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Supply-chain management is proactive and involves the optimization of the flow of information, materials and payment between the supplier and the electrical contracting firm. The objective is to construct an integrated supply chain that uses supplier expertise, capabilities and technology in order to reduce costs and improve installation productivity.
Traditionally, the electrical contracting firm has viewed procurement as a disconnected process involving the movement of information, material and payment across a series of independent and autonomous internal and external organizational boundaries. The challenge for the company is to manage its supply chain and forge these autonomous entities into a continuous value chain that starts with the request for information or quotation and ends with after-installation customer service. Managing the supply chain can reduce costs, increase productivity and improve quality, which will make the electrical contracting firm more competitive and increase customer satisfaction.
Understanding the supply chain
Most firms view their supply chain as a single link and unidirectional. The single link is the link between the contractor and its direct supplier, which is typically the electrical distributor. Unidirectional just means that the link is “one way.” In other words, most firms look at their supply chain as only being about the flow of physical product from the electrical distributor to the electrical contracting firm. This view is very limiting and will keep the electrical contracting firm from realizing the benefits of defining its supply chain more broadly.
The electrical contracting firm’s supply chain is neither single link nor unidirectional; rather, it is both multi-link and bidirectional. The supply chain includes all the links needed to span from the manufacturer of the material or equipment to the crew in the field that will install the material and equipment at the project site. Some of these links, such as the manufacturer and distributor, are outside the electrical contracting firm’s organization while others, such as warehousing and the crew doing the installation, are within the company’s organization.
Similarly, the supply chain is bidirectional with two separate but interdependent channels. One channel involves the movement of physical product between the supplier and the field. The other channel involves the movement of information through the supply chain. Often, the information channel and its importance are not recognized. Instead, the focus is on the physical product flow with little emphasis on the information flow. In reality, procurement is really about effective and efficient information flow. The product flow is just a by-product or the result of the information flow.
Active supply-chain management
Active supply-chain management is based on the belief that the purchasing function, interacting with its external suppliers and internal customers, has tremendous potential to add value. The goal of supply-chain management is to provide materials and equipment to the field at the highest delivered value for the lowest delivered cost. The supply-chain management mindset continually seeks to manage and leverage the skills of its supply chain in order to increase field productivity and reduce overall installed cost.
In order to achieve its goals, the firm must actively manage its supply base. This means that the suppliers that compose its supply base must be carefully selected based on their ability to add value to the electrical contracting firm’s business and integrated into a seamless supply chain.
In addition, there must be a continuous evaluation and feedback between the electrical contracting firm and its supply chain.
Factors in selecting a supplier
The five factors that need to be considered in the development and maintenance of a supply chain for a particular material or project are addressed below.
Required quality. Can the supplier provide the required quality on a consistent basis? Quality is typically set by the project contract documents that include the technical specifications. However, required quality in this case may exceed that required by the specifications if improved material and equipment quality will reduce material handling costs, increase installation productivity and reduce rework. Increased material and equipment quality that results in increased material and equipment costs can result in a payback for the electrical contracting firm.
Availability and delivery. Will the needed materials and equipment be available in the needed quantities and delivered on time? Stock outs and missed delivery schedules can be very expensive and disrupt the construction process. The cost of stock outs and missed delivery schedules can be totally out of proportion to the value of items purchased. Supplier capabilities and reputation for on-time delivery is a matter of prime importance when selecting a supplier.
Efficient information flow. Efficient information flow that includes payment is another important consideration. How willing is the supplier to adjust its procedures to meet the electrical contracting firm’s and project’s needs? Innovative ways of improving the efficiency of information flow, which includes the use of information technology, can pay tremendous dividends. Both the electrical contracting firm and the supplier can benefit a lot from being flexible and seeking ways to streamline information flow.
Ongoing support. Can the supplier provide the necessary ongoing support needed to ensure customer satisfaction and peace of mind for the electrical contracting firm? Ongoing support is important in the traditional distribution market but it is critical in the voice/data/video (VDV) market, where constant technological change and the need to upgrade hardware and software is the norm. As customers become more quality conscious and demanding, ongoing support will become more important.
Competitive price. Lastly, price is a factor. Can the supplier provide a competitive price? Notice that the question refers to “competitive price,” not “lowest price.” The objective here is to purchase materials and equipment based on lowest installed cost and not the lowest price. This requires that all the factors that affect the installation cost be considered, of which initial price is just one factor.
Managing the supply chain
The three aspects of supply-chain management, include supplier selection, supplier orientation and supplier evaluation.
Supplier selection. The selection of a supplier is critical and, as discussed previously, should involve more than just price. Selection of a supplier should be based on its ability to provide the right quality, in the right quantity, at the right place and at the right time. Only after all of these other factors have been considered should price be a consideration.
Supplier orientation. Once selected, the supplier should be oriented to the firm’s procedures and business philosophy as well as the project’s needs. The supplier must understand the electrical contracting firm’s needs and expectations if it is to be an effective partner. Failure of the firm to communicate its needs and expectations to the supplier is a common problem in supplier relationships.
Supplier evaluation. Finally, there must be an ongoing supplier evaluation and feedback to ensure that the supplier is meeting the electrical contracting firm’s needs and expectations. The most effective method of handling this is an internal survey of supplier performance followed by a compilation of responses, which forms the basis for an annual sit-down review with the supplier. In this sit-down review, continuous improvement of service and not price should be the focus.
Supply-chain management benefits
Supply-chain management will provide benefits and new opportunities for the electrical contracting firm. Supply-chain management will result in an increased dialogue between the electrical contracting firm and its suppliers and typically results in narrowing the electrical contracting firm’s supply base due to the development of long-term supplier agreements, partnerships and alliances. Changing the focus of the supplier relationship from price to service will lead to innovative transaction management, improved procurement planning and scheduling and better inventory management. In addition, taking advantage of supplier skills and expertise as a partner will lead to lower installed material and equipment costs through a variety of innovative procurement practices. These practices include custom fabrication, prefabrication and bundling. These practices should reduce both material handling and installation costs in the field. EC
This article is the result of ongoing research into innovative procurement strategies for electrical contracting firms that is being sponsored by the Electrical Contracting Foundation, Inc. The author would like to thank the Foundation for its continuing support.
GLAVINICH is an associate professor in the Department of Civil, Environmental & Architectural Engineering at The University of Kansas. He can be reached at 785.864.3435 or [email protected].
About The Author
Thomas E. Glavinich was an associate professor in the Department of Civil, Environmental and Architectural Engineering at the University of Kansas. His tenure as one of Electrical Contractor's most trusted and reliable source of industry research ended in 2014 when he passed away. Click here for more about Tom.