How to profit as a smaller energy company with supply chain optimization
Companies operating or considering consultation in the Energy industry, regardless of their size, should prioritize optimizing their supply chains. This goes for companies in upstream, midstream, downstream, chemicals, renewables, and utilities. Supply chain optimization provides direct, tangible benefits to the bottom-line.
The incentives for smaller Energy companies
It’s critical to realize that supply chain optimization is not exclusively a concern for big corporations; smaller companies can realize significant benefits from focusing on their supply chain. Here are some key considerations as smaller companies consider when and whether they should include optimizing their supply chain as a strategic piece of their business:
- Timing: Implementing supply chain efficiency should begin as early as possible in the operational planning stage. However, it is not a “one and done,” but an ongoing, iterative process, that adapts to changing market dynamics and technological advancements.
- Cost Efficiency: Smaller companies often operate on tighter budgets, making cost efficiency critical for survival. Effective supply chain management reduces costs and improves profitability.
- Competitive Advantage: A well-optimized supply chain gives a competitive edge to a smaller company by ensuring reliable access to resources, faster response to market demands, and the ability to offer more competitive pricing to customers, which can be especially valuable in volatile markets.
- Risk Mitigation: Optimizing the supply chain can enhance resilience and reduce the impact of unforeseen events. Smaller companies may have fewer resources to handle operational issues; by implementing an efficient supply chain, they are better insulated against market uncertainty and disruptions.
- Scalability: As companies grow, their supply chain complexities increase. Implementing efficient supply chain practices early on can make scaling operations smoother.
The areas where supply chain optimization is most effective
SGS Maine Pointe has helped a wide variety of companies in the energy industry assess and improve the efficiency of their supply chains. Based on our experience, there are several common areas that benefit from optimizing supply chain operations:
- Inventory & Warehouse Management: Many companies struggle with a lack of accurate inventory awareness, leading to excessive inventory, which ties up capital and warehouse space. This is especially a problem for companies that are growing quickly and/or seeking to expand into new operating locations. Maintaining excessive inventory has knock-on impacts on preservation and maintenance programs and dealing with obsolescence, both of which also incur direct staffing expenses.
- Supplier Relationships & Strategic Contracting: Companies that haven’t developed their supply chain commonly procure services and materials on an ad hoc basis, or with little strategic thinking. By understanding their supply base and strengthening relationships with suppliers, a company can obtain better pricing, faster deliveries, and improved collaboration. This includes exploring long-term partnerships and joint ventures, as well as implementing standard contractual terms and conditions to shorten the contracting process.
- Technology Adoption: A critical aspect to optimizing a company’s supply chain in today’s business environment is embracing modern technology. Implementing data analytics and supply chain management software can enhance visibility, traceability, and real-time decision-making within the supply chain, for a distinct competitive advantage.
- Transportation Efficiency: Optimizing transportation routes and modes of transport will reduce transportation costs and environmental impact. This is especially true for companies that maintain a fleet of vehicles to support customers and operations, or transport products via road, rail, or pipelines. Route optimization improves both asset (vehicle) and personnel expense, can result in more timely completion of work, and indirectly impacts all other services that are reliant on the services and materials being provided through the mode of transport.
- Sustainability/ESG: As an Energy company develops its sustainability and ESG strategy, it’s important to realize that an efficient supply chain will significantly improve a company’s performance. Working with suppliers to implement sustainable practices in the supply chain, such as setting targets for reducing emissions and waste, and collaborating with suppliers on new technology and identifying opportunities for operational efficiency, can both support a company’s sustainability objectives and deliver business value.
Barriers to supply chain optimization
Several barriers can impede improvements in supply chain operations for companies in the Energy industry:
- Capital Constraints: Companies may claim a lack of necessary resources to invest in supply chain technologies and improvements. This is especially true for smaller companies, or companies that haven’t chosen to focus on supply chain as a “strategic” part of their business. Capital constraints are often one of the first areas of push-back, but are actually quite easily mitigated. The operational and financial benefits that come with supply chain optimization far outweigh the implementation costs.
- Legacy Systems: More established companies often rely on legacy and outdated systems, and may be resistant to updating (or not know where to start). The assumption is that upgrading or replacing these systems will be costly and time-consuming, especially if the company has multiple legacy systems. However, to maintain competitiveness, one of the first things a company should do is to review how they’re managing their physical assets (inventory, warehouses, and plant and equipment), as well as how they transact procurement and contracting, from a system perspective. Using outdated, multiple, or inefficient systems can lead to massive operational and cost inefficiencies, and set a company at a severe disadvantage compared to their peer group.
- Resistance to Change: Often the most common impediment to supply chain optimization is “organizational inertia.” Both employees and management may resist changes to established processes and workflows, which can block (or hinder) the implementation of more efficient supply chain practices. The operational and cost efficiencies that result from optimizing a company’s supply chain create a clear business case, with direct impact to the bottom-line, and management should demonstrate leadership and “own” the initiative to ensure organizational alignment.
- Market Volatility: The cyclical nature of the Energy industry can make long-term planning and prioritizing investment in supply chain improvements challenging. This is another reason why it is crucial that management buy-in is achieved, and supply chain optimization is seen as a strategic objective.
To remain competitive, Energy companies must prioritize supply chain optimization as a strategic initiative. SGS Maine Pointe’s Total Value Optimization (TVO)™ approach provides clients with enhanced standardization, visibility, and control, and helps them visualize the bottom-line benefits of an optimized supply chain. Implementing an efficient supply chain results in significant financial and operational benefits, but the strategy needs to be endorsed by management, including allocating necessary resources, fostering a culture of innovation, and collaborating with suppliers and industry partners.