Real Estate & Why a big no!

Wife: See there are so many ads from magic bricks, we should buy some property it is the best investment option...
Mom: Son, property prices always go up, Why don't you invest in real estate.
Dad: I know you have already taken a house, but what is the harm in buying a second house ? It is an investment which only appreciates
Relatives: You have not yet bought a house/ second house ?
Friends: Take it & keep it, you are a rich guy... You cannot trust the stock market. Real Estate you can actually touch and feel it

So these are the arguments that go for any individual. People coerce and push you to the limits to acquire either a single house and if you have already bought one, a second house! Do you succumb to the pressure?

I always make it a point to visit each and every property exhibition @ Navi Mumbai... for one my wife loves the stick ice candy and they are typically sold @ these exhibitions, and two we get to see how a 10X10 sft room is made to look like a palace through smart interior designs, though that is not the purpose for which the exhibition is held.

Beyond this, I have been noticing that the participation of the crowds is only thinning and the number of exhibitions are only increasing... Does this mean that the supply is more than the demand ? Seems so!

When I visited Shanghai, Tokyo, I noticed that the residential buildings are really skyscrapers and the buildings in Thane, Navi Mumbai dwarf in comparision! A logical question is, if we do not have space laterally, why don't we build vertically ? The answer is the FSI in Navi Mumbai is pretty low. Question no 2, Why is the FSI low ? A possible answer is, the prices drop like a stone or the construction quality is not good enough to warrant skyscrapers.

I also noticed that the property prices in Mumbai prime location like Nariman point has only come down! We had an office in Nariman point which we had acquired @ 35,000 INR per sft back in early 2000. Reccently concluded the deal by selling it @ 29000 and that too to a SOBO (South Bombaite) as they fashionably call themselves. The prices were actually hovering @ 27,500 - 28000.

This brought me to another conclusion. We Indians are an emotional lot when it comes to personal property buying. This guy was buying the property for his son in the US who would come back and setup an office. Instead of looking @ BKC or any other upcoming location he was hell bent on Nariman point as it was a booming district in his growing up years. So the conclusion from the above two is that:
      Property prices do go down
      We make emotional decisions and inflate the price

Apart from this there are numerous anecdotes I can share where the property prices have infact come down. My brother in law was in 2007 a proud owner of a brand new flat in I town area of Visakhapatnam, bought @ 90 lacs odd. In 2009 - 10 a dispute between the Indian Navy and the port trust started wherein the port wants to expand. So the property prices have tumbled in the I town area. You certainly cannot predict such situations.

Last but not the least, whenever you try to buy property, there is a white component and there is a black component. The black component is the invisible money, builders give you multiple reasons for the black money component:
      It will reduce the cost of registration
      It is for the higher ups.
     

How does studying Law help a business professional ?

The day I enrolled myself to do an MBL from NLSIU, I have been plagued with questions.

Why am I studying Law ?
How do I expect it to help me in my career ?
How do I manage studying the flagship course of the best law school in India with a son who is 2 year old ?
Does it disrupt the work life balance ?

Reading and writing is my passion. I took a hiatus for a few years to be involved in building a family and watching my child grow. This was a fascinating stage and, you know that getting involved into the day to day rigarmarole of family life does leave an impact on your passions.

To get back to the question, Why am I studying Law ?
Reason no 1 would be, over the past 2 years, with a loving wife who added 20 kilos to my belly and an office which is just 6 km from home in Mumbai, I was sort of slipping into a comfort zone. Henkel, where I'am still working as I write the blog has been the organization where I have served the longest till date. So a nice family, a workplace close to home and a profession which I can just sleepwork. Time to get out of the comfort zone.

I personally need the rap and fear of exams to be able to divert my attention and bring it back to the world of books. Why Law ? During the 10 years of career, I have found that the only fear of any business man or corporate is to be caught on the wrong side of law. Apart from that this represents a challenge of epic proportions to me. Sit and study law OMG!!!

and ofcourse as a purchasing professional, I'am signing contracts and dealing with external agencies day in and day out. The last thing I want is to be personally or professionally on the wrong side of law as it damages both me and my organization. Further, many a time we know how to deal effectively with our partners so that we build a lasting relationship. For eg, when an offer is made and accepted a contract is deemed to have formed. So if one of the parties reneges on the promises, it can be brought up as a breach of contract. How many times, in your career have you had a purchaser or a seller renege on the promises made and accepted by just dropping a simple mail to you ?

You seem so helpless!!! Not anymore really. I can give countless examples where a thorough knowledge of business law helps a business professional deal effectively in every negotiation.

How do I expect this to help me in my career ?

Don't you think I will be better respected and better able to close deals more favorable to the organization ?

How difficult is it to study a flagship course from the premier law school of India ?

No words, It is absolutely tough, but then if it were so easy would we be proud of doing it ? The best thing to do is be disciplined, babies need more sleep than adults this is the only mantra I can suggest to you. You study 1-2 hrs everyday that should do the job for you.

Does it disrupt work life balance ?

Well it is both a yes and a no. Yes because you need to spare an hour or two and as the exams near you need to be absolutely focussed on the subjects. No because you can still spare sufficient time with your loved ones if you can sacrifice a bit of the news hour and a bit of other activities to ensure that you still get to maintain your balance. Just that the balance shifts.

So I shall keep writing, you can keep reading!!!

Phase II - Discussions Start

The past few months I have been reviewing the topics and a faw that came @ the top of my mind:

> With a CAGR of > 25% during my career, I believe that I can certainly share my learnings and ups and downs of my professional life

> With a CAGR of > 35% in my wife's career, I can share her views also here!

> I have started investing in stocks and yes I do have an MBA in Finance so will try to put in my views on financial planning. Trust me there will be no hi fi stuff here I have not been in the financial world for the past 8 years!

I had one motto (among the many) when I started my career! Live Life King Size! and being in my profession and career I most certainly have and am living it!

I'm Back

I'am back...

1 year I serenaded a girl & then married her and I completed my first marriage anniversary! Guess that was a long 2 year break... Bring on your telescopes, microscopes and binocs to view the world with me and see a different perspective!

 

B.E.S.T Vs N.M.M.T - A case of niche marketing & appropriate positioning

Every weekday that the clock strikes 7:30AM, the picture unfolds with a shrill ring of the alarm. It is time out, dreams over. A quick shave and a bath: dressed in formals, I'am off to work. I live in Seawoods the peninsular part of Navi Mumbai. My eyes open up to the Arabian sea on all three sides. A romantic evening spent with a loved one with the sun setting in the distant horizon can inspire a donkey to bray poetry. This was the view that compelled me to take up residence at this corner of the world. The flip side is that the connectivity is really bad.

So I revv up my cruiser and take a long drive on the palm beach highway, arguably the most beautiful stretch of road in Mumbai. At speeds of more than 100 kmph it takes me 8 mins to cover a distance of 10.5 kms. So, here I'am at Vashi by 8:30 AM. Driving in Mumbai can be a real pain and so I avoid driving all the way to my office in Chembur which is 11 kms from Vashi. What are the options I have to travel?

Local Train: Not an option, If Shashi Tharoor could call the economy flight, cattle class. I wonder what we can say about the Mumbai local. I have seen people travel on the roof tops and some die travelling, by just falling off the moving train, as simple as that. You cannot move a finger without touching someone & therefore the local train just gets shelved.

Taxi Cab: Bad Option, A cab charges 300/- from Seawoods to Chembur. So the total travelling expenses would come to 12000/- per month, This without the climate control. With so many other options would I want to travel in a taxi everyday?

Local Buses: Decent Option, Local buses are run by two corporations B.E.S.T & N.M.M.T (BrihanMumbai Electricity & State Transport) & (Navi Mumbai Mahanagar Transport) A local bus charges me 10/- from Vashi to Chembur. The frequency is good, the flip side? Crowded and it stops every 0.5 - 1 km. Also as the fleet is pretty old it really takes a long time to travel from Vashi to Chembur close to maybe 45 mins to 1 hr.

Local Cabs: Not a very good option, Individuals moving in & out of Mumbai generally provide lift for a nominal charge. While this is attractive, the problem is that you never know whose car you are entering into. The other day my friend prodded me to get into an Indica and as we were travelling the two guys were talking in Hyderabadi Urdu. One of them then pulled out a pistol and showed it to the driver and said "Today I'm gonna kill that SOB", to which the driver replied "Calm down dude, we will decide after we reach Raghu's place". That day I decided that this is not really a very good option.

State Transport: The best option under the circumstances, The State transport is run by the M.E.S.T (Maharashtra Electricity & State Transport). It charges me 12/- and takes me to Chembur in about 30 mins. So even if I catch hold of a bus by 8:40 AM, I'am in office by 9:10 AM, the official start time being 9:15 AM. This is my preferred mode of travel.

It was one of the mornings, as usual I had a shave and a bath and revved up my engine and I was at Vashi at 8:25 AM. Smiled at the pretty girl who also gets down at Chembur and waited for MEST to arrive, the clock struck 8:30 AM and whoosh!!! what was that? A Volvo arrived and the doors opened under pneumatic pressure. I checked the signage and it was going to Bandra, I asked the conductor if the bus stops at Chembur ? He nodded in the affirmative and I hopped in. Air conditioned with the FM radio and the bus was empty. I plonked on the seat and looked around feeling good. I was ready to pay 50/- and the conductor handed me a 20/- ticket to Chembur. This was value for money I felt. N.M.M.T had caught onto my pulse and come up with a product offering that just suited my needs. As a week passed I could see that the bus was getting a bit crowded, this was not what I expected. I could see myself travelling in a Volvo and standing at times !!!

One more morning and whoosh!!! the Volvo comes and opens its doors in perfect unision. I decided to give it a pass, MEST was better, if not air conditioned, if not music, atleast I got to sit in a corner and travel the distance. As I let the Volvo pass by another vehicle arrived. This was not a Volvo, it was from B.E.S.T, It was air conditioned and it looked empty. I gave a peek in and asked the conductor, does it go to Chembur? An affirmative and I hop in, hmmm the accelaration is not as good as a Volvo. The design also looks tacky, but it is air conditioned and has music playing at a very low volume. The conductor comes up and I hand him over 20/- for Chembur and he says, Sir 30/- for Chembur. I felt that he was ripping me. I protested, the Volvo charges me 20/-. The conductor replied back saying that the Volvo is run by the N.M.M.T while B.E.S.T runs these chinese make buses and B.E.S.T charges 30/-. I shelled out the money and continued the journey.

Later on I realised that I was travelling more frequently by chinese make BEST buses than Volvo make NMMT buses. This was because:

Both offered Airconditioning,

Both offered music, but BEST put on a very low volume while NMMT had blaring music

The low accelaration of BEST ensured that when I opened a book to read there was no strain in the eyes due to jerks.

The differential in pricing ensured that people who really wanted to travel in peace actually travelled in peace.

I was able to complete Outliers by Malcom Gladwell and Kane & Abel by Jeffrey Archer travelling in BEST.

When you look at the bus it may appear that the revenues of NMMT maybe higher than BEST and also the profits of NMMT would therefore be higher than BEST.

However, while an NMMT Volvo maybe taking 30% - 40% more passengers than BEST, BEST has priced it's tickets higher by 50%. Also the Chinese make vehicles must definitely be cheaper than a Volvo leading to lower capital costs. I may not be able to comment on the maintenance but looking at the fact that 40% more passengers board the NMMT, I belive that the maintenance cost of NMMT would be higher than BEST. All of this leads me to only one answer.

BEST is defintely the best and a clear winner.

Cricinfo.com Vs CricketNirvana.com

As the India Vs Australia fever catches on I could not help myself but watch the last 10 overs of each side. Cricket purists may slam me for missing out on the joy of Cricket, but frankly I'm neither a cricket purist, nor a great fan of cricket. For me the fun is in how each of the teams collectively handle the final moments of pressure and come out trumps with both the teams running to the finish line.

There is another catch to my viewing pattern, I do follow the scores as the teams slug it out. Incase of a not so tight finish I may as well avoid watching the match altogether. Incase it is a nail biting match I may as well watch upto 20 overs of the chasing side. The question is how do I track the scores? With a Net connect of 3.1 Mbps it is pretty easy. I open www.cricinfo.com and keep the tab live with score updates.

It was during one of these matches that I took note of an ad for www.cricketnirvana.com. The usp it claimed was quicker updates. cricinfo's 30 sec update does miss some of the action at times, but that is inconsequential as I check back only every 5-10 mins. However, given how much we are hooked onto the speed phenomenon, I definitely checked onto cricketnirvana.com. Here are a few things that I felt are the undoing of cricket nirvana.

My IE7 stores all the recently visited sites so when I type in "c" a pop down appears which shows cricinfo.com and the different pages I must have visited under the same. I select cricinfo.com and view the same. However, to visit cricketnirvana.com for one I need to type in the entire name first up which is definitely very long. Once I have done that, it did take a long time to open up. Once it did open up, it did look interesting. Then again a few more issues.

As the third ODI went underway today on a weekend, I opened up my IE7 and printed "c" there was a listing of all the cricinfo sites I had visited. I typed in "c" "r" "i" "c" "k" & what did I see? cricketnext.in.com and all the different pages I visited under the same. I then had to go all the way to "e" "t" "n" "i" and there I was at cricketnirvana.com. It sure taught me a lesson "KISS" "Keep it Simple Stupid". Why is cricinfo more successful as compared to cricketnext.in.com? A major part must be because in all browser sites as soon as we feed in "cr" it automatically pops out cricinfo after all "k" in cricket comes after "i" in cricinfo.

I believe this is one dimension that marketers need to be aware of...

What caused the financial crisis?

The US $ 700 bailout package proposed by the US government is one of the most extensive government interventions in the financial markets since the great depression. The bailout plan is similar to the 1933 Home Owners' Loan Corporation of the post-depression era. Way back in 1933 it helped in stopping foreclosures and refinance defaulting mortgages , and increasing liquidity. That a similar proposal is being considered indicates the extent of damage caused to the banking and financial services systems all over the world.
But how did the banks and investment banks create this crisis? Let's cut through the financial jargon and understand in simple words how this problem was created in the first place. The root cause for the current crisis seems to be the excessive use of leverage.

Excessive leverage:

To take an example, a company with a net worth of US$ 25 billion borrowed 26 times its net worth and creates leveraged funds of US$ 650 billion to invest or lend them. When a small portion of the company's investments turns bad, as is the norm for the industry, the company's capital is under threat. To put things in perspective a 3.8 percent misjudgment in their books was enough to wipe out their shareholders' capital of $ US 25 billion.

Bad lending policies:

In 2005-07 the property markets were on a high growth path. The property prices kept increasing. A sense of complacency had set in the real estate markets . It was assumed that the residential property prices would keep increasing forever. Mortgage lenders relaxed lending standards. Billions of dollars of sub-prime loans were to given borrowers with the sketchiest credit histories on recommendations of mortgage brokers who were more interested in their commission. Loans were structured very innovatively. Some gave borrowers the ability to skip repayments and some had interest rates that rose over the life of the loan. Lenders were not worried about repayments as defaults if any, on loans, could be recouped from the property itself.
Contrary to this assumption, the property bubble burst leading to sharp depreciation in property prices. As loans were given to people who could not repay it in the best of time, mortgage repayments defaults kept increasing, triggering off a chain of events that led to the bankruptcies of the hallowed institutions of Wall Street.

Financial engineering:

Now you may ask how investment banks of the Wall Street who generally deal in investments in stocks, bonds and commodities have anything to do with mortgage loans. To understand this we move into the realms of financial engineering. Wall Street investment banks purchased the mortgages from the banks. This freed up banks' funds to lend more and gave the investment banks an underlying asset to create their financial magic.
Using these assets as collateral, they created derivative instruments and sold them to various institutional investors like hedge funds, pension funds, mutual funds and banks in all parts of the globe, including Europe and Asia. The instruments were to be redeemed as and when mortgage payments were received from borrowers.
The mortgages were categorised according to their quality. The good ones were pooled together under one derivative instrument. After being highly rated by credit rating agencies and insured from insurance companies these instruments were sold to institutional investors. The second quality ones got lower ratings, but nevertheless could be sold off with higher interest rates. The investment banks decided to keep the junk quality ones with themselves under separate companies called special purpose vehicles (SPVs) paying them the highest interest rates.
In all there was approximately US$ 1 trillion invested in these securities. Things were cruising along as long as property prices were on an upward trajectory . Once the tide turned the echo of defaults were heard far and wide. The value of mortgage-backed securities fell sharply. All institutional investors that had bought these highly-rated bonds in large volumes expecting a good rate of return now faced complete erosion of capital.

The jigsaw puzzle:

So, now, if we look at it as a giant jigsaw puzzle we have many independent pieces. One, a home owner who borrowed a loan; second , a mortgage lender who sold off his loans as income streams; third, an investment bank that purchased and re-engineered them; fourth, an insurer who through credit default swaps insured these debtbacked securities; and finally a bond holder who invested in these highlyrated instruments.
Now, due to defaults by homeowners all institutions up the chain are already bankrupt or facing bankruptcies.

Bailout to the rescue:

This is where the bailout plan is expected to solve the problem. The US government wants to buy mortgages and bonds from these near bankrupt companies with taxpayers' money. The plan as of now seems to be, after acquiring them at steep discounts, to hold them till maturity.
If all mortgages are paid back in full, the government can earn a handsome return on the taxpayers' money. This move will also help banks remove these illiquid assets from their balance sheets and free up the funds to be lent again, hopefully to good borrowers.
While experts seem cautiously optimistic that this bailout will solve the credit crisis to a certain extent, questions remain on whether it can prevent more failures of banks and Wall Street firms.

Bankrupt

Sorry for going offtrack, but could not help. From the day I started preparing for my B School Interviews in 2003, I was fascinated by the world of M&A's (Mergers & Acquisitions). There was a surge in M&A since 2003 an euphoria, what I call an urge to merge. I remember feeling elated and excited on reading the frenetic pace with which M&A activities were on, Sony buys MGM, AOL buys Time Warner. It made me proud to hear Ranbaxy buying a host of foreign drug companies and Tata buying Tetley and ofcourse the JLR (Jaguar Land Rover) deal was a crowning moment of India Inc. I would keep track of the different multi billion dollar deals, I would marvel at the way cash was produced on demand. As my interest in this area kept waxing, I started reading the different ways in which organizations would fund their acquisitions. It also brought me to a very interesting book by the name "Barbarians at the Gate" which detailed how RJR Nabisco was destroyed by a few greedy managers.
Today there is a lot of destruction in value; GM files for Bankruptcy, Lehman Brothers files for Bankruptcy, Meril lynch may be acquired. It is surprising that times change so fast. Lehman brothers, the favored destination for all the budding i bankers. The organization which only takes the best and the brightest of the Management graduates has failed to manage itself. Is it the subprime crisis, Is it an inability to weigh the risks? I am not sure, The euphoria has melted down and the only lesson that I take from this episode is to keep your feet firm on the ground as you try to reach for the stars, but do reach for the stars...

Negotiating by Phone

Negotiating by phone has both similarities and differences with negotiating in person.  Therefore, there are some special rules that you must apply when negotiating by phone.  These rules may sound too simple.  But don't dismiss them.  These little things can make a big difference in your negotiation success.

 

Don't Shortchange Your Preparation - Yes, negotiating by phone is different than negotiating in person.  But you must prepare just the same.  Know, in advance, what your target terms are; what you will say to persuade your supplier to agree to those terms; and how much you are willing to concede.  You must also be prepared for the questions your supplier counterpart may ask you.  Whether you stumble in your speech in person or stumble on the phone, you always weaken your negotiating position when you stumble.  So be prepared!

 

Always Initiate The Call - Negotiating successfully requires focus.  If you are caught off-guard by a supplier calling you, your focus will not be as strong.  If you pick up a ringing phone and there is a supplier representative on the other end and she wants to discuss terms, ask to call her back in five minutes.  Use that time to review what you prepared and then call the supplier.  Initiating the call gives you more control.

 

Turn Off Your Screens - In today's connected world, we expect ourselves to multi-task.  That's great.  But not during a negotiation.  Checking email during a negotiation will dull your focus and could result in your failure to object to terms that the supplier is introducing.  Eliminate the risk of such a distraction and just turn off your computer screen or Blackberry.  Your email will be waiting for you when the call is over.

 

Promptly Transcribe Your Notes - In-person negotiation discussions are easier to remember because you remember what you see, hear, and write.  In phone negotiations, you have one less sense for your memory to depend upon.  As you negotiate by phone, you probably scribble down notes about your conversation. They will make sense to you when you read them.  Until tomorrow. Type up your notes immediately after your call so that you can have a clear recollection of the negotiation outcome later.

Subprime Crisis

The last post promised a detailed discussion on the sub prime crisis. However, I felt that a discussion on the same is beyond the scope of this blog. While a personalised discussion is welcome, I have felt that the subprime crisis would be going to far from the world of sourcing. The treatment given in the last post, would I believe suffice for all the managers connected with sourcing. However, for those of you who would like to know more, Please click on the title. The hyperlink would redirect you to wikipedia where a detailed discussion is available. The treatment is comprehensive. In case it fails please click on the link below or copy paste the url in your web browser.

http://en.wikipedia.org/wiki/Subprime_Crisis

I have referred a diagram showing the causes, Effects and response put in a comprehensive manner by wikipedia here.

Secret behind the price hike of Caustic Soda

In my last post I promised to discuss the reasons behind the price increase of Caustic Soda & Soda Ash. Let me devote this post to the price hike of Caustic Soda. Caustic Soda is NaOH, Somebody suggested why don't we just take an aqueous solution of Common Salt (NaCl) & electrolyse it and produce NaOH. Ofcourse this seems to be a logical process. As I browsed through web pages I found that NaOH is actully produced in the way described above. However, the main product is not NaOH but Chlorine. Caustic Soda is a byproduct of the chlor-alkali process. Therefore, the supply of Caustic soda is dependent on the demand of Chlorine.
The price of Caustic Soda is supposed (actually)to have gone up due to the non availability of the product. It is the supply- demand game that is playing out. If the supply of Caustic Soda has gone down, it is assumed that the demand of chlorine must have gone down. The demand of chlorine is supposed to have gone down due to the subprime crisis.
The obvious question is, What is the subprime crisis ? The answer to this is beyond the scope of this post. However, we will be discussing the same in the next post. For now briefly; The crisis is evolved due to Mr. Bush exhorting the American public to spend their way out of the recession of 2002. Banks started giving loans, housing loans to the general public who carried a credit risk i.e those who may not be able to repay the loan due to unstable incomes, low income or a host of other factors. These were the subprime guys. When the real estate prices crashed due to oversupply of houses, these people found that the net repayment was higher than the market rate of the houses. Therefore there was a mass default of the loans. Meanwhile the banks had bundled the subprime loans and started selling the same to different financial institutions, as instruments. The defaults led to a revaluation of the price of the instruments which pulled the value of the instruments down. (Keep watching for the next post for a detailed discussion). The cascading effect was both a drop in demand for houses or new projects as well as huge losses creeping into the books of the financial institutions.
Going back to the second paragraph, Chlorine produced from the chlor alkali process described is primarily used in the manufacture of polyvinyl chloride resin which is again primarily used by the housing industry. With demand for housing falling, consequently demand for polyvinyl chloride resin fell and consequently the demand for chlorine. This led to a drop in the operating rates of the chlor alkali plants leading to a drop in the supply of caustic soda and with it the hike in prices of caustic soda. Phew... that was one hell of a chain reaction...

A bleak picture turning rosy ?

Companies are raising prices at break neck pace. The rising input costs has painted a gloomy scenario for the procurement function. The industry is faced with two dilemmas:

• Either it increases the prices of its products in response to the increase in key input commodity prices & thereby risk losing the market.
• Continue to hold on the price increases and risk diminishing margins or possibly bleed.

Also a degrowing market has not helped the cause. The problem is compounded in the Indian pharmaceutical industry faced with a triple whammy.

1) With the Olympics due in China, China would want to present itself as a country which is conscious of the environment in which it lives. Therefore, all the chemical firms (supplying intermediates) that were flouting the global environmental norms are being forced shut. This has led to a huge supply crunch. The output has dropped to 40% of the previous year, leading to
unprecedented hike in input costs.

2) The crude story is well documented and would not need much elaboration. However the key reasons identified for the increase in crude price are: (order depends on where you live & who you are)

a) Falling dollar (due to sub prime crisis)

b) US Iran standoff

c) Increasing consumption of oil by third world countries

d) No increase in production

e) Excess Speculation

f) Rising costs of oil exploration & development

3) Key pharmaceutical product prices are controlled by the government (whoever talked of liberalization). Prices of essential drugs are fixed by the government and are revised only through a lengthy, time consuming process. To quote an example, Ibuprofen is considered an essential drug and the government fixes the price of the finished product marketerd by the companies. Ibuprofen was hovering at around Rs 400/- when the government last fixed the price (about six months back) and today the same is hovering at around Rs 500+. To make matters worse the cost of the input Ibuprofen represents 90% of the cost of the finished product, & 65% of the Average selling price. Therefore if the price of the key active pharmaceutical ingredient rises by 25%, the pharma company starts bleeding. This is the reason why many of the pharma products are going of the shelf.

However, all is not lost. China is expected to revive production in a short while and all the pharmaceutical organizations are waiting with bated breath for the olympics to be completed & factories to resume operations. Crude is expected to soften on the back of anticipated production from Brazil, Canada & Central Asia and also due to softening of demand. The government is expected to revise the pricing norms in a shortwhile based on the stable conditions expected to arrive in a short while.

Now you maybe wondering the reason why I have not mentioned the ever so ubiquitous inflation as one of the three reasons. Well inflation is an effect of these three, atleast in the pharma industry. There are other minor factors too like the rise in the prices of Soda ash & Caustic soda. I will be discussing the same in another post. Till then keep your fingers crossed, pray for the early completion of the olympics, discovery of more oil fields and revival of the global economy.

Europe Catches e Sourcing Fever

This is a post from the European Procurement Leaders Network which has been reproduced here for the viewers of this blog.

Tim Minahan of Ariba

Compared to North American firms, European procurement organisations have been reluctant to embrace online sourcing approaches. Their long-time reticence has stemmed from resistance to e-sourcing methods both internally and from suppliers, as well as from a general misunderstanding that e-sourcing = e-auctions. (It doesn’t.)
Yet, private conversations and public presentations at Ariba LIVE Brussels offered hope that e-sourcing (including online auctions) is fast becoming standard operating procedure on the Continent.
Over a dinner and bottle (or two) of fine French wine, a procurement executive from a European aerospace manufacturer, told me that he directs his team to use e-sourcing for every sourcing project. And he prefers that they run a reverse auction. “We are of the mindset that you can auction anything. We’ve auctioned everything from IT to legal services. I refuse to accept that something can’t be put out to bid.”
His gusto was matched by the head of sourcing for a European oil and gas company: “We now align [buyer’s] incentives with how much of their spending is sourced online. We view e-sourcing as the sourcing process, not a subset of it.”
Listening to Telefonica CPO Juan Carlos Montejano Dominguez deliver the Ariba LIVE Brussels keynote the following morning, it was easy to see why European procurement leaders have caught e-sourcing fever.
Over the past year, Telefonica ran more than 35,000 e-sourcing projects for nearly €17 billion in goods and services — a more than 1,500% volume increase since 2003, the first full year of the e-sourcing program. And the telecommunications giant is far from finished. Dominguez is pressing his team to hit a run rate of 70,000 e-sourcing projects per year — a third of which will involve e-auctions.
Why is Telefonica so bullish on e-sourcing? Simple: results. As the below chart clearly indicates, Telefonica has yielded far greater returns from its e-sourcing than offline sourcing projects. And returns from e-auctions are even better.

Dominguez reported that e-sourcing has yielded considerable benefits beyond negotiated savings. Since launching its e-sourcing program five years ago, Telefonica has:

Cut sourcing cycle times in half.

Reduced management cost per awarded amount by more than 27%

Increased the amount of spend managed per FTE by more than 85%.

In addition to these benefits, Dominguez said e-sourcing has actually improved supplier relationships. “e-Sourcing has introduced a new level of integrity and transparency into the process,” said Dominguez. “It increases competition and objectivity in award decisions.”
To back up his assertion, Dominguez shared the results of a recent survey of Telefonica suppliers. Some key findings:
77.3% of suppliers felt e-sourcing “promotes competition and equality of opportunities”
80% said e-sourcing “increases transparency of the purchasing process”
And, more than 70% of suppliers reported that “e-auctions are a transparent method of contraction and they guarantee equal opportunities.”
Feedback and results like these underlie why e-sourcing is finally being widely adopted across Europe.

Strategic Sourcing - Overused and Little understood

The ‘S’ word is getting a real hammering these days, often wantonly, often inappropriately, and often - just plain too often. If people thought more clearly about its real definition, then we would all be better off – so here is a view.
Most people sprinkle ‘strategic’ around in the context of having some sort of plan – ie ‘We have done a strategic category review’. This is not really a good use of the word – it is simply using a fancy word when ‘plan’ would do just fine. Of course it should be well thought through, be linked to the business needs, and have a longer term perspective – that doesn’t really qualify for the strategic title.
Secondly it is used to as a plea to become more involved – ‘we need to do more strategic purchasing’. Most of the time this just means that buyers don’t really get involved early enough, and want to be more a part of the business. Fair call – and not strategic.
There is only one clear definition of a strategic action:
Deferred Pleasure.
A strategic decision is one that, on the face of it, only makes sense in the longer term. If in military terms a location is deemed to be strategic, that means you should put disproportionate effort into defending or gaining it. The same is true in purchasing. You could take a position on a category, or with a supplier, where you are taking the risk that in the longer term you will be better off. Committing to 100% supply ( or indeed deliberately taking a supplier off your supply list ), taking a long term price fix and investing in joint development are all examples of strategic purchasing.
The interesting challenge lies for the wider business – just how many business unit managers would thank you for saying ‘I know you are paying more for this than you have to right now – but its strategic!’
We may want purchasing to be more strategic, and if we really mean it – are we or others actually ready for it yet?

Success factors for Professional Purchasing

High performance purchasing with long-term strategic orientation is a key factor for successful international competition. Therefore, purchasing is one of the most important issues in a company – material costs are the largest cost block in an industrial company. Due to this situation, efficient cooperation with suppliers is becoming increasingly important.
An important success factor for professional purchasing is achieving transparency, especially regarding company-wide purchasing activities, purchasing volumes, frame contracts as well as detailed information about current and potential suppliers. A company can attain this comprehensive view through integrated supplier qualification, contract management and spend analysis.
An active and targeted supplier management is the prerequisite for strategic purchasing. Cross-functional supplier rating identifies supplier strengths and weaknesses. Suppliers are categorized according to their performance and strategic significance based on a substantiated and objective supplier classification. This is the basis for targeted and structured supplier development including measures controlling. During this process, supplier goals are set, deadlines and responsibilities defined, sustainable optimization measures implemented and development progress monitored.
Experience indicates that the individual components must interact with each other in order to provide consistent process support and that maximum benefit can only be achieved through the consolidation of the corresponding information obtained.

Internet Transformed in a blink of an eye

We here at Sourcing Diaries like to think we're not backwards in coming forward when it comes to embracing the power of the Internet.
It would take a brave man to deny that the World Wide Web has transformed modern-day business, so you can imagine the excitement around these parts when talk of ‘the grid’ replacing the Internet, surfaced earlier this week.
The ‘grid’ is nothing new – a cursory google search reveals that a press release trumpeting it’s future was circulated in 2002, but recent developments in Switzerland have caused understandable ripples from Geneva to the Galapagos Islands.
Scientists in Switzerland claim the new ‘grid’ is 10,000 (yes, that’s ten thousand) times quicker than your average broadband connection.
The pioneer of the system, hardly surprisingly, is Cern – the particle physics centre that created the Internet – and it claims that grid will soon offer lighting fast capability for tasks such as high-definition video telephony (all for the price of a local call), and the downloading and sending of sophisticated images. All performed in the blink of an eye, and certainly before you can say ‘Shaan’.
David Britton, professor of physics at Glasgow University and a leading figure in the grid project, believes grid technology will not just revolutionise the way businesses do business but could also change society.
“With this kind of computing power, future generations will have the ability to collaborate and communicate in ways older people like me cannot even imagine,” he said.
Now that, is progress.

CSR and Procurement

Corporate Social Responsibility (CSR) is a concept with growing currency across the globe. It involves looking at how companies take account of social and environmental factors and how these can impact on their reputation among consumers and in the business world.
The involvement of procurement and supply management professionals in CSR policies is increasingly crucial. Sourcing from low-cost countries, for example, is an area fraught with dangers for the procurement function and the business as a whole. Senior procurement managers are ideally placed to input expert knowledge and experience in discussions of low-cost country sourcing in a way that can help reduce the risk of extremely damaging publicity or dealing with costly legal challenges.
It is therefore imperative for procurement and supply chain departments to build constructive relationships with key stakeholders while increasing business transparency and good governance. In this way they can play a pivotal role in shaping the business in a sustainable and competitive way, making sure the highest ethical standards are followed.
The mentality of "out of sight, out of mind" outsourcing is a serious mistake.

Oil rising up agenda as price rise shows no sign of slowing

If oil wasn’t topping procurement’s agenda at the turn of the year, it certainly is now. With the cost of crude rise near to a potentially ruinous $140-a-barrel.
Hardly music to procurement’s ears given that a recent CIBC World Markets Report claimed that once oil hit $120 a barrel, “Every 10% increase in trip distances translates to a 4.5% increase in transportation costs.”
Busch uses the example of the cost of shipping a container from Shanghai to the eastern seaboard of the US having risen 250 per cent since 2000 (when oil prices were a relatively benign $20-a-barrel).
Clearly the latest price hikes are going to put more pressure on those organisations that lean heavily on global sourcing. Any further rises and they may start to ask, if they haven’t already, if the strategy is really delivering the results it once did.

Why e Sourcing is good for suppliers

This post is from the Procurement Leaders network, It tries to dispel a few myths people hold on the e Sourcing tool.

Myth #1: e-Sourcing is all about lowering prices. False. Thanks to tightening supply markets and maturing sourcing methods (and e-sourcing functionality), price-only negotiations have gone the way of Member’s Only jackets. Advanced auctioning capabilities enable buyers to evaluate suppliers on a myriad of price and non-price factors, such as lead-time, delivery, quality, and payment terms. Nearly all e-sourcing users engage in multi-threaded negotiations (e.g., e-RFI-to-e-RFP-to-auction), enabling qualification and evaluation on all attributes of a supplier’s capabilities and costs. And many optimization-based sourcing tools allow suppliers to offer alternative bundles or bids that boost their profit margins and further differentiate their offerings.
Myth #2: e-Sourcing is unfair to suppliers. Untrue. In most cases e-sourcing introduces greater integrity into the sourcing process than existed in the offline mode. e-Sourcing mandates that buyers clearly articulate their selection criteria and award decision framework to all participating suppliers. Suppliers go into a negotiation full knowing how they will be judged and how the award decision will be made. Any clarifying questions asked by suppliers and corresponding answers from the buyer are available for all suppliers to see, further leveling the playing field. This was best summarized by a VP of Sourcing at Cadbury Schweppes “We emphasize fairness and open disclosure on both sides of the sourcing process. We have shut down ‘backdoors’ for internal stakeholders and suppliers.”
Myth #3: e-Sourcing is unfair to incumbents. Nope. Competitive incumbents are in a better position to be exposed to more business volume and new business opportunities, particularly considering that any strategic sourcing initiative goes hand in hand with a supply base rationalization effort. Better e-Sourcing tools also enable the ability for users to incorporate “transformational” elements that give “credits” (in the form of switching costs or innovation credits) to good performing incuments. As a result, incumbents don’t need to be the lowest price bidder in order to win the business. Consider the approach taken by Eastman Kodak: “We sat down with incumbents to explain why we were [using e-auctions] and prepare them with the right strategy and techniques to competitively participate in the event.”
Myth #4: e-Sourcing makes it difficult to win new business. On the contrary, e-sourcing dramatically shrinks sourcing cycles. These efficiencies alone enable buyers to negotiate more spend volumes, across more spend categories, with more suppliers. As noted in the previous example, qualified incumbents in good performance are in a position to expand existing business and be exposed to new business opportunities. One large industrial manufacturing used its e-sourcing strategy to cut the number of MRO suppliers from nearly 2,000 to just 20. Incumbents retaining the business are doing 4X to 10X the volumes than in the past, and they’ve added new, more profitable revenue streams, such as integrated supply relationships.
Myth #5: e-Sourcing lengthens the sales cycle. There is ample evidence that e-sourcing shortens sourcing and, hence, sales cycles. And as an old boss of mine would say, “In a sales cycle, getting to no fast, can be as valuable as getting to yes.” His point was getting to “no” enables you to focus your salesforce on the opportunities they can win.
Myth #6: e-Sourcing burdens suppliers with new cost, technology, and resource requirements. Wrong again. There is compelling evidence that e-sourcing also reduces overall SG&A costs. A recent study from the University of North Texas found: “A supplier can reduce its cost of sales (salesperson commissions, advertising, etc.) using reverse auctions.”
Myth #7: e-Sourcing eliminates buyer-supplier relationships. I recently asked a supply management executive at a major life sciences company how he was able to drive such aggressive use of reverse auctions. His response, “I tell suppliers, ‘If you believe your customer relationship is all about negotiating, then you don’t have a relationship.’” This isn’t just rhetoric. Many companies have begun partnering with suppliers to remove cost from the entire supply chain. New multi-tier sourcing, co-sourcing, and buy-sell approaches are being embraced by a wide range of enterprises (particularly in the aerospace, automotive, and high-tech sectors) looking to gain better visibility into costs and risks inherent in the sub-tier supply and to aggregate spend volumes and remove costs from the total supply chain.

Product/ TPM/RM-PM/ Vendor Coding systems

These four codes are the pillars on which the entire materials spend analysis rests. In this section we explore the logic behind each of the codes & how they help the material spend analysis file as well as the product cost sheets work. These would also aid us in further expanding the analytics and get us to perform various permutations & combinations.

The codes have been developed with a view to accommodate all the business processes of the organization and it is the developer’s vision that the codes would be used universally.

To begin with we analyze the product codes that have been developed:

Product Code:

The products marketed by us have been given a 12-digit code. To illustrate the working of the codes we explain by taking an example.

Serotin AST 100ml Physician Sample
3VST2010100P


First Digit: The first digit of any product code represents the marketing division that handles the product. This helps the spend analytic software to perform analytics for each division. Also it helps segregate products based on the division that is concerned. In this case we have provided the following nomenclature:

1 – ABC
2 – DEF
3 – HIJ
4 – KLM

There is provision for expansion of Divisions so that any new segregation can be done easily.

For e.g.: In this case Serotin AST 100 ml Physician sample is marketed by HIJ hence the first digit is ‘3’.

Second Digit: The second digit of any product code represents the therapy area that the product handles. The same benefits as segregating the product on the basis of the marketing division helps us by segregating on the basis of the therapy area. The software can analyze the portfolio of each therapy area therefore providing essential information on the particular therapy area. In this case we have used the first digit of the therapy area to be represented in the code.

G – Gastroenterology
N – Neuroscience
P – Pain Management
M – Metabolics
U – Urology
V – Vitamins
A – Antibiotics
H – Hospital Care
O - Others

For e.g.: In this case Serotin AST 100ml Physician sample belongs to the therapy area Vitamins, hence the second digit is ‘V’.

Third & Fourth Digits: The third and fourth digits are the first and last digits of the brand whose code has been defined. These are only provided to enable the human mind to identify the product.

For e.g.: In this case Serotin AST 100ml Physician sample has the first and last digits of the brand name as ‘S’ & ‘T’. Therefore the code contains ‘ST’ as the third & fourth digits. Similarly Glaco Total is ‘GL’ and Glaco OD is ‘GD’.

Fifth Digit: The fifth digit represents the type of packing that the product has undergone. This is one digit, which would need further refinement. As of now the nomenclature stands as follows.

1 – Tablets/ Capsules in blister/ PVC/PVDC or foil
2 – Bottles whether they contain capsules or liquid.
3 – Injections/ Vials

The above coding system allows users to identify the kind of primary packing and develop appropriate distribution/ Packing strategies.

For e.g.: In this case Serotin AST 100ml Physician sample is packed in bottles in liquid form therefore the code contains the fifth digit as ‘2’

Sixth, Seventh, Eighth Digits: The sixth, seventh, eighth digits represent the potency of the drug. This helps users differentiate between two drugs with the same brand name and with the same packing. A classic case in question would be Blickan 200, Blickan 400 & Blickan 600. These are only differentiated by the potency of the drug involved.

In this case, 10ml of Serotin is the recommended size of dose. Therefore the sixth, seventh, eighth digits are ‘010’ respectively.

Ninth, Tenth, Eleventh Digits: The ninth, tenth, eleventh digits represent the pack size of the drugs. They help the user identify the primary pack size. A classic example would be Blickan 200 9’s pack and Blickan 200 15’s pack. The last three digits help in differentiating each other.

For e.g.: In this case Serotin AST 100ml Physician sample is packed in bottles of 100ml each. Therefore the ninth, tenth, eleventh digits are ‘100’

Twelfth Digit: The twelfth digit if left blank represents a sale pack and if denoted by ‘P’ represents the physician sample. The digit has been provided only to distinguish between a sale pack and a physician sample pack.

The product codes may be expanded to include other details as well. In a few exceptions, where the names of the products are very similar the third and fourth digits have been appended with one more small case digit. This differentiates between two similar products with similar spellings and similar attributes.

Third Party Manufacturer Codes (TPM Codes):

The TPM codes are fairly simple and the following is the nomenclature. To explain the coding system we take three examples.


A110 – AKMA
A120 – ACOM
B400 – BLODIA.


First Digit: The first digit of any TPM code is the first letter of the TPM name.

For e.g.: The first digit of Akma and Acom is ‘A’. Therefore the first digit ‘A’ represents both the codes. The first digit of Blodia is ‘B’ hence represented by ‘B’.

Second Digit: The second digit of any TPM code is the CST applicable when the product is billed from that location.

For e.g.: The CST applicable when the products are billed from Akma or Acom is 1% therefore the code given is ‘1’.

Third Digit: The third digit is the serial numbers to differentiate between two TPM’s with in the same location and with the same starting letters. A classic example is Akma & Acom. Since both begin with the same letter the serial no 1 & 2 have been used to differentiate the two.

Scope of Expansion:

The fourth digit has been left blank on purpose. The same may be used to denote a TPM located in the excise free zone Vis a Vis a TPM located in the non-excise free zone. Alternatively any other important attribute may be used to signify the fourth digit.

RM/PM Code:

The RM/PM code developed is in a very rudimentary stage as the different attributes of the RM/PM need to be understood before defining the codes. Nevertheless it allows for functioning and currently the following have been incorporated in the codes.

The first 2000 digits 0000 to 2000 represent the Active Pharmaceutical Ingredient that go into the product. The code for each of the API is given alphabetically. Based upon further important criteria, codes may be modified.

The digits from 2001 to 5999 represent excipients, which aid in binding, sweetening and other properties. The structure followed to code the excipients is as given below.

2001 – 2300: These are the Binders. The unique codes for each of the product are given alphabetically.
2301 – 2800: These are the Coatings. The unique codes for each of the product are given alphabetically.
2801 – 3000: These are the Glidants. The unique codes for each of the product are given alphabetically.
3001 – 3300: These are the Fillers. The unique codes for each of the product are given alphabetically.
3301 – 3400: These are the Disintegrants. The unique codes for each of the product are given alphabetically.
3401 – 3600: These are the Lubricants. The unique codes for each of the product are given alphabetically.
3601 – 3900: These are the Preservatives. The unique codes for each of the product are given alphabetically.
3901 – 4800: These are the Flavors & Colors. The unique codes for each of the product are given alphabetically.
4801 – 5000: These are the Sweetners. The unique codes for each of the product are given alphabetically.
5001-5999: These have been left blank intentionally to accommodate for any expansion in the excipient category/ excipients.

The digits from 6000 to 9999 represent the Packing material that is used to pack the product. The different kinds of packing used are Primary, Secondary & Tertiary packing.

The primary packing material is further subdivided into bottles, foils etc. The coding system is as given hereunder.

6000 – 7499: Primary packing material. The primary packing is further subdivided as follows.
6000 – 6099: These are the Plastic containers & Caps. The unique codes for each of the product are given alphabetically.
6100 – 6350: These are bottles. The unique codes for each of the product are given alphabetically.
6360 – 6599: These are the caps. The unique codes for each of the product are given alphabetically.
6600 – 6699: These are PVC foils. The unique codes for each of the product are given alphabetically.
6700 – 6799: These are PVDC foils. The unique codes for each of the product are given alphabetically.
6850 – 7139: These are Aluminum foils. The unique codes for each of the product are given alphabetically.
7140 – 7249: These are Blister foils. The unique codes for each of the product are given alphabetically.
7250 – 7349: These are Glassine foils. The unique codes for each of the product are given alphabetically.
7350 – 7399: These are cups. The unique codes for each of the product are given alphabetically.
7400 – 7499: These are miscellaneous primary packing items. The unique codes for each of the product are given alphabetically.

7500 – 7949: Secondary packing material. The secondary packing is further subdivided as follows.

7500 – 7849: These are cartons. The unique codes for each of the product are given alphabetically.
7850 – 7949: These are Catch Covers. The unique codes for each of the product are given alphabetically.

7850 – 9999: Tertiary packing material. The tertiary packing is further subdivided as follows.

7950 – 7959: These are Hologram labels. The unique codes for each of the product are given alphabetically.
7960 – 8299: These are Labels. The unique codes for each of the product are given alphabetically.
8300 – 8789: These are DFC’s. The unique codes for each of the product are given alphabetically.
8790 – 8839: These are Shippers. The unique codes for each of the product are given alphabetically.
8840 – 8999: These are miscellaneous items provided for expansion of scope of products. The unique codes for each of the product are given alphabetically.
9000 – 9199: These are Gum pastes/ adhesives/ BOPP Tapes. The unique codes for each of the product are given alphabetically.
9200 – 9300: These are labels. The unique codes for each of the product are given alphabetically.
9300 – 9999: These are blank codes provided for expansion of scope of products. The unique codes for each of the product are given alphabetically.