Sourcing and Procurement and Supplier Partnership
On an average, Indian companies typically have more number of suppliers compared to global best practices. For example, in the automotive industry, typically an auto company sources materials from 250 suppliers compared to the best practice of 100 suppliers (According to a CII 2002 report). This increases the complexity of the whole sourcing and procurement process. Supplier consolidation not only simplifies the purchasing but also leads to better utilization of resources. A number of Indian automotive companies are reducing the number of suppliers to achieve this.
Typical procurement cost management strategies include negotiating price by leveraging volume, price and cost analysis (industry cost profiles, process cost models, total cost of ownership models).
Supplier partnership is also needed to enable processes such as cross docking. Cross docking can be an effective way to keep costs low. But implementation issues abound. A huge percentage of suppliers still use email as their primary means of order related communication, with telephone and fax coming as other means of communication. Cross docking requires Advance Shipment Notifications (ASNs) and barcoded shipping labels.
ESourcing/eProcurement is another important step that can lead to substantial cost savings. Many Indian companies are now using the power of internet to source materials internationally. This gives the companies 2 advantages: 1) get best quality raw materials 2) at the best prices. Also the use of technology increases transparency in the whole process.
Aggregation of purchasing across all business units can result in substantial cost savings. Typically in India, most of the business units may be sourcing same raw materials from the same company, but the orders are placed separately. On the other hand, if the companies aggregate their purchasing across all business units, it gives them greater purchasing power in the form of bulk discounts.
The figure shows how Ashok Leyland through its project “Oscar Inbound” went about rationalising its vendor base and reducing inventories by JIT and LCL. This project also included other initiatives like global sourcing and eSourcing. Inventory levels were reduced from 23 days to 18 days. eSourcing helped it achieve savings to the tune of 11.5% of total material cost. (Source: AutoSCM India 2006).
Outsourcing the non-core activities in the supply chain is an important avenue for cost reduction, especially in the pharmaceutical and electronics industries. As shown in the chart below 27% of outsourcing is done to achieve cost reduction.
The diagram below shows the extent of outsourcing of supply chain activities in India.
The host of benefits supply chain outsourcing will bring are extremely relevant to current times, where costs are of primary concern. SC outsourcing will drastically reduce overall supply chain costs which form a major chunk of revenue costs.