Preparedness of Utility Procurement to Confront Emerging Market Challenges

To navigate the current challenging business world, procurement leaders in North American utilities are collaborating closely with business unit heads, implementing tailored category strategies, and developing innovative capabilities.

The role of a utility procurement professional has long been challenging. As one utility chief procurement officer (CPO) noted, "We have one of the toughest jobs in the industry." The ambitious capital expansion plans of utilities have driven double-digit spending growth, compelling procurement teams to source, purchase, and deliver an increasing variety of materials, parts, and services at competitive rates. Many teams struggled to meet these demands as their organizations failed to invest in new procurement capabilities and address high attrition rates.

The COVID-19 pandemic, inflation, macroeconomic uncertainty, and geopolitical tensions have compounded the challenges, adding supply shocks to the procurement function's already demanding role. Data highlights the impact: earlier this year, active container-shipping supply, an indicator of supply chain agility, hit its lowest global level since 2019. Over the past three years, private-sector wages have increased at twice the rate of the previous decade. Additionally, commodity prices, including energy and metals, remain significantly higher than their 2010 baseline levels.

To navigate this accelerated and demanding environment, procurement teams require improved demand transparency, enhanced capabilities, and advanced tools. CPOs must assist their CEOs and CFOs in rethinking procurement’s role in the future success of their organizations.

To thrive in this accelerated and demanding environment, CPOs must assist their CEOs and CFOs in reimagining the future role of procurement within their organizations.

In the last decade, the energy and utility sector's procurement maturity has generally lagged behind that of industries like automotive and consumer. Nevertheless, procurement performance among North American utilities varies significantly. A group of utilities has achieved higher average scores, demonstrating the potential for standout performance. These top performers distinguish themselves through a proactive approach and a commitment to making procurement a central, strategic function within the organization. Many of these leaders have spearheaded company-wide transformation initiatives, elevating their roles far beyond simple order fulfillment.

In each of these priority areas, North American utilities are modifying their practices to address emerging challenges. Drawing on the experiences of leading utilities worldwide, we have identified a collection of global best practices that North American CPOs can implement to elevate their functions to world-class standards in each area. Both mature organizations and those embarking on their transformation journeys can gain valuable insights from these practices.

Enhance Collaborative Relationships to Mitigate Risk, Foster Specification Innovation, and Enhance Demand Planning

For utility procurement organizations, being both timely and cost-effective has always been crucial. Traditionally, many categories were purchased on short notice, with 30 to 45 days often being sufficient to deliver 90 percent of the materials needed by a typical utility.

Today, this is no longer the case. Lead times for essential materials and parts have at least doubled. U.S.-based producers of transformers, meters, metal structures, and regulators are constrained by capacity and cannot meet all the demand. "What used to be a four- to six-week lead time for steel is now 24 weeks," a CPO reported. International supply also presents risks, including qualification challenges and logistical delays.

The ongoing crisis has laid bare a significant vulnerability for many utilities: their lack of robust demand planning. While having visibility into future spending is critical for effective sourcing strategies, numerous utilities only conduct detailed capital planning for a rolling six weeks or an even shorter timeframe. This limited visibility hampers procurement teams' ability to meet service-level agreements, leading to poor performance reviews that drain team resources, dampen morale, and exacerbate attrition.

Moreover, grappling with the complexity of specifications has been an enduring challenge. While many utility engineering departments take pride in their custom equipment designs, these bespoke solutions often entail longer production times and necessitate adjustments to manufacturing lines. Five years ago, equipment manufacturers were more accommodating of such inefficiencies. However, today, utilities that diverge from a manufacturer's recommended specifications risk having their custom designs excluded from production schedules or encountering substantial price hikes.

To mitigate immediate risks, procurement teams require open channels of communication with business units and finance departments. Supply chain leaders can concentrate on establishing a robust stakeholder map and ensuring regular updates from the CPO to the senior leadership team. Enhanced communication serves a dual purpose: fostering trust during crisis management and laying a sturdy foundation for the future.

Even with improved communication, addressing the complexity of today's planning cycles necessitates CPOs to challenge existing processes and cultural norms in a more transformative manner. A sustainable, long-term solution comprises three key components, each representing an ambitious goal for many utilities.

Enhance the granularity and scope of demand planning by establishing a dedicated task force, as demonstrated by a successful utility. This task force, co-led by supply chain and business representatives, aims to transform existing capital and maintenance plans into detailed category-specific statements of work (SOWs), gradually extending the planning horizon from less than one month to over 12 months. Armed with this level of detail, the supply chain team gains a proactive edge, initiating sourcing activities well in advance.

Integrate supply chain insights into capital planning processes by considering factors such as material and labor availability, supplier capacity, input cost fluctuations, and lead times. Expanding procurement's involvement in capital planning necessitates a fundamental shift in mindset for many utilities. While procurement's strategic role in planning is widely recognized in more mature industries like manufacturing and telecommunications, the average North American utility often overlooks its significance and excludes its leaders from key decision-making forums. To effect this paradigm shift, a cultural transformation must be initiated, beginning with senior leadership leading by example.

Streamline and simplify specification complexities through collaborative efforts with business units and vendors. This involves establishing trust-based relationships to facilitate cross-functional discussions and establishing effective feedback loops with vendors to identify opportunities for standardization, cost rationalization without compromising functionality, and potential improvements in lead times and availability. While efforts to reduce complexity typically focus on equipment and parts, utilities can effectively apply this approach to services as well. For instance, one utility, in partnership with the business, successfully simplified line construction units by 50%, leading to streamlined supplier pricing and enhanced alignment between monetary rewards and fieldwork performance.

As capital and operational plans face increasing threats, business partners are more open than ever to collaborative initiatives. 

Enhance Category Management and Supplier Partnerships to Foster Resilience

Over the past decade, businesses have leveraged vendor consolidation to drive efficiencies in their supply chains. In the utility sector, leaders have traditionally focused on engaging two or three vendors to cover up to 90 percent of spending within each category. However, with supply chain disruptions persisting, organizations are increasingly contemplating a shift in their category strategies from consolidation towards greater diversification.

While the move towards diversification appears logical given the current climate, it warrants careful consideration. Not all categories have been equally impacted by supply chain disruptions and inflationary pressures. Many CPOs have encountered unjustified price escalation requests. To address this, a tailored approach is necessary.

To identify truly affected categories and suppliers, it's essential to assess supply risk along two dimensions: the probability of risk and the strategic importance at the category level. Considering that utilities typically manage more than 50 categories on average, while some categories may indeed require significant interventions, others may not.

When implementing a category risk assessment, companies must steer clear of several potential pitfalls. We've distilled a series of recommendations aimed at ensuring that companies effectively achieve the objectives of the risk assessment. These recommendations diverge from common practices:

1. Enlist senior procurement leadership to oversee the assessment, ensuring a standardized approach and consistent level of thoroughness across all categories. Given the long-lasting implications of the assessment results on the entire cost base, the investment of leadership time is warranted.
2. Engage business partners in evaluating the strategic importance of each category, utilizing objective criteria to guide discussions. It's crucial to avoid a scenario where "everything is urgent," as this dilutes the significance of genuine priorities.
3. Perform an independent analysis of market drivers for each category to discern genuine signals from extraneous noise. Avoid relying solely on vendors' perspectives on market drivers as the sole source of truth.

The assessment outcomes serve as a roadmap, delineating which categories and suppliers necessitate derisking, monitoring, or even leveraging to maintain the stability of companies' operation and maintenance budgets.

For categories categorized as requiring derisking, companies can proactively implement various mitigation strategies:

1. Strengthen relationships with current vendors: Enhanced collaboration with suppliers facilitates the validation of existing and projected capacity, as well as encourages regular capacity updates. For instance, a utility CPO dedicates a day each week to personal calls with the CEOs of major suppliers and maintains frequent communication with key stakeholders via text. To address high-risk items or those with lengthy lead times, secure future capacity and consider implementing index-based pricing or establishing open-book contracts to prepare for imminent price escalations.
2. Identify and onboard new vendors: Actively scout the market for diversification opportunities, both domestically and internationally. Expedite the qualification process, including necessary testing, to swiftly onboard new vendors.
3. Standardize service requirements, materials, and parts: Harmonize supply availability with business needs by aligning service requirements, materials, and parts. For example, one utility transitioned from pad-mounted to pole-mounted transformers upon discovering that vendors could no longer supply the former. Simplify specifications to adhere to industry or vendor standards, and consolidate specifications to align with the most prevalent ones.

These strategies are complementary and yield maximum efficacy when pursued concurrently. While many utilities still rely on existing supplier relationships, particularly appealing in the short term, this approach may compromise long-term negotiation positions and should ideally be reinforced by other measures. Ultimately, a bias for action, especially amidst inflationary pressures, is crucial.

Develop Digital and Analytical Proficiencies to Expedite, Enhance, and Maintain Impact

The landscape of digital procurement solutions has expanded significantly, offering a plethora of point solutions and vertically integrated software. When effectively implemented, digital systems have the potential to distinguish leaders from followers by automating a substantial portion of tactical tasks. However, despite the evident advantages, many utility CPOs, as revealed in our survey, express dissatisfaction with their previous digitization endeavors, citing a lack of expected return on investment. "We dedicated 12 months to implementing a new procure-to-pay system, but the benefits didn't materialize," shared one CPO. Another acknowledged the "impressive functionality" of digital tools but highlighted that the "complex user interface hampers adoption."

This discontent is particularly pronounced concerning source-to-pay (S2P) systems and analytics.

Digital Infrastructure and Source-to-Pay (S2P): Approximately 60 percent of North American CPOs characterize their S2P systems as underdeveloped, with over half admitting to not realizing the anticipated returns on their S2P digital investments (refer to Exhibit 4). They frequently cite various issues as underlying causes of unsuccessful digital S2P transformations and poor user adoption, including underestimating the deployment effort during the selection phase, insufficient emphasis on user experience quality, inadequate process standardization, and insufficient user training.

Embarking on a digital transformation journey is a significant undertaking, but there are several swift actions that organizations not yet prepared for a comprehensive transformation can take without regrets:

1. Ensure universal adoption of e-RFx2 tools to automate strategic sourcing processes and enable category managers to concentrate on strategic endeavors. To bolster e-RFx adoption, one utility implemented a real-time dashboard to monitor the usage and activities of each category manager or sourcing specialist. Monthly recognition was granted to those managers or specialists with the highest levels of engagement, fostering a culture of utilization throughout the organization.
2. Enhance awareness of existing automated purchasing channels and collaborate with strategic vendors to introduce new ones.
3. Address critical user pain points by prioritizing customer feedback throughout the procure-to-pay process. For instance, one utility swiftly tackled its top 20 procure-to-pay pain points through agile sprints supported by an in-house development team. Many pain points were resolved with minor adjustments to existing workflows, such as introducing a secondary approver for purchase requisitions or overlooking discrepancies in purchase orders and invoices below $1 in value.

In addition to these actions, there is a recognized need among most CPOs interviewed for significant enhancements in data and analytics capabilities. The adoption of spend transparency tools represents a positive step forward, with over 60 percent of survey respondents having already implemented one of the available spend analytics platforms to establish an initial level of insight.

Certain organizations have gone above and beyond in this regard. For instance, a US utility illustrated the effectiveness of constructing customized parametric models for its major spending categories. These models empowered category managers to secure favorable negotiation outcomes even amidst inflationary pressures. Meanwhile, other utilities have implemented digital control towers to enhance compliance measures and developed dynamic dashboards for monitoring critical commodity items, sharing this vital information across the organization.

Whether a company is in the process of establishing an advanced analytics team or just contemplating the integration of analytics capabilities internally, several insights remain pertinent:

1. Initiate the development of the analytics team gradually as confidence grows and the return on investment becomes evident. Often, procurement leaders attempt to scale without a robust business case, making it challenging for CFOs to approve the investment. Constructing a clear roadmap of use cases and their associated value for the organization can alter the perception of procurement from a mere "cost center" optimized for FTE count to a "value center" that drives impactful outcomes.
2. The initial analytics use cases should strike a balance between impact and simplicity. Beginning with cases successfully deployed by peer organizations instills confidence. For example, one utility tasked its newly recruited analytical resources with constructing a should-cost model for an upcoming wire and cable request for proposal. This not only facilitated the negotiation process but also fostered stronger ties with the engineering team, which welcomed the new capability.
3. Reliable data are essential for successful analytics. Data aggregation and cleansing require a systematic approach, encompassing data management processes, standardized notation practices, and routine data reviews.
   
   

Charting a Roadmap for the Next 24 Months

Maintaining focus amidst the current challenges remains a significant hurdle for utility CPOs. In the midst of firefighting, selecting a few initiatives with substantial impact potential can yield significant benefits. Each organization should consider its unique circumstances. To validate hypotheses for priority initiatives, consider the following questions:

• Which initiatives will result in the greatest time savings for the procurement organization?
• Which initiatives, with sufficient resource allocation, will generate the highest return on investment?
• Which initiatives will offer the most significant benefits to business partners?

Upon selecting initiatives, devise an implementation roadmap with realistic timelines, granular milestones, and clearly defined ownership. Establishing a regular review cadence and governance structure will facilitate adherence to the execution plan.

Transforming procurement for today's unprecedented environment poses significant challenges. However, many of the issues plaguing supply chains are structural and may take years to resolve. Thus, transformative action is imperative. For numerous utility companies, immediate priorities likely include strengthening collaboration between procurement and business units, enhancing category strategies and vendor relationships, and bolstering digital and analytics capabilities for strategic decision-making. To achieve these objectives, successful utility CPOs must elevate the procurement function to become a genuine partner to CEOs, CFOs, and COOs.

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