Answer Case Study Questions. Must be in word format?
Sourcing Energy at a Steel Manufacturer
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?
A large steel producer in Pennsylvania decided to open up its energyspending 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 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.
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 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.
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.