The relationship between train operators and SMEs seems set for change. Along with the Department of Transport’s major re-franchising programme, presently under way for the UK’s railway networks, comes a significant shift in the government’s view on the length of time over which the new franchises will run – extending terms that were commonly six or seven years to about 15 years for the new franchisees.
The government’s decision to lengthen the period of the franchises is founded on the sound principle that the extended terms will enable train operators to commit to higher levels of investment and encourage greater innovation, which should in turn reduce costs and result in greater value for passengers and taxpayers. But extending the period of the franchises will in many instances alter the structure of the train operators’ back-to-back goods and services contracts that support the franchises, as they too seek longer contracts with their suppliers.
According to Kevin Bartlett, head of procurement at First Great Western: “As train operators seek to maximise through-life value for money and drive innovation in their supply chains, contracts will typically be longer in duration, higher in value and commercially more complex. To ensure we genuinely achieve the mutual opportunities in these contracts it is vital that they have effective mechanisms that genuinely enable visibility of the second and third tier supply chain. Otherwise, there is a real risk that, in the future, train operating companies will miss out on the innovation and value that those SMEs undoubtedly bring to the rail industry.”
Bartlett goes on to say: “This means, as we look to develop even closer, more collaborative relationships with the prime contractors, through joint performance reviews and by exploring gain-share opportunities and workshopping processes, it is vital we include our key second and third tier suppliers in that process – many of which will be SMEs.” Bartlett believes much of the innovation in the railway industry comes from those small and medium-sized enterprises, making it an imperative that visibility of SMEs is retained.
First Great Western has recently engaged with Achilles to utilise the Total Supplier Management Solution (TSMS) to gain visibility of SMEs in the sector, open up a conduit for direct communication with smaller, innovative suppliers and mitigate risks in its supply chain. The train operator’s suppliers are registering through the Achilles TSMS portal and are being classified in different risk categories based on their involvement with First Great Western.
First Great Western were interested to know how many of its suppliers were small enterprises (revenue below £6.7 million a year and less than 50 employees) and how many were medium-sized enterprises (more than £6.7 million but less than £27.4 million revenue and below 250 employees). Through their new supplier management solution they were able to identify that, even in their direct supplier base, a very large proportion of it was either small or medium-sized (54 per cent small and 21 per cent medium-sized), and in total 75 per cent were SMEs.
The government is keen to stimulate economic activity by ensuring SMEs are engaged in new railways projects. In particular, the Mayor of London has set out clear guidance regarding the increased involvement of SMEs within contracts associated with London Underground. So it is clear that buyer visibility of smaller suppliers is going to become increasingly important and it is through collaborative tools that buyers will be able to identify, assess and engage with SMEs active in the sector.
Although change in contractual relationships appears inevitable, every indication is that SMEs will benefit from a greater involvement with rail and train operators, albeit perhaps, one step removed. Working closely with primary contractors will hopefully deliver longer-term contracts and greater value for SMEs too, but at this stage the most important point for an SME is to be visible to the buyer community.
Annette Gevaert is director rail and transport at Achilles