SRM for Energy: A Solution for an Industry in the Midst of Major Change

Lester Amidei | Mar 14, 2003

A Shifting Landscape
Regulatory decisions have brought sweeping changes to the landscape for the energy industry. In this new economic setting, electric demand has been constrained while overbuilding has created an overabundance of supply. As it becomes more and more difficult to drive up revenues in today’s economic climate, successful energy companies are finding that lowering costs is becoming one of the best ways to remain competitive.

CFOs are now calling on CIOs to help control spending to improve shareholder value and an energy company’s performance. Gaining visibility and control over the total spend for goods and services while optimizing supplier relationships is becoming increasingly important for energy companies, as economic pressures move to a new level. The effects of deregulation, restructuring and consolidation in the energy industry touch the supply chain and beg for an analysis of supplier relationships.

Deregulation has begun to openthe door for utilities to market energy commodities and expand service into other geographic territories. Restructuring, in many cases, has split the utility into two different entities with varying business functions and needs; one focusing on regulated business and the other on non-regulated energy trading. Mergers are creating super-utilities, giving companies the power of wholesale trading and incremental revenue. The non-constrained customer base that deregulation brings means utilities have to market much like a consumer products firm---fight to keep old customers who have more choices, and add new customers through new product offerings and service programs. While customer relationship management is becoming very important in this new economy, the focus of energy companies, both regulated and unregulated, is on driving out costs. A major part of that focus should be on its external supply chain, controlling costs for supplies and services by implementing best practices for the entire source to settle business process through deploying supplier relationship management (SRM) solutions.

SRM System Helps Choose the Best Suppliers
Given the huge dollar amount that goes to services and goods suppliers, competitive energy companies need to streamline their supplier relationships. They need to “whittle down” their supplier ranks to include only the most high-caliber, readily available and affordable resources, while wringing optimal cost-savings out of contracts with preferred suppliers. The actual accomplishment of this feat, however, is anything but simple, primarily because suppliers’ contracts are often departmentalized and difficult to monitor across the organization.

With no central repository of information, utilities are severely hindered in their abilities to derive contractual cost-savings and negotiate better deals with preferred suppliers. An integrated SRM system helps tackle these issues by linking all of the critical business process components together.

Specifically, an SRM system designed with an energy company in mind might offer online sourcing for all commodities, to reduce the sourcing cycle and allow a clearer view of which suppliers offer the most value to the company. It can automate the full request to check cycle while giving visibility to key contract suppliers. SRM software even allows companies to host sourcing events in a variety of formats, including reverse auctions, tied to the individual requirements of the utility and a particular commodity. It can also further refine the supplier selection process through “what-if” analysis on proposals by adjusting factors, weighting and scores.

Today’s SRM systems can provide buyers with not only unprecedented visibility into the most readily available and affordable suppliers, but also a comprehensive history, down to individual details on individual worker backgrounds and compensation. In this vein, SRM systems help utilities and energy companies ensure the integrity of their contingent workforces, while maintaining consistent compensation levels for similar skill sets – not only between individual contract workers, but between contract workers and in-house resources. Intelligent capital asset acquisition and management can save a company hundreds of thousands of dollars. It is not uncommon for labor to represent 85% of the cost of the project. Today’s SRM systems automatically set limits and control rates, creating parity in compensation levels for similar skills and reducing maverick spending.

More Operational Benefits
Besides the need to evaluate and strengthen relationships with the best suppliers for both raw supplies and services, an SRM enterprise system can help an energy firm increase operational efficiency in several other key areas.

  • Applications to address purchasing, inventory, asset management, expenses and payables along with projects and budgets are integrated to keep an eye on expenditures and monitor in real-time, all parts of the supplier chain.

  • The system can integrate and centralize enterprise functions over geographic lines, lines of business and holding companies
  • Purchasing and procurement is seamlessly linked to FERC accounting requirements, incorporating codes and standards.
  • Stock inventories can be managed more effectively so facilities management and preventative maintenance can occur without impacting 24x7 operations.

    Challenges Remain
    The ultimate benefits of SRM systems – namely, significant cost-savings and improved efficiency and customer service – are realistic and achievable, although not without their challenges. Some challenges include:

    The missing link; contract negotiation:
    There are three main steps to SRM: identification of suppliers, both existing and new, with which to establish preferred relationships; negotiation of relationships; and real-time collaboration with these suppliers across the entire source to settle process, including during critical business events such as when customer demand spikes. Many of today’s SRM systems focus on simple purchasing transactions, but do not yet handle negotiation and optimization of relationships.

    However, by automating the the other non-procurement tasks around managing supplier relationships – namely sourcing, which often subsumes a huge amount of time for procurement departments; invoicing and settlement, which often yields huge paper trails; and supplier performance management, which provides the real-time analytics required to identify problem areas -- employees can focus on more strategic activities, including contract negotiation. Another challenge is change management within the firms looking at SRM.

    Change Management
    Energy companies looking to implement any new system should be prepared for some friction – not only from within, but from its supplier ranks. New SRM systems have been known to intimidate suppliers a bit. With the companies now mandating that information be sent to the system “this way or that way,” suppliers can easily become overwhelmed. The good news is that today’s SRM systems can accommodate diverse types of electronic information exchange. In addition, a Web-enabled solution is easily accessible, no matter the level of technological sophistication on the supplier side. To overcome resistance, energy companies must be prepared to really build the business case both internally and among suppliers. They will need to clearly explain the benefits – i.e. for energy companies, better supplier relationships with the choice suppliers and services workforce; for suppliers, more business and faster payment.

    As today’s economic climate puts more and more pressure on energy companys’ bottom line, the time has come for a closer analysis of supplier relationships. Despite some challenges, an SRM system provides one of the best ways for an energy company to evaluate the “fit” each supplier has with the company and make changes as needed for cost savings and greater operational efficiency. By adding key decision making tools in areas including procurement, labor management and competitive sourcing, an SRM system centralizes these business critical activities in real-time, keeping close tabs on the bottom line, a necessity in today’s tougher business climate.

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