Supply-chain management is the industry's new buzzword, with contractors drastically cutting back on suppliers to boost profits and competitiveness.
This week, the MOD revealed how it will use supply-chain management to help cut the cost of the building work it buys. The ministry is one of a number of top clients, including BAA and Tesco, that have discovered the benefits of streamlining suppliers.

Supply-chain management has replaced partnering as the industry's buzzword, and contractors are waking up to the benefits it can offer. Firms such as Balfour Beatty and Tarmac, both with annual purchasing budgets of more than £1.4bn, have cut the number of suppliers they use for all their activities, from steelwork to light fittings.

Balfour Beatty started its programme of supply-chain management 15 months ago.

In the first year, it shed 40% of its supply base. By the end of the second year, it will have slashed its suppliers from 28 000 to 7000 – a 75% reduction. "When we get to 7000, we'll review it again," says Paul Lester, Balfour Beatty's group managing director. Balfour's belief is that, by giving up to three times more work to a smaller number of selected suppliers, it will get much better discounts.

"If you have 28 000 suppliers, it's impossible to manage them effectively," says Lester. "On top of that, you're not going to get best value from them. Working with fewer suppliers and involving them at an earlier stage is the best way to get value for money from their input on the design." The contractor also hopes that working with preferred suppliers will enable them to respond and adapt to the firm's short- and longer-term plans.

Simplified administration

A major benefit of reducing suppliers is reducing the bureaucracy involved. However, administration can be simplified even further by developing procedures with selected suppliers, such as invoicing.

Balfour Beatty uses just three builders merchants for all of its London sites. To make the administration process even more straightforward, materials for individual projects come from just one merchant. The company has given its managers purchasing cards that allow them to order materials direct from a supplier without having to raise a purchase order through head office every time. Balfour Beatty's bank then pays the supplier at the end of each month.

The contractor has retained two or three key suppliers for each material or service. "When we choose a supplier, we still want them to be competitive," says Lester. "So we speak to two others at the same time and we always keep one waiting in the wings, just to make sure everyone stays on their toes." Once the suppliers have been selected, building up a working relationship is important. Training programmes are used to steer firms away from adversarial attitudes towards a co-operative approach to problem-solving with other team members. This takes time, but the reward can be a significant reduction in a project's contingency budget.

The experience of Balfour Beatty's local project managers was fundamental in trimming its list of suppliers. Tarmac, on the other hand, brought in senior purchasing managers from the aerospace, automotive and process industries to help implement changes to its supply chain.

Tarmac has split the services it procures into categories. Those with the least number of suppliers, such as civil engineering, are furthest down the supply-chain management route, whereas complex divisions, such as mechanical services, are still evolving. Each category has an account manager to act as an interface between Tarmac and its suppliers.

The contractor is not cutting back on suppliers in all areas. Where suppliers add value through design and management skills, it is reducing numbers and building better relations. But where suppliers deliver commodity products, it sees no reason to cut competition.

Tarmac is working with preferred suppliers on specific projects. Ultimately, its goal is to build strategic alliances with suppliers, whereby it will automatically work with one services specialist, say, across all its projects.

However, the decision of whether to go down the preferred partnering route seems to be contract-specific. Traditional competitive tender contracts, which make up about 30% of Tarmac's work, are still tendered with preferred suppliers, but on contracts such as design and build, Tarmac opts for preferred partnering.

Measuring performance

Both Balfour Beatty and Tarmac are working on systems that will rate suppliers on quality, speed and price. Eventually, their databases will allow them to measure suppliers' performance against standard criteria. The selection of suppliers is not always carried out on a national basis. For bulky products, such as aggregates, a network of local suppliers makes more sense.

"It will take at least 18 months before we really start to reap the benefits of all this work," says Balfour's Lester. "But even half way through the review, benefits are starting to trickle through."