Really? — Platform Based Supply Chain in Oil & Gas

Is platform-based supply chain the next big thing in the oil industry to reduce the cost basis? A question that attracts both enthusiasm and skepticism.

Platform based services ( and supply of materials) is a successful concept used very well by Uber, Google, AirBnB and the likes. Probably too far to what we do in the oil industry, but let’s look at what underpins the business model that is based on creating a platform.According to Sangeet Choudary, a coauthor of the book called Platform Revolution, there are two general business models, Pipes and Platforms. With Pipes the value is created by producers and pushed to customers to consume it. This is very common and traditional way of exchanging value in a market. With Platform concept, the value is co-created. According to Sangeet in Platform business models “Users (producers) can create value on the platform for other users (consumers) to consume”. One of the key benefits of the Platform based value exchange is that waste is removed from the whole value chain, hence lowest possible price paid by the consumer. This waste is removed in a variety of ways and include redundant processes, more value creation, removal of large inventories, better utilization ( and sharing) of resources and overall more efficient, as there is less interaction in the whole system.

Now imagine, if there are platforms with network of qualified (and approved if you want) value producers (manufacturers or service providers) who can produce whatever is that you need to buy. Log in, populate what you need and when, and see who has the best deal or launch a reverse auction, and then enter into a valid contract. This is so simple and effective for a large variety of categories of spend in the oil industry. What is also good about it?

• It is transparent & competitive
• It provides better demand and supply information — so much needed in the oil industry
• Suppliers who compete based in utilization of internal resources, have little competitive advantage over platform based suppliers, as their costs are not driven by their assets value, utilization and many other things around owning an asset. Hence, new generation of suppliers participating in a platform based marketplace are able to reduce the cost basis for the whole industry
• Sharing the platforms with other industries is even a step further to share resources and remove waste from the value chain. Service companies in the oil industry borrow many technologies from other industries and utilize their manufacturing resources ( e.g. aviation, space, medical, chemical, military)
• Scalability — low marginal costs and network effects grow the platform and make it more attractive for all, hence reduce cost for all

Why we don’t do it then? There are a few reasons:

• There seems to be no platforms in existence which cover all the aspects of the Platform based business model. There has been a great move towards e-sourcing and e-bidding, lately. But, fundamentally, what those resources (software) do is replicate a manual process into an e-system and automate transactions, which is an attribute of Pipe based model
• The industry is so much obsessed with “sealed bids” and “minimum of 3 bids” , to the extend that people tend to believe that sealed bids and 3 bids result in the best price / value-for-money obtained and no other way is good. The whole idea of buying things off a platform is scary for most of the people ( the industry did a good progress in procure-to-pay systems, though)
• We want to ensure QA/QC is there and no “half-past-six” companies produce value of us
• As the industry we are not used to buy things online. How many people are aware (and use it) of Baker Hughes online shop?! It even has “sale” events!
• We want to have it very clear — who is to blame when smth bad happens

Where can you use it in the oil industry? Well, anything that is based on temporary use (aka callout) and where timely information is key are potential areas for deployment. Perfect candidates may include services like coiled tubing units, onshore cementing units, vessels, manpower, generators, solar units, wireline, callout down-hole tools, repair and workshop services and many others. Most of those things are not proprietary and there is abundance of it these days.

What needs to happen to make it work? In addition to industry specific stereotypes, this is a classical chicken-and-egg situation: no consumers — no producers will come and vice versa, no producers — no consumer will come. Key things to address:

• Oil companies should drive a roll-out of this concept for a simple reason — it is in their best interest to reduce the cost basis
• Champions to promote it within the industry
• Industry collaboration is a must to build a network effect, so value producers become more active and incentivized to come to the platform and stay active
• Use existing industry specific databases to inspect, qualify and vet suppliers. Feedback loop mechanism, being an integral part of the Platform business model, will ensure that information is available and visible to all
• Learn from other industries, where platforms has been successful used, such as:mfg.com, kreatize.com, 3Dhub.com, floow2.com and few more.

Many innovative companies and entrepreneurial people created those platforms to solve a variety of problems in today’s industrial world, yet majority of people ( perhaps none) in the oil industry do not use them. I reckon, people (and companies) will start using the platform based concept when the stick is so big, that there is no other choice but to use the platforms in order to survive in business. BTW, for those who are risk-averse… organizations like NASA, GE, Spacex, Honeywell use some of those platforms already. Today, even the legal industry looks at platform based concept.

As said in the book Platform Revolution “Platform eating the world”. So watch it.