Effect of supplier relationship management practices on corporate performance in the kenyan energy sector
Effect of Supplier Relationship Management Practices on Corporate Performance in the
Kenyan Energy Sector
The general objective of this seminar paper is to analyze Supplier Relationship Management
(SRM) practices on Corporate Performance in the Kenyan Energy Sector; case of Lighting
Company Limited (KPLC). The energy sector plays a critical role in the socio-economic
development of a Country. In Kenya, petroleum and electricity as sources of energy are the
main drivers of the economy, while biomass is mainly used in rural communities and a
section of the urban population. The Kenyan energy sector relies wholly on the importation
of all petroleum requirements. However, with the discovery of oil in Northern Kenya –
Turkana County this trend is likely to change. Electricity generation is predominately hydro,
supplemented by geothermal and thermal sources. KPLC is a limited liability company which
purchases, transmits, distributes and retails electricity to customers throughout Kenya. KPLC
is a public company and is listed at the Nairobi stock Exchange (NSE). On NSE KPLC is a
State Corporation with Government of Kenya (GoK) shareholding of 50.1% and private
shareholding of 49.9% as at December 2013. KPLC procures electrical energy in bulk from
Kenya Electricity Generating Company Limited (KenGen), Independent Power Producers
(IPPs) on the National Grid, Off Grid Power Stations, and Imports from Uganda, Tanzania
and Ethiopia. KenGen is a State Corporation with GoK shareholding of 70% and private
shareholding of 30% as at December 2013. It is mandated to generate electric power,
currently producing the bulk of electricity consumed in the country. KenGen uses various
sources to generate electricity ranging from hydro, geothermal, thermal to wind. IPPs are
privately owned Companies. In December 2013 these IPPs accounted for about 26% of the
country’s installed capacity and played an important role in bridging the demand gap. The
IPPs operating were: Iberafrica Power (E.A.) Company Limited (thermal power plant), Tsavo
Power Company Limited (thermal power plant), Rabai Power Company Limited (thermal
power plant), Orpower 4 Inc (geothermal power plant), Mumias Sugar Company Limited (co-
generation) and Imenti Tea Factory Company Limited (mini-hydro). Currently, KPLC is
facing pertinent challenges such as periodic inadequate bulk supply to fully meet electricity
market demand due adverse hydrological conditions, insufficient transmission and
distribution network redundancy, lack of capacity to absorb all the loan capital financing
available, high internal construction costs, limited affordability by customers, vandalism of
transformers, electricity line cables and accessories, as a diminished reserve margin, supply
and quality constraints coupled with ever- rising primary energy costs. Since 2011 the peak
demand was 1,178MW grew at an average of 5.1% over the past years, with the reserve
generation capacity margin progressively declining to 2.2% in same period and currently at
1.2% during drought season from 27% in 2004; and this does not compare well with the
international standard of 15%. The peak demand is projected to rise to 2,243MW by 2016
with an annual average growth of 13%, consistent with Kenya Vision 2030 economic targets
.To meet projected demand, an additional 1,749MW of firm generation capacity should be
installed before that time limit. It is therefore evident that as a national asset KPLC cannot
overcome the current challenges successfully without strong partnerships with key suppliers.
Impact of global expansion in the power sector has seen increased demand for utility specific
commodities and the resultant implication is the increased pressure on utilities to secure
supply. Significant energy pressures are impacting on traditional systems; as supply tightens
it is important for KPLC to intensify their efforts to build and sustain long- term collaborative
relationships with key Players. With a more strategic view of procurement, companies are
increasingly finding that different types of supplier relationships should be managed
differently to achieve maximum value. Supplier Relationship Management (SRM) has
become increasingly sophisticated; buyer and supplier preferences are driven by circumstance
in any relationship. The relationship portfolio analysis as explained by Cox, Sanderson &
Watson (2000) demonstrates that buyer and supplier relationships center on power,
interdependence and independence and they agree that relationship can be of an arms’ length,
adversarial and collaborative nature depending on the power and style of management.
Electricity pricing in Kenya is based on the principles of Long Run Marginal Cost (LRMC)
of supply. The End-User-Tariff incorporates all prudent costs in the value chain and a fair
return to the investors. Fuel costs and foreign exchange rates gains/losses usually in US $ are
pass-through costs in the current price regime and includes steam charge, hydro water
charges and regional development authorities’ charges. Thermal generation accounted for
high percentage of power supply thus increasing the exposure of electric power price
volatility due to the use of imported petroleum. The reason for the high energy intensity of
the Kenyan economy lies in the high use of thermal power transfer. KPLC’s current level of
electricity pricing remains a major challenge. An assessment of KPLC’s supplier relationship
management practices will be discussed; their electric power suppliers’ contracts to reveal
issues. More significantly, electricity prices one of the contributing factors to KPLC
ballooning expenditure. An assessment of KPLC’s SRM practices is discussed; their Power
Purchase Agreements (PPAs) revealed some very interesting observations. More
significantly, oil prices were a key driver behind KPLC’s significant electricity price
increases and therefore it arguably makes sense to assess the PPAs in KPLC and the
implication for SRM. Globally, the demand for oil is escalating and export prices are soaring.
The findings of this study have revealed very important managerial implications. The results
of the analysis uncovered the differing perceptions of buyer - supplier relationship in the
KPLC divisions and the implication on its dismal business performance. KPLC Corporate
Performance was measured by using Consumer Satisfaction Survey was done by KIPPRA for
petroleum products, electricity and renewable energy providers; of which holds important
implications for both theory and practice. The analysis provided empirical evidence that
collaborative long- term relationship orientation is a focus area in KPLC. In conclusion, the
researcher identified key focus drivers to enhance in supplier relationship management
Practices in KPLC. Furthermore, the research study identified a possible area for future
Babbie, E (1995). The Practice of social research. (7th Edition). Belmont, CA: Wadsworth.
Bless, C, & Higson –smith, C. (1995). Fundamentals of social research methods,
Landsdowne: Juta Education.
Brewer, A.M., Button, K.J. & Henser, D.A. (2001). A Handbook of logistics and supply
chain management. Emerald Group Publishing.
Brindley, C. (Editor). (2004). Supply Chain Risk. London: Ashgate Publishing Limited
Business Day. (14/04/2008). Power is key to Africa GDP growth – IMF. (On-line) internet:
Calen, P.S (1998). Grappling with Change: the South African electricity industry.
Capon, N. (2001). Key account management and planning: the comprehensive handbook for
managing your company’s most important strategic asset. New York. .Free Press
Cooper, P.S. & Schindler, D.R (2001) .Business Research Methods. (7th Edition). New York.
Emmett, S. (2004). Supply chain in ninety minutes. UK Management Books 2000 Ltd.
Emmett, S., & Crocker, B. (2006). The Relationship Driven Supply Chain: Creating A
Culture of Collaboration. Gower Publishing Company pp.xi-159.
Hahn, C.K. Watts, C.A and Kim, K.Y. (1990). The Supplier Development Program: A
Conceptual Model. Journal of Purchasing and Materials Management (Spring): p.2-7.
Hughes & Weiss (2007). CPO agenda: Getting closer to key supplier.
Hughes, J. & Gordon M. (2006). Negotiating and Managing Key Supplier Relationships:
Across -Industry Study Of 20best Practices .Vantage Partners P.52:
Hughes, J. (2005). Supplier metrics that matter. Vantage Partner. (On-line) .Internet:
Hughes, J. (2006). A whitepaper: what is supplier relationship management & why does it
matter Vantage Partners.pp.3-15
Hugo. W.M.J., Baden horst-Weiss, J.A. & van Biljon, E.H.B (Editors). (2004). Supply Chain
Management: Logistics Perspective. First Edition .Pretoria Van Schaik Publishers (pp.3-13)
Hugo. W.M.J., Badenhorst-Weiss, J.A. & van Biljon, E.H.B. & Rooyen, D.C (Consulting
Editor) (2006). Purchasing & supply management. Fifth Edition .Pretoria van Schawk
Kenya Institute for Public Policy Research and Analysis. (2010). A Comprehensive Study
and Analysis on Energy Consumption Patterns in Kenya. Nairobi, Kenya.
KPLC and Lighting Company Limited. (2013). KPLC Annual Report. Nairobi.
Minya, T.M. (2008). An analysis of Relationship Management Practices in Eskom. Published
Academic Dissertation. University of Johannesburg. Johannesburg.
Omenge, J.L.M. (2013). Proceedings from G20 DWG Workshop on Inclusive Green Growth.
Quarterly Bulletin. (June 2008) .South African Reserve Bank. p.1
Republic of Kenya (1978), Statistics of Energy and Power, 1969-1977, Central Bureau of
Republic of Kenya (2001), Study on Kenya’s Energy Demand, supply and Policy. Strategy
for Households, Small-scale Industries and Service, Establishments. Nairobi: Government
Republic of Kenya (2008), Economic Survey, Nairobi: Government Printer.
Republic of Kenya Ministry of Energy and Petroleum. (2013). November 2013 Draft
National Energy Policy. Nairobi, Government Printer.
Ross. D.F (2004). Distribution planning & control: managing in the era of supply chain
management. (2nd Edition). Kluwer academic publishers. pp.47-489
Sengupta, K.., Heisser, D.R & Cook, L.S. (2006). Manufacturing and service supply chain
performance: a comparative analysis. The Journal of Supply Chain Management Vol 42
Number 4, Fall 2006: pp.4-5
Statistics, Ministry of Economic Planning and Community Affairs. Nairobi: Government
Stock, J.R & Lambert D.M (2001). Strategic Logistics Management Fourth Edition McGraw-
Hill International Edition .p.508
World Energy Outlook (2006). International Energy Agency p.65-122
Yin, R.K. (1994,) case study research design: Design and methods, 2nd edition, Newbury
Park Sage Publications.