Hindustan Motors – Shaving-off Procurement Cost Through Reverse Auction

Hindustan Motors is one of the leading manufacturers of automobiles (both passenger and com­mercial vehicles) in India. HM started its manufacturing activities way back in 1945 with one model in the passenger car segment, that is Ambassador. In the 1980s it introduced Contessa in the luxury car segment. However, the model got phased out as it could not stand against foreign competition after the Indian economy opened up in 1991. Thereafter, HM went into collaboration with Mit­subishi of Japan to manufacture Lancer and Pajero from 2000 onwards. Ambassador is still being manufactured; however, the numbers are reducing every year due to competitive markets. Owing to international competition and slowing down of the economy, HM started facing a shrinkage in margins. To ease out the problem, HM looked into their logistics and supply chain cost. One of the areas they could identify was the procurement cost of raw materials, parts and components. The first attack was on the standard items without much technical complexities. The product category identified was lubes and oils. They discovered that the transaction (purchase process) cost could be reduced to a large extent by resorting to reverse auction as against the conventional method that is time consuming. However, HM did not have the necessary infrastructure to conduct reverse auction (commonly known as the e-procurement process).

They invited WIPRO’s “01markets”—e-procurement service provider—which had the reverse auction software to conduct the reverse auction process. “01markets” offers consultancy in the areas of expenditure analysis, category analysis and procurement-to-payment process. The company offers reverse auction services that help buyers reduce the cost of direct and indirect materials and discover new suppliers. In its solutions, “01markets” designs and implements e-procurement and e-sourcing strategies for customers. Its solutions also include reverse and forward auctions, Request for Quotation (RFQ) bidding, online negotiations, procurement catalogues and workflow, strategic sourc­ing management (expenditure analysis), and supplier relationship management. The company esti­mates that the clients’ savings are between 2 and 22 per cent on their purchases, with an average saving of 10 per cent across all product categories.

Estimated at a total INR 37.8 million, Hindustan Motors’ requirements of lubes and oil are spread across six categories—cutting oil, gear oil, hydraulic oil, engine coolant, engine oil and coolants. The requirement was consolidated across the company’s factories at Chennai, Indore and Kolkata. The estimated requirement was INR 37.9 millions. The Olmarkets’ e-procurement team understood and consolidated HML’s requirements, studied the market dynamics and prepared a total cost request for proposal (RFP). The RFP was served to a potential base of over 20 suppliers, including incumbent suppliers in all categories. These suppliers were distributed across Mumbai, New Delhi, Chennai, Kolkata and Ranchi. Looking into the category versus the supplier base matrix, it became clear that it would be necessary to conduct six online auction events, one for each category. In the final analysis there was a saving of INR 7.3 million or 28 per cent on the histori­cal price. The Olmarkets’ e-procurement team, consisting of analysts and consultants, swung into action. The day and the time for the reverse auction was fixed and was conveyed to the bidders. Suppliers were contacted, familiarized with the RFP and trained for the actual bidding marathon. The suppliers logged on to reverse auction website on the day and time already fixed up.

As lot after lot went up for bidding, the price graphs went on a massive downward dive. Lot 1 started early in the morning and delivered a saving of 11.9 per cent over the current buying price. Lot 2 delivered a huge 21.5 per cent cut in prices.

The biggest one, Lot 6, representing 50 per cent of the total requirement by value, was the last to go up for bidding. By the time it was all over with Lot 6, Hindustan Motors had saved a whopping 28 per cent on the historical price. Over 125 bids were received during more than eight hours of bidding. In nutshell, HM could save over INR 7.3 million on a purchase bill of INR 37.8 million—a saving of over 19 per cent. For “01markets” it was a mega success.

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.

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