Why Earlier Is Better: Getting Procurement & Suppliers Involved
In many sectors there is a decline in collaboration between buyers and suppliers in advance of the purchase order. Yet, some industries clearly believe that getting suppliers and procurement involved earlier saves both time and money. In this insight we examine if earlier is really better.
Sellers everywhere have noticed a clear trend with regard to corporate buying. Not only is procurement involved more, it is also involved earlier! Often from the very start – that is at the concept, design or engineering stage.
At the same time suppliers are typically being involved later. The construction sector is perhaps an exception – research in that industry shows involving suppliers earlier saves both time and money.
The Old Model Doesn’t Work!
Traditionally engineering projects followed this pattern: Engineering first, Procurement second and then finally Construction, or production. It was only at the latter stage that suppliers were involved. Hence the acronym EPC.
However for more than a decade it has widely recognised that this model is flawed. There are two reasons:
– The earlier procurement is involved the greater the savings it can deliver.
– The late involvement of suppliers can have significant time and cost implications.
Let us examine each of these factors, then we will explore the now more widely adopted alternative model.
Procurement – Why Earlier Is Better
‘A procurement executive at every engineer’s elbow’, that is the dream of many procurement leaders. But it is more than just a dream – it is a valid strategy for managing spend in relation to technical, engineering, or construction projects and purchases.
It means means the intervention of procurement before the purchase order is written, or the specification is set. There are many reasons why:
– The greatest scope for savings exists in the design stage of a product, or project. Procurement doesn’t just want to be presented with list of predetermined components and materials (to be sourced at the lowest price) – it wants to be be involved in writing or re-writing the shopping list or specification.
– Bringing procurement on board earlier means that it is in place before any major spending takes place. There is no point involving procurement after significant amounts of budget have been committed.
– To ensure that procurement has the freedom to source from the widest choice of suppliers. This freedom can be restricted by engineering – design over specifying what is to be bought, for example: propriety materials, standards or named suppliers. It is procurement’s job to ensure this does not happen.
– To focus on costs. Price and the selection of the lowest cost supplier may not be the number one issue for the design engineer, for example technical quality, or on time product project completion may be of greater concern. However, procurement knows that stripping dollars and cents from the production cost of a new product can make the difference between success and failure.
– To impose some degree of standardization of components and materials bought. This matters because the number and variety of SKUs (i.e. products, components, versions) and the range of suppliers has implications for procurement costs, inventory costs and even more fundamentally the working requirements of the business. Procurement in some organizations may require that a new SKU cannot be added without deleting one or more old SKUs.
– Designers may be working in a vacuum isolated from what is happening in the supply market. For example future trends in respect of volatile raw material markets may have important implications for product composition-design.
– Procurement will be anxious to ensure that engineering – design looks beyond technical requirements to the broader business context including, project and operating objectives. That includes the organizations overall procurement goals and strategy.
– Procurement will be anxious to ensure effective collaboration with all stakeholders in the design process. It knows that changes to the specification later will be costly. This requirement for collaboration extends to suppliers and supply chain partners (as examined below).
So it logically follows that procurement needs to be involved earlier – that is from the very start. But getting procurement involved earlier also presents the opportunity to engage earlier with suppliers.
Suppliers – Why Earlier Is Better
Ironically the earlier involvement of procurement in many other sectors has resulted in the later involvement of suppliers. Indeed in many instances procurement strictly controls consultation with suppliers until the formal buying process is complete. Suppliers are increasingly be called to respond to a detailed RFP in a competitive bidding scenario.
However, construction industry research has shown that suppliers need to be involved in the design stage – indeed these studies have gone so far as to quantify how early supplier input will save time and money later. It can also minimise project risk generally.
Traditionally in engineering and construction projects planning and design started long before any supplier was chosen. Key aspects of complex projects are ‘frequently designed, manufactured, and delivered by suppliers who are outside the circle of cooperation between owner, engineer, and contractor’.
Just like the situation we have just discussed with procurement, the chosen supplier was presented with a fait accompli specification to be implemented. That can cause problems.
The transition from the drafts man’s drawing board to physical reality is not always straight forward. As the famous quote says: “No battle plan survives contact with the enemy“.
The implication (according to the Construction Industry Institute) of not collaborating with suppliers in the design and planning stage is that:
‘…the expertise embedded in the design of strategic procurement items and/or systems as well as the expertise needed for successful project integration is frequently lost or underutilized…’
Many months may have passed since the requirement were gathered and although perfect at the point of capture the specification can quickly fall behind changes in markets, technologies and customers.
Now that is not all bad news for the chosen supplier, many vendors have learned that they can price aggressively to win the contract and make their profits on the all to frequent change requests and out-of-scope work.
Why ‘P’ Comes Before ‘E’
Vital knowledge required for successful design and integration is forgone if suppliers are excluded from the design and planning stage.
Hence the Construction Industry Institutes’s recommendation that EPC becomes PEpC (Procurement, Engineering, procurement and Construction) and the objective is ‘to utilize supplier expertise in all phases of the project life cycle by developing an advance procurement strategy and reaching agreement with suppliers on strategic procurement items and/or systems prior to the associated project engineering activities’.
The PEpC approach works as follows:
– Procure key strategic suppliers early
– Engineer and design (in collaboration with the strategic supplier(s))
– procure (with a small ‘p’) the rest of the more commodity-like items
– Construct (the strategic partner implements, integrates, or builds)
Of course not all items benefit from early procurement. It is only relevant to strategic items. Commodities on the other hand can be purchased on a low cost basis when required. However the case for earlier involvement of strategic suppliers is clear:
‘…if key technologies and key partners are identified early, and if the benefits and synergies of these are leveraged into the design process, both time and cost are reduced. In addition, risk is reduced if key partners are committed to deliver broader scope of supply, and take ownership of performance’.
The Construction Industry Institute‘s Research suggests that using a PEpC could produce savings in excess of 10% to 15% of the time and 4% to 8% over the cost of the traditional EPC process.
Implications For Sellers
If earlier involvement of strategic suppliers in respect of complex engineering and constructions can deliver savings of between 10% and 15%, then the question is:
‘What could the buyer save by engaging your company early in the buying process and in particular around engineering and design?’
Getting involved earlier in the buying process is a key challenges for sellers, so:
– Can you use the CII’s research to support your early involvement?
– What case studies or examples can you use to demonstrate how your input to projects at an early stage has impacted on project performance?