Chapter Corner

United We Stand, Divided We Fall

Posted in: Features, April 2015

"All for one and one for all, united we stand, divided we fall." The classic quote by the Three Musketeers is appropriate to the construction industry and is at the heart of supply chain management. Any discussion of supply chain management requires the term to be defined. While many people use the term, far too often they misuse it. They think of supply chain management in terms of cost or functions such as purchasing, transportation, or warehousing. Unfortunately, that is not supply chain management.

For most people in the construction industry, supply chain management requires a paradigm shift in thinking. In essence, it requires a totally new way of looking at the construction process. In the traditional approach to construction, the buyer attempts to obtain the lowest price by getting multiple bids. While this approach may appear to generate the lowest price for an item, it typically does not create the best price for the project. The practice of attempting to buy each product or service on a construction project at the lowest cost is referred to as sub optimization.

Unfortunately, Edwards Deming began arguing in the 1950s that sub optimization typically leads to higher costs. The reason is that price is meaningless, unless it considers the product’s or service’s cost impact on other project costs.

For example, one distributor of light fixtures may offer a lower price because he plans to deliver all the fixtures at one time. Early delivery requires all the fixtures to be delivered before the first fixture is needed. This approach may save some transportation costs, but at what other added costs? When fixtures are delivered before they are needed, the contractor is forced to store them at the site, and most likely will have to move them several times before they are installed.

Early fixture delivery results in additional costs for the electrical contractor. Research confirms that this is a common practice causing material to be moved four and half times on average before it is installed.

There is the expense of protecting the fixtures and the labor cost of moving them. The longer the fixtures are on the site, and every time they are moved, increases the likelihood they will be damaged. Further, workers are more likely to be injured when moving materials then when installing them. Resulting injuries would have a negative impact on the contractor’s worker compensation modifier, which would raise costs not only for the current project but future projects. When all the above extras costs are added up, they typically exceed the small savings in transportation costs offered by the earlier delivery.

A statement by the Project Management Institute (PMI) further complicates the problem. They have stated, “The buyer becomes the customer and is thus a key stakeholder for the seller.” In essence, PMI is saying that when the general contractor or specialty contractors buy materials or services, they are the customer. First of all, they are not the customer. The client is the only customer, but I will discuss that later. In the traditional approach, the most important thing for a majority of contractors is to obtain the lowest material and subcontractor prices in order to win the bid. Unfortunately, this approach ignores hidden costs to the contractor as illustrated by the fixture example and does not take into account the negative cost impact to other contractors or the client. In contrast,  the client is concerned not only with the individual item’s price, but the total project cost as well as the long-term cost impact. In other words, the client is concerned about total price and how those items impact his performance and operations, including operational costs such as maintenance and energy costs. 

So if supply chain management is not about cost and functions, what is it?

SUPPLY CHAIN MANAGEMENT

Supply chain management is the flow of materials and information throughout the construction process. The movement should be an integrated process that uses technology to meet the customer’s expectations.

Supply chain management is a reversal of the traditional practices where contractors and vendors supply their product or service the way they want. In essence, they provide their product or service in the way that is best for themselves. A problem occurs in construction when each contractor and vendor attempts to do what’s best for itself because chaos is created. In an environment of chaos, no one benefits. It is easy for contractors and vendors to justify the position that they must do what is necessary to protect their interests, because their margins have been squeezed too tight. 

Unfortunately, the chaos caused by everyone only looking out for number one has a negative impact on everyone involved with the project. What saves many contractors is the fact this practice has been in place for so long that their unit prices reflect many of the problems and inefficiencies created by the traditional approach. However, the client pays more than is necessary, and this negatively impacts the contractors. Contractors are paid based on the value they deliver, so when the process is full of inefficiencies, the value to the client declines, and so will the contractor’s profit margins. This situation in part explains why contractors have experienced declining profit margins for decades. 

In contrast, supply chain management understands that working together, in essence, all for one and one for all, many of the inefficiencies and excess costs can be removed. The collaboration across company lines is essential because most of the inefficiencies that occur in the construction industry occurs between the tasks, not within the tasks. For example, if the electrical contractor paid the fixture distributor extra transportation cost to make more timely deliveries, it would reduce the project’s cost. Supply chain management helps improve the handoff of the baton. It doesn’t matter if each runner on the track relay team improves his individual time by a few seconds if he keeps dropping the baton at the exchange.

For this reason, supply chain management focuses on the system as a whole. It constantly asks how we can better work together to improve the overall project efficiency and performance.

The driving force behind supply chain management is aligning everyone on the project to deliver what the project’s customer, the ultimate buyer, needs. When this becomes the goal, all the discussions revolve around a single idea: What is in the best interest of the client? Again, let’s examine this concept in terms of the fixture example. Since early delivery increases project costs, it’s in the best interest of the project, and, therefore, the client’s best interest, to pay the increased transportation cost because it will reduce project costs.

Supply chain management is a joint effort between the client and construction/ design team to exploit the savings, service, and benefits of supply chain management. This is achieved by removing inefficiencies, excessive costs, and excessive inventory from the supply pipeline. Supply chain management includes paying the right price or best price for everything because that aligns the entire effort with what’s best for the project and the client. 

Supply chain management is about the flow of material and information from its source to its destination. In construction, as in any industry where the final product is unique, it’s essential that this information flow two ways. It must go from the client to all the designers, contractors, and vendors, so they know and understand the client’s desired result. Then there is the flow of information between all the vendors and contractors needed to coordinate the design and construction efforts. It’s also about the flow of material from raw materials through installation. Supply chain management helps to ensure the flow of material is done in a timely and cost effective manner. The only way to do this is through an integrated effort between all parties.

FINAL THOUGHT

The ideal supply chain management system includes the design team, the contractors, the vendors, and the client. This is critical because many of the inefficiencies and excess costs occur as a result of poor collaboration between the design and construction teams. In the design-bid-build arena, there is little collaboration as contractors are told what materials to use and how to install them. The lack of collaboration creates many inefficiencies. For that reason, it is highly recommended that supply chain management include the entire design and construction process.

However, it is recognized that the construction team does not dictate the delivery method. Of course, contractors can try to influence the decision, but ultimately, the customer determines the delivery method. However, regardless of the delivery method, the construction team can still lower its project cost by implementing supply chain management over the construction effort. When the construction team collaborates, as opposed to everyone attempting to defend his or her silo, the construction team can reduce the project cost. Lower costs allow the team to submit more competitive bids while increasing their profit margins.

Ted Garrison is the principal at New Construction Strategies. As an international speaker, author, and consultant, he is a catalyst for change within the construction industry. He can be reached on e-mail at Ted@TedGarrison.com or followed on Twitter @TedGarrison.