2009 Academic Case Study Series: BP's Procurement and Supply Chain Management

2009 ACADEMIC CASE STUDY SERIES
BPs Procurement and Supply Chain Management

An Academic Learning Case Study written for the
Council of Supply Chain Management Professionals
Arunachalam Narayanan, Texas A&M University, College Station, Texas

Malini Natarajarathinam, Texas A&M University, College Station, Texas
Brandon Winn, Procurement & Supply Chain Management, BP
Council of Supply Chain Management Professionals

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This case was developed solely for the purpose of classroom discussion. Some details of the case have been
disguised. This case is not intended to serve as endorsements, sources of academic or business data,
or illustrations of effective or ineffective management of the personnel or company.
Overview of BP
BP p.l.c. is one of the worlds largest energy providers of fuel for transportation, energy for
heat and light and petrochemical products for everyday items 1 . BP has interests in both
upstream and downstream segments in over 100 countries worldwide making it a fully
integrated energy company. Upstream refers to finding and extracting crude oil and natural
gas from deep underground reservoirs. Downstream operations consist of refining and
marketing oil and gas into usable consumer products.
The United States subsidiary of BP p.l.c., BP America Inc., is the nation's largest producer of
oil and gas 2 . They own and operate oil and natural gas fields, refineries, chemical plants and
lubricant processing facilities in 22 states that are worth over $40 billion in fixed assets 3 . BP
America has both onshore and offshore drilling operations in the United States.
This case focuses on upstream procurement activities in the Gulf of Mexico. Figure 1 depicts
BPs offshore platforms. Assets in the development stage have project teams and robust
drilling programs to bring newly discovered oil and gas to the market. Once "first oil" is
achieved and the asset is fully commissioned, it transitions to the production group that
operates the newly drilled wells. Overall demand for drilling products and services decreases
in the production stage. A typical oil field in the Gulf of Mexico can produce for up to
twenty years or more before the reservoir is fully depleted and the asset is decommissioned.
BPs official website : http://www.bp.com ; p.l.c. stands for Public Limited Company (UK)
House Committee on Energy Independence and Global Warming, April 1, 2008, Bob Malone
3
BP Americas website : http://www.bp.com/genericarticle.do?categoryId=9004470&contentId=7040414
(Retrieved on May 31, 2008)
2
Figure 1. BP assets in the Gulf of Mexico

BPs Procurement and Supply Chain Management
The Procurement and Supply Chain Management (PSCM) group of BP America is a partially
decentralized organization. Their function is to develop plans for the management of third
party spend and to motivate and engage the broader BP workforce in order to achieve
maximum value from suppliers and contractors. Within their Gulf of Mexico operations, BP
spent about $2.9 billion in 2004 and $3.5 billion in 2005 on third party suppliers.
The goal of PSCM is to achieve maximum value from third party spend while mastering the
associated risks. To deliver this goal the group must leverage BP's scope and scale by
developing foundational and strategic PSCM capabilities such as standardization,
aggregating demand, building
strategic relationships, and
developing supply chains in
C on ductor p ip e
emerging economies.
The
PSCM group is responsible for
sourcing all goods and services
required for drilling and
S u rfa c e ca sing
producing hydrocarbons.
A key product category for
BP's business is steel pipe that
is cemented into the drilled
well to protect and isolate
geological formations from
collapse and contamination.
The other purpose of the pipe is
to allow hydrocarbons to flow
T u bing
Inte rm ed iate cas ing

P a ck er
P e rfo ra tio ns
P rodu ction ca sing
3
Figure 2 . Pipe placement in the wellbore
from the reservoir to the wellhead. Well depths in the deepwater Gulf of Mexico region are
often 25,000 feet from the ocean floor down to the reservoir. This product category is known
in the industry as Oil Country Tubular Goods (OCTG). The terms OCTG and pipe are used
interchangeably throughout this case. Figure 2 illustrates pipe placement in the well and the
corresponding name of each pipe section.
There are three general classifications of OCTG material: carbon, alloy, and chromium.
Carbon pipe is of a lower grade and strength, and is often used in onshore wells of low
criticality. Wells in the deepwater Gulf of Mexico have high pressures and aggressive
corrosion conditions requiring more expensive high grade alloy and chromium pipe for
corrosion resistance.
Wellbore placement is noted in Figure 2. Each joint of pipe is mated together via male and
female threaded connections machined onto each end. When a section of the well is drilled
and ready for pipe placement, workers on the drilling rig vertically stack the pipe and lower it
into the well one by one by twisting each connection together with large iron tongs. After
being lowered and set into the well, cement is pumped through the pipe and then pushed out
the bottom and up the sides between the outside of the pipe and the rock. After the cement is
dry, the next hole section is drilled.
Domestic oil and gas industry
Since 2003, there has been an increase in drilling activities both in the US and around the
world. As the selling price of oil and natural gas increases, more capital is available for
drilling projects 4 . According to the America Petroleum Institute (API), completion of US oil
and gas wells have consecutively increased for the last twelve quarters since 2003 5 , and in
late 2005 reached the highest levels in nearly 20 years 6 . The following figure shows the
number of US oil drills versus the West Texas Intermediate (WTI) crude oil price 7 .
Rach N. M. "Worldwide drilling surges ahead", Vol. 103. Issue 36, 39-47, Oil & Gas Journal, 2005
Snow N "API: US well completions broke records during 3Q", Vol. 104, Issue 42, 28-29, Oil & Gas Journal,
2006
6
"US outlook : All we need are more rigs and crews", Vol. 227, Issue 2, 43-46, World Oil Magazine, February
2006
7
Data for the figure was obtained from Baker Hughes and the U.S. Department of Energy
5
rig rig
count
versus
WTI crude
priceoil price
Figure 3U.S.
. USoiloildrilling
drilling
count
versus
WTI oil
crude
350
$80
$70
300
$50
250
$40
200
$30
Crude Oil Pric e
U.S. Oil Rig Count
$60
$20
150
$10
100
Feb-06
Sep-05
Mar-05
Oct-04
Apr-04
Nov-03
May-03
Dec-02
Jun-02
Jan-02
$0
Rig Count
WTI Price
The upward trend in drilling has put a strain on the OCTG supply chain. According to one
supplier of pipe, the total US OCTG inventories were relatively low at about four months'
supply (or 1.2 million tons) at the end of 2004. Wary of fluctuating steel costs, pipe
distributors have also kept inventory fairly lean in case of a price drop 8 . These
developments, coupled with the capacity limits in the OCTG supply chain, results in long
lead times for the end user and forces energy companies such as BP to carry large amounts of
inventory to meet the drilling demand.
Sourcing pipe at BP
Since OCTG accounts for only one percent of the global steel market, the manufacture of
pipe for the oil industry is scheduled at the steel mills' convenience. The recent economic
boom in China and India caused steel producers to focus on metal goods used in building
construction and the automotive industry (the two largest users of steel). This bias toward
other industries and the scarcity of raw materials result in 2 to 24-month lead teams for
certain OCTG, making demand planning at BP especially difficult.
While steel pipe may sound like a commodity, metallurgy and manufacturing quality is
paramount. BP carefully selects steel mills located in the United States, Europe, and Japan
capable of manufacturing API standard pipe grades with the engineering ability to develop
"Tubular goods suppliers strive to extend 2004s strong performance into 2005", Vol. 2, Issue 3, Oil & Gas
Financial Journal, May 2005
unique metal alloys set by BP's own standards. Only a handful of steel mills meet this
criterion.
To help ease the inventory burden to BP, a single domestic distributor that represents most of
the selected steel mills is utilized. The distributor will only carry products manufactured to
API specifications; any custom pipe made for BP is purchased directly from the mill. The
agreement with the distributor allows for the return of unused or defective products, preferred
pricing, and consignment-based inventory. When custom pipe is ordered, BP owns it at the
time of manufacture. These direct mill orders are non-cancelable and non-returnable.
A further complication to the purchase of pipe used in the Gulf of Mexico is the threaded
connection itself. Premium threads are proprietary thread designs manufactured by select
companies. These proprietary thread designs achieve a gastight metal-to-metal seal that
standard API threads cannot. BP has standardized on two brands of premium threads for
pipe used in offshore wells. These premium threading companies, Seal Tight and Interlock,
have strategic relationships with either the steel mill or distributor. Most pipe orders specify
the thread type so the threading operation is performed at the mill. However, there are some
instances (less than 15 percent) where the pipe is received plain-ended, and BP is responsible
for having the pipe threaded at a local Seal Tight or Interlock facility.
Order placement process

The order placement process of pipe for drilling operations involves the following steps:
First, the engineer defines the pipe specifications after analyzing the drilling location. The
specification includes size, weight, length, grade, and connection types based on the pressure,
corrosion requirements, and well depth. Most of the pipe specifications are based on API
standard grades carried by the distributor. However, exploratory wells present a high level of
uncertainty and sometimes require engineered solutions beyond any standard grade of pipe.
In these instances, BP must work directly with the mill to develop a solution.
The engineer provides these specifications to the materials coordinator (buyer) through an
internal requisition process. The materials coordinator then places the order with the
distributor based on pre-agreed terms and pricing in the master contract 9 . In cases of unique
purchases, the approved mills will submit proposals and a purchase order will be awarded to
the selected bidder.
Once the order is placed, the domestic distributors schedule the production in steel mills
based on pipe specifications, availability of capacity in the steel mill, and its threading
capability. The pipes are mostly ordered on the basis of consignment, while in some cases BP
owns the inventory. The steel mill after receiving the order from the distributor, places it in
9
In most cases, BP would receive staggered shipments of its pipes. For example, if the project requires 100,000
feet of a specific pipe, they would receive 20-40% of it in the first shipment based on lead time and rate of
consumption and accept the remaining quantities in subsequent shipments.
the long production queue based on the priority of the request. After production, the pipe is
shipped to storage yards in Houston. If a domestic mill manufactures the pipe, it is either
shipped via rail car to Houston and unloaded directly into the yard, or placed on a truck that
delivers to the yard location. Pipe ordered from foreign mills is shipped into the Port of
Houston where it is then trucked to the storage facility. In one case, airfreight was used to
transport a very urgent order at a cost of $1 million. Approximately 60% of all OCTG is
ordered from foreign mills.
Storage, inspection, and shipment to drilling rigs
BP stores their inventory in a third party facility located in Houston that specializes in pipe
maintenance and inspection. At the storage facility, pipe is inspected using EMI
(Electromagnetic Inspection) and FLUT (Full Length Ultrasonic Testing) techniques to
identify the presence of any manufacturing or stress induced flaws. Pipe inspection must be
performed at this stage of the supply chain because due to the time consuming process steel
mills will not inspect pipe to the standards required by BP.
Although the storage facilities are not owned or operated by BP, safety of the workers is the
number one priority. BP pays a premium to have its own segregated section of the pipe yard
with specially trained contract personnel to handle the movement of pipe inventory to and
from the inspection facilities. Since pipe is kept in storage for extended periods of time,
corrosion prevention becomes quite important. To maintain the integrity of the pipe, they are
stored at least 18 inches above the ground and stacked up to no more than six feet. The six
foot height restriction is due to an industry safety code that requires personnel to be tethered
in a safety harness. Pipe can be stacked up to ten feet if a tie-off is available. Recycled
plastic timbers are placed between each stack and the threaded portions of the pipe (most
susceptible to corrosion) are protected by composite thread protectors. The racks are
constructed so that the pipe is slightly slanted to allow for water runoff. Such racks cost
approximately $1,500 to $2,000 to construct.
When the operator from the drilling rig requests the pipe, the yard crew prepares it for the
drilling rig, which includes a full-length drift, addition of pipe accessories such as float
equipment and centralizers, and bolstering for offshore platforms. They are stacked on trucks
with 44,000 lbs load limits using a forklift at a loading cost of about $200 per truck, and
shipped to Port Fourchon in Louisiana at a cost ranging from $3 to $5 per mile per truckload.
The pipe is then loaded and shipped on a vessel to the drilling rig.
Pipe purchase: Should they consolidate?
BP's inventory consists of 35 different pipe specifications. Specifications refer to outer
diameter, measured in inches, weight, measured in pounds per foot10 , and grade, which refers
to the metal composition. Most pipe specifications are standard API, except for those used in
exploratory wells, which are typically proprietary grades.
10
Refers to the thickness of pipes
Appendix "A" shows the 35 different pipe specifications currently stored in Houston. The
grades of the pipe increase in material strength and corrosion resistance as you read down the
table. When HC is denoted in the grade, it refers to high collapse which means the pipe has
higher yield strength and can withstand high pressure wells. 13Cr110 grade pipe provides
carbon dioxide corrosion resistance, but cannot be used in sour gas (hydrogen sulfide)
producing wells. 25Cr125 can be used in both sour gas and carbon dioxide producing wells,
but is only utilized by one project. Outer diameter and weight increase when read from left
to right. The table provides information on the average annual usage of each type of pipe in
thousands of feet as well as the standard deviation of demand. There is a large variability in
usage due to project specific orders.
Appendix "B" provides the price per foot of each pipe specification and the associated lead
time in weeks. Generally there is a premium price paid for the higher grade pipe and in most
cases they have longer lead times. Pipe of lower grade can be substituted with pipe of higher
grade if it is within the same outer diameter and weight range. Also, the price per foot will
decrease with an increase in annual usage. The pricing chart provided is associated with the
annual usage in Appendix "A". A forty-foot length should be assumed for all pipe identified
in the table.
Project economics are determined by the price of oil. Exploratory and appraisal wells are
typically the first to be canceled or delayed when oil futures trade low. These types of
projects also require custom engineered pipe that remains in inventory, sometimes for years,
if the project is canceled. Even for sanctioned commercial projects, individual teams often
work in silos and develop different solutions for the same problems. Also, factors such as
weather and lead time may affect project schedule, making demand forecasting even more
unreliable. Lack of standardization and a fragmented project approach lead to excess
inventory that cannot be shared between different projects. When considering inventory
carrying costs, which include the cost of capital, opportunity costs, material handling costs,
and inventory control costs, it is not economically feasible to store the pipe for long
durations. In most cases, the pipes that are left in the pipe yard would probably be written off
as scrap, unless an engineer requests the same grade.
PSCM is looking for ways to coordinate the purchase of pipe to avoid excess inventory in the
system. The plan is to buy a common specification of pipe, which is acceptable to most
locations in the Gulf of Mexico, so that inventory consolidation is possible. Two likely
sources of resistance to this initiative are the engineers and joint-interest accounting.
Engineers on the project teams want their pipe optimized for each individual well. Jointinterest partners have trouble justifying the cost difference between the grades of the pipe.
For example, a pipe designed for high-pressure environments can be used in locations where
the pressure is low, but at a greater unit cost thereby increasing the cost of the drill rig.
A leaner inventory can be troublesome if pipe cannot be expedited. If the pipe is not
available when needed, BP is still obligated to pay for all costs of the drilling rig even when
idle. Non-productive time costs the same as productive time, which can be anywhere from
$400,000 to $1,000,000 per day. The drilling rig costs alone often justify a fully stocked pipe
yard.
Storage and inspection facilities: Current situation

The supply market for OCTG storage and inspection has seen significant consolidation. In
2002 and years prior, BP utilized four pipe yards in the Houston area. In mid-2003, Southern
Inspection, a subsidiary of a large oilfield supply conglomerate, acquired all four of these
facilities. Each service contract was transferred to Southern Inspection, and the pricing was
honored until their expiry in 2004. When a new contract was negotiated, unprecedented
price increases ensued. The average price of inspections rose by 15% and pipe movement
costs increased by 25%. Southern Inspection cited increased demand for storage space and
investments in new inspection equipment as the primary drivers. BP found itself in a weak
buyer position, and accepted the new pricing. The negotiated price list is provided in
Appendix "C".
Soon after the contract was signed in 2004, the BP Logistics group conducted a study
evaluating the possible relocation of the present storage facility for OCTG in Houston to a
site or sites in Louisiana. The study looked at the cost of handling, taxes and logistics
capability in the region. The findings of this study indicated potential savings in dollars and
time through such a move, providing comparable facilities and services were available in
Louisiana. Because this study was limited to transportation and tax issues, additional
information pertaining to the other services required for OCTG storage and inspection is
necessary.
BP currently occupies approximately fifty acres of storage space at the Southern Inspection
yard and expects to increase this space requirement by five percent annually for the next
three years. A compelling reason for moving inventory to Louisiana is the fact that the state
of Louisiana does not tax inventory stored for maritime use. BP inventory stored in Houston
has an ad valorem tax applied to it by the state of Texas. The tax is approximately 3% of the
annual inventory value. This is a significant savings, when considering the cost of pipe
inventory, which generally runs above $150 million annually. Another reason for relocation
is the savings on transportation if pipe is received into the Port of New Orleans (instead of
the Port of Houston) and stored in nearby facilities in Louisiana.
PortofNewOrleans
PortofHouston
PortofFourchon
Figure 4. Location of ports of interest in Texas and Louisiana

In order to fill the information gap, PSCM devised a set of objectives to obtain additional
information for their evaluation of pipe yard relocation. As the initial study was based only
on transportation and tax savings, the second phase of the study was focused on services and
capabilities of the facilities in Louisiana. A market analysis of the facilities in Louisiana was
performed to evaluate the feasibility of such a move.
Supply market analysis
Pipe inspection and storage facilities in Louisiana and Houston were sent a formal Request
for Information (RFI). General criteria included: storage capacity, inspection capabilities,
processing volume capacity, pipe handling capabilities, and proximity to ancillary services
like tool rental, trucking, and cranes. Each supplier was asked to provide a copy of their
Quality Management System, financial statements, testing procedures for their inspection
equipment, and maintenance procedures for their facilities.
Inventory management was an additional area of focus. BP utilizes SAP for all of its
purchasing, accounting, and inventory control. Suppliers were requested to describe their
inventory management system and its customer interface. SAP integration would be ideal,
but even the incumbent supplier does not have this capability.
A Health, Safety, and Environmental (HSE) questionnaire was included along with RFI to
gauge safety culture. A common industry metric is the Total Recordable Incident Rate
(TRIR) established by US Department of Labor and administered by Occupational Safety
and Health Administration (OSHA). The TRIR measures the total number of recordable
injuries and illnesses, injuries resulting in lost time away from work, and fatalities. The total
number of incidents is multiplied by 200,000 and then divided by the total number of hours
worked in the year. For contractors working at a BP site, such as an offshore platform, the
10
acceptable TRIR is less than 2.0. Since pipe inspection is performed at the supplier's
location, this metric is closely monitored for upward trends or otherwise poor performance.
The HSE team within BP can veto contract award to any supplier if they feel safety
performance is lacking.
Threading facilities in Louisiana and Houston were also assessed to understand their ability
to machine premium threads, size capabilities, volume capacity, storage capacity and pipe
handling capabilities. Local threading facilities are necessary when the pipe is ordered plainended.
Results of the market analysis
Approximately 65% of the solicited suppliers in the Gulf Coast Region responded to the
Request for Information and supplier questionnaire. After evaluating the initial results, BP
conducted individual site visits to better understand its potential suppliers. The following
companies are considered to be suitable bid participants.
Inspection and storage facilities in Louisiana:
Out of all the inspection facilities in Louisiana, only three have the ability to perform
inspections to BP standards. The facilities are typically smaller than pipe yards found in
Houston, but there is room for expansion and growth. However, some of them do not have
robust software systems to track inventory or have the ability to communicate with BPs
information system. Figure 5 shows the location and access to road and rail networks for all
the three facilities under consideration.
Houma Tubular Storage. Houma Tubular Storage is a recently constructed storage
facility that currently has no inspection capabilities, but they do own the largest pipe
yard in Louisiana stretching across100 acres. This is a new development with only
30 acres occupied, but is steadily growing each month. Within their pipe yard, all
racks are constructed to BP standards. Inventory is managed on their own system that
has a web-based customer interface. Houma also mentioned future plans to develop
inspection capabilities, but is reluctant due to high capital costs for such equipment.
On the safety side, Houma Tubular Storage employs a Safety Manager that holds
daily tailgate meetings to discuss job risks. While no safety statistics are available for
2004, their TRIR for 2005 and 2006 are 2.6 and 2.03 respectively. Since this is a
privately held company, Houma Tubular Storage did not provide financial
information.
11
Figure 5. Inspection, storage and threading facilities in Louisiana
12
Gulf Coast Inspection. Gulf Coast Inspection is a privately owned company located
in New Iberia, Louisiana. They are fully capable of meeting BP inspection
requirements for ultrasonic testing. They own one FLUT machine with a capacity of
70 pipe joints per shift depending on pipe diameter. Gulf Coast Inspection's pipe yard
spans forty acres and is outfitted with BP approved racks. There is room to expand
the storage space since Gulf Coast Inspection owns an additional 20 acres of land
behind their current yard. One drawback is that customer inventory is tracked using a
spreadsheet. They communicate inventory information to customers via weekly
emails. Customers include other offshore operators and their yard is 80% full, which
indicates the lack of capacity for BP inventory. While Gulf Coast Inspection has no
formal safety program, a bonus system is in place for incident-free hours each month.
Their TRIR was 1.26 for 2004, 0.89 for 2005, and 0.76 for 2006. No financial
information was provided.
Louisiana Pipe. Louisiana Pipe began as a distributor and later expanded in to the
inspection business with a location in Houma, Louisiana. They own three FLUT
machines with only one meeting BP requirements in regards to flaw detection angles.
Their storage yard covers 50 acres and contains pipe racks acceptable to BP.
Expansion of storage space is not possible and yard capacity is currently at 60%
utilization. Since Louisiana Pipe was originally a distributor, their inventory
management capabilities are exceptional. They claim their software can be integrated
with SAP, but none of their other customers use this option. BP was concerned with
their safety performance. No official safety program is in place and their TRIR for
years 2004, 2005, and 2006 are 2.46, 2.78, and 3.15 respectively. This upward trend
in incidents would need to be closely managed by BP until a fully codified safety
program is implemented by Louisiana Pipe. Although Louisiana Pipe is a private
entity, they agreed to provide their audited financial statements that can be found in
Appendix "D".
Oilfield Industrial. Oilfield Industrial is another private company located in
Lafayette, Louisiana. They have two FLUT machines that can detect flaws at any
angle and have a total throughput capacity of 130 joints per shift. The yard is
outfitted with BP approved racks covering 60 acres. Current storage capacity is
around 50%. Inventory is kept in their own proprietary system and customer access
the information via Internet through a read only interface. Oilfield Industrial had a
TRIR of 2.87 for 2004, 3.01 for 2005, and 3.89 for 2006. They did not provide any
financial statements, but BP estimates this to be a $6 million dollar company in terms
of revenue.
Threading facilities in Louisiana:

Seal Tight operates a threading facility in Lafayette, but is roughly half the size of its
Houston counterpart. Interlock does not have a location in Louisiana. However, a machine
shop in Houma carries an Interlock license to machine any of their designs. This license
13
expires every two years and can be revoked at any time. In the worst case, pipe requiring
Interlock threads would have to be transported to Houston for threading and then shipped
back to the storage/inspection site in Louisiana.
Inspection and storage facilities in Houston:
The companies that survived massive consolidation are all located near the Port of Houston.
They are Southern Inspection, Proven Inspection, and Offshore Storage & Inspection.
Proven Inspection is the only privately owned company. Both Southern Inspection and
Offshore Storage & Inspection are subsidiaries of oilfield conglomerates. They manufacture
and sell their own brand of inspection equipment; although not to each other. Figure 6 shows
the location and access to road and rail networks for all the three facilities in consideration.
Southern Inspection. Southern Inspection is the largest inspection and storage
company in the region. After acquiring the three surrounding pipe yards, their total
area spans 300 acres with BP occupying about 50 acres. Other customers include
competing energy companies and local municipalities that store pipe for water
transport. They have five FLUT machines that can inspect 400 joints of pipe per
shift. Southern Inspection's yard crew is fully trained in BP specific OCTG storage
and handling policies and their inspection personnel have a reputation of being the
best in the business. Calibration tests show their equipment to be topnotch. The
space that BP occupies is segregated from the rest of their customers and is kept
especially clean. In addition, BP rents several office trailers onsite for inspection and
logistics coordinators. Inventory is managed by Southern Inspection's proprietary
software accessible through a web portal. BP spends over $6 million annually on
pipe inspection, and an additional $2 million on storage and maintenance with
Southern Inspection. As part of their corporate policy, Southern Inspection employs a
dedicated Safety Manager for this location. They have a fully codified safety
program and incident reporting system that has been recognized as one of the best in
the industry. Their TRIR statistics reflect this: 0.75 for 2004, 0.83 for 2005, and 0.56
for 2006. Southern Inspection is a subsidiary of the oilfield service conglomerate,
Enclave Services International; their 2005 10K report can be found in Appendix "D".
Offshore Storage & Inspection. Offshore Storage & Inspection is located a few
blocks north of Southern Inspection. With support from its parent company, Grand
Valley Group, Offshore Storage & Inspection was able to purchase surrounding pipe
yards and undeveloped land behind its current fence line. As a result, 200 acres are
enclosed while another 40 acres remain accessible. A rail
14
Seal Tight
Interlock
Of f shore Storage
& Inspection
Southern
Inspection
Proven
Inspection
Inspection & Storage

Threading Location
Interlock
Major Roadway
Railway
Figure 6. Inspection, storage and threading facilities in Houston

spur runs through the yard allowing for direct unloading onto the racks. Due to all
the recent acquisitions, about 60% of the racks located in a segregated 120 acre area
15
meet BP requirements. Of this approved rack space, approximately 40 acres remain

unoccupied. On the inspection side, Offshore Storage & Inspection has developed
new FLUT technologies that could lend a competitive advantage over Southern
Inspection. They currently operate four FLUT machines that have a throughput of
340 joints per shift. Inventory is managed electronically through SAP, which is
compatible with the BPs information system. Offshore Storage & Inspection utilizes
a behavior based safety program and conducts regular safety meetings with their
employees. Their TRIR for 2004, 2005, and 2006 were 1.25, 1.03, and 1.16
respectively. Their financial information is also provided in Appendix "D".
Proven Inspection. Proven Inspection is located east of Southern Inspection in an
adjacent lot. The 70 acres pipe yard is currently operated at forty percent capacity.
Proven Inspection operates two FLUT machines that average 150 joints per shift.
However, the equipment is poorly kept and often found out of commission.
Inventory is kept on Proven Inspection's own proprietary system with customer
access available via a web-portal. Like the other pipe yards in Houston, Proven
Inspection also has a safety program and their TRIR was 1.79 in 2006, 1.25 in 2005,
and 1.63 in 2006. Its location offers a unique logistical advantage because barge
traffic from the Port of Houston can dock and unload shipments directly into Proven
Inspection's yard. Most of their revenue is generated through transfers of pipe
shipped to other facilities. In fact, much of BP's international OCTG deliveries are
transferred through Proven Inspection. Southern Inspection attempted to attain
Proven Inspection during its buying campaign, but the offer was refused. The rumor
mill suggests that Southern Inspection is still engaged in talks with Proven Inspection.
No financial information was provided for review during the market analysis.
Threading facilities in Houston:
Both Seal Tight and Interlock have machine shops at various locations in Houston. Capacity
has never been a problem in the past with any of these facilities. There is even a small
Interlock shop in Offshore Storage & Inspection's yard.
16
Action items
Do you recommend the consolidation effort of PSCM? Why or Why not? Justify the answer
and include a plan of action if you decide to consolidate the pipe inventory. The plan should
include the following points:
1. A breakdown of current inventory carrying costs on an annual basis using the
information provided in the case study. What information is missing that would be
helpful? Include any assumptions you make such as fill rate and inventory holding
costs.
2. Develop a strategy for consolidation or standardization that includes which pipe
specifications will be kept and which specifications will be excluded and justify your
reasoning. The plan should include expected annual cost savings, improvements to
inventory management, and a plan to phase out or dispose of obsolete inventory if
applicable.
3. There are two groups that will likely oppose such an effort: BP engineers working on
the various projects and joint-interest partners that help fund each project. Describe
how you would approach the different groups to obtain approval for your
consolidation plan. Describe the drivers that each group faces and identify potential
points of conflict and how you would overcome such opposition if challenged.
The Southern Inspection master service contract expires in four months. Make a
recommendation for or against the Louisiana relocation effort. This recommendation should
include the following:
1. Propose an evaluation process and scorecard, along with any performance metrics
that may apply. Perform a financial health analysis on all the suppliers using the
available information in the case. When financial statements are not provided, what
other methods can be used to better understand supplier health? How does this
information or lack thereof, weigh in to supplier selection?
2. Identify the locations that would be suitable. Justify why the site or sites were
selected.
3. Identify the switching costs from the incumbent supplier. What risks are involved
when switching suppliers? How will these risks be mitigated?
4. How does the pipe inventory consolidation agenda play into the relocation effort?
Would the outcome of one action affect the outcome of the other? Why or why not?
If relocation is recommended, should both inventory consolidation and relocation
efforts take place concurrently? If not, which should take precedence and why?
17
Appendix "A"
Annual Average Usage in '000s of feet from years 2001 to 2005
(Standard Deviation of annual usuage in '000s of feet)
ANNUAL PIPE USAGE

OD in
inches
Weight
in ppf
L N-80
O
HC
5
23
7
29
32
7 7
38
53.5 62.8 62.8
64
66
10 10 11 11 13 13 14
68
71
71.5
65
62
(58)
125 158
(96) (109)
27 18
(19) (10)
210
(139)
282
(67)
62
(34)
225 50 193 185
(97) (59) (84) (63)
88.2 113
84
97
20
22
26
28
109 117 166 187 202 225
138
(79)
90
(65)
187
(67)
Q-125
Q-125
HC
Prop.
Grade
Prop.
Grade
Prop.
Grade
G
R
A 13Cr110
D
E 25Cr125 75
(48)
S
72
18
122
(103)
P-110
HC
H
I
G
H
102 71.8
16
100
(98)
L-80
P-110
46
61
(42)
G
R T-95
A
D
C-110
E
S
39
156
(87)
73
(32)
106
(53)
77 140 112
(58) (96) (61)
86
70
(61)
(43)
68 78
(39) (42)
15
(18)
33
(21)
30
(19)
27
(15)
112
(97)
56
(23)
18
Appendix "B"
U.S. Dollar per foot
(Lead time in weeks)
PIPE PRICING AND LEAD TIMES

OD in
inches
Weight
in ppf
L N-80
O
HC
5
23
7
29
32
7 7
38
46
53.5 62.8 62.8
64
66
10 10 11 11 13 13 14
68
71
71.5
65
102 71.8
88.2 113
84
18
97
20
22
26
28
109 117 166 187 202 225
10.52
(3)
18.76
(4)
12.89 13.01
(5)
(5)
18.60 19.13
(6)
(6)
17.78
(5)
24.89
(6)
19.12
(4)
20.22 21.67 23.88 24.32
(5)
(5)
(5)
(4)
34.78
(8)
32.45
(6)
55.78
(10)
P-110
HC
40.24
(8)
Q-125
29.78
(10)
Q-125
HC
Prop.
Grade
H
I Prop.
G Grade
H Prop.
Grade
33.37
(18)
G
R 13Cr110
A
D
45.36
E 25Cr125 (104)
S
72
16
22.35
(7)
L-80
G
T-95
R
A C-110
D
E P-110
S
39
41.58
(8)
51.12 54.57
(10) (10)
45.62 48.96 55.11

(10) (10) (10)
52.12
(20)
55.78
(20)
123.40
(52)
106.11
(52)
119.10
(52)
120.78
(52)
57.89
(34)
50.12
(104)
19
Appendix "C"
Southern Inspection 2004 Price List
Inspection Charges: Price per foot unless otherwise noted
OD range
4.5" to 5.5" 7" to 7.75"
in inches
Full length visual inspection
$0.07
$0.09
Full length drift
$0.12
$0.15
Full length electromagnetic
$0.35
$0.40
inspection
Full length ultrasonic testing
$0.83
$1.01
Magnetic particle end area (priced
$4.30 /end
$4.98 /end
per end)
Visual end area (priced per end)
$0.50 /end
$0.59 /end
Thread cleaning and reapplication of
$0.87 /end
$1.00 /end
thread compound (priced per end)
-Above inspection rates include labor and equipment
-$1,500 minimum inspection charge
9.5" to 10.75"
10.88" to 11.88"
13.38" to 16"
18" to 22"
26" to 30"
$0.12
$0.18
$0.16
$0.21
$0.20
$0.25
$0.25
$0.31
$0.38
$0.45
$0.43
$0.52
$0.65
$0.87
$1.02
$1.21
$1.44
$1.67
$2.89
$3.20
$5.19 /end
$5.96 /end
$6.30 /end
$6.98 /end
$7.20 /end
$0.66 /end
$0.75 /end
$0.89 /end
$1.02 /end
$1.45 /end
$1.50 /end
$1.75 /end
$2.04 /end
$2.67 /end
$3.05 /end
Movement and Storage Charges: Price per hundred pounds unless otherwise noted
Service Description
Regular Time
Overtime
Holidays
Inbound unloading: Truck to
$0.25
$0.38
$0.50
rack
In-yard movements:
$0.18
$0.27
$0.36
Rack to services building
In-yard movements:
$0.18
$0.27
$0.36
Services building to rack
Rack transfer
$0.20
$0.30
Outbound loading: Rack to truck

$0.25
$0.38
Storage charges per month
$0.45 per ton
-Above movement rates include labor and equipment
-First 30 days of storage is free
$0.40
$0.50
Miscellaneous Labor and Equipment Charges: Price per hour

Description
Regular Time
Overtime
Holidays
Foreman
$31.00
$46.50
$62.00
Laborer
$22.00
$33.00
$44.00
Forklift
$75.00
$112.50
$150.00
Tractor w/
$59.00
$88.50
trailer
30 ton Crane
$210.00
$315.00
45 ton Crane
$250.00
$375.00
-Equipment rates include operator
20
$118.00
$420.00
$500.00
Appendix "D"
Statement of Income for 2005
In Millions of U.S. Dollars
Total Revenue
Cost of Revenue
Gross Profit
Research and Development
Selling General and Administrative
Non Recurring
Others
Total Operating Expenses
Operating Income or Loss
Total Other Income/Expenses Net
Earning Before Interest and Taxes
Interest Expense
Income Before Tax
Income Tax Expense
Minority Interest
Net Income from Continuing Operations
Discontinued Operations
Extraordinary Items
Effect of Accounting Changes
Other Items
Net Income
Preferred Stock and other Adjustments
Net Income Applicable to Common Shares
Enclave Services
International
6055.8
4013.2
2042.6
754.1
8.1
1280.4
(12.8)
1267.6
48.2
1219.4
324.5
(8.7)
886.2
886.2
886.2
Grand Valley
Group
485.6
197.0
288.6
91.1
(5.9)
46.7
156.7
1.6
158.3
0.4
157.9
61.1
96.8
96.8
96.8
Louisiana Pipe
Enclave Services
International
886.2
210.6
53.8
(508.3)
413.4
(612.2)
474.8
918.3
(230.6)
(326.8)
(557.4)
33.8
(4.7)
12.4
41.5
15.8
418.2
Grand Valley
Group
96.8
47.6
(2.1)
(40.9)
12.7
(8.3)
(1.3)
104.5
(139.2)
9.3
(129.9)
(13.1)
(0.7)
25.5
1.1
12.8
(12.6)
Louisiana Pipe
40.2
24.5
15.7
12.4
3.3
0.9
4.2
4.2
(0.8)
5.0
5.0
5.0
Statement of Cash Flows for 2005

Net Income
Depreciation
Adjustments to Net Income
Changes in Accounts Receivables
Changes in Liabilities
Changes in Inventory
Changes in other Operating Activities
Cash from Operating Activities
Capital Expenditures
Investments
Other Investing Cash Flow Items
Cash from Investing Activities
Total Cash Dividends Paid
Issuance of Stock, Net
Issuance of Debt, Net
Other Cash Flows from Financing Act
Cash from Financing Activities
Effect of Foreign Exchange Rates
Change in Cash and Cash Equivalents
5.0
0.3
(1.2)
(2.3)
1.8
(1.1)
(0.3)
2.2
(0.3)
(16.1)
(1.2)
(17.6)
1.2
(0.1)
25.0
26.1
10.7
21
Balance Sheet for 2005

Cash and Equivalents

Short Term Investments
Net Receivables
Inventory
Other Current Assets
Total Current Assets
Long Term Investments
Property, Plant, and Equipment
Goodwill
Intangible Assets
Accumulated Amortization
Other Assets
Deferred Long Term Asset Changes
Total Assets
Accounts Payable
Short/Current Long Term Debt
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Other Liabilities
Deferred Long Term Liabilities Charges
Minority Interest
Total Liabilities
Common Stock
Retained Earnings
Treasury Stock
Capital Surplus
Other Stockholder Equity
Total Stockholder Equity
Enclave Services
International
974.5
2134.3
2375.1
213.2
5697.1
230.6
1056.3
2435.0
789.2
25.4
55.7
10289.3
2958.6
4.7
2963.3
862.2
124.7
423.1
34.8
4408.1
2.4
1815.2
3512.9
35.2
5365.7
Grand Valley
Group
2.7
155.1
28.4
4.9
191.1
245.9
23.1
4.9
465.0
71.4
71.4
37.8
14.5
19.3
143.0
9.6
320.3
7.9
(3.1)
334.7
Louisiana Pipe
11.9
7.4
8.4
5.8
0.7
34.2
5.3
0.3
39.8
5.6
0.1
5.7
0.2
5.9
41.8
(2.5)
2.8
0.1
42.2
Notes:
Enclave Services International is a global provider of oilfield products and services used in drilling
and production operations. Products and services include drilling fluids, oilfield tubular inspection and
pipe management services, directional drilling, artificial lift, wireline services, rental pipe and
downhole tools, and wellbore intervention services. The tubular inspection group, Southern
Inspection, manufactures pipe inspection equipment, applies pipe coatings, and manages inspection
and inventory for energy companies. The tubular inspection group as a whole accounted for 4% of
total revenue in 2005, up from 3% in 2004.
Grand Valley Group provides a broad range of oilfield services to upstream energy companies
operating in the United States. Regions include the Gulf of Mexico, Rocky Mountains, and midcontinent. Services lines consist of: hydraulic workover services, drill pipe and drilling equipment
rental, coiled tubing services, wireline services, and oilfield pipe inspection and storage services.
Grand Valley's pipe inspection and storage operating unit, Offshore Storage & Inspection, accounted
for 6% of revenue in 2005 with their operations in Houston, Texas.
Louisiana Pipe acts as an intermediary between domestic steel mills that produce OCTG and oil & gas
companies that use such pipe in the wells they drill. Louisiana Pipe recently expanded into the pipe
inspection and storage business to enhance their capabilities as a distributor. Their inspection and
storage location in Houma, Louisiana contributed $8 million to total sales in 2005.
22
Appendix "E"
The following are pictures from the pipe storage yard and inspection facilities located in
Houston, Texas.
Threaded pipe with
composite thread
protectors installed
Pipe stacked 18 inches

above the ground with
recycled plastic timbers
separating each layer
Stacks of pipe with

inspection facility
located at the end
of the row
23
Yard crew moving pipe

with forklift
Electromagnetic
Inspection unit
24

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2009 Academic Case Study Series: BP's Procurement and Supply Chain Management

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2009 ACADEMIC CASE STUDY SERIES

BPs Procurement and Supply Chain Management

Arunachalam Narayanan, Texas A&M University, College Station, Texas

Council of Supply Chain Management Professionals

Figure 1. BP assets in the Gulf of Mexico

Inte rm ed iate cas ing

Figure 2 . Pipe placement in the wellbore

Crude Oil Pric e

U.S. Oil Rig Count

Order placement process

Refers to the thickness of pipes

Storage and inspection facilities: Current situation

Figure 4. Location of ports of interest in Texas and Louisiana

Figure 5. Inspection, storage and threading facilities in Louisiana

Threading facilities in Louisiana:

Inspection & Storage

Figure 6. Inspection, storage and threading facilities in Houston

meet BP requirements. Of this approved rack space, approximately 40 acres remain

ANNUAL PIPE USAGE

53.5 62.8 62.8

109 117 166 187 202 225

PIPE PRICING AND LEAD TIMES

53.5 62.8 62.8

109 117 166 187 202 225

45.62 48.96 55.11

Outbound loading: Rack to truck

Miscellaneous Labor and Equipment Charges: Price per hour

Statement of Cash Flows for 2005

Balance Sheet for 2005

Cash and Equivalents

Pipe stacked 18 inches

Stacks of pipe with

Yard crew moving pipe

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