COVID-19 has brought supply chain risks to the forefront in a way that has
really gotten builders' attention. It is easy to see the possibility of
supply chain impacts from direct or indirect results of efforts to stop the
spread of the virus. Possible issues include the shutdown of production
facilities and a slowdown of global—or domestic—product deliveries resulting
from government mandates, as well as labor availability at production
facilities and other human factors.
Subcontractor Performance Risk
July 2020
It's also possible that some materials will spike in price due to lower
supply, and that could cause subcontractors to be unable to deliver work in
accordance with their original bid. Compounding the seriousness of this
situation is the fact that this scenario could play out again, possibly in even
more dramatic fashion, in the future of our highly interconnected world.
Builders, the Supply Chain, and COVID-19
Across the board, builders report that they are strongly concerned regarding
impacts to ongoing projects from supply chain challenges as a result of
COVID-19 and are focused on ensuring their businesses' approach to supply
chain lead-time and price addresses this risk.
Even though the concerns are top of mind, the strategies are harder to nail
down. The supply chain has connections to almost every component of a
construction business. Where should the effort begin? In this article,
we'll look at actions you can take, now and in the future, to develop
resiliency in your supply chains and hedge against future impacts.
Supply Chain Management Tactics To Use Now
This is what to do now.
- Appoint dedicated supply chain leadership. This is a
complicated subject; someone needs to own it to drive success. The role of
supply chain leadership should include efforts to compile and digest the
information being gathered by your various teams and fully leverage it across
the organization. There are many moving parts: processes, systems,
compilation and assessment of data, and the strategy to make sense of it all.
In other words, this should be someone who can see the big picture and who
has the authority to take big-picture actions. Whether it's a dedicated
specialist or part of another position, there's value in someone taking
point.
-
Implement a robust, documented, and continuous subcontractor
communication plan around the supply chain. Subcontractor outreach
is foundational to correctly understanding supply chain risk. They are
closest to the risks and can give you the best possible intelligence on
them. What might a sub outreach program include? It varies, but the common
themes are fairly consistent. Talk to subs about the following.
- Known materials status and availability. Do the subs
or suppliers know there is a problem or that there is no problem? Find
out.
- Potential areas of concern. What are
subcontractors/suppliers worried might become a problem?
- Lead time and price impacts. On both, work with subs
to strategize a solution. Their insights may provide a solution you
wouldn't otherwise think of.
- Comments. In a nutshell, understand what keeps them
up at night. This freeform opportunity for subs to elaborate regarding
anything on their minds regarding the supply chain can be very
revealing—if you read between the lines. Ensure that someone does.
- Conduct a supply chain audit for all in-progress projects and
upcoming or potential projects. Make a consistent effort to
understand what is at risk and where to focus.
- Mitigate potential impacts. Plans may include alternate
materials for those with the potential for delays or escalation, resequencing
work to accommodate delays, or prepurchase and storage—with appropriate
controls.
- Share your knowledge. It's important to educate
owners and designers. You're going to "own" this risk together
for the duration of the project. Some of the smartest strategies will have
cost associated or require a design compromise. Make sure everyone knows
why it makes sense. If the owner makes a different choice, ask them
to indemnify you for the risk with contingencies or other appropriate
measures.
- Implement a materials management plan for all at-risk
materials. Track from the point of origin to your site with
documentation along the way. Confirm the materials are headed your way, and
know when they will arrive. Once on-site, check them in against submittals to
check for correct and sufficient materials. This is an environment in which
substitutions might happen. Don't leave these responsibilities to the
subcontractors only; builders need to own this risk and manage it. This is a
trust but verify situation.
- Incorporate material constraints/delays into your project
schedule so that it accurately reflects the actual activities on
site. This forms the basis of any request for time or cost, so be
sure it is accurate.
- Consult your lessons learned. Have you experienced this
in the past? What did you do then? Make sure you leverage past
experiences.
Supply Chain Management Tactics To Use Later
The above list contains tactics you can use to react to the situation now,
but what are some strategies to put your organization in a better position for
the future? Consider the following.
-
Focus on your go/no-go criteria. Understanding supply
chain challenges can help you pursue the right projects. Knowing how
flexible and accommodating an owner is likely to be matters. To the
greatest extent possible, try to do the following.
- Work with owners you know and trust. You will know
how fairly they manage contract issues; how flexible they are likely to
be when design or material changes make sense; the certainty of funding,
schedule, and cost priorities; and involvement in sub decisions. These
factors matter in a challenging situation.
- Make reasonable schedule commitments. Incorporate
new realities around labor and materials in your schedule. It is likely
that projects built now will not go up as quickly as those in the past.
Adapt to this reality.
- Make reasonable cost commitments. Use reasonable and
current assumptions around cost. Shifting supply chains may mean there
will be cost deltas from historical data.
- Review contract language with legal counsel. The
details matter with regard to risk allocation. Use what you've
learned, and definitely don't take on a contract with the same
problems that you have identified previously.
- Stick to your core competencies. If there's ever
been a time to double down on your strengths, this is it. Avoid
"firsts" and exceptions. Play the long game.
- Collaborate. Implement a process for projects to
communicate with subs and suppliers to understand their supply chain
challenges. Begin this conversation at the earliest possible stage of
bidding, and continue over the life of each project.
- Include supply chain conversations in subcontractors'
qualification analysis. Identify those with supply chain
redundancies and strong supplier relationships, and weigh those things in the
award decision. Ask subs to disclose the value and source of all potential
materials as part of their bid, and use this information to make reasonable
risk management decisions.
- Focus on resiliency. This may include redundant
sourcing, redundant subs, stockpiling some materials, and building strong
relationships in situations where redundancy is less possible.
- Incorporate supply chain strategies into your business continuity
plan. Whether a pandemic, strikes, tariffs, or embargoes,
interruption events like these will arise again, and supply chain
interruptions are typically close behind. Contemplate your approach in your
business continuity plan.
With this type of strategic focus, it is possible to mitigate current risks
and avoid or soften future impacts, and that is a goal worth working
toward.
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