Supply Chain Management

Who should read this fact sheet? This is an introduction to the principles of supply chain management for organisations that are new to the subject or in the early stages of developing a supply chain. There is ample evidence that working in a positive and collaborative way with companies that you supply to and buy from is good for business. Construction companies that work in this way are seeing the benefits both for themselves and their clients. Supply chain management is the formalised process that gives structure to these arrangements. Products and services provided by the companies in a construction project supply chain typically account for about 80% of the cost of the project. The way in which those products and services are procured and managed has a profound effect on the outcome of the project - not only in terms of profitability for all parties, but also the way in which the completed facility meets the clients justifiable expectations of cost, quality and functionality. What is Supply Chain Management? Supply chain is the term used to describe the linkage of companies that turns a series of basic materials, products or services into a finished product for the client. All construction companies, be they client, main contractor, designer, surveyor, sub-contractor, or supplier are therefore part of a supply chain. Because of the project based nature of construction and the way that procurement normally operates, they are usually members of different supply chains on different projects. Each company in the chain has a client the organisation to which the services are provided but an integrated supply chain will have the objective of understanding and working wholly in the interests of the project client. Why move to integrated supply chains? In traditional procurement the companies may only be linked by contracts that have been procured on lowest price against fixed specifications. The supplier is

asked to deliver the specified product or service as cheaply as possible. There is no motivation to work in the clients interest. In some cases the supply chain is not even linked by contract. Designers and contractors often have separate contracts with the client, for example. Modern procurement methods are moving to the appointment of integrated supply chains where the parties in the supply chain have a long-term objective to work together to deliver added value to the client. These long-term relationships enable the power of supply chain management to be fully realised. The benefits for individual companies in the supply chain include: reduced real costs, with margins maintenance incentive to remove waste from the process greater certainty of out-turn costs delivery of better underlying value to the client more repeat business with key clients greater confidence in longer-term planning

The benefits for end-users and project clients include a more responsive industry delivering facilities that better meet user needs, delivered to time and cost with minimum defects. This in turn creates higher customer satisfaction levels and an improved reputation for the industry. When is it best to start implementing supply chains? The opportunity to engage in a formal supply chain may be driven by client demands, but companies that see advantage in this method can also start things off themselves. There is every reason to do this where companies have regular relationships with suppliers and would like to develop an offering for clients based on better value. Having established relationships will mean you understand the processes and will be able to respond faster to opportunities to join other supply chains.

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How do we get started? Whether the supply chain is being established for a whole project or by a group of companies wishing to market their specialisms, the following principles apply: It is likely to be impractical to establish long-term relationships with all members of the supply chain. So you should start by establishing relationships with those suppliers and sub-contractors who are critical to your delivery to the market of better products at lower cost and higher quality. These are your strategic supply chain partners or first tier suppliers. It is vital that you take time and care to establish which companies fulfil the criteria that you set (or have the potential to do so) and that they have similar interests to you in developing long term relations. A successful supply chain of first tier suppliers is a manageable objective. In time you may plan for each of your suppliers to have similar chains, but dont try to conquer the world in one go. Evaluate and compare potential first tier suppliers strengths and capabilities in the following areas: - the strength of the existing relationship - technical capability and reputation - design capability and innovation record - size and market position - management style Remember you are seeking partners capable of reliably supplying you with products and services at competitive prices. Success will deliver mutual commercial benefit through greater success in the market, based on increasingly satisfied clients. All parties in the supply chain must be committed to working for the long term on the basis of continuous improvement and innovation. If anyone is inclined to quit when the going gets tough, the supply chain will fail. Much of the success of supply chains rests on personal relations so look at the guidance that is available on Partnering (see fact sheet). Key personal actions are to be proactive, less adversarial, and to learn from others. Neither partnering nor supply chain management are easy. The parties do not need to be good friends, however. Relationships need to be fair but firm, based on a team approach which involves regular contact and mutual respect. Learning to work in this way is new for most

construction professionals. Developing successful supply chains will therefore be difficult and take time but the rewards will be worthwhile. Involving the designer in the supply chain is essential to long-term success. For a whole project supply chain, there may be a number of professional design teams (architect, structural engineer, services engineer) that need to be involved. On the other hand, where the supply chain is established to deliver a component, the designer may be embedded within one of the supply chain partners. Either way, the designers role is central to delivering: Optional functionality Lowest cost of ownership through a value for money focus on lowest through-life cost Safe construction using least amount labour and minimum waste.

Managing Cost Central to successful collaborative relationships is the approach to cost management. The most enlightened clients accept they will obtain best value if the supply chains margins are offered some protection. That will allow the supply chain to focus on delivering value to the client rather than using its efforts to protect margins.

Ring-fence Manage out (risk management) Optimise target costing supported by VM/VE

Margins

Risk allowances

Component and process costs

PRICE

Even where the supply chain cannot get such agreements from a client, it is still essential that costs are understood and managed. The principle of sharing risk and reward underpins the whole process of collaborating for mutual benefit. Passing all risk down the supply chain does not lead to the lowest cost and certainly does not lead to best value for the client. Gain/pain sharing incentive schemes will often ensure the continuing delivery of optimum value to the client.

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The optimisation of component and process costs which typically amount to 80% of the cost of a project - should be approached from target costing, supported by value management, to determine the real requirement. (Value management should engage all the stakeholders in the project, including the ultimate end-users.) Value engineering should then be used as the design progresses to optimise the engineering of the elements. Risk allowances, which are typically made separately by all suppliers, should be rigorously identified using risk management techniques. Duplication should be eliminated, measures taken to manage out the risk and residual risks placed with the most appropriate owner. Substantial savings should be achievable over target costs using these techniques. In repeat applications, the component and process costs can be further improved by the application of continuous improvement techniques. Manufacturing experience is that there will always be room for continuing cost reductions.

Summary The key objective of supply chain management is to offer better underlying value to a client than the competition. This is done through a combination of defining client value establishing supplier relationships Integrating activities Managing costs collaboratively Developing continuous improvement Mobilising and developing people

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Published by Constructing Excellence T 0845 605 55 56 F 01923 664690 E helpdesk@constructingexcellence.org.uk www.constructingexcellence.org.uk

Supply Chain Management: 19/3/04