Procurement best practices by power utilities


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Procurement best practices by power utilities

  1. 1. Procurement Best Practices by Power Utilities Where does the future of procurement lies? Harsh Thacker, Senior Research Analyst 2nd of June, 2014 © 2014 Frost & Sullivan. All rights reserved. This document contains highly confidential information and is the sole property of Frost & Sullivan. No part of it may be circulated, quoted, copied or otherwise reproduced without the written approval of Frost & Sullivan.
  2. 2. 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. 3. 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. 4. 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. 5. 5 Procurement Evolution – Global Picture Source: Frost & Sullivan USA • Green procurement by multiple utilities • Global Supply Chain • Strategic and Online procurement implemented
  6. 6. 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. 7. 7 Procurement Evolution – Global Picture Source: Frost & Sullivan South Africa • Single State-owned utility • Centre-Led Procurement for over 2 years
  8. 8. 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. 9. 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. 10. 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. 11. 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. 12. 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. 13. 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. 14. 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. 15. 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. 16. 16 Future of Procurement Supplier Empowerment Data Analytics Should Costing
  17. 17. 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.
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  21. 21. 21 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