• Please refer to ELECTRICAL CONTRACTOR magazine for referenced illustrations.
Electrical contracting firms don’t always realize how much value electrical distributors can provide them. Often, the only things they consider in their relationships are material availability and price. However, they aren’t the only value that the electrical distributor provides. Electrical distributors provide the firm with access to products, inventory management, logistical support, short-term financing through trade credit, technical expertise and information, training, and much more.
To understand the value your distributor provides, first understand the importance of procurement to the construction project and the firm’s ultimate success. According to the National Electrical Contractors Association’s (NECA) Electrical Contractors’ Financial Performance Report (Performance Report), material costs comprised an average of 38.63 percent of the direct costs of all responding electrical contracting firms. This is illustrated in the pie chart (page 32), which also shows percentages of other elements from the firm’s direct costs, including direct labor at 35.88 percent. In addition, the bar graph developed from data in the Performance Report shows that material as a percentage of direct costs is greater for smaller firms than it is for larger ones. Materials make up 43.34 percent of direct costs for electrical contracting firms with sales under $2 million as compared to 35.27 percent of direct costs for firms with sales greater than $20 million.
The purchase of materials and equipment for projects is often seen as a required expense rather than an income opportunity for the firm. It is apparent that every dollar saved in purchasing needed materials and equipment drops directly to the bottom line and improves net income. However, what is not so obvious is the impact of procurement on key aspects of project success, such as labor productivity or the overall performance of the firm itself.
Procurement’s impact on project success
Procurement impacts the project from beginning to end. The cost of materials and equipment impacts the firm’s bid price and ability to compete for competitively bid work. In addition, the ultimate cost of materials and equipment will determine how much money or even if a project makes money. Other aspects of procurement can also impact project success.
Materials and equipment can also impact field productivity, which directly affects labor costs. The best materials and equipment may not be the least expensive. A more-expensive material or piece of equipment may be easier and quicker to install in the field. The productivity with using the more-expensive material can often more than compensate for the increased purchase cost of the material or equipment.
In addition, the least-expensive source of materials and equipment may not be the best choice. If the right materials and equipment aren’t delivered in the right quantities at the right time, project productivity will suffer. Without needed materials and equipment, work can grind to a halt at the project site or workers may have to be shifted to other jobs while awaiting needed materials and equipment. Disruptions such as these can have a serious impact on the firm’s field productivity and significantly increase the cost of performing the work.
The firm’s business is about putting work in place at the project site efficiently and expeditiously. The company needs to recognize its electrical distributor’s value in providing the right materials at the right price in the right place at the right time. However, while critical to the success of the project, the delivery of materials and equipment to the project site is only part of what the electrical distributor delivers.
What else does the electrical distributor provide?
The electrical distributor really provides more than necessary materials and equipment to the contractor. Its services include:
• Access to products. The electrical distributor provides the electrical contracting firm with access to a multitude of products from a number of different manufacturers. The breadth and depth of the electrical distributor’s line is very valuable to the electrical contracting firm. Can you imagine putting together a bid or undertaking a project where your firm has to deal with all the hundreds of manufacturers that supply everything from simple everyday materials like raceway and wire to sophisticated equipment like an uninterruptible power supply (UPS)? It would be impossible to do unless your firm actually developed all of the contacts and capabilities that a typical electrical distributor has.
• Inventory management. On a day-to-day basis, the electrical distributor maintains an inventory of materials and equipment based on anticipated demand. This provides the contractor with ready access to equipment and materials needed to serve its customers without needing to maintain an extensive inventory and warehouse operation.
Supply contracts between the distributor and contractor can be developed that specify certain quantities of specific materials and equipment that will be purchased from the electrical distributor over a given period of time such as a year. In return, the distributor guarantees the price, availability and delivery of the specified materials and equipment. Such an arrangement reduces the company’s risk of stock-outs and procurement costs because time and paperwork is reduced. In addition, with a sole-source agreement maverick purchases that usually result in the company paying a premium for materials and equipment are reduced as well as the added paperwork and transaction costs associated with them.
Vendor managed inventory (VMI) takes the greatest advantage of the electrical distributor’s inventory management capabilities. A VMI arrangement can either be developed for specific projects or for the electrical contracting firm as a whole. For specific projects, an arrangement can be developed where the electrical distributor places a trailer on site with the needed materials and equipment and maintains the inventory in the trailer throughout the project. The distributor charges the contractor for materials and equipment used at predetermined prices. At the end of the project, the distributor removes the trailer along with the unused inventory. The contractor neither pays restocking charges nor stocks unused inventory in its own warehouse. Similar to project-based VMI, the company can either fully or partially outsource its warehouse operation to the distributor.
• Short-term financing. The distributor also provides the contractor with trade credit and other arrangements. This short-term financing typically takes the form of “30 days net.” The interest cost is built into the electrical distributor’s overhead costs and included in the cost of the material or equipment purchased. This flexibility in paying for materials and equipment allows the company to better match its income from work performed with the associated expenditures. This flexibility improves the firm’s cash flow and reduces the use of its bank line of credit.
• Technical expertise and information. The contractor usually relies on the distributor to provide product information including shop drawings. Among other things, the electrical distributor can organize training sessions for the electrical contracting firm’s personnel on the proper installation of the specific materials and equipment.
On design/build projects, the electrical distributor can assist the contractor in designing power, communications and control systems. It can also arrange for manufacturer assistance in the performance of lighting design, short-circuit analysis and overcurrent device coordination studies, along with other design assistance.
Partner with your electrical distributor
Procurement plays an important role in the success of the firm’s projects and the company’s overall performance. Electrical distributors deliver a number of services that contribute to the company’s success. The contractor needs to understand the support and expertise that distributors can provide. With this knowledge, the firm can work more effectively with its distributors and leverage their capabilities to make it more competitive and profitable. EC
This article is based on the Electrical Contracting Foundation, Inc. research project entitled “Procurement Strategies for Increased Profitability.” The author would like to thank the Foundation for its continuing support.
GLAVINICH is an associate professor in the Department of Civil, Environmental, and Architectural Engineering at The University of Kansas. He can be reached at (785) 864-3435 or firstname.lastname@example.org.