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Supplier panel: clear rules of the game

The main topics of the interview with Andrey Buzinov, Vice President for Logistics and Supply Management at USC, are the supplier panel that the United Shipbuilding Corporation is establishing and the attractiveness of localization in Russia to foreign partners

Andrey Vladimirovich, why is a panel of suppliers needed and what is it like?

– Let’s start with general, but very important things. The cost of the equipment we do not manufacture accounts for 60–70% of the total order value, therefore the quality of our relations with partners and counterparties directly affects the quality of our work. In the process of design and construction, three parties - we, customers and suppliers – always interact and what the vessel will eventually be handed over to the customer depends on such interaction. Various equipment systems, types and particular brands of equipment are selected, and each of the parties here, of course, has its own interests. The customer almost always seeks to get the highest quality vessel with a good set of equipment at the lowest price. This is normal. We try to meet customer needs, but at the same time ensure delivery in such a way that we ourselves don’t go into the red. The third party is the counterparty. In the early stages, there are usually several counterparties for one type of equipment. And everyone is trying to prove to our designers and end customers that the equipment they produce is the most optimal one that best suits the customer’s needs.

The final vessel configuration is shaped in the course of such trilateral work in several iterations. In these complex relationships, where we act not only as builders, but also as designers (and there is also specific relations between builders and designers), we once took a lot of lumps. I mean the industry as a whole, the professional community rather than USC.

We have studied how it is organized abroad, analyzed our own experience and decided to formulate rules for joint work in the future: to develop a legal framework that regulates our relations, a standard that would define interaction with suppliers, our relations within the corporation, between partners, designers, builders, our relations with potential customers. Thus the “Supplier Panel in Civil Shipbuilding” standard came into being.

But what exactly does it define?

– It addresses a lot of problems. This is the standard for a major recurring business process. The key is to meet customer needs as quickly and cost-effectively as possible. To this end, you need to choose a pool of reliable suppliers without violating the law that protects competition in our country. This is actually quite a challenging task.

To ensure that our dear customers can fulfill their needs in one or another type of equipment with certain performance characteristics, and are not limited to a small number of suppliers, our list should be extensive. It should be borne in mind that more and more research, fishing, or LNG vessels, which are new for our industry, are beginning to be implemented in Russia. The list of chosen counterparties should not limit our own competitiveness.

Another task is that we need not only to be aware of what equipment a particular supplier offers, but also understand how reliable it is in quality. Reliability is also important in meeting its contractual obligations, for example, delivery schedules.

We need to know if there are problems with maintenance of this equipment. After all, the equipment supplier has to provide extensive customer support. That is, we also choose a supplier as a future counterparty for our customer. Sometimes this becomes the key factor in determining the choice. In other words, the requirements are being developed not only for the product – for example, which diesel engine will be delivered – but also for suppliers: who will deliver it, how timely is delivery, what is in-service failure statistics, and how customer service is provided.

In order to quickly design vessels, you must have data on a particular type of equipment at hand – then you can begin designing the very next day after choosing the supplier. It is imperative that everyone who enters our panel of suppliers keep up-to-date their catalogs containing the information necessary for designers. And we will demand it.

It turns out, using the supplier panel, it will be possible to configure several standardized proposals for pre-contract negotiations with the customer?

– Yes. And it‘s important to note that there will be not only one supplier for any item of equipment. This is prohibited by the law on the protection of competition. We can offer the customer a choice. There is a golden formula: «no less than two, no more than three.» Now we see that for some items there can be no more than four equipment options, a standard set. And if the customer and its operational service agree with this set, then, after a fairly short selection procedure, we’re beginning to design and build. The supplier panel enables us to always have complete information about equipment and suppliers. If the customer wants something exclusive, we do not refuse. It would be possibly just a little longer, a little more expensive. Like I said, we do not want to restrict our own competition by a set of suppliers, but there should be a base.

It is clear that the set of suppliers itself cannot be compiled once and for all; it is expected to be updated once a year. The panel of suppliers is a standard, normative document that makes it possible to create a list – a basic makers list for a certain period of time, which allows us to respond flexibly to market changes. To get into this list, you have to meet certain criteria, and we verify this compliance through an audit of suppliers.

And who conducts this audit?

– It is carried out by USC. As I said above, we must have requirements not only for the product, but also for the suppliers themselves. Supplier audit is a very useful tool. With its help, we at the USC have pre-empted many problems by not concluding agreements with some untrustworthy firms.

We want to engage our enterprises and design bureaus more deeply in this work. Although, even now, the groups of specialists involved include representatives of interested design bureaus and factories.

All this applies to Russian suppliers. But the percentage of foreign-made components in the civil shipbuilding industry is rather high...

– Indeed, there is a significant amount of imports and two factors contribute to this. First, there is international division of labor in the world. Of course, we have to try to participate in it, find the most suitable niches for us – those where we can use our competitive advantages. On the other hand, the marine engineering industry is one of those most affected by the collapse of the USSR and the devastation of the 1990s. This is especially true for civil shipbuilding.

The Government of the Russian Federation will increase the level of localization by supporting customers

Anyway, a vessel is under construction and the future operator orders it from USC with state support, for example, under the «catch quotas against keel» program. As a shipbuilding holding wholly owned by the State, we advocate support for localization and are a conductor of the State’s requirements for its promotion. With our direct participation, the Ministry of Industry and Trade of the Russian Federation approved additional requirements for shipbuilding products, as set forth in Government Decree No. 719, for confirmation of production on the territory of the Russian Federation. And now, parameters have been defined in the shipbuilding industry, from which it is clear what and at what stage can be deemed as Russian-made.

As part of building the panel of suppliers, we sign memorandums, cooperation agreements with key suppliers. When the panel is ready, we will sign a document with each of its participants, which will determine where and who will be the market partner of this supplier in the Russian Federation. The document will also identify who will be the localization technology partner.

In other words, is it a call to participate in localization on the territory of the Russian Federation?

– Yes. Work is underway to establish a legal framework regarding what should be considered as a Russian product. The Government of the Russian Federation will definitely increase the level of localization by supporting customers. It is not just a matter of shipbuilding and design activities, but also of marine equipment and therefore it is beneficial to our foreign partners. And today we can say: “Dear colleagues, start localizing your products in Russia!” We don’t care how they will do it: by concluding licensing agreements with any Russian partners, establishing new production facilities or joint ventures. But we are interested in the process and are ready to give expert support and show them who their potential partner in the Russian market is. Moreover, in the early stages we can organizationally support our foreign colleagues. If you want to do business in Russia, get ready for the fact that direct imports are declining, while the requirements for the level of localization in shipbuilding will increase.

These words sound quite often today.

– We are working to explain the new requirements for the market at all large venues, forums and exhibitions. We gather, explain and tell how this will happen in a particular product group, what are the requirements for localization in the new government decree. We bring together Western suppliers and specialized Russian technology partners at events where we are trying to get them so that they communicate with each other and make contacts.

A change in the rules of the game is inevitable, because the State will continue to support both fishermen and transport workers, etc in many ways. The matters of leasing support from our company Mashpromlizing or state-owned companies, for example, GTLK, will also be considered through the prism of state support – they relate to preferential leasing rates. And behind every benefit for the customer there is immediately a requirement for localization – this provides an instrument to promote it.

For companies selected for our basic makers list, which have accepted localization conditions, we organize the so-called “supplier days”, where the suppliers inform about their existing and future product line for shipyards and designers.

Please give examples of successful localization in Russia in the field of shipbuilding.

– Palfinger works in partnership with INMAN, a company from Bashkortostan. It’s about the localization of the Palfinger equipment in the Russian Federation and relates to hydraulic shipboard cranes.

Another USC partner, Germany’s Schottel, specializes in the development, design, manufacture and sale of azimuth thrusters and integrated propulsion solutions with a capacity of up to 30 MW for vessels of all sizes and types. It also considers the Russian market as one of the potentially important ones for itself and is actively working with shipyards, design bureaus and shipowners.

A memorandum was signed with Croatian Vulkan Nova, which is engaged in launching manufacturing of deck equipment at the site of the Vyborg Machine-Building Plant.

Azcue Pumps has been successfully localizing marine pumps, has built a certified test bench in Russia, and also uses domestic components in production.

We have established tripartite cooperation between Motortech and Atomenergomash for the supply and localization of diesel generators.

Korean Hyundai Elevator and Complex Service have organized licensed assembly of ship elevators and lifting platforms, where the share of domestic components exceeds 60%.

We suggest any options which protect business of Western partners in terms of relations with us also with regard to sanctions. We find absolutely legal ways and mechanisms to establish mutually beneficial cooperation when it comes to building a supply chain. It is important that the movement is mutual. For our part, we are open for cooperation.

Supplier panel: clear rules of the game
Supplier panel: clear rules of the game
Supplier panel: clear rules of the game