The Role of the Procurement Department in Acquiring Renewable Energy

(Original title in French: Le rôle du service approvisionnement dans l’acquisition des énergies renouvelables.)

Anissa Aissa is one of the two recipients of a $2,000 scholarship awarded by the Canadian Purchasing Research Fund, for a Masters thesis in procurement written in 2005-2006 at HEC Montréal. This abstract is intended for PMAC members. The full version of the Masters thesis is available at HEC Montréal.

Thesis supervisor:

Professor Jean Nollet, Chairholder, Chair in Supply Management

Abstract

The world economy depends on fossil fuels for 90% of energy needs. Oil shortages, which some people see as imminent, and environmental damage are two key factors that businesses must keep in mind when drawing up an acquisition strategy for renewable energy. These secure alternative energy sources are something that managers will have to consider adopting in the coming decades. There are still many persistent problems related to their accessibility, production and use, however.

The transition to renewable energy spans two different periods: the current period (use of conventional energy sources) and the future (use of renewable energy sources). We have tried to highlight current procurement department practices, but also probable practices in future decades in terms of energy procurement.

In our view, the fact that so little has been written about these practices stems from the state monopoly over energy supplies in most countries. This economic structure forces firms to seek their energy supplies from a single supplier, which dictates the market. In addition, energy prices are inescapably tied to political factors, which influence stock markets and encourage speculation. Many governments have adopted energy stockpiling strategies to avoid the effects of cutbacks by oil suppliers, such as those experienced during the oil crises of 1973 and 1979. The only known role for the procurement department in the whole energy procurement process is to renew contracts and co-operate with the firm’s finance department to identify the company’s energy needs. As a result, energy procurement is often the responsibility of the firm’s finance department and primarily involves negotiating prices, rather than seeking other energy sources. This purely classic approach prevents the procurement department from fully exercising its mandate within the organization.

Current trends

Liberalization of energy markets: For some years now, a number of European countries and the United States have been deregulating energy markets. This situation has prompted firms to evaluate different energy suppliers, so as to identify the best offer. It may inspire suppliers and lead them to take a proactive approach with a view to the future transition to renewable energy. The two contexts, of deregulation and of the transition to renewable energy, have much in common: the choice of a supplier and the type of energy, and service criteria. The procurement department can draw lessons from the situation as markets are liberalized and apply them to the transition to renewable energy.

With the liberalization of energy markets, many firms specializing in energy consultation have emerged. It appears that these consultants perform tasks that the procurement department could handle, in terms of evaluating suppliers. Some training is required, however, especially since renewable energy sources have a number of specific technological features. The degree of involvement of the procurement department will depend more on the company’s procurement strategy than on its energy dependence.

A “green” supply chain: Environmental protection is seen as a concern that should receive greater attention from managers. More and more, people are talking about “green” supply chains. The procurement department and the company as a whole must adjust their strategies to take this shift into account. This will set the stage for a transition to renewable energy, in particular if the procurement department already has dealings with suppliers using renewable energy sources or which it will require to do so in future. In fact, the adoption of ISO 14000 standards by companies is just one encouraging sign of the transition to renewable energy sources that will limit the environmental impact of business operations.

Future trends

Based on a literature review of renewable energy sources, their means of production and their applications, we noted the importance of the technological aspects of the transition to renewable energy and observed that there are many intermediaries that may be involved in this kind of technological change process. Drawing on examples from around the globe, we found that the stakes are rather high for the transportation industry and the secondary sector. For companies that rely heavily on energy, a partnership with these different intermediaries (research centres and intensive research organizations) could be useful. There are various kinds of partnership contracts, however, and it is important to choose the right one if the technological transfer is to be a success.

For acquisition contracts or joint ventures, the procurement department will have to work in close co-operation with the R&D department, since acquisitions involve some highly technical considerations and influence the extent of the company’s competitive advantage in conquering new markets. Accordingly, the procurement department will be expected to act as negotiator and also as the company’s spokesperson. Its role as a communicator is crucial in establishing trust and transparency with partners. Once again, procurement managers will have to have highly specialized technical training in order to handle this type of contract.

The other categories of contract may be considered energy service contracts. The department’s role in such cases will revolve around studying the options available on the market. It may consult government departments to obtain the necessary information and contact research centres for more technical details so as to select the most suitable and, in particular, the most accessible type of energy. This approach will allow the procurement department to identify local suppliers, so as to expedite the technological transfer process (strategic partnership) and hence reduce distribution prices and increase the rapidity of service.

Lastly, the procurement manager must become proactive

If the procurement department is to act as a pioneer in this transition, it will take a good deal of personal commitment by procurement managers and true environmental awareness, to set the organization on the path to using renewable energy. This commitment is key to the success of this crucial transition.

The procurement department plays an important role in providing internal customers (the other departments in the organization) and suppliers with information. Its position as a “gateway” gives it accurate market information, allowing the firm to reduce transfer time and improve the production process and final product quality, while protecting the environment. The procurement department must also be able to track government offers and make the most of any opportunities that could simplify the transition to renewable energy sources.

We have attempted here to draw managers’ attention to the role of the procurement department in years to come, which are sure to be marked by the transition to renewable energy sources. The question is not whether this shift will occur, but rather how best to manage it – and the sooner, the better.