SAIL consumes raw materials worth over Rs 5,000 crore and stores & spares worth Rs 1,800 crore every year. Senior officials of the Government-owned steelmaker feel that a cost reduction of around 5-10 per cent is possible by using specific purchasing strategies.

The officials said this was one of the major recommendations of US consultancy firm McKinsey & Co, which is also assisting SAIL in developing and implementing a "total cost of ownership (TCO)" module.

The TCO approach looks at the cost of purchase items beyond the procurement price, in reducing internal business costs such as inventory holding, transportation and purchasing administration.

An official said SAIL's financial performance has been adversely affected not only by a higher interest and depreciation burden and lower net sales realisation, but bythe continuous rise in input costs.

These factors appeared at a time when SAIL's saleable steel production declined marginally from 9.2 million tonnes in 1995-96 - the year in which it reported its highest-ever profit before tax of Rs 1,319.33 crore - to 8.6mt in 1998-99 fiscal, when it made a record loss before tax of Rs 1,618 crore.

Over the last four years, SAIL's total input cost has gone up by over Rs 3,000 crore, according to the variance analysis in its annual reports. SAIL has already been cutting costs, mainly or raw materials like coking coal. But the latest effort will be wider.

For improving effectiveness of its purchases, SAIL would be focussing on three key elements: TCO, differentiated sourcing strategies and coordinated purchases with specific targets.

The new purchasing process being worked out at SAIL will be overseen by an apex committe of directors. The thrust is on TCO and using the bargaining power of SAIL.

The process has initially been put into operation for four commodities- refractories, ferro alloys, rolls and conveyor belts. Similar processes are proposed for other items.

An analysis of purchasing costs accross the integrated steel plants of SAIL shows that purchase prices are not uniform across the plants, the official said. SAIL's present purchasing system is based on the tendering process, with emphasis on wider network of suppliers. The systems can be modified with focus on negotiations, discussions with suppliers for joint action to reduce TCO, development of new suppliers, re-engineering and simplification of purchase procedures.

Specific commodity teams are being formed with participation of purchase, finance, maintenance and operations personnel, in order to optimise cost-quality trade offs, the SAIL official said.