AUGUST 4, 2002
 Cover Story
 Personal Finance
 Case Game
 Back of the Book

Nasscom Does Some Brain Racking
Slowdown or not, NASSCOM is still eyeing Indian software revenues of $77 billion by 2008. Just what will make it happen? To get a strategy together, it got some top minds to meet in Hyderabad at the India it and ITEs Strategy Summit 2002. A report on what came of it.

Q&A With Ashraf Dimitri
The CEO of Oasis Technology, a key provider of e-payments software, tries to win over converts to a new system.

More Net Specials
Business Today,  July 21, 2002
At Work Profiting From Purchase
By transforming purchase into a radically new procurement system, GlaxoSmithKline Consumer India is saving crores of rupees that it, until recently, left on the supplier's table.
GlaxoSmithKline Consumer India Managing Director Simon Scarff

On a hot and humid day in the middle of May this year, traders at the barley mandi at Chomu (near Jaipur) were surprised to find an avuncular Englishman in their midst. Clad in a dark blue trouser and pink-coloured, buttoned-down shirt, trying to familiarise himself with the intricacies of the barley trade was Simon J. Scarff, the Managing Director of GlaxoSmithKline Consumer India (GSKCI), which owns some popular brands like Horlicks and Iodex.

Over the hours that followed, Scarff, a British national, sat in on an auction, chatted with brokers, and even figured out how to tell good barley from bad barley. (If you must know, experts go by something called thousand corn weight; a thousand corn of barley must weigh at least 43 grams.)

Although the 59-year-old Scarf had been running the India operations for more than two decades, it was his first trip to Chomu. Reason? Barley happens to be one of the biggest spend items for GSKCI. But more importantly, for more than a year now, the Indian subsidiary-following in the footsteps of its $29.5-billion parent-had taken up the challenge of making a radical shift from discrete purchase to integrated, cross-functional procurement.


Treat all work as a sequence of steps rather than tasks or stand-alone activities.
Treat all departments as internal customers, and focus on meeting their needs.
Manage business and work using facts and data as a basis for making decisions.
Waste, be it of time, money, decision-making, or energy, need to be eliminated.
Use the Plan-Do-Check-Act principle to plan and evaluate activities for continuous improvement.
Improvement effort must focus not on incremental but breakthrough results.

As the sponsor, Scarff had the job of putting the right team in place. The trip to Chomu, then, was his way of signalling to the organisation what he thought of procurement. Says Scarff: "Before the merger, procurement was getting little attention. Now, the idea is to develop that into skills that result in win-win deals for both GSK and its suppliers."

Historically, purchasing has been a backroom operation, with no perceived impact on corporate strategy. Even today in traditional companies, different divisions or businesses make their purchases separately. The production department, for instance, requisitions the purchase department for raw materials and consumables; the administration looks after travel, hotel bookings, and housekeeping. The finance team strike deals for insurance and bank charges. Purchase, therefore, happens in silos.

Somewhere down the line somebody woke up-in GSK's case it was Willie Deese, the head of global procurement-and saw what was happening: while the retail battle for profits and marketshares was getting fiercer with every passing day, purchase was actually leaving behind crores of rupees on the supplier table. It was time to say goodbye to plain vanilla purchase, and usher in strategic procurement. In other words, convert procurement into a profit machine. Does it work? Consider: In 2000 alone, the company, which spent $120 million (Rs 588 crore) on everything from barley to skimmed milk powder to packaging to travel, saved a staggering Rs 8 crore. Says Madhav Kurdekar, GSK's head of procurement for Asia Pacific: "The success of this model has encouraged many more of our internal stakeholders to give us their spend areas to manage."

The Paradigm Shift


This system resides on top of GSKCI's ERP system, and allows the procurement team and spend owners to look at best practices in the GSK network. It opens up new ways of doing things and saving costs. New "traks" are added periodically.
Pioneered by Motorola, and popularised by GE, this quality philosophy aims sky-high: an accuracy level of 99.99997 per cent. The core idea being that if variabilities in processes are eliminated, end-quality will automatically go up. Simple, isn't it?
Waste can manifest itself in many ways, including poorly manufactured products. Lean extends the concept to include everything from motion study of a worker to employment of capital and manpower to utilisation of factory space. The idea: do more with less.

Today, at GSKCI, the procurement intiative is structured to involve every key executive, right from Scarff to the category spend owner. Scarff is the sponsor, below him is the facilitator (usually the head of procurement, currently Mohit Jain, who leads a dedicated team of about 40), followed by the spend owner, and then the core, cross-functional team. Spend categories are broadly divided into production, non-production, and capital. Production spend, which accounts for half of all spend, covers raw materials, packaging, and freight and logistics. Non-production is sub-divided into marketing spend (involves expenses relating to advertising), manufacturing spend (on utilities, 'conversion', and consultancy), and administrative spend (on hotels, travel, and rentals).

It's always a cross-functional team that does the negotiations and buying. Any major spend begins with a cross-functional team being put together. A series of steps follow thereafter. First, the business requirements are taken into consideration. Then, all sources of supplies are researched, and the best options identified. Once a strategy for procurement is draw up, it is quickly escalated (if need be) to the management for approval. That done, the strategy is implemented, and it typically involves ensuring the company gets the product or service in order of its business imperatives. Says Jain: "We don't look for the lowest cost, but the best value."

Accordingly, GSKCI's "procurement alphabet", which is based on Maslow's hierarchy of needs, starts with an 'A'-assurance of supply-goes on to quality, service, and only then cost. Regulatory compliance is an all-encompassing issue, and determines whether the company will buy from a particular supplier or not. Often, GSKCI steps in to help vendors, if any innovations are required. Usually, though, most of its suppliers are self-capable of making and implementing changes in specifications to the company's requirement.


Dr Robert Kaplan, Marvin Bower Professor of Leadership and Development at the Harvard Business School and father of the Balanced Scorecard, was recently in Mumbai to talk on strategy-focused organisations. Excerpts from an interview with BT's .

Balanced Score and the current slowdown: One of the things we learnt after 9/11 is that as people have tied incentives and compensations to the balanced scorecard, there may be some apparent contradictions in measurement. For example, if your financials are doing terribly and you are running negative cash flows, and even if some of the scorecard measures say you should be paying bonuses, there may not be cash to pay. So, it has given us an awareness that maybe we have to use financial measures to determine when we have reached certain levels that allow us to pay the bonus.

The biggest challenge in implementing the Balanced Scorecard: When it is viewed narrowly as a better performance measurement system, and led more by middle management group. The problem: it is focused on improving the way we measure existing operations, but doesn't orient the organisation to a new strategy.

First was ABC, then Balanced scorecard. What next?
ABC has given us a way to represent cost curves in a multi-product and multi-customer environment. Balanced scorecard is like a multi-dimensional demand curve. What is it that causes people to buy from us. It's a way of representing what creates value. I am working within that framework and trying to expand its applicability into new sectors.

All procurement-pens and highlighters included-is done paperlessly on the company's ERP system, and a customised JD Edwards system (NIPP) for non-production spend. Another layer, called the Trak System, allows the procurement team to tap into the GSK network. For instance, a Spend Trak allows somebody sitting in Gurgaon to find out what is the category spend on, say, corrugated boxes in Guatemala. A Services Trak puts category-wise best practices on the tap; if you were a GSKCI procurement team member or a category spend owner and wanted to find out about innovations in procurement of skimmed milk powder, all you have to do is log on to the services trak.

The Pay-offs

Making the transition from purchasing to across-the-board procurement wasn't easy for GSKCI, though. As in any corporation, there was resistance to change, compounded by the fact that the company was already handsomely profitable ("So, why change?" was the frequent question from skeptics). But since it was a global initiative, it was made clear to people that they had to fall in or fall out. Simultaneously, the company worked on identifying the gaps between existing and required skills, and addressed that through training.

Explains P. Dwarakanath, Director (HR), GSKCI: "What is most important in such initiatives is strategic communication; if you can convincingly explain the what, how and why of it, you can achieve a complete buy-in."

That's what happened when the company decided to consolidate its hotel room purchases for managers and above. Instead of arbitrarily deciding on a supplier based on price, the procurement team went around mapping the requirements of its internal customers. Did they want airport pick-up, breakfast...even a pressing iron in the room. Based on that, Grand Hyatt was identified as the supplier of choice. The result: while there was no loss in either comfort or convenience of its managers, GSKCI slashed hotel costs by a whopping 20 per cent.

In the case of vendors, it was a little harder. For one, most vendors were used to face-to-face meetings. But the use of internet for procurement made the exercise a lot more impersonal, albeit transparent. For example, when GSKCI decided to invite online bids for transportation, most of the fleet owners hadn't seen a computer, let alone make bids online.

With some help from the company-including an e-procurement expert from, Belgium-transporters were able to make their bids. The payoff for GSKCI: contract negotiations that took two months off -line, could now be wrapped up in less than a week.

The Procurement Dimension

Rs 588 crore
Rs 1,100 crore
Barley, skimmed milk powder
Nutritional, oral care, OTC

Active and major suppliers

The bigger benefits, however, flow from the change in mindset that the new procurement model has been able to effect. Earlier, no one person or a set of people was responsible for innovations. Now, the procurement team and the spend owner are both responsible for spotting opportunities and capitalising on them.

Therefore, recently, when the spend owner for barley found that a huge amount of stock was piled up with the Rajasthan government, he quickly swung into action, made a case for buying a part of the stock, and along with the procurement team was able to bid for some 40,000 bags of barley, in the process saving the company 50,000 pounds (Rs 3.95 crore).

Similarly, when faced with the challenge of cutting packaging costs for its Horlicks brand, the cross-functional procurement team found ways to move from foil to non-foil material, without affecting the efficacy or aesthetics of it. But in terms of costs, packaging was 7 to 10 per cent cheaper. "When the lemon is dry, squeezing it harder only makes it sour," says Jain, explaining why value engineering is better than putting a gun to suppliers' head.

That's more so in the case of FMCG business, where the topline growth is almost non-existent for most companies. Therefore, companies are forced to increasingly focus on supplychain as an area for cost reduction. Fortunately for GSKCI, though, its purchasing profit machine has only just begun humming.

Other Story Links...