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Effective Sourcing Strategies for Construction

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Title: Effective Sourcing Strategies for Construction


1
Effective Sourcing Strategies forConstruction
Facilities Management Services
  • Michael G. Patton
  • PurchasingFirst

2
Effective Sourcing Strategies
  • Typical Category Breakdown
  • Common Issues
  • Necessary tools
  • Strategies
  • Opportunity Identification Methods
  • Case Studies
  • Summary

3
Construction Facilities Management Categories
  • Major Projects Typical new construction, large
    project in size and sq footage
  • Renovations - Renovate existing space
  • Minor Projects New single room construction
  • Maintenance Existing facilities operating and
    repair activities

4
Common Issues Sourcing Services
  • Lack of focus with respect to the magnitude of
    dollars spent on these routine types of services
    (i.e. non major project work)
  • Lack of appropriate personnel (head count and
    skill set deficiencies)
  • Lack of involvement by sourcing professionals
    using Best Practices processes for the
    acquisition of services
  • Lack of purchasing policies and procedures for
    acquiring these types of services
  • Lack of senior management support
  • Construction/Maintenance services viewed by
    management as necessary evil that can be done
    by anyone with little risk/benefit to the company

5
Common IssuesEstablish Comprehensive Purchasing
Procedures
  • RFP/RFQ Development
  • Statement of Works Development
  • Supplier Selection
  • Supplier Evaluations Performance Management

6
Common IssuesDevelop Performance Metrics
  • Cost
  • Time
  • Quality
  • Internal/External Customer Service

7
Major Projects
8
Background - Major Projects
  • Typically involve new construction/major
    renovation
  • One off process where large product/service
    purchases are non-reoccurring
  • Large project in dollar size (millions of dollars
    in FFE) and sq footage (100,000 sq ft and up)
  • Company responsible for all FFE (furniture,
    fixtures and equipment)
  • Work with internal/external designer/design firm
    and architect for specification development
  • Project duration lasts from 2 5 years

9
Issues Major Projects
  • Some Key Issues
  • Logistics
  • Project schedule, delays, contingencies, etc.
  • Disposal of existing FFE
  • Refurbishment of existing FFE
  • Relocation of existing FFE
  • Attic stock
  • Maintenance costs
  • Relocation costs
  • New and existing asset tracking and management
  • Equipment placement and testing

10
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11
Issues - Major Projects
  • Everyone wants to buy/manage/provide the products
    and services required for the project Most for
    the wrong reasons
  • Furniture distributors
  • Design firms
  • Construction Manager
  • Property/Facilities Manager
  • Installation Company
  • Third Party consultants

12
Who Should Buy?
  • Most organizations dont have the time or people
    skilled in major projects to effectively
    manage/source a large project in addition to
    normal duties
  • Optimum solution for major projects is the use of
    a Third Party Consultant due to the following
  • Works for clients interests
  • Objective in performance
  • Work in cross-functional team
  • Brings to the table extensive experience and
    history of achieving results
  • Knows where the pitfalls are in these types of
    projects
  • Knowledge of all components of cost in the the
    Total Acquisition Cost model

13
Required Information Major Projects
  • Specifications for FFE
  • Coordinated Drawings
  • Material Takeoffs
  • Project Schedule
  • Company Standards
  • Project Budget
  • Types of agreements for services with Architects,
    Design Firm, Construction Manager, Construction
    Company, etc.

14
Strategies Major Projects
  • Develop initial bid specifications that are
    flexible and do not lock in a specific product or
    manufacturer
  • Obtain specifications well in advance of actual
    RFP/RFQ issuance
  • Conduct Pre-Qualification process with potential
    suppliers in the market
  • Challenge design decisions Bring business sense
    to the process
  • Consider the total cost, not just unit price
  • Build mock-ups when possible
  • Conduct focus groups with key stakeholders,
    architect and design firm

15
Cost Savings/Avoidance Opportunities - Major
Projects
  • Key Issue Early involvement on the project
    prior to decisions being made results in the
    maximum savings
  • Look for alternatives FFE
  • Fabrics (COMs vs. SOMs vs. knockoffs)
  • Sizes - close to desired recommendations
  • Colors close to desired recommendations
  • Reconditioned/refurbished products (i.e. Files)

16
Cost Savings/Avoidance Opportunities - Major
Projects
  • Negotiate total cost for all products/services
  • Delivery Freight
  • Installation/labor
  • FOB point/acceptance
  • Staging off gassing
  • Attic stock
  • Continuation of product
  • Future needs
  • Packaging
  • Warranties
  • Protection of facilities during installation

17
Cost Savings/Avoidance Opportunities - Major
Projects
  • Find hungry manufacturer/distributor that
    closely meets design requirements
  • Use third party provider, consortium and/or
    buying groups to take advantage of their
    leveraged spend for those products and services
    you require
  • Reverse auctions Use when and where applicable,
    but be cognizant of total cost vs. potential
    savings

18
Cost Savings/Avoidance Opportunities - Major
Projects
  • Scheduling Common Mistakes That Cost
  • Products come in too early - incur extra storage,
    delivery and handling costs as well as
    significantly increase potential of damage
  • Products come in late Room/Floor/Building has
    to be opened to allow for size, weight and
    required utilities of FFE resulting in
    significant costs and damages to facility
  • Dont coordinate delivery and installation
    schedule with CM, Operating Engineers, etc.
    resulting in trucks being turned away,
    unnecessary labor costs being incurred
  • Labor disruptions due to your suppliers,
    installers and contractors resulting in work
    stoppage, sabotage, and other damages and delays

19
Benefits Major Projects
  • Lower total cost for required products/services
    5 - 40
  • Avoid unnecessary costs for delays, handling,
    damages, transportation, etc.
  • Lower project related costs by ensuring on-time
    delivery of all required products, including
    relocation management
  • Formal measurement of services provided
  • Supplier management metrics enforcement
  • Ensure lowest total initial cost for project as
    well as lowest long term maintenance, replacement
    and support cost

20
Benefits Major Projects
  • Best Practices sourcing practices applied to all
    services
  • Apply professional sourcing strategies to
    purchase of all required products/services
  • Leverage benefits achieved into internal
    Facilities Management program
  • Develop/enhance professional relationships via
    cross functional teams with internal departments
  • Take ownership of spend for capital construction
    and maintenance
  • Reduction of inventory, improved use of working
    capital

21
Facilities Management
22
Background Facilities Management
  • Companies manage services for properties that are
    owned/managed in following manner
  • Use own employees, invest in labor, equipment,
    fleet and parts
  • Use small, local companies to provide services
    Primary issue is on-time, quality service,
    secondary issue is price
  • Use third party provider to manage and provide
    required services
  • Use combination of all of the above items

23
IssuesFacilities Management
  • Hard to leverage small service providers for
    companies located in multiple cities/states
  • Labor costs typically are the majority of the
    cost of services, material costs are
    traditionally small
  • Required services are on demand, hard to predict
    and/or schedule, but typically require immediate
    solution (i.e. water/gas leak, snow removal,
    etc.)
  • Property management companies provide many
    required services in some or all of properties
    currently occupied
  • Internal existing Facilities/Property Manager is
    key stakeholder and typically is resistant to
    change or perceived loss of power by purchasing
    involvement and formalization of process

24
Methodology
  • Opportunity Identification
  • Dedicate Resources
  • Establish Comprehensive Purchasing Procedures
  • Build Organizational Support
  • Develop Performance Metrics

25
Opportunity IdentificationFacilities Maintenance
  • Conduct Expenditure Analysis
  • Implement Business Process Assessment
  • Target specific areas for improvement
  • Implement Business Process Improvement

26
Tools, Methods and Processes
Expenditure Analysis Business Process
Assessment Implementation of Business Process
Improvement Program
27
Opportunity IdentificationFacilities Management
  • Expenditure Analysis Information
  • A/P detail
  • G/L detail
  • Current future budget
  • Supplier detail
  • Specifications
  • Company Standards
  • Existing contracts/agreements

28
Expenditure Analysis
  • Conduct selective benchmarking and price
    validation for all products and services
  • Develop data base detailing the following
  • Current unit price
  • Product and service specifications
  • Total cost spent per product and service
  • Part numbers and/or other relevant identification
    of products currently utilized
  • Spend by each supplier of similar product and
    service provided
  • Identification of all providers of similar
    products and services

29
Expenditure Analysis
  • Identify and access the required financial data
  • Assemble the data into a meaningful format
  • Build the Cube
  • Department
  • Commodity
  • Supplier
  • Validate data
  • Analyze Data to Identify Opportunities
  • Create baseline spend summary
  • Identify benchmarks
  • Apply benchmarks to quantify savings potential

30
Expenditure Analysis
  • Financial Information Required
  • GL Database
  • GL Chart of Accounts
  • Accounts Payable Database (Invoices)
  • Accounts Payable Database (Supplier)
  • Capital Expenditure (All Items)
  • Budget for Current Year and Prior Year

31
Components of a Expenditure Analysis
  • Building the Cube

Summary Reporting
32
Expenditure Analysis
  • The information gathered during an Expenditure
    Analysis is a crucial tool in identification of
    cost reduction opportunities and implementation
    strategies. This information is sorted in the
    following manner
  • Summation of commodity category spend
  • Categorization of all general ledgers into
    commodities through the development of a
    commodity tree
  • Detail the sourceable spend under contract
  • Detail the sourceable spend captured by the
    purchasing department
  • Detail the potential opportunity based on the
    baseline spend

33
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34
Potential Save
35
Business Process Assessment
The BPA is a thorough analysis of the current
supply chain process to determine if your company
is properly leveraging its purchasing power.
  • We determine
  • How much is being spent
  • Who is doing the spending
  • How many suppliers are being used
  • What is the basis for supplier selection
  • What are the critical needs of internal customers
  • Analyze data to identify greatest cost savings
    opportunities
  • Compare current performance to best practices and
    identify areas of opportunity
  • Prioritize savings and improvement initiatives

36

Business Process Improvement
  • During a Business Process Improvement
    Implementation you will
  • Develop a Total Cost Model
  • Strategically source selected commodities
  • Identify opportunities
  • Develop strategies
  • Solicit proposals
  • Select suppliers
  • Negotiate contracts
  • Manage contracts
  • Re-engineer and streamline existing processes
  • Implement improved process flows

37
Total Cost Model
  • Product Cost
  • The actual cost of the product or service. Other
    examples beyond the actual unit price are
  • Maintenance / Repair / Parts Support
  • Support materials
  • Surplus Value
  • Transportation
  • Delivery to users site
  • Installation
  • Set-up / Testing
  • Acquisition Cost
  • All costs associated with processing an order
    from request through payment
  • Supplies
  • Office Space
  • Equipment
  • Services
  • General Administrative
  • Wages Salaries
  • Carrying Cost
  • All costs associated with stocking maintaining
    inventory
  • Cost of money
  • Inventory Management
  • Warehouse expense
  • Insurance
  • Taxes on inventory

38
Total Cost Model
Acquisition Cost
CC
AC
Total
Product Cost
Carrying Cost
PC
39
Strategies for Improving SourcingFacilities
Management
  • Establish a strategic sourcing program for
    procurement of targeted services
  • Broaden purchasing departments scope of
    responsibility to ensure professional buying
    principles are applied to the procurement of
    services
  • Get purchasing involved as early as possible
  • Utilize cross-functional teams
  • Develop performance metrics

40
Process Cost ImprovementFacilities Management
  • Use property management companies leverage off
    of their spend
  • Outsource management or all or majority of
    typical facilities management services to a third
    party provider
  • Use consulting firm to identify opportunities and
    establish programs specifically for your company
    You handle the program and purchases
  • Leverage spend via use of third party companies
    (i.e. FacilityPro) to turnkey purchases of all
    indirect materials and services required
  • Leverage spend
  • Reduce direct and indirect costs associated with
    purchasing required services

41
Process Cost ImprovementFacilities Management
  • Identify opportunities, aggregate and leverage
    spend
  • Rationalize supplier base More volume per
    contractor, lower cost of services in
    consideration
  • Negotiate formal agreements Firm pricing for
    labor/materials for defined time frame
  • Provide materials when possible using your
    existing company contracts
  • Establish SOWs, SLAs and KPIs for services and
    suppliers
  • Look for alternatives to traditional sourcing
    agreements for services

42
OutsourcingFacilities Management
  • The IFMA Survey indicated that 35 of respondents
    say reducing costs and 30 say the focus on core
    competencies are the two primary drivers for
    outsourcing services
  • According to survey conducted by the
    International Facility Management Association
    (IFMA), the 10 services most often outsourced
    are
  • Architectural design
  • Trash and waste removal
  • Housekeeping
  • Facility systems
  • Landscape maintenance
  • Property appraisals
  • Major Moves
  • Hazardous materials removed
  • Major redesigns
  • Furniture moves

43
Benefits Facilities Management
  • Lower total cost for required services 10 -
    30
  • Formal measurement of services provided
  • Supplier management metrics enforcement
  • Reduced A/P cost and FTEs 5 - 20
  • Rationalized supplier base 50 reduction
  • Best Practices sourcing practices applied to all
    services
  • Move for reactive to proactive approach
    contract administration vs. tactical buying
  • Reduction of inventory, improved use of working
    capital

44
Case Studies Major ProjectsMerrill Lynch
Global HeadquartersWorld Financial Center
Project
  • 200 million procurement budget
  • Documented savings totaling more than 40 million
    due to analysis of proposed expenditures and
    development and implementation of recommended
    bidding and negotiation strategies
  • Managed and was responsible for purchasing,
    warehousing, receiving, installation, asset
    tracking and installation services
  • Negotiated contracts for all furniture, fixtures,
    floor covering, window treatment, capital
    equipment and services including television
    studio, audio visual systems, security systems,
    mail distribution systems, medical equipment,
    move and installation services
  • Challenges included moving 12,000 employees into
    the World Financial Center with minimal
    disruption to employees

45
Case StudiesState of Pennsylvania
  • The Keystone Building houses four state agencies
    and totals 940,000 square feet, 20 million
    budget. Responsibilities included
  • Developed and verified specifications as well as
    the procurement, delivery, installation, and
    asset management of all new furniture, fixtures
    and equipment
  • Relocation management activities included
    development of the program materials, training
    and education, review of overall records
    retention policies, procedures and existing
    programs
  • Directed and coordinated the move of all
    personnel into the new facility from the nine
    facilities
  • Developed a procurement schedule, bid strategy
    and negotiating final pricing agreements and
    contract terms and conditions

46
Case StudiesState of Pennsylvania
  • Presented recommendations for award of contract
  • Scheduled and received all shipments of new
    furniture, fixtures and equipment into the new
    facility
  • Ensured all new materials were asset tagged, bar
    coded, and scanned into the project asset
    management system
  • Supervised and managed installations of all FFE
    to ensure compliance with the installation
    specification on schedule and free of defects
  • Savings for project FFE totaled approximately
    25 of project budget
  • Project completed almost eighteen months ahead of
    schedule resulting in significant cost avoidance
    in rent payments and associated costs

47
Case StudiesFacilities Management Health Care
  • Consolidated facilities management services to
    single service provider
  • Reduced annual direct spend for services by
    approximately 8
  • Reduced annual indirect spend in accounting,
    personnel, operating and overhead costs by
    approximately 5
  • Maintained or improved quality of services
    provided
  • Established better control over process due to
    improved span of control

48
Summary
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