Potential for Profit

All sourcing activities have the potential for increasing profit through cost reduction.

Selection of Source
1. Quality Quality is rarely a problem in the construction industry, simply because the buying firm provides the supplier with specifications and the supplier must comply. If a supplier cannot provide adequate quality, it will not receive consideration for future business from the contractor. Therefore, after the potential suppliers have been selected, considerations of delivery dependability and price play a more important role in actually selecting one supplier over another. Delivery dependability Delivery dependability is obviously vital in todays fast trac! construction industry, where construction is often begun before the architects final designs are completed. If delivery deadlines are missed, the result can be costly for both the owner and the contractor. In the construction industry, time really is money. If a pro"ect is not completed by its deadline, the loss of potential profits increases with each day past the due date. In the construction industry, suppliers must be able to deliver materials to the contractor when promised. If one company can supply a contractor considerably faster than another supplier, the faster company will have an advantage. Delivery considerations are the most important criteria used in selecting suppliers for the construction industry. #rice #rice also has a significant effect on the process selection. #rice, however, cannot always overshadow all other criteria. The tric! is to stri!e a balance between price and the other factors considered in the process. #remiums often may be required for rush deliveries. The company must weigh the desire for e$pected deliveries with the resulting higher prices. Through negotiation, the buyer and supplier must reach a price agreement that is satisfactory to both parties. 2. Other factors. Most critical criteria

%upplier must be financially stable. A supplier must be financially stable in order to ensure the buyer that it will be around to fulfill the negotiated agreement. &arranties &arranties may also play an important role when buying roofing materials, wooden doors, and cabinets. %upplier location %upplier location also may sway a buyer in the direction of a particular supplier.

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Three Common Supplier Evaluation Systems

1. Categorical Method
The buyer develops a list of performance factors for each supplier and !eeps trac! of each area by assigning a (grade) in simple terms, such as (good,) (neutral,) and (unsatisfactory.)
Supplier Material

A * +

Cost Good (+) Neutral (0) Neutral (0)

Quality Unsatisfactory (-) Good (+) Unsatisfactory (-)

Speed Neutral (0) Good (+) Neutral (0)

Total (0) ++

Performance Characteristics

The categorical method is a simple and informal system in the sense that detailed performance achievements or shortcomings are not measured. Instead, it is primarily used as a basic evaluation tool between top managers in the buying organi,ation and the selling organi,ation, while still permitting the discussion of past performance, future e$pectations, and long term plans. The advantages associated with implementing this sort of evaluation program are that it can be implemented almost immediately and is the least e$pensive of the three systems discussed here. This methods ma"or disadvantage is its dependence on the "udgment of its users. The system is largely dependent on the memories of personnel to e$plain what (unsatisfactory) or (good) means. &ith this method, there is no concrete supporting data.

2. Cost-Ratio Method
The cost ratio method evaluates supplier performance using standard cost analysis. The cost ratio method evaluates supplier performance using standard cost analysis. The total cost of each purchase of materials is calculated as its selling price plus the buying organi,ations internal operating costs associated with the quality, delivery, and service elements of the purchase. +alculations involve a four step approach. The first step is to determine the internal costs associated with quality, delivery, and service. -e$t, each element is converted to a cost ratio, which e$presses the cost as a percentage of the value of the purchase. An e$ample of quality costs follows.
Supplier: AA Elements Costs $ Site visits /00 Sample approval /1 Incoming inspection 21 e!or"ing costs //1 Paper!or" inaccuracies 300 #ost time due to re$ected materials 421 %otal additional &uality costs 3000 %otal value of purchase 300.000 'uality-cost ratio (total &uality cost( total purchase) 35

+orrect supplier selection will be an important factor in determining whether a construction organi,ation is profitable.

Single versus Multiple Sources

The goal of both policies is to provide the buying organi,ation with the best value of a supplied lot of bul! materials.

dvantages of Multiple Sourcing

The main arguments for multiple sourcing are competition and assured supply. It is commonly believed that competition between suppliers for similar materials will drive costs down as suppliers compete against each other for more of the buying organi,ations business. This sense of competition is at the very root of American thought because competition is the basis for capitalism and the bac!bone of &estern economic theory. 6ultiple sources also can guarantee an undisrupted supply of bul! materials. If something should go wrong with one supplier, such as a stri!e or a ma"or brea!down or natural disaster, the other supplier7s8 can pic! up the slac! to deliver all the needed materials without a disruption. 6ultiple sourcing also can provide other benefits such as improved mar!et intelligence and improved supplier appraisal effectiveness. +ontact with many suppliers will allow a firm to !eep abreast with new developments and new technologies as they emerge across the field. In addition, greater contact with suppliers will increase the effectiveness of evaluating a suppliers ability and progress by comparing cost and production data from among suppliers.

dvantages of Single Sourcing

The ma"or arguments in favor of single sourcing are that, with the certainty of large volumes, the supplier can en"oy lower costs per unit and increased cooperation and communication to produce win win relationships between buyer and seller. -aming a certain supplier as the single source and providing it with 300 percent of the contract requirements greatly reduces the uncertainty that the supplier will lose business to another competitor. &ith this contract guarantee, the supplier is more willing to change its business9operating methods to accommodate the construction buying organi,ation. *y reducing duplication in operations in areas such as setup, single sources of bul! materials should be able to provide lower costs per lot compared to multiple sources. %preading fi$ed costs across a larger volume should also result in an accelerated learning curve. +ooperation and communication is enhanced between buyer and seller with a single source agreement because of the fewer number of people involved when compared to multiple sourcing.

Cross-Sourcing
The single sourcing9multiple sourcing issue does not have to be viewed as a (yes or no) type of a decision. A hybrid approach can be used that is !nown as cross sourcing. &ith this method, the supplier base is e$panded without increasing the actual number of suppliers. :or e$ample, if supplier A can supply materials on pro"ects 3, /, 4, ;, and 1 and

so can supplier *, the advantages of both single and multiple sourcing can be achieved if supplier A supplies materials for pro"ects 3, 4, and 1 and supplier * supplies for pro"ects / and ;. If anything happens to supplier A, supplier * can pic! up the slac! because * has the capability to supply pro"ects 3, 4, and 1 as well. -either supplier suffers because overall volume remains the same. The reverse also can be done if supplier * fails to perform.

Supplier Reduction
<egardless of ones final analysis of the single9multiple debate, reduction of the supply base is recommended. If the perceived benefits outweigh the ris!s, and after careful analysis of both short term and long term needs, a single source may be appropriate. =owever, for operations that would be financially damaged if a supply stoppage occurred, then the use or development of a second source is wise. Assuming that it is desirable to reduce the number of suppliers, the question becomes (which one7s8>) The grade and hurdle methods are used to guide the supplier reduction analysis.

Conclusion
+onstruction organi,ations are not proficient at identifying the capabilities of their suppliers and often rationali,e decisions for the selection of materials suppliers based on convenience. This integral function? materials supplier selection process?should be integrated into the supply chain management environment so that the availability of bul! materials is ensured. The mista!es made by many organi,ations in supplier selection can be avoided with three factors for success. #rime contractors should assess the core competencies and capabilities of each supplier and then as! if that supplier could be replaced. %ince firms e$it the mar!et for various reasons, prime contractors should be prepared to establish alternative partnerships. @astly, the prime contractor should share information with all strategic suppliers and request their input.