In my earlier article, some rhetoric questions were raised about the current financial health of the NNPC, and how we can use Supply Chain Management (SCM) models to ensure optimization of the NNPC to profitability.
One of the critical component of optimizing any organization is to ensure the cost of operations is streamlined to profitability and the critical path to this is the effective supply chain management of its operations.
For esteem readers, Supply chain of an organization is the unit responsible to ensure the end to end process of ensuring goods and services are delivered at the optimal price, in good quality and right on time. For NNPC, we will infer that the flowchart of this process is some worth a myriad of complexity.
Taking the oil and gas value chain into perspective, NNPC Supply chain is one of the most, if not the most complex operational organization, as the Upstream, Midstream and downstream operations have its peculiar supply chain process.
Also Read: Bringing the Nigerian National Petroleum Corporation to Sustainable Profitability – 1
This article will try to be a little bit simplified, however, readers should be aware that some technical terms will have to be used to drive home the raison d’ etre of this article.
The combination of these activities in the different segment of the sector, ensure that NNPC balance sheet is amongst the biggest if not the biggest in any public or private organization in Nigeria. Thus its SCM manages the biggest amount of spend, which is far more than the budgets of an entire political zone in Nigeria.
How can NNPC optimize its operations and SCM to ensure that it’s structured for profitability? What is the procurement governance structure around NNPC like. Do we have the right set of procurement team in all subsidiaries and are they competent to do the job. Is there an NNPC Procurement strategy in place- how is it appraised? How does the stakeholder value and NNPC Corporate goals align with the current national procurement strategy of the group? What is the collaborative link of the NNPC group procurement strategy and the Bureau for Public Procurement ( BPP)? Is there a stakeholder engagement in place to align the National Procurement strategy.
To bring it closer home, What cost-cutting model and structure currently exist? Are there ways of ensuring a unified process approach by all subsidiaries. How do we high grade the SCM team to be at par with their contemporaries in the Oil & gas sector. Are there new ideas and innovative procurement value the SCM organization can add?
To buttress the need to make NNPC profitable, one major think- shift would be to develop a new Group Procurement Strategy ( NNPC- GPS), drafted and executed in collaboration with key stakeholders such as the Presidency, Minister of State for Petroleum and the Ministry of Petroleum, Bureau for Public Procurement (BPP), Ministry of Finance & Budget/Planning, Attorney General’s office , key COO’ and Managing Directors of different subsidiaries and should be championed by the Group Managing Director of the NNPC .
One of the key objective of the NNPC -GPS is to ensure that the right framework for all procurement activities is in place and such framework keeps into cognisance the risk management approach in its execution. It should also focus on Governance and Process, in simple terms, the framework should be able to develop Value for money ( VFM) strategies for all NNPC procurement process. The strategy must align and constantly appraised with government objectives.
Subsequently, how is the current SCM structured? Today, NNPC SCM is decentralized, meaning all subsidiaries manages and control its spend structure without due recourse to HQ (Headquarters) which in itself creates an appalling taste to the tongue. Decentralized SCM styles have its own unique challenge. it doesn’t allow the units or subsidiaries see the big picture of the organization, leading to over or under-spending, non-coordination of SCM activities such as inventory management and control. It also doesn’t help with having the right mix of procurement personnel, as they are all straight jacketed in their approach to the buying process.
Also decentralize tend to be biased in its contracting process, as the local managers are vested with too much powers and in oftentimes skew the procurement process for their personal gains. For example one of the main revenue generating subsidiaries of the NNPC has been nicknamed a family Contract Centre where contract portfolios are created and awarded to few Nigerians.
Thanks to the new GMD of the NNPC, who have now restructured that same organization to ensure some sort of transparency in the contract creation and award process.
What kind of SCM structure best fit the NNPC as an organization? The choice of a structure is largely dependent on the overall cooperative objective of the group and its alignment with its procurement strategy, As a consultant, my recommendation is to align strategy and structure to the kind of spend structure. Following Krajlic principle of categorizing different spend structure; it will be of note to recommend a hybrid kind of Structure, combining both centralized and Decentralized patterns.
The Hybrid procurement structure effectively combines both schemes for optimized result. The centralized which is majorly used for Direct spend such EPCI – Exploration, Drilling, Production, White product procurement ( downstream), Power Purchase agreement ( PPA’s), Gas Sales Agreement, Crude Swaps and a lot more of Strategic procurement structure allows for the development of Subject Matter Expert ( SME) in different areas of the sector. It allows for collaborative work between stakeholders subsidiaries, finance, legal teams, and risk management team and to ensure value for money is received for all procurement process. SME’s for such spends are called Category Managers and can be personnel trained to understand the peculiarity of the spend structure.
Today, in NNPC especially with NAPIMS and NPDC whose activities, are strategic to NNPC balance sheet, a review of the spend structure using the strategy above would be of great benefit to the organization. For a poser, does the NNPC know the five years spend trend for the Christmas trees, subsea well heads, manifolds , compressors, structural steel and all critical spares in the industry: Is there a comparative review of drilling cos for both onshore and offshore activities. Are we getting value for money for all these costs? Are there options to review Low-Cost Country initiatives for Critical spends?
To bring it home, NNPC SCM organization should be reorganized to encourage category management of it spends. Category Management is the creation and execution of a strategy that guides the application of different procurement tactics to generate value in a spend area. In Category Management products or services that have similar characteristics and are bought from similar supply, markets are grouped together and treated as a discrete group or category.
These categories are then more manageable from a sourcing perspective because the items in a category require similar supplier market intelligence, similar sourcing strategies and similar supplier relationship management programs. This extensive review process is structured to challenge what has done before, and seek out and implement breakthrough opportunities that will generate significant value for NNPC.
in the next segment of this article, We will review more strategies that will, in turn, elaborate and give credence to how Supply chain excellence models can bring NNPC back to sustainable profitability.
–Mr Emeka EBOAGWU , is an Energy Economist and a Supply chain consultant based in Lagos
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