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Saving cash, the online way

Shobhana Subramanian | May 18, 2005

The small town of Sirohi in Rajasthan, at the base of Mount Abu, is home to a three million tonne cement plant run by JK Corp.

Being heavily dependent on road transport for moving bags of cement, the company was forced to cough up huge amounts as freight, among the biggest items of expenditure for it.

About two and a half years ago, it decided to experiment with e-sourcing in bid to cut costs. Although most of the truck operators in the region are small and unorganised, it succeeded in motivating them to participate in a "reverse auction" -- essentially an online bidding system.

Ultimately around 35 operators, many of whom had never even used a personal computer till then, took part in the auction, keying in their freight quotations.

None of the operators knew what rates the others were charging and JK Corp was able to get a good deal. Since then, the company has managed to pare its annual freight bill of around Rs 90 crore (Rs 900 million) by about 10 per cent.

Today, it's an unwritten rule in JK Corp that any item worth over Rs 500,000 must be e-sourced. Says Shailendra Chouksey, director, JK Corp: "We felt we were making purchases judiciously but since we started buying online we've been continuously surprised."

It's not only JK Corp that has discovered the joys of e-sourcing. Over the last few years several firms have turned to e-sourcing and are completely sold on the idea.

Last year, Dabur managed to save 10-15 per cent of expenses of Rs 700 crore (Rs 7 billion) on raw materials, packaging, sales and travel.

In the last four years auto major Tata Motors has spent around Rs 220 crore (Rs 2.2 billion) less on buying components, while Emerson Power Network, which makes UPS systems, has managed to prune expenses on switchgears and magnetics by 10-15 per cent.

Even the public sector Bharat Earth Movers has kicked off online buying and insurance company ICICI Prudential which e-sourced insurance training programme lap tops last year, is now buying furniture and fixtures the same way.

Sandeep Batra, CFO, ICICI Prudential, refuses to divulge how much his company saves, but says the savings are "significant."

Who's saving big bucks

  • JK Corp has managed to cut its annual freight bill of around Rs 90 crore (Rs 900 million) by about 10 per cent
  • Last year Dabur managed to save 10-15 per cent of its expenses of Rs 700 crore (Rs 7 billion) on raw materials, packaging, sales and travel.
  • In the last four years Tata Motors has spent around Rs 220 crore (Rs 2.2 billion) less on buying components
  • Emerson Power Network, which makes UPS systems, has managed to prune expenses on switchgears and magnetics by 10-15 per cent
  • ICICI Prudential e-sourced insurance training programme lap tops last year and is now buying furniture and fixtures the same way

From Diwali gifts, to balance sheet printing -- almost anything can be e-sourced today.

What is driving companies to buy wares online is the saving that they make on the purchases. Crompton Greaves has in the past two years paid about 10-15 per cent less on its bills for inputs of packaging materials, bearings, stampings and other metal items.

Says B R Jajoo, CFO, Crompton Greaves: "Though we cannot buy our raw materials, on which we spend Rs 1,400 crore (Rs 14 billion), online, we can do it for a very large portion and that's a big saving for us."

Initially JKCorp saved around 10 per cent of its expenditure of Rs 300 crore (Rs 3 billion); now it manages to pay about 6-7 per cent less.

Chouksey concedes that though the savings are much higher initially and become less incrementally, there is nonetheless a big benefit.

Says Ravi Kumaraswami, group director, Ariba India, which helps companies to e-source: "We take the responsibility for ensuring that the savings actually materialise and actually put a number to it in terms of the impact on the earnings per share."

The savings of course differ, being considerably less if the products being bought are commodities. As Jajoo points out, it's not easy to e-source metals because prices tend to be volatile.

He explains that it is better to negotiate offline if the specifications are very complex and the suppliers are few.

E-sourcing has also opened up a whole new world of vendors for manufacturers and is fast changing the way companies manage their supply chains.

With import tariffs coming down, they can now take advantage of low-priced products across the globe. Managements admit that many of these suppliers were inaccessible without e-sourcing.

Emerson Power, for instance, e-sources at two levels -- globally and in the respective countries where it operates, for unit-specific requirements.

That way it is assured of superior quality and the best price. Add to that the transparency of the entire process. With all the bids on screen, suppliers (whose identities are camouflaged) know what they're up against.

Observes L N Jayanty, senior vice president, operations, Emerson Power: "While vendors get a chance to establish their credibility through the reverse auction process, the buyer in turn also gets an opportunity to establish his credibility."

The time taken to negotiate deals too has crashed. Adds Jayanty: "Once you have shortlisted the suppliers, it's all over within a couple of hours."

Where technology also plays a major role is in ensuring that decisions taken by the top management are implemented down the line.

While sourcing decisions are centralised, problems can crop up with regard to the actual procurement, which in large organisations is often decentralised.

Instances of purchase managers exercising their discretion, instead of going by what is decided by superiors, are not uncommon.

To prevent this, many companies have installed a software package that automatically rejects a purchase order placed if it does not meet the specifications.

Economies of scale matter a great deal while buying online because, as Jayanty points out, unless the volumes are large it's difficult to attract quality vendors.

At the same time it's not as though smaller firms cannot make use of a reverse auction. A case in point is tyre manufacturer TVS Srichakra (turnover: Rs 230 crore (Rs 2.3 billion) in March 2004), which has made a small beginning in e-sourcing.

The firm has saved around Rs 3 crore (Rs 30 million) of the Rs 90 crore (Rs 900 million) it spends on buying rubber and carbon black. Auto ancillaries such as Asahi India or TVS Lucas, whose margins are increasingly under pressure, have started exploring the possibilities of using an e-sourcing system.

"For smaller firms we start with one or two key items that make up the bulk of the expenditure," says Kumaraswami.

Those who have tried e-sourcing swear by it. But many are reluctant to change the way they do business. Admits Jajoo: "Using an online system calls for a complete change in the mind set since people are used to dealing across the table and bank on personal relationships."

Explains Pradeep Bahirwani, general manager, procurement solutions at Wipro Technologies which through its Wipro 01 Markets helps companies to e-source: "One reason firms are slow to start e-sourcing is because they are reluctant to pay intermediaries before a transaction that has been firmed up on the screen is fully executed."

He says that if a contract is being executed over a year, companies want to pay only after the year is over. If something goes wrong in between, for example if the vendor does not supply the product on time or backs out, they do not want to suffer for it.

There have also been instances of vendors raising prices, after having agreed to a certain price on screen. On such occasions, some firms have decided that they would not pay the e-sourcing agent, since it would be shelling out a larger amount for the inputs.

Again, some of the bigger firms believe that they are well-equipped to scout for vendors themselves and just want to rent the technology.

Companies are also reluctant to pay a fixed fee -- they would rather enter into a profit sharing or, in this case, a savings -sharing agreement (a percentage of the amount saved goes to the consultant).

Agents on the other hand prefer a combination and are trying to work out on an integrated approach involving both consultancy and technology over a longer-term, instead of offering deal-based solutions.

However, Jajoo believes that once people are convinced that it's a great way to buy, there's no looking back. "With increments and bonuses now directly correlated to divisional profits, everyone's keen to cut costs," he says. That, if nothing else, should see e-sourcing take off.


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