Case Study
Case Study
Case Study
SAADIA IRFAN
NIDA KARIM
FIZZA KHAN
WPS’s Chief Operating Officer (COO) was concerned that the excess levels of inventory would
lead to a requirement for more warehouse space, increased holding costs, bigger financial losses
due to frequent write-offs from thefts and damages, and capital tied up unnecessarily. Inventory
levels that were too low, however, carried the risk of stock would run out and therefore disrupt
the whole supply chain; it might have severe consequences financially and for WPS clients.
After a month in his new position, Ahmed sat in his office compiling notes for a scheduled
meeting with his new team and the COO where he was to recommend improvements to the
inventory management.
Dr. Saadia Irfan, Nida Karim and Fizza Khan from the National University of Sciences and Technology prepared this case for
class discussion. This case is not intended to show effective or ineffective handling of decision or business processes. The authors
might have disguised certain information to protect confidentiality. Cases are written in the past tense, this is not meant to imply
that all practices, organizations, people, places or fact mentioned in the case no longer occur, exist or apply.
© 2022 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be digitized, photocopied
or otherwise reproduced, posted or transmitted in any form or by any means without the permission of The University of Hong
Kong.
Ref. 22/733C
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22/733C Inventory Management at Westa Petroleum Services
An oil well could produce 100 to 5,000 barrels of oil per day. In general, the higher the
production of the oil, the higher the profit of the drilling company. The oil wells in northern
Pakistan were 5,000 to 6,000 meters deep, while those in southern Pakistan were relatively
shallow, with a depth of 2,000 to 4,000 meters. The concentration of wells was greater in the
southern part of the country.
The overall economy in Pakistan depended largely on oil and gas as the major source of energy
generation. As it became increasingly costly to extract oil from deep wells and the amount of
gas production couldn’t meet the demand arising from the economic development, the Pakistani
government started importing liquefied natural gas (LNG) from Qatar as a substitute for natural
gas in 2018. In 2019 the supplies of imported LNG increased by 14% over the year before. In
addition to LNG, the manufacturing sector used coal as a power-generating source to decrease
dependence on oil and gas. The government also began to focus on renewable sources of energy
such as wind and solar energy. All these measures led to the drop in demand for oil and gas and,
hence, the business of the oil and gas companies. Since the revenues of service companies were
tightly tied to the activity level in the downstream oil and gas industry, inevitably oil and gas
services companies were negatively impacted.
The Company
WPS belonged to the upstream oil and gas industry in Pakistan, specializing in providing oil
and gas well-drilling services to oil producers in the country. Based in Islamabad, it was a local
company founded in 1995 and was one of the 10 largest drilling companies in the country. Most
of its competitors were international (with Schlumberger, Halliburton, and Baker Hughes as the
top three). WPS served three clients, namely Pakistan Oilfields Limited (POL), Shell, and Oil
& Gas Development Company Limited (OGDCL), in the cities of Chakwaal, Kohat, and
Rawalpindi, respectively. These clients had negotiated day rates of USD31,000, USD30,000,
and USD28,000,1 respectively and had two years remaining on their contracts. With all three
drilling rigs engaged at high day rates, the nonproductive time (NPT) never exceeded the ceiling
of 1%, and competent manpower employed and profitability had increased; WPS had every
reason to be satisfied.
WPS hired 100% local employees and ensured the best quality service to its client. To WPS,
the benefits of hiring local people were twofold. Unlike in most of the Gulf countries, the
drilling operators in Pakistan were not required to localize job roles to comply with the
country’s local content legislation. As a result, the workforce of the international drillers mostly
comprised expatriates. The support functions of the international companies were centrally
based outside Pakistan and served the whole region. For example, the auditors, maintenance
team, and certification inspectors all were expatriates who came from abroad to the Pakistani
rigs. This meant that branches of these companies (such as Schlumberger, Halliburton, and
Baker Hughes) depended on staff from an international support function and faced increased
expatriate failure rates, which occurred when expatriate employees were not adequately able to
adapt to the local countries’ environment and challenges. One important challenge the
expatriates faced was that they were unable to move freely. The western ministries did not allow
expatriates to go to certain parts of the country because of security threats. Often their security
clearance took more than three months. Moreover, bullet-proof cars and escorts had to be
arranged for expatriates to go to concessions. At WPS, this issue didn’t exist as the whole
workforce was local and hence was able to freely move to the concessions in any part of the
country, if the need arose. For this reason, WPS enjoyed a high reputation among its clients for
its drilling services, with its client evaluation ratings never going below 95%. Moreover, hiring
local labor translated into lower costs and higher profitability for WPS.
1
All currency amounts throughout the case are in US dollars.
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22/733C Inventory Management at Westa Petroleum Services
The contracts with each client required that in case of a necessary shutdown of a rig for repair
or maintenance or for any reason for which the client was not responsible, WPS’s remuneration
during such shutdown was calculated as follows:
A full rate was to be paid for the first 15 consecutive NPT hours accumulated
in any calendar month. After those 15 cumulative hours of NPT in any calendar
month, a zero-day rate was to be applied if the shutdown continued. A zero-
day rate was also applicable if drilling operations were halted due to reasons
within WPS’s control.
The increase in NPT also had serious financial consequences for clients, as each client
concurrently had other contractors on the site engaged in logging, cementing, and wireline
logging processes. With operations halted because of delays on the part of WPS, the contractors
were left idle. As a result, the clients faced spread costs of approximately three times the NPT
loss. In such a situation, the operational evaluation the clients conducted dipped from a core of
95/100 to 70/100, and this seemed to be a trend that had started in early 2018 [see Exhibit 2
for a sample evaluation form]. In addition to filling in evaluation sheets, the clients started to
openly and frequently express their dissatisfaction in the head office meetings held in Islamabad.
The shortfalls in performance, job quality, service reliability, and professionalism all led to
disappointed clients. It made running the business very difficult for the COO. Given this
situation, the COO’s key concern was that WPS no longer had a competitive advantage and its
reputation was continuously declining in the industry. The COO conducted rounds of meetings
with the team to identify what had caused WPS’s performance to deteriorate. According to the
team, the most apparent reason for the decline in reputation was the decrease both in oil prices
and in demand for oil extraction services worldwide, so the clients had higher expectations. The
team said that WPS should rethink its marketing strategy or clients would leave WPS and start
doing business with its competitors. However, the COO knew that less apparent reasons were
yet to be investigated.
Managing inventory at WPS was always a challenge because of the complexity and long lead
times to transport the inventory items from offshore. However, with increased profitability and
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22/733C Inventory Management at Westa Petroleum Services
sound business performance in the past, WPS had every reason to delay the reengineering of
the inventory process. WPS procured inventory only from financially stable, technically
qualified, and reliable sources from abroad. In evaluating potential suppliers, the company
considered delivery prices, supplier reliability, operational costs, and after-sales support. The
import of inventory was regulated by Statutory Regulatory Order (SRO) 678.2 The available
options for importing inventory from abroad were by air and sea. WPS chose to import its
inventory by sea using the DHL courier service. DHL charged WPS according to the weight of
the consignment. There was a concessionary import duty of 5% for the industry. If any item
was imported temporarily (for example, any equipment or tool imported by a service company
from another country for a specific job was to returned to that country), custom authorities
could clear it against a corporate or bank guarantee without levying any import duty.
WPS worked on a decentralized model with warehouses at each of the three rigs. When a certain
inventory item at one rig was needed, WPS ordered it directly from overseas, not from other
rigs.
Each warehouse in the rig employed warehouse men who made an inventory request to the
head office by making a service material order (SMO) with the approval of the tool pusher3 at
the rig [see Exhibit 4 for a sample SMO]. The rig superintendent in the head office then
approved this request. A final approval by the COO was required if the value of the requested
inventory was greater than USD5,000. Once approved, the SMO was forwarded to the supply
chain coordinator in the head office who prepared the purchase order (PO), which in turn was
approved by the supply chain manager and finally the COO [see Exhibit 5 for a sample PO].
After the COO’s final approval, the supply chain coordinator took the quotation from the
original equipment manufacturer (OEM). The PO was sent to the manufacturer. The inventory
was ordered from three main destinations, namely, Houston in the United States, Dubai in the
United Arab Emirates, and Dhahran in Saudi Arabia. The lead time for inventory ordered varied
from country to country, depending on the distance involved. Typically, the lead time was 70
days for Houston, 50 days for Dubai, and 60 days for Dhahran The goods were directly
delivered to the relevant rig, where the warehouse man put them on the shelf and updated the
records in the system [see Exhibit 6 for the process described].
As with all other roles, WPS employed two warehouse men to share the job at each rig; they
had a 14-days-on–14-days-off rotation. Zayyan and Ghazanfar were the warehouse men at Rig
No. 2. They had worked at WPS for over 10 years; both were highly experienced. Having been
acquainted for a long time, they had a good and harmonious working relationship. Their mutual
understanding was that they took work-related calls from each other, even on their days off,
and shared every detail during the handover process. Unfortunately, at the beginning of 2018,
Ghazanfar suddenly had to leave his job for family reasons. He was replaced with a new recruit,
Ali, who had been interning at the rig for the past six months.
One of the problems that the COO found was that WPS had accumulated a large amount of
inventory for some items, which was stored at the three different locations in the country. The
obvious intent was to house “sufficient inventory” that minimized downtime to avoid any NPT
cost to WPS and ensure its client satisfaction. However, the definition of sufficient inventory
remained unclear to WPS’s warehouse men. Historically WPS had set arbitrary targets for
inventory levels. Even so, the targets were frequently violated. No minimum and maximum
amounts of inventory level were set. At the rig warehouses, it was common to find surpluses of
some inventory items and shortages of others.
2
Statutory regulatory orders governing import of inventory in Pakistan.
3 The person who is the main in charge of the rig.
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22/733C Inventory Management at Westa Petroleum Services
The Analysis
WPS needed to investigate the causes of the surpluses and low inventories. A thorough look
into the items revealed that the inventory could be bifurcated into one-off inventory and
recurrent inventory categories. The one-off inventory items ranged from repair kits to overhaul
engines. The recurrent inventory, on the other hand, included items such as filters and liner
piston valves of reciprocating pumps.
Ahmed conducted detailed interviews with the workforce at the rigs and noted the reasons for
each incidence of NPT [see Exhibit 7 for a year-to-date summary]. Ahmed concluded the
increase in NPT incidents could have been avoided with better inventory management. While
it was not possible to conduct a thorough inventory analysis on each inventory item, Ahmed
focused on obtaining the amount of each inventory item consumed in the past two years. For
this, he scanned the sea of past data files created by the team at the cloud in detail for a week
and came up with the information [see Exhibit 3 for the list]. The inventory demand pattern
had been fairly consistent over the past two years. Therefore, Ahmed deemed it safe to base his
analysis on the assumption that demand for inventory would follow the same distribution
pattern in the future. He decided to create a model to calculate the minimum and maximum
levels for each inventory item.
In addition, he physically visited each warehouse to tally the inventory balances, interview
relevant staff, and gather data to find out where attention was required. He was unable to meet
the warehouse men at all three rigs; however he managed to hold in-depth meetings with both
warehouse men at Rig No 2. He saw Zayyan on the last day of his shift and learned that Zayyan
had all the demand patterns and price fluctuations at his fingertips. Ahmed’s contentment soon
turned to curiosity about the actual reason behind the surplus and or insufficient inventory levels.
The next day, still troubled by the same question, he met with Ali, who had just returned to start
his next shift. Ali was a bright young individual who seemed thrilled and enthusiastic about his
new role. He had so much to share about his new appointment that the meeting extended over
lunch at the rig café. Ali shared how Zayyan and Ghazanfar used to spend their overlapping
day sitting at the same table discussing every detail of the operations. He himself had joined
them a couple of times as their intern. However, he had laughed at how he couldn’t understand
the majority of the discussion because they had their own jargon. Ahmed deduced that Ali’s
lack of experience, partly due to the improper work handover from Ghazanfar, and the tendency
to order more inventory than needed might be some reasons for inefficient inventory
management.
Ahmed observed a practice of conducting daily 9 a.m. meetings between the warehouse man
and the tool pusher to get things in motion, in addition to the ad hoc meetings that were initiated
by contingent events. However, he never saw anyone taking minutes at any of those meetings.
Ahmed also noted that the warehouse at each location stored inventory without any segregation
of bins. The warehouses were not locked. As a result, the manpower at the rig frequently took
inventory parts from the warehouse without the knowledge of a warehouse man. In some cases,
critical parts were under the custody of technicians who did not work in the warehouse. In
addition, used or issued parts were re-stored in the warehouse. Could these reasons lead to the
inventory figures not tallying? Were there any other reasons?
The Challenge
Ahmed jotted down the various issues. He could see that definitely there were inefficiencies.
The challenge was not only how to solve the problems that had emerged, but also what the root
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22/733C Inventory Management at Westa Petroleum Services
causes were of all these inventory problems. An obvious solution to this issue might be the
digitization of inventory management, which would improve intracompany communications,
make the information consistent and transparent to the relevant personnel, and eliminate
paperwork and, hence, human errors. However, Ahmed knew that the companies in this
industry, no matter how big and profitable, still relied on Excel spreadsheets and didn’t have
much digitization in their drilling operations, while they did have fancy HR and finance
software in place. Ahmed understood that digitization required a significant IT investment,
including investment in IT software, IT implementation, future maintenance, as well as human
capital involved in the whole process. All this was something the company could not afford at
this time of turmoil. The challenge for Ahmed, therefore, was to find an optimal level for
inventory replenishment for each inventory item, given the existing resources. The other
solutions were better inventory management rules and regulations and better management
systems involving all three rigs, which Ahmed decided to work on.
Inventory optimization was a large-scale initiative at WPS. The thought of questions arising at
the meeting of “Why should we do this at all?” sent chills down Ahmed’s spine. As he heard
the rustling movement of the team members and the COO outside the meeting room, Ahmed
was dreading the response he would get. Would he be able to convey the importance of this
initiative with poise and confidence?
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May 2023.
22/733C Inventory Management at Westa Petroleum Services
This document is authorized for use only in Dr Saadia Irfan's Fundamentals of Financial Management Fall 2022 at NUST - National University of Science and Technology from Nov 2022 to
May 2023.
22/733C Inventory Management at Westa Petroleum Services
This document is authorized for use only in Dr Saadia Irfan's Fundamentals of Financial Management Fall 2022 at NUST - National University of Science and Technology from Nov 2022 to
May 2023.
22/733C Inventory Management at Westa Petroleum Services
Exhibit 3 (in the supplemental Excel file) shows the details of various inventory items held by
WPS in the past two years.
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Total hours of
Date Event description Cause of event
NPT
Rig 1
13-Jan-18 Wash pipe failure. 1 a
12-Feb-18 Top Drive System blower motor failure. 7 e
Mud pump # 3 piston and seat
17-Feb-18 2 a
replacement.
18-Feb-18 Drill string washout. 7.25 e
Replaced wash pipe and pressure test the
7-Mar-18 a
same.
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Total hours of
Date Event description Cause of event
NPT
Internal blow out preventer leakage, pull
out of hole 40 stand, replaced Internal
16-Apr-18 4 e
blow out preventer & Run-in hole to
bottom.
15
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Rig 2
CAM followers of the top drive system
7-Feb-18 internal blow out preventer were 5 a
replaced.
16
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