Train operator adopts pain-share, gain-share strategy

9 September 2011

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9 September 2011 | Adam Leach

Hong Kong rail operator Mass Transit Railway (MTR) has implemented a pain-share, gain-share approach with its suppliers.

The company's Sustainability Report 2010, published yesterday, said that by adopting a target-cost contract approach - where suppliers are offered financial incentives for coming in on or under budget - the company has managed to stimulate a collaborative working relationship with vendors.

Andrew Johnson, an engineer at the company who is working on its Project Risk programme, said: “It incentivises co-operation between contractor and employer for identification and control of risks through a pain-share, gain-share mechanism. Risk awareness is strong and delivers risk control more cohesively with joint participation.”

At the moment, the company's biggest risks are material and labour-rate inflation. In order to counteract these it is working with suppliers to improve its ability to anticipate future costs and make the most of the buying power of its supply chain.

This collaborative strategy involves: initiating informative and continuous dialogue with contractors, involving them more in design and construction plans, bundling contracts where appropriate and working with suppliers to identify potential efficiencies.

In November a report by accountancy firm Ernst & Young, which surveyed 1,400 senior managers and chief level executives, revealed that more than a third (39 per cent) of companies marked out as 'high performers' were looking to increase collaboration with suppliers in response to rising inflation costs. The report said: “In addition to speeding up decision making, leading performers are also seeking to increase flexibility across the supply chain to respond to diversity of demand as well as volatility of change.”

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