Ladies and gentle men, next in line is this exquisite Picasso work. Starting price $7,500, do I hear $8,000? Great, yes…(Twenty minutes later)… $16,000…going for $16,000 one, $16,000 two, $16,000 three." Slam! "Sold to the nice lady in the fur coat, congratulations on your fine purchase, ma’am."

A straight lift from Mickey Blue Eyes, where Hugh Grant plays an adorable auctioneer? Right on! But what does a blue-eyed Hollywood actor or a long-gone man’s painting have anything to do with IT?

They don’t, but auctions do, especially if they are happening online in an e-marketplace and saving companies anything between 10 and 25% on a purchase bill of a few hundred crores. We are talking e-marketplaces and reverse auctions here, the end result of e-sourcing, which is a gamut of activities undertaken by professional purchasing divisions, including answers to some strategic questions—how much to buy, what cost to buy at, how often to buy, et al.

And a perfect example of an organization that has benefited hugely from appropriate e-sourcing is air-conditioning giant Carriers Aircon. The management at the $9-billion air-conditioning monolith is sitting pretty, grinning from ear to ear. Ask why, and pat comes the reply, "We have been buying smartly."

And the loot is there for all to see—on an average, the company is now buying at 15% less than what it paid earlier, without compromising on quality.

Humble beginnings

The air-conditioning industry deals with engineering products and there’s a huge physical mass material that goes into making an AC... copper, aluminum, plastics, motors, you name it. Typically, about 200 parts go into making an AC, of which 50%, in value terms, would be credited to motors, steel and aluminum. For a company that sells ACs of a varying range, the buying process, amounting to about Rs 170 crore annually, was a tall order.

When Carrier started manufacturing, the procurement of raw materials was conventional in nature. "To put it candidly, it wasn’t very different from buying potatoes," says Kaul. Everything was done manually, including finding suppliers (which would be limited to four-to-five in number) and writing requests for quotations (RFQs)— documents that describe the specs of the commodity in question. "Negotiations could go on for days and in the end, possibilities were that the supplier just may come back with agreeable prices." A very rudimentary way of doing things indeed.

"Talking basics"

E-sourcing has radically changed all that. The geographical reach now available to them, as far as suppliers were concerned, has become global. "Our supplier could be sitting anywhere—Trichy or Latin America or Taiwan—the whole world is our playground," says Kaul, with a twinkle. Competitiveness among suppliers has increased with the online bidding process, as compared to face-to-face negotiations.

Moreover, online auctions have also provided another plus—a level playing field. The pressure created in 30 minutes of action where a split second matters is nail-biting, with suppliers trying to outbid each other. "And because there’s no physical contact with the supplier directly, they can’t get away with faulty pricing sugarcoated with fantastic presentation skills or shrewd marketing gimmicks. We are talking about basics here," says Kaul.

So far, Kaul and his team have conducted auctions for four broad categories— ocean freight, capacitors, thermostats and lube oil—saving between 13% and 18% each time. Interestingly, the auction for lube oil saw some PSU heavyweights drop their price, which in the regular scenario, would have been a tough call.

Getting geared up

At the global level, Carrier Corp has been e-sourcing for over four years now. In early 2000, Kaul spent some time in the Singapore office. On this visit, bidding for a key component for the Asia-Pacific region was being conducted by the company’s global e-sourcing partner—Freemarkets. It was then that Kaul met up with the Freemarkets team and discussed the possibility of a similar operation in India. "Keeping in mind the global experience that carrier had with Freemarkets, we didn’t need much convincing on who our vendors ought to be," he says. And when Freemarkets—a US based e-sourcing software and services provider—set up shop in India , Carrier was among the first few to get into a tieup with them. This was in November 2000.

Though Carrier has been in touch with some other players in the e-sourcing space—comparing what all they had to offer—it decided to stick to Freemarkets, finding that the latter was better-suited and far more relevant in its context. "Technology is a facilitator and we will adopt that which offers better value-addition. That’s the bottomline," says Kaul.

The experience that Freemarkets had in the buying process was a plus. The company had helped customers source more that $25 billion in goods and services worldwide, in more than 190 different supply verticals, and leading to savings of over $5.2 billion. Since 1995, Freemarkets had created more than 17,500 online markets.

"Also, close proximity to them helped," he adds, with a grin . Both Freemarkets and Carrier Aircon are based in Gurgaon.

The first product that Carrier brought through online auctions was powder paints. And the management took into its hands the task of educating its team—clearly, e-sourcing was here to stay. Carrier ramped up the auditorium in its Gurgaon corporate office to showcase a live auction real-time on a 6x6 screen.

"It was quite a show we put up. And the impact was tremendous," says Kaul. With 50 people trooping in and out of the auditorium all along, Kaul & Co literally spent their time counting the savings they were making on the procurement price—in some cases as high as 15%. "That kind of did the trick and the acceptance of e-sourcing was immediate and across the board," he reminisces.

"The learning curve"

But this blissful buying did not come without its share of troubles, ranging from the apparent infrastuctural ones to the awareness issue, particularly among suppliers. With most suppliers not even having a computer, leave alone an Internet connection, resistance to e-source was ostensible. But that was something that had to be dealt with if Carrier had to implement the project. "It was a natural learning curve," says Kaul.

The bigger pitfall for Carrier was connectivity. With suppliers based in varied locations, in bustling cities and in remote parts, connectivity was critical. "In two of our events (auctions), the connection snapped. Once, we could just not connect and had to rush to the Freemarkets office," says Kaul. Luckily, the Freemarkets office is only a 15-minute drive away. But things have improved since Carrier implemented its SAP in July 2001. It now runs on leased lines.

As for the connection at the suppliers’ end, Freemarkets has seen to that. "It is critical to ensure continuous connectivity when decisions worth crores of rupees are being taken," says Amit Bhatia, vice-president and general manager at Freemarkets.

"Our operations center ensures that two-to-three different layers of connectivity are maintained and under no circumstances does the auction stop." In case the supplier’s ISP services are knocked down, he can log on to the VPN and stay connected. If all else fails, Freemarkets has a phone back-up, called surrogate bidding. All suppliers need to do is to call the Freemarkets center in Pittsburgh, Brussels or Singapore —all provide 24x7 worldwide coverage—on a toll-free line and bid telephonically.

It’s not so much the fear of technology, but lack of knowledge about it that creates uncertainty. And the management at Carrier took a conscious approach to introduce e-sourcing. "We were clear that we wanted it to be accepted, not rejected," remembers Kaul. Before giving the nod, a fair amount of time was spent in workshops understanding the system and studying the pros and cons. "It was fundamental to put across the right perspective. What could this fancy new tool do was critical to get across."

Today, Carrier employees have a clear understanding of e-sourcing—what it means and where it is going to take the company. Next in line are additions to the e-sourcing list. "Given the choice, I’d would like to buy all products through auctions," quips Kaul. Given the profits, one can understand why. Or perhaps this is inspiration from Hugh Grant...

Meghna Sharma in New Delhi—Dataquest