Office of Corporate Procurement (DCPA) – Arturo Henríquez Autrey, Chief Procurement Officer (CPO) – Mexico
The newly appointed chief executive of Pemex’s recently centralized procurement office lifts the lid on the state oil champion’s internal restructuring as it transitions from monopoly status to a semi-autonomous and competitive entity. He shows how category management will foster smarter decision making when purchasing new technologies and describes how he is successfully mainstreaming a corporate identity reoriented towards efficiency and fiscal discipline.
Pemex has been signing on average 30,000 contracts per year using 120 different procurement units. A big change is now underway with the setting up of the Office of Corporate Procurement. You, in February were appointed to spearhead that. What have been your main achievements to date?
Pemex had been deploying an decentralized procurement model which was simply not conducive to pursuing a common strategies. 120 purchasing units were effectively scattered across the five different companies that make up Pemex – PEP, Pemex Refining, Pemex Petrochemicals, Pemex Gas and the Corporate Office. It was therefore perfectly normal to come across different negotiations with the same suppliers for identical equipment which was being purchased at different conditions. When you consider that the annual spend on procurement averages 25 to 30 billion US dollars, having such an unsynchronized and fragmented process was tremendously sub optimized. Trying to restructure this, however, represents an enormous task when Pemex has some 3,000 employees directly involved in procurement and a further 2,000 indirectly associated.
My response to this has been to embark upon a profound centralization of all procurement functions. Let us be completely clear that this is not a geographic undertaking. We understand that our experts on the field need to have input into procurement decisions, they need to be close and act as liaisons with the end users. It’s rather about injecting strategy and governability into the procurement function as well as standardizing and simplifying our contractual conditions irrespective of whether for national or international procurement. The goal is to build a common strategies where we can consolidate our 30 billion dollars of purchasing power and convert that into economies of scale and aggregate demand, because we see great economic benefits to be accrued through this as well as implementing agility and streamlined processes. Due to an immense collaborative effort from all areas of Pemex in preparation for the restructuring, we are ahead of schedule in integration process. Having started off with the subsidiaries, we have, thus far, completed three of the four. The last remaining one, Pemex Refining, should undergo central transfer of its procurement responsibilities by September.
Reliance on a decentralized system would seem to run counter to prevailing industry trends. To what extent have you been consciously emulating other NOCs and IOCs such as Statoil and Shell when implementing these changes?
Over the past 15 years, both inside and outside of the oil and gas industry, there has been a clear tendency towards centralized procurement so as to reap the benefits that this brings, with the most common being strategic sourcing through category management. You can see many examples across not only the energy industry but also in theautomotive, hospitality and food processing sectors among others. When we started benchmarking industry best practices, we swiftly came to realize the advantages of establishing expertise in particular purchase categories and of developing professional buyers. Category management is something we are consciously applying to our own scenario. It entails understanding what you spend, creating categories amomg 80%of that spend, and then creating procurement specialists, expertise and strategies based on those categories to optimized procurement.
Taking the example of drilling equipment, in 2013 alone we spent close to 76 billion pesos worth via leases, services and purchases. By grouping together expertise from within Pemex ranging from field technicians to legal counsel to purchase administrators we have sought to create a category that knows everything that there is to know in relation to the sourcing of drilling equipment. In short, to establish a cadre of specialists for this niche. Not only should they be familiar with theinstalled supplier base internationally and global best practice, but they should also understand the drivers of emergent trends, technologies and processes. They should be able to analyze how changes to the flows of raw materials that supply the shipyards manufacturing the platforms will determine the extent to which the selling of perforation equipment becomes a buyers’ or sellers’ market. They should be able to interpret the given market conditions at any single point in time and consequently be capable of devising optimum purchase strategies that maximally benefit Pemex.
Is category management, then, the main vehicle by which you ‘inject strategy’ into the procurement process?
While it is not the only one, it is the most relevant. By organizing pools of expertise according to category, we will be able to fortify our market intelligence and make our sourcing of goods and services much more strategic. When Pemex goes shopping for technologies there needs to be much smarter thinking behind our choices. Firstly we need to properly determine our needs and be aware of the wide variety of solutions out there that can respond to our requirements before selecting the most appropriate option. If we decide that our need is best met by a drilling platform, for example, we then have to determine whether we should buy it outright or whether a rent-to-purchase deal would make more sense. We also have to look more closely at who we are buying from and so on. In the past we might have bought from Singapore, but it may be that China’s supply chains would represent a better deal for us. The key point is to introduce strategy into the planning stage and not just at the final decision making stage.
This is a massive undertaking. How are you ensuring this takes place smoothly without disrupting existing relationships? I understand you have a four-phase roadmap for rolling out the centralization strategy.
We have centralized many functions in the past including the HR, IT and legal divisions. Some of these were more successful than others and we have factored in the lessons learned from these combined experiences. When I first discussed the centralization plan with our CEO, Emilio Lozoya, he sanctioned it on condition that the roll out was smooth and in no way, shape or form risked affecting day-to-day operations. We were also aware that the timeframes needed to be ambitious but realistic. We knew right from the start that the internal restructuring of Pemex, of which procurement centralization forms a fundamental plank, needed to keep pace with the rhythm of the industry-wide energy reform to ensure that the NOC is ready to compete when the oil and gas sector opens to free competition.
Our first step was to involve the entire executive cadre of Pemex in the planning process so as to ensure that as many stakeholders as possible bought into the conceptual idea of procurement centralization. There were many different ideas during this initial negotiation phase, not all of which were unanimous, but we demonstrated flexibility to take onboard and integrate new ideas. As mentioned, we have a sequential plan in place that encompasses several distinct phases. Fundamental to this was my decision to start with transferring the procurement functions of PEP. I was keen to tackle the most influential and potentially trickiest entity first so as to achieve fast and tangible results that others could then emulate. Ever since, we have been able to accelerate the pace of our overhaul of procurement.
Have you been encountering any kind of cultural resistance against change? Pemex has traditionally been run as an extension of government, so how do go about instilling entrepreneurial behavior across the workforce?
We have encountered two types of resistance. Firstly there is a resistance to change per se that is not especially directed towards the Office for Procurement. Highly talented people who have been working for over 30 years in a politically orientated entity where the mandate was all about production trumping efficiency are quite naturally going to find it difficult to shift to an entrepreneurial mindset where the focus is on value for money and on bottom-line results. It is equally a big leap to transition from a hierarchical chain of command to a process driven transversal structure. The way we are beginning to surmount this is by effective communication and by demonstrating to Pemex employees that they are privileged to be key actors in a historic époque of change.
The second form of resistance has been to the Procurement office itself. Again this can be considered entirely natural because, when you start removing the procurement function from the subsidiaries, you are obviously going to run up against the vested interests of the very people who used to wield that function. I have, however, been pleasantly surprised at how low this form of resistance has been.
It is essential to change the corporate mindset of Pemex because the industry reforms may give the NOC all the tools it needs to become a strong competitor – whether that is more financial autonomy, a more relaxed fiscal regime, more flexible contractual frameworks or market-level remuneration for personnel – but if our staff don’t learn how to use these tools it will all be in vain. Luckily Pemex’s employees are immensely proud to work for the state champion and have been, so far, striving hard to embrace modernization. It will take time to challenge installed cultural behavior and mannerisms and to try and undo them by shocking the system could be counter-productive in a company of this size. What is important is we are seeing the willingness to adapt to the new environment and the first indicator that changes are afoot.
We’ve talked about what is happening internally within Pemex. From the outside, what changes can suppliers and contractors expect in the future?
Today, contractors and suppliers have to deal with what I call the ‘big spider’s web’. When Suppliers want to provide equipment or services to PEP, they had to deal with each of the over ten divisions representing each region on their own terms. It didn’t suffice to be supplying one. If they wanted to supply another division they would have to restart the selling process again from scratch. It was therefore exceedingly time consuming, complicated and bureaucratic to do business with us. Not surprisingly, many suppliers opted not to deal directly with us and to instead focus on supplying our service contractors or not doing business with Pemex at all. Others decided to limit their interaction with us to one of our subsidiaries or one division of one of those subsidiaries. The end result was that Pemex has been losing out for years because we haven’t been exposed to the full range of technologies. We weren’t experiencing full market conditions.
Our intention is to cut up that spider’s web and replace it with what I call the ‘big door’ via which the relationship with suppliers will be wholly transformed. The big door will be the single outward face and the conduit by which we as the centralized procurement department will link suppliers to the end users within Pemex. The “institutional relationship” with Pemex will be with the Procurement division. The advantage for the suppliers is that they will, in the future, enjoy a much simplified process that will be transparent, fair and efficient. The advantage to Pemex is that we can ensure that the end user has the variety of solutions available to address their needs. As well, we will be able to monitor and evaluate the performance of our suppliers much more effectively.
Over time we will grow an installed base of providers that have proven they can meet Pemex’s needs fast, capably and at the optimum price. Obviously we hope many of these will be National firms as all companies want their supply chains to be as close to them as possible because of the increased opportunity to develop long term relationships and due to the logistical and cost advantages conferred. That way Pemex should be able to gradually convert its transactional suppliers into key suppliers and its key suppliers into preferred ones. This is the trajectory along which we foresee the relationship with our suppliers evolving.
What is your final message to those potential suppliers and contractors that aspire to work with the new Pemex?
Pemex, in spite of its size, needs technology partners, talent partners and investors. We invite you to come to Mexico and collaborate in building a modern, international oil and gas enterprise. We have much to teach you and equally a lot to learn. This is a historic moment because the last frontier has finally decided to take the ambitious step to open up. Mexico has a stable and secure legal regime where we respect property rights and have now opened up the crown jewel of our economy to your participation. The moment is ripe. We welcome you to join us.