San Francisco-based ChevronTexaco, the result of the October 2001 merger of Chevron Corporation and Texaco Inc., is the second-largest U.S.-based energy company and the fifth-largest in the world, based on a market capitalization of approximately $100 billion. Both companies bring to the table certain best practices now being combined to create even greater opportunities. Many of these are taking place in supply chain management.

At the old Chevron, for example, Chairman David J. O'Reilly, in a speech to suppliers in late 2000, identified four strategies for the company: operational excellence, cost reduction, capital stewardship, and profitable growth. Procurement has had a particularly important role to play in the second area (cost reduction), something O'Reilly noted in his speech, when he said, "We're beginning to see the benefits [in cost reduction], for example, from our global procurement process, our restructured support functions and our continued focus on energy conservation."

One of the most important keys to reducing supply chain cost is to focus on total cost of ownership. "Everything in purchasing these days focuses on measuring the value you add in the supply chain," explains Thomas A. Crimi, a member of ChevronTexaco's Houston-based strategic sourcing team, who was with Texaco prior to the merger. "Measurement is the key to determining success. Before, measurement was easy. Price was the focus of most of the purchasing and supply initiatives. Now, it is total cost of ownership." Total cost allows a focus on materials, transaction, inventory, quality, standardization, material substitution, and manpower optimization costs. "Sourcing initiatives should affect the organization in all of areas," he says.

One particularly effective tool in reducing cost is the use of integrated supply programs. "This involves using an extended enterprise concept and relying on key supplier alliances to bring overall costs down," he explains. Prior to the merger, both Chevron and Texaco were very involved with such programs on a domestic basis, and they have reaped numerous benefits. When Crimi was with Texaco, for example, inventory carry costs and transaction costs were major issues, and teams worked together to identify some significant savings in these areas. "In some of our West Coast refineries, we were able to use integrated supply successfully, reaping cost savings of about 15%," he continues.

One of the keys for both former companies and the new merged company has been supplier support. "Suppliers have been enthusiastic about integrated supply programs as long as we set the agreements up in such a way that we don't cost-shift," notes Crimi. "That is, the focus is to be on driving costs down across the supply chain, rather than shifting costs to suppliers." Example: If you integrate your information systems so that you can share information with suppliers in such a way that they have access to the demand side, it provides total cost saving benefits to customer and supplier, because suppliers can plan their inventories. The result is that the suppliers don't need to carry as much inventory, and the customer doesn't, either. "This reduces the suppliers' selling costs and their administrative costs, and we can both focus on joint problem-solving," states Crimi.

With the success of domestic programs well in place, the new organization is setting its sites on global supply chain total cost of ownership initiatives. "As the globalization process grows, total cost of ownership becomes even more important," he notes. "In future, we hope to put together our best domestic practices and look for applications in our global operations, which are quite substantial," he explains. "As we standardize on descriptions and part numbers globally, for example, we will be able to link all of our spending activities around the globe." This will improve opportunities even more for sharing best practices and generating supply chain cost savings.

Despite the tremendous opportunities, there are challenges as well. "The international arena is far more complex than the domestic one," he admits. "For example, the level of infrastructure is not always in place in some other countries as it is here. And in some cases, we are required to purchase from suppliers within certain countries," he notes.