Workbook 1: Customer/Supplier integration - Constructing Excellence

Workbook 1: Customer/Supplier integration - Constructing Excellence

RChainlink Workbook 1Customer/supplier integrationHome TheToolkit Guide Integrated Supply Chain Integrated Project Team What's newAt a glanceIntroduction 1.10 Leverage procurement strategiesRelevance 1.11 Partnering strategiesUsing this Toolkit module 1.12 Supplier selection1.1 Identify and rank product and service procurement needs 1.13 Working together1.2 Evaluate spend for product and service groups 1.14 Realising the improvements1.3 Define the risk associated with each product or service 1.15 Supplier perspective1.4 Plot value vs risk 1.16 Analysis for supplier/customer relationships1.5 Supply positioning analysis Benefits available from improved procurement1.6 The cost of failure Customer positioning flowchart (separate document)1.7 Application of the strategy Supply positioning process (separate document)1.8 Process procurement strategies Lead Contractor Supplier Positioning Example (separatedocument)1.9 Assurance of supply procurement strategiesThe first-time user should take the time to read the whole of the introduction. Returning users may wish to use the linksabove.IntroductionThis Chainlink module covers the basic procurement and supply activities of any customer/supplier relationship in the supplychain. It should be applied to all procurement activities to ensure that company management resources are used mosteffectively. 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 mostrelationships. This module will guide the user to the most appropriate customer/supplier relationship for a particular activityand 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 focusingprocurement activities on a small number of suppliers, both parties are able to make operational improvements and achievecost reductions. In particular, suppliers are able to bring improvements from predictable workloads and economies of scale tothe benefit of both parties. All the procurement methodologies referenced here benefit from long-term stable relationships andtogether 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 partsbe reviewed to gain a proper understanding of the type of relationship that is appropriate.The benefitsThe benefits which can arise from integrating the supply chain are substantial and manifold. They range from reducing wastein time, materials and people through to improving design both to reduce cost and improve the final product. However, fullyeffective mutual relationships can take time to develop and both customer and supplier should initially concentrate onidentifying and categorising those areas where the most important and easily available gains can be obtained. The mostcommon reason for not achieving the available improvements is through failure to rigorously establish and pursue thechanges necessary for their implementation.Relevance

Members of the supply chain who are involved in the supply or procurement of any products, services or combinations of both.Using this Toolkit moduleThe module starts by helping the user define their procurement strategies by using a management tool called 'risk/valueanalysis'.The second stage takes the user through the selection of suitable suppliers to get the most out of the identified procurementstrategy.Stage three helps to identify the principal improvements which can be targeted for each procurement strategy and leads theuser 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 'Toolsand 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 inthe overall construction supply spectrum, to better understand the benefits and workings of the integration concept and togain an appreciation of the need for collective supply chain focus to ensure a satisfactory end result.Analysis for customer/supplier requirementsStep Process Culture and activities Tools and techniques1.1 Identify andrank productand serviceprocurementneedsThe first step in the process is to gather data oncurrent procurement. This is then used tocomplete an analysis of risk against value fordifferent product and service needs.Training in applying thesetechniques in a constructionenvironment is available from Evaluatespend forproduct andservicegroupsGather and evaluate expenditure totals forindividual products and services. Theconcentration is on the type of product or service,not on individual suppliers. If such analysis hasnot been done before it is likely that severalsuppliers provide similar products or services. Usea common period for the analysis; an annual viewis most likely to give the best data.1.3 Define theriskassociatedwith eachproduct orserviceWhilst risk can broadly be defined as a failure tosupply, more specifically, purchasing risk can bedefined as the financial impact on an organisation,as a consequence of an interruption to its routineperformance due to such a failure.Sometimes this kind of risk is caused by externalfactors, but sometimes the organisation itselfbehaves in ways that exposes it to supply risk.All of these internal and external risks affect areaffected by the available supply market. The morerisk there is, the more important strategic supplyplanning becomes. Purchasers need to account forrisks and foresee any likely problems that maybring operations to a halt.Missed opportunity can also be considered as arisk. The failure to procure the optimum solutioneither as a product or service can mean a missedopportunity for profit improvement or leave thepurchaser 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 aproblem arising and the damage, financially orotherwise, which would occur should it happen.Use this flowchart to help positionitems on your chart.

2. High-value spend items that have a low riskassociated with their use.3. Low-value spend items that have a low riskassociated with their use.4. Low-value spend items that have a highrisk associated with their use.Determining whether or not an item is high or lowcost and high or low risk is called 'SupplyPositioning Analysis.' In this analysis, items arepositioned on a chart, and this 'position'determines the supply market strategy and muchmore.Risk (orvulnerability)HighLowLow valueHigh riskLow valueLow riskHigh valueHigh riskHigh valueLow riskLowHighCourtesy of PMMS Consultancy GroupRelative cost (spend)1.5 SupplyPositioningAnalysisNot only is supply positioning a powerful tool foradvancing customer interests, it is also apervasive one, affecting every dimension of thepurchasing function.So much is written on the so called 'right' way topurchase. One can easily become confused as towhat the customer should actually do in specificsituations. One adviser may suggest that'partnership' type relationships are preferred,whilst others may say that a much harder, 'priceoriented'negotiation is the best way.The truth is that both of these strategies andmore are needed in order to make good businessdecisions about suppliers. It is not a question ofwhich method is right, but rather which methodto choose under which circumstances.The four quadrants of supply positioning providethe guidance an organisation needs in solvingpurchasing problems of every kind.If you, as a customer, are questioning what typeof partnership/relationship you should build with asupplier, the themes for each quadrant give youspecific guidance for each class of item.It is important to remember that it is items whichare being positioned here, not supplier, a mistakemost companies make with this approach.All of these relationships can and should co-exist.Strategic purchasing requires intelligent choicesregarding relationships. A general decision topursue one kind of supplier relationship for everyitem is actually an internal risk factor to bemanaged, rather than a solution to anything.Each of the four quadrants are given a name thatreflect how they need to be managed:HighAssurance ofsupplyPartnering

Risk (orvulnerability)LowProcessLeverageLowHighCourtesy of PMSS Consultancy GroupRelative cost (spend)1.6 The Cost ofFailureSince supply positioning can be such a powerfultool, it has to be applied with care and precision.Some of the implications are immediately obvious:1. Treating a leverage item as if it was apartnering item would make it difficult toexploit any opportunities for lowering costs.2. Treating an assurance of supply item as aprocess item would obscure the need tomonitor its availability closely.3. Treating a partnering item as a leverageitem might strain the relationship with thesupplier thereby ensuring that the supplierdoes not share the latest ideas anddevelopments.In summary – the negative consequences frommis-categorisation will be:inappropriate treatment of the supplier bythe buyermis-match of desired relationshipgap between supplier performance and thebusiness needboth buyer and seller become demotivated.1.7 Application ofthe strategyHaving positioned the various products andservices the organisation should prioritise thestrategy development allowing for:importance of risk reductionopportunity for cost savings and otherimprovementsease of implementationavailable procurement resourceother available resource; implementation ofsome strategies, especially partnering,requires time and effort commitment frommany other parts of the organisation toextract the maximum improvements.The next steps are to start implementing the newprocurement strategies as detailed below.Back to 'At a glance'1.8 ProcessprocurementstrategiesThe items in the bottom left quadrant will be lowvalue and have a low-risk exposure. There aremany suppliers in the market able to meet theTip: The secret here is to reducethe time and cost involved inprocurement. Often the costs of

uyer's demand.Characteristics:Low in value.No special quality, safety or environmentalrequirements.Plenty of potential suppliers.procurement can be greater thanthe cost of the product or servicepurchased.Strategy:Minimise Attention.Tactics:Actions:Increase the role of systems.Reduce buying effort.Rationalise supplier base.Minimise administration costs.Minimise negotiation.Outsourcing – if cost-effective.Automate requisitioning e.g.Procurement carde-commercesystems contractingvendor-managed inventory.Purchasing actions:Decreaseinventory (move to supplier)Cost control.Measurement.Attention.Paperwork.IncreaseBlanket orders.User accountability.Budget control.Consignment stocks.Procurement cards.1.9 Assurance ofsupplyprocurementstrategiesThe items in the top left-hand quadrant are alsolow value but there are quality, safety, reliability orenvironmental considerations and/or there is ashortage of product or suppliers. Included in thiscategory might be goods obtained from amonopoly supplier or items with very tighttolerances and specifications. These items arecritical to the operation but are low in cost.

Characteristics:Low in value.Special needs relating to quality, safety orthe environment.Very limited number of suppliers.Failure of performance/delivery results inmajor interference with operations.Strategy:Ensure supplyTactics:Reduce the uniqueness of suppliers.Manage supply.Actions:Widen specifications if possible.Increase competition.Develop new suppliers.Sign long term contracts.Consider in-sourcing.Purchasing Actions:Decreasesensitivity to price/vulnerability/risk.Number of orders.Payments.Use of leverage.IncreaseLength of contracts.Inventory.Search for alternatives.Price.1.10 LeverageprocurementstrategiesBottom right-hand quadrant contains items wherethere is a relatively small spend but where there isno quality, safety reliability or environmentalproblems and where there are plenty of suppliers.Characteristics:Strategy:Relatively high in value.No special quality, safety, environmentalrequirements.Plenty of potential suppliers.Few supplier-related improvementopportunities.Drive profit (leverage)Very rarely compulsory in the supplychain. It is also most often used ona project-by-project basis, thusfailing to deliver the benefits ofleverage procurement.If competitive tendering is to beused, very strict definitions ofrequirements and standards areneeded. Requirements should alsobe combined into the mostattractive packages to appeal to thesupplier to achieve the mostcompetitive prices. This can be doneby commitments to multipleprojects or an extended time period.The costs and effort involved ineffective competitive tenderingmean that is rarely the best overall

Tactics:Concentrate businessMaintain competitionvalue procurement route wheredealing with enlightened customersand suppliers.Actions:Combine requirements into large groupingsby time and quantity.Promote competitive bidding but avoidfragmentation.Exploit market cycles/trends.Procurement co-ordination.Use industry standards.Active sourcing (change suppliers asopportunities arise).Outsource carefully.Purchasing actions:DecreaseUnit price.Supplier knowledge.Security.Inventory.IncreaseMarket knowledge.Market exploitation.Risk/flexibility.Short-term contracts.Back to 'At a glance'1.11 PartneringstrategiesThe items in the top-right quadrant are classifiedas strategic critical, because they are of high costand either have significant quality, safety,reliability or environmental factors or are drawnfrom a difficult market in which there are fewsupplies and suppliers. As the name implies, theseare critical to the overall profitability,competitiveness and well-being of theorganisation.Characteristics:Strategy:High in value.High in risk (quality, safety,environmental).Limited potential suppliers.Performance crucial (profitability,competitiveness).Close supplier management.There are many guides available forpartnering on a project basisincluding:The Partnering Toolkit available fromBSRIA at;AGuide to Project Team Partneringfrom the CIC at following guide covers longertermpartnering arrangements.PSL: Partnership Sourcing Guidewww.pslcbi.comTip: Remember partnering is a twowayprocess: if one of yourcustomers was evaluating yourbusiness on the same criteria thatyou are using on suppliers, wouldyou qualify? If not, perhaps youshould think again about yourminimum standards. Try to putyourself in your potential partner's

Tactics:shoes.Increase role of selected suppliers.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:Frameworks –long termcontracts.Back to back deals.Partnerships.Supplier knowledge.Cost analysis.Contingency planning.1.12 SupplierselectionWhilst the type of relationship required will vary,the needs of supplier selection are similar. Caremust be used in the selection of any supplier.When choosing, use current performance,minimum standards, agreed targets and thesupplier's attitude as your criteria. Look for acultural fit.1: Identify candidatesCompile a shortlist of potential suppliers whoprovide key products/services and are closeenough to your criteria to allow the building of asuitable relationship. Where possible use currentsuppliers where performance experience alreadyexists.OutcomePortfolio analysis references CIPSBest Value Procurement GuidanceNote No1 Aug 2000 see Remember partnering is a twowayprocess: if one of yourcustomers was evaluating yourbusiness on the same criteria thatyou are using on suppliers, wouldyou qualify?If not, perhaps you should thinkagain about your minimumstandards. Try to put yourself inyour potential partner's shoes.A manageable set of existing suppliers fordetailed investigation2: Review candidates' performance to dateWhat have they achieved? Do they have goodquality systems? Can they be at the forefront ofdevelopment? Do they enjoy managing change?Do they have a clearly defined business strategy?Outcome

Evidence indicating which suppliers couldperform in the needed relationship.3: Define the criteria for selecting partnersUse objectives relevant to the procurementstrategy to define the minimum criteria that yourpartners must display. Standards might include:OutcomeTotal quality management policy.ISO 9000 and ISO 14000 certification orequivalent.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 (asappropriate).Attitude on total acquisition cost.Willingness and ability to change, e.g.flexible attitude of management andworkforce.Excellent personnel management(Investors in People accredited).An innovative approach.Financial viability.Stocking policies.Delivery time cycle.An acknowledged commitment to theircustomer (COMPASS Charter).A list of suppliers which meet your criteria.A list of suppliers which don't, but couldmeet your criteria.A list of suppliers, that do not/will not reachyour criteria.4: Assess their management's interest indeveloping a beneficial relationshipIdentify the key decision-makers and influencers.Do they recognise the opportunity forimprovement? Are they capable of taking thepartnering relationship forward and accepting thatthey can play a key role? Remember that peopleare key. It is people who build trust and makerelationships work. Are the people right? Is thechemistry right? Will they put their best people onyour account?OutcomeA commitment to the relationship by thesupplier's management.5: Understand their strategyWhat are their priorities in the short and long

term? Do they match yours? Are they willing andable to invest to achieve their aims? Are theycustomer-driven?OutcomeAgreement that your strategies are closeenough to allow a long-term relationship.6: Select suppliersFrom this analysis and the results of your suppliercommunication programme, consider whichsuppliers are ready, willing and able to proceedwith a relationship.OutcomeSelect one, or a few, suppliers with whomyou will build relationships.7: Additional comments for partneringrelationshipsRemember that selecting partners should be avery rigorous process as both partners will grow torely on each other's performance. The time takenin selecting and developing relationships must beappropriate to the positioning of the product orservice in the risk/value chart. The higher up andthe further to the right, the more time should becommitted.Remember also that partnering relationships takea lot of management time to develop. Do notthreaten the success of the programme byattempting to launch too many at once.1.13 WorkingtogetherAgree targets for both you and your potentialsupplier. Define performance targets, which couldbe timeliness, customer satisfaction and so on.Keep them simple and easy to measure. Publishthese targets to all your potential partners, andthen measure them. Keep them under continuousreview.Remember that a very significant part of asupplier's costs are affected by customers'behaviour. Work together with your supplier tounderstand the drivers of cost to each party.Where cost improvements are targeted ensurethat both parties meet their obligations.Back to 'At a glance'1.14 Realising theimprovementsThe improvements which can arise fromintegration of the supply chain are substantial andmanifold. The establishment of a new relationshipcannot bring forward all the improvements atonce.The customer and supplier should identify thosewhich they wish to pursue and categorise them byimportance and ease of implementation and thenpursue them.At the end of this Toolkit is a chart identifyingmany of the improvements which can be pursuedTip: The most common reason fornot achieving the trueimprovements available from supplychain integration is the failure torigorously identify and pursue thechanges necessary for theirimplementation.Where identified, specific links toother guidance are provided on theimprovements cart.Specific guides to achieving some of

e in a customer/supplier relationship. The list isnot exhaustive and should be used only as a guide.these improvements are availableon the COMPASS website:Other guidance is included in manyof the partnering and supply chainguides available. These include:The Partnering Toolkitavailable from BSRIA.A Guide to Project TeamPartnering from the CICConstruction Best PracticeFactsheets1.15 SupplierperspectiveWhen considering risk factors and the appropriateprocurement strategy for a product it is essentialto look at the supplier's side of the relationship.The following gives some guidance on thesupplier's perspective.A specific guide to partnering from asupplier's perspective is available onthe Partnership SourcingWebsite at1.16 Analysis forSupplier /CustomerRelationshipsLike the customer/supplier analysis, a similarsystem has been developed to establish the styleof customer relationship which best meets thesupplier's specific objectives.Note that here we are seeking to categorisecustomers according to their levels ofattractiveness and relative value.Again, each of the four quadrants are givennames that reflect how they might be managed:Use the customer positioningflow chart to help find yourposition on the chartAttractivenessof accountHighLowDevelopmentNurture clientExpand businessSeek newopportunitiesNuisanceGive lowattentionLose without painWithdrawCoreDefendvigorouslyHigh level ofserviceHighresponsivenessExploitableDrivepremium priceSeek shorttermadvantageRisk losingcustomerLowHighRelative value of businessCourtesy of PMSS Consultancy GroupNuisance accountsThose customer accounts that are of relatively lowvalue and where the account is in any case notvery attractive.The supplier therefore might be expected to showlittle interest or support for the account. In factthe supplier may want to get rid of it either bybenign neglect or a real determination towithdraw.Development accounts

Those accounts which, although being of relativelylow value, nevertheless offer business that isattractive to the supplier. An example of thismight be where a supplier has gained a smalltoehold with a 'blue chip' customer and sees theopportunity to gain more valuable business atsome future date by virtue of this relationship.Exploitable accountsIn this quadrant the supplier may have a highvolume of sales, which forms a substantial part ofhis/her business, in an account that is not veryattractive. The reason for this could be that thecontract is not truly profitable or that the supplieris required to operate under unfavourable oruncertain conditions due to location or otherfactors, such as onerous contract terms.Core AccountsThis business is of highvalue in an attractiveaccount. The supplier will regard this as thebedrock of his/her business portfolio and would bemost concerned if it was lost or reduced in anyway.In this situation the supplier may be expected toprovide these customers with a high level ofservice and attention and to be seeking everymeans of ensuring the business is retained whileseeking to increase profitability in a low-profilemanner. Such a supplier is likely to be receptive tosuggestions of strategic alliance and other ways oflocking in to the customer.Back to 'At a glance'Benefits available from improved procurementGuidanceFunctionImprovementAssuranceof SupplyProcess Leverage PartneringSpecificCheck also the COMPASS websitefor additionsFinancialCost reduction (in all areas of business) x x xCash flow improvements x xReduced warranty costs x xReduced legal costs x x x xImproved trading strategiesxStable and predictable business environment x xCommercialImproved predictability of cost x x x xImproved predictability of timescale x x x xReduced timescalesImproved safetyxxImproved repeatability x x x xImplementation of 'lean construction' x CBP FactsheetContinuous improvement x xIncreased capacityxElimination of duplication x x x x

Improved quality x xImproved flexibility and ability to respond tochangesxPricing stability and consistency x x x xBetter planning x x xE-commerce x x x xTransaction cost reduction x x x xSimplify procurement process x x x xReduce waste through reducing design duplication x xImprove product through access to in-depthtechnical knowledgeShare market intelligencexxProductReduce time to market for new productsIncrease innovationDesign and supply optimum 'solutions' based onmutual knowledgeAbility to provide 'fit for purpose' solutionsxxxxRepeatable solutions x x x xShared product design and developmentIncrease standardised solutionsIncrease off-site fabrication and assemblyxxxLogisticsCBP Introduction to LogisticsLead-time reduction x x x xReduce stock holdings x xImproved site co-ordination x xSimplify procurement process x x x xMinimise site congestion x x xAvoid vehicle queuing x x xMinimise storage on site x x xReduce packagingxRelationshipMutual improvement strategiesEasier and more pleasant business environmentRegular meetings and mutual understandingStrong, stable, sustainable relationshipsTransform supply chain into value chainAbility to maximise mutual leverage up/down wholesupply chainImproved sharing of management informationxxxxxxxxback to topUsing the Toolkit | Site structure | Site map | About the SFC | About the Toolkit | AcknowledgementsCopyright, terms and conditions | Contact and feedback© 2003 The Strategic Forum for ConstructionDesigned by Format Design

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