Tightening the belt means spending more astutely

Water companies will invest around £27B in the industry over the next five years, says Water UK. It is important that works are kept on schedule and disruption is minimised. Fundamental to this is an efficient supply chain. Paul Quinn reports.

The current state of the economy means every penny counts. As water companies submit their spending plans for 2010-2015, any price increases are going to hit the customer hard.

With Ofwat analysing spending plans to protect customers from any unnecessary price rises - challenging companies for justification if needed - water companies and their term contractors need to look at ways to streamline costs to ensure that every pound is spent wisely.

The supply chain is an important part of this - ordering materials and getting them to site is key to the maintenance and capital work that utilities are investing in.

If we consider the fact that premium deliveries can add around 17% to a normal cost, it is clear that forward planning and efficiency in the supply chain can have a significant impact on cost savings. And this is only one part.

If the utilities sector looks at best practice across the whole supply chain, then it could reap some crucial savings and ensure leaner operations. This will pay dividends not only in today's tough environment, but will also ensure better profit margins come brighter economic times.

In other sectors, such as automotive and retail, the supply chain evolves year on year, as manufacturers are savvy to the competitive edge that faster and cheaper ways of getting to showroom and supermarket shelf can deliver. Over the past ten years, we have seen a seismic shift in the way that fast-moving consumer goods, such as books and CDs, are delivered from manufacturers to the customer.

Credit crunch
The advent of new technology, such as the internet, and developments in management information systems - working in conjunction with more sophisticated supply chain models - has seen a huge change in this area.

In the utilities sector, there has not been the same driver and consequently supply chain practices have remained relatively unchanged.

However, as the credit crunch bites harder and pressure mounts to cut costs of moving plant, materials and equipment, this is about to change. New supply chain practices such as detailed forward planning, closer supplier relationships, just-in-time (JIT), straight-to-site and reverse logistics are going to revolutionise the role, cost and efficiency of supply chain providers and onsite operatives.

One of the biggest barriers to companies transforming how their supply chain operations is understanding what it costs. By breaking down each stage and its associated costs, opportunities to drive out cost will become apparent.

From supplier, to distributor, to contractor and in-the-field operatives, costs are accumulated at almost every stage.

Once the supply chain costs are understood, steps can be taken to take out unnecessary cost and this, coupled with more detailed planning practices, can help reduce capital costs before contractors even reach site.

For example, purchasing directly from a manufacturer takes out at least one part of the process. Alternatively, ordering in bulk on certain items reduces spend on particular elements of the supply chain. Goods, and therefore the associated cost, will only have to move from manufacturer, to distributor, to customer once rather than numerous times.

It may sound logical, and it is, but so far these are practices that are not common in the utilities supply chain.

Utility projects are very different to other types, as often they are initiated in response to a problem that needs to be addressed quickly. Projects are often short term, on the roadside, with little site space to store materials and plant.

Therefore the utilities sector is much more reliant on well-performing logistical support to deliver plant, machinery and materials to where it is needed.

Using a logistics partner to ensure materials and plant are sourced and delivered makes for a much more efficient workforce: skilled labourers are not spending their time on unskilled tasks of picking up pipe from a local merchant and projects do not come to a halt due to a lack of materials.

With someone else taking on the role of picking up materials and plant and getting them to site for 8am means that term contractors can go straight to work. Allowing each project partner to concentrate on their strengths - and essentially what they are really employed to do - efficiency will improve by cutting out downtime from picking up materials, setting up site and so forth.

We see one of the greatest inefficiencies - and costs - in the supply chain being caused by paying a premium to have products delivered the same or next day. It sounds simple, but poor planning is a greater issue than is often believed and the impact it has is significant.

Consequently, demand planning is another critical part of the process of improving efficiency and cutting costs.

Just-in-time deliveries are becoming increasingly common in many sectors including construction and automotive. It is a fine line to tread because not having goods ready for use means time can be lost as the next stage of a project is delayed but, at the same time, having goods sitting around on site makes them prone to damage and theft.

And for utilities projects, space and secure lock-up facilities are often in short supply, making JIT extremely beneficial when it comes to project management. This does not mean that site managers need to rely on scheduling deliveries from suppliers.

A growing trend, especially in construction projects, is the use of consolidation centres that enable materials and plant to be stored in a central location, with deliveries planned to a project schedule.

This means money can be saved, as mentioned earlier, by purchasing common materials en mass, and ensuring projects do not rely on deliveries and operatives do not waste their time handling deliveries or collecting materials themselves.

As more and more utilities companies commit to environmental change, how they handle waste becomes more important as they strive to reduce waste going to landfill.

Many are now working towards high recycling rates, from recycling waste aggregates to reallocating unused materials, rather than throwing them in the skip, which has been common practice in the past.

Using the return journey of delivery vehicles, waste and unused materials can be sent back to the consolidation centre. Many manufacturers are now offering take-back schemes for unused materials to help the industry achieve its environmental targets.

Outsourcing the supply chain operation to a logistics partner facilitates the adoption of best practices and enables utilities companies and contractors to focus on their core competency of installing, maintaining and repairing the UK's water system.

From operating warehouses and consolidation centres, to amalgamating deliveries and getting materials to site on a JIT basis, such a relationship will help drive a better working supply chain that helps to reduce costs and keep projects moving forward.

In recognition of the opportunities for developing better supply chain practices in the utilities sector, DHL recently launched an integrated supply chain service that takes supply chain responsibilities that extra mile, bringing together all the elements of the utilities supply chain to offer utilities companies, contractors and sub-contractors one point of contact.

From material procurement, stock management, warehousing, through to collections and JIT deliveries direct to where the goods are needed, DHL offers it all from a single source.

The focus is to service the engineer with the materials needed to complete the job - from utility connections to large capital schemes. As part of the service, DHL supplies a full range of multi-utility products sourced locally and internationally and will ensure delivery to site through its regional logistics network. This enables contractors to focus on their core activity and ultimately increase both their profits and competitiveness.

Improved supply chain practices have been positively received across many industries and by making similar changes, the utilities sector can take significant forward steps when it comes to revolutionising how materials and plant gets to site.

At a time when speculative works are scarce, finding ways to cut out unnecessary costs is even more important and making such changes will help weather the current economic storm, enabling companies to be more competitive when times become prosperous once more.

Paul Quinn is DHL Exel Supply Chain's utilities specialist.

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