IPAC BUSINESS MAGAZINE OF THE YEAR 2010

PROCUREMENTLEADERS
31

Issue 31 march/april 2011 www.procurementleaders.com

ANNUAL RESULTS ROUNDUP

bottomless pit
Rio TInto cpo scott singer
on mining’s finest hour
FINDUS PREPARES FOR VOLATILIE PRICES
TAILORING GLOBAL SUPPLY CHAINS
THE ANSWER TO STATE SPENDING
CFOS MUSCLE IN ON PROCUREMENT
MAR/april 2011

REWARDING TIMES Singapore slang It’s Alive!

NEWLY ANNOUNCED TALENT, RISK AND Time isn’t up for
SHORTLIST INSIDE RELATIONSHIPS in asia strategic sourcing

PL31_01_Cover.indd 1 17/3/11 16:00:57

 on reflection
Forced to take a long hard look at itself over the past 12 months, the oil and gas industry is looking less at technology
and tools and more toward having the right people with the right mix of experience to help mitigate risk in the future
Discussions about risk management
generally cover the usual suspects of
supplier finance, logistics failures,
raw-materials shortages, natural
disasters and geopolitical events.
Certainly, each of those potential
supply chain disruptions deserves
serious attention and all were on
the minds of attendees at a recent
Procurement Leaders roundtable at
the Four Seasons Hotel in Houston,
sponsored by Emptoris.
Indeed, the recent regime-toppling
protests in the Middle East, as well as
last year’s Deepwater Horizon oil well
explosion off the coast of New Orleans,
the Eyjafjallajokull volcanic eruption in
Iceland that grounded air travel in Europe,
crop-destroying droughts in Russia and
raw materials shortages were pressing
reminders to procurement executives
around the world of the importance of
Portraits: Curtis DeGidio
rigorous risk mitigation strategies.
In fact, one might have expected that
oil well disasters and political upheavals
would be the major topics of discussion
among roundtable participants at the
52 procurementleaders
PL31_052-054_Roundtable_Houston.indd 52
event, which had the theme “Smoothing
the road to success: managing and
mitigating procurement risk”. While most
were from the oil and gas industry, they
soon highlighted a different risk that,
in its various forms, was near the top of
everyone’s mind: the risk of not having
enough people with the right experience
and skills to identify and deal with the
range of issues companies face today.
Procurement today requires a different employee set and
a different mindset than when supply chain was tactical
“The ‘people risk’ is our biggest focus,”
said Stephen Hester, vice president
and chief procurement officer of Smith
International Inc, an oil field service
company and equipment manufacturer.
“We need to be developing people, making
sure they get international exposure.”
Ann Ackerson, vice president of global
supply chain for Pride International,
a deep-water drilling contractor,
echoed his sentiments, adding that the
strategic nature of procurement today
requires “a different employee set and
a different mindset than when supply
chain was tactical.” When procurement
was considered a tactical function, the
people who succeeded were the ones who
could execute and could efficiently place
a purchase order with a supplier for a set
amount of money, she said. With today’s
emphasis on the strategic, different
skills are important. Among them are
negotiations skills. She worries that
some buyers have had no negotiations
training. “They need to learn how to say
‘no’ and to push back,” she said.
Tim Moeller, vice president of
procurement and materials for
Halliburton, a products and services
provider to the energy industry, also
counted people as one of the major risks
procurement has to deal with.
“There is a transformation underway
within the workplace and we have to
14/3/11 11:44:26

work with a new generation and teach
them how to identify risks,” he said.
Moeller said that within the oil and
gas industry there are a lot of 20-
and 30-year veterans with extensive
experience who will be retiring in
the next few years. “These veteran
supply chain professionals have tribal
knowledge and can smell risk before
they see it – given their tenure,” he said.
“Additionally, today’s supply chains are
less US-centric, involving more global
economies, many of which have unstable
environments, such as in third world
countries.”
All agreed that talent development in
general is a crucial issue for procurement
and that international knowledge or
experience, as well as experience in
other functions within an organization,
will be a big part of the skillsets of
successful procurement executives.
The concern with people and staffing
also extended to two other areas; one a
perennial issue and one more surprising.
Moeller referred to the people constraint,
or risk, associated with limited housing
availability in some regions. He said
Halliburton has ongoing operations in
North Dakota and a major constraint
those operations face is lack of housing
for workers.
“One of our biggest risks to our growth
there is that there isn’t enough housing
stock to accommodate the employees
we need to have there,” he said. “We
have had to work with local real estate
people and construction companies to
find innovative ways to overcome short-
term housing constraints to mitigate
the risks.”
Build internal relationships
The perennial people risk also resides
in the realm of internal relations.
Roundtable participants talked of
the importance of working with such
internal stakeholders as engineering,
manufacturing and other groups to
ensure they are supporting purchasing’s
initiatives. “We need to build internal
relationships so that the environment
isn’t ‘us versus them’,” said Ackerson.
Hether Benjamin-Brown, VP of
supply chain services for power company
Calpine Corporation, says her executives
rely on purchasing to control compliance
with procurement policy.
“I’m expected to manage my peer
PL31_052-054_Roundtable_Houston.indd 53
roundtable risk management
group to ensure they are following
protocol,” she said. Among the strategies
that work in her favor in that regard is
goal alignment. “We have joint goals
with other departments,” she said.
Halliburton’s Moeller, meanwhile,
warned that “The c-suite has to set
the tone on linkage of goals among
procurement and stakeholders within
the company.” Gerard Kubisiak Hether Benjamin-Brown
Emptoris Calpine Corporation
Anticipate risk
Beyond the related issues of people
development and people and stakeholder
management, Scott Christman, director
of supply chain, National Instruments,
said that his board of directors expects
him and his team to ask the what-ifs
that will help them anticipate risks.
“They want us to think out of the box,”
he said. Mike Burgett Ann Ackerson
Likewise, Tommy Murphy, VP of NuStar Energy Pride International
supply chain management at Key
Energy Services, which develops on-
shore energy production services, said
his board wants him to have a better
crystal ball than the industry has
generally had.
“We need to get a better handle on
strategies and best practices of others in
the industry and we have to take better
advantage of that,” he said. Stephen Hester Tommy Murphy
Interestingly, no one on the roundtable Smith International Key Energy Services
panel mentioned cost as a major risk. Of
course, raw material pricing volatility is
always something procurement has to
prepare for and, just like procurement
executives everywhere, panelists are
charged with controlling costs from
suppliers. And the risk that costs will rise
is real. Political turmoil in Egypt, Yemen,
Tunisia and Libya has raised oil prices
and some European countries, will feel Scott Christman Tim Moeller
especially exposed to economic trouble. National Instruments Halliburton
But, as National Instruments’
Christman said, “You can’t just worry
about costs.” that pre-qualification,” she said.
Indeed, Benjamin-Brown of Calpine Of course, the history of industry in
Corporation said that no one at her general is replete with examples where
company says “cut costs”. Referring safety practices – or lack of – were
to a risk that is particularly important factors in catastrophic events and the oil
in the oil and gas industry, she said and gas industry is no exception. Beyond
that Calpine executives say safety is the tragedy of deaths, events such as the
most important. “Safety is our most explosion at the Deepwater Horizon oil
important criteria,” she said. “We well have been expensive for suppliers
can’t bring in a supplier that has a poor and local communities alike.
safety record.” She added that all Calpine “When we see a supplier where the
suppliers have to be pre-qualified on [safety] numbers are bad, we require a
safety. “I won’t sign a contract without field person to sponsor the suppliers
procurementleaders 53
14/3/11 11:44:52
 Roundtable risk management
and monitor them,” said Mike Burgett,
VP of strategic sourcing for NuStar
Energy LP. “We have high standards and
we will step in and tell field personnel
how they have to manage the safety of
the supplier.”
Ensuring safety is simply a
cost of doing business, said Smith
International’s Hester.
One major aspect of risk management
is ensuring that the practices, products
and policies of tier-two and tier-three
suppliers don’t pose a risk. The best way
to get that assurance is to select the right
tier-one suppliers, said Halliburton’s
Moeller. “If you have the right process
and rigor to ensure quality, reliability
and safety from your tier-one suppliers,
the potential for problems from the lower
tiers is much less,” he said. “You have to
make sure your tier-one suppliers are
doing the right things.”
National Instruments’ Christman
agreed. “The first thing you have to
do to mitigate risks from tier-two and
tier-three is to ensure that tier-one
has a quality-control process.” You
have to ask them about their suppliers’
capabilities, he said. “You have to keep
the monkey on their back because you
If you have the right process and rigor to ensure
quality, reliability and safety from tier-one suppliers, the
potential for problems from the lower tiers is much less
pay them for that.” If you get a blank
stare when asking about their suppliers’
capabilities, you know you’re in trouble,
he added. Still, he noted, “You can never
have 100% risk mitigation across the
supply chain.”
The way to protect against tier-two
and tier-three supplier risks is to build
good relationships, said Benjamin-
Brown. “It’s not in the contracting
process so much as in the relationships
you establish before you start work on
the contract.”
Good supplier relationships can go
a long way to preventing a disruption
in supply, which is the classic
risk management responsibility
for procurement. You need to have
suppliers that can react fast and either
ramp up or down when you ask, said
Moeller. “Fifteen years ago there was
more tolerance regarding cycle times,”
54 procurementleaders
PL31_052-054_Roundtable_Houston.indd 54
he said. “Today, suppliers have to be
much quicker. It’s not good enough if
suppliers say they can be there in five
minutes when you really need them in
two minutes.”
Share data and goals
An essential part of building
good supplier relationships is the
willingness to share information.
Smith International’s Hester said
he has quarterly reviews with key
suppliers during which he shares
forecasts. “We can’t expect suppliers
to respond without knowing how many
wells we will drill,” he said. “The more
you share, the better they can plan.
The risk for procurement is not sharing
enough information.”
Of course, not all stakeholders in
every company are willing to share
information with suppliers. Benjamin-
Brown said, “One of our groups is
reluctant to share information even
though we tell them how important it
is to getting good performance from
suppliers.” The reason is that they
are afraid competitors will learn that
information and use it against them.
To monitor overall supplier risk,
roundtable participants reaffirmed the
importance of the traditional strategies
such as supplier finance monitoring,
attention to contract details and
ensuring alternative sources of supply
for key materials and services.
“We measure supplier risk through
score cards on the consistency and
repeatability of their performance and
analyzing their finances,” said Moeller.
Monitoring supplier finances is easier
for US-centric companies, according
to Moeller. “For suppliers in other
countries, we have local staff on the
ground to do the analyses,” he said.
“They can walk into facilities and
look at finances and procedures and
understand the supplier’s references, as
well as understand our own industry. It’s
critical to have the right people engaged
in doing those analyses.”
Everyone agreed that the catastrophe
at the Deepwater Horizon oil well was a
wake up call for the oil and gas industry
in terms of risk management.
“We looked at training, supplier
health and how we would handle
similar emergencies. It created a lot
of introspection. In the end, at NuStar
we learned that we were fine and we
didn’t have to make any changes,”
said Burgett.
Key Energy Services’ Murphy,
said the Deepwater Horizon incident
prompted establishment of a formalized
risk-management program at his
company that helped them move from
being tactical to being strategic.
Surprisingly, while all agreed
that technology is important in risk
management, there were no technology
game changers they could anticipate.
“We are simply looking at how best to
apply technology,” said Burgett.
Nevertheless, the most important
risk management solution centered
around managing people and external
and internal relationships. “We have to
optimize relationships, especially with
our tier-one,” said Moeller.
In the end, that may be the ultimate
risk management strategy.
To comment, email editor@procurementleaders.com
14/3/11 11:48:06