By Teresa Hansen,
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Utilities must move beyond typical e-procurement to truly improve their purchasing processes. E-marketplaces may be the secret to major improvements and cost reduction.
It has been estimated that North American utility and energy supply companies purchase more than $130 billion worth of goods and services each year. Given this statistic, it is no wonder utility related e-marketplaces are popping up everywhere.
In the past few months, several new e-marketplaces have been formed to couple utility industry buyers with utility industry suppliers. Perhaps it is the complex issues involved with utility purchasing that have caused the creation of e-marketplaces, but more likely, it is the prediction that utilities will be one of the biggest users of e-marketplaces.
According to Forrester Research, between 45 percent and 75 percent of business-to-business electronic commerce will occur through e-marketplaces over the next few years. The heaviest activity will take place in computing and electronics, shipping and warehousing, and utilities industries, where Forrester predicts that more than 70 percent of online trading will go through e-marketplaces.
It is a little early to predict whether or not these newly-created e-marketplaces will succeed; however, based on the investors they are attracting and the number of large utilities supporting them, it appears that many in the industry believe e-marketplaces are the way to go.
E-Procurement vs. the E-Marketplace
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Simply put, e-procurement, which has been around since the early ’90s, is the use of the Internet or an electronic data interchange (EDI) system to source goods and services and to purchase and pay for them electronically. This is according to Peter Manos, formerly Mincom Inc.’s utility marketing and alliances manager, who authored a paper titled “The Challenge of E-Procurement for Utilities,” which was presented at DistribuTECH 2001. The growth of e-procurement has been dramatic and is expected to continue, Manos said. The benefits of e-procurement initiatives, which have focussed primarily on the purchasing needs of manufacturing organizations, are now being promoted across all industry types, including utilities. According to Manos, utilities and other asset-intensive industries have significantly different purchasing needs than manufacturing organizations. For these asset-based industries, successful e-procurement involves much more than merely buying something over the Web, he said.
Generally, in most industries, two-thirds of the cost of goods sold originate in purchased items. This means that any cost savings that procurement personnel can institute, directly impact a company’s profitability, Manos reported. At utilities, however, this is not true. A significant portion of the operating budget is spent on maintenance activities, not on materials needed to produce the commodity being sold. Most maintenance activities require parts and/or services, and a tight integration between maintenance and materials management is necessary to ensure maximum benefit from purchasing programs. Utilities must implement systems and processes that go beyond simply automating their paper processes if they want to produce real benefits.
So, how does an e-marketplace differ from e-procurement? “E-procurement is an integral part or subset of an e-marketplace,” said Duane Selby, buyer development director for Pantellos, a newly created independent online marketplace for utility and energy services industries. “An e-marketplace is more, it is a supply-chain solution. It involves much more than just electronic procurement,” Selby added.
Moving Beyond Online Purchasing
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According to Selby, an e-marketplace includes such things as demand forecasting, human capital management, asset optimization and workforce management. As an example, Selby explained how an e-marketplace can assist both the utility and its suppliers with substation construction. When designing and building a new substation, utility engineers must interact with several design firms, engineering firms, subcontractors, government and environmental agencies, as well as hardware suppliers. The utility must exchange drawings and specifications with these entities, in some cases numerous times. These exchanges are usually time consuming. At the same time, the utility’s design engineer must be in constant contact with its procurement personnel, informing them of the latest specs, delivery dates, etc.
Selby said that an e-marketplace can streamline this process and decrease the time it takes to complete such a project by providing the utility and its suppliers with an online collaboration tool. Such a tool allows all the parties to view and edit drawings online, gain approvals online, and, of course, order materials and labor online. This example illustrates how an e-marketplace can offer its subscribers much more than simple online purchasing. It can offer them tools that will allow them to integrate their planning process with their purchasing process.
Joseph Zelechoski, president and CEO of Enporion, another newly created e-marketplace serving the electric and gas industries, also believes e-marketplaces have a lot to offer utilities, as well as their suppliers. Zelechoski cited an example involving a transformer supplier to illustrate how an e-marketplace can be advantageous to the supplier and the buyer. It is not unusual for a transformer manufacturer to have gaps in production from time to time. It is at these times that the manufacturer may have to lay-off workers or lose money while waiting on new orders to come in and manufacturing to ramp back up. According to Zelechoski, it is during these production lulls that the manufacturer can take advantage of the e-marketplace. The manufacturer now has the option of going to the e-marketplace and offering this excess manufacturing capacity to member buyers, allowing them to bid on transformers to be manufactured during the slow period. Ideally, the buyer will receive transformers at a reduced cost and the manufacturer will be generating revenue during a time when its facility would have otherwise been at or near idle.
Additionally, if a manufacturer has surplus equipment due to an order cancellation, that manufacturer can put the surplus equipment up for bids via the e-marketplace. Again, the manufacturer generates revenue despite a bad situation and the buyer gets a good price on the equipment.
In contrast, a utility (buyer) may have some surplus equipment in the warehouse that it needs to get rid of. Often, in the past, the utility would simply write-off the value of the equipment at the year’s end or sell it at a huge loss. With an e-marketplace, however, the utility can offer the surplus equipment to other buyers and sellers, and, ideally, sell it at a price that benefits both. “The buyer can actually become the seller in some instances,” Zelechoski said.
Obviously, these sorts of transactions can take place without an e-marketplace; however, they would take much longer and be much harder to carry out. The e-marketplace facilitates such transactions, making them quicker and more efficient, thus increasing their value to all parties involved.
Savings via the E-Marketplace
These examples are but a few of the many transactions that can be facilitated and carried out via an e-marketplace. Both Selby and Zelechoski see many ways that the e-marketplace can help buyers and sellers.
Much of the paperwork involved in invoicing and payment processing can be eliminated with an e-marketplace. In addition, much of the paperwork, such as purchase requisitions, purchase orders, and invoices, can be standardized and made consistent for numerous transactions with various buyers and suppliers. This continuity can mean significant cost savings to both, Zelechoski said, estimating that standardization can save suppliers up to 3 percent.
Zelechoski also predicts that an e-marketplace will save buyers from 3 percent to 5 percent on process and pricing improvements. In addition to the savings that are seen through process improvements such as those mentioned above, savings can also be seen through aggregate spending of multiple members and better contract negotiation.
Another benefit to buyers is the ability to reduce inventory levels. Since goods and services can be purchased more quickly through an e-marketplace, the cycle time is shorter, allowing for inventory level reductions. Shorter cycle times also allow suppliers to reduce inventory and thus save money.
Another major benefit for suppliers is the opportunity to increase market share. As a member of an e-marketplace, suppliers maintain their current relationships, while extending their offerings to other buyers with whom they are not currently doing business.
These are but a few of the many benefits described by both Zelechoski and Selby.
Both believe that the benefits of an e-marketplace are almost endless if the buyers and suppliers venture outside their normal way of doing business and take full advantage of the e-marketplace possibilities. It appears that utilities are looking to do just that. “All our members are looking for more than just e-procurement,” Selby said. “They are looking for an integrated supply chain partner.”
Major E-Marketplace Players
Although Pantellos and Enporion are the best known e-marketplaces in the utilities industry, they are by no means the only e-marketplaces. Several e-marketplaces have been formed in the past few months. In late August 2000, community-owned electric utilities created a business-to-business e-procurement exchange called UtilityFrontier.com through a partnership between Hometown Connections, a subsidiary of the American Public Power Association, and KnowledgeA-Z, a software technology firm (see sidebar).
Hagler Bailly announced last summer that it had taken an equity stake in Selectrica Inc., an Internet-based business-to-business service for the global utility industry, and its developer ThinkChainHoldings, LLC. ThinkChain is a company led by FondElec Group, which is a worldwide utility infrastructure investor.
Another utility industry business-to-business Internet exchange is Portland, Ore.-based Utilitywarehouse.com. This company has been around for five years and deals primarily with the utility surplus business. Utilitywarehouse.com reported more than $40 million in utility surplus sales over the last three years.
The e-marketplaces mentioned above are just a few of those currently in operation or expected to begin operation this year. It is evident that many in the industry believe e-marketplaces will provide a valuable service to the energy industry during the 21st century. With so many players out there, it is unlikely that utility buyers or suppliers will position themselves with only one. As Enporion’s Zelechoski said in a recent interview with the St. Petersburg Times (St. Petersburg, Fla.) when speaking of the competition between his company and Pantellos, “With hundreds of utilities out there that can benefit from this, there is room for more than one provider.” Time will tell just how many providers will survive.