When supply chains break down…

June 10th, 2013 Posted in: Industry Issues

There can be little doubt that the prolonged difficulties besetting the construction industry has had a dramatic effect on the ‘natural order of things’ in a business which has evolved over generations of specialist contractor trading.

The rewards and benefits of managing successful, prudent and innovative specialist businesses are being seriously eroded by main contractors’ quest for increased competitiveness which is in turn limiting the numbers of specialist contractors who are able to support them in their bidding process. A particular concern is the worrying increase in some main contractors’ willingness to procure specialist façade and roofing materials directly from system manufacturers and then employing design and installation labour to undertake the works for them.

The result diminishes the strength and importance of experienced, established and capable specialist contractors, who have achieved success in this historically difficult sector.

Not all blame can be put at the contractors’ door for this worrying trend, however.

The reluctance of credit insurance companies to sustain their levels of exposure to all things construction, has had a huge detrimental effect on many suppliers’ routes to market, often bringing very sudden reductions of their established and potential customer lists and as a consequence, market opportunities. This has been especially felt by those suppliers’ whose unrecoverable debt experience and their resultant weakened balance sheets over the last five years precludes trading at risk with uninsured customers, no matter how long and close the business relationship. Faced with at best limited and at worst non-existent credit insurance cover on many of their customers, suppliers will inevitably respond to these main contractor initiatives to sustain their route to market.

Despite these short term mutual benefits, there are significant consequences that must be addressed in terms of the notoriously challenging building façade sector and the increased eventual risk to the main contractor and end client, not to mention the longer term relationship with their traditional well established secure customer and specialist supply chains.

There is the risk that some main contractors will underestimate the administrative detail and complexity in the façade material procurement process, perhaps relying entirely on the limited resource and low accountability of the design and installation company.

Similarly, suppliers may experience expensive changes in their order administration processes and soon recognise the increased need for closer diligence in their dealings with main contractor buyers that are inexperienced in façade component procurement.

In contrast, the more established and secure specialist contractor will deploy both technical experience and essential collaborative relationship in the process, to eliminate risk, audit time scales and recognise innovative solutions within the façade construction.

As for the future, it won’t take many noticeable project failures to illustrate a flawed process, but in the meantime the concern is that the investment of success into the balance sheet of companies like Lakesmere will continue to be unrewarded.

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8 Comments to “When supply chains break down…”

  1. Jim Patterson Says:

    An excellent summary of the perils facing the Industry and, in particular, the specialists in the external envelope field where ever more complex Architecture demands that the design, procurement, manufacturing and installation teams have both the academic knowledge and priceless experience necessary to bring the projects to a successful completion. It would be good if the article could be circulated to all Management and Main Contractor procurement staff!

  2. Lakesmere Says:

    Thanks for your comment Jim. Yes this is an issue Lakesmere feels very strongly about. Please feel free to share our blog to keep the debate going!

  3. Brent Tyrrell Says:

    Thanks for your comment Jim – one hopes the blog will reach the right people !

  4. Mark Harris Says:

    Totally agree with your synopsis. These issues, combined with longer payment terms and onerous (and unfair) contractual conditions, are making the trading environment extremely difficult at the moment, which is a real shame when considering the number of really good facade contractors still operating in the UK. Main contractors need to be protecting their specialist contractor, not working against them.

  5. Brent Tyrrell Says:

    Mark – Thanks for your comment. I’m sure you will agree that this unwelcome method of procurement does nothing but devalue responsible facade companies, who have developed strong balance sheets through innovation, well run organisation and robust supply chain relationships.
    In short it diminishes just reward for success.

  6. DaveR Roberts Says:

    Well constructed as the article is it does not acknowledge that some and many subcontractors behave in exactly the same manner that their customer main contractors are accused of. What should prevail is a higher level of business ethics all round. Decent people will deal with decent people and those with gutter ethics who have overpopulated our industry should be avoided if you can afford to! Sadly a lot of business lies in the hands of clients, contractors and developers who play one off against the next in the shittiest way. Dutch auctions, late payments, dishonest briefs, counterfeit incentives, are just some of the occupational hazards of business today. What ever became of all the good values contained in the long forgotten Egan Report and it’s successor The Latham Report? It’s a tough old world isn’t it?

  7. Brent Tyrrell Says:

    Hi David,
    Your understandably exaggerated and provocative comment has I think at least some basis in fact.
    I could say ‘twas ever thus’ in any business and our own is not immune from the realities of market place commercial tension.
    What we all expect is fair treatment and reward for successful experience which used to be the result of close relationships, but these worrying procurement methods, all be they short lived, are evidence that many suppliers are also prepared to jeopardise customer relationships in their struggle to retain market shares.

  8. Laurence McBeth Says:

    I believe that the issue is an economic and not an ethical one..

    Clearly, proper supply chain processes and equitable trading terms and conditions and what everyone in the industry would like to see. However, the longer this construction industry remains in the doldrums, the less likely we are to enjoy the luxury of ethical trading in either upstream or downstream supply chain relationships…why?

    The reason is that we all have to survive in a market starved of margin and driven by a client base with an interest in keeping it that way…add in a government with a fundamental political aversion to demand led policy and what do we get…cost driven competition with little regard for any real trust in our supply chain relationships…and sadly, all of us accepting and indeed participating in the process in order to secure business.

    The result is good specialist sub-contractors struggling and many going to the wall..

    Conclusion…proper supply chain relationships seem to work best only when the economy allows in times of plenty.

    Food for thought…

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