To discover the keys to operating a strategic procurement and supply function at the fifth-largest independent refiner in the United States, GEP sat down with Abhishek Vyas, the head of procurement and supply chain for CITGO Petroleum Corporation.
We take care of all of the procurement, warehousing and supply chain for non-hydrocarbon goods and services. Our team is responsible for supporting our refineries, plants, terminals and pipelines. In short, we procure non-hydrocarbon-related equipment and services and ensure they are delivered and utilized at our refineries.
We want to be the department that provides the edge to the organization’s competitive advantage. CITGO’s core mission is to be an efficient producer. We help deliver the value that is needed for CITGO to be the refiner of choice for our shareholders and our customers. Moreover, we ensure CITGO operates safely with high integrity and continuity by providing a seamless supply of components and services as needed.
There are different KPIs for different goals. We have a monthly KPI book that we publish, so our metrics are visible to not only my team but also the entire CITGO organization about what’s needed, how we are performing, and how we are performing relative to competitors in the market. Our KPIs track cost savings, how are we negating inflation, our responsiveness, and what kind of corrective actions we are taking with vendors.
We also have data-driven automation in place to flag any potential supply issues during what our industry calls turnarounds. A turnaround is essentially a planned shutdown at the refinery of one or more processing units for maintenance or inspection. Turnaround is a word very specific to refineries and heavy industries, like airlines or oil and gas, where time is literally money. Our KPIs ensure we operate in a safe, controlled, and ethical manner as efficiently as possible.
Like every company, we’re wrestling with significant inflation, continuing shortages of materials and, especially labor. We designed our KPI to have over 99.9% of material delivered before our operations start major projects and turnarounds. It ensures we are preplanning well because our team makes certain the items and services are ready and available to the business. To mitigate inflation, we’ve switched from focusing on securing savings to negotiating price increase requests without hampering our business.
We use a wide variety of strategies and methodologies. We have also defined some boundaries around how we will negotiate requests for price increases. First, we will never compromise with safety, reliability and continuity of supply. In broad terms, our goal is to ensure that any price increases are always below inflation. We begin by understanding if we are ahead of the market or are we just following the market.
We do market research. We get cost benchmarking, contact subject matter experts to find out what they’re seeing for a specific product or service, and utilize services of consultants like GEP to provide benchmarks and what materials should cost. We are looking at commodity indices and using the intel from different data sources that we have to understand what the price projections look like and if we are ahead of that curve or should we be making plans for increases, and how can we hedge for the future.
We have the expertise of negotiating and asking a vendor supplier to explain the proposed price hike. When we recently received a request for an increase from a service contractor, we used service rates from the government’s Bureau of Labor Statistics data along with specific data for our region to understand exactly how the per diem rates were changing, which enabled us to effectively negotiate the request. Similarly, we were successfully able to negotiate down a 9% increase for vacuum truck service by showing the vendor that their requested rate increases were above market rates. The increases that we are more comfortable with are due to salary because we know that the hourly rates are increasing.
We also ensure that we have dual sourcing for key materials and services to ensure we have options and are not beholden to one supplier and can better ensure continuity of supply. Sometimes we use a contract extension as a way of negating any requested increase. Our other strategy is finding ways to lock in lower prices by placing orders early. For instance, based on our data and analysis, we knew that the price of lithium, a key material, would be going up. We look to place orders early with key partners to lock in lower rates and negate some of the inflationary pressures. And lastly, we’re also looking at substitutions for materials with items that are more readily available.
There are three major challenges that we need to proactively manage to ensure continuity of supply for our refineries. The first is really about inflationary pressures that are all around. We see material shortages easing, but we’re continuing to experience a very tight external labor force.
The second challenge is more internal to CITGO: How to develop the talent and ensure that we have talent to lead us going forward. Our industry has been hit with a lot of retirements, and we really need to focus on preparing the next level of talent for taking on leadership roles.
Third is how we optimize the supply chain without negatively impacting any specific process or increasing costs. In essence, how to prepare ourselves against supply chain risk. When I say risk, I don’t just mean geopolitical, but also the risk of common natural disasters that directly impact refiners. We’ve been lucky this year in that we haven’t been impacted by hurricanes, but we won’t be lucky forever. Every year we can anticipate a major disruptive event, such as winter storm Uri, which took place in Texas in 2021 and significantly hampered services. So, how to prepare the supply chain for those kinds of risks?
Because of the widespread global disruptions over the last few years, there is, rightly, a lot of talk about building resilience in supply chains. But the devil is in the details. I don’t think all potential risks can be tackled at once. They have to be tackled individually because foreseeing and preparing for the impact from a war is different than how we mitigate potential hurricanes.
For example, a hurricane impacted the availability of hydrofluoric acid from one of our vendors because their key facility was shut down, which, in turn, directly impacted us. We could have prepared for this eventuality if we were better able to predict the impact from the hurricane. We continue to engage our suppliers regarding their business continuity plans, but we’re also working with universities expressly to develop a data-driven solution that identifies our suppliers at risk from the path of a hurricane. If we know exposure to an event, we will be able to decide on mitigating measures to take, such as stocking up on materials in case one of our suppliers is impacted.
Procurement and supply chain are a source of competitive advantage for our organization. And it’s not only about cost. Securing the lowest cost is one thing we do, but we do a lot more. We make it easy for people to get things that they need to at the right place, in a timely manner. The cost implications of not having critical parts or services available when needed can exponentially exceed the value realized through negotiated cost savings. Safe continuity of supply in today’s market is where the highest value is realized. We’re now measuring, tracking and evaluating the total cost of ownership for products and services, not just the upfront purchase price. When we plan for materials, we are helping the whole organization with its planning. Events like the planning of our projects have to be very accurate. So, we’re trying to influence the organization into much more accurate planning, which is different from how it was four or five years ago.
We’re a capital-intensive sector, so while the rise in the cost of capital is impacting us, it’s not so dramatic, at least not yet. Even simple things, like the cost of renting cranes, has gone up. Coupled with inflation, there is also a shortage of heavy equipment. So, while it is impacting us across the board, I can envision it being more impactful going forward because the equipment that we are buying for other capital projects is going to get more expensive.
Attracting and fostering great talent are really critical. I believe that great talent development really starts at the intake point. If we can develop a rung of entry-level positions, we will have a solid supply of talent. I’m proud that at CITGO we put a lot of emphasis and energy into building terrific relationships with universities, as well as having a good methodology of recruiting. We ensure employees go through formal training, including proper negotiation training, as well as spending time at a variety of our facilities so they develop a deep understanding of how our business is run. We want to develop team members’ knowledge of both our operations and supply chain.
There are two to three technology solutions that are making a difference. GEP’s software has really helped us get our hands around our contract management and ensured that we’re on top of vendors’ key terms and due dates. We’re currently working on upgrading the technology at our warehouses, specifically building a lot more interfaces with the vendors to know the status of our materials at all times, and to automate replenishing. Second, we’re doing a lot more with data analytics, especially to help us decide our inventory levels. We are putting more and more variables into the thought process to ensure we have the right inventory levels at our warehouses. These technologies enable our decision-making to be far more data-driven.
I would say every group is dependent on three key things: people, processes and systems. So, I put a lot of emphasis on people and process. As I said regarding talent, as an industry we really have to do a better job of attracting, nurturing and developing talent not just for ourselves, but for our entire sector. Why? So that the people who are there can work through the processes that create competitive advantage and develop systems that support those. It’s very important for us to emphasize the development of the next generation of leaders.