1

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