Specifications and Supplier Development in the UK Electrical

Specifications and Supplier Development in the UK Electrical Transmission and Distribution Equipment Industry Tom Mc. Govern and Chris Hicks University of Newcastle upon Tyne IGLS 04/1 Dr Tom Mc. Govern and Dr Chris Hicks

Definition of a Specification • “ a written description of a product that is generated beforehand to guide the development of the product” (Smith and Reinertsen, 1991, p 81). • “forum for dialogue” (Nellore and Söderquist). Dr Tom Mc. Govern and Dr Chris Hicks IGLS 04/2

Purpose of a Specification • To state the requirements concerning the performance and technical attributes of a product. • To give guidance on the process of making and using a product. Source: BS 7373, 1998 Dr Tom Mc. Govern and Dr Chris Hicks IGLS 04/3

Performance or Functional Specification • “specifies requirements in terms of features, characteristics, process conditions, limits and exclusions defining the performance of the product” Source: BS 7373, 1998, p 1 IGLS 04/4 Dr Tom Mc. Govern and Dr Chris Hicks

Product or Technical Specification • “ document that prescribes the requirements that the product needs to fulfil in order to conform to the performance specification”. Source: BS 7373, 1998, p 1. IGLS 04/5 Dr Tom Mc. Govern and Dr Chris Hicks

Specification of Processes • Broad and general. • Dependent on internal and external standards (BS, NGTS, IEC, ISO). IGLS 04/6 Dr Tom Mc. Govern and Dr Chris Hicks

Previous Research • • High volume automotive industry Black box engineering. Models of the specification process. Little research conducted in to the low volume, capital goods sector. IGLS 04/7 Dr Tom Mc. Govern and Dr Chris Hicks

Purpose of this Paper • Application of specifications in the UK electrical transmission and distribution equipment industry. • Case studies of National Grid Company and one of its strategic suppliers. IGLS 04/8 Dr Tom Mc. Govern and Dr Chris Hicks

Electricity Industry • In 2001, the electricity industry accounted for 13% of all industrial investment in the UK and contributed 1. 2 % to GDP (DTI, 2003). • Highly capital intensive, with total assets of £ 135 billion, or 4% of the total capital stock of UK industry (DTI, 2000). IGLS 04/9 Dr Tom Mc. Govern and Dr Chris Hicks

Research Methodology • In-depth case studies. • Explore the type of specifications issued by NGC. • NGC’s supplier development initiative. • SSADM to explore internal processes at Supplier. Co and its external communications with customers and suppliers. IGLS 04/10 Dr Tom Mc. Govern and Dr Chris Hicks

Research Methodology (cont. ) • Understand the processes and issues related to specifications. • Investigate how the business processes interacted in response to invitations to tender. • Identify how Supplier. Co put together tenders. IGLS 04/11 Dr Tom Mc. Govern and Dr Chris Hicks

Privatisation of Electricity Supply Industry • 1989 Electricity Act provided the framework for the privatisation of the electricity industry (CEGB) in the UK • Fossil fuel power stations transferred to four generating companies: Power. Gen and National Power in England Wales, and Scottish Power and Hydro-electric in Scotland IGLS 04/12 Dr Tom Mc. Govern and Dr Chris Hicks

Privatisation (cont. ) • Nuclear stations transferred to Nuclear Electric. • NGC took responsibility for operating high voltage transmission grid in England Wales (400, 000 and 275, 000 volts). • Twelve Regional Electricity Companies took responsibility for supply and distribution. IGLS 04/13 Dr Tom Mc. Govern and Dr Chris Hicks

National Grid Company (NGC) • Operates and maintains the 4, 500 -mile transmission grid. • Operates the electricity connectors between England Scotland. • Operates the cross-Channel transmission link to France. • Responsible for maintaining the physical assets and ensuring the long-term IGLS 04/14 reliability of the grid. Dr Tom Mc. Govern and Dr Chris Hicks

NGC (cont. ) • Monopoly position as a system operator. • Regulated by OFGEM. • Under the New Electricity Trading Arrangements (NETA), NGC is to guarantee the quality and reliability of electricity across the network and to balance aggregate supply and demand. IGLS 04/15 Dr Tom Mc. Govern and Dr Chris Hicks

National Grid Technical Specifications (NGTS) • NGC is cost driven. • Substantial technical expertise. • Substantial body of explicit and implicit knowledge. • High age profile of engineers at NGC and its suppliers. • Detailed technical specifications for critical new components. IGLS 04/16 Dr Tom Mc. Govern and Dr Chris Hicks

NGTS (cont. ) • NGTS documents are available on the web to approved suppliers. • Specifications are orientated towards a single integrated grid to give stability of supply. • Specification defines the product requirements to meet performance standard specified by the Regulator (99. 4% availability of supply). IGLS 04/17 Dr Tom Mc. Govern and Dr Chris Hicks

NGTS (cont. ) • Type Registration system for plant and equipment to ensure compliance with NGC technical standards and specifications. • All equipment has to be pre-approved by NGC. • NGC controls design solutions. • NGC seeks well-proven solutions and very high reliability NOT innovation. IGLS 04/18 Dr Tom Mc. Govern and Dr Chris Hicks

NGTS (cont. ) • Tender documents are framed in terms of functional or ‘application’ specifications. These are underpinned by the NGTS framework. IGLS 04/19 Dr Tom Mc. Govern and Dr Chris Hicks

Supplier Development • First tier suppliers of transmission and distribution equipment are assessed as part of the tender evaluation process. • Suppliers are assessed on tender price, tender compliance, capability and performance. IGLS 04/20 Dr Tom Mc. Govern and Dr Chris Hicks

Supplier Development (cont. ) • The capabilities of suppliers are assessed on ten criteria: management systems; contract management; safety, health and environmental; scheme development; tenders; design management; programme management; supplier management; site management; commissioning and postproject support. IGLS 04/21 Dr Tom Mc. Govern and Dr Chris Hicks

Supplier Development (cont. ) • Suppliers are assessed on a scale of 1 to 10 in each of the ten categories: 1 is inadequate, 3 is poor, 7 is good and 10 is excellent. • Suppliers are shown their individual performance on the basis of the assessment criteria plus a comparison with other suppliers. IGLS 04/22 Dr Tom Mc. Govern and Dr Chris Hicks

Supplier Development (cont. ) • NGC works with suppliers to develop a programme and action plan to improve their capabilities. • Supplier performance during each contract is assessed on the basis of project delivery, site delivery and commercial criteria. • NGC has a considerable amount of data for tender evaluation. IGLS 04/23 Dr Tom Mc. Govern and Dr Chris Hicks

Supplier Development (cont. ) • Supplier development strategy guarantees quality assurance and helps suppliers to improve their capabilities and performance IGLS 04/24 Dr Tom Mc. Govern and Dr Chris Hicks

Supply Chain Management • Collaborative as opposed to partnership relationships. • Shift from a product development strategy to supply chain management. • NGC is seeking integrated solutions that encompass product development, construction, tendering, project delivery, maintenance and demolition. IGLS 04/25 Dr Tom Mc. Govern and Dr Chris Hicks

IGLS 04/26 Dr Tom Mc. Govern and Dr Chris Hicks

Supply Chain Management • From January 2004, NGC will not approve components. • Lower-tier suppliers must link in with a first -tier solution provider. • Principal contractor is responsible for ensuring that the product meets NGC standards. • Creation of ‘super clusters’. IGLS 04/27 Dr Tom Mc. Govern and Dr Chris Hicks

Supplier. Co • Produces a wide range of equipment including air-insulated and gas-insulated switchgear. • Restructured into SBUs: Projects, Protection, Automation and Control (A&C). • Tenders come to A&C via Projects. • Projects undertakes the risk management. IGLS 04/28 Dr Tom Mc. Govern and Dr Chris Hicks

Restructuring • Shift from a functional to a customerfocused structure. • Senior engineers operate across the main functions of the business. • Senior engineers are responsible for planning and controlling the project. • Senior engineer liaises directly with the customer. IGLS 04/29 Dr Tom Mc. Govern and Dr Chris Hicks

Tendering • An issue of accuracy with site drawings provided by NGC. • Each clause has to be checked to ensure compliance with NGTS, BS, ISO or IEC standards. • Some specifications are onerous and sometimes over specified resulting in higher costs for the testing of products. IGLS 04/30 Dr Tom Mc. Govern and Dr Chris Hicks

Tendering (cont. ) • NGC system stifles creativity and innovation and increase costs. • Issuing of standard documents to trusted contractors would allow the supplier to indicate non-compliance in particular areas of the tender. • Would prefer to offer alternative products (noncompliant) with improved technology. IGLS 04/31 Dr Tom Mc. Govern and Dr Chris Hicks

Tendering (cont. ) • Supplier. Co always bids compliant. • When seeking quotations or ordering equipment, the relevant sections of the specification are passed to the suppliers. • Primary role of tendering is to develop tenders that achieve the correct price, quality and delivery date to meet customers’ requirements. IGLS 04/32 Dr Tom Mc. Govern and Dr Chris Hicks

Tendering (cont. ) • Takes 7 to 10 days to prepare a tender and involves two to three people working on it part-time. • The work content is generally 80 -100 hours. • 20% tendering success rate. IGLS 04/33 Dr Tom Mc. Govern and Dr Chris Hicks

Benefits of NGC System • NGC management of specifications and supplier development initiative give the Company control of product development and fulfilment processes throughout the supply chain. • Supplier development strategy makes purchasing decisions transparent to suppliers and the Regulator. IGLS 04/34 Dr Tom Mc. Govern and Dr Chris Hicks

Benefits of NGC System (cont) • Engineering competence of NGC is recognised throughout its supply chain and also internationally. • Ensures the adoption of appropriate quality standards throughout the supply chain. • Specifications need to reflect the changing nature of the industry. IGLS 04/35 Dr Tom Mc. Govern and Dr Chris Hicks

Benefits of NGC System (cont. ) • Specifications should take into account the type and amount of information given to or obtained from suppliers. • Few first-tier suppliers and mutual dependence between NGC and its suppliers. • NGC has a large investment in embedded knowledge. IGLS 04/36 Dr Tom Mc. Govern and Dr Chris Hicks

Benefits of NGC System (cont. ) • Design of distribution products is not driven by competition. • Emphasis on reliability and cost reduction to satisfy the Regulator and satisfy shareholders. • Specifications are static, therefore the focus is on supplier development. IGLS 04/37 Dr Tom Mc. Govern and Dr Chris Hicks

Conclusions • Detailed technical specifications reduce the design choices available to suppliers, which may constrain innovation and increase costs. • NGC is adopting functional specifications, but they will be embedded within a comprehensive framework of detailed technical specifications. IGLS 04/38 Dr Tom Mc. Govern and Dr Chris Hicks

Conclusions (cont. ) • Integration of knowledge is NGC’s core competence. • NGC seeks to develop its technical expertise rather than capture it from suppliers. • Supplier development programme controls costs and encourages suppliers to maintain and develop their capabilities. IGLS 04/39 Dr Tom Mc. Govern and Dr Chris Hicks

Conclusions (cont. ) • The programme promotes competition between suppliers. • Specifications influence the power balance between customers and suppliers. • Specifications have a large influence on performance, capital and operating costs. • Specifications are a strategic issue. IGLS 04/40 Dr Tom Mc. Govern and Dr Chris Hicks