Consolidated Purchasing In ABB India's Integrated Supply management organization

unit has its own manufacturing & procurement department with no central control.

Annexure

1.1.5 Industry outlook

ABB India is a major player in electrical & power equipment industry. Some of its major competitors are Crompton Greaves, Siemens, BHEL, Alstom, etc. ABB has changed significantly in past 3.5 years under the stewardship of Mr.Ravi Uppal, its present MD. ABB, in the year 2000, earned Rs.806 crores, when it was a stodgy company.In the year 2003, ABB registered a strong performance and earned Rs.1503 crores.Orders were up to 31% & revenues up 25%.

The future looks bright for ABB India & it is expecting a 10% growth in its business. The electrical industry is also expected to grow by 14%.Increasing demand and reduced borrowing rates have induced capacity improvement investments in companies. Lower Fiscal deficits is likely to encourage investments in infrastructure by Govt.Increase in global competitiveness of Indian players have also improved export demand.

Factors likely to boost growth:

• Expected export growth of 25%
• Passage of Electricity Bill
• Implementation of Accelerated Power Development

          Programme (APRDP)

• Reduction in Customs Duty.
• Manufacturing sector grows at 7.3%.
• Industrial sector -  2002-03 growth - 5.8 %

ABB Ltd has launched a new range of wiring accessories including switches, regulators and sockets for the Indian market. The company has invested Rs 15 crore towards manufacturing this new line of products till date. The four southern States account for 25-30 per cent of the organized segment of this market. The total size of Indian household electrical equipment market is pegged at Rs 1,600 crore, half of which is accounted for by the unorganized sector.

1.2 Objective of project

The objective of project is to study the supply management practices in ABB India & the benefit of consolidated purchasing within the new supply management structure, taking copper purchases as an example

1.3 Rationale of project

Currently all BU’s have their own purchase

1.4 Benefits of project

The project will benefit the company to undertake consolidated purchases of copper items

1.5 Scope of project

1.6 Assumptions

1.7 Literature survey

1.7.1 Purchasing

The role of purchasing department within a company is the purchase of all goods, materials and external services required for the production of its products and service so that an attractive value-add can be created. In a manufacturing company, the purchasing function can be instrumental in the success or failure of the business. Production relies heavily on the purchasing department to provide materials at the right price, the right place, the right quality, the right quantity, the right time and the right terms.

1.7.2 Basics of Purchasing        

Purchasing involves determining the need, selecting the supplier, arriving at the appropriate terms and conditions, issuing the contract and following up to ensure delivery.

Steps in the Purchasing Process:

                Recognition of the need

                Description of the need

                Identification and study of available suppliers

                Supplier Selection

                Preparation and issuance of the Purchase Order

                Follow-up of the Order and/or expediting

                Receipt and inspection of goods

                Review and evaluation of the Invoice

                Close of the Order and maintenance record

Procurement process

1.7.3   Specific Responsibilities or Activities of a Purchasing dept.

           

Records, Data and Basic Information

Maintaining general purchase records

Maintaining Price records

Maintaining Parts History records

Maintaining Stock and consumption records

Maintaining records of vendor performance on price, quality and     service

Maintaining Specification files

Maintaining Catalog files

Purchasing Research, Analysis and Studies

Conducting Market Studies and trends

Conducting Material Studies

Conducting Price Cost Analysis

Investigating supply sources

Conducting Supplier plant visits and inspections

Developing new supply sources

Developing Alternate Materials and Sources

Participating in Value analysis studies

Developing Computer Oriented Purchasing systems

                

Purchasing

Checking authorized requisitions

Issuing requests for bids

Determining bidders lists

Preparing requests for bids

Conducting pre-bid briefings

Receiving all bids

Analyzing quotations and/or proposals

Evaluating Suppliers

Selecting Suppliers

Determining quantity to buy

Scheduling purchases and deliveries

Determining mode of transportation and Carrier

Interviewing Sales people

Negotiating Contracts

Writing and issuing Contractual Agreement

Developing Legal conditions of Contracts

Determining applicable federal, State and local taxes or foreign duties

Following up for delivery, i.e., Expediting

Checking receipts of materials

Checking and approving Invoices

Corresponding with Suppliers

Negotiating adjustments with Suppliers

Negotiating Contract changes

Terminating Contracts

Inventory Management

Developing Inventory Classifications

Maintaining Minimum stocks

Establishing economic order levels

Maintaining Inventory balance

Improving inventory turnover

Transferring materials

Consolidating requirements

Avoiding excess stock and Obsolescence

Declaring surplus inventory

Standardizing packages and containers

Accounting for returnable containers

Maintaining property records

        

        

        

Managerial

Preparing and updating purchase manuals

Assisting in Department audits and reviews

Evaluating Purchasing performance

Evaluating personal performance

Performing merit review and Salary determination

Making reports to Management

Conducting training and job enrichment programs

Conducting cost improvement programs

Participating in Quality and zero defect programs

        

1.7.3 Winds of change

Economic forces and technological advances have combined over the past 20 years to increase the impact of procurement/supply management on company profitability and long-term business success. Procurement is now in a position to affect company profitability faster and more dramatically than any other corporate function.

Companies today are spending more revenue on outside goods and services. Thirty years ago, the typical manufacturer might have spent 30 percent of company revenue on outside supplies and services. Today, that number is likely to have doubled for most manufacturers. Companies have attempted to focus as much as possible on those activities considered to be "core competencies" - those that are performed at a higher level internally than externally - while outsourcing other work to outside companies that are specialists in those fields.

Advances in technology have provided tools that enable thought-leading supply managers to extract maximum possible value from supply. When deployed strategically, technological tools - especially the Internet - increase value for all entities in the supply chain, from raw material supplier to final customer. Advanced information technologies like the Internet have essentially enabled leading companies to integrate their supply chains. In the most advanced cases, these supply chains act more like a single unit than a series of non-aligned entities, which is characteristic of the majority of supply chains. The companies are also increasing developing better relationship with their suppliers within the new SCM framework.

Leading companies in both manufacturing and service industries have used superior supply management strategies and procurement practices to gain a competitive edge in their markets. Examples include: IBM, Honda of America, Toyota, Harley-Davidson, Wal-Mart, Cisco, Chrysler, Motorola, and American Airlines. These companies and others excelled in at least one area - and usually several areas - of procurement/supply management, including cost management, strategic sourcing, new product development, supply chain integration, technology development, supplier training/development, and others.

Unfortunately, if their actions are any indication, far too few companies recognize the tremendous value inherent in their procurement departments and their supply chains. The possible reasons for this failure are many, not the least of which are a high rate of turnover in top management and the pressure on public companies to achieve fast revenue growth in the short term

A win-win relation that’s changing

Procurement also needs to be given high priority because

• It accounts for 60 -70% of cost base
• 40% of Manufacturing cycle time
• 40% of the Project execution Time
• 50% of the Quality cost
• 60% of Design cycle time

1.7.3 Rise of the procurement function

The procurement function today is viewed as an important component of a firm’s strategic arsenal. Put simply, the modern purchasing department can reduce a firm’s operational expenditure through streamlined purchasing and price reductions for goods and services. Either as a revenue generator or cost saver, smart purchasing can reduce costs 20% to 30%, freeing up funds to be used elsewhere. The realization that purchasing can impact bottom line saving has elevated procurement’s strategic importance.

Procurement’s movement from a tactical to a more strategic role in corporate operations is predicated on a broader shift in corporate strategy. Over the past seventy years, procurement as a function has grown from a backwater undertaking within operations or finance to one of the most important industrial components of modern corporate management. Procurement’s growing importance is a byproduct of its increased responsibilities. Today, purchasing departments are responsible for 50% to 70% of corporate expenditures.

1.7.4 Matrix

2. Problem Formulation

2.1 Supply Management organization structure in ABB

Purchasing function in ABB India was totally decentralized. Each BU had its own procurement department which undertook all the purchases for the unit.

There was no centralized exercising authority, as ABB believes in giving total operational freedom to its BU’s.

Advantages of decentralization

• easier coordination/communication with operating department
• speed of response
• effective use of local sources
• business unit autonomy
• reporting line simplicity
• undivided authority and responsibility
• suits purchasing personnel preference
• geographical, cultural, political, environmental, social, language, appropriateness

2.2 Problems faced

However, decentralization also had its own sets for disadvantages for ABB India, some of which are listed below:

• difficult to communicate among business units
• too much focus on local sources – ignoring better supply opportunities

• no critical mass in organization for visibility/ effectiveness - “whole person syndrome”
• lacking clout
• business unit preferences not congruent with corporate preferences

• small differences magnified
• reporting at low level in organization
• limited functional advancement opportunities
• ignored larger organizational considerations
• limited expertise for requirements
• lack of standardization
• cost of supply relatively high

2.3 New Integrated SM organization in ABB India

In order to leverage the benefits of both a centralized & decentralized purchasing organization, ABB India has recently set up a Hybrid centralized – decentralized supply management organization. The new integrated organization will also focus & implement a definite country/global purchasing strategy for greater synergies in purchasing & negotiation

The new organization comprises of existing personnel engaged in supply chain activities & has 2 groups i.e. Projects & Products.

The new Organization will have 5 distinct areas of purchase:

a)        Project Purchases

         These would encompass purchases & services of ABB’s project businesses like erection material, civil services, commissioning services, in-house & out-house equipments, etc.

         

b)        Commodity Purchases

         Many of the ferrous & non-ferrous material purchased across business

units is common to many of them. All these items can be clubbed together &

purchased in bulk from supplier to get better price & service

c)        Unit Purchases

         These would include the items purchased by individual business units.

Stretch 30 principles can be applied to improve their purchasing.

d)        Import

         These would include all the imported items.

e)      C-class items/services

         These include the c-category items & MRO services. Consolidation & reverse auction possibility will be considered here.

6. Inter ABB items
7. Capex purchases

Perceived benefits of new organization:

• Visibility and interaction at all levels – for participation in global strategy & formulation of a local integrated strategy.
• Purchasing at all levels … INABB / Div / BA / BUU, for greater leverage.
• Standardization & sharing of information.
• Vendor rationalization / development
• Focus on unique items.
• More rapid decision-making.
• Consistency of quality, delivery, and other supplier performance gauges.
• Greater opportunity for specialization among purchasing personnel.
• Better utilization of purchasing talent and expertise.
• Greater opportunity for systems integration.
• Greater opportunity for integrated supply chain management.
• Ease of implementing e-commerce solutions.
• Product standardization.
• More influence with key suppliers (better problem-solving).
• Elimination of redundant activities.
• Common purchase policies, auditing performance
• Greater control (less opportunity for buyers to commit fraud or other ethical transgressions).

2.4 Commodity Purchasing

A number of business units in ABB India are purchasing certain commodities in one form or the other which are common to many of them. A list of major commodities purchased by ABB business units are: Copper, porcelain, oil, insulation, steel, etc.

The purchase of these commodities can be grouped together to increase ABB’s negotiating power and get better terms and prices. We can also explore options of standardization & leverage unit expertise further.

1. Lowering costs by spreading fixed costs

   P *Q = F + (V + m)*Q

   P = price Q = order quantity

   F = fixed cost V = variable cost

   m = profit margin

2. Reducing risks by pooling risks

    – provide better service with same or less resource

    (E.g. inventory)

Here we consider example of copper purchases.

2.5 copper purchases

Copper items account for a significant portion of material purchased by

ABB business units. Typical finished copper items used by business units are

wires, rods, strips, bars, tubes, etc.The copper items are used in variety of applications like motors, drives, transformers, bus bars, etc.

ABB India revenue spectrum – Rs. 1503 crores (2003)

As observed from chart, direct materials account for nearly Rs. 1026 crores of ABB’s spending (i.e. nearly 70%).The data is obtained from ABB’s annual

report for year 2003 & from individual business units.

ABB India Direct material spend spectrum – Rs. 1026 crores (2003)

Commodity items include metals, porcelain, stampings, oils, etc.

A break-up of commodity spend is shown below:

 

Commodity items spend Spectrum – Rs. 236 crores (2003)      

The metal purchases account for nearly Rs. 70 crores

The break-up of ABB India metal purchases for product businesses is as follows:

Metal spend spectrum - Rs.70 crores   (2003)

Hence, we see that copper items purchased by ABB India’s product businesses comprises of nearly Rs. 22 crores.If we club the copper purchases of project businesses also, this figure touches nearly 40 crores for year 2003.

According to ICSG & as per market trends the copper prices (lme rates) have increased significantly in past 6 months. This is expected to grow further in future. At the same time as ABB is expecting a strong growth in its businesses this year & in near future, especially the transformer unit. Hence, the value of copper items purchased by business units is going to increase drastically. The expected volume for copper purchases this year is expected to be 2500 MT for product businesses alone.

Currently the copper purchases made by the business units are scattered with no synergies or joint purchases among the business units. If we club the purchases of the business units, there is wide scope of cost savings due to volume discounts & vendor rationalization.

Other benefits:

• Product standardization.
• More influence with key suppliers (better problem-solving).
• Elimination of redundant activities.
• Better utilization of purchasing talent and expertise
• Pooling of risks
• Better leveraging & negotiation power with supplier

3. Research Design

3.1 General Methodology

     

3.2 Data collection from business units

   

The data of copper purchases for each business units for year 2003 & 04

was done in the attached excel sheet format. Some of the critical data collected was volume, value; copper items purchased, convertor details, price break up details, etc.

3.2.1 ABB India copper purchases

Raw copper manufactured by primary & secondary producers is mainly in form of continuous cast copper rods & copper cathodes (billets) of various sizes. None of the business units are directly using the copper in raw form. Currently the copper purchases made by business units fall under 3 categories:

1. Some of the business units like PTTR-PT & PTTR-DT purchase raw copper from the primary producers & give to the intermediaries/convertors.These intermediaries convert the raw copper in finished form, as required by the business unit. This can be wire, tube, strip, enameled plated wires, paper covered conductors, etc.

2. Some of the business units directly purchase the finished copper item from the intermediaries without interacting with the raw copper manufacturers.

3. Certain business units are importing their requirement, due to non-availability of vendors in India, for that special item. A few also purchase imported material for their export order, as per ABB directive.

Spend Spectrum - Copper

3.2.3 Cost savings

We can identify six main areas for cost savings:

1. Bulk monthly purchase from primary producers
2. Reducing the number of convertors/ vendor rationalization
3. Global sourcing
4. Sales tax exemption/ other duty benefits
5. Product value analysis/standardization
6. Clubbing purchases with project businesses

3.2.4 Overall Process

• Make a commodity team
• Approach supplier with total package
• Negotiate total package by the team with the help of expertise available within organization
• Making long term contract with vendor
• Making of monthly purchase order depending on the forecasted monthly requirement

3.2.5 Commodity team process

1. Commodity name: copper

2. Volume :    2500 MT ( forecasted for year 2004)

 Note: Data collected only for ABB India’s product businesses

          i.e. ATAP & PT – P

3. Business units purchasing copper

         

3.3 Data collection from supplier market

3.3.1 Copper Industry in India

Introduction

The structure and role of copper base industries in India has undergone many a change over its long history exceeding five millennia. The traditional industry making utensils and decorative and utility metal wares in cottage and tiny scale gave way to more organized fabricating industries in small, medium and large scale after the Country's independence. There has been a significant growth during the past couple of decades due to Government's policies of liberalization and globalization.

Important land marks in copper production

Fabrication activity growth

• Traditional cottage scale units manufacturing utensils and Utility/decorative metal wares in pre-independence era
• Railway and Defence workshops set up for captive use in I920's
• Ordnance factories and mints set up in 1950's and 1960's
• Wire and cable units, rolling mills and extrusion plants came up during 1950's & 1960's
• Steady growth in number and capacity of copper and copper alloy semis manufacturing units during 70's and 80's.
• Growth of jelly filled copper telecom cable units in private sector in 1990's
• Advent of latest technologies - continuous casting of copper rod and alloy semis high speed wire drawing - cluster rolling mills - continuous strand annealing and' finishing - electrodeposited copper foil for PCB, etc. during 1980's and 90's
• Backward integration of cable units to CCR rod and refined copper production in 1990's

Copper Consumption

• No record of copper consumption in pre-independent India
• Copper consumption was a meager 25,000 tonnes in 1948 just after independence
• Growth in copper consumption was sluggish and erratic during 1950's and 60's
• Steady growth in copper consumption from about 30,000 tonnes in 1970 to 100,000 tonnes in 1980 and to 200,000 tonnes in 1990
• Copper demand/consumption assessed by total absorption of copper from supply side data till 1990
• Significant growth in copper consumption in 1990's promoted by changed government policies and better availability - from 200,000 tonnes in 1990 to 423,000 tonnes in 2000

Copper consumption, globally, is always highly dominated by the power sector and the electrical sector. In India also, sector-wise consumption generally follows the global pattern.

• Power generation -40%
• Defence, Mint 6%
• Transmission - Building & Construction 5%
• Telecommunication 30% - Automobiles 5%
• General Engineering 10% - Others 4%

Copper Availability

• Decanalisation of copper and emergence of copper smelter - refinery units in private sector have indeed eased copper availability since mid nineties
• HCL's production is near full capacity
• Birla copper and Sterlite copper have both achieved near 100% capacity utilisation

Government Policies

The changes in the Government policies also have had a favourable influence on copper industry

• Decanalisation of copper
• Opening up of copper production to private sector
• Reduction in import duty on copper concentrates and metal
• Removal of license requirement for processing industries
• Reduction in import duty on capital goods

3.3.2 Primary producers

 The three main primary producers of raw copper in India are:

1. Birla copper (Indogulf) (Hindalco)
2. Hindustan copper limited (HCL)
3. Sterlite Copper

Market Condition

It is an oligolpolistic market, as they are only the high quality reliable producers in India. In fact, HCL is slated for divestment & rumors are it will be taken over by sterlite copper. Hence it has become a suppliers market. The customers also sometimes demand the product made from copper, produced by these suppliers only. However, as electrical industry is largest purchaser of copper, some amount of leveraging is possible.

     1) Birla copper

Hindalco Industries Limited, is a flagship company of the Aditya Birla Group, with a turnover of about Rs 25.8 billion, & ranks among India's top 10 companies (in terms of market capitalisation). Birla Copper, part of Hindalco, is one the largest producer of copper in India. It has set up a mega greenfield copper smelting and refining complex at Dahej in Bharuch district of Gujarat, INDIA. Worldwide, on quality & cost considerations, CC Rod has fully replaced the wire bars.

Various copper products manufactured and marketed by Birla Copper are:

• Electrolytic grade Copper Cathodes conforming to BS-6017/ASTM B115
• CC Rods of Diameter 8, 11, 12.5, 16, 19 mm conforming to ASTM-B49/98 or IS-12444.
• Trapezoidal Copper bars of 3220 mm2 cross section area having length of 600-1300 mm & corresponding weight of 18-40 kgs.

Copper cathodes

Birla Copper Cathodes are square shaped with purity levels of 99.99% copper and made by Mount ISA electro-refining process.

Typical Chemical Analysis (data in ppm)

Dimensions

Continuous cast copper rods

Birla Copper Continuous Cast Copper Rod meets all the requirements of international quality standards. Available in 8, 11, 12.5, 16 and 19mm dia.

Typical Characteristics:

Typical Chemical Analysis (data in ppm):

Delivery:

The rod surface is protected and packed in coil form on wooden pallets, wrapped with HDPE cover and finally stretched wrapped on it. The delivery to customers is made by truck, rail or sea

Dimensions of the Coils:

Typical weights of coils offered – 1, 2.25, 3, 4 tons. The standard truck has a payload of 9 tons.

2) Sterlite copper

It is part of the Anil Agarwal group of companies. The group is the largest in the non-ferrous metals business in India with interests in copper, aluminium, lead and zinc. The group is controlled through its recently London Stock Exchange listed Vedanta Resources and includes companies such as BALCO (Aluminium) and Hindustan Zinc (Zinc and Lead). Vedanta Resources Limited (listed on the London Stock Exchange) holds 65% stake in SIL.

The material, sizes & delivery is similar to that of birla copper. However, it doesn’t produce 16 mm cc rods

3) Hindustan copper limited

HCL was incorporated on 9th November 1967. It is a Public Sector Enterprise under the Ministry of Mines, Government of India. In the History of Indian Copper, Hindustan Copper Limited (HCL) holds pride of place. With its extensive warehouses and sales offices, HCL satisfies the demand of the customers across the length and breadth of the Country. HCL is the first Indian Copper Producer to be accredited with ISO 9002 certification for Continuous Cast Rod Manufacturer at its Taloja Plant and for manufacture of Cathode at its Refineries both at Indian Copper Complex, Ghatsila, Jharkhand and Khetri Copper Complex, Khetri, Rajasthan.

        Products of hcl   

  

Mining and Integrated Smelting

Although HCL is operating two smelters with Indian ores, integrated smelting and refining may not be the answer for Indian copper production in the long run. Development of indigenous copper mining on sustained basis is constrained by lack of sufficient reserves of good quality ore. All India reserves of copper ore are estimated as 1690 million tonnes containing about 15 million tones of copper metal averaging less than 1% Cu against world average of 1.5% and, much higher copper content in countries like Chile. Most of the reserves are clustered in three states, namely, Bihar in East India, MP in Central India and Rajasthan in West India, but these reserves are distributed over thirty five deposits, and, are hardly economic in world terms.

HCL has mines in all these three states. Ore reserves in HCL's working mines are currently estimated as about 175 million tonnes with 1.3% Cu. Mines in MP (Malanjkhand) contain the best quality ore with average 1.42% Cu, followed by Bihar (ICC mines) 1.38% Cu and lowest grade in Rajasthan (KCC mines) averaging 1.09% Cu. With the available known reserves, and at the current level of exploitation and production, it is estimated that indigenous ore and concentrates with 50,000 tones contained metal annually would last for next 30 years only unless some new rich deposits are explored and mining operations extended to those deposits.

But, because of uneconomical workings, even HCL is planning their future expansions based on imported concentrates, and not indigenous ore. All new smelters would be customs smelters. Sterlite is emerging as a major integrated player in the non-ferrous metals business comparable to the like of Rio Tinto or BHP Billiton. The company’s ongoing expansion of the copper plant to 300,000 tpa would make it India’s largest producer of the metal. Only Hindustan Copper has captive access to copper concentrate–yet it is making losses, which tells a tale about the way the government manages it. Hindalco and Sterlite, on the other hand, import copper concentrate, process it and sell it back. Thus, their earnings depend not on copper prices, but on the treatment and refining charges (TC/RC). To gain more control over costs, both companies have acquired copper mines in Australia, which will partly meet their concentrate needs. However, some of this advantage gets diluted due to the high freight cost involved. Of the two, Hindalco looks better, as it is doubling capacity, which will make it more cost-competitive.

The Secondary Sector

Another manifestation of the price-product parity is the increase in production and trading of secondary metal. India's use of secondary copper is probably the highest in the world as a ratio of total copper consumption - easily one-third of the total. There has, however, been very little effort to produce secondary refined copper in the organised sector unlike in Western Europe and USA.

World ratio of secondary refined production to primary refined production is about 20%. The corresponding ratio in India is almost negligible, although ratio of secondary production (melted scrap) to primary production is as high as 160% total secondary production is about 80,000 tones compared to primary production of about 50,000 tonnes. Only one major venture has been planned for electrolytic copper in the secondary sector scrap based smelter by SWIL in West India for production of electrolytic cathodes (mentioned later).

Most of the secondary production is in the form of melted scrap recast into specified moulds with hardly any refining done. Most common production facilities are in the "unorganized" sector for production of recycled wire bars, which are hot rolled into black copper rods. These are finally used by small-scale units for making general purpose and thicker gauge wires and conductors. Pockets of concentration or clusters are maximum in and around Delhi, neighbourhood of Mumbai (Bombay), and, to a small extent, Calcutta. There are easily about 50 of these "backyard melters" with 10/15 rolling mills supporting them.

3.3.3 Copper prices

The price for copper purchased from the primary producers or converters is dependent on average LME price for the month. Every month, all the primary producers issue a provisional price agreement (annexure), which is reviewed at start of every month. The “Final Price” net of Excise Duty and Taxes, in Indian Rupees per MT, would be calculated and declared at the month end as per the following formulae:

(Average LME CSP of month + Applicable Premium USD *) X (SBI TT selling rate averaged over month) X 1.268

The difference between “Final Price” and “Provisional Price” and Excise Duty

and other taxes there of is settled promptly at end of month.These rates are applicable for both the convertors & ABB business units who are purchasing from them.

Besides, all these primary manufacturers are also giving volume discounts on monthly bulk purchases of cc rods only as follows:

                   

                         

3.3.4 Copper Industry outlook

Demand lead by Asia

For the period 1999–2003 refined copper consumption has grown at a CAGR of 7.9% as against world’s 2.1%. However, refined copper production in the Asian region has just grown by 6.6% there by further widening the supply-demand gap. The deficit has grown from 13.18 mn tpa in CY99 to about 2.03 mn tpa in CY03. Based on forecasted production increases, the deficit is expected to grow further to 2.42 mn tpa by CY06 as per CRU estimates.

The International Copper Study Group (ICSG) expects the deficit in copper supplies in CY03 to continue into 2004 as well. Copper consumption in China is expected to grow by 10% in CY04 to 3.2 mn TPA. While the European demand is expected to grow by 4.5% to 3.92 mn TPA and U.S. by 4.8% to 2.38 mn tpa in CY04. In future, this trend is expected to continue, as Asian economies driven by infrastructure growth, will continue to drive world copper demand.

International prices continue their upward trend and stocks continue to fall

Starting May 2003 international prices of copper have been on a continuous

up trend following the emergence of strong demand from Asian economies

especially China, lower availability of concentrates and the falling US Dollar

against world currencies. Since May 2003 prices have shot up by an average 67.4% and is currently trading at about $2,850 per tonne.The quarterly average stock of copper has also fallen over the last 15 months, from a high of 946,074mt in the period Apr-Jun 2002 to 337,939 mt currently. Given the low stock position and tight demand-supply dynamics, it seems unlikely that copper may trend below $2,300-2400 per mt. Levels through much of 2004.

TC/RC margins

Low copper prices have lead to a fall in copper concentrate production, which in turn has lead to a decline in TC/RC margins (reached a low of 3c/lb in

CY03) for standalone copper smellers. This has forced major smelters in the western world to shut down production. We expect miners to restore to full

production of copper concentrate sighting current prices of copper. This in turn will help standalone copper smelters to improve their operational

Domestic copper

Copper consumption in Indian has grown at a CAGR of 5% over the period 1980-2002. The growth for the period FY00-03 has been slow on account of the slowdown in the telecom cable segment (jelly filled telecom cables) due to technological changes in the telecom sector and higher consumption of optic fibre. However, in future, the thrust on infrastructure development and the passage of The Electricity Act should see demand growing at a CAGR of over 5.5% in the next three to five years.

Capacity expansions

At present the annual installed capacity in Indian stands at 420,000mt. Domestic copper production grew by 6.5% in FY03 to 376,000 mt. Production capacity in India is slated to grow to over the period FY03-06 to 660,000. For FY03, domestic consumption of copper stood at 278,000mt. The same is expected to grow to 354,000mt in FY06. The increased production will be exported to mainly China, where the demand is expected to grow at a CAGR of 8% over 2003-2006.

Domestic Copper Prices

The domestic price of copper is linked with the landed cost of imported copper. Duties levied play an important role in the determination of prices by the domestic manufactures. Recently, the peak rate of customs duty was reduced to 20% from 25% and special additional duty of 4% abolished

As can be seen from the above table the duty reduction announcement in Jan’04, effectively brought the landed cost of copper down by about 7.7%. However, the full impact of duty reduction has not been felt as yet, as the international prices of copper have been trending upwards. Considering the recommendations of the committee on indirect taxes in India and the WTO regulations, a further 5% duty cut on imports in FY06 & FY07 budget is expected.

recommendations

• Equip it with accurate data and powerful IT tools.
• Train the people.
• Categorize spends & evolve basic strategy of each category.
• Set targets.
• Monitor progress.

1. Provide clean and accurate data with proper access.
2. Review MM processes.
3. Use of SM tools – eSMART, café SCM, e-buy…
4. Vendor rationalisation.
5. Internal purchases.
6. Consolidation of common items.
7. Project purchasing.
8. Unit purchases - S 30 principles.
9. Training

IT Initiatives

1. Common vendor master
2. Vendor master to have MDF code
3. Vendor rating
4. Access across the business to vendor master
5. Material masters with MDF code controlled
6. Common MDF codes
7. Supply management processes
8. Linkage with eSMART/café SCM?
9. Training + training + training

Supply Chain Management - Levers

1. Systematic Portfolio review
2. Co-ordination across units
3. Low Labor Cost Countries Sourcing
4. Re-design to cost
5. Supplier interface optimization
6. Standardization
7. Make or Buy

Improving profits

1 Reduction of costs

• Supply Costs
• Civil Costs
• Engineering Costs
• Erection costs
• Commissioning Costs
• Direct Overheads

2 Innovative order execution

• Engineering / approval time
• In time ordering
• Back to back terms
• Erection commissioning time
• Packing lists

3. Preventing profit erosion

• Time over –run
• Engineering
• Civil
• Erection
• Commissioning
• Damages
• Wrong supplies
• Bad storage
• Freight
• Price variation clauses
• Tax / duty laws

4.  Claim management

• Insurance claims
• Changes by client
• Third party claims

Proceedings of the 12th Annual CSU-POM Conference

California State University, Sacramento, February 25-26, 2000

54

INTERNET-BASED PROCUREMENT

Business-to-business sales on the Web is starting to gain popularity. Companies

around the world are getting serious about Internet-based procurement (IBP) because the

return on a relatively modest investment is high and the risk is very low, at least for many

items companies buy routinely. There are two distinct parts of the IBP market:

Direct- Material Procurement, which involves the acquisition of products

directly required for production. These include the components and materials from

key upstream supply chain partners.

Indirect-Material Procurement, which is the purchase of products that are

indirectly used in the production process. They include office supplies; maintenance,

repair and operating supplies (MRO); etc.

eProcurement for Indirect Materials

Indirect materials are in most cases low-value, non-critical, high-volume items

which are ordered by many people in the company. Many corporations start their

eProcurement experience with the purchase of indirect materials. The main reasons for

this approach are the promise of easily quantifiable savings and low risk. If a company

buys office supplies electronically and something goes wrong, the company will not

suffer badly. On the upside, the company can enjoy major savings. According to

Anderson Consulting's report (1999), each year U.S. companies spend more than $400

billion on indirect materials. There are three ways companies are getting into

eProcurement for indirect materials: seller-side solutions, buyer-side solutions, and thirdparty

solutions.

1. Seller-side Solutions - Suppliers have their catalog and specification sheets

on their Web sites. They provide search capabilities and electronic commerce

functionality (the ability to manage routing approvals, tracking orders, etc.). Office

Depot’s site is an example of this type solution.

2. Buyer-side Solutions - Buyers are using software that will accept and

standardize vendor’s catalog and host them on the buyer’s intranet. The purchase

orders are created, routed, and approved on the buyer’s network, and then an order is

transmitted to the seller. Major software providers of this type commerce include

Ariba and Commerce One. This is the most practical solution today for large

companies that want control over their procurement. It has many advantages such as,

eliminating ‘Maverick buying’ (employees can’t go outside negotiated agreements for

their own convenience), providing superior analysis and reporting capabilities

(enhancing negotiating power), reducing the processing costs, and freeing up

purchasing personnel time. These are the advantages for buyers, however, vendors

face increased competition.

3. Third-party Solutions - Neutral sites act as market-place where buyers can

find sellers. They provide catalog-type information from major vendors enabling

buyers to find what they need and, in many cases, handle the transaction on the site.

Many of these sites are industry specific, such as Chemdex for chemicals and

pharmaceuticals. These sites allow the buyer to make selections and actually contract

for the purchase, but they do not deal with routing and approvals, tracking and

shipping and other important functions.

Improving profits

1 Reduction of costs

• Supply Costs
• Civil Costs
• Engineering Costs
• Erection costs
• Commissioning Costs
• Direct Overheads

2 Innovative order execution

• Engineering / approval time
• In time ordering
• Back to back terms
• Erection commissioning time
• Packing lists

3. Preventing profit erosion

• Time over –run
• Engineering
• Civil
• Erection
• Commissioning
• Damages
• Wrong supplies
• Bad storage
• Freight
• Price variation clauses
• Tax / duty laws

4.  Claim management

• Insurance claims
• Changes by client
• Third party claims

COMPARISON OF DOMESTIC AND GLOBAL PURCHASING

 

     Domestic                                                                         Global

Single language and nationality                           Multilingual/multinational/multicultural    

                                                                               Factors

Supplier information usually accurate and           Acquiring supplier information   Collection easy.                                                      Sometimes a formidable task, requiring

                                                                                Higher budgets and more personnel.

Political factors frequently unimportant               Political factors frequently vital

Relative freedom from government interference   Government influences business

                                                                                Decision

Uniform financial climate                                       Variety of financial climates

Single currency                                                        Currencies differing in stability and

                                                                                 Real value

Low admission cost                                                 Can get best technology

Fits “just in time”                                                     Get best price and quality

Avoids risk of trade rule changes                             Need for counter trade credits

Shorter communication                                             Must have volume to cover overhead

                                                                             Costs

Plant visits and technical assistance easier                Need to coordinate international  

                                                                                   Buying activities.

PAYMENT TERMS

C&F (CFR): Cost and Freight. The seller must pay the costs and freight necessary to transport the goods to the named destination. But the risk of loss or the risk of damage to the goods, as well as any cost increases, is transferred from the seller o the buyer when the goods pass the ship’s rail in the port of shipment.

CIF (CIF): Cost, Insurance, and Freight. This term is basically the same as C&F, with the addition that the seller has the responsibility to procure marine insurance against the risk of loss or damage during carriage .The seller contracts with the insurer and pays the insurance premium.

Ex Works (EXW).The seller makes the goods available on its premises. In particular, the seller is not responsible for loading goods into the vehicle provided by the buyer. The buyer assumes full cost and risk involved with transferring goods from the sellers plant to the destination. This arrangement provides minimum risk to the seller.

Delivery Duty Paid (DDP). While the term ex work signifies the sellers’ minimum obligation, delivered duty paid when followed by words naming the buyer’s plant, denotes the other extreme-the seller’s maximum obligation. Delivered Duty Paid may be used irrespective of the mode of transportation.