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Joint utility purchasing: a case study Lane Electric Cooperative.

One method rural electric systems are using to reduce costs and improve service and competitive positions is to utilize joint purchasing agreements with other utilities. Through two examples, our author illustrates that the key to effective purchasing is to analyze and understand the cost drivers for the particular inventory item under examination.

The threat of competition is forcing utilities to change, doing things today better than we did them yesterday so that we will be around tomorrow. One way that Lane Electric Cooperative (LEC) is controlling costs is through cooperation.

LEC is involved with two purchasing groups: one for distribution transformers and one for 15 KV underground primary cable. The cable buying group consist of four cooperatives and two municipal system, whereas the transformer buying group consists of three cooperatives, four municipal systems, and four People's Utility Districts (PUDs). The common thread of the buying groups is public power agencies working together in order to lower costs and improve quality of service.

CABLE BUYING GROUP

The process for the cable buying group began by coming up with a common specification for two standard wire sizes. The largest municipal system formed a task force to evaluate the EPR (Ethylene Propylene Rubber) vs. TRXLOPE (Tree-Retardant Cross-Linked Polyethylene) insulations. Due to so many problems with our present cable, an economic evaluation based on a 40-year life looked at expected cable life, energy costs, cable purchase cost, labor installation costs, and costs to locate and repair cable faults. This thorough study resulted in an EPR insulation specification for 1/0 and 750 aluminum. Okonite was the successful bidder based on cost and their ability to meet the service requirements of the contract.

With completion of the specification, each utility forecasted their annual usage for each wire size of the first year of a three-year bid. Each subsequent year's usage would be forecasted by November of the preceding year. The idea was to offer a quantity in a bid to a manufacturer that was large enough for them to offer a lower price.

Once a given cable is chosen, the largest cost driver is volume. For example, even though no individual utility forecasted using over 100,000 feet in 1994, the total cable purchased by the group totalled over 500,000 feet. LEC realized a savings of 25%, totalling approximately $100,000.

Cost savings are related to cable volume. The savings top out at around 250,000 feet so our group has not allowed other utilities to join our group, but suggests that they form their own group in order to take advantage of cost savings.

The additional operational benefits from the cable buying group includes the ability to borrow or buy material from a neighboring utility in a pinch and know that it is identical material to standard stock such as splices and terminations knowing our tools are going to fit. The Okonite company provides technical training to each utility's line crews on the proper handling, and cable Preparation for termination. The Okonite service center is able to stock an emergency inventory specifically for the group. This was critical for LEC in 1994 when a couple of unexpected projects were completed resulting in the utility using over twice as much cable as forecasted. Okonite was able to met LEC needs and the projects were not delayed due to not having any cable available.

The cable buying group meets quarterly (usually two hours plus a lunch) to update our next quarter's forecasts and to discuss mutual concerns such as recent research in the cable industry. Every utility and the supplier contributes to the agenda.

TRANSFORMER

BUYING GROUP

A common transformer specification was not possible due to different system voltages and different accessories. However, a common loss formula was agreed to in hopes that a common core and coil assembly would provide a volume. The first year bid contained 85 bid items (1766 total units) for all the single phase padmounts, three phase padmounts, and conventional transformers.

LEC realized first year savings of approximately 3% on transformers. Combining quarterly shipments with 85 transformer bid items did not allow the volume cost driver to overcome a transportation cost driver. Most transformer manufacturing plants are located thousands of miles from Oregon and less than full truck shipments adds to the unit cost.

LEC's larger savings with the cable group compared to the transformer group is also related to its past purchase history. Transformers were bid out on an annual needs basis, whereas cable was purchased on an as-needed basis.

After award of the first year's bid and after the utilities had received their first quarter shipment of transformers, the buying group met and invited three manufacturers to input their perspectives regarding our process. They all identified transportation as a cost driver with the following obvious method to reduce this cost: make in truckload quantities available for the manufacturer. Specific suggestions under this principle include all utilities allowing a window for deliveries so the manufacturer can make drop shipments. Allow the manufacturer to deliver the second quarter shipments, for example, any time during the month of June as opposed to specifically June 15th.

Another suggestion was to award the bid as a family of items instead of by line number (i.e., award all conventionals to one manufacturer instead of awarding 15 KVA and 25 KVA units individually). In our first year's case we had 85 line items individually awarded among five manufacturers. They suggested awarding all single phase padmounts as a family, all conventional transformers as a family, and all three phase padmounts as a family. This type of "all or nothing" award system would allow the manufacturers to bid a more competitive price.

They also suggested that the group continue their efforts to derive a more common specification. One cooperative utility uses double hanger conventional transformers whereas all the other utilities in the group use single hanger. If the one utility can change their operational practices, then all the members of the buying group will benefit with lower unit costs. A similar situation exists with single phase padmounts in that two Utilities use a radial feed bushing arrangement while the rest of the group utilize all loop feed arrangements. A common specification would allow for less bid items and, therefore, more units that can be manufactured and shipped from a single facility.

Manufacturers also suggested that the group look at a window of opportunity regarding loss evaluation. This system looks at the total evaluated owning cost and allows a certain percentage (typically 3-7%) window whereby the utility will then go back to the first cost for award. This system is a hedge on the loss evaluation process.

Our contract allows utilities to adjust their quarterly shipments as long as the total year end numbers are within 80-120% of bid values. The manufacturers requested an eight week minimum lead time for any quantity adjustments. Since each utility issues its own purchase orders, the manufacturer requested that each utility issue their purchase order within a month of the bid award so they can meet first quarter time deadlines.

One manufacturer suggested that we give all our business to him and make our specification match his product. Of course, the group realizes that it is in our best interest to have as many competitors as possible that meet our quality standards.

Considering the relatively short time the group has functioned, the removal of barriers between utilities has been phenomenal. Utilities sitting down together and working toward a common specification was unheard of 10 years ago.

CONCLUSION

The meeting of each buying group provides a forum for the utility and supplier to form a relationship that can allow the supplier to do their best for the utility. The group utilizes a supplier evaluation form developed by the Utility Purchasing Management Group in order "to enable both the utility and its supplier to continually improve their ongoing business through meaningful measurement and communication thereby providing greater mutual value and profit to the partnership." With growing pressure for LEC to be the "utility of choice" for our members, we are allowing our supplier to become part of our team.

The Okonite company has partnering agreements with various IOU utilities across the country which enable the IOUs to reduce their inventory levels and associated carrying charges. Competitive forces have led some Oregon public power utilities to seek a similar business arrangements. Partnership and a multi-year contract allow the manufacturer to schedule their production more efficiently, with the ultimate winner being the utility's customer.

The group purchasing of cable worked well because the combined volumes of the individual utilities allow the manufacturer to lower their costs. Less success was achieved with the transformer group because the variations and awarding process did not allow the manufacturer to realize operational savings.
COPYRIGHT 1995 National Rural Electric Cooperative Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1995 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:O'Brien, John
Publication:Management Quarterly
Date:Mar 22, 1995
Words:1464
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