The
MBA program in Supply Chain Management
at NC State University is unique among business
schools. With the support of the Supply Chain
Resource Consortium, an industry/university
partnership, the program brings the industry into
the classroom, involving students, faculty and supply
chain professionals in finding solutions to the
real industry problems. This project-based approach
to education reflects the new model for business
schools described by Peter Drucker.
For
more information...
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Peter
Drucker...
"Management is a practice, like medicine;
and the model should have been the medical school,
where the bulk of the teaching, especially the most
important teaching of the M.D. in his or her residency,
is performed by practitioners. Unlike medicine,
where you can bring sick patients into the classroom,
business education does not allow you to bring an
organization into the classroom. You can, however,
bring experience in through your faculty and students.
Business educators should be out as practitioners
where the problems and results are."
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7/15/03
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Capturing
Savings
of Alliances in
the Energy Sector
by
Rob Handfield
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Energy
sector capital projects typically cost hundreds
of millions and even billions of dollars to
construct. A major component of these projects
is the engineered equipment that the facility
is built around. Managing the engineered equipment
is important during construction not only because
of its high dollar value but also because of
the long lead times to manufacture that may
impact the overall project schedule. Procurement
of engineered equipment has traditionally been
done using lowest bid that does not satisfactorily
integrate the suppliers’ detailed knowledge
about the engineered equipment. One method to
improve procurement of engineered equipment
is through supplier alliances.
A recent research project completed by MBA student
Doug Harper. His Master’s degree thesis
in Construction Engineering involved a series
of detailed interviews with 16 companies. Opportunities
and barriers for supplier alliances in capital
projects were identified. Opportunities were
evaluated based on criteria involving cost,
time, and quality. Questionnaire results and
personal interviews revealed that time savings
and quality improvements were perceived to be
of greater value than the initial cost savings
of the engineered equipment from supplier alliances.
Industry experts estimated that supplier alliance
initial price savings would range from six to
ten percent. Procurement time savings of up
to six months were suggested by an industry
expert by eliminating the bidding cycle for
engineered equipment. The most selected quality
benefits point to supplier alliances designing
better technical solutions due to the suppliers’
input of detailed equipment knowledge that would
also contribute to reduced change orders.
A Capital Projects Supplier Alliance Model was
developed. The model covers five stages of a
supplier alliance. The first model stage is
Company Management that advocates that a company
assess their own culture to support alliances
before considering the use of supplier alliance
agreements. Alliances require collaboration
between the partners which is not common with
lowest bid contracting. The second step is developing
a Business Case to support the development of
the alliance. The third step involves Supply
Base Management that will lead to the selection
of the alliance supplier partner. The fourth
step, Alliance Framework, addresses the issues,
i.e. terms and conditions, standard specifications,
alliance duration, etc., involved in establishing
the alliance. The final step is Alliance Management
that primarily focuses on performance metrics
that should be used to evaluate the health of
the alliance.
An interesting element of Harper’s research
was that most respondents viewed the Owner-Supplier
relationship as the strongest in the industry.
The Owner-Contractor relationship was ranked
second followed by the Contractor-Supplier relationship.
A representative of one company provided some
insights into why Owner-Supplier alliances might
be more beneficial:
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“The
owner has the incentive to spend the time
and money necessary to collaborate with
suppliers to optimize operability and the
total life cycle cost of the given piece
of equipment. General contractors working
on some type of a fee or lump sum basis
generally do no have the incentive (or in
some case the operational knowledge) to
collaborate on these "OPEX" (Operational
Expense) issues, but rather are focused
on "CAPEX" (Capital Expense) front-end
costs." |
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Several
counter-arguments were offered from EPC companies
suggesting why alliance agreements might be
better suited between an EPC and Supplier. A
representative from one company noted that most
Owner-Supplier alliance agreements are focused
on operational issues with an emphasis on equipment
operability and with less focus on CAPEX (capital
expense) cost. An important issue for these
alliances is response time to repair or replace
a major piece of equipment to resume operations.
They felt that EPC alliance agreements could
focus more on cost savings because capital projects
are planned decisions that allow one to determine
in advance when one will need a piece of equipment.
Supplier alliances are not a blanket solution
for procuring all engineered equipment items.
However, for engineered equipment items for
which a business case can be developed, supplier
alliances provide several benefits in terms
of cost, quality and time. The Capital Projects
Supplier Alliance model provides a framework
for developing and managing supplier alliances.
For further details, see Doug Harper’s
report.
Sincerely,
Rob Handfield
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