The Analysis on the Purchasing Model of Aluminum Corporation of China Limited

8/10/2019 The Analysis on the Purchasing Model of Aluminum Corporation of China Limited

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TABLE OF CONTENTS

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In order to cope with the fierce competition of the market environment and the

development of economic globalization trend, strategic procurement which is one of

the important Industry strategic constituent, is an effective way of reducing cost and

increasing benefit in order to strengthen the core competitiveness.

In the traditional sense, procurement is viewed as the operation management;

purchasing department position is relatively low in the enterprise. Since the 1970 s,

with the emergence of the global energy crisis, purchasing is getting more and more

important gradually. It is widely recognized that purchasing is the third resource of

profits for enterprises.

In purchasing management, CHALCO gradually implement centralized purchasing

strategy management through the absorption of advanced purchasing management

experience, and construct the strategic purchase mode which is suitable for this

enterprise and market characteristics. It will provide the beneficial reference of taking

their own advantages, improving the purchasing management level, and participating

in the international competition.

As to CHALCO, the procurement scale has obvious advantages, holding higher

market share in bulk raw and auxiliary materialseven in the seller's market

environmentit also has the strong market discourse power, and the potential of

lowering the cost. After the implementation of centralized procurement strategy,

CHALCO got a lot of purchasing management experience, and have achieved good

economic effect, but compared with large multinational overseas companies, it still

shows insufficient. Today we analyse the experience of centralized procurement and

direction of changes to find industrial enterprise strategies which also have certain

reference value.


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took the 31st place of the top 500 Chinese enterprises, 10 of the top 500 Chinese

manufacturing enterprises in China Business Summit in Yinchuan. Among the Global

500 and China 500, it is a significant step of the process called Create harmonious

first-class century-old enterprise, which lets CHALCO stand on the higher starting

point in the process of creating an international multi-metal mining enterprise.

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of the domestic market share. Soda ash, caustic soda and other varieties in the

domestic market also account for a higher proportion. Through the implementation of

centralized procurement, the influence and the reputation of CHALCO are enhanced.

At the same time, the security of supply increases. The cost of procurement has been

effectively controlled. Above all have laid a solid foundation for further

implementation of strategic procurement.

Bauxite is the most important raw material of the Aluminum industry. The bauxite

procurement model of CHALCO chooses to extend the industrial chain and the

system is relatively independent. The headquarters of the department of mineral

resources, the capital operation department and the overseas development ministry

and other departments are responsible for the development and acquisition of

domestic and overseas bauxite resources. The subsidiaries of CHALCO and the

related alumina enterprise are responsible for the production and procurement of the

domestic bauxite resources, And International Trade is responsible for the

procurement of imported bauxite.

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The following is the introduction of centralized purchasing mode which dominates in

the purchasing mode of CHALCO.

(1) System guarantee

CHALCO strengthens the basement of the managing the centralized purchasing mode

by making rules.

(2) Organization guarantee

Decision-making way that picked by multiple related functional departments

improves the transparency of purchasing process and regulates the purchasing

decision behaviour. At the same time, it promotes the communication between

departments and ensures a healthy centralized purchasing work development.

(3) Business process

CHALCO implements annual contract, quarterly or monthly pricing quantitative and

monthly payment of purchasing mode for centralized purchasing on bulk raw

material.

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key suppliers consultation and signed a strategic cooperation agreement to

consolidate and develop strategic cooperative relations. The CHALCO set up a joint

with the suppliers. The joint a long-term cooperation coordination group which

composed by the Lord Tube of supply, leadership in sales and business functions.

They establish a regular consultation mechanism to communicate information,

coordinate and solve the business operation in the practical difficulties

(3) Enhancing competition ability of the International procurement

Internationalization procurement is the key factors to enhance the competition ability

of the enterprise. At present, the CHALCO accelerates the development of the

domestic business and pays attention to protect the domestic resources protective.

At the same time, the CHALCO strengthens the effort to the overseas mineral

resources exploitation.


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enterprise laid a foundation for the implement of the strategic procurement.

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CHALCO has been listed in New York, Hong Kong and Shanghai respectively. It has

been successful to build financing platform. As the Rate of Return on Common

Stockholders' Equity preformed very excellent, the Enterprise credit rating was rated

BBB+ level of the Standard & Poor's in the past three years. The excellent financing

capacity of the enterprise provides the inexhaustible motiving force for development.

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CHALCO take the market as the guidance, actively develop core technologies and

key technology research and industrialization, has formed the national technology

centre, national Aluminum smelting engineering technology research centre and

postdoctoral research stations and CHALCO technology development centre has been

the work platform of science and technology innovation ability construction, and form

the relatively perfect technical innovation system. In recent years, China has

developed a large number of Aluminum industry of new technology, new technology

for Aluminum industry fast development, which result in the effective use of

resources and energy, reducing industrial waste discharge which has played a positive

role. From 2001 to the end of 2006 the enterprise has application for 1854 patents,

including 345 invention patents, 75 overseas patents, the company independent

innovation ability greatly ascend, core competitive ability is improved.


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Centralized purchasing enhances the power of influence in domestic bulk raw

material market and improves the ability of the allocation of resources. In the global

scope in order to realize the effective allocation of bauxite resources, CHALCO has

successively done development work in other countries which are rich in bauxite

resources.

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The management model of CHALCO is Centralized management and unified

management.it can help the corporation to centralize the best resources so that it can

carry on a strategy, overall planning, and orderly development. However, it will

increase the levels of the management and make the flexibility lower. As for the

Centralized purchasing management, it may have a negative influence that makes the

decision making longer and slower. When face to the complex market, the too slow

decision making may lead the corporation to miss the opportunity in the market.

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There are a lots of companies that belong to CHALCO, such as the first alumina

factorythe first electrolytic Aluminum factoryThe first Aluminum processing

factory of China Aluminum industry. At the same time, there are also many new

factories. As a result, it generates a gap between the management and the facilities,

that is to say, the gap of technology between these two kinds of factories. Some

facilities in the old factories have been used for several years and they can be


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considered as the out-of-date machines. Under such circumstances, the company

overall strength is limited.

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Compared with the international large Aluminum groups, the resources possession of

the CHALCO is still much less than others so that the development of the corporation

may be restricted.

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The rapid development of the national economy gives a strong support to the

Aluminum industry recent years. Recent years, the consumption and the supplement

of the Aluminum are developing at a staggering rate. As a result, there is a large

potential for the development of the Aluminum industry.

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With the rapid development of globalization and competitive ability has been

strengthened. Government encourages the enterprises to carry on the Out-going"

strategy, which can not only helps to expand the international market, but also can

require the relative shortage of resources. CHALCO conforms to national policy

guidance, they not only have explored the bauxite, copper mine and other resources,

but also invested in building the electrolytic Aluminum factories, which improves the

degree of the resources that can be protected and explores the development space of

the enterprise.


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market. In the next 3 years, there are many alumina companies founded, such as the

Chongqing Ding Tai Tuo Yuan, Dongfang Xiwang and so on. In 2007, the volume

production of the alumina has reached 20.4 million tons.

In recent years, electrolytic Aluminum industry also showed a rapid growth trend in

mainland. Since 2001, China became the world's first production of electrolytic

Aluminum. However, at the same time, the Shenhuo Share and Yunnan Aluminum

company were also finished the mergers and acquisitions in 2005-2006. The strength

of the local electrolytic Aluminum enterprises is gradually increased.

In 2007, the output of CHALCOs alumina is 10.5 million tons, the proportion of the

total domestic output is 51%; the output of the electrolytic Aluminum is 3.56 million

tons, the proportion of the total domestic output is 28%. The private companies are

expanding rapidly, and become the strong competitors of CHALCO. The private

companies organize a union to fight for the right to fix the prices. On electrolytic

Aluminum sales and domestic bauxite procurement, the private enterprises adopt to a

strategy of price competition to capture the recourses and market. Therefore, for

CHALCO, there are also increasingly fierce competitions from the domestic

Aluminum industry.


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After the centralized purchasing of petroleum coke, CHALCO integrated the supplier

structure of its branch and subsidiary companies, drastically reduced the number of

suppliers and gradually set up direct supply relations with most petroleum coke

producer. The capability of allocation of resources and supply security has been

notably enhanced. From the year 2005, the shortage of petroleum coke influenced

many enterprises which need it as the materials. But due to the reasonable supplier

structure, the supply of petroleum coke kept smoothly without any emergency

situation.

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CHALCOs profit continued to grow in addition with a good financing platform,

which ensures the strength of funds. The settlement and payment to the supplier are

always in time, winning a good reputation.

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CHALCO has a strong ability of research; the subordinate Zhengzhou institute is the

most professional research institute on carbon products. Now they focus on expanding

the scope of application of petroleum coke, the utilization of petroleum coke will be

improved.

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Since the company implemented the centralized purchasing, they have paid more

attention on analysis of the kinds of materials which need centralized purchasing.

Now they basically know the situation of the suppliers nationwide and establish


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long-term cooperative relationship with many domestic large-scale suppliers. So they

have the first information on the market of petroleum coke, which is conductive to the

general grasp of market and procurement decision making.

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For a long time, the government gives a very strict control to the importing and

processing of crude oil. Most of the factory which produces the crude oil belongs to

the Petro China and Sinopec Corp. Market of the petroleum cokes oligopoly feature

is apparent. Both the supply and the demand market have inequity position. It is

difficult for them to cooperation. The price, quantity, way of the payment, the contract,

all of these are decided by the Petro China Corp and Sinopec Corp. Downstream

industry markets are in the disadvantage position, including the CHALCO.

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The characteristics of the petroleum coke ash is low, less impurity, fixed carbon

content is high, the period of later conductivity higher, under the condition of the

production. Nothing could instead of the petroleum coke to produce the positive pole.

This is another important reason why the Electrolytic Aluminum industry in

petroleum coke market is passive.

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Recent years, the large number of high sulphur and heavy crude oil came into China

from abroad, in addition to this, high sulphur coke proportion is large. Different kinds

of the petroleum coke have different prices. Private enterprises have increased the


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proportion of the petroleum coke in their production so that it can help them to control

the cost. However, the CHALCO and its subsidiaries should improve their strategies

in this aspect.

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Since the rapid development of the Chinese economy, the demand of the energy is

increasing every year. The output of the petroleum coke is increasing companied with

the increase of the Crude oil production, in 2003; the output of the domestic

petroleum coke was 6.61 million tons, which had reached 14.39 million tons in 2007.

Petroleum coke yield has increased more than doubled in 4 years. The demand of the

petroleum coke could be satisfied.

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To ensure steady economic growth and sustainable development, the government

adjusts the tax to restrict the export of the products of the two high one funded. The

petroleum coke, which can be considered as an important resource, is within the range.

In 15th Sep, 2006, government cancel the export rebates of the petroleum coke, In2008, the export rebates of the carbon anode has been cancelled as well so that the

loss of domestic high-quality petroleum coke resource get is restrained.

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Recent years, local petrochemical enterprise is expanding the scale continuously so

that the supply of the domestic petroleum coke has risen. In 2005, the total outputs of


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the local petrochemical enterprise is less that 1 million tons, but the output of it may

be more than 3 million tons, the environment of the market is improved a lot.

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Since the latter half of the year of 2006, the petroleum coke is always

resource-constrained and the price is rising all the time. Some companies begin to

Increase the import purchasing power so that the import of the petroleum coke is

developing at a staggering rate. According To Statistics, the import number of the

petroleum coke was 7,000 thousands, the number was about 5,000 thousands in the

first half year of the 2008 and the number is predicted to be more than 9,000

thousands whole year.

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Due to the high sulphur, heavy crude throughput increased year by year, and the

domestic high sulphur and heavy petroleum coke trend accelerated, domestic

high-quality petroleum coke resources decreasing year by year. On the one hand, new

petrochemical enterprise directly use high sulphur crude oil to product high sulphur

petroleum coke, such as the Qingdao oil refinery which opened in 2008 only product

high sulphur petroleum coke; on the other hand, part of the old enterprise reform to

product the high sulphur petroleum coke, such as Guangzhou Sinopec and Shanghai

Gaoqiao Sinopec.


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In recent years, affected by the cost of production, environmental protection and other

factors, international Aluminum industry giants are interested in the high-quality

petroleum coke resources in China. They procure a large amount of petroleum coke,

petroleum coke and pre-baked anode, or directly construct factories in China, which

intensifies the domestic high-quality petroleum coke resource shortage.

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In the first half of 2008, the international crude oil price rises sharply, in order to

make up for the oil refining loss, the two big Petrochemical Industry companies

continuous greatly raised price of the independent pricing product, including

petroleum coke; by means of increasing the petroleum coke export and other

measures, to achieve the goal that push up the price of petroleum coke. All this

strategy increases the cost of the downstream industries, which brings great threat to

petroleum coke procurement.


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B5

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This chapter will combine the SWOT analysis on the procurement of bulk raw and

auxiliary materials in Aluminum Corporation of China Limited, basing on the

summarize of the centralized procurement strategy experience, and taking the optimal

total cost of ownership as a superclass, to further discuss all the levels relate to

procurement management how to construct the procurement strategies for CHALCO.

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Since its inception, in 2001, the number of member enterprise is keeping increase in

CHALCO, they have formed special operation principles in their long-term business

practice. How to integrate different enterprise culture is biggest project to the

companys management. To shape the common value of the enterprise culture as the

starting point, highlighting the humanist-oriented as the development concept,

progressively established the cornerstone with making determined efforts and

innovation, to pursue the advanced level in the world as the special enterprise culture.

In this paper, the procurement strategy adapts to the enterprise culture is an integral

part of the entire enterprise culture, to construct it from three aspects: the leadership

strategic direction art, organization principle and cross-functionality team

construction.

The leadership strategic direction art: the formulation and implementation of the

enterprise strategy is relying on managers organization management skill, in another


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BD

word, the leadership strategic direction art. In order to build a suitable procurement

strategy of enterprise culture, the leaders need do at least following aspects: realizing

the value to build a cooperation atmosphere for procurement strategy, to continuously

emphasis on the total cost of ownership as the core common value among

departments, to ensure related departments reach a consensus with the contribution on

the total cost of ownership reducing and to communicate the future planning and core

value.

Organization principles: to determine the companys management philosophy,

operation principle, strategic policy and company spirit, to build procurement strategy

management regulation, making sure all the departments comply with the principle:

arranging the specific roles and responsibility to each departments and each position.

Cross-functionally team construction: this team integrates related department together,

to full play theirs skill and knowledge, to finish the works that single department

difficult do it and create a condition for strategy procurement. It would be built the

cross-functionally team through following ways: taking activities out of workplace,

such as outward bound and sports activities. In workplace, to communicate work

experience and coordination problems among departments regularly and irregularly,

encourage them come up with innovative solution. To take a measurement with the

effective and efficient of the cross-functionally cooperation, and giving a rapid

respond to the issues.

To construct the suitable enterprise culture of the procurement strategy requirement,

the key factor is attention and promotion by leaders. It is not enough to rely on the

improvement of the procurement department themselves to achieve procurement

strategy, at same time, enterprise culture is not only a concept, its an operation

process, only the support from management system, it would be last sustainable and

formed a humanist-oriented enterprise culture atmosphere.


25/35

BB

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Through the strategy planning for procurement process, to build efficient procurement

organization structure, enterprise can build confidence to reduce the total cost of

ownership and improve profitability, to promote the core competitiveness of the

enterprise. If the company really want to convert the enterprise culture into total cost

of ownerships motive power, they need to construct suitable procurement

organization structure of the procurement strategy and to improve the organization

ability which is needed by procurement strategy, to blend the enterprise culture in

business process, and to promote the cooperation between the procurement

department and other departments on finish work and achieve forecast purpose.

In this paper, the crux of the purchasing organization revolution are building the total

cost of ownership evaluation system, forming the multi-functional team and making

sure all departments can easily communicate with each other, it provides organizeguarantee to promote enterprises core competency. There are two aspects to depict

enterprises core competency: Technology-oriented professional core competency and

business process oriented institutional core competency, the procurement strategy

belongs to the last one. According to enterprises own characteristics, through existing

single purchasing management system, building an entire business process related to

the total cost of ownership which is highlighted on the connection between different

departments business process and these would form a strategic purchasing system

that others difficult to copy. The following chart is the enterprises purchasing

management system model based on TCO:


26/35

BH

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27/35

B6

They have rich law knowledge, quick leaner, and to accept new purchasing

management theory quickly. They also have ability to collect market information,

analysis it and forecast, beside it, the good PC and internet skill are required.

Human Resource Department recruits staff need according to the requirement of the

purchasing strategy, describing the working procedures and required skills to each

position.

It is necessary to enhance the buyers training and multi-functional team members.

The trainings include following characteristics: first, the training content should to

reflect the strategy features. Second, the trainings combine the theory study with case

analysis. Third, the trainings combine with personal career development. In order to

improve the buyers general capacity, the company held lots of trainings, for example,

leadership, strategy management, procurement and supply chain management,

English and so on.

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From the total cost of ownership conception, the construction of the purchasing

information is a generalized definition. What should be able to provide to industrial

procurement, who is supplier? When to purchase? How much to purchase and control

the information and clues in purchasing process? To reduce the cost through the

information and to improve the effective and efficiency of the procurement, in this

way, the crucial aim to improve the enterprise income is developing their purchasing

information.


28/35

BK

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The characteristic of the purchasing information is multi-directional, comprehensive,

complexity and diversity in total cost of ownership conception. It is not only about

enterprises internal and external information to the purchasing department, but also

including the information from the purchasing department. Related to the enterprise

measurement, testing, storage and the influence from the materials with different

quality to production cost and the product quality, as well as the internal and external

marketing situation change, the trade development-direction, the price trend ofvarious materials, which also include macro environment and economic policy. All of

information about procurement is leading in all the process in procurement strategy

which is directly serving to the construction of the total cost of ownership, suppliers

management strategy, the procurement performance evaluation and purchasing

decisions.

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The two aspects should be noticed when to build a purchasing system:

(1) The purchasing information system designing suitable for the enterprises

strategy development and purchasing management, the information system makes

better service to enterprise and extends the systems life cycle.

(2) The marketing changed rapidly, with the attention to the purchasing systems

decisions function, fully play the subjective initiative of buyers in purchasing

decision making is also important to enterprise.

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There are three functions:


29/35

B4

(1) Making sure what to order

In industry, the procurement department always made a purchasing planning, variety

and quality according to produce requirement. For the nature of the jobs limitation, it

is difficult to control the information change about the relationship between the

supply and demand. But procurement department has detail marketing information, in

order to reduce procurement cost, they communicate with manufactory department

make sure the right quantity materials on the basis of produce requirement. First,

according to the price variance of the different quality materials, re-design the

acceptance criteria, to choose the raw materials with optimal price and suitable quality.

Second, mastering latest technology with lower purchasing price and more

appropriately. Third, try to purchase the lower cost substitute materials.

(2) Making sure who are the suppliers

Making a better purchasing information construction can convenient to mater supplier

strengthen, it also benefits for the procurement department to learn the potential

suppliers situation and provides optimal purchasing channel. First, to develop the

suppliers operation record, it provides a proof for suppliers controlling, assessing,

and evaluating. Taking regular evaluation and sending the result and feedback to

suppliers in time, it promotes the suppliers to improve their supply ability. Second, the

construction of the purchasing information builds a condition for long-term

partnership with suppliers. Third, industry looks for high quality materials with low

cost both in domestic and international to improve security.

(3) When and how many to order

First, it is necessary to augment the marketing investigation and forecast work, to

learn each products marketing characteristics through supply and demand and to find

the main factors which influence the market change and boost analysis skill. Second,

the company makes the regular storage standard and the lowest storage standard on

production costs, transportation capacity and finance conditions. Third, to forecast the

market movements and price changes and considerate the product requirement change

and storage level, the industry purchase mass materials at right time with right price.


30/35

BI

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It is a large cost for purchasing information collection, sortation and building

information system process, the enterprises procurement decision always is on behalf

of theirs development strategy. Therefore, the systematic procurement information is

a part of core competiveness, in intensely competitive marketing, it will be emerged a

large negative effect to the result of purchasing strategys implementation if leaked

out. The way enterprise executes purchasing informations security work as

followings: the specially-assigned person is responsible for the summary, document,

and storage. To limit the range of decision participants, to sign a security agreement

with decision makers, and to check email and telephone record regular, etc.

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The large-scale industry need to purchase a wide variety of materials with a big gap

about the purchasing quantity and purchasing cost, the character of the products and

the importance to industry also is different. At present, the variety of raw materials in

CHALCO is more 10.000, so to pay attention to important minority, to different

products with different purchasing methods, the differentiation purchasing strategy is

the basic requirements of the procurement strategy. In the early age, the procurement

management is according to the difference with procurement, storage and its

management, used Activity Based Classification Method (ABC method) or Pareto

Analysis Method to manage it. In 1983, Peter Kraljic came up with 2*2 procurement

management module, and he had divided purchasing materials into four types.


31/35

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The advantages of the total cost of ownership model as following: first, the benefits

for enterprise to sort the cost related to the total cost of ownership, it convenient for

the enterprise to find the key point for procurement strategy. Second, it would help the

enterprise to learn the concrete relationship between cost and procurement. Third, to

understand which points is significance to improve procurement management during

the total cost of ownership modelling process in order to promote the procurement

strategy persistent. Fourth, it could change the companys decision habits, more

accuracy and lower arbitrary. Fifth, each of industry staff depends on the advanced

model to assess the total cost of ownership quickly, the total cost model to be a kind

of organization power in industry.

To build the total cost of ownership model, it needs follow four principles:

(1) The different cost models for different materials

Consists of the total cost of ownership are different among different materials, so it

needs classification.

(2) Gradually rise from simple to complicated

If company purses the complicate and perfect cost model, for the short of the

comprehensive materials and data, it would have an effect on the confidence to build

a model because of its failure.

(3) To quantify all the key factors of the total cost of the ownership

Part of total costs need quantization, for example, the price trend of some products on

market, it need depend on estimate to quantify. At same time, the importance among

total costs need to give weightiness.

(4) Using PDCA method

PDCA always use in quality management, as a persistent improvement thought

method, it also can use in the cost modelling process. To circulate the planning,

implementation, monitoring, and improvement four processes, to improve costmodels accuracy and credibility gradually.


33/35

H5

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The suppliers is the key factor for enterprises products quality, price, and the

principle of the suppliers management strategy are: preferred suppliers, building a

supplier structure which is matching with firms capacity, optimizing the allocation of

resources, be selective about building the partnership with supplier, reducing the total

cost of ownership.

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Supplier strategy management plays a key role in enterprise purchasing management,

which is resulted in the purchasing strategys total performance. Including the

supplier survey, select, control, performance evaluation, structural improvement and

supplier relation management.

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The investigation of suppliers can be divided into two aspects: first is to resource

markets, and second is according to the companys demand, to their potential

supplier.

The way to do investigation as following:

(1) To analysis suppliers publicity materials,

(2) To investigate the suppliers by the questionnaire.

(3) To get the information from the similar company.

(4) To delegate the investigation to the professional consulting organization.

(5) On-the-spot investigation.

(6) To collect information from the internet.

(7) To investigate through market symposiums.

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We can analysis the suppliers performance according to the companys purchasing

strategy as following aspects:

(1) Supply capacity analysis

Suppliers total situation: organization, the number of staff, location, reputation,

market share, assets and profitability etc.

Supply ability: capacity before, output, annual sale volume, technical facilities in

production etc.

Research ability: research organization, technical advancement, technical innovation

performance, the completeness of the technical resource, and to response the

customers requirement.

Quality management ability: product quality, existing quality management system,

quality controlling, the dealing system for customers quality complains.

Delivery ability: warehouse condition and storage controlling, transportation

organization, timeliness of delivery, processing capacity for rush orders etc.


35/35

Materials support capacity: upstream supply market conditions, downstream

relationship with suppliers and customers, the usage of raw materials, credit

information.

Environment protection ability: environment certificate, resource consumption index,

pollution abatement, resource recycling etc.

(2) Suppliers marketing philosophy analysis

The marketing philosophy is the origin of the major market, and it is direct influence

the relationship between sales and customers, which is the first question for supplier

partnership building. To improve the marketing philosophy can do as following:

Suppliers marketing attitude: supply exceeds demand and demand shorted, in these

two types marketing attitude, whether it turns to improve customers satisfaction.

The intentions to sign a long-term contract: whether signing a long-term contract with

customers and the clause is from win-win model, long-term contract perform.

Suppliers pricing: unified price setting or price discrimination and whether it benefits

for long-term customers privilege.

Customers group: the main customers structure and its stability.

(3) Supplier price analysis

CHALCO pays attention on the supplier price analysis with each product in central

procurement, according to the types of the supplier that they have designed different

cost and price assessment form, so it is providing available information for

negotiation with supplier.

Documents

The Analysis on the Purchasing Model of Aluminum Corporation of China Limited