SCM- Beyond Cost Cutting

In a recession or industry downturn, management will declare ‘la partie en danger” and begin a program of cost reduction and consolidation. For Supply Chain (SC) professionals, cost reduction is an ongoing process of continuous improvement. During a downturn, a spotlight is shone on the SC where further cuts are expected.

In most cases, the cuts are not strategic but tactical to meet a short term goal. The SC professional also sees the opportunity for a more efficient and agile SC.

A recent example is the reaction of oil shale producers in North Dakota. According to the Wall Street Journal (May 18, 2016), the most diversified operators “ are finding ways to make the Bakken Shale formation pay even at low oil prices by trimming budgets, improving field logistics and focusing on their best assets” (my emphasis).

This is the first downturn in 10 years the producers. Among the actions taken by the best producers is to improve rig logistics with “cash operating cost at less than $10 per barrel”. Seeking a perfect well, average well drilling and completion costs have come down by almost a third.

The company Hess, is “implementing lean manufacturing techniques…such at just-in-time supply chain logistics and greater use of standardized parts…”. Indeed, the productivity of each rig has increased substantially. Even though the number of rigs has declined, the number of wells per rig has increased. The time to frack a well is “one day from up to three days two years ago and boosted average initial well production by up to 20%.”

SC professionals can take the lessons from the oil shale producers into other organizations and industries to position their supply chains and overall operations to fit today’s reality and create a competitive position coming out of the downturn.

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