Relationship Management (RM)

CONSTRUCTION SUPPLY CHAIN MANAGEMENT (MGT60803/QSB 2433)

Introduction

• Supply Chain Management (SCM) process is based on the idea of efficient resource coordination and teamwork.

• Depending on whether a project is a vertical or horizontal construction, an architect or design engineer is selected based on qualification and experience to develop a design that meet the functionality and end-user requirement of the project owner.

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Introduction

• Horizontal construction generally refers to bridge design, and vertical construction refers to design of buildings.

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Construction Supply Chain Relationship Management (RM)

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CSC Relationship Management

• The prime contractor takes full responsibility for coordinating and motivating the supply chain to deliver high-quality project under budget and on time.

• The supply chain approach depends on a prime contractor being guided by the following five fundamental principles:- **

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Fundamental Principles

1. Competing by adding supply chain value and eliminating waste (Lean construction)

2. Establishing long-term relationships with subcontractors and suppliers (RM)

3. Focus on supply chain value analysis and target costing (value chain)

4. Development of continuous improvement throughout the supply chain

5. Promotion of upstream and downstream information technology

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Relationship Management

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• Construction supply chain relationships have become increasingly important for a number of reasons.

• There is a major trend toward contractor specialization away from building an entire project and to more subcontracting of a variety of bid items.

Relationship Management

• It is estimated that 80% or more of total project revenue often passes directly to suppliers and subcontractors as payment for labor, materials and equipment.

• This incredible transfer of dollars downstream emphasizes the importance and significance of construction supply chain relationship management.

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Relationship Management• For any construction organization to stay

competitive in today’s aggressive market sector, it is essential that they maintain strong relationships with their best subcontractors and suppliers.

• When a construction business subcontracts a large percentage of project activities bid items, the importance of supply chain relationship management cannot be under-estimated.

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Why Relationship Management (RM) is so important in construction industry?

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Because …

• Prime contracting organizations experience a great deal of pressure from project owners and from competitors to keep their edge and stay in business by reducing costs, improving project quality and enacting continuous improvement.

• Many construction organizations are also reducing the number of subcontractors and suppliers on their list of bidders.

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Because …

• The costs of subcontracting and buying materials from a larger number of subcontractors and suppliers, while still managing a relationship with each, may be too great for a company to absorb.

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Subcontractor and Supplier Reduction

• With the decreasing number of subcontractors and suppliers used by construction organizations, it is more important than ever to maintain strong relationship.

• Keeping these relationships healthy will secure a source of highly qualified subcontracted capabilities and materials that allow for the possibility of lower costs and higher quality.

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Subcontractor and Supplier Reduction

• In addition, strong relationship will offer the promise of greater market share for the increasingly competitive construction market.

• Companies that are shifting toward a smaller subcontractor and supply base cannot ignore the role that relationships will play with the remaining subcontracted capabilities and material suppliers.

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Subcontractor and Supplier Reduction

• Another reason that construction supply chain relationship management is important is the increasing shortages of skilled capabilities and resources.

• Many resources and commodity materials are becoming harder to acquire, and becoming more expensive to purchase.

• With rising prices and increasingly scarce materials supply, a construction organization must maintain strong relationships with the subcontractors/suppliers of these materials to guarantee that they are the first-priority customer.

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Dimensions of SC Relationships

Four behavioral dimensions – the four C’s(1)Counterproductive (lose - lose relationship)(2)Competitive (Win – lose)(3)Cooperative (win – win)(4)Collaboration (win – win)

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Four Dimensions

Counterproductive•Each firm is focused on getting what is the best for it that puts the other at a disadvantage.•Does not promote a positive rapport between firms involved.•Discourage future dealings between firms and create instability in each firm’s reputation.

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Four Dimensions

Competitive•Firms strive to get the very best arrangement in their negotiations and fail to see the benefits of both firms obtaining their goals and objectives.•They will make sure they are on top and do not care about the other firm’s well-being.

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Cooperative•Recognize the potential value of both firms getting what they want and maximize the potential of having a long-term relationship.•A cooperative alliance lacks of teamwork that is needed the various construction organizations to optimize the benefits for all of the members of the supply chain.

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Four Dimensions

Four Dimensions

Collaboration•The two firms truly realize the benefits of working together to optimize the outcomes of both firms.•The two firms work together to develop strategy to deliver high-quality project on time and under budget.•Strategic partners frequently share resources and information.

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Supplier Base

What is supplier base?•The supplier base relates to the number, range, location and characteristics of the vendors that supply the purchaser.•Supplier bases may be described as broad, lean, narrow, single-sourced, local, national, international, diversified or specialized.

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Supplier Base

• They can relate to a “family” of related products and suppliers or the totality of vendors with whom a purchaser does business.

• Factors influencing the supply base of an enterprise include:- the core competences of the enterprise- make, buy, outsourcing and subcontracting decisions

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Supplier Base

- single, multiple and partnership decisions- international and global sourcing- countertrade, intercompany trading and

reciprocal trade- risk aspects, especially in relation to ensuring continuity of supply- miscellaneous factors, such as the social

responsibilities of a large company to local industry or the support of small companies

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Supplier Base

Supplier base optimization?•Supplier base optimization or rationalization is concerned with determining the approximate number of suppliers with whom the purchaser will do business.•The need for such rationalization derives from:

- The requirement to control cost and procurement processes as a large number of suppliers will entail higher admin costs.

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Supplier Base

- The need to eliminate suppliers incapable of meeting the purchaser’s performance requirements or from whom the purchases are made.

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Supplier BasePossible risks of a reduced supplier base•Over dependency on a single supplier.•Danger of supply disruption due to strikes, production breakdowns, floods or similar natural disaster, disruption of supplier’s suppliers.•Reduced competition.

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Relationship Management

A relationship is defined as a connection or association. Relationship apply when individuals, organizations and groups within a external to an

enterprise interact.

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Relationship Management

Customer Relationship Management (CRM)•As currently used, relationship marketing describes as long-term marketing strategy in which emphasis is on building and maintaining long-term relationship with customers, rather than on “one sale at a time” approaches.•The marketing focuses on customer relationship management (CRM).

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Relationship ManagementSupplier Relationship Management•As purchasing is the mirror image of marketing, relationship purchasing aims to achieve strong, lasting relationships with suppliers with a view to securing mutual benefits and the added value of competitive advantages for both parties.•Purchasing or procurement focuses on supplier relationship management (SRM).

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Supplier Relationship Management

How to establish relationship?•Established communication channel•Joint planning and forecasting•Increase trust•Enhanced collaboration approaches and perspectives•Improved value for both parties•Establish common goals and focus on long term benefits

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Supplier Relationship Management

Benefits of SRM:Reducing total cost of ownership•Consolidation of suppliers•Reduce administration cost•Early supplier involvement (ESI)•Enhanced delivery reliability

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Construction Project Partnering• Partnering is a “long term commitment

between two or more organizations for the purposes of achieving specific business objectives by maximizing the effectiveness of each participant’s resources”.

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Construction Project Partnering

Benefits:•Shared ownerships of project objectives•Shared resources•Ease of communication flow•Elimination of adversarial tendencies and litigation•Maximization of competitive advantages•Continuous improvement

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Construction Project Partnering

Barriers:•Concentrate on short term•Lack of top management support•Difficulties in creating mutual trust•Lack of open communication•Ineffective co-ordination•Lack of partnering experience

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Discussions

• Do you think partnering will be more benefited to each parties in construction industry? Discuss.

• How can the barriers to be minimized if partnering applied in the construction projects?

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