Reducing Purchased Equipment Costs Beyond JIP33

I have written about methods to reduce the cost of procuring equipment in many articles. I have referenced or mentioned JIP33 but have never addressed the JIP directly in an article. I want to start off by saying that nothing in this article minimizes the significant achievements made by JIP33. Getting twelve of the largest purchasers in the oil & gas industry together to agree on the program, creating new specifications and associated documents that can be used by any user, and establishing a very large purchasing volume under these standard documents are significant achievements. It is expected these achievements will reduce the price of purchased equipment by 15-20% plus reduce the effort in time and resources by owners and engineering contractors in the purchase of equipment. This is probably the most significant improvement since project purchasing began. This program takes the traditional methods to reduce costs and puts them on steroids. However, I believe further reductions are possible, but it requires thinking differently and deviating from traditional procurement methods. There is a way to reduce the price of equipment by 30% and reduce the effort to procure equipment by 50%.?

As I understand the processes being followed by JIP33, all of the members of JIP33 can contribute to the content of any specification. I also believe non-members can contribute by providing comments to any specification in development that is published online. I suspect the idea is to develop specifications that everyone feels comfortable using. That is a great method to developing specifications that everyone will use but it is very doubtful the method will result in lower cost specifications. I have participated on two industry specification committees and when you included the requested requirements from BP, Chevron, ExxonMobil, Shell, Total and others, you typically end up with specifications that are more costly than the specifications from each individual company. The result will be great specifications that all the participants accept but it typically results in higher cost specifications. Perhaps the JIP33 organization screens comments to manage the number of requirements added to the industry specifications to prevent increased costs. I suspect that the JIP33 organization believes that the very large purchasing volume under their specifications will more than compensate any of the increased costs from the specification development process.?

To truly develop an acceptable specification that is the lowest cost possible requires discussions and even debates between the users and the manufacturers of what should be included in the manufacturers' standard products and options. The lowest cost specifications cannot be developed by the users' community only. Historically, users have developed very detailed specifications because the manufacturers' standard products and standard options never met all of the requirements of almost any user. It is this one issue that forced many of the steps most users follow today to procure equipment and it is these steps that force unnecessary and significant costs in the process. Many or even most of these steps could be eliminated or significantly reduced if the users and the manufacturers agreed on standard products and standard options. This results from heated debates on what requirements should be considered in the design of standard products and standard options.?The users should challenge the manufacturers and convince them to include certain new requirements in their standard products or as standard options. Likewise, the manufacturers should challenge the users and convince them that certain requirements are either not necessary or addressed by other means. It is this push and pull and compromises on both sides that results is standard solutions that will be by definition the lowest cost possible.?

Not every feature negotiated with a manufacturer must be a standard feature always included on a manufactured product. It can be a standard option that can be selected or not selected by a user. This provides the opportunity for one user to order something slightly different from another user. It also allows one project to order something slightly different from another project. This could include differences between products used for an offshore project versus products used by an onshore project or products used in Russia versus products used in U.S. Perhaps the reason why users have historically needed very detailed specification is because the manufacturers have not engineered enough standard options to satisfy the users.

For highly engineered equipment like switchgear, control systems, turbines and compressors, it is unlikely a single specification will reflect the lowest cost standard solutions from multiple manufacturers of a single product. It is possible to develop a single specification that reflects the standard features and options for one manufacturer, but it could force other manufacturers to include features that are not considered standard for them. The objective must be to only order standard equipment from any manufacturer. This may require that slightly different requirements are negotiated with each manufacturer. In these cases, the specifications developed should be owned by the manufacturers, not the owners, since the specifications reflect requirements slightly different between manufacturers.?

There are many reasons why it is beneficial if the manufacturers own the specifications. The industry should want the manufacturers' standard specifications to be the basis for equipment supplied to ALL of the manufacturers' clients to grow the purchasing volume. JIP33 is trying to do this by offering the JIP33 specifications to any user company but the manufacturers have a broader reach and collectively could build a larger purchasing volume. Another reason why the manufacturers should own the specifications is that they would be responsible for maintaining the specifications including all related costs. In fact, if the objective was to develop manufacturers' standard specifications for every manufacturer, the manufacturers would invest the necessary time and resources to develop the specifications with the users and probably take on most of the burden. Eliminating user customizations is the desire by every manufacturer.?

Any level of customizations by the users creates a number of issues with the manufacturers. I toured a manufacturing facility for low voltage MCCs many years ago and I walked the entire process. The manufacturing process was very efficient but there was a large group of personnel at desks in one corner. I asked what they did, and I was told they were the "Engineer to Order" group. They review the users' specifications and identify the modifications to their standard products. They also have to identify the modifications to the manufacturing process and the changes to the check-out, testing and documentation steps. My feedback was that I wanted to put that group out of business for orders placed by my company. Any level of customizations increases the cost of the customizations beyond just the physical cost of the modifications and extends deliveries.

When negotiating the technical content of the manufacturers' standard specifications, there should also be agreement on standard drawings that will be same on every project with the exception of project tag names that could be developed with a computer script. This should allow a project to get standard vendor drawings with a few clicks rather than having to wait weeks or months. Additionally, there should be discussions on a framework for terms & conditions that will end the significant delays negotiating the terms resulting from historical practices.

There are many other costs associated with procuring equipment beyond the purchase price of the equipment. All of these costs should be understood and considered when looking for ways to reduce costs. From the manufacturers' perspective, there is the cost of a proposal team, the cost of the "Engineer to Order" group, the cost of the manufacturing organization, the cost of the FAT team, the cost of the installation team, the cost of the service group and the cost of the documentation group. These costs get reflected in the purchase price and if there are ways to reduce these activities, the price of the equipment should go down. From the users' and engineering contractors' perspective, the cost of the engineers that develop the specifications for a project, the cost of the group that develops the RFQs for projects, the cost of the team that reviews the proposals, the cost of the inspection group, the cost of the FAT team, the cost of the construction team, the cost of the commissioning team and the cost of the documentation group. These costs are not reflected in the price of the equipment, but they are a true costs of equipment procurement and if there are ways to reduce these activities, they should be pursued.

I would argue that the very best way to reduce all of the costs listed above is by only purchasing manufacturers' standard equipment without ANY user customizations. No matter how complex the order, manufacturers' standard equipment should be able to be purchased with a part number or completed data sheets. From the manufacturers' perspective, the cost of the proposal team is almost completely eliminated, the "Engineer to Order" group is eliminated, the cost of the manufacturing organization is reduced because all user customizations are eliminated, the cost of the FAT team is reduced, the cost of the installation team is reduced, the cost of the service group is reduced, and the cost of the documentation group is reduced. From the users' and engineering contractors' perspective, the cost of the specification engineers are almost eliminated, the cost of the RFQ folks are greatly reduced, the cost of the proposal review team is significantly reduced, the cost of the inspection group will be significantly reduced because everything is manufacturers' standard, the cost of the FAT team is significantly reduced because nothing is customized, and the cost of the documentation group is reduced.?

The practice of using manufacturer standard equipment has been used on a major project for all power system equipment (motors, transformers, switchgear, MCCs). The net result was a reduction in purchase prices, a significant reduction in delivery times, a significant reduction in drawing reviews, significantly fewer issues during the manufacturing of the equipment, significant reductions in the effort to test and commission the systems and significant reductions in the owner procurement, engineering, quality assurance and operation staffs in the procurement, engineering, testing and commissioning efforts. The feedback from the selected manufacturer was that the price of the equipment was reduced by 30% and the feedback from the involved engineering contractor was that their costs associated with procuring this equipment was reduced by 50%. This did not account for the reduced costs in the time and resources for the user.

All industries have accepted that some modifications are always necessary to manufacturers' standard products. Either it is just an accepted practice, or it is believed the effort for users and manufacturers to agree on standard products is simply too difficult or even impossible. It does take time, but it is possible, and the effort is done once with each manufacturer.

To achieve the maximum reduction in the cost of procured equipment requires changes in the equipment specifications AND changes in the procurement process. This results in lower equipment prices and significantly lower time and resources involved in the procurement process. Adopting manufacturers' standard features and options allows users to do both.