EDC Construction Supply Chain Report

RESEARCH REPORT

Supply Chain Dynamics and Opportunities Analysis

Canadian Construction Sector

Global Trade Management Centre of Innovation

December 2008

TABLE OF CONTENTS

INTRODUCTION ................................................................................................................................. 1

RESPONDENT PROFILE ......................................................................................................................... 2

1. GENERAL OBSERVATIONS......................................................................................................... 3

KEY OBSERVATIONS ............................................................................................................................ 3

CONSTRUCTION SECTOR SWOT ANALYSIS......................................................................................... 9

2. SUPPLY CHAIN STRUCTURE.................................................................................................... 10

SUPPLY CHAIN MAP........................................................................................................................... 10

CONCENTRATION OF POWER.............................................................................................................. 11

SUPPLY CHAIN MANAGEMENT PRACTICES........................................................................................ 12

3. TRADING DYNAMICS ................................................................................................................. 16

EXPORTS............................................................................................................................................. 16

IMPORTS ............................................................................................................................................. 18

CANADIAN DIRECT INVESTMENT ABROAD......................................................................................... 19

4. SUPPLY CHAIN DYNAMICS....................................................................................................... 20

UPSTREAM SUPPLY CHAIN OPERATIONS ............................................................................................ 20

DOWNSTREAM SUPPLY CHAIN CHARACTERISTICS ............................................................................. 23

KEY SUCCESS FACTORS...................................................................................................................... 24

ADOPTION OF INFORMATION TECHNOLOGY....................................................................................... 24

COMPLIANCE...................................................................................................................................... 27

CRITICAL SUPPLY CHAIN RISKS.......................................................................................................... 28

5. FINANCIAL SUPPLY CHAIN...................................................................................................... 29

6. GAPS ANALYSIS ........................................................................................................................... 33

7. OPPORTUNITY RECOMMENDATIONS .................................................................................. 36

INVESTMENT IN CAPACITY/CAPABILITY BUILDING SOLUTIONS ......................................................... 37

SUPPORTING SUPPLY CHAIN EFFICIENCY ENHANCEMENT ACTIVITIES ............................................... 39

CONCLUSION .................................................................................................................................... 44

APPENDIX 1: SUPPLY CHAIN STRUCTURE.............................................................................. 45

APPENDIX 2: SUPPLY CHAIN PARTICIPANT CHARACTERISTICS ................................... 46

© 2008 EDC. All Rights Reserved. EDC owns all the intellectual property rights associated with this document and its contents which is being shared for information purposes only to requestors and is for their internal use only. It is not intended, and must not be relied upon, as specific advice and any decisions should only be taken with independent research and professional advice. While EDC has made reasonable commercial efforts to ensure that the information contained herein is accurate, EDC does not represent or warrant the accurateness, completeness, currentness, timeliness, reliability or usefulness of any such information, nor its merchantability or fitness for any particular purpose and is not liable for any loss or damage whatsoever, including without limitation, direct, indirect, special, consequential or incidental damages, caused by or resulting from any inaccuracies, errors or omissions in such information.

SUPPLY CHAIN DYNAMICS & OPPORTUNITY ANALYSIS Canadian Construction Sector

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EXECUTIVE SUMMARY

During the fall of 2008, EDC’s Infrastructure Sector Team, the Global Trade Management (GTM)

Centre of Innovation, the Canadian Construction Association (CCA) and several regional construction

associations collaborated in a qualitative study of the Canadian construction supply chain. The study

explored supply chain management practices and needs and included participants from all subsectors,

including: general contractors, trade contractors, road builders, heavy construction contractors,

manufacturers, suppliers and services providers. In all, 65 interviews were conducted.

General Characteristics

The Canadian construction sector is highly fragmented and is dominated by small, privately owned,

owner-operated firms. It is also quite diverse due to different levels of company maturity, scale and

market focus. A services-centred industry, it is characterized by the limited scalability of its

companies, which tend to have a regional or local focus in their operations.

Supply Chain Structure

The construction supply chain is among the most integrated of all supply chains. It is anchored in

owners, and, more specifically in their prime contractors, who control supply chain spending and cash

flow. The industry’s supply chains are extremely complicated, and this has led its companies to create

a highly developed culture of risk management. The sheer complexity of most construction projects

means that communication among the parties involved, plus the availability of skilled labour, are the

most important determinants of a project’s success. In addition to the inflation and volatility of

commodity prices, skills shortages remain the largest threats to the sector.

Trading Dynamics

The sector’s overall propensity to export is relatively low. There are numerous reasons for this,

including legislative barriers, lack of management sophistication, risk aversion, difficulties in

achieving competitive advantages in commodity markets, and the costs, challenges and risks of

operating abroad. However, some firms do export successfully because they maintain a strategic focus

on this business model. Some of the successful export segments are engineering and architectural

services, contractor services and construction materials. While the United States is usually the key

foreign market for these exporters, many of them also succeed globally.

The sector depends to a considerable degree on imports because of the limited domestic availability of

certain building materials and inputs. While the United States is the major source of these imports, the

sector is notable because it also obtains them from around the globe. Although Low Cost Country


ii

Sourcing (LCCS) is common, few companies appear to possess the skills and processes for handling

the increased risks of global supply chain management and procurement.

Supply Chain Operations

In general, the construction industry exhibits a less sophisticated approach to supply chain

management than other sectors, although the level of sophistication varies greatly from firm to firm.

The limited adoption of advanced tools for supply chain management, and of technologies to help

enterprises collaborate in construction processes, means that the sector’s supply chains can achieve the

desired performance and speed only though constant human intervention. This creates substantial risks

and costs. That said, many firms are investing heavily in information technology to manage their

internal activities, and this represents a key sector strength.

The most notable supply chain management practice is that of delegating the control of 60 to 90 per

cent of total project spending to trade contractors. Many respondents reported deep concerns about the

risks caused by underinvestment in the processes, tool and skills needed by project managers to handle

their spending and procurement activities.

Another key feature of the sector is the demand for just-in-time delivery of materials and labour to job

sites. This not only requires a high level of coordination, but also places a considerable burden on the

distribution and wholesale segment of the supply chain, since it is pressured to serve as the industry’s

warehouse. Progressive distributors, however, are finding new ways to address this problem and to

provide value-added services at the same time.

Financial Supply Chain

For most firms, cash flow management is the most critical element of the financial supply chain.

Timely collection is a major concern, and payment is often a highly contentious issue. Practices such

as holdbacks, pay-when-paid and withholding payment as a tool to extract performance can create

serious working capital problems for contractors, especially when the contractor has limited access to

working capital financing. At the time of the interviews, however, most respondents claimed to have

strong liquidity.

Despite the vital importance of cash flow management, most respondents indicated that they focus

predominantly on reductions in procured costs and make every attempt to take early-payment

discounts.


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Gaps and Opportunities

There are service gaps at all levels of the supply chain. Opportunities lie in the two distinct areas,

strategic capacity/capability building and tactical, supply chain-focused, transaction support.

Structural capacity/capability building opportunities exist in the facilitation of foreign trade and

supporting the development of supply chain management as a strategic competency. Within this

context, potential opportunities for the CCA to include:

Export facilitation through Canadian consortium building services (assembling Canadian supply chain participants as possible as “solution package” to foreign owners);

Facilitation of supply chain integration by hosting a Canadian technology platform for buyer and seller collaboration in supply chain processes (including invoicing and payment);

Supply chain management education developed specifically for the construction industry;

Developing a technology solution directory to assist and encourage adoption.

Most of the operational gaps imply niche-oriented opportunities and solutions to help organizations

mitigate risk, improve cash flow and reduce barriers to trade. Areas of consideration include:

Development materials to educate sector participants on the potential applications of Stand-by Letters of Credit in supply chain risk mitigation and to free up working capital;

Support offshore procurement activities through partnerships with sourcing/procurement organizations and providing best practice resources;

Introduce and support the development of Supply Chain Finance in the sector as a tool for cash flow acceleration and work capital management, especially for distributors and manufacturers;

Work with lenders to support programs that finance investments in achieving compliance with foreign market regulations and for finance foreign distribution arrangements for Canadian manufacturers and distributors;

Develop relationships with supply chain risk management service providers to assist sector participants access services that protect against supply chain disruption risk and costs.


INTRODUCTION

During the fall of 2008, EDC’s GTM Centre of Innovation, its Infrastructure Sector Team, the

Canadian Construction Association (CCA) and regional construction associations1 collaborated on an

interview-based, qualitative research project into the Canadian construction supply chain. The study’s

objective was to enhance sector-specific knowledge by:

understanding the business dynamics of both the upstream and downstream supply chains, such as who sells to whom, how they interact with each other and which participants possess significant control of supply chain performance;

documenting business issues and priorities relative to supply chain management (SCM); and

identifying supply chain (SC) challenges, and product and service opportunities in supply chain operations.

Timing of Interviews

Most interviews were conducted between August and November 2008, prior to and during the early stages of the economic downturn. As a result, numerous conditions have changed dramatically since the interviews. The CAD/USD exchange rate and commodity prices have fallen markedly and this would likely affect some of the responses. For example, the exchange rate at the end of September 2008 was $0.94 and the price of a barrel of oil was US$105. In early January 2009, these had fallen to $0.82 and US$38, respectively.

While the shorter-term economic conditions obviously affect these indicators and their impact on the respondents, many of the findings in this document relate to operational elements that remain constant regardless of economic conditions.

The remainder of this document, which consists of seven sections, summarizes the findings of this research:

1. General Observations, providing general, recurring themes that are not necessarily supply-chain specific, but which affect the underlying conditions and behaviours;

2. Supply Chain Structure, mapping the overall supply chain relationships and the buyer-supplier power structure, and describing the predominant management model;

3. Trading Dynamics, outlining the sector’s export, import and foreign direct investment tendencies;

4. Supply Chain Dynamics, examining operational practices in supply chain management;

5. Financial Supply Chain, presenting key financial issues in the functioning of the supply chain;

6. Gaps Analysis, summarizing areas in which respondents describe challenges; and

7. Opportunity Recommendations, describing areas where the CCA can act to close the gaps.

The analysis is based on interviews with a broad range of supply chain participants, and the responses

varied widely from company to company. In consequence, the report is a composite picture of the

1 The Grand Valley Construction Association and the Manitoba Heavy Construction Association.

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sector and is not meant to provide statistically significant results, but rather to indicate the sector’s key

trends, practices, issues and challenges.

This report addresses a number of interests, including:

helping the EDC Infrastructure Sector Team augment its sector strategy by developing a new engagement approach and new ideas for solving problems;

providing EDC business development staff with market intelligence that will increase its knowledge of the sector and help it engage prospects and customers more effectively;

helping the CCA and other associations shape strategic initiatives and investment plans that will enhance the sector’s capabilities and deliver value to its members; and

helping firms in the sector gauge their overall position relative to the industry, and spur them to consider investments related to their supply chains.

Respondent Profile

Respondents from all the sub-sectors of the industrial, commercial and institutional (ICI) and heavy

construction segments of the industry, as well as those from the infrastructure segment, participated in

the study. This included general contractors, trade and industrial contractors, road builders, heavy

construction contractors, manufacturers, suppliers and service providers. In all, 51 interviews were

conducted with CEOs, CFOs and procurement and supply chain executives. An additional 14

discussions were held with other organizations to examine specific questions and findings. Firm sizes

varied considerably, with annual revenues ranging from several million to several billion dollars.

Figure 1 outlines the diversity of the respondents.

Figure 1 - Respondent Profile (n=65)

Trade / Industrial Contractor

15% Distributor /

Wholesaler

12%

Heavy

Construction /

Road builder

12%

Business Services (Legal /

Tech.) 11%

Risk Management

Services 6%

Manufacturer / Commodity

Supplier 12%

General

Contractors

21%

Equipment Rental

5%

Architecture /

Engineering

6%

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1. GENERAL OBSERVATIONS

Key Observations

The construction sector is highly fragmented and is dominated by small, privately-owned, owner-

operated firms. It remains quite diverse due to different levels of company maturity, scale and market

focus. Although it is often maligned even by its members, it is an evolving industry and one that,

according to several respondents, has made giant strides in its professionalism during the past 10

years.

Snapshot – The critical role of associations in the construction sector

The construction sector’s firms show a considerable propensity to participate in sector associations, resulting in a high degree of integration at the policy, industry and relationship development levels. Moreover, given the national integrator role of the CCA, regional and segment associations also show a very high level of collaboration and appear to have strong governance and management continuity. This provides an excellent platform for long-term planning, continuity in advocacy activities and the creation of high-value, industry-wide services

The creation of plan rooms to support bidding on public tenders represents an excellent example of the way associations can deliver a value-added service that goes beyond advocacy for their members.

In this context, some general observations can be made about the sector, as set out below.

Sophisticated risk management — Few sectors reflect greater complexity than the construction

industry, whose companies face the most diverse set of risks and challenges of any supply chain.

These include regulation; the number of parties involved in a project; engineering challenges;

complex, uncertain and often untimely information flows; challenges of supplier performance; tight

timelines; financing and payment risks; nature itself (weather) and scarcity of inputs.

Many respondents referred to business management philosophies that were highly risk-averse. As a

result, the industry has become extremely well attuned to risk levels and has developed not only a

strong culture of internal risk management, but has also spawned a sub-chain that mitigates risk by

supplying legal, bonding and insurance services. The study indicates that most companies focus on

project risks (such as penalties, supplier performance and cost overruns) and are not much concerned

with mitigating supply chain risks.

Most supply chain participants, from owners to manufacturers, indicated their intention of sharing

project risks. However, reality appears to be somewhat different. There is a well-entrenched practice

of pushing risk down the supply chain, often without equitable compensation for accepting it. Owners

try to use contracts to transfer as much risk as possible to prime contractors, who in turn distribute this

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risk onto subcontractors and suppliers. Trade contractors do the same to manufacturers. As a result,

smaller suppliers and contractors often bear a significant share (perhaps more than proportionate) of

the overall risk. Unfortunately, pushing risk onto these generally less-sophisticated firms incurs higher

overall costs and a greater risk of failure in project execution. Nowhere is this clearer than in the pay-

when-paid practice, which can create cash flow problems and payment delays at each level of the

supply chain, and continues to be a major source of friction within the industry.

Service market / domestic orientation — Construction is a services intensive sector, except at the

product manufacturing segment of the supply chain. Most firms concentrate on servicing regional and

even local domestic markets, partly at least because of the numerous structural barriers to exporting.

One of these barriers is fragmented legislation, especially the many building codes and certifications

that govern construction in potential export markets, and affect not only a company’s ability to work

in a foreign jurisdiction but also the types of risk — such as payment and bonding — that it must

accept in order to operate there.

Another factor affecting the propensity to export lies in the established sales model for the industry.

Most contractors win projects by responding to requests for quotations; this is a “pull” approach based

on established relationships, as opposed to a “push” approach based on active business development.

Barring the largest organizations, companies that use an active business development strategy usually

see it as a secondary one and restrict it to local operations, rather than placing its focus on export

market development. It should be noted that companies that are successful abroad tend to dedicate

specific resources to business development.

The inclination to export increases in the goods-oriented part of the supply chain. However, the

commoditized nature of many of the products involved tends to work against this inclination, since

they are often heavy and of low value for their weight. This makes transportation costs a key

determinant of the ability to export.

Snapshot – Importing workers into the Middle East market

The services focus of many firms creates a challenge for in succession planning.Much of a firm’s value resides in its intangible assets, such as good customer relationships and superior internal processes for project delivery, customer satisfaction and cost control. These, however, are difficult to quantify in a succession situation, when the firm is passing to new owners after the departure of the former owners and key employees. Given the low market entry barriers and the absence of tangible assets, many mid-market owners see this focus on intangible services and processes as a substantial barrier to effective succession.

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Decentralization — As a result of the challenges noted above, companies usually replicate themselves

in new target markets by building parallel operations in them. Firms using this growth model tend to

operate in a relatively decentralized fashion, and to shift decision making to the heads of their regional

offices. While this creates a profit-centre mentality for each location, local control often precludes

synergies across the organization because of perceived regional differences and the individual

management styles of the local decision makers. Farther down in the organization, this tendency

repeats itself as management responsibilities are delegated to project managers, who are given

substantial authority and autonomy in making operational decisions and, in essence, find themselves

running their own businesses within each project. As a result, the industry tends to gravitate toward a

suboptimal integration of business processes, with higher operating costs and substantial opportunity

costs.

Asset-based versus non-asset-based firms — This is a fundamental difference between general

and heavy contractors. General contractors often do not perform the labour themselves and therefore

can operate in an asset-light environment, in which they delegate the work to third parties. As a result,

many of these companies exhibit limited leverage in their financial structures, and financial

institutions appear reluctant to extend operating credit to them.

At the other end of the spectrum, heavy construction firms do most of their own work (self-

performance) and often develop considerable vertical integration to support their asset-heavy

activities. Due to their large investments in both fixed and fleet assets, these companies tend to have

major financial leverage in the form of equipment loans and leases.

These differences affect the business models used by the two types of company, with general

contractors tending toward decentralized procurement and heavy construction companies using a

centralized and corporate-wide procurement approach. Additionally, heavy construction companies are

more inclined to explore strategic relationships with vendors in order to reduce operating costs as

much as possible.

Relationship businesses — Most respondents said that building relationships is critical to driving

sales. This is especially true for general and trade contractors and is caused by their limited ability to

differentiate their firms according to the core services they offer.

At the same time, however, there appears to be considerable distrust among these players. While many

general contractors believe that they are prompt and responsible about payment, many trade

contractors do not share this perception. As a result, the latter are not particularly quick to pay their

suppliers, which forces distributors and manufacturers to wait for unreasonable lengths of time (in


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their opinion) before they are paid. Using delayed payment to extract performance is a typical

behaviour. This kind of behaviour elicited interview comments such as, “construction is legalized

extortion.”

Resistance to change — The study suggests that because of intransigence at the leadership level, the

Canadian construction sector is not as progressive as it could be. This is consistent with the aversion to

risk noted above, but results in few companies being willing to embrace even proven solutions if these

differ from existing practices and methods. Many respondents acknowledged this as a key barrier to

innovation. The exceptions appear to be the larger firms and manufacturers that have the capital to

invest in new processes and technologies. For these companies, the ability to differentiate themselves

through research and development (R&D) is an acknowledged competitive strategy. However, the

general unwillingness to embrace change as a tool for competitive differentiation and increased

profitability hampers the industry as a whole.

Communication issues — Many respondents identified communication as one of the supply chain’s

greatest challenges. There are major dependencies among and within the various supply chain

segments that govern project delivery, so effective communication among owners, service providers,

prime contractors and trade contractors is the critical enabler for the on-time, successful completion of

a project.

Strong focus on investment in people — Each respondent was asked where he or she would most

likely commit scarce resources when reinvesting in the business. Almost universally, the response was

that he or she would invest in people, largely through skills development. Those who did not respond

in this way were usually manufacturers seeking to augment productivity through automation and

innovation, or distributors seeking to use automation to improve their cost structures.

There are two reasons for this response: first, there is a scarcity of qualified professionals and

tradespeople; and second, construction is a service industry in which companies must depend on their

staff to make intelligent decisions. Interestingly, only a few companies saw investment in business

processes and management tools as a way to help these people become more effective. This may

simply be a symptom of the industry’s huge demand for skilled people, but it should be an underlying

concern with respect to retaining workers and maximizing their potential.

Skills and supply shortage — Many of the respondents were concerned about their competitiveness

because the shortage of skilled workers in the trades was undercutting their ability to deliver projects

on time and within cost envelopes. There was a similar worry about the scarcity of professionals with

adequate experience in project management and procurement. The proprietary methods used by many


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of the firms also result in steep learning curves for new employees, leading in turn to high training

costs and lower initial productivity.

Companies operating in foreign markets have two skills issues. First, few employees are willing to

leave Canada for the long periods required; second, many lack the knowledge, experience and

language skills needed for success in the local market. These factors are a major barrier to exporting

Canadian construction expertise to emerging markets.

Commodities issues are creating critical supply chain concerns — Price volatility is the most

critical challenge to procurement organizations, and affects a company’s ability to price effectively

and remain competitive in bidding situations. While Canadian road builders have been successful in

implementing escalation clauses relative to the cost of asphalt, this is one of the few commodities for

which buyers and sellers have negotiated agreements covering price volatility. This situation has

created problems at various times during the last few years, with suppliers refusing to hold prices on

quotes for more than one business day, or even less. This has forced procurement managers into risky

behaviours to ensure supplies of scarce commodities and has wrought havoc in estimating tender

prices, especially given the time frames over which these prices are expected to be valid (30, 60 and

even 120 days in some cases).2 This situation has caused innovative companies to leverage their

balance sheets and cash positions to secure supplies of essential materials when prices fall, since the

cost of warehousing and insuring them — for periods of up to two years, in some cases — is more

than offset by the ability to meet client demand at a predictable price.

Complete focus on cost — Due to the commodity nature of the business, most companies, especially

contractors and general contractors, exhibit a relentless focus on reducing cost, largely through the

competitive bidding process. However, this mentality is also evident at the owner level, where

engineering and architecture budgets continue to diminish. This has a particularly detrimental effect on

cost management, since incomplete drawings are frequently released for both bidding and

construction, resulting in expensive errors.

Scale and sophistication drive innovation — The largest general contractors are very clearly the

most progressive with respect to supply chain management and business process development. From

the perspective of process development, technology investment and process integration, however, they

continue to lag behind other sectors, particularly manufacturing.

2 The CCA is currently working to address this issue.


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One indicator of openness to innovation lies in management’s approach to running the business. Firms

run by “lifestyle” owners — that is, owners who see the company primarily as a means to support their

lifestyles — appear to have less propensity to innovate or reinvest profits for company growth, and

instead focus mostly on generating income. These firms appear to dominate the marketplace and have

limited value in succession situations because so much of their worth is bound up in the goodwill that

resides with their owners. At the other end of the spectrum, large, publicly traded firms have the most

integrated and aggressive approaches to innovations that will drive shareholder value. Similar

tendencies exist in professionally managed organizations and family businesses that are designed for

succession. For financial institutions, this subset of construction companies probably represents the

true marketplace for new services.


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Construction Sector SWOT Analysis

Table 1 is a composite picture of the industry based on the most common responses and perspectives

obtained during the interviews.

Table 1. Sector SWOT Analysis

Strengths Weaknesses

Strong financial position of many companies Risk management culture Strong internal IT investment Experienced management in the innovative

firms Strong Canadian community for collaboration

around structural issues; associations play a key role in creating a common voice

World-leading, quality engineering and architectural service providers

Niche expertise in certain construction types and in remote location operations

Limited supply of qualified labour Managerial and cultural resistance to change,

especially at the contractor level, results in the slow adoption of innovative practices and products

Underdeveloped supply chain management practices

Weak inter-enterprise integration precludes tightly integrated operations

Fragmentation of the marketplace results in highly regionalized firms of limited scale

Low export propensity and capacity of many mid-market firms, although this is often a conscious choice due to the perceived risks

Import dependencies in certain raw and value-added materials

Some sub-segments have difficulty accessing capital

Opportunities Threats

Long-term need for infrastructure investment, both in Canada and globally

Significant opportunities for export growth in emerging and developed markets

Investment in supply chain processes offer significant savings opportunities

Innovative product manufacturers can compete in any global market through innovation and value-added services and products

New business models offer ways to provide higher levels of service and supply chain performance

Deterioration of demand conditions Commodity price volatility and transportation

costs Access to operating and project credit is

increasingly limited Domestic and regional focus of firms results in

under-appreciation of the potential threats from global competition

Customer non-payment risk jeopardizes the solvency of undercapitalized mid-market firms

Negative perceptions of the industry by customers

Labour mobility barriers erected by foreign governments

Fragmentation of markets, from a jurisdictional perspective, erects barriers to successful exporting


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2. SUPPLY CHAIN STRUCTURE

Supply Chain Map

From its raw materials to its finished projects, the construction supply chain is one of the most

integrated and interdependent of all supply chains. It also embodies a large and diverse group of

participants, most of which are directly connected to the end product, as opposed to being secondary

or support players. Owners and their prime contractors anchor the overall supply chain, but there are

two discernible sub-chains within it. These are building construction and infrastructure construction,

the latter also being known as heavy construction. Appendix 1 provides a schematic representation of

the sector’s supply chain relationships.

Some of the sector’s characteristics, many of which are different from those of other industries, are

evident from the supply chain.

Professional services — Architects and engineers are vital elements of the supply chain because of their advisory roles and their compliance functions. They also play a key part in transmitting information among owners, general contractors and trade contractors. On infrastructure and similar projects, they may play a major role in procurement either as the Engineer, Procure, Construction (EPC) contractor or as consulting engineers, for example by specifying or directing procurement for major components such as HVAC systems, turbines and generators.

Financial services providers are key enablers.

o Project finance providers furnish credit to owners so they can undertake projects, and these providers may control the overall execution of a project. Toward the end of the study, it became very clear that the rapid shrinkage of available credit was creating a growing threat to success in the industry.

o Equipment finance providers — These institutions provide financing to asset-based heavy construction firms, which typically use credit for most of their equipment purchases.

Risk mitigation providers — Surety, bonding and insurance providers are essential to effective contracting processes and to ensuring the performance of trade contractors. Some general contractors will not work with un-bonded contractors, and some owners also require bonding even for major trade contractors. However, some owners seem increasingly willing to relax this requirement to reduce costs.

Legal services providers — The inherent complexity of the industry means that legal services firms are essential for resolving the contractual disputes that inevitably arise. They also play a key role in the financing process.

Another differentiating characteristic of the industry lies in the way its buyers manage their suppliers.

Buyers employ one set of practices and approaches when dealing with trade contractors and

professional services providers, and a substantially different set when dealing with goods providers.


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Buyers demand a much greater level of flexibility from services providers and actively manage these

relationships to their benefit, since a much higher level of cooperation is required in these interactions.

Relationships with good suppliers are much more transactional and have limited flexibility on

contractual and payment issues.

Appendix 2 provides an overview of the main characteristics of the different supply chain participants.

Concentration of Power

General contractors and heavy contractors typically control project budgets and the associated cash

flows, so they are the most important buying hubs in the overall supply chain. However, in the

building construction sub-segment, trade contractors are usually responsible for the actual

procurement of goods and services, with general contractors frequently delegating 60 to 90 per cent of

total project spending to trade contractors.

Figure 2 depicts the power structure of the major buyer-supplier categories. These relationships are

classified according to the degree of relative power between buyer and seller, as follows:

buyers’ or sellers’ markets, which are controlled by the dominant organization;

power buyer / power seller markets, in which some degree of buyer/seller cooperation occurs, even when one party has some degree of pre-eminence because of factors such as scale or limited supply;

hybrid markets, where the relationships have evolved to include a high degree of collaboration; and

market transactions, where goods and services are simply exchanged with no significant power imbalance in either direction.

The elements of control, cooperation and collaboration are key factors in the development of

integration among firms. They influence procurement and supply chain activities at a variety of levels,

from the simple purchase and delivery of goods to the creation of new value-added services and the

tight integration of companies into the supply chain itself.

While regional demand plays a role in the relative power of buyers and sellers at any given time, the

following is generally true (again in reference to Figure 2):


Specialty TradeContractors

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General and heavy contractors (dark blue) represent the key buying hubs and tend to control the overall supply chain’s operation.

Certain commodity suppliers of raw and intermediate commodities (light blue grey) can also dictate relationships due to demand conditions.

Niche or specialized trade contractors (light grey) possess significant power from the seller’s perspective and therefore maintain some pricing and delivery power.

Manufacturer and distributor relationships appear quite transactional and have limited strategic dependency, as indicated by the predominance of market-based transactions (taupe).

Supply Chain Management Practices

Only a very small number of large contractors employ centralized, corporate procurement. Where this

is done, it is typically for procuring nationally or regionally negotiated contracts for bulk commodities

such as fuel, cement or concrete, or for indirect spending and capital goods.

Manufacturer /

Distributor

C1

C1

C2

C2 C3

Market Transactions

Many to many

Many to Few

Pow

er Buyer

Power Seller

Sel

lers

Mar

ket

Few

to m

any

Buyers Market C1 = controlC2 = cooperationC3 = collaboration

Hybrid

GC / Heavy Construction Contractors

Co

mm

od

itie

s / R

aw

M

ater

ials

Figure 2 - Construction Supply Chain Relative Power Structure


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A much more typical approach to supply chain management, and the one that is used by most

Canadian prime contractors, is shown in figure 3.3 In this model, projects are allocated to project

managers or project teams who are responsible for most aspects of project execution. This includes the

sourcing, procurement and spending management associated with the project; each project, therefore,

operates its own individual supply chain.

The result is a fragmented approach to supply chain management that under-employs best practices

and standard processes. This limits the buyer’s ability to achieve cost economies through pooled or

bulk buying. Furthermore, this model reduces supply chain resiliency because it creates a potential

single point of failure at the project manager level. This means that the success of a project, especially

for small and medium-sized contractors, often depends on the heroic efforts of a small number of

people.

3 Adapted from Kalyan Vaidyanathan and Gregory Howell, “Construction Supply Chain Maturity Model – Conceptual Framework,” Proceedings of the International Group for Lean Construction-15 July 2007.


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There are varying levels of sophistication throughout the industry, and company approaches to SCM

can be classified according to the supply chain maturity model in Table 2.4

4 Adapted from Kalyan Vaidyanathan and Gregory Howell, “Construction Supply Chain Maturity Model – Conceptual Framework,” Proceedings of the International Group for Lean Construction-15 July 2007.

Note: The General Contractor (GC) plays a key anchor role in the functioning of the supply chain. Moreover, this diagram illustrates the critical importance of the Project Manager (PM) in driving the overall supply chain performance. With the authority to control schedule, budget, procurement and supply chain management, the PM represents the key determinant in project success, owing to the cascading effect of decisions at the GC level to remainder of the supply chain participants.

Note: while this model exists for GCs, it is also similar for Trade Contractors as they employ a similar project and supply chain management model.

Bldg. Products Mfg #1


Bldg. Products Mfg n

Distributor / Wholesaler #1

Customer #1Distributor / Wholesaler #2

Distributor / Wholesaler n

Architect / Engineers Proj. #1

Trade Contractor #1

Trade Contractor #2

Trade Contractor n

Logistics

Financial Institutions

Project Financier







Trade Contractor #1

Trade Contractor #2

Trade Contractor n

Logistics







Trade Contractor #1

Trade Contractor #2

Trade Contractor n

Logistics

Architect / Engineers Proj. #2

Architect / Engineers Proj. n

Customer #2

Project Financier

Customer n

Project Financier

Su

pp

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in #

1S

up

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#2

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PM #1

PM #2

PM n

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Figure 3 - Construction Supply Chain Management Practices


- 15 -

Table 2. Canadian Construction Supply Chain Maturity Taxonomy

Maturity Level Key Characteristics Typical Canadian Company

Ad hoc Limited internal processes Independently managed projects Ad hoc internal collaboration Limited planning Limited automation Inconsistent customer satisfaction

Most SME GCs and trade contractors

Defined Cross-project information sharing, but project remains independently managed

Some process structure and collaboration

Performance management in place Some IT integration SCM is tactical function

Progressive SMEs, GCs and trade contractors

Most regional GCs National trade contractors Most heavy construction

contractors

Managed SCM seen as part of corporate strategy Tools and processes exist for multi-

project, cross-firm, cross-functional collaboration

Very strong intra-corporate IT integration

Strong supply visibility Excellent communication between

buyers and suppliers

Large/leading GC and heavy contractors

Multinational manufacturers and distributors

Controlled SCM function is controlled, predictable and managed

Process-oriented SCM functions as opposed to traditional siloed functions

Supply chain becomes a network of collaborators as opposed to competitors

Inter-enterprise IT integration High degree of trust and dependency

Few if any


3. TRADING DYNAMICS

Exports

The sector exhibits a relatively low overall propensity to export. This stems from a variety of reasons,

including legislative barriers, lack of management sophistication, aversion to risk, the difficulty of

achieving competitive advantage in commodity markets, and the challenges associated with managing

projects abroad.

Snapshot – Infrastructure projects and foreign investors

Heavy construction companies and large GCs noted a fear of bidding on foreign-financed domestic infrastructure projects. These could technically be considered an export, since the assets, while located in Canada, are likely beneficially owned and paid for by a foreign concessionaire, often an infrastructure fund or consortium. However, the funding mechanism frequently involves a shell entity designed to own the Canadian component, which limits recourse to the concessionaire and brings into question the certainty of payments. This represents a significant opportunity for credit enhancement and insurance relative to the owner’s obligations to suppliers.

Nevertheless, many Canadian firms successfully export to countries all over the world. Some operate

opportunistically, reacting to tenders and requests for quotes, but most exporters in the Canadian

construction sector — whether service-oriented or product-oriented — view their initiatives as very

strategic ones, primarily because of the high costs of exploiting and servicing foreign markets.

The three most common export models are:

Engineering and architectural services exports — Canadian professional services companies are renowned globally for their expertise, professionalism and quality of work, and many such firms have chosen to deliver their services into foreign markets by leveraging their intellectual property and business capabilities.

Many of these companies provide consulting, EPC and architectural services, where their creativity, relationships and technical expertise allow them to differentiate themselves from their competitors. However, they often find it challenging to acquire the expatriate resources needed to operate consistently in foreign markets. Too few Canadians appear willing to relocate abroad, making this business model unsustainable on a wide scale.

Contractor services exports — General and trade contractors operate effectively in foreign markets by leveraging their proprietary processes and project management/supervisory skills, and this asset-light business model lends itself to the export of knowledge. Most such firms act as general contractors or construction managers; some, however, have carved out niches in certain specialties, and this helps them win contracts when local resources cannot fill these specialized needs.

Many firms that have successfully adopted this model have built close relationships with major global contractors, which pull them into projects in different markets. Many feel that they are

- 16 -


not large enough to win such work on their own, and that the preferred approach is the consortium model in which they cooperate with a prime contractor of global reach.

Usually these exporters do not use Canadian labour abroad, due to mobilization costs and labour cost differentials in emerging markets. Instead, they employ domestic or imported labour (such as Indian workers into the United Arab Emirates) to furnish services in foreign countries, while providing management and supervisory labour from Canada. Like the engineering and architectural services market, however, this business model suffers from the limited availability of expatriate Canadian labour.

Many of the companies that employ this model have expressed an interest in adding value to their contracts through materials supply and supply chain management. However, they frequently lack the knowledge of the local supply chain and its contacts that is required to do this, as well as the financial resources to engage in such an undertaking.

Building materials exports — Companies focused on this market function as goods-based segments of the supply chain and show the greatest propensity to export. The most successful firms are those that provide high value-added and custom manufactured goods, since Canadian manufacturing costs make many of our products uncompetitive in comparison to those being exported from emerging markets. Furthermore, when transportation costs are high relative to the value of the goods, Canadian exporters are most successful when they differentiate their products on the basis of quality, innovation and an overall service offering (e.g. distributor financing etc.), rather than on cost.

Successful Canadian building materials exporters usually adopt one of two models: either they have built strong distribution networks through foreign distributors of building supplies (by creating a solid value proposition for that distributor that may include product, services and financing through attractive payment terms), or they have successfully associated themselves with Canadian companies doing business in foreign markets, and are brought into a consortium due to the high value of their products.

Snapshot – Importing workers into the Middle East market

Companies exporting to the Middle East usually import labour (typically from a country with low-cost labour) into the target market to perform services. In order to meet legislative requirements, the importer must deposit with the relevant government authorities a certain amount per imported worker (typically US$2,000) to ensure that the worker can be returned to his home country at no cost to the government. As it is customary for Canadian exporters to bring hundreds of workers at time to the market, this represents a large amount of cash and a significant erosion of working capital. Bonding or standby letters of credit may be more effective ways of addressing this need and should be considered by the importing company.

Geographic proximity makes the United States a key export market, but many Canadian companies

indicated that the strengthening Canadian dollar has made them very conservative in their view of the

export opportunities in that market. The continued deterioration of the U.S. construction market has

eliminated any optimism related to it, and most exporters to the United States are currently trying to do

no more than defend their market share. Infrastructure investment in emerging markets makes these

regions an attractive alternative for Canadian exporters, however, and the Gulf Cooperation Council,

specifically the UAE, is frequently mentioned in this regard. Latin America and the Caribbean

- 17 -


- 18 -

represent additional areas of interest, and companies in Eastern and Atlantic Canada possess a long

track record of success in these markets.

Imports

The sector is import-intensive at all levels of the supply chain. Imports are crucial at a variety of

levels, from the raw materials used in the manufacture of cement and asphalt, to intermediate goods

such as marble and tile, to finished goods such as valves, building materials, plumbing and electrical

fixtures. Additionally, the limited availability or complete absence of domestic supplies in certain

regions means that these markets must import many products, including masonry materials, stone,

certain grades and profiles of steel, elevators and engineered systems such as HVAC systems. Most

respondents indicated that they imported a large portion of their capital goods from outside Canada.

Common purchases were cranes, manufacturing equipment and heavy construction equipment.

Unlike most other sectors, the construction sector imports labour. This occurs both in Canada and

throughout the rest of the world because of the global lack of skilled labour and its high utilization

rates. As noted later in this report, problems with labour mobility due to immigration and other

compliance issues remain a significant concern for many service providers in the sector.

The United States is the most frequently cited import market because of its geographical proximity,

which results in lower transportation costs, shorter and more reliable delivery times and predictable

quality and warranty service. But despite its preference for acquiring goods domestically or from

North American suppliers, the construction industry has one of Canada’s most diverse sets of import

sources. Among the frequently cited import sources are China (manufactured goods, fixtures and

tiles); Turkey (steel); Brazil (limestone and fly ash); Germany and Sweden (cranes, valves and capital

goods); Italy (tile, granite and marble); and Japan (heavy equipment).

Low Cost Country Sourcing (LCCS) is common. Most of it is driven by major manufacturers of

fixtures and building materials and by distributors that source directly from foreign countries or

through import houses. Most trade contractors prefer to deal with Canadian suppliers and therefore

import indirectly, using distributors. This can allow them to make a third party responsible for

complying with standards set by bodies such as the Canadian Standards Association (CSA). It also

allows them to avoid managing large inventories. Companies seem willing to trade off higher costs for

these services, despite the confirmed belief that low bids win.

Trade contractors are often required to import goods from overseas in order to fulfill specific elements

of their contracts; these goods are frequently owner-specified materials and components such as tile


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and light fixtures. From a skills and process perspective, however, few trade contractors appear

adequately equipped to handle the higher risks of global supply chain management and procurement.

As a result, the delivery and performance issues associated with owner-specified contract requirements

are of considerable concern to these contractors. On the positive side (form a supply chain

management perspective), some larger general contractors are using their greater expertise and better

management processes to relieve the trade contractors of these procurement responsibilities and thus

mitigate their risk, offering increased labour margins to compensate for the lost product sales.

Discussions with wholesale distributors indicated that although their foreign sourcing is critical to

remaining competitive, Canada is not seen as a strategic market for many of their LCCS suppliers nor,

to a lesser extent, is North America. These suppliers appear more interested in capturing significant

shares in higher-growth markets in Asia, the Middle East and even Europe. Canadian firms, in

consequence, must pay constant attention to delivery terms, pricing and even warranty service when

dealing with LCCS suppliers, and dealing with them is generally less satisfactory than dealing with

suppliers in developed nations. Delivery delays represent the most common issue and, due to the cost

of construction delays and penalties for failing to meet milestones, the greatest risk.

Many of the respondents have indicated that while they do business in China, it is a result of habit and

overall market trends. Many are actively exploring India and other emerging markets because of

continuing problems with Chinese product quality, unreliable delivery and service, and the rising

prices of Chinese products.

Canadian direct investment abroad

For the construction sector, Canadian direct investment abroad (CDIA) is the preferred and the most

common approach to penetrating new foreign markets. In the case of the largest Canadian general

contractors, this translates into the acquisition of foreign firms, and most of these companies have used

foreign acquisitions to increase their international footprint and expand their ability to serve different

end-user markets.

The strategy of acquiring foreign businesses is less available to mid-market firms that lack the

financial strength of their larger cousins. These firms tend to grow internationally by replicating

themselves in the host country or region. The result is much lower growth rates, but the overall risks to

the firm are lower because the investment outlays come in stages rather than all at once.


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The interviews revealed an overall propensity to use acquisition when expanding into lower-risk

markets such as the United States, while penetration of riskier markets appears to occur largely

through organic growth or small acquisitions.

4. SUPPLY CHAIN DYNAMICS

Upstream supply chain operations

When compared to other industries, the construction sector exhibits a generally less sophisticated

approach to SCM, especially in the case of services companies. Even within the sector’s supply chain

itself, services firms show large disparities of sophistication, depending on size and on customer and

operational focus. Many larger companies possess institutionalized processes and tools, while smaller

ones tend to operate in a more ad hoc fashion.

Companies in the manufacturing sector, by contrast, by employ well-developed SCM practices and

exhibit the highest levels of SCM sophistication. Some larger commodities players observed that their

suppliers of raw materials (such as limestone and fly ash for cement manufacturing) were not

particularly advanced in SCM management, and had just started to use long-term supply contracts and

demand-management techniques. Sophisticated SCM and procurement people, who have come to the

construction sector from other industries, such as automotive or aerospace, indicate that the

construction supply chain offers many opportunities for cost savings and process enhancements,

especially with respect to inter-enterprise collaboration.

The most notable supply chain feature lies in the willingness of general contractors to delegate the

management of 60 to 90 per cent of their total project spending to trade contractors, whose processes

and tools are often even less sophisticated than those of the general contractor. This increases the

overall risk profile of the supply chain, especially from a project delivery perspective. Not

surprisingly, respondents from both the general and trade contractor levels of the supply chain

described a strong need for manual expediting by project managers to ensure that materials would be

available when required. Given the major penalties that can apply if a project is delayed, some

contractors were willing to incur large transportation charges — often an order of magnitude greater

than budgeted — to make sure that materials reached the project site at the right time.

Another key trait of the industry lies in its almost exclusive focus on cost and on low bids, especially

at the trade contractor level. While many have a preferred supplier list, they nevertheless seem willing

to select the lowest bidder, in some cases regardless of the fact that this may introduce increased

performance risk. The study indicates that companies are willing to accept this suboptimal outcome to


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win business. This characteristic is predominant in industrial, commercial and institutional markets,

but is less common in projects that require specialized services or use directed procurement.

The responsibility for procurement and supply chain management generally resides with the project

managers. Supply chains, consequently, are rarely managed at the enterprise level but rather on a

project-by-project basis. General contractors acknowledge that this results in an underleveraged

capacity to obtain volume discounts, but they contend that a regionalized, fragmented approach to

supply chain management is a sensible strategy. They give several reasons for this: first, that their

annual demand needs are difficult to estimate because it is hard to predict what contracts they will win;

second, that local project offices tend to have their own supplier base due to local and regional

relationships; and third, that procurement managed at the corporate level is potentially costly and

prone to delays.

While most firms embrace this model, some of the more progressive companies are moving toward

increased centralization of procurement and are creating corporation-wide processes for increased

management visibility and control. They are seeking to consolidate buying functions such as indirect

spending and capital investments, and to establish national contracts with preferred suppliers who can

offer greater discounts and specific service levels. Given the wide variability of commodity prices,

some players are negotiating long-term, national-level contracts (of 24 months, in some cases) with

preferred suppliers in order to make their costs and service levels more predictable. Most buying in the

sector, however, is still being done on a spot basis via purchase order.

Procurement outsourcing has not yet become a mainstream strategy, due to the conservative views of

many managers and their general resistance to new business models. This underleveraged situation

could provide some companies with major opportunities for driving down the costs of goods and

improving the economics and efficiency of their logistics. Companies like BuildDirect

(www.builddirect.com), for instance, offer ways to use collective spending in the overall industry to

obtain greater discounts and increase the reliability of the supply chain’s performance, without

creating a centralized procurement group.

As previously noted, the transfer of risk from buyer to seller is a key industry trait. This occurs not

only contractually, but also in the pressures exerted on suppliers and on the distribution segments of

the supply chain. Few contractors have invested in warehouse space to accommodate inventory

buffers; they expect the wholesale/distribution segment to provide this service and its associated

financing so that the contractors can benefit from just-in-time delivery of goods.

http://www.builddirect.com/


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Wholesalers report that although they are willing to do this, many contractors are deficient in demand

planning and in providing lead times for orders, and this disrupts the supply chain. These deficiencies

can be traced back to the contractors’ ad hoc SCM processes, their weak buyer-supplier and inter-trade

communication, and the concentration of procurement responsibilities with a few individuals. As a

result, wholesalers in their turn pressure manufacturers to provide stopgaps by setting up emergency

stocks at different points in the supply chain. The ultimate consequence is an overall increase in the

cost of goods for the end user. Another trend noted by some trade contractors was a tendency for

manufacturers to shift responsibility for warranty claims to their distribution networks. This also

creates extra costs for all involved.

The distribution segment is an excellent example of innovation in supply chain management.

Progressive manufacturers and distribution/wholesale firms are engaging in more sophisticated

approaches to inventory management, such as vendor managed inventory (VMI)5 systems that provide

maintenance-repair-operation (MRO) parts, consumables and spares in customer-owned facilities.

VMI also equips job sites with “inventory trailers” that are regularly restocked so that contractors (e.g.

electrical and plumbing) can be less concerned with goods availability and ordering. Other innovations

lie in guaranteed overnight delivery for orders placed the previous day, and the emergence of

value-added services such as the assembly of kits according to preset bills of materials.

Many small and mid-sized contractors express a preference for doing business with local or regional

suppliers and distributors, and emphasize the importance of relationships and of being close to their

sources of supply. Most of these relationships appear to be transactional rather than strategic, although

they are often of long standing. At the other end of the spectrum, larger national contractors expressed

a preference for dealing with national and multinational distributors, and many are moving toward

national agreements to take advantage of volume discounts and standardized service levels.

The construction supply chain leads other sectors in two major areas of upstream supply chain

management:

Tendering — Given that its projects are so complex, the industry has developed advanced tendering management processes and tools that include creating specifications, compiling estimates, evaluating bids and setting up plan rooms managed by industry associations.

5 In VMI, the supplier assumes responsibility for stocking and maintaining the buying organization’s inventory, and keeps the supplied goods to agreed service levels. The vendor then issues a monthly consolidated invoice for all items used.


- 23 -

Complaints about tendering often stem from the incompleteness of drawings and specifications, which can cause disputes about the scope of work once a contract has been awarded and work is underway.

Contract language — The standardization and simplification of contract language seems to be a goal of most general contractors. The use of Canadian Construction Documents Committee (CCDC) forms, often with modifications, is common for contracts between owners and general contractors, and between general contractors and trade contractors. Since these contracts are the most prone to dispute, the use of CCDC forms does represent some progress. Such standardization, however, is not common in standard purchase orders for goods, nor in indirect spending.

At an operational level, the integration of trade contractors and suppliers is generally limited to using

internal management systems that automatically generate purchase orders to be faxed, mailed or

emailed to suppliers. All contracts with trade contractors are signed in hard copy because of

compliance requirements. Because of these practices, the supply chain offers many opportunities for

process development and integration that will reduce the transaction overhead associated with paper-

based processes. This particular paper burden is relatively low, however, when compared to the

paperwork needed to manage tenders and project documentation.

A major challenge for most organizations, especially at the contractor level, lies in the documentation

requirements. While there is no way to avoid this, given legislated and buyer compliance

requirements, it adds yet another layer of cost to the supply chain.

Downstream supply chain characteristics

For the purposes of this report, the downstream supply chain refers to owner activities. Five major

characteristics of these activities emerged from the interviews:

Unrealistic expectations — Numerous contractors and engineers said that many of their customers do not understand the sheer complexity of their projects and the impact that their decisions have on project schedules. While collaboration tools and better project management practices have improved information sharing, this has provided only a partial solution. As a result, many general contractors reported that clients simply assume that once the tender is awarded, the building will go up quickly and on schedule. It appears that such clients expect instant gratification, at least to some degree, once the tender phase has ended. Protracted tender negotiations that eat into project timelines often aggravate the situation, as owners try to hold contractors to original completion dates in spite of the delays caused by the owners themselves.

Increased willingness to pay for quality — Several respondents reported that some of their more exacting customers are willing to pay for quality and demand superior service and performance. Conversely, others noted that many owners are adopting potentially dangerous practices to deal with escalating construction costs. Underinsuring and using un-bonded trade contractors are examples of this, and represent increased risks.


- 24 -

Selectivity — Partly because of overall market demand for services, most respondents indicated that they were selective about the clients with whom they would deal. Many specialty trades, such as roofing, preferred to deal with owner-operators because payment was more predictable and it was easier to resolve disputes. Land developers were almost universally regarded as among the most difficult customers with the highest risk, and many contractors would deal with them only if the developers provided a bank guarantee for the contract value.

Penalties — From a payment perspective, the threat of liquidated damages and similar penalties places the entire supply chain at risk, and this threat shapes many supply chain decisions. As a result, general contractors place considerable pressure on both trade contractors and suppliers to help them make up any time lost in their schedules.

Warranties — Owners, especially in the heavy construction markets, have increased their warranty requirements over the past few years, forcing contractors to accept a variety of additional risks. This appears predominantly in the road-building segment and is a result of the changing tender requirements of public sector buyers. Suppliers’ responses to this change are varied, although few saw a need for long-term performance bonds. This is likely due to the fact that they are somewhat captive to their clients, and the threat of being removed from tender lists forces them to accept the extra risks.

Key success factors

Respondents were asked about the key factors in winning business. Relationships and price were

crucial, but they identified other influences as well.

Contractors — The vast majority said that quality work and strategic focus on customer satisfaction were essential to consistent success.

Manufacturers and suppliers — This segment of the supply chain placed a premium on innovation and engineering.

Wholesale and distribution — Delivery turnaround and pricing drive the purchase decisions in this segment. Some trade contractors also identified innovation as a secondary differentiator for adding value.

Given that financing and risk management represent integral parts of the supply chain, one might

assume that some firms would see these tools as the means to provide added value for their customers.

In general, though, they were considered as a necessary cost of doing business. As a result, there may

be substantial opportunities for repositioning such services as value creation tools. VMI and new

approaches to supplier payment would be two possibilities.

Adoption of information technology

Adoption of intra-enterprise information technology is a key strength of the industry. General and

heavy contractors have made concerted investments in the following tools:

enterprise resource planning (ERP) and accounting packages to handle billing and project cost management;


- 25 -

project management tools to provide better visibility of project timelines, progress and encumbered costs;

document management to handle project documentation, revision and compliance, and to help eliminate the cost of paper storage resulting from retention requirements; and

collaboration technologies to share project information, to improve communication and to centralize all project information to prevent versioning problems. Many associations, for example, have moved plan rooms online to provide value-added collaboration and bid support services for their members. However, respondents at all levels of the supply chain referred to the rapidly proliferating numbers and types of these tools, which make it difficult to standardize on a single collaboration platform.

Firms with distributed operations exhibit inconsistent adoption of these tools. The ones that are

mandated by head offices seem well entrenched, but systems that would be highly valuable — such as

tender management — are often not adopted by local offices due to managerial decisions at those

locations. It thus appears that some larger firms may be missing opportunities to exploit technology

tools more effectively across their entire organization.

In contrast to the relatively well-developed technology infrastructures within companies, inter-

enterprise technology integration is limited. Many general contactors resist investing in such

integration, claiming that the fragmented levels of technology adoption by trade contractors make it

difficult to implement and that it does not produce a sufficient return on investment. Some also claim

that many small contractors do not even have computer systems to integrate. This may be true in some

instances, but it appears to be the exception, not the rule.

In any case, the creation of an integrated and efficient trading network is a significant competitive

advantage for industries that are capable of achieving it, and in the construction industry we are seeing

some progress in electronic tender management and collaboration. However, at the business process

level and from the perspective of supply chain management, very little progress was noted at the prime

and trade contractor levels other than the use of email to send purchase orders.


Snapshot – Integration platforms for business processes

Industry-wide integration platforms such as Quadrem provide an information technology backbone for business process integration and transaction execution. This allows buyers and sellers to collaborate electronically through the entire procurement-to-payment cycle, regardless of their technological sophistication and their existing investment in systems and processes. Individual company initiatives have also been considered in the construction market, but no complete solution has been devised that provides the business-to-business connectivity required to support the range of existing relationships.

This concept was discussed with all participants, and the responses reflected polar opposites of opinion. On one side was a view that the fragmentation of the market would never allow such integration, because the many small players who dominate the sector would never acquire the skills and sophistication needed to adopt and benefit from such a business model.

At the other end of the spectrum was a much smaller camp of progressive companies. These understood the potential of process streamlining, which would let project managers focus on critical management activities while allowing routine transactions to take place according to a mutually agreed-upon set of business rules

Given the direction that the major buyers in the supply chain are taking, it is possible that construction industry developments may repeat those of the manufacturing industry. In the latter sector, supply chain networks evolve around large buyers, creating relatively closed trading communities that limit the benefit of such technologies to these buyers. This leaves the small and medium-sized enterprises (SMEs), which dominate the Canadian construction sector, with a limited ability to benefit from inter-SME trade. As a result, the possibility of developing an industry-wide platform to provide some level of transaction integration represents a still-untapped opportunity.

The good news is that the most progressive companies are looking at ways to use Internet technologies

to eliminate or streamline the processes that touch on outside parties. In the manufacturing part of the

supply chain, data-driven process integration is more apparent, with some sophisticated manufacturers

and many large distributors using automated stock replenishment systems and some online invoicing.

A few respondents mentioned the use of electronic data interchange (EDI) integration with suppliers, a

process usually driven by supplier initiatives. Most of these suppliers are in the commodity and

intermediate goods segments of the supply chain, such as cement and steel. Internet-based

procurement technologies, however, are scarce. The use of global procurement sites and supply chain

management and payment platforms such as Do2.com, Quadrem, MFG.com, globalsources.com and

alibaba.com, remains nascent, although indirect spending is more likely to be managed using

electronic tools. Some electronic order placement occurs between trade contractors and wholesalers

(mostly large electrical and plumbing supply houses), but this typically represents only 5 to 20 per

cent of these wholesalers’ customers. Many of the wholesalers, however, had relatively aggressive

growth targets for moving customers from manual ordering channels to electronic alternatives.

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- 27 -

The heavy construction industry represents the exception to this trend in e-commerce. Most heavy

equipment operators demonstrate a significant propensity to buy and sell heavy equipment using a

variety of Internet sites that focus on this niche.

Initiatives related to e-bonding and e-tendering demonstrate a growing inclination to adopt new

business process technology. Some of this represents long-standing projects, and general interest in

these technologies remains rudimentary, but they may be the proverbial thin edge of the wedge that

presages a wider adoption of e-services.

When asked about investment intentions, most firms in the services segment of the supply chain

indicated a desire to invest in mobile technologies such as GPS and remote connectivity, rather than in

supply chain integration. Large general contractors generally represented those most interested in

integration technologies and supply chain efficiency enhancements.

Compliance

Few organizations showed any concern about compliance. Most indicated that the major compliance

issues relate to statutory declarations, which are often a condition of payment, and labour mobility.

The latter issue was important to respondents with experience in exporting, since they must manage

the risks of having their employees refused entry into foreign markets. These companies noted the

critical importance of having a competent immigration lawyer to deal with this risk. While not

explicitly saying as much, some respondents left the impression that the challenges of gaining access

to foreign markets contributed to their decision to stay in Canada.

Despite industry literature that describes potential threats from counterfeit electrical and plumbing

supplies not approved by the CSA or UL, most trade contractors indicated only limited concerns about

this issue.

Some product manufacturers stated that a barrier to exporting lies in the need to have products

approved for use on those markets. This can be time consuming and costly.


- 28 -

Critical supply chain risks

Major operational gaps and risks can be divided into the six general categories shown in Table 3.

Many of the responses in the table have been covered elsewhere in this report, but are repeated here

for completeness.

Table 3. Key Supply Chain Risks

Risk Type Common Manifestations

Human resources Limited availability of qualified staff and subcontractors Limited skills of procurement staff Weak cross-functional collaboration

Business processes Poorly defined business processes outside of project management Failure to follow stated processes across distributed offices Limited adoption of management tools Weak technology for process management, resulting in strongly

manual processes and numerous failure points Poor visibility into supply chain conditions Significant expediting required Weak information exchange

Schedule management Unrealistic demand planning and lack of load balancing Poor demand planning and materials management Change orders that create significant difficulties in meeting schedules Long lead-time item management Weak information exchange

Price volatility Fluctuation in commodity prices at unprecedented levels wreaks havoc on estimating and procurement functions, creating major tendering and project execution risks

Transportation cost increases due to fuel costs and surcharges

Supplier performance Failure of manufacturers to adhere to production schedules Consolidation in the supplier base limits choices and reduces the

buying power of contractors

Financial issues Failure to manage cash flow adequately, which affects operational flexibility

For heavy construction companies, inability to obtain equipment financing poses a very serious threat to performance

Gaps in human resources and business processes were the issues most frequently mentioned. Many

respondents felt that some of these issues were out of their control, so they were not actively investing

in dealing with them. This attitude was particularly apparent among smaller firms.


- 29 -

The number of third-party-based risks is reflected in the litigation that occurs in the industry, and

highlights the importance of adequate contracts between buyers and sellers. It also emphasizes the

importance to the sector of its legal services segment.

5. FINANCIAL SUPPLY CHAIN

Payment risk — Payment is perhaps the most contentious issue in the construction industry. The pay-

when-paid approach is a core practice for those that employ it, or that are compelled by legislation in

certain jurisdictions to employ it. It can cause serious payment delays and, as its effects cascade

through the supply chain. Oddly, despite this and other challenges to getting paid, few respondents

said that they used accounts receivable insurance.

While many companies vehemently oppose the concept of pay-when-paid, and will strike it from any

contract, they (especially contract management firms) still face two major challenges in maintaining

their cash flow:

Narrow windows for document submission; many owners and prime contractors have fixed dates and windows for making payment on the previous month’s invoices. Unfortunately, the windows are often so narrow that the parties involved cannot complete the documentation and submit it to the owners for payment within the time allowed. As a result, while the process should ideally require 30 days, it often takes longer due to the failure of one or more parties to meet the prescribed cut-off dates. Payment therefore slips to the owner’s next billing cycle, and the contractor’s cash flow suffers.

Withholding payment to extract performance, often to ensure that deficiencies are corrected, is common. Some trade contractors and suppliers claim that the right of offset is frequently applied when they are working on more than one project for the same owner, so that when deficiencies arise on one project, the owner withholds payment for work completed on another.

Most payment issues tend to exist in the general and trade contractor segments of the supply chain.

Wholesalers and suppliers specifically mentioned payment delays (less so disputes), often referring to

longer than usual payment delays, of 60 to 90 days in some cases. This is likely the result of what we

have coined the “payment bullwhip effect” where payment delays at the front end of the supply chain

with owners, general contactors and trade contractors cascade and escalate through the entire supply

chain resulting in significant delays at the manufacturer end of the supply chain.

Payment terms and methods — Payment practices differ depending on the type of supplier. Service

providers are typically subject to holdbacks of 10 to 15 per cent of the invoice amount; goods

suppliers, however, are not subject to holdbacks. It is generally recognized that the financial health of


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trade contractors depends heavily on their cash flow and timely payment by their general contractors,

and trade contractors do acknowledge that some of the larger general contractors work very hard to

honour their commitments.

Given these circumstances, managing cash flow is among the most critical activities undertaken by

companies in the supply chain. Respondents said that most bankruptcies in the sector do not occur as

a result of losses, but rather because of poor cash flow management. The most frequently cited reason

for slow payment is not a delay caused by a general or trade contractor, but is rather a delay on the part

of the owner.

Holdbacks can be a major problem. For many contractors, the 10 per cent that is retained represents

the entire profit on the contract, and payment can sometimes (albeit infrequently) take years because

of disputes that are outside the contractor’s control. Some companies are consequently interested in

instruments that will guarantee payment when they have met the contract terms and satisfied their

obligations.

Given the largely domestic structure of the industry, payment on open account is the standard method.

Letters of credit are sometimes used in offshore procurement, although larger contractors are

encouraging the use of open accounts in established overseas relationships so they can benefit from

the lower costs of this method and can be paid via wire transfer.

A development worth noting, with respect to foreign supplier payment, is the reluctance of Chinese

suppliers to provide terms of any type. Many buyers have indicated that these suppliers often demand

an up-front payment of 25 to 50 per cent of the order’s value, and require the remaining 50 per cent

before releasing the shipment or before delivering the shipping documents. Given the sometimes

lengthy transportation times associated with such orders, these demands are a financial challenge and

constitute a risk for many Canadian importers.

The vast majority of buyers pay by cheque so they can physically control the disbursement of funds.

This allows them to manage cash flow and to force service providers to address deficiencies before

being paid. However, some progressive buyers are making use of electronic funds transfer (EFT) to

lower transaction costs and increase cash flow velocity within the supply chain. Even so, few appear

willing to move to the next step — an automated reconciliation approach that would automatically pay

undisputed invoices within a pre-negotiated time period after the acceptance of the goods.


SCF seeks to redefine the procure-to-pay and order-to-cash processes by creating a win-win scenario for all parties. It achieves this by reconciling the needs of buyers and sellers, as opposed to the traditional, adversarial procurement model that pits them against each other.

SCF often, but not always, leverages technology investments that facilitate the exchange of electronic documents such as purchase orders, invoices and acceptance notifications among members of a supply chain cluster. More specifically, it uses the “visibility” created by the platform to increase the level of trust in the trading relationships. This trust can exist because all participants can access the same trade data on demand. It also uses the data to create payment triggers that are based on specific events and contract terms, thereby diminishing traditional payment risks.

Raw materials financing / purchasing programs – In this model, buyers and importers provide purchasing support such as access to the volume discounts and favourable terms enjoyed by large buyers. They also provide direct lending and the support of their financial institutions in lending to LCC suppliers, which helps to mitigate capital constraints, provide lower-cost financing and reduce input costs.

Vendor managed inventory (VMI) — In this approach, replenishments and payments are triggered by preset inventory levels and inventory consumption;

Invoice and accounts payable discounting — This is discounting based on approved invoices and on leveraging the credit risk of the buyer, as opposed to that of the supplier;

Its success is contingent on creating stable supply chain networks that fundamentally alter the risk profile from payment risk to supply chain performance risks related to on-time delivery, supply chain agility, quality and performance. Frequently referred to as Data Triggered Finance, the concept revolves around a financial transaction that is triggered by an event. Different types of SCF exist and are often coupled together depending on the needs of the buyers and sellers. Common SCF approaches include:

Supply chain finance (SCF) seeks to integrate capital more efficiently and effectively into a supply chain and increase cash flow velocity within the chain while lowering the cost of capital throughout it. It is transaction financing based on information flow and on an understanding of supply chain risks and interactions.

Snapshot – Emerging Opportunities in Supply Chain Finance

Bonding — Risk migration is a vitally important component of the supply chain, which is well

serviced by surety providers. A key concern for the sector lies in the increasing use of standby letters

of credit (SL/C’s) instead of surety bonds, mostly as a result of increased foreign concessionaire

involvement in the Canadian construction market and in 3P projects. This has a considerable effect on

the ability of Canadian general contractors to bid for these projects. Since SL/C’s are issued by

financial institutions, they require collateral that a general contractor may be unable to provide because

of limited access to operating lines of credit and/or lack of cash. This can create a significant gap in

the ability of Canadian firms to bid on major infrastructure projects.

Working capital management — While managing cash flow is a concern for most companies in the

sector, integrated working capital management is used mostly in the commodity, manufacturing and

distribution segments of the supply chain. A tight focus on inventory is a key performance metric for

many of these companies.

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Every respondent was asked to choose between taking a discount on an invoice, or obtaining extended

payment terms, such as being able to pay in net 90 days. Almost universally, respondents (especially

the contractors) opted for the discount, thus highlighting the industry’s preference for minimizing

costs over optimizing working capital. This may also indicate that the majority of firms possess strong

cash positions.

Many supplier and contractors will discount aggressively to accelerate payment. Whenever possible, most general and trade contractors take advantage of these early payment discounts to reduce overall costs, and use whatever liquidity they have in order to do so. A substantial number of respondents reported difficulty in actually taking the discounts, however, because liquidity constraints delayed the processing of their accounts payable and this in turn caused them to miss the discount window. Statistics quoted by some respondents showed that 25 to 60 per cent of their customers took advantage of the discounts.

Snapshot – Taking Purchase Discounts

Access to capital — Most respondents reported healthy working capital situations, with general and

heavy construction contractors describing strong liquidity. This positions many of the companies to

weather the weak demand conditions that currently prevail.

This management philosophy also reflects the perception that support from financial institutions,

especially in the services segment of the supply chain, is quite limited due to the relatively high risks

in the construction sector. Few general contractors, for example, can secure significant operating lines

of credit from financial institutions because of their limited ability to provide collateral. During the

interviews, it was not unusual for general contractors with over $50 million in annual revenues to

report operating lines of credit of under $1 million.

Most contractors claim to operate on a positive cash flow basis. This is not surprising as the industry

employs a practice called “front-loading” to ensure that billing always exceeds costs at the beginning

of a project.

While credit access may not be a problem for general contractors due to their management practices, it

is an issue throughout the rest of the sector. As this study was concluding, heavy construction

companies were reporting difficulties in obtaining equipment financing.

The distribution and wholesale areas also attract close financial monitoring. These represent the

inventory buffers for the industry, and absolutely must have access to operating credit so they can

meet the just-in-time service requirements of the sector. As progressive distributors, wholesalers and

manufacturers adopt more efficient inventory management tools (such as VMI); dependable inventory

financing becomes even more crucial to developing the overall efficiency of the supply chain.

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6. GAPS ANALYSIS

Using the GTM supply chain solution model6 shown in Figure 4,7 service gaps can be separated into

five categories of key activities in SCM: financing, risk management, compliance, connectivity, and

information and value-added services.

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A review of this supply chain’s dynamics reveals a variety of gaps across a broad range of needs.

Financing — The inconsistent level of support by financial institutions is an overarching issue for

contractors, and makes cash management a critical success factor for many of these firms. Smaller

firms are perceived to have the weakest cash flow management practices and thus the greatest risk

profile; these could benefit by adopting additional tools and processes.

Beyond this structural problem, the gaps appear as niches within the overall financing context. These

niches include the following:

Figure 4 - The Supply Chain Framework

Buyer Supply Chain

6 When conducting business, buyers and suppliers interact through an interdependent and interrelated set of value-creating activities such as sell/buy, ship/receive and pay/collect. The key elements of these supply chain interactions include financing, risk management, compliance and information exchange, as well as the information and trade development services that govern a supply chain’s effectiveness and efficiency. These elements form the basis for the GTM model’s solutions, which are intended to facilitate the execution of transactions.

7 Adapted for the construction industry. Note that the model is slightly different for manufacturers, where the Inbound/Outbound Logistics and Project Execution segments of the chain are reversed.

Cas

h &

Wor

king

Cap

ital M

g

Supplier Supply Chain

Supply Chain Risk Mgmt.

Invoice Processing

PaymentInbound Logistics

Project Execution

Plan / Invest(Long-term Capital)

Source & Procure

mt.

Plan / Invest(Long-term Capital)

Sell & Negotiate

Supply Chain Risk Mgmt.

Invoicing CollectionProject Execution

Outbound Logistics

Financing (Inventory Financing for Dist & Mfg., CDIA capital, cash flow accelerators, technology investment)

Risk Management (supply chain disruption risk mitigation, S L/Cs, 3P projects, managing foreign projects)

Compliance Management (certification of products for other jurisdictions)

Connectivity (Low level of cross-enterprise integration)

Information & Value-added services (export propensity, sourcing support, procurement skills)


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Inventory financing support for distributors — As the industry moves toward more advanced inventory management models, it needs greater and more consistent support from financial institutions in the area of inventory financing. Such improvements would allow this component of the sector to provide more value-added solutions for contractors, thereby increasing their ability to insert themselves into international supply chains. Similarly, it could also be incorporated into export solutions to assist exporters provide support to foreign distributors thereby increasing their overall value propositions to these foreign partners.

Investment capital — This is needed to support foreign expansion either in the form of acquisitions or in the opening of new offices abroad. This gap results from financial institutions’ lack of knowledge about such investments and a limited appetite for the risks associated with them. Investment capital could be either debt, which would be the likely borrower preference, or patient capital in the form of equity or subordinated debt. This would act as an enabler for the sector, and would probably increase its interest in growing into international markets.

Cash flow accelerators in the supply chain — Supplier payment programs are a potential tool that is under-adopted by both financial institutions and buyers in Canada.8 Adopting supplier payment programs would facilitate the taking of discounts that all players rate very highly as a way to extract greater value from their supply chains. Similarly, there is a gap related to the release of holdback funds; this prevents many contractors from realizing their profits until long after they complete a project, and this in turn hampers their ability to reinvest in expansion.

General working capital facilities — General and trade contractors noted a gap in the availability of working capital financing.

Creative use of SL/Cs — The predominant use of sureties in mitigating performance risk in North America has limited the industry’s knowledge of SL/Cs as a substitute for them. However, with the increased participation of Canadian firms in projects abroad, and the increased presence of global owners in North American projects, SL/Cs are becoming better known. Using them, however, creates a working capital challenge for contractors. The requirement to post 100 per cent collateral to the financial institution issuing the SL/C can significantly constrain working capital for extended periods of time and create major cash flow problems.

Despite the growing knowledge of SL/Cs, many respondents remain unaware of their potential for mitigating performance risk, accelerating payment and converting L/C payments to open account. Above and beyond providing performance security, SL/Cs can be used for the following purposes:

o They can provide an alternative to the cash deposits required by host country governments for importing labour into these countries. These deposits consume liquidity that could be recovered by substituting an SL/C to secure the obligation.

o They can address unfavourable payment terms from risk-averse foreign suppliers who require L/Cs or COD orders to ensure payment, practices that lead to extra cost and suboptimal use of working capital. Few companies have considered using SL/Cs to convert suppliers to open account, which they can do by using an SL/C to insure the supplier against non-payment by the buyer.

8 Research by the EDC GTM CoI in 2008 points to a growing structural gap in this area as financial institutions (FIs) and large buyers around the world increasingly adopt cash flow accelerators, such as supply chain finance, within the supply chain. Larger Canadian enterprises and FIs are much earlier in the adoption curve for such services, creating a potential for a structural gap.


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o They can secure warranty obligations over an extended period of time.

o They can monetize delayed holdbacks during the resolution of a dispute or during the final acceptance of a project.

Technology investment — Limited availability of investment capital causes suboptimal levels of investment in business process integration. Although there may not be gaps in the availability of financial instruments for investing in technology, qualitative analysis indicates that underinvestment is in fact impeding profitability, growth and entry into new markets, and that this problem is becoming acute at the SME end of the spectrum.

Risk management — There are several gaps in this area, including the following:

Supply chain interruptions — Volatility in input costs, unpredictable supply, uncontrollable delivery delays and the variable quality of foreign-supplied goods concern most procurement managers because they represent significant costs and, therefore, lost margin. Late delivery and quality problems are major barriers to increased LCCS adoption, despite the acknowledged cost benefits. Firms are therefore under-leveraging this opportunity to reduce their input costs.

Risk in foreign markets — Many exporters highlighted the perceived risks not only of managing projects in foreign countries, but also the challenges of establishing offices in high-growth, emerging markets. While the risk of expropriation in these markets is relatively low, exporters still want ways to insure their investments against potential losses arising from the actions of foreign governments.

Access to risk management instruments — The tendency for smaller players to use less-sophisticated risk management tools is a potential efficiency gap in the market. High costs appear to drive this limited usage, especially among SMEs.

Public-private partnerships (P3) project risk — Emerging payment risks in P3 projects are also a source of increased concern and potentially lost opportunities for Canadian companies. They are deterred not only by the complexity and risks of these undertakings, but also by the limited legal recourse that they, as the private partner, would have in the event of a dispute to enforce payment.

Compliance management — Compliance gaps are relatively limited, since many firms avoid the

associated risks by choosing not to export. The gaps that exporters did identify related to fragmented

regulatory environments and the need for ways to increase workforce mobility.

One specific issue does exist for goods exporters. This is the problem of acquiring product

certification for new markets, a process that is often both costly and murky. Many manufacturers work

closely with their distribution partners to share the costs of certification. In foreign markets, however,

this approach tends to produce suboptimal results because of the local availability of alternative

products.

Connectivity — Few companies have developed any significant degree of connectivity in their supply

chains. They also do not anticipate investing in this area due to other investment priorities and the

perceived structural barriers to integrating supply chain processes. However, new procurement

outsourcing models and the availability of tools such as software-as-a-service (SaaS) can make such

investment quite attractive due to its low acquisition cost and its on-demand nature, which together


can reduce IT investment and internal IT management needs. Even so, few supply chain participants

outside the distribution segment, the large general contractor segment and the heavy equipment

segment are even aware of the Internet-based tools that could help them with their procurement

activities.

Information and value-added services — Because of the sector’s relationship-based and pull-based

sales model, there are substantial gaps in developing and executing export sales strategies. Finding

opportunities and building relationships remain a challenge for many firms, and they are lacking the

kind of integrated opportunity matching that would help qualified, export oriented firms find

customers.

Global sourcing continues to be a challenge. This is especially true for mid-market and smaller

companies without the necessary expertise and whose buying scale is limited. Promoting overall skill

development in procurement would also encourage the introduction of new tools and processes on a

wider scale than is now the case.

7. OPPORTUNITY RECOMMENDATIONS

There are many opportunities that would help close the gaps. Taking advantage of them would deliver

more investment in structural capacity and capabilities and more support for enhancing supply chain

efficiency. These are summarized in Table 4, including the potential benefits to firms and described in

detail in Tables 5 and 6 respectively.

Table 4. Opportunities Portfolio Summary

Construction SC integration platform

Supplier Performance Risk Mitigation

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Foreign Market Compliance Assistance

Global Sourcing & Procurement Support

S L/C & Bonding Opportunities

Structural Capacity/Capability Building Solutions

Consortium Builder Program

Support IT Advisor

SCM Education Partnership

Supply Chain Finance for Construction

Cost Reduction

Revenue Growth

Working Capital /

Financing

Tactical Transactional Support Solutions

Trade Facilitation / Information

Technology / Process

Innovation

Risk Mitigation

Opportunity/ Initiative

End-user Benefit

Table 4. Opportunities Portfolio Summary

Construction SC integration platform



Global Sourcing & Procurement Support

S L/C & Bonding Opportunities

Structural Capacity/Capability Building Solutions


Support IT Advisor

SCM Education Partnership

Supply Chain Finance for Construction

Cost Reduction

Revenue Growth

Working Capital /

Financing

Tactical Transactional Support Solutions

Trade Facilitation / Information

Technology / Process

Innovation

End-user Benefit

Opportunity/ Initiative Risk Mitigation


As a catalyst, the CCA could encourage the industry and its constituents to focus on supply chain

operations and investments. It could do this by creating a “Construction Supply Chain Leaders Round

Table” of 10 to 15 supply chain members who would engage the industry in documenting best

practices and in setting investment priorities for sector associations and other industry constituents.

Investment in capacity/capability building solutions

Table 5. Structural Capacity/Capabilities Opportunities

Initiative/Concept Description


Canadian companies can successfully sell products and quality services into foreign markets. However, the vast majority of companies do not possess the resources or the strategic orientation to effectively generate business abroad. While many of the exporting respondents did describe strong overseas strategies, they also face the challenge of finding the right resources in foreign countries to help them win projects and deliver sales.

Potential CCA value creation opportunity: The Consortium Builder Program, a managed service delivered in partnership with other sector associations and with EDC and DFAIT, could be designed to provide an integrated solution to this issue. It would provide active and passive lead generation, a service to build a roster of export-focused and qualified Canadian contractors and suppliers, and methods for matching them with projects and buyers.

The model could include “high touch” and “low touch” approaches to lead generation and matchmaking. The high-touch model could be delivered through alliances with organizations such as DFAIT and EDC, and focus on trade missions and transaction facilitation, while the low-touch approach could work through a technology platform that provided a centralized repository of lead, project, supplier and buyer qualifications for access by CCA members.

The lead generation, matchmaking and qualifications management features of the Consortium Builder could be further enhanced by the creation of Canadian consortia to provide turnkey solutions for foreign buyers. In the longer term, the technology platform could provide the backbone for the electronic delivery of risk management, financing and other solutions, and could become a value-added service for both Canadian exporters and their foreign customers by simplifying and enhancing buyer-seller business processes.

Snapshot – Online Directory Project

The International Committee’s Online Directory project represents a key asset for the Consortium Builder Program. The Consortium Builder can add value to this basic investment by creating additional structural export capacity, and by becoming a platform from which additional value-added services can be developed or distributed.

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Industry-wide Supply Chain Process Integration Platform Development

While many respondents were somewhat sceptical about using process integration technologies in the procure-to-pay lifecycle, the most innovative firms are now moving in this direction. Many smaller respondents were enthusiastic about the potential efficiency gains, especially if they could be linked to accelerated cash flow. While the industry lags behind other sectors in the adoption of this type of technology, this lag actually represents a positive situation since the industry does not yet possess the large investments that would constitute a barrier to entry.

One of the largest barriers to technology investment will be capital cost and return on investment. Many firms can look to software-as-a-service (SaaS) vendors to defray the initial cost, as these vendors operate on a subscription basis.9 For those looking to make proprietary systems investments, financing is available for such projects from banks, from some leasing companies and from the Business Development Bank of Canada.

It may be challenging to build a critical mass of supplier participation in such technology projects, but doing so is crucial to their success. Industry associations have an advocacy and facilitation role to play in this area, a role that could easily be expanded to encompass the sponsorship of a technology that would allow companies to carry out transactions electronically. By bringing enough buyers and suppliers to the table, such a project could dramatically lower the adoption barriers that often plague similar initiatives.

Given the fragmented nature of the Canadian construction landscape, the benefit of these solutions lies in enabling the majority of buyers and sellers to take advantage of increased process integration. A many-to-many solution (as opposed to big-buyer-driven solutions that can create discrete supply chain networks) appears to offer the greatest value to the entire industry because it allows SMEs to interact with each other while allowing larger players to leverage their existing investments.

Potential CCA value creation opportunity: As a potential initiative, a feasibility analysis and pilot project could use the unique reach of the CCA to act as a sponsor and promoter of a Canadian construction supply chain integration platform. Suitable technologies are widely available, and success lies in developing operating models that deliver high returns on their users’ investments. The long-term value lies not only in improving transactional information exchange, but in coupling it with cash flow acceleration, financing and risk management solutions that can be delivered through, or enabled by, the platform itself.

For companies that want to transform their supply base into a strategic asset,

9 SaaS is a software distribution method that provides access to software applications through the Internet. Since SaaS pricing is based on a monthly fee, the service allows organizations to use these applications at a cost that is typically lower than purchasing them outright. SaaS eliminates the costs of installation, set-up, maintenance and additional hardware because the vendor takes responsibility for these items.


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this type of initiative represents a high-value opportunity. In order to obtain the greatest value from this technology, however, most companies will need to develop rigorous procurement and management processes before they adopt it.

Supply Chain Management Education Partnership

Most firms in the sector do not treat their supply chain as a strategic asset. Direct procurement is generally a tactical function within the overall project management function. Companies are also currently being squeezed by a skills shortage.

Potential CCA value creation opportunity: The CCA can collaborate with organizations such as Supply Chain and Logistics Canada (SCL), the Purchasing Management Association of Canada (PMAC) and the Supply Chain Sector Council maintained by Human Resources and Skills Development Canada (HRSDC). Such collaboration could help set up development programs to enhance the SCM skills of sector participants.

This training could be supplemented by tools for recruiting experienced procurement and supply chain staff from other, more mature sectors. The CCA could also develop a best practices guide for construction procurement and SCM.

Technology Vendor Directory

(Construction IT Advisor)

As noted, technology investment is a priority for some firms and should be for others. However, discussions with executives indicated that few were aware of the breadth and depth of the solutions available to the sector.

Potential CCA value creation opportunity: There is significant value in creating a directory of industry-focused tools to address the needs of the sector and to promote the adoption of supply chain management and other automation tools. Rather than employ a vendor sponsorship approach, a more compelling value proposition lies in having an impartial third party, such as a market analysis firm, compile the directory and perhaps develop case studies examining how these tools have been applied.

Supporting supply chain efficiency enhancement activities

While the creation of service partnerships is not something that the CCA or its association members

can necessarily deliver themselves, success in building supply chain effectiveness and efficiency can

be enhanced through such measures. In this context, the CCA can seek to establish and promote

programs and relationships that provide members with access to the necessary services. These services

would also be customized to the needs of the participants. Such programs might be established on a

revenue-sharing basis to provide additional income to the CCA.


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Table 6. Supply Chain Efficiency Enablement

Initiative Description

Standby Letter of Credit / Bonding Opportunities

While the North American market relies on sureties for performance risk mitigation, there is considerable concern over the use of SL/Cs as performance securities, and over the ability of Canadian companies to provide them given their impact on working capital.

Potential CCA value creation opportunity: Education about the use of such instruments, in the form of a short guide, would allow firms to become more comfortable with the tool and allow them to build appropriate management practices to employ them. Additionally, some of the gaps outlined in this report lend themselves to use of SL/Cs, including:

accelerating payments of holdbacks while unrelated issues are resolved;

providing performance security guarantees to foreign concessionaires and owners when sureties are not acceptable;

replacing cash deposits to foreign authorities on export contracts, such as the deposits required in the Middle East for imported labour;

providing warranty protections to owners and buyers; and,

securing better payment terms from foreign suppliers who are currently seeking large deposits or payment-on-documents terms.

Given how important the providers of risk management services are to the CCA and the industry, it might be worthwhile for the CCA to explore how surety firms may be wiling to help construction companies address these gaps.


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Global Sourcing and Procurement Support

Few companies appear to use the global sourcing groups and trade agents that specialize in offshore procurement and supply chain management, so a significant opportunity lies in helping the sector’s SMEs use these resources to leverage LCCS more effectively. This could be achieved at an association level by building links to credible, established sourcing and procurement organizations, including online sourcing tools such as www.mfg.com, www.globalspec.com, www.globalsources.com, www.quadrem.com and www.ariba.com.

Similarly, given the small and regional focus of many firms, the creation of buying groups such as those that exist in other industries and in geographic markets would allow companies to acquire bulk, MRO and other non-strategic goods more cost-effectively. The concept does not have much appeal to the participants in this study, however, and perhaps deserves increased promotion through studies of best practices in other industries and countries. Companies that do seek to pursue this avenue can use their local/regional industry associations — and potentially those of other industries as well — to develop a network of like-minded businesses that want to develop such buying groups.

A similar benefit could be achieved through increased exposure to, and education about, the value of third-party procurement outsourcers such as BuildDirect.com.

Potential CCA value creation opportunity: The CCA’s role could lie in catalyzing the use of these tools through collaboration with the relevant vendors. This could be done through a referral program or even through co-marketed programs. Additionally, the CA could also create best practices guide for sourcing in the construction market (which would be complementary to the education path suggested above).


Supply Chain Financing (SCF)

While it is a relatively new concept and has limited availability for SMEs, companies should be exploring SCF as an approach to generating enhanced working capital management and reducing costs. This would also allow them to deal with foreign suppliers from a stronger position, or at the very least not be hampered by tight payment terms.

SCF involves balancing the objectives of both suppliers and buyers from the perspectives of terms and cash flow. It can include invoice discounting at very attractive rates, vendor managed inventory and use of SL/C’s to improve payment terms.

Buyers

For buyers, SCF can:

minimize investment in working capital by increasing days-payables-outstanding (DSO) and reducing inventory levels;

reduce input costs, since many buyers report being able to negotiate better discounts due to tighter and more formal buyer/supplier relationships under SCF;

reduce borrowing costs, since total borrowing declines due to smaller investments in working capital; and

increase the stability of the supply chain, as buyers no longer shift their risk to the smallest, weakest member of the chain.

Suppliers

For sellers, SCF can:

reduce accounts receivable by offering early payment opportunities — essentially, on-demand payment is available;

reduce costs by leveraging the lowest cost of capital in the supply chain; increase the certainty of cash flows though defined payment terms and,

when technology is deployed, better visibility into payment status; increase the strength of the customer relationship.

Potential CCA value creation opportunity: The direct opportunity for CCA is relatively limited. It may have an educational role in describing the new financial services available to the sector. Additionally, it could seek to partner with preferred financial service providers that are willing to work with sector participants on addressing the sector’s needs for cash flow management.

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Snapshot – Focusing on collaborative procurement

The traditional procurement model often produces suboptimal procurement, since the more powerful buyer seeks to extract concessions on price, payment terms and delivery from the weaker supplier. This shifting of costs to the weaker participant actually increases the cost to the buyer, since the supplier will naturally incorporate its higher cost of capital into the cost of the goods. Moreover, in extracting such concessions, the buyer weakens the overall strength of the supplier, thereby increasing the long-term risk of supply chain disruptions. SCF-based procurement seeks to balance the objectives of both parties to achieve their respective objectives.



Issues of legislative, labour and safety compliance are often the largest barriers to successful market penetration abroad. The costs of complying are frequently prohibitive and limit smaller companies’ capacity and desire to target foreign markets. While financing options in these areas are limited, companies should look to the Business Development Bank of Canada (BDC) when possible, and try to extract the most from R&D tax credits to defray the costs of their development programs.

Potential CCA value creation opportunity: The CCA could approach the BDC and other lending institutions to create a targeted foreign market compliance solution. This would allow Canadian companies (primarily in the manufacturing segment) to finance product development for foreign market compliance. Ideally, such a solution would be structured as a term loan repayable over a five-year term. Other possibilities might be principal repayment deferrals for the first year or two, or royalties based on sales volume in the foreign market.


Supplier performance, at all levels of the supply chain, plays a crucial role in the overall success of companies. Many companies shy away from LCCS, for example, due to past experiences or concerns about a foreign supplier’s failure to perform. It is clear that products such as Specification Compliance Insurance, performance guarantees, bonds and other tools are used only in exceptional circumstances by smaller companies. Additional product development is obviously required in the risk management and financial services sector to address the increased risks to SMEs, and a collective direction is needed to steer these investments.

Potential CCA value creation opportunity: The CCA’s role can span multiple opportunities to increase the awareness and adoption of supply chain risk management tools. It could provide a directory of risk management tools and referrals to suppliers, act as a focal point for sector-specific solution development with third-party providers, and provide education about supply chain risk management.

Snapshot – Specification Compliance Insurance

Specification Compliance Insurance covers the ultimate risk that manufactured goods may be found, after arrival at the buyer’s site, not to be as ordered. The insurer will pay if the goods are not in accordance with the specifications, thus covering the financial loss to the buyer or its lenders. This coverage is an extension to a regular all-perils marine cargo policy; its main requirement is an inspection at the point of production by the insurer's designated auditor.

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EDC INTERNAL USE ONLY

Page 44

CONCLUSION

Although it is domestically and regionally focused, the construction sector offers opportunities to

deliver new solutions for a broad array of issues, especially given the complex needs of the sector and

its crucial concerns with risk and cash flow management. The key opportunities for the CCA and other

sector associations lie in focusing on structural enablement for exporting, importing and supply chain

management. Establishing partnerships to drive solution development and service delivery, and thus

increase the breadth and depth of the sector’s marketplace capabilities, is a highly effective means of

addressing the challenges identified in this report.

UPPLY CHAIN DYNAMICS & OPPORTUNITY ANALYSIS Sector

Private Sector Owners

Page 45

APPENDIX 1: SUPPLY CHAIN STRUCTURE

Petroleum Products / Petrochemicals

Petroleum Products / Petrochemicals

Raw MtlsRaw Mtls

EnergyEnergy

Heavy Construction / Road Builders

Heavy Construction / Road Builders

General Contractors

General Contractors

Trade Contractors

Public Sector Owners

Public Sector Owners

Building Materials Distribution

Building Materials Distribution

Building MtlsManufacturersBuilding Mtls

Manufacturers

Transportation Services

Warehousing / Logistics

Import / Export Control

Customs Brokers

Transportation Services

Warehousing / Logistics

Import / Export Control

Customs Brokers

Equipment FinancingEquipment Financing

OEMsOEMs

Equipment RentalEquipment Rental

Intermediate CommoditiesIntermediate Commodities

Equipment DealersEquipment Dealers

Specialized Services

Specialized Services

Lenders/ InvestorsLenders/ Investors

Value-added CommoditiesValue-added Commodities

Architectural Services



Consulting Engineers

Legal Services

Consulting EngineersConsulting Engineers

MRO vendorsMRO vendors

Insurance / Surety / Bonding

Insurance / Surety / Bonding

Core Supply ChainSecondary Supply Chain

SCanadian Construction


APPENDIX 2: SUPPLY CHAIN PARTICIPANT CHARACTERISTICS

Company Type

Core Characteristics

Upstream Supply Chain

Downstream Supply Chain

Financial Value Chain

Technological Sophistication

Global Trade Propensity

General Contractors

Large

• Multi-regional / national

operations • Supply chain anchor • Asset-light

Some self-perform

• Generally decentralized

procurement • Tactical, project focused

procurement with some strategic sourcing

• Some employ multi-year, national contracts for certain inputs

• Most procurement delegated to trade contractors

• Selectivity increasing

due to deteriorating • Value and customer

satisfaction oriented • Very focused on

timeliness of project execution due to penalties arising from delays

• Strong cost reduction

bias • Seek to support supply

chain by focus on timely payment

• High to very high

internally IT adoption Project management

and document management focused

• Limited integration with business partners

Exports • Moderate. Expansion

generally in North America.

• Acquisition and replication are favored models

Imports • Increasing usage of

offshore sourcing

SME • Local / regional operations

• Asset-light Some self-perform

• Tactical, project focused procurement

• Limited ability to create economies of scale

• Most procurement delegated to trade contractors

• Selectivity increasing • Customer satisfaction

and cost focused

• Extreme cost reduction focused

• Front loading of invoicing to improve cash flow

• Construction management focused firms have very tight cash cycles due to invoicing time lines

• Moderate to high internally IT adoption Project

management and document management focused

Exports: • Very limited Imports: • Indirect imports through

supply chain partners

Heavy Contractors

• Asset intensive • Mostly regional in

nature • Majority of operations

self-performed • Some have maintenance

operations smooth cash flows

• Greater use of centralized procurement

• Significant exposure to commodity price volatility

• Strong focus on government business and large owners

• Commodity price risk passed on to buyers in many cases

• Increasing concern about escalating warranty requirements

• Strong use of leverage for asset acquisition

• Strong cash flow focus

• Varied levels of internal IT sophistication

• GPS technologies for fleet and operational efficiency

Exports: • Generally limited Imports: • Direct import of capital

equipment

Trade Contractors

• Mostly regional in nature

• Specialized competencies Scarcity provides

some pricing control

• While procurement remain project based, strategic relationships with vendors are noted

• Require JIT delivery from distributors / manufacturers

• Price competition dominates

• Focus on building personal relationships with GCs

• Cost focused • Some concern about GC

payment practices and timelines for invoice submission

• Moderate level of IT adoption.

• Progressive firms are investing in IT and other technology to drive operational efficiency and flexibility (i.e. GPS)

Exports: • Generally limited,

however some specialist firms (e.g. structural steel erectors) have strong export foci

Imports: • Limited direct imports,

extensive product import through distributors.

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Company Type

Core Characteristics

Upstream Supply Chain

Downstream Supply Chain

Financial Value Chain

Technological Sophistication

Global Trade Propensity

Engineering / Architecture

• Wide range of scale of operations and sizes

• Large firms also provide turnkey services (acting as procurement agent)

• Very limited goods procurement except when acting as agent for buyers

• Influence client procurement decisions through engineering decisions

• Key partner to GCs and owners

• Concern exists with respect to continued reduction in engineering budgets and squeezed timelines which results reduces drawing quality

• Fee for services generally tied to work performed results in more stable cash flow

• Focus on collections and working capital management

• Relatively high level of information technology adoption

• Engineering, design and document management focused

• Global market focus ranges from low for smaller firms to very high from large firms

Distributors / Equipment Sales and Rental

• Range from small local providers to multi-national global firms

• Multi-line and single line product distribution models exist

• Service innovation and relationship are key

• Very focused on developing and maintaining manufacturer relationships

• Play critical role in physical goods inventory management and delivery

• Implementing innovative inventory and delivery models to improve service levels

• Transportation cost optimization is important

• Working capital management is critical Focus on cost,

inventory turns and collections

• Concern exists with respect to GC payment practices and undercapitalized trade contractors

• Increased credit management occurring

• Highest level of IT sophistication in supply chain

• Focused on pushing integration solutions to clients to increase online orders and low overhead

• Equipment

Exports: • Generally limited as

business model is regionally focused

Imports: • Significant direct

importation from foreign manufacturers

Manufacturers • Range from raw materials providers to value-added manufacturers

• Supply chain integration critical to reducing costs

• Significant LCCS and offshore sourcing

• Focus on product innovation for better performance and lower cost

• Transportation cost optimization is key to getting product to market

• Lead times are a challenge due to demand in manufactured products

• Working capital management is key

• Far removed from ultimate customer and project cash flow creating payment concerns

• Increased credit management occurring

• Key focus on driving manufacturing productivity

• Investment in IT is important, but less so that process enhancement

Exports: • Canadian value added

manufacturers ate highly export oriented due to limited Canadian market

• Commodities harder to export due to transportation costs

Imports: • Significant direct

importation from foreign manufacturers as raw materials

• Smaller manufacturers concerned by risk of LCCS despite desire top pursue this strategy