Effect of Supplier Relationship Management Practices on Corporate Performance in the Kenyan Energy Sector

The general objective of this seminar paper is to analyze Supplier Relationship Management (SRM) practices on Corporate Performance in the Kenyan Energy Sector; case of Lighting Company Limited (KPLC). The energy sector plays a critical role in the socio-economic development of a Country. In Kenya, petroleum and electricity as sources of energy are the main drivers of the economy, while biomass is mainly used in rural communities and a section of the urban population.

The Kenyan energy sector relies wholly on the importation of all petroleum requirements. However, with the discovery of oil in Northern Kenya – Turkana County this trend is likely to change.

Electricity generation is predominately hydro, supplemented by geothermal and thermal sources. KPLC is a limited liability company which purchases, transmits, distributes and retails electricity to customers throughout Kenya. KPLC is a public company and is listed at the Nairobi stock Exchange (NSE). On NSE KPLC is a State Corporation with Government of Kenya (GoK) shareholding of 50.1% and private shareholding of 49.9% as at December 2013.

KPLC procures electrical energy in bulk from Kenya Electricity Generating Company Limited (KenGen), Independent Power Producers (IPPs) on the National Grid, Off Grid Power Stations, and Imports from Uganda, Tanzania and Ethiopia.

KenGen is a State Corporation with GoK shareholding of 70% and private shareholding of 30% as at December 2013. It is mandated to generate electric power, currently producing the bulk of electricity consumed in the country. KenGen uses various sources to generate electricity ranging from hydro, geothermal, thermal to wind.

IPPs are privately owned Companies. In December 2013 these IPPs accounted for about 26% of the country’s installed capacity and played an important role in bridging the demand gap. The IPPs operating were: Iberafrica Power (E.A.) Company Limited (thermal power plant), Tsavo Power Company Limited (thermal power plant), Rabai Power Company Limited (thermal power plant), Orpower 4 Inc (geothermal power plant), Mumias Sugar Company Limited (co-generation) and Imenti Tea Factory Company Limited (mini-hydro).

Currently, KPLC is facing pertinent challenges such as periodic inadequate bulk supply to fully meet electricity market demand due adverse hydrological conditions, insufficient transmission and distribution network redundancy, lack of capacity to absorb all the loan capital financing available, high internal construction costs, limited affordability by customers, vandalism of transformers, electricity line cables and accessories, as a diminished reserve margin, supply and quality constraints coupled with ever- rising primary energy costs. Since 2011 the peak demand was 1,178MW grew at an average of 5.1% over the past years, with the reserve generation capacity margin progressively declining to 2.2% in same period and currently at 1.2% during drought season from 27% in 2004; and this does not compare well with the international standard of 15%. The peak demand is projected to rise to 2,243MW by 2016 with an annual average growth of 13%, consistent with Kenya Vision 2030 economic targets .To meet projected demand, an additional 1,749MW of firm generation capacity should be installed before that time limit.

It is therefore evident that as a national asset KPLC cannot overcome the current challenges successfully without strong partnerships with key suppliers. Impact of global expansion in the power sector has seen increased demand for utility specific commodities and the resultant implication is the increased pressure on utilities to secure supply. Significant energy pressures are impacting on traditional systems; as supply tightens it is important for KPLC to intensify their efforts to build and sustain long- term collaborative relationships with key Players. With a more strategic view of procurement, companies are increasingly finding that different types of supplier relationships should be managed differently to achieve maximum value.

Supplier Relationship Management (SRM) has become increasingly sophisticated; buyer and supplier preferences are driven by circumstance in any relationship. The relationship portfolio analysis as explained by Cox, Sanderson & Watson (2000) demonstrates that buyer and supplier relationships center on power, interdependence and independence and they agree that relationship can be of an arms’ length, adversarial and collaborative nature depending on the power and style of management.

Electricity pricing in Kenya is based on the principles of Long Run Marginal Cost (LRMC) of supply. The End-User-Tariff incorporates all prudent costs in the value chain and a fair return to the investors. Fuel costs and foreign exchange rates gains/losses usually in US $ are pass-through costs in the current price regime and includes steam charge, hydro water charges and regional development authorities’ charges. Thermal generation accounted for high percentage of power supply thus increasing the exposure of electric power price volatility due to the use of imported petroleum. The reason for the high energy intensity of the Kenyan economy lies in the high use of thermal power transfer. KPLC’s current level of electricity pricing remains a major challenge.

An assessment of KPLC’s supplier relationship management practices will be discussed; their electric power suppliers’ contracts to reveal issues. More significantly, electricity prices one of the contributing factors to KPLC ballooning expenditure. An assessment of KPLC’s SRM practices is discussed; their Power Purchase Agreements (PPAs) revealed some very interesting observations. More significantly, oil prices were a key driver behind KPLC’s significant electricity price increases and therefore it arguably makes sense to assess the PPAs in KPLC and the implication for SRM. Globally, the demand for oil is escalating and export prices are soaring.

The findings of this study have revealed very important managerial implications. The results of the analysis uncovered the differing perceptions of buyer – supplier relationship in the KPLC divisions and the implication on its dismal business performance. KPLC Corporate Performance was measured by using Consumer Satisfaction Survey was done by KIPPRA for petroleum products, electricity and renewable energy providers; of which holds important implications for both theory and practice. The analysis provided empirical evidence that collaborative long- term relationship orientation is a focus area in KPLC. In conclusion, the researcher identified key focus drivers to enhance in supplier relationship management Practices in KPLC. Furthermore, the research study identified a possible area for future research.


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One thought on “Effect of Supplier Relationship Management Practices on Corporate Performance in the Kenyan Energy Sector

  1. Philip - November 25, 2014 at 10:24 pm

    Thanks sip much for the content. It’s so helpful to me.


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