Supply chain resilience used to denote effectively managing supply risks. But lately resiliency has come to mean much more than risk management. It now covers the ability to confront and overcome threats to one’s supply chains and then be in a stronger position afterward.
The American Psychological Association defines resilience as “the process and outcome of successfully adapting to difficult or challenging life experiences, especially through mental, emotional, and behavioral flexibility and adjustment to external and internal demands.” Or as Amit Sood, executive director of the Global Center for Resiliency and Well-Being and creator of the Resilient Option program, explains: “It’s your ability to withstand adversity and bounce back and grow despite life’s downturns.”
Similarly, resilience in the corporate world is the ability of a company to bounce back from a catastrophe or a disruption and return to normal operations levels. Dr. Yossi Sheffi, a professor at the Massachusetts Institute of Technology and author of The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage, highlights three main ways companies can develop resilience: increasing redundancy, building flexibility, and cultivating an empowering culture.
For many companies, resiliency is a fairly recent area of focus. For Aramco, however, resiliency and persistence are long-standing parts of the culture and history. Aramco traces its beginnings to 1933, when Saudi Arabia signed a concession agreement with the Standard Oil Company of California (SOCAL) that allowed SOCAL to survey the Saudi desert for oil. Drilling began in 1935 but failed to produce any results. Instead of abandoning the drilling program, company executives followed the advice of their chief geologist Max Steineke, to “keep on drilling.” That persistence paid dividends when in 1938 commercial oil production began with Dammam No. 7 or “Prosperity Well.” At that time, there was no basic infrastructure, equipment manufacturing, or services in Saudi Arabia. As a result, Aramco’s drilling operation required extensive planning and coordination as all material and services came from providers outside of Saudi Arabia. The supply chain had to be designed for resiliency out of necessity. Whether drilling for one well or hundreds, the operations required a supply chain designed around redundancy due to the long lead times for materials and services. As a result, a culture of resiliency took root, and it is now second nature.
As Aramco’s operations grew, a more strategic approach to redundancy and supply chain resiliency started to take shape. The foundation for Aramco’s redundancy strategy is based on three core pillars:
- Local manufacturing base. Having local sources for key products shortens lead times and creates a more flexible supply chain. If a disruption occurs, suppliers can respond more quickly, and materials can arrive sooner.
- Multi-geography sourcing. Having suppliers located in more than one region creates redundancy and supplier diversity while enabling flexible production capacity. If suppliers in one region are affected by a risk event, Aramco can source from suppliers in a different region.
- Strategic inventory management. By taking a strategic approach to setting and managing inventory levels, the company ensures that optimal safety stock levels are maintained to help respond to disruptions.
As a result of the company’s focus on these three pillars, Aramco’s supply chain has proven to be highly resilient, weathering multiple disruptions and proving to be capable of returning to normal operations.
These pillars were formalized in programs that enabled local investments and in the building of strategic inventory. One example is the Aramco In-Kingdom Total Value Add (iktva) program that was launched at the end of 2015. The program was designed to drive supply chain efficiency and value across Aramco’s operations by developing a diverse, sustainable, and globally competitive oil and gas supply chain within the Kingdom of Saudi Arabia, as opposed to relying on imports.
Since the launch, iktva has added over $130 billion (SR 488 million) to Saudi Arabia’s gross domestic product (GDP). By the end of 2022, Aramco was sourcing 63% of its materials and services from local suppliers, an increase from 35% in 2015. The target is to reach 70% by 2025, as highlighted by Senior Vice President of Procurement and Supply Chain Management, Mohammad Al Shammary. While the program has been good for Saudi Arabia and benefited the local economy, it has also enhanced the value of Aramco’s supply chains. As a result of having an established and rooted local supply chain, Aramco’s operations have become more reliable and efficient.
Withstanding disruption
The three pillars and the iktva program have enabled Aramco to weather several significant disruptions and risk events. On September 2019, for example, just prior to the COVID pandemic, the Abqaiq and Khurais producing plants were hit by drone attacks, cutting production by 5.7 million barrels. Following the attacks, Aramco restored production levels within 11 days, demonstrating its long-standing reputation for reliability. Figure 1 outlines some of the key actions that the Procurement & Supply Chain Management organization took to expedite recovery for both plants.1 These actions were all based on the three core pillars and many of them were enabled by Aramco’s iktva program.
Shortly after Aramco recovered from the attacks, the company faced another incident when the COVID-19 pandemic started in early 2020. The pandemic disrupted many global supply chains due to not having available capacity, regional lockdowns, and suppliers facing financial distress. Aramco, however, experienced minimal impact from these global supply chain disruptions because of the strategic inventory it held for critical commodities and its reliance on local suppliers.
A study conducted by Boston Consulting Group (BCG) assessing Aramco’s supply chain resilience during the pandemic showed that the company was more effective than its peer group of national oil companies and oil and gas majors. The assessment focused on four key areas and 11 subgroups. The key areas included 1) demand assessment, 2) risk monitoring, 3) risk mitigation, and 4) opportunity capture. The outcome of the assessment is outlined in Figure 2, showing Aramco is best in class for seven of the 11 subgroups, with minor gaps in the remaining four areas. The study’s results indicate that Saudi Aramco's Procurement & Supply Chain Management organization managed to overcome challenges brought on by the pandemic based on having redundancy and flexibility combined with a culture focused on being resilient.
For the four subgroups with gaps, the study identified the following key actions Aramco needs to take to reach best-in-class performance in supply chain resilience:
- Conduct a comprehensive risk assessment and monitoring of suppliers’ financial, strategic, and technological risks;
- Incentivize performance for service contracts to ensure alignment of contract goals, resulting in better quality of service and mutual trust with suppliers;
- Conduct market research to identify and evaluate partnership opportunities to reduce risks; and
- Drive sustainability along the supply chain, including assessing suppliers to ensure alignment.
Going forward, other focus areas to strengthen the resiliency of the supply chain operations include:
- Leveraging technology to establish end-to-end visibility, driving further insights with tier-1 and tier-2 suppliers;
- Maintaining strong networks locally and globally to increase transparency with the supply base; and
- Developing long-term partnerships, including acquisitions that focus on innovation, operational efficiency, and extending strategic objectives (for example, localization and sustainability) across the supply chain network.
These are just some of the areas for continuous improvement that Aramco is focusing on to develop an even more resilient supply chain in the future.
Resiliency is a choice
Supply chain resilience is a critical factor for businesses to succeed in today's dynamic and unpredictable marketplace. Resilience is not an inherent trait of supply chains; it is a choice that companies must choose to make. Businesses need to invest in creating a resilient supply chain by developing strategies that focus on risk management, agility, and flexibility. They must proactively assess potential risks and threats and develop contingency plans to mitigate them. Furthermore, organizations must recognize that achieving resilience is an ongoing process and requires a long-term commitment. It involves continuous monitoring, assessing, and updating of plans and procedures to ensure that they remain relevant and effective.
For Aramco, building a resilient supply chain was a strategic imperative rather than a cost center. The benefits of a resilient supply chain are significant and have allowed Aramco to create a competitive advantage by enabling its operations to respond quickly and effectively to disruptions, minimize losses, and maintain a reliable supply of energy.
In conclusion, being resilient is a choice that businesses must make. Companies that prioritize building a resilient supply chain will be better equipped to navigate the challenges and uncertainties of today's business environment, maintaining their competitiveness and ensuring their long-term success.
Notes:
1. For more detail about how Aramco recovered from the drone attacks, see the October 16, 2019, edition of the Arabian Sun, a weekly Saudi Aramco publication for employees: https://www.aramco.com/-/media/publications/arabian-sun/2019/2019-40.pdf
