PPL - Looking to Purchasing to Manage Costs at PPL Imagine an industry where government regulation virtually guaranteed a return on investment For

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Looking to Purchasing to Manage Costs at PPL Imagine an industry where government regulation virtually guaranteed a return on investment. For most of our modern industrial era, this is how the U.S. electric industry has operated, usually resulting in a failure by most utilities to economize. Regulators routinely allowed electric utilities to earn a fixed rate of return on their assets, whether the assets involved a power generating station or the lush remodeling of a corporate boardroom. This may be the only industry where rules and regulations rewarded inefficiency by guaranteeing a fair return on assets. An executive at a major nuclear power utility remarked that cost overruns on their nuclear plants doubled our assets and doubled our earnings. Unfortunately for utility executives, the sense of security provided by regulation is disappearing. Utilities have entered an era of deregulated competition where consumers and businesses will select carriers similar to selecting phone services. Cost reduction and control is now the emphasis among utilities. Competition is becoming intense in Pennsylvania, which is at the forefront of electric deregulation. PPL, an electric utility with almost $3 billion in revenues headquartered in Allentown, Pa., concluded more than five years ago that it must reduce costs to succeed in an era of deregulated utility service. Procurement managers at this utility are keenly aware of the need to provide better service to internal customers while helping lower the utility’s average kilowatt per hour rate (KWH). This is motivating purchasing to develop systems and processes that reduce the effort and transactions required to process low value goods and services. Interestingly, how this utility defines a low value purchase differs dramatically from a typical manufacturing firm. Purchasing defines a small dollar purchase as less than $50,000 for services, and less than $3,000 for material purchases. This involves items or services not purchased regularly or covered by a corporate contract. A contract that exceeds $50,000 automatically involves purchasing. Given the nature of utility work (24 hours a day/seven day a week operation subject to emergencies and weather conditions), this definition of low value services and goods makes sense. Most internal purchasing customers are assigned to power generating plants or field warehouses that stock items for maintaining the utility network. Field engineers and mangers must have the ability to subcontract services or obtain needed materials quickly, which is one reason the decentralized purchasing systems featured here are important. PPL is noted for using aggressive approaches to using system technology, supported by other methods, to streamline the process for obtaining lower value goods and services. The company has developed four approaches for reducing the effort and transactions required to process low value purchases. These approaches include: User negotiated and issued service contracts
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This note was uploaded on 04/21/2011 for the course MGT 01 taught by Professor Gad during the Spring '11 term at Tanta University.

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PPL - Looking to Purchasing to Manage Costs at PPL Imagine an industry where government regulation virtually guaranteed a return on investment For

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