Natural supply chains: A new strategy for utilities

Published: December 1, 2010

Executive summary

Supply chain expenditures make up about 60 percent of capital and operating costs for typical utilities. Many utilities have executed successful “strategic sourcing” programs and conducted a number of other initiatives, such as materials and services or inventory reduction, to reduce costs and improve service to the business. However, cost pressures continue to mount, along with new obstacles to earnings, and many business units still perceive the supply chain function as a procurement and sourcing service and not as a strategic business partner that can help drive full value from third-party expenditures.

One reason for this perception is that few companies explicitly recognize that there are multiple supply chains that must be aligned to the different types of business activities within the utility, rather than just to the business units. This approach, which we call natural supply chains, holds that some supply chains are naturally positioned across business units and are made up of business activities that have inherent similarities based on their specific requirements. For example, major projects or routine maintenance programs would each have a supply chain to support its activities, no matter where in the organization they are — and that supply chain would differ greatly from one directed at small construction efforts or at emergency outages.

After a utility’s natural supply chains are identified, the end-to-end supply chain model can be tailored to meet the distinct needs of each. An appropriate set of capabilities — roles, processes, and tools — is matched with the requirements of each natural supply chain to provide a fit-for-purpose solution that maximizes value. With this approach, total value performance across all important measures, including supplier reliability, supplier risk management, project completion, and costs, can be improved so significantly that incremental savings of more than 15 percent are possible, well beyond the savings from strategic sourcing programs.

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Natural supply chains: A new strategy for utilities

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