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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 business.

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 reliable manner.

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 billion.

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.

Corporate initiative

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 different places."

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," said Jayanty.

PRODUCT LINES

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 (HPAC).

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).

Codes

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)."

MIN Dataflow

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.

Commodity managers

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 for materials.

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 this.

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 procurement projects.

More Benefits

Since MIN contains consolidated procurement and material information for the whole group, the various divisions that access this can benefit in a number of ways.

The primary benefit is cost savings in material procurement. This can be achieved through price parity analyses, supplier consolidation, and increased raw material leverage.

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 consolidation.

As this supplier will get a substantial business from Emerson as a whole, price discounts can be negotiated, leading to further savings.

ENPIL benefits

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.

Beyond MIN

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 via SMS.

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 brianp@networkmagazineindia.com

In a nutshell

The company

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.

The need

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.

The solution

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.

The benefits

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.


Reverse auctions for the best deal

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.

Benefits

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.


INFLATION MODEL

This software tool enables a division to proactively plan projects for procurement price improvement, and to track and monitor such projects.

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 price reductions.

"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, ENPIL.

 
     
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