Oil and Gas Industry: Suppliers Selection

Oil and Gas Industry: Suppliers Selection

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Over the last decade, the supply chain management has influence to business all over the globe. Purchasing is one function within supply chain which becomes the most important element to establish value-added products or services. The major aspect of purchasing is supplier selection. It is recognized that selecting appropriate supplier is one of the key success factors of a firm. Selecting the right supplier is always a difficult task for purchasing manager (Liu et al., 2005). Right suppliers selection can lead the company to success and achieve the objectives. On the contrary, wrong supplier selection can lead the company to financial problem. Therefore, purchasing departments need to emphasize about supplier performance evaluation which not only concern one criterion such as price, but also consider of multi criteria for evaluating suppliers in order to select the right supplier.

1.1 Background of the Study

Nowadays, oil and gas industry plays a major role to driving the business in both local and global level. It provides energy and essential chemical for industry, homes and transport which is increasingly consumed by user every day. There are around fifty oil and gas companies located in Thailand and ten out of fifty are ABC Company’s customer. The ABC Company is one of the leading trading, stockist, sole distributor and engineering company who supply industrial process equipment of piping materials for instance pipeline, flanges and fitting. The company was established in May, 1998 with 100% Thai shareholder. The company caters the materials and supply to oil and gas industry in order to construct and maintenance for transmission pipeline project and shutdown plants.

Figure 1.1: Piping Material of ABC Company

Description Picture



Source: ABC Company

The company is growing gradually 4.42% in trading materials likewise the purchasing amount is also incessantly increased 11.87%. The increasing in purchasing is from the company committed to stock the material in order supply anytime when customer needed to fulfill the customer’s satisfaction. Table 1.1 shows the comparison of sales data and purchase data from 2012 to 2013 of the ABC Company.

Table 1.1: Sale and Purchasing data of the ABC Company

Year % Increase
2012 2013
Total Sales
(Million THB) 747 780 4.42%
(Approx. 33 Million THB)
Total Purchasing
(Million THB) 438 490 11.87%
(Approx. 52 Million THB)

Source: ABC Company

During the year, the ABC Company has to purchase piping materials which compose of pipeline, flanges and fitting as the proportion shown in figure 1.2.

Figure 1.2: Purchasing proportion of the ABC Company

Source: ABC Company

Source: ABC Company

From figure 1.2, the amount purchase of ABC Company from year 2012 to 2013 of pipeline, flange and fitting are approximately equal 68%, 18% and 14% respectively.

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The purchase amount of pipeline is significantly higher than others material. Thus, only the pipeline of ABC Company will be studied on supplier evaluation by using Analytic Hierarchy Process (AHP).

1.2 Statement of the Problem

Evaluation is the method of measurement. The effective of supplier evaluation should concern on several criteria such as pricing, delivery, quality and service. Therefore, in every business where there have purchasing functions or especially trading company, supplier evaluation method is essential to measure and monitor the performances of supplier in order to ensure that products or service will be right in material at the right time at the right price and in the right place.

Aforementioned, the ABC Company has the highest purchase on pipeline which is around 68% of the total purchasing from year 2012 to 2013. The company has three suppliers who supply pipeline which using for oil and gas industry. All suppliers are based in oversea such as Korea, Singapore and China. At the present, criteria that company used to select supplier is only price by regardless attention to others criteria. The supplier who offers lowest bidding quotation will be the source which the company selected to purchase with. Therefore, currently method which is concern only on one criterion is insufficient to select the right supplier. Regard to the historical data year 2012 to 2013, the rejection report of pipeline from two major cause are defect pipeline such as crack, dent, and wall thickness not meet with standard, and penalty from late delivery to client which normally is 0.2% of the purchase order amount, the indicated lost values are 3.8 Million THB and 4.6 Million THB or 0.87% and 0.94% of total purchase respectively.

Figure 1.3: Comparison value between Purchasing and Rejection of Pipeline of the ABC Company

Source: ABC Company
While the percentage of rejection comparing with purchasing is not statistically significant, but it is significantly loss when the company considers in term of monetary value. Therefore, it is necessary to apply the appropriate methodology which can help the ABC Company to select the right supplier based on using Multiple Criteria Decision Making (MCDM). In MCDM, the several conflict factors are the problem which affect in supplier selection. So the managers need to analyze and trade-off among the several criteria, and it is also rely on the purchasing situations which the various criteria need to weight in order to select the critical one to consider to purchase.

Reference to available literature, Analytic Hierarchy Process (AHP) is one of effective MCDM which is wildly used successfully in multifactor decision making circumstance where all criteria are weighted based on pair-wise comparison. This kind of method has ability to structure complex, multi-attribute, multi-person and multi-period problems hierarchically (Yusuff, PohYee & Hashmi, 2001). The AHP can be useful when it involves in several decision makers with the various conflicting objectives to work out as consensus. The AHP method is recognized to assist in decision making resolve the supplier selection problem in selecting the optimal supplier combination (Yu & Jing, 2004). Hence, this study aims to find out the problem of “How would the ABC Company apply the AHP to identify the supplier selection criteria?” From this study by using AHP to evaluate the supplier criteria selection, it would help the ABC Company completely understand the perspective supplier’s performance then the company can apply to select the right supplier.

1.3 Research Objectives

This study is attended on three objectives are:

1.3.1. To identify the essential criteria for pipeline supplier selection for ABC Company.
1.3.2. To apply Analytic Hierarchy Process (AHP) model to assist the company makes a decision involving with a Multiple Criteria Decision Making (MCDM) in order to enhance efficiency of decision maker.
1.3.3. To analyze the optimal supplier base on AHP method.

1.4 Scope of the Research

This study focuses on evaluation of multiple criteria by using AHP method to evaluate the various criteria for supplier selection of ABC Company. The selected evaluation is from the highest monetary value purchase item which is pipeline. The study is regardless to focus on customer satisfaction, increasing in sale value or decreasing inventory. There are three suppliers out of five pipeline supplier base on Pareto Analysis will be evaluated and scoring. All multiple criteria will be weighted score by pairwise comparison by purchasing manager, sale manager, quality control manager and logistic manager. In computation process, the rounding function in Microsoft excel with 4 decimal will be applied.

1.5 Significance of the Research

This study aims to apply AHP method to improve supplier selection process by muti-criteria decision for ABC Company. The AHP is logically evaluation method to select the appropriate supplier lead to increase customer satisfaction and company’s revenue. Therefore, the result of this study will benefit to the company not only for pipeline product but also apply to use with the others kind of high value products. Besides, this study will be benefit to the company in the way that it provides better method than the existing, and also serve the company as the basis of systematic method and a theoretical model for future analyze and selecting suppliers based on multi-criteria decision making.

1.6 Limitations of the Research

This study is primarily limited by the information database of ABC Company. Unfortunately, in year 2011 SAP system of the company has failed result in all recorded data has lost and the system could not recovery the data. Thus, in this study will bring the available recorded data only from year 2012 onward to 2013. Secondly, almost all pipeline suppliers are supply at oversea country, thereby the monetary unit will not be the same and also the currency exchange was fluctuating over the year 2012 to 2013. Lastly, the study pertains only to pipeline supplier selection criteria for ABC Company. The criteria evaluated result may difference depend on management, type of products and business style of each organization.

1.7 Definition of Terms

Pipeline is the pipe used for transport liquids and gases.
Flange is a plate to form a rim of pipeline to fastened with another pipeline.
Fitting is used to connect the straight pipe, to adapt to difference size and shapes
Shutdown is the oil and gas plant allow all components to be properly checked and serviced.
Supplier performance evaluation is a process used for measure and approving potential supplier
Pipeline rejected is the pipeline which is under quality detected by quality control of the company, such as dent, rough surface, crack and under size of wall thickness.
Supplier Selection is the process which the company identify, evaluate and contract with suppliers
Purchasing is the activity of ordering to obtaining goods or services to achieve the objectives of an organization.
Multiple Criteria Decision Making (MCDM) is consider more than one characterized as a choice among alternatives factors.
Trade-off is a situation which two factors need to be chosen only one regarded as more necessary.
Analytic Hierarchy Process (AHP) is the method based from mathematical, allow to solve with multi-criteria situation by weight score on the considered criteria.
Pair-wise comparison is the process to comparing and evaluate alternatives or a group of items by assigning weights on decision making criteria.

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