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:

• With limited resources in procurement, the team lacks the bandwidth to drive strategic sourcing initiatives. It becomes overwhelmed simply meeting day-to-day business requirements of its stakeholders.
• Only 10%-15% of procurement activities are strategic, and as much as 85%-90% are transactional in nature across business functions.
• In generation, nearly all procurement activities are transactional (more than 90%).  Utilities often set up a separate generation procurement group focused on capital project sourcing and more strategic activities.
• For transmission, approximately 70% of procurement activities are strategic for material and equipment, and 10% are strategic for labor and services.
• Distribution often doesn’t have procurement people within the operating companies. It’s spending only 15%-20% of its time on strategic activities on the material and equipment side.

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:

• Typically, very little spend analysis is being done, mainly due to unavailability of consistent and meaningful data in a timely manner.
• Spend-analysis software is often implemented; however, staff reductions over many years have left very few people who can proactively analyze the spend data even after the tool is implemented. This limits the ability of the procurement team to utilize spend analytics tools to develop better sourcing opportunities.
• Procurement is often limited in its ability to leverage volume buys — for example, staff augmentation for vegetation removal, since often the operating companies continue to maintain local contracts.

As a best practice, utilities should focus their programs on:

• Performing category-based analytics to drive procurement performance management and reporting;
• Centralizing and streamlining sourcing and procure-to-pay processes across categories, utilizing automated sourcing tools and reverse auctions;
• Setting up a commodity hierarchy with suppliers classified in strategic categories and subcategories;
• Implementing category-specific economic and scale-related levers to realize savings from frequently purchased goods and services, and
• Treating procurement as a strategic initiative spanning major spend categories.  It’s important to see procurement initiatives holistically — how they impact other operations.

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:

• Creation of a supplier segmentation model and development of an SRM framework to define the levels of interaction for each segment of the supply base;
• Efforts to become more proactive with supplier development and get ahead of the business needs;
• Development of a collaborative process between operating and business units, to identify and engage suppliers early in the purchasing or development lifecycle, and
• Creation of an integrated planning process with suppliers to ensure quality products and services.

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:

• Using technology to automate the creation and delivery of the scorecard, and focus performance management activity based on the supplier segment and performance trends.
• Utilizing a supplier portal to automate collaboration as well as supplier relationship management enhancements.
• Defining supplier performance metrics and a standard method for regularly delivering those internally and to the supplier. Strategic suppliers should be treated as business partners. Typically, 70%-80% of procurement managed spend is purchased from the top 20% of suppliers. 
• Documenting and recording supplier and market knowledge in a standard format that’s accessible to all of procurement. This will enable further supplier development and faster cycle times.
• Classifying strategic and transactional suppliers, so that utilities can further develop existing relationships and collaborate on new offerings to take to the business.

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: 

• Launching a procurement organization design initiative focused on refining the procurement structure and clarifying the jobs;
• Communicating procurement contacts and responsibilities to key stakeholders across the business;
• Defining the key responsibilities, accountabilities and governance (RACI) for major organizational decisions involving procurement;
• Identifying the top five competency gaps having the highest business impact, then rolling out targeted training courses for improved employee retention, and
• Developing a recruiting action plan to hire select resources for building out expertise in those categories with the highest value.

Sandeep Shah is global procurement consulting practice head, and TK Subramanian is an engagement director, with Tata Consultancy Services (TCS).