At AEP, MRO buyers eye expanded role, formalize process to manage costs
Utility's procurement team views safety and reliability as more critical qualities for an MRO supplier.
By Susan Avery -- Purchasing, 9/17/2009 2:00:00 AM
Managing a supply chain for a utility differs from managing a supply chain for a manufacturer. When choosing a supplier to provide MRO goods and services for a manufacturer, procurement typically considers costs or price as one of the more important factors in the decision. But at a utility, procurement views safety and reliability as more critical qualities for an MRO supplier.
That's not to say that managing MRO costs is not important to a utility. In fact, procurement operations at a growing number of utilities have come to recognize the contribution of suppliers to holding costs in line, and are formalizing processes that demonstrate that value to management.
Russ Steward, director of procurement at AEP in Columbus, Ohio, for one, says that the supply chain operation plays a key role in showing due diligence regarding costs when the utility goes through regulatory processes to adjust its rates.
"Our focus in supply chain on total cost is helpful and beneficial," he says. "We are going to put a whole lot of steam in that engine to demonstrate transparency around cost and what we are doing to drive out inefficiency. It might also help us as a utility understand that we may not need to go after as much of an increase in rates because we are reducing costs in certain areas."
HOW THEY BUY. AEP is one of the largest generators of electricity in the U.S. The utility spends approximately $4 billion on goods and services annually. Goods—poles, towers, wires, transformers, breakers and maintenance, repair and operations (MRO) items—make up about 40% of that figure. Categories of services spend—construction, EPC (engineering procurement construction) consulting, telecom and others—make up the remaining 60%. A separate procurement function is responsible for the utility's spending on coal.
While many items a utility sources can be considered MRO, some of the more common are safety items and pipes, valves and fittings (PVF). For AEP, MRO does not include capital goods.
Because each of the utility's business units—generation, transmission, distribution and enterprise—are different and purchase different items, including MRO, cross functional teams assist Steward with developing sourcing strategy. Representatives from the businesses serve on the teams with a procurement manager.
The procurement operation has profiled each spend category and places it in a quadrant—non-critical, strategic, leveraged and bottleneck. The teams develop strategy for the category based on its quadrant.
Take the strategic quadrant, for instance. Transformers is a good example of an MRO category that falls into the strategic quadrant. Procurement's approach to the quadrant consists of a quarterly refresh, or look at market conditions, pricing and other factors that may impact the sourcing strategy. A team of supplier development professionals keeps an eye on suppliers—and their capabilities—that fall in this quadrant especially those that are currently a single source supplier.
For the other quadrants, procurement takes more of a competitive approach to sourcing, putting in place long-term (2–3 years) blanket agreements with suppliers for these spend categories. Supplier selection consists of a process that prequalifies suppliers that register on the AEP company website. Then, procurement qualifies suppliers capable of meeting its specification. And, for some categories, it creates a market basket and shares the business between them.
"Utilities are generally risk averse," Steward says of this competitive approach to sourcing. "We don't like to put all our eggs in one basket. I like to have three, four or five suppliers for each category."
Still, procurement manages relationships with the top three suppliers in each spend category. Steward and his team are beginning to measure strategic suppliers using a scorecard that tracks such metrics as delivery, quality, order fulfillment, safety and customer satisfaction. They have set a goal to meet with these suppliers annually to discuss performance and business opportunities.
"We don't just intend to lob the scorecard data over," Steward says of the performance measurement process. "The data is really a starting point for discussion. The whole process is intended to be a collaborative effort."
WHERE COST FITS. Steward is working to formalize processes that demonstrate procurement—and supplier—contribution to cost management activities across spend categories. He recalls an instance where the utility had been replacing conveyor belts more often than the manufacturer recommended. Engineers at AEP working with the supplier examined the material handling system and learned that a bearing was causing the belts to wear prematurely.
"There was a bearing oddly enough that we chose not to put on the system because of its initial cost," says Steward. "When we looked at the total cost of using a more expensive bearing over the longevity of the belt and the system, it was an obvious solution. We put in the more expensive bearing in and improved the value including reducing the total cost of the system."
Therein lies the challenge, he says. "We are not buying more belts from the supplier, yet it is providing additional value. Yet, when we compete the supplier again in three years, where will it fit on the scale? There's a gap in being able to demonstrate the total value of the relationship. That's our goal. It's where we're headed." To this end, Steward is working with supplier Strategic Business Solutions which provides cost management programs to both buyer and supplier companies.
MRO Buyers' 30-day price expectations, August
Commodities most likely to rise in price
| UP | DOWN | SAME | INDEX | CHANGE ** | |
| Index: Above 50 = rising; below 50 = falling ** From last month www.purchasingdata.com |
|||||
| Lubricants | 15% | 4% | 81% | 55.4 | up |
| Special fasteners | 10% | 0% | 90% | 55.1 | up |
| Test instruments | 13% | 3% | 84% | 54.8 | down |
| Speed reducers | 9% | 0% | 91% | 54.3 | up |
| Electric motors: 1–30 HP | 13% | 5% | 82% | 53.9 | up |
| Adhesives | 7% | 0% | 93% | 53.4 | up |
| Motor controls | 13% | 6% | 81% | 53.1 | down |
| Temperature controls | 6% | 0% | 94% | 53.1 | down |
| Pressure instruments | 13% | 6% | 81% | 53.1 | down |
| Gears | 9% | 6% | 85% | 51.5 | up |
| Cutting tool inserts | 6% | 3% | 91% | 51.5 | even |
| Lift truck batteries | 9% | 6% | 85% | 51.5 | down |
| Lighting fixtures | 6% | 6% | 88% | 50.0 | down |
| Nonfriction bearings | 9% | 9% | 82% | 50.0 | down |
| Pumps | 9% | 10% | 81% | 50.0 | down |
| Seals & gaskets | 0% | 0% | 100% | 50.0 | up |
| Valves | 5% | 5% | 90% | 50.0 | up |
| Lift trucks | 5% | 10% | 85% | 47.5 | down |
| Grinding wheel | 3% | 13% | 84% | 44.7 | down |
| Filters | 4% | 20% | 76% | 42.0 | down |
Now Playing: 
