Global Processing

Can outsourcing the natural gas purchasing process benefit your bottom line?

March 31, 2005

Ohio’s manufacturers know firsthand the financial pain caused by the current natural gas market’s rising costs, extreme volatility and irrational behavior. How can anyone know when the best time to buy is anymore? Can anyone predict where the market is going? The honest answers are that you can’t do either with any kind of absolute certainty. On the other hand, industry experts generally agree that the $4 to $7 per MMBtu price range is probably going to be around for a while. Price swings of $0.30 to $0.50 within a single day are now common. Add to that the recurring threat of substantial price spikes and you end up with a very challenging situation.

If you are buying natural gas in the traditional fashion you probably are doing it one of two ways. Either a significant amount of internal time and resources are being devoted to this effort, or you are simply renewing contracts with the same supplier without much consideration of other competitive offers. Unfortunately the reality is that neither of these methods will get you the best results and you will likely pay $0.05 to $0.30 per MMBtu higher than necessary in physical basis alone. Multiply that estimated range by your annual usage and you can get an idea of potential dollars to be saved if the buying process were improved.

Assuming your company takes the time to try and manage this expense and given what is known about market conditions let’s take a minute to explore the inherent problems and obstacles in the traditional buying process. First, how do you request supplier offers? Do you use a paper-based RFP to get supplier offers or just make a few phone calls for verbal quotes? Second, how do you accurately evaluate multiple supplier quotes when each price component is defined somewhat differently? Third, what is the process to review the various non-standardized supplier contracts? Supplier contracts are typically very different and include industry jargon and other terminology that makes it tough to accurately compare and calculate the differences. Finally, are you able to match up the cost implications of the contracting provisions with price quotes for an apples-to-apples comparison of the total price for natural gas?

If today’s natural gas purchasing process seems overwhelming, that’s because it truly can be. Today’s cost conscious business environment complicates the process further because most manufacturing businesses are downsizing. This puts more responsibilities into fewer hands, which translates into less available time for non-core functions like energy purchasing. Essentially, outsourcing becomes a requirement for the successful evaluation of available supplier offers, contracts and best overall price supplier selection. In turn, you can still retain final supplier selection and better manage your natural gas cost while refocusing time, resources and management back into your core value proposition, manufacturing.

Tom Weinrich is President and CEO of Metal Forming and Coining (MFC), a Toledo-based manufacturer of cold formed and impact extruded components for the automotive, commercial truck, off-highway, industrial and aerospace markets. Weinrichbelieves his business is better off outsourcing his energy purchases to a specialized firm that has made investments in both energy professionals and the systems and technology to do the best job possible, just as he has done at MFC.

“The return that I get from outsourcing to a supply-side energy management specialist has been well worth the investment, in the first year we saved over $6,900 net,” says Weinrich. Previously his staff did their best to negotiate supplier contracts but admits they didn’t have the energy market knowledge, proper training or resources to get the best available deal for the company. By working with their supply-side manager they are now shopping the market for the best deal available and locking in the savings.

However, outsourcing energy supply management is not just about small to mid-sized companies. The Whirlpool Corporation is just one example of using both in-house and outsourced expertise to control costs and improve energy efficiencies.

The Whirlpool Corporation Ohio Energy Team believes they have a good working knowledge of energy markets. On the other hand they say that this market awareness doesn’t mean they know which supplier has the best available price, terms and contract for his business at any given moment. Whirlpool spends tens of millions of dollars annually on natural gas and could conceivably devote internal resources to manage this cost. Instead, The Ohio Energy Team chose to outsource to a firm who has the resources to micromanage all the details and squeeze out every last penny of cost possible.

In summary, anyone can spend a few hours on the phone calling a few suppliers, superficially comparing prices and contracts and pay something for their natural gas. But ask yourself is that really the best way to purchase and manage your company’s natural gas expense? Can you afford to overspend on natural gas? Do you know if you are overspending? If the answer is “No” or “I’m not sure” then consider using an independent supply-side energy management firm with a solid track record of helping manufacturers reduce and manage costs by utilizing innovative energy purchasing solutions.