Technology Corridor
Mining Gold From The Supply Chain
January 15, 2003
By Jennifer Alvey
Utilities and vendors take a hard look at online procurement.
Feel like saving your company $50 million? That's the question Joseph Zelechoski, director of supply chain at PPL, has for those who haven't tried online supply chain management.
He thinks many executives don't view supply chain management as a critical resource. Yet, if utilities are buying $1 billion in materials and services-not unlikely at the larger energy companies-and could save 5 percent, they would save $50 million. "Fifty million against your bottom line is huge!" Zelechoski exclaims.
E-Marketplaces Still Hanging On
At the height of the dot-com boom, online supply chain management (SCM) was hot. Millions were poured into several flavors of online B2B (remember that moniker for business-to-business?) portals, all of which promised to fulfill the potential of e-commerce, bringing buyers and sellers together to save buyers money and help suppliers find more markets. Tombstones and dark Web sites are all that remain of many B2B portals, but two portals focused on the energy industry, Pantellos and Enporion, have survived and may yet thrive.
With online marketplaces, and indeed by using specialized software packages in-house, energy companies can issue online requests for proposals (RFPs) for recurring procurement needs-wood poles, for example-and hold auctions for spot purchases, such as turbines. The initial appeal to buyers is cost savings through lower unit prices, achieved by pushing potential suppliers to compete directly against one another-a sort of LendingTree.com for utilities.
But some of the savings comes from consolidating spending on things like janitorial supplies. Steve Newland, vice-president of sales and marketing at Pantellos, points out that such purchases are typically fragmented purchases throughout the company, with as many as 20 different suppliers. The act of rolling up total demand into one or two suppliers in and of itself can create cost savings through volume purchasing, he says. In addition, mandating online procurement throughout an organization can prevent "maverick buys," says Diana Dykstra, manager of auction services and e-commerce development at Pepco. Through the use of online catalogs, she says, employees can get the goods they need, using suppliers who have already committed to offering competitive prices to the company.
Early Misgivings Give Way
When online auctions and procurement started, there were a lot of misgivings among potential energy company buyers, who wondered how an auction could be better than an RFP. Many buyers weren't all that ready to commit, and when suppliers balked at participating, some buyers took their toe out of the water.
Early on, sellers were deeply skeptical about participating. They didn't want anything like an online marketplace between them and their customers.
In fact, there was a crisis of sorts for a while at Enporion, when sellers did not want to participate. George Gordon, chairman and CEO of Enporion, says he had to remind the founding members that they put a lot of money into the company, and that if they decided to make Enporion work, it would work. Once the members committed to using the online marketplace, their suppliers got on board, Gordon says.
In the first year or so of online marketplaces, suppliers could refuse to participate without much risk, and a few big ones-GE and Alstom-did just that, Zelechoski says. "They could go with that bluff the first year, but now they are getting their market share squeezed," he says.
It's not just about empowering buyers, though that alone would be sufficient for many energy companies. Sup-pliers, too, are starting to see benefits. Dykstra says suppliers get "unbelievable, phenomenal market intelligence" from participating in online marketing. Suppliers-and buyers-benefit from paperless transactions, too. The generation, routing, and tracking of purchase orders is all electronic, so administrative time drops. Lead time on orders for both sides is better, Dykstra says, and in some cases the use of electronic procurement can reduce inventories. Suppliers benefit from electronic funds payments, as well. "The whole supply chain is becoming integrated and streamlined, so we can give suppliers better information, so they can team with us more effectively," she says.
Zelechoski agrees. Suppliers now really like the consistent way they connect to customers who use online marketplaces, he says. With those customers, there isn't the fragmented communication of faxes from one, e-mails from another, and snail mail from yet another.
Zelechoski also sees order standardization as a real boon to suppliers. "Utilities have always been a group of companies that wanted things their own way," he observes. He argues that to remain competitive, energy companies must stop customizing everything they do. One way to do that is to develop common standards for common equipment. Take meters, for example. Each utility has different standards for shape, color, logo, and nameplate, Zelechoski says. Those all could be standardized, which would save suppliers money by allowing them to have fewer production lines. The savings could be passed on to buyers, he argues. Online marketplaces can drive such standardization, according to Zelechoski.
The Bottom Line
Those who have tried managing their supply chain online boast of some impressive savings. For example, Dykstra says that Pepco has saved up to 50 percent on goods and services purchased through their electronic procurement system. After a year of activity in online procurement and auctions, PPL boasts savings of around 13 percent. Their overall savings target for this year? Eight percent.
So why aren't energy companies flocking to online SCM? Gordon sums it up in one word: inertia.
"Inertia is our greatest competitor," Gordon says. There's no doubt that moving to online SCM requires change. Familiar ways of doing things are re-engineered. New suppliers may dislodge old suppliers. In other words, it's about change, something the energy industry typically has embraced slowly. While Enron pushed the industry to change and embrace the new economy, both the company and the concept are now flat on their backs.
Yet online exchanges have much more solid results to offer now than they did when they started up in 2000. Zelechoski recalls that when PPL helped found Enporion, "we were promising people things, and saying 'trust us, there will be group contracts, you'll save money on auctions.' " The first year Enporion was up and running, he says, there were three auctions. Now, he says, there's an average of five contracts per month.
As far as Pantellos is concerned, the biggest barrier to growth is time-namely, the time it takes a utility to warm up to a new concept. Newland says that it takes anywhere from six to 12 months between a pitch to a new potential customer and getting into the Pantellos' online marketplace.
Another barrier to growth is what Newland calls the common misperceptions about online marketplaces, including:
- Online exchanges are akin to country clubs;
- A very costly investment must be made up front;
- Online exchanges are just for "the big guys"; and
- Companies must make big technology investments
None of these perceptions are true, Newland says. He points out that at Pantellos, there is no upfront cost to join, and that a number of à la carte applications are available based on a usage fee, akin to cell phone minutes. Pantellos charges a fixed fee for access to its
transactions hub, and a percentage of customer spend on its workforce management systems.
Enporion's fee structure differs. There is an initiation fee, plus a subscription fee for services that is one-tenth of 1 percent of a member's non-fuel spending. Gordon says that as long as a company spends a set minimum amount for procurement and auction via Enporion, he guarantees that companies will save more on their purchases than they spend on fees in the first year, or Enporion will write them a check for the difference.
Top-Down Leadership Is Key
Zelechoski says that if he were on a board of directors at an energy company, he would be asking three questions:
- Couldn't you be saving money on spot buys using online auction services?
- Have you thought about joining a consortium of buyers to leverage your spending and get better pricing?
- What's the number of staff reductions that you should be incurring if you had more electronic commerce?
Zelechoski hazards a guess that in some organizations, those questions are simply not being asked, perhaps because the executives don't view the supply chain as a critical service.
The key to success in implementing online marketplaces is leadership from the highest executive levels. Anything less, and the project is likely to run into insurmountable resistance. As Gordon puts it, the challenge to implementing online SCM in any organization "is 20 percent technical, and 80 percent cultural." Just consider something common, like meter procurement. Engineering creates specifications, operations must perform the installations, and legal needs to approve the contract. All have a say in the procurement-but without CEO or other high-level leadership, what are the chances of success in changing the way that procurement gets done?
Dykstra says that leadership support-from Pepco Chairman and CEO John Derrick on down-was pivotal to the success of online supply chain management at Pepco. Zelechoski echoes that sentiment, saying, "I would never have attempted to join an e-marketplace or put in place an extensive strategic sourcing program across all the PPL companies, if I didn't have upper management-not only their support, but also their driving this."
Jennifer Alvey is associate editor at Public Utilities Fortnightly.
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