BP's supply chain resilience after the 2010 Gulf of Mexico oil spill

British Petroleum

How the Oil Spill Affected British Petroleum's Supply Chain

How did it affect its profits and

What they had to do for clean up of the oil spill including costs.

What money they spent repaying business for their losses.

How much oil was spilled in relation to how much they could have sold as profit if the incident never happened.

Did they have back up oil wells to supply their customers that usually received their supply from them one that burst etc.

How they had to re-align their supply chain management to minimize profit lost.

The British Petroleum Oil Spill that occurred on April 20, 2010 created a risk to the supply chain of the BP company. BP's supply chain is comprised of a network of sources including crude oil and oil products, natural gas, power, chemicals, finance and shipping. Any major risk or disruption to a company's supply chain will create a threat to the company longevity. It is the company's responsibility to create resilience within their infrastructure. On way of establishing resilience is to recognize vulnerabilities that exist within a company's supply chain and create capabilities by which the company will address the vulnerabilities. In creating resilience, a company should strive to balance vulnerabilities with capabilities. Failing to do so may result in the company experiencing increased risk or eroded profit. While establishing resilience in this manner, the company should strive to maintain a culture of risk management which seeks to minimize risks. The Oil Spill was a major disruption to the supply chain of BP. However, BP in the past established five capabilities that currently address the vulnerabilities created by the Spill. Through act of risk assessment and management, BP established a resilient framework for itself that anticipated a risk such as the Spill well in advance of the actual event.

Overview of the British Petroleum Oil Spill

On April 20, 2010 British Petroleum (BP) experienced a major catastrophe in the Gulf of Mexico. While drilling for oil off the Gulf Coast, an explosion occurred resulting in massive amounts of oil being spilled into the Gulf of Mexico. The Spill encroached to towards the coast of the Gulf of Mexico for 87 days until it was sealed by BP in July 2010. Blackburn and Muir (2010). An enormous loss to our ecosystem resulted as well as a loss to the economic system of the surrounding areas. The losses to the economy and to individuals are still being recovered and BP is the process of re-aligning its internal structure. The Oil Spill created severe effects on BP -- it created a supply chain risk. Subsequently, this supply chain risk could have a major impact on the company's supply chain. Since then, BP has implemented strategies that will make its supply chain more resilient and will result in the organization rebounding and returning to its pre-spill standing.

Supply chain risks and security threats from source to end consumer

Identifying the supply chain risks is a task that can result in extended growth for a company. According to Sagin, LLC, there are six strategies that can assist a company in identifying and assessing supply chain risks: 1) Examine the risks inherent to the suppliers, shippers, handlers, and sources of raw material, 2) Identify the downstream users of the product including those that exist beyond the product's life, 3) Using the above, perform a risk assessment to uncover vulnerabilities in the supply chain, 4) Note and quantify the impact of disruption, product malfunction, and other harm, 5) Identify and plan improvement to the company's supply chain, and 6) Establish measurable goals and utilize public relations in attaining these goals. Sagin, L.L.C (2010).

Utilizing these steps, an example of BP's risks and security threats for source to end consumer follows. For practical purposes only principles 1-5 will be included.

1) Risks to suppliers, shippers, handlers, and sources of raw material: A major risk regarding the sources of raw materials, for example oil, is an unstable market in terms of pricing -- a market that existed prior to the Spill, but has become more unpredictable since the Spill. This is a significant risk because as addressed earlier if the price of oil or energy increase the consumer will ultimately be required to pay more. Still, significant for BP is that if BP's prices are higher than a competitor's, BP is likely to lose the consumer. However, if the BP's prices are the same as a competitor's BP must offer an incentive to attract that consumer. If BP does not offer such an incentive, the risk for BP remains obvious.

2) the downstream users of the BP's products are all consumers that own or use transportation such as cars, trains, aircraft, etc. Other downstream users of BP's products are any and all of those that have a need for oil supplies.

Examples of potential vulnerabilities can exist for companies are presented by Jan Hudsal, but only the vulnerabilities that apply to BP will be elaborated on here. According to Jan Hudsal examples of vulnerabilities are: Turbulence: described as frequent and uncontrollable changes in the external environment, Deliberate threats described as intentional attacks on the supply chain in order to cause harm, Connectivity described as the degree of interdependence and reliance on outside entities, Sensitivity described as importance of carefully controlled environments for product integrity, Resource limits described as constraints on output because of unavailability of input, Supplier/customer disruptions described as susceptibility of suppliers and customers to outside forces, and External pressures described as influences that create constraints or barriers. Hudsal (2010).

3) Vulnerabilities in BP's supply chain would consist of turbulence as a result of the unpredictable oil prices, connectivity to the extent that BP relies on outside sources in its supply chain. BP considered power, chemical, supply and shipping as part of its supply chain and these parts of the chain are likely to represent a vulnerability regarding connectivity, to the extent that BP relies on others for its supplies. Sensitivity is also an example of vulnerability in BP's supply chain. Addressed earlier was the effect of the Spill on the ability to obtain natural gas and since a carefully controlled environment is necessary to obtain natural gas, at the risk of marine life, sensitivity is a risk to BP's supply chain. Finally, because BP's customers and suppliers are subject to outside forces and external barriers in terms of availability and prices, customer/supply disruptions are also vulnerability in BP's supply chain.

4) the Impact of Disruption and Other Harm on BP's supply chain could have a tremendous overall impact for BP depending on which portion of the supply chain is affected. For example, as mentioned earlier, if BP's oil products are considerably more costly than its competitors, they are likely to lose the consumer to the competition. On the other hand, if BP's shipping link in the supply chain is affected, this could a domino affect ultimately affecting the recipient of the goods. Because numerous links comprise BP's supply chain, it is unlikely that a disruption in the supply chain will be without effect in some way.

5) a Plan of Improvement in BP's supply chain would begin with noting where the specific vulnerabilities are in BP's supply chain and increasing BP's capabilities regarding each vulnerability or increasing the company's capabilities in general. This is referred to as establishing a "Resilience Framework" and will be discussed in detail below. However, for the purposes of this section, vulnerability was identified in terms of the turbulence in the oil and market prices. Hudsal identified a list of factors that influence a company's capabilities. Among those that would benefit BP in offsetting the vulnerability of the turbulent market are: Anticipation -- working to anticipate future increases in oil prices, collaboration with other entities for a mutual benefit, increasing its financial strength, and increasing its efficiency to produce outputs with minimum resource requirements. Hudsal (2010).

A Major Disruption and Its impact the Supply Chain's Economics and Operational Performance

The Oil Spill is an example of a major disruption on BP's supply chain. However, the impact on the supply chain's economics and operational performance are still be researched. Potential effects on the operational chain include -- an increase in the cost of crude oil and oil supplies, a diminished availability of natural gas due to threat on marine life.

Business continuity/contingency plan that would make the supply chain more resilient

Resilience in a supply chain is defined as "the ability of a system to return to its desired state after being disturbed." Christopher and Rutherford (2004). In addition, Sheffi and Rice in their article state that "An organization's ability to recover from disruption quickly can be improved by building redundancy and flexibility into its supply chain." Sheffi and Rice (2005).

Pettit, Fiksel, and Croxton cite to four key factors that comprise a company's supply chain resilience: (1) Resilience can be built into a system in advance of a disruption (i.e., re-engineering), (2) Resilience requires a high level of collaboration to identify and manage risks, (3) Agility is essential to react quickly to unforeseen events, and (4) the culture of risk management is a necessity. Characteristics such as agility, availability, efficiency, flexibility, redundancy, velocity, and visibility were treated as secondary factors. Pettit, Fiksel, and Croxton (2010).

An Example of a Resilience Framework for BP

1) Use the Oil Spill to bring success. This is building a system of resilience into the company in advance of the results of the disruption. For example, BP has hired millions of workers to clean up the Oil Spill. It has hired legal representation who in turn has hired additional assistance to process claims of businesses claiming to have lost income. BP has a fund set aside to compensate those businesses and employers in the Gulf Coast who claim losses as a result of the Spill. Through these three actions, BP has created opportunities from a potential disaster. It has created thousands of jobs for individuals who did not have them prior to the spill and BP has helped thousands of individuals by compensating them for their losses. This increases the resilience of BP because it fuels into the economy.

2) Collaborate with organizations for Risk Management Assessment/Identify

Vulnerabilities and Capabilities

BP's vulnerabilities will be determined base on collaboration with agencies outside of the company to accurately assess risks and validate risks. For example, BP could hire focus groups that are familiar with BP's operations on different levels and illicit research from them regarding the company's vulnerabilities. It is important to note that when assessing vulnerabilities and creating capabilities to offset the vulnerabilities, BP should strive for a balanced approach. In other words, too few capabilities in response to the vulnerabilities will result in the excessive risks, while too many capabilities in proportion to the risks will result in eroded profitability as the company will expend profit on a perceived rather than existent risk. Pettit, Fiksel, and Croxton (2010).

BP's vulnerabilities as a result of the Spill were addressed in detail earlier and are: 1) Turbulence as a result of the unpredictable oil prices, 2) Connectivity to the extent that BP relies on outside sources in its supply chain. 3) Sensitivity is also an example of a vulnerability in BP's supply chain since a carefully controlled environment is necessary to obtain natural gas, at the risk of marine life, and 4) Customer/supply disruptions are also a vulnerability in BP's supply chain because BP's customers and suppliers are subject to outside forces such as the market and the economy.

The same focus groups could then be used by BP to obtain information on the capabilities. Actual capabilities that have been established by BP in the past will be presented here as an example of the culture of risk management that BP established within its infrastructure -- each of the capabilities established in the past by BP are still relevant to address each of the current vulnerabilities:

1) Increasing its capabilities by targeting the benefits of achieving 'virtual integration.' Through virtual integration BP will optimize hydrocarbon flows across the value chain, from the upstream supply source through to the downstream consumer, calling on the company's knowledge of energy markets, asset operations, logistics, trading and risk management, and control systems. Knott (2005).

2) Permitting IST, a division within their own company, to manage inputs and outputs to the company's refining, gas and power facilities. These facilities also take significant positions in the world's trading markets in support of BP's businesses. Knott (2005).

3) Make an investment in leading edge digital and communications technology -- the DCT side of the business. The investment is in the shape of packaged and bespoke software applications and systems. The goal is to create a world class energy supply, trading and optimization capability which is second to none. Knott (2005).

4) Maintain the capability to manage energy/price risk -- creation of IST will help to manage the financial risk. Knott (2005).

5) Continue exploiting new global energy markets through creation of this new banking investment system. Knott (2005).

Assessment of Risks/Capabilities and Analysis of Competitive Advantages

In its Resilience Framework example, BP identified four risks and five capabilities. This is a balanced approach that will likely not result in increased risk or eroded profitability. The first risk, turbulence as a result of unpredictable oil prices is addressed by the each of the capabilities. For example, employing capability five -- exploiting new global energy markets through a new investment banking system -- will give BP continued options regarding whether to invest in oil if the market is not favorable or to take advantage of a newly discovered market. Through this capability, BP increases its investment options in the midst of the turbulent market while creating a culture of risk management and building a competitive advantage.

The second vulnerability -- connectivity in relying on outside sources in its supply chain -- is addressed by the each of the capabilities. For example, the second capability -- permitting IST a company in their division to manage inputs and outputs of BP's gas and power facilities -- reduces BP's connectivity with an outside organization that performed this service in the past for them. This is important because it creates a competitive advantage for BP by reducing reliance on an outside organization. This reduces the risk to BP as it could reduce financial expenditures, and at the same could result in growth and expansion by BP of its IST division.

The third vulnerability, sensitivity resulting from the reliance on a controlled environment in order to obtain natural gas, is addressed by specifically by the first capability -- increasing virtual integration to optimize hydrocarbon flows across the value chain. With this capability, BP creates another alternative to the natural gas for whose availability has become questionable after the Spill. Hydrocarbon is another form of a natural gas. Again, through this capability BP is operating under a culture of risk management. The third capability also addresses this vulnerability.

The fourth vulnerability, customer/supply disruptions, is addressed by each of the five capabilities. The same analysis applies here regarding the first capability, as it did in the previous section discussing the third vulnerability of sensitivity. In 2005, when it established the above capabilities, BP established a resilient framework and established a firm foundation for risk management in that the capabilities it created at that time addressed its current vulnerabilities and those that exist after the Spill.

Potential Barriers to Integrating a Security Culture into Supply Chain Operations

In spite of the Spill that occurred 2010, BP has established a Resilience Framework that will enable it to successfully rebound from the potential loss. In addition to this Resilience Framework, any possible and pending threat that exists on security should be taken into consideration, and an integration of a security culture into its operations will contribute to its resilience as a company.

The concept of security acknowledges a threat to a company's supply chain and seeks to reduce that threat rather than mitigate losses afterwards. Ravi (2006). One of the greatest risks to a company's supply chain through a security threat include is shipping of freight through a company's supply chain via containers. Ravi (2006). Methods that exist to integrate security into a supply chain include the concept of layered security. Such an approach builds redundancy into the system, so that security breaches at one level can be guarded against at a subsequent level. Ravi (2006). Potential barriers that exist against a system like layered security for example are the cost of implementing the system. Russell and Saldanha in 2003 estimated that security-related supply chain modifications could cost around $65 billion. Ravi (2006).

Still, in light of its well established Resistance Framework, establishing a security culture, in light of the associated cost, will further strengthen the resilience of BP and make in a global force for years to come.