"Today, when industry is feeling an acute need for cost leadership, e-sourcing is becoming a business compulsion." Amit Bhatia, Country Manager, Freemarkets

Ashish Kaul was trying to bring down his oil bill. Like any dynamic manager looking to cut costs, Kaul was willing to try new techniques. He was cautious, putting just one major material-whose sourcing was not a cross-functional responsibility-to the test. So Kaul, General Manager (Supply Chain) of airconditioner maker Carrier Aircon, decided to use the internet to buy 2 lakh litres of compressor oil. He approached Freemarkets India, the local arm of an international e-sourcing provider. As it turned out, the e-sourcing-the technique of gathering suppliers at a pre-appointed internet address and allowing them to bid for the contract-was a big hit. The participants were nine large oil companies: three Indian public sector giants competed with Castrol, Shell, and other MNCs.

	Thy Hand, Great Anarch
	Cheap Ain't Best

After the reverse auction, as the bid is called, was over, Carrier found it had saved 12 per cent-and this when oil prices were going up worldwide and oil PSUs had a history of being notoriously intransigent on price. e-Sourcing itself is not new to India. It came in with the dotcom boom. But this is the first time that large companies are actually trying out large purchases on the internet-not easy given the complexities of rationalising sources, material orders, and the process itself, online. Kaul appreciates the planning and technology that made the compressor oil deal happen. "The real value has been managing the back-end operations throughout the event,'' says Kaul.

It's an evolving market. None of the 30 e-sourcing providers in India makes money. While Freemarkets has done Rs 1,000 crore of e-sourcing in India since mid-1999, saving companies over Rs 120 crore in the process, it has only just broken even in India with revenues of more than Rs 15 crore.

1 IF YOU'RE BIG, BE BOLD
Big companies can make big savings

Normal buying procedures in big companies can be cumbersome. A manufacturer typically sends out request for quotations (RFQs) to its existing and possible new suppliers, with the specifications for the component, a few months before a contract expires. Traditionally, RFQs don't spell out a lot of important items, but an e-sourcer standardises just about every item in the RFQ. It's different from traditional sealed bids where every supplier can only guess his competitor's price. Online bidding is transparent: every participant can see competitor prices in real-time. This worked well for Telco when the auto giant was on a cost-cutting spree last year. Execs decided to take to e-sourcing in a big way by offering Rs 400 crore of material (a tenth of total direct material cost) online, including bearings and tyres. As opposed to its normal two-month process of exhaustive negotiations with tyre companies, Telco saw the online reverse auction for its entire batch of materials conducted by Freemarkets take just over two days. By the end of the process, Telco's 1,100 suppliers were consolidated to 700, Chinese suppliers offered cheaper bearings, and Telco saved Rs 38 crore in 12 product categories after the first phase, which ended in December 2001. ''We are definitely looking at e-sourcing on a long term basis,'' says V.N. Bedekar, Deputy General Manager (Procurement), Telco.

2 OFFER SIMPLE ITEMS
High on volume, low on complexity

Companies that do e-sourcing for you will first conduct an "opportunity assessment" with you to help decide items suited for e-sourcing. Telco's Bedekar is e-sourcing items where the volumes are high and complexity low, like bearings and tyres. Carrier and Freemarkets identified ocean freight, powder paints, lube oils, capacitors, and thermostats. ''Categories where competitiveness and ease of changeover are the maximum are most compatible to the e-sourcing model,'' says Kaul. In some categories like ocean freight, Carrier had 17 international suppliers. Dealing with each of them in a manual process was getting to be a logistical nightmare. Hiring Freemarkets with its multinational presence helped because even talking to a Korean supplier could otherwise be a problem. e-Sourcing companies also help bring in fresh suppliers.

''We have chosen product categories where new suppliers could be identified and brought in,'' says Subhash Gupta, coo of US auto component maker Dana Spicer India, which identified forgings, castings and bearings for e-sourcing.

3 OUTSOURCE E-SOURCING
Do-it-yourself is good for smaller spends

Companies often face a dilemma on whether to bring in an e-sourcing specialist or buy their own software. You can, of course, do a bit of both. GlaxoSmithKline has moved on to a self-service platform for managing smaller spends. ''Smaller spends need a simple process and not the elaborate sourcing processes for their buyers,'' says Amit Bhatia, Country Manager, Freemarkets. Telco, after finishing the first phase by totally outsourcing to Freemarkets, has chosen a mix of both solutions for phase II: full outsourcing of critical and complex spends; self-help for simpler items like tools and consumables. Solution providers like Commerce One and Ariba, both US companies with Indian branches, offer software solutions and have tie-ups with other consultants. Carrier's Kaul feels things will ultimately move towards owning your own software. But he agrees that it's best initially to let the entire process be handled by professionals. Remember, the market is full of e-sourcing providers, most of them converted b2b dotcoms.

"We have managed to save up to 13 per cent (in supply cost) through some international auctions." Ashish Kaul, General Manager, Carrier Aircon

4 KNOW YOUR SUPPLIER
New suppliers could easily be unreliable

Companies often need to validate newly introduced suppliers before allowing them to bid for an auction. Emersen Electric, a $16-billion US company, which operates a sourcing office in India, had to prequalify buyers before allowing them into the auctions after one bad experience. Emersen conducted a study, which revealed that in the bidding for 100 lots, the bids for 40 lots were from Indian suppliers, many of them unreliable. Only about six finally got the business. ''Though participation has increased, actual business has not risen,'' observes Manoj Kulkarni, India Procurement Manager, Emersen Electric. Some suppliers who participate either do not have the required capacity or the technology. A Telco team is just back after visiting some supplier facilities in China and is now validating their products. The company also has to do a balancing act with suppliers who have often worked with it for a long period. Supplier relationships can be a problem. In a recent Dana Spicer auction, two existing suppliers did reduce prices, but others, miffed, stuck to existing prices even at the online auction.

5 GET TOP APPROVAL
e-Sourcing has to be top-management driven

Top management has to spare enough time and effort to make e-sourcing work. Telco Executive Director Ravi Kant, Indo Rama President O.P. Lohia and Dana's Gupta have been involved in implementing e-sourcing. Freemarkets had 40 meetings with Telco's team in Pune and Jamshedpur to understand its requirements and identify cost-reduction opportunities. A 30-minute auction could well be preceded by 45 days of ground work. ''e-Sourcing is largely about a change in thinking," reasons Ravi Kumaraswamy, Group Director (Sales), Freemarkets India. There are still no long-term commitments from corporates: most use online exchanges for one-off events. "Corporates are realising the benefits slowly," says Subroto Bannerjee, ceo, Trade2gain, which has tied up with Ariba. And then, of course, purchasing departments will have to come to terms with no 'Diwali gifts', those touchy-feely annual bonanzas from suppliers.