Rapid Graffiti

Material costs are something that every manufacturer wants to reduce on a regular basis.  However, after a certain threshold limit, it is not possible to cut the cost as easily.  One needs to think “out-of-the-box” (a standard b-school jargon) to find out opportunities which were unexplored previously. 

The objective of my project is the same – to cut the procurement cost through unexplored opportunites.  The component I’m working on is copper tubes. 

Blue Star primarily provides cooling solutions.  The cooling process involves heat exchange, and that’s where copper is used.  Why cooper?  The reasons are very clear.  It has high corrosion resisting capacity.  It does not react with most of the refrigerants.  It is duct able and malleable.  It is easy to braze copper.  And above all, it is a great heat conductor. 

The above information would seem very common to a science grad, but I’ve done my schooling in general stream, and wasn’t aware about all this stuff before I came here. 

Copper consists of about 15% of total cost of an air conditioning unit.  The highest contributor to the cost of AC is compressor with 40% of cost, copper in various forms comes second.  The various forms in which copper is used are Heat Exchangers tubes, Interconnecting tubes, Fins for special application, Hardware: Elbows, Reducers. 

So how exactly have I gone about cost cutting?

My two years of experience at Tendercity.com as a business development executive, my short stint at an IT MNC at Pune, and one year at the b-school has confirmed my belief that going straight is not the best option (I’m not talking about my sexual orientation).  I personally believe in trying a lot of alternatives and approaches (often failing), and then following the best option.  I primarily do this to cut down efforts, because I do not and can not term myself as a hard worker. 

The various options that I’ve explored / am exploring are: 

• Streamlining the procurement process:  My experience at Tendercity.com was primarily in sales and marketing of our e-procurement suite.  The company was relatively small, so BD executives like me also undertook pilot project implementation, which gave me exposure at streamlining the procurement processes at various Government departments and PSUs.  I saw a huge opportunity at Blue Star in terms of implementation of e-procurement in the form of reverse auctions.  This is going to be one of my official suggestions, and if time permits, I would certainly like to do a pilot for the Dadra plant. 
• Finding new suppliers: Lot of people think that finding new suppliers is the best way to cut the cost.  It must be realized that the purchase people are smart, and if a cheaper supplier existed, they would have already contacted hi.  However, I tried this option as well, but in a different manner.  Instead of going to B2B sites and finding suppliers for copper tubes, I did a competitor analysis to find out where they are procuring copper tubes from.  I succeeded and found out the sources of Voltas, Fedders, Hitachi, Daikin, Trane, Kenmore, Mitsubishi, Samsung, Panasonic,
  Lennox, Carrier, Haier, Toshiba, and a lot of other HVAC players.  We are in the process of contacting the sources, but experience and early response is showing the signs that they are not going to be cheaper than the current suppliers.  Moreover, many of the competitor sources are also our sources.  So chances of a break through here are bleak.
• Manufacturing the components in-house: While doing competitor analysis, I was surprised to see that many of the HVAC majors are manufacturing copper tubes themselves.  They have joint venture either in China, Thailand or
  Korea, which definitely cuts their cost.  Forming a strategic alliance with tube manufacturers is an option which I felt our firm has not explored.  Again an official recommendation which is very well taken by the Central Procurement Cell.
• Price Risk Management:  The company already has tie ups with fabricators.  We provide them copper and they fabricate for us.  Copper is procured through the
  London metal exchange (www.lme.co.uk).  The LME works like a stock exchange, except that it has still open ring cries for all the commodities.  The ring trading times are 12:00 to 12:05, 12:30 to 12:35, 15:30 to 15:35 and 16:10 to 16:15.  There are 11 selected firms which are represented in the ring, which determines the official trading price.  If you are following the newspaper, you might be aware that metal prices are going hay wire since a couple of months.  Price Risk Management at this point in time is both interesting and challenging.  I’ve contacted the ring traders to see what can be done regarding risk management.  First meeting is in the next week, with one of the best banks of
  London.
• Exchange Risk Management:  Going beyond LME risk and copper, I realized that a large number of the components that go into an AC are imported.  The risk of foreign exchange is pretty obvious then.  The next step is to meet bankers to work out how this risk can be hedged. 
• Other metal exchanges:  Ignoring the concept of arbitration, I thought of exploring the New York metal exchange and the
  Shanghai futures to see whether we can book contracts there at a cheaper rate.  Arbitration rules… no scope of cheaper copper there…
• Processing Scrap and using it:  Seems this is one option which is really going to be helpful.  However copper scrap is not easy to procure.  We are in talks with one of the refineries to work out this option.  I’m confident of achieving some cost cutting here.  It is also well taken by the central procurement cell.  Major implementation to start after a feasibility study.

My takeaways?  It is possible to do “good” work irrespective of industry, function or your past background.  Right amount of research, guidance and network is what you need to excel. 

Right from my childhood, I never wanted to work in a manufacturing plant.  The idea of a plant painted a picture of a messy, sweaty place which is very uncomfortable. 

Now I think I’m comfortable working here, and have started enjoying the work.  Strange, isn’t it?

Copper prices at the current level of USD 7,980.00 per Mt for cash buyer and USD 7,870 for 3-months buyer settlement are certainly unsustainable.  The highest price recorded on 12^th to 14^th May, which is also the highest for the metal in its history of existence, was USD 8,600 per Mt.  There are a lot of factors that affect the copper prices.  Some of them are as follows:

• There is a drawn-out strike in the La Caridad mine of
  Mexico.  This mine produces 140,000 tons of copper concentrates per year.  If the strike continues for a longer time, the production will come down, which would reduce the supply and hence might increase the price further.  Similar strikes are going on in Chile and
  Papua New Guinea in some mines over different issues.   
• 21 of the 28 largest copper mines are NOT amendable to expansion.  Many large copper mines will be exhausted in 2010-2015
• Chile is facing shortage of water.  This is affecting copper production through slower mine expansion
• Mines are focusing on ore grades that have higher value by-products, such as molybdenum, for which prices are rising faster than copper.  This might again reduce the supply of copper.
• China, one of the biggest consumers of copper, is growing at a rate of almost 10%.  Its growth is largely dependent of manufacturing industries, and copper is key element used in manufacturing.
• China, along with Korea and
  Thailand, is also considered as the base for manufacturing of HVAC (Heat, Ventilation, and Air Condition) Industries.  Many HVAC players like Voltas, Fedders, SANYO, Hitachi, Lg, Samsuang, National, and Electrolux have their manufacturing base of copper tubes in China, which ultimately increases demand of copper in
  China.
• Pension funds managers saw commodities as a ripe option to invest.  Historically, the returns were really good.  On 12^th March this year, the price was around USD 5,000 per Mt, while on 12^th May this year, it was USD 8,600 per Mt.  This means a return of 72% in less than 72 days, which I believe is really amazing.  Of course I’ve selected the period with highest returns, but this is just an example of how spectacular commodities can be.
• Hence, the investment and speculation grew in the copper market which resulted in rising copper price.
• Fed raised interest rates again on 10^th May, 2006.  This was the 16^th straight interest rate hike, and now the rate stands at 5%.  Further hikes may be expected when the Fed meeting takes place on June 28-29, 2006.   
• Whenever the Fed raises the interest rates, the dollar becomes strong, although for temporary period in some cases.  This is because of capital inflows corresponding to interest rates hikes.  The LME prices are quoted in USD.  So if USD appreciates, investors of other countries face a probable loss due to USD appreciation.
• Japan also showed signs that it might raise the interest rates.  Speculators who have borrowed from
  Japan, and have invested in commodities market started exiting due to these signs.

The above factors have brought down the copper prices to a certain extent.  Still the prices are unpredictable.

My job at Blue Star is price risk management.  I’m basically working on the hedge ratio to cut cost of procurement in long run.  When I interviewed, I was told that the project is all about international marketing. 

Nevertheless, Global sourcing seems to be really interesting.  My previous experience in e-procurement with Tendercity.com has really helped me. 

I’m looking forward to more action in the next 10 days.