CXO

Multinational oil company rolls out unique procure-to-pay system

Caltex, a multinational petroleum company, needed to get its procurement systems under control. This case study examines the evolution of Caltex's procure-to-pay system, which ties supply chain management to a secure payment system.


Procurement traditionally has been a fragmented business for Singapore-headquartered Caltex Corporation, a major player in the oil industry throughout Africa, the Middle East, and Asia. But a new online procurement system that Caltex is now rolling out is reinventing the way it does business, according to Mike Mahon, the company’s general manager of procurement.

As with many multinationals, Caltex’s greatest strength in procuring goods and services, its massive size and spending power, has been in large part negated by the tedium and bureaucracy that inherently plagues a concern of its scope. A joint venture established in 1936 between the recently merged (Oct. 9, 2001) U.S. oil companies Chevron and Texaco, Caltex refines, distributes, and markets fuels, lubricants, motor oils, liquefied petroleum gas (LPG), and gas products in more than 60 countries. Its 13,500-member workforce also handles shipping, storage, supply, and trading operations. Caltex has interests in 11 refineries and 7,800 retail outlets. The company also sells its products through its nearly 700 Star Mart outlets located throughout the Asia Pacific region and Africa. Along with BP and Shell, it is one of the big three oil companies in its sphere of operations.

In addition to the problems raised by the size, complexity, and geographic range of the company’s operations, executives have to deal with differences in language and culture from territory to territory as well as major variations in financial and IT infrastructure. Managers in each country previously had to depend on thousands of local or regional suppliers, because doing anything else was simply too complex.

But Caltex’s unique procure-to-pay (P2P) system, Mahon’s major project for the past four years since he transferred to Caltex from Texaco, was designed to drastically streamline the procurement process. The new system, which just wrapped up a beta of its payment system, combines the best aspects of established resource-management software, including Ariba and SAP products, as well as a payment system that offers vendors the same security and ease as online banking, Mahon says. This mini case study examines how Mahon’s project used an online solution to simplify a complex process across a large company.

Starting small with the supply chain
Mahon began developing the first parts of the P2P system in Dallas, where Caltex was headquartered until moving to Singapore in mid-1999, to be closer to its customer and operational bases.

After familiarizing himself with the scope of operations, Mahon introduced the company’s first e-procurement initiative in December 1998 with a license for Ariba 5.1 supply chain and e-market software.

“What we started in Dallas was really only a trial run for the main event, which was to bring e-procurement, e-payment, and e-commerce across the board to our areas of operation,” Mahon said.

At the same time Mahon was concentrating on the development of this project, there was a sea change going on across the company and its IT philosophy. Caltex was restructured from operating along country lines to using a functionalist approach with a global management team put in place for the following four major business sectors:
  • Marketing
  • Lubricants and new business
  • Manufacturing
  • Supply and trading

As a part of this change, operations of the company’s SAP enterprise resource-management system were outsourced in 1998 to EDS, which was contracted to manage the basic processing and infrastructure management tasks. At Caltex’s request, EDS set up two major centers: one in Singapore to look after Asia’s requirements and the other in South Africa to handle Africa and the Middle East.

Caltex’s internal IT managers now focus on building business processes around the central outsourcing operation. The resulting processes and structures are then deployed country by country.

Mahon’s rollout of the P2P system is a part of a general framework that has seen implementation of a number of other e-commerce initiatives, including e-lpg.com, which helps Caltex customers find reliable suppliers and product information online, and StarNet, for Caltex’s lubricants and commercial customers.

When the company moved its headquarters to Singapore, Caltex Chief Executive Officer Jock McKenzie said, "To what extent and how e-commerce will impact the Asian region is still being defined, but no one assumes it is a passing fancy. B2B e-commerce is here to stay, and how traditional companies utilize their power and potential will be a significant determinant in defining our success. The downstream industry in Asia-Pacific faces many challenges as we move tentatively out of the most difficult operating period in memory."

Linking existing tools
Mahon said Caltex and the people and organizations it has been working with to develop the P2P system have come up with a pretty definitive answer to the problems of sourcing for multinational operations.

The first step after the initial Ariba license was to upgrade to Ariba 6.1 and link this to the SAP centers in Singapore and Cape Town, South Africa. Ariba version 7.03 is now the installed version.

“We were the first Ariba center to fully integrate with our international operations around the world, and this really gives us a lot of flexibility,” Mahon said.

The e-procurement part of the P2P package, which will eventually integrate the company's entire buying and selling process, has been rolled out across the six main markets of Singapore, Malaysia, Thailand, Hong Kong, the Philippines, and South Africa, and by the end of the year will be live in New Zealand and possibly in Australia by Caltex’s affiliate there.

Mahon says the limited rollout has already paid for itself, with the savings already generating “orders of magnitude higher than the implementation costs,” but this is just the tip of the iceberg. Caltex Chief Financial Officer Richard Guiltinan has estimated P2P will cut 20 percent from Caltex’s annual procurement spend, which in hard cash is somewhere between $80 million and $160 million, according to oil and gas industry analysts.

Securing the payment system
A two-month pilot of the e-payment part of the system, which will be fully integrated with e-procurement to form the P2P structure, was also successfully rolled out. Caltex worked with accountants, Cap Gemini Ernst & Young, and investment bank JP Morgan Chase on the system, and as a result, it has the same level of security built in to it as an online banking or broking system, Mahon says.

The system will provide to both buyers at Caltex and suppliers an automated platform from order entry to payment, which provides tremendous flexibility in several respects. It is an open system, which allows suppliers to use their own banks, and it can automatically handle cross-border currency conversion, tax reporting, withholding, and remittance.

This means a Caltex facility in the Philippines, for example, can order and pay for equipment sourced in Korea using the one system, whereas before, the only economical alternative was probably a local supplier.

Building better relationships
Caltex had thousands of suppliers scattered around the world under the old regime, but now it is possible to develop solid relationships with the best of them and buy in bulk. But just as importantly, the new system allows payment terms to be worked out individually with each supplier. “If you ask suppliers their main problem when dealing with multinationals, it’s getting paid when they are supposed to,” Mahon said. “But our system allows the supplier to ensure on-time payment and for us to negotiate discounts for early payment, which can result in major savings.”

He says everybody is basically a winner using P2P, including Caltex itself, preferred suppliers, banks, and even governments because the e-payment system takes care of all the tax reporting. “Governments know if they deal with us, our system will automatically make sure tax is recorded and gets paid,” he said.

“Suppliers love it, and their banks do as well as they have not seen anything like it before,” Mahon said.

He believes Caltex was able to develop the system in such a short space of time because the company is big enough to have all of the expertise necessary to design the state-of-the-art system, but it is also nimble enough to focus its resources on the job at hand. "We were able to move very quickly on things—more quickly, I think, than our competitors. They may be bigger and stronger; I just think that we're faster."

The reaction to the system has been so positive than Mahon and his colleagues at Caltex are looking at commercializing it and selling it to other multinationals. “The system is not sector- or product-specific and could be used by any number of companies with complex cross-border operations,” Mahon said.

How closely tied are your supply chain and payment systems?
What kind of advantages could your firm realize from an integrated purchasing and payment system? Join or start a discussion below and tell us what you think.

 

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