Supply Chain Issues Are Here To Stay. Are Procurement Teams The Answer?

If someone was looking to send a chill down the spine of a commercial real estate developer, they would simply have to say two words: supply chain.

The CRE industry is facing extraordinary supply chain issues brought on by the pandemic, from cities like Chicago searching in vain for precast concrete and steel joists to clogged ports and warehouses around the globe, and many are predicting it will be a long time before inventory returns to pre-pandemic levels. 

As developers and subcontractors struggle to get the materials they need, project delays are running rampant. Some CRE firms, however, have been able to navigate this crisis better than others with the help of a procurement specialist — a person whose sole job is to acquire goods and services and/or smooth out supply chain issues for a company. 

“Historically, general contractors would win projects and the procurement was done by project management teams who went out for bids and got the best prices they could,” said Todd Grunert, who serves as director of procurement for Chicago-based construction firm Leopardo. “This was fine for a while, but you need to get more innovative when facing challenges like these.” 

Grunert said that early involvement is key — the sooner he is looped in on a project and able to start the process of acquiring materials, the more he can maximize project timing, savings and profits. For project owners, starting the materials search early means fewer project delays, better credit terms and a better chance of getting items on time that often have long lead times. 

"These methods save time, money and set us up to take a proactive approach to the supply chain issues as opposed to a reactive one," Grunert said. "The company is able to stock up on more materials, reach out to its direct contacts at manufacturing and distribution sites and leverage its buying power to get the goods and materials it needs to build throughout the pandemic."

Grunert has been working in procurement for more than 30 years and he said that the current supply chain issues are driven by several things, not least of which was the near-simultaneous shutdown of the world’s manufacturing economies due to Covid-19. Also playing a role: pandemic-driven closures of manufacturing sites; inventories being drawn down and depleted; shortages at manufacturers of raw materials and subcomponents used to manufacture goods; manufacturers and service providers unable to produce materials or service their customers due to labor shortages; and the chaos that ensued in the logistics and transportation space. 

When Grunert first started at Leopardo, before the pandemic, he was focused on procuring site-related services including fencing, dumpsters, temporary toilets and hand-washing stations, site offices/trailers and other things a team needs on a project site.

He shifted to looking into building materials that Leopardo purchased directly, segmenting the trades and project materials into spend categories. He spent months working with the IT and accounts payable departments, diving into the spend analytics behind the scenes to determine where Leopardo was spending its money and how it could improve its processes. 

"It became clear from the data that Leopardo was working with a large number of suppliers and subcontractors for their goods and services purchases, but like any good Pareto analysis, regardless of the category, the top 20% of suppliers and subcontractors held 80% of the spend," Grunert said. 

With this, Grunert had the information he needed. He would then consolidate the suppliers and subcontractors in the remaining 80% “tail spend” and leverage that with the top 20% as an incentive and negotiation point to create a collection of preferred suppliers by trade/spend category.

“When you work with 15 providers, you may do some solid business with the top five regularly and then one or two transactions with the other 10,” he said. “If you consolidate the money you would spend on them and give it to the top three as an incentive and say, ‘hey, you are now our dedicated providers and stand to gain X amount of additional business,’ then suddenly you’re getting discounts and preferential treatment for your business and your loyalty.” 

All of this is Procurement 101, Grunert said. The real goal is to negotiate direct-buy opportunities with manufacturers, manufacturing sales representatives, distributors and subcontractors to reduce owner's costs, improve communications and impact lead times, and provide product logistics and transportation visibility for Leopardo and its clients and owners.

This is a paradigm shift in the industry, he said, that allows Leopardo to buy materials at an early stage in the supply chain.

Looking toward the future of the supply chain, Grunert said he believes the largest impact of the pandemic is the change in risk profile across people, processes and products. It’s time for firms to accept what has changed, and to adjust and adapt. 

“I would say the supply chain will never go back to the way it was,” he said. “Labor shortages have the workforce asking for more money, which is going to impact raw materials and lead manufacturers to sell their products for more. Raw material shortages and extended lead times have made it a seller’s market, and let’s not even talk about logistics and transportation costs. At the moment, the focus has moved from cost optimization to preferred suppliers and ensuring product availability. This is why it’s time for construction companies to embrace what procurement teams can offer them and their clients.” 

This article was produced in collaboration between Studio B and Leopardo. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.