The construction industry faces challenges in optimizing procurement methods, resulting in financial losses for companies. McKinsey, a management consulting firm, conducted an analysis on procurement in the construction sector, highlighting its significance as it represents a substantial portion of overall spending. Efficient procurement strategies can lead to significant cost savings, but the industry still struggles to achieve optimal performance. Let’s explore the reasons behind this and go over McKinsey’s recommendations for improving procurement practices.
Challenges in the Construction Industry
The construction industry faces both external and internal challenges that hinder effective procurement.
External Challenges
1. Lack of control over project requirements. Construction companies often encounter uncertainties and changes in project requirements, making it difficult to establish a streamlined procurement process.
2. Complex supplier networks. The construction industry relies on numerous suppliers, resulting in a fragmented and disjointed network, which poses challenges for efficient procurement.
Internal Challenges
1. Project-by-project mindset. Construction companies often adopt a decentralized mindset, approaching procurement on a project-by-project basis rather than adopting a holistic approach.
Recommendations for Procurement Improvement
McKinsey proposes to improve procurement efforts in three key areas, focusing on commercial optimization, demand optimization, and technical optimization.
1. Commercial Optimization (30%)
– Utilize purchasing power to negotiate lower prices with suppliers.
– Align the company’s capabilities with the supplier landscape to ensure a mutually beneficial partnership.
2. Demand Optimization (50%)
– Forecast and prepare for demand to purchase the appropriate quantity of materials.
– Reduce inventory levels and optimize surplus materials to minimize waste.
3. Technical Optimization (20%)
– Make informed procurement decisions to lower the total cost of ownership by exploring alternative designs or specifications.
Procurement as a Value-Creating Function
To improve procurement practices, construction companies should redefine their perspective and try to view procurement as a value-creating function. This shift in mindset would ideally involve implementing digital tools that leverage supplier knowledge and market data, thereby enhancing the company’s competitive position.
Promoting Decarbonization through Procurement
McKinsey emphasizes the role of procurement in promoting decarbonization within the construction industry. It identifies short-term and long-term levers to achieve this goal.
Short-term Levers
1. Generating lifecycle perspectives and assessing the CO2 footprint. You need to evaluate the environmental impact of sustainable versus non-sustainable materials during the sourcing process.
2. Obtaining specific information on cost and CO2 emissions. It would require collaboration with engineering and project management teams to balance cost and environmental considerations.
3. Collaborating with stakeholders. Foster collaboration among procurement, engineering, and project management teams to make informed decisions on material selection and supplier choices.
Long-term Levers
1. Establish, educate, and attract new skills. You will need to work on developing expertise in order to properly evaluate trade-offs between different technologies and materials, assess risks, and explore any new innovative ideas.
2. Involve procurement executives early on. Work on Engaging procurement professionals during the tender stage so you can get their input and optimize the decision-making process.
3. Market research and access to data. Make sure to provide the procurement specialists with comprehensive market research and data. This will help in improving their understanding of materials and suppliers.
It should be obvious by now that proper procurement practices in the construction industry can lead to significant cost savings and also support decarbonization efforts. Simply by addressing external challenges, adopting a value-creating mindset, and implementing digital tools, construction companies can optimize procurement strategies. Collaboration between procurement, engineering, and project management teams is quite helpful when you are trying to achieve sustainable and cost-effective procurement outcomes.