ADNOC Company spending and sourcing process and practices

Executive Summary

This report analysis focuses on ADNOC Company spending and sourcing process and practices. The investigation is classified into three primary levels, namely the identification of the spend items and the strategic positioning, the evaluation of the adopted sourcing approached, and finally an examination of the supplier’s appraisal process for the purchase of safety equipment’s. First, in examining the spend items within ADNOC. The analysis indicates that some of the spend items include safety equipment purchase, vessels hiring, machinery and plant equipment purchases, and finally, the repair and maintenance spend items respectively. There are different but critical and significant high volume spend areas at ADNOC. In a strategic analysis, the evaluation is the Krilij model. This is a model indicating the value/significance of spend in terms of its contributions to profitability and the associated supplier risks. Through a four-matrix model, the analysis suggests that the different spends fall into the leverage, strategic. Bottleneck and the non-critical categories, respectively. Also, in evaluating some of the applied sourcing approaches, these analyses indicated that the main used models by the ADNOC Company include the single sourcing, dual sourcing, partnership sourcing, and he multiple sourcing approaches, respectively. Finally, in analysing the applicable supplier appraisal checklist, the analysis denotes that the 10C model is critically applicable.

1.0 Introduction

The Abu Dhabi National Oil Company (ADNOC) is a leading international entity in the hydrocarbon value chain. This is an organisation that is primarily involved in the exploration, storage, refining, and the distribution of oil and other related Petro-chemical products. As an entity, in its execution of the different functions and mandates, it incurs immense spending.  As of the Q3 of 2019, it was estimated that in running its functions, the organisation had a direct cost line of AED 4,391,879. This is an indication of the amount of funding and resources spent by the organisation in meeting its vision and mission goals (ADNOC, 2019). Critically, it is through prudent financial spending that organisation acquires profitability and value for the stakeholders. This forms the basis for examining the core spending areas and items for the ADNOC Company nd how the different sourcing strategies are applicable and can be used to create value for the entity. This report investigates the various spending categories at ADNOC, and their importance and strategic positioning, the applicable sourcing approaches for the spending, and finally the evaluation of the supplier’s appraisal system for the most critical and valuable spending area.

2.0 Categories of Spending and Positioning

2.1 Categories of Spending at ADNCOC

In discussing the spending categories at ADNOC, the analysis was guided by the ADNOC 2019 financial year spending. This is a mandate that is placed under the organisation procurement function. This is a function that is mandated with the management of the expenditure and ensuring that the organisation acquires value for its spent resources. Among other critical spending’s for ADNOC, the four main areas of spending include exploration vessels hiring, equipment and plants purchasing, maintenance and repair spending, as well as safety spending, respectively. They are as detailed below.

The first line of spending is on vessels hire and port charges. This is a critical spending base for the organisation that supports its range of products and services delivery. Under its mandate, the ADNOC Company is involved in the exploration of oil and possible oil mining and drilling sites. As such, the oil company incurs costs and spending in the hiring and contracting of such required exploration vessels. This is a spending and vessel requirements that are pegged and based on the nature of the exploration and the expectations that the organisation has on a particular exploration. It is vital to ensure that the vessels hiring and acquisition spending is effectively managed and handled. This allows for the acquisition of value for money and realisation of its exploration goals (ADNOC, 2019).

The second spending by the ADNOC Company is the plant and equipment’s purchase. The company is directly involved in the storage and the refining of oil and related Petro-chemical products. This is a practice and function that include the use of plants and equipment’s such the refineries and other storage and distribution apparatus. This is a capital-intensive spending that is incurred by the organisation. It allows for the acquisition of up to date machinery and plant equipment’s to allow for practical functions execution. With a changing energy industry landscape, the spending on plants and machinery ensures that any technology and machinery changes and apparatus are acquired by the company, to support its functions and operations.

A third spending is on spare parts and maintenance services acquisition. As already mentioned, the organisation has an extensive base of plants, machinery and equipment’s. Although it purchases its machinery and equipment’s regularly, some of the machinery and plants need repair and maintenance services. This is spending that is imperative to ensure that the machineries and equipment’s remain in an active capacity and at full capacity. Thus, the ADNOC procurement functions involved in ensuring that the organisation has reliable and credible repair and maintenance services.

A fourth spending area for the organisation is on the safety of the facilities and the employees. As an entity working in the oil and gas industry, it is exposed to safety risks ranging from health hazard for the involved entity employees to safety concerns such as on environmental pollution, among others. To ensure that the aspect of safety is maintained, the entity spends a significant proportion of its budgetary allocations to contract safety apparatus such as fire extinguishers and safety wear for the employees among other safety-related equipment’s.

2.2 Spending Positioning

To understand the value of the spending items and areas by ADNOC. This analysis applies to the Krilij matrix model. The model argues the spending portfolio and ranking of an item is pegged on two dimensions, (a) the profit value and (b) the supplier risk. It is based on the classification of these two dimensions that the value and the critical nature of an item are established. Overall, there are five levels and portfolios in spending, namely the leverage, strategic, non-critical, and bottleneck items, respectively. The vital items have a combination of both a high-profit value and a supplier risk. This is followed by the leverage items that, although with a low supplier risk, have a higher profit value (CIPS, 2019). Further, the bottleneck items have a high supplier risk but a low profitability index. Finally, the non-critical items have both low risk and low-profit impacts. Based on the established model matrix, the four analysed spend items by ADNOC are summarised, as indicated in the figure below.

Figure 1: ADNOC Spending Analysis

Source: Summarised by the report

From the above findings, it is clear that the maintenance and repair spending has a high impact on profits. However, its impact on supplier risk is minimal. This is unlike the vessels hiring spending that has both high impacts on profits and supplier risks This is due to the technical nature of the vessels’ required the implications success or failure in exploration has on long term profitability for ADNOC. Additionally, the safety dimension has a low impact on profitability but with a very high supplier risk. This is because safety is an indirect supportive function that is not directly evident in the final ADNOC products. However, it remains a critical part of its functions to ensure seamless functioning and running of its operations. Finally, plant and machinery spending is less critical. This is because the spending is planned for the long term and less repetitive. Hence, its impacts on annual profits are low, and there is minimal risk on suppliers’ end since this is a long term spend and planning process.

3.0 Sourcing Approaches

The nest step in the spending cycle after determining the spending item is the determination of a sourcing approach applicable. As CIPS (2018) stated, the sourcing strategy and approach applicability varies based on the context. This includes the environment, the organisation, and the nature and type of spend by an entity. Overall, though there are different sourcing approaches, some of the most common sourcing approaches applied by the ADNOC entity include (a) single sourcing, (b) multiple sourcing, (c) dual sourcing, and (d) partnerships sourcing approaches, respectively. The determination of an ideal sourcing approach is hedged on an evaluation of the existing market conditions such as a market monopoly or a perfect competition, Additionally, it encompasses the evaluation of the involved stakeholders in terms of their interest and power elements.

3.1 Single Sourcing

This is a sourcing strategy and process through which the ADNOC Company engages only a single supplier. Under this model, Christopher, Mena, Khan and Yurt (2011) noted that the process includes contracting and interacting with a single supplier. This is a strategy that is best applicable in three main scenarios. First, CIPS (2018) asserted that single sourcing is applied in instances where the market is a monopoly. This means that there does not exist other suppliers in the market who are capable and willing to offer the required products and services to an entity. As such, the entity has no option but to single source the existing monopoly supplier. Secondly, the strategy is applied in instances where there are emergence and time constraints. The single-sourcing process allows for ease of procurement and products acquisition. Finally, single sourcing is applied for non-critical items that have a low risk and low profitability impact. This is often to reduce the costs associated with the acquisition of such products and goods. This is predominantly applicable in instances where the required products are technical and as such need for a specialised single technical based supplier. An evaluation of the ADNOC spending items indicates that the plant and machinery purchase spending falls under this sourcing category. The items are highly specialised and as such, require a long-term working relationship with a single supplier. Additionally, they have a less repetitive spending pattern, thus reducing the need for competitive bidding, which would increase the acquisition in sourcing costs for the products.

3.2 Dual Sourcing

Trent and Monczka (2005) described dual sourcing as a sourcing model through which the procuring entity engages a supplier with a supply network. In this case, the focus of the dual sourcing strategy is to ensure that the complexity of a spend item is realised and met. This is a strategy that allows an entity to source and model than a single supplier in the supply of a given spending item. Often, as Blome and Henke (2009) illustrated, this is a practice adopted in an instance where the required products are either in large volumes or with a high technicality and specialisation needs. In examining the ADNOC spending patterns, the organisation applies the dual sourcing system for its safety items. In this case, it has classified int safety items into two tiers. The first tier is the employee safety items such as their wear and other used safety tools, and equipment’s in their line of work. The second tier is the operational safety equipment’s such as fire hazards, and other facility-based safety measures and equipment’s. In its sourcing strategy, the ADNOC Company uses two different suppliers. One focus on the employee safety items and equipment’s, while the second offers nd supplies the facility-based safety equipment’s. This is a safety specialisation and focus strategy that has enabled it ensures that all quality required products are supplied and availed.

3.3 Partnership Sourcing

The third applicable sourcing strategy and one applied in length by the ADNOC company is the partnership sourcing. As CIPS (2018) described it, this involves the buying organisation partnering and collaborating with a small number of its suppliers. This is a strategic sourcing process through which the entities share in the risks and the rewards associated with the spending and supply process. Under this model, the entity and the supplier shift from the traditional arm’s length relationships and interactions between procuring entire and the suppliers to the relational model and approach. The ADNOC entity has applied this sourcing strategy in acquiring its vessels hiring spending. Under this, the vessels’ required are regularly and often differ in specifications based on the expiration assignment and needs. Thus,  to ensure that the required vessels are available on a timely basis and in the required conditions and specifications, the organisation works closely with its suppliers. This involves its engagement in the vessels designing and development to ensure that they are at par and within the expected range of its stakeholders.

3.4 Multiple Sourcing

Jonsson, Andersson, Schiele, Horn and Vos (2011) noted that this is one of the most competitive forms of sourcing. Unlike the single-sourcing strategy, the multiple sourcing strategies include contacting and engaging in a wide range of suppliers.  Under this supplier selection process, the procuring organisation sends out requests for quotation or tenders’ invitations to a wide range of suppliers. This is a sourcing system applied in instances where the sourced products have a wide range of potential suppliers. It allows for supplier quality selection and obtaining value for money for the producing entities. For ADNOC, it applies this sourcing strategy in sourcing for its repair and maintenance tools and services. This is because there are numerous repair and maintenance service providers in the market. Through this, it can ensure that it obtained value for its spent money and acquire nd work with the best suppliers available and interested in the market.

4.0 Supplier Appraisal for safety spend Item

This is the strategic procurement function and roles through which the capability of the supplier is assessed and examined. It is only after the procurement function is satisfied that the supplier has the required capabilities, that such a supplier is selected to supply a given spend item. Regardless of the applied sourcing approach, the supplier capability is a fundamental threshold in ensuring that an organisation acquires a spend item value for money.

This analysis develops a critical examination of the applied supplier appraisal model and system by ADNOC in acquiring its safety spend item suppliers. As illustrated above, it uses a dual supplier sourcing strategy. The question is on the model uses to select the two suppliers for the item. Theoretically, and in practice, ADNOC applies the 10C model in appraising its suppliers, the breakdown of the threshold required under each of the 10Cs models in supplying safety spend items is as demonstrated in the summary table below.

5.0 Conclusion and Recommendations

In summary, this report has demonstrated that there are different spend time sand areas at ADNOC. They include safety equipment purchase, vessels hiring, machinery and plant equipment purchases, and finally, the repair and maintenance spend items respectively. The applicable sourcing approaches include single, dual, partnership, and multiple sourcing strategies, respectively. Finally, it concludes that the 10C model is applicable in supplier appraisal for the safety products spend.

Based on the obtained findings this analysis recommends that

• The ADNOC Company should consider automating its supplier appraisal system. Based on the 10C system, the organisation should create a new supplier system for each of the spend items. As such, this would ensure an easy supplier appraisal basis.
• The ADNOC Company should apply multiple/ different supplier sourcing approaches. As illustrated in the analysis, there is no single fit all supplier sourcing strategy. Thus, this analysis recommends that the organisation should consider using different sourcing strategies for its different spend areas.

References

ADNOC, 2019; Financial Statements-ADNOC Distribution, Author. [Online] Available at <https://www.adnocdistribution.ae/reports/ar2018/pdf/ADNOC_Financial_Statements.pdf> [Accessed: 5^th March 2020}

Blome, C. and Henke, M., 2009. Single versus multiple sourcing: A supply risk management perspective. In Supply Chain Risk (pp. 125-135). Springer, Boston, MA.

Christopher, M., Mena, C., Khan, O. and Yurt, O., 2011. Approaches to managing global sourcing risk. Supply Chain Management: An International Journal.

CIPS, 2018, Single-Sourcing vs Sole Sourcing, Author. [Online] Available at < https://www.cips.org/en/knowledge/procurement-topics-and-skills/strategy-policy/models-sc-sourcing–procurement-costs/single-sourcing-vs-sole-sourcing/ > [Accessed: 5^th March 2020}

CIPS, 2019; Krilij Matrix, Author. [Online] Available at < https://www.cips.org/en/knowledge/procurement-topics-and-skills/srm-and-sc-management/supplier-positioning1/kraljic-matrix/> [Accessed: 5^th March 2020]

Jonsson, P., Andersson, D., Schiele, H., Horn, P. and Vos, B., 2011. Estimating cost‐saving potential from international sourcing and other sourcing levers. International Journal of Physical Distribution & Logistics Management.

Trent, R.J. and Monczka, R.M., 2005. Achieving excellence in global sourcing. MIT Sloan Management Review, 47(1), p.24.