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Procurement without boundaries

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Driving innovation in construction and housing.

I was recently asked to present on the topic of ‘innovation in procurement’ which is a particularly ‘hot topic’ across the housing and construction sectors.  Unfortunately, procurement is rarely seen as a facilitator to innovation when considered in this context.

This is a subject close to my heart as I am a passionate advocate of procurements role in value creation in organisations.  This is often a challenging position to take in housing and construction as procurement is often a peripheral and transactional function and the sectors are renowned for a limited degree of innovative or disruptive change, often for very valid reasons.

Like many other areas of society though this position is under intense pressure – inequality, scarcity of housing, safety and compliance, skills amongst other things are putting increasing pressure on existing business models and in particular on housing and the construction sector.  This increasing pressure is often a catalyst for innovation and market disruption.

I could have looked at the brief and discussed ‘procuring through new innovations’ looking at many of the developments in how we complete our source to pay processes and our analytics.  Recent developments such as Amazon Business are clearly disrupting this space.

This, although very exciting, is not where I see the real value procurement can create.  The real value is in the ‘procurement of innovation’ – How did Apple’s supply chain and procurement change markets and production, how will 3D digital printing change traditional industries, what will happen as AI, Blockchain or battery storage develop.

Cultural Deficit

Housing and construction have never been synonymous with disruptive innovation and are traditionally slow and at best medium adopters of change.  This though is not meant as a negative statement when you begin to understand the reality of these sectors.

In the first instance both sectors are incredibly highly regulated.  Often, with life changing consequences, regulation comes with a high degree of perceived risk for individuals.  The tragedy at Grenfell clearly evidences this.

Alongside this I believe there is what I define as a ‘Cultural Deficit’.  This can manifest itself in many ways:

  • An inherent desire to transfer risk to supply chains when procuring goods and services;
  • Organisations that set targets that support the status quo;
  • A high degree of perceived cost and risk of transitioning to a new way of doing things – in particular in asset management and construction; and
  • The personal cost of failure – if this goes wrong will I lose my job or future career opportunities!

So, what we end up with are pockets of adoption but rarely is this early adoption.  A great example of this is the ‘digital transformation’ agenda across the sector.  We are embracing and adopting new digital business models but much, much later than many other industries.

 

Pent-up Value

Again, this slow adoption can be acceptable in many cases.  But, I believe that some things are changing that may require our sector to take a different view.  The macro and micro economic and social situation that is prevalent across our sectors and increasing competition means that innovation will be driven by need.

Our sectors are actually doing an immense amount of creative and innovative things such as the use of financial investment tools to build and maintain properties, smart homes, health and social care technology, digital inclusion, Internet of Things, modern methods of construction, social value and social enterprise.

We can see as a sector we have a huge amount of ‘Pent-up Value’ that is being marginally exploited but could have significant impact.  What is challenging though is that amongst all of this, some key areas around traditional supply chains in development, repairs and capital expenditure are lacking any disruptive innovation on any scale.

The structure of the construction sector is highly fragmented with multiple tiers of supply chain and a high degree of sub-contracting.  This fragmentation and transactional cost drives huge inefficiencies and does not support scalable innovation easily.

Does Procurement have a role to play?

If I link this back to procurement, I think we have an interesting role to play.  This role though requires a future view of what procurement should be doing in an organisation.  It also asks the question ’do we have the right skill sets to support the evolution of procurement creating value through innovation?’  People and culture will be critical for our future success.

Our traditional procurement model in housing and construction supports typically, a centralised function with targets set around compliance, spend under management and savings and all supported by stringent process.  If I take asset management in housing as an example, procurements involvement only occurs long after any real value creation – often being engaged just to complete and police a sourcing exercise.

What though if our sectors adopted an alternative model where procurement was characterised differently.

Skills – Our recruitment and development processes focussed on skills much wider than EU procurement knowledge such as, stakeholder management, analytics, consultative expertise, commercial acumen, product development and innovation, enterprise, and networking.

Structure – We developed our teams to work in integrated procurement groups that worked in the business rather than on the business.  These groups critically worked throughout the contract lifecycle rather than just during the sourcing phase of activities -becoming an integral owner of value creation through category management, strategic sourcing, analytics, contract management, supplier relationship and performance management, risk management, product development and so on.

Measurement – Although traditional key performance indicators will still be relevant in procurement we must develop these and provide ‘weight’ to alternative measures of success.  Things such as time to market, ‘end user’ experience and satisfaction, product success, RoI, and a product or service to price and quality ratios.

Procurement can become an integral part of a functions success.  Ownership of championing the function, change management, horizon scanning, investment and funding because they are clearly integrated and aligned to the business goals.

A final word….

Who knows what we could achieve in construction and housing if we release the ‘pent-up’ value.  Maybe we could have properties that were fully enabled with sensors and repairs work was reduced significantly due to improved planned maintenance or we may be able to develop financial deals for new build at cost and builders would model in predictive maintenance costs for the lifetime of the property driving velocity into building new homes.

What is clear, is that for procurement to drive value through innovation, we need the right leadership, skills and desire.  With this I truly believe the housing and construction sector are on a precipice of a fantastic opportunity.

 

Steve Malone, MD at PfH

Are you a good customer?

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Recent events in the construction and housing sectors, such as the collapse of Carillion and the tragic events at Grenfell, have led me to consider the viability of housings long-term business plans.  What would happen if supply chain costs rose above our forecasts?  What’s the impact of market failure?  Are we managing the risk of scarcity of supply?

This prompted me to ask a question the sector rarely addresses – Am I a good customer?  Why should I even consider this question – Suppliers are lucky to have the business.  But with pressure mounting on the sector to drive value and reduce risk and other markets looking increasingly attractive to suppliers, that attitude may need to change.

There are a number of things the sector should reflect on in order to become a better customer.

We are often slow to make decisions, we often have a lowest price procurement philosophy because we target our teams with ‘price’ savings rather than evaluating the total cost of ownership or ‘lifetime’ cost. We regularly have demand fluctuations or sometimes cancel projects last minute due to funding issues. We can be adversarial with suppliers and complain when contracts don’t go well.  Yet we do little contract management to make projects successful.

Overlay this then with huge construction issues such as skills shortages; a policy environment with no cohesive long-term strategy; margins hovering at 2%; payment periods in excess of 70 days; major works and maintenance spend down by 12.95% and 7.56% and no decent homes programmes to fall back on.

Although the sector still spends huge amounts in construction, we must examine how we do business and plan ahead.  As HS2 gathers pace and private house building increases will our supply chains look to other markets?  These conditions will also potentially drive costs upwards – the impact of Brexit on material prices and labour shortages is already having an impact.

It is estimated that 65% of organisations have no visibility of their supply chain beyond their ‘tier one’ main contractors.  If you consider that the construction market is predominantly made up of ‘tier two’ subcontractors and below and that 38% of SME construction businesses do not survive beyond five years, landlords must recognise that they need to take a more active role in mitigating these risks.

Your procurement function should be integral in managing some of these challenges.  But how often do procurement teams in housing struggle to break in to our organisations asset spend.  Procurement specialists should be engaged with the market, assessing innovation and the use of technology, analysing spend patterns, measuring performance, supporting in contract management, mitigating risk and developing sustainable relationships with critical suppliers.

If your procurement team are there just to run a compliant sourcing process and get the lowest price then the outcome on your long-term business plan, given the market volatility could be disastrous.

 

Steve Malone is managing director of Procurement for Housing (PfH)

Materials: Six steps to strengthen your contract

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Every social landlord wants a materials agreement that delivers top quality, at the best price, for the life of the contract. Yet few manage to tick all three boxes, all the time.

Here, Jeff Edginton – materials category manager at PfH – discusses the foundations of a strong materials deal – and offers six tips on how to get the basics right.

Stress-test your current agreement

When was the last time you procured your materials contract? If it was more than three or four years ago then your housing organisation, like many, may have evolved and your existing agreement might not be entirely fit for purpose.

Maybe your organisation is now part of a group structure with new corporate standards. Perhaps you are using a materials contract inherited from a recent merger.

Reviewing the terms of your deal might help to remove conditions that are no longer needed. For example, your housing association could be paying for a service such as Call & Collect, yet raw materials or parts are now delivered straight to site.

You may have recently set up an electrical repairs team. Are you procuring the products they require at the best price? If your operatives are driving around to pick up parts and struggling with availability, would it be better for them to get everything from one, large central merchant that stocks hundreds of different lines?

Review your KPIs

KPIs are essential to effective contract management. They ensure your supplier knows what must be achieved and what you’re going to measure their success or failure against. But setting KPIs isn’t enough – it’s the monitoring of them that tells the real story. Get this scrutiny wrong and you may miss problems or negative trends early on before they develop into more major service failures.

If you do uncover issues, then just presenting a supplier with the results and saying, ‘you need to do better’, won’t work. You also need a clear system for acting on findings and rectifying issues.

Remember to review your KPIs regularly so you have exactly the right ones in place. Perhaps you have a set of indicators that measure cost and performance, but since you last put gauges in place, social value has become more of a priority for your housing association. Do KPIs need to shift so they consider a commitment to local suppliers, the creation of apprenticeships or other wider community benefits?

Build trust and equality with suppliers

Your relationship with suppliers is paramount to a contract’s overall success. Acting in partnership with your supply chain, explaining issues and seeking joint solutions will get better results.

Occasionally, a new supplier may take time to ‘bed-in’ to delivering a new service as conditions may be ones they are not used to. It’s vital that you don’t immediately go into confrontation mode, thinking that a muscular response will solve everything. This can set a relationship off on the wrong foot, creating a combative culture that makes it more difficult to resolve issues in future. Instead, if you work with a supplier, rather than against them, then, from experience, they will settle in faster and work with you even harder to achieve your goals.

Manage your product lists

PfH achieves value for money for its members through a core list that covers the most popular materials goods, identified via spend volume. However, it isn’t unusual to see ‘product drift’, whereby less of an organisation’s spend goes on the core products for which PfH has negotiated preferential rates.

To avoid costs creeping up via product drift, check spend with your suppliers at regular intervals. Ensure that staff are buying from the core list and periodically refresh the items on this list so they reflect your housing association’s current needs. At PfH we achieve this via regular review meetings and ongoing dialogue with suppliers.

Rationalise product lines

Members often focus on the savings they can achieve when initially negotiating contracts, but further savings can often be made by looking at how materials contracts are managed on the ground.

Product rationalisation is one way to do this. For example, a housing provider might buy several types of one particular building material, product or part. By working with the supplier to refine the number of lines; they benefit from reduced stock requirements. The housing provider’s operatives benefit as it’s more likely that the product will be in stock and the social landlord benefits from cost savings.

Review new goods

New products come to market all the time, including a supplier’s own-brand goods and leading edge, innovative products that may work quite differently from existing lines. To help members navigate the latest releases, PfH looks at how products work in practice and, where advantageous, works with members and suppliers to embed them into core lists at discounted rates.

Your suppliers should keep you informed of new products that may improve service delivery, reduce cost, require lower maintenance, be easier or quicker to install and have longer guarantees – particularly relevant when considering life cycle costing.

It takes time to get the fundamentals of a materials contract right. But these six tips will help you to start building a cost effective, high quality agreement that delivers a wide range of benefits for your organisation and its tenants throughout its life time.

Materials and Associated Managed Services: The materials framework helps asset managers deliver their strategic objectives with access to a wide range of products across 10 lots including electrical, building materials, plumbing & heating and renewables.

Details are available on the PfH website or contact our category expert Jeff Edginton on 01925 286377 or JEdginton@inprovagroup.com

Procurement v asset management: The road to reconciliation

As a procurement professional in the housing sector I have heard those rasping statements on many an occasion from long serving asset managers – ‘we are more than capable of defining our requirements and negotiating with our suppliers, therefore there is no need for procurements involvement.  Procurement participation proves to be time consuming, costly and, due to a lack of understanding of asset management, does not always generate the correct solution.’

In this highly stressful environment we are often seen as an unnecessary bureaucracy, adding little value and creating barriers or slowing the process down.

To a sensitive soul this may be disheartening, but to a world class procurement professional it is merely the fact that they have not experienced your collaborative, value focussed tenacity yet!

So how can that enthusiastic, tough skinned, value ninja hurl down the gauntlet and convince the asset team to let them in.

Walk in their shoes

The asset management world is a decidedly complex, results driven, high risk, customer challenging environment.  Often there is daily fires to put out, reputational risk to manage, supply chain challenges all of which mean asset managers are extremely sensitive towards any potential disruption or change.  With this as a setting it is understandable that asset managers can lose sight of the overall commercial impact of the current supplier set-up.

Immersing yourself in their work is crucial to understand their critical requirements, the daily challenges they face and the performance of existing suppliers.  Speak the same language and listen to their experience and detailed technical knowledge.  Pick up on the key measures and targets they have and address these in any solutions proposed.  Learn from their past experiences, the impact of lead times, the impact of stock issues, the impact the contractor has on tenant satisfaction, the resource constraints they have, the total cost of ownership or the challenge of training a workforce in new product installation.

Only from this level of understanding can you create the opportunity to bring together a bottom up strategic commercial analysis.

Become an adopted team member

Make sure you take every opportunity to collaborate, work as one team and align goals.  Continuously and evangelically reassert that you want to help them achieve their objectives and goals and show that, not only through words but actions.  Add value in their eyes as well as the wider organisation and never stop challenging yourself about this.  Show your commercial and analytical capability to enable them to understand and challenge the existing status quo and recognise the need for change.

Know the housing market better than your colleagues

As a procurement professional you should have a unique position that you understand and know the suppliers in the market, their capabilities, emerging innovation, technological developments – anything less and you will have no credibility.  Knowing the daily challenges that the asset team faces from ‘walking in their shoes’ gives you the opportunity to engage with the broader market, probe incumbent suppliers, engage with prospective suppliers or new entrants on how to overcome these challenges.  Identify from your network how other organisations are dealing with these challenges and improving service delivery.  Look at how innovation is driving continuous quality and cost improvements.  Try to encourage the asset team to explore a broader view of the supply chain and facilitate learning opportunities for them that will shift their mind set that ‘only one supplier can deliver their needs.’

Shine a light on your commercial capability

As a procurement professional make sure you do your job properly.  If you only accept invitations to manage an EU procurement process or manage the sourcing and implementation process as an extra pair of hands then you will not be able to influence and change the mind set of the asset management team.  You need to become part of the team, know the market and walk in their shoes but you also need to be relentless in ‘doing your job’.  Complete your bottom up commercial analysis as part of your continuous supplier relationship and contract management process.  Analyse spend, identify opportunities, measure performance, create benchmarks and assess against external information, obtain data and interpret it.  Spend the time educating the asset management team on this so that they can assess the capability, innovation, risk, commercial models of both the incumbent suppliers and prospective suppliers.  Spend time educating and agreeing with the asset team what they require, the negotiation strategy to be deployed, the risk profile they are prepared to adopt, the key measures of performance that will drive quality, value for money and ultimately tenant satisfaction.  Show your commercial prowess and wait for the moment when your true value is recognised!

 

Procurement and asset management can and must become a complementary pairing if housing organisations are going to deliver on their business plans.  Both have critical roles to play and value to add – it is imperative that you understand the effort required to achieve your organisations goals – now make it happen!

 

As the dedicated procurement services provider to the housing sector, PfH works with you to assess procurement and asset management effectiveness – enabling us to identify opportunities for short-term as well as sustainable efficiencies and improvements.

Many of our Members achieve step-change improvements through our combined approach of delivering immediate cost savings at the same time as driving insightful long-term benefit through smart and strategic procurement.

If you’d like to discover how you can reconcile procurement with asset management within your organisation, contact our Consultancy team for a no obligation discussion:

consultancy@pfh.co.uk

01925 282398

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