Will Supply Management Be Added to the List of Challenges to Water Utility Managers?

procurement plans

By Jim Baehr

Water utilities were already facing a long list of challenges before COVID-19. Add to the list employee health protection, shutoff moratoriums, intensified affordability issues, unstable cash flow, the inability to foresee the “new normal” and matters become more complicated. It’s probable the list will continue to grow. Will supply management, defined as — identifying, acquiring and managing resources and supplier relationships that are essential to operations — be added to this list of challenges?

According to AWWA, 56 percent of utilities surveyed indicate experiencing PPE supply chain issues due to the pandemic. In the early stages of the emergency there were expressed concerns of interruptions to the supply chain for treatment chemicals. These supply chain issues may be short term, or not. What we are experiencing isn’t a typical risk event. The scale surpasses anything that even the savviest supply chain leaders could have anticipated.

At the outset there was an absolute need to respond quickly and confidently to shape and execute short-term tactical plans for goods and services. At this point the more compelling need is to understand the implications of the disruptions that are rippling through the global supply system. The events that began to play out in early March 2020 literally decimated the foundations of the modern supply chain. Even the biggest and most well-resourced supply management organizations are struggling. The pressing question for water utilities is, “Do we have the capability and capacity to deal with supply chain uncertainties?”

The Challenge

For most water utilities procurement is viewed as a function. It’s not expected to deliver value – just goods and services. It’s a linear process of defining requirements, issuing solicitations and awarding based on low price. Risk is mitigated by insurance or bonds. Compliance is essential as it should be for any public entity. But the line of sight is straight ahead and not designed to grasp the big picture. Procurement has difficulty seeing the landscape on the other side of the compliance guardrails.

Generally, agreements are short term — one or two-year arrangements — making the process repetitive and labor intensive. This tactical approach devalues the need for sourcing or category strategies. Procurement is more about completing purchase orders than about developing supply market knowledge. Market knowledge comes merely from evaluation of bid responses to solicitations.

The public utility procurement process is not designed to exercise alternative sources of supply. Moreover, there’s an unhealthy reverence for precedent — “that’s not the way we do things.” Adapting becomes stymied when an entity defines itself by what it does versus what it knows.

The Reaction

When cash flows decline organizations look at what functions can be reduced or removed. If procurement is viewed solely as a function its people and their become targets for furlough or elimination. The reasoning — fewer purchase orders, fewer solicitations, less heavy lifting and the possibility to automate these repetitive business processes. This logic can be validated anecdotally by the influx of calls to e-purchasing software providers over the past few months to inquire about functionality, availability and costs associated with these cloud-based tools. The expectation is that technology can make up for any reductions in purchasing headcount.

The Uncertainty

One of the downsides is that water utilities are local — they’re islands — unconnected with what other water utilities are doing when it comes to best practices or sharing experiences. This may be one of the reasons for the slow pace of change when it comes to procurement. Matters are viewed through a local lens. Taking for granted that products and services will always be there from the supplier next door could be shortsighted.

Goods and services are often in some way indirectly acquired through large national suppliers/distributors. These suppliers are inextricably linked to the global supply chain. While there may be mandates to buy American, what goes on in other countries will affect a local water utility. It’s naïve to believe that secondary and tertiary suppliers of critical components, both electronic and mechanical are all U.S.-based.

There has never been a better reason to challenge the established norms and to rethink procurement.

Chemicals is a global business — pipes and fittings are global — how much do you know about the current state of plastic, steel, and ductile iron pipe suppliers? Even when markets are stable, water chemicals have been pulled from the market causing the need for a quick change — think about what goes into recertifying a new product. And what are the implications, if any, of the major ductile iron pipe suppliers being located in the same immediate geographic area?

Availability can almost instantaneously become a costly problem. Ask the state buyers of PPE — who found themselves bidding amongst each other and the federal government to get critical medical supplies. New York Gov. Andrew Cuomo, an outspoken critic of the situation said it accurately, “This is not the way to do it, this is ad hoc, I’m competing with other states, I’m bidding up other states on the prices.”

As for capital projects thinking “we can rely on our contractors’ buying power” may be delusional.

Finally, can local suppliers continue to sustain themselves when 80 percent of their business revenues could be significantly impacted by your decisions to cut projects and forego purchases?

Changing Relationships

Accept that many risks are relationship-specific.

Many suppliers are cutting sales positions while not cutting their sales forecasts or quotas. The high-end performers will be retained to focus on maintaining the “good customer” relationships. Sales executives will not dedicate their best performers to handling transactional relationships. The same applies to expecting suppliers will be willing to renegotiate pricing.

What to Do

There were tough decisions and lessons learned by water leadership during the great recession of 2008-2009. Many are being revisited to determine which can be applied. It’s important to recognize the great recession was a financial crisis with an emphasis on cost reductions. COVID-19 is having the same financial effects, but it is also a global supply chain crisis that requires attention to availability and sustainability.

While priorities may differ every water entity large and small needs to be able to answer the following:

  • What supply risks pose the greatest threat to our ability to operate?
    – How are these risks being mitigated?
    – How do we embed supply risk management into our procurement decisions?
  • Who are we doing business with and how well do we know them?
    – Are they critical? Are they stable? Will they survive?
    – What suppliers/subcontractors are they using that may expose us to risk?
    – How well do we communicate with them?
    – Are we viewed as a “good” customer?
  • Do we clearly understand the terms and conditions of our contracts?

For all those water entities advocating for innovation, accept that now is the time to advance how you do supply management. There has never been a better reason to challenge the established norms and to rethink procurement. It’s time to start developing buying strategies and committing resources to understanding the big picture of the supply chain. There are two priorities — risk and value, not price and transactions — to enable agility in supporting capital programs and operations.

View procurement as a resource not a function. Invest in understanding your supply management capabilities and capacity. Not knowing this is dangerous. Finally, invest in your procurement professionals. Developing their competence is crucial to sourcing success in our post-COVID world.

Jim Baehr is the founder of the Sourcing Strategies Group, supporting the supply management needs of clients in both public and private sectors. He has also served as an independent advisor leading transformation initiatives and supply management projects for chemicals, energy, retail and water clients. Baehr is a frequent contributor to WF&M.

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