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As manufactures make it more and more difficult to keep your items for the long term, how can social housing providers make the most of their money rather than following the false economy of consistently buying and replacing?
The PfH & KTP partnership has helped PfH to automate the categorisation of purchases made by PfH members, drilling right down into their spend data.
As fuel prices have risen for what is now the thirteenth week running and show no sign of slowing down, it’s at times like these that it can feel impossible to reign in the cost of running a light commercial vehicle fleet.
With the social housing sector one of the most vulnerable to currency volatility, and to an uncertain investment and operating climate, supply chains must be optimised to reduce the risks of Brexit next March.
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
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)
PFH have been following recent developments with the Grenfell enquiry and wanted to issue the following statement to Members who may have concerns relating to fire doors and associated works within their properties.
Social housing providers face a difficult task when it comes to deciding what products are needed in their properties. Issues around compliance and safety increasingly need to be balanced with cost and efficiency, particularly in bathroom product procurement.
Businesses in all sectors will continue to look for ways to reduce their costs. Sometimes budget conscious managers will say that prices paid for supplies are too high and they assume that price is correlated with cost, believing that a drop in purchase price will lead to reductions in costs.
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