You buy what you are – how to get outperformance on your projects
These are challenging times for those procuring major projects and programmes. Around the world, unprecedented volumes of infrastructure spending are planned, with owners fighting to attract the best resources to deliver their projects.
At the same time, projects are under pressure from their boards, and from global competition to deliver more value for less cost in shorter periods of time. In the UK, for example, the Government’s ‘Construction 2025’ report proposes a 33 percent reduction in the capital and whole-life costs of new assets and a 50 percent reduction in the time taken from inception to completion.
Enlightened organisations across sectors are rethinking the way they plan, resource and manage major programmes of work. They are orchestrating massive cultural shifts across all functional areas internally and changing the way they engage with their suppliers. The outcome is more value creation for the programme and organisation.
What these clients have realised is that their own behaviours are driving the outcomes they achieve through their supply chains. The way a client engages with its suppliers, how it measures them, how it incentivises them, the strength of the supply chain interface processes it uses to deal with them, will ultimately define the value that supply chain adds – or detracts – to a project or programme.
"We now find ourselves in a seller’s market, with many suppliers only tendering for the highest margin opportunities. Some clients are reporting failure to attract any bidders.”
Desperately seeking bidders
Some programmes are paying now for having procured on lowest price in the aftermath of the recession. Suppliers forced to submit low-cost tenders in order to win work are looking to recoup costs through claims and compensation events. Some have gone into administration.
We now find ourselves in a seller’s market, with many suppliers only tendering for the highest margin opportunities. Some clients are reporting failure to attract any bidders. Risks were passed onto the supply chain rather than allocated according to the stakeholder best placed to mitigate them. Now some of those risks have come home to roost and projects are overrunning on time and cost.
Perhaps worst of all, organisations are failing to get the best outcome from their investment. They have made decisions based on capital cost rather than on value to the organisation’s end customers and its core business goals. Innovation has suffered as a result, stifling creativity in the industry and leaving out potentially lucrative improvement opportunities.
Now the tables have turned. The capacity constraints driven by previous buying behaviours have created a supply chain which is consolidated, lacks trust and does not have the capacity to deliver the unprecedented level of infrastructure investment we face today.
In this environment, how can a client create the right supply chain strategy and procurement approach? Collaboration is increasingly cited as the panacea for all supply chain problems, but it is time consuming and therefore expensive – for both sides of the table – and so can only deliver value in certain situations.
Where relationships are long term, where programmes are complex or technically challenging – and where the supply chain sees a benefit too - collaboration works well. There are, however, still examples of buyer-supplier relationships, which are best approached with a transactional mindset, creating an easy-to-use and efficient engagement where these are most appropriate.
Often we find an organisation’s stated goals have not been translated through into the way it transacts with its supply chain.
“The capacity constraints driven by previous buying behaviours have created a supply chain which is consolidated, lacks trust and does not have the capacity to deliver the unprecedented level of infrastructure investment we face today.”
Behaviours drive value
Now, more than ever before, clients need a profound understanding of their supply chains, what challenges they face and what motivates them. Engaging early with different groups of suppliers will reveal that their goals and needs are very different; procurement and wider supplier engagement strategies should be tailored accordingly. Other industries, such as manufacturing, have useful lessons to teach about this bespoke category management approach.
Some suppliers may be looking for a pipeline of work to help with planning and resource management. Others may simply want to deliver the work, be paid fairly and minimise their costs of engaging with each client. Clients should also consider whether contracting directly with some carefully selected second tier suppliers – rather than through a first tier integrator – would allow suppliers to create more value.
Where collaborative relationships are the best option, clients have to work hard to ensure that those relationships are mutually beneficial. Simply demanding year-on-year cost reductions often leads to lower-tier contractors being squeezed, potentially damaging individual businesses and industry capacity.
Perhaps the most important message of all is that the way a supply chain behaves is defined by the way it is treated. The form of procurement, the commercial model, how performance is measured and rewarded; these elements all communicate what the true values of a client organisation are.
Often we find an organisation’s stated goals have not been translated into the way it transacts with its supply chain. For instance, we find the procurement team incentivised to deliver year-on-year savings on cost, but the organisation’s most important stated goal is to improve customer experience.
Internal teams as well as external teams all must be incentivised so that everyone is pulling in the same direction. Trust comes from knowing that an organisation’s behaviours match its stated values; and that a long-term relationship really will be long-term.
Procurement is of strategic importance because it can add huge value to an organisation – or detract hugely from it if things go wrong.
"Now, more than ever before, clients need a profound understanding of their supply chains, what challenges they face and what motivates them.”
A question of maturity
Ultimately, mature clients develop a culture and behaviours which banish the ‘them and us’ mentality. Your supply chain is delivering your programme: you really are what you buy.
For mature clients, procurement isn’t something at the bottom of a long chain of command, an administrative activity left to the procurement team.
Procurement is of strategic importance because it can add huge value to an organisation – or detract hugely from it if things go wrong. Procurement is a matter for the delivery team, the operations team and the leadership team.
The first step towards creating more value with your supply chain is to understand how mature you are as a client, how you benchmark against peers, and against best-in-class, in your home market and globally. From there, organisations can start building the behaviours and culture that attract the right sorts of suppliers – and set up their contracts, systems and incentives accordingly.
At Turner & Townsend, we know this approach works, because we have supported some of the world’s most progressive asset owners and developers as they have transformed their relationships with supply chains. Our data, experience and capabilities have informed decisions on supply chain strategies and management for a range of organisations: international airports to county councils, logistics giants to water companies and highways authorities.