1.9 End-of-Chapter Case: An Attempt To Bring PSM Techniques To Velocity Oil And

Question

1.9 End-of-Chapter Case: An Attempt To Bring PSM Techniques To Velocity Oil And Gas Kyle Ritter, Manager of the Strategic Sourcing Group (SSG) at Velocity Oil & Gas Company, sat at his desk ever SSG at Velocity. A year ago, he had left a promising career as a purchasing manager with a and ran through his briefing points for his meeting later in the day. Kyle was the manager of the first- consumer-packaged goods firm back in the mid-west for a complete change of scenery, geographically (Denver) and professionally (oil and gas exploration and production, or "E&P"). Velocity drilled and operated wells in the "DJ Basin" and the Bakken Formation, oil and gas-rich regions in Colorado and North Dakota. Kyle had been approached by a senior VP at Velocity about starting a professionalized PSM function for Velocity. Like many E&P companies, Velocity did not have a sophisticated PSM operation. In fact, they didn't have one at all. The engineers and project managers who designed the wells and ran day-to-day operations made all the key PSM decisions: which suppliers to do busines with, negotations of price and delivery terms, contractual issues, etc. Kyle was brought on board to change that, to bring the advantages of a more sophisticated and strategic PSM approach to an industry badly in need of it. Unfortunately, Kyle's "honeymoon" lasted about a week. Johnny Grumpman, one of the most senior engineers, had approached him in the cafeteria and said "Welcome aboard. I don't even know why you're here." When Kyle had tried to clarify what he meant a few days later, Johnny seemed dismissive. Look, I know you mean well, but this isn't like making laundry detergent or breakfast cereal. We move fast, we all talk in 'engineering language', and we've already got strong relationships with the important suppliers we want to use. I can pick the suppliers better than somebody with a business background could, so why even have you here?" While most of the engineers weren't quite as blunt as Johnny, his sentiments were shared by a majority of them. In the year that followed, Kyle built his team and embraced the steep learning curve in educating himself about the oil and gas industry and the supplier mackets serving it. He attended meetings that felt like they were being conducted in another language ("Engineese" as one co-worker called it) and utilized his communication skills to make inroads with his engineering and operations internal customers. But he still felt that he was being held at arms-length. The engineers were happy enough to hand him work they felt "wasted their time" and wasn't as important to them, but were very reluctant to let his team have significant input on supplier selection or negotiation on large and critical needs. Even after his team saved over $1M annually by negotiating a contract for well-site MRO (machinery, repair and operations) supplies, he was still relegated to "second class status" in his mind. It was quite frustrating. In other industries, PSM was recognized for its strategic value, why not here? Kyle was convinced that the meeting today would finally move things forward and show the value that a the supplier for well-site fracking services, a very large and important buy. Kyle's team had done professionalized PSM function could bring to Velocity. The team would be making a final selection on extensive research, and had discovered the following: Velocity had used Ferocious Fracking, a smaller outfit with whom many of the senior engineers had close personal relationships, for most of their wells in the last fifteen years. Occasionally, due to the bid s being too far apart, or the difficulty of getting the right people in place (especially in North Dakota), Behemoth Oil Field Services (BOFS), a global leader in such services, had been used. But Behemoth clearly seemed to be the "backup" supplier in the mind of Velocity. As many as ten companies had tried to bid on the current well project, and at least five of them seemed to meet the

Explanation / Answer

(1) Kyle will recieved with concerns related to charge as the engineers have apprehensions working with new suppliers with whom they do not have experience of price negotiations or delivery assurance. His data driven approach can make him more likely to be successful in the Long-Run, if he can prove how important and helpful PSM function can be in terms of letter cost and delivery terms.

(2) Velocity has taken long to try personalize its PSM function as it may not have faced any competition or cost constraints. The delivery with the ussual suppliers were happening on time and the engineers concerned shared a rapport with the supplier. The product in E&P industry are technical and the deals are large buys. Engineers may find any change in the process risky and uncertain. But with increasing operationsand competition, it must be required the PSM Function to coordinate, purchase, negotiation and delivery.

(3) Real barriers to reaping the value GPSM at velocity is the uncertainity and risk associated with working with now suppliers and the fears of engineers of losing control on the process which might affect their performance and busines. As the projects are long term and require considerable investment, engineers find less hassle in working with fimiliar suppliers.

(4). Kyle can better demonstrate the value of PSM at to skeptical internal customers by advocating the various benefits of PSM to kem and giving examples of the companies where PSM has been implemented and delivered results by improving business. To reduce the challenges in implementing PSM. He can employ a mixed approach and gradually bring a change in the system by taking the internal customers in confidence and building relationships with the suppliers.

Note: Typed the answer, but if you feel any query, shall answer separately.

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