As we continue to share ideas for a new approach to drive better collaboration across the people and materials supply chains, it will be essential to establish an operating model that will ensure this new approach delivers value to all stakeholders.
In our recently published thoughts on a global governance model, we outlined how a global governing body would be formed and how this body would provide oversight to ensure compliance with a new set of global standards. As the energy and minerals industries seek to drive down costs, standardization will be essential. In fact, through standardization alone, Accenture and the World Economic Forum estimate a potential 10-20% improvement in logistics utilization.
Bringing Together Global Governance & Local Action
Time is of the essence, and we must act now. It will take some time before the governing body can begin to create the scopes of work and contract terms that will be needed to source lead logistics partners (LLPs) in each basin, a proposal we’ll cover in greater depth in the next section (The Lead Logistics Provider).
However, while the global governing body builds out the strong foundation that will support long-term sustainability of this new model, the IECs in each basin can take steps to help achieve the envisioned outcome by forming logistics joint ventures (JVs) within each basin, with the objective of unifying all logistics operations under the direction of the JV. This JV model is common in the energy and minerals industries, and the Marine Well Containment Company set a further precedent for what is possible when industry peers commit to collaborate for meaningful change.
While this is an interim step toward having independent LLPs provide a fully outsourced service for each basin, it provides substantial benefits during the transition, including:
- Ensuring real change can be initiated and acted on immediately
- Developing a “migration” approach that can be used to transition portions of logistics into the new model over time
- Making sure the change process is carefully managed to prevent risks to ecosystem participants
The IECs will share in the JV investment strategy. Each in-basin logistics JV can be established with seconded employees from the IECs operating in that basin. These employees understand their companies’ needs and will provide a link back to ensure commitment and engagement from the IECs during the migration. Furthermore, they will provide a local link back to their companies’ representatives in the governing body to advise on unified standards, the lead logistics provider scope of work and contract terms for their basin—as well as to raise visibility to operating conditions, costs and best practices developed within their basin during the migration.
In this way, we’ll immediately begin to replace the current fragmented multiple dysfunction model, in which all operators work independently, with an extended enterprise framework that will drive standardization, efficiencies, savings and visibility while eliminating waste across both the people and materials supply chains.
The Role of the Lead Logistics Provider
Following setup, the global governing body will be tasked to work with host governments to choose lead logistics partners (LLPs) in each basin. However, the governing body will need to first work with all ecosystem participants to assemble the unified safety, security, health, environmental, technical and operational standards.
Once the global governing body has created a robust scope of work and standard smart contract, it will be time to source the LLP for each basin. As mentioned in our previous publication, the governing body will:
- Lead the LLP sourcing activity for each basin
- Award the contract and retain oversight of the contractual relationship with the LLP
- Continue to ensure LLP performance
In this way, each basin will transition from the JV combined logistics management model to a fully outsourced logistics operation.
In each basin, the LLP should be a non-asset-based management company, operating independently from the IECs. In our governance model, we have proposed that these LLPs would contract directly with the governing body, which would also be accountable for auditing LLP performance. All LLPs would be held to the same standard terms, ensuring consistency and making it easy to measure success, determine benchmarks and realize the true value of collaboration. In addition to shared logistics service, the IECs will also benefit from price transparency.
The LLPs will:
- Provide operations staffing to plan, schedule, coordinate execution and analyze and report on results
- Source logistics service providers (LSPs), negotiating contracts and overseeing these supplier relationships, with the LLP owning the contract with each LSP and negotiating from a position of power, backed by the collective demand of all IECs in the basin
- Provide health, environment and safety (HES) and technical staffing to give oversight to LSPs and operations
- Select and provide oversight to a digital ecosystem orchestration (DEO) company, with the LLP owning the contract with the DEO company
In this way, the energy and minerals industries will mature into a 4th party logistics (4PL) model, which has long been the reality for other industries, and realize the associated advantages.
Driving Benefits for All Participants
We recommend this operating model to ensure all stakeholders realize immediate and ongoing value, recognizing that collaboration must result in a better future for everyone.
- The IECs will see tangible benefits like significant cost savings, improved visibility to data and better processes to ensure people and assets are optimized. What’s more, the IECs will no longer be required to oversee these cumbersome processes, freeing them to focus on other crucial aspects of their business.
- By working closely with the global governing body, LLPs benefit from a single relationship and contract as well as clearly established, simple standards to follow. Furthermore, LLPs will be operating in a greenfield industry for logistics as the 4PL concept is almost entirely new for the energy and minerals sectors.
- Instead of dealing with multiple customers with different standards and different contractual expectations, the LSPs will be able to focus on the relationship with the LLP. This simplification will accrue back-office benefits, improve communication and reduce confusion and conflicts.
- Engineering, procurement, and construction companies (EPCs) have long struggled with an organizational capability gap in logistics. IECs expect EPCs to utilize in-basin logistics to the greatest extent possible, to adhere to their preferred standards and to provide logistics cost transparency. By engaging directly with the in-basin LLP, EPCs can easily meet those IEC expectations while benefitting from utilizing a partner with deep logistics organizational capabilities.
- DEOs benefit from an ecosystem that values the power of data and is founded on digital connectivity. We’ll provide more insights on the DEO company in our next paper outlining the digital model.
- Local communities and talent. Having LLPs in each basin will encourage the use of local talent and uncover other opportunities to keep money local, creating vibrant communities with opportunities for education, skill development and entrepreneurship in line with our belief in empowering diverse talent and supporting local economies.
Another benefit of the intermediate JV step is the opportunity to redefine the economic model for oilfield logistics. Current transactions typically involve long-term, fixed, time-based rate arrangements especially for facilities, vessels, and aircraft. Invoices are generated monthly, are paid on 60+ day terms and are difficult to reconcile to operational activities that occurred 90 days or more before payment. LSPs struggle to manage their accounts receivables for better cash flow, and IECs have only an abstract understanding of the logistics costs of doing business.
We aspire to move to a real-time, pay-per-use economic model that allows the financial exchange to occur at the point of operational activity. In this way, IECs will be able to pay only for what they consume (e.g., a seat on an aircraft, a certain amount of cargo on a vessel, the time required for a truck to transport a specific load) rather than paying a long-term lease for each of these types of assets. The LSPs will benefit as well, through improved cash flow, increased utilization of their assets and the opportunity to improve transactional profit margins.
This funding model exists in many current logistics scenarios and can certainly be achieved through the LLP structure. It will be the task of the JV to reshape the economic model as each basin migrates into the new operating structure.
The New Global Model for Logistics
The model below provides a pictorial representation of the global structure we are proposing. This new structure, from global governance, through in-basin LLP management, to execution activities performed by LSPs and DEOs is specifically designed to drive improvements for local communities, IECs and EPCs conducting business in each basin.
Coming Soon: Our Digital Model
Stay tuned for the final piece of the puzzle—our proposed digital model that will ensure data integrity and accuracy while keeping the door open to future innovation.