Recent events in the construction and housing sectors, such as the collapse of Carillion and the tragic events at Grenfell, have led me to consider the viability of housings long-term business plans. What would happen if supply chain costs rose above our forecasts? What’s the impact of market failure? Are we managing the risk of scarcity of supply?
This prompted me to ask a question the sector rarely addresses – Am I a good customer? Why should I even consider this question – Suppliers are lucky to have the business. But with pressure mounting on the sector to drive value and reduce risk and other markets looking increasingly attractive to suppliers, that attitude may need to change.
There are a number of things the sector should reflect on in order to become a better customer.
We are often slow to make decisions, we often have a lowest price procurement philosophy because we target our teams with ‘price’ savings rather than evaluating the total cost of ownership or ‘lifetime’ cost. We regularly have demand fluctuations or sometimes cancel projects last minute due to funding issues. We can be adversarial with suppliers and complain when contracts don’t go well. Yet we do little contract management to make projects successful.
Overlay this then with huge construction issues such as skills shortages; a policy environment with no cohesive long-term strategy; margins hovering at 2%; payment periods in excess of 70 days; major works and maintenance spend down by 12.95% and 7.56% and no decent homes programmes to fall back on.
Although the sector still spends huge amounts in construction, we must examine how we do business and plan ahead. As HS2 gathers pace and private house building increases will our supply chains look to other markets? These conditions will also potentially drive costs upwards – the impact of Brexit on material prices and labour shortages is already having an impact.
It is estimated that 65% of organisations have no visibility of their supply chain beyond their ‘tier one’ main contractors. If you consider that the construction market is predominantly made up of ‘tier two’ subcontractors and below and that 38% of SME construction businesses do not survive beyond five years, landlords must recognise that they need to take a more active role in mitigating these risks.
Your procurement function should be integral in managing some of these challenges. But how often do procurement teams in housing struggle to break in to our organisations asset spend. Procurement specialists should be engaged with the market, assessing innovation and the use of technology, analysing spend patterns, measuring performance, supporting in contract management, mitigating risk and developing sustainable relationships with critical suppliers.
If your procurement team are there just to run a compliant sourcing process and get the lowest price then the outcome on your long-term business plan, given the market volatility could be disastrous.
Steve Malone is managing director of Procurement for Housing (PfH)