Michael C Zimmerman CQM, CQA

&

Craig Bristor CPM

SUMMARY

Over a decade of energy supply legislation has forced the regulated utility industry to enter into a rapidly changing competitive market. Utilities have never had to operate in a competitive environment and suddenly a new set of rules had to be developed. Baltimore Gas and Electric’s, Gas Division, ‘Supplier Quality Program’ was developed to address this changing environment. The program employed industry best business practices and a structured approach to Quality, Inventory, and Supplier Management.

KEYWORDS

Alliance, Competition, Cost, Process, Standardization

TEXT

Over a decade of changing energy supply legislation has forced the historically regulated utility industry to enter into a rapidly changing competitive market. Utilities have never had to operate in a competitive environment and suddenly a new set of rules have to be developed. Baltimore Gas and Electric’s, Gas Division, ‘Supplier Quality Program’ was developed to address this changing environment. The program employed industry best business practices and a structured approach to Quality, Inventory, and Supplier Management.

In order to adapt to the changing business environment of the utility industry, BGE undertook a corporate re-engineering initiative to address procurement practices. The objectives of the analysis were to:

• Reduce Procurement Cost

• Remove Barriers To Customer Service (The Business Units)

• Simplify The Procurement Process

• Develop A Flexible System That Will Accommodate Changing Corporate Structure

The goal was to develop a strategic procurement program tailored to the specific needs of each business unit.

The analysis showed that BGE had not been concerned with the events that every competitive industry has been working with for years. Typical purchasing policies focused only on the purchase price. All the cost associated with material and process quality, maintenance, reliability, and service were being ignored. Since these costs could no longer be absorbed into the cost of operating the system, strategies based on total cost analysis, life cycle analysis, and quality management would need to be developed. The project pointed out that a new approach, based on competitive industry "Best Business Practices" should be developed. The analysis indicated that:

• Material Should Not Be Treated Equally Or Procured With The Same Strategy

• Quality Is A Fundamental Requirement

• All Cost Factors (Internal And External) Must Be Determined.

• Results Must Be Measured Long Term

The corporate re-engineering team evaluated the recommendations and employed the ones that fit the corporate business structure at the time. Some of the major initiatives coming from the re-engineering effort were:

• Deployment Of Purchasing Personnel To Customer Locations

• Corporate Procurement Cards

• Increased Limited Value Purchase Orders.

Employee deployment, physically relocated Purchasing personnel to business unit locations. This allowed ‘cross functional’ teams to be developed and communications efforts became much more effective. Corporate procurement cards allowed the business unit to purchase commodity items in a more efficient manner and increased limits on ‘limited value purchase orders’ allowed the business unit to purchase lower cost, non-stock items, without overheads associated with the Purchasing Department individual purchase order process.

While the corporation made several process changes so did the Gas Division. The Gas Division began developing the ‘Supplier Quality Program’ (SQP) in an effort to address specific needs of the division. The goal of this initiative was to focus on supply chain/life cycle cost. The program was set up to be an ongoing dynamic team process based on competitive industry best practices. The SQP consisted of three sections:

Quality Management

Inventory Management

Supplier Management

In the gas distribution business Quality Management is an essential element when factoring safe operation, long term performance and regulatory compliance. The Quality Management section of the program addressed 3 basic areas:

Material Quality

Commercial Quality

Performance Monitoring

In order to fully address the requirements of ‘Quality’, BGE developed and implemented ‘Supplier Certification’ criteria. Suppliers who participate in the program must have a formal documented quality program, be technically competent, have production capability, be competitive, and offer superior delivery and service. Although BGE does not specify a specific manufacturing quality standard such as ISO or API, these standards are excellent models. Supplier Certification (and re-certification) is the vehicle BG&E uses to verify the suppliers ability to perform to industry or individually published standards. Both certification and re-certification require the supplier’s quality system be audited in order to verify compliance. The audit results are shared with the supplier in an effort to promote process improvement.

Material quality addressed the technical aspects of product purchased from the supplier. These areas are related to form, fit, and function. BGE has developed a ‘rejected material’ data base to track supplier performance. We have also put reports generated from the data base on the BGE web site so that employees who turn in defective material can track the rejection process through resolution.

Commercial quality addresses the quality of service. Areas tracked include on time delivery, fill rate, and effective communication techniques. BGE expects to be notified when items are going to be delivered late or if any other condition of the purchase order changes. We also monitor supplier reaction to special request and emergency requirements.

Performance monitoring evaluates the total cost of doing business. It incorporates factors related to product "form, fit, and function", supplier performance and the quality of the interface between the stakeholders involved. Suppliers are given performance report cards at scheduled communication meetings from which process improvement initiatives are developed. These programs must offer process improvements for all stakeholders. Suppliers are also asked to give BGE performance report cards. The report cards are used in order identify process improvement areas that will be focused on.

The second area BGE focused on related to Inventory Management. The inventory management segment of the program defined strategies that can be applied to individual items as well as categories of items. The strategies included:

• Product Standardization

• Material Classification

• Reduced Inventory Levels

• Increased Inventory turns

• Shorter Lead Time

BGE undertook a product standardization program in order to better utilize resources. The utility industry has historically taken a manufacturers standard product and modified it to meet a specific need or requirement. These requirements are typically carryovers from past practices. Special items are supplied at a premium cost with an extended lead time. The Supplier Quality Program compared special product specifications to standard industry specifications. This review facilitated product consolidation, supplier competition, and reduced lead time. This review also provided the structure for the material classification. The focus in this area was the classification of individual material based on risk and criticality factors. Once material was classified it became apparent that standard Pareto principles applied, 20 % of our items represented 80% of our expenditure. We then took the top 20% and broke it into two categories, critical and strategic. The balance of stock items were classified as commodity items. With the material classification completed we were then able to develop new inventory strategy for the different classes of items. The strategy focused a majority of our time on managing the 20% of the items that represented 80% of the dollars. Special initiatives were implemented with the critical and strategic material suppliers that enabled BGE to lower inventory value while increasing our customer service level. These special initiatives allowed BGE to reduce inventory and achieve shorter purchasing lead time. BGE was then able to capitalize on the process changes and achieve more inventory turns. BGE and it’s critical material suppliers were also able to develop strategies that included alternate stocking programs, scheduled deliveries, evaluated receipt summary, and shared inventory data. All these programs were analyzed and implemented to allow all stakeholders to achieve benefits.

The third part of the process was BGE’s development of Supplier Management strategy. Based on our material classification, the status of our suppliers were defined. As were the materials, suppliers were classified as ‘critical’, ‘strategic’, or ‘commodity’. The supplier classification was determined by the class of material they supplied. The strategic goals for this part of the program included:

• Total Cost Analysis

• Two Way Communication And Information Sharing

• Process Improvements

• Partners/Alliances

• Sharing of Risk and Profit

Specific procurement strategies were developed to meet the needs of each supplier classification. Critical suppliers were evaluated for alliance/partner relationships with long term, ‘evergreen’ blanket purchase orders. Supplier consolidation was also focused on in an effort to reduce the supplier base. This allowed BGE to offer a large enough package for the successful supplier to achieve economies of manufacturing and benefit from related processes. Open communications and information sharing is a vital component of our strategy with these suppliers as well as with our strategic suppliers. Strategic suppliers provide material and services that are very important to the day to day operations but would not necessarily create an emergency situation if they did not perform to expectations. Critical and strategic suppliers are required to meet with BGE every 4 to 6 weeks. These meetings allow the stakeholders to communicate upcoming material requirements, changes in status (all parties), a review of past performance, and any other topics that may need addressed. The ‘communication’ meetings are also the vehicle to coordinate the development of process improvement projects. Process improvement projects are often the result of a cost model analysis where we have determined that the process needs to be evaluated from a ‘total cost’ perspective. One of the agreements with critical material suppliers is a sharing of risk and profit. If the team decides to undertake a project, any improvements gained through process improvement are shared as are the risks involved. Commodity suppliers, are treated much differently. Basically material in this category is commercially available and not governed by standards and specifications. While we attempt to make commodity material available for our customers at all times, there is less effort due to the fact that they have alternate methods of procurement such as credit cards and petty cash. These items are characterized as low value/low criticality.

The adoption of SQP resulted in a significant change in the way we approach our business and represented a major ‘culture change’ in our purchasing strategy. BGE realized significant value in the Gas Division’s program development and direction setting. Since the adoption of the program in 1997/1998 we have achieved:

• Critical And Strategic Material Service Levels increased to 99.8%

In establishing service level targets based on criticality we were able to achieve significant improvement in the availability of those items which effect our daily production and efficiency. Unavailability of these items results in emergency treatment and are usually resolved in 24 hours.

• Inventory Reduced By 25%

Although many items are in stock for emergency use only, our overall average inventory turn has increased. Inventory turns for high demand items fall in the 6 to 7 turn per year range with 100% availability.

• Realized over $4 million in product and process savings.

These savings represent material cost, shipping cost, warehouse cost, and process cost such as invoice processing improvements. In addition, internal process efficiencies associated with long term contracts and reduced expediting have been achieved. Although $4 million in savings to date have been realized, another $4 million will be achieved due to the process improvements put in place over the life of current contracts.

• Successful Partnerships/Alliances.

We have developed a comprehensive communication process with our critical suppliers which allows an open two way information flow. This type of communication allows all parties to have current up to date marketplace data.

These results have been realized utilizing our existing operating/engineering and purchasing personnel. The "Process Improvement Team" responsible for day to day operation of the initiatives consists of engineering staff, purchasing personnel, and materials specialist. The team works together on site and continuously plans and updates our focus/goals. This change in our business practice has resulted in a reallocation of resources with no personnel increases.

CONCLUSION

The cornerstone of the Supplier Quality Program is ‘Quality’. There must be a dedicated focus on total quality - quality of product, service, and personnel. The business approach as described involves a significant concept change over traditional utility purchasing practices. This approach must involve personnel who are committed to total quality management, open to change, and comfortable dealing with total cost management. The approach creates a continuous improvement atmosphere fostered by a cross functional team’s ability to implement change management. It is equally important to recognize that the success of such dramatic philosophical changes hinge on the leadership of such changes. This is a long term commitment, which will only succeed through the dedication of the team and their belief in the approach. This program focuses on continuous improvement and the team must constantly sell their efforts to suppliers, management, and other team members.

Open and honest communication is the key to establishing credibility of the program and personnel involved. Internal teamwork and coordination is mandatory when presenting changes from past practices. Suppliers can easily tell when internal conflict dilutes lofty objectives and a mixed message is sent. These programs must have a win–win outcome for all parties in order to maintain motivation. While the road to success has been difficult, the commitment to the concepts presented have achieved measurable results.

This article was edited for web site publishing