THE DAYS OF SHORT LEAD TIMES, STABLE MATERIALS MARKETS AND ENDLESS PRODUCTION CAPACITY for large power and generator step-up transformers are over.

Today's reality is upward curves in global and domestic demand, unprecedented price increases in core steel, copper and mineral oil, and a “you want it, you are going to pay for it” market. Get used to it. Trying to predict when the dust will settle on this storm leaves even the best utility sourcing experts scratching their heads.

Similar to how the Federal Reserve is using economic indicators to measure the national gross domestic product (GDP), utility buyers use the increase in equipment lead times as an indicator of whether domestic and global capacity can meet demand. Mounting pressure from regulatory bodies, regional transmission organizations (RTOs) and public utility commissions (PUCs) on system reliability, and moderate to significant investment increases in the emerging grid — coupled with financial incentives to get power to the wholesale markets — are increasing the demand for these complex machines.

Unfortunately, U.S. companies often lack the crane and production capacity necessary to manufacture these behemoths. So, don't look here at home if you need to purchase a large power or generator step-up transformer at or above 345 kV/400 MVA. Ordering means crossing the border or booking a flight across the big pond to find a supplier. Global sourcing isn't a matter of if, it's a must for utilities planning major capital expansions or rehab projects over the next three to five years.

Making buying decisions in the global marketplace for large power transformers is more complex than simply comparing manufacturer prices. One might say, “It's risky business.”

Today's decision makers not only need the right information to make timely and informed business decisions, but they need to formulate risk-mitigation strategies associated with overseas suppliers. The risks include:

• Ocean and inland transportation, compliance with specifications, quality, testing, raw materials and major global events (hurricanes) can significantly influence a supplier's lead time and delivery reliability.

• Cultural differences and other communication barriers can be challenging. In many cultures, the “relationship” means more than what the contract says or doesn't say.

• Fluctuations in currency exchange rates and major increases in material prices during the time in which your transformer is being manufactured can quickly change the competitive bid price for your order.

Do you want to cancel an order? Good luck. Delay a year or two for that much-needed capital expansion project to meet reliability standards, and you are certain to wilt under the hot spotlight of the Federal Energy Regulatory Commission (FERC) and PUC scrutiny.

The truth is, once you have entered into an “alliance” relationship, it's for better or for worse until transformer do you part. Rarely can many utilities afford to order the same transformer with a backup supplier. However, here are some suggestions to reduce the risk:

• Build and manage a portfolio of qualified and experienced suppliers in the Asian, European, South American and North American markets. Interview the supplier and check its references.

• Be creative in developing price-adjustment models that share the risk (for example, currency and materials) and adjust to current market conditions and dynamics. Encourage the supplier to adopt optimal currency hedging models.

• Avoid caps that limit direct damages for delivery delay(s) (liquidated damages) or develop a tiered approach that gives the supplier a break in between caps. Remember, the supplier wants to get you the transformer as quickly as possible.

• Create sourcing strategies and solutions that address the total cost of ownership, supply-chain logistics, and technical and macro-economic considerations.

• Plan effectively for long-term capital expansion and rehab projects (five to seven years) and communicate effectively with your alliance partner(s) on projected manufacturing slots.

• Support the development of alliance- or partnership-type agreements that encourage investment in the relationship on both sides of the fence.

• Mutually develop and manage risk-mitigation plans to anticipate the what-if scenarios. They will happen.

Utilities lacking the sophistication or experience in global sourcing face the greatest challenges in the years ahead. However, focusing on proactive business strategies aimed at reducing the risks inherent to global sourcing, planning effectively, and managing a portfolio of qualified and experienced suppliers should better position you for the future.

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Judson Schumacher is a sourcing analyst with American Electric Power Co. jmschumacher@AEP.com