Property directors, estate directors, head of acquisitions, facilities director….whatever your title and whatever your industry, reducing total cost of ownership (TCO) and mitigating risk are two of the major aspects of your responsibility.
It’s a multi-dimensional problem and finding ways to reduce costs whilst maintaining quality of service is one of the chief sources of frustration for property directors.
Unlike some of your co-directors, your area is one most likely to experience those unexpected costs. Not that unplanned maintenance work, the cost of repairs after a flood, or the cost rectifying compliance issues is your fault, of course. It’s just that everyone – CEOs, Operations Directors, Financial Directors and yourself – would prefer NOT to have those unexpected costs.
So how do you control those unexpected costs?
This is where disruptive procurement comes in – some out-of-the-box thinking and learning from other industries to provide new solutions to old problems.
1 Fix maintenance costs - learn from other industries
Let me give you an example of a restaurant chain learning from manufacturing – not about food production a la McDonalds but applying a different approach to facilities maintenance and management.
The restaurant industry largely relies on the people operating the equipment plus calendar or usage based servicing to ensure equipment performs optimally.
Let’s just look at what happens….
The restaurant workers are focused on revenue – they want to keep things working as long as possible and maximise daily takings. Non-safety related issues can be considered lower priority, but the old adage “a stitch in time saves nine” often applies, and things that are left working at suboptimal conditions can end up causing bigger problems…and costs.
A leaky tap? Not a problem until the inflated water bill comes in.
The restaurant chain’s outsourced electricians, plumbers etc are also interested in profit, so they make more money by spending as much time as possible on site.
It’s easy to see how maintenance costs are uncontrolled in that environment.
We were called in to see if we could reduce maintenance costs and, with our disruptive procurement hats on, we challenged ourselves to address not one but two problems:
- How could we reduce costs and maintain / improve service levels? AND
- Could we find a way to FIX maintenance costs?
For a long time, manufacturing companies have implemented computer aided monitoring systems to facilitate preventive maintenance of equipment and machinery. Electronic sensors that measure vibration, heat, speed and other factors are linked to maintenance management systems to create inspection requests and alerts for items falling outside pre-determined tolerances.
Our procurement consultants brought that learning into the restaurant chain. We worked with them to implement a computer aided facilities management system and aligned the incentives for the maintenance companies with delivering an optimal solution – lower cost, low risk, improved service levels.
We agreed a maximum price for each property under management. We delivered over 25% cost savings, but more importantly moved maintenance from variable to fixed cost.
2 Cost efficient buildings by design - not just energy efficient
A proportion of the cost of ownership of a building can be related to the design of the building or the fit-out work.
It’s obvious that good insulation reduces heating costs, but what about the design of access points for maintenance work? Or the ease with which parts of the fittings can be replaced if they become dirty or damaged without replacing everything?
Now we’re really talking about reducing the total cost of ownership.
That’s what our procurement experts helped one major high street retailer to achieve. They were regularly building out new facilities throughout the UK. Whilst they were all similar, each one was constructed individually with design and contract changes occurring from building to building.
We worked with them to define a standardised building design focused on operational efficiency. We put a supply chain behind it, and in summary this delivered:
- faster turnaround projects
- reduction in build costs of 12%
- reduction in running costs
3 Monitoring systems - get what you paid for!
This may seem obvious and nobody wants to admit that they haven’t actually got what they paid for, but tracking every maintenance activity in a multi-property estate can be nigh on impossible.
It is not unusual for us to find that suppliers have sent bills for work that has never been completed, or charging for more time than was actually spent on site.
Can you afford to have an appropriate person on site to record the time they worked, assess the work and ensure that the charge for the completed job is appropriate?
Is there a better way?
We think so!
One of our clients – a major distributor - had no data whatsoever to support its maintenance activity. They had no idea how long suppliers were on site, what work they were doing and whether their invoices were reasonable.
We worked with them to put in place systems and processes to capture the information needed to build out a profile of the work required and validate supplier invoices.
This has set them up to refine their property strategy going forward and to release circa 15% in cost in the first year.
4 Another way of working with multiple suppliers
Asking a supplier to determine requirements and carry them out is just like giving them an open cheque, yet so often we see businesses using the same company to carry out statutory inspections and then do the remedial work.
In some cases that is the most practical thing to do, but we have realised cost savings where there is an opportunity to place a contract for statutory checks with one business and the remedial work with another.
By thinking carefully about the incentives and payoffs for each party, we designed a procurement and contract management approach which delivered improved services at significantly lower costs. This was achieved despite considerable asset complexity with differing equipment, conditions and age across the estate.
Total costs for our 1,000 property client have reduced by nearly 40% in the category.
5 Supplier Performance Management Systems
Good supplier performance results in:
- An estate that functions well
- No (or very few) unexpected operational costs
- No (or very few) unexpected capital costs to fix long-standing issues
Yet many companies don’t have a system in place to assess supplier performance.
Defining standards and setting up supplier performance management systems isn’t necessarily easy, but definitely provides rewards in terms of smoother operations and lower costs.
According to the Institute for Supply Management, the benefits of Supplier Performance Management include:
- Increasing performance visibility
- Uncovering hidden costs in the supply chain
- Leveraging the supply base
- Aligning customer and supplier business practices
- Mitigating risk
- Improving supplier performance
The Aberdeen/iSource Supplier Performance Measurement Benchmarking Project found that enterprises applying consistent performance measurements and procedures were able to improve supplier performance by more than 26%, on average.
We’ll be sharing our views on supplier performance management solutions in one of our future blogs. Sign up to our blog to get email notification.
In the meantime, I have given you a few small examples of the disruptive procurement techniques that our procurement consultancy has used in this blog, but to see more detailed examples from a diverse range of industries, download our eBook “11 thought-provoking examples of disruptive procurement in action".