Innovative Models for Provision of Materials and Services

Presented by Stewart Bell, Manager Procurement

Overview
Background Construction services Equipment and Materials Conclusions and questions

Powerlinks Capital Spend

$800,000,000 $700,000,000 $600,000,000 $500,000,000 $400,000,000 $300,000,000 $200,000,000 $100,000,000 $0 04/05 05/06 06/07 07/08 08/09 09/10

Procurement Trends
In recent years there has been a move to centralised procurement Utilities Country Energy, Transpower Centralise procurement facilitates the ramp up in spend

Construction Services

Different Contract Models

Max. Max. Cost reimbursable (Cost Plus) Owners risk Min. Min.

Target cost Owners flexibility (Schedule of Rates) Contractors risk

Lump sum Min. Min. Contractors incentive Max. Max.

Award Method
Competitive typically aligned with Lump sum Pros Competition high - no incentive to inflate price Supplier may take time to gear up after award Market allocates the work Negotiated typically aligned with Alliancing Only need one supplier Negotiation can start before scope complete Supplier ready to work when awarded Scope flexible BUT clear scope at the outset lowers client risk Cons Need a number of suppliers Can reduce amount of communication up front with suppliers Need less skilled negotiators Scope must be clear at the outset - inflexible Competitive pressure weak - counter with benchmarking / open book Need skilled negotiators Need allocation of work mechanism and probity

Alliancing vs Fixed Price

T.C.E. Gain share
Normal profit Corporate overheads

Variations

Direct project costs

Fixed price

Value for Money

Cost Risk Management Quality Environment/Cultural Heritage/Community Safety Delivery Client focus/ behaviours Industrial Relations

Cost Reimbursable Must Dos

Clear up front what is a project cost verses a project overhead; E.g. Training, bonuses, management costs etc Do not start work until you have a clear scope Ensure that an audit schedule is developed early and make sure that it is delivered Ensure that the effort is put in up front this will pay real dividends on the longer term Get advice from those experienced in this type of contracting research is essential Most State Government Procurement Groups have developed guidelines for use one of note is the Victorian Government Guidelines

Materials

Principal Supplied Items

Some utilities provide some Principal Supplied Items and some do not most do a mixture
Free Issue Must deliver on time or could be liable for delays Item quality must be exactly correct or contractor will seek variation or delays Easier to standardise eg firmware Longer term approach as have to live with the asset for up to 40 years Economies of scale Contractor Supplied Contractor manages their responsibility Quality issues are theoretically managed by the contractor May take shorter term approach unless significant warranty period May lack economies of scale

Equipment Must Dos

Standardise and change equipment in a controlled manner If you do not . opex costs will be higher: spares, training, different faults to investigate, compatibility issues, faults due to lack of familiarity.. Too much standardisation is not enough When you do change: Too much change management is not enough Do not make it a special When you are forced to: Buy the spares now!!!

Equipment Panels
Number of utilities have panels for equipment in place Typically three years with extensions Facilitates standardisation and a more strategic approach to sourcing Helps to reduce the change impact on the organisation Panels can take various forms Number on the panel depends on volumes and redundancy Allocated by competitive tender or on performance Supplier management is an ongoing dialogue, not a set and forget It is intensive and takes energy and time: choose your targets carefully Remember your behaviour too: Good supplier relationships are collaborative Do not forget sub-suppliers: The changes they make are the most dangerous of all

Change Impact
Only so much change a utility can manage Risks come from both the introduction of a new supplier and / or technology Equipment types have different risk profiles Suppliers have different risk profiles Mitigate these risks Factory assessments Factory Acceptance Testing Type testing Routine or batch testing as applicable Procedures and tools must match the products Read and act on test reports before you use the product 360 degree reviews and feedback

Sourcing from Low Cost Countries

Recent shift to more high end manufacturing in China Foreign sponsored companies and native Chinese Benefits more from native companies but risks potentially higher Must reinvest some of the savings to manage the risk .again do in a controlled manner and ensure they manage their suppliers

Asia Pacific Utilities Group

APUG is an international group of utilities who collaborate on supply chain management activities in the Asia Pacific region Number of Australian utilities are already members Benefit in networking and learning from each others successes and mistakes Help reduce risk associated with procuring equipment from new suppliers more comfort if you know someone who is successfully using a product

APUG Members

Conclusions
If your company has significant capital expenditure .. the procurement role is essential If done right procurement will support: Value for money Delivery of the program of work Risk management Lower ongoing operational and maintenance costs Ignore procurement at your peril