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Source: Business-improvement.eu
WorldClass: Value adding, smooth & perfect organization
Shell optimizes its supply chains‘We want a Shell Way of management’
Shell improves their inbound supply chains

By Dr Jaap van Ede, editor-in-chief business-improvement.eu, 20-09-2021
Published earlier in a slightly different form in Supply Chain Movement [ Dutch version ]

Factories of Shell have fluctuating demand for labour and materials. However, until now there was no integral way to plan, source and deliver the right mix, just-in-time. There was a lot of silo-like behaviour; planners, buyers and logistic managers did not work together.

About 2 years ago, this started to change. As a result, the supply chains towards the assets of Shell become increasingly more reliable and efficient.

We have two kinds of supply chains, explains Sanchay Roy, supply chain transformation lead at Shell. ‘Our primary supply chains handle the transport of hydrocarbons, like crude oil, gas, LNG, and finished products we make out of these commodities. These primary chains connect our plants, or assets as we call them, mutually and with our customers’

‘Our secondary supply chains, also called our non-hydrocarbon supply chains, run towards our assets. They ensure the timely arrival of the right people and materials, for smooth-running operations, maintenance, projects and turn-arounds. Just-in-time arrival of people and materials is very important, since any disruption can cost millions of euros per day.’

Among the, often hired, people are engineers, repairman, contractors and turn around teams. ‘The rmaterials that are required range from simple items, such as filters, to very complex components, such as large valves.’

Sanchay RoySilo-wise
Until recently, each ‘asset’ of Shell managed its own secondary supply chain. Silo-wise, with little alignment with the inbound supply chains of other assets in the same country.

‘Besides this, we had no common management system that described how the supply could be optimized. Unilever and for example Philips, in which I worked for several years, lay far ahead of us regarding this.’

An even better example is Toyota and their famous Toyota Way. ‘It dictates how their factories operate, regardless of the place where these are located. The Toyota Way covers the type of leadership, the learning cycles, and a common language for continuous improvement. We wanted a similar Shell Way.’

Three types of assets
Shell has three types of assets. First, upstream assets like drilling platforms, to find and extract oil and gas. The second category concerns integrated gas assets, and new energy assets related to sustainable energy production, such as wind mill parks and hydrogen gas production facilities.

The third and final category are refineries and chemical plants, that produce end products. The refineries in Pernis and Moerdijk in The Netherlands are for example part of this group.

‘Historically, Shell grew by way of acquisitions and joint-ventures. This is one explanation that most assets used to operate in a rather silo-like way’, explains Roy.

The Bonga oil platform of Shell in the Gulf of Guinea near Nigeria
The Bonga oil platform of Shell in the Gulf of Guinea near Nigeria

Bad behavior

The fact that oil prices have been high for a long time, is another factor that contributed to a suboptimal supply chain approach. A luxury situation provoked ‘bad behaviour’ . For example, assets could buy a lot of materials as safety stock, regardless of the costs.

All these extra materials turned out to be no insurance for smooth operation. ‘When we analysed the situation, in two-third of the cases the right people and/or materials still were not available when needed. So the safety stocks at for example an oil drilling platform were not only too high, but also encompassed the wrong items.’

Besides this, large safety stock brings two disadvantages. ‘First, an item that you urgently need, may be hard to find. Second, the inventory turnover rate sometimes was seven to nine years, or even more. As a result some materials like for example valves turned out to be unusable when needed, because these had been stored improperly or were simply too old. In that case, a new item still had to be ordered in a rush, at high cost.’

The consequences can be considerable. ‘It can take for example 12 to 18 months to get a new valve from a supplier in Germany to an oil platform in Nigeria.’

This is not due to the transportation time, since with a plane and then a helicopter one week would be enough. ‘The problem is that components are often specially designed for us. If we need a new item, sometimes redesigning is needed. Then the item must be produced and assembled, with components that must be delivered by sub-suppliers. Next, a lot of other steps follow, like customs clearance. Especially between steps extra delays are possible, because of unclarities or missing information.’

To summarize, each asset of Shell not only managed its own supply chain, which made it impossible to exploit synergies. In addition, the inbound supply chains where (1) far too expensive due to high satety stocks, and (2) the supply of the materials did not ensure smooth operation!

No feedback loop
This was caused by a silo-like organization structure. Both externally – assets did not work together – and internally. ‘Within the assets, the three consecutive processes plan, source and deliver were executed by different teams. As a consequence, there was no feedback-loop: is the delivery as planned and if not, why?

This led among others to the aforementioned situation where an extra valve was ordered as ‘insurance” against a long lead time, regardless if this valve was really needed. Preventive maintenance was included in the planning, but also this was not an integral part of supply chain management. The same could be said about procurement.’

De supply chain management phases plan, source en deliver were executed by separated teamsDe supply chain management phases plan, source en deliver were executed by separated teams. Today this is an integrated process, which includes a feedback-loop.

Besides this lack of internal coordination of the SCM-phases, and the lack of external collaboration with other assets, there was a third form of silo-like behaviour.

An asset like an oil platform needs materials and people for drilling, operation, maintenance and for turnarounds. Needs associated with these activities were planned separately. ‘As a result for example two helicopters could fly towards an oil platform within a short period, with e.g. materials and a team for production, and with materials and a team for maintenance.’

Full truck loads
Regarding transportation on land there were similar inefficiencies.

Like for example truck manufacturer Scania, known for their Lean supply network, Shell strives for just-in-time delivery from their ditribution centres, with full truck loads . For Shell this is extra complicated because this company is active in countries with relatively poor infrastructure, like Nigeria.

Integral approach
To reduce the three forms of silo-like behaviour, there was definitely a need for a more integral approach to supply chain management. A new approach, in which all assets in a country would work together, and in which the supply for materials and people is optimized overall. 

This approach, for which Sanchay Roy is responsible for Europe, Middle-East and Africa (EMEA), becomes part of Shell’s new and standardized asset management system worldwide. This is the afore mentioned Shell Way.

By 2025, there should be one standardized, integral and digitalized approach to supply chain management around the globe. ‘The North Star is to make every day excellent for our frontline workers’, says Roy. Excellent means that there are zero supply-chain related production losses, zero safety incidents and that there is zero waste, like unnecessary stocks.

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‘‘Nigeria is important, since Shell has a lot of assets there. I will use our logistics in this country as an example. However, we are transforming supply chain management in countries like the UK and the Netherlands in the same way.’

Despite that there is much safety stock, the goal of zero supply-chain related production losses is far away. So, the high stock levels do not really help. ‘There are still a lot of disturbances, some leading to slower production. Other disturbances are solved by expensive rush transports, to bring needed materials in.’

The transformation started with visibility. ‘Or, as we call it, readiness: is the supply chain able to deliver-as-promised? To address this, we started to make an integrated planning for each asset for 3 to 5 years ahead. This planning encompasses all materials and people needed for drilling activities, projects, maintenance and turn arounds. A planning team gathers every week, to check if there were any problems with deliveries. If so, they search for the root cause of this.’

Not all materials are equally important.

‘For each asset, we make an end-to-end value stream map to see which engineering systems and related spare parts are needed. For an oil platform this can be thousands of parts. Next, it is checked which parts are critical for operation and/or could cause the highest deferment in production. This turned out to be 540 items for one specific oil platform, divided across six engineering systems. For this category of critical items, 100% availability should be guaranteed.’

To make this possible a Lean supply system with supermarkets as sources was set up. A larger supermarket ashore, and smaller supermarkets offshore. ‘When a part is taken from one of the mini-supermarkets offshore, a Kanban signal for replenishment is send to the large supermarket. Replenishment of the mini-supermarkets is done by a boat that calls every three days at the oil platforms. It is a milk-run system.’

The large supermarket ashore sends grouped replenishment orders to the suppliers.

The results are astonishing. ‘At the start, critical materials were delivered on-time, only in about 30% of the cases. As a result the production rate sometimes had to be slowed down, and it meant dissatisfaction and stress. Now, critical materials are available 99% on time.’

Value Stream Mapping at Shell in NigeriaValue Stream Mapping at Shell in Nigeria

Convert to dollars
Once the goal of (almost) zero supply-related production loss was achieved, it was time for the next step: to make the supply chain more efficient. Or, in other words: to reduce wasteful activities!

‘Converting opportunities or data into dollars you could call this. For example, we investigated which chemicals and fuels can be grouped and bought together. We did something similar regarding sea transportation. There were hundreds of ships in operation, of which most are contracted. Thanks to the new integrated planning, leading to lesser and more combined transport, the number of ships could be reduced by almost half. We call these kinds of opportunities value gaps. In the first improvement wave, closing these gaps should result in savings of tens of million dollars.’

Digital go-see
To make all decisions data-driven, first of all the activities in the supply chain must be made visible. ‘There must be one version of the truth, accessable to everyone involved. We call this “digital go-see”.’

‘When for example a spare part does not arrive on time, you can digitally check if this aberration is already dealt with. In nine out of ten of the cases no further action is needed, since every effort is already done to correct the problem. In the past this could not be seen, and led to an unnecessary chain of e-mails and meetings.’

The software Shell uses is Power BI of Microsoft. ‘This tool can be coupled easily to almost any database. A lot of data was already available in our ERP-system SAP, but it required a lot of searching for access. The new approach, digital go-see with Power BI, is much easier and faster.’

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Thanks to the combination of the integrated supply chain planning and digital dashboards, Shell Nigeria could respond much faster to the Covid-crisis than otherwise would have been possible. ‘At the start of the crisis, we began to review all our key categories of items. Light blue means secured supply for a period of 30 days, brown means secured for a period of 60 days, and dark blue means a secured supply for more than 90 days. We aim for the availability of all critical materials and people to become dark-blue.’

‘This does not mean that we increase our inventory or human capacity. Instead, we made mitigation plans for worst-case scenarios, like a new wave of Covid, supplier bankruptcy, devaluation of Naira against the Dollar, and/or a prolonged low oil price. Many potential scenarios became true, but our preparedness ensured continuity of our operations.’

Oil price
The Covid-crisis for example led to a rapid fall of the oil price.

‘This resulted in pressure on our operating costs. However, because of our clear view on the supply chain, we could now immediately see who our key suppliers are. We talked openly with them and searched for win-win opportunities, in which we would both operate with a lower margin. Prior to this, our category experts conducted a detailed analysis to ensure there was opportunity for value improvement.’

‘In the past period, the biggest challenge was to create the supply chain resilience needed to cope with the Corona-crisis, and the temporarily low oil price related with it’, Roy concludes. ’Now, many of our new supply chain solutions have an additional focus: sustainablility.’

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