The Beijing Axis helps leading SA equipment manufacturer to cut costs by sourcing steel in China

6 May 2014

With Asia dramatically boosting its steel production and rising to the position of the world’s top steel powerhouse, many companies in steel consuming industries from other parts of the world are looking for ways to reap the benefits of sourcing steel products from the region.

China focused international advisory and procurement firmThe Beijing Axis (TBA) –part of Imperial Logistics group company Resolve – successfully assistedone of South Africa’s largest heavy engineering equipment manufacturers in its bid to source semi-finished and finished steel products for the rail, petrochemical and wind sectors (mainly rings and flanges) from Asia.

The Problem

TBA’s Associate Director Javier Cuñat explains that prior to this, the client was sourcing semi-finished products (steel billets and ingots) from South Africa and Europe. “The client faced issues pertaining to both high costs and unreliable supplies due to reoccurring disruptions from its major supplier. Another complication was that the client’s major manufacturing facility was facing a temporary slowdown in the production of finished products,” he adds.

The Beijing Axis Approach

In order to develop strategic relationships with the most suitable and reliable suppliers for both types of products in the specified locations, Cuñat explains that the client – in partnership with TBA – first needed to form a holistic view of the steel market in these countries, including potential risk factors. We then proceeded with identifying, shortlisting and selecting the most relevant companies for engagement. Finally, TBA selected fully capable suppliers that met the client’s price and specification requirements; TBA then proceeded to engage with them on behalf of the client. The project scope also entailed transaction support from TBA’s procurement specialists, which included performing due diligence on selected suppliers, participating in negotiations and closing procedures, contract facilitation, and transaction monitoring.

Lessons Learnt

TBA divided its investigation into sourcing semi-finished and finished products. TBA learnt that the cost advantage offered by China was eroded by high export tariffs, making the country uncompetitive in semi-finished products. As for South Korea, upon engagement with suppliers, we concluded that this country was not viable for sourcing semi-finished materials, due to its incompatibility with the client’s requirements for shapes and sizes of ingots and billets. Nevertheless, in India, out of 80 companies, TBA managed to select a reliable supplier that met the client’s semi-finished product requirements at a competitive price.

For finished goods, it became clear during our engagement with suppliers that prices in China were the most competitive among all the target countries. Furthermore, the large supply base in China gave our client more buying power and the ability to easily shift between suppliers.

The Outcome

For the Chinese supplier, The Beijing Axis assisted the client with all contract documentation, including document preparation, transaction monitoring, quality assurance and logistics management. For the Indian supplier, TBA are currently at the final stage of negotiations, assisting the client to achieve the most favourable terms in their contract. In the meantime, TBA are managing and supervising the overall communication process between the client and suppliers, which includes providing translation, RFQ management and disputes settlement services.

The outcome of this project is that TBA have successfully assisted one of South Africa’s leading manufacturers of heavy engineering equipment to cut costs and boost its competitiveness, by establishing a strategic partnership with a Chinese supplier for finished steel products. The client was so impressed with the manufacturing capabilities of the supplier that they decided not only to procure products in the short term, as originally planned, but also to source a range of products over the long term, signing a three-year contract with the supplier.

The two parties are currently engaged in the final stage of negotiations, and are set to sign a formal contract that will enable TBA client to achieve excellent cost savings as the supplier’s price level is significantly lower than that of the client’s current suppliers.

“The Beijing Axis also provided this client with strategic intelligence and insights on the current status of the steel industry in the target countries, which will help guide senior management in decision making going forward,”he concludes.

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