What is Supply Chain Management?
In recent years supply chain management has becom widely adopted-and widely misunderstood- as a managerial process. Many companies have realised that 60 – 80 % of their turnover is accounted for by money spent outside their own organisation. Managed astutely that spend can providfe tremendous leverage on their profitability. Simple aritmatic shows that profit can be increase by 10% for a 1% improvement in value secured through enhanced purchasing effectiveness.
In the offshore oil and gas supplies industries the pressure of low oil prices has turned the industry’s attension to this technique as a route to producing oil from the UK sector at a cost level that can maintain the attractiveness of the sector to the oil operators whilst maintaining margind of profitability for the contranctors and supplies.
Can Supply Chains be Developed?
Supply chain development has taken on different meanings in different industries. In the context of the offshore supplies industry it is taken to mean the development of increasingly close relationships between costumers and suppliers and encompasses appproaches including:
- Development of long term relationships with suppliers
- Greater and earlier involvement of suppliers in product technology
- Development of mutual contractual and competence trust
- Supplier associations
- Benchmarking
- Common supplier assesment schemes
A number of other industries – aerospace, automotive and retail for example, have achieved substantial savings and improved efficiency by developing improved supply relationships.
Research Already Performed
In 1997 the DTI commissioned a study on the impact of changging supply chain relationships in the offshore oil and gas supplies industries particularly on SMEs. The study include a review of practice in other industries. At the time of the study Supply Chain Management was seen as a set of management processes which could usefully help the industry overcome some of the challanges it then faced. Now that oil prices have dropped by $6/barrel or more what was simply desirable has now become an imperative. Margins in the development of the UK’s oil and gas reserves have become eroded. Supply Chain Management is seen as a technique which can make a considerable constribution to the economics of offshore development, without which the industry could move into decline.
It is therefore timely to issue a series of informative publications highlighting the potential benefits of supply chain management practice. In the auto industry for example, ten years ago vehicle manufacturers were resourcing components outside the UK because of a lack confidence in the competence of UK based suppliers. Now the reverse is true and the UK is the most effecient location for manufacturers in the EU.
Clearly, car manufacturing is a volume industry, whereas the offshore industry operates on a made to order basis. However, the underlying principles of collaboration, trust, transparency and benchmarking are applicable to this industry as much as they are to others.
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Highlight in the Oil and Gas Industry
The review of practice in this and other industries was prepared in the course of the 1997 study and provides a useful insight to resources available to help highlight the benefits of managing the supply chain to secure greater value from outside expenditure.
Initially, a background to supply chain management is presented which – while initially appearing very theoretical – provides a good introduction to this process.
An overview of the supply situation in the oil and gas industry is then given, with specific examples of some of the benefit of initiatives such as alliancing, CRINE and experience in other countries outside the UK. Research also indicated the not all experiences of supply chain initiatives in the early 1990’s have been positive – particularly for small suppliers. A set of 23 hypotheses were tested during IEP’s 1997 study using face to face and telephone interviews, and a postal survey of nearly 2.000 oil and gas SMEs (small and medium enterprises) – with an outstanding 35% respons rate. The conclution of the interviews and survey are presented in the study’s Summary Report document. These conclusions flagged up a number of key issues requiring action, as follows:
- Supply Chain Management
- Collaborative Working
- Marketing Capabilities Within Suppliers
- Indetification of Future Technology Requirements
- Factor Affecting Innovation (e.g. funding)
- Industry Image and Staff
- Industry Support Structures
- Awareness of Government Initiatives and assintance
Research Highlights in Other Industries
Research was also carried out in the 1997 study into four other industries – automotive, food, construction and defence. This research provide a number of pointers which were also explored in the oil and gas industry survey described above, and showed that these industries are addressing issues which are also faced by the oil and gas industry. They are taking steps to:
- Increase competitiveness and flexibility (e.g. through synchronised production systems), enhance innovation and reduce the time required for new product introductions in the automotive industry;
- Provide continuous offer of new product concepts in the food industry;
- Cope with increasing complexity of design and reduce costs in the construction industry;
- Reduce the cost of supply chain operations and increse flexibility of response (including provision of spares and infrequent call down) in the defence industry.
How to Use This Review
The reader is encouraged to read this review as a foundation and background to the whole process of supply chain management (SCM) in the oil and gas industry. Having gained this background, a set of business planning tools which can be used by operators, integrated service contractors, and suppliers (large and small) are provided, together with a directory of resources which will assist in supply chain management and optimisation.
BACKGROUND TO SUPPLY CHAIN MANAGEMENT
The Changing Structure of Industrial Organisations
Over recent years, the phenomenon of the supply chain has generated enormous academic and popular interest. The roots of this preoccupation may be traced to the early 1980s and an increasingly lack-lustre performance from many of the West’s blue chip corporations. Suddenly the inefficencies of the very corporations that had both spearheaded and epitomised post-war capitalist development were exposed: corporations such as Ford, General Motors and IBM were found seriously wanting as they were comprehensively out-manoeuvred by an emerging group of Asian rivals.
The surrounding economic malaise across westen Europe and North America was bad enough. However what was particularly alarming for corporations and governments alike was that the ground rules of industrial organisation appeared to be shifting. Specially, the underlying premise that vertically integrated corporations constituded the elemental unit of dynamic and prosperous economies was shown to be erroneous. This fallacity had important implications. It is therefore important to understand its origin and arguably this may be traced to two largely misunderstood relationships
Changes in the Social Division of Labour
The first concern the link between the production system and the social division of labour which may be defined as the allocation of people to different firms or units of production. From the industrial revolution until the 1960s, there was an apparently inexorable growth in the size of lead firms. This trend was seen across many parameters: market share, levels of employment, physical assets, and so on. For this reason, lead firms were increasingly equated with the production system. In pratical terms, this was largely correct. However it was conceptually flawed. Considerable importance was therefore focused on large firms.
Changes in the Technical Division of Labour
But herein lies the second misconception. Firms – whether large or small – are effectively only vessels for different elements of the technical division of labour and it is these, rather than firms, that define the production process; firms are merely organising units. A vertically integrated giant corporation that is apparently coincident with the production system – (A) in figure 1 – actually encompasses a number of discrete tasks or units in the technical division of labour. The underlying fallacy was that these tasks would necessarily be completed within a single enterprise.
Figure 1: The Changing Premises of Industrial Organisasion
In fact, tasks can potentially be distributed across the social division of labour in many different permutations; the vertically integrated giant corporation was just one of the myriad possibilities. Nevertheless, until the mid-1980s, it increasingly dominated every facet of the production process. While in one sense entirely arbitrary, the vertically integrated corporation provide a wholly appropriate vessel for production at a certain stage in the development of the technical division of labour, it did for example create the scope for substantial economies of scale.
Such an arrangement was not however without its drowbacks. Specifically, sizeable cost surrounded the coordination of different tasks. These derived from many sources: inventories, unavoidable down time, the management of a diverse skills base, and so on. Particularly during the 1970s, the balance between the cost and benefits of production within the context of the giant corporation shifted.
Increasing Complexity of Production Processes
Underlying this transformation were important developments within the technical division of labour. Simply put, the number of identifiable tasks within many production processes increased exponentially. Products became ever more complex and, for the most part, they came to depend upon an increasing range of technologies and competencies. For instance, in constucting motor vehicles, there is now a requirement to draw heavily upon the computer electronics industry and those with the wherewithal to design state-of-the-art air conditioning systems. Add to this the new disciplined of ergonomics, high level safety and digitalised sound, and the growing complexity of the production process surrounding the motor car becomes apparent. This rapid increase in the number of tasks is mirrored across the majority of product lines and it amounts to a significant elaboration of the technical division of labour.
For the vertically integrated corporations however, this process created enormous challanges. For one thing, the range of expertise required became vast such that is extended far beyond anything that Henry Ford could have envisaged in the context of manufacturing motor cars. Concomitantly, the fixed costs associated with integrated production processes have risen to prohibitive levels. For these reasons alone, the viability of the vertically integrated corporation was called into question.
The Changing Nature of Demand
However, to this must be added a further set of processes relating to the changing nature of demand. Consumers have become increasingly discriminating and Henry Ford’s infamous adage ‘you can have any colour as long as it’s black’ has certainly become our-moded. The vertically integrated corporation was manifestly ill-equipped to respond flexibly and efficiently to an emerging corpus of highly demanding consumers. With an elaborate technical division of labour, the cost of co-ordination were in any case high. Compounding this with a need for flexibility and responsiveness revealed further inherent weakness within this organisational form.
The Emergence of Novel Organisational Forms
For all of these reasons, by early 1980s, many structural flaws within thefabric of the giant corporation were being exposed. In addition, the implicit rules underpinning the post-war economic order were both violated and overturned. And conceptually, the fallacy of conflating the production system – the technical division of labour and the social division of labour – wa revealed.
It is in this context that the full and radical implications of novel organisational forms must be understood. Suddenly loose groupings of – mostly Asian – firms comprehensively out – performed the corporations that had spearheaded the post – war economic revival. And the reason why Japanese ‘Keiretsu’ groupings and the like were able to achieve this feat lay less in their technologies or specific workforce skills than in the apparently mundane question of industrial organisation. In short, in the context of a far more elaborate technical division of labour, the Asia industrial groupings were able to succeed because the technical division of labour, the Asian industrial groupings were able to succed because the technical and social division of labour, the Asian industrial groupings were able to succeed because the technical and social division of labour without the gross inefficiencies that would have surroundded full vertical integration. Moreover, because it was able to use offectively the full range of potential inputs, end products tended to be highly innovative. On the basis of both cost and new product development (NPD), the new production system therefore out-performed the established order.
A New Focus on the Supply Chain
The giant corporations have not however been slow to respond. Over the last decade, many have sought to down-size, to focus in their core competencies and then to out-source all other element of the production process. In so doing they have reduced their overhead costs. They have also shed much of the risk surrounding NPD while retaining – if not enhaching – their ability to innovative. By drawing on specialist expertise from within the supply chain, the parameters for innovation have broadened considerably: the immense possibilities that surround hybrid technologies and processes have become clear. In addition, the duration of product development processes has been cut: lead firms and their supply chains have learned both to respond to provoke rapid chages in market conditions.
Radical Restructuring
The restructuring that has occured has been truly radica. A part from anything else, it has comelled firms to engage proactively in both the creation and management of vialbe supply chains. This in itself has engendered a whole new set of challanges: it is wrong to assume either that suitable supply chain partners simply exist or that managing relationships so as to effect cost savings and innovation is strightforward. Supply chain relations may be managed in innumerable ways depending on the nature of the production process and the underlying competitive position:thus the form and nature of buyer-supplier relationships in the food industry differ subtantially from those in defence.
Nevertheless the rationale for developing such an organosational matrix invariably reflects the developments in the technical division of labour described above.
In terms of oechestrating supply chains, many developments have been premised on advances within the arena of information technology: the internet, electronic data interchange (EDI), ISDN network, and so on have all facilitated the spatial and organisational separation of different elements of the production system. While it is important not to over-state the role of IT within the restructuring process, advances in this domain have certainly rendered novel organisational possibilities feasible.
Changing Roles of Large Corporations
The ascendancy of the supply chain as the primary organisational device has arguably been the major manifestation of economic restructuring in the late twentieth century. That said, it is important to recognise that for the most part, giant corporations are still extrmely buoyant. However the nature of IBM, Ford, General Motors and so on, has changed. No longer are they integrated production systems; instead they effectively provide the control centre for organisationally fragmented filiѐres. Their direct employment levels and the extent of their property assets have both declined, but their market presence has expanded and in this sense, the majority have become truly global players. Importantly therefore, while their absolute power remains intact, the manifestations of it are quite different.
Conclusions
In examining developments within the supply chain, there are then a whole gamut of considerations that must be taken into account. The literature that exists in this field is vast: elements within it variously address structural issues, the implications of power relations, the nature of the innovation process, the critical but highly differentiated character of management – or governance – along the supply chain, the implications of fragmented production system for regulatory processes, and so on. This paper proceeds by considering the supply chain issues pertaining to a number of industries (oil and gas, automobiles, construction, defence and food). These industries vary across many criteria: levels of technological sophistication, the extent to which production is continuous or project-based, levels of market concentration, and degrees of internationalisation.
OIL AND GAS INDUSTRY
Bacground
The UK offshore oil and gas industry represents an annual £9bn market for contractors and suppliers, an estimated 75% of which is currently spent with UK companies. In addition, the worldwide oil, gas and petrochemicals industry is estimated to spend around £200bn annually on goods and services. There are clearly major export opportunities to be exploited. The UK offshore oil and gas industry also employs some 250.000 people (Pacec/Cogent Strategies, 1998) throughout the whole supply chain – making it highly important for the health of the UK economy. Hence, it is essential for the Government and Government funded bodies to ensure that the industry continues to be profitable and to facilitate any changes necessary, to enlarge the supplier base, and to ensure that operators do not abandon activity in the North Sea. In the face of reduction of activity is a real possibility unless there is a constant stream of innovative ideas and technologies feeding through from indigenous supply firms, particularly those in the small to mendium-sized (SME) bracket, to enable continued cost reductions.
This literature survey for the oil and gas industry, which is underpinned by preliminary discussions with around 20 important industry figures, explored ways in which SME supply relationships can be improved, and culminated in a set of possible support initiatives and notional hypotheses (see Figure 2), which were then tested and analysed (conclusions are presented in the summary report ‘Improving SME Supply Relationships in the UK Oil and Gas Industry’). Some of the comments quoted here are merely opinions expressed by individuals, whereas othershave foundation in quantitves research. Where applicable, this distinction is noted in the document. For clarity, the words ‘alliancing’ and ‘partnering’ are used interchangeably.
The Changing Supply Situation and the Impact on Innovation
In the late 1980s it became apparent that continued cost reductions were needed to enable operators to develop marginal field or extend the life of existing North Sea fields. The term ‘Win 90s’ was coined to describe a changed method of working which it was anticipated would reap great benefits in lower development costs. Around the early 90s there are a number of articles written describing this concept in glowing term: ‘Win 90s in Practice Implementation and Result ’93’ suggest that great improvement in productivity, quality and cost reduction had already been achieved.
Lean Supply
Wind 90s is essentially what we know today as ‘lean supply’ i.e. operators moving to closer relationships with fewer or single main contractor in order to exploit synergies between the two companies. Synergies are describes as those functions which are duplicated in each of the organisations and would benefit from either being combined or being carried out by one of the organisations only (A New Managerial Approach of Integrated Services and Outsourcing Non-Core Activities ’94). It was impossible for operators to form this kind of relationship, which should be based on a high level of trust and openness, with more than one or two companies, which meant that main contractors began to form the total interface between operators and the remainder of the supply chain, sourcing the whole range of integrated services on the operators’ behalf.
It was considered that integrated service companies would than taken responsibility for the lower tier supply chain, and the arorementioned article declares the ‘a supply menegement profesional is likely to prefer to work in a world class supply chain management company, not an oil company’. In addition, operators in the main drastically downsized their technical department, reducing their ability to undertake research and development and their capability to evaluate new technologies. Again, this function was largely passed onto the main contractor.
CRINE
It Win 90s baton was taken up by the CRINE initiative, or ‘cost reduction initiative for the new era’, which again advocated closer relationships between operators and main contractors termed as ‘alliancing’ or ‘partnering’. The aims were the same, to work togather at an early stage of a project to find ways of reducing costs, either by smarter methods of working or via the introduction of innovative technologies. Recent quantitive research by Richard Green, at Robert Gordon University (RGU), Aberdeen shows that a whole cluster of alliances were formed in 1993 at the time when alliancing is working in practice, and Richard states that ‘views on the practically and benefits of collaboration vary across the industry’.
In particular, concern has been expressed that CRINE implementation has caused problems for small to medium-sized companies (SMEs), who are ‘the largest source of innovation and capable of fastest growth in employment terms’ (Can SMEs survive CRINE?). concerns centre on the apparent isolation now felt by SMEs who feel estranged from the operators (end users), and find it harder to gain acceptance or development founding for new technologies, or new applications. [It should be noted that since this research study was carried out CRINE has been superseded by CRINE Network, which is actively addressing many of the concerns noted above]
Alliancing and CRINE: What Do They Mean for Contractors?
If alliancing/partnering is working well it should be providing a win:win situation for all parties. As Macbeth and Ferguson say collaboration ‘is less about a macho quick hit, …and more about ensuring that the other trasactional partners laso have a change to survive so that, through their survival, the first party is allowed the opportunity also to prosper’. Norman Chambers of Brown & Root, writing in Offshore Magazine in ’93 is also very positive about partnering and advocates its continuation. A feature of alliancing is the ‘incentive’ contract, where both parties agree a target cost at the outsit and share the benefits or risks of meeting or overshooting that target. The contractor then has more to gain by bringing the job in under budget. This was demonstrated on the BP Andrew field where a gain-share contract resulted in an outturn cost £83m less than target (Energy Day 17/04/97). These sort of gains are only possible where there is complete trust and open communications between tha parties.
However, Richard Green suggest that ‘second tier contractors and SMEs are less positive about the impact of collaborative working on their business’ and there is evidence that the larger contractors have also had bad experiences. An article in Energy World 18/7/96 suggest that ‘contractors are doing more work for less reward now that operators have downsized’. There is also hearsay evidence of operators on occasions abusing their relationship by setting unrealistic target costs or poorly defining the project (J Phil Wilbourn, Texaco Dec ’94). On occasions it has been suggested that operators have asked for excessive detail in bids then touted the best ideas to the lowest bidder. Recently, the contractors on BP’s Schiehallion development, who include Coflexip Stena Offshore and Brown & Root, have rejected partnering in favour of traditional contracting. Stories exist of contractors saying ‘we’ll give you a good price if you don’t ask us to enter a partnering relationship’ (Partnering and Alliance, Theory & Practice, Richard Green ’95). The level of disatisfaction with alliancing contract was tested as part of the face to face interviews in this study, this impact upon the future role of alliance in the offshore industry.
The Impact on SMEs, Innovation and Supply Relationships
The relationship between the operator and the main contractors and the new roles and responsibilities take on by the contractors, obviously have major implications for the companies lower down the supply chain, largely represented by SMEs. In addition, uncertainties generated by a changing situation appear to have bred distrust and a reluctance to invest in new technology. The paper ‘Supply relationships in the UK Oil & Gas Industry ’96‘ states that ‘complex relationships and lack of standardisation in procurement in generating confusion for SMEs and making personal relationships disproportionately important in procurement decisions’.
Now that operators have shed engineering capability and largely passed procurement responsibility to main contractors, certain SMEs express concern that their links with operators have been severed or are diminishing (Alistair Punt, IME ’95). This ‘marginalisation’ (David Liddle, ’96) is making it harder for SMEs to get their innovative ideas and technologies considered by the operators. SMEs find it difficult getting into the supply chain early enough to have their innovations considered (Andrew Gray, Oceanscan ’95) and they view alliances as being a ‘closed shop’. A UKOOA (UK Offshore Operators Association) spokesman believes that ‘SMEs got a more sympathetic hearing in the past form operators’, but with cost cutting so high on the agenda and generally smaller engineering department, it is now much harder for SMEs to get operators interested in their ideas.
Marketing Capabilities of SMEs
A view is that the operators now lack the capability to evaluate new technologies. Whereas SMEs could approach engineering departments in operators and find ‘product champions’ (Beecham ’95) they now have to indentify project teams, which may consist of operator and contractor engineers, and who are essentially mobile (Andrew Gray, Oceanscan ’95). This presents a massive marketing challenge for SMEs who, themselves admit they often lack the expertise and resources continually to identify the ‘informed buyer’ and sell their concepts to him. It is also a harder sell; certain innovations may mean actually doing away with some members of the project team, plus there are fewer people to target. Alistair Punt of Ian Murray Engineering, underlined the situation in 1995 at Offshore Europe: “one of the possible major threats to SMEs caused by the inevitable consequences of CRINE is a dramatic reduction in the number of client”.
SMEs are certainly adapting their methods to this new market scenarion but some are struggling. However, Beecham is less certain that links with operators have been broken and suggests “that operators still have a preponderance of direct channels with small firms supplying critical product and those positioned in niche markets”. This points to there being a possible division between highly technical companies and those supplying essentially commodity items; it may well be that only in the latter situation has the link with operators been severed. It has also been suggested that service suppliers are experiencing more difficulties than those supplying products. In some instances operators are still maintaining their own approved supplier list (albeit much rationalised), and contractors have been told they must source from these, giving the contractor no freedom to go to the market. Whether it is felt essential for the future of innovation for SMEs to have direct links with operators, and the extent to which these links have actually been broken, was tested in face to face interviews.
Supplier: Contractor Relationships
The relationship between SMEs and main contractors is universally agreed to be less than good, and in many cases very poor. Richard Green (whose long term research involved face to face interviews with a wide cross-section of industry players) says that relationships are often short term and adversarial. SMEs worry particularly about the predarory nature of contractors and fear being ‘swallowed up’ or having their know-how or employess poached or stolen. The question of IPR at this level is therefore an interesting issue to be explored further. SMEs often find themselved competing against contractors’ sub-divisions which puts them at a grave disadvantage (entrepreneurship in the 1990s University of Aberdeen ’95). Also they ‘don’t bring (their) best technology to the table in an alliance with firms which are competitors in anothet project’ (Supply Relationships in the UK Oil & Gas Industry, University of Aberdeen ’95). Aberdeen University has undertaken research in this area over several years and their conclusions are based on wide industry contanct.
The extent to which contractors are using sub-divisions rather than searching the market and forming productive relationships with suppliers, was tested in the face to face interviews. It has been suggested that this trend is denying operators the benefits of ‘best technologies’. SMEs have themselves sometimes been to blame for poor relationships: ducking product performance guarantees ensures they will not be used again (Beecham ’95). However, contractors have on occasions been heavy handed, abusing confidences, and thereby making SMEs reluctant to reveal their ideas.
Effect on Innovation
All the people spoken to in the study agreed that these various changes in supply methods are having, or may have an adverse effect on innovation. Cost cutting initiatives often embodied in alliancing arrangements, usually transfer increased risks onto the contractor. In the past the operator took these risks in return for the high rewards available – these high rewards are not avialable to the contractor whose margins are being heavily squeezed (Can SMEs survive CRINE? ’95). According to SMEs this makes the contractor highly reluctant to take on any new ideas since innovation means greater risks, and they therefore tend to stick with tried and tested technology. The ‘most certain cost control is avoidable of risk’ (John D’Ancona, Dec ’94). Innovations providing only marginal improvement are very likely not to be adopted, and in some cases SMEs have been told that only innovations that will make a 5% reduction in the bottom line will be considered (Can SMEs survive CRINE? ’95).
Owening to the above factors, contractors are reluctant to provide funding for development and this, coupled with the downsizing of operator’ T&I (Technology and Innovation) departments, has created the impression that there is generally less money available in the industry to carry out T&I activities for the good of the industry. SMEs feel that their margins are being squeezed as a consquence of contractors having to cut project costs and that their own in-house funding of T&I is being curtailed. A further threat to innovation comes directly from CRINE, which suggests standardisation as a means of cutting costs (Can SMEs survive CRINE? ’95). Subsquents face to face interviews sought to establish by what extent T&I funding has been reduced, what problems SMEs have faced in communicating new innovations, and whether there is a split in experience between those SMEs supplying technical products and those supplying commodity products. Conclusions are presented in the summary report.
Experience in Other Countries
A number of contact in both Brazil and Norway were pursued as part of the literature survey, and it became clear that similar concerns to those promting this study were being expressed in both of these countries, although the direction of those concerns was not identical. In Norway a study into “what does Norsok mean to smaller and medium sized companies?” was undertaken by Rogaland Research, Stavanger, funded by the Norwegian Research Council (a govenment body). Norsok is the Norwegian equivalent to CRINE.
Norway
It is apparent that Norway fears some SMEs have lost out through industry restructuring (ie the move to lean supply), although high demand is masking this to some extent. Martin Gjeldsvek, the project leader, stated that it was an accepted view in Norwat that SMEs lack marketing skills and are not making the best of the opportunities open to them. Although it was too early for him to say if there was a difference in experiece between technical and non-technical companies, he did feel that product companies were having to change to become more like service providers, ie there was much more emphasis on the capability and competence of the people behind the products.
According to a spokesman for the offshore industry at the Federation of Norwegian Engineering Industries, experience in Norway in mixed. Smaller projects are bid direct to the supply industry, whereas the larger contracts are undertaken via alliancing. There is generally a good relationship between SMEs and the contracting community, but difficulties sometimes arise through the passing down of risk and contract claim clauses.
Brazil
In Brazil Petrobras now put around 50% of their developments (around $US1 bn per annum) out via main contractors, but retain considerablle control over the supply chain. Petrobras maintain strong links with SME suppliers. Hence, a spokesman for Petrobras’ Tecnical Procurement department feels that cost cutting initiatives in Brazil have actually encouraged, rather than stifled innovation.
The Future
Many commentators have expressed concern about the future of the UK Oil & Gas Industry if these trends are left unchecked. All agree there is a ‘need to continue to develop innovative product’ (Presentation to CRINE Network Conference, Martin Stanly ’97). This is backed up by the University of Aberdeen in their well researced paper “Supply Relationships in the UK Oil & Gas Industry, ’96” wherein they state ‘continuing innovation from suppliers and subcontractors is regarded by all industry members as of great importance for reducing innovation from suppliers and subcontractors is regarded by all industry members as of great importance for reducing costs and uncertainties in the North Sea Oil and Gas industry network’. Norman Chambers, Brown & Root, stated in Dec ’94 that without continually reducing costs the North Sea would stop being attractive to operators. It is clear that greater prizes are available elsewhere in the world, often for much lower exploration and production costs.
SMEs and Innovation
There is also a shared perception that the largest percentage of new technologies have come from the SMEs: ‘the best and most innovation has been generated by SMEs’ (John D’Ancona, Dec ’94). It seems clear also that contractors ‘will pass down the responsibility for technology identification and development to SMEs’ (Beecham ’95). James Hay, director of the Scottish Subsea Technology Group (an Aberdeen-based grouping of SMEs active in the subsea sector), welcomes the cost cutting initiatives as being ‘good’ for this members; in order to cut costs operators and contractors have to seek innovation from SMEs. SMEs themselves recognise this drive and are actively seeking ways to introduce cost cutting technologies.
The current situation however, may not be suffiently conductive to providing this continuing stream on innovative product, and making them available for adoption to operators. Trevor Eden, Managing Director of Morgan Moore Engineering, stated in 1997 that ‘as margins are eroded there is less money available to invest in the technology and innovation which will take our industry into next century’. Richard Green also believes that reducing costs mean that there will be less T&I funding available for the future. A Scottish Enterprise survey of SMEs in the industry in 1995 showed that there had been an average 18% drop in in-house T&I spending over the previous 4 years. Procurement practices such as taking an innovation to the lowest bidder also threaten future T&I spending: ‘there is no quicker way to snuff out innovation than evade its cost’ (Leonard Le Blanc, Offshore Magazine ’94).
Recruitment and Training of Staff
A more insidious threat than the more easily identifiable one of reduced T&I funding, is that some SMEs have been quote as claiming that cost reduction has caused them to severely curtail recruitmet and training of staff (Alistair Punt, IME ’95), although the literature survey has been unable to quantify this. ‘CRINE’ therefore present threats to innovation, training of staff and funding of R&D’ (Andrew Gray, Oceanscan ’95). This would mean that the capability of the indigenous SME suppliers to introduce innovative product would decline overtime, leaving operators and contractors to either source from elsewhere, or more likely, to reduce their operations in the UK. Another senior industry source suggested that whilst the SME market has always been volatile, there are now fewer start-ups to replace those that are leaving the industry, either through growth, takeover or failing. We uncovered no research that had attempted to verify or quantify this claim however.
Changing Market Conditions
There do also seem to be examples of operators not accessing best technologies when these are available in the market place. For instance, contractors sourcing from sub-divisions rather than scanning the marketplace for alternative technology suppliers; preffering to source tried and tested technology rather than risk using an innovation despite it having the potential to reduce cost for the operator; and demanding exessively large cost reduction potential before considering an idea. It is possible that SMEs are also being slow to adapt to the changed market and that their marketing and communications strategies are inadequate to ensure that operators hear of all relevant developments. Innovations which are not adopted quickly are likely never to be adopted, since SMEs ‘T&I and marketing budgets are small and they cannot afford to continue to push and develop products which do not achieve sales within a reasonable time frame (John Mercier, Offshore Magazine Dec ’94). All this suggest that operators may be playing more for development and production of North Sea reserves than necessary, and although this may only be marginal at present it could increase with time, decreasing the attractiveness of the industry.
A Positive Outlook
The future is not all dismal, however. Norman Chambers of Brown & Root feels sure that ‘there is a lot life left in the North Sea for companies who have got the right approach and can bring the skill to bear’. This seems to be key – the Scottish Subsea Technology Group (SSTG) feels that ‘SMEs can be survive CRINE but only if they adjust to changging market conditions’. Also in a survey carried out by Scottish Enterprise in 1995, half of the 460 SMEs replying said that they expected profit double over the next 3 – 5 years. Many SMEs are also looking outside the UK for future markets; whilst the market potential is considerable, this presents own challanges for already streched companies. SMEs have a role to play in ensuring their own future, but operators and contractors also have a duty to support innovation (Larry Farmer, Brown & Root Dec ’94) and take responsibility for the supply chain.
The above perceptions of less T&I funds available, poor procurement practices, SMEs losing innovative capacity etc, were subsequently tested and quantified in the postal survey and interviews. The survey tried to establish the extent of these difficulties and their actual impact upon the UK Oil and Gas industry.
The Learning Process
The view has been expressed that most new technology has come direct from project applications rather than pure research, and this need will continue to exist (John Mercier, Offshore Magazine Dec ’94). However, OTM is not convinced that all the technologies and lessons learnt from project applications are being effectively ‘captured’ for subsequent application and this is an area that requires consideration. A number of industries have recognised the need to become ‘learning organisations’ and leading exponents of this concept include British Airways and Anglian Water. The idea is that, particularly in large organisations (such as operators and contractors), best practice initiated in one project team or department, should be disseminated around the company and adopted universally. This concept would seem to be highly applicable to the offshore industry where project teams are mobile and organisations are large and geographically spread around the world. A role therefore exists in promoting this concept amongst contractors and operators, in launching initiatives in this regard. A simple format is suggested such as intranet database perhaps accompanied by newsletters and websites. Participacing companies may then wish to share their experieces and IEP could facilitate this by organising workshops and/or electronic interchanges.
What Else Needs To Be Done?
In response to changing market conditions, some SMEs have adapted their approach. In particular, they need to increase and better target their marketing effort and many are being successful. In order to cover rising marketing cost and to share market information, some have banded togather in support groups, such as SSTG. This type of grouping gives the SMEs a stronger voice, enables them to access better the informed buyer, gives the end users a single point of contact for a number of emerging and existing technologies, and facilitates networking. In addition, they provide a forum for SMEs to get together and share the development costs of a particular project, or to offer a package of integrated product/services to end users. However some, whilst believing that groups such as SSTG are ‘a thoroughly good thing’ are unsure of their value on promoting innovation amongst members.
A working group (which turned into a forum called EUROGIF) sponsored by the European commission and involving CMPT and high ranking representatives from operators, contractors and SMEs met in February 1997 to discuss the removal of barries to SMEs and SME innovations within the offshore industry. Their recommendations to the commission include the setting up of various forums to facilitate discussion both amongst SMEs themselves and between SMEs and contractors; the founding of a European R&D centre to act as a ‘broker’ between innovators and potential clients, and also innovators and potential development partners; a ‘Technology Watch’ programme and an on-line directory of SMEs on the internet.
It is also incumbent upon operators and contractors to take on responsibilities to ensure they nurture innovation and to practice open and honest procurement. The goverment has a role to play here in encouraging these large companies to play more significant role in T&I funding such as taking part in JIPs or directly assisting SMEs with particular developments; and to define best procurement practices. A working group within CRINE Network is also looking at this subject area and has issues guidelines on good practice in alliancing and procurement. Brown & Root Energy Services together with other operators, contractors and Scottish Enterprise, have also been working to establish a standard SME contract to allay liability fears of cumbersome contracts produced by operators and contractors. In Brazil, Petrobras take an active role in encouraging innovation via technological cooperation agreements with suppliers, whereby they share the costs of development and testing.
Conclusions
The literature survey has uncovered some positive actions which can be furthured or initiated to improve the situation of SMEs and ensure the continuing health of the industry. The next task was to tast perceptions and quantify difficulties via face to face interviews and a postal survey. On the basis that ideas needed to be presented to interviewees and respondents to facilitate an informed response, a number of hypotheses were developed for testing and are presented in figure 2 below.
- The isolation experienced by SMEs is due to poor marketing.
- Most new technologies being applied in the industry come from SMEs.
- Prime contractors have abused their strong position in the supply chain leadin to a poor relationship between them and SMEs.
- Downsizing of operators ‘technical departments has left them incapable of property evaluating new ideas and technologies.
- It is now difficult for SMEs to identify and access the ‘informed buyer’ in potential costumers and end-user organisations.
- Operators and contractors have a responsibility to nurture the supply chain in order to maitain the technological health of the industry; this responsibility is currently being neglected.
- The squeezing of margins and laying off risk has led to prime contractors only wanting to use tried and tested technologies.
- Good SMEs still have a strong link with operators, the fact that bad ones do not is an inevitable result of a maturing market.
- It is important that SMEs maintain good relationships with operators.
- Operators are not getting ‘best’ technologies since prime contractors are using their own sub-divisions, rather than forming relationships with SMEs which may lead to lower cost, higher performance solutions.
- R&D founding is drying up since operators have shrunk their technical departments, contractors are unwilling to found R&D and there are limited monies from government.
- SMEs need to develop long term relationships with the science-base to stimulate a constant flow of innovation, which they can then spend their energies applying.
- Over-specification by operator is some instances has left the contractor with no change to ‘add value’, expect by reducing suppliers’ price.
- The application of CRINE has led to a serious reduction in recruitment and training particularly amongst SMEs, meaning there will be a shortage of capable people to bring innovations forward in the future.
- Without innovation and continued unduly important in procurement decision-making.
- Personal relationships have become unduly improtant in procurement decision-making
- Prime contractors themselves are not keen on alliancing as currently practised.
- Operators have to learn to be better costomers.
- SMEs position could be greatly ebhanced by the used of flexible, long term partnering/alliancing arrangements between SMEs and contractors.
- Developing highly innovative products for the future demands proactive informed lead buyers (operators)
- There is a need for more organisational inftastucture such as CRINE, SSTG, JIPs.
- Widespread use of agency staff reduces contractors’ willingness to incorporate innovations.
- A learning culture should be inducted through the use of secondments and graduate recruitment.
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Figure 2: Hypotheses Tested in Face to Face Interviews and Postal Survey
The Automotive Industry
Introduction
A key conclusion of a survey carried out in 1992 to explore the performance gap between British and world class automotive manufactures was the need to develop supply chains which are tighly integrated, based on long term shared destiny relationships, and maximising close communication and the opportunity for shared learning.
A major impact has been the recognition of the need for costumers to work with suppliers and to improve quality, cost, response times, flexibility and innovation. In particular, there has been a growing recognition of the need to obtain the involvement of suppliers in the innovation process such as manufacturing methods.
Key Trends
A number of key trends have become apparent in the automotive industry which include:
- The automotive assemblers focusing on core competencies (e.g. marketing, distribution, design and final assembly), pushing responsibility down the supply chain expecting suppliers to be experts in their areas and no have the necessary T&I.
- Suppliers parks and synchronous supply in which system suppliers and component suppliers are co-located to ensure local supply capability.
- Additional trends, such as global supply, electronic linkages via EDI, reduction in product lead times, collaboration and alliances between component and systems suppliers, open book accounting.
The logical conclution of current trend may be moving towards a more ‘virtual’ type of environment, where component and system suppliers are considered to be the experts in the design and manufacture of their products, delivering Just In Time to the assemblers’ production line. The logical extention is a dedicated part of the plant or assembly line. Such an approach is now starting to be implemented by companies such as VW.
Key Issues In Developing The Supply Chain
The development of supply chains and the encouragement of innovatives to improve innovation have encountered a number of important issues regarding relationships amongst the different organisations involved. These include:
- Trust and confidence (e.g. in contractual promises, supplier capability)
- Communication (e.g. EDI efficiency, ‘overbearing’ supplier development schemes)
- Collaboration (e.g. early supplier involvement, cost transparency)
- Schedule stability
- System incompatibility
- Lack of 2nd tier involvement (i.e. relationship at top not being reflected downwards)
- Innovation.
Initiatives
A number of initiatives have been taken recently both by individual automotive manufacturers and jointly by industry associations. Some of these initiatives are describes below
SMMT / DTI Initiatives
The SMMT (Society of Motor Manufacturers and Traders) and the DTI have organised a supply chain initiative aimed at improving the management capabilities of second and third tier suppliers. This involves a number of activities including:
- Development of an industry forum to discuss supply chain issues mainly through a series of workshop discussions and follow-up surveys.
- Master classes in process improvement where top level engineers undertake improvement programmes in suppliers (e.g. line balancing and Kaizen with component suppliers)
- Support for supply chain groups, looking at complete supply chains working as a group to establish better communication links particularly SMEs
- Support for supplier development programmes to help large companies develop their own supplier chains
- A self-assesment workbook on product development for component suppliers.
Nissan
The company has a supplier base of 204 companies spread throughout Europe of which of which 134 are in the UK and operates a partnership sourcing policy which involves working closly with a limited number of suppliers. The company operates the following key supply chain systems:
- Supplier appraisal and improvement system (SAIS) which evaluates performance against defined criteria for quality, cost, delivery, development and management
- Prestigious supplier award in recognition for consistently high performance/improvement
- Supplier development teams within the purchasing department which work to support suppliers in the continous improvement process
- Just in time philosophy which requires the reduction of non-value added activities and resources to the minimum (such as storge, inspection, material movement).
- A suppliers’ area near the site where key suppliers are located, facilitating JIT production.
The result of recent supplier improvement activities include an increase in percentege on-time delevery from 85% in 1993 to some 97% in 1996 and a reduction in reject parts from over 1000 parts per million (ppm) in 1992 to under 100 ppm in 1996. More recently, Nissan has established the COGENT programme to promote supplier self sufficiency in design and right first time development and to cut the time design to market from 40 months to 30.
COGENT – Innovative Manufacturing Initiative
Nissan’s measurement of its supplier performance confirmed that quality, cost and delivery had improved greatly, but that development capability had lagged significantly behind. The focus of the COGENT project is on co-development in which the car maker and supplier operate joint (synchonous) development of a new product. The design and development process determines 80% of cost, quality and performance. Japan has led the way in improvements in this area. The goal of the project is to make significant reductions in part cost and development time. An important spin off could be the developmnet of a communications infrastructure that would enable ‘virtual co-location’ between Nissan and its suppliers. The final part of the project will be to remove the Nissan specific wishing to improve their supplier co-development capability.
Supplier Associations
Indirect suppliers will remain unconnected firms unless they some machanisms binding them into a second tier. This is done in Japan through supplier associations to give second tier suppliers an identity within a supply chain. The methods emplyed include meeting at which suppliers discuss potential improvement to the vehicle manufacturer’s supply chain. Supplier associations have been started in the UK in South Wales principally to serve the Japanese vehicle manufacturers based in the UK.
Other Initiatives
Other recent initiatives include:
- Benchmarking
- Open book negotiation
- Single sourcing (identification of preferred suppliers for long term single source contracts)
- Co-location of suppliers
- Supplier appraisal (in particular 2-way customer/supplier appraisals, and relationship assessments).
Industry Conclusions
The literature seach has demonstrated a high level of interest in supply chain issues within the automotive industry and an increasing realisation of the need for action at the level of the individual company and by the industry as a whole. Nevertheless, there appears to be little information about the extent to which recent initiatives have led to positive improvements in performance. In addition, the literature does not indicate whether small and medium sized firms are particularly affected by supply chain issues. One of the interesting features of the automotive industry is its capacity for international technology transfer through the supply chain management made by Japanese manufacturers are transmitted to other companies by the international nature of trade and supply in the industry.
The potential for supply chain improvement in the industry is an important issue and a number of factors may prove relevant to the oil and gas industry including:
- The development of innovation-related supply chain initiatives such as ‘COGENT’ by Nissan
- The development of mutual costumer/supplier ‘relationship assessments’ and improvement programmes
- The difficulty in drawing second tier suppliers into shared learning and quality improvement
- The introduction of supply chain initiatives by trade associations and the DTI which reflect the need for suppliers to share responsibility for innovation
- The issues related to open book accounting systems
- Benchmarking where initiatives might be taken to encourage suppliers to benchmark themselves against world class standards of performance
- The scope for the introduction of EDI and its standardised application.
The Food Industry
The UK food industry is vast. With a turnover in excess of £60bn, account for around 10% of GDP. Moreover, leading players within the grocery industry rank among the leading corporations nation-wide: Tesco, Sainsbury, Hillsdown Holding, Northern Foods, and so on, all feature prominently within the Times
100 index. For both these reasons, the industry should not be underestimated, either in its own right or in terms of the insight it provides into more general organisatioanl processes.
The food industry has undergone truly radical organisational changes over recent year. In the 1960s, the interface between manufacturers and retailers was dominated by powerful brand manufacturers selling their products through innocuous shopkeepers. Thirty years later and the same interface is altogether messier; it is characteristised by a pleathora of sub-contract relations through which powerful retail corporations procure own-label product supplied to their own specification.
Supply Chain Initiation Modes
One key moment in the transformation of the food industry concerned the process of supply chain initiation. Contrary to the assumption across all of the academic literature, a network of potential sub-contract partners was not simply available for retailers to plug into. In the 1960s, manufacturers were still buttressed by Resale Price Maintenance. Retailers were therefore unable to compete on the basis of brand price: the concept of the own-label was their principal response to this predicament. In this context, retailers have had to engage purposefully in the creation of supply chain structures through which own-label products could potentially be procured.
First, supply chain initiation depended solely on processes of brand subtitution (where struggling brand manufacturers were persuaded to produce a low cost variant of their brand under the retailer’s own-label). A second initiation mode relied upon processes of product diversification (where a manufacturer would be persuaded to diversify its product portfolio and then supply a retailer’s own-label in the new product area on an exclusive basis). A third initiation mode involved multiple retailers establishing very close working relationships with embryonic enterprises that-in the first instance-lacked either the skill or capacity to supply a national multiple. However with considerable technical ) though seldom financial) input from the retailer, the successful manufacturers expanded rapidly.
Distinction between these three processes ara far from absolute and it is possible to find many hybrid examples within the food industry. However these three scenarios do reveal a number of extremely important insight into the character of supply chains, both in the food industry and more generally:
- First, it cannot be assumed that suitable supply chain partners simply exist. Invariably lead firms have to create and then mould the relationship. Suppliers may be more or less proactive in this regard, but this most crutial initiation process is in itself demanding.
- Second, the nature of the supply chain relationship will depend on the capabilities of the actors involved. Over the last twenty years, food retailers have become much more sophiscated actors. They now have subtantial technical expertise. This has become an important tool within the initiation process and it also provides enormous possibilities in the context of product innovation.
- Third, the nature of the product will have a bearing on the range of available options when lead firms are seeking to initiative supply chain arrangements. Specifically, developing highly innovative products through the supply chain is likely to demand a far greater input on the part of the lead firm.
The Need to Manage Supply Chains
Establishing supply chains is obviously a necessary stage, but however well done, it is not sufficient to ensure commercial success. In order to sustain competitive advantage, supply chains must be managed. It is useful to consider two management processes reflecting the relative importance of two key pillars of competition: price differentials (where suppliers are often played off against one another in competitives tendering) and product innovation (leading to potential abuses of highly dependent new-product suppliers).
The above discussion hints at the range of scenarios within which small firms must operate. Specifically:
- Some SMEs are forced to produce large volumes of low margin products. Such firms are also obligated to engage in processes of competitive bidding and as a result, their existence may be precarious. Given the margins on which they operate, the scope for investing in NPD (new product development) is usually very limited. Consequently these SMEs may not be able to improve their position within the supply chain structure.
- A second group of SMEs within the food industry may be found in the context of higher margin product lines. These enterprises often owe their very existence to relationships with particular retailers. While their capacity to innovative may be substantial, it is frequently also intertwined with that of the retailer, both practically and legally. For this reason, the extent of the SMEs autonomy may be modest. Nevertheless, some firms in this position have developed a proprietary brand and in so doing they have sought to create an existence independent of the relationship with their principal retail patron.
Construction Industry
Introduction
Construction includes a range of different markets ranging from one-off refurbishment and new-build projects to major one off civil project and structures. Although labour costs in Britain’s construction industry are low, total construction costs are amongst the highest in the EU. This is reported to be partly caused by poor labour productivity, but more importantly by industry’s organisational structure and culture.
Although construction industries in all countries tend to be fragmented, the UK is almost unique in the adversarial nature of relationships between firms. This often manifests itself in claim and counter claims and in litigation which continues after the project has been finished. This adversarial environment has been the subject of a number of studies including the recent Latham Committee report and many commentators believe that improving the performance of the industry will require new forms of collaborative association.
The traditional model of construction views the construction process as the purchase of a product government by legal contracts. This provide a small level of uncertainty about project ends, but uncertainty about the means by which it is implemented is passed on to contractors and sub contractors as risk. The process of construction id completed by dividing tasks into discrete packages according to a series of logical phases. The traditional model can work for relatively slow and certain projects. However, when project are more complex or uncertain (as is increasingly the case in this industry), or need to be completed rapidly, it becomes harder to co-ordinate the large number of specialist participants. Under these circumstances, traditional boundaries between phases become blurred and more complex. Non-hierarchical communications system are required. The construction process is described more like a prototyping operation where the needs and means are continually negotiated.
Key Issues and Initiatives
Partnering has been put forward as a key approach which has the potential to improve the performance of the construction process. Partnering is seen to be most appropriate where the value of the product or service is high or critical to the client’s business or where the type of project is complex and the number of contractors able to carry out the work is limited.
Important issues in paartnering include contractual relationships, forms of remuneration (e.g. gain sharing, payment, terms, innovation opprotunities), communications (e.g. reducing paperwork/meeting, simplifying chains of command, openness), personnel selection and optimising the mix of personalities, project and partner goal and mutual trust and understanding of these.
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Closed/Rigid Communications
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Open Flexible Communications
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High individual ‘fit’ in the partnering team
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One side, short term, win-lose relationship
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High trust, collaborative, mutual understanding, long term, win-win
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Low individual ‘fit’ in the partnering team
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Mistrust, defensive, disputes, lose-lose relationship
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Differing goal, incompability, wrong team, lose-win
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Figure 3: Key Influence on Partnering Outcomes
In recognition of the need to improve relationships within the industry and to reduce costs of major projects, a new initiative has been developed called ‘ACTIVE’ which has objectives broadly similar to those of ‘CRINE’. It seems apparent, from early discussions, that the concepts of partnering and value management are currently less advanced than in the oil and gas industry.
Defence Industry
Introduction
The UK defence cluster had total sales of some £14bn in 1993 of which £10.6bn were to the MOD and £3.4bn were defence exports. Over the period 1990 – 1998 UK defence spending as a share of national output is expected to fall from 4.2% in 1990/1 to 2.8% in 1997/8. In 1993/4 there were over 500 UK based contractors paid over £1m or more by the MOD. Of the £3.5bn defence exports, about 90% is accounted for by the aerospace industry.
One of the key trends in the industry is for the customer (MOD) to put more responsibility on the prime contractors for design, and increasingly ownership (providing leasing to MOD) and maintenance. The push to encourage first tier suppliers to take responsibility for innovation may cascade down to second and third tier suppliers to take responsbility for innovation may cascade down to second and third tier supplier, but there is often insuffient knowledge of who these suppliers are. In many cases, such suppliers may only have a modest involvement in the defence industry. However, there is also a danger that some of the more important second tier suppliers may become isolated and may need to develop alliances with major companies in order to retain their technological capabilities.
Key Issues In Developing The Supply Chain
There is a lack of published data about supply networks. Supply chains are complex and there are problems in identifying first, second and third their suppliers since there is evidence that the same supplier may be involved at different levels in the supply chain. Moreover, companies in the second and third tiers are often unaware that they are supplying goods and services which are ultimately sold in defence markets.
Changes in the MOD procurement policy have affected the position of smaller companies in the UK defence cluster. There is a belief in the industry that the MOD’s policy of using prime contractors means that smaller specialist companies are now ‘less visible’ to the MOD. Previously, MOD purchased directly from many of the smaller companies and then provided component to the main contractors as Governmental Furnished Equipment. As a result the MOD had an incentive to maintain these suppliers in good health since the Ministry was responsible for supplying quality components on time. However, prime contractors now purchase world-wide on a competitive basis with possible adverse impact on the UK’s specialist suppliers.
Three main studies have been undertaken of the UK defence industry supply chains. These are based on the Eurofighter 2000 (EFA), warships and the Challanger 2 Main Battle Tank (MBT).
The survey by the Society of British Aerospace Companies (SBAC) of the Eurofighter supply chain (1992) found that the three prime contractors had 314 first tier suppliers of which 67% were outside the aerospace industry. Typically, first tier suppliers were small to medium sized firms employing fewer than 300 people. An additional 250 suppliers were identified at the second tier level. Of these, 190 were UK based, 30 were US based and 25 European. The survey found that, as a rule of thumb, for every five jobs at the prime contractor level, another three are generated at the first tier and another two at the second tier and beyond.
The warship study noted that the construction ot warships involves two tasks, ship construction and supply of combat systems. The study of a Type 23 Frigate showed that shipbuilding accounted for 60% and the combat system 40% of unit production costs. There are many interlocking relationships between prime contractors and main sub contractors and at the level of sub contractors, the relationships become progressively more complex. In three of the 13 major sub-contract markets, there is effectively only one UK supplier.
The Centre for Defence Economics study of the Challanger 2 MBT supply chain of 1990 identified Vickers Defence Systems as the prime contractor and 43 major suppliers of which 34 were in the UK.
Initiatives
- The DTI has undertaken a number of initiatives including commissioning a study of the value of the defence industry to the UK economy, undertaking a number of studies of specific supply chains (armoured vehicle supply chain), and undertaking a study of the supply chain in aerospace and of best practice.
- The DERA (Defence Evaluation and Research Agency) Pathfinder programme provides a series of documents (e.g. timetable for submission and review of proposals, guide to ‘getting involved’), news sheets and an annual conference to provide information to companies and academics about forward technology requirements. Tha Pathfinder programme is intended to obtain more value for the MOD’s money by allowing industry and academia to propose research work which is of use to the MOD and is in line with industry’s own needs. This can provide a richer source of advice for the MOD, improvement in industrial capacity and opportunities for technology transfer. Path finder project are normally about 15 months duration but can be of up to 3 years duration and a 33 – 50% industry constribution is usual, although funding can ve 100%.
- DERA has a scheme which facilitates secondment of DERA staff into industry which is aimed at facilitating wealth creation and technology transfer and providing secondees with experience of industry. The scheme has involved about £5m turnover per annum and about 40 staff.
- The DERA ‘Beacon’ fund is aimed at encouraging collaboration between DERA and industry/SMEs/academia and research institutes and had an estimated budget of some £4m for 1997/8.
- DERA Dual-Use Technologies Centres provide opportunities for companies to use specialised DERA facilities for development purposes. These facilities include the Farnborough Supercomputing facility, the Structural Materials Centre and the Centra for Marine Technology which undertakes some work relevant to the offshore industry (e.g. risers, pipeline bundles). These facilities are available for use by SMEs and provide opportunities for technology transfer as well as commercial income for DERA.
- The Society of British Aerospace Companies (SBAC) have developed an initiative under the DTI’s Competitive Challenge programme entitled ‘Supply Chain Relationships In Aerospace’ (SCARIA). This programme involves a code of practice covering issues such as communications, design for manufacture and continuous improvement along the supply chain, workshops on the use of the code, awareness seminars, training programmes (e.g. EDI), a survey to establish views about supply chain relationships and to provide feedback on whether the SCARIA initiative has had any impact, an SBAC Best Practice unit which works with the University of Warwick Manufacturing Group on new techniques such as ‘Time Based Process Mapping’, and regional initiatives to encourage supply chain development in a region such as the South West in Conjunction with the relevant Business Links.
- The RAF Logistics Command have worked on supply chain management (SCM) over a number of years. There has recently been some concern that the MOD as a whole are increasingly dealing with prime contractors and that SMEs are losing contact with the MOD. In addition, there is some concenrn in the MOD that as the government contracts out more of the non-core activities, prime contractors are gaining an increasingly powerful position. The philosophy of SCM, led in the RAF by a 40 strong task force, was introduced in 1993 with three broad objective: to introduce the concept of tailored, specific support chains that reflect the lead times, impact of support chain failure and total cost of selected options; to develop support chains which were affordable, flexible and robust to support the RAF’s peacetime tasks, but which have the capability to produce additional resources in times of operational necessity; to encourage horizontal cost awareness and the adoption of best business practice across the organisation.
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Defence Technology Enterprises (DTE) was set up in 1985 by the MOD and a consortium of 8 founder members with venture capital. DTE had right of access to the MOD’s non-nuclear research establishments and employed security cleared staff (known as ferrets) whose role was to find suitable ideas and product that could be exploited in the civil marketplace. By 1988, 260 firms had become associate members and 32 licences had been taken out to use ideas emanating through the scheme. In 1989, it was estimated that £60m of business could be generated over the following eight year period. However, DTE effectively ceased to exist by 1990. The main reasons for its failure are reported to include the fact that the most obviously exploitable technologies had already been identified by the research establishments themselves, and that it is very rare that nugget of technology can be lifted out as a package and transferred to industry.
Industry Conclusions
The literature search has demonstrated a high level of interest din supply chain issues within the defence and aerospace industries both on the part of the constumer (MOD) and the prime suppliers (particularly aerospace). A wide range of initiatives have been develop, although systematic evidence of their effectiveness has not yet been demonstrated. Evidence from individual company experience is available, particularly in relation to improving lead times for the delivery of parts.
The following points appear to be relevant to supply chain improvement:
- The importance of early knowledge about future plans
- The initiatives taken by DERA to allow small firms to participate in R&D projects
- Bridging of the cultural gap between types of organisations, in particular military and civilian
- The possibilities for using dual use technology centres
- Training for suppliers under the ‘working together’ programme.
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