In the new ‘away centre fabrication’ model vendors have to purchase raw material from company-approved suppliers
In the ACF model, introduced almost three years ago by Bhel, vendors have to purchase raw materials from company-approved suppliers, while in the conventional sourcing model, the company supplies vendors with raw materials and buys back finished products from them. Bhel started outsourcing material manufacturing with the conventional model in 1969.
ACF, which gives Bhel the flexibility to outsource materials from vendors even in other states (instead of relying on local supplies for production as in the earlier model), is expected to provide the company with the additional supplies it will require when its capacity expansion projects are completed.
Bhel has about 560 vendors, 500 of whom are local vendors following the conventional model and 60 are under the ACF model, mostly with facilities away from Tiruchi. “The ACF model provides flexibility to vendors in sourcing raw materials. We are educating our local vendors about the model and expect around 20 of them to convert to ACF from the traditional model in 2011-12,” said G Ramakrishna, general manager, outsourcing, at Bhel’s Tiruchi Complex.
“In the ACF model there is a profit for the manufacturers in buying raw materials from Bhel-approved sources,” he said. Manufacturers can negotiate with the approved sources for the purchase, depending on the quantum of their purchase and their relations with the supplying firm.
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In 2010-11, the Tiruchi unit outsourced almost 125,000 metric tons (MT) through the ACF model, out of a total outsourced tonnage of 341,000 MT of non-pressure parts, said Ramakrishna. The company’s outlay on outsourcing was Rs 1,530 crore in 2010-11, of which almost Rs 750 crore went to ACF vendors.
Local vendors, facing shortages of power and manpower, are able to supply only around 3 00,000 MT of materials to Bhel per year. The company is expanding its boiler capacity to 15,000 Mw per year by March 2012, and this will increase the demand for outsourced materials. It expects the outsourcing tonnage to go up to 45 0,000 MT in the current fiscal year. Any requirement above 300,000 MT has to be sourced through ACF, said Ramakrishna.
Micro and small companies are insulated from risks in manufacturing products for Bhel through the conventional supply model, since the raw material is provided by the company itself and there is assured buyback of finished products.
However, starting an ACF model is not easy for micro and small units, since it needs initial investment on the manufacturing facility and on raw material purchases. The traditional model made the business easy for local vendors, since they were not required to invest much in the beginning.
Besides, they are also protected from the risk of raw material price hikes, since the company cushions any price variation, whether in steel or other materials, said Rajappa Rajkumar, vice-president of the Tamil Nadu Small and Tiny Industries Association (TANSTIA).
“That is one of the reasons why local vendors may not be able to switch to the new model,” he added. However, local vendors are making an effort to bring in more automation in their facilities. Micro and small-scale manufacturers in Tiruchi invested Rs 150 crore last year in automation and will invest Rs 250 crore more in new manufacturing facilities to suit contemporary needs, he said.
Bhel also does not expect the majority of its micro and small-scale vendors in Tiruchi to shift to the ACF model, said Ramakrishna. Only 10 per cent of the existing vendors in Tiruchi have preferred to shift to the new model so far.
Local manufacturers had earlier expressed concern about Bhel’s emphasis on the ACF model, since they compete with bigger vendors from other parts of the country who do business with the company.