143 Socio-economic variables for strategic decisions
From The Mobile Indian
There's a new fragrance in town - Engage!
If automation is the future of business, digitisation of processes may be considered the first step in that direction. Proponents of this vision of tomorrow believe that minimising human interference provides the dual advantage of lower costs and higher efficiencies. An area where this belief finds proof is procurement, as increasingly companies across sectors experiment with electronic procurement ( e-procurement) systems, moving away from the traditional ones.
Six Hills Consulting, a UK-based consulting firm, supports the trend, as described in one of its white papers: "The application of technology is usually focused on a business's core profit generating activities. However, the cost of many secondary activities in support of an organisation's primary business can often also be greatly reduced by the introduction of appropriate technology. In particular, our own experience shows that traditional procurement processes and cycles harbour substantial inefficiencies that can be removed by the introduction of network-based electronic procurement systems."
The industry seems to have taken cognisance of e-procurement potential as per Ravi Razdan, head systems, Jyothi Laboratories. He says, "Bigger FMCG (fast moving consumer goods) players were already using such platforms; now, everybody is going in for such platforms. The number of firms using these services globally would be more than that in India; but India is definitely catching up. It can be full sourcing or partial sourcing in terms of RFQs (request for quotation) or RFIs (request for information) but some kind of e-sourcing platform is definitely being used or tried by the companies now."
Traditionally, procurement meant a series of calls to suppliers for price negotiations, follow ups on delivery, back and forth on invoices and so on. E-procurement, on the other hand, is the business-to-business or business-to-government purchase and sale of supplies, work, and services through the internet as well as other information and networking systems, such as electronic data interchange (EDI) and enterprise resource planning (ERP). The internet may be used for sourcing and supplier discovery whereas EDI may be used to facilitate flow of digital documents.
E-procurement's sell phrase is helping you 'buy smarter'. That doesn't mean just buying at the lowest price, says Amit Bhatia, group director and head of sales, India subcontinent, Ariba, a SAP company and provider of e-procurement services. "Buying smarter is about knowing everything about your company's spending habits, and using that knowledge to be a stronger negotiator. It's being connected to a diverse network of suppliers, so you can quickly discover collaborative partners who can lower your costs for goods and services while minimising your risks," says Bhatia.
Among the benefits touted by players are: lower transaction costs, shorter order cycle times, higher compliance levels, lower inventories etc. But there are limitations too. Like, if the component or part being sourced requires extensive customisation, e-procurement may not be a viable option. Even the scale of operations may determine the extent of the advantages offered by e-procurement. Like a bigger company with more negotiation muscle may gain more than a smaller one. Though the smaller one could benefit from a larger pool of suppliers to dip his feet into.
Managing the shift
After a decade of strong revenue and margin growth, Tata Motors began 2001 with a major challenge. Tata Motors was making major investments in the passenger car division to move away from the cyclical commercial vehicles business. But the same year, the commercial vehicles market shrunk by 40 per cent, leading to a sharp decline in profitability. The company decided to focus on CQD or cost reduction, quality and delivery improvement. As a step towards achieving the 'C', it decided to opt for e-procurement.
The company, along with its e-procurement partner, ran a business diagnostic exercise with the entire purchasing team to understand the buying pattern, business constraints and savings potential.
E-procurement is done with a software application and typically requires the company to align itself with one of the e-procurement platform providers. Post which, the company can connect with the entire pool of suppliers empanelled with the platform and take bids for its contracts.
The cost of implementation of e-procurement systems is directly proportional to the scale of operations of a business. Apart from the initial payment for getting the software, there are also recurring payments, something of a subscription fee. Or, as Bhatia of Ariba puts it, "pay per use". The costs will, therefore, be determined by a number of factors like the number of users, that is employees with access in your organisation, order sizes and frequency etc.
In the case of Tata Motors, it was found that direct materials consumed nearly three-quarters of the cost of a vehicle. Therefore, the company started with cost reduction in direct materials like forgings, castings, fasteners, machinings, bearings, tires and also indirect materials categories such as lubes. To help achieve its e-sourcing goals, Tata Motors mandated that categories with annual spend greater than Rs 5 lakh should preferably be sourced online. This mandate resulted in significant improvement in e-sourcing adoption as per the company. By 2003, the company was running the e-sourcing programme like a savings factory. It has since then expanded to adoption of e-sourcing for new products as well as international markets.
The team recommends selecting the right categories for sourcing to get the best return on investment. "Supply-side competitiveness, business impact and ease of implementation are key factors to assess while prioritising the categories," says a spokesperson. The company estimates savings of around $166 million till date via the shift to e-procurement.
Another company that opted for e-procurement to reduce costs was Ranbaxy. The company first set out in the direction in 2004, identifying e-sourceable spend, aggregate spend across various plants, standardise RFQs, recommend vendors for indirect spend and evolve sourcing solutions for strategic items sharing industry best practices and contract terms.
Ranbaxy realised that to gain the maximum from a shift to e-procurement, it would have to popularise the concept internally, among its employees. So it appointed a champion to lead the e-sourcing initiative within the company, and also established adoption of e-sourcing as a performance metric for its buyers. It even established a reward programme to recognise the best e-sourcing users within Ranbaxy on a monthly basis. In order to drive e-sourcing adoption among buyers, the e-sourcing team conducted extensive training programmes, knowledge sharing sessions, and category-specific idea generation.
Ranbaxy has built up its e-sourcing initiatives in a phased manner. It is now extending the spend management initiatives to several key global locations in the US, Nigeria, and Romania. Without sharing specifics, Govind Jaju, vice-president, global material sourcing and API business, Ranbaxy, says, "Investing in spend management solutions has not only helped us realise significant cost savings, but also allowed us to drive best-practice processes across our organisation." The company says the standardisation of sourcing-related templates across all locations and departments provides clarity on data requirements at each stage of a sourcing project. This prevents delays due to lack of relevant information thereby increasing the productivity of the sourcing function.
The real advantage
The cost differential offered by e-procurement is what often lures companies. Speaking about the cost difference afforded by e-procurement over traditional methods, L Pattnaik, financial affairs and chief compliance officer, Daikin, says, "It is easily between 10-15 per cent. It's huge and we have experienced it." Or as Hemang Marfatia, deputy general manager, finance, at Lupin, Unimark Pharma, says "We saved on an average 12-15 per cent in the capital goods and about 2-3 per cent in the raw material purchases. New vendors were found for it which saved a lot of manpower."
Sometimes the cost advantage cannot be easily measured. Take the case of L&T Heavy Industries. Pinakin H Desai, deputy general manager, L&T Heavy Industries, says, "In the traditional legacy of sourcing through email, the negotiation is without any time and cost limit. (With) e-sourcing, there is a fix time window for bidders to submit their bid along with a specific price - purely driven by the market during the event/e-auction. One can also conclude the bid online. Hence, there is an initial investment for adoption of this technology, but just over a period of six weeks it was possible to recover the amount spent and it is indeed an investment rather than a cost incurred that reaps you benefits in the future."
Even the absence of no absolute cost savings is not a problem. "It also helps you in a way that if it does not lead to your saving, it leads to you to price discovery. You don't know the price of the good in the marketplace but if two suppliers are fighting for a good, you get to know that you aren't paying high or low but paying what is the market rate," says Razdan. He adds that costs saved via e-procurement won't be uniform across sectors. "It depends on the category you are using e-procurement for. For instance, if the category is low margin, the saving potential is low. If the margin is high, like it is in services, the potential is definitely more."
E-procurement benefits are not restricted to only large scale players. Even small and medium enterprises can benefit from it. The experience of Hemas, a Sri Lanka-based medium-sized group, bears it out. "Manual procurement process (MPP) was a time consuming and labour intensive approach. Much effort and expense went into ensuring the quality and integrity of the materials sourced through the MPP. The inefficiencies due to lack of transparency in the negotiation process caused an adverse impact on the bottom line. As our corporate sourcing requirements escalated, the cumbersome MPP weighed us down," says a spokesperson. This prompted the company to move from the conventional decentralised MPP to an automated alternative. A key advantage of moving to the e-procurement systems for the company was the opportunity to connect with domestic and international suppliers simultaneously, while bringing transparency to the entire system.
A key word here is transparency, something that can add significant value to your business, both tangible and intangible. "E-sourcing removes preferences towards brands, historic biases, face to face negotiations and brings in transparency, visibility and accountability in spends of any organisation," says Bindi Thakkar, marketing, HDFC ERGO General Insurance. Companies can track spends across centres online, spends that initially happened at individual pocket level leaving much room for manipulation. In fact, this benefit of the system is a key reason for even government departments opting for e-sourcing.
The benefits of e-procurement cannot be denied. But one must understand that it requires a long-term commitment and much training on the company and supplier side for both the parties to be on the same page and avail of the benefits of the process.
"The real danger, as with any enterprise software, is going for the wrong model of e-procurement": Manmohan Sodhi
While e-procurement may be hailed as the next big cost reduction measure, there are several shortcomings that businesses must be wary of before taking the plunge. Professor Manmohan Sodhi debunks a few myths.
Are the advantages of e-procurement uniform across sectors?
No, because not all sectors are uniform. You would not necessarily want to use e-procurement to source building of bridges for instance. But for purchasing MRO (maintenance, repairs and operations) - nearly all sectors buy MRO products including things like office stationery - the benefits could be to all sectors. So the answer depends on the type of items being purchased and the standardisation of the process necessary to purchase them.
Is scale of operations the sole determinant for companies opting for e-procurement?
There are benefits for anyone. To the extent there is a standard process, and the process fits well with the need, e-procurement can be a benefit to anyone. Who pays for it and how it is implemented is a separate issue: a web-based platform hosted by a large buyer can benefit SME suppliers as well without the latter incurring any substantial costs.
How real is the benefit of being able to connect to international suppliers through an e-procurement portal? Or is it just a cosmetic benefit, not used often?
There are different levels of procurement that can be done with e-procurement. One can simply look for sources in marketplaces like Alibaba.com or tie in with Tier 1 suppliers as in the auto industry. A portal can be more than cosmetic in being able to access suppliers internationally, or at the other extreme, be able to run reverse auctions among suppliers internationally.
E-procurement benefits can be real because electronic transaction can reduce transaction and search costs. But adding an international dimension, especially in the Indian regulatory environment, can only reduce such benefits.
Can such standardisation of processes deny businesses the pricing benefit enjoyed through long durations of sourcing arrangements?
The pricing benefit from non-standard processes is illusory to both buyer and supplier - the supplier suffers from lost profits and the buyer suffers from possible loss in quality or unreliable delivery. Standardisation helps by putting better controls on prices and, in the long run, is better for both parties.
Any other shortcomings of switching over to e-procurement?
The real danger, as with any enterprise software, is going for the wrong model of e-procurement based on popular misconceptions. IT is a tool - it should help with what you are already doing and not being a goal in itself. So the danger is e-procurement becomes a goal and people forget that they procure different types of items differently that cannot be all forced through the e-procurement system.
Munjal Global Manufacturing Institute.
Indian School of Business