PROBLEM IDENTIFICATION
Company background
The Vietnamese full name: Korea National Oil Corporation- VPĐH tại Vietnam
The English name: Korea National Oil Corporation - Vietnam office
Address: 10 th Floor, Diamond Plaza, 34 Le Duan Street, District 1 , HCM city , Vietnam
The Korea National Oil Corporation Vietnam office (KNOC VN) commenced operations in Block 11-2 by signing a production sharing contract (PSC) in May 1992 After verifying gas reserves through the drilling of three exploratory wells, KNOC VN secured a stable sales channel by signing a tentative gas sales agreement with Petro Vietnam in December 2004 Subsequently, the company finalized a construction contract and initiated full development of the block.
As the sole operator, KNOC VN carries out exploration, development, and production activities in Block 11-2, approximately 320 kilometers offshore Vietnam.
KNOC VN holds 75% of participating interest in this block on behalf of the Korean Consortium which consists of LG International Corp., Daesung Industrial Com.,
Daewoo International Corp., Hyundai Corp., Samwhan Corp., and Seoul City Gas Co
Ltd PetroVietnam Exploration and Production Company (PVEP) holds the remaining 25% of the interest in the block.
Production began on December 25, 2006 The average daily production of natural gas from the seven production wells in the block reaches 171 million standard cubic feet.
The block boasts a recoverable volume of 770 billion standard cubic feet, with total reserves matching this figure Daily production is currently at 108 million cubic feet, and operations are set to continue until 2024, spanning a total production period of 17 years from 2007 to 2024.
KNOCVN's inaugural overseas project has achieved successful production in the Rong Doi and Rong Doi Tay fields, marking a significant milestone for both the company and Korea's oil and gas industry Employees of KNOC VN played a crucial role throughout all phases of exploration, development, and production, engaging in key activities such as negotiations, drilling, reserve estimation, and the engineering and construction of offshore facilities.
Number of employees: 164 Departments: 4 (Admin & Finance, Operations,
Drilling, Sub-Surface) Procurement Team belongs to Operations Department.
Procurement team has five members (one Procurement Manager and one
Sr.Procurement Officer, three Procurement Officers) take care of purchasing mechanical equipment, electrical equipment, logistic services and consumable All are generally called equipment.
Problem symptoms
To find out what are the current problems that procurement team is facing with, the writer carried out in-depth interview with Ms Giang, Procurement Manager of KNOC
Between 2013 and 2015, transportation costs from onshore to offshore in Vietnam have risen, resulting in payable amounts exceeding the approved budget, despite stable transportation prices.
Report for transportation cost of chopper.
Q'ty Price Total Amount Q'ty Price Total Amount Q'ty Price Total Amount
(Source: KNOC VN’s yearly report)
Late delivery of equipment is the first reason cause to cost overrun.
The quality of equipment received has been a significant concern, as some items were refurbished rather than brand new, leading to a shorter lifespan This poor-quality equipment often fails unexpectedly, leaving end-users unable to manage its operational period or perform repairs.
One common issue is the delivery of incorrect items, where the equipment received does not match the part number specified in the purchase order This discrepancy can lead to delays as the wrong item must be returned and a replacement obtained.
In accordance with report and information, it can be concluded that the issue of late in delivery materials and equipment is the central problem.
Problem definition and importance of the problem
Late delivery of equipment significantly contributes to project delays, as highlighted by Al-Momani Additionally, Ismail et al emphasize that the timing of notices to proceed further exacerbates these delays.
Irregular deliveries and incorrect materials during construction can significantly impact productivity and lead to cost overruns According to Flyvbjerg et al., cost overruns refer to the disparity between the final actual costs and the initially budgeted expenses.
Potential causes of problem and the justification
The company is currently facing cost overruns, particularly in transportation expenses From 2007 to 2012, the annual transportation costs from onshore to offshore remained consistent During this period, the company utilized spare parts acquired alongside the main machinery for project phases However, between 2013 and 2015, significant annual expenditures were incurred for ad hoc chopper services, which were necessary to transport critical equipment due to delays in delivery.
Rosneft Vietnam, formerly known as TNK-BP Holding, has successfully recruited a highly skilled procurement team, enhancing its operational efficiency The company has also adapted its procurement procedures for application across global offices With a strong human capital base and robust support systems, Rosneft's procurement team operates with remarkable efficiency.
They are seldom using adhoc chopper or supply boat to carry equipment onshore to offshore for emergency case.
1.5 Potential causes of problem and justification
According to an interview with Ms Giang, the procurement function is essential for ensuring that the company acquires equipment of the right quality at the most cost-effective price, while also guaranteeing timely availability All purchased equipment is delivered to the KNOC warehouse in Vung Tau City Based on the needs of end-users on the Rong Doi Platform offshore, equipment is transported via supply boats or helicopters The company typically operates two regular supply boats each month to transport cargo, including food and equipment, and two helicopters every Monday and Thursday to deliver personnel and small equipment items to offshore locations.
All equipment is required delivery on-time in accordance with choppers’ schedule as well as supply boat’s schedule.
The procurement team consists of five members, including two staff members who transitioned from the document controlling department and lack experience in procurement Their contributions have not met the necessary requirements According to job assignments, a procurement officer is designated as the primary contact for suppliers, responsible for maintaining proactive communication to ensure timely delivery of equipment.
Several purchase orders were delivered late due to slow response times and decision-making by procurement officers When sellers raised issues regarding these orders, they often faced uncertainty about whom to contact, leading to delays in communication Critical orders suffered further complications as a result of inadequate communication and support among internal teams when interacting with vendors.
Negotiation skills are essential for procurement professionals, as they help resolve daily disputes and address challenging user requirements Effective negotiations ensure that procurement needs are commercially viable and add value to the organization Additionally, negotiations serve as a conflict resolution tool between buyers and suppliers A successful negotiator secures a greater value in exchange for something they consider less valuable, ultimately benefiting both parties involved.
Lack of negotiation skill was leaded to lengthy process results in which delays in the award of projects that lead increase in costs.
Since 2013, the company has been grappling with declining oil prices, which has resulted in a lack of training budget for staff This absence of proper training means that both new and existing employees are not equipped with the necessary information and skills to perform their tasks to their fullest potential.
Training programs are essential in the workplace as they equip employees with the necessary information, skills, and professional development opportunities to effectively fulfill their responsibilities By focusing on enhancing employee performance, these effective training and development initiatives play a crucial role in driving organizational success.
The company employs a Management by Objectives (MBO) program to assess employee performance; however, employees have not received any feedback from the human resources department regarding their evaluations or potential salary increases Notably, there have been no salary increases for staff since 2014.
Evaluating and ranking employees within an organization is a complex task influenced by multiple factors Each employee demonstrates varying performance levels across these factors, leading to potentially overwhelming information An effective evaluation program should not only inform salary and promotion decisions based on past performance but also consider future potential and development opportunities.
Procurement is a crucial and complex aspect of the industry, significantly influencing profitability due to the unique nature of each project It involves a sequential process where various individuals with different authorities make critical decisions The procurement process encompasses all activities, from identifying a business need to selecting a supplier and ensuring satisfactory outcomes.
Shehzad 4 stated that among the five most frequent causes of oil & gas construction project delays were identified is shortage of skilled labor Derek et al 5 explained on human capital and ways in which its effectiveness can be leveraged through procurement systems Human capital consists of the skills, competences and knowledge and creative energy that employees bring an organization.
In accordance with Article 7.3 of the procurement procedure, it is essential to select bidders prior to sending inquiries to suppliers The selection process should evaluate suppliers based on their technical and financial capabilities Key criteria for inclusion in the Bidder List include the company's experience, track record, previous performance, financial statements, and the expertise of key personnel.
The KNOCVN procurement procedure lacks a systematic approach for selecting and evaluating supplier performance, resulting in decisions that are often based on individual procurement officers' experiences rather than strategic criteria Consequently, equipment is typically sourced from familiar suppliers or those listed in previous Purchase Orders and Contracts Furthermore, there is an absence of recorded performance metrics related to critical factors such as product quality and delivery timelines.
The procurement process at KNOC VN begins with purchase requisitions from offshore or onshore engineers, detailing required materials such as quantity, description, specifications, and required delivery dates Each requisition identifies the manufacturer or brand, although standard items may not specify these details Upon receipt of the requisition, the procurement officer requests quotations from suppliers, while engineers may conduct a technical evaluation of these quotations Ultimately, the purchase order is awarded to the technically acceptable supplier that offers the lowest cost.
ALTERNALTIVE SOLUTION
Solutions
The company is currently experiencing cost overruns in transportation from onshore to offshore, primarily due to staff qualifications and procurement procedures To address this issue, several solutions can be implemented, including offering necessary training courses for staff, stocking essential equipment, and establishing a clear supplier selection and performance evaluation process for procurement personnel.
Solution comparison
Training staff Stock equipment Provide process
-To increase competitiveness for firms through raising skill levels.
-To enhance the ability of employees to perform their jobs at peak level.
- Available to use at any time.
- To control the production capacity.
- To select the right supplier.
- To build a good relationship with supplier.
Every item needs to be available at
On job training by Sr.
- Professional development courses from oversea centers. warehouse using for one replacement.
Timing Every year Every year 3 months
Solution selection
To effectively address the company's challenges, establishing a robust supplier selection and performance evaluation process is essential This process is vital for identifying the strengths and weaknesses of suppliers, enabling better supplier management Additionally, it facilitates the monitoring of daily operations with suppliers, ensuring consistent performance and alignment with the company's goals.
Outsourcing has emerged as a crucial strategy for firms seeking competitive advantage, prompting organizations to concentrate on their core competencies while delegating other activities to external suppliers These suppliers are increasingly taking on significant roles, including the design of new products, sub-assemblies, and component parts, thereby enhancing overall efficiency and innovation.
Hotabe et al (2011) identified that factors such as supplier competency, service quality control, transaction cost drivers, supplier brand image, and country characteristics are crucial in supplier selection The process of evaluating suppliers should extend beyond price considerations to include quality, organizational factors, and relationship dynamics This comprehensive approach ensures that decision-making reflects the supplier's overall capabilities in a strategic and long-term manner.
Shenhar et al 12 suggested that adopting effectiveness measures will more often lead to project success, by relating success to long-term impacts to the business.
Solution details
Qualifying and selecting new suppliers method
In today's highly competitive global economy, it is essential for businesses to not only nurture their existing suppliers but also seek out new ones New suppliers can offer advantages such as superior quality or lower structural costs, often due to factors like affordable labor or beneficial import/export regulations Additionally, relying solely on existing suppliers poses risks, as they may face financial difficulties or rising costs Diversifying the supplier base is crucial for fostering competition, minimizing supply disruptions, and achieving business goals like supplier diversity.
Production delays caused by parts shortages and recalls of defective products from noncompliant suppliers have resulted in significant financial losses for buyer firms, amounting to millions of dollars in recall expenses, warranty claims, and necessary inventory adjustments These issues have also severely harmed their reputations and jeopardized future sales opportunities.
Lopez 13 stated that supplier selection is one of the most crucial components of the purchasing function of a firm It becomes a strategic decision when the purchasing organization attempts to establish a long-term and win-win business relationship with its suppliers In order to select the right supplier, comprehensive and configurable metrics for supplier selection must be outlined early in the process Depend on each industry, the supplier selection criteria is being considered.
The proposed model integrates the company's strategic policies to establish a robust framework for Supplier Portfolio Management, focusing on supplier selection and empowerment aligned with corporate and procurement strategies It consolidates similar project requirements into appealing business packages for suppliers, who are evaluated not only on price and quality but also on strategic partnerships and long-term development potential This model categorizes outsourced items into two Pareto sets: the first set comprises 80% of non-critical items, which can be procured through traditional methods, while the second set, constituting 20%, is selected based on Supplier Portfolio methodologies that consider corporate, business, and procurement strategies.
Effective supplier evaluation is crucial for ensuring that potential sources of supply meet established performance criteria, especially for items not typically offered by suppliers Management emphasizes that supplier selection should only take place after a comprehensive review of all relevant criteria by the purchasing team.
Supplier selection criteria include the following:
‐ Engineering and manufacturing technical competence
‐ Management of its own suppliers
‐ Ability to work with the customer
Teng 14 stated that there are a number of approaches being used to assist the supplier performance evaluation Four commonly-used traditional methods stated in several studies are categorical method, weighted-point method, cost ratio approach and dimensional analysis model, analytic hierarchy process (AHP).
The AHP model was chosen for its ability to effectively meet the company's objectives by recognizing the varying levels of importance among evaluation criteria This approach simplifies complex, multi-criteria problems into a hierarchical structure, allowing for a systematic analysis of intricate issues To establish a conceptual framework, performance evaluation criteria were selected, focusing on four main criteria: quality, delivery, service, and flexibility, along with eighteen related sub-criteria.
The Analytic Hierarchy Process (AHP) serves as a flexible and systematic problem-solving tool that simplifies complex, multi-criteria issues It organizes problems into a hierarchical structure, with the main objective at the top, followed by criteria and sub-criteria, and alternatives at the bottom By assessing the relative importance of each criterion through pair-wise comparisons, AHP effectively determines priority levels, enabling the construction of a robust supplier evaluation system, as noted by Ordoobadi et al.
Identifying relevant evaluation criteria is crucial in the supplier performance evaluation process, as it directly impacts the assessment of supplier effectiveness Key criteria play a significant role in measuring supplier performance and ensuring optimal collaboration.
Supplier performance evaluation extends beyond just price and quality, necessitating a multi-criteria assessment approach, as highlighted by Kwong et al While quality remains a top priority for customer satisfaction, other significant attributes must also be taken into account Consequently, purchasing companies should define and select evaluation criteria that align with their objectives and activities to effectively meet customer needs Cormican et al emphasize the importance of identifying relevant criteria and metrics that are objectively applicable to the company at all levels.
Main- criteria Sub-criteria Description
Quality of product Supplied goods comply with specifications with no defect Quality of packaging/packing
Properly packed goods ensure safe transportation and storage, with packaging that meets all necessary requirements Essential supporting documents and materials accompany the shipment, facilitating a smooth delivery process Timely delivery guarantees that goods reach their designated destination as scheduled.
Delivery accuracy Goods are delivered accurately with no missing or Non-splitting delivery Goods are delivered in large lot and with no
Supplier informs in advance if the delivery schedule is not as planned
Shipping document is issued correctly and accurately
Supplier promptly arranges replacement delivery if defect or discrepancy is found Service Responsiveness to request for quotation
Supplier promptly submits quotation after receiving a request for quotation
Responsiveness to Supplier quickly responses back when
Information sharing Supplier willingly supports and shares information, e.g.
Quality of sales person Salesperson is knowledgeable about the goods and accurately and courteously to support company’s Communication systems
Supplier has good and reliable communication system, e.g email system, document tracking
Inventory availability Supplier always has inventory on-hand to fulfill customer’s demand
The supplier is always prepared with sufficient inventory to promptly respond to orders, ensuring customization options are available to meet specific requirements Additionally, they demonstrate flexibility by being open to negotiating both pricing and delivery schedules.
Supplier evaluation typically employs a structured methodology through formal surveys, which should possess key characteristics for effectiveness Firstly, the survey must be comprehensive, encompassing all performance categories deemed critical for evaluation and selection Secondly, it is essential for the survey process to maintain objectivity, necessitating a scoring system that clearly defines the significance of each value on the measurement scale Lastly, both the survey items and measurement scales must demonstrate reliability to ensure accurate assessments.
Annual supplier performance evaluations should be conducted at the end of each year, with results communicated to all procurement officers to facilitate the implementation of future orders.
Issues often stem from vague specifications or poor supplier selection Additionally, the lack of systematic evaluation of suppliers can lead to problematic ones remaining in the supply chain, resulting in recurring delivery issues.
ACTION PLAN
To ensure effective supplier management, it is crucial to establish a shared understanding of improvement opportunities and systematically monitor purchasing implementations Applying a thorough supplier selection and performance evaluation process fosters mutual comprehension between buyers and sellers Prompt implementation of this program is essential for optimal results.
According to the current company’s financial status, the program will be drafted by
Sr Procurement officer with reviewed and commented by Procurement Manager The timeline is as below:
No Description Person In charge Date
1 Draft the process of supplier selection and performance evaluation process
2 Review and comment Procurement Manager 21 April 2017
1 How long have you been working for this organization?
I have been working for this organization for ten years.
2 How many staff in your department?
Our team has five members including me (one manager, one senior procurement officer, three procurement officers).
3 How long have they been working for this organization?
All of them have been working for this organization for more than 8 years.
4 Do they have experience/background of procurement works before joining your department?
Two team members were recruited from oil and gas trading companies, bringing valuable industry experience The other two have spent over three years in the controller team, making them familiar with the oil and gas sector However, none of them possess prior experience or background in procurement roles.
5 Can you describe the function of procurement department?
The Procurement team plays a crucial role in acquiring materials, equipment, and services essential for rig operations This process begins with the receipt of an approved purchase requisition and continues through to the delivery of goods from suppliers and the subsequent payment to them.
6 How do you manage your staff for effective purchasing decision?
Procurement is divided into four key areas: mechanical, electrical, logistics, and consumables Each procurement officer is responsible for one specific area, managing the entire process from start to finish.
7 What would you feel about their working behavior?
They are polite They follow the company policy, go to work ontime.
8 Do they well communicate with other teams?
Effective communication is crucial for team success, as personality conflicts can lead to excessive discussions about issues instead of taking action Teams lacking essential communication skills may struggle with task delegation and project execution Signs of poor communication include a lack of clear direction, team discord, and frequent arguments among members.
9 Do they have good communication and relationship with suppliers?
In general, they have good communication with supplier but they need to build good communication and relationship with key supplier.
10 Do they try their best to meet the deadline?
They work hard but sometime unable to meet the deadline, for example the deadline of goods receipt for rig maintenance.
11 What made they worked hard to meet the goal? How about salary increasing
Promotion Company did not increase salary by 2014 due to oil price deceasing.
12 What could they do differently to help your department better perform?
Some individuals are highly proactive in addressing issues, actively seeking solutions when problems arise However, others struggle with work management and tend to simply relay information from vendors without taking initiative in problem-solving.
13 What are the personal development areas in which they need to improve?
They need to improve the working skills such as negotiation skill, information technology skill, and the most importance is problem solving skill.
14 Are there any problem / conflict between procurement with other team?
Conflicts in the workplace can arise from differing approaches to tasks, such as an employer's detail-oriented perspective versus an employee's desire for a more collaborative and creative process Additionally, personal differences in demeanor, like a subdued employer contrasting with an effervescent employee, can lead to misunderstandings and conflicts due to their varying responses to situations.
15 Do you provide any professional training course to your department for the last three years?
Before that the company yearly offered training course to staff but for the last two years the training was no more offered due to oil price is going down.
16 Do you have procurement procedure or procurement strategy?
We have procurement procedure It is now version 3.0 applying from year of 2011 upto now.
17 How many members are involved within procurement process? Who is contact point?
The procurement process involves various roles, including engineers, procurement officers, legal teams, import-export officers, accountants, and warehouse controllers The procurement officer serves as the primary liaison between different teams and vendors The order process begins when an offshore or onshore engineer generates a purchase requisition The procurement officer then manages vendor quotations and addresses both technical and commercial inquiries Once the purchase order is signed, materials and equipment are delivered to the warehouse, and payment is processed to the vendor.
18 How many suppliers you have on the list? Are they local or oversea? Are they manufacturers or trading companies?
We have a thousand of suppliers They are local vendors, oversea vendors, manufacturers, trading companies.
19 How many purchase orders your team issued for a year? Are they ontime delivered?
It is around one thousand purchases orders for both local orders and oversea orders.
20 Can you let me know the minimum purchase order value as well as maximum purchase order amount?
It is around 100 USD up to 3,000,000 USD.
21 Did you apply liquids damaged for late delivery order?
The liquids damaged rate is one percent (1%) per day and up to maximum of ten percent (10%) of purchase order.
22 Does your supplier agree to apply liquid damaged for late delivery?
It is very hard to negotiate with vendor for applying liquids damaged specially for the orders with small amount.
23 How long usually takes place for an order to be completed?
It is around six weeks from purchase requisition approved to purchase order approved.
The delivery time or lead time is relied on quotation of supplier.
24 Is it enough time for supplier to response to your request? Did they ask to extend the deadline?
We set the timeline for supplier to response within one week Sometime they asked to extend for more time.
25 How fast the supplier responses to your request?
One day, two days or two weeks It is depended on their available and the order value.
26 Is the supplier willing to support you in urgency issues?
It depend on what case.
27 Does the supplier ask for price increasing with a valid reason?
Yes, they asked for pricing increasing but sometime without a reason.
28 Is there any process for identifying critical supply categories?
29 How often you do KPI for suppliers?
We have never been done it.
30 Do you think Procurement have significant impact on company?
Effective procurement of materials and services is crucial for maintaining a company's competitive advantage, as the quality of these inputs directly influences operational efficiency and output Inefficient procurement processes can lead to increased input costs and a loss of production capacity, ultimately hindering the company's performance in the market.
31 What are the most difficult issues in your department now?
In the face of cost-saving pressures from headquarters, businesses are grappling with the fluctuating expenses of materials, equipment, and transportation Despite the growing need for staff training, the absence of a dedicated training budget poses a significant challenge to workforce development.
APPENDIX B: TERMS AND CONDITIONS OF PURCHASE
1.ACKNOWLEDGMENT AND ACCEPTANCE OF ORDER
The Terms and Conditions of this Purchase Order shall apply to the purchase of goods, materials , items , products , components or services (hereinafter referred to as
This Purchase Order includes all materials, exhibits, attachments, technical specifications, drawings, notes, instructions, and referenced information, which are incorporated by reference The Terms and Conditions outlined herein take precedence unless explicitly modified by the terms stated on the Purchase Order Furthermore, this Purchase Order supersedes any prior written or oral agreements and understandings.
The Vendor shall supply and deliver to Buyer the Materials in the manner and in the quantities stipulated on the face of this Purchase Order.
Unless specified otherwise in the Seller's quotation, all delivery or completion timelines commence from the Effective Date and are considered commitments by the Seller The Seller must promptly inform the Buyer of any reasons for delays and provide an estimated timeframe for resolution to reach a mutual agreement In the event of late delivery, the Seller agrees to liquidated damages of one percent (1%) per day, capped at a maximum of ten percent (10%) of the total value of the delayed goods, which will be deducted from the Buyer's payment upon agreement.
If the Seller faces delays or is unable to fulfill its obligations under the Contract due to the actions or inactions of the Buyer or its representatives—such as not providing necessary specifications, detailed drawings, or other required information—the delivery timeline and Contract Price will be modified accordingly.
If delivery is delayed due to the Buyer's actions or requests, or if the Buyer fails to take delivery after being notified that the Goods are ready, the Seller may store the Goods at the Buyer's expense Once the Goods are stored, delivery is considered complete, the risk transfers to the Buyer, and the Buyer is obligated to pay the Seller accordingly.
The Vendor retains all risk for the Materials until they are delivered as outlined in the Purchase Order Ownership and risk will transfer to the Buyer upon delivery, unless otherwise stipulated in the Purchase Order.