SOURCE CODE – E-sourcing made for a good start. Now the procurement masters are moving to the next level

The Economic Times,

ABOUT A YEAR AGO, CEAT CONDUCTED A detailed analysis of its procurement function. The tyre manufacturer studied its Rs 2, 000 crore cost base in detail to streamline processes and squeeze out cost savings. Against the backdrop of a global supply crunch, natural rubber prices have been galloping towards record highs and given that natural rubber makes up about half the cost of a tyre, the industry has been grappling with dipping profit margins. CEAT was no exception. For the RPG group company, the exercise threw up a revelation: competitors were rapidly adopting information technology enabled sourcing and CEAT was way behind. It decided to adopt the e-sourcing platform and procurement efficiency is now a strategic issue for the company’s C-suite.

As companies like CEAT focus on costs, process re-engineering has become de rigueur. Stiff competition, increasing customer expectations and squeezed margins are forcing businesses to invest in streamlining operations. Often though, some of the greatest inefficiencies lie unnoticed in paper-based, ad hoc dealings with other businesses – inter-enterprise commerce or e-sourcing.

Some Indian companies, like Dabur, were early converts to esourcing. The company has a very diverse buying basket with 6100 inputs for 540 products. These are low spend items but the supply is diverse and fragmented. Dabur turned to Ariba, a provider of procurement software and consulting services, and started its esourcing journey with saffron, which was traditionally purchased from cultivators in Kashmir and therefore far from the ideal candidate for a technology-driven process. The market was a virtual oligopoly and every year suppliers would quote uniform prices with Dabur allocating equal quantities to each of them.

“We started e-sourcing with herbs, the most difficult category because of the fragmented suppliers that were dominating the business. But then, you crack the hardest and all the doubting Thomases have to shut up, “says Dabur’s vice president for supply management, Jude Magima.

PROGRESSIVE VISION

TRANSPARENCY and meritocracy were brought into the system as soon as the company moved from ad hoc, negotiation-led buying to the reverse auction platform. When price competitiveness was brought into the buying process, cost savings followed. In the initial years, by switching to the price competitive platform of reverse auctions Dabur managed to shave off 10- 15% of its e-sourced cost base. With inflationary prices today, it’s more like an incremental 2-3 % each year.

Today, the biggest takers for e- enabled sourcing are globalising Indian companies. “Indian firms are acquiring foreign assets everyday and the questions they’re asking are: how do you manage global trading equations while rapidly scaling up operations How do you manage and control businesses How do you ensure transparency across entities”says Ravindra Sharma, Group Director and General Manager, Ariba India & Middle East.

One of Ariba’s favourite Indian case studies is Tata Motors. Ten years ago, the company started using e-sourcing with the primary aim to reduce spending on direct materials. Given that in the auto industry, cost controls ensure competitiveness, the savings were at the core of sourcing projects, especially with new product launches. To date, according to Sharma, Tata Motors has e-sourced Rs 10, 000 crore worth, with cost savings of Rs 1, 000 crore.

Procurement transformation is often a case of slow evolution. CEAT mandated e-sourcing worth Rs 200 crore in the first year, starting with the more routine purchases – logistics and promotional items. Today though, it has successfully moved towards e-sourcing direct cost categories like nylon tyre cord from China. “If we’ve saved 10 % through negotiation, we’ve probably saved another 4-5 % over that. Considering that direct raw material costs contribute to a significant percentage of revenue, every rupee saved is great for the bottom line, “says Anant Goeka, deputy MD, CEAT.

It doesn’t take a rocket scientist to know that a paperbased, labour-intensive system of sourcing can hardly be efficient. “Non e-sourcing processes involve lengthy discussions and negotiations. Esourcing cuts that out and can take just a week if you prepare a tender in advance, “says Ashu Khanna, Head – Supply Chain (Nature Care & Value Added Products), Marico. Like Dabur, Marico was an early adopter seven years ago. According to Khanna, when you first adopt e-sourcing, you almost always see a reduction in price, up to 10-20 %, depending on the category. Marico has since gone from employing an external software provider to having developed its own e-sourcing portal three years ago. “It is part of our DNA now, “says Khanna.

Supplier networks run by e-sourcing partners are another bonus, assisting companies in finding the most viable suppliers for their materials in terms of costs and quality. With the opening up of global economies there’s no reason why companies shouldn’t source from the best suppliers across the world. “Global participation is growing both for Indian suppliers and buyers. Indian companies are increasingly a part of that collaborative commerce, “says Ariba’s Sharma.

Two years ago, the Essar group, with a sourcing base of $10-12 bn, decided it needed an international platform for e-bidding. Many of its group companies were in rapid expansion mode and were looking to globalise their supplier networks. Essar decided to introduce e-sourcing to its steel business, which was then in a major investment phase with capacity expansion work underway in Canada, Indonesia and Hazra. “We wanted the best deals both nationally and internationally and we wanted solid vendor evaluation and access to the best known supplier names, “says CN Ram, CIO, Essar group.

Adapting to these growing needs, e-sourcing vendors have also upped their game;they not only list suppliers but track poor service, time to market and inconsistent quality. “Sourcing networks provide tools which let businesses organise and compare supplier information more effectively, “says Dinesh Agarwal, the founder of IndiaMART, India’s largest b2b marketplace. “Often you completely miss suppliers that happen to be in your own neighbourhood, “he says. IndiaMART connects Indian suppliers to global buyers, generating $1-billion worth of b2b sales annually for its members.

As companies accrue knowledge about e-sourcing, learnings are being replicated within group companies. Essar has mandated group company Aegis to establish the centralised procurement shared service for the entire group. Ram explains how esourcing encourages the development of an integrated knowledge framework: “Because most of the processes involved in e-sourcing get templatised, successful practices can easily be replicated with those templates. When Essar Projects set up plants, it now uses the same dossier of suppliers which enables timely completion and economies of scale. Esourcing has offered the company 30% reduction in its sourcing cycle. ”

Aegis has been using some form of reverse auctions for ten years. As vice president, Harikrishnan Shankaranarayanan says, it’s been an evolution from plain vanilla auctions, where they would simply put out an order and let suppliers fight it out over price, to the more complex transformation type bids being used in reverse auctions these days. The auctions have recently also moved from tactical items like logistics, promotional spends, canteen purchases to more strategic items like capital equipment.

Several companies feel that while e-sourcing works for a majority of spend categories it doesn’t work for everything. “In certain raw material categories where supply is a constraint, it’s hard, “says Goenka. “The benefits of e-sourcing are highly dependent on sourcing the right type of product category. No one size fits all. E-sourcing is not advised for strategic items where you’re looking for long term relationships with vendors who will invest in your business and help you drive product improvement, innovation, and wastage reduction” adds Marico’s Khanna.

The other serious challenge is handling resistance, both internally and from suppliers. “There are often big egos involved in the purchasing function. Besides, if you were getting a cut from a supplier why would you want the system to change”says Magima. There are bigger challenges going forward. Experts say that the hunt for the best suppliers could only get more complicated. A recent Accenture report suggests that while companies around the globe have viewed China as a sourcing gold mine, rising raw material costs and increasing wages may make it less attractive as a long-term option for companies. According to Sanjay Dawar, Lead Supply Chain Management, APAC, Accenture, companies must increasingly move away from the traditional notion of low cost countries to best cost countries. “Opportunities exist depending upon the category of material to leverage markets like ASEAN countries, Korea and Taiwan in APAC, Eastern Europe and Latin America, “he says.

Even more significantly, just having an e-sourcing platform is no longer enough. According to Dawar, the real “procurement masters” have a broad supply chain view and have moved on to the next level, which involves adopting technology led platforms for procurement transactions as well as supplier relationship management systems. A recent Accenture study on ‘Procurement Performance Mastery’ quotes the case study of a global food-industry leader that launched a worldwide “e-supply chain” program to enhance, harmonise and standardise procurement information sharing, processes and applications. The program also involved the development of solutions for maximising consistency across the company’s packaging operations and its raw-material supplier base. Key results include a plug-and-play solution for all supplier categories, sizes and capabilities. The solution has spurred a 25% reduction in delivery times, a 15% reduction in inventories, a 20% reduction in obsolescence costs, and a 20% increase in back-office and warehouse productivity.

This kind of procurement transformation is something that’s slowly gaining traction in India. At Ballarpur Industries for instance, e-sourcing was introduced six years ago across five plants. In the last four years though, the company has shifted to a whole procurement transformation. Today there is a centralised procurement system, everyone across the organisation raises requisitions electronically. About 170 key suppliers transact with the company only electronically. Even Essar, according to Shankaranarayanan, is in the process of implementing systems for automating transactional procurement, including catalogue based buying, procurement workflow automation, contract workflow management and supplier invoicing.

Going forward, even more exciting will be the effects of large scale adoption of cloud based services. According to a recent Accenture study titled Six questions every supply chain executive should ask about cloud computing, leveraging the power of cloud computing in supply chains will lead to a revolution in the way they will shift away from traditional, contracted outsourcing models to more flexible, transaction-based models. It will heighten speed-to-market for new products and services and will drive companies with traditional, infrastructure-intensive supply chains to re-invent themselves.

It certainly seems like the days of lengthy visits from your friendly neighbourhood supplier over endless rounds of coffee and favours in exchange for a purchase order, might soon be a thing of the past. Now if only the Commonwealth Games had been compelled to use e-sourcing, we’d have all been saved a whole lot of trouble. arati. menon@timesgroup. com

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