Procurement management in a TQC environment
by Robinson Sezar and Afonso Aguilar
BASED IN PORTO ALEGRE in southern Brazil, Goldsztein SA designs, builds and sells about 250,000 square meters a year of high-quality residential and commercial buildings. As a construction project-oriented company, procurement management represents an important area in its managerial system.
In 1996 Goldsztein set out to reengineer its procurement management by implementing the then-new managerial system of Total Quality Control (TQC). They soon found that TQC and project procurement management have some serious incompatibilities.
Classic Project Procurement and Total Quality Control
In most projects suppliers are hired when the product has already been designed and budgeted. The buyer-supplier relationships are formal, even in those cases where the buyer-seller have worked together on past projects. The selection process for even the most elaborate project is usually price-driven, and most project-oriented companies do it project by project. Since it is only one of multiple companies under consideration, a supplier, fearing to lose competitive advantage, will not usually discuss potential improvements to the product. The supplier may also establish prices by taking into consideration prior adversarial history or seeking compensation for prior bad deals. After signing the contract, both buyer and supplier are more interested in ensuring contractual terms and specifications. So changes are more difficult to manage once work has begun, even when they are to meet customer needs. Since the supplier is hired for just one project, it has little incentive to participate in designing future teamwork or in making further improvements on similar client products.
on the other hand, TQC requires different buyer-supplier commitment. Suppliers cannot be considered merely as companies trying to sell products, nor clients merely as a means to short-term profits. Both buyer and supplier have to commit themselves to the end-user needs and together develop products to meet those needs. To do this the first thing that has to change is their relationship. One of the objectives of the TQC management system is to create a relationship with suppliers that ensures the product's fitness for use with a minimum of inspection or corrective action. Quality and service become as important as price when selecting suppliers. The capability of making positive contributions in product design, process design and costs of the finished product is also important. Contracts for longer periods are usually made to reflect the companies’ interest in working together over the long term. This increases supplier interest in participating in teamwork and encourages investment in future improvements. The buyer company has to be able to deploy product goals, such as costs and end-user needs, to those purchases that need a teamwork environment. In this environment, important information and mutual technical assistance are provided at the design phase. Both buyer and supplier must be comfortable with the idea of a long-term relationship based on trust, open communication and teamwork.
Exhibit 1 compares the major management differences between classic project procurement and TQC.
Goldsztein TQC and Project Procurement Management
In 1996, Goldsztein simultaneously dealt with 200 supplier companies for the acquisition of approximately 2,000 products for each construction project. The procurement processes consumed too much time, cost too much, and required a huge logistic endeavor to coordinate all the items and their related activities. All these items involve different fields of knowledge and a variety of technologies and expertise such as civil engineering, electrical and hydraulic installations, air conditioning systems, elevators, aluminum frames.
Since TQC has been implemented, target costs and end-user needs have been deployed to the major items of each product to be launched. Meeting these goals often requires supplier participation in teamwork. one objective has been to reduce the complexity of coordination by reducing the number of suppliers involved in the projects. However, this managerial system cannot be achieved overnight. So, simultaneously with the quality program implementation, Goldsztein began a Supplier Development subprogram, with the objective of finding potential suppliers capable of and interested in working within the TQC management system.
The first thing to be done was to find a way to classify the suppliers into groups. Because of the amount of teamwork required, Goldsztein was concerned about suppliers’ managerial and technical abilities. The suppliers’ capability of managing finished-items rather than components was also important in order to reduce the number of suppliers involved in a project. These major attributes resulted in a classification by levels in which suppliers fell into three categories. After classification, an investigation was carried out to discover how many suppliers there were in each category. The results formed “the pyramid of suppliers” of a typical Goldsztein building project, as presented in Exhibit 2.
The last and most important detail was to know how much the construction project costs were affected by each group of suppliers. Upon investigation, it was found that the cost distribution per supplier category fell into a Pareto case wherein approximately 27 percent of the items procured represented 73 percent of the most important ones (Exhibit 3).
Simultaneously with the quality program implementation, Goldsztein began a supplier development subprogram, with the objective of finding potential suppliers capable and interested in working within the TQC management system. Siemens was one of the suppliers chosen.
Exhibit 1. Implementing Total Quality Control means restructuring the entire procurement process, as this comparison of characteristics of the two methods makes clear.
With the results at hand, the next step was the procurement process, as described in PMI‘s A Guide to the Project Management Body of Knowledge. One of the objectives was to focus on finished-items rather than components. Finished-items are those that involve a specific kind of technology with related components and activities. In Goldsztein's case these represented 73 percent of all costs of a typical project. Product or service requirements had to be documented in a general way using, for instance, shelf-items as a base. The objective of the procurement process was not only to acquire products or services for just one project but also for a project portfolio. Potential suppliers were identified, keeping in mind the following requirements:
The supplier should be able to make positive contributions at the design phase, helping to develop the best product with the best technology available within predetermined goals such as costs, customer benefits, constructibility aspects. Supplier participation is also expected in the related teamwork, as required.
The supplier should manage all logistic aspects of its products. Since it is contracted at an earlier phase, the supplier has to manage the components according to the project schedule, which means putting items in the right place at the right time and in the right quantity.
Another requirement is the application engineering service. When a supplier provides only the technology and components, and is not responsible for the assembly or installation phases, it is important that the supplier offers complete support, such as training and consulting, to the company that will be hired for these phases.
After selecting a prospective supplier, negotiation is begun to establish a long-term contract, which will include all construction projects for the next two years. This reflects the Goldsztein commitment to work with the chosen supplier for at least this period. The contract contains all Goldsztein requirements, the basic shelf-item unit prices of the supplier, and the two-year construction projects’ portfolio. From this point on, after each project designing phase, the team orders the products and services for the project through a contract addendum called “supplying term.” In the supplying term are detailed all purchased items, specifications, quantities and delivery schedules.
Exhibit 2. In order to choose suppliers that could be developed into long-term partners in the TQC process, Goldsztein ranked them according to managerial and technical ability as well as the ability to deliver finished-items rather than just components. The result was this ability-based three-tier classification.
Exhibit 3. In a classic illustration of the Pareto principle, 27 percent of the items procured for a given project represented 73 percent of the most important ones.
Two months from the beginning of the program the first supplier company to sign such a contract was Siemens, a 150-year-old worldwide company that has operated in Brazil for 91 years. Since signing the contract, Goldsztein and Siemens have worked together on electrical and telecommunication installation solutions to all Goldsztein building projects. The solutions involve everything from the way the components are delivered on construction sites to automation solutions in intelligent buildings. For example, a material waste reduction of 60 percent has been achieved by delivering wires and cables in appropriate lengths on construction sites. Reduction in labor-hours has also been achieved by delivering switches, outlets, control panels and circuit breakers in kits that are packed according to the installation sequence or the construction project necessities.
One of the reasons for choosing Siemens is that their line of products covers all major electrical and telecommunication components of a typical Goldsztein construction project. Thus, while seven suppliers were involved previously, now only one supplies all the items.
Siemens changed some of its usual procedures in order to meet Goldsztein needs. The local Siemens branch is divided into four business units, strategically designed to focus on specific markets. Since Goldsztein requires products from at least three of these business units simultaneously, the Siemens managers named a manager to coordinate all necessary service to Goldsztein. Another important aspect that required a solution was the logistics problem. Siemens components come from different plants from all over Brazil. In delivering kits to construction sites, Siemens had to use local retailer support to pack components according to the requirements of specific projects.
PROJECT PROCUREMENT management handles not only the way a buyer acquires goods and services from suppliers but also the way they relate and commit to each other. TQC is a management system by which goals are deployed throughout the production chain in a client-supplier environment. The continuous improvement of these goals and the necessary innovations require a long-term relationship between buyer and suppliers, in which expertise is maximized to meet end-user needs. In order to meld classic project procurement management with TQC, changes in the way project information is shared, in incentives to supplier improvements, in the buyer's inspection requirements had to be made. The short-term relationships of project-by-project procurement had to give way to longer-term partnerships.
The Goldsztein and Siemens partnership is a successful example of how project procurement management and TQC objectives can be achieved simultaneously. It also shows how reducing the number of suppliers involved in construction projects can result in reduced complexity and thus, reduced costs. This partnership seems to represent a new paradigm for managing procurement for construction projects at the end of this century and perhaps into the next century. ■
Robinson Sezar has a background in project and construction management of large projects and is the designing and engineering manager of Goldsztein and coordinator of the TQC implementation. He is also a PMI member.
Afonso Aguilar is a specialist in electrical engineering and is a Siemens manager responsible for building products, automation and systems. He is also responsible for Siemens Latin America support in automation building solutions.
PM Network • November 1997