Increasing Return on Assets through insourcing logistics

Abstract

Insourcing and vertical integration often allow companies to gain competitive advantage by exercising a greater degree of control over their supply chain. In the case of ABC Oilfield Services, insourcing the transportation of their products to offshore oil rigs at sea - a function currently provided by their customers - will increase asset velocity of their most important tools, and allow them to service more customers with fewer tools. This is an especially important consideration in light of the fact that the offshore drilling market will see double-digit growth in the coming years. This paper examines the effect of such increased asset velocity on Return on Assets (ROA). Using detailed historical data of ABC shipments of their biggest revenue-generating tools, we modeled both the status quo logistics system of ABC, and an alternative system based on sound insourcing assumptions. We then compared the projected ROA of the two scenarios in order to gain insights into the relationship between insourcing and its likely effect on ROA. We attempt to quantify the asset velocity benefits of insourcing, but also show the surprising result that increased asset velocity can have a negative effect on revenue under common pricing schemes. While there may be several other factors which help in ultimately making the decision to insource, the paper provides an important contribution in helping decision makers see the effects of insourcing in the oilfield services industry more clearly, and identifying the conditions under which insourcing will have the biggest benefit to ROA.