FEATURE:SUPPly CHAIN smoother, flatter roller coaster ride that many in the supply chain would welcome. 1 Energy &Utility Skills Labour Market Investigation of the UK Water Industry. Autumn 2004 2 CIPD (Chartered Institute of Personnel and Development) Fact Sheet – Survey Results updated 2010
THE AMP CyClE AND INNOVATION - A SUPPly CHAIN VIEW By David Smoker, Chair, SBWWI Although privatisation of the UK water industry has brought much needed investment in infrastructure, it is my contention that the regulatory regime has not engendered effective uptake of innovation. The recent HM Treasury report1 on smoothing the cyclical nature of the industry considered the implications of a 2012 study carried out by IMS Consulting which looked at the impact of the current 5 year cycle on the industry2. In all the areas considered – morale, resources, staff turnover, profitability, efficiency and innovation – there were consistent negative responses from the supply chain. Interestingly, nearly 20% of suppliers believe that continuation of the current process would either force them to leave the industry or put them out of business, while all 5 responding water companies expected their suppliers to continue as they are now.
WHAT IS AT THE ROOT OF THIS DISCONNECT? Ofwat tasks the water companies to provide efficiencies in order to maintain customer bills at an affordable level.
However, the mechanisms for bringing innovation through are neither clear, nor consistent between the water companies. A straw poll among suppliers indicated that it takes at least 3 years for innovations to go through the process of approval and take up, and that water company materials approval groups often seem to act as gatekeepers to prevent new products being approved and used.
Although innovation can help drive those efficiencies, SBWWI members are concerned that the risk element associated with innovation has not been properly recognised within the determinations leading to reluctance by the water companies to take up truly innovative products and/or processes.
Very few companies want to be a guinea pig so the convoluted product approval process has to be repeated in each company. Innovation is supposed to lead to efficiency but the current process itself is inefficient. We know that every water company claims to be different but why not a ‘clearing house’ for innovative ideas so that we don’t end up reinventing the wheel with every water company?
The expectation is that the supply chain that will bring innovative products or services to the water companies. But one manufacturer has said to me “why should I bother discussing potential innovation with the water companies. I invest my money to help the water company to become more efficient, but at the next determination any efficiency is scooped up by Ofwat under comparative competition, efficiency targets are reset and we are back to talking about cost per unit”. SBWWI believes the incentivisation of innovation could play a significant role in improving service delivery. It is important that incentives for innovation allow for products and services delivering benefits over the medium and long term. It is equally important that the disincentives inherent in the current approach are removed. We would also like to see some ring fencing of funds for innovation that enable water companies to adopt a greater degree of risk taking in this area without a deleterious impact on ongoing activities. We are somewhat encouraged that Ofwat’s ‘Future Price Limits – Statement of Principles’ posits the introduction of Totex, to bring more of a balance between Capital cost and Operational cost. The supply chain (and I am sure the water companies) would like clarity on how Ofwat will treat innovations within Totex and particularly the time horizons that will be allowed. When carbon costing is included in Totex, life cycle analysis must be carried out over time periods inconsistent with the 5 year cycle.
Our suggestions for improving the uptake of innovation: • Water companies acknowledging the impact of the AMP cycle on innovation from their contractors and materials suppliers. • An incentive mechanism established to encourage future R&d investment from the water companies, which in turn would relieve some of the pressure on the supply chain to take all the risk. • Clarity from Ofwat on Totex time horizons to reflect the risk/benefit of innovation uptake. • Best Materials Groups to actively promote innovative products and solutions, rather than acting as gatekeepers. • A water industry clearing house for innovation. Innovation is in the lifeblood of suppliers but innovations can only bring the efficiencies that the Water Industry needs if they are implemented, and in a timely manner. 1 Smoothing investment cycles in the water sector, H M Treasury, July 2012 2 www.britishwater.co.uk/what_we_do/AMP_Cycle_Summit_23_ February_2012.aspx 3 Independent Review of Competition and Innovation in Water Markets, Professor Martin Cave, April 2009
do you agree?
Professor Cave’s report on competition within the industry3 considered moving to a more commercial paradigm, leading to innovation, in turn leading to greater efficiency.
The Institute is keen to hear what you think about this issue for a follow up feature in our next issue.
Water companies need innovation to achieve their stretching efficiency targets and most have appointed innovation champions within their organisations, specifically tasked with bringing innovation on board.
Please contact Lyndsey Gilmartin on 0191 4220088 if you would like to be involved.
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