Lean Implementation and

Supply Chain Development

at Oak Hills $1$

Industry and Company Overview

The Oak Hills facility is a unit of The Oil and Gas Services Company $($TOGS$),$ an integrated oil and gas industry services provider headquartered in Houston, Texas. Primarily,

TOGS provides upstream services to public and government$-$owned energy companies.

Currently, oil prices and demand are at a low point in an industry$-$wide cyclical slump,

and no upturn in oil prices or demand is evident in the foreseeable future. In addition, a

wave of mergers and acquisitions has taken place within the oil and gas industry. TOGS

was no exception and had recently acquired a competitor, Triangle Corp. $($Triangle$).$ The

two companies manufacture the same types of service products. In turn, TOGS was in

the process of being acquired by Pasadena Services, a larger competitor. At the time of

the facility visit, the acquisition had not yet been fully completed. In order to finance the

purchase of TOGS, Pasadena Services planned to issue a large amount of bond debt. Press

releases by Pasadena Services indicated that the company intended to reduce operating

expenses by consolidating redundant operations. Pasadena Services also expected that revenues would increase since the combined companies would now offer a full array of

upstream services that could be marketed as a complete service package.

The Oak Hills Facility and Product Line

A project team of students in a Supply Chain Management class had been assigned

the task of assisting the Oak Hills manufacturing facility in improving their operations

processes. The semester was only two weeks old when the team met Pauline Zhang, special projects coordinator at the Oak Hills facility. Oak Hills was a separate facility located

close to TOGS headquarters, and Pauline had recently been assigned to the Oak Hills

plant. The agenda for the visit was to provide an overview of the facility and the product

line under consideration for conversion to a lean system. A full tour of the facility,

including the production lines, and a short question and answer session would conclude

the visit. The facility layout is shown in Figure $1.$

The main product manufactured at the Oak Hills facility was a special testing instrument used in oil and gas exploration. The facility supplies both internal and external customers. Internal customers at the Exploration and Extraction unit $($E&E$)$ used the testing

instrument as part of a logging$,$ drilling and measurement services package offered to

external clients. The facility also sold to other oilfield supply companies and to large foreign government$-$owned companies that did not own manufacturing facilities for the

$1.$ John K$.$ Visich, Ph$.$D$.,$ Bryant University and Angela M$.$ Wicks, Ph$.$D$.,$ Bryant University. Used with

permission.

$79$

testing instrument. Due to the depressed price of oil, exploration activities were at an alltime low, and demand for Oak Hills$$ testing instruments was anticipated to drop from

an estimated $2\mathrm{.}5$ million units in the previous year to less than half of that amount for

the current year. This estimate included the demand from Triangle, but not from

Pasadena Services. Oak Hills management was not certain when testing instruments

would actually be provided to existing Pasadena Services business units and customers.

Demand for testing instruments was both local and global and, as seen in Table $1,$ was

highly erratic within product lines. Large volume orders with lead times of up to three

months were the norm for foreign orders, so months could go by before a specific instrument was manufactured again. The reason for the large international orders was the stringent paperwork requirement of the U$.$S$.$ Government. Domestic order volumes were

smaller, and lead times were between one to two weeks. Many E&E domestic orders were

rush jobs and had to be expedited on the shop floor since the daily cost of an idle exploration

well could range from U$.$S$.$ $$50,000$ to U$.$S$.$ $$100,000$ a day. Oak Hills management wanted

to reduce domestic lead times to one week and lower the number of expedited orders.

The Oak Hills plant had little information concerning current or impending E&E

projects that would require the testing instruments the facility supplied. Another problem was the fact that E&E customers were used to the luxury of placing rush orders:

hence the plant had to maintain a high level of raw materials inventory on site. This, in

turn, meant that inventory holding costs were quite high; inventory was estimated to

turn over five times annually. Increased delivery costs and overtime pay were other

costs associated with expediting orders. In addition, employee morale suffered and

desired customer service levels were not maintained.

The testing instrument produced by Oak Hills was simple in design and consisted of

three primary components that comprised $80$ percent of the total production cost.

Figure $1$ The Oak Hills Facil