famd outsourcing experience - cct meeting - gokarn1
TRANSCRIPT
FAMD’s Conversion Business
Advantages & Disadvantages of
Outsourcing Ferro Alloy Production
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Prabhash Gokarn
Ferro Alloys & Minerals
TATA STEEL
CCT Meeting on Sourcing Strategies
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Index
Introduction
Core competencies
Outsourcing
Outsourcing Ferro Alloy Production
History
Current Scenario
Advantages of Outsourcing
Disadvantages of Outsourcing
Conclusions 2
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Introduction
To compete effectively, it is essential for
business to concentrate on what they do best
and where they can add value.
Organizations have switched emphasis to
concentrate on their core competencies in
order to increase market penetration and
become more competitive.
Rather “own the market” than “own assets”
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Core competencies
Core competencies are the capabilities of an organization that truly distinguish it from its competitors.
They are unique capabilities upon which the success of the company depends.
They are what gives an organization its clear leadership position as seen by its customers.
All remaining activities are non-core competencies.
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Outsourcing
Outsourcing involves the transfer of the
responsibility for carrying out an activity to an
external service provider.
Outsourcing covers a range of different types of
functional areas
Some functions are usually always outsourced
(unless that is the main business) :
Transportation
IT Services
Payment Gateways 5
Definitions
Outsourcing is the transfer of activities, that were previously conducted in-house, to a third party
Outsourcing means that the company divests itself of the resources to fulfill a particular activity to another company to focus more effectively on its own competence
Outsourcing is the decision and subsequent transfer process by which activities that constitute a function, that earlier have been carried out within the company, are instead purchased from an external supplier
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Major Characteristics of
Outsourcing
Major characteristics of outsourcing are…
that activities that initially were performed in-house
are transferred to an external party
that assets and people go over to that external party
that there will be an extended relationship between
the parties involved over a longer period of time
that in transferring the activity to the external party
the buyer is exposed to both a cost- and risk profile,
both of which are new to the companies involved
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Definitions
Decision to outsource
Decision to outsource
Transfer of the function
and/or activities to an
external supplier
Transfer of the function
and/or activities to an
external supplier
Outsourcing
Outsourcing consists of two important dimensions
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Rationales for outsourcing
Strategic reasons
for outsourcing
1. Improve company focus
2. Gain access to world class capabilities
3. Get access to resources that are not available internally
4. Accelerate reengineering benefits
5. Improve customer satisfaction
6. Increase flexibility
7. Sharing risks
Tactical reasons
for outsourcing
1. Reduce control costs and operating costs
2. Free up internal resources
3. Receive an important cash infusion
4. Improve performance
5. Ability to manage functions that are out of control
All these reasons underlie one overall objective: to improve the
overall performance of the outsourcing firm
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Rationales for outsourcing
Advantages Disadvantages
Freeing up of cash: investments can be
concentated on core activities
Increased dependence on suppliers
Optimal usage of knowledge, equipment and
experience of third party
Continuous follow-up and monitoring of the
supplier relationship necessary
Increased flexibility: fluctuations in the workload
can more easily be absorbed
Risks of communication and organizational
problems during the transfer of activities to a third
party
Outsourcing leads to easier and more focussed
primary processes in the organization
Risks of leakage of confidential information
Input through an independent party’s point of view
which reduces the risks of introvert short-
sightedness in the organization
Performance incentives and penalties
Risk of losing essential strategic knowledge
Advantages and disadvantages of outsourcing
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Brief About FAMD &
Conversion Business
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FAMD – Ferro Alloys & Minerals Business carved out for greater
focus and formed as a separate profit center in 1993.
Three distinct business lines: Chrome, Manganese and Flux.
Major Customers are Carbon Steel, Alloy Steel & Stainless Steel
Manufacturers
Integrated Operations –Mining (Chrome and Manganese),
Beneficiation and Production , A Definitive Competitive Edge.
6th Largest Chrome Alloy Producer in the World with Production
Units in India and South Africa
Global reach - Strong presence in Japan, Korea, China
Nurtures LT relationships & Long Term Business Agreements.
FAMD
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MINERALS FERRO ALLOYS
CHROME ALLOYS MANGANESE ALLOYS DOLOMITE / PYROXINITE CHROME CONCENTATE
FLUXES
FERRO ALLOYS & MINERALS DIVISION (FAMD)
Only supplier of both FeCr & Ch Cr in the World
Ferro Alloys are essential inputs in Steel making
Addition of different elements influence
the mechanical, physical and corrosion resistant properties of Steel.
Ferro Chrome
ChargeChrome Ferro Manganese
Silico Manganese
FAMD - Products
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CHROME ALLOYS
MANGANESE ALLOYS
FERRO ALLOYS
CHROME CONCENTATE
MINERALS
F L U X
DOLOMITE /
PYROXINITE
• Every Third Utensil in India contains our Chrome Alloys
• Almost every Gillette Blade in the
world contains FeCr From FAMD
• 100% Share with JFE Japan For Chrome concentrate, World’s leading specialty steel producer
• 100% Share with Tata Steel India, TSTH & NAT Steel for FeCr and Manganese Alloys
• Pyroxinite supplies to Tata Steel Jsr Works giving strategic advantage to Tata Steel in terms of cost
Products End Use Highlights
• 100% Share with Hitachi Japan for Ferro Chrome
Stainless / Alloy Steel
Carbon & Stainless Steel (200 Series)
Manufacture of Chrome alloys and Stainless Steel
Manufacture of Steel
FAMD - Products
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1949 Discovered chrome in India
1957 FAP Joda 1st plant in India
1960 Chrome mining started at Sukinda-1st Cr Mine
1982 Mechanization of Sukinda Chromite Mine
1991 FAP Bamnipal acquired 50k cap ; COB Plant set up
1992 -1993 FAMD carved out for greater focus
1994- First Overseas Marketing Office in Hongkong
2006 Rawmet acquired 50k cap (renamed TS Alloys)
2008 TSKZN Operation Started;
1st Overseas Greenfield Project of Tata Steel
1929 Discovered manganese in India
1988 FeCr Conversion - 1st Conversion Model in India
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2010 Approval for Nayagarh(SiMn) & Gopalpur(FeCr)
Greenfield projects
2007 Ist Division of TSL certified to OHSAS
2007 Ist Mine in World To Be Certified to SA 8000
FAMD - Milestones
Pioneer in out
sourced
manufacturing
of ferroalloys
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FAMD – Conversion History
• Started with two 5 year contracts from 1988-89 to
1993-94 with VBC Ferroalloys at Hyderabad and
Nava Bharat Ferro Alloys at Paloncha for ferro
chrome. The contracts were successful and
renewed in 1994-95 till 2000 with yearly
extensions.
• New Contracts with
• ICCL (IMFA subsidiary)
• Standard Chrome
In 1991 – 92 due to various issues at the mines,
and subsequent non supply of chrome ore these
contracts ended up in litigation. TSL’s attempt to
take over Standard Chrome also failed.
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FAMD – Conversion History
Chrome Alloys • Subsequent Ferro Chrome contracts with :
• IDC at Jajpur
• Andhra Ferro Alloys Kothavalsa
• FACOR at Garividi then Randia
Were successful; but Facor contract ended in bad
taste when Facor successful got part of the
truncated Sukinda lease.
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FAMD – Conversion History
Special Chrome Alloys • In NBFAL Dhenkenal perfected making of Low
Phos Ferro Chrome with friable lumps and no
briquettes.
• Subsequent learning transferred to own plant at
Bamnipal
Award from Chairman Tata Steel
for low phos Ferro Chrome 18
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FAMD – Conversion History
Manganese Alloys
• First Silico Manganese Contract : 1998-1999 then
renewed 1999-2000 with Universal Ferro Alloys,
Tumsar. Ended when Uniferro became insolvent.
• First Ferro Silicon Buyback arrangement with VBC
Ferro Alloys in 1998-99 and 1999-2000
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FAMD – Conversion History
Silico Manganese
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FAMD – Conversion History
Ferro Silicon
• First Ferro Silicon Contract : 1998-1999 with VBC
Ferro Alloys (more like a buy-back) – solely
supplied to Jsr
• Ferro Silicon Buyback arrangement with VBC
Ferro Alloys in 1998-99 and 1999-2000
• Buy back with Bhutan Ferro Alloys for a short
period
• Stopped when Chinese FeSi flooded Indian
Market
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FAMD – Conversion History
Special Alloys
• First Medium Carbon Ferroalloy Conversion with
Ravi Chaudhuri based on alumino thermic
process in 1999-2000 at 300 MT/month for Jsr
supplies
• Ended due to varying requirements of
Jamshedpur and crash in MC FeMn prices due to
cheap Chinese imports.
• MC FeMn and LC SiMn from furnace route
introduced in 2015
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The outsourcing process
Competence
analysis
Assessment
& approval
Contract
negotiation
Project execution
& transfer
Managing
relationship
Contract
termination
Strategic phase Transition phase Operational phase
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Different outsourcing contracts
Lump-sum turnkey Contract is based upon a fixed price (per period) for executing the project or a
certain activity
Reimbursable turn-key The provider is compensated for all costs that he incurs for executing the project
or a certain activity
Semi lumpsum turn-
key
Part of the work is compensated on a fixed price basis; the other part is
compensated on a reimbursable basis
Lumpsum fixed price The supplier agrees to complete the work against a fixed price based upon a
predefined, detailed scope of work. Everything that is not included in the scope of
work is settled between parties on an ad-hoc basis
Cost reimbursable The supplier agrees to complete the work on open book, open cost basis based
upon a general scope of work. There is no sharing of savings
Guaranteed maximum
contract
The same as a cost reimbursable contract, only the outsourcer pays to a certain
agreed maximum. The extra costs are for the supplier
Share the savings /
loss (target price
contract)
The services are paid for on a reimbursable basis. When the contract costs are
higher or lower than the original budget (target price), the difference is shared
between parties on a pre-agreed basis
Unit rate Rates are agreed for regular, routine activities, the size of which cannot be
anticipated. Rates are defined per m2 of paint, meter of cable to be installed, etc.
Payments are made based upon actual use.
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Success in Outsourcing
Depends On
Core values Supporting factors
Shared goals and objectives
Mutual dependence
Open lines for communication
Concern for the other’s profitability
Mutual commitment to customer
satisfaction
Trust
Developing a personal relationship
Having professional respect
Investment of effort by top management
Commitment to continuous improvement
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Critical success factors of
outsourcing Understanding company goals and objectives
A strategic vision and plan
Selecting the right vendor
A properly structured contract
Open communication with the individual groups involved
Ongoing management of the relationship
Senior executive support and involvement
Careful attention to personnel issues
The way the company is strategically positioned vis-à-vis its supplier. Can it still exert some control over its supplier, or not?
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FAMD’s Experience
Many Hits, Few Misses
HITS
• Production levels started from around 30,000
MT/year of FeCr in 1988 and increased to over
1,00,000 MT/year FeCr by 2015 and from 25,000
of SiMn in 1998-99 to over 1,00,000 MTPA in
2015
• New Alloys : from solely FeCr to FeCr + SiMn +
FeSi + FeMn + MC FeMn & LC SiMn
• Low Phos FeCr perfected at a conversion agent
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FAMD’s Experience
Many Hits, Few Misses
MISSES
• Our former conversion agents successfully got
our SCM lease truncated and received parts of
the truncated mines : FACOR & IMFA. NBFAL too
participated but delay in establishing ferro plant at
Dhenkenal cost them the lease
• Legal cases with ICCL/IMFA and Standard
Chrome
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FAMD’s Experience
FOOD FOR THOUGHT
• Has Conversion Model helped generate competition in
India for Tata Steel by teaching others the business and
exposing them to the market ?
• Loss of lease as mentioned earlier. Competition for
subsequent renewals.
• Lack of your own plant : missed opportunities in boom
period when conversion agents prefer to strike it on their
own.
• Conversion model has prevented TSL in establishing
plants when getting land was easy…a vital chink in our
armour when it comes to dominating the global ferro alloy
industry. 29
