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Cutting the cost of failure in rail procurement

Annette Gevaert, Director of Rail and Transport at Achilles, explores the knock-on costs when suppliers fail – or fail
to deliver.

The Department for Transport has committed over £38bn for Network Rail to run and improve the network between 2014 and 2019. Under the CP5 spending plans billions of pounds will be channelled into updating stations, building new track and increasing capacity – more than 7,000km of track and nearly 6,000 sets of points will be renewed or refurbished, and 7,000km of fencing and 300,000m2 of station platforms will be replaced or renewed.

This is just an example of the scale of spend underway in the rail sector – “record amounts,” according to transport secretary Patrick McLoughlin.

But with such large sums being spent, we need to ask if procurement professionals are protecting their investments by adequately mitigating risk?

Be prepared for a shock. Recent research* suggests that there are significant annual costs associated with supply chain failure.

Global supplier information firm Achilles, which manages Link-up, the supplier registration and pre-qualification scheme, commissioned independent consultancy IFF to survey a broad industry base including businesses in rail. Results showed that supply chain failure is costing annually an average of £165,600 in total per business.

That includes: suppliers failing to deliver on time; the failure of a supplier to deliver the required service in terms of quality; the financial failure of a supplier; natural disasters and severe weather; damage to reputation due to a supplier; failure of a supplier to meet its health and safety obligations; industrial action; exposure to litigation due to a supplier; and acts of terrorism or conflict.

The most common cause of failure is a supplier failing to deliver on time, experienced by 64% of those surveyed and resulting in an average cost of £58,000. Just over half (53%) experienced an issue with suppliers failing to deliver products of the required quality, 34% of whom incurred a cost. The average bill was £111,500.

And ranking third in the most common causes of failure is a supplier going bust. One third (37%) experienced the financial failure of a supplier, with 44% paying a financial price. The average cost was £73,000.

Examples of suppliers to the rail sector failing financially are not difficult to find.

Only in January, Bombardier supplier Engments failed after operating for more than 50 years. In November Vital Services Group, the largest supplier of labour for Network Rail, went into administration, affecting 2,200 workers. And earlier, in August last year, Railcare, the company that maintains the Royal train, went bust with the loss of 150 jobs.

Of course, a supplier going out of business could also be the reason for ‘a supplier failing to deliver on time’. But then there are other risks too, such as a supplier failing to comply with health and safety rules. A failure of this nature can bring even greater costs in terms of loss of life, litigation, delays, and damage to reputation.

Some 5% of respondents had been exposed to litigation – with an average pay-out of £110,000 for those where a cost was involved – and 10% of those surveyed experienced damage to reputation, with an average cost of £292,000 to those experiencing cost.

With such significant costs being incurred it is important that buyers ensure that risk of supplier failure is minimised. Of course, not
all failure costs can be avoided, but efforts need to be made to identify early indicators of failure so that their impact can be mitigated – and the way to achieve this is to get smart with supplier information.

Those in charge of procurement and supply chain management should not shy away from investment, but must act swiftly to put processes in place that provide in-depth, accurate and validated information on suppliers – and critically, this should include detailed and up-to-date financial data.

Managing supplier information need not be a costly in-house operation. Working in a collaborative community of suppliers and buyers aligned to the railway sector, economies of scale make thorough checks on data a viable and highly efficient option, bringing operational benefits to both buyers and suppliers. By being part of the community, the costs are shared and data only needs to
be maintained at one central location, where it is checked by one centralised resource – all of which makes life easier for suppliers too.

Taking action to manage supplier information in the right way can reduce exposure to risk and cut the expense of supply chain failure.

*Research was conducted on behalf of Achilles by IFF Research in January 2014 amongst 146 directors, procurement managers and buyers of large UK businesses. 

(Image: Steve Parsons & PA Wire)

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