The Leap from “Logistics-as-a-Function” to “Logistics-as-a-Service” for Energy & Resources Sector
As the world learns to live with COVID-19, businesses are battling to stay relevant. The energy sector was hit a double blow with the prices of Brent hitting historical lows, and WTI futures running into negatives. Energy companies were quick in responding to the industry downturn by cutting capital expenditure by 30-40%, scaling back existing production, reducing workforce by 50-65%, running operations with essential workforce only, and halting drilling with rig counts reduced by more than half. Though a pandemic of this scale is unprecedented, energy companies have to find innovative ways to transform to stay competitive in these difficult times.
Logistics is one of the essential parts for the Energy and Resources business which, in itself, is complex with regulatory compliances, safety requirements, multiple modes of transportation, high cost of operations, and high consequence of delayed logistics. Administrative and transportation costs range from $2-$5 per barrel of oil1, which is more than 70% of the operating cost for certain regions. With such high logistics cost, companies should redefine logistics in a fundamental way and look at alternate logistics models to further optimize the cost.
Evolution of Logistics in the Energy & Resources sector
Back in the early days, most companies followed the 'de-centralised' logistics model to meet their supply chain requirements. Departments like drilling, production, and major projects were working in silos and managing their logistics requirements. It is safe to say that across the world, the industry has moved away from this model, due to high cost of operations, poor load factor, non-standardized process, high risk of incidents & HSE issues, and most importantly, non-scalability to adapt to changing industry trends.
The energy & resources industry transformed from different functions working in silos to consolidating logistics demand by a 'centralised' logistics team who manage the end to end execution of logistics. Around the world, there are different flavours of centralised logistics models that are adopted, ranging from companies owning the assets and executing the logistics in-house to managing logistics via 3PL (3rd Party Logistics) firms. The common denominator in all of these variants is a centralised logistics team to consolidate the demand, engage with the logistics execution teams for each mode of transportation and track the day-to-day operations. With this demand consolidation, energy companies were able to bring in the standardisation of the logistics process, improve load factor, reduce logistics cost per barrel & reduce exposure of HSE & incidents. This maturity in the process brought the key transformation of looking at logistics as an essential function within the industry.
- Should logistics be a part of energy companies' core business/function?
- Can logistics be executed by a specialist 3rd party company, without compromising on safety, ensuring criticality to the core business and addressing its complexity in a cost effective way?
- Can industry further optimise load factor and reduce cost of operations by asset sharing?
'Logistics-as-a-Service' – 4PL model
4PL (4th Party Logistics model) is a business model where specialized firms manage, run, and execute logistics on behalf of energy companies. Integrated energy companies use 4PL to ensure the job is done right. Through this model, companies are able to further optimize the logistics cost, improve asset utilization, minimize asset downtimes, and reduce safety exposures. 4PL models are still not widespread across various regions and energy companies continue to have a centralised team to control & monitor the end-to-end logistics operations, manage the 4PL contracting firms, and decide on 3PL service providers. 4PL firms run dedicated operations for these companies and have not evolved into a shared service operation managing multiple energy companies' demand leveraging the economies of scale. There are many apprehensions energy companies have, to adopt logistics as a service model, which the service provider industry needs to take into account.
If I can bring in an analogy, a decade ago on-premise hosting of software application was the norm, with cloud hosting and SaaS (Software-as-a-Service) models just getting introduced to the world. A decade later, software can no longer survive if it is not hosted on cloud and world is aggressively moving to multi-cloud strategy. Similarly, energy companies have to view the transformation of logistics from a function to a service.
'Logistics-as-a-Service' – Shared Service Consortium Model
In the past, shared service business models have been attempted by the consolidation of demand, i.e., energy companies, who have operations in the same region, coming together and choosing a 4PL firm to operate on their behalf by having a seat-sharing agreement. One of the biggest concerns in this approach is scalability and replicating such a model for newer areas of operations. Over the last couple of years, 'supply-side consolidation' is driving the shared service models to realize the complete benefits of executing logistics as a service. Multiple logistics specialist companies are aggressively partnering to offer a comprehensive end-to-end service for energy companies.
For example, for the Canadian energy sector, a consortium of multiple charter airline service providers with varying fleet sizes, Fixed Base Operators (FBO) & service contractors, Travel Services management, and Technology companies have come together to service both large and small-sized energy companies & operators.
These consortiums offer managed service of end-to-end logistics activities such as flight scheduling, capacity optimization, reservation command centre, dispatch operation, ground handling, ground transport and IROP by enabling asset sharing across multiple energy companies. Similar consortium models are being operated in Australia and European regions as well. Diverse service provider consortiums are one of the key elements for the success of the shared logistics model. These regional consortiums should be able to address all local requirements and offer a shared service for multiple energy companies in the same region. This model ensures further reduction in logistics cost, an asset-free logistics management and meets all safety & regulations.
'Logistics-as-a-Service' – Logistics On-Demand Model
In the world of personal commute, 'Logistics-on-demand' is the norm. Innovations like air-taxis or heli-taxis are going to be at the forefront in the next 5 to 10 years. Logistics on demand enables multiple service provider options, competitive pricing and flexibility. This model looks less feasible for energy sector, considering the operational constraints of remote logistics, regulatory, and safety requirements but it may be used along with shared service model as a hybrid approach. This will enable the door-to-door logistics for home pickup/drop off of workforce. Energy companies should use the current COVID-19 crisis to bridge the gap on how logistics is being executed taking inspiration from personal commute and other industries.
During any crisis, as the saying goes, 'getting back to basics is the simplest way to find calm in the chaos'. Energy and Resources companies should use this crisis as an opportunity to have a paradigm shift in how logistics is viewed, aggressively pursue 100% asset-free logistics management and enable industry-wide shared service models. Through this transformation, energy companies can drastically reduce logistics operations cost and focus on its core business, execute logistics-as-a-service without compromising on safety, regulations & meeting its business objectives. More than demand-driven consolidation, supply-driven consolidation & optimization shall enable industry-wide sharing and increase collaborative platform. Many factors are essential for the success of shared service consortium like removing apprehensions of energy companies, meeting the service levels, visibility to the operations, ensuring business objectives are met, regional & company-specific requirements, and so on. Some of these have to be addressed by logistics specialists and consortiums through the process and Standard Operating Procedures (SOP's). An integrated technology platform plays a vital role in enabling the industry to fasten this transformation, which is the topic we shall focus in our coming blog posts.
1. Rystad Energy UCube
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