Three Steps To Reducing Excess Inventory in Oil & Gas

Two concurrent trends in the oil and gas industry highlight the need for comprehensive service parts management. The first is a move from focusing on capital asset sales to an increased emphasis on after-sale, uptime-guarantee contracts. The second is a continued struggle with scarcity of new oil and gas projects, pushing manufacturers and OEMs to examine their revenue and margin drivers and drainers. The oil and gas industry’s service parts stockpiles are liabilities, hamstringing outcome-focused contract possibilities, and tying up precious capital and draining margins.

Oil and gas manufacturers’ capital, even more important today, is inextricably tied to service parts. From shipping parts across geographies, to overstocking parts that become obsolete in time, or carrying overstock that is costly to maintain and warehouse. The oil and gas industry is especially susceptible to carrying excess inventory because:

• Oil and gas service and parts are highly decentralized, managing geographies and product lines separately, with no “theater” view of all equipment and parts across locations.
• This decentralized execution is localized to where oil and gas production is, with regionally-based parts forecasting that doesn’t take into account nearby and global locations.
• Difficulty with, or lack of initial provisioning forecasts, which leads to overestimation or underestimation of parts needed for a project.
• A tendency to overbuy parts in order to maintain a service-level agreement or an on-shelf availability rate rather than focus on asset availability.
• The oil and gas industry is historically risk-averse when the price of oil is under $100 per barrel, and overstocks at the piece-level instead of focusing on system and sub-system levels.

There are several risks associated with excess, location-focused service part inventories. When component availability is emphasized over capital asset uptime, it almost always comes at the expense of equipment uptime and, by proxy, industrial operations.

Carrying excess service parts also ties up capital, making it unavailable for new projects and research and development. So, what strategy and process improvements should the oil and gas industry pursue to free itself from excess inventories and set itself up for profitability regardless of the fluctuating price of oil?

Step 1: Stop decentralized planning

Parts planning by location and product, without a theater-level view of the entire equipment and parts ecosystem ignores how locations operate together, as well as the inherent part dependencies in capital assets across operations. Service parts planners should create availability-focused stocking strategies through multi-echelon inventory optimization. This technique results in stocking recommendations that are based on: 

• What you're willing to spend on spare parts.
• The effective lead times across multiple locations.
• Demand for certain parts.
• How those parts impact an asset's overall availability.

The technique has enabled organizations to actually reduce their inventories by up to 30%.

Step 2: Stock uptime-critical parts

Currently, oil and gas companies focus on SLAs and fill-rates rather than asset uptime. This piece-level management at the expense of system-critical parts with long lead times might maintain a high on-shelf availability when the end-user expects maximum asset availability. In other words, having nuts and bolts available 95% of the time is far less important than having 100% availability of a piston on a blowout preventer.

Step 3: Invest in a comprehensive parts planning solution

When the price of oil is low, margins are much tighter, and inventory costs become much more of a pain point. At the same time, overbuying service parts inventory when the price of oil is high hampers agility, and ultimately fails to meet objectives if the right parts are not in the right locations at the right times.

Spreadsheets are simply not built to account for part dependencies, location dependencies, initial part provisioning, causal forecasting, and other industry factors that significantly affect uptime (and profits) in oil and gas.

With a change to service planning strategy, oil and gas industry players can offer profitable uptime-guarantee contracts, free up capital, and save the costs of maintaining, housing, and writing off excess inventory. A robust strategy now will safeguard margins in down times, and improve agility in an industry boon.

To learn more about how to create a part stocking strategy, you can watch a recording of our Parts Planning Webinar below: