The paper presents an integrated analysis of the procurement and supply policy of ADCO for seismic acquisition survey. The analysis was conducted by decomposing the procurement policy into five different factors. From the analysis of procurement and supply in the management of expenditure, it is concluded that ADCO is more focused on technical specification for selecting its seismic exploration partner while they should have put a similar emphasis on the commercial issues as well.
Analysis of the stakeholders’ impact revealed that internal employees are the most influential stakeholders in case of selecting a supplier for the firm. Important sections of a successful contract are briefly discussed in the paper which pointed how ADCO could improve its technical and commercial negotiation. The paper also analyzed the existing supplier’s selection process and revealed that the company did not develop any valuation model for numerically ranking the supplier’s list.
The final section entailed application of the 5-R model to examine the aspects of purchase that call for negotiation. The study then suggests ADCO incorporate a team of experts starting from researchers, engineers and to finance experts. It also showed that adaptation of KPI would increase the effectiveness of the company procurement.
Role of Procurement and Supply in Managing Expenditures
The roles of Procurement and supply in managing this area of expenditure is depended on the requested specification of the company and it can change until the end of the agreement. The P&S can help the company to manage its expenditure in each and every phase of the survey contract. Erridge and McIlroy stated that organizations need to devise measures that ensure sustainability in the core areas of operations such as procurement in order to manage expenditures (59).
ADCO sources its suppliers using the tendering method as it is proved to be cost effective in many cases. As a matter of fact, for selecting the seismic survey providing firm ADCO uses the tendering process as well. The company looks for the lowest bid that provides the highest value. In the case of selecting a partner for seismic survey the firm usually compare the bids in terms of quality of materials to be used in the survey, estimated quantity of different materials, and most importantly the accuracy of the survey.
Successful discovery of oil or gas reserve is the ultimate output of the seismic survey which is a very sophisticated process; considering this fact the company should put more emphasis on the technical knowledge and experience of the survey team along with other variables while selecting the survey providing firm. Holm pointed out that effectiveness of procurement is a foundation for sustainable success (11). On the Kraljic matrix if the seismic survey would be of high importance to the company
The seismic survey is a strategic issue as the degree of market difficulty and the impact on the firm’s profitability would be high. It can be said that successful seismic survey increases the value of an energy producing firm as it is the only thing that increases the energy reserve of the firm. The company should implement such an effective procurement system that helps ADCO to select the most efficient seismic survey partner, as well as make sure the procurement process is cost effective. It is found from the analysis that ADCO is focusing on managing the cost only while it should also have focused on selecting the best survey partner for increasing the success rate of its survey projects. The company could ensure the following things for establishing an effective procurement system-
- Set the project objectives: ADCO should set a number of objectives before initiating a seismic survey and define the lowest boundary of the project’s outcome.
- Internal research team: The company can employ a group of researchers who would be researching to determine the probability of finding oil and gas reserves in different geographical regions on the globe. These research data would help the firm match with the supplier firm’s exploration proposal.
- A preferred list of Suppliers: Rather than going for an open tender, the company should gather data about all the suppliers in the market, assess their quality through an analysis of those suppliers. The firm should assess the supplier’s quality by applying weight on different variables that are consistent with the company vision and the project objectives. Based on the analysis, the company then should create a ranking of the potential suppliers before inviting the suppliers for participating in the tendering event. Field trials shall be done to those new comers to support and increase their chance with no cure no pay strategy which will lead to the reduction in the price from current suppliers and increase competition.
- End User should have clear criteria for evaluation at an early stage of the processing order to have a precise and fair evaluation. Each should have a minimum acceptable percentage to pass and the percentage shall vary based on the criticality of the service. The contract with suppliers should be quantifiable and the firm can do this by setting a number of KPIs. For the seismic survey, ADCO could consider a number of the successful discovery of oil and gas reserve and time consumed by the supplier, cost and estimated value of the project with time, the option valuation can be used to determine the potential survey outcomes.
- Post tender negotiation: The tender evaluation team resolves issues between the firm and the supplier. According to the information received from P&S Department of ADCO, the company follows many steps before making the final decision. Although the evaluation team focuses more on technical evaluation when they should also have focused on the commercial implication of the contract. As the seismic survey is usually a long-term contract, the firm should negotiate about projected outcome, progress reporting, making output based payments, and other issues like this.
- Contract awarding: If the parties agree to the terms and conditions, the contract is signed and thereafter implementation starts. ADCO supervises the process to ensure that the interests of all stakeholders are met. ADCO Supply chain needs to have real input in the post award stage since post award is only Contract Administrator responsibility now. SC shall have a specialized team to follow up post award tasks in terms of distributions the funds based on the original award strategy, performance of suppliers at the site and following HSE rules and regulations.
An example of enhancing efficiency between ADCO and RPS is discussed in Appendix I
Inputs of Stakeholders
The company has internal stakeholders and external stakeholders and both types of stakeholders have significant contribution to the company. In this section, the specific contribution of different stakeholders will be discussed in light of seismic survey contracting process. Using a Mandelow’s matrix for the seismic survey the following stakeholder were found to be the key player in decision making-
Internal employees are the most important stakeholder when it comes to the evaluation of input for improving the procurement and logistics system of the company. The employees contribute to the firm by providing historical information. Especially the employees of the P&S department of ADCO have deep knowledge on seismic survey providers with whom they have already worked, and their input in evaluating the supplier’s list would be invaluable for the company.
The contract administrator’s input is very crucial as he/she decides which supplier to select and what should be the contract arrangements.
The finance team evaluates the potential present value of the project to assess the profitability of the survey.
The most important external stakeholders are the potential and existing suppliers of the firm. The existing suppliers who might be working with some other rivals of ADCO would have better insight about some seismic survey providers, the company can engage those suppliers to have their opinion considered while selecting a supplier for the seismic survey project.
Property Appraiser’s Office
For having a better insight about the potential suppliers of seismic survey, ADCO can consider different third-party appraisers as one of the influential stakeholders. The appraisers usually possess authentic information about assets of different companies, also they can value a project indifferently. The company can use third party appraisers for valuing the proposed survey project.
Researchers who are actively conducting various experiments on different geographical locations should have significant information on the natural resources that ADCO is searching through seismic survey. The input of these researcher could help the company initiating a better survey, as well as selecting the best supplier.
The regulatory system of the country, in which the company is operating, plays a key role as the government decides how the oil and gas companies can conduct exploratory researches in search of natural resources. If the government regulation is not supportive to the exploration then it would become very difficult for the company to conduct seismic researches.
Country Attorney’s office
The contract validity or dispute settlement between parties depends on the legal facilities of the country. So, the country’s attorney’s office would have a significant influence on the seismic survey as ADCO conduct the exploratory research through an agreement with the supplier. The efficient management of the contract can be influenced by the attorney’s office.
Techniques that can be applied to the Area of Expenditure to Improve Added Value
ADCO’s seismic surveys are based on practical excavation, which require precision to avoid accumulation of costs. Due to the comprehensive nature of the surveys, they are influenced by different factors that affect the procurement process. Major factor is market situation and competitions between service providers. In the current market situation and reduction of oil price all markets are targeting best price to add value.
Shareholders instruction is to always go for minimum 5companies to start any tender; this strategy is well known in the market which leads to have a competition between suppliers and reduction in price.
In addition, because of current market situation is to reduce the production due to reduction in oil price. In this region we have a very limited number of buyers; it’s only ADNOC Companies and EMARAT in UAE and few in Gulf region which includes ARAMCO in KSA, KOC in Kuwait and QP in Qatar and PI in Oman. So demand is decreasing, supply is increasing so the price should decrease.
In upcoming years 2020, Abu Dhabi is planning to increase the production from 1.6 Billion barrel of oil to 1.8 Billion Barrel of Oil as announced by high management in ADNOC Group of Companies. ADCO and other ADNOC Companies demand prior to that will increase dramatically if the market will go back to stability which will increase the area for Seismic Survey which needs more companies to cover all Abu Dhabi and western region area.
Prior starting any Tender, EU shall have an estimated Contract value to request Budget from Shareholder. This estimation should be prepared carefully since if any huge deviation between the estimation and the final Contract value, justification should be prepared for Shareholders. Usually End User relay on previous project in estimation and doesn’t consider the market situation for estimation. So ADCO shall consider doing benchmarking/market survey prior starting any project to request the right budget and can negotiate the price with Suppliers later on.
In order to uphold value, PESTLE technique is also one of the main techniques that can be used in the area of expenditure to improve added value. PESTLE analysis is discussed in appendix II
Inclusions that should be made in Contracts
Contracts play a great role in establishing a measure of certainty. In order to carry out its functions effectively, ADCO procurement and supply is mainly done based on prior business relationship between ADCO and the suppliers. However, the selection of the suppliers is guided by the need to ensure cost effectiveness. Hence, each contract is drafted to ensure that important inclusions are put into consideration in order to guarantee mutual benefit of the parties. ADCO uses different Contract templates based on the Service required. For SeismicSurvey call out for Downhole service template is used.
Inclusions in a Contract
The seismic acquisition contract should include all the significant sections of the contract. In relation to ADCO’s survey, the terms should relate to the materials and equipment needed, their quality, and the agreed price. The terms are negotiated based on the market standards. In addition, the specifications are drawn to ensure that they are in line with legal requirements and the set out environmental standards. The inclusions guarantee better value by integration of various factors that include the reduction in the risks, right prices, agreed timescales and reduction in the commercial risks.
An effective seismic agreement between ADCO and the supplier includes seven sections in general. The first section of the agreement describes the general requirements of ADCO for the proposed seismic survey, the second section includes the contracts documents which are subdivided into three segments- terms and conditions, technical section, and commercial section, the third chapter includes the covenants for execution of the service, the fourth chapter documents the contract value and others financial aspects, the next chapter describes articles that survives termination, and the final chapter presents the acceptance of both the party.
Definition and interpretation
This chapter includes the definition and underlying meaning of all the technical terms that are used in different chapters of the contract. It also interprets different headings used in the agreement.
This is the most important part of the agreement as it includes all the terms and conditions, technical specifications, and commercial specifications.
The terms and condition section starts with the details of project duration and followed by termination procedures, early termination, the right of cancellation. All the negotiated terms and conditions are reflected in this section of the agreement. The terms and conditions clauses includes but are not limited to area of operation, performance standard, Audit and inspection, modification in service, reporting, contractor’s obligation, ADCO’s obligations, safety measures, environmental compliance, insurance, taxes, payment and invoicing, Bankruptcy, compliance with laws, intellectual property rights, force majeure, ethical business standard, and confidentiality.
The commercial section
This section of agreement discusses the business or commercial relation of ADCO with the supplier. As it was stated earlier the evaluation team must put emphasis on this section for making the contract profitable for the company.
In this section, ADCO must agree with the supplier about the scope of the project, reporting system of the contractor. In the commercial section of the agreement, ADCO set the compensation for the contractor and set a term for when to pay, how to pay, for which purposes the company would pay. In order to make the sourcing procedures cost effective, the ADCO team must focus on employing effective negotiations technique in this section of the agreement. It was also discussed before that the selection of the area of operation is very crucial for a successful seismic survey.
The area of operation is determined by the parties in the commercial section of the document and it is very important to include the most potential area for the exploration activities. The commercial section also indicates the hoe the supplier would invoice ADCO and how the payments will be settled. Another important inclusion in the commercial section is the legal setting of the agreement, the chapter includes what laws and regulation shall be followed in case of legal proceedings.
The technical section
The technical section of the agreement is another important area to work on for successful sourcing of suppliers. The seismic survey is a sophisticated research work which usually presents a broader scope to work on but all the scope of works is not commercially beneficial for ADCO. The company can implement the best possible scope of work for ensuring the highest probability of a successful exploration project. The technical section must include the minimum requirements of personnel, survey vessel and equipment, QC, and HSE which can be used for assessing the estimated cost of the project.
A list of quality parameter is also set by ADCO in the technical section which should include but is not limited to noise, streamer, source, positioning, and requirements for line starts. The section also defines what would be the deliverables of the assignment, for example, ADCO can ask for original test data or recording tape, navigation logs, observers reports, and velocity tapes etc. The technical section also deals with the operational parameters, specifications, and procedures.
In short, the technical section defines all the operational aspects of the proposed projects and defining this terms in favor of ADCO would be the primary task of the procurement and supply chain department of the company. In the case of selecting the seismic survey provider, the S&P department must continuously develop its knowledge on the survey and should have the updated information on related technology.
The evaluation team of the company should consist people with technical knowledge of the different area, and the inclusion of researchers in the team would be a valuable addition to the team. The effectivity of seismic survey depends on the selection of perfect technical parameters and optimal commercial parameters, and the P&S department of ADCO should take initiatives for enhancing the team’s capacity in selecting the parameters through efficient negotiations with the suppliers.
Measures that can be taken to select Effective Suppliers
Effective suppliers ensure that the terms of contracts are met without coercion. In addition, effective suppliers are critical in the completion of a project. Just like in other business operations, positioning of suppliers is critical in achieving the competitive advantage. In order to understand the supplier position, the critical questions to ask include which supplier? Where to focus effort? The type of relationship to cultivate during the supply process, and the issues that might arise in the supply process? In the context of the present seismic survey, the questions are integral in ensuring that the supplier chosen has the capability and complies with the technical requirements. One of the best ways to select effective suppliers is by use of the Kraljic’s Matrix as the basis for assessing the suppliers.
Selection of the Effective Supplier
Seismic supplier selection can be considered as a strategic issue for all the companies operating in the oil and gas industry. In order ensure a sustainable growth the energy companies must find sources of energy to increase its reserve, and the seismic survey is the process of identifying new energy sources. The success ratio of the seismic survey is positively correlated with the value of the company, and it signifies the importance of selection of the seismic survey partner. According to Bausman, Chowdhury, and Tupper, the prequalification for suppliers should be based on financial stability, the technical abilities, experience in the field of the supply, the track record of the suppliers, the employment policies of the suppliers, compliance with the various regulations and the environmental sustainability capabilities (8).
ADCO has implemented a standard process for selecting its supplier regardless of the requirements. ADCO follow three basic steps for selecting its suppliers. The first step of the selecting supplier is the supplier registration, the company invites all interested suppliers to register on their designated website expressing the interest of becoming a supplier of the company. There are no specific requirements mentioned for registering as a supplier.
The next step of suppliers selection is the assessment of pre-qualification, in which the P&S department compares the registered company’s information with a predetermined set of acceptable criteria. If the registered company’s information satisfies the P&S requirements then ADCO includes the supplier on its eligible list. All the selected companies receive an invitation to participate in a tendering process.
At the third step of selecting a supplier the company invites listed suppliers to submit their bids through the tendering system, the company policy suggests that there should be five participants in a tendering process otherwise the tendering process shall be considered illegal. Once ADCO receives the bid from different suppliers, the evaluation team compares the bid of suppliers in terms of the technical proposal and commercial proposal.
The selection team selects some best alternatives and sit for post tendering meetings with the selected best alternatives. In these meetings, they discuss different technical matters and finally select the suppliers based on the technical suitability of the supplier.
From the supplier selection process the following issues were identified-
- The pre-qualification assessment criteria could be used in the registration process to avoid inexperienced suppliers.
- There is no specific requirement for seismic survey suppliers which may reduce the quality of the survey providers.
- The team only focuses on technical issues at the post tendering meetings and decides based on technical variables only, whereas it was proved that commercial section improves the profitability and reduce the risk of the firm.
- The system does not inform about the technical knowledge assessment of the seismic survey partners.
- More weight should be put on the companies with huge experience and noticeable track records.
Kraljic’s Supplier Model
This model is based on four quadrants that are used to rate the products in order to decide on the supplier who can best deliver the product. They include classification of the product, analysis of the market, strategic positioning, and action planning (Glöckner, Pieters, and de Rooij 5). Figure 1 is an outline of the model. It is based on planned risk management and it helps buyers in selection of the most effective supplier based on the product classification. The result is the maximisation of caution in the choosing the right supplier based on the type of the product being procured. Thus, the identification of the supplier becomes a strategic undertaking.
In the strategic application of the model in the seismic survey, the quadrant which was more applicable than the others was the ‘strategic items’. This was due to the fact that most of the equipment required for the acquisition processes are specific in nature; hence, limited number of suppliers who can provide the products. In essence, the selection of the supplier becomes more of a strategic process rather than transactional activity. The model is key in helping ADCO to maximise the supply security; hence, multifaceted approach in the identification and award of contracts. Strategic items such as oils, seismic mapping and analysis services are given to suppliers who have proven capacity based on their work relationship with ADCO.
The strategic items have high profit impact and high supply risk. For example, the machinery required, data acquisition systems, and the general technological requirements can be provided by people who specialise in the field of the geological surveys. A case example, in the selection of the RPS Energy for the supply of oil and computer software for the seismic acquisition survey, consideration was based on the knowledge, expertise in the field, financial capability and past performance of the suppliers. Therefore, the efficiency of the suppliers was the preference; therefore, the rationale for single sourcing instead of tendering process.
The rationale was anchored on the facts provided in the Kraljic’s model that in dealing with items that have great influence on the project, attention should be paid to ensure that only the suppliers with capability to deliver are contracted. As a result, single sourcing framework became more applicable. It is worth noting that in the seismic survey, data acquisition is crucial in determining the final outcome; thus, the necessity to source for excellent service provider tested before. On the other hand, the environmental implications, and time required to complete the project called for a known oil dealer. Besides, fuel accounts for substantial cost in the whole project; therefore, making the product a strategic product.
Since the service is strategic, in ADCO during the technical evaluation stakeholder who set the criteria should consider the criticality of the service by increasing the pass mark for supplier. For instant, if the pass mark is low i.e. 50% later on during the commercial evaluation, suppliers with 52% score will be treated like the supplier with 95% score in awarding the Contract which is not fair and by this ADCO scarify the quality and efficiency of work. This strategy shall be amended for ADCO benefit to have high performance and good quality, so as mentioned before SC shall revisit the Contract award strategy.
In addition, ADCO shall check third parties capabilities for example subcontractors of the main Contractors. They shall be evaluated and go through the prequalification process to ensure good performance.
Another essential sourcing strategy that SC needs to consider is amending the procedure and KPI measurement duration for each step in the process for example EOI fax shall not be sent to seek interests from already prequalified Bidders which waste around one month to get a response. Also, technical and commercial Bids shall be invited together to save time since currently ADCO is inviting Commercial after concluding the technical evaluation which takes around 4 months, this can be shorten to be within 1 month if both invited together.
Aspects of the Purchase/Supply that may require Negotiation
Negotiations in the procurement and supply process play a critical role in ensuring value for either party. This is attributed to the contribution of the function in the cost reduction and improvement of quality in organisations (Driedonks, Gevers, and van Weele 288). In order to ensure value, negotiations become part of the sourcing process. This section analyses the aspects of negotiations that could be raised with contracted suppliers in order to enhance performance.
Aspects of purchasing that may require Negotiation
According to Driedonks, Gevers and van Weele, negotiation is a matter of take and give. Win-Win situation is the right approach in any negotiation.
Several factors influence the commercial negotiation process. Negotiations are carried out based on the understanding that purchasing is a function that has a high potential to influence the long-term performance of an organisation. This denotes that negotiation requires in-depth review of the entire purchase process in order to ascertain the points of value addition which are subject to negotiation.
Negotiation occurs at different stages and with different stakeholders in ADCO; Therefore, to enhance the execution of the contracts, the negotiations should be analysed by use of the of 5-R model, which is based right quality, right quantity, right time, right source, and right price as outlined in figure 2. Cases of Negotiations Based on 5-R model are discussed in Appendix V.
Conclusions and Recommendations
Supply management plays a critical role in the creation of value for organisations. Proper assessment of the entire procurement process can lead to understanding the gaps that arise in the process and hence, put in place measures to bridge the gaps. This was evidenced in the areas of managing expenditures, development of contracts, sourcing the right suppliers, and negotiation in the procurement process.
A key finding in these sections was that in-depth analysis of the supply management can lead to incorporation of processes that make the supply of the products and services for the seismic survey more specific; thus, impacting on the efficiency and cost effectiveness. Therefore, it is true to draw generalisations that supply management is a strategic process which should be undertaken by people with right expertise in order to deliver the required value for all stakeholders.
Therefore, one key recommendation for ADCO is to adopt Key Performance Indicators. The KPIs must form the basis for evaluation in order to set indicators for drafting comprehensive contracts and negotiations. In this respect, the KPIs should be incorporated to:
- Improve performance in the procurement process. This should entail putting in place indictors for measuring the performance of suppliers. This can be achieved by capturing data on performance over time in order to draw comparisons. The KPIs should be specific, measurable, attainable, realistic, and time based in order for value to be realised.
- Improve quality: in relation to the quality, first, KPIs should be designed to measure the defect rate of the supplier in terms of complying with the laid down technical requirements. For example, quantifying whether the technical provisions in the contract have been met as agreed. Secondly, quality should be measured in context of the procurement cycle time. The procurement cycle time is classified on basis of the length of turnover that is recorded between the requisition and delivery time. Thirdly, the KPIs should evaluate the suppliers’ compliance with the provisions provided in the contract. The compliance relates on the agreement during negotiations, ensuring that prices are negotiated based on the international market trends, sticking on the general contractual terms, and the delivery times.
- Improve rate of return on the procurement, the KPIs should also be used to analyse cost in order to ensure cost savings, cost avoidance and measure cost effectiveness for the process.
Based on the findings on ADCO supply chain in terms of selecting seismic survey partner several issues were indicated. In order to improve the procurement and supply system of the seismic, survey partner sourcing ADCO can adopt the following proposed plan to integrate with its existing P&S system,
- The selection team of ADCO supply chain can be made more efficient by selecting experts on different oil sourcing technology, and for the commercial purpose, a team of highly qualified finance and management people should be integrated into the supplier selection team.
- To increase the effectivity of seismic exploration a team of earth scientists can be employed who should be working to find the potential geographical location for conducting seismic exploration. Apart from that, the finance team would be able to have a better idea of valuing a potential seismic operation. Employing the research team would become beneficial for the firm because the team would actively be searching for a potential location where energy reserves can be found. With this, the firm would avail the option to not go for seismic survey until the research team reports a significant probability of oil reserves existence. It would help the firm to engage in more profitable seismic operation as well as reduce cost by limiting the required number of seismic survey per year, and obviously, it will be helping the P&S team to select the best available seismic survey partner.
To sum up, ADCO and its sisters companies under the umbrella of ADNOC shall implement a unified and standard Terms and conditions and HSE policy for easy monitor, control and implementation.
Supply Chain has an important role in ADCO Stakeholder management since it connects internal and external stakeholders which are:
- External such as: UNEP, Government, Suppliers and Shareholders (ADNOC, TOTAL, BP, GODCO, GSE, CNBC and CEFC)
- Internal such as: ADCO executive team, legal team, Finance, Contract Administrator, operation teams (ADCO fields), HSE and insurance.
Identifying the stakeholders and their interest help to take proper action needed from each of the above stakeholders and specify their roles and enhance the process to get each of their feedback.
A case in point, ADCO procured services of RPS Energy Ltd in order to enhance the efficiency of the seismic processes. ADCO required strategic services in order to enhance safety and cost effectiveness. The identification of the RPS Energy was based on prior business relationship and lower bidding upon the invitation for the bids. The contract added value to ADCO by reducing exploration cost by increasing the computer power and software capability in the development of real time data.
The contract was awarded by putting into consideration that effectiveness without efficiency does not lead to the ultimate required goals (Borgström 6). Figure 3 is a representation of the role of effective procurement in creation of value for the stakeholders. Thus, incorporation of the RPS Energy in the seismic survey enhanced efficiency that in turn resulted in cost saving mechanisms which created value for stakeholders.
The main areas of concern of the stakeholders relate to the prevention of environmental pollution in the process of survey and the management of the natural resources. Stakeholders have expectations that must be met in the implementation of a project. The seismic surveys have great impact on the environment; thus, one of the key stakeholders for the onshore seismic acquisition surveys has been UNEP, which represents the global community on matters related to environmental safety.
The role of the body in the seismic survey has been to ensure that the ethical concepts of environment are followed. This is not carried out on a supervisory manner, but on consultancy and advisory basis in order to ensure the integrity of the project. Even though UNEP role is directly aligned to environmental impact, it has an indirect effect on the financial integrity in ensuring that exploration techniques are tested and proven for environmental safety; which in turn leads to efficiency and effectiveness.
Government as a stakeholder is concerned with ensuring that seismic surveys do not interfere with the ecological system. For a contract to be effective and acceptable, the parties have to outline measures that will ensure balance of the ecosystem is maintained.
Suppliers determine the efficiency and cost effectiveness of the overall process. In ADCO, they are treated as business partners and create value for the organisation by ensuring that the supply chain is not disrupted.
ADCO Shareholders are ADNOC, Total, JODCO, BP and GSE. The shareholders are represented in the key management departments of the organisations. They approve budget for the survey projects, they review and approve bidders list. Also, if a project is to be extended they are involved in the approving the additional budget. Shareholders’ approval duration takes very long which affect the tendering cycle; projects with very high value related to Seismic or Drilling also go for SPC-supreme Petroleum Council Approval which sometimes takes 3 to 4 months which delays tendering cycle. Accordingly, ADCO with its shareholders shall reconsider the duration for each party.
EU can reduce the duration for Technical evaluation, in some cases it takes around 3 to 6 months for evaluation, if clear criteria for evaluation have been built from beginning this will reduce the duration which will reduce the tendering cycle for urgent requests.
Appendix II-PESTLE analysis
PESTLE analysis is a strategic planning tool that deals with macro environmental factors that affect the operation of a business by offering an overview of the external factors that affect the operation of any business (Vrontis and Pavlou 291). This is in relation to social, technological, economic, environmental, political and legal factors (Peng and Nunes 7). Table below is the general overview of the factors. However, in the context of ADCO’s seismic surveys, the main area of concern is the economic and environmental elements.
A summary of the factors to consider when carrying out PESTLE analysis
|Political factors ||Economic factors |
|Social factors ||Technological factors |
|Legal factors ||Environmental factors |
Most of the processes that relate to exploration of natural resources are closely monitored by the governments. ADCO’s seismic processes have to be cleared by the government regulatory bodies before they are executed. Hence, ADCO invests a lot of resources to ensure that all service providers comply with the government requirements on the use of equipment and chemicals.
Economic changes have direct effect on the operations of ADCO.
For instance, the changes in the prices of the materials and tools used in the ADCO’s seismic acquisition survey such as the exchange rates, the taxes and the prevailing growth trends affect the outcome of project. In seismic survey, ADCO requires a lot of energy from fossil fuels for the geophysical acquisition techniques. Changes in the cost of fuel have had a great impact on the cost of the survey. The main challenge has been the fluctuation of the fuel costs in the international market; hence, the need to keep on renegotiating contracts based on the prevailing fuel prices. In first two quarters of 2016, ADCO has had to renegotiate contracts awarded to the oil supplier RPS Energy to ensure quarterly of review of prices. The adoption of the measures has resulted in creation of value for the stakeholders as the prices are adjusted based on the market trends. The main gain has been in relation to the cost of oil, which accounts for 30% of the costs for the seismic operations.
Moreover, in accordance to the relation between supply and demand; the fertile number of pre-qualified service providers in ADCO of Seismic survey should lead to decrease in market rates due to limited demand of the service at this time.
The procurement of service providers for the seismic acquisition survey is dictated by the technological requirements. For example, the contract between ADCO and RPS Energy Ltd for the provision of the computerised services was influenced by the technological requirement and the capacity of the supplier to provide the software applications required for the seismic processes. In relation to technology, only technically acceptable suppliers are considered. To select the right supplier, shareholders participate in the assessment of the bidders in terms of technological capacity and their prices. ADCO shall consider that service is required not the tool or the technology used to avoid paying suppliers high cost for the tools not the service.
The relationship between ADCO and the suppliers is guided by different legal factors. The legal factors entail the general terms of contracting as laid out in the constitution. Further, the partners are bound by contractual terms for the agreement. For example, ADCO has to negotiate and agree with the suppliers by following the legal framework that relate to the specified contracts. To add value here ADCO shall have a master agreement with regular and international suppliers to have a standard Contracts for easy implementation and reference which will shorten the process to gain time in the tendering process.
The onshore seismic surveys affect the marine and terrestrial lives near the operational areas. This is in relation to noise emitted by the equipment being used, vibrations, and gas and liquid discharged during the project. Due to the implications, there are a lot of regulations both at the local and the international levels. As a result, ADCO has had to partner with key stakeholders in drawing the contracts with various suppliers in order to ensure compliance with set standards.
All the service contracts are signed based on the government policy on environmental conservation. ADCO has been compelled to procure services of UNEP to provide consultancy on review of equipment used for the surveys. For example, assessments of the environmental impact for the special trucks that are vibrated in order to produce seismic signal.
In the selection of the right supplier in terms of the pricing, the following steps are crucial.
If we take RPS as an example, since they have a good experience in the area they will bring the right equipment and the correct number of personnel/tools from day one this will decrease the price. In terms of Demand, market situation is getting better and expected to grow so the price will increase. Nowadays list of pre-qualified list is growing since many new comers joined the market so this will increase competition accordingly the price should decrease.
it important to note the responsibility charting is through application of RACI framework. This entails identification of functional areas of the surveys, the main activities, dealing with ambiguities and problem solution through team effort; i.e. selecting the person (R) responsible for the work, gauging the (A) accountability, (C) Consulting and (I) informing. The shareholders act as the owners of the project; hence, they establish ‘consults’ and ‘informs’ other stakeholders to streamline communication and execution of the project. It is worth noting that the main goal is not only to save money, but to attain value in the process of procurement.
The contract will be a performance driven where contractor(s) will be evaluated based on the attached KPI criteria. Contractors will be monitored throughout the contract duration and the allocation will be adjusted based on Contractor’s performance quarterly.
Contractor Performance Evaluation For Scope A.
|Date Equipment Ordered||On Location|
|Date Personnel Ordered||On Location|
|Pre planning Stage (to be completed in Aub Dhabi):|
|a) Well profile / drilling programme delivered in time (Yes / No)|
|b) Bit / BHA programme discussed thoroughly (Yes / No)|
|c) Co-Ordinator’s planning performance (Good / Average / Improvement Needed)|
|d) Co-Ordinator’s input through out job (Good / Average / Improvement Needed)|
|e) Pre-Planning stage quality (Good / Average / Improvement Needed)|
|Equipment Delivery / Performance|
|a) Tools loaded safely||Yes||No|
|b) Delivered on time||Yes||No|
|c) Correct tools for job application||Yes||No|
|d) Inspection reports available||Yes||No|
|e) Maintenance acceptable (Motor / MWD / LWD)|
|Field Job Performance|
|a) Build Rate/ Landing point achieved||Yes||No|
|b) Geological objectives achieved||Yes||No|
|c) Drilled as per trip plan||Yes||No|
|d) Planned No. of BHA’s||1|
|e) Actual No. of BHA||1|
|f) Trajectory as per plan||Yes||No|
|g) Tools Hang Up||Yes||No|
|a) Motor Size : Type :||Yes||No|
|b) Motor Size Type :||Yes||No|
|c) Bent Housing||Yes||No|
|d) LWD N/A||Yes||No|
|e) Equipment on standby duration (Days)|
|a) Directional Driller’s experience level (High / Average / Improvement Needed)|
|b) MWD engineers experience level (High / Average / Improvement Needed) –N/A-|
|c) Contributed to pre job planning||Yes||No|
|d) Anticipated & discussed consequences in time||Yes||No|
|e) Made suggestions to improve operations||Yes||No|
|f) Contributed to ensure safety on the rig & operations||Yes||No|
|g) Teamwork / communication||Yes||No|
|Safety / Environmental Performance|
|a) Use of correct personal protective clothing||Yes||No|
|b) Safe driving||Yes||No|
|c) Unit rigged up safely||Yes||No|
|d) Tools stored orderly, safely||Yes||No|
|e) Waste management awareness||Yes||No|
|f) Raised a near miss report||Yes||No|
|Total Lost Time||Total Operating Time|
|ADCO Rep. Name||DD. Eng. Name|
- ADCO Representative will send copy to Team Leader.
- Contractor will attach copy with invoice.
Appendix IV- Comparison between awarding the Contract based on ADCO strategy and Cherry Picking
|Bidder B||Bidder A||Bidder C||Bidder E||Bidder D||Bidder I||Bidder H||Bidder F||Bidder G||Cherry Picking|
|Table -1: A1 – Standard Category||17,229,650.80*||8,795,529.65||7,273,645.90||10,905,132.13||13,151,235.00||17,486,662.50||22,209,855.00||12,844,975.30||16,250,580.00||7,273,645.90|
|Table -1 A3: Additional Pulsed Neutron Modes and Common Services||510,796.18||2,772,905.39||2,796,823.82||2,933,421.55||3,900,510.48||3,270,043.25||10,472,373.28||110,688,830.13||326,145,901.00||510,796.18|
|TABLE – 2: Coil Tubing Services Charges||20,881,500.00||21,626,253.00||25,862,819.00||23,047,800.00||26,500,000.00||28,570,000.00||27,239,313.00||25,051,500.00||24,080,000.00||20,881,500.00|
|TABLE – 3: Tractors Services Charges||567,655.00||1,992,460.00||1,534,400.00||1,421,687.50||1,368,000.00||1,030,559.00||896,905.00||1,514,439.00||1,129,700.00||567,655.00|
|TABLE – 4: H2S Service Charges||33,400.00||1,565,226.00||650,000.00||3,052,800.00||1,270,000.00||774,304.00||769,500.00||1,680,000.00||1,980,000.00||33,400.00|
|Table 5.1 (Canceled and Incomplete Operation Charges – Using Coiled Tubing)||954,000.00||2,730,594.00||3,333,000.00||2,697,000.00||2,883,600.00||3,567,000.00||2,957,400.00||3,387,120.00||3,639,000.00||954,000.00|
|Table 5.2 (Canceled and Incomplete Operation Charges – Using Tractor)||25,500.00 ***||297,000.00||279,960.00||184,500.00||334,200.00||165,000.00||94,500.00||247,500.00||160,500.00||25,500.00|
|Table 5.3 (Canceled and Incomplete Operation Charges –MPFM)||26,000.00||263,744.00||284,700.00||476,500.00||235,000.00||445,310.00||510,000.00||564,747.30||372,000.00||26,000.00|
|Table- 6: Additional Charges||2,935,244.00||2,025,383.00||475,147.89||1,732,665.00||1,357,318.00||718,600.00||2,569,050.00||4,050,752.00||2,152,900.00||475,147.89|
|Table- 7: Multi Phase Flow Meter (Surface)||178,500.00||1,575,017.00||1,941,750.00||3,096,740.00||2,286,500.00||3,140,579.00||3,664,100.00||3,388,312.00||2,376,000.00||178,500.00|
|Table- 8: Dedicated Coiled tubing packages (OPTIONAL) *||–||–||–||–||–||–||–||–||–||–|
|Table- 9: Standby Daily Rate||40,200.00||664,452.00||950,792.00||1,296,640.00||1,445,000.00||948,442.00||906,180.00||974,684.40||800,800.00||40,200.00|
|Table- 10: Third Party Service||1,200.00||144,000.00||33,600.00||38,400.00||120,000.00||60,000.00||300,000.00||32,760.00||25,200.00||1,200.00|
*Bidder quoted very high price for the first item which has high usage factor.
** Contract price has reduced dramatically after applying cherry picking methodology
*** Bidder has quoted very low price comparing to other and market for item with very low usage factor
Appendix V – 5 Rights Analysis
First negotiation in any tender is between EU and supply chain. Recently SC decided to control the quality even what is related to EU responsibility, however, EU trying to resist the contribution of SC in this stage. SC tries to enhance the Scope for the benefit of ADCO in terms of personnel or specific tools/materials so EU should have clear requirements and references for the required service. Even the cost estimate should have the right basic and reference, all these are recently being checked by SC.
Another part of negotiation happens after receiving the Technical Bids from Bidders between EU and Bidders in presence of SC. Bidders propose many changes to the SOW which sometimes EU agrees to add since it was missed from the beginning. But if EU rejects that, Bidders insists to modify but at the end they need to reach to an agreement for compromise it’s either EU revisit the Scope or Bidder shall withdraw their clarification/amendment to close the issue.
Another tough negotiations happens when Bidders have contractual exceptions on ADCO T&Cs, this is to be negotiated between Tender Qualification Committee which represents ADCO and legal representative from Contractors. This type of negotiations takes many rounds until closing all items.
Concerns in this matter shall be studied and negotiated in a very diplomatic to reach a compromised situation. Bidder main concerns are the items which have cost impact like reducing the value of Liquidated damage, the value of non-productive time, amount of PBG, liabilities and indemnities which includes Equipment lost in hole / Damaged beyond Repair. ADCO rejects changing these values since they are decided from SHs and Bidders are requested to price it. ADCO shall reconsider this or shall be discussed with SHs in yearly basis for the benefit of ADCO since Bidders always consider these items in their offers which increase the price.
The right quality designates the use of the standard specifications, efficiency and environmental considerations. Having been a long term supplier, cases of quality compromise have been reported. As a result, ADCO has to renegotiate the quality terms with RPS Energy to ensure that value of money is realised. In this case, ADCO has the bargaining power as a continued breach of the contractual term can lead to termination of the contract which RPS has enjoyed for the past two three years.
Right time is a critical factor in the purchase process. Many disputes arise due to late suppliers. There is the need for consensus between ADCO and the suppliers on timescales for delivery or commencement of products.
Negotiation happens while discussing the mobilization time to reduce it to minimum if Contract is signed already and the current contract for the same service is expired. In this regard ADCO shall request and negotiate the mobilization period after issuing the Tender Invitation package directly and the duration proposed shall be evaluated during the technical evaluation to avoid risk in delay. This is done between EU(Contract Admin), supply chain and Supplier to decide the best decision and how ADCO can help them to deliver within the right time.
In many past instances, RPS Energy has cited logistical hurdles that have resulted in delayed supplies. Therefore, the point of negotiation would be to readjust the contract terms in order for the supplier to come up with mitigation measures in case of delayed supply. One area of negotiation is to agree on special supplies for each delivery which will be reconciled and compensated on quarterly basis. Agreement on the extra supplies will avoid the unforeseen instances of fuel shortages due to the logistical hurdles that in many cases affect the efficiency of the seismic onshore survey.
Right quantity entails an agreement with the supplier on the regular flow of the materials (Christopher 12). Value of money is realised by ensuring that the right quantities are delivered to the organisation. Currently, the key contracts between ADCO and suppliers that have a direct effect on the performance include the data acquisition services and the supply of the fossil fuels for the seismic work.
Therefore, the points of the negotiations between the suppliers should centre on the points of improvements in order to ensure that quantities are delivered as agreed on the contract. Also, a point of negotiation would be in areas where there is need of reduction of the agreed quantity. For example, as the work progresses, many activities have been completed and the demand for the fuels has been reducing. As a result, ADCO needs to renegotiate the quantities of fuel in the context of the projected works in order to avoid cases of surplus.
As pointed out, seismic surveys have a high potential of interfering with the existing ecosystems. Therefore, the products used by ADCO for the process should be from certified producers who have been approved to be compliant with sustainable environmental practices. For example, in the case of oil supplier, negotiations should centre on ensuring that RPS Energy obtains its oils from trusted international dealers for supply of clean oils.
The most critical and touch negotiation happens when is done to discuss commercial issues. Unfortunately ADCO doesn’t really negotiate commercially for the regular tender since the lowest Bidder is awarded without negotiation then the second lowest shall equate his price to the lowest if not ADCO will go directly to the third lowest and so on.
However, in the current market situation and fluctuation in the oil price, ADCO with its Shareholders discussed how ADCO can get benefit from this dramatic situation? Negotiation with all current Contractors were conducted and they were requested to provide minimum of 20% discounts on the total Contract value which was very hard for Contractors and many rounds of negotiation has been done.
Basic negotiation technique that ADCO practised is the long term relationship as partners not buyers with suppliers and the endless support that ADCO provided to all newcomers in the market with field trials and on time payment. Another good approach shall be done by ADCO if more discounts is required is to encourage suppliers to provide discounts by increasing their shares or grant their participation in future tenders.
Example: After the changes in the oil prices experienced in 2015, the point of negotiation between ADCO and RPS Energy should be on adjustment of the cost of the oils in order to reflect the prevailing international market prices. Also, another point of negotiation in relation to the fuel supply is for ADCO to request at least 10% discount on all fuel supplies made between February and August in order to compensate the oil drops recorded at close of 2015 in which RPS Energy did not adjust the prices on the fuels it supplied to ADCO. Agreement on the proposals will enhance business between the two companies and create value for ADCO’s shareholders.
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