Welcome And Host Introductions

Intro & Outro 0:00

Welcome to Tennessee on Supply Chain Development, where we unpack the drivers typing today's global supply chain. From innovative ideas to real-world solutions. Each episode brings you insights from the leaders charting the course for our discipline. Now here are your hosts.

Ted Stank 0:20

Hey everybody. This is something we started a few years ago where in our monthly University of Tennessee on supply chain management podcast goes live at the forum. I'd like to tell you that we planned this guest to be really, really timely and topical, but actually I talked to Tom back in August, I think, to try to get him on our schedule. And it just so happens that this happens to be a really timely and topical topic. This is um season four, episode six of Tennessee on Supply Chain Management. My name's Ted Stank. I'm one of the co-hosts. Sad to say that Tom Goldsby had a family event and he had to go take care of things in Indiana. And so, you know, on pardon the interruption, they call him Phil in Frank. If you ever watch that show, this is Phil in Lance. This is my good friend Lance Saunders. Lance is going to be joining me on the podcast today. And our guest is Tom Johnson. Tom is procurement leader at HF Sinclair, an oil refiner. Tom has spent his entire career in oil and gas, previously with Holly Frontier and Valero. Remember what I said this morning about if we can do this right and really learn a lot and teach great students who go out and do great things, they come back to us. Tom is one of those. Tom is one of our students, uh UT undergrad. Happy to say he's continuing that transition because his son is now a supply chain major at the University of Tennessee in Tom Goldsby's class, I think. Is that right?

Lance Saunders 1:45

And he's not changed majors yet?

Ted Stank 1:47

No. That's a good thing. Yeah. We wouldn't announce that. We wouldn't announce that. Yeah. So, Tom, welcome. Great to have you with me. Thank you.

Tom Johnson 1:56

Thank you.

Why Refineries Fear Downtime

Ted Stank 1:57

Let's get started. Let's start really high level. What are you watching now? What are the kinds of things that are causing those 3 a.m. phone calls for you?

Tom Johnson 2:05

So my role of being responsible for procurement, uh, I'll qualify first. So uh I am not responsible for the procurement of crude oil. That's a traded product. We have a trading floor and deal with all that. Where I get the 3 a.m. phone calls are uh we don't have what we need to run our refineries. And those in heavy manufacturing can appreciate very, very high cost of operation, very expensive downtime. So surety of supply and resiliency are the big issues, right?

Ted Stank 2:35

Right, right. And it's certainly a continuous process business, right? So you can't shut that down. Yeah. What happens when a refinery shuts down?

Tom Johnson 2:42

Uh bad things. So um it usually costs us a lot of money. And, you know, so let's say something breaks. Well, you you have the cost of fixing what broke, but you also have contracts with customers to supply fuel. And in many cases, you have to go out and procure that in the open market. So not only do you potentially lose your margin, you're having to go out and buy replacement product to keep that customer happy.

Ted Stank 3:06

So before we dive into the, and I'm thinking about drones blowing up refineries in the Middle East and everything, so that even if oil did start flowing out of the Straits of Hormuz immediately, we've got lots of disruption issues. But and I want to get to that later. But to set the table first, can you explain to us the nature of your supply chain, where HF Sinclair fits in that overall oil, you know, energy supply?

Upstream Midstream Downstream Explained

Tom Johnson 3:30

Because there's people like me out there that need simple. Okay, yeah. So uh simple sense. When you think of the oil industry, you'll hear terms like upstream and downstream. Upstream is essentially drilling for the product. Downstream would be the processing of crude into products. And then you have a bucket in the middle that we call midstream. That's the logistics piece of, say, pipelines, ships, and trucks. HF Sinclair, we are in the midstream and downstream space. So the way to think about us is we buy every barrel of crude that we process through our facilities that differentiates us from, say, someone like Exxon who might drill for their own crude and process it themselves. So you have to think about us similar to, say, like a Valero or a Philips 66.

Lance Saunders 4:16

So one of the things that I think a lot of people maybe don't fully comprehend is, you know, we think of when we think of crude, we think of the what we put in our vehicles. But what are some of the other ways that, you know, you have an impact on the products that we use every day?

Tom Johnson 4:31

Yeah. So crude in and of itself without refineries is pretty useless. So you have to think about the a coexistence there that's necessary. And the industries operate very differently from a PL perspective. I I think the story on oil and gas is that it's essentially in everything you consume or utilize on a daily basis. And that can be products that you put in your vehicle, the airplanes you fly on. In many cases, like your uh great looking.

Ted Stank 5:00

I had a one-up Ted. This morning Lance was out on the side of the highway picking up trash, but now he's now he's here with the Statute of Limitations is done on that.

Tom Johnson 5:08

It's just I finished that last week. There are certain applications in things like food and beverage, whether that's your chapstick or uh coatings on fruits. It isn't everything you we utilize in the economy. So in general, the industry is thought of as as being more of a fuel uh component, and that's a that's obviously a big piece of it, but you really have to think about it in a broad sense of how it's utilized. I know we've got some folks here from automotive and supply in that industry. You think about the the tire industry and the petrochemical industry heavily reliant on oil and gas.

Petroleum In Everyday Products

Ted Stank 5:41

How many of you here have watched this TV show Landman? You know, I I know it's a Hollywood production and you know it's it's Hollywoodized. But I asked Tom when we were prepping for this, there's one episode where Billy Bob Thornton's character goes off on, you know, everybody's talking about alternative energy that and and that would be wonderful if we could just turn it off and go to alternative energy. But how many different things that petroleum is in that to your point, it's not just fuel, it's in everything that we do, everything that we use, and it's just not feasible to think that that it's gonna go away anytime soon.

Tom Johnson 6:16

That little rant and landman made its way around the industry pretty quickly, as you can imagine. There's a lot of truth in that, obviously. I mean, you can talk about how renewables evolve. We tend to be a believer that there's an all of the above type option, yeah, and consumers will decide. Ultimately, any sort of transition that occurs likely goes slower than what has been predicted.

Ted Stank 6:41

Yeah. Yeah. Interesting though. It's you know, it was an interesting juxtaposition for me who didn't have a lot of familiarity into the industry.

Lance Saunders 6:48

I thought you were about to compare yourself to Billy Bob Thornton, so I'm just glad that in the No, I was gonna compare Tom to Billy Bob Thornton.

Retail Brands And Regional Markets

Ted Stank 6:55

So with that kind of placemat of where the supply chain is for oil and gas and energy and where HF Sinclair plays a role. Talk a little bit about the value you play. Do we have anybody from pilot here? Usually we do. There's our pilot folks, right? So I think when people like consumers like Lance and I think about oil and gas, we think about, well, yeah, I'm gonna stop at pilot and get some gas. Where are they in your supply chain and how does their world differ from yours?

Tom Johnson 7:21

So things have evolved since we purchased the uh the Sinclair organization. Uh, Sinclair is a retail brand out in the Western U.S. Many people may have seen our green dinosaur. And so it gives us a marketing uh presence. Pilot and how it relates to us. So pilot's actually a fairly large customer. So when you think about going to a pilot station, in in some cases, you may be purchasing fuel that we refine through one of our facilities. It just depends on where you are in the country. So in some ways, we can compete with pilot in other parts of the country with the brand, but in many cases they're a wholesale customer where we sell them product.

Ted Stank 7:56

You had told me as we prepared for this that your footprint, at least from a retail standpoint, is primarily uh mid-continent, the Rockies and West Coast. What makes the markets different? What are some of the challenges you have in different?

Tom Johnson 8:07

Um Yeah, so we do not really have a presence east of the Mississippi River. Our assets sit in Oklahoma, Kansas, New Mexico, and then in the Rockies region, so Utah, Wyoming, and then in the Pacific Northwest. The industry, in terms of how it sits today, can really be broken up in a couple of areas. Do you have assets on water or do you have assets inland? And when you think about all the challenges in the world today and you hear about different prices and how all that works, in some cases, if you have an asset on the water, you can put product on a boat and ship it somewhere else in the world and sell it. Or if you happen to have a refinery in, say, Salt Lake City, you have a very limited region in which you can ship that product and still make margins. So you end up with very unique market situations, again, dependent upon supply and demand. But one thing I will tell you is that post-COVID, as we've seen populations move around in the U.S., we happen to be located in markets like Salt Lake City, Phoenix, Denver. And we've seen some pretty significant population changes that have actually driven margin in a good way. And so for us, it's it's investing in those assets. We can pick on California a little bit. And, you know, obviously a number of closures in the industry, and that's moving the supply chain around in terms of whether they're importing product or there are pipelines that are going to be built and product continuing to move west. So it's a it's a pretty dynamic change in the industry that's occurred, you could really say, in the last five to six years.

Ted Stank 9:44

Interesting.

Inland Versus Waterborne Refineries

Lance Saunders 9:44

And logistically, what are some of the differences you've seen and how your networks had to just adapt to that?

Regulation And Safety In Procurement

Tom Johnson 9:52

Well, we had to make decisions on whether we wanted to invest in pipelines. Refineries go for sale all the time. We look at is this an asset that would make sense to fit our portfolio? What's the market look like? What's crude availability look like? So those are some of the challenges that we see from an organizational perspective and from a growth side. You talk a lot about refineries not being built in the last 30, 40 years. Many of those that that exist today are expanded. The grassroots process of permitting and building a refinery could be five to ten years. And you can imagine the political cycles that go on with that. And so just a lot of challenge with how that would how regulatory-wise, you get a lot of not in my backyard issues with refineries. Well, so we are a very heavily regulated industry. I'm sure the pilot folks can can attest to that. Everything from we're mandated to blend in renewable fuels into the product that we sell. That's an ethanol, a big prop to the ethanol industry in the United States. But if you think about it, I mean, we produce a hazardous product. So there's a whole lot in terms of just the health safety and environment side of things that we have to maintain a high standard. And that translates all the way through to what my folks do in the procurement organization, whether it's qualifying suppliers and having folks that can come into our fence and work and not get hurt and not create an issue for our neighbors, right?

Geopolitics Demand And Supply Risk

Lance Saunders 11:19

Yeah. So, you know, I think that gives a very good level set for what you guys are having to manage. But I'm sure that's changing daily right now. So maybe we can talk about maybe some of the big macro pressures and market dynamics that are starting to shape your industry. Like how are you guys managing what's going on in the world right now?

Tom Johnson 11:40

Yeah, so I'll talk about it from a company perspective, then I'll give you my perspective from the procurement space. HF Sinclair is predominantly an inland refiner. We only have one asset on water. So for us, obviously we have to purchase crude. Crude prices have moved up quite substantially. Refiners make money on economic activity, not on the price of crude. So for us, and again, this is what differentiates us, say, from an Exxon, it's important that you guys buy fuel for your car and you buy airline tickets and you take your vacations. And those are the sorts of things that drive the refining margin. So as you see crude prices go up, and we very closely watch demand and see how that plays. Obviously, not having a number of waterborne assets, our markets stay pretty static. Um, you can talk about what folks are having to pay in Asia and Europe and the situation with Jeff.

Ted Stank 12:36

Do you export any?

Tom Johnson 12:37

We do export some. We have a refinery in the Puget Sound area in in Washington, and we we can sell products. Basically, we'll look at margins in the world and where we may be able to ship. From a procurement perspective, my group's responsible for a number of surety of supply issues with our sites. If you think about the Strait of Hormuz closure, a number of petrochemical type building blocks come through that strait. Helium turned out to be a big issue, which we're not a big consumer there, but that was one of a number of issues that popped up that surprised us. So for us, it's what could end up being a pretty good business environment for the year. It's concern about do we have what we need to run our plants?

Ted Stank 13:20

Yeah, so you get pushed on both sides then. What do you need to run the plants? And then on the other side, what's happening with the economy and how all this geopolitical stuff affects the economy. See, so far we've been relatively robust. I mean, to the last few years, all these predictions about the economy is going to go into recession, and I we just all keep spending. I guess we're getting used to craziness, you know.

US Exports Imports And Crude Types

Lance Saunders 13:42

Expand a little bit. I think you know, we hear a lot in the news about that we're a net exporter of crude. But I I was surprised, you know, when you read about all this that we actually do import actually a lot. And then you have the fracking that was a game changer in terms of being a net exporter. Can you kind of talk about the market dynamics of that?

Tom Johnson 14:05

Yep. So if you dial back 20 years ago or so, here we were take, fracking and shale crude changed the game in the United States. And I think it was the Obama administration. It was technically illegal for the United States to export crude. And so a law changed. And the bottom line is we are an exporter of crude to the world. We do not consume as much as what we produce. It's a good place to be, right?

Ted Stank 14:31

Certainly is.

Tom Johnson 14:32

Um so that's one element. If you look at the refining infrastructure in the United States, again, many of those assets are 20 plus years old. They have engineered equipment that effectively is built to operate on certain crude diets. And if you think about crude in terms of just the different specs that are out there, you have light sweet and you have heavy sour. And so it's a it's a gravity and sulfur element. Well, if you pick a certain refinery in the United States, it may be required to operate on some heavy sour crude. And the U.S. traditionally has not been a producer of that. So you are purchasing that crude, say, from Canada or from Venezuela or Mexico, for instance. And so this whole dichotomy of exporting but also importing is a little bit of matchmaking in terms of the assets that that sit in the U.S.

Ted Stank 15:27

And is the final product that comes out of it? I know we're getting into kind of petrochemical stuff here, but is the final product that comes out of those different barrels of crude different?

Tom Johnson 15:36

It can be. So if you think about heavy crude for a moment, you can have equipment that'll allow you to process out a lot of the heavy, and you'll make effectively what is coke, and it's it's like a coal type product. If you don't have that, you can produce asphalt. So asphalt is actually a byproduct of refining. And it's a market that we uh sell into. We actually have multiple asphalt terminals and deal with DOTs and so funny that this is such a common product for us all.

Ted Stank 16:05

I mean, it runs everything, and yet most of us are ignorant about it.

Asphalt Lubricants And Specialty Chemicals

Tom Johnson 16:08

But to your point, the gasoline and diesel and jet fuel is the same. It's a question of do you get a little more of one or the other, depending on how your plant's set up and what you use as anything?

Ted Stank 16:18

Yeah, so there are focus factories essentially. Those of us in manufacturing, right? You can't make every product in every factory.

Lance Saunders 16:24

Yep. Okay, you guys even make like a lot of lubricants, right?

Tom Johnson 16:27

Yeah, so we have a specialty lubricants business. You can think about it more like a consumer uh non-discretionary space. So if you if you think about the days of COVID when everyone was locked in their basement and no one was driving, uh, well, you were still buying toothpaste and chapstick and all of the things that fit into what I'd say is more of a specialty chemical business. So if you think of someone like Eastman, for instance, it has more of a niche there. And those products stay pretty stable. So everything from greases to motor oils, again, food and pharma applications. So it's a it's a really unique business for us internal to the organization that has a totally different customer base.

How HF Sinclair Runs Procurement

Ted Stank 17:09

This is why Tom could do the Billy Bob Thornton role, I think. Hey, by the way, there's also that barcode up there for you all to enter questions in Slido. Love to get some questions from you all. So please engage with us. Before we go to those, Tom, let's go a little bit to actually managing what you manage within HF Sinclair and procurement. What is procurement like? What kind of skill sets do those folks have to have?

Tom Johnson 17:34

Yeah, so I manage an organization of around 100 folks, and I have a pretty diverse team. We manage about $2 billion in spend for the company. The company's about $20 billion that moves around based on the price of crude, obviously. But I have folks that are co-located at refinery sites that interact with maintenance and operations folks on a daily basis. I have a category management organization that helps leverage that $2 billion in spend. And we have a what I'd call a burgeoning data analytics team within our procurement function that has turned out to be kind of the secret sauce of helping our operations team make better business decisions. We originally created that to help us with our category management. And the unintended consequence was it gave us a bigger seat at the table with operations decisions because the ops leaders that I interact with had multiple conversations about wow, your folks really understand where we spend our money. And yeah, you may not be a chemical engineer, but you know what levers we can pull and the things that that we could potentially take in terms of business decisions to optimize. So that turned out to be a real benefit over the last couple of years.

Lance Saunders 18:46

You guys figured out that every customer, every product is not the same cost and stuff like that.

Tom Johnson 18:52

Well, and so we'll I know we were going to talk about this, but um the largest component of our spin that we manage is actually labor. So if you think about plant operations, for us, you know, there's core business things that we do running the plant. But if you think about maintenance and certain other operations, we feel like we're better uh utilizing third parties for those.

Ted Stank 19:14

Okay.

Talent Skills AI And Reading The Room

Lance Saunders 19:14

Let me give you a plug too. As you know, we have a lot of students sitting way back in the back. And it's amazing, even the last year, how much, you know, just AI has changed. And so I think where the winners and losers are going to be in terms of you know who's successful moving forward are those that learn to problem solve and can actually think and understand the business. Can you maybe expand a little bit on what you're seeing on the other side in terms of those students coming in and what skill sets they need to have?

Tom Johnson 19:44

Well, so um I will tell you that most of the students that come out with supply chain degrees are prepared from a curriculum perspective. So we see that as a as a known quantity. The real differentiator are those who can fit within an organization. And so I think culture is a big part. We've talked about that uh today, obviously. The term I use with my team a lot is being able to read the room. If you're sitting in a room with a group of ops stakeholders, can you read the room?

Lance Saunders 20:14

My wife would say I shouldn't be able to work at H F Sinclair then.

Tom Johnson 20:18

So reading the room is a big deal.

Ted Stank 20:20

Yeah, situational awareness.

Tom Johnson 20:22

Situational awareness. Look, I think the way that the world is evolving with the use of data and manipulating data and now how we pull in AI, what we've seen is the students who can come in and help us optimize how we've historically made business decisions. Look at our work process and a 15-step process that took two or three days. Can we do that now in hours, or can we cut five or six steps out of that? And so I think what a lot of what we see in terms of early talent are set of new eyes in terms of um, well, did you think about doing this differently or injecting this technology? So that's what we've seen. Many of those folks turn out to be leaders within the first few years, depending on how well they told me you have a 25-year-old running your data analytics group. Yeah, so we've brought in a number of folks from intern and rotational roles, and those folks are becoming junior leaders in the org today. That's awesome. Um some of that has to do with, again, the core competency of understanding data, but how to communicate it and and interact with folks. That's a skill set that some of us Gen Xers don't have, right?

Ted Stank 21:34

Talking to a boomer here.

Lance Saunders 21:35

Well, I I make sure to say it all the time. Whenever uh Ted's asked the question, I'm like, okay, boomer.

COVID Changed Procurement’s Role

Ted Stank 21:41

So that's an interesting question. So how do you integrate the kind of skill sets that new hires are coming out with with your existing workforce? And how do you kind of re-educate them with the skills they need to succeed in this environment?

Tom Johnson 21:54

I mean, in in many cases, the new grads need ops experience. So we're real big about. Trying to co-locate them at plants or give them projects where they can work with plants. We are very clear that we don't make money in corporate, we make money in operations. So that's an important aspect.

Ted Stank 22:11

Yeah.

Tom Johnson 22:11

I would tell you that getting those groups to work together. So if I if I think about data analytics in a corporate role and an ops procurement person at a site, I think we found a good way to get those folks to work together in terms of, well, here are my problems of the day, and here's how you can solve those using data or tools, right?

Ted Stank 22:30

You are midstream in this, but a long time ago I worked with an oil gas exploration company, Kerma Ghee. And we used to have them come in for one week um supply chain leadership end-to-end. And these were all chemical engineers from Texas AM and Oklahoma State and everything. And they're like, this is all BS, this supply chain stuff. Our business is, you know, 10% of the holes that we drill are productive. If we could get that to 20%, our business goes crazy. And we had to talk to them about well, what is your spend on things like drilling materials on your drilling rigs and stuff? And turned out it was like billions of dollars. So what if you could cut $500 million from that kind of stuff? So you probably have a lot of those kinds of conversations, right?

Tom Johnson 23:15

I I would tell you the things changed during COVID. And I think we all can appreciate as supply chain practitioners, folks started to figure out what supply chain was able to do and bring results for your business when you were challenged, right? In our case, when we think of downtime in the industry and being cyclical, supply chain folks get phone calls. How can I optimize? How can I cut $20 million, $30 million? And so having a team that understands business operations, again, not necessarily engineers, but can work well with engineers and help them understand well, here are three opportunities that you can look at. Would you do this differently? And if so, here's the potential reward to do it. So being quasi-internal consultants, but knowing that you are a customer support function and not the customer.

Lance Saunders 24:06

Right. Interesting.

Tom Johnson 24:08

Should we get a question, Ted?

Tariffs Should Costing And Tier Two Risk

Lance Saunders 24:09

Yeah, yeah. Let's do one more question on this. I've always wanted to do this. So I mean this is not a very relevant question, I'm sure, because tariffs haven't affected your business at all. Oh okay, they have. So how have you dealt with that? What are some of the best practices that you know that you've developed as you've gone through this? And what are some of the decisions you're glad you made? And then looking back, what are maybe some of those decisions you've had to kind of evolve the way you looked at it?

Ted Stank 24:34

And by the way, Tom has brought us a few barrels of crude about that.

Tom Johnson 24:37

So for answering that question, I don't have a swag, so I can uh No, look, the tariff situation for us was a concern from a surety supply standpoint. However, being in procurement, the big what I would tell you in terms of best practice for us was should costing. So when you start thinking about, well, what's this tariff really mean? Were folks using it to take advantage? Uh I'm not going to say that doesn't happen with fuel surcharges, but I think we could kind of think about it in terms of like a fuel surcharge and trying to understand the math of that. In some cases, tariffs changed industries. So if you just think about metals and say steel pipe, for instance, it changed the game in terms of what markets you might utilize versus those you didn't. For us, if we had projects on the books that we were going to execute, was there an immediate risk for us, or are we really thinking about risk two or three years down the road? So I feel like we did that very well. I would tell you an area that I think we could probably do better is that secondary supply chain. So it's one thing to say, I know what the issues are with my suppliers, but I don't have good visibility to my suppliers' suppliers. And how well have they done their homework versus you getting the phone call that, hey, you're not going to get this when you think you are because about your suppliers, suppliers, suppliers. That's another issue, right? That's an area that I would say I don't feel like we've solved that problem as well from even the COVID days. Yeah. Uh we're better at it, but it's just not easy, right?

Ted Stank 26:15

Well that plays into the visibility issue Jennifer was talking about earlier, right?

Lance Saunders 26:18

Let's ask a question from one. When we were teaching together, one of our favorite former students, Anonymous, just asked. Looking macro in the last, you know, six years. Obviously, you guys have gone through many, many what you almost call black swan events. I don't know if they're even black swan anymore since you made the point they happen every two years. But what's some of your biggest wins um over these past few years?

Tom Johnson 26:40

Um I would say wins. So being a procurement person who's done this for decades, we used to pride ourselves on single sources of supply and negotiating best deals. And I think we realized during COVID and the Ukraine war and now this Gulf War. So so that every two-year black swan that we seem to be having now.

Lance Saunders 27:02

So it's kind of a grayish swan. Yeah.

Tom Johnson 27:04

Yeah. Surety of supply means having backup options or knowing how you're going to pivot. So I would tell you that's an area that I feel like we've done a really good job. If you think about COVID for a minute, we went from having to find places to store gasoline to the opening party, and then now everyone wants to travel, and I can't make enough, and I need to get as much this and that to support a plant. And so it flipped so quickly that it really, really forced us to think big picture in terms of just that surety supply side of the state. So do you feel like you have a seat at the table now more than you used to? Absolutely, absolutely. And sometimes that seat at the table, sometimes you wish you didn't, right? I mean, and what I mean by that is now in many cases you get the 3 a.m. phone calls that you didn't get before, or you get the the really tough question that you can't answer. You've got to go do research and you've got to go figure out what's the best way to solve this, and how do I do that in a in an environment to where I don't bring risk to the organization.

Ted Stank 28:11

And I would imagine this is where your analytics team comes in. Absolutely.

Tom Johnson 28:15

Absolutely. And you think about that on a just a daily news cycle, a supplier research side of things. We are much better now at being able to predict what our historical demand looked like. And so we can go back and look, say, the last five years at demand for labor, demand for certain materials in those swings that we've seen. So I feel like we're way better today at communicating with a supplier. Hey, I might need this catalyst or I might need this chemical to operate a plant versus um, I think I need this. And let's talk about that labor issue.

Skilled Trades Shortage And New Pipelines

Ted Stank 28:51

Huge issue for all of us that have operations in the U. Well, really any industrialized country in the world. The world is shrinking. For the first time in human history, by the way, by the midpoint of this century, population is going to start going down. How do we deal with that? That's not something ever in human history that we've had to consider. It's starting to hit us already, certainly with labor, and it's obviously a big political issue and everything. How do you manage that, Tom? What's happening in skilled trades, for example? Just give you an example. I have not to scare students. A friend of mine has a child in who's majoring in computer science here at the University of Tennessee. Two years ago, way more jobs than there were available students to fill that. Now this kid can't get a job. And somebody recommended to them that you should go out and get a skilled trade.

Tom Johnson 29:41

So I know we've got a number of folks in the room that rely on trades, and it is a very, very challenging situation for us in the United States. If you think about how high schools in many cases have moved away from vocational programs and become more of prep schools for university, right? And not everyone's going to follow that path. So I'm not here to talk about one versus the other in terms of uh good or bad. What I would tell you is we struggle with finding qualified trades to come in and execute work. And what I mean by that are folks like welders, boilermakers, pipe fitters, general laborers, so folks that build scaffolding, folks that do hydroblasting, folks that dig ditches. Those are trades that in many cases we have had to develop relationships with contractors, make commitments in many cases, months or years out to ensure that we can get the most qualified people to do the work. I will tell you that I feel positive directionally where we're going as a country because in many cases the contractors that I'm talking about have realized that they have a problem too. And they are starting to build their own trade programs. What's interesting is if you think about do I go back and build vocational programs in high school, what they're finding is that they have to start those conversations in the sixth and seventh and eighth grade. Because by the time they're in high school, they have their mind made up that they're going one direction or the other. But if if I just pick on Texas, for instance, there are certain contractors in the Corpus Christi area who have built their own trade, essentially trade schools. They go into these middle schools and high schools and they find the students that they feel like will fit in those roles. So if you think about that for a minute, you have 18, 19, 20-year-old welders, boilermakers, pipe fitters that in many cases can make six figures within the first five years of exiting that program. And their debt situation is very different in many cases than what a university student would look like, right?

Ted Stank 31:51

Yeah. We're in the middle of a tremendous transformation, I think. Uh, you know, and you read all kinds of stuff about AI and the fear of AI, I think the truth lies somewhere in the middle. But maybe I'm an optimist. But if you look at jump the curb technologies historically, we always come out of it with a massive increase in productivity and growth and wealth. But there's a time period where there's some real pain in the transformation. There's not a lot of buggy whip manufacturers around today, right? And there was a bunch about in 1900. And so those folks had to find new things to do to create wealth. And I think we're gonna head into that period in the next 10 years. I'm glad that I'm a boomer, Lance, because someday somebody might be able to have Claude teach for you.

Lance Saunders 32:34

So I know we're about to close up, but you know, I want to talk about how much of a full circle moment this probably is for Tom if you think about it. Because, you know, undergrad here, and he was definitely up at 3 a.m. then, and now he's up at 3 a.m. for a different answer. Before it was a Lap in library, and now it's uh You think?

Ted Stank 32:52

I bet you were up at 3 a.m. for some other reason.

Lance Saunders 32:54

The days have changed. Yeah. See, Ted was not an undergrad here, so he doesn't know the Lap and library where a bar on campus is a very good thing. Oh, is that right?

Ted Stank 33:02

Okay. So no, I wasn't. No. Steve and I were studying hard at the Naval Academies.

Lance Saunders 33:06

So thanks, Tom, for uh being here with us. So no question.

Ted Stank 33:09

Lance, we have 20 minutes left.

Lance Saunders 33:11

Oh. I thought we had 35. Oh well, never mind. Fill in, fill in, Lance is messing up our timing here. Ask another question then, Ted. Okay.

Venezuela Rare Earths And Critical Inputs

Ted Stank 33:23

Uh here's an interesting one. Given your inland footprint, that this is interesting too, and we were mentioned it before. How do you balance investment in pipeline with flexibility? Like I would imagine that what doesn't go pipeline goes truck or rail. Do you use some rail too?

Tom Johnson 33:38

Truck and rail are very expensive modes for us. Okay. We we can do that short haul. We don't like to do it long haul. So pipeline is the cheapest and safest form of transportation for petroleum products, but it's expensive to build. And we talked about regulatory and how all that works. Most folks don't love pipelines in their backyard for whatever reason. Right. So there's a challenge to obviously get those, you know, in many cases permitted. You know, I think I think for us, as the population started to move around, we look at pipelines as an enabler. So an example might be if we have assets in the Rocky Mountains and we have petroleum product that could perhaps serve the markets in the Western U.S., a la California, we might look at an application of building a pipeline and serving that market. Think about it as a long-term capital investment. There are pipelines in the ground that have been uh you know 50 plus years operating. Uh, there are two that go through Knoxville, so most of your fuel here comes up on one of two pipelines.

Ted Stank 34:42

Which is one of the reasons why we always got hacked a couple of days and they did. Which is one of the reasons why we have advantageous pricing right here. You drive around, Knoxville usually has really good prices. Once again, with supply chains, we often realize how it impacts our lives when it breaks. And when Lance is talking about that, I I remember having a challenge driving from North Carolina to Tennessee, being able to get fuel because that continent was colonial pipeline.

Tom Johnson 35:08

Yeah. The closest refinery to Knoxville is actually, and of all places, Tuscaloosa, Alabama. Is that why our gas sucks? Well, that's you can you can uh you can draw your own conclusions there. But um anyway, the point is the refining complex for the eastern U.S. sits on the Gulf Coast. So without pipelines, you guys would struggle in this part of the country, the Carolinas up through the uh Virginia areas uh without pipelines.

Ted Stank 35:35

And my place in North Carolina is on the coast, so I mean really far away from the yeah. Yeah, it was kind of crazy. I I was driving, it's about a 540-mile drive from where I have a place on the North Carolina coast to Knoxville. And I had to get back. I had commitments here. And I literally was, I didn't care about price. Wherever I saw gas and I was getting like boat fuel and stuff, whatever I could get to make sure I could get here. And it's one of those things we take for granted until there's a disruption, which I think is the reason why, you know, if you're on Saturday night with your neighbors and they find out that you're in supply chain, they start asking you all questions about what do you think is going to happen, you know, with this Iran situation and you know, in Venezuela. So, Tom, how does Venezuela play into this?

Tom Johnson 36:20

So you could argue that the Venezuelan situation happened at the perfect time, because if if you think about the crude, I bet Nicolas Maduro does not agree. He probably doesn't, yeah. Um now, obviously, there's some long cycle investment that needs to go into Venezuela. I mean, arguably, they were probably one of the more sophisticated operators in the world prior to some five years. Yeah, 25 years ago. There is investment in there now. I believe Chevron's in there, and there's some others that are that are investing, but that crude is desperately needed in the world market today, no doubt. And so the Venezuelans produce a heavy crude that again fits some of those assets we talked about earlier. So yeah, it's it's very opportunistic for them as a country. I think we have to see how they handle that, right?

Ted Stank 37:05

Yeah. How much do you and your team have to pay attention to geopolitics? You know, if they paid more, I'd have been a history professor because I love history, but they don't pay enough. So it became a supply chain.

Tom Johnson 37:16

Yeah, I'll give you an example. So 20 years ago, there was a spat in the world about rare earths. And for folks who know what rare earths are, they're another product that are in a little bit of everything that folks think about. So your iPhones all the way to, in our case, it is a product that goes into catalyst. And catalyst is a product that we must have to be able to crack the molecules of the crude to make the products. Well, the Chinese have a very, very large manufacturing uh capability in rare earths. It's a rather uh dirty mining process that, again, many folks probably don't want in their backyard. So the U.S. is an importer. The Chinese put on export constraints and it created all sorts of havoc in the catalyst supply chain for us. And so it really forced the industry to look worldwide. And, you know, again, a situation where you can make money selling your product, but can you find what you need? Uh so that's just an example. If if we think about the straight today, I think for us, I worry about the building blocks that go into chemicals that we use. Yeah, obviously there's an opportunity in terms of selling finished products, but if I think about the chemicals and gases and the things that we need to run our plants, that's what has me a little worried.

Ted Stank 38:36

Well, you mentioned helium.

Tom Johnson 38:37

Helium's one. We don't really use it as much. I think if you're a chip manufacturer, you're probably really worried about that. The longer this goes on, if you if you think about the industries that produce and ship out of the strait, those are not areas in which you can go build that infrastructure elsewhere in months. It's years in many cases. So it's challenging. And I think you know, the big question, I was talking to a couple of faculty yesterday, how long does it go on? And that's been the question of the last, what, six plus weeks. But even if it stopped today, there's significant damage to even if it stops today, you have to think about things like a cargo of, say, jet fuel weeks to ship that to Western Europe. And so, yeah, I mean, you can't speed that up, right? If they have a hole in their ship, then it's even slower, right? Yes, yeah. I I think the whole economics of getting shot at or something that obviously the some of the transportation folks have to wrestle with, right? Versus just insurance and whatever else, right?

Contracting Lessons And Procurement Metrics

Lance Saunders 39:36

And that leads to one of the questions this anonymous student is really good, Ted. Um but they said, you know, with everything that's gone on, you had to make a lot of decisions, you know, and supply chain inherently is about making decisions under uncertainty, you know, with less than full information. And what's a decision to you that looked right on paper but didn't play out as you expected? And what'd you learn from that?

Tom Johnson 39:59

Oh, I think sometimes in in the world of procurement, if we think about tying certain agreements to say commodity pricing, that sometimes isn't the best idea, or tying it to say, a government index versus looking a little bit more holistically. You know, sometimes those are very lagging indicators and you don't get a good perspective.

Ted Stank 40:20

Do you have to generally lock those in long-term as well, or no? I think it's a good idea. It depends on what it is.

Tom Johnson 40:24

Yeah, I mean, we we try to make as many of our critical supply relationships strategic. Again, I go back to COVID because COVID changed things in terms of what was happening in the world. What was strategic and what was transactional. That forced us to really think about some things that maybe we'd considered transactional, that all of a sudden I have an ops. I have an ops VP that wants to meet an owner of one of these companies, and that level of attention wasn't there 10 years ago.

Ted Stank 40:52

Yeah. Interesting.

Tom Johnson 40:53

Very interesting.

Ted Stank 40:54

You know, I cut my teeth in supply chain coming out of the logistics world, but I think that strategically the procurement role has really emerged as in this world of geopolitical uncertainty and and natural disaster uncertainty, et cetera. I think the procurement function has really emerged as critical to how we manage our firms strategically.

Lance Saunders 41:17

Have you seen just a shift from the highest levels down on the metrics that they've used to evaluate your organization?

Tom Johnson 41:24

Yeah, so and and you can get into the argument here on where should procurement reports? Do they report into ops or do they report into finance? Yeah. I happen to report into the finance organization, but I spend 80 plus percent of my time with the ops organization. So it's a little bit of a your metrics sit here, but your customers are really here. We measure ourselves in the value we deliver for the business. And so you can think about that in terms of true PL impact. What did you save the company in terms of money? And then you get into some softer things of where have you gotten the company out of trouble? And what I mean by that are what we'd call cost avoidance type situations. And hey, someone made a bad deal or I have a risk here. And I would tell you that we really look at ourselves like internal consultants. We try to measure ourselves on a transparent basis. I have a chart that I show our leaders on our ROI. So I take our full cost within the organization, and then we look at the drivers and metrics in terms of what we deliver and put it on the board and talk about it every every six months.

Ted Stank 42:33

Does working capital cost play into your PL?

Tom Johnson 42:36

So I have a working capital element, as you can probably imagine, with $2 billion in spend and things like payment terms. I didn't mention earlier, but my teams are responsible for managing about $250 million in plant inventory. So think about spare parts and those sorts of things. And so I get a little bit of a nudge from the controller and the CFO about what's on the balance sheet there. And it's a balancing act of tying up those dollars versus reducing risk for the refinery operations. That's a tug of war that will always go on.

Ted Stank 43:10

And it's forever been a challenge. How do you tie cost avoidance from risk with the working capital that you're carrying?

Crack Spreads Explained Simply

Lance Saunders 43:15

I just want to see if this one question is a real question. You can do this briefly is can you comment on your crack spread and how that's okay? That is a real question.

Tom Johnson 43:24

So I'm curious in the room, does how many people know what a crack spread is? I'm guessing what it is. The pilot folks better know. So the crack spread is the margin that refiners make. So if we think about for a minute, we talked about crude oil earlier, and then we talked about the products that we sell. That delta is called the crack spread. And so the reason it's called crack spread is you you take that crude and you crack the molecule, right? That's the terminology. It is directly tied to economic activity. So we didn't really talk about it earlier, but refiners love cracking activities. Crude prices in this sweet spot. Yeah, yeah. And the pilot folks are the same way, right? I mean, you don't want really expensive crude and you don't want really cheap crude. What you want is if we pick on the room for a minute, we want everyone to fill up. We want folks to take their vacations. We want them to buy their airline tickets. You want to fill up ships. Economic activity is a huge driver for refining. So that crack spread moves around on seasonality. It moves around on geopolitical issues. It can be very regional. And again, some of that comes back to assets on water versus assets inland. So yeah, that's how we make our money.

Ted Stank 44:38

You know, one thing that Hey, Lance, do you see those numbers there? Yeah.

Misconceptions Sustainability And EV Demand

Lance Saunders 44:41

That's the amount of time we have to do it. Thank you. Thank you very much. So seven. Okay, thanks. Um I'm never gonna live that down, am I? Yeah. I mean, I want to get out to the bar. At 9 30? Yeah. 7 30? I have to be on stage later. A couple good bourbons, as you know, helps. Um so I think you know, you're in an industry that probably is also misunderstood. You know, you're trying to recruit new hires from University of Tennessee and other programs. So what are some of the best, biggest like misconceptions you think about the oil and gas industry?

Tom Johnson 45:17

I don't know that the industry's done a good job of promoting itself and explaining what we do. I think we've gotten better at that over time, obviously with the help of things like Landman. I guess. I was just thinking, I mean, I joke about it. We say that. I spoke to a class here last year, I think, and I asked the folks who's watched Landman, and more than half of them raised their hands. So, well, they understand something about the industry. Um I think the opportunity for new grads to come in, it is a great place to learn about manufacturing. It's a dynamic industry. It supports the lifeblood of the economy, right? Um so in many cases, you're contributing to a core part of what we do on a macro basis in the country, right? For the students that come into our organization, we're of a size that we're large enough to be in a good financial spot, but we're also small enough that they get to interact with our senior leaders. So the opportunity to come in and you know be a part of a rotational program or uh an intern program, in many cases, you know, they get to work on projects and interact with those leaders and learn to be a leader themselves. I tell my procurement team all the time, and they experience this, is no two days are the same. Uh, you you can think you're gonna come in on a Wednesday and do this, and then the phone rings and you're off to go do this.

Ted Stank 46:41

Some people love that, some people don't, right? How do you answer, and I think I know how you're gonna answer this, but how do you answer a question? You know, Gen Zers are notorious for being really into sustainability and things like that. How do you answer, well, I don't want to come to work for your industry because you're killing the world, you know?

Tom Johnson 46:58

That's an opportunity to come contribute. And honestly, let's think about that for a minute. So is it's an industry that processes carbon, let's be honest. That's what we do. It's core to the economy. In many cases, refineries are very, very efficient. They're obviously highly regulated, but they're also very efficient. But there is opportunity to come in and help us build a more sustainable supply chain. And, you know, we found opportunities for folks to come in and do that. Uh, and I think they've been very surprised that this wasn't what I thought it was going to be.

Ted Stank 47:31

And I reflect back again to that Billy Bob Rant about, you know, it would be wonderful. I mean, I can think that's how we started. It'd be wonderful if we could shut this all down right now. But in terms of what the world needs, that's just not going to happen. And so let's be better at it.

Tom Johnson 47:46

Yeah. I mean, there are things that we look at all the time in terms of reducing emissions, reducing our footprint of what we can ultimately recycle or how we can optimize our plants. And some of that obviously gets into very nerdy chemical processing operations, but then there's other elements of, hey, I can do this different in the procurement side of things, and it impacts the supply chain in this regard. So those are out there, and I think those folks have found those to be pretty fulfilling opportunities. Yeah. Grid.

Lance Saunders 48:15

Have you noticed that we act like you are just going to turn off the switch, but uh and we all know it's not gonna happen, but have you noticed that the EVs, how are they impacted?

Tom Johnson 48:24

Um Yeah, they there's no doubt they've impacted fuel demand. Obviously, it depends on the part of the country, that sort of thing. If you start thinking about the electric grid and the sheer level of infrastructure required for it, again, we can talk about what does a transition look like, how long does it take? My comment would be it it's a longer cycle change than I think what folks are specialty chemicals, there's lubricants and everything else. Well, that that's the thing, right? So the student that comes in today to oil and gas, oil and gas might look different in 30 years. And so let's say, for instance, that gasoline demand looks different. Well, you still have a challenge of how do you fuel an airplane, how do you fuel a ship. And so those types of things, the alternatives are not there, or they're gonna be much further behind and laggards of to where you know my belief is this generation will see some different things, but I don't believe the industry will will not exist, say it that way. Trevor Burrus, Jr.

Lance Saunders 49:30

Ted, you've always said, you know, we're actually entering kind of the golden age of supply chain. These students going out there are gonna have the potential to you know oversee these huge changes, not just in oil and gas, but in across industries.

Closing Thoughts And Listener Callouts

Ted Stank 49:42

Yeah, I mean, I think that if those of us who have been working in this field for a long time, I always say that prior to 2020, you'd say you were in supply chain management, and they'd look at you kind of blank-faced. And that doesn't happen today. You say you're in supply chain management today, even casual people you meet on the street, they at least know what happens when it screws up. They may not know exactly what it is that we do, but they at least know what happened. I was at a neighborhood party on Saturday night, and people were asking me, what do you think is going to happen with Iran? And you know, what's gonna be the impact at the gas pumps and everything? And, you know, with a couple of drinks and you can wax very poetic about a lot of things. And so I think you're right, it's a great time to be in it. I think the the skilled labor issue is something that we all have to kind of think about um as we enter this field. It would be interesting to see students in certain areas today if they do say, you know what, I'm gonna go out and get myself a trade because I can make six figures, you know, in a few years. Tom, thank you so much. Group, thank you for the great questions. Um I always love doing this live. I wish we could always do it live.

Lance Saunders 50:49

And now we are supposed to, you know, plug that November 10th through 12th, never too early to plan, is our next forum. Make sure to subscribe and follow the podcast. Um, and email us at gscii at utk.edu.

Intro & Outro 51:05

Thanks for listening to Tennessee on supply chain management. Be sure to subscribe on your favorite podcast platform for more conversations with the leaders of framing the path for practitioners, scholars, and students. Have a question or idea? We'd love to hear from you at gsci at utk.edu. Until next time, listeners.