Risk Management and Strategic Sourcing Framework for Shell Report

This report provides a comprehensive analysis of Shell's procurement management strategies, focusing on the Nigerian context. It critically investigates Shell's sourcing methods, supplier base, and supplier management practices, identifying both strengths and weaknesses. The report delves into the evolution of Shell's sourcing strategies, including new-buy and re-buy situations, and examines the application of weight-oriented methods. It further assesses Shell's supplier base and proposes a strategic sourcing framework aimed at achieving procurement excellence and value growth, taking into account the challenges of operating in a dynamic oil and gas market. The report also highlights the importance of supply chain transformation, the adoption of fourth-party logistics, and the need for agility in the face of industry disruptions. Finally, it suggests areas for improvement in Shell's procurement practices, emphasizing the potential for cost reduction and increased profitability.

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Risk Management
Name of the Student
Name of the University
Author Note

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Table of Content
Introduction................................................................................................................................2
Critically investigating the souring methods and suppliers base-..............................................2
Examining the supplier base and supplier management............................................................6
Proposing a strategic source framework which leading to procurement excellence and value
growth........................................................................................................................................7
Conclusion -.............................................................................................................................11
References................................................................................................................................12

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Introduction
This report provides a detailed evaluation and analysis of procurement management
strategies of the organization Shell in Nigeria. It has been identified that minimization on
firm’s supplier strength is often a potential objective of any sort of procurement professional
in an emerging professional. As put forward by Yusuf et al. (2014), a supply base is
characterized as the proportion of supply network, which is effectively managed by buying a
business. This report particularly discusses the sourcing techniques in the supply chain
management process. The purpose of the report is to evaluate the current procurement
management strategies followed by Shell in Nigeria and develop more useful techniques
related to sourcing method and supplier base.
Critically investigating the souring methods and suppliers base-
When it comes to supplier base, the business or the organizations must have to be
confident that a supplier could manufacture or produce a regular supply of goods and deliver
them in a timely manner. An, Wilhelm and Searcy (2011) particularly mentioned that an
interruption of raw materials could be costly, as human resource as well as plant machinery
may not be used for an indeterminate time. As put forward by Zhu, Sarkis and Lai (2007), an
organization’s sourcing strategy can be characterized by three significant decisions- such as a
proper criteria for developing a supplier base, criteria for selecting suppliers who are
supposed to receive an order from each supplier selected. As put forward by Gold, Seuring
and Beske (2010), quality and delivery are strategically important supplier
Strategic Evolution of Sourcing
The strategy of sourcing involved in corporate field is more crucial or important as the
competition in the global environment and rapid technology changes may move faster. As
mentioned by Hannevik et al. (2014), supplier management orientation of a firm is usually

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reflected in its contracting policy for the external purchase. Particularly, in Shell, contracting
and procurement provides a wealth of opportunities in their upstream and downstream
operation developing relationship with suppliers and supporting the global delivery of
services. As Shell operates a global operation, the firm has applied several method of
sourcing in supply chain but the idea of minimizing cost is just emerging one. Handfield,
Primo and Oliveira (2015) argued that today souring and procurement executives of many
global businesses are under a firm pressure to extract cost saving from supply base and at the
same time trying to enhance and maintain the quality of service ensuring supply continuity.
In the case of Shell in Nigeria, as always is on an aggressive growth path; they make large
investment in new and advanced technologies to maximize production, storage and
distribution, focusing on increasing their product quality and omitting the environmental
hazards.
Notwithstanding, Pagell and Shevchenko (2014) argued that large global organization
like Shell and BP (British Petroleum) often face the fluctuation in supply, unpredicted
global demand market dynamics as the challenge. However, when it comes to sourcing, Baily
(2017) mentioned about the supplier selection which is also a sourcing strategy where the
buyer selects products and services from offerings made by the suppliers presently operating
in the market. The authors have particularly insisted on the fact that an anti-arm relationship
could sustain between the buyer and supplier consisting a low level of collaboration as well
as interaction . In the case of Shell, this buyer and supplier relationship requires a pre-set
criteria to form because Shell uses a global system to pre-qualify the suppliers informed for
the upcoming contacts (Shell.com 2018). It is identified that Shell designs “Supplier
Qualification System” (SQS) to gather and stock information on suppliers on suppliers
approached to do business with Shell. Nevertheless, this SQS delivers a high-quality as well
as streamlined approach to pre-qualification method and make sure that suppliers finish this

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important evaluation but the organisation makes sure that registration in SQS does not
guarantee any business with Shell.
A study performed by Ho et al. (2015), that short-term contract may provide large amount of
flexibility and ignore fixed investment; however, it relinquishes development as well as price
certainty advantages afforded from long-term contacts. Hence, this evaluation reveals the fact
that “short-term contracting” can be treated as ideal under a broad series of conditions. An
experimental study provides a survey findings, they observe that management takes the
responsibility of forming a long-term contract but it is frequently seen that in short-term
contract such ideal buyer-supplier relationship is not unique or rare.
New-Buy Situations: Supplier Appraisal
When it comes to sourcing of supplies and supplier selection technique in the same,
new-buy situations comes in the middle. Here, Kallestrup et al. (2014) mentioned that
supplier selection can only be based on a general assessment of suppliers’ potential because
information on past performance may not be available. Such appraisal stage of the supplier
selection technique intends to verify which particular vendors have the capability,
commitment and financial viability to warrant the placing of an order to facilitate addition as
preferred supplier. According to Saad, Mohamed Udin and Hasnan (2014), some of the
factors that should be considered at the time of the appraisal exercise include suppliers’
financial position, standard of quality, customer profile and plans for the future. Hence, the
probability of being bought or sold need to be ascertained because this could affect suppliers
‘future plan as well as the priorities. This means that potential provider should not be too
much reliant on any customer or stuck to a particular supplier. Another study performed by
Rui et al. (2017), mentioned that buying business should also make sure that a potential

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supplier has adequate contingency or disaster recovery in place to create a strong guarantee
security of supply.
Re-Buy Situation: Supplier Evaluation
After the new-buy situation, Shell further extends its method to re-buy situation which
seems to be little tougher than the process followed in New-Buy Situation (Giannakis and
Papadopoulos (2016). According to the supplier selection technique followed by Shell,
supplier appraisal is an appropriate types of selection for new-buy situation and as the
channel to qualify suppliers as potent to contribute the business with (Shell.com 2018). This
is determined on the basis of the evaluation of potential performance. Nonetheless, here
Ivanov, Sokolov and Dolgui (2014) mentioned that if re-purchasing environment resides,
estimates and perception could be replaced with solid facts and in such situation supplier
selection is particularly based on the evaluation of actual performance recorded in the past
phase. Conversely, it is also identified that supplier selection is not done by one single
method; keeping the alignment with the market dynamics, Shell pays attention to an
emerging categorical method under which a list of relevant performance variables or the
factors assessed; here the organisation could assign the performance rating of evaluating
attribute in the form of categorical terms –such as good, neutral and poor. At the time of
creating the rating judgment, Shell follows a global industry standard and by making an
agreement between different representatives from many functions in the business including
procurement, logistics and production.
Weight-oriented method
Even though the above two methods are potent enough to maintain quality in products
and transparency in service, there is an extended method called weight –oriented method.
Some particular businesses, for example, Unilever, IKEA have been observed to be

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incorporating this weight oriented technique in which the factors are weighted according to
their relative importance and further implemented to performance measure (Rui et al. 2017).
This technique particularly identifies that factors are not equally significant but all allocations
of weighting may stull e arbitrary.
Examining the supplier base and supplier management
As put forward by Yusuf et al. (2014), oil and gas organizations tend to run their
operation in mostly complex and changing environment where challenges are inevitable,
particularly, with respect to supply as well as demand. Here, An, Wilhelm and Searcy (2011)
also mentioned that as the oil price is historically low, the business should take time to
evaluate procurement method and cost management. With the purpose of making a
significant change in the supply chain, the oil and gas giant Shell made a huge transformation
in supply chain. Shell in 2005, used the technique of more upstream and profitable
downstream to distil its new strategy (Shell.com 2018). With the help of more upstream
initiatives, the petrochemical and energy groups continues the search and recovery of oil and
gas. Notwithstanding, oil and gas firms should insist on their product supply chain and the
same should also be placed “non-hydrocarbon supply chain” that usually manage materials
and parts required to run the business. The author also pointed out the fact that “non-
hydrocarbon” supply chain is important and it is highly required to deliver equipment and
services needed to discover, and eventually place the product in the market. In a similar way,
Shell builds the process of refining and placing the product to market through downstream
operation. Shell develops the way it refines and delivers products to customers through
downstream operation initiatives. In a shorter sense, it can be ascertained that Shell’s
technique means if it increases production, its income could go up (Shell.com 2018).
So, the transformation is the key to understating this strategy. Consequently, the
organization is able to restructure its supply chain with many values and goals. These could

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include standardizing, practicing and technologies, creating stable cash flow and finally
putting demand-driven practices. Notwithstanding, Saad et al. (2014) mentioned that in a
competitive and dynamic market standardising with a restructure may not be an effective
solution for the long-term growth and moreover technology implementation include a huge
cost.
This means that this traditional process of supply chain may not sustain longer
because the business today may experience long-lasting volatility, intensified competition as
well as the digital disruption, which means that business operation is required to be reliably
agile. Major disadvantage of Shell’s current supply chain management was that Shell was
utilising third party logistic (3PL) to purchase products; this means it did not have proper
command of the procurement process (Shell.com 2018). As the recovery of the strategy, Shell
collaborated with Accenture to develop a fourth party logistic which is known as Logistic
Management Service. This newly formed LMS supports Shell’s upstream operation which
can cover production and projects. Nonetheless, this also falls under the conventional supply
chain practices and Ho et al. (2015) mentioned that industry convergence as well as digital
business could disrupt this traditional process of supply chain. The business could move from
linear process including discrete partners to a more fluid as well as integrated ecosystem
where speed and visibility are the keys. However, every business should understand the every
disruption is an opportunity in by applying the opportunity, the business can achieve rapid as
well as sustainable growth.
Proposing a strategic source framework which leading to procurement excellence and
value growth
The above presented analysis helps to identify the fact that supply chain practices in
oil and gas sector lag behind the others in the sector that implements innovative techniques
with the inclusion of optimized inventory management, collaborative supplier relationship

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management. A brief insight is provided in the following about concerning the opportunities
and fields in which practices of supply chain can be enhanced among global as well as
national O&G organizations.
According to Handfield, Primo and Oliveira (2015), purchased goods and services which
accounts for above 50% of the average oil and gas firm’s total cost. Thus, even 5% reduction
in cost of purchase could lead to increment in the profit range for oil and gas business.
Therefore, to accomplish this, Shell should particularly focus on the below mentioned
opportunities delivering significant supply chain value.
 “Market intelligence of supply chain”
 “Supplier Relation Management”
 Talent and Technology in supply chain
As put forward by Pagell and Shevchenko (2014), the supply chain market intelligence
remains the process of obtaining as well as analysing information to gain insight about the
present and future market and support current and future sourcing. This may increases the
ability of business to make estimation about the changes effectively in the external market
and take actions before others make any changes. It can be stated that market intelligence in
supply chain conventionally support and oil and gas organizations to handle the supply chain
obstacles such as limited capacity, market volatility and infrastructure. This may also help the
companies to make appropriate decisions about which market could he appropriate to make
purchase from and how to determine appropriate price to pay as well as appropriate
benchmarking. This eventually helps to gain competitive advantages.
It is also identified that Royal Dutch Shell is largely reliant on suppliers to deliver
tricky services and significant equipment to support the uncompleted projects and
organizational operation. On a frequent basis, “supplier relationship management” and

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“contract management” do not have the ability to reach the mark. Consequently, Shell may
have to bear the supplier risk. Thus, to enhance and maintain “supplier relationship
management”, business should incorporate a clear technique of supplier benchmarking. The
organization should measure the robustness as well as performance of variety of contractors
for different spends and categories, which continually rely on dialog with them; thereby, the
suppliers remain in agreement with required obligation with respect to safety, training,
equipment and staffing requirement.
Another significant technique which could help Shell in making a pricing negotiation
is the application of “should-cost” framework as well as “total-cost-ownership” (TCO)
framework. Earlier, the “total acquisition cost” for specific aspect of equipment comes by
considering the design cost, operating cost of supplier and supplier margin and the acquisition
cost (Handfield, Primo and Oliveira 2015). Hence, the “should-cost” model for variety of
spend categories can empower oil and gas business for making the negotiation of contract
terms and conditions with the suppliers. However, in the field of TCO approach, different
cost, acquisition cost, operation and maintenance cost come before selecting the appropriate
supplier at the most reasonable price. Some businesses have incorporated degrees with the
inclusion of “should cost” model but others in the field are due to implement major players in
the sector. So, it is comprehensive that such field of “supplier relationship management” may
require an in-depth analysis.
Although technology is helping oil and gas business in extracting more oil,
requirement for incorporation of supply chain and procurement are high to generate and
deliver additional value. It is worth mentioning that modern enterprise resource planning
(ERP) systems seem to be useful to resolve the stated concerns. Such ERP systems are
required to provide information about how inventories are managed, how demands are
forecasting and application of e-procurement. Here, the forecast of demand associated with

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inventory management and e-procurement develop the root of the supply chain strategy of oil
and gas.
In this context, Ivanov, Sokolov and Dolgui (2014) commented that ERP systems
that are associated with oil and gas can revolutionize the way resource planning of business is
performed in many nations. It has been found that there have been a significant example of
shift aligned with the way oil and gas originations have adopted e-procurement and generate
interest in e-procurement technique. In fact, the best in class supply chain techniques and
system, without skilled people, standard supply chain practices could be difficult to develop
and the business might it difficult to gain the full benefits from the process. Like the other
sector, oil and gas is supposed to deal with the efficiency of adequate skills. Some particular
measure that can appropriately be incorporated may include training as well as development
of talent in supply chain functions and growth of supply platform to brush up the supply
chain talent. Thus, to enhance and implement the total value of some major supply chain
practices, the organization need to carry out some of the real world measures –such as:
 To figure out the total value of some major investment categories, which may require
a thoroughly examined cost and options throughout the supply chain for each of the
category and then determination of appropriate interventions like searching new
specifications related to the suppliers and alternation of contract terms
 Develop a “custom-fit procurement” process which deliver effective clarity and
involve suppliers early in the technique. Both execution and operation should he
followed
 The business has to deal with the risks across the entire spending portfolio; hence, the
focus should not only be on the individual project

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 The organization will have to manage the supply base, choose relevant suppliers and
pay attention to alignment and sustainability and finally make sure a business
ownership and accountability is transparent to suppliers
 The organization also needs to develop the capabilities required for developing
procurement and some activities of supply chain. Presently, such deficiency of skills
could remain at a high extent and in the near future, it could be so important to
cultivate talent because it remains as the most critical talent and functional areas
Even few important practices of supply chain have delivered disappointing outcome, there is
always a scope for further enhancement. According to Yusuf et al. (2014), appropraote
planning of demand and customized management of inventories could help businesses to
manage oil and gas equipment uptime; here benefits could come from enhanced productivity.
As an implication, it is worth mentioning that developing spend category management as well
as “collaborative supplier relationship management”, doubled with speedy automation of
transaction process leading to sourcing savings and selection of secondary saving scopes.
Conclusion -
With the help of transmission in the supply chain, Shell has developed how significant
supply chain could be to broader company changes. The restructuring process of supply chain
enabled Shell to show “more upstream” and profitable downstream in action. In conclusion, it
can be mentioned that oil and gas industry tend to face rapid market dynamics along with
changing external forces which have a strong impact on the organizations. Thus, the
organization should not rely on one single procedure of procurement; this means that the
business should react in accordance to the market needs.