Aramco Supply Chain Managment

Table of Contents Page Number Introduction3 Background of the Company8 The Dilemma in Saudi Aramco Supply Chain Management10 Analysis of the operation of the Company’s Supply Chain Management12 Conclusion16 References17 Introduction: Several company managers are continuously searching for the best possible way of reducing cost and utilizing their inventories so that the company can implement cost reduction strategy. With all prices of prime commodities are accelerating for increases to maintain the business, the challenge for manufacturing companies nowadays is to come up with a management strategy that could lessen the burden of imposing additional prices to the consumer’s purchases. Yet seemingly, it seems impossible to achieve due to the domino effect in the market offering. Starting from the raw materials to the manufacturing plant then to the manufacturing plant to its distribution centers and from the distribution centers to the consumers, the process entails expenditures either from the supplier or from the manufacturing plant. Once transporting raw materials is affected by the movement in the prices of gasoline and oil, salary increases of its work force and additional price for the vehicle’s spare parts suppliers cannot but face the reality that they must charge additional cost to their buyers. So goes the trend. The usual thinking about a supply chain is a vertical flow of the entire materials for production that is fully integrated because it is owned by a single firm although its channels are operating independently. Hence, an efficient coordination among the managers of its channels is demanded for the success of the supply chain. However, a supply chain need not only be limited to a single ownership of the entire process. By its definition, according to the paper of B. B. Arntzen, G. G. Brown, T. P. Harrison, and L. Trafton (1993) a supply chain is a network of facilities and distribution alternatives that begins from the procurement of materials, converting the materials into mid-way and finished products, then the distribution of the products to customers. Supply chain is not limited to manufacturing alone but also in the service industry. There may also be expected difficulties along the entire chain due to the varying approaches from industry to industry or from firm to firm but the process proceeds as planned. Company A Company B DistributorCustomers Raw Materials manufacturing plant Finished Product Company This may sound simple but a realistic supply chain actually embraces several finished products with shared components, facilities, and capacities. Materials flow does not come only from one single network but from other networks also. At times, different modes of transportation are considered and usually the bills of materials for the finished products are both costly and enormous. R. H. Ballou, (1992) believes that traditional supply chain still operate along this pattern but on this case the supply chain deviates from the old practice of supply chain and paved the way to another model of creating an effective cost reduction strategy. In the supply chain, according to M. C. Cooper and L. M. Ellram (1993) the main focus lies on the mistake of materials, unnecessary information and unpredictable finances as they move from their supplier, to the respective manufacturer then to the wholesaler passed on the retailer before finally reaching the consumer. However, another view was presented by J. B. Houlihan (1985) because his notion of supply chain is involved in coordinating and integrating these flows for inside the company and its relation with other companies. The ultimate goal of all effective supply chain management is to reduce inventory but available when needed hence, minimize the cost of production. The product flow consists of the progress of goods from supplier to customer. Information flow is the transmittal of orders and keeping posted the status of the delivery. The financial flow covers the credit terms, payment schedules, and consignment title of ownership arrangement. As Cohen, et al. (1989) noted supply chain also consists of strategic decisions and operational decision levels. Strategic decisions usually entail longer time to observe its effect on the company. It requires close monitoring of the corporate strategy, but oftentimes, in many companies, it is already the firm’s business strategy. Setting aside, operational level decisions are shorter period and concentrates mainly on the day to day basis of inventory, production, and packaging. The main objective on this level is maintaining an effective and efficient product flow from the strategically planned supply chain. Houlihan (1985) reiterates that supply chain management operates according to four major decision areas namely; business location, production input and output, materials inventory, and distribution including transportation and channels. It should be noted that on these decision areas the elements of strategic planning and operational procedures are inclusive. It is because strategic decisions include what products to produce, and which plants to produce them in, allocation of suppliers to plants, plants to Distribution Channels, and Distribution Channels to customer markets Business location refers to the place where production facilities, warehouse, and source point are easily accessible both by the suppliers and other stakeholders of the company. Location facilities cover an assurance of resources for a longer period due to the long term plan of the business. Considered also for an effective supply chain location are the size, number, and the possible paths by which the product flows through to the customers. This decision is important because it represents the main strategy for accessing customer markets which definitely have effect on revenue, cost, and level of service. It is determined by employing a routine check on production costs, taxes, duties and duty drawback, tariff, local content, distribution costs, production limitation and many others. Production decision is also a critical concern in supply chain management because it entails the capacity of the manufacturing facilities to handle the production process. It is focused on detailed production scheduling. It includes the construction of the master production plan, time table on the machines, and maintenance of equipments. The elements of workload balancing and quality control that are being measured on this facility are seriously considered. Materials inventory are managed properly in the supply chain management levels of decision. Inventories could either be raw materials, semi-finished or already finished merchandize. These materials may also be in the process between locations or in other place as in the case of outsourcing activity. The purpose of managing the inventories is to safeguard against any uncertainties that might exists in the supply chain. Holding inventories can cost as much as one half of the product’s value. Too much inventories of raw materials means slow return of investment and large inventories of finished products can cause lower prices due to overflowing supplies. The aspect of transportation viewed according to the context of H. L. Lee and C. Billington (1992) is also another element in the supply chain management issues because it is closely associated with the inventory due to its mode of moving the raw materials or the finished products. The best mode of trading off the cost is to transport with the indirect cost of inventory associated with the type of transportation. While using air is fast, reliable, and warrant lesser safety stock, it is very expensive. Shipping by sea or by train may be cheaper but they take longer time and consumed large amount of inventories to buffer against the uncertainties associated with it. Hence, shipment sizes, routing, and scheduling of equipments are the main factors operating in the Supply Chain Management. Another point was raised by J. M. Masters, (1993) as he discussed on the process of supply chain management and the level of decisions that have to be made on these models are enormous and require considerable amount of data. Due to the huge data requirement and the broad scope of decisions, each supply chain decision models provide approximate solutions. The operational decisions, meanwhile, address the day to day operation of the supply chain. Therefore the models that describe them are often very specific in nature. Due to their narrow perspective, these models often consider great detail and provide very good, if not optimal, solutions to the operational decisions. As a solution for successful supply chain management, Saudi Aramco employed a sophisticated software systems, with Web interfaces and has already been in competition with the Web-based Service Application Providers or the SAP, that provide part or all of the SCM service for the company. Saudi Aramco must have been blest to be able to implement supply chain management on its production process and updated it with the use of modern day Information Technology. In spite of the global financial problem that oil producing countries are suffering at present, Saudi Aramco still stands tall amidst financial chaos. Supply chain management is at its best at Saudi Aramco that is why there is less worry even if the prices of oil and crude went down in the global landscape. At Saudi Aramco, the corporate policies guide the supply chain to a particular and specific objective that the firm hopes to achieve (http://www. saudiaramco. com. sa/html/). 11. Background of the Company State-owned Saudi Arabian Oil Co. (Saudi Aramco) is the king of oil. It is the world's number one oil producer, supplying more than 10% of the world's oil demand. The company controls proved oil reserves of about 259. 8 billion barrels. It extracts 9. 1 million barrels a day, operates refineries, markets oil internationally, and distributes it domestically. Saudi Aramco owns a fleet of oil tankers and invests in refineries and distribution networks in other countries; it also owns 239. 5 trillion cu. ft. of natural gas reserves. The company dates back to 1933, when Saudi Arabia agreed to open up a large area for exploration by Standard Oil of California now known as Chevron. From its headquarters in Dhahran on the eastern shores of the Arabian Peninsula, Saudi Aramco manages virtually all of Saudi Arabia's enormous hydrocarbon enterprise. From the giant Ghawar and Safaniya oil fields, the world's largest onshore and offshore fields, to the leading-edge technology at the Exploration and Petroleum Engineering Center, and from one of the largest and most modern fleets of supertankers to refining and marketing joint ventures around the globe, Saudi Aramco is positioned to continue to play its leading role in meeting the world's demand for oil. Saudi Aramco revenue is estimated between 150 billion and 350 billion dollars. It varies greatly year to year due to high dependency upon hydrocarbon prices. Saudi Aramco is responsible for 99 percent of the Kingdom's proven crude oil reserves of 259 billion barrels (41. 2 1010m? ) about a quarter of the world's total. That is more than double the total of Iraq, the country with the world's second largest reserves, and nearly 12 times the reserves of the United States. Saudi Aramco produces and exports more crude oil than any other company. Recent production has averaged some 8 million barrels (1,300,000 m? ) per day. That is more than twice the output of the next highest producer and nearly five times greater than the largest U. S. oil company. Saudi Aramco maintains a maximum sustained crude production capacity of 8. 5 million barrels per day. Saudi Aramco ranks among the top ten companies in gas production worldwide. The company is also a leader in both the production and export of natural gas liquids (NGL), and a major producer of refined products. The company produces natural gas in association with crude oil and non associated gas from deep, independent gas fields. This gas is used as fuel and feedstock for the Kingdom's backbone industries and utilities, and for export and domestic consumption as NGL. A vigorous program is currently under way to expand gas production and processing capabilities to meet increasing demand for gas at home to power the Kingdom's robust domestic economic growth. Saudi Aramco's oil operations encompass the Kingdom of Saudi Arabia, including territorial waters in the Persian Gulf and the Red Sea. Totaling more than 1. 5 million square kilometers, this area is larger than the combined areas of Texas, California, Oklahoma and Utah, or of France, Spain and Germany. Most production comes from fields in the coastal plains of the Eastern Province in an area extending 300 kilometers north and south of Dhahran. Saudi Aramco VP announced Aramco's plans to build projects worth about 487. 5 billion Saudi Riyals (US $130 billion) in the next 5 years. Due to the unprecedented global demand for oil, Aramco announced that the number of its oil rigs will double by the end of 2006 (http://www. saudiaramco. om) Governed with its vision and holistic mission, the company is striving to make perfect its management concept and practices in order to build solid human resource foundation and company culture that would serve its competitive against other banking institutions in the entire Kingdom within the next couple of years (http://www. saudiaramco. com. sa/html/). 111. The Dilemma in Saudi Aramc o Supply Chain Management Saudi Aramco is the world leader in the oil industry and it possesses the huge deposit of oil and mineral resources. It built strong and reliable ties with its market all over the world while continuously harnessing its rogressive communication with its entire supplier from manpower, facilities, equipments, construction, development projects, and community services. At present Saudi Aramco remains stable and assured of the relentless efforts of its entire people in making the company a world leader in the oil industry and a good example to follow. The entire materials and needed machineries for the oil drilling, processing, plant treatment, transportation and distribution of petroleum are provided by the supply chain from all private industrial suppliers around the Kingdom belonging to the Saudi nationals. No imported materials are used aside from those that are not available in the kingdom. The ongoing calls for localization of Aramco’s production materials are contained in the company’s oath to support local industries and private industrial businesses in the Kingdom. One particular project that the company listed on an indefinite postponement is the envisioned 40 hectares plant facilities and accommodations at Rastanura. In the middle of 2008, Saudi Aramco invited bidders and quotations from several constructing firm around the Kingdom and to some well known companies the Gulf. Toward the end of year, the project was awarded to Foster Wheeler Group of Companies Middle East. The said project was divided into four phases and phase one would start by March 2009. However, Foster Wheeler received a notice from the company on mid February 2009 stating that the Rastanura project would be postponed indefinitely. Foster Wheeler through its resources found out that the main reason for the postponement is the company supplier and sub contractors were heavily affected by the global financial crisis (Thajudeen, 2009). Saudi Aramco suppliers of equipments and high quality standard materials could not meet the requirements needed by the company for the construction of its project. The cost of delivering the materials to Saudi Arabia from the place of origin almost tripled. The high price of raw materials plus low supply prompted Aramco suppliers to increase its prices too but since everything was stipulated in the contract, Saudi Aramco would not accept the new price schedule. The problem begins. Due to the company’s adherence to the Saudization program an option to change suppliers and seek foreign assistance cannot be implemented. France and Great Britain are rich suppliers of equipments needed to continue the construction of drilling plants and community accommodations of its people. The prospect of getting from these countries will destroy the supply chain which Aramco have been protecting and preserving all those years. Japan’s Sumimoto Industry’s offered Saudi Aramco well defined and structured supply chain that could even generate a healthy foreign relation between the government of the Kingdom of Saudi Arabia and the people of Japan. The offer was shelved temporarily and for further consideration and study. While the present economic crisis continuously spreading in some major industries in the Kingdom, Saudi Aramco remains financially firm and liquid. There is no question whether the company can provide the necessary funds for the completion of the project. There is also no doubt in the capacity of Foster Wheeler to deliver the project on time. It is only a matter of the availability of supplies that Saudi Aramco encountered some critical problems. 1V. Analysis of the operation of the Company’s Supply Chain Management For the past several years, Saudi Aramco perfectly managed its supply chain and it can be proven by the smooth development and completion of all existing projects the company have ever made. The fact is that starting 2008 up to the present the global financial crunch created havocs and collapsed of several industries in the world. Included in this chaotic situation are some suppliers of Saudi Aramco. The law of supply and demands in Economics is pretty much at work at this time. There seems to be a blank solution to this perennial problem at present. If this is the case, the postponement of Saudi Aramco project in Rastanura would be justified. On the second thought, there could be another better solution that could be worked on without jeopardizing the effort exerted by Foster Wheeler to win the project. An excerpt from the speech of Abdallah S. Jum'ah, President and CEO of Saudi Aramco (2002), he said â€Å"The greatest share of our investments as oil and gas producers goes to assuring that we maintain the ability to supply our products without interruption. While such costs are burdensome, they nevertheless are critical to the sustainability of energy supply. No one can long afford to be without this lifeline. † This was also reiterated in the speech delivered by Ali I. Al-Naimi (2002), Saudi Arabia's Minister of Petroleum and Mineral Resources, in Washington D. C. as he claimed â€Å"we have invested billions of dollars to build production capacity and to construct diverse export routes. The importance of the excess production capacity of Saudi Arabia has been demonstrated in more than one supply crisis in the past two decades such as the Iranian Revolution of 1978-1979, the Iran-Iraq war in 1980, the invasion of Kuwait in 1990 and the supply infrastructure crisis of 2000†. Granted that the chain of supply has a domino effect and a disruption in one unit of the chain may result to the interruption of operation of the entire system, Saudi Aramco with its huge resources could help solve the problem in terms of loan assistance to the ailing unit of the chain. Saudi Aramco management could serve as mediator between suppliers of materials to the members of its supply chain to retain its old price schedule which would be compensated by Saudi Aramco in terms of supply of oil with no extra charges and at its lowest price. The problem is rooted in the availability of funds and not on mismanagement of the supply chain. The remedy to this kind of situation is by capital assistance. Another possible option to maintain the flow of the supply chain is by acquisition of the units in the chain that is experiencing a hard blow from the economic crisis. Aramco could temporarily take over the financing of its production so that the unit may continue to operate and the employee would not lose their jobs. Unemployment would create additional burden to the ongoing financial crisis. Saudi Aramco has the capacity to generate production of its supply chain unless it is willing to suspend indefinitely its project with Foster Wheeler. The movement of Saudi Aramco supply is vital to its operation in distribution and expansion in order to accommodate the growing demand for oil in the world. Saudi Aramco is also part of another supply chain and the disruption on its supply would create stoppage of production to it end user. In the same manner, the stoppage of supply from the company supply chain might also result to a decease or worst, stoppage of the company production in the long run. For as long there is still the chance to save the continuous decline of financially able company in the supply chain of Saudi Aramco, it is the best opportunity for Aramco to show its goodwill to all its allies and to the world in general. The management team of Saudi Aramco is determined to continue to play its role in meeting the world's demand for oil exploration & producing, refining, distribution, shipping, marketing as the leading producer of the energy that powers the world's economies and empowers its people, committed to fulfill the kingdom development goals including developing the Kingdom’s industrial base and diversifying economy, helping creates jobs for Saudi nationals and maximizing the value of the Kingdom’s natural resources. Much more so, the Company cannot afford to create possible problems in its supply chain. Saudi Aramco is a government owned company and it does not depend on any political pressures or compromises from any person in the country except to the King due to the monarchial form of government that Saudi Arabia has. The company structure of Aramco is bureaucratic and hierarchical that is why there is absence of threat coming from the labor sector or any human rights advocates in the international scene. Saudi Arabia law is based on Shari’ a law and its legal implications. In this case, the Company has the power to take control temporarily of its suppliers who are experiencing financial downturn. At Saudi Aramco, there is no other power aside from the monarch and the top management level of the company. Stakeholders are not a major threat nor can they pose any threat at all. Aramco’s investment is more of partnership with other big oil producing countries and not on the individual share of investments. What can be considered to have power over the company is the presence of foreign partners as distributors and international oil producing companies that accepted Aramco’s partnership strategy in producing enough supply of world’s fuel and oil needs. Saudi Aramco also uses Management Information and Decision Support System that delivers information to support many of its day-to-day management’s decision-making needs and supply chain operation processes. Reports, display, and responses produced by such systems provide wide range of information that the Aramco management has specified in advance to meet adequately their information needs. Such predefined information satisfies the need for awareness and updated situation of the organization in relation to its supply chain performance, financial situation and production apabilities (http://www. saudiaramco. com. sa). Saudi Aramco MIDSS provides the needed information to the Aramco’s decision makers at the operational and tactical level of the organization. Based on the data generated from the program Saudi Aramco management can determine how and when to entertain an increase of oil production, price, cost of operation, wages and purchasing ability of the company. The in formation takes the form of periodic, exception, and demand reports and immediate responses to inquiry. Saudi Aramco’s web browsers, application programs, and data-base-management-software provide access to information in the intranet and other operational database of the organization. These databases are maintained by transaction processing system. The data about the business environment are gathered from the Internet or intranet when necessary and when greatly demanded. (http://www. aramco. com) Based on this technological competencies, the company is able to secure all the necessary information its suppliers might be needed at the moment so as to continue their production. V. Conclusion The plight of Saudi Aramco supply chain management definitely lies on the hand of the company. We have learned from Saudi Aramco that the company’s supply chain has been operating perfectly without interruption. The company was able to manage its supplier’s time scheduling, processing, manufacturing, delivering, and stocking. There were minor problems along the way especially in transporting the supplies needed by the company but the problem was resolved immediately before it can cause damage to the company’s oil production. By becoming the world leader in the oil industry the company’s long term plan must not sacrificed due to financial difficulties of its suppliers. Small problem that is left unattended became big and too difficult to solve in the near future. The same occurrence is happening to the supply chain process of the Saudi Aramco high quality materials and equipments for its development and expansionary project at Rastanura. The delay in the start of the project would lead to the extension of its completion, late performance, and finally slow production which would be advantageous to competitors. Supply chain management assures the end ompany an uninterrupted production and a continuous flow of resources from the suppliers’ supplier to the manufacturer to the consumer then back to the supplier’s supplier. The cycle goes on and on for as long as the chain remains consistent and stable. Saudi Aramco with vast resources and technological capabilities can easily detect any di sruptive factor along its supply chain. Now is the time for Saudi Aramco to divert momentarily a portion of its focus to the financial status of its suppliers. V1. References: Al-Naimi, A. I. (2002) Saudi Arabia's Minister of Petroleum and Mineral Resources, Washington, D. C. April 22. http://www. saudiaramco. com/html/speeches (access June 5, 2009) Al-Naimi, A. I. (2002) Saudi Arabia's Approach to Oil Market Stability and Energy Security, Expanding Energy Frontiers – The Institute of Energy Economics of Japan, Osaka, Japan http://www. saudiaramco. com/html/speeches (access June 5, 2009) Arntzen, B. C. , G. G. Brown, T. P. Harrison, and L. Trafton (1995) Global Supply Chain Management at Digital Equipment Corporation, Interfaces, Journal of Operation Management, No. 231, p. 112 Ballou, R. H. (1992) Business Logistics Management, 3rd Edition, Prentice Hall, Englewood Cliffs, NJ, p. 1 – 23 Cohen, M. A. and H. L. Lee (1989) Resource Deployment Analysis of Global Manufactu ring and Distribution Networks, Journal of Manufacturing and Operations Management, No. 7, pp. 81-84 Cooper, M. C. , and L. M. Ellram (1993) Characteristics of Supply Chain Management and the Implications for Purchasing and Logistics Strategy. The International Journal of Logistics Management, No. 23 pp. 4, 2, 13-24. Jum'ah, A. S. (2002) President and CEO Saudi Aramco, Calgary, Canada, June 11. http://www. saudiaramco. com/html/speeches (access June 5, 2009) Lee, H. L. , and C. Billington (1992) Supply Chain Management: Pitfalls and Opportunities, Sloan Management Review, No. 33, Spring, pp. 65-73. Lee, H. L. , and C. Billington (1993) Material Management in Decentralized Supply Chains, Operations Research, No. 41 pp. 35-47 Masters, J. M. (1993) Determination of Near-Optimal Stock Levels for Multi-Echelon Distribution Inventories, Journal of Business Logistics, No. 14, pp. 165-195. Thajudeen, S. M. (2009) Foster Wheeler Group of Companies Middle East Region, Al Khobar, Saudi Arabia, February 15. http://www. saudiaramco. com. sa/homepage/projects (access June 5, 2009)