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Re-Inventing the Buyer/Supplier Link in the Internet Age

By David J. O'Reilly, Chairman and Chief Executive Officer

Conference and Business Opportunity Fair

New Orleans, Louisiana

Today, I've been asked to share with you some of Chevron's business strategies for the future and how minority suppliers factor into those strategies. But before I get into that, I'd like to say a few words about the National Minority Supplier Development Council (NMSDC).

I'm pleased to say that Chevron has had a very beneficial and productive relationship with the council over the years. We have always supported their work, because we feel it adds value to our business. In fact, two of our executives from our procurement organizations have served on the council's board in recent years, and we also actively support the Gulf South Minority Business Council here in New Orleans.

Key Operations

Chevron has been doing business in this part of the country for many years. We consider New Orleans and the Gulf Coast region to be one of our key operating areas. Right now, for instance, we're exploring for and producing oil and gas in the deepwater areas of the Gulf of Mexico.

We completed our first deepwater oil and gas project, which we call Genesis, a couple of years ago using a state-of-the-art floating spar platform. Genesis is located about 150 miles south of here in 2,600 feet of water. And we have more deepwater projects on the drawing board.

The Gulf Coast is also a key refining and petrochemical processing region for Chevron. Our largest refinery at Pascagoula, Miss., just east of here, processes 300,000 barrels of crude oil per day into valuable light products.

We also have several other plants located here in Louisiana and next door in Texas, which produce petrochemicals and additives for consumers and industrial use.

So, you can see, we've got lots of things going on down here that make up a large and important part of Chevron's worldwide business operations. Today, we have about 31,500 employees worldwide. A little over 10,000 of those work in the Gulf Coast region in Mississippi, Texas and Louisiana.

I'd like to take just a moment at this point to acknowledge some of our key suppliers, like Red Man Pipe and Supply, Chickasaw, Greenco, Rose International, DLP Wireline, and Ralph G. Moore & Associates, minority-owned companies that have contributed much to Chevron's success in this area.

The New vs. the Old

I'd like to begin this morning with a few remarks about the "new" economy, then move on to a brief discussion of Chevron's strategies, and then finish up with my assessment of the impact of the Internet and B2B (business-to-business) on our business.

Like most everything else today, the oil and gas business is changing to meet the needs of a changing world -- a world that has christened the dot-com companies as the new economy and blue chip companies as the old economy. We see the tug-of-war between the new and the old played out every day in the seesaw battle between the Nasdaq and the Dow Jones.

The Internet-driven B2B economy is here to stay because it offers people easier, faster and cheaper ways to conduct business.

In reality, of course, there is no such thing as a new economy and an old economy. Our economy at any point in history has always consisted of a complex mixture of new economic trends and old economic trends -- there's no sharp dividing line between the "new" and the "old."

Examples of this abound.

For instance, all horses weren't immediately put out to pasture as soon as the internal combustion engine showed up. People didn't stop writing letters right after the telephone was invented. And passenger trains weren't thrown on the scrap pile after the first airplane took off.

Today is no different.

The burgeoning use of the Internet won't spell the demise of basic industries, like energy and steel. While that may be true, I also believe the Internet-driven business-to-business (B2B) economy is here to stay, because it offers people easier, faster and cheaper ways to conduct their business. For those basic reasons, its use and influence will certainly continue to grow.

Focused Strategies

The past 10 to 15 years have been a time of downsizing, restructuring and mergers in the oil and gas industry. In order to survive these monumental disruptions, Chevron had to find new ways of doing business.

First, we decentralized our organizational structure into multiple business units and operating entities, which has allowed us to quickly evaluate and try new approaches to our business.

We refocused our business around several basic, long-term strategies which included building a committed team of employees, reducing costs, increasing our international exploration and production growth, and achieving top financial performance from our U.S. production, refining and chemical operations.

Today, after many years of constant re-evaluation and fine-tuning, those strategies have been distilled down and refocused into four, basic core areas that will define superior performance for Chevron in the years ahead.

First, there's operational excellence.

To achieve operational excellence, we have committed ourselves to achieving safe, reliable, efficient operations worldwide. This is our top priority. It provides the essential foundation for everything else we do.

Next, there's cost reduction.

It's absolutely critical that our costs remain competitive. We've had great success in reducing our costs over the decade of the '90s, but we feel we must continue the effort. We're beginning to see the benefits, for example, from our global procurement process, our restructured support functions and our continued focus on energy conservation.

Next, there's capital stewardship.

Since we invest more than $5 billion annually in our business, it's essential that we be wise stewards of our investors' money. To help us do that, we have a world-class project management process that continually improves the quality of our decisions and the execution of our projects.

Finally, there's profitable growth.

Profits, of course, will surely come if we deliver on the first three areas I mentioned -- operational excellence, cost reduction and capital stewardship. But it's obvious we need to do more, if we are to successfully compete for investors' dollars. That's why we'll seek continued profitable growth in our core businesses, look for opportunities to enhance that growth through new businesses and apply the latest technology, such as the Internet, to enhance both.

The key to success in achieving our four strategies is organizational capability. By organizational capability, I mean combining the talents and the knowledge of our employees and our suppliers, along with the effective use of our systems and processes to achieve superior performance. And I feel strongly that minority suppliers, like those I mentioned earlier, will have a role to play in helping Chevron achieve these goals.

A New Way to Do Business

One of the key elements for improving our organizational capability has been, and will continue to be, our development and use of new technology, such as deepwater drilling, refinery catalysts, seismology, gas-to-liquids conversion and so forth. But there was something else we felt we had to do, to improve our organizational capability even more. We had to become active participants in the new, Internet-driven B2B economy, because it's been clear for some time that it's profoundly changing the nature of business.

We had to become active participants in the new, Internet-driven B2B economy, because it's been clear for some time that it's profoundly changing the nature of business.

I understand that you had a plenary session yesterday on e-business, so it's obvious that we aren't the only ones who have come to this realization. In fact, we feel it's so important, that we've tapped B2B as one of the keys to Chevron's future success.

In mid-1999, we formed Chevron eBusiness Development Co. to launch e-business companies using a basic three-step formula -- we first test the concept internally, then spin off the successful ventures, and ultimately sell shares to the public.

Here's an example of what I'm talking about.

We started our Chevron Retailer Alliance in 1999, leveraging Web power to link thousands of investor-owned service stations. We plan to spin off this highly successful, customer-based concept and call it RetailersMarketXchange. We have high hopes it will become the industry's premier, Web-based, business-to-business, open marketplace for convenience store retailers, small-business retailers and their suppliers. We expect the RetailersMarketXchange to be up and running before the end of this year.

We've also helped create several other independent Web-based marketplaces for the oil and gas industry.

For example, there's PetroCosm, which enables companies of all sizes to buy and sell products and services that span the oil and gas industry supply chain, from drilling and electrical supplies and equipment, to professional, engineering and construction services. Then there's the Silicon Valley Oil Co., an electronic marketplace designed to connect thousands of commercial and industrial customers to the thousands of petroleum marketers who make up the $50-billion U.S. market for lubricants and diesel fuel.

In addition to these independent, Web-based marketplace exchanges, we're in the process of transforming our current procurement and payables functions into a world-class process using the Internet. While we were putting our new e-procurement process together, we worked very hard with our major suppliers, from the very beginning, to integrate minority suppliers into the process, offering discounted rates to those whose catalogs we've loaded into our system. Greenco, Stratford and Chickasaw are just some the of companies whose catalogs are already on our system.

I personally think that we've just touched the tip of the iceberg when it comes to B2B activity on the Net. Eventually all segments of Chevron's business will be affected by the Internet and B2B.

Just a Tool

Joining the Internet Revolution has always had a certain level of risk associated with it, but we felt we had to actively participate in Web-based B2B, because it offered a great opportunity to develop new, efficient, and cost-effective ways of doing business.

Although we've embraced e-business with open arms, for us, it's only a tool to enable our core businesses to function more effectively and profitably. We're still in the energy business. We have no intention of turning ourselves into a "dot-com" company. We'll ride the Internet bandwagon only as far as it takes to help us achieve our goals in operational excellence, cost reduction, capital stewardship and profitable growth.

Even though the Internet's just a tool, it's a tool that can unlock infinite possibilities. As it grows, it will provide abundant opportunities for all companies, big and small, to expand their business, because the Internet allows suppliers to access buyers directly at low cost -- even small suppliers of services and products for whom the cost of knocking on the doors of big business has been prohibitive. The Internet also allows you to access an enormous worldwide customer base that was all but impossible in the past. Put simply: B2B drives down the cost of access to your customers, while the ease and speed of that access goes up.

I'm happy to announce that Chevron has just recently donated significant funds to the Small Business Administration and the San Jose State University Foundation to support small-business outreach and training in the Silicon Valley/San Jose area in California. Our contribution will help fund the delivery of technology-based services to small and minority-owned businesses, including the basics of conducting e-business and growth marketing strategies on the Web, as well as the basics of building an integrated business and technology plan.

Challenges Ahead

Of course, there are also some challenges that go along with the incredible opportunities the Internet brings. You need to be knowledgeable, creative and fast to make it in the e-business world, no matter what the size of your company or what the owners look like. And you must establish a small-company, entrepreneurial attitude to be successful in B2B.

At July's National Minority Supplier Development Council conference, Shelly Stewart of Raytheon said, "You can't automate what doesn't exist." I happen to agree with that. Before you can make the jump to e-business, first you must have strong, robust supply chains that include diverse suppliers, suppliers that bring to the table focused, innovative, cost-effective solutions.

Chevron has had and will continue to have a long-term commitment to doing business with focused, innovative, cost-effective minority suppliers. It's not only good business practice, it's in the best interest of our company, our employees and our stockholders.

Here to Stay

It should be obvious to everyone by now that the Internet is here to stay. However, like most new technologies you need to understand clearly what the Internet can and cannot do for you, before you make it an integral part of your daily business operations.

For us at Chevron, we are convinced that Web-based B2B can save us money and make us more efficient in the bargain. But the Internet won't change our core business principles. We're still an energy company, as I said, and we plan to stay that way. Energy will become even more important in the years ahead than it is today, as computers and the Internet consume increasing amounts of it.

That's an important fact that people seem to forget in their headlong embrace of the "new" Internet-driven economy. The so called "new economy" wouldn't even exist without energy -- it won't work if you can't turn the lights on. But, as long as there are sufficient, reliable sources of energy, Web-based e-business will continue to grow.

We are convinced that Web-based B2B can save us money and make us more efficient in the bargain.

If you take a moment to look beyond your video screen and your keyboard, past all those computers, printers and servers that we all use every day, you'll see they don't really run on electricity -- they run mainly on coal and natural gas, the fuels that fire our power plants. That's why most experts see demand for all kinds of energy growing steadily over the next 10 to 20 years.

So, the outlook is clear to me. To sustain our modern societies and to improve people's lives in developing nations, we're going to need more oil, more natural gas and more power in the new century. And the Internet, B2B and a robust, diverse, supplier base will help us provide the energy the world needs.

Updated: November 2000