Price up – bring cost down!

In Productivity and motivation, Productivity culture, UK productivity, Uncategorized on April 28, 2011 by Tim Aikens

The oil industry is fascinating for a number of reasons.  The ‘Upstream’ or Exploration and Production part of the industry has little control over the price it receives for each barrel sold. Oil is a commodity and so its price is largely determined by supply and demand.  In 1998 it fell as low as $10 a barrel. It has risen to over $140 and is currently about $125.  How do you manage in such a volatile price regime and what does this mean in terms of productivity?

This is where it gets interesting.  Whether $10 or $125 the industry – or at least the smart oil companies are always interested in doing more for less.  In the tough times they need to reduce cost just to generate some cash and hopefully a bit of profit.  In the good times it is all about getting more oil out of the ground to make more money whilst the price is high – for who knows when it could slump again.  The focus is not quite the same in both situations – the first one is on cost cutting – the second on efficiency and effectiveness.  However, from my experience of working in oil companies under both price regimes, the approach is fairly similar.  If you try to cut cost, you will almost inevitably improve efficiency and if you are focused on improving efficiency you will end up reducing cost.

It is because of this price volatility that the oil industry has had to be flexible and willing to change.  As an industry they still have some way to go, but they are working at it.

What makes them stand out is the determination to keep improving efficiency or cutting cost regardless of the cost/ profit environment.  This is not to say that no other industry does this.  On the contrary most successful organisations will have this mindset.  The real message is that every organisation has to be relentless in bringing cost down and improving the way it does things.  Even when business is good and you are getting a good price for your out put, seek to bring down price.  This comes full circle to one of my earlier blogs about productivity culture. If your organisation does not have it – then go out and develop it!


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