Navigating the Waters: Challenges and Solutions for the UK Water Industry in AMP8
Asset Management Period 8 (AMP8) provides an interesting but difficult challenge for the UK water industry to navigate in the not-too-distant future. The new AMP8 will be rolled out in April 2025, meaning water companies are gearing up for the changes that it will entail. Companies will be left with the challenge of balancing the imperative to achieve net-zero emissions by 2030, two decades ahead of the UKs wider net-zero target, with wider challenges such as disruptions to the supply chains, labour shortages across the industry, and rising costs. In this article we will delve into how robust Supplier Relationship Management (SRM) practices, will be able to help the industry to overcome these challenges.
Balancing the Drive to Net-Zero
The UK water industry has been at the forefront of sustainability initiatives, with a commitment to achieving net-zero carbon emissions. We’ve seen companies already making great leaps in this space, for example Thames Water have cut their emissions by 588ktCO2e compared with what they were generating in 1990, whilst Severn Trent Water are building the world’s first carbon neutral waste treatment plant in Staffordshire. While this drive is commendable, it presents additional challenges in terms of upgrading infrastructure, adopting innovative technologies, and implementing sustainable practices. These initiatives require substantial financial investment and operational changes, in an industry which is already struggling with large debts, creating a delicate balancing act for water companies.
Escalating Costs
The water industry faces the dual challenge of addressing environmental concerns while grappling with rising costs associated with infrastructure upgrades, compliance with regulations, and the adoption of green technologies. To highlight how much of an issue this is, using Thames Water as an example, 20% of all bills paid by the customers in 2023 simply went towards servicing the debt owed by the company to the government. The need for substantial investments in technology, infrastructure and innovation places a strain on financial resources, potentially affecting service delivery and project timelines. With the costs increasing for these companies, it’s the consumers that are being impacted with the average annual water and sewerage bill for customers in England and Wales rising by 6% in 2024. This just highlights how difficult a task the water industry faces over the coming years.
Disruptions to Supply Chains
Global events, geopolitical tensions, and the ongoing effects of the COVID-19 pandemic have exposed vulnerabilities in supply chains across industries. The water sector is no exception, with disruptions impacting the timely delivery of critical materials and equipment, significantly disrupting the path to sustainability. A study conducted by Atkins and Frontier economics showed that the pandemic alone caused an industry-wide reduction in return on regulated equity between 0.35% and 0.97% over the entirety of AMP7. It is events like this which suppliers need to be aware of and actively plan to mitigate against any adverse impacts to their overall services and supply chains.
Labour Shortages
The water industry, like many others, is grappling with labour shortages, hindering project execution and maintenance activities. An ageing workforce and increased demand due to a growing population and an increased expectation to reach sustainability targets, is causing problems for suppliers. It is predicted that 63,000 vacancies will need to be filled within the water sector over the next decade to maintain and ultimately advance levels of service. Currently only 1% of the workforce in the UK in the water industry are graduates, which leaves a long-term problem of more workers leaving/retiring than starting out in their careers in the industry. Skilled professionals are in high demand, and attracting and retaining talent poses a significant challenge.
SRM and how it can help
State of Flux works with suppliers in the water industry to be proactive and work closely and collaboratively with their suppliers to ensure robust SRM governance procedures are in place, proactive risk management strategies are adopted and continuously improved, and overall supply chain resilience is reviewed and improved over time to be prepared for any disruptions. The following are examples of SRM best practice which can be implemented to ensure the smooth transition to AMP8:
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State of Flux have designed, built and refined a best-in-class SRM playbook for suppliers to follow in order to get the best value from their relationships. This playbook includes all things SRM from segmentation, treatment strategies, governance procedures and best in class templates and tools for supplier managers to use in their day-to-day operations. The idea is that one standard approach for SRM is embedded and ingrained into the ways of working, ensuring mutual added value is gained from all supplier relationships, and ultimately ensuring a smooth transition from AMP7 to AMP8.
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A well-structured SRM program includes risk management strategies to identify and mitigate potential disruptions. By establishing contingency plans and fostering open communication channels, water companies and suppliers can navigate uncertainties collaboratively, ensuring the resilience of the supply chain.
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State of Flux run capability assessments which can be used to baseline the overall skills and competencies of the workforce. From there, targeted training can be rolled out to upskill and ensure, despite labour shortages, that the remaining workforce have the desired skills to maintain consistent growth and to meet the growing list of challenges faced by the sector.
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Working closely with the supply chain is imperative to negotiate current challenges such as supply chain disruptions and escalating costs. We recommend either Supplier Summits or more focused Joint Business Planning (JBP) sessions to work with key strategic suppliers, focusing on new innovations in the marketplace and creating value release initiatives, which can help to add value to both parties throughout the duration of AMP8.
Conclusion
As the UK water industry prepares for AMP8 in 2025, the challenges of achieving net-zero, managing escalating costs, addressing disruptions to supply chains, and overcoming labour shortages are formidable. Implementing robust Supplier Relationship Management practices, including substantial governance measures, is instrumental in navigating these challenges successfully. By fostering collaboration, transparency, and adaptability, the water industry can build a resilient foundation for sustainable and efficient operations in the years to come.
Author: Joe Brown, Manager Consultant at State of Flux