SUPPLY & DEMAND

UWL18 Special Report #4: Disruption & the supply chain
Published 17 April 2018

The importance of the relationship between utilities and the supply chain has long been recognised, but is now more vital than ever, or as Andy Clark, head of procurement and contract management at Yorkshire Water puts it, “the challenges faced by and expectations placed on supply chain management have never been greater.”

Cost and efficiency pressures on utilities are being passed on to the supply chain. Combined with a fast-changing regulatory and policy environment and the evolving needs of customers, it’s clear that traditional models of operation will no longer cut it.

But through these changes, Richard Hepworth, director, Digital Transformation at PwC says there is a huge opportunity for utilities and plant owners to embrace technology, and particularly, he says, the internet of things (IoT). He sees that potential manifest to a great extent in the supply chain, notably with regard to predictive maintenance for critical assets such as wires, pipes, meters and pumping stations: “GE have produced their own IoT platform, Predix, for example.

Supply chain quote

If you get into that automation of devices around the supply chain, it saves millions of pounds and enables people to be much more predictive in theory, extending asset lives, improving designs through clever analytics like digital twins and the like.”

But GE isn’t alone in creating tech that will prove disruptive to the supply chain. He also points to BoilerIQ from British Gas, which enables the boiler to be managed more effectively and prevents breakdowns with conditional services instead of boiler breaks that necessitate sending an engineer out: “It enables better scheduling of engineers and better customer service to end user. Every part of the utility supply chain will be affected by IoT in one way, shape or form.”

At Utility Week Live 2018 (22-23 May), disruption is the headline theme. Held at the NEC in Birmingham, the exhibition and seminar sessions will gather industry intelligence and spark debate on themes including the IoT and other game-changing technologies, utilities innovation and new solutions to serve customer interests and opportunities for applying new, collaborative ways of working in the sector in key areas such as streetworks.

The supply chain will be a key focus of the ongoing disruption debate and insight at the event, as well as in the build up to it. In the fourth of a five-part series detailing the responses of more than 700 utilities executives to our disruption survey, we reveal the top five disruptive future supply chain trends.

KEY FINDINGS:

 The majority of utility companies see technology changing procurement and believe alliances can be effective 

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1. PROCUREMENT TECHNOLOGIES

What’s the deal: New procurement technologies promise to open up new horizons for process efficiency and relationship management with supply chain partners – or so vendors claim.

The key advances in recent years which differentiate new procurement systems from old, relate to automation which can strip cost out of core procurement processes as well as removing human error. And in a new round of technological progress, these system improvements will be overlaid with increasingly adept artificial intelligence (AI) that can help utilities make better procurement choices and monitor supplier performance.

In Utility WEek Live’s disruption survey around 58 per cent of utility respondents said new procurement technologies are changing the way they interact with their supply chain, with the highest levels of disruption reported from water (59.4 per cent) and energy networks (55.4 per cent).

Why it matters: Utilities are under pressure to push the envelope on efficiency and innovation. Retailers need to cut out waste to relieve a tight squeeze on margins while regulated utilities must answer increasing demands for evidence they are improving the value for money that consumers get from their monopoly providers.

Procurement is a key opportunity area for businesses seeking to respond to these pressures. It includes a range of business processes ripe for automation – such as invoicing and generating contracts – as well as opportunities to apply AI to the selection of supply chain partners. In other industries, AI is already being used in this way, scanning disparate information about the past performance of viable firms for signs of strength and weakness which are relevant to a new contract, and shortlisting the best companies for consideration by human decision makers.

Furthermore, the cost of implementing such clever procurement technology is relatively low thanks to many solutions being cloud-based. Utilities keen to take advantage can “plug and play” solutions as and when they need them – particularly useful for regulated monopolies who have cyclical peaks in contracting requirements.

For suppliers, these developments in procurement opportunity may be welcome on the one hand but disturbing on the other. Greater efficiency in invoice processing for example ought to reduce late payments – and indeed suppliers may choose to invest in new automated invoice generation and payment processing technology of their own to match that of their clients. AI now means suppliers can predict when late payment is likely and issue action triggers for connected systems and people.

On the other hand though, it’s unclear how using machine learning to assist with supplier selection and the awarding of contracts might impact the competitive landscape for suppliers – especially for smaller firms which often argue they have a tough time getting air time with utilities in any case.

 

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2. The future of alliances 

What’s the deal?

Alliancing is a procurement route that solves many of the challenges caused by adversarial contracts, and as such becomes a useful approach for projects that have high levels of complexity and risk or urgency, as well as major capital programmes.

The project alliance concept was first introduced in the early 1990s, in the North Sea offshore oil and gas industry. Perhaps one of the best-known, and certainly the largest, infrastructure alliances in the water sector is Thames Water’s eight2O, which includes Thames Water, and two design-and-build joint ventures made up of Costain, Atkins, Black & Veatch (CABV); and Skanska, MWH and Balfour Beatty (SMB). MWH also leads programme control and IBM is the technology innovation partner.

Together, the alliance will carry out £1.75 billion of capital investment work during the AMP6 period (2015-2020), with the potential to extend the contract to 2025. This includes a large mains replacement programme, with a required outcome of reducing leakage, bursts, flooding, and increasing capacity for growth.

Why it matters:

In recent years, alliance contracting has emerged as a popular procurement route for large complex infrastructure developments. In fact in our research, 60.8 per cent of respondent said they feel alliances are the most effective and efficient approach to the delivery of major capital programmes.

Another major UK water alliance is Anglian Water’s @One Alliance. Alliance director Dale Evans says: “One of the reasons we created an alliance was because we wanted the benefits of integration with partner organisations to constantly drive us forward, bringing new ideas, new practices.

“We’ve been able to challenge our alliances to deliver some fairly audacious goals; in a collaborative arrangement we get a constructive and progressive response, we don’t get a defensive contractual response, and that’s a fundamental difference.”

Previously, partnering was the preferred method for enhancing collaboration, improving communication, and encouraging innovation between project team members without relying on a contractual mechanism.

However, as key elements of project partnering were legally non-binding, partnering did not offer the protections of a legally enforceable contract.

But an alliance requires a culture which transcends the culture of the individuals and organisations involved in it. Unlike the traditional partnership model, an adversarial “master-contractor” dynamic will not work, and an alliance requires a complex governing model.

While the partners in an alliance or JV still control their own operations, sharing resources and risks requires a lot of trust. In a research document, PwC says setting the goals of an alliance or JV too high can be an issue.

Companies must have a plan for if and when the alliance will be unwound, including the dispersal of any shared resources. These can be sensitive conversations, but failing to agree on these crucial points can jeopardize the partners entering into the alliance. Add to that the fact that our research found 21.6 per cent of supply chain respondents worry that working with some utilities could negatively impact their own brand, and it becomes clear that these alliances must be chosen and formed carefully.

“Not surprisingly,” says the PwC research document, “some alliances crumble before their planned end date, causing financial damage to one or both partners. So, it is especially important for boards to ask about strategic alignment and exit plans while management is negotiating a major alliance.”

3. Asset-light networks 

What’s the deal?

The concept of “asset light” utility infrastructure operators is arguably a logical extension of the considerable degree to which construction and maintenance of utility assets are already delegated to key contracting partners.

The idea essentially involves today’s monopoly utilities – our energy networks and water companies – taking a declining stake in asset ownership, instead building capability to operate their systems at a high level, managing data flows and overseeing new markets for balancing demand and supply. Meanwhile, current tier one suppliers or new entrants could compete to provide system capacity and enabling infrastructure.

According to our survey, it’s a direction of travel a significant minority of supply chain partners are keen to pursue. Over a third (36.5 per cent) said they believe their company could undertake the bulk of infrastructure management as a service to utility companies within the next ten years.

Why it matters:

A total shift to asset-light utility networks would be a radical step for the industry. It would significantly shift the risk profile of today’s asset-heavy monopoly network operators, heavily impacting their value proposition to investors.

Nevertheless, it may be inevitable. At Utility Week Live 2016, UK Power Networks’ chief executive Basil Scarsella openly speculated about the potential for networks to follow the models pioneered by the likes of Airbnb and Uber which have rapidly risen to become the largest hotel and taxi companies in the world, but which own no hotels or cabs. Such a model might become increasingly attractive in the energy system as distribution network operators move to take on roles as distribution system operators, Scarsella implied.

Meanwhile, recent regulatory developments suggest Ofgem and Ofwat too see benefits attached to decentralising asset ownership for utilities. The introduction of competitive tendering for offshore transmission connections – previously provided by the monopoly transmission owner - has already taken hold with the aim of driving down connection costs, and onshore links will soon follow suit. 

In water, the initiation of direct procurement for customers will similarly provide an opportunity for ambitious contractors to directly own, maintain and operate increasing proportions of critical national infrastructure as a service to water companies who will retain responsibility for service quality and continuity.

Of course, energy retailers have long since moved down the asset-light route. Vertically integrated companies have decoupled their supply arms from their generation businesses. Some, like Centrica have even divested the latter, freeing themselves up to compete in a market founded on digital and remote service capability, rather than field-force muscle and asset-ownership.

4. Innovation

What’s the deal?

Innovation, innovation, innovation. Everywhere you look in the utilities sector, market participants old and new are professing their enthusiasm for innovation, for embracing the impact of global technology trends and their interaction with environmental and social shifts like climate change, population growth and devolution of power to regions.

Supply chain partners have a critical role to play in delivering the increasing levels of innovation utilities need to discover. Many of them produce original technology solutions, honed to answer specific industry issues, and they are often more fleet of foot in responding to market forces than their regulated utility counterparts.

But is innovation from the supply chain being encouraged and exploited to the full by mainstream utilities providers? Anecdotal evidence, back up by Utility Week Live’s industry research, suggests not.

Just a fifth (20.3 per cent) of supply chain respondents to Utility Week Live’s disruption survey said the supply chain arrangements of their major utility clients allow them to bring forward ground breaking new ideas. And this compares poorly to the innovation partnerships the same companies strike with owners of private utility infrastructure. 67.6 per cent of supply chain respondents said they have more productive innovation relationships with such networks.

Why it matters:

Utilities of all stripes desperately need to sustain or increase their levels of innovation. Primarily this need is driven by efficiency and the ongoing requirement to deliver more for less, particularly as regulators seek to cut costs for customers.

But multiple other drivers for innovation also exist, including existential challenges like climate change, the changing nature of customer expectations, back office processes, technology delivery and asset maintenance functions.

Regulators have aligned behind these drivers, bringing forward new mechanisms and funds to try and accelerate innovation in their sectors. Their aim is to ensure innovation benefits for companies are shared with consumers. And recently regulators have given direct consideration to the ways in which they might incentivise better innovation partnerships between third parties and utilities. Indeed, Ofgem is even considering ways to make network innovation funds directly accessible to supply chain partners with big ideas – arguably bigger ideas than their regulated counterparts dare to have.

This development clearly represents a huge opportunity to players large and small in the utilities supply chain. And it should also push utilities to review their procurement and supply chain management practices with a view to unlocking more intelligent and open-minded ways to solve problems. Currently, just a third of suppliers say their utility partners take an “intelligent” approach to relationship management.

5. Prosumers

What’s the deal?

Smart home technologies and rapid growth in decentralised energy resources are powering a prosumer revolution – enabling individuals to understand their consumption, control it and participate actively in utility markets.

The rise of the prosumer is increasingly recognised as both a challenge and an opportunity for utility companies. For water companies, prosumers could open the door to a new era of enhanced engagement on issues like water scarcity. They might also provide an impetus for greater bundling of water services with broader, technology-enabled smart home services.

It’s in relation to energy, however, that the prosumer is having the most notable impact on utility strategies. Here, where flexible energy technologies linked to consumer-grade control tools provide the scope for individuals and communities to move off-grid and become energy self-sufficient, the prosumer concept is prompting competitive innovation, market reform and even fear of industry “death-spirals” for both retailers and grid infrastructure owners.

But Utility Week Live’s research shows that the rise of the prosumer is also shaping the way in which supply chain partners to utilities see their future. Asked to what extent prosumer trends will impact their organisational strategies in the near, medium and long term, supply chain respondents said they expect increasing levels of influence. On a fifteen-year time horizon, respondents rated prosumer impacts on business strategy at a significant 7.2 out of 10, up from a middling 6.5 out of 10 in the coming five years.

Why it matters:

In one sense, it’s little surprise to see the supply chain expects increasing levels of business impact from prosumer trends. After all, we know that the desires and demands of prosumers are a significant driving force behind lead utility company strategies. It therefore makes sense that savvy suppliers are thinking about how they can support their major clients in developing and delivering new operating and services models that match these.

However, the expectation for prosumer-driven disruption among supply chain partners may also hint at more disruptive possibilities. For some suppliers, for instance, increasingly confident prosumers may offer the opportunity to develop direct relationships with end customers, cutting out the utility middle-man altogether.

For example, increasing levels of investment in establishing independent energy communities are already exciting big providers of technology and asset management. A leader at one such tier 1 utility supplier recently told Utility Week that investment levels in micro-grid infrastructure and maintenance agreements have multiplied exponentially in recent years and now represent a significant revenue stream rather than a niche practice. Furthermore, the same spokesperson said that working with these prosumer communities tends to be more exciting than working with mainstream utilities, because there is greater openness to experimentation and innovation.

Another opportunity area for today’s supply chain participants to usurp conventional utility-customer relationships is via peer-to peer trading. Retail market constructs which create the need for an intermediary to purchase energy on the behalf of consumers and manage market risks for them look cumbersome and unnecessarily complex in the shadow of technology platforms like blockchain – a fact energy regulator Ofgem has acknowledged with the launch of a workstream to look at alternatives to the “supplier hub” model.

Whether today’s supply chain players have the appetite to seize these opportunities whole heartedly remains to be seen. But one thing’s for sure, whether at one remove or directly, prosumer trends will have a definitive impact on the whole utility value chain of the future.

THE RESULTS AND WHY THEY MATTER

by Andy Clark, head of procurement and contract management, Yorkshire Water

“The challenges faced by and expectations placed on supply chain management have never been greater. There are an increasing number of risks that challenge compliance and reputation of businesses through new legislation such as the Modern Slavery Act and GDPR. These areas alter the dynamic for procurement leaders away from seeking to protect the business through contract clauses and into proactive management of risk and much greater visibility of the operation of the supply chain. Coupled with this increased need for effective risk management is the ever increasing need for efficiency seen through progressively challenging price determinations, driven by real affordability issues for customers. Most organisations deliver a significant proportion of their work through third party spend and as a result this efficiency challenge falls to a great degree on supply chain managers. The levels of efficiency required mean that innovation both in terms of solutions delivered and contract models are required. Many organisations are looking at traditional risk allocating contract models and the high overhead that is typically associated and re-evaluating whether more inter-dependant risk sharing models would represent better value. Alliances are generally considered to be some of the most mature risk sharing models and a good fit for delivering complex and high risk infrastructure. Alongside this drive for more sophisticated models is a reversion to more straightforward contracts for simple works. This move towards a “Tier 2 model” has been increasingly prevalent in the electricity and gas sectors and is now becoming more common in water as the need to find lower overhead delivery routes becomes more pressing.

The drive for innovation also requires supply chain managers to consider whether the contract models and arrangements which are established create innovation-ogenic environments or whether they stifle innovation. To promote innovation, suppliers need early access to risk development and a more embedded working process to gain the insight, data and strategic understanding to drive change. Clients are likely to have to take or at least share delivery risk for suppliers to be truly freed up to innovate and this challenges some of the risk-averse practices of utility clients. A further area of innovation is to look at the types of coverage which contracts encompass. Innovation is less likely when suppliers are handled transactionally and contracted for only a small part of an overall process.

The drive for efficiency also challenges commercial functions to be agile and responsive to the needs of the business. New technologies are enabling efficiency in the delivery of procurement exercises and the contract management process. A key feature of this is access to better data, whether that is consumption history to aid procurement or contract usage to aid effective KPI management by contract managers. Used effectively this gives the opportunity for time and cost savings for both the procurer and bidder.”

Attend Utility Week Live 2018 to understand how these disruptive technologies can be best utilised in your business, and meet the organisations and innovators developing the next generation of tech and product solutions:

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Liked this report? Read more in the series of special reports:

REPORT #1: DISRUPTIVE COMPANIES
REPORT #2: DISRUPTIVE TECHNOLOGIES
REPORT #3: DISRUPTIVE REGULATIONS

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