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Purchasing, Leadership & Construction

Steve Bauld

Kevin McGuinness

October, 2007

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1.0 Our Focus Today

Two areas of concern:

• Purchasing • Leadership

• Using some recent construction examples, to show the common factors that links these subjects together

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1.1 Why Ask Us?

• Steve: – Purchasing professional for 32

years, in public and private sector, in Canada & US, now Vice President Ontario General Contractors Association

• Kevin: – Lawyer for 27 years, in

Canada, Australia and UK• Co-authors:

– Municipal Procurement Handbook– Leadership, of the Lack Thereof• Regular article in Summit

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1.2 Overview

1.0 Focus1.1 Why Ask Us?1.2 Overview2.1 Nature of Purchasing Function2.2 Neglected Importance of Purchasing3.0 Problems in Public Procurement4.0 Causes of those Problems

5.0 Some Innovations in Construction

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Overview Cont’d.

• 6.0 Leadership and Procurement• 7.0 Using Leadership to Solve Procurement

Problems

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Key Concerns

• The links: what is the relationship between these subjects? Specifically1. How can people in

purchasing show leadership in the way they carry out their jobs?

2. What lessons can be learned from construction procurement that can be fed into question 1?

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2.1 Nature of the Purchasing Function

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An Ever Changing Landscape

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Purchasing: Not the Most Glamorous Profession

• Few children imagine growing up to be purchasing agents.

• More likely to want to be a police officer, firefighter, doctor, nurse or soldier

• Purchasing has long kept a low profile.

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Purchasing, cont’d.

Let’s face it:

Even Clark Kent, wasn’t mild mannered enough

to be a purchasing agent.

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2.2 The Neglected Importance of Purchasing

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The Importance of Procurement

Napoleon

“An army marches on its stomach”

Translation: if supplies aren’t there on time and in

sufficient quantity, the army isn’t going anywhere

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For example: Hurricane Katrina

• Many of the biggest failings with respect to Hurricane Katrina, related to inadequacies of the two critical functions of procurement, supply and logistics

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Importance of Purchasing

• Japanese economic miracle was linked to innovations in management of supply

– High price of land means limited warehouse space for parts

– Before the 1950s, this was thought to be a disadvantage because it forced the production lot size below the economic lot size.

– Toyota learned to exploit this problem to its own advantage

– Taiichi Ohno, Toyota’s chief engineer, worked out that just in time inventory could be used to make production more flexible, to reduce the overhead costs of retooling and thereby allow economic production levels despite limited warehouse space.

– JIT is one of the two 'pillars' of the Toyota Production System.

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As the previous slide makes clear

• Few divisions influence overall organizational operations more than procurement.

• You can learn almost everything about a business by watching – what it needs, what it wants– when it buys, what it buys – how it buys, and – what it does with what it

buys.

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3.0 Problems in Public Procurement

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Public Procurement

Look up “government mis-management” on the Internet, and most examples given are procurement related:

– over-expenditure

– over-supply or under-supply

– delay in delivery

– cost-overruns due to design changes

– failure to follow sound business practice

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The US Comanche Helicopter

• The US Comanche helicopter program

• An example of a failure of project management

• When all is said and done, project management is largely about showing leadership within the specific context of procurement.

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Many Other Examples of this Kind

• Nimrod AEW aircraft (RAF)

• Not all Foreign– Skydome

– Mirabel Airport

– Adscam

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Other examples, cont’d.

• It is hard to find a sports stadium that has not run into problems. Those associated with the Montreal Olympic Stadium (often called “The Bid Owe”) are legendary

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Government Pays More

• One thing that has fascinated us during much of our research has the phenomena that the government always pays more

• Seems to be true for all levels of government, everywhere

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Government pays more, cont’d.

• US Federal government pays more per citizen for health care, than any other government in the world, – Including the governments of

countries that provide comprehensive cradle-to-grave health care for all their citizens.

– In addition, many state governments provide health care.

• Even so, nearly one out of six Americans has no health-care coverage of any kind.

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Government pays more, cont’d.

• Danish Government pays electric windmill owners US$300 million above-market prices for their power, even though Danish electricity is among the most expensive in the world.

• US Federal Government’s income support to dairy farmers costs that Government 90¢ a pound above what private sector food makers pay for milk protein.

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Government pays more, cont’d

• Crown construction costs are very high: on average more than 53% higher than private sector for comparable buildings.

• Causes: – design change during

construction process

– Preserving legacy buildings

– Stop-start nature of procurement

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Government pays more

• Found no report of a government paying less for anything than the going price to a private business, even though Governments are the largest purchasers of goods and services

• It is even hard to find reports of a government paying a comparable price,

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4.0 Some causes of over-payment, etc.

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Unique Problems in Public Sector Procurement

• Conflicting lines of responsibility– Political vs. Administrative vs. Functional– Can create the impression that things are out-

of-control

• Conflicting objectives– A system that is “open, transparent and fair”– Value for money: prudent use of public funds– Hard to identify priority

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The root list

• Tender related problems

• Alienation of suppliers• Value for money• Vendor performance

assessment• Lack of integrity (or

the perception of a dishonest system)

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Root list, cont’d.

• Our goal here is not to sing out a litany of what is wrong with public procurement

• Cannot look at the foregoing in any great detail.

• We do want to look at some of their features to identify any common threads-aside from watching money fly away.

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Let’s Look at the Tender Process

• In recent years, the process of public procurement has largely become:

• Largely the result of the law of tender, which has promoted a highly technical, counter-productive system.

The “Game” of Procurement

(it is a lot like “Simon Says”)

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The tender paradox

• Tenders should produce a low price– Competitive– Low marketing costs

• No Advertising Cost to Supplier

• No business entertainment expenses

– Customer spells out exactly what is required

– Even the form of tender is relatively simple to fill out.

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So what goes wrong?

• The tender system is intended to create a system of public procurement that is “open, transparent and fair”

• All too often it achieves none of these goals.

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Tender Related Problems

• Some of the problems related to tendering include:– law of tender

• not much that we can do about this

• contract around some of the worst problems.

– Using tenders for inappropriate types of supply

– “Front end” documents that are inconsistent with the type of supply to be made

– Feeding unrealistic customer expectations by attempting to shift all risk to the supplier.

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Alienation of Suppliers

• Highly technical pre-qualification

• Inconsistency in pre-qualification

• Excessive insurance requirements, arising from an over-dependence on cut and paste document preparation

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Value for Money

• Disproportionately high cost of government construction has not produced high quality buildings

• Lack of concern with full lifetime costing, because it is hard to explain, hard to work out, and often involves a higher initial capital outlay.

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5.0 Some Innovations in Construction

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Vendor Performance

• Very often, the only protection of the public interest is at the contract award stage.

• Staff cutbacks mean no monitoring of performance received.

• In any event it is not done systematically

• The result is that it is impossible give poor suppliers the bad rank they deserve.

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A Guide to Prequalification of

Contractors

Ontario General Contractors Association

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The “Guide”

• Produced by the OGCA in cooperation with partners across the industry

• Primary purpose to settle “best practices” for conducting and participating in the Prequalification Process

• Applies to any public or private sector projects• Works equally well for the prequalification of

construction managers and major sub-trades

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Other Projects

• OGCA– A leader in Ontario in working with other parties to

produce more effective/efficient relationships– Our president, Clive Thurston, has promoted

consultation as opposed to confrontation.

• CCDC 2 will be coming out shortly. Again, a joint effort by several stakeholders

• Document 100 on Close-out procedures for construction projects has also been revised and is coming out this fall.

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Trade Associations and their Role

• Trade associations can all show such leadership.

• Supplier and customer associations can should work together to develop fair, viable and cost-effective solutions to problems – To improve value for money. – Balanced representation is

essential

• If a tender is based on fair documents, prices should reflect that fact.

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Encouraging Innovation

One area in which purchasing can play an effective leadership role is in the

dissemination of information within government as to newly emerging cost-

effective solutions to long standing problems.

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LEED—Saving Money in an Environmentally Friendly Way

• 2004 US General Services Administration study: gross per square foot cost for lowest level of certification can be as little as 76¢ per square foot.

• Is it worth it?– The California Task Force study: present value cost

saving per square foot in energy of $5.79 per square foot.

– At the BC Cancer Research Center, annual energy savings of $381.000, with a 43% saving on water usage.

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AFP or PFI Contracts

• Alternative Finance and Procurement• Attempt to marry private sector

efficiency/expertise to public sector needs• Strengths: better maintenance, higher standard of

construction, lower life cycle replacement• Weaknesses: high construction, financing and

transaction cost; long term commitment.

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6.0 Leadership And Procurement

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What is Leadership?

• The leadership paradox:– “leader” and “leadership”

lack clear and precise definition.

– Yet, we all seem to have an intuitive ability to identify weak and strong leadership.

• Very often, leadership is subtle.

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What is Leadership, cont’d.

• Leadership may be variously described as being: – the ability to focus the progress of a group, – a personality trait;– the ability to influence the behavior of others,;– a form of specialized persuasion;– a power relationship;– an instrument to assist an organization in achieving its

goals; – a structural relationship within an organization; or– some combination of the foregoing.

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What is Leadership, cont’d.

• Study of leadership = identifying the skills that will make anyone better at their job.

• Goal: to improve the performance of everyone,

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What is Leadership, cont’d.?

• to give them the basic skills that they require to assume responsibility, and

• to discharge the authority entrusted to them competently

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Great Leaders

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Great Leaders

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But let’s not forget …

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The Three Stooges?

• Well, why not:– They are remembered long after their careers

ended– They were and are still popular (i.e. they met

customer/client needs)– They had a profound effect on comedy during

their careers (i.e. they were professionally competent), and

– They are still influential (i.e. enduring effect)

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Stooges, cont’d.

• If all that you were ever remembered for in your career was that:– You always delivered goods/services on time

and on budget– They always met the specifications for the job,

and they always worked as specified.

• That would not be a bad reputation to take into retirement.

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Lesson About Leadership Number 1

Leaders must be assessed by reference to the question of how well they do their jobs

given the resources at their disposal; and that they have been asked to do.

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Why is this important

• Because leadership is far more common than most people realize

• Because we have largely forgotten how to identify leadership

• And because, due to that fact, we have also forgotten how to drawn on leadership to maximize organizational efficiency.

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What are the Requirements of Leadership?

• Most organizations under-utilize their workers. They do not:

– challenge them

– integrate them into planning and decision making

– engage them or guide them

– draw on their skills or talents

• Too often purchasing suffers from this more than any other part of a business

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What are the requirements of leadership?

• Not hard to identify the requirements of leadership

• Lot of material written on the subject.• Generally, that material is rather confused,

but it is possible to put together several different sets of shopping list, relating to attributes of leadership, expectations of leadership and leadership tools and styles

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Leadership Attributes

• Responsibility

• Vision

• Capacity for Strategic Thought

• Attitude– Drive

– Tenacity

– Enthusiasm

– Risk Taking

– Fexlibility

• Generosity & Compassion• Charisma• Foresight• Knowledge & Wisdom• Decision Making Ability• Effective management of

people– couching peak performance– Building a strong team

• Prudent Management of resources

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Character & Expectations of Leadership

• Courage• Self-control• Decisiveness• Principle• Honesty & Integrity• Dignity

• Resilience (making the most of a bad situation

• Devotion to duty• Sense of

Destiny/Purpose• Sense of honor

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Leadership Tools

• Effective communications

• Effective strategic planning

• Effective tactical execution

• Team building• Appropriate

management style

• Effective negotiation skills

• “Can Do” Attitude and Delivery– Motivational Ability

– Simplification

– Prioritization

– Proper Supervision

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Key Operational Skills

• Ability to work effectively within the organizational structure– Includes the ability to form necessary alliances– To the ability to adhere to strategic plan – Proper reporting, and working within governance

constraints

• Most importantly: on time, on budget performance and a delivery of product that meets the customer need

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7.0 Using Leadership Skills To Solve Procurement Problems?

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Buyers are not the “purchasing police”

• Purchasing department is not just a control mechanism.

• It also has a production function.

• The main responsibility of purchasing (in both the public and private sector) is to get staff the materiel that they need to do their job.

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A balanced approach

• Purchasing needs to see itself as being as much production/service delivery related, as it is control related.

• Buyers need to be aligned with the client group that they service, so that they understand its needs.

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Identification of Need

• Intelligent use of consultants• Listing Specific Requirements

– Consult First, Design Later, Build Last

– Make Sure You Get What You Need

– Avoid Features You Cannot Afford

• Categorization– Essential vs. Desired vs.

Intrigued by– Over-emphasis on Aesthetics– State of the Art Problem

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Role of purchasing “management”

• Exercise Healthy Skepticism• Overall Approach: an integrated, purpose

driven and comprehensive control system to govern all aspects of a Project from inception to conclusion

• Based upon a critical assessment of need• And a conservative approach to what is

possible

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Managing Expectations

• Problem of over-specification– The legendary $5000 wrench

• Causes– Lack of understanding as to what specifications ought to contain

– Lack of understanding of impact on price

– Trying to dictate the direction of the market

– Over-wedded to obsolete, eccentric or over-specialized approaches, when generic will work just as well.

• Purchasing management needs to exercise discipline in this area

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Improving Project Management

• Best way to control the change process– Creation of early warning system

– Requirement for Flexible and Effective Response

– Expeditious Dispute Resolution Process

• Other benefits– Proper documentation of decision making

– Avoiding activity traps

– Risk Management

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To be most effective, Project Management must

• Be properly and sufficiently resourced

• Be integrated, purpose driven and

• Provide a comprehensive control system to govern all aspects of a Project from inception to conclusion.

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Conclusion