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.

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

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.

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 Freemarkets.com, 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 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.