In our first post on the this topic, we highlighted the implications of the $62-billion U.S. government program to incentivize utilities to embrace best practices for streamlining procurement processes and implementing next-generation technologies.
Since then, a series of geopolitical factors, both intended and unintended, have set in motion a global energy ecosystem crisis, impacting economic and security-related decisions for governments and companies alike. It has pushed up energy prices significantly, and subsequently supply chain costs and product prices, for consumers and businesses around the world.
Despite these uncertainties, utility companies must continue to provide seamless and consistent services to their customers. Decisions still must be taken about which projects to focus on. In this environment, the role of procurement becomes even more critical, as companies struggle to manage key supplier relationships, and plan for some level of business stability in an extremely volatile ecosystem.
Procurement organizations within large electric utilities often encounter the following obstacles:
For the utilities to materially improve, they should first benchmark their performance against other companies. This high-level exercise provides a starting point. Many relevant industry key performance indicators (KPIs), such as cost effectiveness, cycle time, process efficiency and staff productivity, are available from global industry standards organizations such as APQC.
In this follow-up to our previous ThinkTank blog post, we highlight the importance of good category, sourcing and supplier relationship management, as well as the optimal organizational structure for the basic procurement function.
Category Management and Sourcing
By analyzing detailed spend, transactional cost and pricing data, and continuously monitoring the pricing markets, the category management team can routinely identify and solutions that drive incremental unit cost reductions through additional sourcing, substitutions and improved demand management. However, they are often challenged to identify and drive improvement for the following reasons:
As a best practice, utilities should focus their programs on:
Supplier Relationship Management
SRM can take the form of tactical collaboration on an as-needed basis, all the way to fully integrated supplier relationships with web-enabled tools. Supplier enablement is a long lead-time activity, and needs to be planned and staffed accordingly. Problems occur when utilities are limited in their ability to develop strategic supplier relationships that can provide value to the business, or supplier relationships are primarily built at an individual level, with informal processes for managing supplier data and information.
To improve performance, it’s important for utilities to work collaboratively with suppliers to make us of available solutions and improve end-to-end processes. Best practices of successful improvement initiatives include:
Improvements in service levels and collaboration also occur when the procurement organization has utilized supplier-based balanced scorecards with key metrics. Typically, this has been enabled by:
Procurement Organization Structure
In certain situations, employees involved in the procurement process have focused on their narrow functions without a holistic view of the overall organizational strategy. It’s vital that they be aligned with the company’s strategy before any changes made to the organization or strategy can be implemented.
Some procurement functions work closely with the business units and operating companies, whereas some other functions face challenges of renegade buys by the operating companies.
Transmission procurement often works closely with transmission business unit projects. Often transmission projects are a priority area, providing for high returns, and not being dependent on rate payers and utility commissions.
As a best practice, people and the organization should align to the strategy and operating model with clear roles and responsibilities throughout. High performers within the procurement organization will make it a desired destination for people to work in.
For procurement to be more relevant in this fast-changing environment and be seen as a value-add organization to the business, it should prioritize and mobilize critical initiatives such as:
Sandeep Shah is global procurement consulting practice head, and TK Subramanian is an engagement director, with Tata Consultancy Services (TCS).
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