procurement best practices by power utilities
TRANSCRIPT
Procurement Best Practices by Power Utilities
Where does the future of procurement lies?
Harsh Thacker, Senior Research Analyst
2nd of June, 2014
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Focus Points
1. What are the procurement evolution trend on global level?
2. How are utilities trying to reduce procurement costs ?
3. Top four challenges faced by power utilities in adhering to the best
practices?
4. Which are the utilities following the best practices in procurement?
5. What is the future of procurement in power utilities across the world?
3
Change in Industry Dynamics
Challenging the Status Quo
Public awareness and ability to influence key
decisions
Increased fuel price volatility
Rising labor and construction costs
New technologies challenging the traditional
business model
Need to comply with stringent environmental
guidelines
Reduced revenue growth
Internal Budget Pressure
Regulatory pressures limiting tariff increases
4
Procurement Transformation
Traditional Approach Modern Approach
• Decentralized procurement
• Tactical
• Manual process
• Local procurement
• Unsustainable practice
• Centralized (or Center-led)
Procurement
• Strategic
• Automated process
• Global procurement
• Green procurement model
5
Procurement Evolution – Global Picture
Source: Frost & Sullivan
USA
• Green procurement by multiple utilities
• Global Supply Chain
• Strategic and Online procurement
implemented
6
Procurement Evolution – Global Picture
Source: Frost & Sullivan
India
• Centralized procurement,
• IT procurement tools easily available
• CPO role not present in most of
Utilities
7
Procurement Evolution – Global Picture
Source: Frost & Sullivan
South Africa
• Single State-owned utility
• Centre-Led Procurement for
over 2 years
8
Procurement Evolution – Global Picture
Source: Frost & Sullivan
Europe
• Both state and private utilities
• Centralized procurement structure
• Open market after 2004
• Green procurement established in UK
9
Procurement Evolution – Global Picture
Source: Frost & Sullivan
Southeast Asia
• Privatization of utilities has
accelerated procurement evolution
• Not all utilities have a centralized
procurement team
Japan
• Centralized procurement
• Risk elimination by multiple supplier
sourcing and safer warehousing
• Voluntarily following Green
Procurement
• Efficient Category Management
10
Procurement Transformation: Tactical to Strategic
Tactical Procurement Strategic Procurement
• Driven by internal short
term demand
• Driven by business needs
• Buying what the market
has to offer
• CPO influences key
decision in supply chain
• A discrete function within
the organization
• A cross-functional process
• Passive role by
management
• Management (CFO/CPO)
takes an active role
• Covers minimal spend • Covers maximum spend
• Ad hoc supplier selection • Future direction based
• Buying a product or a
solution at lowest cost
• Solving a business need
Enablers
Align procurement strategy
with organizational goals
Separate purchase function
from strategic sourcing
Evaluate strategic value of
sourcing function by
developing specific Key
Performance Indicators
(KPIs)
Analyze market
developments
11
Procurement Transformation: Local to Global
American utilities have witnessed 15% to 20% reduction in costs of equipment like power
cables, wires and lattice transmission towers when purchased from other countries like South
Korea, China, India and Brazil instead of local market.
China India South Korea Brazil
Suppliers Large supplier base
both state owned
and private
companies
Emerging supplier
base
Export oriented
suppliers
Multinational and
local suppliers
Products Wire, cables, other
distribution
equipment, valves,
fittings
Transmission tower
structures, pipes, IT
services
Wires, cables and
other T&D
equipment
Metal fabricated
structures and
small equipment
Advantages Low pricing,
engineering support
Proficient English
skills, competitive
pricing
Excellent export
track record and
reliable quality.
Competitive pricing
and low
transportation cost
to US
Challenges Difficulty in
communicating in
English
Small companies Currency
fluctuations and
political risks
Currency
fluctuations and
small operations
12
Impact of IT implementation in Procurement
Enhanced Supply Chain Visibility
Reduced Cycle Time
Improved Vendor Management
Increased Spend Under
Management
Better Category Management
13
Green Procurement by Power Utilities
Green Procurement is a practice in which utility doesn’t only prioritize price and
quality of equipment, but also make sure that the equipment and services are
ethically sourced and are not produced against well being of environment and
society.
American Utilities use GRI’s 3.1
guidelines as well as Electrical
Utility Sector Supplement for
reporting on industry specific
information.
14
Challenges
1. Maintaining Supply Chain Visibility
2. Implementation of Strategic Sourcing
3. Total implementation of e-Procurement and IT practices
4. Vendor Management
Challenges
ration
Source: Frost & Sullivan analysis.
15
Future of Supply Chain: Revamping of the Procurement
Organization Structure
In future the power companies have to draw a clear boundary between these departments,
define their distinct roles and interlink them for gaining efficiency in the supply chain.
Purchase
Purchase department in the supply chain will
have the responsibility to buy as per short
term requirements and
negotiate with the vendors.
Strategic Sourcing
As per the long term vision of the
company, this team will shortlist their trusted pool of suppliers and
list down the sources from
where they need to buy to meet
the future requirements.
Planning
Planning team will have the
responsibility of analyzing and
forecasting internal demand
of the organization.
Logistics
Logistics team will ensure that the material is
shifted efficiently from the supplier to warehousing to the end user.
16
Future of Procurement
Supplier
Empowerment
Data Analytics
Should Costing
17
Key Findings
Source: Frost & Sullivan analysis.
2 As the power infrastructure development speeds up in Asia, the procurement
process should evolve at a faster rate to gain better efficiency in the supply chains.
3
Data analytics will revolutionize the procurement practices of power utilities. Initially,
the analysis carried out will be mostly for identification of compliance issues and
demand and price tracking.
1
In future, supply chains will be much leaner and majority of the sourcing will be done
from strategic suppliers. Utilities will put the onus of quality on these suppliers, who
will also share the responsibility of demand planning and warehousing.
18
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Today’s Presenter
Harsh has over five years of experience in the power sector with a particular
specialization in the areas of power distribution sector. Prior to joining Frost & Sullivan,
he was working with a power distribution company in Mumbai. His research
experience focuses area of Power Generation and T&D Equipment, Power Sector
Investments, Renewable Energy Development and Power Utilities Best Practices.
Harsh Thacker, Senior Research Analyst,
Frost & Sullivan