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What happens when none of your expectations come true? Remember skipping flat rocks across the pond when you were a kid? With practice, we could predict the skip pattern, depending on the shape of the rock. Yet, nothing has prepared the oil, gas and petrochemical industry for the instability we are facing today.
A quick review of past economic troughs may elucidate the challenges we face. The Asian Financial Crisis, a sovereign debt crisis, resulted in a collapse of base commodity and asset prices. The shockwaves of the 9/11 attacks were buffered by war and Chinese economic growth. The financial crisis we endured beginning in 2008 saw a decline in real estate values for the first time since the Great Depression. Also recent in our memories is the Russian Invasion of Ukraine and the subsequent realignment of oil markets. Now we face the granddaddy of them all: the 2020 pandemic. New technology, increased production, demand destruction and a truly global economic shutdown to boot.
During previous events, we sought a return to normalcy. Normal supply, normal demand and normal behavior. Today we are faced with the challenges of what will become our new normal moving forward. How will our emerging patterns of behavior related to social interaction impact communication and commercial engagements? By what method will we pursue installed cost reductions as opposed to headline price reductions?
QUESTIONS THAT NEED ANSWERS
Consider for a moment excellence in execution. Can we do better? Is on time and under budget just a platitude? Or do present day events necessitate better planning moving forward? Has consolidation and scale resulted in your supply chain operating more efficiently? Or has it cemented in place patterns of behavior and mechanisms of exchange that commonly result in delays and cost overruns?
Unquestionably, times of uncertainty facilitate innovation. Whether embraced or forced, our industry will be impacted by change. Therefore, uncertainty is both a challenge and an opportunity for those that are the most adaptive.
Today’s events have had a significantly greater dramatic impact on oil when compared to other commodities, such as copper and nickel. In fact, nickel and copper have remained well above their prior crisis levels. Iron ore is another example of buoyancy. As a juxtaposition, oil had a short stint in negative territory. For those of us involved in the Oil and Gas industry, it is appropriate to ask, “why is this time different?”
Is social distancing sustainable? Imagine a world without office buildings. Retailers filing for bankruptcy, empty mall space, lower rents and perhaps a commercially driven real estate event, similar to 2008, and the repercussions of another potential financial crisis. Will we return to the office, or shift toward working from home?
The answers to those questions will impact our lives tremendously. Fewer miles driven, followed by fewer cars sold, followed by less demand for steel and plastics. The precipice we are approaching could indeed be slippery.
To put the current demand destruction into historical context, we must look beyond economics. A historical comparison may be found in looking at countries invaded by a hostile power and the resulting imposition of martial law. France, Germany and Japan experienced dramatic GDP declines after occupation while martial law was imposed. COVID-19 has not destroyed our infrastructure as bombs would have, but it has nevertheless forced us to shelter. Reprisals against China will certainly impact supply chains for piping and other refinery products going forward.
If industrialized nations hold China accountable for the economic devastation caused by the global reaction to COVID-19, and move to reengineer supply chains and strategic investments, consider this: Since China applied for the WTO in 1995, the cumulative goods trade deficit with China has grown to more than FIVE TRILLION DOLLARS. Further context includes the 1995 trade deficit of $34 billion, surging to a level of $367 billion in 2015. China averaged 9.49% GDP growth from 1989 until 2019. Realigning supply chains against this backdrop will present some material challenges, but we must prepare.
Those most familiar with the fluid control products supply chain (Pipe, Valves, Fittings, Flanges) understand the huge investments needed to overcome a structural trade deficit that is generations in the making. The supply chain required to operate our facilities will be global for the foreseeable future. What policies would incentivize the massive investments required to achieve American self-sufficiency?
In addition to the tectonic shift we are now encountering, our industry already faced a myriad of supply chain impediments. Substandard properties in midstream fittings and flanges led to an API task force and new MSS specifications recently published. Brittle fracture issues surrounding A105 flanges have led to an evaluation of impact properties in cold service. Subcategories of the brittle fracture issue are normalization, fine grain practice and manganese to carbon ratios. Anti-dumping measures, section 232 and section 302 have all dramatically impacted supply options.
One benefit of the new specifications is a move toward supply chain transparency. Who made it versus who labeled it? The new MSS specifications, SP44 and SP75, require traceability throughout the value-added chain. What benefits lie ahead relating to transparency? Will Lf2 replace A105N for industrial applications? Will manufacturers of midstream roughs be added to approved vendors lists to achieve cost savings? What will be the impact on prices as quality improves? Safety will no doubt continue to remain a priority.
Prior to the fracking revolution, refinery capital spending was often referred to as a barometer of demand forecasting. Most observers would confess that today the focal point of Capex has shifted. LNG, fractionation, ethane crackers and cryogenic plants require a different product menu than refineries and Petrochem. Has your supply chain evolved to meet these shifting requirements?
More acutely, are the consolidated establishment players designed to be proactive in the face of dynamic change? If your key performance indicators have been developed to forecast based on history versus looking forward, how do you confront realignment? Are layoffs and early retirement packages new tactics? Is a traditional MRO approach the best solution moving forward, or may it be a Maginot Line?
LOOKING FORWARD
As we are at an inflection point with the past, perhaps we should ask a few questions. Is transaction cost-reduction a new concept? How about E-commerce? Competitive bids? Are they really competitive? Auctions? Jack Welch retired but his legacy of adversarial cost reduction lives on. Is there a more productive path going forward? At a time when greater cooperation is required, does cutting human resources signal a willingness to reflect and adapt?
How do we improve efficiency? Will evaluation of efficiency lead us beyond headline price to installed cost? Is supply chain efficiency a praiseworthy objective during extreme supply disruption? Will plant closures impact availability more or less than interrupted stock purchasing cycles? In the world of price and delivery, which is your priority? We evaluate price because it is easy to compare in Excel spreadsheets. Installed cost, on the other hand, requires a novel analytical methodology. Yet, common sense tells us that an engine at idle does not get good mileage. A steady flow of on-time deliveries maximizes efficiency and return on investment.
Now we face many questions never before encountered in previous economic disruptions. Will the recovery be V-shaped? U-shaped? Perhaps a Nike swoosh? Or will we enter a lush green valley? How much will our undefined social patterns impact the recovery? How will other cultures combat reduced expectations of wellbeing? Will society accept a twenty percent drop in economic activity? How will a perceived long-term reduction in the standard of living impact decision-makers? Online versus on-location and the consequences of social distancing are still to be determined.
SUPPLY CHAIN INNOVATION TO THE RESCUE
If we are pursuing more efficient and effective supply chains, where improved planning and responses lead to lower installed cost, how do we achieve this? What pioneers will lead the way to new frontiers? How will decision-makers confront custom, and steady as we go institutional instincts? This too shall pass or pass us by. Is the cost of change greater than the risk of not changing, or vice versa?
Arm’s length versus hand-in-hand. Price versus delivery. Risk mitigation versus risk-taking. Do we understand our supply chains, or have we outsourced said understanding to established interests? If you have excelled or dominated in the current environment, why would you transition voluntarily? Is the current winner of your confidence worthy of said confidence?
On the other hand, if the current framework of engagement limits your audience, you have no chance of survival unless you pursue innovative approaches. An epic battle of attributes, Batman versus Superman, or Flash versus The Hulk, new versus old.
Here comes J2 Resources: Big company supply chain and quality, but with small-company-like responsiveness, attention to detail, model documentation, detail by heat number, integrated supply chain and business development functions. All combined with a breadth of inventory that redefines the concept of ability to serve. Clever and quick contrasted with brute force. While brute force may have value, it is in times like these that new solutions may arise by engaging a resource that is clever and nimble. Never overpowering, yet extremely adaptive. Loading arms, pumps and custody transfer equipment for pipelines and terminals, as well as valves for nearly every application. All the various and sundry for your everyday piping needs and FAST. Where else can you discuss your full project scope in one meeting? Do you currently engage a supplier with this range of expertise and still have peace of mind around quality, supply chain and price?
As we are all aware, a general rule applies to delivery. The greater the value-added, the longer the lead time. For instance, we can expect pipe to have a shorter lead time than the fitting made from it. We can expect flanges to take longer than the billet they are made from, and so on. Valves are historically the longest lead item.
If you are a manufacturer quoting a project that has gone out for bid, when do you begin to buy the raw material? What are the lead times today versus when the BOM was shopped? Which items on the material list will you be awarded? All these questions compound inefficiency and consequently result in risk-mitigating behavior, delayed delivery and an increase in installed cost. Arm’s length is inefficient. The drawbacks are compounded in special grades and heavy wall thicknesses typical in projects.
J2 HAS A DIRECT APPROACH
When J2 engages a project, we take a different approach. We look at your requirements, analyze raw material availability, pick a manufacturer for material that is known to be effective in the particular material scope, and send them the selected BOM with delivery requirements. J2 Resources then prices the delivery rather than relay their standard delivery. At J2, certainty of outcome is not a platitude. We believe a different approach and different principles lead to different results.
J2’s inventory includes a laundry list of world-class suppliers, both domestic and international. Although we are extremely competitive, none of our suppliers are chosen on price. Inventory purchases are almost never competitively bid. Capabilities are paramount in vendor selection. Recently, we created a supply chain for fittings used in HF Acid service. A mill-certified Low RE fitting sets a new bar for the industry. Just one example of the harmony achieved by our cooperative and transparent Supply Chain Optimization process!
Our supply chain efforts are augmented by a world-class quality program that does not rely on audit or an inspection. Purchase product specifications, first article qualifications, and ongoing verification testing protocols all designed around the most critical service requirements and latest specifications. Womb to tomb, we trust but verify.
If J2 Resources leads in quality, maintains a global supply base of approved (and soon to be approved) manufacturers while also possessing an industry-leading breadth of expertise--what else differentiates J2 Resources from the rest? While enthusiasm may be a man’s best friend, our dedication to providing service and meeting deadlines is exemplary. Our in-house machining facilities are an exclamation point to our claims of exceptional service, and our semi-finished inventory further makes the case.
Your emergency needs are tackled as a team. We are all on-call ALL the time. Our experienced staff gets you what you need when you need it. Whether or not your service representative requires help is irrelevant; help is coming. To put this into perspective, our staff is more comfortable calling than texting. In addition to a great staff, you will be pleasantly surprised at the vast array of SKUs on hand. Low temp, high pressure and heavy wall, all in stock and on your AML.
I think I can, I think I can, is the story we live by. The little distributor that could. An end-to-end approach that is diagnostic. Planning which is proactive. J2 Resources is inherently adaptive, extremely communicative and unique in many ways. If the pause caused by today’s environment has placed improved performance, new approaches and supply chain optimization on your radar, now is the time to consider J2 Resources.
For more info copy: For more information on J2 Resources and how you can cut costs through their supply chain expertise, please call 866-280-2418 or visit J2Resources.com.
