Ten years ago, the general manager of a fast-growing utility in Tennessee made a call to its power supplier, TVA. “We need help in our purchasing,” he said. “We’re spending more than we’re taking in.”
The utility’s customer base had been growing by almost 1,000 customers a year, or about 2 percent, increasing from 36,000 customers in the early ’90s to more than 54,000 today. Its purchases of poles, wire, conductors and transformers had gone through the roof-and so had the prices.
At TVA, Paul LaPointe, senior vice president for procurement, put purchasing agent Scott Woodlee on the job. “He sent me down there,” said Woodlee, now the Customer Procurement Partnership Program manager. “That utility had so many new customers coming in and so much money going out the door, they needed to figure something out.”
Located in a booming area close to Knoxville, the utility is one of 158 municipal and co-operative utilities across the Tennessee Valley that buy wholesale electric power from TVA and distribute it to local homes, businesses and industries. Together, they’re partners in serving the 8.6 million people of the Tennessee Valley region, but the distributors are now, and always have been, independent of TVA and of each other.
The idea of working together to gain savings and efficiency on large purchases had never been a priority, nor had there been an efficient mechanism for doing so. But to adapt an old saying, rising costs and increased power demand for new customers were the “mother of invention.”
TVA committed to innovation
TVA’s procurement organization committed itself to innovative practices to save time and money. LaPointe was pushing hard for standardized software, paperless transactions, just-in-time delivery and more effective inventory management, efforts that have saved TVA hundreds of millions of dollars in its purchases, from office supplies to nuclear reactor components. Woodlee was directed to use the same kind of innovative thinking to help the Tennessee utility.
Woodlee, 51, started with TVA at age 20, working construction at the Watts Bar Nuclear Plant. In the course of 22 years at Watts Bar, he did quality assurance, concrete inspection, technical writing and engineering modifications. In 1995, he became a purchasing agent. “All those things helped me to go in and find ways to help our customers.”
He started by looking over the Tennessee utility’s purchases for the previous 12 months, to find opportunities for consolidating purchases and leveraging large purchases in the marketplace. Some improvements were easy, like gas for service trucks. Crews were filling up at gas stations in three counties, under no contract. By leveraging the purchases in the marketplace and buying gas under just one or two contracts, the utility was able to cut fuel costs for its trucks.
There were redundancies, where the utility purchased the same equipment and supplies from different vendors at different prices. By looking at the purchases over a typical year, Woodlee helped the utility make a purchasing plan and get better contracts based on volume.
At one point, Woodlee arranged for the utility to be able to take advantage of TVA deals where like and needed materials matched up. This grew into the Distributor Procurement Partnership Program, which provides access to TVA deals for steel poles, chemicals, safety clothes, cell phones, and other purchases that TVA has in common with its distributor customers.
For items like poles, conductors and transformers, generating and transmission utilities like TVA use different equipment than distributors use for bringing electricity to local customers. So Woodlee’s next step was to look at the utility’s neighbors and purchases they had in common.
Woodlee found two neighboring utilities that were buying similar types of wire and he saw the beginnings of standardization. By negotiating a contract together, the two distributors gained better leverage and better deals.
“Soon we had six or seven distributors involved,” said Woodlee. “Then it was 10 or 15, and things started falling into place.”
achieving savings collectively
What developed was the Valley Supply Chain Committee of the organization that represents TVA distributor customers, the Tennessee Valley Public Power Association, or TVPPA. The Supply Chain Committee was established two-and-a-half years ago and supports joint purchases of equipment, materials, supplies and services to achieve savings for its members.
“It’s getting harder by the day for distributors to make ends meet,” said Woodlee. “With rising costs, they’re working hard to find ways to save on expenditures.” Power generally makes up about 80 percent or more of a distributor’s budget. Payroll is another 8 percent, non-payroll expenses 5 percent, and tax-equivalent payments 2 percent. Material counts for about 5 percent, or about 25 percent of the costs they can control.
A similar effort has yielded TVPPA’s Vehicle Incentive Program, which enables distributors to buy fleet vehicles at fleet-level discounts.
“By finding even minor savings in the unit costs of poles, conductors and transformers,” said Woodlee, “employees can make a real impact. By working together and optimizing material purchases, many companies have achieved improvements in best-practices for purchasing. Aggregated and joint purchasing is in its infancy, being embraced, nurtured and grown by those who see the value. The more and deeper the level of standardization, the more power companies can benefit.”
buying group saved $5 million
In May 2006, Frank Jennings, president of the Middle Tennessee Electric Membership Cooperative, based in Murfreesboro, Tenn., told his story.
It started with Middle Tennessee sponsoring a transformer partnership in the late 1990s with five or six distributors. It quickly grew to include 34 municipal and cooperative utilities. The largest co-op in the TVPPA, Middle Tennessee, serves more than 162,000 customers.
The biggest challenge for the transformer partnership was the differences in voltage and equipment used by the members. Of the 34 members, 23 use 7200V, seven 14400V, seven 7620V, two 2400-7200V, and three 14400 – 7200.
“At first, very few vendors were willing to come to the table,” said Jennings. Eventually they found four willing to work with them.
The contracts use a monthly pricing adjustment mechanism, a base price and commodity pricing. There are 550 items available with standardized specifications, maximizing the partners’ purchasing power, with more transformers purchased at one time. The contracts remove the bid cycle, saving time. This approach also creates a “virtual inventory” for the partners. When supplies in the market are low, members receive their allotments first. The result is the flexibility to reduce real inventories while actually improving delivery time and protecting distributors from cost spikes.
Part of the ordering process is a spot check of the marketplace to verify savings and a “reverse auction” process. “Bids are e-mailed back to all bidders for their review,” said Jennings. “All the bidders know what they missed, how much higher they were than the winning bid, and what they did wrong.”
Members pay less for storage, less interest on inventoried items and a lower cost at the time of purchase. The partners are saving time by using Pecos, an Internet purchasing tool that TVA provides to distributors at no cost.
“We’re now building a database of opportunities,” said Jennings, “and continue to develop active working relationships with other distributors.”
The bottom line: Between 2002 and 2006, the Buying Group spent $29 million on transformers and saved $5 million.
poles and wire
Based in rural Decatur, Tenn., Volunteer Energy Cooperative strings plenty of wire, 8,664 miles of it at last count. The co-op serves 12 customers per mile, spread over 16 counties and four congressional districts from Kentucky to Georgia.
President and CEO Rody Blevins used to look at Volunteer’s huge inventories of wire and ask, “Why are we buying 50 miles of wire at a time?” The answer was, “So we don’t run out.” As prices for copper, aluminum and steel started rising, large inventories of wire became even more expensive.
Started in 2002, the Co-op Wire Group has yielded some 3 to 8 percent savings, along with more efficient inventory management. “And we’re not re-bidding every month,” says Blevins.
Group member Middle Tennessee Electric Membership Cooperative sets the prices, which change every month based on published indexes and manufacturer commodity costs. A grid of wire prices is sent out to the vendor each month. On purchases of $1.3 million, Volunteer saved $65,000. The group as a whole had sales of $9 million, saving $500,000. In the Municipal Wire Group, on sales of $1.4 million, savings ran about 7.6 percent.
The Valleywide Pole Contract includes poles, line hardware and meters. Members had to commit to purchasing from the contract and participating in specifications and contracts, but since 1999, many distributors have benefited from the programs. “Committing to your partners is a big thing on these contracts,” said Blevins. “Shared experiences lead to better product specification. And group data promises leverage for the future. We found that a lot of people have a lot in common.”
Serving just 21,000 customers nestled near the Smoky Mountain National Park, Newport (Tenn.) Utilities Board sponsored the municipal wire group in East Tennessee. “We presented it to our board as an acceptable bid process,” said Newport Utilities Manager Lee Baker.
Newport Utilities spent $736,000 in the last year, with $70,000 saved in three product groups: $283,000 for wire ($21,000 savings), $403,000 for transformers ($48,000 in savings), and $50,000 in pole line hardware ($8,000 in savings).
“This has been a culture change,” said Woodlee. “The distributors had been buying the same way for 60 years. To have them say what is taking place is bringing value to them in many ways-time, money, best practices-that’s our goal!”