Procurement strategy unraveled

Without a comprehensive procurement strategy being implemented, it is impossible to know whether or not procurement is aligned with the government’s vision or the company’s corporate objective. Sandeep Menezes looks at the various risks and opportunities that need to be considered while drawing up a sound procurement strategy.

 

India is slated to implement infrastructure projects worth $1 trillion during the 12th Plan period (2012-17) in different sectors like housing, townships, roads, ports, power, and airports etc. These massive infrastructure projects will require construction materials and equipments which together accounts for nearly 50 to 60 per cent of total costs in any project.

But the biggest challenge will remain procuring the right quality of materials or equipment at proper pricing within appropriate timeframe and getting it transported to projects sites without damage. Therefore procurement remains a challenge both with public sector or government authorities and also private companies.

Public Procurement in India

Public procurement in India is a nationwide activity across the Central and state governments, their autonomous and statutory bodies and public sector undertakings, with a wide variety of sector/institution specific requirements. Out of India’s total GDP of $1,842 billion in 2012, the government procurement market is estimated to be around 25 to 30 per cent or $460-553 billion.

There has always been the myth nationwide that public procurement policies are skewed heavily in favour of governmental entities.

A. K. Halder, Executive Director (Marketing), BEML Ltd however rejects the notion of PSU preference in public procurement stating that “Look at all the purchase policies. There is nothing that favors the public sector. The company has to be L1 (lowest bidder) in the tender and then only gets the business.”

India’s public procurement system is vitiated by:
-Absence of standard contracts and tender documents.
-Inadequate publicity of tender inquiries.
-Pre-qualifying criteria being to restrictive.
-Absence of stipulation of adequate timelines for bidding participation.
-No rules for compulsory publishing of tender results.
-Delays in procurement decisions.
-Failure to utilise open tender route
-Insufficient regulations to check conflict of interest
-Lack of an independent grievance redressal mechanism.

Procurement Strategy:

PSUs or Private Companies implement purchasing strategies in order to make cost effective purchasing decisions from a group of efficient vendors who will deliver quality goods on time and at mutually agreeable terms. The objectives of a good procurement strategy are to promote the prudent use of funds with selected suppliers through efficient, transparent and sound business practices that include standardized procedures, quality control, contract and performance management and reporting.

Deben Moza, National Director – Project Management Consultancy, Knight Frank India states that procurement has always been the most important part of the pre-construction period. Procurement strategy and its effective implementation define the subsequent activities falling in line with the schedule estimate. A good manager would preempt the challenges/risk associated with the current procurement strategy thereby arriving at a right balance between the direct purchase and onsite works. The principal components that decide the procurement strategy are: time of the year, duration of the project, geographical location, price, etc. shortage of manpower in a current geographical location or factory made finish would prompt the use of factory fabricated components than made on site. A good manager would identify the risks and plan the mitigations before formulating a strategy.

Karthegasen Nakulan, Country Manager – India, Sinclair Knight Merz (India) Pvt. Ltd states that procurement always remains a vital part of any construction execution. An effective procurement process will result in cost savings, while a poor one will generate negative outcomes. The main areas where challenges are faced involve early market engagement, supplier relationship management and competitive dialogue procedure.

To make the procurement process more innovative, one should target these key areas with a strategic procurement plan.

Anticipated GST Effect:

According to Confederation of Indian Industry (CII), GST will help in increasing tax base, curbing evasion and raising compliance for both indirect and direct taxes. Better compliance could raise additional tax revenues of almost 20 per cent. By instituting consumption-based taxation, GST would make India a single market and ensure free flow of goods. This would create more efficient supply chains and reduce transaction costs, lowering final prices for buyers. A more competitive manufacturing sector could help add more jobs and encourage exports as well.

Rangnath Kadam, Head Corporate Materials Management, Kirloskar Brothers Ltd, hoped that introduction of GST will help to streamline or rationalise existing taxation process across the country. However, one has to wait for detailed information and more clarity on this issue, he added.

Adarsh Hegde, Executive Director, Allcargo Logistics, stated that the uniform implementation of GST across our economy at the earliest will be one of the biggest steps India can take to boosts its economy. Its positive effects will not only bring efficiencies in processing time, logistics and transportation within the country but will also boost cost efficiency in implementing infrastructure and construction projects. With companies not worrying about multilevel taxation payments through various states, it will boost seamless trade within states and make reduce transportation time considerably. GST will significantly help India reduce the transaction costs of doing business to and from the economy for all private as well as public enterprises & thus increase India’s competitiveness globally.

Impact of Depreciating Rupee:

The Rupee depreciation has led to imported goods and services becoming more expensive vis-à-vis locally manufactured products and services. This has led to a situation wherein most manufacturers or buyers are increasingly looking towards replacing imported components or raw materials with local substitutes. This leads to reduction in costs and makes locally manufactured products more competitive.

Products manufactured through locally procured materials or components are also more competitive in the export market due to the Rupee depreciation. Direct import inputs have caused greater cash outflow for KBL. Even import content in domestically sourced materials has also lead to price rise claims/price validity issues with suppliers. Price escalation of commodities like copper, nickel, gun metal have inflated our import bill. Existing measures like forex hedging/forward cover have proved insufficient in such a volatile scenario. Hence, more action on that front, as well as, measures like reduction of import content, import substitution, timing of major imports have become important in such case explained Rangnath Kadam.

Somnath Bhattacharjee, President, Material Handling Solutions Equipment & Project Solutions Business, TIL Ltd felt that “there has been a significant impact because our products are between 30 to 50 per cent import content depending on which model we are talking about. At one point the Rupee had devalued nearly 20 per cent and that had an impact on the end product. Therefore it has definitely put lot of pressure on profitability.”

Speaking about the Rupee depreciation effect on construction equipment sector, R. Nandagopal, Chief Executive Officer—Construction Equipment Business, Greaves Cotton Ltd was of the view, “if you look at most of the construction equipment manufacturers, it is found that most of components especially hydraulics are imported. The high value hydraulics or control systems continue to be imported with most being European. Therefore most construction equipment manufacturers must have taken at least a 10 to 15 per cent hit on costs due to Rupee depreciation.”

To reduce impact of Rupee depreciation, many manufacturers are increasingly replacing imported components with localized alternatives. Explaining this scenario, Anand Sundaresan, Vice Chairman and Managing Director, Schwing Stetter (India) Pvt Ltd stated that “there are certain products wherein we have localized to nearly 95 per cent. There are other products wherein the imported content is nearly 55 to 60 per cent because they are actually new products wherein lot of indigenization has to still occur. But we have a very clear plan to localize the products in India.”

Logistics Hurdles Facing Procurement Planning:

India’s logistic cost as a percentage of the GDP is unusually high – double that of developed countries and substantially higher than even BRIC nations. India’s underdeveloped infrastructure scenario means that logistic cost as a percentage of the GDP is as high as 13-14 per cent compared to 7-8 per cent in developed countries and 9-10 per cent in other BRIC countries. Therefore any procurement planner needs to consider the logistics costs and also available infrastructure on-route while taking procurement decisions. Because although logistics costs on a particular route may be cheaper, the consequence of underdeveloped infrastructure could be unnecessary delays or even damage to the procured materials.

Adarsh Hegde explains that infrastructure projects for an economy like India are key macroeconomic variables which need priority attention all across the policy framework. That also includes the important aspect of its value chain such as procurement for these projects. The most important factor for managing high investment projects in infrastructure and construction is the cost of individual elements, from sourcing, procurement to transportation. Particularly in India these costs tends to be on the higher side right from the beginning of cycle itself, due numerous factors related to policy as well as support infrastructure. Policies have to transparent and should propel private as well as public players to invest in the sector. Level playing fields and clearly defined taxation norms can also boost the effectiveness and reduce final costs in the overall length of the project.

A case in point is a large infrastructure project like a power plant where over-dimensional cargo needs to move from point A to B within the hinterlands of India, but due to existing multi-layered approval and state-level taxation policies, the feasibility to execute large projects economically and efficiently remains a big challenge. One of the most fundamental ways this can be streamlined is to create a single window clearance mechanism especially for infrastructure projects across India. This one initiative will go a long way in reducing the transaction cost of doing this economic activity, thus overall reducing the final cost of operation. Encouraging companies through trade friendly policies for using alternate medium of transportation within India such as Coastal Shipping will also bring in the much needed efficiency in procurement value chain for infrastructure projects as well. The primary reason being, as compared to road and rail, coastal shipping is more economical, efficient and considerably reduces carbon emissions within the country, explained Adarsh Hegde.

Conclusion:

The procurement strategy should be based on an objective assessment of the procurer’s needs and the project characteristics. It has to take into consideration various risks or opportunities that may bear some effect on the procurement decision. Like localizing procurement due to Rupee depreciation is a risk mitigating effort, it is also an opportunity since it increases export competitiveness. While the procurement decision should ensure risks are eliminated or minimized, opportunities should never be wasted.

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