By Joseph R. Zelechoski
For any company, in any industry, buying materials and services involves numerous manual tasks, cumbersome administrative work and time-consuming research. In the utility industry, companies are increasingly focused on maintaining competitive pricing and finding new opportunities for cost reductions. Many have identified procurement as a significant potential source of savings. Pennsylvania-based PPL Corp. is one company that has experienced this first hand.
PPL operates fossil fuel, electric, nuclear, hydro and natural gas generation and distribution facilities in the northeastern and western United States, electric distribution facilities in Latin America, and generation and electric distribution facilities in Europe. It knows one key to operating successfully in this competitive global energy environment is to drive supply chain excellence. Procurement and sourcing are parts of the supply chain where PPL felt it could make dramatic efficiency improvements.
PPL is implementing a strategic sourcing program that will automate time-consuming and costly processes and leverage the advantages of an e-marketplace. As part of this program, it is re-sourcing both direct and indirect goods–totaling about $600 million in its U.S. operations. Once the program is completed in two years, PPL expects to expand the program to the rest of its global operations.
Put simply, PPL’s strategic sourcing program is focused on aggregating all corporate-wide spending for materials–everything from cable, pipes and valves to computers. Rather than having multiple contracts for office supplies, for instance, it has one sourcing contract. The benefits are larger volume discounts, a stronger relationship with suppliers and better management of the procurement process that will help the company more closely monitor maverick spending. Maverick spend can drain savings that should be realized through blanket contracts and competitive negotiations.
The engine driving PPL’s strategic sourcing program is IndusBuyDemand (an e-procurement system from Indus International which integrates the sourcing program with the company’s enterprise asset management system, Indus PassPort) and its membership in the Enporion e-marketplace (www.enporion.com). As a member of Enporion, PPL’s buyers can search for items in e-catalogs and transmit orders to multiple suppliers. Under group contracts, PPL coordinates with Enporion’s other 11 energy company members to aggregate purchases, resulting in volume discounts larger than would have been gained by purchasing materials on its own. It also means a stronger relationship with suppliers since aggregate buying also provides them with improved process efficiencies, less administrative work and higher market share, enabling suppliers to focus on offering value-added service to this large buying community.
As part of the sourcing process, Enporion sends all RFP’s electronically to prospective suppliers. For example, as a member, PPL participated in 25 sourcing initiatives and averages approximately 25 suppliers on each RFP. The process of creating group contracts, by aggregating PPL’s spend with other members of the e-marketplace and by managing this RFP process, is highly refined and productive. Participation in these group contracts is clearly the greatest value PPL is seeing from the exchange.
The company’s goal is an 8 percent improvement in pricing through group contracts. In just two months, PPL’s results ranged between 2 percent to more than 15 percent better pricing from group contracts. Group contracts will eventually lighten the workload of buyers since they are dealing with a smaller number of suppliers. This allows PPL’s buyers to focus on other strategic work, such as procuring materials for new major capital projects, rather than routine purchases.
Another feature of the sourcing program includes using online auction services available at the e-marketplace. This provides better pricing than group contracts when “spot” buying items such as furniture, construction services, vehicles and tree trimming services. However, online auctions are only worthwhile if one understands the market conditions for those materials and services, and there are at least three bidders to make it competitive. PPL has already seen a total savings of more than 9 percent in procuring materials and services from online auctions and group contracts.
Another benefit seen in procuring materials online through group purchases or online auctions is the reduction in cycle time from RFP to implementation. The real-time nature of the electronic bid process can reduce cycle time from several weeks to days. This translates into further savings from reduced administrative and processing time.
Integration of the PPL supply chain processes using IndusBuyDemand and Enporion is an essential ingredient for reaping benefits from the new sourcing program. This integration results in several supply chain efficiencies, such as the automation of time-consuming and costly manual procurement processes, improved inventory management, better information flow and visibility of its spending throughout the company. These benefits translate into significant cost savings throughout the supply chain. Ultimately, it has a direct and positive impact on the bottom line, which benefits everyone–employees, managers, trading partners, shareholders and, most importantly, PPL’s customers.
Joseph Zelechoski is director of supply chain for PPL Services. Mr. Zelechoski was also a driving force behind the formation of Enporion and served as the company’s interim CEO during its first year of operation.