QUALITY MANAGEMENT IN THE OIL INDUSTRY: HOW BP GREASES ITS MACHINERY FOR FRICTIONLESS SOURCING

Martin Lockstrom, Shen Li and Zhang Shengrong wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain namesand other identifying information to protect confidentiality.
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Copyright © 2012, CEIBS (China Europe Inter
national Business School) Version: 2012-03-28
It was the cold winter of 2010 in Shanghai, and
Dr. Zeb Feng was becoming increasingly frustrated. As
British Petroleums (BP) director of procurement
and supply-chain management in Asia, Dr. Feng was
acutely aware of the growing burden that quality c
ontrol imposed over his companys global operations.
Chinese suppliers were masters of cost cutting, bu
t quality and compliance often suffered as a result,
which led in turn to increasing needs for supplie
r development, sourced goods, quality control and
assurance efforts.
Almost five years previously, BP Asia had establis
hed an international procurement office (IPO) in
Shanghai, which served as a shared service centre for
internal customers throughout the BP organization
worldwide. Since that time, the IP
O had been sourcing mainly non-hy
drocarbon goods and services, such
as manufacturing equipment and materials, packaging,
catalysts, chemicals and additives, marketing
products and retail equipment, as well as drilling services and well-completion services. After a corporate
board meeting with Christina De Luca, the vice-presi
dent of procurement and supply-chain management
for BPs downstream operations, it had been decided th
at the company would start to enhance its global
competitive sourcing.
As the number one supply market in the world, Ch
ina was naturally highly prioritized for further
exploration. The pressing point that concerned Dr. Fe
ng was whether Chinese suppliers were sufficiently
ready to supply mission-critical supplies for oil drilling, extraction and refining. During a recent
conference call, De Luca had reiterated, ]Zeb, our
competitors are way ahead of us in their sourcing
operations, and they achieve much lower costs. We
ve got to do something!^ Dr. Feng put down the
receiver and went back to his office to gather his team for a planning strategy meeting. He knew that
supply quality was the key issue, but how could it be resolved?
COMPANY INTRODUCTION
BP p.l.c. was one of the worlds largest energy
companies, providing its customers with fuel for
transportation, energy for heat and light, retail ser
vices and petrochemicals products for everyday items
under the brands BP, Aral, Arco, Castrol, Am/pm and W
ild Bean Cafe. Exhibit 1 lists some major brands
within BP Group.
The company started out amid uncertain beginning
s in 1901, when William DArcy gambled his life
savings to sponsor explorers in the search for oil in Persia. On May 26, 1908, DArcys venture paid off
as the team in Persia struck gold, and a fountain of
oil spewed out from the ground, reaching for the sky.
Since that time, BP has endured many ups and downs during the course of its history, including two
World Wars and all the sweeping changes made in
the Middle East during the 1970s, which changed all
the rules of the oil industry. By the end of 2010,
the BP group operated across six continents, and its
products and services were available in more than 80
countries. BPs main functions could be classified
into six categories: finding oil and gas, moving oil and gas, extracting oil and gas, making fuel and fuel
products, selling fuel and fuel produc
ts, and generating low carbon energy.
In 2010, the BP group had a sales and operating reve
nue of more than $297,107 million and employed
more than 79,700 people. The company operated approxi
mately 22,100 retail sites a
nd partially or wholly
owned 16 refineries. It had a replacement cost profit of $4,519 million.
In terms of its product reserve, BP
has proved reserves equivalent to 18,071 million barrels
of oil, with upstream activity in 29 countries. The
refining throughput stood at 2,426 th
ousand barrels per day in 2010.
BP had been operating in China since the early 1970s.
To date, with total foreign direct investment (FDI)
of more than approximately US$4.7 billion, BP was one
of the leading foreign investors in China, where
it had more than 27 joint ventures (JVs) and wholly
owned foreign enterprises (WOFEs). BP Asias own
staff numbered 1,200, in addition to 3,600 JV staff and 12,000 contractors. BP
Asias business activities
included offshore gas production, chemical joint
ventures, aviation fuel supply, LPG import and
marketing, oil product and lubricant retailing, solar
power installations and manufacturing, and the sales
of chemicals technology.
BPS NEW INTERNATIONAL PROCUREMENT OFFICE IN CHINA
On March 26, 2007, Reyad Fezzani, senior vice-pr
esident of BP, and De Luca formally opened the
companys international procurement office (IPO) in
Shanghai. IPOs can be defined as offshore buying
offices or buying houses set up to procure components, pa
rts, materials and other industrial input to be
used globally by manufacturing. The newly opene
d IPO was expected to cover all BP-affiliated
companies, including WOFEs, JVs, state-owned ente
rprises, and public and private companies based in
China, all toward the goal of extending its services
to other geographic regions within Asia. The two
objectives of the new Asia IPO were, first, to suppor
t the companys ongoing gr
owth needs in China and
second, to unlock the potential value from Chinese s
ourcing by offering a variety of services a namely,
procurement and supply chain management (PSCM) capability development, market research and
intelligence, cost modelling, supplier identification/pr
e-qualification, due diligence, (e)RFx, tendering and
negotiation, product quality control and assurance, orde
r management, logistics optimization, etc. a in
order to ensure quality on all sourced goods.
The organizational chart of the Asia
IPO in China in Exhibit 2 clear
ly illustrates the above objectives.
Exhibit 3 illustrates the categories and sub-categori
es for which the IPO service could provide knowledge
on each market. For example, under manufacturing equipment and material, the IPO service had strong
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