Recommendations on Aes's Electricity Meter Sourcing Strategy

With increasing competition in the retail electricity market, and pressure from the decreasing net income margin, AES began initiating cost-cutting and repositioning strategies corporate-wise, particularly focusing in the company's new global strategic sourcing department. The corporate strategy included plans to capture the scale benefits in the procurement of services and supplies and to leverage the current organizational structure with more capabilities and competitive advantages for the transformation to a world-class global sourcing organization. The global sourcing organization consisted of a three (year) phase plan.

The Electricity Meter sourcing team, as part of the second phase of the sourcing initiative, plays an important role in applying advanced-cost modeling from phase one and understanding the cost structure of its suppliers, as well as selecting, building and managing cooperative relationships with the suppliers. All these efforts contributed to the cost reduction goal within the organization as well. To better facilitate AES's corporate strategy and the operational sourcing initiatives, the Electricity Meter sourcing team needs to further analyze the market demand and specifications for its products and suppliers qualifications. Then it should consolidate its current supplier base and eventually it could achieve cost savings, and establish a successful example for the global strategic sourcing model in the organization.

I. Overview of Phase I strategic transformation

During the first year, a central global-sourcing team was built to ensure effective change management of the transformation, and link the sourcing organization with the whole company with better visibility. The team conducted a Spend analysis, where spend categories were identified. Each category was assigned with a sourcing team, and they were responsible for providing further detail, and develop, execute and leverage the strategy through a common, structured process.

Phase I of the transformation was a great success, as the company's cost savings from the first year had a total between 7% - 10% of the historical costs. Yet challenges remained, especially in integrating the strategic sourcing in the culture of the whole company.

II. The Second Phase transformation: The Electricity Meter sourcing team

The second phase of the sourcing initiative aims to push the cost analysis in detail, further into their supplier base. At the same time the sourcing teams were expected to develop strategies related to supplier relationship management. The Electricity Meter sourcing team, one of 16 sourcing teams, sought to fulfill the cost-saving initiative by reducing the cost of purchasing meters by 10% through the development and the implementation of Sustainable Global Meter Sourcing Strategy.

1) Initiated Steps: Category Profiling and Industry Analysis

Of the five strategic sourcing processes, the team has started the category profiling and market analysis. The team conducted category profiling by segmenting the purchasing data by supplier and product type. And the industry analysis mostly focused on the market trend in increasing retail access of electricity services, growing product attributes requirements for meters, and a couple benchmarking examples from their competitors. Both steps were very necessary in establishing the basis for strategic decision marking, yet more details were needed. For example, their industry research did not provide much detail in their retail market positioning, or demand information from their target market.

2) Strategy Development: Suppliers Selection and Supplier Relationship Management

During the strategy development stage, the sourcing team sought to evaluate their current suppliers, decide on their supplier network design, and maintain efficient supplier relationship management aiming for long-term partnership. Factors that we need to take into consideration when comparing the suppliers include: total landed costs, total cost of ownership, specific scorecard measurements based on the specifications and other strategic factors. At the same time, analyzing the cost structure and cost drivers of the suppliers would help the AES better understand their partners'