Spend Areas Analysis and Positioning Examination.

Executive Summary

This report develops a critical examination of spend items at ADNOC and the applied sourcing approaches. The determination of the spend areas is based on the ADNOC 2019 financial statements that demonstrate four of the leading spend areas. They are the technology infrastructure, machinery and equipment, distribution fleet, and office furniture and equipment, respectively. The spend areas have a combined spend amount of an estimated AED 264 Million for the Q3 period. In analysing the sourcing approaches used, the report indicates that there are four main applied sourcing approaches. They are (a) single sourcing-office and furniture items, (b) dual sourcing- distribution fleet, (c) multiple sourcing- technology infrastructure, and (d) partnership sourcing- machinery and equipment respectively. The findings demonstrate that ADNOC applies and uses different sourcing approaches for different spend items. A critical examination of the items indicates that although a majority are sourced through the optimal models, the single sourcing is not the most ideal for office furniture, Thus, under its recommendations, the report notes that the entity should consider creating and adoption the multiple supplier approach. This would help it leverage on market competition, thus obtaining value for money. The final report section is a checklist development on sourcing the strategic technology infrastructure items.

1.0 Introduction

In procurement, the strategic focus is creating value for money. This is an aspect of sourcing that, according to CIPS (2018) is gained through a proper supply chain system management. One of the core areas of the supply chain system is at the sourcing stage. This determines not only the lead time to acquiring and procuring a product and item but also the costs involved in such a procurement and sourcing process. This report develops an examination of the Abu Dhabi National Oil Company (ADNOC). This is an entity established by the Abu Dhabi government in 1975 as an exploration, drilling, distribution, and refiner of oil and related Petro-chemical products. In executing its functions, the organisation has a high spending index. For instance, an evaluation of its 2019 financial reports, it is clear that for the Q4 of the 2010 year, the organisation had a spend of AED 264 million (ADNOC, 2020). This is an indication that it spends a significant amount in the procurement and the management of the entire procurement of items process. This report develops a critical examination of some of the core areas of spend for the venture. Among the identified leading spend areas are in machinery and equipment, distribution fleet, technology infrastructure, and office furniture and equipment respectively. For each, it identifies the applied sourcing approach and the rationale for the adopted sourcing model. Finally, for the supply of the technology infrastructure, a supplier checklist is developed and recommendations offered.

2.0 Spend Areas Analysis and Positioning Examination

2.1 Spend Areas Description

In developing an analysis of the spend items and the identification of the core spend items, this analysis, was guided by the organisational 2019 financial year reports. This is a report that documented the activities and the core spend areas of the organisation. In particular, the analysis was guided by the 2019 Q4, that was the last internally audited financial report. Thus, allowing for accuracy. As mentioned, the core identified spend areas include in machinery and equipment, distribution fleet, technology infrastructure, and office furniture and equipment, respectively. They are each discussed in this section.

The first spend item is the machinery and equipment. This is a critical spend item as it is involved in the core business and activities of the ADNOC organisation. As an exploration, drilling, refining, and distribution venture, it requires machinery and support equipment at every stage of the activities. For instance, at the exploration stage, the organisation involves exploration machines. At the same time, as it requires refining equipment and distribution support machinery in the refining and distribution stages. This has remained a significantly high spend are for the venture with an estimated spend of AED 9.3 million for the 2019 Q3 and Q4 periods, respectively (ADNOC, 2020).

The second area of spending is on the distribution fleet. As a national and international Petro-chemical products distributor, ADNOC requires to invest heavily in distribution fleets. This includes a combination of both on sea distribution ship fleets and land trucks among other distribution support systems. In managing this spend area, it is imperative to ensure that it secures quality distribution fleets and models of transport that are both durable and guarantee on the standards and safety of the transported oil products in the vessels. As such, the organisation has invested heavily in enhancing and ensuring that it has the globally recognised and required standards of distribution vessels. To this effect, an evaluation of the organisational financial statements indicates that for the 2019 Q3 and Q4 periods, the organisation spent over AED 4.8 Million on distribution fleets (ADNOC, 2020).

The third area of spend is technology infrastructure. This is core-spending area. As global dynamics change and evolve, there is a need to improve operations and functioning. For instance, the exploration strategies and techniques have changed over the years. This includes ensuring that there is a suitable technology infrastructure base to support its operations, including its distribution and refining strategies and process. In ensuring that the required technology infrastructure is obtained, the organisation, as illustrated on its 2019 Q3 and Q4 financial statements spent over AED 84 Million. Evidently, besides spending on active projects that r capital base, this was the highest spending, and recurrent spend is for the venture within this period (ADNOC, 2020).

The fourth evaluated spend area for the organisation is on office furniture and equipment. This is a supportive non-core spend area. However, it is the availability of this furniture and equipment that makes the working environment and the offices conducive for increased employees’ productivity and motivation. They aid in ensuring that the employees‘ function and deliver on their goals and expectations for the organisation. In ensuring that the employees are supported, for 2019 Q3 and Q4, the organisation spent a total of AED 2.9 Million on office furniture and equipment. Although non-core, it is clear that the spending index was high, implying its strategic value and significance (ADNOC, 2020).

2.2 Kraljic Model Analysis

In analysing and determining the applicable and ideal sourcing model and strategy, the procurement function must understand the category for each of the spend areas. As Wagner, Padhi and Bode (2013) indicated, the positioning and ranking of a spend area determine the applied procurement systems and procedures, including the sourcing strategy and models used. One such an appropriate determination tool is the Kraljic model. As Padhi, Wagner and Aggarwal (2012) described it, this is a model that ranks spend items based on two dimensions of (i) profitability effect, and (ii) the supplier risks involved. The highest-ranking items are one that has the highest profitability effect and has the highest supplier risks index. Equally, the lowest ranking items are those that have both low profitability and supplier risk index. A summarised figure-based view of the discussed ADNOC spend items positioning is as demonstrated in the figure below.

Figure 1: Spend Items Positioning

Source: Summarised by the Report

Based on the two-matrix model above, it is clear that the items fall into different categories. The first level and positioning identified is the leverage spending. This is a spending area in which the items have a high profitability impact and value to the organisation. However, the supplier base is relatively static and as such, pose a minimal significant risk in the supply process. A detailed examination of the ADNOC key spend areas indicates that two spend categories fall under this positioning. They are fleet spending and machinery and equipment spending. Both of these spending areas have a high profitability impact. For instance, the fleet spending has a direct impact on the volume and distribution capability. In contrast, machinery spending has a direct impact and influence on drilling and exploration capabilities. However, these are durable items in the market, and as such, their supply and availability remain relatively stable. It means the supplier risk index is considerably low.

The second positioning identified is the strategic items positioning. This is a positioning level for which the spend items have both high profitability and supplier risk index. Among the discussed spend areas, the analysis demonstrated that the technology infrastructure spends items fall under this category. In terms of operations, the spend items are critical in enhancing modernity and efficiency in venture operations (Nellore and Söderquist, 2010). Equally, due to a changing technology landscape and the emergence of disruptive technologies, this creates a risk in terms of the used supplier base. Finally, the analysis indicates that the spending on office equipment and furniture falls under the non-critical spend areas. In this case, the analysis demonstrates that the office furniture and equipment have a low direct contribution towards the organisational profitability index, As already noted, these are non-core products and as such do not directly influence or determine the profitability index. Equally due to their fragmented nature and non-essentiality, there is a wide and stable suppliers base both domestically and internationally. This means that the supplier risk index is significantly low.

3.0 Sourcing Approaches

This section develops a detailed examination of the sourcing approaches applied by the ADNOC Company in sourcing it spends items and in incurring the spend items as illustrated above. O’brien (2019) noted that the sourcing approach is the method and process through which an entity seeks out for a supplier of a spending item in the market. Overall, the analysis noted that the variances in the different sourcing strategies and approaches are based on the number of suppliers involved. The number of suppliers sourced and included in the sourcing process by an entity range from a single to multiple suppliers in the market. Although there are different forms and types of sourcing approach, the four main approaches applied at ADNOC include (i) single sourcing, (ii) multiple sourcing, (iii) dual sourcing, and (iv) partnership sourcing approaches respectively (Kim, Suresh and Kocabasoglu-Hillmer, 2015). This section develops a detailed analysis of how the sourcing approaches are applied in the venture concerning the different identified items.

3.1 Single Sourcing

This is a sourcing approach through which the involved procuring entity engages with a single supplier in the market. According to Diabat (2016), this is applicable in an instance where the spending item supply base is a monopoly. As such, it means that there is no supplier base diversity in the market. Thus, this implies that the procuring entities have to work and relate with the single monopoly suppliers in the market. This sourcing model is also applicable in an instance where there are time limitations in acquiring the spend items.  This is to means that the procuring entity has no time for engaging a large supplier base, and has to contend with the single available suppliers to ensure that the supply chain systems are not disrupted. A critical examination of the ADNOC Company spends items. The analysis indicates that the Office furniture and equipment spend item has largely been sourced through single sourcing. This means that the venture does not engage with many suppliers in the market. This has been through an improved model. The rationale for this approach application is due to the non-core influent of the items. Additionally, market prices are relatively the same. Hence, once the organisation identified its potential supplier, it retains the supplier for the long-term period. The suppliers are only changed and a new supplier sourced if their prices vary from the market rates or if they fail on the 5R s of procurement in delivering the office furniture and equipment. This is a rational approach to spending on office furniture as it reduced the cost and resources, such as procurement staff involved in sourcing and evaluating suppliers for such non-essential spend items in the organisation.

3.2 Dual Sourcing

The second applicable sourcing strategy at ADNOC is the dual sourcing approach. As Xanthopoulos, Vlachos and Iakovou (2012) described it, this is a sourcing strategy and model that allows a procuring entity to source and use more than a single supplier for an item. Traditionally, the procurement process was hedged on the use and contracting a single supplier for a specific spend item. Unfortunately, with increased operations ad functioning, the spend items are increasingly complex and in large volume. This necessitates the adoption and use of more than a single supplier for the items. This is realised using the dual sourcing model. Under this model, the ADNOC entity engages with more than a single supplier, mainly two suppliers for the same spend item. This is a sourcing approach applied in the spending on distribution fleet. As mentioned in the spend item description, it includes the sourcing and procuring of fleet vessels both for land and sea as well as international distribution and domestic distribution vessels. The supplier capacity, quality and standards required differ significantly for each of the distribution fleets spend items (ADNOC, 2020). Hence, the ADNOC Company could not rely on the series and the support of a single supplier in availing all the items. Instead, it has two supplier bases, one for the land distribution vessels and the second for the sea distribution fleet vessels. This has enabled it to allow for specialisation and quality on the sourced and procured distribution fleet vessels.

3.3 Multiple Sourcing

This is a sourcing strategy and approach through which the organisations have a competitive approach to saucing. Under this model, this is applied through an entity sending out a request for quotations as well as request for proposals. This is in the form of an open tender to all qualified suppliers in the market, both domestically and internationally. Overall, the procuring organisation selects the strategically ideal and most suitable supplier for the select item. The section criteria, as Silbermayr and Minner (2014) demonstrated, include both the aspects of quality and costs involved.  An evaluation of the ADNOC Company indicates that it uses this sourcing model in sourcing for its technology infrastructure. This is a strategic item that has both high supplier risk and profitability implications. To address the supplier risks, a multiple sourcing approach ensures that the procuring entity picks the most reliable and qualified supplier in the market. This approach allows for global sourcing which increase the level of reliability and quality of technology infrastructure items supplied to ADNOC (ADNOC, 2020).

3.4 Partnership Sourcing

The fourth applied sourcing strategy at ADNOC is the partnership sourcing model. As Orsdemir, Hu and Deshpande (2015) described it, this is a sourcing approach through which entities and suppliers shift from the competitive arm’s length relationships. Instead, they shift to the collaborative, relational approach. This ensures that the two parties work jointly in sourcing the commodities in the market. A critical examination of the ADNOC sourcing strategy indicates that it applies a partnership model in sourcing for the machinery and equipment spend item. This is due to the specificity, and functionality level of the items require. It requires not only standard and quality, but highly customised machinery that is compatible and can work jointly the existing machinery, Thus, the procurement of generic machinery would pose a significant challenge. Thus, the organisation uses the partnership model to engage the suppliers and actively participate in the designing and production process of its equipment.

4.0 Supplier Appraisal for Technology Infrastructure

A critical analysis of the spend items indicates that the technology spend item is the one sourced by the organisation through a multiple sourcing approach. This means that a large number of suppliers are invited to bid for the entity to spend item supply. Of the interested suppliers in the market, the ADNOC procurement function has a responsibility and obligation of selecting the best. The selection process of the most ideal and strategic supplier is hedged on the applied evaluation. This is in the form of the supplier appraisal. Genovese, Lenny Koh, Bruno and Esposito (2013) described it as the process of examining the capacity and the capability of a supplier to meet the spend item supply needs and organisational expectations. One of the applicable approaches to an effective supplier appraisal is the creation of a supplier checklist. The analysis illustrated that the 10C model is an application checklist and appraisal evaluation model. This section develops a model appraisal and checklist for selecting a suitable supplier for ADNOC technology infrastructure spend items.

5.0 Conclusion and Recommendations

In summary, this report has developed a critical and detailed evaluation of the ADNOC spend items area as well as the applied sourcing approaches for the different spend items. Overall, based on the spent amounts for the 2019 Q3 and Q4 financial years the analysis demonstrated four main spend areas namely the machinery and equipment, technology infrastructure, distribution fleet, and finally the office furniture and equipment. In this respect, it noted that the applied four sourcing approaches include the single, dual, multiple, and partnership sourcing models, respectively. Finally, the report develops a summary supplier checklist for the selection of a supplier in delivering the strategic technology infrastructure to spend items.

Based on the report findings, the following recommendations are proposed for ADNOC

• Use Multiple Sourcing Increasingly: Although the use of single sourcing has allowed the venture to reduce sourcing costs for the office furniture spend item, it has also denied it the market competitiveness gains. Since there are a majority of suppliers, both domestically and internally, using multiple sourcing strategies for this spending item would increase its value for money.
• Focus on Supplier Sustainability: The DNOC Company should focus on and priorities on ensuring that on its supplier checklist, sustainability in avenues such as clean energy is realised and prioritised.

References

ADNOC, 2020, FOURTH Quarter and Full Year Financial Results 2019, Author. [Online] Available at < https://www.adnocdistribution.ae/media/2992/adnoc_distribution_q4fy_2019_mda-report_en_aed.pdf > [Accessed: 8^th April 2020]

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