white paper

The Integrated Approach

Consolidation of supply... the right way forward

white paper | The Integrated Approach

Contents
Introduction How We Got Here Supplier Selection Managing the Relationship Conclusion References 01 01 05 06 07 07

white paper | The Integrated Approach

A whitepaper on supply chain rationalisation as a valuable alternative to traditional procurement methods, and how to select and manage suppliers when developing your supply chain.

among those companies E&Y considered high performers. As businesses strive to reduce costs and deliver greater value there is a saying that spring to mind, if you always do what youve always done, you will always get what you always got. If you want to achieve a different outcome you can either take a tactical approach (re-arrange the deck chairs on the titanic) or step back and think strategically about new ways of doing things and break old habits (alter the course of the ship). An example of this was the announcement in November 2010 by Carillion to cut 20,000 suppliers from its supply-chain as part a streamlining action plan. Carillion had approximately 25,000 suppliers on their books, but will reduce this figure to 5,000 saving 140 million a year by 2013.

How We Got Here

Perhaps we need to start by exploring the current situation and how and why we are here. Under the current procurement practices separate work packages are created for each of the elements of the build and these are typically let to separate suppliers. This practice has grown up for a number of reasons: Price Purchasing have been able to negotiate with each of the suppliers to drive down cost for each of the elements. Purchasing has been seen as transactional and price driven. Control By splitting the packages the contractor removes the risk of being locked-in to a specific supplier. Each supplier has responsibility for a discrete part of the overall program. Capability With specialist suppliers and proprietary systems the work packages were aligned to fit the capabilities of suppliers in their areas of expertise.

Abstract
The construction industry has evolved seeing the individual service components of the build let to different sub-contractors. Whilst this has served the industry well for many years, the time to consider supply chain rationalisation has arrived in order to drive down costs, remove risk and improve delivery timescales. The market has evolved and there are cost benefits of up to 10% to be realised by reworking the procurement approach. In order to select the right integration company to partner with for such programs it is important to select carefully and thus manage effectively.

Figure 1: Divide and conquer

Structured Cabling

IP CCTV

Access Control System

BMS

Introduction
Supply chain rationalisation, supplier consolidation and supplier reduction approaches are being widely adopted across many markets. Here we look at this approach in the construction market. Over the next few pages we will look at an alternative approach to the traditional method of procurement of separate work packages to understand the benefits, and how you should select and mange suppliers to work with when rationalising the supply chain. According to an Ernst and Young (E&Y) study of 1,400 senior managers and chief level executives, they found that 28 per cent of companys were increasing collaboration with suppliers. This figure increased to 39 per cent Materials Materials Materials Materials

Labour

Labour

Labour

Labour

Prelims

Prelims

Prelims

Prelims

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white paper | The Integrated Approach

Whilst the above is a rational approach it comes with a number of consequences which can be seen in the diagram below. Although there are some unique aspects to the work packages, there is also a lot of duplication. Labour and prelims can all be supplied (and charged for) multiple times.

Figure 2: Removing Duplication

Structured Cabling

IP CCTV

Access Control System

BMS

The impact of this approach is:

Increased Cost Whilst this approach was designed to reduce cost through negotiation, it can actually increase costs through duplication. An engineer, whilst on site, can install multiple systems e.g. structured cable points and CCTV cameras. Under the traditional approach this would require two visits from two engineers and increased costs. Increased Control Coordination of multiple suppliers and engineers increases the project management activity and complexity. Two, or more, different engineers working on the same part of the system leads to greater need for coordinated activity. Increased time A direct impact of the above is an increase in installation time and overall project completion time. Increased Risk With multiple suppliers the responsibility for systems integration passes to the main contractor. Each work package can be shown to function, but the overall building systems capability may not be fully functional. With the fast growing number of building systems all integrating and communicating over a converged IP (internet protocol) network this aspect is becoming increasingly complex. This is not typically a core skill for main contractors and hence passing the responsibility and accountability for total integration to another specialist company becomes more important. Figure 3: Integrated Approach Materials Materials Materials Materials

Labour

Labour

Labour

Labour

X Prelims

X Prelims

X Prelims

X Prelims

Structured Cabling

IP CCTV

Access Control System

BMS

Materials

Materials

Materials

Materials

Labour

Prelims

Duplication

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white paper | The Integrated Approach

Rationalising the supply chain and integrating the approach hence allows for the duplicate costs to be removed, risks to be reduced and overall control improved. Figure 4: Conventional Delivery Structure

The advent of open standards, to replace the previous supplier proprietary standards, means that the previous fears of supplier lock-in can now be mitigated.

With a standards based open architecture approach to the plan, design, build and management based on best of breed suppliers, you are able to rule out this risk.

Fire Contractor

BMS Contractor

Security / CCTV Contractor

Project Manager

Design Engineer

Commission
Manager + Labour

Electrical Installer (Subcontractor)

Company A Company B Company C

Figure 5: Integrated Delivery Structure

Fire Contractor

BMS Contractor

Security / CCTV Contractor

Project Manager

Permanently site based Improved into flow Visibility for critica systems

Design Engineer

Multiskilled Providing technical integration Main contact with design team

Commission

Key interface to M&E Providing early programme integration

Manager + Labour

Electrical Installer (Subcontractor)

Common installer for fire, BMS and CCTV / Security

IP Cabling & Technology Partner

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white paper | The Integrated Approach

If we take a look at the difference between a conventional and integrated approach during a typical example delivery we can see the areas of benefit: Figure 6: Reduced Labour Peak Labour Solutions designed traditionally with constant re-invention of the wheel and site based installation and commissioning

Solutions standardised, simplified type tested with maximum advantage taken of opportunities for offsite installation and commissioning

Time

As an example we can see the impact on the labour peak reduced program risk, rapid start-up and commissioning and greatly improved efficiencies. Below is an example of how the economic cost benefits may be realised showing a Figure 7: Economic Benefits

Separate Contractors:

Component Materials Labour Prelims

Single Contractors:

SCS 40.00 40.00 8.00

IP CCTV 33.00 33.00 6.60

ACS 17.00 17.00 3.40

BMS 25.00 45.00 7.00

Total 115.00 135.00 25.00

Component Materials Labour Prelims

SCS 36.00 36.00 7.20

IP CCTV 29.70 29.70 5.94

ACS 15.30 15.30 3.06

BMS 22.50 40.50 6.30

Total 103.50 121.50 22.50

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white paper | The Integrated Approach

significant financial reward for adopting an integrated approach. Based on a number of case studies, the typical saving is 10%:

Decisions about which suppliers to use are based on factors such as price, quality, sustainability, ethics and reliability.

Figure 8: Dos and Donts

Dos and donts

Do identify potential partners for collaboration Do build a dialogue around common objectives and outcomes Dont let negotiations deteriorate into arm-wrestling or pokerplaying Do establish what knowledge can be shared and how Do set up a joint value-creation process to encourage new ideas Dont hang on to value-creation ideas if they are not delivering Do define what value means for those involve Source: Guide to... Collaborative working David Hawkins, operations director at PSL, Adrian Miller, senior commercial specialist in supply chain management at NATS, Thanks also to Jaye Cook, senior manager, 4C Associates Ltd

Supplier Selection
For this to be viable you need to select the right supplier and partner to work with. In their Guide to... Collaborative Working Hawkins & Miller comment that: Collaborative relationships can be used in many different circumstances, and finding the right partner should not be left to chance. Too often, selection is by default or based on the length of time of the relationship. However, this may not always be the best criterion. A well established supplier may not be the most suitable choice when you are considering a more integrated approach... Whatever the drivers for collaboration, you need to have a clear perspective on which companies the potential partner or partners might be In the Carillion case mentioned earlier they commented that

I would add to the list above:

Ability to establish common objectives and vision. If you have a common aim, enablement becomes much easier. Ability and willingness to share information. Aberdeen Groups study on Supplier enablement - the sharing of information between buyers and suppliers, found that best-in-class companies were 25 per cent more likely to share information with suppliers than other firms. Depth and breadth of supplier relationship. If the supplier is to become the system integrator they need to have established relationships with best of breed suppliers. A good skill base of resources that can be applied to the projects Flexibility and responsiveness. Nothing stays constant, so the attitude to flexibility and ability to respond quickly is always necessary.

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white paper | The Integrated Approach

If you dont already have an established supplier evaluation process you may wish to consider the Kraljic Portfolio Purchasing Model:

Figure 9: Purchasing Portfolio Model

High Profit Impact Low Low

A good source of guidance on how to make relationships work is found in Best Practice:
Managing the Relationship
Effectively managing the on-going relationship is a large topic in itself. Having invested time and effort into supplier selection and shared important information to make the relationship effective, there needs to be on-going activity to enable the relationship to realise its full potential. A good source of guidance on how to make relationships work is found in Best Practice: Simple Rules for Making Alliances Work Jonathan Hughes & Jeff Weiss HBR Once the supplier is in place, an important component of the on-going management

Leverage Items

Strategic Items

Non-Critical Items

Bottleneck Items

Supply Risk

High

Kraljic recommends the following purchasing approaches for each of the four quadrants: Strategic items (high profit impact, high supply risk) These items deserve the most attention from purchasing managers. Options include developing longterm supply relationships, analyzing and managing risks regularly, planning for contingencies and considering making the item in-house rather than buying it, if appropriate. Leverage items (high profit impact, low supply risk) Purchasing approaches to consider here include using your full purchasing power, substituting products or suppliers and placing high-volume orders. Bottleneck items (low profit impact, high supply risk) Useful approaches here include over ordering when the item is available (lack of reliable availability is one of the most common reasons that supply is unreliable) and looking forways to control vendors. Non-critical items (low profit impact, low supply risk) Purchasing approaches for these items include using standardized products, monitoring and/or optimizing order volume and optimizing inventory levels. Source: http://www.midtools.com

Figure 10: Making Relationships Work Simple Rules for Making Alliances Work

Place Less Emphasis on ...

Defining the right business arrangement Creating end metrics Eliminating differences Establishing formal alliance management systems and structures Managing the external relationship with partners

Place More Emphasis on ...

Developing the righ working relationship Creating means metrics Embracing difference Enabling collaborative behaviour Managing you own internal stakeholders

Source: Best Practice: Simple Rules for Making Alliances Work Jonathan Hughes & Jeff Weiss HBR

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white paper | The Integrated Approach

is to establish good metrics and a scorecard. This forms the basis for the quarterly business review (QBR) that should take place to review the previous and next quarters. The QBR should not be about any specific project, this is covered in other regular project meetings.

To establish the right metrics there are a number of best practice recommendations (see figure 11). As suggested these metrics should be used to measure both the means (progress and approach) as well as the ends (outcome).

Conclusion
In conclusion we have seen proven, through numerous case studies, a typical cost saving of 10% achieved through an integrated approach Vs a traditional purchase approach. The time for change in supply chain has arrived, by rationalising and consolidating supply chain a number of benefits can be achieved cost reduction (removal of duplication in labour and prelims), risk reductions and improved delivery timescales. Selecting the right supplier, who can work with you, requires careful selection against the right selection criteria. Once selected the relationship needs to be managed and measured to continuously improve and deliver upon its full potential.

Figure 11: Characteristics of Good Metrics

Characteristic
Meaningful Valuable Balanced Linked Practical Comparable Credible Timely Simple Robust Vital Few Communication Actionable

Description
Relates to strategies goals Delates to customer requirements gets to the root cause Use both loeading and log indicators Directly related to customer Easy to obtain without many resources Can be compared with other data over time Based on accurate and reliable data Reported in a reasonable time frame Easy to calculalte and understand Based on best practice and not just what other firms are doing Focus on quality of metrics, not quantity Share performance lfeedback with suppliers and internal stakeholders Can be acted upon to drive improvements and connect behaviours

References:
Characteristics of Good Metrics Source: Developing Good Metrics and Scorecards http://www.esourcingwiki.com/ index.php/Supplier_Performance_ Management Guide to... Collaborative working David Hawkins, operations director at PSL Adrian Miller, senior commercial specialist in supply chain management at NATS and thanks also to Jaye Cook, senior manager,4C Associates Ltd. Best Practice: Simple Rules for Making Alliances Work Jonathan Hughes & Jeff Weiss HBR Prepared in conjunction with Prepit Ltd

Source: Developing Good Metrics and Scorecards http://www.esourcingwiki.com/index.php/Supplier_Performance_Management

CS / DDNS-0070 / 11/11 Copyright Dimension Data 2011

For further information www.dimensiondata.com

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white paper | The Integrated Approach

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