Driving savings and supporting expansion within construction
Growth in the construction industry
Construction companies have been recording excellent growth and continue to thrive.
The UK Government is committed to building over 1 million new homes by 2020 and growth of 23% is being predicted by the Construction Products Association. In the United States over 210,000 new jobs were created in the construction sector in 2017 with a huge number of new hires secured in the final quarter (source: U.S. Bureau of Labor Statistics).
However, despite this growth, the top 10 UK contractors made a combined loss of £53m in 2017 and the average profit margin was minus 0.5 per cent, despite four consecutive years of industry growth.
This coupled with the impact of Brexit - a weaker pound, minimum wage rises and supplier relationships being affected – means that the battle to squeeze every penny out of profit margins has come to the fore. Delivering procurement cost reduction programmes is becoming an increasingly effective way of addressing this challenge - with around 50% of spend being addressable in many instances.
Our findings have indicated that despite being multi-billion turnover businesses, many construction firms don’t have a dedicated procurement team. This means that the buying power is spread out throughout the business with no centralised strategic buying function.
There’s no denying that a construction company will have strong relationships with their suppliers when it comes to buying bricks and mortar, but is this necessarily delivering the best value for money? Although the three requirements of “on budget, on time and a neat finish” still apply, procurement must now play a more integral role in savings throughout the business.
How can savings be secured?
Sustainable performance improvement requires both organisational change and the upskilling of procurement resources. Procurement transformation is a hot topic throughout all sectors.
As previously mentioned, procurement is merely viewed as a transactional process within some businesses, but the time for them to deliver real savings and impact the business is now. Recent changes underpinning a need for transformation include:
- Supporting growth by developing scale-able and future-proof procurement functions, ‘fit for purpose’ and ready to support much larger businesses
- Addressing market conditions, economic uncertainty and relentless pressure on margins
- Creating a group approach to procurement, particularly where sub divisions had previously acted autonomously
- Providing an effective response to a world of ever increasing regulation
- Being the best – using procurement excellence to create competitive differentiation
Organisations will find themselves on the journey up the procurement maturity curve from ‘operational’ to ‘excellent’, shifting from an availability focus through price focus to cost focus and finally a value focus. Each step change requires an effective alignment with broader organisational goals - in terms of Strategy, Processes, Strategic Sourcing, Infrastructure & Tools and Resources.
One of the main questions being posed by executives is ‘where are we vs. where do we need to be?’ on the maturity curve. Determining exactly how far a specific procurement function should progress along this maturity curve and ensuring the end game is implemented (and sustained) requires effective transformation planning and activity.
Transformation is key to turning buying teams in to a fit for purpose function that is capable of delivering cost savings. It also provides the capability for procurement teams to continue to provide strategic support during expansion.
Points to consider
- Procurement transformation is an increasingly crucial component of strategic change
- Identifying the current ‘starting point’ is an important first step in any process
- Build in cost saving targets to ground transformation in hard numbers and help fund activity
- Learning through real experience is a highly effective way of creating engagement