Operations Lessons from BP

The release last week of BP’s internal report on the Deepwater Horizon oil rig accident is a good opportunity for the world’s businesses to reflect on lessons they should learn from the event. In our experience, no business can confidently say that it is safe from a number of similarly large risks in its industry. In an earlier post we focused on legal and compliance lessons, and in this post we look at what firms can learn to improve their supply chain processes.

The report and recommendations from BP revealed the firm’s focus on fairly traditional methods for managing suppliers using risk and quality prerogatives: build better overall staff skills to identify and mitigate risks, and increase the quality and depth of the auditing regime.

Both of these are admirable and necessary goals.  However, what this approach fails to adequately address is how potential risks get identified and communicated across partners in the supply chain.  BPs recommendations do not adequately resolve the supplier governance issues that led to the gulf oil incident. Our Operations research suggests two imperatives for companies that seek to identify and elevate risks across the supply chain: first, increase supply chain visibility; and second improve supplier governance.

Increase Visibility Across Service Supply Chains

Our Operations-focused programs, including the Operations Leadership Exchange and the Procurement Strategy Council find that few companies have sufficiently deep visibility into their supply chains to see big risks form and grow. It is well-understood that lack of visibility and decisions made in isolation will compound error across physical supply chains (e.g., in the form of excess inventory); BP’s experience affirms that this also applies to service supply chains with high risk potential. In this case, BP, Transocean, Halliburton, and other partners made small safety tradeoffs that combined to create a much higher overall risk profile for the ultimate provider of goods to an end-customer, BP.

As supply chains have extended over the past decade, and as financial solvency became a concern more recently, companies have adopted creative methods beyond basic credit reports and referrals to uncover and address hidden risks in their partnerships. Four that may have helped to mitigate the recent disaster include:

• Triangulation: Using partners’ suppliers and other customers for leading indicators of tradeoffs/shortcuts taken by suppliers.
• Signature signal lists: Generating lists of non-standard measures of risks forming within partner firms, customized by the type of partner, to make risk monitoring more efficient.
• Rotating quality audits: Building comprehensive quality and performance audit checklists where activities are spread over four audits on a rotating basis. This allows for deeper regular investigations with a continuous refresh over the four-audit period.
• Maintaining the internal talent bench: Training employees to give them skills needed to understand the activities being outsourced by their firm prevents companies from losing critical ability to take a leadership role in identifying risks to the company, or more positively, driving useful innovation among the supply base.

Improve Supplier Governance

BP’s eight recommendations admirably seek to build out the skills and competencies of key staff in oil-well operations and bolster overall oil-well safety and auditing practices.  What these recommendations fail to address is how to effectively govern outsourced operations in ways that create effective communication on safety and reliability to all parties involved, and account for tradeoffs made across all parts of the supply chain.

We often work with companies that have failed to achieve the full value of outsourcing partnerships because they aren’t tracking the performance of their partner properly and aren’t working with their outsourcing partner to source valuable new innovation. Our research shows that failure to do these two things can actually erode up to 90% of the value of the partnership.

However, BP’s reports suggests a more basic governance failure: not providing incentives to detect and eradicate serious risk. Outsourcing partnerships might be a lot less valuable without innovative ideas and ever deeper partnership but this won’t cause them to fail completely. They fail because neither the vendor nor the outsourcing company establish  a proper governance culture that equally rewards both parties for value-added activities and creates an environment of collective responsibility to detect and mitigate against potential risks.

As we say, none of the world’s largest firms are wholly immune from the problems that beset BP. All firms would be well advised to learn as much as they can from what happened in the Gulf of Mexico this year, and adapt accordingly.