Rising to the challenge Steve Malone Managing Director at PfH 28 th June 2016
Apr 13, 2017
Rising to the challenge
Steve MaloneManaging Director at PfH28th June 2016
Welcome
Agenda
Procurement in a housing context
The new normal – value creation Case study Talent
management
Context for Procurement
Seismic change
1. EU exit
2. Government policy
3. The regulator
HCA – Regression analysis‘As the sector seeks both to produce savings, and simultaneously deliver investment in new and existing homes, it will be increasingly important that providers optimise the use of their resources and assets’
‘around 50% of variation in costs cannot be explained……(and) are likely to be due to variations in operating efficiency’
‘Providers are forecasting making materially greater cost savings…..7% in absolute terms (11% in real terms)
‘boards of providers need to understand the costs of running their businesses….’
EU Exit1. The UK public sector spent £242bn last year on goods and services
2. It is unlikely therefore that procurement rules will change significantly
3. Housing providers are classed as a public body
4. Departure from the EU will not happen immediately
5. Supply chains may be effected by global market conditions
Other environmental conditions1. Fraud
1. The fraud challenge is estimated at £193bn per annum in the UK2. It is estimated that 88% of fraud relates to procurement3. Ranges from duplicate invoices, bribes, incorrect sourcing procedures,
incorrect pricing etc
2. National procurement strategy1. Failure to identify savings2. Little adoption of technology3. No change in investment in procurement even with devolution & greater
control of finances locally.
The problem for procurement…
9 9
Barriers:• spend analysis
• market intelligence• status• resource• reactive• structure
Barriers:• contract mgt• savings tracker• audit / compliance• externalisation of
expertise• no supplier
evaluation
Leve
l of i
nvol
vem
ent
NeedIdentification
Sourcing process Tendering Contract award Post contract
The problem with The market
Revenue pressure – welfare reform etcFunding & borrowing challengesSkills & materials shortagesRising labour costsEnd of decent homesProjected construction inflation between 2015 & 2018 is > 18%
Housing Spend
Utilities2.5%
Indirects30%
Property67.5%
Develop’t?%
Using HCA cost per unit of £3,950Assuming 50% of cost is spent with external providers
Planned28%
FM22%
R&M50%
The new normal
Housing providers need a relentless pursuit of innovation and operational excellence in the face of
risk and volatility to succeed.
This is an unheralded opportunity for procurement to evolve it’s value proposition to the business.
What should we be recognised for?
Delivery of cashable savings
Efficiencies to reduce
operating costs
Strategic supplier relations to
promote innovation & product
development
Demand management to
reduce operating costs
Mitigating risks in supply chainsBy delivering on this organisations will
be able to:
Reinvest in their businesses, stock and communities;
Have a lower cost to serve model
Procurements value modelValue Management
Demand Management
TCO
Reduction
Purchased Cost Reduction
Supply Assurance
Increased value (and capability
Value Proposition Procurements Role
Right goods & services, at the right time, in the right place
…..and at the right price……
…..by reducing total supply costs (not just supplier profits……
…..reducing unneeded demand activity, complexity, immediacy and variability ……
…..ultimately stimulating good demand and increasing business value derived from spend (and supply markets) rather than just reducing spend magnitude.
Site-level tactical sourcing, ordering and expediting
Negotiations
Cost modelling; supplier/market analysis; supplier management & SRM; supply planning; project management; risk management
Customer relationship management; money management; demand/specification influence
Safely harnessing the power of supply markets for competitive advantage
Where savings come from
1. Demand side
2. Supply side
3. Total cost side
Value influence40%
Sourcing & Category Man-
agement
30% Compliance, contract & supplier
management
20%Aggregation
10%Other Efficiencies
10 – 15% average indirect spend
savings
Construction - a case study
18
Client
ConsultantsProfessional
Services
Main contractor
Sub-contractor
1
Sub-contractor
2
Sub-contractor
3
Sub-contractor
4
Sub-contractor
5
Sub-contractor
6
Sub-sub contractor
Materials supplier
Materials supplier
Materials supplier
NEEDS: Low cost, good quality
NEEDS: High fees, acceptable quality
NEEDS: High final price to maximise profit
NEEDS: Payment on time
Potential for conflict & additional costs at each interfaceStructure re-assembled for each project
C
C
C
C
C
Why doesn’t the asset team involve procurement?
I have used this contractor before
They just slow the process down
It’s all about compliance –
compliance police We can get better pricing
This supplier knows us really
well
My supplier will meet our prices if we ask
them
We have no problems with our existing supply
chain
Not enough technical expertise and I am
worried over spec and requirements
No technical expertise so I seem to be doing most
of the work myself
Barriers to Value for MoneyProductivity, VfM & overall client satisfaction in the construction sector are low It is a multi-faceted problem:
Focus on surviving recessionsLow and discontinuous demandFrequent changes in specificationInappropriate selection criteriaInappropriate allocation of riskPoor qualityInefficient methods – little investment in innovationPoor managementInadequate investmentAdversarial cultureFragmented industry structureLack of stock information and data
What is the outcome?65% of contracts are unravelling before their full term
Costs are out of sync with other sectors i.e. New Build
Typical over-runs
Over specifications
Significantly more re-specifying than other sectors
Lower satisfaction levels
Higher lifetime maintenance costs
What is the issue with not involving procurement?
A lack of independence
Risk of fraud and/or collusion
No competitive tension
No review of requirements
Limited innovation
Status Quo
No understanding of cost or analysis of spend
Complete risk transfer – do you even know?
Old specs typically re-used
How should procurement be involved?
1. Analytics
2. Market knowledge
3. Category planning / sourcing strategies
4. Supplier & contract management
Don’t just rely on expertise on EU rules
Some thoughts on value creation?Analytics
Market engagement
Sourcing
Increase spend under managementConsolidate spendConsolidate supply chainReduce invoicing & payment requirementsReduce deviation from core listProduct lifetime cost analysisRestructuring existing relationships
Independent KPI managementValue executionPrice checkingPrice increase management
Transfer where appropriateMitigate supplier failureReputationChallenge & compliance risk
NegotiationAdditional valueCash flow
InnovationSpec. developmentDemand management
Risk managementContract &
supplier management
Talent Management
Talent
Administrator; process expert; price
orientated; limited commercial awareness
Procurement experts; EU experts; Policy &
process; Basic analytics; Basic
category management
Financial, commercial & category acumen; innovation focused – ideas not products & services; customer, supplier & business
centric; Collaboration skills; consultant,
networker, analyst
Increasing value (and capability)
How can PfH help?
A partner with complimentary resources and
capabilities providing…
Frameworks
Bespoke consultancy
Technology
Conclusion1. Have a detailed spend map across your entire organisation, updated quarterly
2. Be a driver of sustainable savings (when, where, why and how)
3. Be engaged with the wider organisation to understand how procurement can reduce cost across the value chain
4. Ensure that value is realised through contract management and SRM frameworks that are operationalised
5. Be delivering procurement within an operating model that connects commercial and technical capability to drive optimal outcomes
Thank You & Questions