The Benefits of Electronic Procurement at PPL Corporation

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Frederick Underwood
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1 The Benefits of Electronic Procurement at PPL Corporation A Case Study Prepared by And April 7, 2006

2 Executive Summary "PPL will conduct business with approved suppliers using Enporion to facilitate sourceto-settlement e-transaction efficiencies" Jim Miller, President and Chief Operating Officer, PPL Corporation, Allentown, PA. With those words, spoken to a group of PPL Corporation s key suppliers in a meeting held in September 2005, PPL confirmed its direction to fully embrace and implement electronic interchange of procurement documents with its suppliers. This action was the culmination of a journey that had begun a few years earlier and increasingly made use of all the powerful tools of electronic commerce. PPL is now electronically transmitting Purchase Orders and Change Orders, and electronically receiving PO Responses and Invoices from key suppliers and is quickly moving ahead to add many more of its supplier community. Throughout this process, PPL has seen the increased efficiencies of electronic operations, all of which led to this most recent step to accept more supplier invoices via electronic transmission. In 2004, PPL s Accounts Payable Department processed approximately 196,000 paper invoices from suppliers. Now these invoices are rapidly moving to the new electronic submission process and the savings results are substantial. In the AP department, for every 10 invoices moved from the paper process to electronic, one hour of overtime labor is being saved. In addition to the significant benefits for PPL, suppliers are experiencing benefits as well. Because electronic invoices can be processed more expeditiously, PPL has the ability to take advantage of supplier payment discounts offered. The invoice submittal process is simpler; and both parties have a total and complete electronic record of every purchasing document exchanged for a particular order. The results of the e-invoicing initiative to date indicate that plans for further implementation with PPL s approved suppliers offer the potential for continued and increased process savings. 2

3 Introduction PPL Overview Headquartered in Allentown, Pa., PPL Corporation controls about 12,000 megawatts of generating capacity in the United States, sells energy in key U.S. markets, and delivers electricity to nearly 5 million customers in Pennsylvania, the United Kingdom and Latin America. Operating revenue in 2004 was approximately $5.8 billion. Annual U.S. supply chain spend is approximately $800 million. Strategic Sourcing at PPL PPL began its strategic alliance program in 1996 and initiated approximately 35 alliances through During this period, PPL explored the potential benefits of e-commerce and began an EDI implementation with selected suppliers. In 2000, PPL joined with six other energy companies to test an e-marketplace concept that led to the formation of Enporion. PPL had two primary objectives associated with its decision to participate with Enporion. First was to reduce overhead costs through the strategic use of aggregated contracts and reverse auctions. Second was to take advantage of the substantial process efficiencies and cost savings that would be realized by establishing a single connection to the Enporion marketplace in order to transact electronically with hundreds of suppliers. In late 2001, PPL successfully completed an integration to the Enporion marketplace enabling them to maintain a single XML connection to Enporion in order to electronically exchange routine purchasing documents with key suppliers. Enporion receives the documents from PPL in a common XML format, and delivers them to the supplier via its hosted website or translates them into the supplier s desired format through an integrated connection. Inbound documents are received by Enporion from suppliers in the same manner before being converted back into XML and delivered to PPL. In 2002, the Strategic Sourcing Section was established within Supply Chain to advance and sustain sourcing and e-commerce disciplines. The main objective of Strategic Sourcing was to research emerging industry best practices and recommend change within Supply Chain where it was needed. The responsibilities of the Strategic Sourcing group included promoting the utilization of e-commerce tools and identifying areas where e- commerce could improve efficiency and reduce costs. Scott Madden Associates was engaged to analyze PPL s supplier base, which led to a recommendation to decrease the size of that base over the next several years. This approach enabled PPL to streamline their supplier base, and was a significant step towards identifying the key suppliers PPL would work with in order to strengthen the ongoing relationship through the use of e-commerce initiatives. 3

4 PPL formed an e-commerce Team late in 2004 to identify and advance strategic initiatives that would enable PPL to take full advantage of e-commerce efficiencies. The team had key executive management oversight and included representatives from Supply Chain, Information Technology, Business Process Support, and Cash Operations. The team met monthly for the purpose of tracking the progress of e-commerce initiatives throughout the Purchasing department. PPL began the process of profiling their supplier base in late 2005 in order to prioritize which suppliers would initially be approached to begin e-invoicing. During this time, PPL worked with Enporion to develop a Supplier Transaction Agreement (STA) that would serve as the contract vehicle to facilitate supplier connections and electronic transactions. The team began implementation in the fall of 2005, by first hosting an e-commerce Supplier Conference where they informed key suppliers of their intention to aggressively implement e-invoicing. PPL processed their 1 st e-invoice sent via the Enporion marketplace on September 27 th. Since October 2005, Accounts Payable has processed more than 2,600 e-invoices submitted through Enporion from 31 suppliers, and the quantity is increasing each month. The invoice processing time from receipt to "OK to pay" for those suppliers has been reduced from 21 days for paper to approximately 7 days for electronic, an average reduction of 14 days. This provides a documented basis whereby the Supply Chain team and those suppliers can agree upon mutually beneficial discounted payment terms in the future. Acceleration of the process is continuing as PPL brings more of the company s suppliers into the process utilizing Enporion s hosted Order Manager software. Training is accomplished in a 30-minute phone call. Enporion s Help Desk is always available to handle any follow-up questions. With approximately 200,000 paper invoices being processed per year by PPL Accounts Payable, e-invoicing will deliver substantial cost savings for the company. Throughout the implementation of sourcing and e-commerce initiatives, appropriate goals, metrics and communication plans have been put in place to achieve desired results and measure effectiveness. 4

5 Automating Supplier Processes PPL replaced an in-house purchasing system with Indus Passport beginning in Passport enabled electronic preparation of RFx, Purchase Orders and service contracts. At this time, Purchase Orders were primarily delivered to suppliers by fax. During the late-90 s, PPL established EDI connections with approximately 40 suppliers of key commodities to begin to take advantage of the benefits of e-commerce. Today, by taking advantage of the electronic translation capabilities of Enporion, PPL is able to replace these individual EDI connections with a single connection to Enporion. Purchasing documents can now be translated by Enporion into the desired format of the 40 EDI suppliers, delivered to them, received by Enporion, and translated back into XML for delivery to PPL. This process enables PPL to avoid the costs associated with maintaining 40 separate EDI connections. PPL is now including an e-commerce clause in their RFQ documents requesting the winning supplier to transact electronically with PPL via the Enporion marketplace. This supports PPL s e-commerce strategy to conduct all e-transactions with suppliers through the PPL single XML connection to Enporion. In 2006, PPL plans to investigate re-engineering the paper aspects of its quoting and document filing processes with the objective of facilitating full electronic source-tosettlement capability in Getting to e-invoicing Paper invoice processing at PPL requires significant clerical resources for receipt, input into back office system and error resolution. Enporion now enables suppliers to input e- invoices directly into PPL s AP system consistently and with greatly reduced errors/discrepancies by applying business rules upon entry. PPL s AP Department has documented a savings of one person/hour for every 10 invoices sent electronically vs. paper. Suppliers can now flip an order into an e-invoice on Enporion s hosted Order Manager website, or input e-invoices directly to Enporion/PPL by integrating their accounting system with Enporion, thereby reducing input errors, eliminating US mail time and better ensuring payment per order terms. Aside from the cost savings associated with moving from paper to electronic, suppliers have seen on-time payment from PPL rise from 63% on paper invoices to 95% on invoices submitted electronically. 5

6 Results Summary Single XML connection access to suppliers through Enporion Enporion facilitated supplier adoption, integration, translation services Reasonably priced connection, transaction fees for suppliers E-invoice capability and process savings (one hour per 10 e-invoices) Reduced invoice errors and kickouts Improved ability to meet order payment terms and realize the associated discounts Enhanced spend aggregation and management Support for supplier rationalization and supplier relationship management 6

7 Enporion Overview Enporion: creating powerful connections Enporion provides powerful electronic procurement solutions to gas and electric utility companies, as well as to companies in other industries. These solutions include both software technologies and services, and are implemented both as a supplement to existing ERP systems as well as in stand-alone environments. Enporion s customers benefit from significant financial and productivity improvements that these tools deliver. Enporion delivers value through: the use of state-of-the-art electronic procurement tools and processes; aggregated sourcing, using the leveraged buying power of many companies; participation in standardization opportunities and benefits; and savings advantages that result from an electronic commerce community Enabling your supply chain electronically is a key service from Enporion. This is accomplished through the following: Buyer and Supplier connection and enablement; electronic transactions from requisition to settlement; electronic marketplace catalog; and supply chain management tools A state-of-the-art software technology platform, Supply Chain Manager, developed, maintained, and operated by Enporion, provides the basis for implementing these functions with customers. Not all customers use all components of Supply Chain Manager. Customers with existing ERP systems, for example, may elect to focus on the use of Catalog Manager by integrating to the Enporion hosted catalog; other customers focus on the routing functions of Transaction Manager to exchange electronic supply chain documents with suppliers, while leaving the implementation and ongoing management of supplier connections up to Enporion. Supply Chain Manager consists of a series of Transaction Modules which perform the actions of creating, managing, translating and transmitting all the documents related to purchasing processes. Further, four Management and Analysis Modules assist the organization in performing tasks such as spend analysis, project management, contract management and vendor performance management. A Company Customization layer application the Dashboard - allows individuals, depending on different levels of responsibility and authority in the supply chain organization, to structure how they view and manage their day-to-day sourcing tasks. Enporion s on-demand hosted model offers the benefits of proven software applications for catalog and e-procurement at a fraction of the cost of implementing the software behind a customer s firewall. 7

8 Industry Observations Benefits of Electronic Procurement The benefits of electronic procurement (defined by Aberdeen as internet-based procurement automation ) have been well documented in the last couple years. What was once perceived as a capability available only to the largest corporations is now rapidly being embraced by mid-sized (approximately $100M to $1Billion in annual revenues) businesses as well. In a report published by Aberdeen in December 2004, it was noted that companies using e-procurement had o Reduced off-contract ( maverick ) spend by 64% o Reduced price by 7.3% for spend brought back onto contract o Reduced requisition-to-order cycles by 66% (from 20.4 to 3.8 days) o Reduced requisition-to-order costs by 58% (from $56 to $23) o Increased total spend under management of procurement group by 20%; each new dollar under management can yield 5-20% cost reductions E-invoicing is an industry best practice supported by independent research findings that include the following: o World Class AP organizations using e-invoicing can reduce processing costs up to 600 percent, have 44 percent fewer errors and reduce discrepancy resolution costs up to 350 percent. (Source: The Hackett Group) o Invoice processing cycle times can be reduced up to 65 percent to take advantage of discounts and avoid late fees. (Source: Aberdeen Group) Summary Business organizations can drive significant savings to their bottom line by implementing the tools of e-procurement. Enporion has been providing these tools and related support services to its customers for several years. Implemented in an on-demand or hosted environment, Enporion has found its implementation times for new customers range from a few weeks to a few months and can therefore drive positive Return on Investment very quickly. 8

9 PPL s aggressive approach to upgrading its supply chain has literally delivered millions of dollars per year to its operating result. PPL works closely with its suppliers to insure that they too see the benefits and advantages of the electronic supply chain. Getting started requires an evolutionary plan. Change has to be introduced in a rational manner. But as PPL has shown, by proceeding in this way, the economic benefits of electronic purchasing transmission to and from suppliers will continue to be realized. PPL Contact: Enporion Contact: Richard J. Goch Michael C. Grohman Manager, Strategic Sourcing VP, Marketing and Business Devel. PPL Services Corp. Enporion (610) rjgoch@pplweb.com mgrohman@enporion.com 9

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