In reference to the Mexico Oil & Gas Procurement Forum event held on June 2nd at the María Isabel Sheraton Hotel in Mexico City, we have decided to share with you the article written from the interview that our team held with recently appointed Chief Procurement Officer of PEMEX, Arturo Henríquez Autrey and published in Mexico Oil & Gas Review 2014. This blog post also contains previously unreleased material written by our editorial team explaining the concepts behind category management, the main relevant change in PEMEX’s procurement function according to Henríquez Autrey.
Do not miss out on Mexico Oil & Gas Review 2014, as it contains vital information shared by the industry’s key stakeholders and analyzed and edited by a team of knowledgeable people within the oil and gas industry.
After studying different procurement models of oil companies across several countries, PEMEX decided to centralize its procurement processes. The decentralized model PEMEX was previously following involved 120 different purchasing units operating through approximately 30,000 procurement contracts. According to Arturo Henríquez Autrey, Chief Procurement Officer of PEMEX, economies of scale were not achieved under the decentralized model, due to the missing aggregation of demand and a lack of standardization. “It became crystal clear that, in order for PEMEX to be efficient and competitive in a newly open industry, the procurement process had to be changed. The shift to a centralized procurement model allows PEMEX to standardize processes, improve purchasing power, enhance efficiency, improve the transparency of procurement processes, and ensure a unified interpretation of the applicable laws,” says Henríquez Autrey, who was appointed to his current position at the beginning of 2014 to formally start the centralization of PEMEX’s procurement procedures.
Although the secondary legislation establishes that all projects shall meet a 25% national content requirement by 2025, PEMEX will be able to choose its suppliers based on value rather than cost variables in a free market context. Henríquez Autrey says that PEMEX’s commitment to supplier development, possibly combined with a public trust that will be created for national supplier development under the proposed secondary laws, will boost the competencies of suppliers and foment the creation of jobs and infrastructure. He also notes that the division in charge of supplier relations will be a great vehicle in making sure providers, technologies, and products satisfy PEMEX’s quality demands.
A category management strategy will be implemented to create value for PEMEX. “Most oil and gas companies nowadays operate through category management PEMEX will soon get on board with this as well,” says Henríquez Autrey. He explains that this method did not yet exist at PEMEX mainly because of a lack of visibility. “It is hard to know what goods and services PEMEX buys because there is no standardized homologation; given this mayhem, suppliers cannot possibly know what categories PEMEX uses.” Once more visibility is achieved, the company will be able to apply a category management approach to bring further clarity to its reformed procurement strategy.”
The traditional procurement methods pose a serious problem in Henríquez Autrey’s opinion, because there are no procurement specialists in any of PEMEX’s subsidiaries. “Even if operators work on platforms, they are not specialists in the procurement of platforms. However, they are the ones writing technical specifications and deciding which platforms to buy. The subsidiary then proceeds to do market research based on the written technical specifications, followed by an economic analysis to match budgets. Nevertheless, the purchasing power of these budgets is diminished because of the inability to create economies of scale. All of this, which happens for 30,000 contracts each year, will disappear with proper category management,” says Henríquez Autrey. “Category managers will be responsible for 80% of PEMEX’s procurement by value, making the procurement process more efficient and well-guided. The category management strategy is based on the creation teams of specialists who know their sector in depth. They have the latest information on the top-tier companies, the latest technologies, current market conditions, and what the pricing structure is,” details Henríquez Autrey. These teams will be in constant communication with the end user, making sure that they are aware of its needs and demands. Being knowledgeable authorities in their respective fields, the category experts will be able to advise end users on specific products.
The streamlining of PEMEX’s procurement process is driven internally but the company intends that this evolution permeates all the way down to its suppliers. Henríquez Autrey says the secondary laws should address this through contractual regimes. At the moment, public servants rely on the PEMEX Law and the Law of Public Works. Officials do not know which legislative body has authority over the different procurement processes, resulting in bottlenecks and other unnecessary bureaucratic procedures. “While other companies take two months to decide on a US$300 million platform, it takes us up to a year for PEMEX to complete the approval cycle. This has to change,” stresses Henríquez Autrey. For the PEMEX CPO, streamlining should also happen at the execution level, even when concerning public tenders. “The fact that purchasing is now going to be done through the central procurement office, and the fact that economic and market analysis will be taken away from the user, should streamline processes,” says Henríquez Autrey. While he is aware that PEMEX’s bad procurement habits are not going to disappear overnight, he is confident that slowly making the procurement processes efficient will improve the company’s future direction.
INTRODUCTION TO CATEGORY MANAGEMENT
Category Management (CatMan) is a continuous collaborative process between manufacturers and retailers to assess and manage product categories as individual business units. The concept originated in marketing during the 1980s, when it helped to redefine the relationship between shoppers and buyers, especially in the consumer goods industry. The main contribution of this strategy consisted in grouping similar products into categories, based on how consumers used each product. In the first years of implementation, this strategy helped retailers improve sales and profits by maximizing synergies and minimizing unproductive competition between their own brands and products. The general purpose of the CatMan process is to optimize customer satisfaction and fulfill the role chosen by the retailer for each category within the overall portfolio of categories. CatMan simplifies the purchasing experience, combining assortment, price, presentation, and promotion while optimizing the role of each product category over time.
The evolution of CatMan has seen move from being primarily used in retail to being a lynchpin of procurement strategies in other industries. In procurement, CatMan relies on cross-functional teamwork to generate procurement outcomes that fully satisfy agreed business needs. Categories group products and services together based on the ability of the market to supply these, and not on the basis of organizational boundaries. In other words, the category serves as the platform from which a procurement strategy can be launched. Given its nature, CatMan is data intensive and analytical in character; it is all about analyzing and understanding all the data available from each category. This is why cross-functional teams are set up to manage each category: the team scans every part of the organization that consumes the category in question and visualizes the applications that the items from the category are given within the different areas of the organization. By analyzing this, the cross-functional team in charge of managing each category can come up with a better strategy for the procurement, maintenance, and application of the products within their category. To successfully implement a CatMan strategy, both buyers and sellers have to understand their role as partners sharing the same objectives, and not as one-time traders.
PEMEX is now seeking to implement a CatMan approach as part of its centralization of all its procurement efforts, where different teams of specialists are assembled for the distinct categories of goods and services that the company demands. A successful implementation of CatMan would help PEMEX unify its expenditure strategy and budget under the same objectives, while generating a centralized governance process that would cross the boundaries within the organization, such as its subsidiary framework. This would minimize the risk of corruption breaking into different levels of the organization. It would also allow PEMEX to have experts present for separate categories to evaluate and manage the best technologies and the highest quality at the best possible prices, by aggregating the demand coming from different areas within the organization. This could, in turn, generate important savings for the company, such as the ones that PEMEX Procurement International has achieved in the past years on the international side of PEMEX’s procurement efforts.
The monopoly paradigm behind the Mexican oil and gas industry has finally changed. After the approval of the 2013 Energy Reform, Mexico is looking at a whole new energy sector, filled with attractive opportunities and possibilities to invest. PEMEX is set to start over as a business-oriented oil company, with a new production base in the fields and areas granted by SENER within the Round Zero proposal, and with the opportunity to form alliances with other companies to face the most challenging issues in its E&P endeavors – whether they are national, international, public, or private companies. At the same time, private operators are being lured to the Mexican oil and gas industry through attractive investment opportunities being drafted in subsequent contracting rounds by SENER and SHCP, under the technical assistance of CNH. While trying to increase production and government take, the Mexican federal administration will be leading the industry to build on the exploration and production successes of past years and facilitating the technological spillover to face the new challenges ahead.
Mexico Oil & Gas Review 2014 is dedicated to accelerating the exchange of essential information that drives the industry’s development and allows you to capitalize on emerging business opportunities. The topics covered in this year’s edition of Mexico Oil & Gas Review are those that have been the most relevant in the Mexican oil and gas industry over the last twelve months. Our publication also provides you with an in-depth understanding of the most relevant issues that are expected to influence and transform the industry in the coming year.