According to USG and U.S. Chamber of Commerce commercial construction index Q2 2019, contractors in the U.S. commercial construction industry remain optimistic about the market. This comes despite ongoing challenges with skilled workforce availability, supply chain pressure and tariff-related concerns.
Despite the optimistic outlook, there is still the very real possibility of a slowdown in commercial construction in the next 18 to 24 months. In this scenario, increased competition for a smaller number of projects will inevitably result in margin erosion. Forward-looking executives are already preparing by optimizing margins and removing cost from the end-to-end supply chain.
REMAINING COMPETITIVE IN A CHANGING INDUSTRY
In May 2019, the U.S. administration rolled out its list three tariffs on $300 billion of Chinese imports. This list comprised 5,745 items, approximately 450 of which are commonly used in the residential construction industry. Combined with tightening immigration legislation, labor laws and a hesitant industry, a significant impact on the construction industry is inevitable. Even the biggest players in the sector are facing some significant headwinds in the form of a shortage of skilled labor, low productivity, pricing volatility, and stricter environmental and safety regulations.
There is also a significant amount of waste (more than $120 billion annually) in U.S. construction because of out-of-control delays, cost overruns and other inefficiencies. All of this is having a negative impact on many companies’ ability to meet demand, while hitting corporate profitability.
- Eliminating waste and inefficiency (zero waste);
- Adapting to the latest innovative technologies;
- Offering ‘green’ construction solutions; and
- Providing a superior service proposition.
HOW CAN SENIOR EXECUTIVES ENSURE THAT THEY HAVE AN EFFICIENT SUPPLY CHAIN THAT IS CAPABLE OF CAPTURING GROWTH AND PROFITABILITY IMPROVEMENT OPPORTUNITIES?
Construction supply chain management offers a new approach to reducing costs and increasing reliability and speed. The trick is to have an end-to-end view of your value chain to identify and drive execution to reduce inefficiencies and waste. Many organizations recognize the need for this, but few have the internal capabilities to carry out a full analysis on their current logistics, site operations, sub-contractor selection and management, and procurement functions.
The construction industry isn’t shy of good ideas. For example, the Lean construction institute has been around for many years training members in improvement techniques. The challenge is following through on implementation and consistent execution across sites. For many companies, the answer is to seek out partners who can help them take advantage of innovation to drive step-change improvements in value. One of the greatest opportunities for creating value and differentiation is in reducing the waste and inefficiency in project delivery—valued at 20% to 40% of project cost.
For example, a large global construction firm struggling to ensure its supply chain was able to re-capture market share while meeting shareholder demands for margin improvement. The savings opportunities identified across the buy-make-move-fulfill supply chain totaled between $100 million to $179 million.
HOW TO IDENTIFY OPERATIONAL IMPROVEMENT OPPORTUNITIES
To quickly assess whether they may have operational improvement opportunities in their business, there are some simple questions that construction industry CEOs to ask themselves.
- Do I have a consistent controls and processes across my project sites?
- Am I fully leveraging strategic procurement to increase my margins?
- Is my project acquisition process getting me profitable business with minimal risk?
If the answer to any, or all of these questions is “probably not,” they may be missing out on some significant savings opportunities in their operations.
MANY CONSTRUCTION EXECUTIVES ARE UNDER PRESSURE AND SIMPLY DON’T HAVE THE TIME FOR ANOTHER MAJOR CORPORATE INITIATIVE
CEOs in the construction sector are being asked to deliver larger, more complex, multi-disciplinary projects for clients in the public and private sectors as well as smaller special projects. With an immense range of items competing for their attention, it’s not surprising that they are wary of committing themselves to another “big bang” initiative.
However, it is possible to take a more pragmatic, step-by-step approach to execute on a competitive strategy. Setting out a personalized journey map that allows you to achieve your stakeholder and value targets at a pace driven by you. The focus is on aligning leader and operational teams with strategic goals, enhancing internal and external teams/processes and behaviors to deliver sustainable improvements.
As companies drive synergy, savings and an on-demand customer service, they find that their logistics, procurement and site operations excellence become increasingly interdependent and less siloed. The end result is a synchronized buy-make-move-fulfill supply chain capable of delivering the greatest value to customers and investors at the lowest cost to business. This is encapsulated in a Total Value Optimization approach. How can executives quickly assess whether they have the in-house resource to mitigate the risks and capitalize on this opportunity?
It’s critical that business leaders are able to frankly assess their own capabilities and ascertain whether or not they have internal hands-on specialists that can analyze and implement changes to capture value. To do this, executives should answer the following questions.
- Do we have the skills and capacity to identify and quantify the real opportunity?
- Do we need external help to identify our own constraints and to help us to break through functional barriers and silos?
- Do we have the internal capabilities to create a robust and measurable business case with a clear ROI and deliver against it on time, on target and on budget?
- Do we have the change management skills to enhance our internal teams and deliver sustainable performance?
Then, there’s one final question they might want to consider: What is it worth to our company to accelerate improved results? For example, what if we could get to benefit in nine to 12 months with external help versus three to four years on our own?