Free Assingment on Procurement & Contracts

Procurement & Contracts

EXECUTIVE SUMMARY
This report provides of brief summary of category management in procurement and
supply chain management in oil and gas industry. It is planned to proposed all the activities
which is conducted by company with the single aim of reducing overall production cost to a
certain level so that more profit margin would be earn by them as compare to other competitors.
Various potential risks which is faced by upstream company while operating their
operations and mitigating strategies for it is explained and determine. Different practical
examples which could be adopt by company to improve their productivity and efficiency is also
given. Like risk management will help company to identify the risk they are going to face in
future and how it could be removed so that company won’t get affected from it in negative way.
Moreover, it also company to identify the opportunity in the market and how it could be adopted
without wasting time and money.

Contents
EXECUTIVE SUMMARY.............................................................................................................2
Contents...........................................................................................................................................3
INTRODUCTION...........................................................................................................................4
MAIN BODY...................................................................................................................................4
Overview of company............................................................................................................4
Risk management plan...........................................................................................................5
Supply chain of oil and gas industry......................................................................................7
Kraljic Portfolio Purchasing Model........................................................................................7
Porters five forces model (because upstream is more closer to natural environment)...........8
Recommendations..................................................................................................................8
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11
APPENDIX....................................................................................................................................15

INTRODUCTION
Procurement category refers to a process of groupings all the materials which are similar in
nature, have same suppliers, demand drivers etc. Category management is a step by step and
strategic approach of accumulating those resources which are similar to each other and then
procuring it to reduce excess procurement cost. Main objective behind category management is
to focus on specific areas for conducting market analysis so that uncertain circumstances or
obstacle would be removed in the first place. Besides this, supply chain role in oil and gas
industry to transport the raw material or machinery on time so that proper utilisation of resources
would be attain.
For this report, Dragon oil holdings is taken for consideration which conducts their
business in private upstream oil and gas organisations in UAE. Company was founded in 1971
and headquarter in Dubai. This report will throw some light on different strategies of
procurement and how it could affect company performance in a positive or negative way. Risk
management model will be explained by taking functional example of Dragon oil holdings.
Aspects which affects upstream oil and gas industry is determine by considering porter five
forces model. At last, various recommendations is given to company so that they would be able
to sustain their market position.
MAIN BODY
Overview of company
Dragon oil was registered in Irish stock exchange and after that it was acquired by oil giant
Emirates National Oil Company (Murphy and et al., 2017). Company was launched by Dr Oliver
Conor Waldron in 1971 but changes their name to dragon oil in 1993 and starts working in
Cheleken region. But external environment has affected their performance in the mid 90’s due to
late delivery of product resulting in millions of losses for the owner and stakeholders. To cope up
with the environment, company sells their shares to Emirates national oil company and in 2015,
sell the remaining 46 per cent shares in exchange of approximately 3.7 billion Euro. Company
has been running their operations in various places like Cairo, Egypt, Algiers etc. Firm has the
ability of extracting 100,000 barrels per day which gives them competitive advantage over other
competitors (Rentizelas and et al., 2018).

Risk management plan
Risk management plan is a process of identifying risk which could be faced by company in
future and ways through which it is reduced so that market position would be sustain for longer
period of time (Dey, De and Soni, 2019). This approach is taken for consideration because if
company like Dragon oil holdings are not aware about the problems they are going to face then it
would affect their performance. All the risk identified in the first place must be prioritises on the
basis of principles which are given below,
 Level of importance to company
 Number of times same risk has been faced by company
 Benefit of resolving it
For instance, Dragon oil holdings employees are not able to dig their field properly due to poor
skills or less motivation towards work. So it must be resolve on highly urgent basis as
incapability’s of employee’s leads to overall poor performance and increases chances of accident
which might affect firm financial numbers in negative way (O'brien, 2019). Different risk faced
by Dragon oil holdings is given below,
Economic category: This risk is always faced by Upstream oil and gas company as prices are
very sensitive in nature and changes very frequently. For instance, if Dragon oil holdings incurs
70 dollars per barrel for extraction but due to high overall supply, market price reduces to 50
dollars per barrel which means company needs to sell their product in low price as compare to ist
cost price resulting in loss for the company. This risk is always likely to happen with these
companies and affect their performance and profitability negatively. To mitigate this risk,
company needs to use finance instruments and heading strategies to predict the future oil price
and then changes their production process accordingly (Jane and et al., 2018). Other way of
reducing cost price is investment in R&D department with the aim of reducing production cost.
Like if company know that price of the oil will increase in future then they must dig more oil
before the price goes high so that more profitability would be earn (Sharma and Swapp, 2016)
Environmental category: Most of the activities of upstream companies are conducted nearby
water or in ocean which means risk of oceans can also affect company’s operations like breaking
of machinery due to high intensity typhoon (Al-Obaidi and et al., 2016). Cost of business
interruption is very high as the entire machine and human resources become idle at that time
which increases material handling cost thus low profitability. To mitigate this risk, Dragon oil

holdings must buy insurance on their operations or machinery with the aim of covering up the
losses incur by natural disaster. Moreover, crisis management strategy must also be prepared by
them so that company won’t lose their productivity due to uncertain circumstances (Jo, Lee and
Pyo, 2018).
Operational category: Industrial accident is the risk which is faced by company who does not
have highly qualified and skilful employees and management or poor quality of machinery used
by them. Spill in Mexico is one of the lethal oil spill in the world as BP company was fined
billions of dollars as due to them millions of flora and fauna was died. Various risk related to it is
environmental damage, loss of operating license by government resulting in shutting of
operations, heavy fines which exhaust company’s profit etc. Industrial risk can be mitigated by
proper training and development sessions of employees so that margin of error would reduce to
zero (Suppramaniam, Ismail and Suppramaniam, 2018). Besides this, Dragon oil holdings can
also reduce operational risk by procuring that machinery which is reliable and credible in nature
instead of going with the cheapest price.
Resource category: No upstream company can conduct their business if raw materials are not
present with them at the right time and right place. Besides this, unavailability of oil in the area
where company is digging is also a kind of risk as if company does not find what they are
looking for then it will leads to wastage of money (Ghaithan, Attia and Duffuaa, 2017). For
instance, Dragon oil holdings went to conduct their operations in Iraq but expected resources
were not available at the site then company will lose their money as production cost without
earning money on It (Joshi and et al., 2017). To mitigate these types of risk, company needs to
research regarding the resources and must not start their operation until and unless they are sure
about the available resources. Besides this, Dragon oil holdings can invest in best available
technology in the market with the aim of predicting right amount of resources or external
analyses at right places.
So overall, it can be conclude that Dragon oil holdings needs to mitigate their risk as soon
as they find it as risk has high and low impact on performance of employees depends on its
nature. By following this way, company can sustain their performance and position in the market
by eliminating risk at the right time.

Supply chain of oil and gas industry
Whole process of finding the oil in oceans till delivering it to customers is divided into three
different parts i.e., Upstream Activities, mid-stream activities and down-stream activities.
Dragon oil holdings is an upstream company in which their work is to extract the oil from earth
core and then send it to next phase so that crude oil will transform into petrol or diesel which are
used by direct clients (Yusuf and et al., 2019). Upstream includes identification of oil in different
places around the targeted region, then exploration of oil started as oil and gas is scatter in acres
of place and finding the right spot is a complex and chaotic task. After that drilling started in
which process of placing machinery nearby right spot and starts extraction. For instance, if oil is
not extracted in the first place then whole process starts from the starting with the aim of again
finding the right spot (Olsson and et al., 2016). At last, production of oil phase starts in which
material is extracted from the core and sent for filtration so that it would be transfer to mid
activities. This is the overall activity perform by Dragon oil holdings in their working operations.
In the mid-stream, oil are transported from rig to warehouse where it can be store under artificial
suitable environment. After that, it goes in to down-stream, in which oil is refined and
disseminate in the market according to demands (Ceptureanu and et al., 2018).
Kraljic Portfolio Purchasing Model
This model is used by company to analyse their procurement and purchasing activities and then
try to identify those cost which could be easily removed from the overall production unit
resulting in more profit for company (Thompson, Okorie and Sakty, 2019). This model will also
assist company to identify which raw materials needs to be reorder in future at right time so that
inventory cost will reduced by maintain available resources in working operations. Whole matrix
is based on two different factors i.e., profit impact and supply risk.
Leverage products: Items which has high profit impact on company and low supply risk is
known as leverage products. These types of products can be purchased from more than one
supplier at the same time due to which cost price of it remains at the lower end. But on the other
hand, shift in price will also has a high impact on profit and vice versa (Pacheco-Blanco and
Bastante-Ceca, 2016). Electronic motors, oils, hardware of machinery are few examples of
leverage products. Key performance criteria of these types of product are cost price of it and how
much profit will it be helping company to earn (Gürakar and Bircan, 2016)

Strategic Products: These are those items which have high profit impact on company and on
the same time has high supply risk. Most of the items are purchased from one supplier only due
to high price sensitivity. Metal, machinery, rig composure etc are few example of strategic
products (Dehdasht and et al., 2017). Natural scarcity of the material is one of the risk associated
with these products. Dragon oil holdings main focus is to identify suppliers which are providing
the material in low price as compare to others and on the other side maintain the quality of it as
quality of material used in upstream activities cannot be compromised.
Routine products: Those materials which has been routinely purchased by company to run their
business operations smoothly as known as routine or non-critical items. Such material does not
has high value and easily available in the market which reflects low supply risk (Ochieng and et
al., 2018) . Though price of the product is dependent on the standardisation of product as high
standard of product automatically increase procuring time and money. Steels, coals, office
suppliers, rods etc are few examples of non-critical items (Hugos, 2018). Lower level of
employees in Dragon oil holdings decides the quantity of it and then conveys it to manager for
procurement as purchasing power is decentralised in nature.
Bottleneck products: Product which has low profit impact and has high supply risk is known as
bottleneck items. These type of items are not valuable in nature but has important role in supply
chain as without it, productivity of Dragon oil holdings decreases. Electronic items, bolt, wires,
third party services etc are example of it (Gardas and et al., 2019). Main idea behind these
product is to manage producing cost to its lowest as they have short life cycle as compare to
other products. Companies which have experience in making these products with advanced
technology are the supplier of it. (Girth, 2018)
Pestle model
Upstream oil and Gas Company like Dragon oil holdings is highly affected by external
environment as they are the who are making contact with the environment while extracting their
product. It is essential and mandatory for any company to analyse their environment in which
they are working because it has a direct and adverse impact on company’s performance of not
properly planned and analysed (Wilson, 2017). For instance, Dragon oil holdings has chosen a
place where earthquake are regular in nature then it will not be suitable for company to run their
operations over there as chances of destruction due to life losses and machinery broke down is
higher than other place. So overall, it will only bring losses for company which is not suitable for

nature. So due to this reason, this model is taken for consideration which is explained below with
example of Dragon oil holdings.
Political factor: This aspect has always impact oil and gas industry in a positive and negative
way according to the circumstances they are operating. For instance, due to tension between
American and Iran over few months, crude oil price has increased and still increasing with the a
steady growth rate which means company needs to sell their product on higher price than
expected resulting in less selling, higher profitability as customers will switch their usage of
fossil fuel to another due to high prices of oil (AUTHORITY and OWNER, 2019). So overall it
has a two different impact on company, first,, it will increase their profitability due to high profit
margin. Second it will reduce sell of product due to increase in cost price.
Economical factor: It has been proven that oil price as direct connections with countries
economy as it plays a huge role in transportation and other sectors which can operate without oil.
So fluctuation of price also has the same impact and consequences as political factor as increase
in exchange rate between supplier and customer will improve cost price and profitability but on
the other hand, reduces overall sale of the product (Chopra, 2019).
Social factor: This factor is gaining attraction from around the world as every country is now
focusing on green or renewable resources which are the substitute of oil thus affecting Dragon
oil holdings performance in a negative way. To tackle it, company needs to invest in solar energy
while running their operations unit so that less pollution and carbon will be produced by them
while working.
Recommendations
There are many ways through which company would be able to implement best supply chain
practices in their operations which is given below,
 Company must have proper understanding of the spending they are doing to procurement
raw materials. All the cost incurs by company must be identify and then way of reducing
must be identify. For instance, identification of more than one suppliers in the market will
save their cost as company needs to select those suppliers which are providing less
expensive product with high quality. Specification of product or supply chain must be
continuous update according to external environment
 To reduce inventory and material handling cost, Just in Time techniques must be used by
company while procuring raw materials so that profit margin would be increased. Fewer

inventories will require less space, human resources and other miscellaneous cost which
leads to more profitability and efficiency.
 Suppliers standards must be set by company while contacting and making terms with
suppliers or manufactures so that high quality of material would be maintain.
 Artificial Intelligence and Internet on Things should be implemented by company in their
rig so that future risk would be high cost or healthy and safety concern will be reduced.
For instance, IOT must be set in on the wall of rig so that any kind of leakage will
automatically shut the well resulting in saving hundreds of employees life at a time.

CONCLUSION
As from the above information, it can be summarise that proper management of
categories of products or service assist company to gain competitive edge over others
competitors as it assist them in reducing overall operation cost by eliminating wastage. It can
only be attain if proper scanning of external environment is conducted by company as if they
want to sustain in the market then company needs to change their operations according to
external environment. Apart from this, strategies for mitigating risk must also be prepared by
company as business environment is uncertain in nature and company needs to prepare
themselves from any kind of obstacle which could hamper their performance over time. With the
help of Krajlic model, company would be benefited through reduction in procurement and
production cost, reduce in warehouse quantity or inventory, At last, proper implementation of
category management and supply chain will help oil companies to reduce their production cost,
improve company earnings and managing delivery of oil with higher efficiency.

REFERENCES
Books and Journals
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coopetition successful? An inter-organizational side analysis on coopetition critical success
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Gürakar, E.C. and Bircan, T., 2016, October. Political connections and public procurement in
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A., 2018. Utilising a systematic knowledge management based system to optimise project
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risk management strategies of Swedish district heating plants and implications for energy
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Pacheco-Blanco, B. and Bastante-Ceca, M.J., 2016. Green public procurement as an initiative for
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Rentizelas, A., de Sousa Jabbour, A.B.L., Al Balushi, A.D. and Tuni, A., 2018. Social
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APPENDIX
Figure 1Ways to reduce procurement cost
Figure 2 Oil Supply Chain