Every new project represents a significant investment of capital, time, and opportunity. The return on this investment is realized over the long term, but even small inefficiencies can erode profitability, causing anticipated gains to slip away. Operating at a slightly lower profit margin over the life of a project can significantly reduce the overall attractiveness of the investment.

To sustain long-term profitability, maintaining healthy cash flows during daily operations is critical. Poor decisions, inaccurate forecasts, and rushed choices can gradually erode margins, leading to a decline in overall performance.

Based on our extensive experience with hundreds of asset and materials management projects, we’ve found that a strong focus on materials management is essential to safeguarding cash flow and enhancing profitability.

Here are a few common ways in which improved materials management leads to better cash flows for Oil & Gas companies: 

1. Inventory Optimization

Inventory holding and management is a significant expense for every oil and gas company. Often, these companies face numerous discrepancies in their inventory, including duplicates, surplus, and non-moving items. Proper materials management involves accurately cataloging materials to enable efficient procurement. We have observed that many oil and gas companies require comprehensive materials data to address their inventory discrepancies.

Better materials management will lead to: 

Reduced Inventory Carrying Costs: Efficient materials management ensures the right inventory amount is maintained, minimizing excess stock. This reduces storage costs, obsolescence, and the financial burden of holding unnecessary inventory.

Avoidance of Stockouts: By closely monitoring inventory levels and demand forecasts, companies can avoid costly production delays due to stockouts, ensuring continuous operations and consistent revenue streams. While stockouts do not directly impact cash flows, the possibility of stockouts can force the procurement team to do rushed procurement, which can disrupt the cash flows. 

2. Improved Procurement Processes

For every Oil & Gas facility, procurement is a daily process. The efficiency of the procurement process contributes directly to the bottom line. Improved materials management will improve the procurement process by impacting two areas: 

Cost Reduction through Strategic Sourcing: Strategic procurement practices such as bulk purchasing, vendor negotiations, and long-term contracts can significantly reduce procurement costs and ease the supply chain. That being said, to implement these strategies, Oil and gas companies need highly reliable materials and maintenance data. 

Unplanned purchases, rushed procurement, batch purchases, and not buying from the best vendors - these deviations from ideal procurement practices will hurt the cash flows. 

Just-in-Time (JIT) Procurement: Implementing JIT strategies helps in minimizing inventory holding costs while ensuring that materials are available when needed. It is expected to see inventory worth millions of dollars lying idle in the racks. Dead inventory represents capital locked; Just-in-Time sourcing can substantially reduce the inventory holding cost, but companies need reliable and accurate data which they can act on confidently to enable JIT sourcing. Such confidence is possible only when Oil & Gas companies have well-defined materials management practices. 

3. Enhanced Supply Chain Efficiency

The supply chain is the muscle of any Oil and gas company. Longer lead times lead to increased costs. A swift supply chain is essential for executing and completing projects within the desired timelines, which is, in turn, imperative for reaping anticipated profits from those projects. 

Better materials management will impact the supply chain positively in more ways than one. 

Reduced Lead Times: Preventing expenses is just one way of saving cash. Shipping out products faster and getting paid for them is the second. Efficient materials management streamlines the supply chain, reducing lead times for critical materials, which allows for faster project execution, reducing time-to-market, and accelerating cash inflows. A timely injection of cash acts like a much-needed elixir for cash flows. 

Minimized Disruption Risks: Nothing costs more than disruptions that halt production. Disruptions in the supply chain lead to production outages. It is common to see Oil and gas companies running on insufficient materials and vendor data. It is not very common to see companies running on a robust and transparent materials management system. By having a robust and transparent materials management system, companies can better anticipate and mitigate risks such as supplier disruptions, thus avoiding costly downtimes.

4. Waste Reduction and Improved Materials Utilization 

Reducing consumption is the best way to improve cash flows. It might be hard to believe, but our experience shows that Oil and gas companies often spend many resources on materials they don't need. We have seen many items on the shelves for years because they are either wrongly cataloged or have insufficient associated data. Having correct materials data and management in place puts you in a better position when it comes to reducing waste and increasing the efficiency of materials utilization. 

5. Better Capital Allocation

Capital is always limited and should be put to the best possible use. If capital is locked in inventory and materials, it cannot be deployed for the growth of the business. Whenever the cash flows of any company run dry, the deficit is compensated by drawing from the capital. Better materials management can improve the cash flows by: 

Freeing Up Working Capital: Efficient materials management frees up capital that can be redirected into other business areas, such as new projects, debt reduction, or dividend payments. This improves overall financial flexibility.

Project Cost Management: Materials account for a large chunk of the overall project costs. They fall into multiple categories, such as capital spares, commissioning/start-up spares, two-year operational spares, and insurance spares. Not having correct materials data and well-laid materials management practices can lead to over- or under-stocking these spares, making the cash flows vulnerable to sudden pressures. 

By effectively managing materials, companies can keep project costs under control, ensuring that capital expenditures do not spiral out of budget and leading to better cash flow management.

6. Data-Driven Decision Making

Oil & Gas companies are increasingly adopting data-driven decision-making. Basing the decisions on data makes them swift, apt, and less prone to errors. Needless to say, data-driven decision-making depends on 'data.' Data is generated out of processes, and processes are further built on data. If there are no well-defined materials management processes, Oil & Gas companies will lack the necessary data for decision-making. Improving materials management will equip the company to deploy predictive analytics and put the much-required transparency and accountability in place. All these factors ultimately strengthen the cash flows and improve the liquidity. 

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Summary

To ensure healthy cash flows, oil and gas companies should prioritize enhancing the efficiency of their materials management practices. By optimizing these processes, companies can significantly improve the balance between cash inflows and outflows, ensuring sufficient liquidity for daily operations and reducing financial strain.

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