Material Information Network
MIN-cing material costs
Materials management is an important matter at Emerson Network Power (India)
Private Limited. The company found that material costs are between 60 and 70
percent of the cost of goods sold. So it made innovative use of a database and
some tools to cut costs. by Brian Pereira
The Emerson Electric Group (EEG) companies rely heavily on suppliers for raw
materials and components that go into its product lines. And being a global
organization involved in the manufacture, sales and service of process control
systems, industrial automation, precision air-conditioning, UPS, professional
tools, and appliances, the relationships with the suppliers is vital to the
The companies realized that material costs make up between 60 and 70 percent
of the cost of goods sold. So, EEG began to look for a way to cut spending on
raw materials and components.
It developed a solution in the form of a Material Information Network (MIN).
MIN is a centralized procurement database, which complements online reverse
auction events, and an Inflation Model. By using MIN and the associated tools,
the group companies including Emerson Network Power (India) Private Limited
(ENPIL) were able to source its raw materials in a faster, cheaper, and more
And by leveraging on the information in the MIN database, ENPIL can use the
Inflation Model to plan projects for procurement price improvement, and track
and monitor these projects.
The business model
EEG is based in St. Louis, Missouri, USA. and has eight broad divisions (with
subsidiaries) located around the world. Emerson Network Power (ENP) is one such
division, and it accounts for $2 billion of the total Group turnover of $15
ENPIL, formerly Tata Liebert, is a 100 percent subsidiary of ENP. The 350-employee
company has branch offices in around 15 nationwide towns. The head office and
factory (manufacturing) is located at Thane, Maharashtra. The other offices
handle sales and service and are interconnected through a WAN.
The company has 50 business partners (dealers) who already have access to the
network and it plans to connect to supplier networks.
MIN, a centralized procurement database, is an Emerson corporate initiative.
The procurement and material information in the database from all Emerson divisions
is shared by the group companies and divisions. Although most of the divisions
operate independently, they interact with each other based on this information
to keep a check on material cost.
L.N. Jayanty, Vice President-Operations, ENPIL said, "The objective of
MIN is to control inflation because material prices keep changing and there
is a lot of disparity when different divisions of Emerson make purchases in
Since information about suppliers and material costs are consolidated, one can
search for the best prices and suppliers. "Being a global organization
gives us that capability. It enables us to consolidate orders and suppliers,"
ENPIL currently has seven finished product lines that are distributed between
its three divisions. Product lines are independent of brands and each product
line could have one or more brands.
ENPIL deals primarily with the following product lines:
1. UPS-AC power systems
2. DC power systems (typical Telco products)
3. Precision air-conditioning (for the critical equipment used in IT, Telecom
and process industry). This is also referred to as High-Performance Air-Conditioning
In addition, it has an after-sales service division that deals with installation
and commission, warranty, and AMCs. This division is called Emerson Network
Power Global Service (ENPGS).
All material required for manufacture are classified and registered in MIN using
commodity codes. MIN currently has 629 unique commodity codes called Data Research
Institute (DRI) codes.
Likewise, the Emerson divisions purchase material from various suppliers at
a global level. So each supplier has been allotted a Duns number (by Dun &
Bradstreet). The Duns numbers (referred to as D&B D-U-N-S Number) are also
entered in the MIN database.
Royston Fernandes, Champion, Supply Chain Management, Emerson Network Power
(India) said, "MIN rests on two pillars, the DRI codes (for parts) and
the Duns number (for suppliers)."
The Emerson divisions around the world have their own ERP and MRP systems. Once
a month (before the 10th day) these divisions upload data to the central server
at the HQ. This data is validated and put in the MIN database. So by the 15th
day it is available for all the divisions to access.
"This is more relevant to the Emerson companies that perform manufacturing,
and Emerson has more than 300 plant companies around the world," said Jayanty.
Every group company submits two types of data, static data (submitted quarterly)
and dynamic data (submitted monthly). All this data is consolidated into fact
tables which have dimensions like commodity, supplier, organization, and time.
Dimensions are used to query the fact tables at different levels.
The MIN database can be queried and the data analyzed using a database application
called Explore. Explore organizes data in a consistent manner so that the users
can query information in various ways.
By using MIN, an Emerson division can get the best deal on materials. A team
of Commodity Managers at the corporate HQ in St. Louis, negotiate with suppliers
for the Emerson group as a whole.
The corporate commodity managers are responsible for different commodities across
Emerson divisions like Steel, switchgear, active components, etc. They monitor
the global market for commodities and help divisions in sourcing and negotiating
Commodity managers analyze all the information uploaded by the various divisions
and revert for clarifications. Orders are then consolidated and supplier negotiations
are initiated. Orders are placed through a process called reverse auctions (See
'Reverse Auctions for the best deal') and a company called FreeMarkets enables
The commodity managers are in touch with the global suppliers and are knowledgeable
about their business plans like expansion, diversification, and acquisitions.
Hence the Emerson divisions can leverage on such market intelligence while planning
Since MIN contains consolidated procurement and material information for the
whole group, the various divisions that access this can benefit in a number
The primary benefit is cost savings in material procurement. This can be achieved
through price parity analyses, supplier consolidation, and increased raw material
To elaborate: price parity refers to the comparison of prices paid by different
Emerson companies for the same item procured from different sources. This information
enables procurement from the lowest price source.
Demand for items common to different Emerson companies can be consolidated and
sourced from a single supplier who offers the best price, thus leading to suppler
As this supplier will get a substantial business from Emerson as a whole, price
discounts can be negotiated, leading to further savings.
ENPIL has benefited from this corporate initiative in the following ways:
- The visibility of ENPIL's spend to the Emerson corporate is driving the
inclusion of ENPIL in Global Emerson Corporate Freemarket Reverse Auction
Events (See sidebar). ENPIL participated in a Global Reverse Auction for fans
last year and realized some savings.
- MIN provides a source for identifying alternate suppliers of items used
across different Emerson companies. One such supplier was identified for a
type of capacitor purchased by ENPIL. This supplier was already supplying
another Emerson company and hence offered a discount to ENPIL for supplying
the same capacitor.
- MIN also identifies opportunities for negotiation with existing suppliers.
For instance, an Emerson company is combining its spend on IGBTs (Insulated
Gate Bipolar Transistors) with that of ENPIL, and is using the combined spend
as added leverage to negotiate with the supplier to both companies. The resultant
saving will be passed on to ENPIL.
- Price disparities are also identifiable using MIN. ENPIL found a supplier
who was supplying a component to it and was also supplying the same component
to another Emerson company at a lesser price. This information was used to
negotiate a lower price for the component with the supplier.
MIN and FreeMarkets are the foundation of a larger IT initiative at Emerson.
"ERP, MIN and FreeMarkets constituted Phase-1 (Dec 2002 - May 2003) of
our IT initiative. Last year we focussed on the eCRM (Phase-2), and for this
the company has implemented a Sales Force Automation module. With this ENPIL's
sales force can log in customer interactions/transactions into the company's
network, get up-to-date status on the order pipeline and keep track of orders
as they get duly processed," informed R.S. Nalakumar, Corporate Champion,
IT & E-business, ENPIL.
In Phase-3, the company will focus on DSS (decision support system), a combination
of data warehouse and data mining tools that help in quick analysis, to find
out various trends in the Sales and Inventory module.
In Phase-4 ENPIL will introduce the eBuy module, a direct interface between
ENPIL's ERP network and the company's suppliers. ENPI has also installed an
SMS engine in the design structure of the module, thereby allowing for alerts
Explained Nalakumar, "This will take care of data communication between
the ERP system and the supplier. When a division places a purchase order, it
will be published on the eBuy website. The supplier can acknowledge the order
on the website and can post the status of shipments so we would be aware about
the status of goods in transit."
In Phase-5 there are plans for the eSell module that would essentially monitor
sales across India by creating a direct interface with ENPIL's Business Partners
(BPs). Currently, the company has launched a website for its BPs for sharing
a status on claims.
Brian Pereira can be reached at firstname.lastname@example.org
Emerson Network Power (India)
Private Limited (ENPIL) is a 100 percent subsidiary of Emerson Network
Power (ENP). The parent company the Emerson Electric Group (EEG), operates
in seven countries and has eight broad divisions, Emerson Network Power
(ENP) being one of them. ENP accounts for $2 billion of the total Group
turnover of $15 billion.
Material cost comprised
between 60 and 70 percent of the cost of goods sold. EEG wanted a way
to control cost of raw materials. It felt the need for a system that keeps
check on inflation, as material prices kept changing. The information
in the system would also need to support planning for future projects.
By consolidating material,
orders, and suppliers for the various group companies at a global level,
EEG was able to bring down costs through volume discounts. A centralized
database (MIN), online reverse auction events, and the Inflation Model
are the tools that made this possible.
With MIN and the associated
tools ENPIL can now source its raw materials in a faster, cheaper, and
more reliable manner.
Leveraging on the information
in the MIN database, ENPIL can also use the Inflation Model to plan projects
for procurement price improvement, and to track and monitor these projects.
Divisions within the Emerson
Group regularly participate in online reverse auctions to buy material
and components from global suppliers.
Online reverse auctions
are fixed-duration bidding events hosted by a single buyer, in which multiple
suppliers compete for business. In a reverse auction, the buyer places
an enquiry and multiple sellers quote their most competitive price against
the enquiry. The buyer opts for the most competitive quote based on the
best terms offered.
Bidders (suppliers) are
pre-qualified and when the auction begins, they bid what they will charge
to supply a commodity. This bidding is online over the Internet and hence
the physical location of the supplier is not a constraint. This process
of buying helps the buyer leverage the power of the Internet, whereby
he has greater control over the purchases, increased liquidity, and a
competitive price determined by the market forces. It also enables reduced
procurement cycle times.
Emerson has partnered with
a company called FreeMarkets for online reverse auctions.
ENPIL has benefited from
reverse auctions in several ways. It was able to leverage the large volumes
being purchased by other Emerson divisions, to obtain more competitive
prices from global suppliers. This process has helped it expand its supply
base, as the entire supply base of Emerson and FreeMarkets is available.
Reverse auctions help to
identify the best sources and prices globally. And this process has exposed
Emerson Network Power's Indian suppliers to global competition. Some of
the local Indian suppliers have as a result been able to obtain business
on a global scale.
Proponents claim reverse
auctions can lower the cost of procuring products and services by as much
as 20 percent, making them the e-business application of choice for companies
faced with declining sales and margins.
This software tool enables a division to proactively
plan projects for procurement price improvement, and to track and monitor
The Inflation Model gets its base procurement data
from MIN. Using this base data, each division specifies the different
procurement projects it will be undertaking every year to obtain procurement
"We have set an Inflation Model target of
-3.5%, which means we will try to reduce our direct material costs by
3.5% this year, said L.N. Jayanty, Sr. Vice President-Operations,