Supply Management SMT- Procurement

Lesson 4 Case - Sourcing Energy at a Steel Manufacturer

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:

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Supply Management SMT- Procurement

- 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

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Supply Management SMT- Procurement

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.

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Supply Management SMT- Procurement

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.

Assignment Questions

1. Consider the different suppliers – which one would you select? What type of agreement

would you use?

2. What are the risks and rewards to consider in this case? How can the team balance these

risks and rewards?

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