ESSAY: Sourcing Energy

Read the following case study in your week four module and respond to both questions within the forum.

Sourcing Energy at a Steel Manufacturer (Case Study)
Consider the different suppliers – which one would you select? What type of agreement would you use?
What are the risks and rewards to consider in this case? How can the team balance these risks and rewards?
Sourcing Energy at a Steel Manufacturer (Case Study)
Consider the different suppliers – which one would you select? What type of agreement would you use?
What are the risks and rewards to consider in this case? How can the team balance these risks and rewards?

A large steel producer in Pennsylvania decided to open up its energy-spending contract to a number of existing and new energy providers that had entered the market as a result of deregulation. Up to this time, each of the steel plants had a separate contract with the local energy provider. The goal was to include existing local suppliers, but also identify potential new entrants. The strategy development team included managers from building and property maintenance, engineering, plant stakeholders, and purchasing. Initially, the team elected to consider just a single facility contract as a pilot for their energy sourcing strategy. Of their other facilities:

Pennsylvania – one facility considered had contracts expiring; the other is not yet in an openly competitive market, but will be in a year
Maryland – competition arrives in two years
New York – currently being served by a low cost hydroelectric provider – it is unlikely that anyone can compete with this provider
Indiana – status of deregulation still unsure.
For the facility in Pennsylvania new entrants were identified and researched by studying their websites, and were sent an RFP. As a result of this open RFP, four potential suppliers were identified and interviewed to identify their proposals for reducing the organizations’ energy cost. This included the current supplier (Company A) and three new suppliers. Next, each supplier was invited to visit and present their case to the team, emphasizing why they should be the provider for this block of energy to the facilities. The following description of the utility evaluations illustrates how the team considered multiple criteria in evaluating each of the four suppliers:

Company A
Company A submitted the best response right from the start and continued to improve it as the selection process moved forward. All of the information requested was provided in a neat and organized fashion and was accompanied by additional facts about Company A. Some of the more interesting components of the offer included:

A comprehensive Energy Analysis of the facility with recommendations on how to improve energy efficiency
A pricing schedule which is dependant on the building’s load factor
A “Net 30 days” payment term with a 0.3% discount if payment is made within 10 days
Access to a diverse group of energy service companies
The company’s extensive experience within the energy market and with the steel (buying) company energy requirements – especially at one of the steel company’s larger facilities

The contact person with Company A came in to answer any questions the steel company had and was very helpful throughout the process. During the meeting the prices for the steel company’s smaller accounts which were eligible for the customer choice program were also discussed; Company A was the first company to respond to this request.

Company B

Considering Company B called and asked if they could receive the distributed RFP, it seemed doubtful that they would be at all competitive; they were. Company B ended up being one of the final two competitors in the sourcing decision. Company B offered competitive pricing and a network that spans across the United States. They do not, however, possess any of their own generation. While this was obviously not a limiting factor, it did cause some concern. They do have some large accounts throughout the country and a positive track record but nothing that could really compete with the history the steel company had with Company A. In order to get the contract to service steel company’s main building, Company B would have had to beat Company A in all areas and they just were not able to do so.

Company B did propose some interesting pricing alternatives that caused the steel company to thoroughly consider what Company B had to offer. There were discussions concerning short term fixed pricing (3 or 6 months) that could then be adjusted to reflect the market for the remainder of the term of the contract or until the next adjustment point. There were discussions concerning longer-term contracts such as 22 or 24 months but none of those prices could beat what Company A offered.. There were also discussions concerning a savings sharing plan which would split the savings a drop in the market would cause even if the steel company had agreed to a fixed price over the life of the contract.

Company B seems to be the wave of the future in electricity sales. They understand the market, and will definitely be considered when the steel company begins future projects. Company B’s representative visited the building and was very knowledgeable and helpful during the meeting and throughout the entire sourcing process.

Company C

Company C chose not to complete the RFP but instead submitted the information they thought the steel company would like. They typed a few answers onto the RFP that was originally sent and gave the steel company a standardized packet of information to supplement it. In addition, the steel company was erroneously given the pricing information for a different company located in the Lehigh Valley . Company C was competitive on pricing originally, but was absolutely unwilling to budge from this offer. A lower price offer put them out of the running. Although the affiliation with their parent offered a strong name and history, there was just too much of a price difference in the end. This affiliation should have given them the capacity needed to be price competitive since they were one of the few companies that did not have to buy extra capacity from someone else.

Two representatives from Company C came to steel company’s facility to explain the benefits of choosing Company C. While both seemed knowledgeable, they appeared more interested in putting on a show than in answering any questions the steel company may have had.

Company D

Expected to be a top contender, Company D was a definite disappointment. While able to offer almost everything the steel company would have liked to have seen from an electric company, Company D was not able to come anywhere close to the desired pricing. The pricing submitted by Company D was based purely on the market. Market prices for next summer have been bid up much higher than what the steel company would be willing to pay.

Company D also felt that they should not bid for the steel company’s smaller accounts due to Company D’s market based pricing. They felt that the pricing they could provide would not be competitive and was therefore not worth submitting. They do understand that the steel company would like to do business with them in the future and they would like to work with steel company as well. A good relationship could develop from this even if the steel company is offering no business to Company D at this time.

ANSWER

Sourcing Energy at a Steel Manufacturer (Case Study)

            The primary focus in selecting energy supplier for a steel company is considering factors beyond cost. Company A fits these interests considering it has a good reputation in the market, ensures efficiency since it is the original supplier. On cost, the company offers a suitable discount package which is beneficial to reducing operational cost. Importantly, Company A’s customer service history gives confidence for consistency in future energy demands. In instances of power outrange, the company would offer support services to ensure the running of the business. The best contractual arrangement to enter with company A is a fixed rate contract that entails supplying energy for a fixed price within a specific period.

            Company B poses the steel manufacturer at high risks of inefficiency since it is not the primary source supplier. Despite having competitive pricing in the United States, the company might incur more costs if it fails to operate due to power out the range. Company A offers more options for power suppliers despite being the primary source. Offering low fixed price for the first months does not match with a discounted offer by company A in the long run. Company C does not have price flexibility, and its high charges will increase operational cost. Company D lacks is dependent on market price, which is relatively higher than expected.

            The strategic contracting chosen for company A is crucial since it allows the company to know the expected cost while at the same time eliminating risk in price rise. Besides, company A has a good reputation in supplying energy which implies that the agreed terms will be observed. However, if the steel products are in low demand, the company is at risk of suffering loss, considering energy cost remains constant. Indeed, there is a challenge in determining what to be included in deciding the fixed price. This risk can be addressed by creating a risk-sharing environment where renegotiations are made when the company bears high operational costs. The goal of the company, to manufacture steel at a low cost and maximize profit, should be observed all along….