By Brian K. Schimmoller,
The euphoria that consumed the power sector from 1999-2001 was not restricted simply to power plant development and wholesale market exploitation. Remember e-business? Technology mavens and ambitious dot-com proponents hyped – and overhyped – the benefits of e-business until many felt their business models would disintegrate if they didn’t take quick action.
As the power industry cleans up from the wreckage inflicted over the past few years, and re-positions itself for the hoped-for economic recovery, it’s clear that the e-business phenomenon promised more than it could initially deliver cost-effectively. However, it’s also clear that e-business has taken root within the power generation sector, and can deliver savings if implemented carefully.
E-business means different things to different people, but there are at least three commonly used e-business categories: (1) e-procurement, which involves strategic sourcing supported by e-tools; (2) e-supply chain management, which typically involves vendor-managed inventory control; and (3) e-commerce, which involves on-line buying and selling, both direct business-to-business and via third party exchanges. Success with e-business depends on a company’s mix of these functions, as well as on its level of investment and its commitment to the process.
Because e-business is still in its infancy, and because widely varying definitions are employed, gauging the value and importance of e-business on a broad scale is rather nebulous. For example, consider a recent survey finding from Forrester Research that the percentage of companies that have “mostly or fully adopted the Net for procurement” rose 5.0 percent to 12.2 percent from fourth quarter 2002 to first quarter 2003. This number is encouraging, but when viewed in light of a finding from the same survey that the percentage of companies using enterprise-wide procurement tools had dropped 2.5 percent from fourth quarter 2002, the message is muddled.
E-commerce has exhibited similarly mixed results. “I’m only aware of a few successful on-line exchanges – such as the World Wide Retail Exchange and the Aero Exchange – that have been consistent in their approach,” says Michael Kruklinski, Principal with A.T. Kearney. “Most of the others have either folded or are re-defining themselves. Even the Covisint exchange, the auto industry exchange, which many felt would revolutionize the auto industry supply chain, is re-thinking its strategy.”
Still, e-business has drastically changed the business landscape. Companies have become much more aware of the bottom-line impact of procurement, sourcing and materials management, particularly since external purchases can account for 50 percent or more of a company’s expense base. “The e-business movement has brought about a ‘C’ change, attracting the attention of the CEO, CFO, COO, and all others at executive management levels,” says Kruklinski.
The power industry does present some unique challenges, however, including its historically conservative philosophy, decentralization of supply chain management, and the need for non-commodity parts and services. “A relatively small part of our spend utilizes our eProcurement solution, mostly for high-volume, non-inventoried products with little variation in specifications,” says Tom Christensen, Director – Decision Support with Ontario Power Generation, which is a member of the Pantellos exchange. “For technical services, engineered products, MRO supplies, we use our enterprise resource planning system, which seamlessly communicates with our pre-approved vendors. We are also pursuing greater use of Pantellos’ various capabilities.”
While many of the technical barriers encountered with early e-business efforts have been eliminated — communications language incompatibility, content reformatting fees, insufficient content — several barriers remain, primarily cultural in nature. “If you’re buying $2-4 billion of products and services per year, you have to be able to demonstrate you’re getting value,” says Oliver Butler, Supply Chain VP at Ontario Power Generation. “The only way to do that is through knowledge and education – and that’s the real challenge. People have to get re-focused and re-engaged with their industry so they can function more effectively with both internal and external clients. They can’t be sourcing engineered products on Tuesday and coal on Wednesday.” OPG recently completed a major re-organization with this in mind, establishing centers of expertise that will work to identify and exploit value opportunities in the supply chain.
A second cultural barrier to successful e-business implementation is corporate buy-in. “Procurement and supply chain management should be one of the top three things that a CEO or CFO thinks about, as it often represents the largest percentage of the influenceable spend,” says Kruklinski. Adds OPG’s Butler, “If the CEO doesn’t buy in to the need for a world-class supply chain, it’s very difficult to implement because the nature of supply chain leadership is supportive on one end but intrusive on the other.”
Many people view cost savings as the ultimate goal of e-business, and, in fact, the savings can be large. “A 10 percent reduction in a utility’s non-fuel spend can translate to a 21 percent increase in earnings per share,” says George Gordon, Chairman and CEO of Enporion.
Savings are not the end-all and be-all, however. “The savings will come, but if you’re not delivering service first, you won’t be able to sustain the economic benefits,” says Butler. “From a supply chain point of view, what matters most is engagement with internal clients, service, relationship management, and value. Without these, no one is going to stick with you just to save some money.”
In dot-com hindsight, the initial fervor related to e-business represented another case of expectations exceeding reality. The internet go-go days of 1999-2000, however, are what provided the creativity, capital, and technology to bring e-business to the forefront of business planning. In an ironic twist, the difficulties experienced by the power industry the past two years may be the true catalyst for greater growth in e-business. As asset owners struggle to reduce costs in a competitive environment characterized by low power prices, attacking the supply chain via e-business may be the weapon of choice.