9 December 2010 | Lindsay Clark

The UK transport minister has announced an overhaul of the rail industry after a report found supply chain inefficiencies in the sector.

The shake-up of the industry could reduce running costs by up to £1 billion a year and lead to better and more efficient train services, said transport secretary Philip Hammond.

His announcement follows the publication of the interim report, Rail Value for Money Study, by Sir Roy McNulty. He found that the key to making these savings was much closer working and alignment of incentives between train operators and Network Rail, the publicly owned infrastructure company, and strong leadership across the industry.

Hammond insisted on a “relentless drive for efficiency on the part of the industry” in parallel with the government’s multi-billion pound rail investment programme. He has promised to set up “a high-level government and industry group” to help Network Rail and train operators to work together more efficiently.

Sir Roy’s study, jointly sponsored by the Office of Rail Regulation, said that in 2008, international benchmarking found an efficiency gap between Network Rail and the top-performing European railways of between 34 and 40 per cent. “This was supported by bottom-up benchmarking which [also] showed an efficiency gap between Network Rail and comparator countries, much of which could be explained by differences in procurement strategies, engineering work arrangements, and approaches to asset management,” the report said.

“We have identified examples of good supply chain management practice within current industry structures,” it said. “However, there are many areas where significant improvements could be made.”

These include poor demand management, which caused a significant boom and bust demand profile, particularly in rolling stock. Evidence suggested that the industry fails to challenge requirements, plans or costs sufficiently at an early stage, particularly in terms of value for money.

The report said there was also an overly complex supply chain in the rail industry, with not enough standardisation. It found that levels of trust and collaboration in the industry were low. “Other industries appear to have been more successful at developing mechanisms to encourage partnership with suppliers while retaining the advantages of competition,” it said.

Sir Roy’s final report is expected in April 2011.