Concept of Buyer and Supplier Relationship
In the contemporary business scenario, oil and gas industry in the United Kingdom can be identified as one of the most anticipated industry. Pioneering modern technology and management process of the entire industry has largely contributed to boosting the oil and gas production. Oil and Gas UK, the leading representative and governing body for the offshore oil and gas sector in the United Kingdom has vowed the negative impact of Brexit on the entire sector. Currently, the UK oil and gas industry is becoming one of the competitive industries at the international level although legal restrictions and additional cost burden have reduced the expansion of the sector. Due to Brexit, the best applicable tariffs with the non-EU nations can cost £500 million for the UK according to the rules of World Trade Organisation (WTO). In the meantime, the slump in the WTI Crude since 2014 has forced job cuts in the industry. According to the reports, more than 120,000 employments have been shredded during the timeframe of 2014 and 2016 (Vaughan, 2017).
In the reported study, the development of the buyer and supplier relationship in the increasingly competitive UK oil and gas industry has been determined. The procurement and acquisition process identifies how the relationship between buyer and supplier associated with the sector has been altered over the time (Kannan & Choon Tan, 2016). Furthermore, the existing and future business trends in the sector have been illustrated providing relevant cases. In addition, precise material and resource management strategy implemented by the UK oil and gas companies has been described in the study as well. In order to make the discussion paper more effective, a critical review of contracting and tendering framework and crucial aspects of the negotiating process in the UK oil and gas sector have been demonstrated including several facts and statistics (Mackenzie & Rosenberg, 2007).
The concept of buyer and supplier relationship is essential to understand as sometimes it can be complex according to the related terms. Meanwhile, the buyer can be identified as the person or the company that buys raw materials or finished goods from the suppliers. In the buyer and supplier relationship, each of the components involved has wanted to minimise resources, time, and cash (Sarang, Bhasin, Verma & Kharat, 2016). In terms of relationship, based on regular purchases, buyer and supplier relationship can be short term or long term (Bowhill, 2014). Understandably, the buyer-supplier relationships mainly dictate the commercial transactions between the purchasing and supplying companies.
Development of Buyer and Supplier Relationship
According to the established agreements and contracts, a number of advantages, as well as disadvantages, can be attached to short term and long term buyer and supplier relationship. For instance, in the case of flexibility is needed in trade, short term relationship can offer additional options to the purchasers. Buyers can select suppliers according to the requisite in short term agreements with suppliers. Also, short term contracts can be effective for the buyers when the prices of a commodity remain volatile (Gebert, 2014). Precisely, globalisation has added a range of specific disciplines to be followed by the management to maintain a stable buyer-supplier relationship.
A development in the buyer and supplier relationship can be evident with development of technology and increase in globalisation (Boyer & McDermott, 2009). The selection and empowerment of adequate suppliers provide competitive advantage in the portfolio of the projects. The oil and gas industry trends have focused on streamlining and consolidating the supply base as a part of the supply chain by weeding out the suppliers that do not meet the needs of the organisation (Fleming & McKinstry, 2008). In the current scenario, the strategic process of supplier management has replaced the historic functions of purchasing. In the present generation, the assessment of the supplier’s capability to deliver the specification of the project has become a vital factor for the success of a particular project.
Currently, the relationship between the buyer and supplier is based on the past performance of the supplier, track record and reputation of the seller, third party certification, demonstration and evaluation of the products quality and objective appraisal (Ellegaard & Freytag, 2008). New approach known as vendor rating has been implemented by the major oil and gas companies to capture data about the supplier’s actual performance and choose the most suitable supplier for the project.
In the current scenario, the project managers, budget managers and key project personnel such as procurement managers plays an essential role in developing the buyer and supplier relationships (Garcia, Lessard & Singh, 2014). Different supplier performance metrics are used such as quality index of goods and services, timeliness of the supplies, quality of the services and price offered by the suppliers are used to judge the performance of the suppliers (Burke, 2013). On the basis of the results of the supplier performance metrics, a procurement strategy is development by the project management team to enhance the efficiency and effectiveness of the project. Hence, with change in time and increase in the competitiveness in the market, the concept of the buyer and supplier relationship has developed in the recent years.
Current and Future Business Trends
The procurement practices of British Petroleum helps the organisation to develop strategic supplier relationship that provides mutual benefits to both the parties. The multifaceted business relationships with the suppliers are viewed through four major dimensions known as economic value, strategic value, risk management and performance. Therefore, SRM is used as a systematic approach by the project management team of British Petroleum that analyses, segments and aligns the buyer supplier relationships in order to develop ongoing value (Chaplinsky, Lynch & Doherty, 2017). The company formally categorises the supplier relationships into several levels of relationships and importance. For instance, least attention is given to one-time purchase relationships and commodity suppliers. On the other hand, some of the suppliers are categorised as the candidates for acquisition due to their proprietary capabilities that are of significance (Welsh, 2013). Furthermore, the suppliers that have unique capabilities to help the company develop a stronger brand and higher added value in the market, but are not acquirable can be provided with advance orders (Chaplinsky, Lynch & Doherty, 2017). Additionally, the suppliers who act as technology partners due to their superior knowledge are provided with better investment opportunities and higher involvement in the product development decision making. Hence, the relationships with the suppliers are based on their capabilities and ability to support the achievement of the organisation’s objectives and strategic goals.
The slump in the oil due to global economic recovery and growth worries of the leading economies had forced crude oil to come down from $100 a barrel to $40 a barrel in 2016. Currently, the developing activities and lower oil prices have been identified as the major positives for the UK oil and gas sector. The role of the UK oil and gas sector is inevitable as the industry delivers around 75 percent of the demanded energy to the economy (Shahzad, Sillanpää, Sillanpää & Imeri, 2016). Precisely, latest technological development and expansion of the infrastructure have largely contributed to the growth of the UK’s oil and gas sector lowering the cost of production of crude. The renowned market operators such as British Petroleum, ExxonMobil, and Shell have been engaged with the UK’s oil and gas industry dealing in oil exploration and production projects (Boyer & McDermott, 2009).
The growth of the UK oil and gas sector has remained intact in the long-term basis. The forecasts of the sector have revealed that despite the event of Brexit, the post-Brexit scenario can provide additional investment in the targeted sector. As the UK will be separated from EU, new funding can be seen in the oil exploration projects in the longer run. The post-Brexit scenario can be identified as one of the most complicated factors for UK oil and gas industry. If the United Kingdom negotiates with the EU regarding leaving the European Union, a two year uncertainty can be developed in the oil and gas industry (Li & Turkina, 2017). Due to falling prices of crude at the international level, investment has been reduced in the targeted sector. Adversely, the government of the UK has lent a hand by abolishing 35 percent Petroleum Revenue Tax. Meanwhile, the government of UK has also reduced the corporate tax on the industry from 20 percent to 10 percent. In the underlying figure, the North Sea Capital spending has been shown:
Figure: North Sea Capital Spending
Source: (“Oil & Gas UK”, 2017)
The operational strategies of leading companies such as British Petroleum (BP) and ExxonMobil can be taken into account to determine the current as well as futuristic business trends in the UK oil and gas sector. Effectively, BP is focusing on certain corporate strategic objectives that will deliver long-term profitability and sustainability of business in the UK market. However, the slump in the crude oil prices to $40 a barrel can push the interest rates up in the near future (Pollard, 2013). As a result of the consequences, the cost of debt of the companies will also increase at a substantial rate. Meanwhile, leading participants in the UK oil and gas sector such as BP and ExxonMobil have relied on differentiated capabilities to improve the production and oil exploration projects (Kannan & Choon Tan, 2016). Precisely, modern technologies have been implemented so that cost efficiency can be achieved. Also, new business models and venture with other international companies have opened up latest opportunities exploring the emerging markets. Specially, single market operations have been replaced by alliances so that business costs as well as risks can be mitigated (Chaplinsky, Lynch & Doherty, 2017).
In order to increase the efficiency of the UK oil and gas sector and minimising the chances of duplication, the Efficiency Task Force (ETF) has predicted that effective contracting and tendering framework in the UK can save £25 million every year as buyer-supplier relationship can be handled in an organised way. The legal framework has included procurement policies and regulations to be followed by the market participants (“Oil & Gas UK”, 2017). Precisely, the Crown Commercial Services (CCS) has been given the responsibility to develop and implement subsequent policies in favour of the government. During project management in the UK oil and gas industry, all the public sector procurement can be determined by the legal framework that inspires free and open market competition to the market players and promotes monetary value (Hodge, 2016).
Meanwhile, each of the contracting and tendering must be in line with the domestic as well as global regulations to promote transparency and equality. The statutory legal framework includes international obligations such as treaty obligations and EU procurement directives. Each of the public procurement must be covered by the EU treaty principles i.e. non-discrimination, free movement of commodities, liberty to provide services, and liberty of establishment (Smart, Maddern & Maull, 2009). On the other hand, the procurement directives must be followed under the EU rules. In case of contracting, certain laws, contract regulations and directives must be fulfilled by each of the agreed parties. Evidently, in a contract, a number of considerations, terms and conditions must be briefed so that any misuse of the contract can be avoided (Kannan & Choon Tan, 2016).
Invariably, Public Contracts Regulations 2015 has been implemented so that best tender as well as right suppliers can be found in accordance with the business practices. Also, the regulation simplifies the activities of contracting so that procurements can be run faster. Meanwhile, before allowing a contract to a supplier, each of the procedures must be followed (Lowson, 2016). In case of sub-threshold contracts, additional UK regulations have been included to enhance the suppliers’ reach. On the other hand, the Utilities Contract Regulations 2016 and the Concession Contract Regulations 2016 must be taken into account so that effective training and other relevant guidance can be provided to the suppliers.
In case of bidding for a tender, there are certain regulations and standards to be met by the suppliers as well. For instance, Procurement Policy Note has been taken to analyse the previous performance of the suppliers. Evidently, references can be considered as essential for suppliers seeking contracts. By accepting the requests, the reputation of suppliers can be increased by the purchasers (Burke, 2013). Hence, past records of the suppliers have been influential to get contracts. In case of contract terms and conditions, valid terms and conditions must be included by the suppliers as well as purchasers so that the procurement process will be conducted following all the legal directives. In addition to the policies, Transparency Principles must be followed according to the Freedom of Information Act so that fair contracts can be created (Verville, Taskin & Law, 2011).
The key aspects of the negotiation process in the oil and gas industry are presented herein below:
It is important to note that there are several eyes on the oil and gas contract negotiation process other than the two principal parties. For example, affected landowners, indigenous communities and other related individuals often demand compensation for the use and disturbance of their property (Sepehri, 2013). Hence, it is important to develop a good relationship with the local political authorities and communities in order to process the negotiation contracts effectively.
It is a challenging task for the government as well as the oil and gas companies to select the members of the negotiation team. It is important to note that negotiation is an art that requires strategic skills (Tauzin, 2016). The member of the negotiation team must have proper knowledge of the sector and use trial and error method to conduct the process. Furthermore, there is a need of formal training and application of skills at appropriate levels in order to actively participate in the negotiation process (Radon, 2006). However, it can be seen that members of the negotiation team are chosen from foreign countries as well as domestic regions during the oil and gas contract negotiations. The members of the negotiation team belong to government authorities, international governing organisations and two parties involved in the process.
A contract is formed only after proper acceptance through the negotiation process. The negotiation team participate in the negotiation process in order to accept, reject or provide a counter offer. The acceptance of the offer must be supported by proper documentation and proof in order to legally prove the acceptance. A figure has been presented herein below for better understanding:
Figure: Formation of a contract
Source: Lecture Notes
The oil and gas contract negotiation process include the following steps:
- Planning: During this phase, the constraints are determined and options available are identified. Furthermore, the venue and logistics of the procurement process are planned during this phase.
- Introduction: The social exchange offer is presented to the suppliers.
- Negotiation: The counter offer is presented verbally or through written communication.
- Opening: The potential offers are exposed between both the parties.
- Review: The bargained offered is reviewed and evaluated for both the parties.
- Concessions: The concessions are discussed and well balanced to benefit both the parties.
- Identification: The final position is identified and discussed during the negotiation meetings.
- Conclude: The agreement is finalised and reached in order to provide a fair outcome to both the parties.
The negotiation process is one of the difficult tasks for the members of the project management team in the oil and gas industry. Therefore, the negotiation process is well planned and the tactics to be used during the bargaining process is pre-planned to increase the efficiency and effectiveness of the materials and resources management process (Gebert, 2014). The planning phase of the negotiation process includes the following activities:
- Develop negotiation team: During this phase, the negotiation team is developed. The roles and responsibilities are allocated to the members of the negotiation team to make them aware of the duties in the negotiation process.
- Decide the optimum number: The optimum numbers of the team members are decided during this activity. A brainstorming session is conducted to know whether the team is aware of the objectives and goals of the organisation.
- Assign the responsibility of the team leader: The team leader is chosen and allocated with the responsibility to lead the negotiation team.
- Conduct pre-meetings: Pre-meetings are conducted to make the negotiation team aware of the budget and requirements of the firm. The pre-meetings help the negotiation team to get aware of the necessary facts and information required for the bargaining process.
- Develop written objectives: The objectives of the negotiation process are identified and documented in a written version. The written objectives are used as references to evaluate the performance of the negotiation process and avoid mistakes in future projects.
- Brainstorm pitfalls to avoid personal goals: The pitfalls of the negotiation teams are identified through a brainstorming session to avoid personal goals. The common objectives of the organisation are communicated among the team members of the negotiation process.
The primary objective of the negotiation process in oil and gas industry is to maintain a good the buyer and supplier relationship by constituting a fair outcome. On the basis of the fact, the materials and resource planning strategies are used in order to understand the needs and objectives of the firm. Additionally, external analyses are conducted by the project management team of oil and gas companies to observe the external factors such as economic, political and legal obligations in the market (Gebert, 2014). Hence, the negotiation process is conducted keeping in mind the objective of providing mutual benefits to both the parties and establish a fair outcome during the formation of a contract.
Conclusion
The entire discussion has indicated that leading oil and gas companies operating in the UK oil and gas sector have adopted latest technologies and style of management to improve their market dominance. Although falling crude prices has been a major worry for the oil explorers and producers, the long-term outlook for the industry remains intact. However, decrease in the investment in the sector and a number of contracting aspects have added extra pressure on the companies. Meanwhile, suitable development of buyer-supplier relationship in the industry has increased the benefits as well. Economists have predicted the falling oil prices can increase the rate of interest. Therefore, the debt of the oil and gas companies may rise at the significant level. In the meantime, the government of United Kingdom has continuously shown the support by altering tax structure imposed on the sector reducing the burden. Affirmatively, the contracting and negotiating terms have been rightly implemented by the government so that both the buyers and suppliers will be benefited during their respective business model.
References
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