Arturo Henríquez
Chief Procurement Officer
View from the Top

Procurement Centralization Pays Off in Efficiency and Savings

Wed, 01/21/2015 - 13:05

Q: What have been the main achievements in the restructuring of PEMEX’s procurement activities?

A: First of all, the integration of PEMEX’s four subsidiaries, which saw their resources, people, and procedures centralized, was properly and punctually prepared, resulting in a smooth and fluid process that was finished ahead of schedule. In terms of our procurement business model and governance, we have aligned our procurement offices and reduced their number from 120 to 59, while reducing the headcount by about 21% by eliminating redundancies and inefficiencies. A purchasing unit can vary from a single person to a sub-directorate. However, it is not the number of people that is relevant, but the type of decisions that are being made. Purchasing units that only execute procedures but do not make relevant decisions are not procurement offices; they are operational offices. Physically, the 120 procurement centers still exist but only 59 of them are making decisions while the rest execute those decisions. In 2015, we expect to see a further reduction of about 20 procurement offices, of which about ten will become centrally led, applying standardized processes under guidelines instructed by the Director General of PEMEX. Our procurement strategy is destined to allow PEMEX to save MX$21 billion in five years. These savings are the result of multiple initiatives, such as better valuation methods, simultaneous biddings, inverse auctions, and the use of service agreements. However, the most significant initiative relates to strategic sourcing. The pillar of strategic sourcing is category management, under which we have developed 23 categories organized in six main families: drilling equipment, offshore, jack-up rigs, land rigs, semi-submergible rigs, and modular rigs. These 23 categories each have their own strategies that are presently being implemented. Each category has a leader and a dedicated market intelligence team, its own cost engineering, legal and administrative areas, and supplier analysis mechanisms.

Q: What needs to be in place for one of these categories to be fully operational?

A: There is no rule of thumb because each category has its particularities, but they require supplier demand, market intelligence, and the best practices for procuring equipment. The idea is that every purchasing unit should have sufficient knowledge to create strategies applicable to any particular category. Furthermore, each category is affected by market conditions which, in turn, affects the supplier base, supply and demand, and new technologies. These factors naturally impact specific strategies and how they are formulated. Right now, we have gone from a seller’s market to a buyer’s market, and we do not foresee the market changing course soon, so the procurement strategies may not change dramatically in the next two to three years.

Q: How do you approach the challenge of putting the right team in place for each category?

A: The right competencies and knowledge can be found all across PEMEX, as we have some of the best engineers and technical professionals. The present challenge for the company is to change its old mentality and move from a focus on volume to a value-added mindset. This transition will become far easier if we implement the right training and provide the right tools to PEMEX’s employees. Constant reinforcement will be required to remind people that we are living in a new era, not because of a new administration, but because Mexico’s energy sector has been completely transformed. Our mission is to communicate to our teams what this transformation entails for PEMEX and what it will bring about in the future.

Q: Are you concerned about the potential gap between the expertise of PEMEX employees and incoming IOCs?

A: The PEMEX talent pool has not been a handicap to date. We have some of the most capable people working in the subsidiaries, many of which are experts in different areas. For example, when dealing with complex and large investments, such as the procurement of an FPSO, we have skilled people who can manage this process and we complement their expertise with third party experts. When it comes to shale oil and gas, we do need to further expand PEMEX’s capabilities and competencies. The joint ventures that will emerge from Round One will clearly help PEMEX in this regard. PEMEX and its partners need to know very clearly when they will act as an operator. In conversations with PEMEX’s prospective partners so far, there have not been many grey areas. In shallow waters, conventional onshore fields, and mature fields, it will be very difficult for anyone to compete with PEMEX in Mexico.

Q: How could a partnership between PEMEX and an IOC with significant supplier alliances affect the operation of PEMEX’s procurement division?

A: Each joint operating agreement and joint venture will have its own intricacies. PEMEX will deal with these on a case-by-case basis, considering who brings more value in different areas. Procurement is part of many elements that are brought up during such negotiations and this aspect takes on a bigger role for an operator than for a non-operator. In cases when PEMEX wants to be the operator, procurement will be essential. As we get to processes and projects that require specific types of equipment, such as deepwater, ultradeepwater, and shale oil and gas, PEMEX will need to learn as it goes. The company can buy the appropriate equipment but that is somewhat irrelevant, as expertise is the key component.

Q: Despite a reduction in the number of signed contracts, the total value of PEMEX’s procurement has not decreased. Has the value of the average contract grown?

A: On average, we used to sign 30,000 contracts on a yearly basis. As we have already been able to aggregate demand and consolidate, we have brought that number down to about 21,000. There is still a lot more room for progress, but the centralization process is already paying off. As PEMEX has consolidated, the value of certain contracts has gone up. This has also been positive for our suppliers, as it ensures more visibility and fewer procedures for them to complete. Shell spends about US$60 billion a year on procurement, but has less than 30,000 contracts. PEMEX spends half of that amount across twice as many contracts. For example, each of PEMEX’s six refineries buys the same items separately. This is woefully inefficient but easy to consolidate. Once the consolidation process is finished, suppliers will go from having to follow a dozen procedures to only one or two. This makes things easier for PEMEX and its suppliers alike.

Q: How will SMEs be affected by the consolidation of contracts?

A: We cannot view PEMEX’s consolidation process as an absolute. Not every peso spent can be consolidated and many contracts will be isolated simply because of their local nature. PEMEX will not necessarily stop signing contracts for under US$1 million in goods or services. From a consolidation standpoint, some SMEs might be at a disadvantage, but they will still participate in procurement areas that cannot be consolidated. After all, our current focus is to strengthen our local supplier base and better integrate it into PEMEX’s entire supply chain. Therefore, one of our initiatives involves collaboration with banks to create financial solutions for SMEs.

Q: How will the MX$62 billion budget cut affect the procurement strategy and the pace at which PEMEX can advance the process of change?

A: Budget cuts or increases do not affect the procurement strategy in any way. PEMEX is still developing its strategic sourcing and category management. We will still streamline our procurement into one standardized process, homologating contracts, training people to use different methods of evaluation, and strengthening tools for areas like prequalification. None of these initiatives or the regionalization of the procurement centers are affected by budget cuts. Since these cuts concern CAPEX, certain projects will be pushed back and others will not be implemented at their full capacity. PEMEX has implemented an austerity program and needs to be more effective in the use of its resources, making this an ideal time to deal with inefficiency in its procurement.