The source of e-ngineering

Three years ago, the E&C (engineering & construction) division of the Rs 9,000-crore engineering major Larsen & Toubro approached the topic of e-sourcing the same way other Indian companies tackled the issue ""through a third party service provider.

After trying three of them "" Indiaengineering.com, Free-markets.com and 01markets.com, the company decided to strike out on its own.

Today, L&T's e-sourcing initiative has proved successful enough for even former service providers to acknowledge it.

At present, the E&C division's e-sourcing initiative LnTEnC.com, has cut its purchase order cycles from four months in the conventional sourcing method to 20 days.

And in the two years of e-sourcing, the company claims to have sourced nearly Rs 350 crore worth of equipment.

This year, the company hopes to achieve Rs 300 crore worth of equipment sourcing through this mode.

K Venkatramanan, president operations and member of the board, says it was imperative that the company got its e-sourcing strategy right.

This is because, in the E & C business, except for the modular fabrication done by L&T at its Hazira facility, 60 to 70 per cent of the materials and machinery that the company supplies to project sites is outsourced.

As a result of global competition, the company had to compete with Korean international E&C players like Daelim, Hyundai, Samsung and others for both domestic and international bids.

And international players with the advantage of sourcing from suppliers all over the globe, won contracts mainly on the basis of offering lower costs.

As a result, there was growing pressure on L&T's margins. Pre-liberalisation day margins were in the 18 to 20 per cent range.

But tackling the low-cost Korean giants meant taking a hit; on certain projects the company had to make do with margins of 1 or 2 per cent.

"We considered e-sourcing to gain a competitive advantage over others in the field. This helps improve customer satisfaction and enables us to squeeze a higher margin from project orders," says Venkatramanan.

But using conventional methods of sourcing by inviting bids from a historical database of suppliers off-line yielded unsatisfactory results, primarily because of issues like lack of co-ordination among the three main offices of the E&C business (Baroda, Hazira and Mumbai).

As a result,employees did not necessarily have access to the best supplier.

Though L&T's first reaction was to hire a third party service provider who would take care of the sourcing requirements, the firm realised it was not the best solution, partly because e-sourcing as a concept was new.

So even the service providers were in learning mode. It was a question of whether to help the service provider learn at the company's expense or to learn at your own expense, Venkatramanan points out.

Also, a service provider needed to be paid, a fact that impinged on gaining competitive advantage. Venkatramanan also points out that confidentiality played a big part in L&T's decision to go it alone.

There were other issues too. For instance, e-sourcing service providers took a percentage-based fee out of the savings, irrespective of supply and demand. Even the benefit of savings on components having a low demand had to be shared.

"We felt that we were not able to get the right cost structure through a service provider," says Venkatramanan.

There was also the danger that the service providers would push their favoured suppliers. Also, some service providers had a global presence.

So if the equipment required by L&T was being procured by, say, a European buyer, he could inflate the price as he would benchmark the negotiations based on global average prices.

In 2000, the company launched LnTEnC.com, its portal for e-sourcing.

It also created a global intranet repository of newly discovered sources, which were not yet registered as approved suppliers.

This knowledge management system, named Know Net, captured the experiences of buyers and users of the items sourced.

The company claims that this was useful not only for the engineering centres to improve their designs and specifications, but also to evolve better commercial terms and conditions the next time the item is sourced.

To attract new suppliers to enlist on its site, L&T put up dummy requirements of big ticket items on its site.

Of course, this could have led to problems if the suppliers realised that the company was luring them with a hollow promise.

Fortunately for L&T, even suppliers were accustomed to the nature of the engineering business "" companies take quotes from suppliers saying they are bidding for a new project that they might win or lose.

L&T claims that it receives 30 to 50 applications from new suppliers every month because of e-sourcing, compared to practically nothing through the conventional way.

To make it work, however, the company had to ensure a total buy-in from its employees and suppliers. L&T executives say that "influencing all participants and making them modify their traditional ways of working was a challenge".

To overcome resistance, the company organised motivational programmes through HR initiatives and competitions.

To encourage its employees to get into the habit of sourcing through the Internet, it started a concept called, e-battlezone.

Employees who registered were called e-warriors, who had to contribute ideas on e-procurement and identify new vendors through the Internet. The top three warriors were rewarded at the end of the year.

The company also held workshops with its employees and suppliers to hand-hold them through the process of e-procurement. It provided on-site support to help suppliers with facilities like chat and so on.

Despite encouraging early results, the task for L&T is still half-done. This is because out of its total supplier base of 12,000, only 10 per cent (1,300) are registered vendors for e-sourcing.

The company says that it is slowly bringing the others on board. Till then, L&T's E&C business sourcing is going to be a clicks and mortar affair.

How it works

The E & C division's website, www.LnTEnC.com, facilitates the discovery of new suppliers through a link titled "global sourcing". Suppliers click on the link to find out the company's requirements and register (currently, 35 categories of components and suppliers for eight industries are required, which can change with projects).

Initially, the company did not get even these basics right. Because of graphic-heavy web-pages, search engines gave them a low priority.

In 2000, a search for L&T on the web would locate it as listed among the first one lakh finds "" in the first 24 or 25 web pages. So the look and feel of its website had to be changed to simple formats to make the site search-engine friendly.

Once a supplier posts his request for registration, the website automatically replies to the supplier, while simultaneously notifying the buyer concerned at L&T about this new discovery.

After this, based on an initial screening of the new supplier-source, the buyer moves into the off-line path. After telephonic conversations or video conferencing with the new supplier, a visit to the supplier's facility is organised for a quality and capability analysis.

The details of such visits and the findings are recorded on an intranet site for sharing the information with the entire community of buyers across all the business units of E&C at Mumbai, Baroda & Hazira.

Suppliers who are approved get registered into the SAP R/3 system's vendor master and automatically qualify to bid for project supplies in the future.

The e-procurement system enables buyers to instantly connect with the approved suppliers and share the drawings and specifications over the Internet irrespective of geographic locations.

Online clarifications like chat, which the company added at a later stage, helps in ensuring that the bids are technically and commercially compliant.

In a situation when the company's requirements attract three or more bidders, buyers can opt for the reverse auction (where vendors bid competitively in a downward spiral).

The company claims to have obtained 6 to 11 per cent price reductions in a span of three hours of online negotiations. Venkatramanan feels that this transparent negotiating tool can get approximately 3 to 4 per cent more cost efficiencies than the conventional negotiations.

He adds that the distinct advantage is that negotiations can be wound up in far less time.

Finally, the purchase order (PO) is created in the company's system after approvals and due diligence. The buyer then transfers the PO to the e-procurement system and makes it instantly available to the vendor or supplier. The vendor accepts the PO online and begins operations.

e-benefits

Discovery of better-performing sources irrespective of geography. When the company was executing a project for Malaysian petroleum major Petronas, it found a new and more efficient US-based supplier for expansion joints. Previously, L&T used to source all "expansion joints" from a Chennai-based supplier.

Faster cycle times "" on an average, for an outsourced item with a 20-week delivery period, L&T could save 4 weeks.

Due to the managed environment in the e- sourcing system, a new buyer's effectiveness increased by 50 per cent. For negotiations for best prices, no psychological games were needed "" everything was on the Internet for suppliers to see and quote accordingly

Suppliers are happier because of faster responses to their queries or even in interactions with the company for payments. The cycle-time reduction increases their productivity.