20 January 2011 | Rebecca Ellinor

A massive transformation has been taking place at Thames Water. Head of supply chain Ian Bolger tells SM what the company did, how and why.

The simplest things often turn out to be more complicated than you thought. Take the simple act of turning on the tap or flushing the loo. When you scale up these everyday actions to the 13.8 million customers Thames Water serves, the numbers are staggering.

Every day it pumps 2.6 billion litres of drinking water through its 20,000 miles of pipes and 100 water treatment works. It also treats 2.8 billion litres of sewage through a separate network of 43,000 miles of sewers and 349 treatment plants. In operating and maintaining this network, the company spends £1.6 billion a year with 3,000 suppliers and contractors.

The industry is regulated by Ofwat, which ensures customers get value for money, and that water companies deliver the right levels of capital investment in the region’s ageing infrastructure. Funding is agreed in five-year cycles or Asset Management Plans (AMPs). The fifth round of these, AMP5, began last April when Ofwat authorised Thames Water to spend £4.9 billion upgrading its water pipes, sewers and other facilities.

Assumed in this funding was a significant cost and efficiency challenge, making it essential to procure and deliver the capital programme with maximum efficiency. Head of supply chain Ian Bolger joined the business in September 2007 with a brief from the CEO to transform procurement and the company’s cost base.

“I found a team that was pretty demoralised, and had suffered from a lack of clear strategy and direction,” he says. “Procurement had a reputation for under-delivery, and struggled to influence the wider business.”

Interviews with the key stakeholders painted a pretty clear picture. “There were some good individuals, but an inconsistent standard of performance across the department. Systems and processes were slow and overly bureaucratic; and projects were seldom delivered to plan.”

Bolger and his management team set about rebuilding confidence and restructuring the teams to use staff in a more focused way to achieve value in the categories that mattered to stakeholders and slim down tactical buying roles. “Strategic sourcing is the value engine in any business and we had too many of the wrong kind of people, in the wrong place doing the wrong things,” he says.

Within 12 months a new category management structure had been implemented, focused on the key stakeholder spend categories. New talent was hired to lead these categories, and a clear annual procurement plan was agreed with the business. Local tactical buying roles were eliminated and the accounts payable and buying teams joined in a single purchase-to-pay (P2P) team, with all legacy systems replaced with SAP.

“A key breakthrough was persuading the budget holders and finance to incorporate our savings targets into the annual business planning cycle,” Bolger says.

“In my experience, this is crucial. It makes the savings real, baking them into the profit and loss (P&L) account, and in doing so it generates real tension and co-commitment from the budget holders. It was a measure of our credibility that the business felt able to trust the procurement team to deliver on time and on target.”   

Operational spend

Since the AMP4 capital strategy had already been set, making it hard to influence, the early priority was operational expenditure. Over 18 months 98 per cent of spend categories were re-tendered, delivering an overall 23 per cent cost reduction of more than £100 million. Purchase-to-pay performance was transformed, with on-time payments rising from 66 per cent in 2007 to consistently above 90 per cent.

Bolger says there were five key success criteria:

• Visible executive support. The CEO personally mandated a culture of compliance and early and full procurement involvement.

• P&L alignment. The expected savings were made part of budgets, which meant there was mutual accountability and budget-holders, finance and procurement were aligned behind a single set of deliverables visible in the P&L.

• Integrated consultancy support. Strategic sourcing consultancy Efficio was employed to boost team capabilities and establish best practice strategic sourcing. Staff and consultants worked for 18 months in integrated teams to deliver savings, which resulted in improvements in processes, staff skills and confidence.

• Focus on value not cost. All investments in new staff, training and consultancy support were based on business cases, which helped stakeholders focus on long-term value generation.

• Delivery focus. The sourcing processes were streamlined and teams focused on hitting targets.

Capital spend

With credibility restored and significant results delivered, the team turned its focus to the AMP5 programme, £4.9 billion of work between 2010 and 2015.

The objective agreed with the executive was to “transform the AMP5 capital delivery and supply chain strategy, delivering sector-leading efficiency and a step-change improvement in cost transparency and performance”.

The team set about determining the best contracting and procurement strategy, researching capital contracting models, supply chain tools and techniques from all market sectors.

Bolger says: “Stakeholders were initially not sure why we put so much effort into research. A radical strategy change was needed and radical change is often heavily resisted. The research insights were crucial to create fact-based arguments to support our proposals. The base-lining process produced a compelling picture of actual capital spend and procurement practices – it highlighted the inefficiencies.”  

After examining the root causes of inefficiencies, the team identified ways to overcome them (see Focus on change section at the end of the article).

Implementation was through three work streams. The first defined and tendered the capital programme. The market was briefed in July 2008 and a number of joint ventures formed to submit bids. Thames Water made a fundamental shift by defining upfront about 50 per cent of the total five-year workload. Tender assessment required the coordination of more than 200 internal staff, and the management of hundreds of bidder queries and site visits. More than 50 negotiation and clarification meetings were held, culminating in contracts being awarded in April 2010.

The second workstream involved the strategic sourcing of tier-two goods, services and materials using best practice strategic sourcing. This required the analysis of 840,000 lines of actual invoice data and the tendering of 72 commodities with more than 300 suppliers. New prices were then negotiated into the tier-one contracts.

The third workstream involves a combined client/contractor team reviewing procurement plans and identifying savings. So far, the team has identified £15 million through joint procurement and it is estimated this will grow to £100 million. Material Requirements Planning (MRP) forecasting systems have been implemented, which give demand visibility to the extended supply chain.

The supply chain transformation has delivered significant efficiencies, including:

• Total contract costs reduced on average by over 20 per cent, which helped to deliver the required level of capital infrastructure investment.

• Tier-two rates negotiated for 72 categories of goods, materials and services saving on average 28 per cent on previous prices, with enhanced specification, quality and service levels.

• Thames Water’s recycled aggregate supply chain was awarded the National Joint Utilities Group UK Sustainability Award. By August, the firm was recycling 99 per cent of its construction spoil, saving 1.3 million tonnes of landfill a year and more than £40 million.

• An innovative legal contract that combined the security of a capped total cost with the gain-share potential, with additional performance incentives, risk transfer and measures to protect regulatory outputs.

• A culture and process to foster collaborative joint procurement across the extended supply chain to optimise the £1 billion yet to be sourced.

• Processes to improve visibility of demand data.

Strategic sourcing

By December 2010 more than 65 per cent of the five-year capital programme had been procured. “The team had to work under intense pressure to help deliver a cost base that could survive the regulator’s funding cuts,” says Bolger. “Despite the pressure and long hours, the guys really enjoyed working in integrated teams with the Efficio consultants and were left with enhanced skills, processes and confidence in using many leading-edge supply chain techniques.”

Bolger says the project has transformed efficiency in the company’s capital supply chain, reducing like-for-like costs by more than £1 billion. The project was shortlisted for the 2010 CIPS/SM Awards, and Bolger won the CIPS Procurement and Supply Chain Management Professional of the Year Award for leading the work.

Steve Shine, chief operating officer, says: “As a measure of the team’s credibility, the business has been willing to invest in supply chain staff, consultancy and systems at a time of wide-ranging budget and headcount cuts. This investment has delivered a real step-change in our costs.”

So what next? “We have largely met the original transformation goals set out in 2007,” says Bolger. “We now have a good team, with enhanced tools, techniques, process and systems. We have won the respect of the business, and our staff are involved early in all projects. The next phase is to enhance our strategic sourcing capability and agility. Once you have won the confidence of the business, you need to keep up with demand.”

The company is in the process of tendering for a long-term contract to outsource its strategic sourcing team. Bolger describes this more as “insourcing agility, capability and category expertise” with a new integrated team based at the company’s Reading offices alongside business stakeholders. The new function is set to go live in April, sourcing more than £500 million of goods and services each year across all core spend categories.

“This integrated outsource model will be a compelling option for ambitious businesses,” says Bolger. One thing is certain: the pressure will remain on Bolger and his team to keep up the good work.

Focus on change

Thames Water overcame inefficiencies by encouraging:

• Commitment. Letting long-term programmes and increasing visibility and commitment of work to enable the best use of resources (plants, labour, materials) and economies of scale.
• Empowerment. Moving to design and build to utilise the full skills and experience of contractors, encouraging innovation and increasing accountability.
• Capability. Encouraging joint ventures to ensure delivery partners have full capability and capacity.
• Competition. Letting fewer, larger contracts locking-in key contractors and suppliers, maximising economies of scale and enabling management to focus on fewer relationships.
• Cost analysis. Mandating full transparency at unit-cost level to enable forensic cost-analysis.
• Control. Extending Thames Water’s control and leverage to 80 per cent of the extended supply chain to ensure leverage is not fragmented by multiple delivery partners.
• Collaboration. Contractors work in a joint team led by Thames Water, supported by forecasting processes for material requirements planning, giving advanced demand visibility to tiers two and three of the extended supply chain.