Procurement Spend Reduction for one of India's leading manufacturers of electrical and power equipment
Title: Established strategic, tactical and execution procurement processes, identified new supplier, developed contracts and negotiation plans to improve the competitiveness by reduction in the total procurement costs
Background:
- The client is operating in the heavy electricals manufacturing sector in India. The assignment done for the transformers division, characterized by a highly competitive market and a tough upstream supply market
- Client has been losing margins and market share as competition became stiffer. Also, unpredictability of the supply market, specifically metals - Copper and Steel, has resulted in increased direct material costs
- Inadequate quality processes that monitored compliance of actual (delivered by vendors) versus specifications (as required by client) of key sub-assemblies has also resulted in cost leakages.
Existing Procurement Process Assessment :
Unit Price Costing Gaps:
- Inability to compare the market prices with internal benchmark
- Non-uniform pricing of a material across vendors within the same month
- Sub-optimal sourcing i.e. while some material had more than 8 vendors operating (supplier fragmentation), others had 1 or 2 vendors (single sourcing)
- No long term contracts with vendors despite having sizeable volume to leverage
Process Gaps:
- Manual & sub-optimal procurement planning and control
- Need for a much improved material cost leakage avoidance QA process
- Metals commodity hedging not practiced
- Industry/peer analysis done by Aqua MCG, revealed that there existed a large gap with respect to the extent of backward integration done by the client's competitors for the top 2 materials.
Our Solution:
- Establishment of strategic procurement processes including corporate teams for strategic sourcing, plant specific category managers, quarterly material portfolio process, sourcing group framework development, etc.
- Establishment of tactical and execution processes including internal target costs, supplier cost structure, cost analysis, quantity-discount analysis, fixed-variable cost analysis, structured procurement planning process, etc.
- Identification of new suppliers comprising, formal supplier selection process, templates to prepare RFx, etc.
- Development of Contracts and Negotiation plan including, volume based contract scenarios, price variation clauses, negotiation plan and evaluation process, etc.
Benefits:
- Planned 8-10% reduction in material cost for A class materials.
- Estimated 3.5 Cr to 4 Cr annual cost savings for one of the A class materials [7%]
- Elimination of all manual procurement planning process