The first-time user should take the time to read the whole of the introduction.
Returning users may wish to use the links above.
This Chainlink module covers the basic procurement and supply activities
of any customer/supplier relationship in the supply chain.
It should be applied to all procurement activities to ensure that company
management resources are used most effectively. Knowing where to concentrate
effort is an important part of the process.
Because of the complex operational nature of nearly all construction
activities a degree of integration can be beneficial to most relationships.
This module will guide the user to the most appropriate customer/supplier
relationship for a particular activity and identify guidance on how to
establish the necessary relationships.
This module will guide the user through the steps necessary to realise
the benefits of supply chain integration. By focusing procurement activities
on a small number of suppliers, both parties are able to make operational
improvements and achieve cost reductions. In particular, suppliers are
able to bring improvements from predictable workloads and economies
of scale to the benefit of both parties. All the procurement methodologies
referenced here benefit from long-term stable relationships and together
can deliver the benefits envisioned in 'Accelerating Change.'
Separate consideration in the risk/value analysis is given to both suppliers
and customers. It is recommended that both parts be reviewed to gain
a proper understanding of the type of relationship that is appropriate.
The benefits which can arise from integrating the supply chain are substantial
and manifold. They range from reducing waste in time, materials and people
through to improving design both to reduce cost and improve the final
product. However, fully effective mutual relationships can take time to
develop and both customer and supplier should initially concentrate on
identifying and categorising those areas where the most important and
easily available gains can be obtained. The most common reason for not
achieving the available improvements is through failure to rigorously
establish and pursue the changes necessary for their implementation.
Members of the supply chain who are involved in the supply or procurement
of any products, services or combinations of both.
The module starts by helping the user define their procurement strategies
by using a management tool called 'risk/value analysis'.
The second stage takes the user through the selection of suitable suppliers
to get the most out of the identified procurement strategy.
Stage three helps to identify the principal improvements which can be
targeted for each procurement strategy and leads the user to further details
on realising them.
Each key step in the development of a procurement strategy is identified
in the 'Process' column. The 'Culture and Activities'
column then provides a summary of the necessary ethos and actions required
for their implementation. The adjacent 'Tools and Techniques'
column provides recommendations, Toolkit cross-references and links to
external supporting information.
Note: Users of this Toolkit module are encouraged to explore the other
sections of this Toolkit to determine their position in the overall
construction supply spectrum, to better understand the benefits and
workings of the integration concept and to gain an appreciation of the
need for collective supply chain focus to ensure a satisfactory end
result.
Analysis for customer/supplier requirements
|
Step
|
|
Process
|
|
Culture and activities
|
|
Tools and techniques
|
1.1
|
|
Identify and rank product and service procurement needs
|
|
The first step in the process is to gather data on current procurement.
This is then used to complete an analysis of risk against value
for different product and service needs.
|
|
Training in applying these techniques in a construction environment
is available from CWC Ltd.
www.collaborativeworking.co.uk
|
1.2
|
|
Evaluate spend for product and service groups
|
|
Gather and evaluate expenditure totals for individual products
and services. The concentration is on the type of product or service,
not on individual suppliers. If such analysis has not been done
before it is likely that several suppliers provide similar products
or services. Use a common period for the analysis; an annual view
is most likely to give the best data.
|
|
|
1.3
|
|
Define the risk associated with each product or service
|
|
Whilst risk can broadly be defined as a failure to supply, more
specifically, purchasing risk can be defined as the financial
impact on an organisation, as a consequence of an interruption
to its routine performance due to such a failure.
Sometimes this kind of risk is caused by external factors, but
sometimes the organisation itself behaves in ways that exposes
it to supply risk.
All of these internal and external risks affect are affected by
the available supply market. The more risk there is, the more important
strategic supply planning becomes. Purchasers need to account for
risks and foresee any likely problems that may bring operations
to a halt.
Missed opportunity can also be considered as a risk. The failure
to procure the optimum solution either as a product or service
can mean a missed opportunity for profit improvement or leave
the purchaser at a disadvantage to its competitors.
The comparative level of risk to use in the risk/value analysis
is a combination of the risk of a problem arising and the damage,
financially or otherwise, which would occur should it happen.
|
|
Use this flowchart
to help position items on your chart.
|
1.3a
|
|
Internal causes of risk to consider
|
|
Internal risk factors often arise from rigidity or inflexibility
within the organisation, making it difficult for purchasers to
make the best decisions for the firm. Another common source of
supply risk is a lack of mutual understanding between purchasers
and suppliers. Some typical causes may include:
-
Too narrow specifications restrict supply market.
-
Inappropriate contract/treatment may alienate key supplier.
-
Organisational constraints discourage new solutions.
-
Complex processes create narrow/special requirements.
-
Inflexible processes preclude alternatives.
|
|
|
1.3b
|
|
External causes of risk to consider
|
|
External risk arises largely from unpredictability, and economic
forces to which all organisations are subject. Some examples may
include:
-
Market dominated by few suppliers.
-
Technically complex item.
-
Rapidly changing technology item.
-
Process with long lead-time.
-
Volatile supply/demand swings in market.
-
Supplier financially unreliable.
-
Supplier has unique selling advantage.
-
Few suppliers can meet quality requirements.
|
|
|
1.3c
|
|
Missed opportunity as risk
|
|
Missed opportunity can have as significant an effect on company
financial performance as any other risk. This is because the organisation
can lose opportunities to improve internal performance and put
itself at a competitive disadvantage in its market-place. Examples
could include:
-
Design input from a supplier.
-
Logistic improvements.
-
Mutual continuous improvement strategies.
-
Stock reduction.
-
Improved lead times.
-
Pricing stability and consistency.
|
|
Examine the improvements list at the end of this Toolkit to help
recognise those opportunities which could come from a more integrated
relationship.
|
|
|
1.4
|
|
Plot value vs risk
|
|
To understand how vulnerable an organisation is to different procurement
risks, a comparison needs to be carried out between the value
of spend on a purchase/product/resource and its associated risk.
There are four relationships that need to be considered:
-
High-value spend items that have a high risk associated with
their use.
-
High-value spend items that have a low risk associated with
their use.
-
Low-value spend items that have a low risk associated with
their use.
-
Low-value spend items that have a high risk associated with
their use.
Determining whether or not an item is high or low cost and high
or low risk is called 'Supply Positioning Analysis.' In
this analysis, items are positioned on a chart, and this 'position'
determines the supply market strategy and much more.
|
Risk (or vulnerability)
|
High
|
Low value
High risk
|
High value
High risk
|
Low
|
Low value
Low risk
|
High value
Low risk
|
| |
|
Low
|
High
|
| |
|
Relative cost (spend)
|
Courtesy of PMMS
Consultancy Group |
|
An example of a completed chart for a lead contractor is shown
here
|
1.5
|
|
Supply Positioning Analysis
|
|
Not only is supply positioning a powerful tool for advancing customer
interests, it is also a pervasive one, affecting every dimension
of the purchasing function.
So much is written on the so called 'right' way to purchase.
One can easily become confused as to what the customer should
actually do in specific situations. One adviser may suggest that
'partnership' type relationships are preferred, whilst others may
say that a much harder, 'price-oriented' negotiation
is the best way.
The truth is that both of these strategies and more are needed
in order to make good business decisions about suppliers. It is
not a question of which method is right, but rather which method
to choose under which circumstances.
The four quadrants of supply positioning provide the guidance
an organisation needs in solving purchasing problems of every kind.
If you, as a customer, are questioning what type of partnership/relationship
you should build with a supplier, the themes for each quadrant give
you specific guidance for each class of item.
It is important to remember that it is items which are being positioned
here, not supplier, a mistake most companies make with this approach.
All of these relationships can and should co-exist. Strategic purchasing
requires intelligent choices regarding relationships. A general
decision to pursue one kind of supplier relationship for every item
is actually an internal risk factor to be managed, rather than a
solution to anything.
Each of the four quadrants are given a name that reflect how they
need to be managed:
|
Risk (or vulnerability)
|
High
|
Assurance of supply
|
Partnering
|
Low
|
Process
|
Leverage
|
| |
|
Low
|
High
|
| |
|
Relative cost (spend)
|
Courtesy of PMMS
Consultancy Group |
|
|
1.6
|
|
The Cost of Failure
|
|
Since supply positioning can be such a powerful tool, it has to
be applied with care and precision.
Some of the implications are immediately obvious:
-
Treating a leverage item as if it was a partnering item would
make it difficult to exploit any opportunities for lowering
costs.
-
Treating an assurance of supply item as a process item would
obscure the need to monitor its availability closely.
-
Treating a partnering item as a leverage item might strain
the relationship with the supplier thereby ensuring that the
supplier does not share the latest ideas and developments.
In summary – the negative consequences from mis-categorisation
will be:
-
inappropriate treatment of the supplier by the buyer
-
mis-match of desired relationship
-
gap between supplier performance and the business need
-
both buyer and seller become demotivated.
|
|
|
1.7
|
|
Application of the strategy
|
|
Having positioned the various products and services the organisation
should prioritise the strategy development allowing for:
-
importance of risk reduction
-
opportunity for cost savings and other improvements
-
ease of implementation
-
available procurement resource
-
other available resource; implementation of some strategies,
especially partnering, requires time and effort commitment
from many other parts of the organisation to extract the maximum
improvements.
The next steps are to start implementing the new procurement strategies
as detailed below.
|
|
|
|
|
1.8
|
|
Process procurement strategies
|
|
The items in the bottom left quadrant will be low value and have
a low-risk exposure. There are many suppliers in the market able
to meet the buyer's demand.
Characteristics:
Strategy:
Tactics:
- Increase the role of systems.
- Reduce buying effort.
Actions:
-
Rationalise supplier base.
-
Minimise administration costs.
-
Minimise negotiation.
-
Outsourcing – if cost-effective.
-
Automate requisitioning e.g.
-
Procurement card
-
e-commerce
-
systems contracting
- vendor-managed inventory.
Purchasing actions:
Decrease
- inventory (move to supplier)
- Cost control.
- Measurement.
- Attention.
- Paperwork.
Increase
- Blanket orders.
- User accountability.
- Budget control.
- Consignment stocks.
- Procurement cards.
|
|
Tip: The secret here is to reduce the time and cost involved
in procurement. Often the costs of procurement can be greater than
the cost of the product or service purchased.
|
1.9
|
|
Assurance of supply procurement strategies
|
|
The items in the top left-hand quadrant are also low value but
there are quality, safety, reliability or environmental considerations
and/or there is a shortage of product or suppliers. Included in
this category might be goods obtained from a monopoly supplier
or items with very tight tolerances and specifications. These
items are critical to the operation but are low in cost.
Characteristics:
-
Low in value.
-
Special needs relating to quality, safety or the environment.
-
Very limited number of suppliers.
-
Failure of performance/delivery results in major interference
with operations.
Strategy:
Tactics:
Actions:
Purchasing Actions:
-
Decrease
- sensitivity to price/vulnerability/risk.
- Number of orders.
- Payments.
- Use of leverage.
- Increase
- Length of contracts.
- Inventory.
- Search for alternatives.
- Price.
|
|
|
1.10
|
|
Leverage procurement strategies
|
|
Bottom right-hand quadrant contains items where there is a relatively
small spend but where there is no quality, safety reliability
or environmental problems and where there are plenty of suppliers.
Characteristics:
-
Relatively high in value.
-
No special quality, safety, environmental requirements.
-
Plenty of potential suppliers.
-
Few supplier-related improvement opportunities.
Strategy:
Tactics:
-
Concentrate business
-
Maintain competition
Actions:
-
Combine requirements into large groupings by time and quantity.
-
Promote competitive bidding but avoid fragmentation.
-
Exploit market cycles/trends.
-
Procurement co-ordination.
-
Use industry standards.
-
Active sourcing (change suppliers as opportunities arise).
-
Outsource carefully.
Purchasing actions:
-
Decrease
- Unit price.
- Supplier knowledge.
- Security.
- Inventory.
-
Increase
- Market knowledge.
- Market exploitation.
- Risk/flexibility.
- Short-term contracts.
|
|
Very rarely compulsory in the supply chain. It is also most often
used on a project-by-project basis, thus failing to deliver the
benefits of leverage procurement.
If competitive tendering is to be used, very strict definitions
of requirements and standards are needed. Requirements should
also be combined into the most attractive packages to appeal to
the supplier to achieve the most competitive prices. This can
be done by commitments to multiple projects or an extended time
period. The costs and effort involved in effective competitive
tendering mean that is rarely the best overall value procurement
route where dealing with enlightened customers and suppliers.
|
|
|
1.11
|
|
Partnering strategies
|
|
The items in the top-right quadrant are classified as strategic
critical, because they are of high cost and either have significant
quality, safety, reliability or environmental factors or are drawn
from a difficult market in which there are few supplies and suppliers.
As the name implies, these are critical to the overall profitability,
competitiveness and well-being of the organisation.
Characteristics:
-
High in value.
-
High in risk (quality, safety, environmental).
-
Limited potential suppliers.
-
Performance crucial (profitability, competitiveness).
Strategy:
Tactics:
Actions:
-
Thorough negotiation.
-
Supplier process management.
-
Prepare contingency plans.
-
Analyze market/competitors.
-
Use functional specifications.
-
Do not outsource.
Purchasing actions:
Decrease:
-
Number of orders.
-
Competitive price.
Increase:
|
|
There are many guides available for partnering on a project basis
including:
The Partnering Toolkit available from BSRIA at www.bsria.co.uk;
A Guide to Project Team Partnering from the CIC at www.cic.org.uk/information/
Publications/publications.htm.
The following guide covers longer-term partnering arrangements.
PSL: Partnership Sourcing Guide www.pslcbi.com
Tip: Remember partnering is a two-way process: if one of
your customers was evaluating your business on the same criteria
that you are using on suppliers, would you qualify? If not, perhaps
you should think again about your minimum standards. Try to put
yourself in your potential partner's shoes.
|
1.12
|
|
Supplier selection
|
|
Whilst the type of relationship required will vary, the needs of
supplier selection are similar. Care must be used in the selection
of any supplier. When choosing, use current performance, minimum
standards, agreed targets and the supplier's attitude as your criteria.
Look for a cultural fit.
1: Identify candidates
Compile a shortlist of potential suppliers who provide key products/services
and are close enough to your criteria to allow the building of a
suitable relationship. Where possible use current suppliers where
performance experience already exists.
Outcome
2: Review candidates' performance to date
What have they achieved? Do they have good quality systems? Can
they be at the forefront of development? Do they enjoy managing
change? Do they have a clearly defined business strategy?
Outcome
3: Define the criteria for selecting partners
Use objectives relevant to the procurement strategy to define the
minimum criteria that your partners must display. Standards might
include:
-
Total quality management policy.
-
ISO 9000 and ISO 14000 certification or equivalent.
-
Implementing latest techniques, e.g. electronic data interchange,
just-in-time, etc.
-
Access to research and development.
-
In-house design capability.
-
An ability to supply worldwide (as appropriate).
-
Attitude on total acquisition cost.
-
Willingness and ability to change, e.g. flexible attitude
of management and workforce.
-
Excellent personnel management (Investors in People accredited).
-
An innovative approach.
-
Financial viability.
-
Stocking policies.
-
Delivery time cycle.
-
An acknowledged commitment to their customer (COMPASS Charter).
Outcome
-
A list of suppliers which meet your criteria.
-
A list of suppliers which don't, but could meet your criteria.
-
A list of suppliers, that do not/will not reach your criteria.
4: Assess their management's interest in developing a beneficial
relationship
Identify the key decision-makers and influencers. Do they recognise
the opportunity for improvement? Are they capable of taking the
partnering relationship forward and accepting that they can play
a key role? Remember that people are key. It is people who build
trust and make relationships work. Are the people right? Is the
chemistry right? Will they put their best people on your account?
Outcome
5: Understand their strategy
What are their priorities in the short and long term? Do they match
yours? Are they willing and able to invest to achieve their aims?
Are they customer-driven?
Outcome
6: Select suppliers
From this analysis and the results of your supplier communication
programme, consider which suppliers are ready, willing and able
to proceed with a relationship.
Outcome
7: Additional comments for partnering relationships
Remember that selecting partners should be a very rigorous process
as both partners will grow to rely on each other's performance.
The time taken in selecting and developing relationships must
be appropriate to the positioning of the product or service in
the risk/value chart. The higher up and the further to the right,
the more time should be committed.
Remember also that partnering relationships take a lot of management
time to develop. Do not threaten the success of the programme by
attempting to launch too many at once.
|
|
Portfolio analysis references CIPS Best Value Procurement Guidance
Note No 1 Aug 2000 see www.cips.org.
Tip: Remember partnering is a two-way process: if one of
your customers was evaluating your business on the same criteria
that you are using on suppliers, would you qualify?
If not, perhaps you should think again about your minimum standards.
Try to put yourself in your potential partner's shoes.
|
1.13
|
|
Working together
|
|
Agree targets for both you and your potential supplier. Define
performance targets, which could be timeliness, customer satisfaction
and so on. Keep them simple and easy to measure. Publish these targets
to all your potential partners, and then measure them. Keep them
under continuous review.
Remember that a very significant part of a supplier's costs are
affected by customers' behaviour. Work together with your supplier
to understand the drivers of cost to each party. Where cost improvements
are targeted ensure that both parties meet their obligations.
|
|
|
|
|
1.14
|
|
Realising the improvements
|
|
The improvements which can arise from integration of the supply
chain are substantial and manifold. The establishment of a new relationship
cannot bring forward all the improvements at once.
The customer and supplier should identify those which they wish
to pursue and categorise them by importance and ease of implementation
and then pursue them.
At the end of this Toolkit is a chart identifying many of the
improvements which can be pursued be in a customer/supplier relationship.
The list is not exhaustive and should be used only as a guide.
|
|
Tip: The most common reason for not achieving the true improvements
available from supply chain integration is the failure to rigorously
identify and pursue the changes necessary for their implementation.
Where identified, specific links to other guidance are provided
on the improvements cart.
Specific guides to achieving some of these improvements are available
on the COMPASS
website:
Other guidance is included in many of the partnering and supply
chain guides available. These include:
|
1.15
|
|
Supplier perspective
|
|
When considering risk factors and the appropriate procurement strategy
for a product it is essential to look at the supplier's side of
the relationship.
The following gives some guidance on the supplier's perspective.
|
|
A specific guide to partnering from a supplier's perspective is
available on the Partnership
Sourcing Website.
|
1.16
|
|
Analysis for Supplier / Customer Relationships
|
|
Like the customer/supplier analysis, a similar system has been
developed to establish the style of customer relationship which
best meets the supplier's specific objectives.
Note that here we are seeking to categorise customers according
to their levels of attractiveness and relative value.
Again, each of the four quadrants are given names that reflect
how they might be managed:
|
Attractiveness of account
|
High
|
Development
Nurture client
Expand business
Seek new opportunities
|
Core
Defend vigorously
High level of service
High responsiveness
|
Low
|
Nuisance
Give low attention
Lose without pain
Withdraw
|
Exploitable
Drive premium price
Seek short-term advantage
Risk losing customer
|
| |
|
Low
|
High
|
| |
|
Relative value of business
|
Courtesy of PMMS
Consultancy Group
Nuisance accounts
Those customer accounts that are of relatively low value and where
the account is in any case not very attractive.
The supplier therefore might be expected to show little interest
or support for the account. In fact the supplier may want to get
rid of it either by benign neglect or a real determination to withdraw.
Development accounts
Those accounts which, although being of relatively low value, nevertheless
offer business that is attractive to the supplier. An example of
this might be where a supplier has gained a small toehold with a
'blue chip' customer and sees the opportunity to gain more valuable
business at some future date by virtue of this relationship.
Exploitable accounts
In this quadrant the supplier may have a high volume of sales,
which forms a substantial part of his/her business, in an account
that is not very attractive. The reason for this could be that
the contract is not truly profitable or that the supplier is required
to operate under unfavourable or uncertain conditions due to location
or other factors, such as onerous contract terms.
Core Accounts
This business is of highvalue in an attractive account. The supplier
will regard this as the bedrock of his/her business portfolio
and would be most concerned if it was lost or reduced in any way.
In this situation the supplier may be expected to provide these
customers with a high level of service and attention and to be
seeking every means of ensuring the business is retained while
seeking to increase profitability in a low-profile manner. Such
a supplier is likely to be receptive to suggestions of strategic
alliance and other ways of locking in to the customer.
|
|
Use the customer
positioning flow chart to help find your position on the
chart.
|
|
|
Function
|
Improvement
|
Assurance
of Supply
|
Process
|
Leverage
|
Partnering
|
Specific Guidance
|
Financial
|
|
|
|
|
|
|
|
Cost reduction (in all areas of business)
|
|
x
|
x
|
x
|
|
|
Cash flow improvements
|
|
x
|
|
x
|
|
|
Reduced warranty costs
|
x
|
|
|
x
|
|
|
Reduced legal costs
|
x
|
x
|
x
|
x
|
|
|
Improved trading strategies
|
|
|
|
x
|
|
|
Stable and predictable business environment
|
x
|
|
|
x
|
|
Commercial
|
|
|
|
|
|
|
|
Improved predictability of cost
|
x
|
x
|
x
|
x
|
|
|
Improved predictability of timescale
|
x
|
x
|
x
|
x
|
|
|
Reduced timescales
|
|
|
|
x
|
|
|
Improved safety
|
|
|
|
x
|
|
|
Improved repeatability
|
x
|
x
|
x
|
x
|
|
|
Implementation of 'lean construction'
|
|
|
|
x
|
CBP Factsheet
|
|
Continuous improvement
|
|
x
|
|
x
|
|
|
Increased capacity
|
|
|
|
x
|
|
|
Elimination of duplication
|
x
|
x
|
x
|
x
|
|
|
Improved quality
|
x
|
|
|
x
|
|
|
Improved flexibility and ability to respond to changes
|
|
|
|
x
|
|
|
Pricing stability and consistency
|
x
|
x
|
x
|
x
|
|
|
Better planning
|
x
|
x
|
|
x
|
|
|
E-commerce
|
x
|
x
|
x
|
x
|
|
|
Transaction cost reduction
|
x
|
x
|
x
|
x
|
|
|
Simplify procurement process
|
x
|
x
|
x
|
x
|
|
|
Reduce waste through reducing design duplication
|
x
|
|
|
x
|
|
|
Improve product through access to in-depth technical knowledge
|
|
|
|
x
|
|
|
Share market intelligence
|
|
|
|
x
|
|
Product
|
|
|
|
|
|
|
|
Reduce time to market for new products
|
|
|
|
x
|
|
|
Increase innovation
|
|
|
|
x
|
|
|
Design and supply optimum 'solutions' based on mutual knowledge
|
|
|
|
x
|
|
|
Ability to provide 'fit for purpose' solutions
|
|
|
|
x
|
|
|
Repeatable solutions
|
x
|
x
|
x
|
x
|
|
|
Shared product design and development
|
|
|
|
x
|
|
|
Increase standardised solutions
|
|
|
|
x
|
|
|
Increase off-site fabrication and assembly
|
|
|
|
x
|
|
Logistics
|
|
|
|
|
|
CBP Introduction to Logistics
|
|
Lead-time reduction
|
x
|
x
|
x
|
x
|
|
|
Reduce stock holdings
|
|
x
|
|
x
|
|
|
Improved site co-ordination
|
|
x
|
|
x
|
|
|
Simplify procurement process
|
x
|
x
|
x
|
x
|
|
|
Minimise site congestion
|
x
|
x
|
|
x
|
|
|
Avoid vehicle queuing
|
x
|
x
|
|
x
|
|
|
Minimise storage on site
|
x
|
x
|
|
x
|
|
|
Reduce packaging
|
|
|
|
x
|
|
Relationship
|
|
|
|
|
|
|
|
Mutual improvement strategies
|
|
|
|
x
|
|
|
Easier and more pleasant business environment
|
|
|
|
x
|
|
|
Regular meetings and mutual understanding
|
|
|
|
x
|
|
|
Strong, stable, sustainable relationships
|
|
|
|
x
|
|
|
Transform supply chain into value chain
|
|
|
|
x
|
|
|
Ability to maximise mutual leverage up/down whole supply chain
|
|
|
x
|
x
|
|
|
Improved sharing of management information
|
|
|
|
x
|
|
|
|
|
|
|
|
|
