Creating competitive advantage with strategic procurement, supply chain management
Jim Scotti, Fluor Corp.
Procurement’s role in engineering and construction is changing. Procurement is evolving into a far more strategic discipline, driven primarily by a greater awareness of the financial implications of executing the function well. Almost two-thirds of the money spent on offshore oil and gas projects goes to procure goods and services, so the return on investment in well-executed strategic procurement and supply chain management can be very high.
What are the characteristics of world-class procurement functions? What identifies the best engineering and construction firms in the procurement arena? Those companies are characterized by a focus on center-led procurement, strategic sourcing, supplier integration, enterprise-spend management, supplier diversity, and cross-industry benchmarking.
Center-led procurement
Center-led procurement is driven by a central management team that directs the procurement and sourcing of goods and services globally. This central group aggregates company expenditures across various supply chain functions and delivers consistent and unvarying processes throughout the entire organization. Also included in this center-led group is a central team of product directors and sourcing specialists who continually review supplier proposals on all projects. They know what goods, materials, and equipment should cost and when delivery should be expected to ensure that projects and clients benefit from the best values available in the marketplace. Rather than having 1,000 voices speaking to a supply base - which occurred in less strategic days - companies that embrace center-led procurement represent a single, strategic voice to suppliers of goods and services globally.
Strategic sourcing
Strategic sourcing is another way of saying “less is more.” At one time, engineering, procurement and construction firms could have global networks of as many as 30,000 suppliers. Qualifying them and evaluating prices and capabilities was done inefficiently on a project-by-project basis.
Today, the Fluor supplier list has been pared to approximately 1,000 firms. The company has global supply agreements covering key capital equipment and material categories with over 100 commercial entities. As a result, significant leverage can be applied to suppliers to ensure the best possible return on the materials and equipment purchased.
There is another critical benefit to strategic sourcing. Because it can be done “horizontally” with suppliers across multiple projects in a variety of sectors around the globe, it yields invaluable data in terms of pricing and mitigating procurement risks.
Supplier integration
Supplier integration is the catalyst that generates the greatest competitive advantage. It helps reduce engineering effort and shortens cycle times to allow clients to bring product to market faster, and to lessen project risk. All relate to overall cost reduction.
The opportunity to influence project cost is greatest at the beginning of the project, and bringing strategic suppliers in early is critical to success. The validity of this concept came to the forefront in the late 1990s, thanks to research by the Construction Industry Institute (CII), a research organization dedicated to improving the planning and execution of major construction projects.
Under the auspices of the CII, a 15-person team from a variety of engineering firms and major corporations explored the potential for changing the traditional relationships among owners, contractors, and suppliers to enhance the suppliers’ contributions to the process. The result is titledReforming Owner, Contractor, Supplier Relationships: A Project Delivery System to Optimize Roles in EPC Projects.
The game-changing element of the research team’s work was a “cost influence curve,” which Fluor has altered to show the forward movement of its strategic suppliers in the supply chain of a typical construction project.
The cost-influence curve as amended by Fluor.
The “cost influence curve” shows that, although the ability to influence the cost of a project is greatest during the early design engineering (“E”) stages of a project, months go by before critical equipment and material are procured (“P”), allowing only then for the construction (“C”) to begin. The CII research revealed that awarding strategic procurement items earlier on a typical EPC project could produce price savings of 4-8% and dramatic savings of 10-15% in the time to complete the project. Therefore, moving the big “P” (the purchase of strategic items or, in the case of Fluor, “strategic suppliers”) in front of Engineering and adding a little “p” (the balance of items to be procured) reconfigures the traditional EPC model into Procurement, Engineering, procurement, and Construction, or PEpC.
To maximize savings, Fluor has instituted a program that involves its suppliers with engineering during the proposal or design phase of a project and with construction earlier in the process than typical in the past. In exchange, suppliers have the opportunity to contract with Fluor and its clients on a preferred basis.
There are five steps that must be taken to implement PEpC, according to CII:
- Identify the project-critical components in a project prior to all but the most conceptual project engineering
- Consummate commercially complete transactions to engage the most project-favorable suppliers of those components (according to project-specific selection criteria)
- Facilitate the delivery of those suppliers’ core competencies into the project delivery process, including the suppliers’ ability to accept broader roles in project execution and risk management
- Influence, define, and benefit the overall project execution strategy and the detailed engineering effort
- Undertake this project strategically, deliberately, and consistently.
Enterprise spend management
Data is the fuel that drives strategic procurement - particularly for companies operating in diverse global markets. Investing in systems that can gather data on specific suppliers of specific goods and services in specific countries can improve dramatically the efficiency and effectiveness of procurement efforts.
Fluor’s Enterprise Spend Management processes track major procurement commitments, capturing price and bid information for benchmarking. Data warehousing and analysis enable valid comparisons of component pricing and identify buying patterns and market trends.
Fluor produces an annualMaterial Market Outlook (MMO) to assess market conditions for a variety of material and equipment categories. The detailed document, which runs more than 100 pages, enables the company to stay abreast of sourcing trends.
For example, the 2007 edition includes a “Delivery Dashboard” that contains specific forecast information for lead time and bid validity by equipment and material category.
Published each January and updated throughout the year, the MMO is compiled by Fluor’s sourcing group based on information from the company’s global supply base, data from Fluor global projects, and interviews in the field.
Many companies operate in diverse markets best served by diverse resources, including local suppliers and subcontractors. The challenge for a center-led procurement team is to identify and to reach out to certified, small, minority-owned, and women-owned businesses. An online supplier registration process can be a valuable supplier diversity tracking tool and creates a competitive advantage by efficiently matching the needs of businesses and their clients with small, disadvantaged, minority-, and women-owned enterprises.
Cross-industry benchmarking
Winning in highly competitive industries like oil and gas, engineering, and construction boils down to out managing and out executing the competition. Fundamental to that is evaluating performance against industry leaders - not only in specific segments, but other industrial sectors as well. Those businesses that focus on benchmarking often find themselves best-in-class in their sectors.
Benchmarking yields a repository of data, which can help set targets and create reports for management. Beyond that, it directs attention to areas, which can yield the greatest and most immediate impact. Benchmarking also can be a valuable marketing tool.
Data against which to benchmark are available. The CII Benchmarking and Metrics program provides data on more than 1,250 projects representing in excess of $60 billion in installed costs. Another resource is CAPS Research, co-sponsored by the Arizona State University W.P. Carey School of Business and the Institute for Supply Management compares supply-chain performance with leaders in diverse sectors such as banking, foods, shipbuilding, and municipal governments, as well as industry-specific and subject-specific benchmarking.
About the author
Jim Scotti is vice president and chief procurement officer of Fluor Corp. Since he first became involved in procurement in the early 1980s, he has focused on bringing more people with technical backgrounds and broad business acumen into the procurement discipline, treating suppliers as business partners, and using his engineering background to help integrate the engineering and procurement disciplines of the companies for which he worked and with which he partnered.
