Excellence in Infrastructure & Construction procurement: A transformational approach to achieving high performance

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1 Excellence in Infrastructure & Construction procurement: A transformational approach to achieving high performance

2 An optimized purchasing function in Infrastructure & Construction is more important than ever. Procurement costs account for as much as 60 per cent of the projects budget for some global players. And with the emergence of large, public-private partnership projects the focus on purchasing performance, which is closely linked with project margin, is intensifying. Accenture s decade of experience working closely with the top global players in Infrastructure & Construction suggests that leading players are starting to transform their purchasing function. Far-sighted companies have recognized that today s industry challenges volatile raw materials prices, globalization, sustainability, security, product innovation and shifting supplier sales strategies require a new approach. They know that centralizing the purchasing function can cut costs by as much as per cent. And they are modifying the way their buyers work, the types of purchases they make and their relationships with suppliers. Indeed, by streamlining not only their purchasing strategy but also their purchasing organisation, these players are capitalizing on their know-how and turning daunting challenges into new opportunities. By following 2 their example, pursuing best practices in regard to operating models as well as both supplier and internal relationships; the rest of the industry can make significant progress on the path to high performance. The challenges The path to procurement excellence is strewn with challenges, to be sure. Take, for example, globalization the emergence of an increasingly integrated global economy with multiple poles of economic power and influence. Players that have internationalized their business in response to globalization have realized higher growth but working with foreign suppliers and clients in global projects also greatly complicates purchasing negotiations. The supply chain organization needs to accommodate multiple business partners, increased logistics costs, and language and cultural differences as well as legal discrepancies, diverse global standards, incoterms and tax management, and significant additional purchases such as site accommodations for expatriates and higher travel expenses. Product innovation can be equally challenging, requiring new skills both technical and judgemental. And because suppliers are offering not only new products, but also add-on services and solutions like product maintenance, companies need to understand the total cost of ownership across all their product categories building a more complex comparison matrix that considers services and solutions in addition to the product itself.

3 The way forward Leading players are showing a way forward by tackling these challenges head-on. The need to be more selective about suppliers has prompted some to set up special innovation divisions within the purchasing department, for example. Rising demand for sustainable building projects is also prompting wider use of independent services that rate suppliers environmental credentials. Best practices In addition, leading players recognize that adapting to market trends and conditions requires not only bold initiatives but also a transformational approach. They are taking steps to place their purchasing function at the heart of a structure that links with other departments, as well as with suppliers and projects (see below). They also prioritize processes, in a dynamic structure of strategic sourcing that sets targets and monitors performance and puts systems including mobility and other solutions, analytic capabilities and communications tools with suppliers at the service of the organization to support both processes and people (see next page). Some leading companies are investing in advanced technologies such as embedded software to improve on-site reporting and cut the time they spend on administration. And some are collaborating with suppliers to respond to specific project challenges. When one construction company was forced to respect a low sound level limit, for example, it co-developed a soundproof tarpaulin to mask machine noise. Suppliers Purchasing department Support Services Projects 3

4 Processes Target Setting & Performance Monitoring Strategic Sourcing Procurement Strategy Development Sourcing & Negotiation Contracting Supplier Management/ Development Ordering Receiving Paying Enablers People Organization Systems 4

5 Their efforts, moreover, are characterized by the following best practices: Define well-balanced operating models with both local and global dimensions Each Infrastructure & Construction project is of course unique so it s hardly surprising that some companies continue to operate a decentralized purchasing model, designed to service the needs of each specific project. Leading players, however, know better. They know that the purchasing function must mature, adapting to market trends and applying additional negotiation levers. And they have re-balanced their operating models to incorporate both global and local dimensions. The global purchasing department defines global purchasing strategy, manages global risk, negotiates frame agreements, ensures ethical compliance, enables consolidation, and monitors at the corporate level. It carries out category management by defining purchasing categories based on recurrence and volume, defining category buyers and allocating materials into these categories. It also defines, monitors and manages the most strategic materials (and their panel of suppliers) carefully, following up the total order amount per supplier in order to request the relevant negotiated end-of year bonus and reallocate it within the company. The global purchasing department must also take benefit of the international procurement offices by developing experts in local international market with potential low cost suppliers. These experts will support the project buyers to find the best opportunities worldwide. The local purchasing department is aligned with projects and geographies and works with project managers and other internal clients to understand their requirements and constraints. A panel of suppliers can be defined locally for low-volume materials (in terms of quantity and value), and these can be purchased through globalisation or frame agreements: global negotiated contracts may have localised clauses to take account of specific country circumstances, for instance. Local teams support global sourcing by enabling the consolidation and sharing of information through analytic capabilities that deliver an accurate overview, and facilitate spend analysis and decision-making, as well as reducing prices through economies of scale. These economies of scale can be leveraged by outsourcing the procurement of some materials. For instance the partnership of a company with Accenture to outsource the procurement of 16 material categories including IT hardware, office supplies and furniture, provided 23% net savings for 7 of the categories and double digit savings for the entire project, after a quick 5

6 implementation (4 weeks between contract signature and the first order creation via the electronic platform). Reinvent supplier relationships By reducing the number of contact points, implementing leading-edge information systems, modernizing Web-based tools and selecting the best suppliers based on common criteria leading companies are professionalizing relationships with their suppliers. These players share information about each supplier across the organisation and compare it with comments made by other buyers through information technology. Such an evaluation helps define the best panel of suppliers and reduces the risk of discrepancies in internal communications consulting a supplier already rejected by another project, for example. This evaluation is a key input to enable the companies to streamline the number of suppliers they are in contact with, in order to negotiate better prices. Leading companies fully assess supplier risks (including financial and logistical concerns) and develop formal mitigation plans: a supplier registry, for instance, which records financial and sustainability ratings, quality certifications, market share and other high-risk criteria. By setting up automated communication with specific suppliers chosen on criteria such as volume or recurrence, as part of a collaborative platform and trusting relationship, they also cut administrative costs, as well as the risk of errors. To increase performance, platforms can be shared by several internal branches or even different companies, hosted by a third party with a cloud computing solution. Strengthen relationships between purchasing teams and project managers Leading companies maintain a strong integration between project management and the purchasing department in order to obtain the best from each material specification on one side, and negotiation performance on the other. After all, contracts negotiated by buyers are not only relevant to prices, but also to such factors as price conditions, insurances, included services and additional spare parts. Responsibilities must be clearly defined and can differ depending on the specific project size, structure or complexities. But involving the purchasing department from the very beginning of the project life cycle at the bidding phase enables the project manager to estimate purchasing costs early and precisely and reduces the risks of possible discrepancies between forecasts and the margin ultimately realized. It also provides 6

7 an opportunity to identify which already-negotiated frame contracts to leverage. Once the deal is won, the project manager works closely with the buyer to communicate the project plan, the purchasing forecast and day-to-day modifications, enabling the buyer to build up a full picture of procurement needs. Since the on-site purchases have reached 60% in quantity for some projects, companies have increase their control on this practice. Some of them have totally forbidden purchases outside their internal platform since others enable the foreman to purchase only under a certain limit directly on-site. The companies need to find the right balance between having a high purchasing control and enabling the foremen to perform the work and be reactive. Leading companies also leverage mobility solutions to support data collection directly on site and to identify project needs and act on them, thereby reducing administrative costs and time spent, and enabling a high purchasing reactivity. Increase integration between purchasing and other departments Procurement touches almost every corporate function and a key characteristic of procurement masters is their adoption of a cross-functional approach. On global projects the purchasing department is in close contact with both the global and the local Chief Financial Officer regarding risk management relevant to exchange rates, insurances or geopolitical problems. Leading companies have also automated the invoicing process to enable an efficient communication between finance and purchasing and avoid discrepancies in unit prices, ordered quantity, delivered quantity and additional costs (transportation, for example). Engineering maintains close contact with purchasing as well (from the bidding phase onwards), helping the buyer find the best solutions for project needs and evaluating and checking the technical compliance of suppliers proposals. Once the project has been won, engineering validates modifications or proposes alternatives, managing different versions via an internal portal. Looking to the future Accenture experience suggests that Infrastructure & Construction companies seeking to develop procurement mastery will also need to take additional measures in order to become truly differentiated players in tomorrow s markets. Turning the sustainable construction challenge into a differentiator, for example, will require a collaborative response to evolving regulation and compliance standards. Industry consolidation in response to saturated Western markets offers opportunities to share purchasing information and to increase purchases globalization. While vertical integration can help overcome supplier monopolies as one leading construction player recently did by buying a cement manufacturer. As companies strive to secure publicprivate-partnership opportunities with turnkey solutions involving different divisions and departments internal collaboration will be increasingly important. And risk management, sustained by standardized processes supported by the right systems and a more professional approach, will be key to securing competitive advantage. For more information about how Accenture can help your purchasing department become a driver of high performance, please contact: Supply Chain Management, Paris office Pierre-François Kaltenbach pierre.f.kaltenbach@accenture.com Infrastructure & Construction, Paris office Jean-Nicolas Brun jean.nicolas.brun@accenture.com Infrastructure & Construction, Madrid office Jordi Roca jordi.roca@accenture.com Infrastructure & Construction, Mumbai office Raghu Gullapalli raghu.gullapalli@accenture.com Infrastructure & Construction, Chicago office Glenn J. Thomas glenn.j.thomas@accenture.com 7

8 About Accenture Accenture is a global management consulting, technology services and outsourcing company, with approximately 211,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.6 billion for the fiscal year ended Aug. 31, Its home page is Copyright 2011 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.