INSIDE TRACK How Can You Reduce Costs and Grow Revenue in North America’s Utility Sector? The practice of supply chain management hasn’t been embraced as a discipline in these capital intensive, serviced-based conglomerates. But here’s the secret to more profitable and efficient utilities in North America. Backgrounders to Supply Chain Management in Utilities Certainly in my thirty years in the utilities sector,which I’ll define as those businesses that distribute electricity, natural gas and water to the residential, commercial and industrial stakeholders of our communities, I have been exposed to a culture utilities hold dear. Ironically, but for a few exceptions, nothing is more puzzling to me than how this culture of utilities is often cited as the one of the most salient of the myriad of reasons offered to explain why supply chain management has not been embraced by this capital intensive, service-based group. This article examines why this is a prevalent condition in this sector and, more importantly, will provide those organizations embarking on a supply chain initiative with the tools of understanding required for success. Utility industries are as capital intensive as one could imagine, with wide geographical investments in wire, towers, pipe, control stations, construction depots, service depots, office buildings, vehicles and heavy duty equipment. Specific to supply chain management, however, these investments contain a very large component of inventory and warehouses. The amount of inventory capital dedicated to supply chain management in the utility industry represents one-to-two percent of revenues, which alone could justify a measured investment in supply chain management.But interestingly, this has not occurred. 12 LQ winter 2003/2004 By Jim Ellis B.Sc., P.Log., FCAM, CM Certainly, the performance metrics associated with asset performance should likely have been justification as well,with a 3.0 turn average overall.But again, there is a reluctance and, perhaps, disinterest despite the opportunities for growth and savings. In summary, I believe the most salient reasons for maintaining the status quo are: 1. “We’re Unique” 2. Inventory has been a good thing 3. The Materials Management Group has not earned the confidence of the organization 4. Managing inventory means get lots…not just enough 5. Mobile or Field Inventory means “never having to say your sorry…or return” 6. Controls don’t apply to the Operations Group 7. Having lots of vendors has been a good thing 8. Warehouses and lots of storage locations have been a good thing 9. Supply Chain Management (SCM) is not viewed as a strategic or a corecompetency Not surprisingly, supply chain professionals in utilities are often frustrated due to their inability to gain traction in their companies to create the results that chain management achieves in virtually every other sector of the economy. In order to mitigate the hurdles to their success it’s important to define these nine key reasons to understand how they act as the barriers to SCM success in this sector. We’re unique This is a particularly paralyzing belief system, as evidenced by utility executives’comments,who traditionally would elaborate:“…due to our uniqueness as a business”and “our responsibilities to the public in terms of continuity of service, stakeholder safety and cost reasonability, some things just don’t work here.” (We will examine the reasonability of this belief in depth in second article of this five-part series.) Inventory has been a good thing Up until the noises of deregulation or re-regulation began in the 1990s, a formidable focus on Rate of Return made utilities view their assets as premier revenue generators.Utility companies earn their profits from operating their extensive network of plant and equipment through a percentage rate of return that is applied to the values and assets on their balance sheets. Consequently, a utility, which is wrestling with cost containment and the painful process of filing rate increases, often looks to capital investment to bolster revenues. Accordingly, items on the balance sheet such as inventories and the warehousing and storage buildings that hold those inventories became a welcome boost for the cause. Coupled with an internalized culture of continuity of service and stakeholder safety, field personnel has developed a justification for holding large inventory caches throughout the organization, resulting in the perception that inven- <strong>Logistics</strong><strong>Quarterly</strong>.com
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