Procurement in Practice — JSC Ukrainian Railways CPO talks to Spend Matters

Spend Matters is running a series of interviews with CPOs and senior procurement professionals to help practitioners from any industry or sector gain a better understanding of the common experiences of their peers at the coalface. We aim to share the best practice learnings of those who have gone through process, technology or personnel changes, and who are happy to impart their knowledge to help accelerate a more efficient, modern procurement operation for any organization.

We recently had the opportunity to talk to the CPO of the Ukrainian railway network, JSC (joint stock company) Ukrainian Railways (Укрзалізниця, Ukrzaliznytsia).

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JSC Ukrainian Railways is the incumbent state-owned enterprise of railroad passenger and freight transport in Ukraine, and controls the vast majority of railway transportation in the country.

Originally Russian Imperial Railways, then Soviet Railways and latterly Ukrainian Railways, the organization has transformed through the merger of a state agency and a state-owned enterprise into a public joint stock company owned by the state. It is now one of the biggest organizations in Europe in terms of the size of its network, possessing a combined total track length of over 23,000 km, and one of the biggest in the world in terms of number of employees (243,000).

Sergii Dovgalenko is an experienced procurement strategist and transformation executive; he is also a licensed tutor and author — his most recent book being “The Technology Procurement Handbook: A Practical Guide to Digital Buying.” Prior to being CPO of JSC Ukrainian Railways he was head of procurement for Etihad Airways in the UAE, where he headed up indirect procurement and P2P operations.

The business of procurement transformation is complex

Sergii is now responsible for the strategic turnaround of the legacy procurement and supply management of the state railway with a procurement spend of over $1.2 billion. There are 120 people within centralized procurement but the function comprises more than 1000 people across its many affiliate bodies and regional railway companies (be they in charge of rolling stock, infrastructure, new construction, quality standards or project works) and produces 10,000 to 15,000 tenders annually with over 7000 suppliers to manage — suffice to say it is a huge operation.

“The company is undergoing a massive business transformation to become a profitable, modern and transparent organization that will help drive the Ukrainian economy,” he tells us. “End-to-end transformation is fully supported by the executive management and the Supervisory Board comprised of independent international directors and government representatives – my job is to run the procurement part of that initiative.”

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He must oversee the development and implementation of the new strategy, a Target Operating Model based upon 4 functional verticals (Strategy & Transformation, Planning & Control, Category Management and Sourcing). He is responsible for the redesign of the corporate governance framework, enhancing reporting, analytics, communications and SRM, and building a new center-led organization across 36 entities.

What’s interesting about JSC Ukrainian Railways is that legacy has issued it more than rolling stock and railway, unlike many very modern Western European organizations it also owns and manages billions of dollars’ worth of land and buildings used as hospitals, sanatoriums and domiciles for the people working within the railway.

“The interesting aspect of this,” explains Sergii, “is that we find ourselves working within parts of the business you wouldn’t normally expect for procurement. For example, we have to buy the natural gas not only for our production purposes, but for all the heating of the houses connected to our gas distribution network, the same applies to water and energy, and we have the social responsibility of looking after the many staff who work for us countrywide, including their welfare and recreational facilities.”

This not only makes for an extremely complex procurement environment, but the responsibility supports social value in its truest sense. “Everything we do is a hard mix of social and business values,” Sergii tells us. A concept that many western firms and governments have relatively recently started to embrace.

Tenders, contracts and awards — the importance of transparency

Centralized procurement is managed by one affiliate company which acts as a central buying organization and is the owner of the high-spend contracts — here strategic categories are sourced and transferred to regional affiliates. In this way it runs about 30% of the tenders but covers about 80% of the spend, while the regional affiliates run about 20% of the spend but 70% of tenders and contracts.

We were curious about the rules around procurement. Does Ukraine have to follow OJEU guidelines for example?

“We have our own OJEU equivalent,” Sergii says. “Under the Public Procurement Law, Prozorro was introduced in 2016 as our public procurement platform and was recently updated to be further synchronized with EU guidelines. Our laws are somewhat stricter however, absolutely everything we do, especially in sourcing activities, has to be transparently represented in Prozorro. It sets the ground rules for all procurements: the annual sourcing plan, the S2C workflow, the contract and supplier data. We like to think of Prozorro as the logic and muscle of public procurement processes.”

This level of transparency is the one big change that Sergii has witnessed in recent years. “Prozorro is a powerful solution for our S2C activities,” he says, “it has developed over the years to become an ecosystem rather than a platform, having accumulated business intelligence which firms and vendors can use in their own developed plug-ins that both extract and feedback data into the system. It also acts in an anti-corruption capacity as it establishes links between different companies that are bidding and can flag any firm that has the same owner for example. This ecosystem is linked to multiple government data repositories, so anyone can find information on contractors and their beneficiaries, their tender history, legal and tax disputes, payments, and much more. Corruption risk indicators are also automated, and state auditors can start an investigation based on system-generated alerts.”

Transparency International also supports the system, and has developed its own business intelligence model that sits atop Prozorro, which receives, cleanses and analyses all of the data. It allows procurement to post that data onto the corporate website so that anybody can clearly see procurement activities, like how many contracts they have, with whom, what the tenders are, how many suppliers they have, their details, award success rates, and so on to get a full overview of procurement activity. The user can even download a report with the data they are interested in.

“We are one of the most transparent countries in Europe in terms of procurement data availability,” says Sergii.

Key Learning #1 – systems must talk to each other

We asked Sergii about his learnings from digital transformation projects. While JSC Ukrainian Railways is in the early stages of its journey, he cites an example from his days at Etihad Airways.

“We had some very sizable projects under way,” he says, “the state airline of UAE completely reshuffled its procurement from the ground-up. We swapped out our entire ERP system and introduced a fully digitized S2P suite. During 2016 to 2019, when we were in the active stage of our digital transformation, one of our biggest challenges came with the integrity of the S2P system. We discovered that even when you source the entire e-procurement suite from one provider, integrity of the solution is not a given.”

“The sourcing module was not integrated with the contract management module and the P2P part required you to work in two systems. So you cannot assume that the different elements of your suite will work together and talk to each other. It was a big effort to begin a sourcing project then realize you had to manually input all the data into the CLM system — it was counter-productive. So my advice would be to check thoroughly that the links between the different elements of the workflow flow! I instill into my colleagues that, irrespective of whether you are buying suites or best of breed, from one vendor or several, always keep in mind the integrity of the S2P cycle, and that just because some elements of a suite may be the fanciest, it doesn’t mean anything if they don’t communicate with the rest of the process. Lack of data flow from one app to another will cause all sorts of problems further down the line and implicate the inefficient use of procurement data and badly informed decisions.”

Key Learning #2 – best practice can simply mean following the basic ground rules

So much for learning curves from implementing an end-to-end S2P system, we were also keen to ask Sergii about his experience of projects that did go well, and any observations he could share from that.

“One project we finished recently,” he says, “ended up being shortlisted for a CIPS award.”

JSC Ukrainian Railways’ fuel category management approach achieved Finalist position for the CIPS “Best Public Procurement Project.”

The railway’s main category of expense is in diesel fuel: it is the country’s single highest consumer, has the highest spend, and the highest number of bidders. In 2019 it witnessed 56 tender cycles, which created enormous workload on Fuel Procurement; 61% of tenders had been delayed due to claims and requests (many of those maleficent to discourage competition or postpone the start of ordering); each successful claim resulted in a change of tender documentation or contract, hence restricting the uniformity of documentation.

What they ended up with was supplier qualification taking place only once for the duration of the Frame Agreement; claims being allowed only during the qualification stage; accelerated process of bidding and contracting with uniform documentation; and the source-to-contract cycle being reduced to only five days.

So how did they manage this?

“When I arrived at the organization, the spend on diesel fuel of about $400 million p.a. was distributed among three or four vendors, but the efficiency savings just were not there in the way you’d expect from that amount of expenditure. To turn this around, we very simply applied the normal ground rules of procurement.

“First of all we went to the market and opened up a communication. We stipulated very clearly ‘no cartel agreements.’ We were in the business of transforming this category and instilling fair competition. We presented the requirements to the market prior to releasing the tender so everyone could understand what would be required of them and give them a chance to raise any concerns or give any suggestions to optimize the bidding process, and we adjusted our bidding implementation in accordance with the expectations of the market. We ran the tender openly and transparently until we eventually entered into a frame agreement with 12 major traders.

“This framework assumes that any subsequent order for diesel would go for quick auction to those 12, and they are free to participate – or not. The result is that they are all now participating and we have already run more than 20 rounds of the auctions. So right now we put our weekly demand out for bidding and this represents an opportunity for every participant to have their chance of getting a fair share of the business. They decide when they want to bid higher – for example, this might be when they have a full tanker of fuel immediately available and are therefore in a better position to bid than others that might be planning to import the fuel.

“We now have formula-based pricing based on commodity market indicators (Platts); we have increased competition; we have clear and transparent processes; and we are adjusting the rules in cooperation with the market as far as is workable, because it’s the market that gives you new ideas and innovation.”

The eventual outcome is that for 14 months in a row (at time of writing) procurement has been buying at well below the market level, saved about $30 million, exceeded savings targets for the year, increased bidders from 3-4 to 8-12 per tender, decreased vendor margins by up to 400%, and is now one of the best customers of the fuel industry. “Suppliers understand how to deal with us,” says Sergii, “and they want to do business with us, which is a huge success for a government organization.”

“For me,” he says, “this is testimony that you do not have to do anything fancy to achieve great results. You can apply the basic activities that any procurement professional should do, and still earn tremendous savings and efficiencies.”

Spend Matters thanks Sergii Dovgalenko and the JSC Ukrainian Railways for contributing candidly to our ongoing CPO advisory series.