The chase for quality raw materials

Updated: Aug 5 2005, 05:30am hrs
A number of mails have been received from SMEs on the issue of access to raw material. This raises questions on the present state of supply chains. The inefficiencies in India are manifest in all the three dimensions of raw material markets: quality, quantity and prices.

Post-liberalisation, the problems related to availability have largely disappeared, barring occasional shortages of iron and steel. But the challenges of quality and price have become prominent. This article analyses the issue of quality of raw materials.

For SMEs engaged in manufacturing and job work, the four major raw materials are iron and steel, copper, aluminum and plastic. The number of SMEs dependent on these are the largest after those dependent on agro-based inputs and textiles. There are over 1.25 lakh registered SSI units directly involved in manufacturing or processing of products based on ferrous and non-ferrous metals. The number of units in the unorganised sector in this segment is almost 10 times. The raw materials are produced by both the public and private sectors: such as Sail, Tatas, RINL, Bhushan, Hindalco, Balco, Nalco, HCL, Sterlite, Indo-Gulf, RIL etc. The second set of supplies comes from the recyclersa sizeable segment dominated by small producers. The third set comes from imports.

Almost the entire requirement of raw material of the sector is met through small traders. Only a small fraction of the sector gets the material from mills, or their authorised distributors. Various reasons are given by the players: mills and their authorised dealers say that dealing with a large number of small customers increases their transaction costs, whereas small companies complain that the mills supply prime material overseas or to their large customers under long-term contracts and the seconds material is offloaded to traders in lots.

Many small companies also go to traders because of payment flexibility. What is surprising is the lack of knowledge of quality standards of these raw materials at all levels, even at agents level appointed by mills. The marking practice on products is generally not followed by mills. Variation in thickness and sizes is quite common in ferrous and non-ferrous products. As the products are seldom sold along with the accompanying test report, the physical and chemical characteristics remain suspect. Unless you are a bulk buyer, the test report is refused even if there are running facilities at a few authorised agents, if not all. The majority of traders of these raw materials procure lots from mills, re-cyclers, or import in lots. Their driving force is cost and their expertise to play with prices.

Another interesting feature of the Indian market is that whereas recycling as an industry was encouraged in developed countries to address the environmental concerns born out of waste, the prime objective of Indian recyclers is to leverage it as a tool to reduce cost. The choice of technology employed has been to only attain this objective. Quality is neither their forte nor their desire. Therefore, for a large number of SMEs, access to quality raw material is becoming a new challenge.

SMEs point out that this is one of the major reasons for their poor image as producers of inconsistent quality. They find it extremely difficult to have access to quality raw materials on a consistent basis. Second, they claim that in iron and steel, they have to bear the extra cost of 5-7% because of the poor quality of raw material.

Third, their requirement being of small lots, import is not viable in most cases. The net result is that it affects their competitiveness and impedes their efforts in becoming suppliers to large production networks. What is clear is that there are inefficiencies in the supply chain of industrial raw materials in India.

There are several things that need to be done to make the supply chains function more efficiently. First, large mills need to adopt best practices of product markings and ensuring quality right up to retail.

Second, we need to think why, in spite of a business opportunity in India, large national or international trading companies have not yet ventured to exploit market inefficiencies.

We are importing aluminum rods for the first time. There is a price premium of $10-15 if we accept an LME registered product. Should we go ahead

Rajat Shah, Ahmedabad.

Trade experts are of the view that paying a small premium for LME registered products is always worthwhile. It would ensure a minimum standard disclosed of the product you import.

Anil Bhardwaj is former, secretary-general, Fisme. Readers may send queries to fesmes@gmail.com