Anand Pawar
July 20, 2022
While fixing the purchase contract period of a strategic input item, there are usually two broad criteria that the procurement team keeps in mind. One is the price trend of the item and the other, the demand for their finished product. The demand for the finished product helps to determine the quantity of the input item to be bought at one go, and the quantity to be bought thereafter. Purchasers obviously prefer a shorter term contract if prices of the finished product is expected to drop by the time the next lot is bought.
Also, in case the demand for the finished product starts to fluctuate, production is also curtailed, and inventory of input items bought just for a month may turn out to be inventory for three months!
This is precisely what has happened in the last economic downturn of 2009, when most industries found demand of their finished product plummeting. In order to control inventory, therefore, most of them resorted to short term sourcing of their strategic inputs.
Short-term contracts
Purchasers opt for short-term contracts or spot buying primarily when the demand for their finished product is uncertain, and short contracts help in inventory control.
However, such contracts increase the administrative cost to a great extent. Purchase orders must be released more frequently and deliveries have to be ensured by pushing suppliers who are inevitably new each time.
On the flip side again, if the input item of the seller is volatile in nature, the seller can decide quickly the best price at which to sell. Sometimes the seller also sells at prices below his cost of production as future demand is uncertain and he urgently needs to clear inventory in order to ensure cash flow.
However, industry best practices indicate that long-term sourcing is ideal, as it creates a perceptible price advantage as well as creates dedicated suppliers.
Long-term sourcing
Industry trends indicate that if a finished product is in demand, it makes sense to opt for long-term contracts of strategic input items. For one, bulk buying inevitably means more discounts. The other major advantage is that it helps to build a long-term and valued relationship with the supplier. Since strategic inputs are mandatory for the production process, and are usually required in large volumes, they are usually also scarce and highly priced. Thus, a long-term relationship with the supplier of such a commodity is also valuable for a buyer.
However, it is also important that a purchaser must have sufficient negotiating power and the situation for the item is not monopolistic in nature. For instance, if the supplier supplying furnace oil is as big as Indian Oil and the purchaser’s buy is not even 5 percent of the total volume sold by the seller, the purchaser will have no choice but to comply with the terms set by the seller.
Thus it is only in a competitive market that long-term contracts can secure supplies from the sellers who agree to such contracts.
Apart from assured supplies and a long-term relationship with the vendor, the other consideration for a long-term contract is of course the price. However, if the price of the input item is volatile, the seller will put a higher purchase margin on the selling price for long term negotiations, making the buy expensive. The purchaser, in this case, can impose a price variation clause (PVC) on a benchmark input price.
In case the input material is an exchange traded item, the PVC clause works well. However, for non-exchange traded items, things may not work out always as desired.
A Steel Plant for instance, had floated a tender to buy 24,000 tons of silicon-manganese for the period September 2009 to August 2010. A price variation clause linked with Manganese Ore India Ltd (MOIL) price list, power cost and the fixed cost of the manufacturer had been indicated in the tender.
But in case cheaper imports of manganese ore start flowing in, the Steel Plant will pay a higher price to the vendor for a full quarter as MOIL revises its price list every quarter. In spite of this, advantages of long-term contracts far outweigh its disadvantages, according to industry users.
Dynamics of exchange traded items
Metals such as copper, aluminium, zinc, lead, nickel and crude oil are exchange traded items and deciding on a contract period is much easier in case the products are bought from a competitive market. Purchasers often buy products which contain major quantity of these exchange traded items. Here they can indicate to the seller that price settled in a long-term contract would follow the price trend of the exchange. Benchmarking a major part of the product thus leads to an effective long-term contract.
For example, dry cell battery manufacturers often buy zinc through long term contracts from international sellers, using the London Metal Exchange (LME) prices as benchmarks.
Driven by demand and supply of the exchange traded commodity, both physical and notional, declining price at the exchange is likely to be accompanied by heavy buying which will drive up the price. Similarly, rising price will be accompanied by selling of the commodity if the participants at the exchange feel the price has risen enough.
Determining the point at which market reversal will take place is difficult and this gives rise to widespread speculation among the market participants.
However, for a non-exchange traded item, such a benchmark is difficult to get and hence the benefits of a long-term contract are negated. It is natural for a SAIL buyer to benchmark steel products buy on the price they set, but other buyers may find imported price ruling much lower than SAIL price.
Non-exchange traded items
Items such as steel and polymer are not normally dealt through exchanges and hence decision making for long term contracts is difficult for buyers of such items.
Even steel makers buy steel through spot contracts and benefit immensely. For this, it was found that a Steel Plant, with a Growth Shop which produces ladles and torpedo cars for the steel plant, buys flat products in spot contract through the reverse auction route. This forms a part of their regular procurement for the company.
More and more converters manufacturing PP bags used for packing cement and fertilizers import their strategic item polymer granules, when domestic market price rises above the imported landed price.
At one point of time, it was found domestic caustic soda manufacturers were losing out to the international players as domestic buyers such as Hindustan Lever preferred to import than keeping long term relation with domestic seller for manufacturing soaps and other detergents.
To avail the emerging opportunity, several buyers were seen to outsource their non-strategic items to a third party vendor. Their internal procurement team was removed from the burden and was asked to focus only on strategic items which included procurement of steel and various metal in bulk quantities.
A Steel Plant based in central India, for example, had benefited by implementing outsourcing of non-strategic buy through third party vendors. In case another economic downturn is apprehended, market insiders are therefore of the opinion to allow experts to operate at least in the area of non-strategic items procurement to judge the best contracting method for the benefit of the procuring company.
Simran Alchemist
March 28, 2022
Forward looking companies are presently seen to actively consider outsourcing of their tail end spend to achieve total cost of ownership savings. Tail end spend normally constitutes those items which contributes to maximum count of purchase orders and leads to interaction with numerous suppliers. Outsourcing these tail end spend frees up the internal procurement resources of the company who then starts to focus more on their high end spend which offers maximum cost savings opportunity. This enhances TCO savings for the company.
Perhaps the most pertinent learning from the pandemic is the need for de-risking and controlling the supply chain which requires huge management bandwidth. The creation of an efficient and consolidated supply chain strategy to address the tail end spend is thus the need of the hour for an organization. This will free management bandwidth, diminish supply risks, provide hard cost savings, reduced inventory and working capital. It is a decision that must, therefore, be properly researched, and must necessarily take into account far more than the unit cost of individual products. From being an option few would consider a decade ago, procurement outsourcing is now an increasing popular course of action for many manufacturers across the industry sectors who are achieving measurable benefits as a result. Tail end spend management is not limited to a particular industry sector or organization. Incidentally, Industry leaders across sectors as diverse as Heavy Manufacturing to Real estate and Automobiles to Food & Beverages has chosen mjunction as their preferred partner for procurement transformation in Tail end spend management.
Finding the tail
If we make a simple spend analysis or make a list of the items an organization procures over a period of time we would be able to identify a long list of certain items which are low in value but significantly high in numbers. We call it the Tail end spend. If we apply here the Pareto’s principle we would be fair to assume 80% of these items by number contributes to only 20% of the total spend, while the balance 20% of the items (by number) contributes to 80% of the total value. While this ratio of 80:20 may not be exactly true in all cases and there may be certain deviations, this principle holds an important key to stratification of the overall spend of an organization and the prioritizations of the various strata for optimal efficiency of the procurement function. Understandably there is an obvious organizational focus on the ‘vital few’ which is the biggest component of the total procurement budget. However an improper approach to the tail end spend can have negative impact to the procurement function which would finally lead to related organization inefficiencies. Due to the low value of the tail it’s often the most ignored part of the procurement spend and hence might be managed badly. More than missing the savings opportunity it may often result in
1. Poor delivery compliance resulting in risk to business operations
2. Increased inventory levels owing to increased cycle time which blocks the working capital
3. Poor contract coverage leading to increased Maverick Spend
This often spoils the great work done by the buying team for the major spend buckets. The tail-end buys are not mission critical yet timely availability must be ensured for smooth business operations. Moreover the humungous list of tail end buys often occupies a significant bandwidth of the procurement team, finance & accounts team and even the management as the number of transactions are significantly higher than in case of major items. Often these items are single time buys and every time a new vendor has to be inducted in the system to get the required product or service further increases the pain of the procurement team as well as finance & accounts team.
Benefits of single supplier for tail-spend
Apart from mitigating the risk of GST input credit there is transfer of an overarching risk of disastrous supply interruptions from the largest portion of supplier base by appointing a single supplier for the tail end buys. Also there is a risk associated with delayed payment to MSME suppliers and financial liability therein. Notably the tail end buys are mostly catered by MSME suppliers who have statutory protection incase payment is deferred by their customers. This liability arises if ordered goods are delivered but Goods/ Material Receipt Note (GRN/ MRN) is delayed beyond stipulated credit period. This is aggravated due to lack of uniform processes across different plant locations. mjunction played an important role in rationalization the processes which helped client organization to manage their tail-spend in a better way.
Conclusion
The pandemic has taught us many lessons in supply chain management and perhaps the most pertinent being the risk to business continuity. With little or no knowledge of the fragmented small time tail end suppliers there is immeasurable risk of defaults. The business share is often insignificant for these individual suppliers too hence it’s prudent to consolidate the tail end supplies and outsource to a single supplier. To sum it up the primary and most important benefit from this kind of engagement is- Unlocked management and transactional bandwidth which could be best used to manage strategic and high value items and enhance Total Cost of Ownership savings for the company.
Simran Alchemist
November 30, 2020
In an age of cut-throat competition and shorter product life, many organisations strengthen their core competence in select critical areas of their operations through strategic alliances. On one hand this helps to block competitive threat and reduces significant risks to business. On the other hand, the firm gets innovative solutions to reduce its operating cost without increasing its resource cost or overheads significantly.
A study of spends of a firm reveals that some items bought by the company are significantly critical to its operations and are bought at a higher price to ensure competitiveness. This category of item is strategic for the firm to maintain its competitive edge. The company can either have its internal research team to continuously upgrade these products and enhance product life cycle, or resort to strategic alliance with a firm which has already invested on development of the item. Here a mere transactional relationship with the supplier would fail as other than the product, the buyer needs to pick up the expertise and best practices of the industry from that supplier. Procurement assistance also involves getting continuous supply of the item according to his need at the best possible price which simultaneously reduces his buying cost and increases margin of his final product.
A strategic alliance here gives the buyer both the product and technology to follow industry best practice at an optimum cost.
Good positioning
A buyer thus may get a lot of benefit from strategic alliance but also has to ensure that the vendor gets a maximum share of business and that the confidentiality of the technology involved is maintained.
This leads to a good balance and the buyer and seller both benefit equally. The seller increases his business volume substantially without much marketing effort and the buyer reduces administrative cost involved in chasing the item for delivery and checking the item after it arrives in store. The seller here, acting as a business partner, ensures availability of the material when it is needed and ensures that only correct material is supplied. This leads to just-in-time (JIT) receipt of goods and buyers do not have to maintain an inventory at all in such cases.
Leading auto manufacturers working with strategic partner vendors are often seen to maintain inventory, not in weeks or hours but in minutes and these vendors, in turn, are able to make very high inventory turnover getting faster payment from their buyers. Higher inventory turn ensures high growth in profitability without spending additional working capital.
The vendors here also constantly upgrade themselves through continuous research and that often leads to lower usage of items supplied by them. So buyers continue to buy these items at same price but as the quantity of the item required comes down, total cost of ownership (TCO) decreases and this directly impacts the bottomline of the company positively.
The strategic partner is also able to provide a different product altogether when the buyer organisation has to change his final product after the life of the earlier product has been exhausted. Thus getting a different design of engine for a Nano car was easier for Tata Motors from its strategic partner and it was available just when it was needed.
Alliance threats
During audit process, a strategic alliance may come across as being unfair as it amounts to putting all eggs in one basket or spending all company resources to a single party and losing out on the price advantage as deals here are not negotiated on an open platform. In case a strategic supplier becomes more powerful than the purchaser himself, he might try to extract more advantage in his favour and in that case, the buyer might turn out to be a loser.
Such threats are practical problems faced by practising professionals who use strategic alliance as a tool.
To tackle such problems, most companies have legal exit clauses to protect themselves in case of non-performance of a seller under strategic alliance. Some companies might have two similar products in two different lines and responsibility of supplies in one line is given to one supplier. So effectively if one supplier fails in one line, the other can immediately take charge of the other line.
Critical success factors
The critical success factors of a strategic alliance depend on how well the supplier delivers according to expectation and how well the purchaser looks after the needs of the supplier.
First and foremost, the purchaser should get a high level of performance and quality from the suppliers under alliance. Next, there should be a high degree of delivery compliance. In case the supplier under alliance is bringing the material from a different country altogether, he should have a local warehouse to serve the buyer promptly. The supplier also should extend technical support as and when needed by the users of the buying organisation.
This can happen if there are adequate visits by the technical team of the supplier to the production site of the buying organisation. The users and quality team of the buyer should also visit suppliers’ manufacturing processes so that the buyer can add more value in his own production process leading to supplier value management.
The buyer should reciprocate by making long term deals with the supplier and that should be done ethically and transparently with the supplier.
Lastly, the purchase team should work with the suppliers with empathy. They must understand that if the partner’s health is affected due to certain wrong moves from the buying organization such as reduce costs of procurement beyond feasible limits, the strategic relationship benefits would remain a distant dream.
Industry norms of Strategic alliance –
Pros –
Capacity –
• Capacity availability is ensured during uncertainty in demand and shorter lead time requirement.
• The long term business assurance helps suppliers to put up dedicated satellite infrastructure to assure the quality of the products and ensure just-in-time supply system.
Price –
• Pricing stability is assured over longer periods of time in an inflationary market.
Supply chain –
• Key suppliers work on optimising supply routes as well as improving productivity, thereby giving a cost competitive position to buyer.
• Multinational vendors allows buyers to avoid import formality in strategic alliance and these partners often save the buyer on additional logistics cost for importing smaller lots of materials.
Core competence –
• Strategic alliance helps the buyer to build on its core competence area, save on TCO and upgrade its performance.
• Strategic alliance also helps the buyer to maintain a lean procurement / commercial team while outsourcing most of the non-core activity of procurement.
Cons –
• Purchasers in some cases do not have much option and have to go with the available source of supply. These are commodities where the supplier has dominance in the industry.
• Risk of supply uncertainty looms during economic crisis.
• Strategic supplier over a period of time may become complacent and uncompetitive.
Simran Alchemist
September 3, 2020
Can You Break A Cartel?
A cartel is a group of suppliers which together attempts to control production, marketing, and pricing of a product, with an objective to increase their operating margins. Under antitrust laws in many regions of the world, cartels are illegal, because they eliminate fair market competition. However, several international cartels continue to exist despite these laws. Within nations, private cartels may control the market for certain commodities.
For the members of a cartel, cooperating together has a distinct advantage. By agreeing to not compete, the members of the cartel mutually benefit. Cartels are often successful in driving up the price of the commodity they control well beyond what could be considered the fair market value.
Typically, cartels are formed for commodities for which their suppliers were earlier forced to operate at a bare minimum profit and very low margins. Once these suppliers get together, the buyers are forced to pay higher.
Though purchasers are at liberty to take legal recourse to break such cartel, operating in an era where supplier relationship holds the key to competitive advantage, innovative concepts are often used to break a cartel. Creating a preferred pool of suppliers, listening to them closely and awarding them for their good work are some of the latest initiatives which help to break a cartel.
However, a reactive way to break a cartel is through online reverse auctions, which is also used where negotiation is done with a group of suppliers simultaneously instead of negotiating on a one to one basis.
In cases where buyers find it difficult to manage things and they find it difficult to manage the increasing demand of the suppliers, they resort to the legal mode. Legal procedures are difficult to prove and time consuming.
Forming strategic alliance and enhancing the market share of the vendor to take the best return, is a one time solution, but thereafter in case the strategic partner is not continuously evaluated on every front especially on the price front, the parent company may be losing on competitive advantage.
A solution to this is continuous vendor development activity and a continuous process of creating new business opportunity within the function so that the strategic partner finds it difficult to settle on firm ground. In this way, the motive to form the cartel can be rightly addressed.
Motive to form cartel
A vendor is moved to form a cartel when according to his perception, the market price obtained is not sufficient to justify his value addition. After failing to convince the purchaser on every occasion and working out a remunerative deal, he goes out to convince his competitors that the problem of lower margin is a universal problem and cannot be solved in isolation. The cartel then settles among themselves to only accept a price which would justify their perceived value addition.
Increasing the profit level obviously would call for increasing the selling price and if the buyer gets no other source to buy the item, he would have to shell out the set price.
In case importing is a solution to bypass the domestic vendors, vendors trying to form a domestic cartel would have to convince the government that importing would be injurious to the domestic industry and an import duty needs to be implemented as a measure of safeguard.
However, the item for which a cartel is being formed has to be a critical item to the buyer. Otherwise, the effects of cartelization would be nullified.
Detecting a cartel
A cartel can be detected for all items which are being bought critically by the buyer on a regular interval. Obviously, the buyer would always try to strategically avoid paying higher to the seller by all possible means. Similar strategic efforts would also be made by the seller to ensure that he gets paid for his perceived value addition. In case, the seller is not able to do it alone, he would form a cartel. The seller may also try to buy stakes in competing companies where ever possible and through this consolidation would try to ensure a justified margin.
Items not so critical for a company can be made critical if the specifications and terms of supply are so designed that only a very few vendor can match the competency level required to pass the eligibility criteria. This also increases the chance of cartel in non-critical items bought by the company.
Breaking a cartel
The main motive of the cartel can be resolved by properly collaborating effectively with the vendor. If the vendor feels he is part of a family where buyer is a family member, he would not indulge in any cartel activity.
But this may raise serious questions on the creditability of a buyer if the relationship goes beyond a professional relationship as corruption is not an unknown practice.
In a transactional atmosphere, where there is a central figure initiating a cartel activity, one to one negotiation can be done to break a cartel. Alternatively, there are electronic negotiations which are breaking the cartels effectively. In case this option also fails, increasing the scope of supply and accommodating service elements along with an item supply and training selected lot of suppliers to do the same job becomes a viable alternative to break a cartel.
In a one to one negotiation done after a cartel is detected, assurances are given to increase market share of the selected vendor if he discloses all financial details pertaining to his company. A vendor who has ploughed back his profit element into various research and development activity is normally preferred over a vendor who uses this profit margin in other ways. From the list of vendors so generated, the most balanced vendor is chosen who is given the larger pie on a commitment that he would give maximum value to the buying company and the selected vendor is continuously evaluated on every front.
In case such a negotiation fails to deliver, the next best alternative to break a cartel is to go for an online negotiation. Here the auction engine is so programmed that if a second person wishes to give the same offer, it is automatically rejected by the system. So all the vendors involved can only get their price registered in the system, if each vendor offers a lower price than the other. Normally at the end of such reverse auctions, an order is awarded on preset terms to a limited number of vendors out of which one gets the maximum share of business. This helps to break a price cartel.
Sometimes it so happens that all the vendors have lower capacity than the share of business offered by the buyer. Vendors here sometimes form a quantity cartel where everyone commits to supply an equal quantity at the same price. In such a scenario, a reverse auction can be so programmed that the quantity and price commitments of each vendor has to be different.
In extreme cases where an online negotiation does not give better results, the scope of supply of an item is increased and it involves an ‘apply’ element also. The supplier here needs to maintain his own workforce at the buyers’ plant to do the job in totality and the buyer ensures training to all the suppliers before awarding the order to a specific supplier based on his performance and quoted price. This is an evolving process which keeps even the strategic partner guessing for the next scope might be too difficult for him to comply.
In a nutshell, cartel is there to stay and evolve and a purchaser skill is proved if he is able to evolve tools to take best advantage of the situation without resorting to the legal route.
Simran Alchemist
July 9, 2020
Hospitality sector banks on food to bounce back from September
Building of trust among the customers will be the key for revival of hospitality sector given that the unprecedented nature of global crisis created by COVID-19 has jeopardized the sector to a large extent. Industry experts say its food and beverage segment may be instrumental for reviving this trust and a comeback as early as September 2020 is being contemplated, provided the spread of virus is contained by then.
Incidentally, food and beverage is the key segment in the hospitality industry as it contributes approx. 50% of the total revenue in a star hotel and approx. 40% of the total revenue being generated by the entire hospitality industry combined together. Therefore frequent customers to the hospitality sector are closely watching the segment’s readiness and performance to make their future plans.
Future plan of the customers include business and leisure travels including hotel stays, arranging social function in hotels and banqueting facilities, family get together at restaurants etc. All these activities are currently remaining suspended since the operation of the hospitality industry has been held up for the COVID 19 pandemic from March this year.
As serving of food and beverage (f&b) is the most important aspect in any business meeting, social function, family gathering etc, any development in this segment is also being closely monitored by prospective customers.
The most noticeable recent event of f&b segment was the distribution of food to the frontline workers like doctors, health workers and nurses who are treating the Covid patients. Any adverse impact on these frontline workers can be directly attributed to the safety aspects of the food distribution.
Initiatives such as #MealsToSmiles are therefore being taken up with utmost care by the f&b segment, hoping that it facilitates quick turnaround of hospitality sector.
Incidentally, such hashtag meals initiative are taken up by reputed brands of hospitality Network Chain and in one such initiative over 2 million meals has already been delivered in last three months. Through this, cooked food is served to not only the front line warriors of Covid-19 consisting of the doctors and nurses but also the migrant workers. The campaign has moved the frequent customers of hospitality industry and they have started to plan looking at the outstanding performance.
In fact, there are evidences of social gatherings being planned in hotels in next 3 to 4 months’ time. In a webinar on June 24th arranged by BW Hotelier; Veer Vijay Singh, CEO and MD of Trance Hotels said, he has already seen some wedding bookings as early as September this year in leading hotels. In the same webinar, Rajiv Kaul, the former President of Leela Palace, Hotels and Resorts admitted that brands are at work to create competitive advantage by winning trust of their customers early.
Deeper introspection reveals such hastag meals initiatives are often driven by reputed catering outfits under the guise of branded hotels. One such hastag meals initiative is run by a reputed airlines catering company which is a joint venture with Asia’s largest hospitality company and continent’s leading food solution enterprise. With airlines operation coming to a grinding halt from March end, this airlines catering company had gainfully moved their resources to such massive relief effort. However, such quick transformation was not easy as dynamics of air catering was completely different compared to the present work process that they were handling. Vendor contracting had to be aligned quickly for this initiative. Though safety and hygiene part was not new for the air-catering company, arranging vendors who would ensure strict quality norms in a time when entire country was experiencing a lockdown condition was undoubtedly challenging.
This was actually not a big deal for this airlines catering company as the supply chain was modeled for such eventuality, said Dipankar Das, Head of Hospitality vertical at mjunction who is also responsible for handling sourcing needs of the airline catering company. Incidentally, the airlines catering company had outsourced the procurement management part to mjunction to achieve efficiency and reduce cost. “mjunction introduced COVID 19 protocols for the vendors to follow across all the units in the country for the company”, Das said. This was done through introduction of appropriate clauses in the SLA of the vendors and taking set declaration from the vendors to maintain various Hygiene & Safety related Protocols while delivering the goods to airline catering company, he added.
The efforts taken by mjunction was much appreciated by management of the airlines catering company. Mjunction bent backwards in helping us in procuring several food, packaging items, sanitizers, PPE kit etc. during the tough phase, said GM-procurement and logistics of the airline catering company in a letter addressed to mjunction. “Sourcing and procurement during lockdown in the country was extremely difficult, but we along with team mjunction overcame the challenges and emerged as winners,” he said.
Introduction of mjunction in airline catering company operation was part of the business continuity plan of the company, analysts opined. Companies often are seen to plan much in advance before a disruption actually hits their operation. Introduction of mjunction was in similar lines, a person in knowledge of the subject commented.
In fact, 3 years ago the airline catering company felt the need of such a procurement service provider who could streamline their backend procurement operation. The company at that time was catering to approx. 22 airlines on a daily basis & was providing approx. 76000 meals per day to various airlines & other food outlets through its various flight catering units spread across the country.
The entire material of the airline catering company for daily cooking requirement was being procured through various vendors who were attached with its catering units against either monthly or yearly agreements. However, the vendor agreements and rates were done at three levels – central materials group, regional purchase committee and unit level which looked after its parent company comprising a wide network of Hospitality Group Chain of hotels.
Mjunction found that airlines catering company could improve on procurement efficiency by increasing the contract coverage of central materials group which at that time was languishing at 13% of the total spend volume. “This was a herculean task, but we managed to do justice to the expectation set through creation of a central materials group which works exclusively for the airlines catering company, “Das said.
However, the big picture was not ignored and mjunction aligned at all three levels to handle around 15 categories of items comprising of food & beverage and food related packaging materials. “In value terms, we handled spend of Rs 134 crores in FY 2019-20 and generated savings of 3.80% of the spend value for the airlines catering company,” Das added.
Simran Alchemist
June 4, 2020
Mining sector may soon witness a spike in eCommerce activity with Government of India showcasing immense opportunity to the Engineering, Procurement and Construction (EPC) Companies through privatization initiatives. An opportunity of $1.77 billion or Rs 1.33 lac crores has been talked about in Invest India government website to enhance private investments in the mineral sector.
It is expected that these EPC contractors, post winning the contracts, would search for suitable eCommerce partners to outsource their non-core functions, industry observers felt. Non-core activity of EPC mining contractors include buying or leasing various items economically and selling the excavated products at the highest price possible.
When such activities gets outsourced, the eCommerce companies normally charges a percentage of transaction made as fees. eCommerce revenue in the buy and sell side may amount to 0.1% of the investment made, commented ex-Chief General Manager of Coal India, P.P. Sengupta. This would roughly translate to Rs 133 crores revenue for the eCommerce companies.
According to the eCommerce major mjunction services limited, there is a definite opportunity which is emerging and worth exploring. “Several mining development and operations contracts are already in various phases of finalization by RA & ASS BU of our company”, Ashish Goel, head of marketing, mjunction services limited said. The Reverse Auction & Assisted Sourcing (RA&AS) team negotiates the best rate for high valued items through technology platform to give market driven dynamic rates to its clients. Incidentally, mjunction has mineral selling service also and procurement and selling service can be offered together as a combined service to any EPC company, an industry expert said. “We have experience in supporting mines with MSS, RA and FA services, and also a little bit asset sales,” said Manish J K Mathur, Chief of MSS PSP services, mjunction services limited. Steel and mineral is normally sold through FA or Forward Auction and idle asset is also sold in a similar fashion by the company.
Interestingly, procurement is by far the most valued activity in any EPC company as no two projects happen nearby and transferring material from one project to another is next to impossible. We therefore prefer to remain asset light, commented Satyavrat Singh, CEO of Uniseven Engineering and Infrastructure Pvt Ltd. As a case, in one Rajasthan project, Uniseven required to install 7 cranes with capacity ranging from 80 to 500 ton. “Subsequent project requiring the same cranes was in Coimbatore and moving cranes from North India to South India was practically impossible,” Singh said. Getting the cranes leased out for both location was therefore the best option and for that good procurement skill is necessary at the two hubs. Incidentally, a 500 ton crane may cost upto Rs 20 crores and EPC industries are mostly leasing such equipment to remain competitive, an industry observer commented. Also outsourcing the negotiation services through eCommerce companies is a better option here to limit unnecessary addition of resources in the EPC companies.
However, size of mining tender would determine whether eCommerce service providers would benefit out of these privatization initiatives. According to the announcement made by the government in May 2020, nearly 50 coal blocks would be offered through bidding process for private participation immediately. There would be no eligibility conditions, but the eligible bidder needs to make upfront payment. EPC contractors like Uniseven can take up projects to the size of Rs 10 – 50 crores. “We cannot take Rs 100 crores project as we have fund limitation,” said Satyavrat Singh, CEO Uniseven. This is because for Rs 100 crore project, an advance bank guarantee of Rs 10 crores is required. Further, party has to also make an upfront security deposit of another Rs 10 crores.
According to industry observers, if tenders come out in size more than Rs 100 crores, it would be less competitive in the bidding process also as would be taken up by heavyweight EPC contractors such as L&T, HEC, Nagarjuna etc. There would not be much competition in such tenders as the smaller EPC contractors would be weeded out.
These heavy weight companies also may not like to outsource the procurement or selling functions to eCommerce service providers as they have adequate in–house resources to address the need, the observer commented.
