A Structured Approach to Supplier Performance Measurement

The start of the new millennium will see companies in the oil and gas industry faced with a dual challenge. Not only will they have to undertake exploration in more demanding terrain and environments, but they also face far more competition in what they previously regarded as their traditional marketplace. The goal of meeting both shareholder and customer needs, while simultaneously attempting to increase market share by becoming more competitive, will be paramount if this success is to be achieved. While a number of strategies have been developed over the last decade in an attempt to achieve and balance these financial goals, the control and reduction of costs play a significant part in all such ‘cost effective’ programs. Past approaches have targeted the organisational structure, internal processes and strategic advantage through acquisitions, mergers and downsizing. However, any gains realised by such programs must be continuously improved upon by implementing innovative approaches to future reductions and controlling costs. Some companies have shifted the focus from internal cost scrutiny to influencing and ultimately controlling external factors of cost. The supply chain offers a tremendous opportunity to drive out costs, one such approach being to partner with the best suppliers of key components to shorten delivery times while minimizing life cycle costs. It is therefore paramount that one distinguishes between those who are simply suppliers and that smaller group who are the best suppliers, all the while fostering a win-win relationship by sharing growth and profitability. This paper will introduce the concepts of the Supplier Performance Measurement Process (SPMP), which NOVA / TransCanada introduced in late 1997 to measure and manage its suppliers’ performance in the provision of a few strategically critical commodities. To provide context for this paper two such commodities, high pressure line pipe and high integrity pipe coatings are addressed in some detail. The application of the process to these commodities alone yielded a capital cost reduction of 6%. The paper explains in practical terms, the steps involved in the implementation of SPMP, and provides a simple process for eliciting feedback on the efficacy of the procurement process.