logistics control towers for reduced costs and complexity in hydraulic fracturing
TRANSCRIPT
Confidential and Proprietary
Logistics Control Towers for Reduced
Costs and Complexity in Hydraulic
Fracturing
Brittain Ladd
Global Supply Chain and Logistics
June 2012
Confidential and Proprietary
Executive summary
• Average cost to frack a well = $8.4 million to $8.8 million
• Each well requires three to five million gallons of water and three to
five million pounds of proppants
– An average of 400 tanker truck loads per well
• An average of 40,000 pounds of chemicals are used per well
• Each well requires specialized tools and equipment to complete the
fracking and capping process
• The bottom line is that fracking is labor and cost intensive
• Applying the science of supply chain optimization and logistics best
practices will reduce costs and complexity and increase profit
margins per well
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Confidential and Proprietary
Frac sand – The lifeblood of the fracking industry
• Frac sand is key to hydraulic fracturing as the sand holds open the fractures created
• Frac sand grains must have a high compressive strength of between 6,000 psi and 14,000 psi
• Sands that meet these specifications are mined from Cambrian and Ordovician sandstones (more specifically, from the Jordan, Wonewoc, Mt. Simon, and St. Peter Formations)
• The sandstone is found mainly in Wisconsin and Minnesota and mined primarily by four companies: – Ottawa Sand Company LLC
– Winn Bay Sand,
– Taylor Frac LLC
– Unimin Corporation
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Confidential and Proprietary
Industry challenges
• High logistics costs due to:
– A shortage of rail cars and increasing rail lease costs for covered hopper
cars
– Inefficient rail car utilization
– Expensive and less efficient truck transportation
• Logistics challenges have become so great that companies are going
to extremes to ensure availability of supply:
– Preferred Sands LLC is building their own railway
– Halliburton is investing $20MM to build their own frac sand terminal to
supply their operations in the Denver-Julesburg (DJ) basin
– EOG Resources announced plans to build their own 1.7m tpa frac sand
plant
– Pioneer Natural Resources Company acquired Carmeuse Industrial Sands
in order to provide frac sand below market value
• Estimated savings of $75MM to $80MM
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Confidential and Proprietary
Potential solutions to meeting the logistics challenges related to
fracking
• Acquire a 3PL with established rail contracts, sand and water storage tanks, sand hauler relationships or a private fleet, and transloading facilities
– Operate the company as a separate entity to continue servicing the needs of customers
– Expand the operations to meet the logistics requirements for the known shale fields currently in operation
– Leverage infrastructure and assets to meet corporate logistics needs at the lowest costs
• Enter into a collaborative procurement agreement to purchase sand, water, chemicals and transportation as part of a co-op to leverage combined spend
– Enter into long-term contracts with semi-annual contractual review periods
• Vertically integrate by purchasing mining rights for sand, build rail capability
– Not recommended due to capital requirements and risk
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Confidential and Proprietary
Supply chain network optimization – getting supply closer to the
operations
• Today, the majority of oilfield services companies transport sand from mines by rail to transloading facilities where sand is then trucked to the final well destination
– Cost intensive
– High risk due to increasing rail congestion
• Frac sand demand planning can be utilized to store sand in locations to service well operations cost effectively
– Locations are selected that will minimize logistics costs
– Replenishment of sand can be done cost-effectively by rail without paying expedited freight charges; repeatable and reproducible
– Trucking costs are reduced by minimizing miles travelled
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Confidential and Proprietary
Overview
• The term “control tower” refers to a centralized location whereby a
highly skilled and well-managed team of supply chain professionals
are organized and equipped to:
– Provide detailed data analysis of the supply chain for the purpose
of identifying opportunities to reduce costs and complexity
– Assure oversight of the supply chain from end-to-end utilizing
technology and best practices across suppliers to customers
– Strategically align with operations to conduct advanced analysis of
the drivers of logistics costs (supply, inventory, transportation) and
collaborate on strategies to reduce costs
– Provide an optimal platform for analyzing day-to-day tactical
requirements while analyzing data for increased demand planning
• Most importantly, Logistics Control Towers accelerate
execution!
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Confidential and Proprietary
The Logistics Control Tower – achieving best-in-class supply chain
and logistics management
• Control towers combine organizations
(people), systems and processes in
order to provide supply chain partners
with a high-level of product visibility
along the entire supply chain
• This enables three levels of
management control:
Strategic – provides control over the
design of the overall supply chain network
Tactical – enables proactive planning of procurement, operations and distribution according to demand
Operational – encompasses various real-time functionality including transportation management, inventory tracking and exception management to maximize execution while reducing costs
• Ensures “one version of the truth” as it
relates to the supply chain
• Aligns “The Voice of the Network” with
“The Voice of the Customer”
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Real-time data analysis and predictive analytics are a key feature
of Logistics Control Towers
• Data is analyzed to identify the optimal logistics response while
reducing costs:
– Sand requirements by well location (red, yellow, green)
– Water requirements by well location (red, yellow, green)
– Chemical requirements by well location (red, yellow, green)
– Total inventory on hand and in safety stock (sand, water,
chemicals)
– Forecasted demand of product (sand, water, chemicals) by well
location
– Transportation across all modes planned and inbound
– Logistics costs vs. plan
– On-time delivery across all modes
– Risk analysis and recommendations for reducing/eliminating risk
– Cost-to-Serve Optimization
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Confidential and Proprietary
Key Business Issues Addressed – Reduce transportation spend by analyzing and identifying the optimal transportation strategy by mode
Transportation & Network Analysis
• Optimal sourcing
• Mode selection (ocean, rail, truck, LTL, parcel)
• Shipment sizing & scheduling
• Asset utilization (railcars, trucks, etc.)
• Intra-company shipping
• Transportation needs by region
• Transportation forecasting
• What If? analysis
Network & Transportation Analysis
As the single largest driver of logistics costs, Logistics Control
Towers focus on reducing transportation costs across all modes
Confidential and Proprietary
Examples of transportation metrics and KPI’s captured within a
Logistics Control Tower
Rail
Ocean / Barge
Express/Parcel
Air
TL/LTL
Container
• Lane utilization by Mode and Carrier
• Lane utilization by Forecasted Volumes
• Lane variance by Mode
• On-time pick-up
• On-time Delivery
• Transportation as a Percentage of the COGS
• Load Factor by LTL
• Percentage of Claims by Mode
• Fuel as a Percentage of Costs by Mode
• Contracted Carrier Performance vs. Actual
• Weight Break Analysis (LTL vs. Parcel)
• LTL to TL Consolidation Percentage
• Global Carrier Optimization
• Percentage of Business by Carrier
• What If? analysis to consider scenario tradeoffs
• Can costs be reduced
increasing/decreasing business with a
specific carrier?
• Total Cycle Time
• Mode Trade-Off
Confidential and Proprietary
Example of how global logistics needs can be monitored and
managed via the use of Logistics Control Towers
Logistics Control Towers provide global visibility of all logistics needs from inventory to transportation. Supply chain network and transportation optimization software evaluates the
logistics needs of the global network aligning supply with demand on a continuous basis.
Inbound Shipments
and Data
Outbound Shipments
and Data
Confidential and Proprietary
Projected Logistics Control Tower design and implementation
timeline
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Confidential and Proprietary
Assessing the Logistics Network to
Identify Opportunities to Reduce Costs
Confidential and Proprietary 20
The first step in reducing logistics costs is to conduct an
assessment of the supply chain end-to-end
Confidential and Proprietary
Few areas within business are more complicated than supply
chain management and logistics
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Enterprise Asset Management
Finance & Accounting
Human Capital Management
Enterprise Performance Mgmt
Integration & Analysis
Service Definition
Customer Service & Operation Center
Execution
Sales and Marketing
Settlement
Planning & Order Management
Regulatory Compliance
Pickup Scheduling
Order & Shipment
Monitoring
Delivery
Scheduling
Invoices
& Payments Order Monitoring
Order &
Shipment
Quotes
Sales &
Customer
On-boarding
Confidential and Proprietary
The four-step Logistics Assessment methodology – average of
one to three months to complete
• Identify scope and objectives for assessment
• Mobilize joint project team
• Conduct focus interviews with key stakeholders
• Identify top issues
• Define data requirements
• Collect and validate data
• Conduct site visits
• Leading practice comparison
• Peer group KPI benchmark comparison
• Business process review
• Technology assessment
• Organizational assessment
• High-level network modeling
• Identify / socialize improvement opportunities
• Prioritize improvement opportunities for further evaluation
• Identify potential solutions
–People –Process –Technology
• Develop “benefits logic”
linking potential solutions and benefits
• Identify go-forward opportunities
• Confirm stakeholder alignment
• Estimate timing and investment for each opportunity
• Develop transition / implementation plan
• Construct business case with estimated ROI
• Summarize and document findings
• Present findings
• Identify next steps to drive agreed-upon improvements
Step 1
Mobilize Team & Collect Data
Step 2
Identify Opportunities
Step 3
Refine Opportunities & Define Solutions
Step 4
Formulate Business Case
The assessment creates a portfolio of cost improvement opportunities, vetted by stakeholders, and supported by a high-level business case and implementation plan
Confidential and Proprietary
The objective of a Logistics Assessment project is to answer these types of questions and
identify the best opportunities for cost and service improvements
“
“Are we leveraging our transportation spend? How do we
know?”
“How do we increase our
visibility globally?”
“How can we reduce our need for transportation in
the first place?”
“Do we know what it costs to serve our
customers?”
“How can we mitigate rising freight costs?”
“ How do we maximize our carrier relationships and
leverage our carriers globally?”
“How do we know that we’re making the best decisions for the company?”
“How can we benchmark our logistics costs?”
“What are we really paying for inbound freight? How can we take control of our inbound
transportation?”
“Why are our competitors better at managing their
supply chains?”
Example of questions asked during a Logistics Assessment
“Are we best-in-class or just trying to do our best? Are we working hard or
working smart?”
Confidential and Proprietary
Examples of outputs from a Logistics Assessment
IT Requirements
SOP’s
Network, Transportation
Modeling & Analysis Strategies
Metrics and KPI’s
Transportation and Logistics
Best Practices
Cost and Trend
Analysis
As Is & To Be Process Flows
Confidential and Proprietary
Strategic Analysis Business Transformation Design & Delivery
Target Operating Model Design
Strategic Analysis & Design
Transformation Strategy & Design
Transformation Delivery
Identify the Challenge
Agree the Challenge
Creating the Vision
Establishing the Intent
Building the Insight
Designing the Solution
Delivering the Change
Completing the Transformation
“I think there is a problem”
“We have a problem that we
must solve”
“We see what we must achieve”
“We really understand what we must do - and why”
“We are building our future”
“We’ve done it!
The Business Transformation Methodology
OperationalAnalytics
Market and Customer Analytics
FinancialAnalytics
CapabilityAnalytics What is my current financial
position?
How does what I do generate revenue and costs?
How do the options close the gaps in my financial position?
How is the business positioned in the industrial and competitive landscape?
Who are the attractive customers, what do they want and howcan I target them?
How am I currently structured?
How do I collaborate with suppliers, partners and customers to deliver services?
What channels do I exploit to deliver services?
How does this need to change?
What are my core competencies and capabilities?
How do these need to change?
How can I leverage what I
have to gain competitive advantage?
Vision
Customer vision
ROI objectives
Corporate / national objectives
Organisational outcomes The Strategic Operating Model undertakes to translate the corporate strategy into a practical, high-level view of the target operating modelsufficient to target and scope transformation opportunities.
The primary purpose is to identify where the existing operating model is unable to deliver the business strategy and where change is required to achieve the target model.
CorporateStrategy
Detailed Operating Model Design
Transformation
Process Design
IT Architecture
Organisation
Infrastructure
StrategicOperating Model
BusinessContext
TargetValue
Drivers
AssessCurrentModel
IdentifyPrioritise
Gaps
TARGETOPERATING
MODEL
BusinessTransformationProgrammeDesign
Confidential and Proprietary
Summary
• Increasing costs across all areas of the
supply chain
– Sand
– Water
– Chemicals
– Transportation
• Increasing scrutiny by state and federal
authorities related to fracking
– Concerns about water contamination
– Concerns about earthquakes
– Concerns about the future
– Concerns about unknown unknowns
Realities of the Industry
• Oilfield services companies will not be
competitive if they cannot manage the
logistics required for fracking
• Oilfield services companies must
become agile, adaptable, and aligned
with the changing nature of the fracking
industry in order to remain competitive
• The logistics methodologies utilized in
the past are no longer capable of
meeting the challenges of today due to
growing complexity and supply
constraints
The Need for Logistics Excellence
Industry recommendation: Invest in the design and implementation of Logistics
Control Towers in conjunction with collaborative demand planning, forecasting, and
replenishment.