Robert Rudzki, a regular contributor to Sourcing Innovation, recently edited a great two-part series on the nature of energy as a purchased item (Part I and Part II) by Ted Eichenlaub over on the Supply Chain Management Review that should be added to your reading list if energy is a reasonably significant cost of your operations, as the price of energy is only going to increase in years to come.
In these pieces, Ted, who is a senior advisor in the energy practice at Greybeard Advisors, elaborates on the increasing complexity of energy buys in today’s Procurement environment as the commodity cost of energy is only one part of the total cost of energy to the end-user.
Some important points to keep in mind are:
- Price and Volume
Energy is expensive and its price is volatile. In order to take advantage of price volatility, the buyer must know what price will achieve the desired cost ledger performance, the volume requirements, and and the nature of the volume.
Hedging can be used to reduce price volatility, but it can also increase price volatility if the hedges are not made by an expert.
- Credit Worthiness
A supplier may be unwilling to grant a major long-term contract with price that is very likely to below the price it could command in a month or two if it thinks there is a good chance that the buyer might not be around to utilize the full volume of energy that the buyer is committing to.
- Standardized Contracts
Most suppliers use standardized contracts and there is little room for negotiation beyond price and volume.
- Worldwide Sources
The energy might be produced locally, across state lines, or internationally (in Canada). Depending on where it is produced, and where it is purchased, there may be documentary requirements, energy credits, or other concerns that need to be taken into account.
In addition, there are concerns regarding transportation and delivery, regulation, and responsibility that also need to be understood. For more information, check out the two part series on the nature of energy as a purchased item (Part I and Part II).