The following content was originally published July 2021 on IBM’s Category Insights Newsletter.
Industry Changes and Trends:
As we continue our recovery from the impacts of the pandemic, inflation rates across the globe are on the rise.
On average an inflation rate over 2% is impacting costs across North America, Europe, and Asia. With an average jobless rate over 6% the impact on consumers is high, but demand is rising.
As a result, demand on lumber and steel is at an all-time high causing major steel suppliers to temporarily halt new orders and lumber distributors are paying premiums to redistribute supply. Overall, the index for subcontractor labor and materials is down from March, but still trending high overall for the year.
Six-month projections suggest rates will continue to rise through the year, but at a more moderate rate than we saw from January to March.
Global housing starts are on the rise 33% overall, led by recovery in Japan (347%) and Spain (56%). Slight decreases were noted in Canada, Bulgaria, and Finland (<-17%).
Speculation from Private Equity on future infrastructure spending bills are causing M&A activity. Most notably global private equity firm KKR announced its acquisition of international infrastructure giant John Liang Group.
Other potential M&A activity resulting from market strain is the potential liquidation of the UK’s 3rd largest steel business Liberty Steel Group.
Act as a Strategic Advisor to the Business
The COVID-19 pandemic has affected; material supply, commodity pricing, availability of labor, and raised questions about return-to-work. With the construction market in a state of high volatility, procurement must become the Business’ trusted advisor. Constraints on supply and upward pressures on key commodities, mean Businesses cannot rely on procurement models of the past.
Thoughtful early engagement with procurement is essential and procurement must transform how the Business procures construction services. Fostering a trusted advisor relationship with Procurement means the Business must treat Procurement as a partner and engage early. A partnership with Procurement begins with a forward-looking capital plan that gives Procurement visibility into the work ahead. This kind of transparency allows Procurement to be proactive and contribute to the capital plan. Early engagement allows procurement to be more thoughtful and comprehensive with their sourcing and allows for careful consideration of various contracting models.
To cultivate and maintain the role of trusted advisor, Procurement must continually demonstrate their value to the Business. Staying tuned to market conditions by knowing the market trends and tracking downstream commodities is essential. The role of Trusted Advisor demands that Procurement be well-versed in the various delivery and pricing models and that they are constantly considering ways to meet the Business needs through careful application of these models. The role of trusted advisor also demands that Procurement have a thorough, comprehensive, and objective view of the Service Providers in every market and that they bring that knowledge forward every time.
Align Skills and Talent with Business Needs
Procurement strategies should always align with business strategy, but when markets are highly constrained, demand for alignment is more important than ever.
In construction, a high probability of change driven by market forces creates conditions of high risk. These conditions can be mitigated, but clear alignment with the business needs is imperative.
To achieve this alignment, it is essential that we begin with a Capital Construction Plan aligned with the company direction. Procurement can then develop a Construction Category Plan that is responsive and aligned with the capital plan. This fundamental alignment between the capital plan and the category plan allows Procurement to Act
proactively and strategically to facilitate the planned work.
Address Cost/Risks of the Supply Chain
During these turbulent times, the number one risk to any construction project is the potential constraint on supply. Everything from lumber and steel to equipment and furniture has been impacted by a confluence of supply constraints and increased demand.
Project strategies must evaluate the potential impact of these constraints to avoid impact during construction. Early awareness is essential as almost all mitigation strategies require preventive action. Late mitigations are simply not as effective.
Increase Spend Influence
In order to achieve meaningful savings, procurement must maximize it’s influence over-spend. For construction, this does not mean addressing every dollar with the same approach.
Procurement should tailor the approach depending in the clip level. This mean focusing on the most strategic projects while putting in place strategic solutions to manage non-strategic spend. This approach works best when clip level are defined through a comprehensive spend segmentation analysis.
2022 UPDATE
Since the date of this article, we have seen inflation rates rise to over 4%. Lumber prices stabilized but shot back up again in January. Demand on materials and equipment remains high. Supply chain disruptions are being experienced across all materials and equipment lines.
Early engagement with category experts remains the key to managing supply chain challenges.
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