Lean Horizons Consulting | Industry Expertise

Using Lean to Extract Millions in Free Cash Flow

Global economic growth is driving an unprecedented demand for energy stocks. Favorable market conditions have created investment cases for the expansion of operations to diverse fields and intensive environments. As a result, the potential rewards facing the Oil and Gas industry have never been greater – nor have the risks. While near term profits for the mineral rights owners continue to be driven by global supply and demand balance, an inevitable industry downturn can leave companies over-extended regarding both invested capital and requirements for operating cash. Liquidity and its maintenance is a constant concern in mitigating the risk of downturns of unknown timings and durations. To enhance liquidity and improve their ability to attract and maintain investors, progressive industry players have turned to Lean as a means to (1) Leverage Assets/Operations/Speed to Market, (2) increase gross margins and (3) strengthen their balance sheets and cash flows. Lean provides a systematic route to create a high-velocity flow of working capital, maximize fixed asset capacity and increase Return on Assets; a three-pronged approach to business performance.

Our role in Oil and Gas: Enabling Profitable Growth in Oil Field Services

Lean Horizons possesses global experience in O&G, with remarkable results to prove it. Just one of our engagements in the sector generated for a client in excess of $100 million in free-cash-flow and associated uplifts in ROA, EBITDA and EPS. Importantly, the financial improvements we help clients realize parallel gains in Capacity, Safety, Quality, and Service/Delivery. These results are not obtained by simplistically overlaying “Factory Lean” on a unique business services model. Through a deep understanding and analysis of the drivers of value creation – and waste – we enable your organization to leverage the majority of oil field service revenues – and profits – not by traditional core service offerings of equipment repair and overhaul but by improving the Value Streams supporting the sale/rental of materials, fluids and labor. The return is the strategic liberation of cash from operations to fund aggressive growth.

Global inventory reduction: Lean Supply Chain

The O&G supply chain can be complex, extensive and, in some cases, extreme, with a single enterprise counting among its customers some 3,000 oil rigs located across the globe, including many in of the most remote and inhospitable locations on earth. With a cardinal service rule of “keep the rigs running”, out-of-stocks or extended supply lead times for materials and spares, especially for less-accessible rigs, are intolerable. The traditional solution to ensuring reliable supply is an extensive warehouse network developed across geographically diverse operations. As many as 500 local warehouse operations may service the rigs; drawing from regional hub distribution centers supplied from upstream and, in some cases, distant suppliers. To enhance reliability of immediate supply, operators at each warehouse build and hold stocks to an empirical “just-in-case” policy exacerbated by the volatile demands of the 30 - 200% volume growth experienced in some regions. An organization’s pool of professional buying, planning and materials management resources strains to manage the proliferation of “must have” local inventories. An understandable philosophy of “don’t ever run out” creates a massive network-wide inventory, with working capital growing even more rapidly than revenues.

Seen through Lean eyes, “just-in-case” inventory can convert to cash. Our approach involves a combination of tools and solutions tailored to (1) inventory type (rig, warehouse, hub and/or supplier), (2) consumption pattern (constant demand, front-end loaded demand, emergency chemicals) and (3) replenishment frequency (daily, weekly, monthly or “only when tundra is frozen”). Rather than recommending “one-size-fits-all” fixes, we work with your organization and your suppliers to custom tailor solutions; some involve deploying traditional pull signals (kanban), some demand forecasting and Sales & Operations Planning (S&OP), some exploit the “quick delivery” capability of hubs (milk-runs) while others employ statistical analysis to calculate “right sized” (risk calculated) inventory policies at each level of the supply chain. An initial, scalable, deployment requiring 6-18 months and involving operations on multiple continents and at sea returns dramatic, representative results:

• Free cash liberated through working capital reduction: $20 million
• Inventory reduced 20-45% at individual network nodes
• Inventory turns increased: 40-200%
• Associated improvements in Capacity, Productivity, Order Fill Rate, Service and Floor Space Consumed

Woldwide Reduction in Receivables: Lean Administrative Process Transformation

It’s not uncommon for receivables to be on the order of $1 billion and characterized by chronic sources of payment delays. By employing our proprietary Value Stream Mapping for Information flow (VSMi) process your organization can (1) scope the global improvement opportunity, (2) determine first-wave, priority leverage points for the business, (3) set a phased deployment plan for Lean-based improvement and (4) implement and track the delivery of results to the P&L. The power of VSMi continues to grow as it is extended across the entire supply network in response to process breakdowns pinpointed through root cause analysis. Critically, it’s not just about the tools. Success requires the transfer of implicit knowledge. By engaging your organization’s line staff in both mapping and solution development numerous improvement opportunities came to the fore and cross-functional teams become problem-solvers, enabling your organization to elevate its performance to the next level; not only are traditional benchmarks met – often they are exceeded, not once, but continuously. Our people – your coaches – work side-by-side with your teams in the oil fields, on the rigs and in parallel with your central administrative centers to define the necessary information flows and implement the solutions that facilitate payments. This enterprise-wide approach, a hallmark of our firm, engages all reaches of the receivables process in defining, aligning, acquiring and communicating information – from the field warehouses, to administrative centers, to Accounts Payable at customer facilities. Representative results are, again, dramatic, impacting positively an organization’s balance sheet and P&L:

• $77.7million in free cash returned to the business
• 84% of the improvement achieved by 67% of the districts that engaged Lean/VSMi methodology
• Comparative improvement, Lean adopters to Non-Lean: 262%
• Average improvement by district ranges from 14% - 54%, reducing DSO by 18 - 39 days

Summary of representative results:

The following table provides representative results from Lean client collaborations in O&G.
Metric	Improvement
Inventory Reduction	Reduced 20%-45% (within 18 months) • Fluids • Spares
Inventory Turns	Reduced 40%-200% (within 18 months) • Fluids • Spares
Receivables	Improved 18-39 days (DSO's)
Free Cash Flow	$75+ million from DSO's $20+ million from Inventory

		Other Areas of Industry Expertise
		Financial Services

		Healthcare

		Private Equity

		Manufacturing

		Biotech & Pharmaceuticals