The Power to Purchase

As temperatures dip below freezing this winter, consumers in Boise turning up their thermostats are probably more concerned with staying warm than with how much their utility company is spending on office supplies. But on the other end of the electric lines, Idaho Power Company is using an e-procurement system to streamline its purchasing, cut its costs and sustain its reputation as one of the most efficient utilities in the United States.

[From iSource Business, January 2001] Let's be clear from the start: Deb Kunkler, procurement manager at Idaho Power for the past four years, is no cowpoke riding herd on wild, maverick spenders. "I don't even own a pair of boots," she laughs.

Admittedly, the soft-spoken, thoughtful Kunkler  who spent 15 years in materials management with the utility before taking her current position  is leading the implementation of an e-procurement system that is intended, at least in part, to curb maverick spending at the utility. But the company's broader vision for e-procurement is to integrate purchasing applications with the utility's ERP system, leveraging the ERP investment to achieve greater savings than a standalone e-procurement system could provide. The effort, underway since January 1999, is already producing measurable results and creating efficiencies in their supply chain.

A Reputation for Efficiency

Idaho Power, with about 1,800 full-time employees, serves 800,000 people spread across 20,000 square miles in southern Idaho, eastern Oregon and northern Nevada. The 83-year-old utility owns and operates 17 hydroelectric plants on the Snake River and its tributaries. It also owns interests in three coal-fired generating stations.

The company has built a reputation as a progressive power provider, earning recognition from Public Utilities Fortnightly, an electric industry publication, as the country's most efficient utility in 1998. In 1999, a national study by J.D. Power and Associates/Navigant Consulting, Inc. ranked Idaho Power highest in customer satisfaction among electric utilities in the western United States (in a tie with Arizona's Salt River Project). Small wonder: A nationwide survey of investor-owned utilities by the Edison Electric Institute found that Idaho Power was offering its customers the lowest combined rates for electricity in the nation.

The company began its drive to become "the best small utility in the United States." (in the words of its chief executive officer and president, Jan Packwood) in 1996 with an ERP implementation intended to facilitate maintenance and work order processes. Indus International, of San Francisco, Calif., provided the ERP system called PassPort. With that system in place, the utility started looking for an e-procurement system that would not only streamline internal purchasing processes and reduce maverick spending, but also link to external suppliers and the utility's own ERP applications.

Early on, Idaho Power elected not to implement electronic data interchange (EDI) applications to connect with suppliers. Kunkler says the company felt EDI required too much maintenance and too much effort to integrate with multiple suppliers using diverse EDI systems. The system was also not able to provide the kind of centralization required for effective procurement in an organization as large and distributed as the utility, with its 19 warehouse sites, numerous power plant facilities and $238 million annual spend (including fuel and coal).

By the same token, Idaho Power rejected the approach that utilities elsewhere had taken  installing a standalone e-procurement system that could produce a rapid ROI in terms of eliminating maverick spending while avoiding the challenges associated with integrating new systems with back-end ERP applications. Kunkler explains her company viewed the shift to e-procurement as an opportunity to leverage, and improve upon, the ERP investment rather than go around it.

"With an ERP system, we wanted specifically to be able to create a mainstream set of processes," Kunkler says. "But we were ending up with a catalog maintenance person, a design and construct person, a stores person, a purchasing person and none of them would agree on a single set of cataloging terms. We really needed that single entry point to bring the whole commerce aspect together." In this way, their unique supply chain for their environment could operate more efficiently.

A single entry point was critical for users as well, since giving requisitioners a unified, user-friendly storefront would help eliminate maverick buying, which Kunkler admits was an issue for the utility and one of the driving factors in the move to e-procurement at the company.

Eight-week Implementation

Idaho Power began reviewing alternative e-procurement platforms in 1998 and eventually settled on Commerce One's BuySite solution. BuySite is compatible with the PassPort ERP system, which would allow the utility to consolidate maintenance requirements within a uniform application environment, rather than once for the ERP and again for the e-procurement system. Further, this integration would allow for information to be shared across the company. The e-procurement system would be able to pull information out of the ERP system to determine whether items called for in work orders were in inventory or needed to be ordered, which the system would do automatically if necessary. This level of integration met Idaho Power's objective of enhancing the company's PassPort system and helping it achieve a higher return on the ERP investment, Kunkler says.

Idaho Power began the eight-week implementation in January 1999, with MCI Systemhouse (which MCI sold to EDS in April 1999) acting as integration consultant on the project. By March 1999, the utility had a pilot group of 60 users at the company's main corporate complex transacting through the system. The pilot program targeted those individuals who did most of the office supply ordering, matching the profile of the initial group of office products suppliers brought into the system.

The users group expanded over the course of 1999 to include 175 employees who were ordering from a total of three suppliers. Idaho Power suspended further expansion of the user group in April 2000 due to a planned upgrade in the PassPort system, which was completed in September 2000. The upgrade and additional integration between BuySite and the ERP system (through a product called IndusBuyDemand for Utilities) allowed for increased ordering of maintenance, repair and operations (MRO) items through the e-procurement system. This in turn has allowed Kunkler to expand the user group further, with the goal of eventually putting as many as 500 employees on the system.

With the ERP upgrade and integration complete, Idaho Power has also increased the number of suppliers available through the e-procurement system to include a group of five suppliers accessed through Commerce One's Round Trip technology. Round Trip allows buyers to access a supplier's own Web site directly from within the BuySite, configure items for ordering and then bring the order back into BuySite for approval and transmission back to the supplier for fulfillment. In all, Kunkler anticipated having 10 suppliers on the Idaho Power system by the end of 2000.

First Results

The total spend going through the new e-procurement system was initially small, reaching only about $100,000 on an annual basis by September 2000, primarily because the utility first targeted office supplies. Kunkler expected this amount to increase rapidly following the completion of the integration, to $500,000 by the end of 2000.

Kunkler says she calculated a 36-month ROI for the e-procurement project, with the returns picking up pace over time. "We weren't planning a really quick return," she explains, "because our strategy was to start off with things like office products, where there is not a huge amount of spend, and then move into our MRO and utility-type products once we had the interface up with our ERP system."

The utility has reduced its maverick spending, according to Kunkler, although she says the amount of savings was limited prior to the completion of the ERP upgrade and the cost reductions would increase as more users came onto the system. "We used to get a lot of people out there doing their own thing, buying randomly from suppliers, so the more people we have using BuySite, the more we can pull those folks in and leverage our discount opportunities," she says.

The new system did allow Idaho Power to reduce office supplies inventory in corporate warehouses by $100,000, according to Kunkler. As is typical in e-procurement implementations, employees gained confidence they would be able to order and receive goods in a timely manner, so they no longer felt the need to keep stocks of those goods handy.

In addition, thanks to the process efficiencies afforded by the new system, the company's purchasing department was able to reassign one of two people who did purchase order releasing. The freed employee is now managing the e-procurement system. Another employee is dedicated part-time to assisting with supplier adoption, also as a consequence of process savings realized through the new system. In both cases, their new responsibilities are more strategic for the organization.

Building on the Past

Reflecting on the challenges involved in the company's e-procurement implementation to date, Kunkler says that Idaho Power has had to deal with the typical issues associated with being an early adopter of any new technology, namely, spending a certain amount of time fine-tuning the system. She notes the company has had good support from Commerce One, which now has a Northwest support team based in Seattle that can assist the utility.

In general, the amount of effort involved in the implementation was greater than Kunkler and her team anticipated. "One of the things we really underestimated was the amount of internal support as far as project team," she notes. "We really didn't have the luxury of spare people to work on this effort."

Kunkler, who says she frequently gets calls from purchasers at other utilities that are considering e-procurement, recommends coming up with an integration strategy that leverages a company's prior investment in an ERP system. "I think one of the advantages [of an e-procurement system] is to enhance that big investment you already have," she says.

The power company is continuing to add new e-procurement capabilities. The company has begun using auction services through eBreviate, and Kunkler and her team are beta-testing an electronic RFP system from Webango.

Although she is reluctant to discuss future plans for expanding e-procurement at Idaho Power, Kunkler says the utility is considering participating in one or more Internet-based exchanges with a focus on the Northwest, perhaps to address issues of logistics and freight. As before, Kunkler is looking to capitalize on the company's prior investment.

"We are looking at other strategies to benefit from the e-procurement software we have installed here," she says, adding, "That's still in the early phase."