Friday Rant: The Supplier Management Fallout From BP (Part 1)

A week or two ago, I read a quote from an equity research analyst who said something to the effect that the biggest danger to BP in the Gulf oil spill disaster was "British" in its name. In other words, it's far easier to point a finger at the culprit in such a disaster given the political and geographic distance of the organization who appears to be the guiltiest party (it's even easier when the chief executive shows up in front of Obama and Congress in a stereotypical and quintessentially British $3,000 Savile row suit). I question if the Obama administration and Congress would have had the exact same reaction if the rig in question was owned by Exxon Mobil, conveniently headquartered in Irving, Texas rather than BP, which we know is based across the Atlantic. After all, Exxon's dividends are more likely to take care of US pensioners than UK ones.

But the purpose of this rant is not to play out "what if" scenarios regarding rig ownership, fault and government/citizen responsiveness. Rather, I'm most curious about the long-term supplier management implications of what the oil spill will bring. After all, BP did not service, build or manage the rig itself. Those other roles went to Halliburton, Transocean and Hydril (GE), among many other suppliers (the above-mentioned suppliers did not, however, provide the controls and blowout preventer in question -- a company called Cameron International can take credit for that, though admittedly, it may have simply been the installation amongst many other possible factors). In fact, for a list of all the suppliers in question, see this site. Certainly, the fact that BP acted similar to Boeing with its long-delayed 787 project by becoming completely reliant on key supply chain partners is relevant here. I can't help but wonder if there was greater vertical integration -- or perhaps, a better managed supplier development program -- within the offshore drilling supply chain that the problems that led to the rig explosion would have been caught (and acted on) before it was too late.

The Times Online published a story in May that provided a paper trail of corrective action requests to one of the suppliers in question. According to the story, "In June 2000, the oil giant issued a 'notice of default' to Transocean, the operator of the rig ... The dispute was over problems with a blowout preventer, a set of iron slabs that should close out-of-control wells. It failed on the Gulf of Mexico rig, triggering the explosion and oil spill. Transocean acknowledged at the time that the preventer did 'not work exactly right.' The rig in question, the Discover Enterprise, was unable to operate for extended periods while the problem was fixed ... The preventer was made by Hydril, now owned by GE's oil and gas arm, and Cameron International, a Houston company. Cameron also made the preventer on the Deepwater Horizon, the rig that exploded. Its preventer was fitted at about the same time BP was complaining of problems with its sister vessel."

I'm sure it will take a long time to ultimately pinpoint the shared responsibility -- if not the liability -- within BP's rig supply chain. Perhaps we'll learn that that the issue ultimately came down to a failure to adequately monitor and oversee a complex multi-tier supply chain. Or perhaps part of the ultimately liability should rest with a key supplier or set of suppliers who knowingly produced, assembled installed, or operated faulty equipment (or managed an operation with faulty processes). Regardless, I have no doubt the BP issue will ultimately raise the role of supplier management in averting disasters to new levels. After all, if a single Black Swan event such as this can push a Global 10 company close to receivership, it can happen to any organization that fails to manage its suppliers effectively.

On a more local political level, just after the tragedy and disaster struck, I wrote a post questioning whether the incident would become Obama's Katrina. In the column at the time, I suggested that if I had to bet on it, "I'd wager that six months from now, the BP oil disaster ends up serving as a painful and slippery reminder about how supply risk incidents can impact the overall economy, and even political administrations. In fact, I believe that just as the poor and delayed FEMA response to Katrina came back to hurt the Bush administration, a similar delayed response will come back to hurt the Obama White House as well. But this time around, it will also cause similar damage to BP's reputation, even though it was a supplier that was responsible for administering the rig."

These words proved prescient indeed (at least we get things right on some occasions). Stay tuned for further analysis of how this single incident could potentially change the legislative landscape when it comes to supplier oversight and supply chain regulatory controls. I think we're onto something much bigger here than a single disaster.

Jason Busch

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