Utility Supply Management Association Notes
I had the opportunity to speak to a group of utility companies and many of their direct suppliers at the annual Utility Supply Management Association in Savannah, Georgia, on Monday. This was a great opportunity to share insights from our recent research, on the subject of driving closer buyer-seller relationships , and the role of analytics.
There were a lot of people at the conference, including the Sourcing Interest Group with whom we have a partnership, as well as our friends from Duke Energy, SPX, PSEG, CenterPointe Energy, and others. Many of the people at the conference had been going there for 20 years, which incidentally was the anniversary of this gathering today.
It was interesting speaking with people at lunch and in the breakouts as well. It was clear from my discussions that many energy utilities are under pressure to drive down cost. Many of the executives at the supplier (manufacturer) organizations noted how this was translating into a tendency for purchasing to focus almost exclusively on price, at the expense of reliability, durability, and in many cases quality, all of which translates into total cost of ownership.
For example, a supplier quality manager at a large public utility described it this way. “I work in supplier quality, and am constantly preaching to our purchasing people that we need to be thinking more about total cost. As an example, we buy transformers, and have put incredible pressure on transformer suppliers such as ABB, Eaton, Alstom, and others. As we continue to push them, they find ways to make the product less expensive. Maybe they substitute materials, use less oil in the transformer, use a lower grade of aluminum or copper that costs less, and other ways to “value engineer” the product’s costs down. But what we are finding is that when we take these down from the poles, that the new ones will last only 7 years, whereas the transformers we are taking down from poles that were built in the 70’s are 30 or 40 years old, and have withstood the test of time! And we have done this to ourselves! Because we are so focused on unit price out of the box, we have lost sight of the long-term costs of having to replace these every 7 years!”
One of the key elements of driving closer buyer-supplier relationships is the willingness to look at these types of issues, and to drive innovative solutions that define the measure of success. Success needs to be defined in terms of OUTCOMES, not just price of the product or the lowest lump sum bid. As such, organizations need a better way to evaluate all components of value, not just price. In my presentation, I noted that RFP’s often included a space for suppliers to define new approaches or innovative solutions that were not specifically identified in the RFP or RFQ. These approaches can often create new solutions that buyers haven’t always thought about using. (Many buyers also admitted that RFP’s were often “cut and paste” from prior contracts, and did not always include new technology requirements!) One supplier asked – “does anyone ever read these solutions proposed on RFP’s?” Many people stood up and said “Absolutely!” If suppliers are able to find new solutions that take out cost for buyers, and result in improved solutions, you’d have to be crazy to ignore them. After all – it is their business and they know it better than anyone else – including buyers!