Challenged by Rising Costs, a Solar Energy Business Automates Spend Management

Advanced Energy Industries Inc. occupies a highly specific but critical part of the solar-energy business. It manufactures inverters, which take direct-current power generated by solar panels and convert it to alternating current. Major customers include utility companies and commercial accounts, especially those with large buildings being fitted with alternative energy sources. Some of AE's products are used in the making of thin films, which can be found in cell phones, flat screens, automobiles and window glass, in addition to solar panels.

The company's supplier base is equally rarefied. Its sourcing program falls into four major categories: magnetics, including transformers, inductors and copper cables; components, such as large bus capacitors and semiconductors; printed circuit boards; and precision mechanicals, including the sheet metal and machining that goes into cabinets.

The placement of those suppliers is changing, but in the opposite direction from what many manufacturers are experiencing today. AE had been sourcing about 60 percent of its materials in the U.S. and 40 percent in China, according to Travis Johnson, director of supply chain management with the AE Solar Energy unit of Advanced Energy Industries. Recently the company, which has a manufacturing operation in Shenzhen, has been looking to boost its share of sourcing from China. It's also looking at other low-cost regions such as Eastern Europe and Southeast Asia.

The move is being driven by an intense focus on cost, which in turn is the result of recent industry trends. Government subsidies to aid the development of solar energy are being cut or eliminated, placing "extreme price pressure" on manufacturers, Johnson says. As a result, solar power is becoming less competitive on a price-per-watt basis with traditional fossil-fuel sources such as coal.

"As governments feel the crunch of the economy and are limiting their amount of investment into alternative sources of energy, then markets have to be able to sustain themselves," says Johnson. For a manufacturer like AE, the short-term answer lies in cutting costs wherever possible.

Automating and Optimizing

One way to bring down the high cost of goods is to automate the sourcing process, as a means of optimizing the supply base. The idea in part was to create a more competitive environment among prospective suppliers, while allowing AE to perform in-depth analyses of its total costs. In addition, Johnson says, the company needed broader visibility into its universe of suppliers, in order to "pulse" the market and identify the best means of fulfilling its strict requirements for price and product quality.

Johnson didn't have to look far for a technology provider. He was intimately familiar with Ariba Inc., the vendor of software for procurement and supplier networking. He had used Ariba applications, or their predecessors, in several previous jobs. His experience in implementing the software would prove essential to getting the new system up and running quickly.

In fact, the project took only about five days to complete. "With Travis, the key element to the deployment was getting things done as quickly as possible," says Wesley Rice, manager of upstream deployment for Ariba. "He had some pretty aggressive timelines."

Relatively little was required of suppliers who were linking up to the system, known as Ariba Sourcing On-Demand. "It's very intuitive and Web-based," says Johnson. "There was no cost to them." Suppliers with questions had access to a help desk. In any case, he adds, many were already familiar with Ariba's technology.

In adopting the tool, AE was doing more than automating relationships with existing partners. The company was ranging well beyond its current supply base. "We wanted to look outside of it, to make sure that we've got market pricing," says Johnson.

AE is using the application to locate new suppliers, then streamline the process of negotiation. It's also structuring and executing sourcing events, whether through requests for proposals or reverse auctions. Finally, the tool is helping the company to manage its project workflows, develop commodity-specific templates for working with various suppliers and generate reports that can aid in optimizing future efforts.

Discovering New Suppliers

The company initially is locating suppliers with the help of the feature known as Ariba Discovery. Then it will rely on the sourcing platform to communicate RFPs to chosen prospects. Through the strict tracking and auditing of information, it can provide "fair and ethical opportunities for every supplier to win AE's business," says Johnson.

Material cost, of course, isn't the sole criterion in selecting a supplier. AE has the capability to analyze candidates based on multiple factors, to arrive at a total-cost determination. For commodity-like categories that are sensitive to price, it can conduct reverse auctions. For items that require quality or compliance certification, it will factor in other considerations.

"They're able to capture and have visibility into everything that's happening in the life of a sourcing event," says Dan Graff, Ariba's upstream account executive. "They can post event-run optimization scenarios to see how they want to award business to suppliers."

AE only got the Ariba system up and running in May, but has already seen benefits from its use. It has increased its exposure to the market and been able to identify new suppliers, according to Johnson. Through access to multiple bids, it gains a better idea of the market price for a given item.

"We've already seen pricing come back in open projects that are better than the historic price," Johnson says. In addition, company morale has soared, thanks to the system's ease of use and early benefits.

For the future, Johnson intends to make even greater use of the Ariba technology, getting access to line-item details and standardizing procedures across all of its RFPs. A complete set of spend-management modules will help it to better evaluate spending, performance management and contract authoring.

Johnson is doing his own tweaking of the model to account for aspects of project management such as deliverables, risk mitigation, and better monitoring of the overall timeline. "We can see when [a project] has been created, when it's estimated to end, and what the risks are," he says. "That's been a huge benefit for me."

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