Disha 2017

Landscape of Procurement Practices in the Steel Industry

Amitava Baksi

Chief Procurement Officer

Tata Steel

1

Agenda

1. Indian Steel Industry

2. Industry Challenges and Role of Procurement

3. Best Practices driven by Procurement (Tata Steel) 1. Establishing Strategic Relationship with Key Suppliers

2. Collabarative Sourcing

3. Focus on TCO (Total Cost of Ownership)

4. Establishing Risk Management

5. Social Responsibility and Green Initiatives

2

Indian Steel Industry

• Steel Crucial for Development of the Country

• Per Capita Steel Consumption – Indicator of Economic Growth

• Demand for Steel – Automobiles, Infrastructure, Construction etc.

• Employs 6 million people directly

• Indian Economy: Projected to grow at 6-7% in next 2-3 years (Steel Demand Growth 8-9%)

• Per Capita Steel Consumption in India – 60 Kgs

(Global Average – 200 Kgs; China – 500 Kgs)

• Government Initiatives: Make in India, Invest in India tremendous opportunity for Indian Steel Industry to grow aggressively.

3

Industry Challenges

• Cheap Steel imports from China & Russia

• Import Restrictions - MIP (Minimum Import Price) and Safeguard Duty

– difference between landed price of Chinese steel and Indian steel price is less than 5%

• Sales realization has been a challenge and margins are very thin

• Switching cost of Suppliers High

• Dependency on Major Suppliers High

Procurement will have to play a very crucial role in effective cost

management to remain competitive in the market 4

Proc. is best positioned in the Organization

End Result

Procurement

Diagnose/

Resolve Disruptions

Cost Pressures

Supply Chain Complexities

Demand Volatility

Agile Supply Chain

Challenges

With the advent of globalization and ever increasing supply chain complexities,

Procurement is the best positioned organization to quickly identify, diagnose and resolve disruptions

5

BEST PRACTICES 1. SUPPLIER RELATIONSHIP MANAGEMENT

6

Supplier Relationship Management

• Two way mutually beneficial relationship to deliver greater levels of innovation leading to competitive advantage

• One of the areas with increased focus, investment in Procurement

• Growing focus on SRM is a marker of advancing maturity

Why focus on SRM?

SRM has everything to do with what happens after the contract is signed and the sourcing process is completed

Not engaging in SRM runs the risk of

Business thinking Procurement only negotiates the deal but is ‘missing in action’ when some goes wrong

Narrowing Procurement’s scope to negotiation, not ‘doing business together’ & limiting its focus to the ‘deal’ not the

collaboration

Contracted savings & benefits ‘leaking away’ and never being ‘cashed’

Suppliers considering Procurement less credible

7

Supplier Relationship Management (SRM) for Strategic Vendors

Focused interactions between operations, maintenance

and technology groups of both organizations to

maximize the value outcome of partnership

Role of Sales and Procurement: Facilitation of these

interactions to generate greater value and efficient day to

day management

90% of the interaction is limited between the Sales

function of supplier/vendor and Procurement personnel

alone

Supplier Buyer

Sales Procurement

Technology

Group

Maintenance

R&D

Operations

Technology

Group

Maintenance

R&D

Operations

Adversarial

relation

General Buying relationship

Sales

Technology

Group

Maintenance

R&DOperations

Maintenance

Operations

Technology

Group

R&D

Procurement

Supplier- Partner Buyer

Collaborative

relation

Supplier Relationship Management (SRM)

8

SRM Process: Post Launch Journey

SRM Team Formulation &

KPIs Finalization

Idea Generation Workshop (IGW)

Idea Evaluation Meeting

(IEM)

Project Prioritisation and

Syndication

Project Charter Sign off

Project Implementation

1 2 3 4 5 6

Opportunity/Gaps

identified

Voice of Customer (VOC)

Voice of Partner (VOP)

Value Chain Analysis (VCA)

Comprised of

experts from both

organizations,

aided by facilitator

and co-ordinator

from TSL and

partner

respectively.

Additionally, KPIs

identified

SRM team

generates ideas on

key focus areas,

arising from VOC,

VOS Past Issues &

OFIs etc. to

assimilate the

possible projects to

be undertaken

SRM Team

evaluates and

prioritizes each

idea on predefined

criteria like value

potential, ease of

implementation,

Investment

requirement &

sustainability

Evaluated ideas to

be implemented

are categorized

into Long vs. Short

term and finally

syndicated and

approved with Sr.

Management of

both Organizations

SRM Team

formulates the

project charter

(Background,

scope, potential

impact, KPI, activity

list with timelines

etc.)

Continuous Review

of project

implementation

with suitable

tracking and saving

potential,

possibility of

patent/publications

, and eventual

closure of project

Regular reviews are conducted post the project charter sign off phase to monitor the project implementation progress and KPI status

Next cycle

9

SRM Journey so far

SRM launched with 60 partners, constituting ~42% of Tata Steel’s buy value

Numerous tangible and intangible benefits accrued to both partner and TSL

Greater involvement between the two resulting in process efficiency and strengthened relationships

10

BEST PRACTICES 2. COLLOBORATIVE SOURCING - CCT/SSC APPROACH

11

Collaborative Approach

12

Collaborative Sourcing requires greater integration in supply chains through close interaction among all players in the value

chain (Users, Procurement, Seller etc.)

Collaborative Sourcing aims at visibility and cost reduction across the board

The closer all the stakeholders collaborate, the more efficient, transparent and cost-effective the entire supply chain will be!

Traditional

Procurment

• Purchsing team

negotiates a best

possible deal with

supplier

Procurement

Collaboration

• Similar approach to

Traditional Approach

with Electronic means of

Communication

Supply Chain

Collaboration

• Goes beyond traditional

customer/vendor

relationship. Creation of

value is still within

Procurement

• VMI, Demand Planning

with Vendors etc.

Value Chain

Integration

• Involving key suppliers

not only in sourcing

process but also in

conception of Product

itself

Sustainable

Partnerships

• Relationships purely

based on well

understood sense of

exclusivity that creates

value

• Development of formal

alliances/JVs

Cost Driven Value Driven

Full Value

Creation

13

Tata Steel’s CCT (Commodity Competency Team) Approach

A cross functional team approach to create value by formulating sourcing strategies based on Value-in-use (VIU) & Total Cost of Ownership (TCO) basis

Increasing focus on value creation

Drive sourcing agenda & synergies

Increase Accounability

Pillars of Effective Governance through CCTs

Procurement User

Departments

Expert

Services

Suppliers

Members chosen from areas with maximum relevance

Technical

Improvement

Demand

Management

Risk

Management Standardization

Obsolescence

Management

Quality

Assurance

Low Cost

Country

Sourcing

Supplier

Development

Partnership

8 C

RIT

ICA

L L

EV

ER

S

BEST PRACTICES 3. FOCUS ON TOTAL COST OF OWNERSHIP

14

Total Cost of Ownership

15

Traditional Approach of Supplier Selection only Price

Lowest price does not always realize the best result

Total cost of ownership (TCO) is an assessment of all costs, direct and indirect, involved

with an item over the useful life of that item

In order to negotiate effectively, buyers must understand and evaluate the cost impact of

each of the four elements of QSDP

With the stress on quality in business today, Quality is often the most important element

of cost

QUALITY DELIVERY

SERVICE PRICE

4 Elements of Cost

Total Cost of Ownership

Service + Delivery + Quality + Price

Shining Case

Procurement of Refractory based on Life of Material

16

Snorkel is a complicated refractory assembly which is inner-lined with bricks and outer-lined with monolithic

refractories on the cylindrical steel core shell High Spend area in Steel Industry

However, on life cycle cost basis, Vendor 2 offered life of 150 heats

while Vendor 1 offered life of only 112 heats

Vendor 1 Vendor 2

Position based on 'Price'

Price

3% more

Vendor 1 Vendor 2

Position based on 'Specific Cost'

Specific Cost (Rs./ Heat)

30% more

BEST PRACTICES 4. ENTERPRISE RISK MANAGEMENT

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MEANS

• Session with the Central

Team

• Leading Questions to

think about the possible

discontinuities

• LTP & ABP objectives

discussed, BO & S

analysis

• Review Last Year’s Risks

RISK FRAMEWORK: 5 Step Process

Mitigate Establish

Context

Identify

Risks &

Controls

Assess

Risks &

Evaluate

Monitor,

Review &

Report

AP

PR

OA

CH

OBJECTIVES

• Understand the Risk

Framework

• Define Risk Categories &

Relevance

• Understand Business

Objectives of the

company & Department

• Learning from Past

Experiences

Risk

identification

methodology

Workshops

Directed

interview

Inputs from

CCT/SCT

Leaders

Survey

Questionnaire

Inputs from

select Vendors

Leadership

inputs

Inputs

from Snr.

Leadership

Outside in

perspective

Central

ERM Team

Inputs

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• Risk impact scored on a scale of 1-5 as per risk impact matrix

Impact analysis

• Risks likelihood scored on a scale 1-5 as per risk likelihood matrix

Likelihood analysis

• Risks mapped on risk heat map based on risk score=Risk likelihood X risk impact score

Risk heat map

Impact matrix

Likelihood matrix Risk heat map

26 Risks

Identified

Risks exclude

Normal business

Challenges. 19 Risks

After eliminating

duplicate risks.

7 Risks

Class A: 1 Risks

Class B: 6 Risks

Sl.N

o. Risk Title Risk description

Objectives/Target

s/ Assumptions in

plan

Assumptions

for Risk

Description

Owner Risk toEarly Warning

Indicators

Risk

likeliho

od

Risk

impa

ct

Risk

Impact

Over

all

Risk

Mitigation

PlansKPI

Timeli

ne

Respons

ibility

Contin

gency

Plan

Respon

sibilityTimeline

Residual

Risk

Resi

dual

Risk

Revie

w

Forum

( Headline

Risk)

(Describe the details of the risk

covering the following

Event :

Cause:

Effect/Impact)

(The baseline for Risk

Identification)

These are assumptions

as per BOS (Like

delivery compliance by

90%/ Uninterrupted

(The worst case

scenario)Factors

contributing to the

possibilities of risk

/E.g certain

specific regulatory

(One who

Cordinates

this Risk)

(Parameters that it

Impacts out of the

following :- Cost,

Volume, Reputation,

Community, Profitability,

Safety & security,

(How to sense the

occurrence of Risk

before it occurs)

1 to 5

as

Likelihood

matrix

1 to 5

as per

impact

matrix

(Quantitative

Value of Risk

Rs Crs)

Likelihoo

d

x Impact

( Action Plan to Prevent

the risk from occuring)

( Review

Parameter

for the

Mitigation

Plans)

(For the

Mitigation

Plan

Completio

n)

For Mitigation

action)

( How to

operate If

the risk

plays out)

(For

contingency

Plan)

( For

contingency

plan)

( Describe

the net of

Risk left after

contingency

and

Mitigation)

Rs Crs

( Within

the

Division)

VP Review

VP Review

Risk Register

19

Illustration

Departmental Governance mechanism (Review Forum)

Risk Oversight

Risk Coordinators

Risk Ownership

Reviews status to Class A risks

Overall status / progress of ERM process

Actions against last review MOM

Exception reports of Class B&C risks

Monthly Review

Reviews overall status to Class A ,B &C risks

Early warning status

Details on mitigation plans of unit level risks

Monitor Mitigation Plan Progress

Monthly Review

Provides extended support to roll out ERM process to all

major projects

Coordination with risk owners for completion.

Coordination with ERM for vetting

Monthly Departmental Report /dashboard for reviews

Monthly Review

Departmental review forum

chaired by VP CS

(Departmental Head) CPO

Segment Chiefs

Departmental Risk

co-ordinator (BAG)

Departmental Segment level

risk owners

1. Bulk Commodities

2. JSR Proc

3. Transportation

4. EPC

5. MRO & Services

6. West Bokaro

7. FAMD

8. OMQ

9. Jharia

10. TSK

20

L – Likelihood, I – Impact, S- Score

Sample Risk Heat Map

Impact → Low (1)

Minor (2) Moderate

(3) Major (4) Critical (5)

Likelihood ↓

Almost certain (5)

Likely (4)

7,

Possible (3) 6, 3,4, 1,

Unlikely (2) 5, 2

Rare (1)

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BEST PRACTICES 5. SOCIAL RESPONSIBILITY & GREEN INITIATIVES

22

RESPONSIBLE PROCUREMENT POLICY

23

5 Building Blocks of Responsible Procurement Policy

Responsible Procurement Policy guides the

organizations to procures its raw materials, goods and

services in a responsible way, in line with the

organization’s values

Responsible Procurement will be given systematic

consideration alongside factors such as price and

quality

SOCIAL RESPONSIBILITY

Case: Towards greater Challenges

Chandmani Kunkal – School Teacher in Jamshedpur

In 2011, she attended a Tata Steel discussion to embed

more SC/ST entreprenuers in the company’s value chain

Hand-held and mentored by Tata Steel’s Procurement

division, she started her own firm with one truck to

transport company’s products

Today, Ms. Kunkal has 43 employees (90% tribals) and a

fleet of 28 trailers, 16 tippers, 3 wheel loaders, 2 back-

hoe loaders, 7 cranes and 5 excavators

In the previous financial year, her company did ~ Rs. 4

Crore worth of business with Tata Steel

Tata Steel, on its part, intends to challenge her with

assignments of greater operational complexities

24

GREEN INITIATIVES Going forward, Tata Steel firmly believes that reduction of Carbon Footprint is one of the ways of doing sustainable business Case: Encouraging Vendor Partners to adopt Best Practices Environment friendly containerized rake transportation for finished goods

by Tata Steel reduced the CO2 emissions by 54 Kg / Ton-KM Impact: Reduction of ~ 4 Lakh Kgs of CO2 emissions per month

Previously, Wooden Cradles were used in Steel Rolls transportation we encouraged our supplier partner to come with a eco-friendly solution that

will not only reduce the cost & carbon footprint but also improve the customer delight

Our partner came up with a Polymer Cradle which drastically reduced the wood consumption.

Impact: Number of Wooden Cradles previously used: 82,000 Carbon Footprint / Wood Cradle: 1.5 Total CFT Saved: 1,23,000 Number of Trees saved: 6,150 Our partner has invested in these new cradles because it has helped them reduce

the carbon footprint and reduction in customer compliants.

Sharing the Best Practice

with Vendor

THANK YOU

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