In the fast-paced world of the construction industry, it is important that companies pursue every competitive advantage available while continuously learning, planning, and adapting to technological differentiators as they enter the market.
One significant differentiator that remains largely unexploited in the construction market is the implementation, execution, and proficiency of supply-chain management. Effective supply-chain management programs within construction companies create a powerful impact on operations by providing a variety of tools to cut costs, increase efficiency, enhance visibility, and ultimately drive on-time and under-budget project completion.
An overview of the competencies associated with supply-chain management and its inherent cost-cutting benefits to construction companies can be examined through the lens of three specific tools:
- Inventory control
- Commoditization
- Strategic sourcing
Cost-Savings Tools for Construction
Inventory control plays a critical role in overall cost reduction, both directly and indirectly. The first direct benefit of inventory control is a decrease in inventory overstocking and its associated carrying costs, which frees up working capital.
This newly available capital, now unconstrained from inventory can be leveraged to create additional indirect savings through effective cash deployment to timely investments and other areas of business as needed. Further, the savings recouped from unnecessary inventory costs reduce the risk of missed enterprise opportunities for investment and cash deployment due to available cash-flow.
Another key and often overlooked factor of inventory control is the negative financial ripple effect created when inventory is not properly managed and items are not available or in-stock.
When a key material, asset, or product is not available when needed, the ripple effect begins; project schedules are delayed, deadlines are compromised, equipment is forced into non-utilization and field crews are left unable to work. These consequences of failed inventory management decrease potential revenue generation while also creating significant costs, which can be avoided with effective inventory control.
Commoditization of material, assets, and products can significantly cut costs in a variety of ways. First, commoditization enables greater visibility of alike-item spend; this allows companies to consolidate generic items to increase purchase volume and unlock volume-break pricing discounts.
Second, commoditization at the product level creates valuable visibility into the tie between commodity purchasing data and the corresponding supplier. This link can be used to expose any unwarranted purchasing within a commodity group that may not be cost or time effective. The intersection of this data also helps create visibility into outlier suppliers that offer few items, and do so with long lead times; this combination acts to slow down the entire supply chain and put production at risk.
Companies that move towards commoditization are better positioned for sustained technological advantage while also driving down operational costs. At a fundamental level, commoditization supports the development of smarter procurement, while also providing a more visible, substantiated, and streamlined purchasing process.
Strategic sourcing is very important for maintaining cost control in any business endeavor, but especially for those that require supply-chain operations. The focus is to create more favorable supplier relationships by leveraging quantitative business insight related to spend, freight costs, payment terms, lead times, product quality, product price, and availability.
A valuable tool for strategic sourcing which may appear laborious at first, but will pay dividends in cost-savings over time is the creation of a shipping map. The shipping map should comprehensively include suppliers, distributors, consolidators, and port locations—as well as the average lead time per supplier and delivery route.
This process is very useful for identifying and resolving issues with problematic suppliers that have poor lead times and inefficient routes. Another benefit of this exercise is that the visual aid of the map creates awareness into potential supplier consolidation based on geography, when advantageous for cost, freight, volume, or speed.
The cost savings associated with strategic sourcing are most effectively realized when combined with knowledge and reporting of current supplier relationships and agreed upon terms. Better and more informed sourcing decisions can be made when the, spend, freight costs, payment terms, lead times, product quality, product price, and product availability are known across the existing supplier base. Once this information is made available, specific tactics may be put in place to take advantage of the business insight created.
A few potential cost-savings initiatives that leverage this knowledge are:
- Development of a commodity driven sourcing plan
- Recurrently negotiating payment terms and tracking the negotiated outcome
- Understanding the dollar ratio of freight to goods purchased per supplier
- Monitoring product purchase cost trends on fast moving and high-dollar items
Evaluating Your Internal Competencies & Processes
Companies seeking a competitive advantage in the construction market should first consider evaluating their own organization’s internal supply-chain management competencies and processes. The three supply-chain management cost savings tools overviewed in this article represent a very small fraction of the potential benefits of having a supply-chain management program. However, the more important goal of understanding these three specific tools is to serve as a starting point to begin discussing, assessing, and implementing supply-chain solutions focused on cost savings, increased efficiency, and enhanced visibility.
Alan Welsh is technology consultant at Tilson.
