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ACKNOWLEDGEMENT

On having completed this project, it gives me immense pleasure to express my thanks and

gratitude to all those without whom this project would not have been a success.

I would like to thank Mr. Cherian K A (Sr. E.S. to ED, HR) for giving me the opportunity to do

my summer internship project at NTPC Ltd.

I would like to thank Mr. S K Pandita (AGM, Corporate Materials Management) Mr. R C

Khorwal (Deputy General Manager, Corporate Materials Management), and Mr.B V Pathak

(Deputy General Manager, Corporate Materials Management) for providing me the opportunity

to do this project in the Corporate Materials Management of NTPC Ltd and for providing me

with time to time guidance. Their valuable insights and knowledge has helped me in shaping my

project in the right direction.

I would also like to express my heartfelt gratitude to Mr. Venu G (Addl General Manager,

Project Engg. Mech), Mr. Sarath (Sr. Engineer Quality Assurance) and Ms. Smita Menon (Sr.

Officer HR) for giving me the impetus for doing the project.

I would like to express my gratitude to Mr.Venkatesh V.G (Asst. Prof. SCM, SIOM) for his

valuable guidance and mentoring.

I would like to thank the employees of NTPC Ltd. and all my friends there for supporting me in

my endeavours.

I would like to express my gratitude Dr.Vandana Sonwaney (Director, SIOM) and Prof. P. N.

Parameshwaran (Head Corporate Relations and Placements) for finding me capable to do my

project at Cochin Shipyard Ltd.

S Jayachandran

MBA(Operations Management)

Symbiosis Institute of Operations Management


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Table of Contents

1. EXECUTIVE SUMMARY ...................................................................................................................................... 3

2. INTRODUCTION ................................................................................................................................................ 4

3. COMPANY BACKGROUND................................................................................................................................. 6

3.1 EVOLUTION OF NTPC ..................................................................................................................................... 73.2 SOME FACTS AND FIGURES .......................................................................................................................... 10

3.3 CURRENT FINANCIAL STATUS ....................................................................................................................... 10

3.4 Diversified Growth of NTPC .......................................................................................................................... 11

3.5 Functional aspects in NTPC .......................................................................................................................... 13

4. DEFINITION AND SCOPE OF PROJECT ............................................................................................................. 14

CONCEPTUAL REVIEW OF PROJECT AREA ............................................................................................................... 15

PROCUREMENT PROCESS ................................................................................................................................... 15

Various steps involved in Materials Procurement .............................................................................................. 15

Responsibilities involved in a Purchase function ................................................................................................ 16

PARAMETERS FOR EFFECTIVE PURCHASE MANAGEMENT ................................................................................. 17

PURCHASE CYCLE FOLLOWED IN NTPC ............................................................................................................... 18

CHALLENGES IN THE PURCHASE MANAGEMENT FUNCTION ............................................................................. 19

EXISTING PROCUREMENT PROCESS IN NTPC ...................................................................................................... 19

REVERSE AUCTION........................................................................................................................................ 24

IDENTIFIED STRENGTHS OF THE PUBLIC PROCUREMENT SYSTEM ..................................................................... 25

IDENTIFIED WEAKNESS OF THE PUBLIC PROCUREMENT SYSTEM ...................................................................... 26

5. ANALYSIS AND FINDINGS ................................................................................................................................ 27

PARETO ANALYSIS ............................................................................................................................................... 27

DATA OF ITEMS PROCURED THROUGH REVERSE AUCTION .............................................................................. 31

DEA ANALYSIS FOR VENDOR EVALUATION ......................................................................................................... 32

6. CONCLUSIONS AND RECOMMENDATIONS .................................................................................................... 34

Conclusions ......................................................................................................................................................... 34

Recommendations .............................................................................................................................................. 35

7. FINAL VALUE ADDITION .................................................................................................................................. 38

Monetary Benefits .............................................................................................................................................. 38

Non-monetary Benefits ...................................................................................................................................... 39

8. NEXT STEPS ..................................................................................................................................................... 40

9. GLOSSARY OF TERMS...................................................................................................................................... 41


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1. EXECUTIVE SUMMARYThe group of people responsible for controlling and

organizing a company is management. As per Peter Drucker "Management is a multi-purpose

organ that manages business and manages managers and manages workers and work. Everymanagement problem involves decision making. Decision making is an importantactivitythat allorganizations have totake regularly. The decision has to be based on factual understanding. In

this project our objective was to study the Procurement System at NTPC one of the leading

NAVARATNA & PSU of Government of India. The lead time taken for the procurement

process isa very common issue in public sector organizations. Here in NTPC since everyprocurement can happen only through Tendering process, the lead time of the entire process

escalates. Our study was done in CMM (Corporate Material Management) which deals in

centralized procurement of materials and services. CMM, Indenting and Finance are the stake

holders involved in the process.

The project aims at reducing lead time of the procurement process

of CMM. Sometimes unforeseen factors like Government Orders or Legal issues or request for

change in terms and conditions from vendors play an influential role in increase of lead time.

The CMM has to work in harmony with indenting and Finances for procurement. The

responsibility of CMM starts when they receive the clean PR (Purchase Requisition). In this

project we tried to do a root cause analysis so that the real issues are addressed and brought to

the notice of the top management .The most critical process has been identified as the time

taken for the preparation of QR (Qualification Requirements). So it was very essential to

form a continuous monitoring system to control the lead time and to improve the process. We

have tried to develop a solution in MS excel which can provide better visibility of the activities

happening for each PR. Apart from this, vendor enlistment and e-procurement has been

suggested as the best practices that can be adopted to reduce the lead time of the procurement

process. Data Envelop analysis (DEA) for bringing in more objectivity in the vendor evaluation

has also been suggested. Using of reverse auction for the procurement process will result in high

monetary and time benefits and hence this has also been included as one of our major

suggestions.


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2. INTRODUCTIONIn our project we have studied the current procurement system of NTPC

and have tried to improve it. The procurement is done in a very unique way in the organization.

Since its a PSU there are a lot of procedures that is to be followed for the procurement. The

entire process is coordinated by CMM working in harmony with Finance and Indenter. From the

cases we went through we were able to identify the areas of concern.

The procurement process starts as and when the CMM receives a clean

Purchase Requisition (the PR which has both administrative approval and financial concurrence

from competent authorities is called as clean PR) from the Indenter. Depending upon the

availability of vendors in the market the tender type is decided.

There are basically three types of tender namely

Open Tenders: In an open tender, bids are invited giving wide and adequate publicity. This is

the most preferred mode of tendering with respect to transparency in procurement.

Limited Tenders: In the case of small value works, urgent works and in case only a few bidders

are available in the market, limited tenders from such bidders who have been enlisted are invited.

In case of Limited Tenders the enlistment should be done in a transparent way and updated

periodically.

Single Tender/Nomination Basis: Award of contracts on nomination basis, which is also called

a single tender is to be resorted to only under exceptional circumstances such as natural

calamities and emergencies or there were no bids to repeated tenders or where only one supplier

has been licensed ( proprietary item ) in respect of goods sought to be procure.

Depending upon the number of vendors available in the market the tender type is

decided. NTPC will go for a limited tender if they have confidence in the existing vendors and

also value is not exceeding 15 lacs. For the limited tender screening committee is to be

constituted for the approval of vendor list. A tender committee is constituted in all cases in which


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3. COMPANY BACKGROUND

Corporate Vision:

A world class integrated power major, powering Indias growth, with increasing global

presence

Core Values of NTPC:

BECOMITTEDB-Business Ethics

C-Customer Focus

O-Organizational & Professional prideM-Mutual Respect and Trust

I- Innovation & Speed

T-Total quality for Excellence

T-Transparent and Respected organization

E-Enterprising

D-Devoted

NTPC's core business is engineering, construction and operation

of power generating plants and providing consultancy to power utilities in India and abroad.

NTPC Limited (formerly National Thermal Power Corporation) is

the largest Indian state-owned electric utilities company based in New Delhi, India. It is listed

in Forbes Global 2000 for 2011 ranked it 348th in the world. It is an Indian public sector

company listed on the Bombay Stock Exchange in which at present the Government of India
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holds 84.5% (after divestment the stake by Indian government on 19th October, 2009) of its

equity.

With a current generating capacity of 36,014 MW, NTPC has embarked on plans to become a

75,000 MW company by 2017.

The Company was incorporated on November 7th, 1975 under the

Companies act as a private limited company under the name National Thermal PowerCorporation Private Limited. On September 30th 1985, the Company was converted from a

private limited into a public limited company. Subsequently the name of the Company was

changed to its present name NTPC Limited and a fresh certificate of incorporation was issued onOctober 28th 2005. The name of the company was changed to reflect the diversification of its

business operations beyond thermal power generation to include among others, generation of

power from hydro, nuclear and renewable energy sources and undertaking coal mining and oil

exploration activities.

3.1 EVOLUTION OF NTPC

1975- Incorporation of the Company

1978- Takeover of management of the Badarpur project

1982- Commissioning of the first 200 MW unit at Singrauli


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1984-The transmission line based on High Voltage Direct Current (HVDC) technology,

commissioned for power transmission from Rihand to Delhi.

1986- Synchronized first 500MW unit at Singrauli.

1987- 5,000 MW installed capacity mark crossed

1988- First syndicated Japanese loan of 30 billion JPY raised.

1989-Consultancy division of our Company launched and First unit (88 MW) of the Companys

first gas based combined power plant at Anta, Rajasthan commissioned

1990- Total installed capacity 10,000 MW reached

1992- First acquisition by the Company of Feroze Gandhi Unchahar Thermal Power Station

(2x21OMW) from Uttar Pradesh Rajya Vidyut Utpadan Nigam of Uttar Pradesh,

1992- The transmission system owned by the company were transferred to Power Grid

Corporation of India Limited pursuant to legislation by The Parliament of India

1993- IBRD extended direct loan of US$400 million to the Company under time slice concept

for its projects.

1994- 15,000 MWof Installed capacity achieved1997- Navratna status granted by the Government.

1998- Commissioned the first Naphtha based plant at Kayamkulam with a capacity of 350 MW

1999- Companys Dadri thermal power project, Uttar Pradesh adjudged the best in India with a

PLF of 96.12% certified with ISO 14001.

2002- Three wholly owned subsidiaries NTPC Electric Supply Company Limited, NTPC Hydro

Limited and NTPC Vidyut Vyapar Nigam Limited incorporated ESP [Electrostatic precipitators)

set up at Talcher power plant 20,000 MW installed capacity mark exceeded.


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Construction of first hydro-electric power project of 800MW capacity in Himachal Pradeshcommenced after the investment approval.

2004- The award of contract for the first Super critical Thermal Power Plant at Sipat reached a

total installed capacity of 22,249 MW with the Talcher Unit V gelling Synchronized on May

13,2004

2005-Company received International Project Management award 2005 for its Simhadri project

at International Project Management Association World Congress. The company was ranked 3rd

great place to work for in India for the second time in succession by a survey conducted by Grow

Talent and Business World 2005.

2006- Badarpur thermal power station having an installed capacity of 705MW transferred to

NTPC.

2008- NTPC was judged the star PSU-2008. Board expanded by the appointment of five

independent directors. India Power Award conferred on Centre for Power Efficiency and

Environmental Protection.

2009-MoU entered into with Nuclear Power Corporation of India Limited for development of

nuclear power in India 30000MW installed capacity mark crossed. Long term fuel supply

agreement signed with Coal India Limited for supply of coal to the power stations of NTPC all

over India for a period of 20years.

NTPC acquired Kerala and Transformers and Electrical Kerala Limited from Gov. of

Kerala for a massive 313.4mn.

NTPC enters MOU with NPCIL to work together for the development of nuclear power

projects in India and for this purpose to form a joint venture company for setting up nuclear

power projects

NTPC inks JV agreement with SAIL, RINL Coal India and NMDC.


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3.2 SOME FACTS AND FIGURES

The total installed capacity of the company is 36,014 MW (including JVs)

with 15 coal based and 7 gas based stations, located across the country. In addition under JVs, 5stations are coal-based, and another station uses naphtha/LNG as fuel. By 2017, the power

generation portfolio is expected to have a diversified fuel mix with coal based capacity of around

27,535 MW, 3,955 MW through gas, 1,328 MW through Hydro generation, about 1400 MW

from nuclear sources and around 1000 MW from Renewable Energy Sources (RES). NTPC has

adopted a multi-pronged growth strategy which includes capacity addition through green field

projects, expansion of existing stations, joint ventures, subsidiaries and takeover of stations.

NTPC has been operating its plants at high efficiency levels. Although the

company has 19% of the total national capacity it contributes 29% of total power generation due

to its focus on high efficiency. NTPCs share at 31 Mar 2001 of the total instal led capacity of the

country was 24.51% and it generated 29.68% of the power of the country in 200809. Every

fourth home in India is lit by NTPC. As at 31 Mar 2011 NTPC's share of the country's total

installed capacity is 17.75% and it generated 27.4% of the power generation of the country in

201011. NTPC is lighting every third bulb in India. 170.88BU of electricity was produced by its

stations in the financial year 20052006. The Net Profit after Tax on March 31, 2006 was58.202 billion. Net profit after tax for the quarter ended June 30, 2006 was 15.528 billion,

which is 18.65% more than that for the same quarter in the previous financial year. It is listed

in Forbes Global 2000 for 2011 ranked it 348th in the world.

3.3 CURRENT FINANCIAL STATUS

State-run NTPC has paid an interim dividend of Rs.2, 885.92 crore for the

current fiscal. Interim dividend is a payment made before a companys final financial statements.

NTPC paid this dividend to the government, which is the promoter of the company with 84.5 per

cent stake. The company has paid an interim dividend of Rs.3.50 per equity share, being 35 per

cent of the paid-up equity share capital of the company amounting to Rs.2, 885.92 crore for the

financial year 2011-12 on February 9, 2012. Net profit of the company rose 10 per cent to Rs.2,

130.39 crore for the quarter ended December 31, 2011 due to increase in coal prices. NTPC had
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posted a net profit of Rs.2, 371 crore during the corresponding period last fiscal. Cost of fuel

(coal) witnessed a sharp jump of about 29 per cent at Rs.10, 793.29 against Rs.8, 338.64

crore.Net sales rose 14 per cent to Rs.15,332 crore from Rs.13,421 crore. NTPC floated a tender

in November 2011 for importing 4 million tonnes of coal during the current financial year to feed

its plants. The companys annual coal requirement is approximately around 164 metric ton. It

generates over 36,000 MW of electricity from its various power plants from all sources of

energy.

3.4 Diversified Growth of NTPC

As per new corporate plan, NTPC plans to become a 75 GW company by the year 2017 and

envisages to have an installed capacity of 128 GW by the year 2032 with a well-diversified fuel

mix comprising 56% coal, 16% gas, 11% nuclear energy, 9% renewable energy and 8% hydro

power based capacity.

As such, by the year 2032, 28% of NTPCs installed generating capacity will be based on carbon

free energy sources. Further, the coal based capacity will increasingly be based on high-efficient-

low-emission technologies such as Super-critical and Ultra-Super-critical. Along with this

growth, NTPC will utilize a strategic mix of options to ensure fuel security for its fleet of power

stations.

Looking at the opportunities coming its way, due to changes in the business environment, NTPC

made changes in its strategy and diversified in the business adjacencies along the energy value

chain. In its pursuit of diversification NTPC has developed strategic alliances and joint ventures

with leading national and international companies. NTPC has also made long strides in

developing its Ash Utilization business.

Hydro Power: In order to give impetus to hydro power growth in the country and to havea balanced portfolio of power generation, NTPC entered hydro power business with the

800 MW Koldam hydro project in Himachal Pradesh. Two more projects have also been

taken up in Uttarakhand. A wholly owned subsidiary, NTPC Hydro Ltd., is setting up

hydro projects of capacities up to 250 MW.


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Renewable Energy: In order to broad base its fuel mix NTPC has plan of capacityaddition of about 1,000 MW through renewable resources by 2017.

Nuclear Power: A Joint Venture Company "Anushakti Vidhyut Nigam Ltd." has beenformed (with 51% stake of NPCIL and 49% stake of NTPC) for development of nuclear

power projects in the country.

Coal Mining: In a major backward integration move to create fuel security, NTPC hasventured into coal mining business with an aim to meet about 20% of its coal requirement

from its captive mines by 2017. The Government of India has so far allotted 7 coal blocks

to NTPC, including 2 blocks to be developed through joint venture route.

Power Trading: 'NTPC Vidyut Vyapar Nigam Ltd.' (NVVN), a wholly owned subsidiarywas created for trading power leading to optimal utilization of NTPCs assets. It is the

second largest power trading company in the country. In order to facilitate power trading

in the country, National Power Exchange Ltd., a JV of NTPC, NHPC, PFC and TCS

has been formed for operating a Power Exchange.

Ash Business: NTPC has focused on the utilization of ash generated by its power stationsto convert the challenge of ash disposal into an opportunity. Ash is being used as a raw

material input by cement companies and brick manufacturers. NVVN is engaged in the

business of Fly Ash export and sale to domestic customers. Joint ventures with cement

companies are being planned to set up cement grinding units in the vicinity of NTPC

stations.

Power Distribution:NTPC Electric Supply Company Ltd. (NESCL), a wholly ownedsubsidiary of NTPC, was set up for distribution of power. NESCL is actively engaged in

Rajiv Gandhi Gramin Vidyutikaran Yojanaprogramme for rural electrification.

Equipment Manufacturing: Enormous growth in power sector necessitates augmentationof power equipment manufacturing capacity. NTPC has formed JVs with BHEL and

Bharat Forge Ltd. for power plant equipment manufacturing. NTPC has also acquired

stake in Transformers and Electricals Kerala Ltd. (TELK) for manufacturing and repair

of transformers.


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3.5 Functional aspects in NTPC

The company is a major power producer in India. Major activities carried

out by NTPC are conducting financial viability and environmental impact assessment for new

projects, design and installation of power plants and operation of power plants. The various

departments in NTPC are

Projects Engineering carries out the basic engineering needs of the power plantConstruction, installation, Commissioning and subsequent Operation details

Operation Services, carries out the monitoring the operation & functions of the Running& commissioned plants & their maintenance.

Quality Assurance which helps in getting the materials at the right quality and accordingto the terms and conditions in the contracts/tender. Developing new vendors and thus

increasing the competition among the existing vendors is one of the functions carried out

by Quality assurance

Finance which helps in providing funds for the projects, spare parts and for the day to dayadministrative and operational activities

Contracts which enter into long term contracts & initial setting up of Power Plantsincluding purchases of machinery and fuel for running of the same.

i. Contracts deals in the centralized procurement of materials and servicesii. Materials department at various plants deals in the procurement for

operation of power plants


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4. DEFINITION AND SCOPE OF PROJECT

The project aims at analyzing the Lead Time of procurement process for

materials and services done by the Corporate Materials Management department for various

Departments in NTPC corporate office (EOC) and projects.

Also it deals with the root cause analysis for the increase in lead time of

procurement process. With the help of Pareto analysis and Fishbone diagram/Cause & Effect

diagram various causes for the delay has been listed and solutions for these problems have been

recommended.

The study of existing vendor evaluation process and exploring the

possibility of using DEA analysis for the improvement of vendor evaluation process is one of the

major parts of our work. Data envelopment analysis (DEA) is a nonparametric method

in operations research and economics for the estimation of production frontiers. It is used to

empirically measure productive efficiency ofdecision making units (or DMUs).The efficiency of

various vendors for a material was analyzed.

E-procurement coupled with reverse auctioning has huge potential forreduction in Lead Time and also for getting a better bargain from the vendors. The different

aspects of reverse auction and e-procurement process in NTPC were studied.

The Lead time analysis done in CMM can definitely help the organization

and top management to have a retrospection of existing system and bring in necessary changes.

The recommendations given in the form of suggestions as well as deliverables will enable NTPC

in long run to control the Lead Time related issues in the procurement process and they can

control the entire process in a much more effective way.
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CONCEPTUAL REVIEW OF PROJECT AREA

PROCUREMENT PROCESS

First phaseof procurement process is the planning stage which isof prime importance. Planning can be basically divided into two phases. There are

some specific requirements that is to be fulfilled in the first phase which are

Clear concise and complete description of stores and its specification anddrawings are prepared.

The eligibility criteria, the previous performances Important commercial requirements are laid down A realistic delivery period is determined Mode of purchase is selected The second phase of planning includes the following stages which are very

critical

To adopt standard specifications To broad base the technical features in order to facilitate competition It takes the help of users and the manufactures in finalizing the technical

specifications

To arrive at realistic delivery time-frame with a view of securing optimum prices To arrange pre-bid conferences with the prospective suppliers in order to explain

to them the requirements and get fully responsive offers

Various steps involved in Materials Procurement

Selection of source of supply:

Information gathering: If the potential customer does not already have an established

relationship with sales/ marketing functions of suppliers of needed products and services (P/S), it

is necessary to search for suppliers who can satisfy the requirements.


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Supplier contact: When one or more suitable suppliers have been identified, requests for

quotation, requests for proposals, requests for information orrequests for tendermay be

advertised, or direct contact may be made with the suppliers.

Background review: References for product/service quality are consulted, and any requirements

for follow-up services including installation, maintenance, and warranty are investigated.

Samples of the P/S being considered may be examined or trials undertaken.

Finalization of terms of purchase:Negotiations are undertaken, and price, availability, and customization

possibilities are established. Delivery schedules are negotiated, and a contract to acquirethe P/S is completed.

Placement of Purchase Orders (POs) Follow ups Maintenance of cordial relations with the suppliers Vendor evaluation

Responsibilities involved in a Purchase function

Pre Purchase Order Systemo Purchase Requisition (PR)o Checking requisition for Specs, QAP etc.o Vendor selectiono Calling Tenderso Evaluation of Tenders

Purchase Order Systemo Timely order placement on technically acceptable lowest bidder L1 if necessary

after negotiation

o Detailing Terms & conditions of the ordero Bidding on supplier accepting the order
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Right Qualityo Proper specificationso Technical data, drawing and quality Plano Samplingo Standardization(Item/Product)

Right Timeo Re Order Level(ROL)o Lead time analysiso Consumption pattern

Right Source

o Vendor ratingo Dependabilityo Purchase researcho Standardization (Source)

Right Quantityo Price structure and discountso EOQ

Right Contracto Legal aspects

Right Transportationo Cost analysis of transportation and logistics

Right Attitude

PURCHASE CYCLE FOLLOWED IN NTPC

The procedure adopted may vary among different type of purchase.

However, normal cycle of activities in purchase comprises the following steps:

1. Develop clear and complete description and specification of the item


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2. Determine important commercial requirements performance criteria eligibility criteriaetc.

3. Invite bids allowing reasonable time for response from traders4. Open tenders in public5. Evaluate tenders6. Assess capacity of new suppliers7. Select suppliers8. Award contracts9. Follow up the contracts10.Inspect the stores at manufacturers premises11.Release initial payment12.Check the stores at consignees end13.Release balance payment14.Finalize and close the contract

CHALLENGES IN THE PURCHASE MANAGEMENT FUNCTION

Lack of Quality Awareness Fund constraints Change in Government Policies including CVC guidelines from time to time.

EXISTING PROCUREMENT PROCESS IN NTPC

The existing conventional procurement in NTPC is covered by the

activities enlisted here and it is governed by the Works and Procurement Policy in Delegation Of

Power (DOP).

Tender stage in any procurement has following stages

Pre award Indent, Budget Cost approvals & Govt approvals Preparation of QR/bid document approval Basic Engineering & Tender Specifications NIT approval


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Award

Preparation of tender document Invitation of bids and bid opening Technical evaluation report by indenter Technical clarification from vendor Preparation and TC recommendation for price bid opening Approval for price bid opening Communication to bidders and opening of price bid Price bid opening and CS Preparation and TC recommendation for award/pre-award discussion Approval of TC recommendations PRE AWARD DISCUSSION Pre award discussion with bidder TC note approval after pre award discussion Issue of Purchase Order(PO)

Post Award Acceptance of Order Approvals of quality Plans & inspection schedules Expediting of Supplies.

The existing conventional procurement in NTPC is governed by the

activities undertaken with respect to the adopted mode of tendering and the time period or thetime taken in performing any or either of functions as per conventional methods and norms.

The present available procedures and guidelines provides following time

period for converting PR to PO.


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TENDER TYPE WITHOUT PRE-AWARD

DISCUSSION

WITH PRE-AWARD

DISCUSSION

I. SINGLE TENDER 8 WEEKS 10 WEEKSII. LIMITED TENDER 14 WEEKS 16 WEEKS

III. OPEN TENDER 16 WEEKS 18 WEEKS

All these activities are in line with NTPC procurement system as per

works and procurement policy and DOP (Delegation of Power)

In a transparent system, tenders are opened in public in the presence of

authorized trade representatives at the time and place designated in the invitation of bids is called

as tender opening. The price quoted by bidders is read out during the bid opening.

The decision for finalization of tender is taken by the Tender

Committee nominated by the competent authorities to evaluate, analyze then to put up the

recommendation for the procurement and placement of award, a committee consisting of

representatives from Indenter, Finance and Materials departments.

. The constitution of this committee varies from case to case depending on the value of purchase.

Evaluation of vendors happen keeping in view the bid requirements

(technical & commercial) set out in tender invitation and the compliance of the bids with the

specification, drawings etc. Bids are evaluated by the Tender Committee

At the initial stage of evaluation the offers are categorized into

i. Responsiveii. Unresponsive

iii. Technically acceptableiv. Technically unacceptable


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Having undertaken this exercise further attention is focused only on bids

which are responsive and technically acceptable.

The next concern in the evaluation of bids is the reasonableness of the

price. Reasonability is determined on the basis of either cost analysis or price analysis. Cost

analysis is a bit extensive and time-taking exercise and cost varies from one manufacturer to

another. Therefore price analysis is undertaken in many cases to assess the reasonableness of the

bids. Determination of reasonable price leads one to take a decision as to whether negotiations

need to be conducted. This decision is normally taken by the competent authorities based on the

recommendations made by the Tender Committee. In case it is concluded that the quoted prices

are appreciably higher than what the reasonable price ought to be, negotiations are held with a

view to obtaining the right price.

In case of new bidder to assess their capability an assessment committee

is constituted, which includes the members of Indenter, Finance and Materials (can be same as

TC) along with the representatives from Quality assurance (QA) and Inspection department. The

committee methodically does the financial verification, capacity assessment, after sales service,

quality controls and procedures, inspection and testing facilities, documentation systems etc. as

per job requirements, the reliability of such bidders is then judged keeping in mind various

factors including their status, past performance, etc. and puts up the report to the Tender

Committee (TC).

Tender recommendation is the subsequent step to the evaluation of

the bids by the Tender Committee put up to the competent authority. Generally the

recommendations carry a common methodology which includes

Calling for discussions to sort out technical issues Calling for price negotiations to obtaining right price After sales report Delivery requirement Manufacturing capacity of bidder


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Financial strength of bidder Delivery committed by the bidder Present load and performance of the bidder

After the discussions and negotiations on the above issues which refine the

tender, Tender committee puts up the Award recommendation to the competent authority.

After finalizing the purchase decision the contracts are awarded within the

validity of the offers, clearly specifying the stipulated requirements as

Description of item Price Payment terms Inspection clauses Delivery Taxes and duties etc.

In case of high value transactions, the acceptance of the supplier is also obtained on the spot after

making necessary amendments which may be desired by the supplier in order to establish a

concluded contract.

Another practice NTPC has adopted is the E-procurement.

Internet having changed the manner of conducting business, revolutionized the way of

communication internally & externally via e-mails & Websites and the manner in which

business in conducted with Partners, suppliers and customers. For the serious business

purposes, it is essential to adopt the internet technologies and the key benefits of e-business

are in creating efficiencies and producing. In Materials Management, Procurement is an area

where the use of combination of Internet Technologies can drive major efficiencies i.e.

controlling cost and improving employee productivity


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Benefits of e-procurement model

Reduced tender cycle-time. Fast and accurate pre-qualification and evaluation, which enable the automatic rejection

of suppliers that fail to meet the tender specification.

Faster response to questions and points of clarification during the tender period. Reduction in the labor intensive tasks of receipt, recording and distribution of tender

submissions.

Reduction of the paper trail on tendering exercises, reducing costs to both theorganization and the suppliers.

Improved audit trail increasing integrity and transparency of the tendering process. Improved quality of tender specification and supplier response. Provision of quality management information

REVERSE AUCTION

Reverse auction is a type of auction in which the role of the buyer

and seller are reversed, with the primary objective to drive purchase prices downward. In an

ordinary auction (also known as a forward auction), buyers compete to obtain goods or services.

In a reverse auction, sellers compete to obtain business. During a reverse auction, all the

interested bidders log on to the auction site and inputs several quotes, in multiples of a specified

amount, over a 30-90 minute period. These quotes reflect the prices at which they are willing

to supply the requested package. As the bidder can only view its relative position with respect to

other bidders, he bids down the price until the price quoted by him becomes the lowest of all.

After completion of reverse auction, the L1 bidder (the bidder which quotes the lowest price)

will submit the item rates within 48 hours (2 days) of completion of reverse auction. Thepercentage reduction of prices achieved during the auction is uniformly distributed over all the

items. In no case, the individual item rate can be revised to higher value than indicated in the

original item rate schedule against which the reverse auction has been conducted. After

receivingthe item rate, the tender committee shall put up recommendations to the competent


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authority offline. After approval of competent authority the order shall be released to L1 bidder

as per normal procedure.

Reverse auction can be adopted wherever there is a scope of buying in large quantities lucrative

enough for the market players to participate in competitive bidding. Ideally reverse auction can

be extended to procurement of any product/ service provided more than three vendors are

participating. This can also help in doing away with the administrative work to a great extent,

leading to reduction in Lead Time in procurement along with the price reduction..

IDENTIFIED STRENGTHS OF THE PUBLIC PROCUREMENT SYSTEM

A broad based specification is formulated for procurement wherein a standardspecification is not available (adherence to standard specification is recommended). This

encourages competition.

Competition is also encouraged by giving wide publicity to the Tender enquiries, whichare normally advertised resulting in a good price for the purchaser.

The bids are opened in public in front of authorized representatives of bidders whichgives the procurement process a high degree of transparency.

Eligibility and evaluation are specified at the time of inviting tenders so that after bidopening the offers are evaluated in an objective manner and the contract is awarded to the

bidder who has the lowest bid both technically and commercially and also responsive.

The system does have the provision to consider offers from new sources/vendors andafter the verification of technical and financial strength of such sources/vendors. This

does take time but in many cases results in economic purchases and long terms relationswith sources/vendors.

The accountability of the official should be quite high. This puts the officers on guard andensures careful processing of tenders, checking of various parameters and fair decisions.


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Purchase managers normally takes a decision in consultation with Tender Committee andthe Financial concurrence before the recommendations are put up to the competent

authority. The purchase mangers do not enjoy adequate delegation of powers

IDENTIFIED WEAKNESS OF THE PUBLIC PROCUREMENT SYSTEM

The LEAD TIME is very high depending upon the type of tender (min of 8 weeks to 18weeks if every process happens within the stipulated time limit).

Inadequacy in DOP. Rigid rules Emphasis on lowest bidder irrespective of quality Inadequate interaction with bidders (forcing changes in technical requirements in case of

open tender) resulting in lead time increase of the process

Difficulty in maintaining long term relationship with vendors Over emphasized role of watchdog bodies like CVC, CBI etc. resulting in restricting the

employees from working with a degree of freedom

Multiplicity of tender and contract documents Lack of training facility in procurement and contract management


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5. ANALYSIS AND FINDINGSPARETO ANALYSIS


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We analysed 20 cases wherein which delays happened. The

method of analysis was done by going through the files of CMM Notes and dissents given by

different authoroties were studied. Also communication between different depts and

communication between vendors and CMM of NTPC were analysed. On a case to case basis the

severity due to five main reasons were noted down for each of these 20 cases. The highest

severity being rated 5 and lowest rated 1 the result of which is tabulated in the FIG1. We found it

will be apt to use the pareto analysis to differentiate between the significant few from

insignificant many. The five severities being lag by indentation department, lag by Finance lag

by vendor, lag by CM dept and lag by systems and procedures.Of these 80% delay was

contributed by indentation dept,lag by finance dept,lag by vendor. The analysis chart is given in

FIG2. From the graph its quite clear that what are the major concerns that shall be attended and

rectified. As a continuation of our analysis we have used Fish-bone diagram for cause-effect

analysis to drill down the entire process and find out suitable solutions.


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FISH-BONE ANALYSIS

INCREASEINLE

AD

TIME

RIGIDITYOF

LEVEL

OF

HIERA

RCHY

ANDN

OOF

PPROVALS

UNAVAILABILITY

OF

I

FOLLOWU

PS

ISNOT

I

EMD

MISSINGOR

INADEQUATE

REQUEST

BGABSENT

ZERO

WRONG

ESTIMATE

I

CLARIFICATIO

NS

ANDI

I

TECHSPECSNOT

FUTURE

BINDING

DELAYIN

II

DELAYIN

I

INADEQUATE

V

ETTING

INADEQUATE

BASELINING

OF

REQUIREMENTS/SPE


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The cause-and-effect diagram is one of the seven tools of quality.

From the pareto analysis we identified 3 main causes and we went for root cause analysis. For

root cause analysis we used fish bone as a tool. This has thrown light to the sub causes which

was hidden deep from the superficial vision of the system. We have refined the root causes and

identified it as

1. Indent2. Bidding process3. Award4. Tendering

The root cause analysis has helped to pin point the flaws in the

systems and come up with multiple suggestions the major one being Lead Time Monitoring

System (LTMS). The LTMS as a tool was developed by us using excel and it will be

incorporated into the NTPC system ACCESS with the help of IT department how that tool is

being used and the output is as shown below.

PRNumber

TenderType

Delay incompleting

QR

Delay inbid

document

approval

Delayin

NIT/

RFQ

issue

LT due toBOD

Extension

LTin

FER

LTin

TC

note

LT in Preaward

discussion

LTin

draft

PO

Issue

LTin

PO

Issue

20146 LT 0 0 0 3 0 3 0 0 0

14328 OT 45 7 0 0 141 70 0 17 0

13923 OT 129 0 0 0 0 2 0 0 0

1365 LT 17 35 0 23 0 0 0 0 0

5585 OT 0 0 3 0 10 58 0 0 3


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From the above graph we can see the large degree of

variation between different tenders that has been used for procurement of various materials or

services. It also gives the user an idea about how much delay is there between each stages of the

procurement process provided the ideal time is known for the user which is a pre-requisite. The

chart can be used to educate personnel about the increase in lead time of the process and how it

can be reduced. Since our analysis has been in tune with the observations from the prior

experience of managers in the CMM, we started brainstorming on the possible solutions to fix

the issues.

DATA OF ITEMS PROCURED THROUGH REVERSE AUCTION

The list of items that were procured in NTPC through Reverse auction till date was obtained

from SAP SRM module.This list is provided in annexure A2.Mainly spares and consumables are

0

20

40

60

80

100

120

140

160

Numberofdays

LTMS Output

20146 LT

14328 OT

13923 OT

1365 LT

5585 OT


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procured through reverse auction.Sometimes construction works were also awarded through this

process.

DEA ANALYSIS FOR VENDOR EVALUATION

One of the most important objectives in the purchasing process is

that of the selection and maintenance of an effective supply base. Supplier selection is becoming

increasingly critical as companies continue to develop more collaborative and long-term

relationships with their suppliers. With the purchasing function playing a more strategic role,

supplier selection has now become a strategic decision, particularly in relation to strategic

purchased items. When a supplier selection decision needs to be made, the buyer establishes a set

of evaluation criteria that can be used to compare the potential sources. These evaluation factors

are classified into input and output factors.

Although some supplier selection criteria were found to vary in different

situations, three common criteria emerged as important, regardless of the type of purchased

product. These were quality, on-time delivery, and supplier performance history. These are

important factors that should be considered in almost any supplier selection decision. However,

under partnership sourcing, it becomes not a task of supplier selection but rather a question ofidentifying the best partner for a long- term relationship. The factors that are considered for

supplier evaluation in this project are


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Input factors: Financial stability and Quality of Human Resources.

Output factors: Timely Delivery, Quality and Service history

Output Input Analysis findings

Unit TimelyDelivery

Quality Servicehistory

FinancialStability

Quality ofHuman

Resources

Weightedoutput

Weightedinput

Difference DEAEfficiency

1 5.98 7.7 92 54.25779 127.4615 0 0 0 0.645531

2 7.18 9.7 99 25.42579 129.5846 0 0 0 0.927754

3 4.97 9.3 76 16.32823 67.97072 0 0 0 1

4 5.32 7.7 87 23.09122 106.8769 0 0 0 0.809465

5 3.39 7.8 46 49.81192 108.0321 0 0 0 0.527692


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6. CONCLUSIONS AND RECOMMENDATIONSConclusions

The procurement can be done within the ideal time period as envisaged by theCMM managers subject to fulfillment of followings,

The Purchase Requisitions received from the indenter are complete in every aspect. The indenter has done proper research about the product/service. Aggressive monitoring of the process is adopted. Standardization of documents should be a norm. No deviation clause is widely adopted. Rate Contracts for common equipment through Reverse Auction.

Reverse auction has infinite possibility in an organization like NTPC.

From the study using data collected of the materials and services procured through reverse

auction we came to the conclusion that there is still more scope of improvement. NTPC being an

organization which buys materials in large quantities can positively dictate the terms of the

market.

It will be beneficial for the organization to go for rate contracts for the items like conveyor

belts, grinding rolls etc. and also adopt the mode of reverse auction which is the existing

practice. This will help leverage the bargaining power of buyer because of economies of scale.

The vendor evaluation process can be made moreeffective using the DEA method we suggested. This can help NTPC in identifying the scope for

improvement of different vendors associated with NTPC. If a vendor is regularly in the lower

side of DEA efficiency he will be kept in hold. Periodic review mechanism will help in

identifying new vendors to the list. New vendors are added to the list so that more competition

among the vendors will give N.T.PC better product in terms of quality and price. DEA can help

in identifying the relative efficiency of the new vendor with respect to the existing ones. A

minimum cut off percentage for DEA efficiency can be specified for a new vendor to qualify.


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Recommendations

The procurement lead time can be reduced by adopting the following practices

For the procurement of unique items used for laboratory etc. it is observed in general thatthere is a communication gap between vendors and indenters seeking clarification ontechnical specs in case of the procurement of unique items used for laboratory etc. The

communication followed is purely in written format which is traditionally being

followed. If an informative video of length about ten minutes / some photographs of the

equipment is added explaining how the product qualifies the technical specifications and

is shared with the indenter the communication will be far more effective. The videos

must be informative in such a way that it should depict the technical specs in the required

sequence by the Indenter. Photographs can also be used for this purpose.

The reporting tool used by managers can be fine-tuned and the reports showing the statuscan be modified according to logic we developed in MS Excel. This will show individual

lead time contribution of each stage. Thus visibility of the activities and comparisons

between the PRs can be done easily.

We have identified processes such as Pre Bid meeting and finalization of technical specsand preparation of bid documents that can be carried out in parallel to certain other

activities like Administrative Approval and registration of Purchase Requisition which

will reduce the lead time of the process up to 8 weeks.


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End user should be included in all the technical discussions whether it be freezing ofinitial technical specs or any changes suggested by vendors so that changes in the later

part of tendering can be avoided and the product or service is in conformance with the

requirement of end user.This may be done through video conferencing to avoid wastageof time and money.

Vendor registration portal for vendor selection and enlistment. At present in NTPCthere is an e-tendering process where the vendors register with a user name and

password. They can buy the bid document and be a part of the tendering process. We are

suggesting to expand the scope of this activity. In current website the vendor himself can

register for vendor enlistment. Here he should give the details about the financial

viability, quality assurance processes/certifications, quality of human resources and most

importantly the items which he can provide for NTPCs procurement. There should be a

provision for uploading the documents of previous Purchase Orders which can meet the

qualification requirements of NTPC. NTPC can design the data base so as to classify /

access/sort information about any vendor.

Once this is in practice NTPC can reduce the lead time by at least 1

week in the areas like checking the qualification requirements etc. It also gives NTPC an

off the shelf list of vendors for a particular material or service.

In case of local vendors (smaller companies) they must be given predefined structure toshow the necessary details and the format of cost sheet so as to avoid arithmetic

corrections that may arise. We are suggesting this based on the observation that local

vendors usually make mistakes in this area.

A sample set of documents in which the process has been completed in a reasonable timeperiod viz without any hitches should be provided to the Indenter.

Vendor directory should be made available with all Indenter and they should be asked torefer the same before suggesting the tender type.

Give enough training to the Indenter so they can decide upon the type of tender that hasto be adopted which invariably can save a lot of time for CMM. Training may include the

following

1. How a good document shall be prepared2. Whether to give rigidity or lucidity in the specification depending upon

the tender type

3. Educate them about the no deviation clause and the list that must beenclosed with the PR.

4. In case of annual maintenance contracts the indenter should intimate theCMM well before the expiry of the current contract so that new contract

shall be implemented in the right time. An auto generated mail should be


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sent to the Indenter reminding them about the expiry of contract at least 3

months before.

5. Indenter should look for vendors who can satisfy their requirements andthe selected vendors may be informed to provide RFI and once RFI is

provided the indenter shall associate the vendors in deciding the technical

requirements/qualification requirements. Trade magazines showing the

product specifications and websites like indiamart.com etc. can be used by

Indenters for vendor selection.

Arithmetic correction shall be done only for technically qualified bidders. This willreduce the redundancy since the same process is done for every vendor who is placing a

bid.

We have observed that the screening/tender committees members have othercommitments on the day of such meetings and these meetings to give approval gets

delayed. We are suggesting a preponement of the meeting rather than postponement.Also there can be a system in place which has time slots in a week which are reserved for

Tender Committee/Screening committee meetings. The members are supposed to avoid

these time slots for their other priorities. This will on an average save 3-4 days of delay.

A standardized MOM shall be prepared and the required approvals shall be completed onthe same day of meeting or latest by the next day. This can reduce on an average 1-2 days

of delay.

Checklist should be provided for the indenter and vendor. In most of the cases we cameacross the documents that were provided was insufficient as per the requirements of the

CMM or some documents were missing. Having a standard checklist will ensure that all

the required documents are in place and that they contain relevant and adequate

information.

Since the procurement in public sector follows similar norms it is advisable to ask thevendors at the RFI stage itself about the technical specifications put forward by other

PSUs for similar or same equipment. This will help NTPC leverage on the past

experience of the vendor with other PSUs and the documentation of technical

specification can be completed in a shorter span. The Indenter shall maintain soft

documents for same or similar kind of procurements for the purpose of reference.

Apart from the items in the list given in annexure A2, we identified the following fouritems,Coal burner,APH Seals,Economiser coil,Power cycle piping which are notprocured through reverse auction mode as of now.If the company decides to buy these

items through reverse auction huge monetary benefits can be achieved.

A proper study can be done which can comprehensively list out the items which can bebought through reverse auction route and can be compared with the list of items in

annexure A2.


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7. FINAL VALUE ADDITIONMonetary Benefits

Procurement of following four items - Coal Burner, Air Pre Heater seals, Economizercoil, Power cycle piping through reverse auction will bring in following monetary benefit

Item Cost of

procurement per

year per

unit(500MW

power

generation)

Total cost of

procurement per

year for NTPC

Expected

reduction in

cost by opting

reverse auction

as percentage

Monetary

benefit

Coal Burner70 Lakhs 21 Crore 20% 4.2 Crore

APH Seals7 lakhs 2.1 Crore 20% .42 Crore

Economizer

Coil

5 lakhs 1.5 Crore 20% .30 Crore

Power cycle

Piping

2 Lakhs 0.6 Crore 20% .12 Crore

Lump sum

Monetary

Benefit

5.04 Crore

This is an indicative list only. There are many more items to be identified if a

comprehensive study is taken up by the organization for finding out items that satisfy the

following conditions

1. Vendors who are ready to bid competitively should be minimum three and2. The quantity and value of bid should be high.


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Non-monetary Benefits

Introduction of new vendor evaluation technique Data Envelopment Analysis. Complete study and root cause analysis of centralized procurement process of CMM. Better satisfaction for Indenters due to reduction in lead time. Efficient use of resources within the CMM.


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8. NEXT STEPS The existing list of reverse has been identified and the monetary benefits are indicated in

the above table 3. The recommendation for a study about the items which can be

procured through reverse auction is suggested. We are expecting the organization to take

up the suggestion.

Incorporation ofLTMS in the existing monitoring system. Checklist should be provided for the indenter and vendor. In most of the cases we came

across the documents that were provided was insufficient as per the requirements of the

CMM or some documents were missing. Having a standard checklist will ensure that all

the required documents are in place and that they contain relevant and adequate

information.

Training sessions can be conducted for Indenter.


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9. GLOSSARY OF TERMSTendering Process

Procurement Process involves a biddingprocess called as

Tendering. A company may want to purchase a given product or service. If the cost for that

product/service is over the threshold that has been established (e.g. Company X policy: "any

product/service desired that is over $1,000 requires a bidding process"), depending on policy or

legal requirements, Company X is required to state the product/service desired and make the

contract open to the bidding process. Company X may have ten bidders that state the cost of the

product/service they are willing to provide. Then, Company X will usually select the lowest

bidder. If the lowest bidder is deemed incompetent to provide the desired product/service,

Company X will then select the submitter who has the next best price, and is competent to

provide the product/service. In the European Union there are strict rules on procurement

processes that must be followed by public bodies, with contract value thresholds dictating what

processes should be observed (relating to advertising the contract, the actual process etc.).

Pareto analysis

Pareto analysis is a statistical technique in decision making that is

used for selection of a limited number of tasks that produce significant overall effect. In terms of

quality improvement, a large majority of problems (80%) are produced by a few key causes

(20%).

Fish-bone analysis

Ishikawa diagrams(also calledfishbone diagrams, orherringbone

diagrams,cause-and-effect diagrams orFishikawa) arecausal diagrams that show the causes of a

specific event -- created byKaoru Ishikawa (1968Fish-bone primarily is a tool for analyzing

process dispersion. The cause-and-effect diagram is one of the seven tools of quality.
http://en.wikipedia.org/wiki/Biddinghttp://en.wikipedia.org/wiki/Statisticshttp://en.wikipedia.org/wiki/Decision_makinghttp://en.wikipedia.org/wiki/Causal_diagramhttp://en.wikipedia.org/wiki/Causal_diagramhttp://en.wikipedia.org/wiki/Causehttp://en.wiktionary.org/wiki/eventhttp://en.wikipedia.org/wiki/Kaoru_Ishikawahttp://en.wikipedia.org/wiki/Kaoru_Ishikawahttp://en.wikipedia.org/wiki/Kaoru_Ishikawahttp://en.wiktionary.org/wiki/eventhttp://en.wikipedia.org/wiki/Causehttp://en.wikipedia.org/wiki/Causal_diagramhttp://en.wikipedia.org/wiki/Decision_makinghttp://en.wikipedia.org/wiki/Statisticshttp://en.wikipedia.org/wiki/Bidding


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Data Envelopment Analysis (DEA)

Data envelopment analysis (DEA) is a nonparametric method

in operations research and economics for the estimation of production frontiers. It is used to

empirically measure productive efficiency ofdecision making units (or DMU.

.
http://en.wikipedia.org/wiki/Non-parametric_statisticshttp://en.wikipedia.org/wiki/Operations_researchhttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Productive_efficiencyhttp://en.wikipedia.org/wiki/Buying_centerhttp://en.wikipedia.org/wiki/Buying_centerhttp://en.wikipedia.org/wiki/Productive_efficiencyhttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Operations_researchhttp://en.wikipedia.org/wiki/Non-parametric_statistics

Final Under Compilation R2

Documents

Transcript of Final Under Compilation R2