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Sustainable Cost Reduction

Presented by Ray Carterof DPSS Consultants

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Oil and Gas Value Chain

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Key Questions?

Can costs be “reduced” or is it processes and behaviours/attitudes that have to change?

What does “sustainable” really mean?

Tools and Techniques?

Who should be involved in the process?

Blockers and Backers?

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Sustainable defined

Capable of being sustained

Something that can endure or is able to be maintained for long periods of time.

Able to be sustained and yet avoid depletion

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Sustainable Cost Reduction – The DPSS 7 Step Process

Step 1 Spend Management and Compliance

Step 2 Identification of Key Cost Drivers

Step 3 Value Analysis and NVA

Step 4 Standardisation, Collaboration & Aggregation

Step 5 Supply Market Analysis/Non Traditional

Step 6 Leverage the Spend and the Relationship

Step 7 Monitor and Measure DPSS CONSULTANTS

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The “Context”

ClientClient

People

Culture

Structure

BusinessModels

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Tools, Techniques and Processes

Spend Management IT Contracting models Category Management Value Analysis and Value Engineering Process Mapping S.T.O.P W.A.S.T.E model Stakeholder Management Models Target Costing Supply Market Analysis ABC Analysis Cost Pool Analysis TCO DPSS CONSULTANTS

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What is a Non Value Adding Activity?

Any activity that does not in some way enable the cost of that activity to be recovered from the customer

Activities that do not improve or enhance the final product or service

Activities the customer does not see value in…..

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Value Analysis – A means of defining “Fit for Purpose”

Value Analysis – “A systematic process aimed at ensuring that necessary functions are achieved at minimum costs”

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Classic Examples…….

Russian Pencil in Space Swimming Pools

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Volkswagen in the USA

Volkswagen produce a low cost version of the Passat – savings are being made by using a less elaborate axel…..

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Spend Management

Who spends what?

With whom?

When?

How?

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Supply Market Analysis– Non Competing

Action/Strategy

Cartel/oligopoly Legal actionSet up consortiumOffer partnershipBreak the cartel

Mature Market – no threats Develop new suppliersReduce entry barriers

Immature/growing market Seek out ambitious/high potential suppliers

Government or InternationalRegulation and restrictions

Build understanding,loopholes, seek alternatives

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The Price of Life…

The price of maize is expected to increase by about 90 per cent on the commodities market by 2030, according to a report by Oxfam.

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Example - S.T.O.P W.A.S.T.E

Standardisation? Transportation mode?

Outsource?

Process Re engineer?

Weight/materials?

Acquisition Costs?

Specification?

Take out the gold plate?

Elimination?

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Stakeholders in the Process – Blockers and Backers

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Change Agents

Agreement with the project

Understanding of the project

High

Low

Against For

Advocates

The only group driving change

Opponents

BlockersFollowers

Indifferent

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Case Studies…….

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Nestle Profits from VA

Value Analysis contributed to a reduction in total water consumption by 27%

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Laptops – Value Engineering

$300 de “specified” laptops – originally developed for poor children – are now available in the US and the EU

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Spend Management - Overpayments

The UK government believes it could save £264 million lost in overpayments to suppliers

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Procurements contribution to LG Electronics’ Profitability

The creation of an entirely new procurement organisation adopting “best practices” has resulted in $5.9 billion in direct material savings on a spend of $24.8 billion and $200 million savings on non-material, indirect spend of $7.5 billion

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Pallet company CHEP has awarded a five-year procurement outsourcing contract to Xchanging.

Under the deal, Xchanging will manage spend of £75 million on behalf of CHEP Europe. It plans to consolidate spend management across CHEP’s European businesses.

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Proclad

Proclad recently carried out a case study for Middle East operating company looking at carbon steel against a clad material. The pipeline in question is 14 inch diameter with an anticipated design life of 17 years.

Total Capex/Opex costs for a carbon steel pipeline $14,956,000

Total Capex/Opex costs for a carbon steel clad pipeline $9,996,057

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Collaboration at Siemens

Purchasing and supply at Siemens made a

“substantial contribution to earnings”

They have bundled a large share their of purchasing volume – a total of 44 per cent – across sectors (industry, energy and healthcare).

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Leverage at Lloyds

At Lloyds TSB and HBOS procurement has contributed £127 million in savings, with over 90% of spend now being through its top 1,000 suppliers

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Standardisation at Ford

Ford is planning to standardise its global small compact cars - based upon the UK Fiesta Model

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Collaboration and Leverage at KimberlyClark

Consumer products giant Kimberly-Clark has set up

a global procurement hub to help cut costs by $500 million by 2013.

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Waste Reduction at BAA

Recycling of construction materials, and emphasis on off-the-shelf purchases have helped procurement save around £260 million at BAA

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Target Costing at Tata

The Tata Nano car was based on a “target cost” via the use of Value Engineering and Supplier

collaboration

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Benefits…..

Supply Chain Engagement

Sustainable

Environmental Impact

Change of mind set – “Want to Need…..”

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