Effective Sourcing Strategies for Construction

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Effective Sourcing Strategies forConstruction
Facilities Management Services

• Michael G. Patton
• PurchasingFirst

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Effective Sourcing Strategies

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

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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

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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

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Common IssuesEstablish Comprehensive Purchasing
Procedures

• RFP/RFQ Development
• Statement of Works Development
• Supplier Selection
• Supplier Evaluations Performance Management

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Common IssuesDevelop Performance Metrics

• Cost
• Time
• Quality
• Internal/External Customer Service

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Major Projects
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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

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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

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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

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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

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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.

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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

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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)

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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

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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

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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

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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

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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

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Facilities Management
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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

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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

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Methodology

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

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Opportunity IdentificationFacilities Maintenance

• Conduct Expenditure Analysis
• Implement Business Process Assessment
• Target specific areas for improvement
• Implement Business Process Improvement

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Tools, Methods and Processes
Expenditure Analysis Business Process
Assessment Implementation of Business Process
Improvement Program
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Opportunity IdentificationFacilities Management

• Expenditure Analysis Information
• A/P detail
• G/L detail
• Current future budget
• Supplier detail
• Specifications
• Company Standards
• Existing contracts/agreements

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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

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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

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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

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Components of a Expenditure Analysis

• Building the Cube

Summary Reporting
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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

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Potential Save
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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

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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

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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

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Total Cost Model
Acquisition Cost
CC
AC
Total
Product Cost
Carrying Cost
PC
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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

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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

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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

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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

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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

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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

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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

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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

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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

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Summary