STOP! This is Part 2 of the Post! Please do not continue if you have not read Part 1! Thank you!

Moving beyond knowing what you are buying, this will address applying that knowledge to value capture.

“If you can’t spot the sucker in the first half hour at the table then you are the sucker”

The reason why touching what you buy is so important, is because it gives you a familiarity with the product. Manufacturers are notorious for trying to convince buyers that what they have to offer is the best thing, that the price they are quoting is the absolute best, and that the lead time is within a microsecond of the fastest possible time period. Many times the manufacturer is successful in winning the argument with Procurement because the buyers have no idea that they are being misled. I had a manufacturer tell me that the lead time for a tubesheet insulation board was 2 months. Basically what they would be doing is cutting holes. One person could operate the machine and complete it in two days, tops. The fact that they were charging $12,000 to do it was insane, especially as we were supplying the material, so really the entire quote was for labour and packaging. They quickly realized how intimately familiar I was with the fabrication process and the quote was drastically reduced in price and lead time. All of our buyers were capable of asking for a better price or delivery date. But no one else was telling the manufacturer why their quote was so out of whack. They could do that if they walked across campus and sat down with an engineer and found out what the exact purpose was of the component. Or they could if they drove to the manufacturing facility and observed the process. Visiting facilities gave me an excellent idea about not just the process, but their storage capabilities, their shift schedules, their safety mentality, etc.

Beyond the Buzzword: What is Value Capture?

Value capture is where procurement can get a lower price, better delivery times, better payment terms, etc. It is a hugely vital process to ensure no cost overruns occur. I do believe the large reason why I was able to have a 95% value capture rate on all my orders is because I knew very well what I was buying, what it took to make it, and how it should be packaged. When interacting with Oil & Gas buyers, I quickly realized that they had no clue what they were buying, because if they did, they would definitely be asking me for a discount or better lead times. As a matter of fact, I would happily go work for a Marathon, Valero, or ExxonMobil, not take a penny in salary, and just take 15% of what I saved the company. I would easily make over $500,000 a year. Why? Surely these companies have very capable procurement departments! Yes, they do. But procurement requires someone to be a jack of all trades, and master of none. There is more attention placed on the Terms and Conditions of the purchase than there is on the price. Sure, a way to get around that is to place competitive bids and do a Cost Benefit Analysis. Except that truly knowing which bids are good ones and which ones are too aggressive just may be an artform in of itself. The reality is that not one time did I have a domestic client challenge me on my pricing or what I was offering. Not once. It didn’t matter to them. Why? Well, because my transfer line bid was $1.5 million. That’s a drop in the bucket for these guys. They have bigger fish to fry, like the pricing on an entire Fluid Catalytic Cracker module. Basically what that allowed me to do was provide double alpha to the company. I would get the highest price possible from the client, and then pay as little as I could on manufacturing the order. Did touching a pigtail help me do this? Absolutely. Will EPC firms follow this process? Nope.

Old Dogs and New Tricks

So it all comes back full circle to change. Why won’t EPC firms change? They all claim that they do. But the reality is that they don’t. And the reason why is tragically simple. Few people genuinely want to learn more to make them better at their jobs. They are micro-businesses of their own, aren’t they? They want to charge as much as they can and do as little for it as possible. Asking an already busy person to add on countless hours of research, visits, training, etc. is just not worth it when they don’t see any benefit to it. Well, here’s the benefit: I came into the business with no experience at the worst possible time to get into oil and gas. 2015 started a horrible three-year period where projects just shriveled up. I survived four rounds of layoffs because I was able to make our company money. Not only did I survive, I got raises, bonuses, and more responsibility because I had a better comprehension of the exact nature of the components that we were providing. And no drawing or YouTube video replaces the value of actually touching what it is that is being made. You’re not buying a part. If something goes wrong, things explode and people die. Forget the economic benefit. Touch what you buy because people’s lives are depending on it. If that isn’t a motivation for change, I don’t know what is.

If you don’t know really know what you’re about to buy, conversations with clients and suppliers gets very frustrating.

“There are things we do out of habit that are not always good for us. Break the bad habits and develop some good ones.” – David Kirsch

Exhilarating to some and terrifying to most, change is one of the greatest challenges that we must face. The business world is an environment where the conflict related to change occurs on a daily basis. A conservative outlook on things is to protect the current ways of operating (BTTWADI, anyone?) or revert back to traditional methods. Heavily conservative, the Oil & Gas industry and the Engineering, Procurement, and Construction (EPC) firms that support them, are steeped in habits that restrict their efficiency and hinder not only their timelines, but also their profit margins. I have personally experienced being part of the destruction of a once mighty firm because change was not embraced.

Silos are a popular business management concept. While the goal is to remove as many barriers as we can, for an EPC firm, that is almost impossible. The very acronym suggests that there will always be compartmentalization that is unavoidable. Here is a cynical and tragically relatable cartoon that demonstrates the dangers of poor communication and collaboration:

Silos, anyone?

From Business Development to Engineering to Construction, all divisions of a company will gleefully point fingers at the other departments for the difficulties, cost overruns, and customer complaints that arise on major projects. The company I worked for had over 55,000 employees and a huge number were black-belt certified in finger-pointing. This is a human condition, not a unique feature to that company. After all, that organization gave someone with no experience a chance at a critically important position, for which I will always be eternally grateful! One of the advantages that I had is that my role actually had components of every single department, which gave me enormous insight to the challenges and perspectives each group had. I managed a group called Aftermarket Products, but the nickname for it was Spare Parts. Basically, any project in the past that we ever worked on, when something broke or needed to be replaced or upgraded, I was the person that was contacted. I believe it was, by far, the absolute coolest job in the entire company. I was responsible for receiving the inquiry, deciding if we were going to quote it, consulted with engineering about the best option, priced it out, sold it, project managed the order, bought all the components, logistically got it to the location, and then billed for it. Our department was essentially a mini-EPC firm in a giant one. If you think Spare Parts is replacing some nuts and bolts, you are very sorely mistaken (although we actually did that too, for an unbelievable profit!). Spare Parts consisted of replacing Claus Combustors® on Sulphur Recovery Units, Sulfseps®, tubesheet insulation boards, transformers for desalters, catalyst tubes and outlet headers for steam methane reformers, slag grinders on gasification units, transfer lines, pumps and motors, and well, you get the idea. Basically we touched the entire refining process from the very beginning steps of storage (double deck floating roof tanks) all the way to petcoke gasification. What all this exposure taught me was that particularly in Procurement, people had no clue what they were buying.

It’s not as simple as just buying stuff…

Procurement is a fascinating discipline. A finished project, whether it is a new refinery, a nuclear power plant, or an aircraft carrier, consists of hundreds of thousands or millions of smaller components, all of which had to be purchased. At an EPC firm, procurement is separated into categories, because the complexities of the parts are just too overwhelming for one person to handle them all. Even one particular category, let’s say valves, opens up an entire universe that is staggering in variety. Ball valves, globe valves, butterfly valves, knife gate valves, pressure release valves, pig valves, the list goes on and on. And every single one of them comes in different sizes, different seat materials, different connections, different actuators. Go into a procurement office at Valero or KP and ask someone how much a 6″ ball valve weighs. I bet you that they won’t know. And that is a big problem.

Part 2 completes this discussion!