic innovations in “just-in-time inventory control”.  At the same time as the Wal-Mart Corporation was paying employees to bring magnetic tapes to Bentonville, Arkansas by car each night to allow detailed sales analysis, Japanese auto manufacturers were making amazing innovations in managing their supply chain and significantly reducing the cost of manufacture.

In the early 1980s this concept was a popular Thesis topic for Masters and PhD candidates in many academic fields.  By the end of the decade CEO’s and Boards of Directors had noticed and many Supply Chain Management departments were formed in corporations to take advantage the huge cost savings that Honda and Toyota were realizing.  Unfortunately too few of these departments really understood the underlying principles that facilitated the successes.

Supply Chain Management is a quite complex subject founded on two very basic principles:  (1) Units of Production will always be available to the production process with minimal inventory on hand; and (2) Tools of Production will be available with adequate redundancy to minimize the impact of an outage on production throughput.

Units of production are those things that leave the facility as a component being sold.  The front blade on a bulldozer would be a unit of production for Caterpillar, John Deere, or Kobota, so would the knob on the top of the control selector.  The most successful bulldozer manufacturer will likely be the one who minimizes the “warehousing days” for the units of production.

Tools of production are those things that remain with the manufacturer when the product leaves the shop floor.  Painting robots, floor lighting, conveyer belts, the break room vending machines, and the office laptops are all tools of production.  The most successful bulldozer manufacturer is the one that has great training for their maintenance staff, adequate (even excessive) spare parts on hand, and appropriate redundancy.

The Oil & Gas industry like most non-manufacturing and all extractive industries adopted the Supply Chain Management infection with vigor and remarkably little understanding.  A careful analysis would show that the upstream portion of the Oil & Gas industry has “hydrocarbon molecules” as our units of production.  How boring is that?  No one will ever be able to advance their career by managing hydrocarbon molecules.

Similarly, our tools of production are valve repair kits, replacement control valves, programmable logic controllers, compressor engines, etc.  Some of these items have a significant cost and Supply Chain Management departments saw opportunity in “managing” these multi-million dollar “squirrel stores” that people were carrying in their trucks and had stashed behind the compressor shop.

Within a few years of the onset of the infection the industry had “work order systems” with goals like “all work will be scheduled 90 days in advance” and “no spare parts will be issued without a work order”.  Fundamentally, any job in upstream Oil & Gas that can wait 90 days for initiation can wait forever.  A failed diaphragm in a control valve in a level-control function can be replaced in under an hour with spare parts on hand—work that is well within the capabilities of the field operations staff.  Under too many work order systems, the field tech is not allowed to carry the necessary diaphragm on his truck and acquiring one is a multi-layer approval process that often takes days or weeks, so instead of the well shut-in for a few minutes it is shut-in for a week to the detriment of the reservoir and the company’s bottom line.

The next stage in the evolution of Supply Chain Management has the potential to be the most harmful yet.  The 21^st century innovation is to treat workers as “units of production”.  This primary manifestation of this approach in “control rooms” that “dispatch” workers to problem wells.  It is quite impossible for personnel in a control room to see a developing problem, they can only see the issue when it is a full-blown failure.  Instead of field techs seeing the onset of a condition that can lead to failure (which allows them to fix the problem before it becomes a failure), they are dispatched to cold, broken wells and equipment without any clear diagnostics available.  Some companies have taken this idea to the point where field techs can have their employment terminated for going to a well that they hadn’t been dispatched to.  Post appraisal data of these plans is universally negative, but since it is the flavor of the week more companies are moving in that direction every day.  We can only hope that this trend will reverse itself before the industry implodes and has to start over from scratch with an untrained workforce.  Again.

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