Kyle Ritter, Manager of the Strategic Sourcing Group (SSG) at Velocity Oil & Gas
ID: 427728 • Letter: K
Question
Kyle Ritter, Manager of the Strategic Sourcing Group (SSG) at Velocity Oil & Gas Company, sat at his desk and ran through his briefing points for his meeting later in the day. Kyle was the manager of the first-ever SSG at Velocity. A year ago, he had left a promising career as a purchasing manager with a consumer-packaged goods firm back in the mid-west for a complete change of scenery, geography (Denver), and profession (oil and gas exploration and production, or "E&P"). Velocity drilled and operated wells in the "DJ Basin" and the Bakken Formation, oil and gas-rich regions in Colorado and North Dakota. Kyle had been approached by a senior VP at Velocity about starting a professionalized PSM function for Velocity. Like many E&P companies, Velocity did not have a sophisticated PSM operation. In fact, they didn't have one at all. The engineers and project managers who designed the wells and ran day-to-day operations made all the key PSM decisions such as, which suppliers to do business with, negotiations of price and delivery terms, contractual issues, etc. Kyle was brought on board to change that, he was to bring the advantages of a more sophisticated and strategic PSM approach to an industry badly in need of it.
Rough Landing
Unfortunately, Kyle's "honeymoon" lasted about a week. Johnny Grumpman, one of the most senior engineers, had approached him in the cafeteria and said, "Welcome aboard. I don't even know why you're here." When Kyle had tried to clarify what he meant a few days later, Johnny seemed dismissive, "Look, I know you mean well, but this isn't like making laundry detergent or breakfast cereal. We move fast, we all talk in ‘engineering language', and we've already got strong relationships with the important suppliers we want to use. I can pick the suppliers better than somebody with a business background could, so why even have you here?" While most of the engineers weren't quite as blunt as Johnny, his sentiments were shared by a majority of them.
In the year that followed, Kyle built his team and embraced the steep learning curve in educating himself about the oil and gas industry and the supplier markets serving it. He attended meetings that felt like they were being conducted in another language ("Engineese" as one co-worker called it) and utilized his communication skills to make inroads with his engineering and operations internal customers. But he still felt that he was being held at arm's-length. The engineers were happy enough to hand him work they felt "wasted their time" and wasn't as important to them, but were very reluctant to let his team have significant input on supplier selection or negotiation on large and critical needs. Even after his team saved over $1M annually by negotiating a contract for well-site MRO (machinery, repair and operations) supplies, he was still relegated to "second class status" in his mind. It was quite frustrating. In other industries, PSM was recognized for its strategic value, why not here?
The Supplier Selection Meeting
Kyle was convinced that the meeting today would finally move things forward and show the value that a professionalized PSM function could bring to Velocity. The team would be making a final selection on the supplier for well-site fracking services, a very large and important buy. Kyle's team had done extensive research, and had discovered the following:
Velocity had used Ferocious Fracking, a smaller outfit with whom many of the senior engineers had close personal relationships, for most of their wells in the last fifteen years.
Occasionally, due to the bid prices being too far apart, or the difficulty of getting the right people in place (especially in North Dakota), Behemoth Oil Field Services (BOFS), a global leader in such services, had been used. But Behemoth clearly seemed to be the "backup" supplier in the mind of Velocity.
As many as ten companies had tried to bid on the current well project, and at least five of them seemed to meet the minimum financial, quality, delivery and price requirements to be considered for the business. Two of those five were fairly new companies.
Based on market analysis, Velocity seemed to be overpaying for fracking services, and a couple of the companies mentioned above were bidding at or slightly below market rates.
Usually, the engineers would simply decide whom to use by having a general discussion around the table, and would do a quick glance at the basic price quote from Furious and Behemoth. Kyle's intention was to use the data his team had assembled to make the case for a formal bidding procedure. He planned to argue that five companies should be considered, and that they should be required to submit detailed proposals for how they planned to meet Velocity's needs in all areas: quality, price, delivery, etc. He knew he'd have a tough time – when he mentioned it to Johnny earlier that month, Johnny simply snorted "Eh, why fix what isn't broken? I've known Furious Fracking for years, I trust them. And if they screw up or can't do it, Behemoth's ready to snatch it away from them. I don't know any of these other guys, why should I spend a lot of time evaluating them?"
Kyle headed towards the conference room, feeling slightly nervous. Today he was making the pitch for why the synergies between his team's commercial expertise and the engineering group's technical knowledge would bring great value to Velocity. How would his proposals be greeted?
Questions
How do you think Kyle will be received? Will his "data-driven" approach make him more likely to be successful?
Why has Velocity taken so long to try and professionalize its PSM function? Every industry thinks it is completely different and unique – is the E&P industry really that different, in your opinion? Why/why not?
What are the real barriers to reaping the value of PSM at Velocity?
In your opinion, how can Kyle better demonstrate the value of PSM to skeptical internal customers?
Explanation / Answer
Kylie will be received with hostile and a defensive approach. He is seen as an unnecessary resource and a potential professional rival who is interfering in a smooth sailing organization.
His data-driven approach can make a positive appeal to the management and might create some interest in the engineers and project managers. The engineers and project managers are more interested in making a quick decision rather than just saving costs by using scientific data-driven approach. The management will be happy to cut costs and introduce a process driven approach rather than a person driven approach.
Velocity has taken long to professionalize its PSM function as the attitude of the engineers, project managers, and team members are not in favor of the introduction of any systems or processes. They also feel that they are doing the best and there is no room for change or improvement. The engineers and project managers also feel threatened by using a process driven approach as their importance might get diluted.
The E&P is not different as it has the same functions as any project management company and they have repeated activities in each project which can be taken as a profit center for example:
The real barriers to implementation of PSM at Velocity are as follows:
Kylie can change his approach from a directive one to an inclusive one. Some of the key engineers should be involved in the process of PSM implementation and the key members can be asked to demonstrate through presentations the usefulness of using PSM. The key team members should be trained and educated by the management for the need of PSM and also how it will support their work. Kylie has to work along with the engineers and project managers and should spend more time understanding their perspective and make presentations accordingly.
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