Traditional Purchase to Strategic Sourcing

Introduction

Today the procurement function of most of the high-technology companies encompasses every effort and interaction that goes into planning, sourcing, making and delivering a final product. It is not confined to activities such as floating enquiries, receiving bids and placing orders. Since material cost accounts for over 50 per cent of the total cost of production of steel, efficient functioning of material management has received greater attention and sourcing has been identified as one of the thrust areas for improvement in most of the steel manufacturing companies.

2 Recent Changes in Procurement Practices Worldwide 

Organizations have become very much concerned about the purchasing activities as these have a direct bottom-line impact on the business profit of the company. To handle these activities in a more systematic and structured way many companies all over the world are following a process called ‘strategic sourcing’. Through strategic sourcing, organizations are achieving a substantial amount of savings through the adoption of different techno-commercial, cost-effective measures and leveraging the knowledge and capab’iVil’ies 0\ Vr>e suppers \n\\o can o^w ^e >aost quality products and services. Strategic sourcing has been defined as ‘a disciplined, systematic process for reducing the total procurement coste o\ externally purchased materials, products and services while maintaining or improving.

levels of quality, service and technology/Today the focus is on Total Cost of Ownership (TCO) not the purchase price. TCO is a structured approach to properly understand the (a) different costs involved so as to get a holistic approach towards the overall costs and (b) the technical aspects of the commodity.

3 Procurement Division ofTata Steel: Formation of Strategic Sourcing

Prior to strategic sourcing, the procurement division of Tata Steel was a typical purchase organization driven by transactions and negotiations focused on price reduction only, with limited knowledge about the commodity and its end use in the process of steel-making.
Over the years, this division has changed itself from a transactional unit to a knowledge-based buying organization through the evolution processes it has undergone over the last five years (see Figure”!). After the introduction of strategic sourcing in 1999, the key service of the division has been identified as fulfilment of a customer’s requirement through knowledge-based sourcing of different commodities, as well as services, related directly or indirectly to steel-making processes. The differences between a standard negotiation process and a strategic sourcing process have been shown broadly in Figure2.

Figure 1: Evolution of Procurement Organization atTata Steel

Flg.2: Difference in Negotiation Approach with the Introduction of Strategic Sourcing

3.1 Strategic Sourcing Approach

Tata Steel’s approach is based on the principle that strategic procurement is an exercise beyond cost reduction. Commodities used for steel-making processes and their allied services are being selected and prioritized for study using strategic sourcing tools, before their annual procurement, depending upon their annual purchase value and criticality of application. After the selection of the commodities, a Commodity Competence Team (CCT) is formed which is a cross-functional team wherein people from different departments such as User/Operation, Research and Development, Quality Control, MRO, Supply Management and Finance come together to formulate sourcing strategies for a commodity purely on a techno-commercial basis. After the formation of the CCT, the commodity studies are carried out based on different technical and commercial parameters as shown in Figure 3. The steps followed for commodity studies have been shown in Figure 4.

3.2 Strategic Sourcing Levers

Strategic sourcing requires the application and interpretation of sophisticated strategic sourcing tools and techniques. Tata Steel follows a variety of sourcing strategies, as shown in Figure 5, with multifarious objectiveswhich are mentioned below:

• Decrease specific consumption and specific cost of commodities on life-cycle costing basis.
• Source consistent quality products.
• Ensure continuous supply of materials.
• To increase the productivity of blast furnaces or steel-Melting shops by decreasing the down time through the use of improved quality, cost-effective materials, wherever applicable.

4 Implementation of Strategic Sourcing Levers-TCO approach

4 Total Refractory Management of Cast House Refractories for a High-capacity Blast Furnace at Tata Steel

4.1.1 Objective

Molten iron and slag produced in the blast furnace are removed and separated in the cast house. Molten metal, produced in the blast Furnace, comes out from the taphole and falls into the trough and after passing through it finally enters the torpedo ladle which is used for the transportation of hot metal from the blast furnace to the steel-melting shop. Amongst the many factors responsible for ensuring high productivity from blast furnaces, efficient cast house practices are quite important and the quality of cast house refractories (i.e. taphole clay and trough castable/mix) is a critical[ parameter.

So the basic objectives of this study are:
• Problem-free blast furnace operation,
• Increase in productivity of the furnace,
• Decrease in specific consumption (kg/tonne of hot metal) as well as specific cost (Rs/thm throughput) by studying different techno-commercial aspects of cast house refractories.

4.1.2 Total Refractory Management Concept

To ensure the quality of refractories, proper service and the life of cast house runners which are directly related to the hot metal production and also to decrease the total cost of ownership on a life-cycle costing basis, a strategic decision was taken to go for ‘total refractory management’. In the total refractory management of cast house troughs for high-capacity blast furnaces, the supplier is responsible for the supply of the entire refractory material for all the locations of cast house troughs, initial installation, regular supervision, maintenance of troughs through casting till guaranteed throughput hot metal is achieved and the supply of all kinds of equipments required for installation and maintenance of cast houses.

4.1.3 Vendor Selection through comparative assessment

A comparative analysis of the suppliers was carried out based on parameters, which includes total throughput commitment of hot metal, throughput of hot metal committed in between two repairs, total down time of trough runners, a reference list of a supplier’s customers, quality of refractories to be used and life-cycle cost of refractories in terms of Rs/ tonne of hot metal (Rs/thm).

4.1.4 Reduction of Life-cycle cost

A reduction of the total life-cycle cost.of refractories, in terms of Rs/thm, has been done by proper selection of material, optimization of its amount to achieve the guaranteed throughput and finally by knowledge-based negotiation.

4.1.5 Benefit to Tata Steel

• Reduced down time of the trough runners leading to higher rate of production.
• Reduced specific consumption of refractory in terms of kg/thm.
• Reduced overall cost of ownership due to higher campaign life of refractories and also due to higher rate of production, as the productivity of the blast furnace largely depends on the quality of refractories used at the cast house.

Figure 5: Different Sourcing Levers Applied for Procurement of High Value and Critical Commodities

4.2 Procurement of Aluminium

4.2.1 Objective

Different forms of aluminium (notch bar, cube and aluminium wire) are used at different stages of steel-making to kill the oxygen in the slag, and hot metal as well as to achieve the desired chemistry. The basic objective of this study was to decrease the specific cost of aluminium, in terms of Rs/ tonne of crude steel (Rs/tcs), by decreasing the specific consumption of aluminium in terms of kg/tcs through the application of various levers of strategic sourcing.

4.2.2 Product Substitution

The use of aluminium wire, replacing the aluminium notch Bar and cube has provided a substantial amount of benefit in terms of reduced specific consumption and cost due to the following reasons:
• Aluminium wire deep penetration-up to bottom part of the ladle.
• Better stirring and faster deoxidation.
• Higher recovery of aluminium due to less vaporization loss.
• Reduces the specific cost of aluminium in terms of Rs/tcs due to the much higher recovery of aluminium.

4.2.3 Benefit to Tata Steel

Decrease of specific cost of aluminium by six to eight per cent due to the decrease of specific consumption.

4.3 Commodity Study on Desulphurization Compound

4.3.1 Objective of the Study

The desulphurizing compounds (DS) are used to remove sulphur (S) from hot metal. These compounds are basically a mechanical mixture of two major components—CaC2 and CaO. Worldwide, the current trend in the steel industry is towards lower cost and higher quality products. The study focused on the entire desulphurization process along with the specification of the DS compounds to find out the scope for bringing down the total procurement cost of the DS compounds without affecting the quality of steel, as well as without increasing the overall cost of the desulphurization process.

4.3.2 Development of Cost Effective Improved Quality new DS Compound-Changes in Specification:

A limerichDS compound was developed after conducting a series of successful trials, replacing the carbide-rich compound. The newly developed compound has been used continuously over the last four years, replacing a high-cost calcium-carbide-rich compound.The trial results were analysed based on the following factors:

• Comparison of per cent success rate in terms of achieving the target S of hot metal-Carbide-rich compound vs lime-rich compound.
• Specific consumption, kg/tonne of hot metal.
• I njection time-Flow rate of new compound. The success of the Lime-rich compound over the carbide-rich compound is due to the following factors:
• Theoretically, lime can remove more S than calcium carbide.
• The amount of highly reactive soft burnt lime is more in the new compound.

4.3.3 Benefit toTata Steel

The lower specific cost of the DS compound in terms of Rs/tonne of hot metal has reduced the total procurement value of DS compounds by 25 per cent.

4.4 Procurement of Graphite Electrodes on Life Cycle Costing Basis

The graphite electrodes are used in ladle furnaces to maintain the required melting temperature of steel. Continuous development of the operational efficiency of ladle furnaces requires graphite electrodes of very high quality with an emphasis on better consumption norms and least electromechanical problems. The commodity study on graphite electrodes had the following basic objectives:

1. To use consistent high-quality electrodes to decrease the specific consumption of electrodes in terms of kg/tcs as well as electromechanical problems as far as possible.

2. To increase the availability/turnaround time of ladle furnaces by increasing the length of UHP-grade electrodes.

3. To decrease the life-cycle cost of graphite electrodes in terms of Rs/ tcs through knowledge-based negotiation.

4.4.1 Procurement Strategies:

To fulfil the above mentioned objectives the following procurement strategies were adopted.
• A knowledge-based negotiation was conducted based on the cost model developed, (dentirymg the major cost drivers and a comprehensive analysis of the key players of graphite electrodes in India as well as abroad.
• Formulation and incorporation of performance guarantee clauses.
• Change in specification.

4.4.2 Performance Guarantee Clause

The different parameters which influence the erosion of graphite electrodes during their operation at high temperatures, i.e. 16501700oC, were studied thoroughly.
A strong correlation was observed when the actual specific consumption of graphite electrode (kg/ton of crude steel), obtained during operation, was plotted against the corresponding specific power consumption (kwh/ ton of crude steel). The correlation coefficient, i.e. R2 value, was more than.

4.4.3 Benefit to Tata Steel

The commodity study on graphite electrodes has resulted in a savings of almost 20 per cent of their annual procurement value due to the adoption of the following strategies:

a. Knowledge-based negotiation.
b. incorporation of performance guarantee clauses.
c. Life-cycle costing analysis of products sourced from different vendors-performance-based procurement

5.0 Conclusion

The strategic sourcing methodology in Tata Steel utilizes a phased management process, cross-functional teams and a set of analytical tools. Value is created by better buying decisions because buying decisions have become business decisions. The structured methodology of strategic sourcing activities in Tata Steel helps to lower the total cost of procurement of different commodities, considering both the tangible and intangible benefits, by studying and analysing the techno-commercial aspects mainly on a life-cycle costing basis wherever possible and this has helped Tata Steel to become one of the lowest-cost producers of steel in the world. With the implementation of strategic sourcing principles in most of the high-value and critical commodities, before their procurement, the steel company is achieving not only a substantial amount of savings but also strengthening the ties with suppliers offering the best quality products and services.