It’s a current business trend to centralise anything associated with sourcing goods and service to the procurement group. The benefits of “strategic procurement processes” can include cost reduction, efficiency and innovation. The process holds the key to these benefits, ensuring repeatability, competition (tenders) and quality of outcome (confirming product or service). The implied assumption is that there are many suppliers, the product is more or less homogenous, and an appropriately detailed specification can inform product or service selection.
Energy, unfortunately, is anything but homogenous; frequently there are few suppliers; and there are numerous considerations that impact costs including the supply chain; and critically, consumers have significantly less information about the market than suppliers. But probably most importantly, procurement, as a process driven activity is essentially a passive approach in dealing with suppliers. At its core, it relies on competitive tension of tender processes to drive the best outcome. While a final negotiation might seek to improve on tender submissions, faith in market competition in driving down costs is the trump card of strategic procurement.
By contrast, energy contracting should be an active process where the consumer drives a predetermined target outcome which has been thoroughly researched (market analysis); develops a strategy to drive the negotiation process; and the engagement process with suppliers not only drives competition, it enables trading of value toward the desired outcome. The last point is key, a buyer of energy needs to understand how the supplier sees value in the transaction in relation to price, volume, flexibility, reliability & risk. The active negotiation that follows, allows the buyer to compare and contrast the various supply proposals in real time ensuring the best overall energy supply contract according to the target outcome.
And contracting energy involves other contracting considerations and decisions that either rely on the final contract, or can influence the final energy contracting decision depending the propose supply terms and costs. A good example related to gas is gas transport and storage. Typically, gas contracts ensure that the consumer can rely on delivery of its maximum requirements even though daily consumption is usually less. This creates a volume risk for the consumer. By contrast, a consumer can contract gas storage, and buy lower priced spot gas for maximum consumption. This avoids the volume risk and can reduce overall gas costs. But the decision depends on the cost of gas (spot and contract), the cost of storage, and risk of loss associated with gas contracted that cannot be consumed.
This kind of dynamic contracting decision-making and negotiation will always achieve the best outcome for the energy buyer – provided the buyer is well informed and organised prior to engaging the market. BrightSource Consulting has experience in all areas of the energy (gas) supply chain and can assist buyers through this complex and dynamic contracting process, together with supply chain executives within the business.