Vendors (and Contractors) play a pivotal role in any project delivery. Despite best of efforts in selecting the right vendor, there are challenges faced by the site teams / GC in getting the work done in time and to the quality desired. These smaller contractors / Vendors become the weakest link in the chain, for project completion and cannot be taken out of the system as well. While the risks cannot be mitigated 100%, there are many proactive steps that can be taken to assess the risks and take right action as part of good practises. Large corporates having significant dependency on vendors due to emphasis on core competency, have the vendor development as centre of their strategy. The most compelling model is by DELL computers where the company is known for manufacturing computers but in reality, they simply assemble the parts and focus on marketing which is their core competency. They create an eco system where all their critical parts are outsourced to local vendors who are made to locate their factories in and around DELL assembly shop such that materials are received just in time and Vendors facilities are indirectly overseen for quality and timely supply.
“Like other retail giants, Dell has long-term relationships with suppliers that help the brand streamline their inventory management as well. The company considers its vendors to be an integral part of its success.
The key objective of Dell’s inventory management is to minimize the inventory and optimize the production speed. As a result, the company does not hold inventory for more than 6 days and avoids unnecessary carrying costs.
The retail giant has got suppliers from all over the world, including major companies such as Motorola, Samsung, Sony and more. All of them supply the components – HDDs, cables, motherboards, etc. according to a set of rules provided by Dell.
For example, it is strongly advised that each supplier have a manufacturing plant near Dell’s plant. The suppliers should also cooperate with logistics companies that can both deliver the components and ship the customer orders. Finally, the company manages its inventory based on the VMI model, meaning the supplied components are kept on the truck only and taken as needed while the vendor manages the inventory.
Dell and its suppliers communicate with each other via an internal website called Value Chain. At this website, the companies can access information about the inventory status within the supply chain as well as get demand and production data. [1] ”
Phoenix as part of the overall strategy endeavour to move from Construction of building into assembly of building where 70-80% of value creation should happen in factories and what happens at site should be assembly of various items custom manufactured for the project. Great progress has been achieved in this by converting the cores to Slipform, structure by fabricated steel, precast staircases and walls etc. We shall continue to move in this direction and give more emphasis on mechanisation such that dependency of labour is reduced.
All of these is possible only if we choose the vendor who meet the following VALUE FIT principles;
It is a misnomer that Class A contractor or vendor is always costly; price is a function of defining the requirement precisely and doing a deep dive to understand the cost structure of the vendor. There could be situations that inefficiencies of the vendor operations are passed on to the customer like us as cost of operations. Proper understanding of the cost of the vendor is paramount in negotiation of price.
Rule 6.31
(Rule 6.31) It is important that Phoenix as part of Vendor development implement the following best practices
- For every product we purchase or works we contract, the Procurement department shall identify at least 3-5 experienced vendors from the market who have the abilities to carry out the trades for which they have been chosen.
- These vendors need to be thoroughly vetted for pre-qualification (PQ).
- These vendors / contractors should meet the Value Fit principles explained above.
- Vendor development includes constantly engaging with them to make sure they innovate, improve their processes and also work on their inefficiencies. While large companies have their own eco system to manage these, the above are relevant for medium and small vendors.
- It is perfectly fine to work with smaller vendors and groom them provided they are willing to commit to our requirements.
- Financial support to smaller vendors to grow is a good strategy so long the risks are properly assessed and understood, and suitable control / mitigation mechanism is instilled.
- Negotiation is NOT bargaining; it is an art where we understand the cost structure of the vendor/contractor and make sure we pay for their efficiencies and speed and remove the cost of their inefficiencies. Hard bargaining at times could be fatal. The vendor at times might accept the price in the interest of taking up the order and choke later when it comes to delivery. Paying a lower than current value is more fatal than paying a premium.
- Lowest price (L1) is not always the best price. The best price is the cost of production based on efficiencies plus reasonable profit margin to the vendor/contractor. We can know this only when gather enough of insights and knowledge on cost of the vendors and contractors. We should have the complete and precise information on the cost structure.
- We should always see the price as a VALUE the product/services deserve and not a number we close the transaction.
- We should constantly keep watch over the financial health of all our vendors. Suitable actions should be taken should there be any untoward developments with the vendors. This is possible only if we do periodical assessment of all our vendors.
- Many a times, the vendors or contractors get distracted when they get large orders from other business entities. Many of them act on greed and end up taking up too much to handle which will have far reaching impact on the ongoing works due to paucity of working capital or capacity. Such information should be known to us in time and suitable actions should be taken to make sure our works are not affected.
- Vendor motivation initiatives such as annual meets/ awards/ incentives/ appreciations/ recognitions/ merit certificates should be undertaken periodically.
- One of the key secrets to make sure we make the vendor perform is timely certification and payment of all their bills. We need to create a system to track the certification of invoices and payment and make sure there are no delays.
- Finally, Vendors should be treated as Partners in Progress and not merely as suppliers or contractors. We should learn to respect them and treat them with dignity. Shouting, yelling and screaming wont yield results in the long run. We should learn and take efforts to understand their genuine problems and find amicable solution in case of distress situations.
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