the Oilfield Services Industry Authors: Clayton Mealer & Sung - - PowerPoint PPT Presentation

A Simplified and Scalable Should-Cost Tool in the Oilfield Services Industry

Authors: Clayton Mealer & Sung Hwan Park Advisor: Dr. Shardul Phadnis

MIT SCM Research Fest May 22-23, 2013

Agenda

• Background
• Problem Statement
• Methodology
• Available Data
• Seven-step Process
• Results
• Conclusion

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Background

• Third party spend accounts for a significant amount of a business’

costs and it is often negotiated with suppliers during the procurement process.

• Due to the limited understanding of the supplier’s true production

cost, various techniques and models for determining how much a procured product should cost have been tried.

• In our work, we expand an approach that uses aggregate industry-

specific financial data to develop a simple, scalable tool to estimate a product's should-cost.

• This work creates a tool that simplifies a complex product,

determines component costs, and estimates the final price.

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Problem Statement

• To allow a company to better estimate the true costs
• f products it purchases and provide a tool to assist in

price negotiation, we must determine:

• Can aggregate industry-specific financial data be

developed into a simple, scalable tool to estimate a product's should-cost?

• If so, how does this should-cost tool's price

compare to the actual product's negotiated price?

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Methodology

• We focused on a qualitative interview study to define our

problem and develop a solution. Our initial research relied on descriptions from qualitative interviews to guide the development of our should-cost tool.

• Identify the parameters of the model
• Define the expected output
• Understand the intended role this tool would play in

the procurement process

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Available Data – NAICS

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Available Data – U.S. Census Bureau

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Geographic Area 2007 NAICS Codes Meaning of 2007 NAICS Codes Year Number of Employees Production Workers Wage ($ 1,000) Materials, Parts, …

• etc. used

($ 1,000) Total value

• f

shipments ($ 1,000) ……

United States

31-33 Manufacturing

2011 10,649,378 313,709,882 2,916,521,678 5,498,599,159 United States

332 Fabricated Metal Product Manufacturing

2011 1,285,707 38,937,642 132,300,674 326,796,980 United States

3321 Forging and Stamping

2011 103,326 3,158,048 15,931,134 33,120,698 United States

33211 Forging and Stamping

2011 103,326 3,158,048 15,931,134 33,120,698 United States

332114 Custom roll Forming

2011 17,372 541,416 5,031,139 7,645,962

Available Data – Financial Benchmarks

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MANUFACTURING - Iron and Steel Forging NAICS 332111 NUMBER OF STATEMENTS

0-1 MM

Current Data Sorted by Sales

1-3 MM 3-5 MM 5-10 MM 10-25 MM 25 MM & Over

ASSETS

Cash & Equivalent …

% % 10.8 … % % 4.7 … % 8.9 … % 8.0 …

LIABILITIES

Notes Payable-Short Term …

19.8 … 8.5 … 10.6 … 5.7 …

INCOME DATA

NET SALES GROSS PROFIT OPERATING EXPENSES OPERATING PROFIT All Other Expenses (net) Profit Before Taxes

100.0 100.0 100.0 100.0 30.3 26.2 23.9 20.6 31.9 21.5 17.0 13.4

• 1.6

4.7 6.9 7.3 2.3 1.3 1.3 2.0

• 3.8

3.4 5.6 5.3

Sub Part Breakdown

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End Item

Final Product

Sub-Part 1

Or only process

Manufacturing Process 1

If Necessary

Manufacturing Process 2

If Necessary

Manufacturing Process 3

Or only part

Sub-Part 2

If Necessary

Manufacturing Process 1

If Necessary

Manufacturing Process 2

If Necessary

Manufacturing Process 3

If Necessary

Sub-Part 3

If Necessary

Manufacturing Process 1

If Necessary

Manufacturing Process 2

If Necessary

Manufacturing Process 3

If Necessary

Seven-step Process

• 1. Identify the Sub Parts

Because of the complexity of some products, an end item often needs broken down into smaller part for NAICS codes to be applicable for should-cost estimation.

• 2. Identify the RM and Manufacturing Process(es)

For sub items, primary Raw Materials and major manufacturing process should be determined.

• 3. Allocate NAICS Codes

For major manufacturing process, appropriate NAICS code needs to be allocated.

• 4. Estimate Financial Ratios

Using the U.S. Census Bureau data and RMA financial data, calculate financial ratios between Raw Material Cost and Other Costs factors.

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Seven-step Process

• 5. Calculate RM Cost

Using the Standard Material Weight, Standard Material Unit Price, and Material Production Defective Rate, estimate the RM Cost.

• 6. Estimate Sub Part Should-Cost(s)

With the RM cost and Financial Ratio information from steps 4 and 5, calculate the sub part should-cost(s).

• 7. Calculate the Total Should-Cost

By adding the should-costs of all sub parts, you can estimate the total should-cost.

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Results

• Validation Case
• Applied the seven-step process
• Used the knowledge of our sponsor company’s representative
• Determined the should-cost of a procured pumping mechanism

to be $63,305.

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Conclusion

• Validation case estimated the should-cost to be 91% of

the currently negotiated price.

• A should-cost tool, using aggregate industry-specific

financial data, can be constructed.

• Breaking the procured end item into smaller and smaller

sub parts effectively makes the tool scalable to a wide array of simple to complex products.

• The should-cost tool is generally used for leverage items,

which occupy a high proportion of the company’s purchasing budget and are available from numerous suppliers.

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