AMP8: How Water Companies Can Reduce Supply Chain Risk

Asset Management Period 8 (AMP8) commences on 1 April 2025 affecting all English and Welsh Water companies. The purpose of AMP periods, set by industry regulator Ofwat, is to increase efficiency and service levels within the sector. It is anticipated that AMP8 will particularly aim to transform the water industry’s commitments towards climate change and customer expectations on service, society and the environment.

The backdrop to AMP8 of course is that the sector has been rocked by both worldwide and sector level pressures. With the industry still reeling from the impact of Covid and the implications of Brexit during this time, the war in Ukraine has further compounded this period of uncertainty. All of this has put inflationary pressures on the economy overall, driving costs up.

Critically, for the water industry, are serious concerns regarding the sector’s supply chain resilience and whether the supply chain is capable of supporting water companies to deliver on the mandates outlined in AMP8. At the heart of this concern is that the water industry has become a less attractive sector for suppliers who view it as a higher risk industry than other infrastructure-based industries. The highly regulated nature of the sector will also of course be an off-putting factor for some suppliers, but concerns over the profit margins within this sector and the pipeline of long-term work has meant that the water sector is simply a less attractive proposition to the supply chain. This fragility of the supply chain is compounded by the fact that as supply chain capacity diminishes, water companies will be scrambling to source specialist support that will enable them to reach the targets set within AMP8.

So what should water companies do to mitigate against this challenge? Organisations within the sector will need to become a client of choice to secure the most effective supply chain. To do this there are number of areas to focus upon:

Creation of a Commercial Model Reflective of the Market

Creating an environment that ensures both collaboration and outperformance from all stakeholders will be key to the success of AMP8 and will partly be driven by a commercial model that instills joint accountability and sharing performance metrics that align to those of the water companies. When considering what their optimum delivery model will look like, water companies will need to consider unprecedented pressures coupled with changes in the supply chain, the environment as well as from the Regulator. There is a need now more than ever to create a supply chain that is sustainable and to be attractive to the market, offering a clearly defined delivery model that allows for capability as well as scalability at the pace required, underpinned by a commercial model that will incentivise all parties whilst delivering their commitments more efficiently in relation to both cost and time.

Strategic KPIs

When an organisation can offer a realistic, metric based approach to its KPIs, this will always appeal to suppliers. Furthermore, by harmonizing KPIs with desired outcomes linked to AMP8, all parties understand the purpose behind their action (a significant motivating factor) and are well placed to create milestones that enable them to maintain focus on the end goal. The ability to monitor and take appropriate action when required, will keep resources and budget focused, demonstrating a responsible approach that will appeal to the supply chain.

Effective Risk Management

Historically the water industry has placed ‘innovation’ and ‘development’ risk within the supply chain, placing a strain on those organisations. With a volatile macro environment and rising inflationary pressures, many suppliers will be adverse to shouldering this burden alone. Water companies need to build greater capability to understand risk. Adopting a more collaborative approach to risk management, finding new ways of working, and the budget to support a shared risk approach, will undoubtedly support an organisation to meet the challenges of AMP8.

Collaborative Supply Chain Partnerships

A supply chain partnership to safeguard the sustainability of the supply chain is crucial. Companies that can work closely with their full supply chain will appeal to Tier 1 suppliers, who will recognise the commitment to a collaborative approach that drives innovation and efficiencies. As AMP8 is expected to focus on climate change resilience, gaining a robust understanding of the full supply chain will also be crucial to anticipated reporting and reduction of scope 3 emissions for the water company itself.

Profit Margins

Low profit margins within the industry have been cited as a major turn-off for suppliers. It is crucial that water companies consider how they can best incentivise and share profits more equally within their supply chain. Those that do will naturally be a more attractive prospect.

Pipeline of Work

Organisations that can commit to longer-term work plans would undoubtedly make them a more attractive client to suppliers looking to establish a partnership of longevity. Of course, this may not be possible, but it would certainly strengthen the water company’s appeal within the supply chain.

Integrity

To fulfil AMP8 requirements, the whole organisation will need to understand the challenges faced and be empowered to work together to deliver on the vision. Water companies should ensure that all areas within the business are well-informed and understand the part that they need to play in the successful delivery of AMP8. In doing so this will reassure suppliers who are integral to the delivery of AMP8 outcomes.

Communication

Effective communication with the supply chain is critical to success. Those organisations that build a communication strategy as part of their AMP8 procurement activity will ensure that the correct audiences are communicated to at the right time with the correct messaging. Failure to do this could lead to confusion and distrust amongst the supply chain.

Talent

Retaining talented procurement staff who understand the procurement requirements to support AMP8 is crucial. This is critical if the framework scopes are to be clear, aligned and achievable whilst driving value and efficiencies at the same time. The credibility of an organisation is dependent on the people within it, and those organisations who retain and recruit procurement professionals with strong supplier relationship management credentials and a long-term vision will appeal to suppliers who recognise the value in a strategic procurement approach to AMP8.

It is widely believed that AMP8 represents one of the most significant challenges for the water industry to date. Water companies will require specialist support, particularly when considering innovative approaches to support net zero objectives. With evidence that the sector itself is losing appeal to the supply chain, it is imperative that water companies act now to ensure that their organisation is a client of choice, putting themselves in the best possible position to secure a supply chain that will support the delivery of AMP8.

Barkers Commercial Consultancy are specialists in the utility sector. Our senior managing consultants have decades of experience supporting this industry and are up to date with the latest regulatory pressures and best practice to support water companies to efficiently and effectively meet the challenges of AMP8 and beyond.