As vital service providers, Power & Utility companies are on the frontline of the COVID battle:
How can Procurement help prevail this challenge?
Enduring COVID-19 and its aftermath could be the most challenging task of our times. As we dive into a global recession with uncertainty, companies are torn between protecting financial returns and ensuring business continuity.
Compared to other sectors, the Power and Utilities industry is well-prepared to handle major disruptions. Robust contingency plans are in place to tackle unexpected outages and natural disasters. However, the current situation is unlike any past disruption and so, companies need to act now in order to successfully combat this battle.
Companies are seeing their revenues drop as consumption declines
Industrial and commercial customers account for the majority of energy and water consumption in the UK. Even though household consumption saw a spike due to the novelty of working from home, the decrease in industrial and commercial demand has negatively impacted sector revenues.
- Italy, which is ahead of the pandemic curve, has seen its electricity demand decrease by an average of 22% in March 2020 compared to the same period last year, as illustrated in Figure 1
- Industrial gas consumption in Italy is also on a downward trend
- In addition, water companies expect to see their revenues drop similarly to the US, as a result of the COVID-19 outbreak
Figure 1: Comparison of electricity consumption between March 2019 and 2020 in Germany, UK and Italy (Source: Statista, INVERTO Analysis)
Payment deferments threaten liquidity
To provide financial relief the government has given private households and business customers the option to defer payments. This means, cash holdings for Power and Utilities companies will be quickly diminishing, putting liquidity at risk, especially as the rebound will not be a walk in the park.
Unforeseen operating costs are straining margins
The sector is providing vital infrastructure and services to maintain normality even amid the crisis and this is putting operations under remarkable strain. For instance, the scarcity of toilet paper led to consumers using wet wipes as substitutes causing blockage of the sewage system.
Operating costs cannot be cut to match the decrease in revenue but rather spin out of control due to limited availability of labour and material, the main drivers.
- Installation, maintenance and customer support services are labour intensive, and companies rely on the availability of internal workforce supported by temporary labour
- As companies see labour shortages due to sickness or isolation of key workers, the need for more costly temporary labour to fill the gaps increases
- Considered non-essential businesses, suppliers of equipment and spare parts face production halts and a decrease in output, endangering supply continuity for critical maintenance parts
- Lead times for the supply of parts is also affecting material shortages, jeopardising a smooth flow of operations
Procurement can safeguard profitability and reduce operational burden
There is a real need for companies to act fast to tackle margin erosion, manage liquidity and operational stability. Procurement can create visibility on company spend, supply base and business requirements and is therefore well placed to stimulate cash flow and identify savings opportunities while avoiding operational disruption.
As Lance Younger, Managing Director at INVERTO, puts it “Covid-19 is testing the business resilience of Power & Utilities companies. Now more than ever, Procurement has a pivotal role to play in unlocking inherent cost benefits and adopting deep supplier collaboration principles to stabilise operations”.
To get through the crisis, Power and Utilities companies should consider the following actions which can help dampen the financial impact and protect operational stability.
Figure 2: Recommended procurement measures for power and utilities companies in times of COVID-19 (Source: INVERTO, 2020)
1. Smoothen operational activities
- Assess inventory of (non-)essential maintenance parts including min/max levels to account for longer lead times for critical parts
- Postpone enhancement and estate upgrades unless work is critical or where a halt would lead to significant additional expenses, so that pressure on operations and costs can be relieved
- Identify business critical suppliers and tier them by risk to ensure operations remain stable. For example, pay crucial temporary labour suppliers upfront, if cash is not an issue
2. Re-evaluate operating costs to release pressure on margins
- Apply radical demand management measures and reduce service levels to “minimum viable operations” on categories such as Marketing or even selected parts of HR and Facilities Management. Eliminate discretionary spend and establish a rigid process to sanction spending on ‘needs vs wants’
- Conduct competitive tenders or targeted renegotiations in areas less impacted by COVID such as Telecoms and Fleet to deliver cost savings. Guaranteeing stable demand can go a long way in obtaining preferable terms in such uncertain times. Simultaneously streamline specifications to leverage buying power and make yourself efficient to serve for your key suppliers
- Take advantage of declining commodity prices to negotiate and lock-in improved terms on spare parts and CAPEX with the option of offering long-term contract terms
3. Collaborate with suppliers to emerge stronger together
- Explore deep supplier collaboration opportunities especially with long term suppliers to gain preferred status and desired service levels during unforeseen demand levels
- Take advantage of the low interest rates currently available to create mutually beneficial opportunities by securing liquidity for you and your suppliers through supply chain finance
- Review the supply market and initiate supplier qualification process for alternative new suppliers to prepare for the rebound, build redundancy in your supply chain and reach cost efficiencies
As a provider of vital services, the Power and Utilities sector plays an indispensable role in battling the COVID-19 outbreak. Thus, even amongst the economic disruptions, operations need to continue. Hands-on procurement management can help safeguard margins and increase business resilience to navigate through unexpected events
As we transition into the next phase of the virus battle, would you like to learn more about procurements role in this fight?
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