Introduction
This module addresses the need for closer working relationships between
manufacturers and subcontractors with an emphasis on formalised agreements.
The relevance of mutual collateral guarantees is also covered.
Like most good ideas the concept is simple: manufacturers and subcontractors
working together as a team, driving down costs, improving quality, innovating
and accelerating products to market far more effectively than in a traditional
'them and us' relationship. Formal partnering tie-ups between manufacturers
and subcontractors are a proven, yet massively under-utilised, route
to improved construction efficiency.
Limitations
Formal partnering relationships with subcontractors are not necessarily
the optimum route to market for a manufacturing company's entire output.
In many cases the manufacturer will use a 'licensed' or 'approved' network
to market full, added-value systems, perhaps with some form of back-to-back
guarantee and, at the same time, sell individual components through
more conventional channels. This demonstrates that the system is non-restrictive
and ensures all the manufacturer's eggs are not in the one commercial
basket.
The Benefits
This module is primarily aimed at:
1. Construction product manufacturers/material
suppliers seeking:
i. closer, long-term, working relationships with installers
ii. a route to enhanced profitability through the supply of added-value
systems
iii. a means of improving installed quality and whole-life costs
iv. a way of meeting changing market expectations such as the demand
for 'best-value' solutions and to supply and fix guarantees
v. to realise real cost savings and other tangible benefits of collaborative
working including:
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Enhanced customer satisfaction through ongoing productivity and
quality improvements leading to reduced waste, reduced defects, lower
cost of ownership, innovative solutions, on-time and on-cost completions.
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Quicker concept-to-completion cycles and improved response times
to market demands, especially safety, sustainability, replication,
modularity, etc.
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Lower up-front material prices derived from more efficient and
recurring transactional mechanisms, economies of scale, elimination
of unnecessary competitive tendering costs, removal of excessive
design overlap, improved order scheduling, etc.
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Reduction in interface problems and predefined defect remediation
procedures.
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The creation of supply-chain configurations that lend themselves
to project insurance and insurance-backed collateral guarantees.
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Early engagement allowing design input and improved JIT (just-in-time)
site scheduling for lower costs and improved inventory control.
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Greater scope for less reliance on increasingly scarce skills through
pre-assembly, standardisation and modularisation.
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Market-focused innovation. Solutions can be co-engineered for greater
site safety, improved sustainability, rapid installation, reduced
waste, reduced maintenance etc.
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Elimination/reduction of the tangle of claims and litigation which
characterise the industry.
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More focused and efficient research and development. Reduced development
timescales. The confidence and wherewithal to invest in sustainable,
prefabricated and material efficient solutions.
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Facilitated decision-making at all levels through sharing cost data,
design data, production and installation possibilities and limitations
etc.
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Documented evidence and track record of long-term supply chain
partnering relationships for bidding purposes.
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Greater financial stability and certainty of outcome through being
in a position to negotiate and enter strategic partnering relationships
with repeat customers.
2. Specialist subcontractors entering, or seeking to enter, a manufacturer
licensing arrangement.
3. Project and term contract managers assembling supply chains.
Formal partnering relationships with subcontractors are not necessarily
the optimum route to market for a manufacturing company's entire output.
In many cases the manufacturer will use a licensed network to market
full, added-value, systems, perhaps with some form of back-to-back guarantee
and, at the same time, sell individual components through more conventional
channels. This demonstrates that the route to market is non-restrictive
and ensures that all the manufacturer's commercial eggs are not in one
basket.
However, there are one or two key recommendations:
1. When marketing products/systems, under a formalised manufacturer/subcontractor
relationship, it is recommended that the network be granted sole rights
of supply. Where such exclusivity forms part of the partnering agreement
there must be absolutely no exceptions if network commitment and trust
are to be maintained.
2. If it is not possible for commercial, legal or other reasons for
the subcontractor network to enjoy supply exclusivity, it will be necessary
to provide the partnering network with other differentiating benefits
and incentives. The provision of joint guarantees might be an example
of this.
3. Supplying through intermediaries such as builder's merchants or specialist
distributors is often the preferred route to market for many products.
This does not preclude the use of this approach but allowances must be
made for the additional interfaces involved and the history of prior engagement.
For more details on intermediary integration refer to Module
3.
Types of manufacturer/subcontractor relationship
Two levels of formal manufacturers/subcontractor schemes are considered
in this Toolkit as follows:
'Approved Contractor' schemes
'Approved Contractor' schemes include those where the relationship
with the manufacturer concerned is governed by a formal agreement.
'Approved Contractors' or 'Accreditees' must meet strict
criteria in areas such as solvency, resources, performance, quality
control, health and safety, etc. Manufacturer-driven training
is usually obligatory. 'Approved Contractor' relationships are
usually less restrictive/binding than licensing arrangements.
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'Licensed Contractor' schemes
In 'Licensed Contractor' schemes the subcontractor is licensed
to supply a proprietary product or system from the principal manufacturer.
This results in a degree of exclusivity and a higher degree of manufacturer/subcontractor
interdependence. 'Licensed Contractor' schemes normally involve
a legally binding licence agreement and consequently tend to be
more comprehensive and rigorous than 'Approved Contractor' schemes.
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Recommendation – do not breach the distribution
agreement
Experience shows that some of the most successful manufacturer/subcontractor
relationships involve the supply of a proprietary system(s) through
a licensed subcontractor network. Where this is the case, the system(s)
involved must be distributed exclusively through the network with absolutely
no exceptions. Only in this way can the necessary trust and commitment
from the subcontractor network be fostered and maintained.
Supplying
through intermediaries.
Supplying through intermediaries such as builder's merchants or specialist
distributors is often the preferred route to market for many products.
This does not preclude the use of formal manufacaturer/subcontractor
relationships but allowances must be made for the additional interfaces
involved and the history of prior engagement. For more details on integration
with intermediaries refer to MODULE
3.
Relevance
Aimed at:
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Construction product manufacturers/material suppliers.
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Specialist subcontractors entering, or seeking to enter, a manufacturer
licensing arrangement.
Of interest to:
Using this Toolkit module
Each key step in the development of a formal partnering relationship
between manufacturers and supplier 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.
In the matrix below the following definitions apply:
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'Principal Company': a company responsible for setting up and leading
the network. Usually a manufacturer or other supplier.
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'Licensee': a company operating under licence to a Principal Company.
Usually a specialist subcontractor or intermediary.
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'Accreditee': an 'approved' company operating within a
formal approval system set up and administered by a Principal Company.
Usually a specialist subcontractor or intermediary.
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'Network': a group of independent Licensees or Accreditees under
the leadership of a Principal Company.
Workbook
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Step
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Process
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Culture and activities
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Tools and techniques
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2.1
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Determine the need
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Is this form of partnering appropriate?
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Does it have a good fit with your corporate strategy?
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For which of your products/services/systems is it appropriate?
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Does it open up the potential for supplying highly differentiated,
added-value systems? Consider the competitive advantages this
might afford.
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Refer to the Decision
flowchart
See case study - Bekaert Fencing
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2.2
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Core principles
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Mutual trust amongst all network participants.
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Genuine commitment from top management of the partnering organisations.
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Communicating the vision – sell the idea internally.
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Principal Company capable of exerting network leadership to
achieve communal goals.
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Comprehension and dedication to integrated working throughout
the network.
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A clearly defined strategy that sets out the aims, objectives
and long-term goals.
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Clear, measurable, value-for-money benefits for all parties.
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Agreed, measurable and realistic performance indicators.
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Formal and informal communication between all parties.
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Creation of an environment of continuous learning and improvement.
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Suitable dispute resolution systems.
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Where possible, proprietary systems and assemblies supplied
as all-inclusive 'material packages'.
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The Construction Manufacturers' Partnering Association (COMPASS),
through its Charter scheme provides a means of establishing a
cultural framework for the pursuit of supply chain integration.
See the COMPASS
website for details.
Tip: Chief Executive of Principal Company, or other individual
with the authority to commit the organisation and lead the necessary
cultural change, to set up and lead a series of in-house seminar/
workshops covering the rationale behind the partnering model, the
objectives and the cultural/ organisational changes necessary. These
to be positive, interactive sessions with the aim of securing 100%
staff commitment to the network/partnering philosophy.
The Principal Company
The Principal Company must visibly commit to promoting/specifying
the Licensee/Accreditee network. This network promotion can be
strengthened by the use of a differentiating factor, preferably
specifiable, that is unique to the network offer. For example,
a particular product or system itself may be exclusive to the
network or the Network members may provide a unique added-value
benefit such as a collateral warranty scheme.
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2.3
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Planning stage
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Identify the products/systems covered by the licensing arrangements.
Consideration of any necessary re-organisation to facilitate and
progress partnering principles.
Examine the marketing implications - cost, competitor reaction,
customer perceptions.
The Partnering Agreement.
The Partnering Agreement is the non-binding code of practice that
governs the relationship between the Principal and its Licensees/Accreditees.
It is distinct from a legally constituted licence or service contract
which may form part of the relationship.
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Portfolio analysis refs CIPS Best Value Procurement Guidance Note
No 1 Aug 2000; PSL Partnering Guides can be found on the PSL website.
A typical agreement might address, inter alia:
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the terms and conditions of the Licence, including assignment
of rights to licensee
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prior disclosure of existing commercial affiliations
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standards of service including tender response
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quality of workmanship
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design/detail approvals and specification compliance
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warranty provisions and relative liabilities
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inspection/audit regime
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operative training requirements
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terms of business
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incentive scheme details
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probationary, review, termination and exit conditions
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Licensee support packages.
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2.4
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Selecting partners
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Partner selection programme.
The number of contractors in a licensed/accredited network will
vary depending on factors such as the nature of the business and
the availability of suitable candidates. Aim for good geographical
coverage, a healthy degree of intra-network competition and an ability
to competitively service market demand in both large and small projects.
When establishing a subcontractor network, care must be exercised
to ensure that current legislation with respect to competition and
restrictive practices is not inadvertently flouted.
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Tip: Be quick, be first – and get the best partners available!
Sell the business case to prospective partners e.g. strategic
advantage, exclusivity, support, long-term relationship, cost
savings, etc.
Invite prospects to introductory, no obligation seminars or one-to-ones
to discuss the possibilities and gauge their commitment. Assess
candidate partners using a rigorous quality-based selection system
covering both quantitative and qualitative criteria.
Use this Toolkit to give the process structure and a shared belief
foundation. Tip: Give the highest priority to developing
the cultural aspects of your partnering relationships.
Make sure you comply with the provisions of the Competition Act
1998 (see the HMSO
website for more information), and relevant EU procurement Directives
and other legislation. In general, membership of a subcontractor
network must be open to all contractors that can meet the published
licence/contract criteria and these must be lawful and reasonable.
Take legal advice.
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2.5
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Address relational/process interface issues
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In most construction procurement scenarios, transactional and
process-related improvements offer huge scope for cost/efficiency
gains.
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See Module 1: Customer/supplier
procurement integration
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2.6
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Agreeing measurable objectives
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Short- medium- and long-term targets for both the Principal Company
and its Accreditees/Licensees must be established. These objectives
may be global, i.e. communal, or specific, and might include:
- commitment levels
- partnering-specific business levels
- profitability goals
- technical goals
- product development goals
- commercial
- cultural
- cost savings
- quality improvements
- resource employment/allocation
- service levels and response times.
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Tip: Make sure you set objectives that encourage a high
degree of engagement and interaction. Remember – the greatest
success will accrue from the mutual attainment of common goals.
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2.7
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Determination of Key Performance Indicators
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Benchmarking/milestoning through KPIs is an essential part of
the management process, enabling continuous improvement to be
measured and compared against both the network objectives and industry
norms.
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Use the COMPASS Charter Key Performance Indicators
or similar as a straightforward means of monitoring and measuring
progress. Ensure that licencees are an integral part of the benchmarking
process, measuring as well as being measured.
Tip: Publicise the benchmark results across the network.
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2.8
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Management and communications
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Network management
Ensure that a democratic and transparent network management process
is in place to engender trust, commitment, enthusiasm and network
'ownership'.
Cultural transformation through education, emulation training and
example is the goal.
These relationship-building aspects of the Network must be underpinned
by effective monitoring & measurement systems.
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Establish a mechanism for driving the cultural processes within
the Principal Company and throughout the Licencee / Accreditee Network.
The aim is to oversee the integration strategy with your partners
through promoting, guiding and monitoring.
Consider setting up a Joint Review Team to review network progress
against KPIs and other objectives, agree on new targets, assess/allocate
risk and resolve contentious issues as they arise.
See Resources.
Continually review and audit network performance.
Tip: Don't compromise on quality or commitment.
If a licensee consistently fails to deliver against its agreed
objectives then:
a. Reconsider the objectives to determine their validity/attainability.
Adjust if necessary.
b. Discuss the requirements with the licensee in question with
a view to rectification.
c. If all else fails, determine the licence agreement in accordance
with the termination terms therein.
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Risk management
Establishing a licensed contractor network is not about risk transferral;
it is about risk management and removal. At this stage, the team
should set out the basis for sharing risks. The correct management,
monitoring and measurement systems will ensure that risk is identified,
minimised and shared equitably. In some areas, insurance can be
a means of transferring/controlling risk.
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Adopt the COMPASS Charter Key Performance Indicators or equivalent
as a straightforward means of monitoring and measuring continuous
improvement. Note that the COMPASS KPIs meet the market monitoring
requirements of ISO 9001: 2000, saving unnecessary duplication
of work. For details go to the COMPASS website.
See Control of Risk – A Guide to the Systematic
Management of Risk from Construction, available from
CIRIA.
See The Partnering Toolkit pp 26, 27 available
from
BSRIA.
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Training
Training will play a vital role in any manufacturers/subcontractor
partnership.
Network motivation
Network relationships must be nurtured, stimulated and rewarded.
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Tip: Prepare a joint training programme to meet the commercial,
technical and cultural aspects of the programme and in accordance
with the agreed KPIs.
Ensure, through regular communications such as face-to-face meetings,
conferences and newsletters, that everyone involved in the manufacturing
organisation and its licensed network are fully aware of the KPIs
and their significance.
Hold regular, at least annual, network conferences to foster team
spirit and trust, share knowledge, educate and motivate. Encourage
network social and team building events.
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Incentive schemes
Incentive schemes can be a useful means of engendering commitment
and focus.
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Give consideration to an awards scheme to honour best performance;
celebrate success and foster competition amongst the network.
Tip: Consider introducing a self-financing incentive scheme tied
to:
i. achievement of business targets, and
ii. meeting and exceeding KPI targets.
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2.9
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Adding value, differentiation and control through collateral guarantees
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Assured performance can be offered through insurance-backed, supply
and fix guarantees. Shared liabilities and independent auditing
of workmanship ensures quality compliance.
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For further information on manufacturer's combined product/workmanship
insurance-backed guarantees refer to the COMPASS website.
The COMPASSure insurance scheme is an example of an independently
audited guarantee that is available on a 'single-premium total-turnover'
basis.
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2.10
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STEPS FORWARD
Product co-development and innovation
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A mature contractor network will develop the trust, confidence,
mutual respect and interdependence to allow collaborative innovation
and product development programmes.
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Consider regular collaborative design workshops with the aim of
reducing waste, improving quality, simplifying interfaces and producing
value-engineered solutions
Tip: Start small and concentrate on easy-to-implement and cost-efficient
product enhancements rather than long-term R&D programmes.
Design for installability, manufacturability, sustainability, rationalisation,
standardisation, simplification and safety.
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2.11
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Collaborative marketing
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Established contractors can collaborate in promoting the network's
generic 'best value' advantages without prejudice to its competitive
facets. In this way even a small network can exert significant promotional
leverage.
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Consider the developmernt of shared cost joint promotional programmes
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2.12
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Develop compatible electronic and other streamlined interfaces
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See Module 1 Customer/Supplier
Procurement Integration
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2.13
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Vertical integration
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Develop vertical partnering relationships with clients, principal
contractors, consultants, etc
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2.14
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Refine, improve and develop
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Licensed networks are an evolutionary species! Continually apply
the lessons learnt from feedback, reviews, successes and failures.
Improve, improve, improve!
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See Module 1 Customer/supplier
procurement integration;
see PSL Partnering Guides at the PSL
website.
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