Case 3

Rem Chemicals

Cost Reduction Through Improved Material Procurement System

Rem Chemicals (RC) is a large manufacturing organization having 5 large-and 12 smaller-capacity plants in various locations. They are the leading market players and manufacturers of polyester, petrochemicals and polymer products in the country.

The regular store requirements like gaskets, valves, welding electrodes, fasteners, pipes and pipe fittings, and electrical and instrumentation consumables, were procured directly from various stores across the sites by raising POs after calling quotations from ‘registered’ regular suppliers and placing orders as and when required. The management observed that this procurement process caused inconsistency and variability in purchase pricing, resulting in overall higher procurement costs. They also observed the variations in product quality at different points and times of purchases. The management decided to review the prevailing procurement process and initiated the following actions:

• Assess the annual requirements of each of the above items at all locations.
• Raise the requirements (purchase requisitions) for a longer period of requirement under the ARC (annual rate contract) system.
• Review the number of vendors supplying these quantities.
• Reduce the number of PRs (purchase requisitions) and POs (purchase orders) to reduce transaction cost and paperwork.
• Review the cost in procurement process.
• Reduce the lead time for these regularly required items.

After studying these factors, the management reduced the suppliers’ base of the company by 45 per cent. RC established the ARCs with the suppliers which reduced considerably the inconsistencies over the price of the consumables in all the plants. As the orders increased, a strong business relationship was developed with the suppliers. Buying in bulk reduced the costs. By avoiding repeat buying through tendering at various locations, lead time between PR and PO was reduced by 63 per cent. These benefits accrued; a few mechanical items listed in Table 1 is illustrative of the new procurement system. Similarly, Table 2 is illustrative of reduction in lead time after the implementation of ARC. The savings achieved after implementation of the new procurement system is listed in Table 3.

Table 1 Suppliers Base Reduction

Table 2 ARC Implementation: Benefits

Table 3 New Procurement System: Savings

A major reason for lead-time reduction was reduction in tendering time. As the vendors were aware in advance of the possible orders, they were prepared for supply. Due to the implementation of the ARC system, the suppliers directly got the electronic copy of PO from the company leading to reduction in time as well as transaction costs.

REVIEW QUESTIONS

1. Review and discuss the old procurement process in Rem chemicals.
2. Explain the changes the management has made in old procurement process.
3. What is annual rate contract (ARC) and what should a firm look into while going in for ARC?
4. Discuss the benefits accrued to Rem by adopting a new system of procurement.