NZ Government Construction Accord

On the 26 JANUARY 2020 the NZ government in partnership with industry launched the NZ construction accord. This was in response to the Treasury New Zealand Construction Conditions of Contract Report back in September 2019 and the number of Construction companies either entering into liquidation or posting large annual losses.

https://www.constructionaccord.nz/the-accord/

Procurement had and still has a significant part to play in the construction sector and the new accord highlights some key areas for procurement to modify its past behaviour when working with suppliers in the sector.

The accord introduces priority focus areas which are Industry Led, Government Led and shared.

Procurement is a Government led Priority area highlighting the focus on “Better procurement practices and improved pipeline management”

“Create a more certain, visible and better coordinated pipeline of government construction work” ( There have always been challenges for suppliers to make investments when there is no surety of future work/contracts)

“Improve government and industry procurement practices so they are more consistent, focus on good value and enable the industry to succeed” ( the key word here is good value and not lowest cost , fixed price, fixed cost as seen in the past)

The shared priority area that is another stand out for me and procurement professionals is;

Better risk management and fairer risk allocation. It is great to see the new view of not transferring all risk as you can and should never do this.

The statement ” Re-balance risk in the sector so it sits with the party best able to manage it. Improve the understanding of construction risks and their impact and costs” is a fantastic set of principles.

Over 10 years ago I was in a company contracting many construction companies. We always sat down with the supplier and asked them to price each item of risk even compensation events. As a Business we chose the risks we would take on ourselves (budgeted and put in our contingency) and also the risks we would pay the supplier for as a fixed price. A much more open, transparent and fair way to jointly share risk.

I am excited about this accord and the proof of the pudding will be in the eating ( as they say). Lets all support this approach creating a strong, vibrant, consistent, fair and sustainable construction sector for all in New Zealand

RISKY BUSINESS

Strategic risk if not well managed has the potential to destroy the greatest value for an organisation yet; it is where management, risk/audit and board risk committees tend to spend the least amount of time. (Arash Rashidian).

What are some of the risks organisations face?

  • Labour model disruption
  • Lagging digitisation
  • The pace of change
  • Digitisation misconceptions (AI, Robotics etc)
  • Climate change liability
  • Remote working for workforce
  • Dated policies and procedures
  • The War for Talent ( shortages )
  • Sustainability
  • Trade wars

With organisations average spend being upwards of 60% through 3rd party suppliers how are they managing the supply chain risk?

Supply chain risk can be defined as “the implementation of strategies to manage both everyday and exceptional risks along the supply chain based on continuous risk assessment with the objective of reducing vulnerability and ensuring continuity” (Wikipedia)

If you are working in the supply chain you will be familiar with the trend that  the world is becoming more influenced by VUCA – Volatility, Uncertainty, Complexity and Ambiguity.

These drivers are increasingly used in recent years to describe the current business environment and the impact it has on the supply chain performance.

Countries such as the United Kingdom and Australia have legislation holding large organisations to account ensuring that there are no suppliers using modern slavery in the manufacturing and provisioning of goods and services supplied to that organisation

The food industry is seeing an increasing demand by consumers for clarity of provenance–also leading to a focus on supply chain risk.

 How do we manage supply chain risks in our businesses today?

 Supply Chain Visions, Inc. has developed a model that targets 4 areas, Strategic, Operational, Financial and Physical risk as per the picture below.

SCRM 
SCOPE

Most organisations today are managing risk through Enterprise Risk Management methodologies like Bow-Tie and Monte Carlo.

Monte Carlo simulation performs risk analysis by building models of possible results by substituting a range of values—a probability distribution—for any factor that has inherent uncertainty– a much more realistic way of describing uncertainty in variables of a risk analysis. Below is an example of a simulation presented in a histogram format.

Image result for monte carlo risk analysis

Bow-tie  is a risk evaluation method that can be used to analyse and demonstrate causal relationships in high risk scenarios. A Bow-tie diagram does two things. Firstly, a Bow-tie gives a visual summary of all plausible accident scenarios that could exist around a certain hazard. Secondly, by identifying control measures the Bow-tie displays what a company does to control those scenarios.

From <https://www.cgerisk.com/knowledgebase/The_history_of_bowtie>

Image result for bow tie risk analysis

Diagram CGE Risk Management Solutions

I have seen this being introduced in complex organisational environments as it provides a simple clear high level management view of what can be a complex analysis.

There are known risks,  where organisation’s can use a typical approach for risk identification mapping out and assessing the value chains of all major products and services, and unknown risks, which by their nature are difficult or impossible to predict, quantify, or incorporate into the risk-management framework 

McKinsey has developed a practical approach methodology to managing unknown risks a model colloquially known as the Swiss cheese model.

ayers o 
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Risk processes, standards, competency, organization, and culture

Australia and New Zealand have adopted the ISO 31000 standard for risk management. Standards New Zealand state that Using AS/NZS ISO 31000 will assist organisations to:

  • increase the likelihood of achieving objectives
  • be aware of the need to identify and treat risk throughout the organisation
  • improve the identification of opportunities and threats
  • comply with relevant legal and regulatory requirements and international norms
  • improve financial reporting
  • improve governance
  • improve stakeholder confidence and trust
  • establish a reliable basis for decision-making and planning
  • improve controls
  • effectively allocate and use resources for risk treatment
  • improve operational effectiveness and efficiency
  • enhance health and safety performance, as well as environmental protection
  • improve loss prevention and incident management
  • minimise losses
  • improve organisational learning
  • improve organisational resilience.

From <https://www.standards.govt.nz/search-and-buy-standards/standards-information/risk-managment/>

Having common standards allow risk to be benchmarked in a macro environment. Comparison and correlation will enable risk management improvements both on a micro and macro level.

In the procurement and supply chain domain of risk management many suppliers of ERP, Sourcing and P2P systems have been developing management tools to deliver integrated reporting of Supplier Risk:

https://www.ariba.com/solutions/solutions-overview/supplier-management/supplier-risk

https://www.zycus.com/blog/supplier-management/5-supplier-risk-assessment-pitfalls-to-avoid.html

https://www.gatekeeperhq.com/risk-module

https://www.oracle.com/technetwork/apps-tech/grc-accelerators/supplierriskmanagementdetails-326886.pdf

https://www.coupa.com/products/supplier-management/risk-assess/

https://www.oracle.com/africa/applications/erp/procurement-cloud/supplier-qualification-management.html

https://www.bvdinfo.com/en-gb/solutions-for-your-role/supplier-risk-management-and-procurement

Procurement Leaders’ have launched a guide to third-party risk management which provides a summary of the maturity curve outlining progression of a function’s management of third party and supplier risk.

The guide is divided into four sections:

  • Functional Efficiency
  • Cross – Functional cooperation
  • Supplier collaboration
  • Network coordination

It describes each maturity level in detail and provides supplementary details on the activities and tools teams can apply at each level.   Procurement Leaders are a global entity that provide procurement and supply chain insights for a global membership through research and white papers.

This is another procurement focused organisation that has seen a more intensified focus on supplier and supply chain risk.

SUMMARY

In a VUCA world many businesses are under increasing pressure to take a more proactive approach to mitigate risks.

Along with traditional risk functions within businesses, supply chain risk partnering with emerging technologies enable organisations to accomplish risk management more efficiently.

At Kearney’s paper “Are you prepared for a black swan event” highlights that the focus on risk by procurement leaders comes at a time when procurement stakeholders (CEO,CXO, CFO, COOs etc) who have been dealing with business risk for many years have higher expectations of procurement leaders to manage supply chain risk.

Procurement teams that are maximising this opportunity and looking at risk management in innovative ways are starting to benefit, demonstrating an opportunity for the procurement function to help build resilience and add value to the whole business.

The advent of Big Data and innovative technology has enabled greater insight for organisations to accomplish this more efficiently. By embracing risk management, procurement can use it to deliver immediate value to all businesses and also enhance its own internal brand.

At What Cost?

At what cost?  a blog about the unintended consequences of continually driving cost savings Year on Year from your suppliers.

Lets start with a definitions to whet the appetite;

Cost savings also known as cost reductions or ‘hard’ cost savings, are savings that directly impact the company’s bottom line (i.e. profit/loss).

In relation to procurement ; The aim of Procurement savings are to drive down procurement costs, improve supplier terms and decrease product prices. A cost-effective procurement process would help a large organization generate millions of dollars of savings every year.

What do you think ? Do you agree?

There is a very fine line when continually requesting cost savings from your suppliers year on year, especially when  only focused on the input price and not Value or Total Cost of Ownership. Suppliers have to make a return on investment for their shareholders.  Continually squeezing margins can drive many unintended consequences. 

I have a saying that is a different take on squeezing blood out of a stone.  In the context of your suppliers “If you continue to squeeze a stone with your hand what happens to your hand ? –  ( It will be your hand that bleeds)!”

The Construction Industry

A great example of unintended consequences of cost out in New Zealand is the systemic issues in our construction industry. An industry’s boom / bust cycle is constantly under review. (NZ demographics for the construction industry show 90% of organisations have less than 10 employees – atypical compared to many OECD countries). For many years there has been a focus on fixed price construction at lowest cost combined with the drive to transfer as much risk as possible to the supplier. The articles below highlight the issues the big companies (10% of the industry) have had over the last few years entering liquidation or writing off millions of dollars;

https://www.stuff.co.nz/business/opinion-analysis/111232667/a-history-of-mainzeals-collapse-in-10-chapters

https://www.stuff.co.nz/business/property/105930927/collapsed-construction-firm-ebert-linked-to-previous-company-failure

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11994098

https://www.tvnz.co.nz/one-news/new-zealand/calls-change-after-collapse-another-major-nz-construction-company

In boom time liquidation should be unheard of. This is one of the unintended consequences around costs and fixed prices!

“Sometimes it costs you more to do something that it is actually worth”

Do you have any examples of when this has occurred?

Global Fashion

Consumer demand can also driver unintended consequences and at what cost? The Global Fashion Industry was worth $2.4 trillion in 2018 with an expected growth of 5-6% Year on Year.

Consumer demand has driven a substantial growth in the fast fashion industry for cheap throw away fashion.

Andrew  Morgan’s documentary The True Cost on Netflix  is about the clothes we wear, the people who make them, and the impact the industry is having on our world. The price of clothing has been decreasing for decades, while the human and environmental costs have grown dramatically. Filmed all over the world, the documentary spans the brightest runways to the darkest slums, and features interviews with the world’s leading influencers including Stella McCartney, Livia Firth and Vandana Shiva, The True Cost is an unprecedented project that invites us on an eye opening journey around the world and into the lives of the many people and places behind our clothes.

From <https://truecostmovie.com/about/>

The consumer driven consumption for low cost fashion items and the link to sweat shops and industrialisation of resources creates unsustainable issues on our natural resources. Also forms of modern slavery through inhumane working conditions begs the question who really pays the price for our clothing?

Modern Slavery

Modern slavery is a critical issue derived by the demand to continually cut manufacturing costs at the expense of human rights – ( humane working conditions, a fair days pay for a fair days work )

Based on a recent CIPS modern slavery workshop I co-hosted in Australia, here are some of the global modern slavery statistics taken from the globalslaveryindex.org;

  • 40.3 million people in modern slavery world-wide (71% are female)
  • 24.9 million in forced labor
  • 65% of modern slavery is concentrated in the Asia Pacific region
  • G20 countries leaders in consumption: $354 billion of at-risk products imported by G20 countries on a yearly basis
  • Government response
  • Most at-risk imported products: electronic devices $200B, garments $128B, fishing $13B, cocoa $3.6B, sugarcane $2B

Who would have thought that in the G20 counties the average person employs 40 slaves!

The Australian statistics are also quite challenging, however in response Federal Government Legislation was introduced in January 2019 ( only the second country in the world to implement modern slavery legislation). The philanthropist Andrew Forest and his wife set up Walk Free Foundation with a vision for a world free of modern slavery and human trafficking.  https://www.freedomunited.org/about-us/

Australia’s Modern Slavery statistics;

  • 15,000 people in modern slavery in Australia
  • Forced labor is the most common form of slavery
  • Over $12B imported at-risk products every year
  • Number one on most active countries for response to modern slavery in the Asia Pacific region (before Act was introduced)
  • Most at-risk imported products: electronic devices $7.1B, garments $4.6B, fishing $180M, rice$40M, cocoa $23M
  • Most at-risk industries: service (cleaning & security), agriculture, fishing

Summary

Controlling costs is key to managing sustainable businesses, however driving an environment that continually puts pressures on suppliers has many negative unintended consequences. Global consumer demand and low cost not only creates irreparable environmental issues, it also builds an environment that ignores basic human rights. 

A new focus on Sustainability, Value, Quality, Risk and the Total Social Cost of Ownership (TSCO) should be something that all organisations should aspire to. Procurement is one of the enablers of this focus as 40-70% of business’s expenditure is through third party suppliers.

It is time for procurement to help lead a change by doing the right thing!

Are you on board?  Drive that change!

What is the cost of not?

Putting the P back into Procurement

If you have read my previous blog “Procurement is it time for a re-brand?” you will appreciate the debate that has plagued the procurement community for numerous years. For people who know me, I have always advocated in the need to put the POWER into Procurement. I thought I would have a little bit of fun ( although with some serious underlying benefits) by delivering a blog on Putting the P back into procurement.

If you are as passionate ( 1st P meaning ardent, enthusiastic, heartfelt, energetic) like me about procurement take a few minutes to think about what attributes are aligned to your values, reflects  your motivations, in a profession that is far reaching, in constant change and can deliver huge value/benefits for your organisation.

Below is a small list of the P’s that put the Power into procurement. Lets get started with some examples from the list of how the P enables our procurement profession;

  • Positive
  • Proactive
  • Passionate
  • Professional
  • Pragmatic
  • People
  • Presence
  • Principled
  • Planned
  • Provider
  • Persuasive
  • Partner
  • Pact
  • Progressive
  • Pervasive

Proactive (definitions: Pre-emptive, active, hands-on, upbeat)

Does procurement in your organisation have insight and presents ideas and innovation to stakeholders before they know about it? How good do you know the market place, suppliers and your business goals and strategies? Procurement teams that have the “Trusted advisor status”  are leading the way by managing the incipient demand of their stakeholders. It is like being an evidenced based fortune teller!

Professional (definitions: expert , proficient, specialised and qualified, certified)

How many in your procurement team understand and are qualified and certified in procurement? How many are imposters?

Lawyers, accountants, doctors, engineers, designers are just some examples of industries that have rigorous qualifications and certification. Malcolm Gladwell in “Outliers” highlighted that mastery takes 10,000 hours of practice.

When stakeholders impromptu come for advice you know they think of you as an expert.

Principled (definitions: ethics, integrity, morals, values)

Peter Drucker the management guru  coined the phrase “Culture eats strategy for breakfast”. Teams that are not principled lack trust. I have had the pleasure of taking over a team that had no organisational trust. It felt at times you were walking in quicksand but like every journey of a thousand miles starts with the first step. Ethical and transparent procurement is a prerequisite for the procurement profession and without it you will not be able to deliver the basics let alone corporate value.

Planned (definitions: strategic, organised,  frame, premeditated)

The edited version of the 6Ps of planning is; Proper Planning Prevents Poor Performance. This is something that all teams not only procurement  should aspire too. There is much hype about agile and scrum but this is still a methodology that speeds up the planning function. My wife has an adage that I have adopted ” A dream is a goal with a timeline (deadline). Setting goals is key to any success.

Persuasive (definitions: Influencer, negotiator, diplomat)

To me persuasion is one of the key attributes for the Procurement profession. Procurement usually sits in some form of shared service , support capacity for most organisations. A key part of the role is to support the business decisions through 3rd party sourcing and engagement. How would you influence an executive if they disagreed with you about changing strategic suppliers when you know well inclusive of evidential data that they are the market leaders from quality, time and price?

So focus I have left for last  is one of the top concerns for most Executive (including CPOs) are people. People can be defined as a community or group and in this form we can all attribute the word Team. The great philosopher Aristotle first coined the phrase ” the whole is greater than the sum of the parts”. In a changing world, the war on talent and capability has increased. Employing the right people with the right attitude and the right capabilities are key for most roles within an organisation.  Attitude and open mindset are my key takeaways from managing teams since the age of 24. I also have a saying that if you are playing for Manchester United your transfer fee will be higher than playing for Auckland City – so how can we build a team like Man United in our profession? Have you ever been in a high performing team that has “Collaborative Confidence” everyone knows each others roles, the energy is fast pace with lots of customer delivery, satisfaction and fun.

Training and skills are essential so aligning to a global standard such as CIPS with its ethics exams and code of conduct enable people to feel confident, both from an individual, employer customer and supplier perspective.

I hope you have enjoyed this blog , along with a few smiles I am sure there are some useful takeaways

Please let me know your feedback and/or some ideas for areas you would like me to explore more deeply