Procurement practices are constantly being redefined, yet understanding of technology and competition is still young, say experts.
AK Das Sharma, General Manager (Supply Chain Management), Tata Projects Limited, whose order book value is approximately Rs 8,000 crore.
Amit Gupta, CEO Pipelines, Essar Projects, whose portfolio, which includes India's first 48″ gas pipeline from Vijaipur to Dadri.
Abhijit Avarsekar, Vice Chairman and Managing Director, Unity Infra Projects, which has expanded from construction to EPC in water and roads.
Ravi Raina, President, Astonfield Renewables, an emerging solar power EPC player in India.
Satish Parakh, Managing Director, Ashoka Buildcon, whose EPC division procures material for the company's road construction; the company has 21 BOT projects.
Shyam Bagrodia, Group President Procurement, Essar Group, whose quantum of procurement per year is Rs 19,200 crore excluding raw material purchase.
About 60 percent of an Engineering, Procurement, Construction (EPC) project cost goes to procurement. Have you seen an evolution from procurement to supply chain management?
Yes, procurement now does not stop at placing the order, but also enÂcompasses logistics coordination, expediting, tariff engineering and matÂerial coordination. Key elements of the supply chain management (SCM) which have now become integrated with proÂcurement are stroÂng emphasis on quaÂlity, timely delivery and price with suitable organiÂsational struÂcture to support the requireÂments within each of these criteria.
In recent years, SCM's role in the value chain has been re-evaluated and procurement has been identified as a critical activity. At Tata Projects Ltd (TPL), the methods used in the various areas of procurement which include sourcing, distribution, storage, disÂposal and supÂporting activities changed significantly. We have moved to a long-term approach we call supply chain-based procurement, where instead of being an isolated function, procurement becomes a part of the strategic value creation process.
There is a move to have dedicated vendors who are an integral part of supply chain with direct interface with the engineering and design teams, just needing approval from the procurement division of the EPC to start manufacturing of standard product or mobilise needed services. This supply chain relationship leads to drastically cut prices for components as competence capacity to supply is already pre-assessed and agreed upon beforehand.
How have procurement mechanisms progressed in EPC contracts in terms of quality, upgrade of technologies and competitiveness?
Modern procurement mechanisms now include e-sourcing and reverse auctions, meaning faster PR to PO cycles and clearer understanding of tender requirements and resulting in competitive pricing.
We have a dedicated Project Supplies and Field Quality Department that inspects project equipment and materials before they are handed over to the client, besides stage inspection during manufacturing.
We have been able to successfully leverage technology to increase SCM efficiency. With an ERP system and a host of other tools, we have been able to automate the end-to-end activities of SCM which brought in increased transparency and reduced timelines. A scientific method for endor Performance Evaluation and an online web-based expediting system were also developed.
In a bid to boost our competitiveness, several new and standardised approaches like e-auctioning, green sourcing, Total Cost of Ownership (TCO), ethical sourcing and strategic alliances have been identified and most of them were implemented. Since the client expects the EPC Contractor to proactively anticipate changing market trends in advance, we developed processes for:
â€¢ Market intelligence
â€¢ Developing expertise and execution efficiency
â€¢ Due diligence and planning
â€¢ Connecting with licensors/suppliers and enter into joint ventures/consortium/pre-bid arrangements with major suppliers/contractors.
We practice vendor/item consolidation to get better discounts and practice Just in Time (JIT) approach for procurement of high value consumables like steel and cement. By maintaining the price movement history of critical raw materials, we have been able to manage price uncertainties to our advantage.
Suppliers' accountability has risen to a higher degree. The PMC approves the sources of major material and then procurement is done from those sources alone. We have our own quality testing laboratories where the raw materials received are subject to stringent quality cheÂcks and accepted only if they conform to the standards. Domestic supplies are still monopolistic to some extent, but the competition will grow further.
Do you believe material quality and technology has suffered due to L1 policy of bidding?
These days, government tenders, these days, impose stringent pre-qualification criteria which requires techÂnical acceptance without any deviation to the specifications. The price comes later.Technological superÂiority is as important as price competitiveness.
The L1 route allows small players and new entrants entry into a project.
In some cases, we have seen that the material quality and technology have definitely suffered at the hands of the L1 bidding policy: The client qualifies bidders who may not be technically qualified just to add on to the competition, resulting in comÂpromise on material quaÂlity and technology.The effect of this controversial L1 bidding policy may not be immediately seen but it could have a strong negative impact in the future.
Yes it has. We have been advocating the cause of proper pre-qualification and weightage for technical score, but so far response is not encouraging; not even from private sector.
Do you believe government tenders demand adequate qualitative thresholds in material?
The government needs to be more agile in demanding qualitative thresholds by adopting the best praÂctices followed worldwide. Hence, we find that most specifications in government tenders are either too old or do not take into account the latest technologies and advances.
Yes, the norms laid down by the government are adeÂquate and thorough, at least in our (roads) sector.
Many government tenders follow conventional (standalone) procÂess of procurement and construction. In many projects, adequate qualitative thresholds are not maintained in material and construction contracts.
Should the defect liability period (DLP) be extended in EPC contracts?
Defect liability is hard to prove, and tracking this is only possible where material and design sources follÂow the best quality practices. EPC only provides back-to-back guarantee and therefore increasing DLP at this stage will not be practical.
Binding the EPC contractor to longer DLPs will ensure high-quality, competitive infrastructure.
DLP has already been increased in most of the highÂway projects to 3-5 years, which is sufficient. Maintenance of the project for five years should also be included in the scope of EPC contractor.
Industry sources say the developer's micromanagement sometimes results in inadequate operational independence to the EPC contractor. What has been your experience?
In some cases, the developer's micromanagement ensues because the operational plans of the EPC contractor may not exactly correspond with those of the client.Contractors indulge in their own micro-level plaÂnning to exeÂcute the project with a reasonable profit margin, and their plans may not match those of the client. We have been able to resolve this issue through increased communiÂcation so that both parties are aware of each other's expectations.
In small value EPC projects, the developer tends to micromanage in an attempt to save the cost of appointing an owner's engineer.
We work on a fully integrated model, so we are ourÂselves the developers in almost all the projects being exeÂcuted by us. This mitigates the differences between developer and contractors to a great extent. DBFOT (Design, Build, Finance, Operate and Transfer) being used in many upcoming projects will increase the operational independence of the EPC contractor.
Developers tend to impinge micromanagement specifically in procurement process which consequently decreases the operational independence of the contractor. Right from engineering document approval to delivery of material at site, all sections are monitored rigorously by developers. The drawbacks are:
â€¢ Limits options for choosing vendor if select vendors are to be appointed from developer's nominations.
â€¢ (Therefore) Reduces chances of obtaining the most competitive cost.
â€¢ Lead time for inquiry floatation is compromised as developers enforce hasty decisions.
â€¢ Sometimes, strong association and influence with developers gives some vendors an undue advantage.
Micromanagement is acceptable as long as approval of drawings/bar bending schedules gets expedited throÂugh client's pro-active intervention. However, if work is held up for issues pertaining to quality and HSE without proper reason, it unnecessarily hampers the progress and operational efficiency of contractor.
What are the challenges in procurement at a global level, including HSE and higher qualitative requirements?
The major global procurement challenges are:
1. Identification and development of reliable vendors from low cost countries.
2. Obtaining client's approval for global vendors.
3. Developing long-term relationships with vendors.
4. Differentiation and benchmarking.
To counterbalance the impacts, we proactively idenÂtify the latest technology trends and practices. By forming JVs and pre-bid tie-ups for upgraded technology, we keep the costs from sky-rocketing.
The volatility and availability of basic raw material, shipment / freight handling at ports and local transportation and local legislation towards taxes duty levies is ambiguous at times and pose challenges.
Although procurement form overseas has become easier, the turbulence in global markets remains a concern, especially cement, steel, bitumen and crude oil.
There are direct and indirect impacts of international expÂectations. For example, pipeline system developers may opt for autoÂmated valves or monitoring systems manufactured and available predominantly interÂnationÂally and scarcely in domestic markets. This directly affeÂcts the cost, which are at higher international rates
An example of indirect impacts is pipe grade material in Indian pipeline projects is now X-80. Domestic suppÂliers of steel are not qualified for this grade.The scarce availability of this pipe grade subseÂquently delays the pipe availability at site.
How has e-procurement changed the way EPC works? In particular, has e-procurement been able to arrest corruption and ambiguity?
E-procurement is still at a nascent stage, especially for non-repetitive capital purchases, despite which there is a general perception among the CPOs that this has resulted in significant transparency and has arrested/will further be able to arrest corruption and ambiguity.
One of the greatest outcomes of e-procurement is the breaking of the vendor cartel. Further, e-procurement has facilitated real-time analysis to reduce costs and enabled centralised tracking of transactions with full repÂorting on requisitions, items purchased, orders processing and payments made. Reduction in cycle time, unnecessary paper work and a simultaneous increase in transÂparency levels are some of the benefits of e-procurement. With standardised approval processes and forÂmal workÂflows, compliance to critical processes has improved.
E-procurement has as of now only opened doors for more and more suppliers to contact the contractors.
Sometimes, it becomes cumbersome to load huge data. It is good to use for pricing, while the rest, including bid bond, can be manual, at least as an option.
What impacts have mining and environmental restrictions have had on your procurement costs, availability of aggregates, local mafias?
Overall costs of virtually all raw materials are escaÂlating due to environmental factors, with resulting impact on cost of manufactured materials. Scarce availability of adequately skilled manpower (quality and numbers) is another reason for increasing costs and delay in availability of the required materials.
The effect has been drastic and it has affected adversely on costs as well as availability. On one hand, where development projects are on the rise, the restrictions have created a serious imbalance between the demand and supply.
Although we agree that in order to protect the depÂleting resources of the environment, these restrictions are inevitable yet, irrational and irresponsible changes in governance should be avoided as they create hurdles in development.
The restrictions have generated scarcity of materials, which in turn, is made available in the grey market at premium costs. Local mafias govern and earn higher marÂgins on certain materials and opting for supply through such suppliers comes out of no choice since completion of project and higher cost is at stake.
Please cite a particularly interesting procurement that your company has done recently that had procurement challenges.
Indian projects can often be chaotic, where every stakeholder has a say, forcing planning process to be repeatedly revised. Our renewable energy project in Rajasthan is backed by bank guarantee with a provision to confiscate in event of delay, and developed on non-recourse funding. Now, the due diligence process varies from bank to bank and the developer was not able to give a firm starting date.
So we had to split our project into two parts one order for balance of plant (BOP) goods/services and the other main order for another vendor for supply of modules. Overall responsibility of final commissioning and contract performance was given to the BOP contractor.
One of the most important resources in our projects is steel. Depending on the project, steel is required in different forms and sizes. Since it takes up approximately half of the total procurement cost, any attempt at reducing project cost must consider procurement of steel at a competitive price and reduce its wastage.Towards this end, we decided to procure steel in a customised cut-to-length form instead of the standard form. After discussions with the potential vendors, we had estimated the optimum quantity/lot size acceptable to the manufacturers. Identifying the right vendors was a key challenge and we have involved both domestic and international suppliers to negotiate a competitive price. This initiative resulted in cost savings of about 10-12 percent.
Capital procurement for large projects, as required at Essar, is always challenging and interesting. A significant portion of the procurement is unique and first-time procurement involving vendor location/selection, coordinating evolution of technical specifications during offer and bid evaluation stage, in addition to meticulous stage inspection during manufacturing. In the case of a large 1,400 tonne equipment manufactured out of exotic material, we were even required to depute our head of inspection at the shop, along with round-the-clock inspection to ensure adherence to quality and speed of fabrication.
The longest lead items in a recent short-timeframe project were the high pressure ball valves required for the system. Immediately on award of the project, we had to work for days on end to finalise the data sheet and specifications of the ball valves. Within the first 15 days of award of the Letter of Intent (LOI), we had placed the order for the item, saving at least 45 days. Further, we placed our expediting team in all the sub-vendor shops to expedite the raw materials required, and ensured that we finally delivered the goods within the scheduled time frame.