Demand for electricity in the United States is rising at a rate of 1 to 2 percent annually, which presents utility companies with a clear challenge: how to increase profitability in such a slow-growing industry. But for Craig Adams, senior vice president and chief supply officer (CSO) with Chicago-based power company Exelon Corp., the answer to this challenge is equally clear: "Based on growth in electric demand now," Adams says, "we really need to focus on getting cost out of the business."
A New Approach to Supply Chain
Exelon, the result of the October 2000 merger of Philadelphia-based PECO Energy and Chicago's Unicom Corp., is one of the top U.S. utilities, with more than $15 billion in annual revenue and a ranking as No. 126 on the 2004 Fortune 500 list. The company, which serves approximately 5.1 million electric customers in Illinois and Pennsylvania and 460,000 gas customers in the Philadelphia area, is comprised of two divisions — energy generation (including nuclear, fossil and hydro) and energy delivery (through ComEd in Northern Illinois and PECO Energy in and around Philadelphia). In all, Exelon has about 18,000 employees, and it has an annual spend of more than $2 billion.
Following the merger, the unified Exelon maintained a largely decentralized supply chain, with the company's different business units preserving a substantial degree of autonomy. This is not surprising given Exelon's industry, which, over the past 100-plus years, has built out capacity incrementally and without a great deal of standardization over time. In Exelon's nuclear business unit, for example, the company operates 10 different nuclear power stations across its geographic regions, and each station traditionally had its own local supply organization, staffed by 30 or so employees and reporting to the vice president at each plant. The company's other business units also had independent supply chains to one degree or another.
All of which, says Bridget Reidy, senior vice president for customer and marketing services with the Exelon Energy Delivery business, was not necessarily a bad thing. Reidy, who formerly was Exelon's first chief supply officer before stepping into her new position this past July, says that each of the company's different supply chains was operating quite well on its own. However, by 2002, after the dust from the PECO Energy-Unicom merger had settled, Exelon's senior supply chain executives began to consider changing their approach to supply management. "A lot of things were working very well within the supply chains in each of the different business units," Reidy says. "But we looked at it from the perspective of each individual business unit, and we didn't have an Exelon-wide perspective. We thought we could achieve a lot of benefit if we looked at our supply chain slightly differently."
Aggressive Timeline, Ambitious Goals
The company brought its supply chain leads together in 2002 to discuss options for transforming Exelon's approach to supply management, and ultimately the group came up with a plan for consolidating all of the company's supply chains within Exelon's Business Services Company (BSC), which also includes such functions as information technology (IT), human resources, finance and legal. The plan also called for revisiting all of the company's spend categories from an enterprise-wide perspective and re-sourcing categories using a total cost of ownership (TCO) approach; standardizing supply chain practices and processes throughout the company; and maintaining or improving service levels in the supply chain. The three-year consolidation plan provided for an aggressive timeline, allowing just four months for the new supply organization to come together, unify the company's supply staff in a new reporting structure and begin acting as a single, enterprise-wide supply chain. The bottom-line goals for what became known as the Supply Chain Transformation Initiative (SCTI) were equally ambitious: $200 million in savings over the three-year life of the project, with $120 million coming in the first year.