75 per cent of companies faced supply disruptions that impacted operations, forcing many to look for alternative suppliers for critical materials, and increased inventory and monitoring
Covid-19 has dealt a massive blow to the energy industry, and national energy companies in the Middle East must pursue bold structural cost-reduction measures to mitigate the impacts and emerge stronger from the crisis, according to a new report by Boston Consulting Group (BCG).
The report, titled ‘Procurement post Covid-19: A new reality for national energy companies’ explains how companies must act now to balance near-term supply chain management urgencies and redesign the supply footprint and supply capabilities.
BCG conducted the 2020 National Energy Operator Survey in April and May 2020 to understand the Covid-19 related supply chain challenges encountered by these companies. According to BCG findings, 75 per cent of participants have encountered supply disruptions that have impacted operations and national energy companies have taken several prudent measures to safeguard the supply chain during this time of crisis.
First and foremost, many have focused primarily on supply chain de-risking: 92 per cent of respondents have set up Covid-19 response teams, more than 75 per cent of these are already engaging with key suppliers, and close to 70 per cent have identified alternative suppliers for critical materials and increased inventory and monitoring.
Secondly, most teams have initiated quick-win cash and control measures: 90 per cent of respondents are actively negotiating down prices of metal-based items as commodity metal prices fall, while 70 per cent are either considering or already working on reducing discretionary spend and repurposing existing wherever possible to defer future purchases.
"National energy companies need to consider structural cost reduction exercises. The majority of companies we surveyed have not yet initiated those changes; only less than 30 per cent of respondents are working with their functional counterparts to identify alternative materials, reduce demand, and cancel non-critical procurement," said Arun Bruce, Managing Director and Partner, BCG.
BCG analysis indicates that most service providers to the energy industry will likely experience cost deflations in the range of 20-30 per cent over the next 12 months. This will be driven by declining demand due to steep Capex cuts, commodity price drop, salary/wage reductions, and financial distress within the supplier ecosystem which leads to reduced overheads and profit margins. Capex-related services and materials such as drilling and OCTG would see prices fall by 20 per cent to 30 per cent in the next 12 months.
Opex-related services will see marginal price declines while savings on Opex materials including piping valves and fittings could be in the 5 per cent to 15 per cent range. However, there is an underlying need for caution since excessive bargain hunting could permanently damage the supply chain by forcing financially distressed suppliers out of business.
Furthermore, as per the BCG study and analysis, the future of supply chains will be centered on three major objectives: supply security, cost efficiency and supplier innovation. To rebound and move forward, BCG has proposed five key levers that companies should adopt while p ursuing these three objectives:
• Establish complete category, supplier, and Covid-19-related market intelligence.
• Forge stronger collaborations and partnerships with key suppliers and end user
• Embrace digital ways of working
• Institute end-to-end supplier risk management
• Support local content and national supplier ecosystem
"Although crises are known to cause significant economic strain, they also provide opportunities for growth and companies that flourish during downturns share common traits of preparation, preemption, growth orientation, and lasting transformation," said Cristiano Rizzi, Managing Director and Partner, BCG.
"Based on the 2020 National Energy Operator Survey and our independent analysis, we are confident that the supply chains of national energy companies will recover and rebound. But in order to achieve objectives in this regard, several key levers must be utilised to ensure they act in earnest, starting right now."