Supply Chain Management
Technologies Link Financial, Physical Supply Chains
By Jennifer Beaupre
HOUSTON–Given the recent market shifts in the oil and natural gas industry, producers are adjusting their operating strategies and realigning their corporate objectives to optimize bottom-line performance under prevailing business conditions. That includes placing a renewed focus on quickly and efficiently streamlining costs and better managing inventory in the supply chain. One problem, however, is that the financial supply chain (buyers) and physical supply chain (suppliers) do not always work well together.
Companies typically have unrealized financial assets caught up in the supply chain and are unaware of the negative impact to their overall corporate goals. Instead, the focus is often on trying to find suppliers that can do the work for less, provide parts that are cheaper, and arrange faster delivery dates. Although companies are rightly working to save money and drive greater value to the bottom line, they often overlook inefficiencies and missed opportunities within their own financial supply chain processes.
Better financial management can help companies achieve their goals of cutting costs and managing inventory to help navigate economic volatility, particularly during times of heightened uncertainty and low commodity prices. Three best practices for improving financial management in the supply chain include adhering to industry standards, employing technology solutions to maximize efficiencies, and analyzing data to better understand the complete financial picture.
One of the reasons for the disconnection between the financial and physical chains is the sheer volume and complexity of the types of data used in the oil and gas industry. Intricate taxation, multiple products and differing digital formats all contribute to the complexity and difficulty in passing financial information in the supply chain. It is becoming clear that there is a growing need for industrywide format standardization. While digital technology allows operators to address critical business challenges and communicate with suppliers, the industry is slow to adopt standardized billing and payment practices.
In addition, within the supply chain, various technologies and proprietary systems utilize different data formats and workflows. These can result in decreased productivity as organizations work to transfer, convert and organize various forms of information to formats that are used in their internal systems.
Implementing information exchange standards that are technology agnostic and vendor neutral is one solution to get both buyers and suppliers on the same page. Standardizing data benefits the entire supply chain and solves the problem of data inconsistency. By using a common set of standards, resources and time can be allocated toward addressing core business and operational issues, rather than toward reformatting or interpreting data.
Although most companies agree that there are huge benefits in imposing standards throughout the supply chain, many find the process to be highly time-consuming and complex. Therefore, most exploration, drilling and production companies are still in the early stages of managing standards.
By providing a global forum for delivering process, information and technology standards to facilitate seamless and efficient electronic business transactions, Petroleum Industry Data Exchange (PIDX) is an example of an organization that is bringing companies together to maintain and promote standardization within the oil and gas industry and its trading community. PIDX standards are used by oil and gas companies around the world, as well as service and supply companies, and represent more than 80 percent of annual global upstream spending.
The standards are enforced through the middleware between the buyers’ enterprise resource planning (ERP) systems and the suppliers’ financial management or invoicing systems. Suppliers submit invoices digitally in the PIDX format and operators are able to digitally input that information into their ERP systems. This standardization dramatically improves efficiencies between the physical supply chain and the financial supply chain.
Without standards, suppliers code, invoice and charge differently. When oil and gas companies receive that inconsistent data, they must take time to standardize and enter information into their ERP systems. Middleware that converts invoices to industry standards facilitates faster exchange of information and speeds time to payment for suppliers.
Also, many suppliers already implement standards such as PIDX, so oil and gas operators benefit from working with partners that see the upside of using standards. When buyers have faster access to data because it is standardized, they are able to recognize early payment discounts, decrease time figuring out charges, and are able to bring new suppliers on board faster.
Technology for the supply chain is now more accessible, efficient and user friendly than ever before. Yet, while companies are often aware that they are missing opportunities to increase efficiencies and save money with better financial management for the supply chain, they often struggle with implementing solutions or adopting technology solutions. Instead, many suppliers rely on traditional methods such as spreadsheet tracking to maintain inventory, manual processes to send invoices, and paper storage of important documents and information.
Buyers also struggle to implement efficient financial supply chain programs and technology. According to analyst Viktoriya Sadlovska of Aberdeen Research, “It is difficult for companies to understand where the most savings could be derived and where to begin a supply chain finance project.”
With an increasingly complex business environment and a greater need to be efficient, manual systems simply are not enough to maintain growth. To be successful, vendors within the supply chain must evolve to implement technologies that drive efficiency, boost productivity, and ultimately, cut costs. Middleware technologies that route financial information between buyers and suppliers can speed the procure-to-pay process and save time and money.
Examples of technology solutions that can help increase performance and drive efficiency gains in the supply chain include complete inventory management systems for small to mid-sized companies, transportation management systems, cloud-based warehouse management systems, and an accounts payable workflow solution designed especially for oil and gas producers.
However, the most important aspect of improving supply chain efficiencies is digitizing paper data. When the information flows between buyers and sellers, the information becomes more visible, can be delivered faster, and enables companies to communicate more efficiently. This also provides real savings that can significantly impact the bottom line.
Data and financial analytics are essential for improving the financial supply chain process. Technology tools that have reporting options can help companies analyze data and report on trends. Something as simple as providing visibility into the physical supply chain can trigger better financial processes. Financial terms often reference specific supply chain events, and good reporting can help improve the speed of and visibility into financial transactions. This could mean a shorter procure-to-pay process and could minimize capital investment.
By using a digital platform to manage and analyze financial interactions within the supply chain, oil and gas companies can also process invoices and export data with fewer clicks, providing better insight into and control over the accounts payable process. With this clearer visibility and reduced processing time, organizations can avoid late payments and the fees associated with them. In addition, enhanced visibility provides more insight into cash flows and allows finance and accounting teams to be more strategic in the payment process.
Not only can the data help identify opportunities for early pay discounts and the avoidance of late fees, but it also can provide valuable information about suppliers, geographies and product output. Financial supply chain automation solutions can provide reporting and analytics capabilities because all financial information from the supplier to the operator is stored in one place. Moreover, the stored data is much more complex and comprehensive than data analyzed from paper or manual processes, capable pf revealing important patterns and trends that relate directly to a company’s performance and profitability.
When oil and gas companies take measures to process and analyze their financial data, they are able to access a much more complete financial picture. Having more insight into their business practices allows operators to be more efficient and make better strategic decisions. In addition, data analytics and eliminating paper processes frees up resources from data entry and allows more time for data analysis. When people in the financial supply chain are able to analyze data, they are able to make the adjustments that can enhance and protect a company’s bottom line.
The financial supply chain is inextricably linked to the physical supply chain, yet most companies struggle with finding effective solutions to help them work more efficiently and more profitably. Better financial management is essential not only during temporary downturns, but also when the cycle turns back up as a way to maximize returns.
This story came from the print edition of The American Oil & Gas Reporter. For other great articles about exploration, drilling, completions and production, subscribe.