Chapter 14 Supply chain issues

1. Chapter 14Supply chain issues • Introduction • The supply chain • Purchasing and contracts • Modern approaches to supply chain management • Summary Project management in practice: Heathrow Terminal 5

2. Introduction • Today most goods and services are a product of a supply chain • Similarly a large proportion of project work • Resulting in a recent trend to outsource (to external firms) major parts of the work • Relationships developed between parties in the supply chain are vital to survival • As outsourcing becomes increasingly popular, organisations are exploring the many deferent ways working with suppliers and customers • The basic principles are showcased by the Heathrow Terminal 5 project.

3. 14.1 The supply chain • A project is only as good as the weakest part of the process • Purchasing and the supply management has evolved • 20 years ago the central issue was purchasing • Specialist buyers • Entirely reactive process • Obtaining goods and services at lowest possible price • Provide short-term needs • More recently the central issue is developing relationships • Relying less on contract and more on trust and long-term relationships • Resulting in high levels of performance of the supply chain • Shorter development times • Lower levels of inventory • High levels of quality

4. 14.1 The supply chain (Continued) Figure 14.1 Scope of influence of purchasing, materials management and supply chain management

5. 14.1 The supply chain (Continued) • The traditional purchasing department is concerned with the relationship with first-tier suppliers, those who supply the project organisation directly • Materials management is concerned with • Physical goods and the logistic aspects of flow between first-tier suppliers through the project organisation to the first-tier customers • The product breakdown structure provides the bill of materials • Supply chain management is concerned • With project strategy and operations • From primary industry to end-user

6. 14.1 The supply chain (Continued) Table 14.1 Examples of supply chains

7. 14.1 The supply chain (Continued) • How important is the supply chain to the success of the project? • Depends on • Value of bought-in products and services relative to the total value of the project • The criticality of the items being purchased • The timing of the work being purchased • The impact of the quality of work purchased • If an organisation uses the same supplier over a period of time, suppliers usually rate highly on all four counts. • Considerable time must be invested in developing relationships • When a large organisation is being supplied by small ones, direct investment, knowledge sharing, training may be on offer

8. 14.2 Purchasing and contracts • Some companies are ‘management shells’ • No direct capability to deliver project, they co-ordinate the delivery and take revenue for this • Outsourcing examples: training, IT provision and support • Direct and indirect costs are significant • Who does the purchasing? • Firm A: £20 million purchases per year made by the purchasing department of 2 people • Firm B: £20 million purchases per year made by the purchasing department of 20 people • Size of purchasing department dependent on • Number of steps in the process • Size of each order • Size of the supply base • The ease of placing an order (electronic or paper)

9. 14.2 Purchasing and contracts (Continued) Figure 14.2 Purchasing processes

10. 14.2 Purchasing and contracts (Continued) • ‘Authorised staff’ make purchases – facilitates central control • They receive a formal ‘request to purchase’ • Short process if regular or standard item • Longer if seeking/selecting suppliers for large capital items • The order is placed with a ‘purchase order’ – a unique and traceable identifier • On goods arrival a ‘goods inward note’ is triggered • The goods inward note must be reconciled with • The supplier’s ‘delivery note’ • The original purchase order • The eventual suppliers ‘invoice’ or request for payment • The invoice can then be signed off for payment

11. 14.2 Purchasing and contracts (Continued) The organisation of purchasing • Centralised • All projects place requirements through one purchasing office • This office has control of all purchasing requirements for the whole of the business • Localised • A project manager can employ or use a local purchasing officer or outsource it to an external provider or purchasing agent • Employees may be allowed to buy up to a certain value using a credit card • Mixed arrangements • Large or standard items purchased centrally • Items needing local knowledge or rapid delivery purchased locally • Reduction in central control • Closer to meeting project needs

12. 14.2 Purchasing and contracts (Continued) Table 14.2 The advantages of centralised and localised purchasing

13. 14.2 Purchasing and contracts (Continued) Purchasing and project strategy • The objectives of the purchasing activities must be consistent with the objectives of the project • Broadly time, cost, quality • With other objectives arranged in priority • The strategy is converted into the ‘five rights’, interdependent characteristics • Right quantity • Right quality • Right price • Right time and place • Right supplier

14. 14.2 Purchasing and contracts (Continued) Contracts • The process of awarding contracts depends on • the nature of the task being contracted • the relationship between purchaser and supplier • the relative size of each • industry/sector norms • Types of contract • Fixed price: fixed amount agreed for job • Time and materials: daily rate plus material costs • Target cost: suppliers suggest what they can provide for the price • Revenue share: the more the final product is sold for, the more revenue for the suppliers • Cost-plus: reimburse costs plus a margin for profit

15. 14.2 Purchasing and contracts (Continued) The process for establishing contracts • A single-stage process for suppliers of major parts (Figure 14.3) • Large (often public) organisations demand a two or more stage process • First stage: a call to find who has technical capability and capacity • This may provide extra information on how the product/service can be improved • Second stage: potential bidders requested to provide detailed costing of proposals • This takes time to complete and there may be several rounds of bidding • It does save time by pre-filtering technical capability

16. 14.2 Purchasing and contracts (Continued) Figure 14.3 Establishment of contracts

17. 14.2 Purchasing and contracts (Continued) Other rules and issues 1: • Public purchase contracts above a stipulated value must go out to tender in Europe • Bids may be treated as ‘sealed’ (not opened until a given date) or ‘open’ (information is public when the bids are received) • The information in the bids should be fed into the planning stage, amendments to schedule/budget may have to be made • Contractual arrangements are usually based on ‘standard terms and conditions’ • Legal advisors must establish whether the supplier’s or purchaser's terms apply • Breeches of contract and ensuing litigation rarely benefit either party except the legal industry • ‘Penalty clauses’ may be used to encourage suppliers to do what they said they would; in practice, these are used as a last resort

18. 14.2 Purchasing and contracts (Continued) Other rules and issues 2: • ‘Bonds and insurances’ are often required from the supplier in mitigation of their default • ‘Retention money’ is often kept back from final payment until all final jobs are completed to customer satisfaction • ‘Stage payments’ or ‘interim payments on delivery of specified objectives’ may be made in large projects to enable supplier to stay financially afloat • ‘Letters of intent’ may precede the contract. This enables work to start overcoming lengthy delays in preparing contract paperwork • Legislation says goods and services provided should be what they say they are and do what they say they should do. Buying a licence to use a particular product apparently circumnavigates this law.

19. 14.3 Modern approaches to supply chain management Relationships between buyers and suppliers have changed from short-term contracts to long-term partnerships based on trust Classification of relationships 1: • Adversarial (traditional) • Reliance on contract, competitive bidding, short-term relationships with little co-operation • Focus on cost and short-term gain • Orders conveyed by fax or letter • Several suppliers for each item

20. 14.3 Modern approaches to supply chain management (Continued) Classification of relationships 2: • Partnership • Long-term agreement • Purchaser agrees that supplier will be the sole supplier in return for process developments and co-operation on costs and information transfer • Orders/‘call offs’ often exchanged by ‘electronic data interchange’ • Large customers may directly invest in equipment or research and development for small suppliers

21. Relationship management Complex supply network One party takes on the role of co-ordinating and developing the entire supply network This goes beyond partnership May consider all elements of the supply chain Aim is to find and strengthen weak links 14.3 Modern approaches to supply chain management (Continued)

22. 14.3 Modern approaches to supply chain management (Continued) Table 14.3 Adversarial versus partnership relationships

23. 14.3 Modern approaches to supply chain management (Continued) • Differences in adversarial and partnership approaches: in practice differences in the execution of work • In partnership conditions • Likely to be one supplier in each category • Significant rationalisation of the supply base • Simplification of purchasing process • There is an intrusive nature to the relationship • Tough requirements for improvement often placed on supplier • In practice not all win–win • Managing relationships needs considerable effort

24. 14.3 Modern approaches to supply chain management (Continued) Modern techniques in supply chain management 1: • Open book accounting • The supplier opens up the accounts for customer scrutiny • Supplier demonstrates how much profit is being made • Too little profit: the customer knows the supplier will not be able to invest for improvements • Too much profit: the customer will look for price reductions • Popular with customers • Not popular with suppliers • They resent intrusion • They have reduced bargaining power

25. 14.3 Modern approaches to supply chain management (Continued) Modern techniques in supply chain management 2: • Vendor-managed inventory • Often need to buy goods in bulk in advance • Peace of mind, material on-site in advance • Discount prices for bulk orders • Problems for supplier • Supplier has sudden surge in demand, staff need to work overtime, costs are increased • Problems for customer • Customer has to store, count, move, protect the bulk order • Customer will probably over-order in case of theft • Customer will have to dispose of excess at the end of job

26. 14.3 Modern approaches to supply chain management (Continued) • Solution • The supplier and customer work together • They determine the amount needed and when it will be needed • The supplier sends regular small (not bulk) despatches to site • The customer takes materials when needed • The supplier owns the materials until used, invoicing regularly • The supplier will be involved in the planning process • They may provide technical support • They become the sole supplier • The customer pays only for material used and when used • The supplier now manages materials • Costs of storage, checking and moving materials are eliminated • A win–win • Trust and partnership are key

27. Summary • The value of goods and services purchased can be a major portion of a project budget • The trend to outsource is increasing • Purchasing (or procurement) has changed to incorporate supply chain management – the management of both supplier and customer with the objective of maximising performance • The supply chain relies on negotiation of contract • There are standard procedures and legal issues • The contract is still the formal basis for some projects; it contains the criteria by which work will be assessed • For some projects the contract takes the role of a document ‘just in case’ it all goes wrong • Relationships between customers and supplier can be adversarial or a partnership