|GlaxoSmithKline Consumer India Managing Director
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.
THE PROCUREMENT MANTRA
Treat all work
as a sequence of steps rather than tasks or stand-alone activities.
departments as internal customers, and focus on meeting their
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.
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
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,
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.
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
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
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 Procurement Dimension
Rs 1,100 crore
|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
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.