In Brief
- In addition to supplier relationship management, you must leverage IoT, machine learning, blockchain, cloud computing, etc., to improve visibility, efficiency, and traceability in your supply chain operations.
- The energy sector has a complex supply chain network with different stakeholders, including suppliers, oil and gas companies, contractors, and transportation services. A complex supply chain can cause delays, cost overruns, regulator issues, and safety problems.
- Your company must implement a risk management strategy and adopt sustainable practices, such as reducing waste and emissions, using renewable energy sources, and incorporating circular economy practices to overcome challenges.
Table of content:
- Supply Chain Management Challenges in the Energy Industry
- Logistics and Transportation
- Supplier Management and Procurement
- Risk Management and Compliance
- Sustainability and Digitalization
The Covid-19 pandemic caused significant problems for businesses in various sectors, including the energy industry. Most companies experienced severe challenges during the pandemic, negatively impacting the global supply chain.
Axio reports that 75% of companies in the United States experienced disruptions in their supply chain operations during the pandemic. According to the World Bank, the Covid-19 pandemic severely affected 25% of companies, with a substantial 50% drop in sales.
The National Association of Manufacturers highlights that over 1.4 million people lost their jobs between 2020 and 2021 due to the Covid-19 pandemic. Besides the pandemic, geopolitical tensions between the U.S. and China are the leading causes of disruptions in the global supply chain.
So this has also impacted the global energy industry, preventing companies from streamlining their operations. While supply chain management is critical to adapting efficient energy production, most companies do not have a sophisticated and evidence-based framework to optimize the process and achieve their goals.
Today’s article will discuss the challenges of supply chain management experienced by companies in the energy industry. We will also discuss optimal solutions that can help businesses in the energy sector to streamline operations!
Supply Chain Management Challenges in the Energy Industry
The global energy industry experiences various problems and is under intense scrutiny. The reason is that wholesale energy costs are skyrocketing. The government, public/private sector, and consumers’ pressure to shift from fossil fuels to more clean, green, and sustainable energy have caused problems for companies because they don’t have a reliable framework to do this rapidly.
According to B2BE, 33% of companies in the energy sector believe that unpredictable situations due to geopolitical issues are one of the unique challenges. The problem may persist in the coming years.
Besides, 33% of companies reported that the government’s and consumers’ demand for regulations is another significant challenge. Organizations lack the resources and tools to brace themselves for upcoming standards, protocols, and regulations.
Moreover, 22% of businesses report that energy production is a substantial challenge. The reason is that most companies find it cumbersome to efficiently and quickly move away from fossil-based systems to renewable energy sources, such as solar and wind. Other crucial supply chain challenges faced by the energy industry are:
- Global supply chain management
- Transportation issues
- Procurement problems
- Compliance with regulations
Global Supply Chains
Managing global supply chains is one of the critical challenges for companies in the energy industry. Most companies fail to move products across borders due to problems like trade barriers, geopolitical tensions, and currency fluctuations.
However, companies can follow evidence-based methods and implement a tailored policy focusing on contingency planning and risk management to ensure everything goes smoothly and suppliers streamline their operations.
Transportation
Transportation is another complex challenge experienced by businesses in the energy sector, negatively impacting their supply chain operations. Bear in mind that the energy sector relies on logistics to supply materials and equipment.
So, transportation delays can lead to significant disruptions, costing companies hundreds of thousands of dollars. Therefore, we recommend businesses manage their transportation requirements and focus on the following:
- Route planning
- Real-time monitoring
- Data analysis
- Coordinating with suppliers
- Optimize relationships with carriers
Procurement
Some companies fail to optimize their procurement-related operations, preventing them from sourcing materials and equipment, such as machinery, valves, piping, and electrical tools or products.
Businesses seeking optimization and efficiency must focus on strategic sourcing and develop sophisticated risk mitigation and supplier management policies to overcome procurement issues.
Compliance
Governments, private/public sectors, and consumers pressure companies to follow the rules, standards, and regulations. So, compliance becomes necessary for businesses to achieve efficiency, reliability, and smooth operations.
However, most companies do not have a framework or strategy to follow and maintain environmental, societal, and governance aspects. Likewise, non-compliance can lead to legal liabilities, fines, and reputational damage.
Logistics and Transportation
Logistics and transportation are essential for companies in the energy sector to streamline the movement of resources, materials, and equipment. The purpose is to optimize various processes, such as production site operations, and supply the final product to consumers.
In addition, the energy industry must deliver resources, such as natural gas, crude oil, coal, solar panels, and wind turbines, efficiently and promptly. The primary objective of efficient and prompt delivery is to improve your company’s reputation and satisfy consumers, increasing revenues and the business’s bottom line.
However, managing transportation is not easy. It requires thorough planning and preparation. Let us discuss the challenges the energy industry experiences in its supply chains and strategies to overcome them. Continue reading!
Regulatory Compliance
Government regulations, particularly during the Covid-19 pandemic, have caused numerous problems for companies in the energy industry. Most businesses do not have the resources and tools to comply with regulations and standards.
So this makes it challenging for companies to transport resources across different countries and regions. Remember, this can cause delays, leading to higher costs and legal penalties.
Security Risks
Theft, piracy, and terrorism are the most significant issues companies face when transporting energy resources from one place to another. Incorporating and maintaining optimal security measures are essential for businesses to streamline operations. However, this can add cost complexity to the transportation process.
Limited Infrastructure
Limited infrastructure is another critical challenge experienced by businesses in the energy sector, negatively impacting their supply chain operations. For example, infrastructure limitations, such as inadequate ports, roads, and pipelines, can cause delays, bottlenecks, and higher costs.
So, this can deteriorate your company’s supply chain. We recommend the energy industry collaborate with the government to develop and maintain infrastructure to streamline the supply chain operations.
Supplier Management and Procurement
According to a research report published by Deloitte, a disrupted supply chain can cause various problems, such as delayed product launches and damaged brand reputation. About 31% of companies look forward to restructuring and optimizing their supplier management and strategy to streamline operations.
Supplier management is essential for companies in the energy industry to achieve efficiency and ensure the procurement process goes smoothly. So, positive supplier relationship management allows you to share ideas and feedback to improve processes and go-to-market times, leading to lowered costs and enhanced brand reputation.
According to PWC, optimal relationship management can positively affect companies in the industry sector. It offers numerous benefits to businesses, allowing them to:
- Increase the market share
- Respond to changes in the industry
- Generate higher returns on investments (ROIs)
- Shorten the lead times and fulfill orders
Supplier Management & Procurement Challenges
Running an energy company is daunting and frustrating because it requires developing trusted and long-lasting supplier relationships. Likewise, you must understand the causes of ineffective and untrusted relationships.
According to Prokuria, most companies promise too much and deliver too little, causing an unrealistic situation for them and their suppliers. The primary reason is a lack of communication between your company and suppliers.
As a result, you fail to communicate with suppliers or exchange information correctly. Remember, minor misunderstandings can lead to significant disruptions, costing you a lot of money.
At the same time, this affects your suppliers, consumers, and other stakeholders. Moreover, when you fail to respect the agreed-upon terms, such as wrong delivery terms, disagreement in price lists, and overdue payments, you will experience inconsistency in your company’s operations.
Therefore, you must develop a sophisticated communication and relationship strategy with your suppliers to optimize procurement and other operations. So, you must create goals that align with your company’s values.
Improving Supplier Management and Procurement
Supplier management is integral to modern procurement, allowing companies to optimize functions and achieve goals. However, most companies do not have a reliable strategy to improve supplier management, leading to delays in procuring energy sources, materials, and equipment.
Setting clear objectives requires thorough research, collecting historical and real-time data, and using cutting-edge tools to gain insights. You can use these insights to make informed decisions based on your requirements. We recommend the following strategies for effective supplier management:
- Improve visibility into your supplier management and relationship
- Speed up processing times, particularly procurement-related processing times
- Focus on storing and maintaining supplier data, including:
- Contracts
- Memos
- Certificates
- Conversations
- (Note: we recommend storing and accessing this information from a centralized location to avoid redundancies and incongruencies)
- Monitor supplier spending and make informed decisions regarding volume allocations
Risk Management and Compliance
Most companies in the energy sector consider compliance an externally focused function, protecting them from external legal entities and regulators. Although compliance is an unpleasant necessity, you must follow the rules to stay afloat in the market and avoid legal penalties.
On the other hand, risk management is a wise investment, allowing you to manage your company correctly. So, we believe risk management is similar to a security system you control, and compliance is a police officer patrolling the area.
However, most businesses in the energy industry fail to combine compliance and risk management and make the most of it. Sometimes, companies don’t share data or information.
We suggest focusing on the actual value and creating an overarching compliance strategy that goes hand-in-hand with risk management. The purpose is to protect your business and stakeholders and improve your company’s bottom line. Let us now discuss some challenges and solutions for risk management and compliance.
ESG Regulatory Risks
Environmental, social, and governance (ESG) regulations are essential for your company to optimize supply chain operations. The energy industry sources products and services from countries involved in human rights violations.
Some companies even procure products from countries or regions that fail to comply with environmental regulations and ethical practices. Because the energy industry is shifting from fossil fuels to renewable sources, you must comply with ESG regulations, primarily focusing on standards for climate change.
In addition, your company must follow human rights regulations to avoid legal penalties. According to Exiger, Chinese companies use the Uyghurs community for low-cost slave labor, which has led to an unfair economic advantage.
However, the Uyghur Forced Labor Prevention Act required companies to certify they source materials and equipment from businesses not involved in forced labor. Otherwise, the U.S. government will take strict action against the company.
You must comply with the act if your supply chain network operates in China. Moreover, you must have data, information, and transparency into suppliers and third parties you deal with indirectly. The purpose is to create a reliable system for suppliers and measure risks. Thus, you can analyze real-time data and generate insights to make informed decisions and minimize ESG risks.
Cybersecurity Risks
According to GSA, cybersecurity risks can deteriorate a business’s supply chain operations and harm its reputation. These risks include intellectual property theft, unauthorized production, insertion of counterfeits, hardware theft, data tampering, malware, viruses, information leaks, etc.
For instance, Russian cybercriminals targeted more than ten power plants in the United States in 2018. Hackers used spear phishing, malware, and other techniques to access networks.
According to PROSPERO Events, the DMEA, a Colorado-based energy company, closed its 90% of operations due to malware that deleted 25 years of historical data. As a result, the DMEA experienced severe disruptions in its operations, including payment and billing processes.
So this shows that companies in the energy sector must focus on cybersecurity and develop high-level encrypted systems to overcome challenges. You must achieve high-end visibility into suppliers’ and vendors’ multiple layers to identify and mitigate risks appropriately.
Sustainability and Digitalization
A research study published by Science Direct highlights that digitalization is integral to companies’ success in the energy sector. It optimizes business operations and increases transparency while influencing your company’s sustainability through innovative technologies.
However, digitizing your company and its supply chains to improve sustainability is daunting, leading to various complexities. The Covid-19 pandemic, the Russia-Ukraine war, and unpredictable/uncertain geopolitical and economic situations have caused companies in the energy sector to adopt cutting-edge technologies. The primary objective is to incorporate digital channels for:
- Delivering invoices
- Data collection
- Payments
- Sensors to limit human travel
- Set up digital meters
- Redesign specific technological processes
- Develop SMART traffic control platforms
- And reporting methodologies
In addition, digitalization for the sustainable development of your company requires utilizing SMART technologies that automate specific processes. You can use advanced software programs based on artificial intelligence and machine learning algorithms to streamline operations.
However, digitalization has various implications, including data conversion from analog to digital format and transforming organizational, environmental, social, and economic processes via IT tools. Research shows that integrating digital technologies in your company following the Industry 4.0 standards is essential to transforming your supply chain operations. These technologies include:
- Internet of Things (IoT)
- Autonomous Robots
- Additive manufacturing
- Big Data Analytics
- Augmented Reality
- Artificial Intelligence
- Cloud Computing
- Predictive Modeling
According to Science Direct, integrating these technologies can transform your energy company through automated and optimized systems. Thus, you can achieve efficiency in supply chains and establish reliable relationships between producers, suppliers, consumers, and other stakeholders. Another study highlights that companies must integrate sustainable energy sources in their supply chains to reduce consumption and its environmental impact.
Final Words
The energy sector has complex supply chain networks with multiple layers of producers, suppliers, distributors, and regulators. So, this makes it challenging for you to manage your supply chain operations.
In addition, ESG regulations have become more critical for companies in the energy industry. However, these standards/regulations can pose various challenges for businesses to manage their supply chains.
The good news is that advanced technologies can help you stay up-to-date and analyze real-time data to cope with rising problems. We recommend establishing relationships with suppliers to promote transparency and reliability of supplies.
Likewise, you can develop a resilient supply chain to respond to risks and disruptions efficiently and quickly. Use IoT, blockchain, automated systems, etc., to achieve visibility, optimization, and efficiency.
What role does planning and forecasting play in supply chain management in the energy industry?
Supply chain planning and forecasting are critical for companies in the energy sector, allowing them to combine historical data with insights and information about demand.
The primary objective is to make informed decisions for your business and streamline processes, such as stocking inventory, booking cargo, planning the budget, and expanding to new markets.
What is supplier management, and how is it different in the energy industry from other industries?
Supplier management in the energy sector is a systematic approach to managing relationships, including selection, assessment, monitoring, and analysis of suppliers to improve performance.
It identifies products, services, and equipment required, followed by potential suppliers’ assessment based on quality, price, delivery time, and ESG criteria. For instance, energy companies must follow strict standards and regulations like NERC and ISO 9001 quality management protocols.
The energy sector’s supplier management differs from other industries because it involves various risks, such as supply chain disruptions, price volatility, geopolitical tensions, etc.
What is cost management, and how do companies in the energy industry manage costs in their supply chains?
Cost management plans and controls expenses/prices in your business. It is one of the most daunting and time-consuming tasks for companies in the energy sector because it requires a thorough approach to collect, analyze, evaluate, and report cost-related data and insights for budgeting.
How do energy industry companies manage supply chain risks, such as disruptions and regulatory compliance?
You can manage risks by creating an emergency plan, partnering with stakeholders to perform supply chain audits, and investing in cutting-edge technology to automate the process and reduce data redundancy.
In addition, we recommend companies diversify suppliers and understand where the risks lie. Collaborating with stakeholders, monitoring operations in real time, collecting and analyzing data, and continuous improvement are excellent ways to predict and prevent potential risks.
Regulatory compliance requires determining which rules are relevant to the energy industry. Next, identify the requirements you must comply with and conduct an initial internal audit to establish compliance policies. Moreover, provide your managers and employees with training on compliance.
What is sustainability, and how is it relevant to supply chain management in the energy industry?
Sustainability refers to managing your business’s environmental, social, and governance aspects and their impact on the environment and society. Governments, investors, and consumers put a lot of pressure on companies to reduce greenhouse gas emissions and shift from fossil fuels to renewable energy.
So you must incorporate sustainable practices in your supply chain operations to reduce waste, improve efficiency, and minimize the carbon footprint. In addition to developing good supplier relationships, we suggest focusing on transparency and reporting on ESG performance.
How is digitalization transforming supply chain management in the energy industry, and what benefits does it offer?
Digitalization empowers you to plan, source, collaborate, and automate your supply chain operations and management practices. It helps you integrate the growing share of sustainable energy through flexible electricity systems, providing on-demand solutions and energy storage. You can leverage cutting-edge tools to optimize the energy value chain, generation, transport, supply, distribution, and consumption.
What role do data analytics play in supply chain management in the energy industry?
Data analytics is a powerful tool for a company to gain valuable insights from massive volumes of data regarding procurement, processing, and distribution. You can use data analytics to digitalize and create an autonomous and reliable supply chain. It helps you make informed decisions based on real-time data.
What are some unique challenges facing supply chain management in the renewable energy sector?
According to MH&L, some of the most significant challenges experienced by companies in the renewable energy sector are special equipment needs, unpredictable market conditions, ineffective global supply chain visibility, tighter budgets, and strict timelines.
How do geopolitical factors and climate change impact supply chain management in the energy industry?
Conflicts, sanctions, trade wars, etc., are geopolitical factors that can disrupt your supply chain operations. These aspects create uncertain situations in the market, preventing your company from achieving efficiency and reliability. There is always uncertainty, leading to chaotic situations throughout the supply chain networks.
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Author
By David Wardle,
Vice President, Operations
David has been at GPSI since its inception in 2006. He is responsible for the development and execution of Operational Strategies. Prior to joining GPSI, David held several Senior Leadership roles at Boeing Toronto Limited/McDonnell Douglas Canada and accumulated over thirty years of Aerospace Management experience. David is Lean Manufacturing Certified, has earned diplomas in Human Resources Management and Aircraft Maintenance Engineering and is a graduate of the Boeing Leadership Centre.
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