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Discussion - Sourcing Energy at a Steel Manufacturer

Discussion - Sourcing Energy at a Steel Manufacturer - Case...

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This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. Case Solution: Sourcing Energy at a Steel Manufacturer This type of case requires students to consider all of the different possibilities associated with the supplier presentations. There is a combination of hard and soft data to be considered, including how well the suppliers are prepared. 1. What supplier would you select, and why type of contract? As a result of this evaluation of the four suppliers, the steel company elected to source their requirements from Company A at a flat tariff rate for two years. Savings on one of their major facilities was 11% over previously contracted rates. Although leveraging across the Pennsylvania/Maryland/New Jersey grid is not yet an option, this strategy will be explored as deregulation occurs. It is anticipated that a ten-year contracting planning horizon will be established with competitive providers as this occurs. Until that time however, the sourcing team expects to use short term contracts to exploit steadily decreasing prices. The steel company also has co-generation in three sites in Baltimore, Indiana, and New York. The co-generated power does not meet all load requirements, but it helps alleviate concerns regarding brownouts and plant shutdowns. In some cases when the co-generated power exceeds current requirements, the plant is selling the power back onto the grid through the local provider, and being reimbursed for the block of energy. Through employing a portfolio of different energy strategies, the team is continuing to work on reducing energy costs for all of its global steel facilities. 2. What are the risks and rewards associated with this type of decision?
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This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. It is also useful to consider the different risks and rewards associated with this type of strategy. The following figure illustrates some of the most common risks and rewards associated with a strategic sourcing decision, especially in markets like energy where the deregulation status is uncertain moving forward. RISKS REWARDS Local regulations Market uncertainty Enron Effect Mergers Reliability Stranded cost recovery risk Cost Savings Innovation 3 rd party Providers Distrib. generation Leveraging Aggregation 1. Aggregate data on business needs and volumes - Impact of cost savings - Alternative rate structures 2. Team defines focus area and tolerance for risk Appoint experts across business divisions 3. Collect data and knowledge and set goals Estimate cost of energy portfolios Total cost solution for entire enterprise 4. Evaluate supplier proposals and select supplier(s) Develop performance metrics / incentives Award contract 5. Finalize strategy and communicate procedures.
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