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2009 ACADEMIC CASE STUDY SERIES
BPs Procurement and Supply Chain Management
An Academic Learning Case Study written for the Council of
Supply Chain Management Professionals
Arunachalam Narayanan, Texas A&M University, College
Station, Texas Malini Natarajarathinam, Texas A&M University,
College Station, Texas
Brandon Winn, Procurement & Supply Chain Management, BP
Council of Supply Chain Management Professionals 333 East
Butterfield Road, Suite 140
Lombard, Illinois 60148 USA + 1 630.574.0985
[email protected] cscmp.org
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This case was developed solely for the purpose of classroom
discussion. Some details of the case have been disguised. This case
is not intended to serve as endorsements, sources of academic or
business data, or illustrations of effective or ineffective
management of the personnel or company. Overview of BP BP p.l.c. is
one of the worlds largest energy providers of fuel for
transportation, energy for heat and light and petrochemical
products for everyday items1. BP has interests in both upstream and
downstream segments in over 100 countries worldwide making it a
fully integrated energy company. Upstream refers to finding and
extracting crude oil and natural gas from deep underground
reservoirs. Downstream operations consist of refining and marketing
oil and gas into usable consumer products. The United States
subsidiary of BP p.l.c., BP America Inc., is the nation's largest
producer of oil and gas2. They own and operate oil and natural gas
fields, refineries, chemical plants and lubricant processing
facilities in 22 states that are worth over $40 billion in fixed
assets3. BP America has both onshore and offshore drilling
operations in the United States. This case focuses on upstream
procurement activities in the Gulf of Mexico. Figure 1 depicts BPs
offshore platforms. Assets in the development stage have project
teams and robust drilling programs to bring newly discovered oil
and gas to the market. Once "first oil" is achieved and the asset
is fully commissioned, it transitions to the production group that
operates the newly drilled wells. Overall demand for drilling
products and services decreases in the production stage. A typical
oil field in the Gulf of Mexico can produce for up to twenty years
or more before the reservoir is fully depleted and the asset is
decommissioned.
1 BPs official website : http://www.bp.com ; p.l.c. stands for
Public Limited Company (UK) 2 House Committee on Energy
Independence and Global Warming, April 1, 2008, Bob Malone 3 BP
Americas website :
http://www.bp.com/genericarticle.do?categoryId=9004470&contentId=7040414
(Retrieved on May 31, 2008)
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http://www.bp.com/http://www.bp.com/genericarticle.do?categoryId=9004470&contentId=7040414
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Figure 1. BP assets in the Gulf of Mexico BPs Procurement and
Supply Chain Management The Procurement and Supply Chain Management
(PSCM) group of BP America is a partially decentralized
organization. Their function is to develop plans for the management
of third party spend and to motivate and engage the broader BP
workforce in order to achieve maximum value from suppliers and
contractors. Within their Gulf of Mexico operations, BP spent about
$2.9 billion in 2004 and $3.5 billion in 2005 on third party
suppliers.
Conductor p ipe
Surface casing
Interm ediate casing
Production casing
Perfora tions
Tubing
Packer
Conductor p ipeConductor p ipe
Surface casingSurface casing
Interm ediate casingInterm ediate casing
Production casingProduction casing
Perfora tions
The goal of PSCM is to achieve maximum value from third party
spend while mastering the associated risks. To deliver this goal
the group must leverage BP's scope and scale by developing
foundational and strategic PSCM capabilities such as
standardization, aggregating demand, building strategic
relationships, and developing supply chains in emerging economies.
The PSCM group is responsible for sourcing all goods and services
required for drilling and producing hydrocarbons. A key product
category for BP's business is steel pipe that is cemented into the
drilled well to protect and isolate geological formations from
collapse and contamination. The other purpose of the pipe is to
allow hydrocarbons to flow
TubingTubingTubing
PackerPacker
Perfora tions
3
Figure 2 . Pipe placement in the wellbore This document is
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from the reservoir to the wellhead. Well depths in the deepwater
Gulf of Mexico region are often 25,000 feet from the ocean floor
down to the reservoir. This product category is known in the
industry as Oil Country Tubular Goods (OCTG). The terms OCTG and
pipe are used interchangeably throughout this case. Figure 2
illustrates pipe placement in the well and the corresponding name
of each pipe section. There are three general classifications of
OCTG material: carbon, alloy, and chromium. Carbon pipe is of a
lower grade and strength, and is often used in onshore wells of low
criticality. Wells in the deepwater Gulf of Mexico have high
pressures and aggressive corrosion conditions requiring more
expensive high grade alloy and chromium pipe for corrosion
resistance. Wellbore placement is noted in Figure 2. Each joint of
pipe is mated together via male and female threaded connections
machined onto each end. When a section of the well is drilled and
ready for pipe placement, workers on the drilling rig vertically
stack the pipe and lower it into the well one by one by twisting
each connection together with large iron tongs. After being lowered
and set into the well, cement is pumped through the pipe and then
pushed out the bottom and up the sides between the outside of the
pipe and the rock. After the cement is dry, the next hole section
is drilled. Domestic oil and gas industry Since 2003, there has
been an increase in drilling activities both in the US and around
the world. As the selling price of oil and natural gas increases,
more capital is available for drilling projects4. According to the
America Petroleum Institute (API), completion of US oil and gas
wells have consecutively increased for the last twelve quarters
since 20035, and in late 2005 reached the highest levels in nearly
20 years6. The following figure shows the number of US oil drills
versus the West Texas Intermediate (WTI) crude oil price7.
4 Rach N. M. "Worldwide drilling surges ahead", Vol. 103. Issue
36, 39-47, Oil & Gas Journal, 2005 5 Snow N "API: US well
completions broke records during 3Q", Vol. 104, Issue 42, 28-29,
Oil & Gas Journal, 2006 6 "US outlook : All we need are more
rigs and crews", Vol. 227, Issue 2, 43-46, World Oil Magazine,
February 2006 7 Data for the figure was obtained from Baker Hughes
and the U.S. Department of Energy
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U.S. oil drilling rig count versus WTI crude oil price
100
150
200
250
300
350
Jan-
02
Jun-
02
Dec
-02
May
-03
Nov
-03
Apr-
04
Oct
-04
Mar
-05
Sep-
05
Feb-
06
U.S
. Oil R
ig C
oun
$0
$10
$20
$30
$40
$50
$60
$70
$80
Cru
de O
il Pric
t
e
Rig Count
WTI Price
Figure 3 . US oil drilling rig count versus WTI crude oil
price
The upward trend in drilling has put a strain on the OCTG supply
chain. According to one supplier of pipe, the total US OCTG
inventories were relatively low at about four months' supply (or
1.2 million tons) at the end of 2004. Wary of fluctuating steel
costs, pipe distributors have also kept inventory fairly lean in
case of a price drop8. These developments, coupled with the
capacity limits in the OCTG supply chain, results in long lead
times for the end user and forces energy companies such as BP to
carry large amounts of inventory to meet the drilling demand.
Sourcing pipe at BP Since OCTG accounts for only one percent of the
global steel market, the manufacture of pipe for the oil industry
is scheduled at the steel mills' convenience. The recent economic
boom in China and India caused steel producers to focus on metal
goods used in building construction and the automotive industry
(the two largest users of steel). This bias toward other industries
and the scarcity of raw materials result in 2 to 24-month lead
teams for certain OCTG, making demand planning at BP especially
difficult. While steel pipe may sound like a commodity, metallurgy
and manufacturing quality is paramount. BP carefully selects steel
mills located in the United States, Europe, and Japan capable of
manufacturing API standard pipe grades with the engineering ability
to develop
8 "Tubular goods suppliers strive to extend 2004s strong
performance into 2005", Vol. 2, Issue 3, Oil & Gas Financial
Journal, May 2005
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unique metal alloys set by BP's own standards. Only a handful of
steel mills meet this criterion. To help ease the inventory burden
to BP, a single domestic distributor that represents most of the
selected steel mills is utilized. The distributor will only carry
products manufactured to API specifications; any custom pipe made
for BP is purchased directly from the mill. The agreement with the
distributor allows for the return of unused or defective products,
preferred pricing, and consignment-based inventory. When custom
pipe is ordered, BP owns it at the time of manufacture. These
direct mill orders are non-cancelable and non-returnable. A further
complication to the purchase of pipe used in the Gulf of Mexico is
the threaded connection itself. Premium threads are proprietary
thread designs manufactured by select companies. These proprietary
thread designs achieve a gastight metal-to-metal seal that standard
API threads cannot. BP has standardized on two brands of premium
threads for pipe used in offshore wells. These premium threading
companies, Seal Tight and Interlock, have strategic relationships
with either the steel mill or distributor. Most pipe orders specify
the thread type so the threading operation is performed at the
mill. However, there are some instances (less than 15 percent)
where the pipe is received plain-ended, and BP is responsible for
having the pipe threaded at a local Seal Tight or Interlock
facility. Order placement process The order placement process of
pipe for drilling operations involves the following steps:
First, the engineer defines the pipe specifications after
analyzing the drilling location. The specification includes size,
weight, length, grade, and connection types based on the pressure,
corrosion requirements, and well depth. Most of the pipe
specifications are based on API standard grades carried by the
distributor. However, exploratory wells present a high level of
uncertainty and sometimes require engineered solutions beyond any
standard grade of pipe. In these instances, BP must work directly
with the mill to develop a solution. The engineer provides these
specifications to the materials coordinator (buyer) through an
internal requisition process. The materials coordinator then places
the order with the distributor based on pre-agreed terms and
pricing in the master contract9. In cases of unique purchases, the
approved mills will submit proposals and a purchase order will be
awarded to the selected bidder. Once the order is placed, the
domestic distributors schedule the production in steel mills based
on pipe specifications, availability of capacity in the steel mill,
and its threading capability. The pipes are mostly ordered on the
basis of consignment, while in some cases BP owns the inventory.
The steel mill after receiving the order from the distributor,
places it in
9 In most cases, BP would receive staggered shipments of its
pipes. For example, if the project requires 100,000 feet of a
specific pipe, they would receive 20-40% of it in the first
shipment based on lead time and rate of consumption and accept the
remaining quantities in subsequent shipments.
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the long production queue based on the priority of the request.
After production, the pipe is shipped to storage yards in Houston.
If a domestic mill manufactures the pipe, it is either shipped via
rail car to Houston and unloaded directly into the yard, or placed
on a truck that delivers to the yard location. Pipe ordered from
foreign mills is shipped into the Port of Houston where it is then
trucked to the storage facility. In one case, airfreight was used
to transport a very urgent order at a cost of $1 million.
Approximately 60% of all OCTG is ordered from foreign mills.
Storage, inspection, and shipment to drilling rigs BP stores their
inventory in a third party facility located in Houston that
specializes in pipe maintenance and inspection. At the storage
facility, pipe is inspected using EMI (Electromagnetic Inspection)
and FLUT (Full Length Ultrasonic Testing) techniques to identify
the presence of any manufacturing or stress induced flaws. Pipe
inspection must be performed at this stage of the supply chain
because due to the time consuming process steel mills will not
inspect pipe to the standards required by BP. Although the storage
facilities are not owned or operated by BP, safety of the workers
is the number one priority. BP pays a premium to have its own
segregated section of the pipe yard with specially trained contract
personnel to handle the movement of pipe inventory to and from the
inspection facilities. Since pipe is kept in storage for extended
periods of time, corrosion prevention becomes quite important. To
maintain the integrity of the pipe, they are stored at least 18
inches above the ground and stacked up to no more than six feet.
The six foot height restriction is due to an industry safety code
that requires personnel to be tethered in a safety harness. Pipe
can be stacked up to ten feet if a tie-off is available. Recycled
plastic timbers are placed between each stack and the threaded
portions of the pipe (most susceptible to corrosion) are protected
by composite thread protectors. The racks are constructed so that
the pipe is slightly slanted to allow for water runoff. Such racks
cost approximately $1,500 to $2,000 to construct. When the operator
from the drilling rig requests the pipe, the yard crew prepares it
for the drilling rig, which includes a full-length drift, addition
of pipe accessories such as float equipment and centralizers, and
bolstering for offshore platforms. They are stacked on trucks with
44,000 lbs load limits using a forklift at a loading cost of about
$200 per truck, and shipped to Port Fourchon in Louisiana at a cost
ranging from $3 to $5 per mile per truckload. The pipe is then
loaded and shipped on a vessel to the drilling rig. Pipe purchase:
Should they consolidate? BP's inventory consists of 35 different
pipe specifications. Specifications refer to outer diameter,
measured in inches, weight, measured in pounds per foot10, and
grade, which refers to the metal composition. Most pipe
specifications are standard API, except for those used in
exploratory wells, which are typically proprietary grades.
10 Refers to the thickness of pipes
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Appendix "A" shows the 35 different pipe specifications
currently stored in Houston. The grades of the pipe increase in
material strength and corrosion resistance as you read down the
table. When HC is denoted in the grade, it refers to high collapse
which means the pipe has higher yield strength and can withstand
high pressure wells. 13Cr110 grade pipe provides carbon dioxide
corrosion resistance, but cannot be used in sour gas (hydrogen
sulfide) producing wells. 25Cr125 can be used in both sour gas and
carbon dioxide producing wells, but is only utilized by one
project. Outer diameter and weight increase when read from left to
right. The table provides information on the average annual usage
of each type of pipe in thousands of feet as well as the standard
deviation of demand. There is a large variability in usage due to
project specific orders. Appendix "B" provides the price per foot
of each pipe specification and the associated lead time in weeks.
Generally there is a premium price paid for the higher grade pipe
and in most cases they have longer lead times. Pipe of lower grade
can be substituted with pipe of higher grade if it is within the
same outer diameter and weight range. Also, the price per foot will
decrease with an increase in annual usage. The pricing chart
provided is associated with the annual usage in Appendix "A". A
forty-foot length should be assumed for all pipe identified in the
table. Project economics are determined by the price of oil.
Exploratory and appraisal wells are typically the first to be
canceled or delayed when oil futures trade low. These types of
projects also require custom engineered pipe that remains in
inventory, sometimes for years, if the project is canceled. Even
for sanctioned commercial projects, individual teams often work in
silos and develop different solutions for the same problems. Also,
factors such as weather and lead time may affect project schedule,
making demand forecasting even more unreliable. Lack of
standardization and a fragmented project approach lead to excess
inventory that cannot be shared between different projects. When
considering inventory carrying costs, which include the cost of
capital, opportunity costs, material handling costs, and inventory
control costs, it is not economically feasible to store the pipe
for long durations. In most cases, the pipes that are left in the
pipe yard would probably be written off as scrap, unless an
engineer requests the same grade. PSCM is looking for ways to
coordinate the purchase of pipe to avoid excess inventory in the
system. The plan is to buy a common specification of pipe, which is
acceptable to most locations in the Gulf of Mexico, so that
inventory consolidation is possible. Two likely sources of
resistance to this initiative are the engineers and joint-interest
accounting. Engineers on the project teams want their pipe
optimized for each individual well. Joint-interest partners have
trouble justifying the cost difference between the grades of the
pipe. For example, a pipe designed for high-pressure environments
can be used in locations where the pressure is low, but at a
greater unit cost thereby increasing the cost of the drill rig. A
leaner inventory can be troublesome if pipe cannot be expedited. If
the pipe is not available when needed, BP is still obligated to pay
for all costs of the drilling rig even when idle. Non-productive
time costs the same as productive time, which can be anywhere from
$400,000 to $1,000,000 per day. The drilling rig costs alone often
justify a fully stocked pipe yard.
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Storage and inspection facilities: Current situation The supply
market for OCTG storage and inspection has seen significant
consolidation. In 2002 and years prior, BP utilized four pipe yards
in the Houston area. In mid-2003, Southern Inspection, a subsidiary
of a large oilfield supply conglomerate, acquired all four of these
facilities. Each service contract was transferred to Southern
Inspection, and the pricing was honored until their expiry in 2004.
When a new contract was negotiated, unprecedented price increases
ensued. The average price of inspections rose by 15% and pipe
movement costs increased by 25%. Southern Inspection cited
increased demand for storage space and investments in new
inspection equipment as the primary drivers. BP found itself in a
weak buyer position, and accepted the new pricing. The negotiated
price list is provided in Appendix "C". Soon after the contract was
signed in 2004, the BP Logistics group conducted a study evaluating
the possible relocation of the present storage facility for OCTG in
Houston to a site or sites in Louisiana. The study looked at the
cost of handling, taxes and logistics capability in the region. The
findings of this study indicated potential savings in dollars and
time through such a move, providing comparable facilities and
services were available in Louisiana. Because this study was
limited to transportation and tax issues, additional information
pertaining to the other services required for OCTG storage and
inspection is necessary. BP currently occupies approximately fifty
acres of storage space at the Southern Inspection yard and expects
to increase this space requirement by five percent annually for the
next three years. A compelling reason for moving inventory to
Louisiana is the fact that the state of Louisiana does not tax
inventory stored for maritime use. BP inventory stored in Houston
has an ad valorem tax applied to it by the state of Texas. The tax
is approximately 3% of the annual inventory value. This is a
significant savings, when considering the cost of pipe inventory,
which generally runs above $150 million annually. Another reason
for relocation is the savings on transportation if pipe is received
into the Port of New Orleans (instead of the Port of Houston) and
stored in nearby facilities in Louisiana.
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Figure 4. Location of ports of interest in Texas and
Louisiana
In order to fill the information gap, PSCM devised a set of
o
PortofHoustonPortofFourchon
PortofNewOrleans
bjectives to obtain additionrmation for their evaluation of pipe
yard relocation. As the initial study was based only
stem, financial statements, testing procedures for their
inipment, and maintenance procedures for their facilities.
al fo
spection qu
y management system and its customer interface. SAP integration
would be ideal, ut even the incumbent supplier does not have this
capability.
Health, Safety, and Environmental (HSE) questionnaire was
included along with RFI to
umber of incidents is multiplied by 200,000 and then divided by
the total number of hours worked in the year. For contractors
working at a BP site, such as an offshore platform, the
inon transportation and tax savings, the second phase of the
study was focused on services and capabilities of the facilities in
Louisiana. A market analysis of the facilities in Louisiana was
performed to evaluate the feasibility of such a move. Supply market
analysis Pipe inspection and storage facilities in Louisiana and
Houston were sent a formal Request for Information (RFI). General
criteria included: storage capacity, inspection capabilities,
processing volume capacity, pipe handling capabilities, and
proximity to ancillary services like tool rental, trucking, and
cranes. Each supplier was asked to provide a copy of their Quality
Management Sye Inventory management was an additional area of
focus. BP utilizes SAP for all of its purchasing, accounting, and
inventory control. Suppliers were requested to describe their
inventorb Agauge safety culture. A common industry metric is the
Total Recordable Incident Rate (TRIR) established by US Department
of Labor and administered by Occupational Safety and Health
Administration (OSHA). The TRIR measures the total number of
recordable injuries and illnesses, injuries resulting in lost time
away from work, and fatalities. The total n
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acceptable TRIR is less than 2.0. Since pipe inspection is
performed at the supplier's cation, this metric is closely
monitored for upward trends or otherwise poor performance.
acilities are necessary when the pipe is ordered plain-nded.
loThe HSE team within BP can veto contract award to any supplier
if they feel safety performance is lacking. Threading facilities in
Louisiana and Houston were also assessed to understand their
ability to machine premium threads, size capabilities, volume
capacity, storage capacity and pipe handling capabilities. Local
threading fe Results of the market analysis Approximately 65% of
the solicited suppliers in the Gulf Coast Region responded to the
Request for Information and supplier questionnaire. After
evaluating the initial results, BP conducted individual site visits
to better understand its potential suppliers. The following
companies are considered to be suitable bid participants.
Inspection and storage facilities in Louisiana: Out of all the
inspection facilities in Louisiana, only three have the ability to
perform inspections to BP standards. The facilities are typically
smaller than pipe yards found in Houston, but there is room for
expansion and growth. However, some of them do not have robust
software systems to track inventory or have the ability to
communicate with BPs information system. Figure 5 shows the
location and access to road and rail networks for all the three
facilities under consideration.
Houma Tubular Storage. Houma Tubular Storage is a recently
constructed storage facility that currently has no inspection
capabilities, but they do own the largest pipe yard in Louisiana
stretching across100 acres. This is a new development with only 30
acres occupied, but is steadily growing each month. Within their
pipe yard, all racks are constructed to BP standards. Inventory is
managed on their own system that has a web-based customer
interface. Houma also mentioned future plans to develop inspection
capabilities, but is reluctant due to high capital costs for such
equipment. On the safety side, Houma Tubular Storage employs a
Safety Manager that holds daily tailgate meetings to discuss job
risks. While no safety statistics are available for 2004, their
TRIR for 2005 and 2006 are 2.6 and 2.03 respectively. Since this is
a privately held company, Houma Tubular Storage did not provide
financial information.
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Figure 5. Inspection, storage and threading facilities in
Louisiana
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Gulf Coast Inspection. Gulf Coast Inspection is a privately
owned company located
in New Iberia, Louisiana. They are fully capable of meeting BP
inspection requirements for ultrasonic testing. They own one FLUT
machine with a capacity of 70 pipe joints per shift depending on
pipe diameter. Gulf Coast Inspection's pipe yard spans forty acres
and is outfitted with BP approved racks. There is room to expand
the storage space since Gulf Coast Inspection owns an additional 20
acres of land behind their current yard. One drawback is that
customer inventory is tracked using a spreadsheet. They communicate
inventory information to customers via weekly emails. Customers
include other offshore operators and their yard is 80% full, which
indicates the lack of capacity for BP inventory. While Gulf Coast
Inspection has no formal safety program, a bonus system is in place
for incident-free hours each month. Their TRIR was 1.26 for 2004,
0.89 for 2005, and 0.76 for 2006. No financial information was
provided.
Louisiana Pipe. Louisiana Pipe began as a distributor and later
expanded in to the inspection business with a location in Houma,
Louisiana. They own three FLUT machines with only one meeting BP
requirements in regards to flaw detection angles. Their storage
yard covers 50 acres and contains pipe racks acceptable to BP.
Expansion of storage space is not possible and yard capacity is
currently at 60% utilization. Since Louisiana Pipe was originally a
distributor, their inventory management capabilities are
exceptional. They claim their software can be integrated with SAP,
but none of their other customers use this option. BP was concerned
with their safety performance. No official safety program is in
place and their TRIR for years 2004, 2005, and 2006 are 2.46, 2.78,
and 3.15 respectively. This upward trend in incidents would need to
be closely managed by BP until a fully codified safety program is
implemented by Louisiana Pipe. Although Louisiana Pipe is a private
entity, they agreed to provide their audited financial statements
that can be found in Appendix "D".
Oilfield Industrial. Oilfield Industrial is another private
company located in Lafayette, Louisiana. They have two FLUT
machines that can detect flaws at any angle and have a total
throughput capacity of 130 joints per shift. The yard is outfitted
with BP approved racks covering 60 acres. Current storage capacity
is around 50%. Inventory is kept in their own proprietary system
and customer access the information via Internet through a read
only interface. Oilfield Industrial had a TRIR of 2.87 for 2004,
3.01 for 2005, and 3.89 for 2006. They did not provide any
financial statements, but BP estimates this to be a $6 million
dollar company in terms of revenue.
Threading facilities in Louisiana: Seal Tight operates a
threading facility in Lafayette, but is roughly half the size of
its Houston counterpart. Interlock does not have a location in
Louisiana. However, a machine shop in Houma carries an Interlock
license to machine any of their designs. This license
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expires every two years and can be revoked at any time. In the
worst case, pipe requiring Interlock threads would have to be
transported to Houston for threading and then shipped back to the
storage/inspection site in Louisiana. Inspection and storage
facilities in Houston: The companies that survived massive
consolidation are all located near the Port of Houston. They are
Southern Inspection, Proven Inspection, and Offshore Storage &
Inspection. Proven Inspection is the only privately owned company.
Both Southern Inspection and Offshore Storage & Inspection are
subsidiaries of oilfield conglomerates. They manufacture and sell
their own brand of inspection equipment; although not to each
other. Figure 6 shows the location and access to road and rail
networks for all the three facilities in consideration.
Southern Inspection. Southern Inspection is the largest
inspection and storage company in the region. After acquiring the
three surrounding pipe yards, their total area spans 300 acres with
BP occupying about 50 acres. Other customers include competing
energy companies and local municipalities that store pipe for water
transport. They have five FLUT machines that can inspect 400 joints
of pipe per shift. Southern Inspection's yard crew is fully trained
in BP specific OCTG storage and handling policies and their
inspection personnel have a reputation of being the best in the
business. Calibration tests show their equipment to be topnotch.
The space that BP occupies is segregated from the rest of their
customers and is kept especially clean. In addition, BP rents
several office trailers onsite for inspection and logistics
coordinators. Inventory is managed by Southern Inspection's
proprietary software accessible through a web portal. BP spends
over $6 million annually on pipe inspection, and an additional $2
million on storage and maintenance with Southern Inspection. As
part of their corporate policy, Southern Inspection employs a
dedicated Safety Manager for this location. They have a fully
codified safety program and incident reporting system that has been
recognized as one of the best in the industry. Their TRIR
statistics reflect this: 0.75 for 2004, 0.83 for 2005, and 0.56 for
2006. Southern Inspection is a subsidiary of the oilfield service
conglomerate, Enclave Services International; their 2005 10K report
can be found in Appendix "D".
Offshore Storage & Inspection. Offshore Storage &
Inspection is located a few blocks north of Southern Inspection.
With support from its parent company, Grand Valley Group, Offshore
Storage & Inspection was able to purchase surrounding pipe
yards and undeveloped land behind its current fence line. As a
result, 200 acres are enclosed while another 40 acres remain
accessible. A rail
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Interlock Seal Tight
Interlock
Proven Inspection
Southern Inspection
Offshore Storage & Inspection
Inspection & Storage
Threading Location
Major Roadway
Railway
Figure 6. Inspection, storage and threading facilities in
Houston
spur runs through the yard allowing for direct unloading onto
the racks. Due to all the recent acquisitions, about 60% of the
racks located in a segregated 120 acre area
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meet BP requirements. Of this approved rack space, approximately
40 acres remain unoccupied. On the inspection side, Offshore
Storage & Inspection has developed new FLUT technologies that
could lend a competitive advantage over Southern Inspection. They
currently operate four FLUT machines that have a throughput of 340
joints per shift. Inventory is managed electronically through SAP,
which is compatible with the BPs information system. Offshore
Storage & Inspection utilizes a behavior based safety program
and conducts regular safety meetings with their employees. Their
TRIR for 2004, 2005, and 2006 were 1.25, 1.03, and 1.16
respectively. Their financial information is also provided in
Appendix "D".
Proven Inspection. Proven Inspection is located east of Southern
Inspection in an adjacent lot. The 70 acres pipe yard is currently
operated at forty percent capacity. Proven Inspection operates two
FLUT machines that average 150 joints per shift. However, the
equipment is poorly kept and often found out of commission.
Inventory is kept on Proven Inspection's own proprietary system
with customer access available via a web-portal. Like the other
pipe yards in Houston, Proven Inspection also has a safety program
and their TRIR was 1.79 in 2006, 1.25 in 2005, and 1.63 in 2006.
Its location offers a unique logistical advantage because barge
traffic from the Port of Houston can dock and unload shipments
directly into Proven Inspection's yard. Most of their revenue is
generated through transfers of pipe shipped to other facilities. In
fact, much of BP's international OCTG deliveries are transferred
through Proven Inspection. Southern Inspection attempted to attain
Proven Inspection during its buying campaign, but the offer was
refused. The rumor mill suggests that Southern Inspection is still
engaged in talks with Proven Inspection. No financial information
was provided for review during the market analysis.
Threading facilities in Houston: Both Seal Tight and Interlock
have machine shops at various locations in Houston. Capacity has
never been a problem in the past with any of these facilities.
There is even a small Interlock shop in Offshore Storage &
Inspection's yard.
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17
Action items Do you recommend the consolidation effort of PSCM?
Why or Why not? Justify the answer and include a plan of action if
you decide to consolidate the pipe inventory. The plan should
include the following points:
1. A breakdown of current inventory carrying costs on an annual
basis using the information provided in the case study. What
information is missing that would be helpful? Include any
assumptions you make such as fill rate and inventory holding
costs.
2. Develop a strategy for consolidation or standardization that
includes which pipe
specifications will be kept and which specifications will be
excluded and justify your reasoning. The plan should include
expected annual cost savings, improvements to inventory management,
and a plan to phase out or dispose of obsolete inventory if
applicable.
3. There are two groups that will likely oppose such an effort:
BP engineers working on
the various projects and joint-interest partners that help fund
each project. Describe how you would approach the different groups
to obtain approval for your consolidation plan. Describe the
drivers that each group faces and identify potential points of
conflict and how you would overcome such opposition if
challenged.
The Southern Inspection master service contract expires in four
months. Make a recommendation for or against the Louisiana
relocation effort. This recommendation should include the
following:
1. Propose an evaluation process and scorecard, along with any
performance metrics that may apply. Perform a financial health
analysis on all the suppliers using the available information in
the case. When financial statements are not provided, what other
methods can be used to better understand supplier health? How does
this information or lack thereof, weigh in to supplier
selection?
2. Identify the locations that would be suitable. Justify why
the site or sites were selected.
3. Identify the switching costs from the incumbent supplier.
What risks are involved
when switching suppliers? How will these risks be mitigated? 4.
How does the pipe inventory consolidation agenda play into the
relocation effort?
Would the outcome of one action affect the outcome of the other?
Why or why not? If relocation is recommended, should both inventory
consolidation and relocation efforts take place concurrently? If
not, which should take precedence and why?
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Appendix "A" Annual Average Usage in '000s of feet from years
2001 to 2005 (Standard Deviation of annual usuage in '000s of
feet)
ANNUAL PIPE USAGE OD in inches 5 7 7 7 9 9 10 10 11 11 13 13 14
16 18 20 22 26 28
Weight in ppf 23 29 32 38 39 46 53.5 62.8 62.8 64 66 68 71 71.5
65 102 71.8 72 88.2 113 84 97 109 117 166 187 202 225
LOW
GR A D E S
H I GH
GR A D E S
N-80 HC
61 (42)
L-80 100 (98)
T-95 62 (58) 62
(34)
C-110 125 (96) 158
(109) 210
(139) 225(97)
50 (59)
193(84)
185(63)
122 (103)
P-110 27 (19) 18
(10) 282 (67)
138(79)
73 (32)
P-110 HC
106(53)
68 (39)
78 (42)
Q-125 90 (65) 156(87)
77 (58)
140(96)
112(61)
Q-125 HC
187(67)
86 (61)
70 (43)
Prop. Grade
15 (18)
Prop. Grade
33 (21)
30 (19)
Prop. Grade
27 (15)
13Cr110 112(97)
25Cr125 75 (48) 56
(23)
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19
Appendix "B" U.S. Dollar per foot (Lead time in weeks)
PIPE PRICING AND LEAD TIMES OD in inches 5 7 7 7 9 9 10 10 11 11
13 13 14 16 18 20 22 26 28
Weight in ppf 23 29 32 38 39 46 53.5 62.8 62.8 64 66 68 71 71.5
65 102 71.8 72 88.2 113 84 97 109 117 166 187 202 225
LOW
GR A D E S
H I GH
GR A D E S
N-80 HC
22.35(7)
L-80 10.52
(3)
T-95 18.76
(4) 19.12
(4)
C-110 12.89
(5) 13.01
(5) 17.78
(5) 20.22
(5) 21.67
(5) 23.88
(5) 24.32
(4) 34.78
(8)
P-110 18.60
(6) 19.13
(6) 24.89
(6) 32.45
(6) 55.78(10)
P-110 HC
40.24(8)
51.12(10)
54.57(10)
Q-125 29.78(10)
41.58(8)
45.62(10)
48.96(10)
55.11(10)
Q-125 HC
33.37(18)
52.12 (20)
55.78(20)
Prop. Grade
123.40 (52)
Prop. Grade
106.11(52)
119.10(52)
Prop. Grade
120.78(52)
13Cr110
57.89(34)
25Cr125 45.36 (104) 50.12 (104)
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Appendix "C"
Southern Inspection 2004 Price List Inspection Charges: Price
per foot unless otherwise noted
OD range in inches 4.5" to 5.5" 7" to 7.75" 9.5" to 10.75"
10.88" to 11.88" 13.38" to 16" 18" to 22" 26" to 30"
Full length visual inspection $0.07 $0.09 $0.12 $0.16 $0.20
$0.25 $0.38 Full length drift $0.12 $0.15 $0.18 $0.21 $0.25 $0.31
$0.45 Full length electromagnetic inspection $0.35 $0.40 $0.43
$0.52 $0.65 $0.87 $1.02
Full length ultrasonic testing $0.83 $1.01 $1.21 $1.44 $1.67
$2.89 $3.20 Magnetic particle end area (priced per end) $4.30 /end
$4.98 /end $5.19 /end $5.96 /end $6.30 /end $6.98 /end $7.20
/end
Visual end area (priced per end) $0.50 /end $0.59 /end $0.66
/end $0.75 /end $0.89 /end $1.02 /end $1.45 /end Thread cleaning
and reapplication of thread compound (priced per end) $0.87 /end
$1.00 /end $1.50 /end $1.75 /end $2.04 /end $2.67 /end $3.05
/end
-Above inspection rates include labor and equipment -$1,500
minimum inspection charge
Movement and Storage Charges: Price per hundred pounds unless
otherwise noted Miscellaneous Labor and Equipment Charges: Price
per hour Service Description Regular Time Overtime Holidays
Description Regular Time Overtime Holidays Inbound unloading: Truck
to rack $0.25 $0.38 $0.50
Foreman $31.00 $46.50 $62.00
In-yard movements: Rack to services building $0.18 $0.27
$0.36
Laborer $22.00 $33.00 $44.00
In-yard movements: Services building to rack $0.18 $0.27
$0.36
Forklift $75.00 $112.50 $150.00
Rack transfer $0.20 $0.30 $0.40 Tractor w/ trailer $59.00 $88.50
$118.00
Outbound loading: Rack to truck $0.25 $0.38 $0.50 30 ton Crane
$210.00 $315.00 $420.00 Storage charges per month $0.45 per ton 45
ton Crane $250.00 $375.00 $500.00
-Above movement rates include labor and equipment -Equipment
rates include operator -First 30 days of storage is free
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Appendix "D"
Statement of Income for 2005
In Millions of U.S. Dollars Enclave Services International
Grand Valley Group
Louisiana Pipe
Total Revenue 6055.8 485.6 40.2 Cost of Revenue 4013.2 197.0
24.5 Gross Profit 2042.6 288.6 15.7 Research and Development - - -
Selling General and Administrative 754.1 91.1 12.4 Non Recurring
8.1 (5.9) - Others - 46.7 - Total Operating Expenses - - -
Operating Income or Loss 1280.4 156.7 3.3 Total Other
Income/Expenses Net (12.8) 1.6 0.9 Earning Before Interest and
Taxes 1267.6 158.3 4.2 Interest Expense 48.2 0.4 - Income Before
Tax 1219.4 157.9 4.2 Income Tax Expense 324.5 61.1 (0.8) Minority
Interest (8.7) - - Net Income from Continuing Operations 886.2 96.8
5.0 Discontinued Operations - - - Extraordinary Items - - - Effect
of Accounting Changes - - - Other Items - - - Net Income 886.2 96.8
5.0 Preferred Stock and other Adjustments - - - Net Income
Applicable to Common Shares 886.2 96.8 5.0
Statement of Cash Flows for 2005
In Millions of U.S. Dollars Enclave Services International
Grand Valley Group
Louisiana Pipe
Net Income 886.2 96.8 5.0 Depreciation 210.6 47.6 0.3
Adjustments to Net Income 53.8 (2.1) (1.2) Changes in Accounts
Receivables (508.3) (40.9) (2.3) Changes in Liabilities 413.4 12.7
1.8 Changes in Inventory (612.2) (8.3) (1.1) Changes in other
Operating Activities 474.8 (1.3) (0.3) Cash from Operating
Activities 918.3 104.5 2.2 Capital Expenditures (230.6) (139.2)
(0.3) Investments - - (16.1) Other Investing Cash Flow Items
(326.8) 9.3 (1.2) Cash from Investing Activities (557.4) (129.9)
(17.6) Total Cash Dividends Paid - (13.1) - Issuance of Stock, Net
33.8 (0.7) 1.2 Issuance of Debt, Net (4.7) 25.5 (0.1) Other Cash
Flows from Financing Act 12.4 1.1 25.0 Cash from Financing
Activities 41.5 12.8 26.1 Effect of Foreign Exchange Rates 15.8 - -
Change in Cash and Cash Equivalents 418.2 (12.6) 10.7
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22
Balance Sheet for 2005
In Millions of U.S. Dollars Enclave Services International
Grand Valley Group
Louisiana Pipe
Cash and Equivalents 974.5 2.7 11.9 Short Term Investments - -
7.4 Net Receivables 2134.3 155.1 8.4 Inventory 2375.1 28.4 5.8
Other Current Assets 213.2 4.9 0.7 Total Current Assets 5697.1
191.1 34.2 Long Term Investments 230.6 - - Property, Plant, and
Equipment 1056.3 245.9 5.3 Goodwill 2435.0 23.1 - Intangible Assets
789.2 - - Accumulated Amortization - - - Other Assets 25.4 4.9 -
Deferred Long Term Asset Changes 55.7 - 0.3 Total Assets 10289.3
465.0 39.8 Accounts Payable 2958.6 71.4 5.6 Short/Current Long Term
Debt 4.7 - 0.1 Other Current Liabilities - - - Total Current
Liabilities 2963.3 71.4 5.7 Long Term Debt 862.2 37.8 0.2 Other
Liabilities 124.7 14.5 - Deferred Long Term Liabilities Charges
423.1 19.3 - Minority Interest 34.8 - - Total Liabilities 4408.1
143.0 5.9 Common Stock 2.4 9.6 41.8 Retained Earnings 1815.2 320.3
(2.5) Treasury Stock - - - Capital Surplus 3512.9 7.9 2.8 Other
Stockholder Equity 35.2 (3.1) 0.1 Total Stockholder Equity 5365.7
334.7 42.2 Notes:
Enclave Services International is a global provider of oilfield
products and services used in drilling and production operations.
Products and services include drilling fluids, oilfield tubular
inspection and pipe management services, directional drilling,
artificial lift, wireline services, rental pipe and downhole tools,
and wellbore intervention services. The tubular inspection group,
Southern Inspection, manufactures pipe inspection equipment,
applies pipe coatings, and manages inspection and inventory for
energy companies. The tubular inspection group as a whole accounted
for 4% of total revenue in 2005, up from 3% in 2004.
Grand Valley Group provides a broad range of oilfield services
to upstream energy companies operating in the United States.
Regions include the Gulf of Mexico, Rocky Mountains, and
mid-continent. Services lines consist of: hydraulic workover
services, drill pipe and drilling equipment rental, coiled tubing
services, wireline services, and oilfield pipe inspection and
storage services. Grand Valley's pipe inspection and storage
operating unit, Offshore Storage & Inspection, accounted for 6%
of revenue in 2005 with their operations in Houston, Texas.
Louisiana Pipe acts as an intermediary between domestic steel
mills that produce OCTG and oil & gas
companies that use such pipe in the wells they drill. Louisiana
Pipe recently expanded into the pipe inspection and storage
business to enhance their capabilities as a distributor. Their
inspection and storage location in Houma, Louisiana contributed $8
million to total sales in 2005.
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Appendix "E" The following are pictures from the pipe storage
yard and inspection facilities located in Houston, Texas. Threaded
pipe with composite thread protectors installed
Pipe stacked 18 inches above the ground with recycled plastic
timbers separating each layer
Stacks of pipe with inspection facility located at the end of
the row
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Yard crew moving pipe with forklift
Electromagnetic Inspection unit
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