supply chain management - constructingexcellencesw.org.uk · supply chain partner protocols •...
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Supply Chain Management
13th of March 2015
Marc Preite
Your current understanding of SCM is.....
Definition 1
• ..the management of a group of suppliers involved in the production of components used in an end product…..
• There should be a clear understanding between all parties in the chain….
• Only by analysing the supply chain in detail can we hope to remove unnecessary and wasteful
activities. Mace
Definition 2
“The strategic management process, unifying the systematic planning and control of all technologies, materials and services, from identification of need by the ultimate customer. It encompasses planning, designing, purchasing, production, inventory control, storage, distribution, logistics and quality. The objectives are to optimise performance in meeting agreed customer service requirements, minimising cost, whilst optimising the use of all resources throughout the entire supply chain”
Lord Chilver of Cranfield
The goal of Supply Chain Management
“To manage upstream and downstream relationships with suppliers and customers in order to create enhanced value in the final market place at less cost to the supply chain as a whole”
Professor Martin Christopher of Cranfield
To cover:
• The supply chain integrator
• Strategic supply chain partners and key suppliers
• Selection criteria
• Achieving client best value
• Reducing cost not price
• Protected margins
• Supply chain partner protocols
• Collaborative contracts
To include:
• Clustering & cluster leaders
• Early involvement of suppliers in design
• Costing & planning
• The use of output specifications
• Risk management
• Long term relationships
• Key Performance Indicators
• Target costing
• Continuous improvement from project to project
• Co-ordination & Leadership. To include:
• Process- value management and engineering
• Incentivisation
• Open book accounting
• Continuity of work
A comparison of collaborative and traditional supply chain management principles
Managing key suppliers
The Traditional Method Fails to Perform
Fragmented
Insular
Project based
Little continuity
Poor profit margins
Sequential hand off
Low opportunity to influence decisions
Minimal investment in R&D
Low levels of training
Low moral
A Big Difference Between Other
Industries and Construction
Manufacturing etc companies implemented
SCM/SCI as part of their strategy for improved
performance
Construction companies are doing it because
clients are forcing it on them
So where has it gone wrong?
“The problem, however, as our survey reveals, is that
even where the principles of Rethinking Construction
have been adopted, too often the commitment is skin-
deep. Scratch beneath the surface and you find many
so-called partners who still seek to avoid or exploit
risk to maximise their own profits, rather than find
ways to share risk and collaborate genuinely so that
all can profit.”
So where has it gone wrong?
“Companies who say that they partner will still seek
to retain profit for themselves and pass risk down the
supply chain, rather than use shared profit to
eliminate risk for the whole team.”
INTEGRATION AND COLLABORATIVE WORKING
Concept
• Pre-selection and appointment of long term supply chains
• Early formation of integrated project teams - involvement and
commitment to all principal partners at onset
• Shared goals, objectives and outcomes
Issues
No common understanding
People don’t realise how radical and different it is
Requires faith and trust
Few people are sufficiently aware, willing and able
The Way Forward
What does Supply Chain
Integration Mean?
Involve early to unlock benefits
Ability to
Change Cost of
Change
Historic Project Stages
Briefing Feasibility Outline Design Detail Design Implementation
Key concepts
agreed & owned
What does integrated design do?
Fixes the economic effectiveness of a project
Fixes aesthetics, environmental impacts,
architectural and cultural character
Fixes amount and cost of materials and
components to be used
Impacts on waste of materials and labour during
construction
Impacts on the safe building of the structure.
Fixes values for money the client receives
Challenges for the Supplier:
• Establish long-term relations with contractors & key suppliers
• Be prepared to Open Books and work collaboratively to reduce costs whilst protecting profit
• Contribute early in the project to design, planning and costing
• Develop the processes and skills to ensure deliver of the right product at the right time
• Participate in Continuous Improvement
Principles and Practicalities of
Supplier Selection
Assessing Needs
Short, medium and long term objectives
Anticipated workload
Necessary skills
Capability/availability of internal resources
Capability/availability of existing suppliers
Appropriate supplier base
Suitable frameworks
Benefits of other methods
What are we trying to create?
A team (which includes clients) that will work
together in selected markets delivering superior
value to its clients
A team with key members who can contribute
to all aspects of design and implementation
A team that will maintain its competitiveness by
offering ever-increasing value for money
A team that makes sound and predictable
margins
A team that grows together
A team that can mobilise resources to suit
demand
So what do we need to do?
Be clear about the potential opportunities
Accept that continuity of the team is the winning proposition
Accept the need for a different set of commercial realities
Think about which categories of supplier are critical to maximising the effectiveness of the team
Which leads on to…
The need to select key suppliers for reasons other
than price
The need for long-term relationships
The need for long-term competitiveness
The need to manage the team for the benefit of all
Identifying potential key suppliers
What is a key supplier? − One who “fixes” underlying cost – designers − Those accounting for greatest elements of cost –
constructors and specialist sub-contractors − Significant contributors to design and construction
decisions − Those with significant impact on outcomes − Those best able to take responsibility for design and
construction of major element of project
… not too many; but how many is enough?
How to choose… Suppliers
− Who want to work in your chosen market and on your types of projects
− Have an interest in your value stream
− With appropriate design and/or construction capabilities (designers who understand construction and contractors who understand design)
− Have access to the necessary resources – in quantity, locality and speciality terms
− Have a desire to meet new challenges
− With aligned commercial objectives
Confirm that there is mutuality of interest!
Selection Criteria
Strategic importance
Commitment to client
Leadership and managerial ability
Competence
Culture
Commitment to continuous improvement
Commitment to people and training
Willingness to change
Financial stability
Best in Field
Transparent Cost
Back to Back Terms
Relevant Experience
Capability
Innovation
Added Value
Reciprocal Trading
Effective Selection Seeks
Compatibility
What everyone must understand
Each project must deliver best value for the customer
All underlying costs are subject to scrutiny to ensure they
are justified in delivering value
Profit is agreed but your performance could undermine it (pain/gain)
Work with cost not price
Waste must be continually removed at all steps - with help
from the supply chain integrator where needed
Managing key suppliers
Responsibilities must be defined and agreed e.g. clustering
Need for co-ordination and leadership
Improvement processes should be agreed
Value of sharing savings – Incentivisation
Books are open
Trust is developed if you are trustworthy
They need continuity of work
Supply Chain Opportunities
Identify mutual development objectives
Strip out transactional costs
Pool occasional/specialist needs
Identify intra-network opportunities
Build a network culture
Train across company boundaries
Market the chain(s)/network
Managing Project Cost Through Understanding and Managing
Suppliers' Costs
Getting to grips with
cost, not price
Getting at Cost
Need collaborative management of real
cost:-
Margin
Risk Allowance
Component and
Process Cost
RING FENCE
MANAGE OUT
OPTIMISE BY REMOVING
WASTE
Traditional Model
Minimising own risk Maximising own certainty (quality, cost, time)
Maximise own profit
Window of Opportunity
Future Model
Minimising supply chain risk Maximising certainty (quality, cost, time)
Maximise customer value
Window of Opportunity
Traditional Model
Future Model
Window of Opportunity
Window of Opportunity
Price, cost and profit : What
should you pay?
Market Price + Undisclosed profit = Wrong
Actual Cost + Ring-fenced profit =
Right!
We will look at this later buts lets try
something!
Lessons…
20% added value time is typical − when client and contractor work together there is
huge potential for improving productivity and reducing waste cost
But the cost has to be understood first
− Current BoQ’s & schedules of rates give little indication of real cost
− As a result, neither clients nor contractors understand real cost
− If you don’t understand cost, you cannot set targets and should not partner
− Understanding and passing risk to the partner best placed to manage or mitigate it can lead to dramatic and immediate cost savings when you start to collaborate
Things to do with suppliers
Understand their commercial objectives
Agree gross margin which is justified in
respect of those objectives
Identify the categories in which you want
the price/cost to be evaluated
Negotiate on the basis of facts. Use
knowledge mechanisms to find and agree
ways to reduce costs – not margins
How does a supplier come up with their price?
Labour – own and sub-contractors’
Materials prices – own and provided by sub-
contractors
Prelims
Risk – real risk and unreal risk/contingency
Margin on margin
Overheads
Profits
What do we need to do to understand supplier’s cost?
Separate margin
Understand how he calculates labour content
Understand what he does to get at his own suppliers’ labour content
Understand what is included in risk
Understand how he arrives at material and component prices
Understand what “prelims” consist of
DON’T BE AFRAID TO ASK – DON’T BE AFRAID TO DISCLOSE
Incentivisation Model
HRC
Concept design cost & risk plan
Design Gain share split
70/30
Concept Design Construction
Budget
Target Price
Final Price
Pain share split 50/50
Gain share split 80/20
Why does SCM have failures?
• Lack of focus on the best markets to suit the characteristics of the whole supply chain
• Procurement function focused on sites and projects, not long-term relationships
• Senior culture of pressurising suppliers
• Regional management structure means differing approaches; hence lack of trust
• Reticence about opening account books
• No shared clear long term strategy
New Attitudes
• Culture change - collaboration not conflict
• Openness with clients and partners
• Sharing information about needs, wants, expectations, benefits
• Understanding each other’s business
• Willingness to negotiate and trade benefits
Applied Management Techniques
Attitude
The longer I live, the more I realise the impact of attitude
on life. Attitude to me is more important than facts. It is more important than the past, than education, than money, than circumstances, than failures, than successes, than what other people think or do. It is more important than appearance, giftedness or skill. It will make or break a company, a church, a home……
I am convinced that life is 10% what happens to me and 90% how I react to it. And so it is with you; we are in charge of our attitudes.
Charles Swindoll
Applied Management Techniques
Benefits of SCM
– Less disruption of work
– Less waste of time and money
–Problems and barriers overcome
– Jobs completed earlier / faster
–Greater gross profit margins
–Better client satisfaction and loyalty
Improved Decision Making
Improved understanding
Better analysis
Better decisions
Quicker agreement
Better buy in
More honesty & realism
Shared problem solving
More Benefits
Improved Financial Performance
Minimised risk of overspend
Reduced need for contingency
Better allocation of funds
Lower out turn cost
Reduced operational revenue
Minimised reworking
Minimised duplication & wastage
Improved financial security & profit
More Benefits
Engaging with the Supply Chain
Leads to Benefits in….
More appropriate specification/selection
(equipment, materials and methods)
Simplified design
Increased standardisation
More efficient processes
Fabrication in “factory” instead of site conditions
Modularisation – kit of parts
Off site assembly
1. Over production • Too Large batch size
• More than customer demand
• Just in case
…and access to the 7 (+1) areas of waste 2. Waiting • something to happen
• material to come
• missing information
3. Transportation • Incorrect placement
• Multiple movement
• “Panic” delivery
4. Over processing • Duplication
• Checkers checking checkers
• Recording discussion
5. Excess motion • Walking & Lifting
• Repositioning
• Twisting & Turning
6. Inventory • Too much variety
• Keeping obsolete items
• Storing low cost goods
7. Scrap & rework • Abortive time
• Wasted materials
• Diverted labor
Accidents & Incidents • Loss of resource
• Loss of skill/experience
• Loss of moral
One good reason to keep on pushing the boundaries beyond your ‘safety zone’…..
Any Questions?
Lets take a break and then look at some examples.
Exercise :Quality vs. Time
Can you tie a tie?
Exercise
Understanding and Reducing
Costs
Central Costs on which Gross
Margin is based
Cost
Corporate Overhead £150
Operating Profit £50
Project-specific Costs
Labour Hours £991
Labour-related overheads £200
Materials and Components £800 – boiler
£400 – Pipes and rads
£1200 - total
Prelims £100
Plant £20
Contingencies £50
Total Price per house £2761
Heating Installation – Tender
Price Breakdown
Analysis of Labour Costs Activity Time Taken Cost
Defective boilers time wasted rectifying
boiler faults
£ 60
Gaining access 8 visits to achieve 4
accesses – 4.5 hours
wasted for 2 people
£126
Waiting for
information
2.5 hours for 2 people £ 70
Waiting for
materials
3 hours for 2 people £ 84
Wasted travel time 1 hour for 2 people £ 28
Time filling in
paperwork
2.5 hours for 2 people £ 35
Travel time to
houses
13 hours for 2 people £364
Productive time 8 hours for 2 people £224
Total £991