Contractors Must Cut Supply Chain Costs

BY William Atkinson, Special to CONTRACTOR CONTRACTORS, WHOLESALERS and manufacturers in the traditional supply chain make too many errors and then have to spend substantial amounts of time and dollars to correct the mistakes, said Peter Placko, national accounts manager for wholesaler Ferguson Enterprises. These involve processes such as shipping, pricing, rebilling, crediting, excess material returns

BY William Atkinson, Special to CONTRACTOR

CONTRACTORS, WHOLESALERS and manufacturers in the traditional supply chain make too many errors and then have to spend substantial amounts of time and dollars to correct the mistakes, said Peter Placko, national accounts manager for wholesaler Ferguson Enterprises.

“These involve processes such as shipping, pricing, rebilling, crediting, excess material returns and incorrect materials shipped,” Placko told CONTRACTOR. “The key to maintaining profits is to be more efficient within the supply chain.”

Steve Carder, co-owner of Carder Plumbing, Heating, Cooling Co. in Sand Springs, Okla., and past president of the Plumbing-Heating-Cooling Contractors — National Association, added: “If all you do is look for the lowest part price from a wholesaler, you can’t work together to cut cost from the whole process. You need to look at what you need in terms of quantities, when you need it to be available, and where you need it to be available.”

The first step in improving the supply chain is for a contractor to select a wholesaler that meets his needs, said Robert Vick, NIBCO’s vice president/commercial and industrial. The wholesaler should then select manufacturers that provide value.

“Then the three can create a vertically integrated supply chain and begin working to remove cost from the supply chain,” Vick said. “Contractors will have to take the lead. If they don’t demand value from wholesalers, such as just-in-time delivery, reliable data, etc., nothing will change.”

In 2002, the Mechanical Contractors Association of America began working on a model that would show contractors how to measure the total installed cost of product beyond just invoiced pricing and how to measure the value of their wholesalers and manufacturers. The results of the project were released in December 2004 (“Contractors can use supply chain to increase profits: study,” January, pg. 3). Vick and Placko were members of a task force that developed the report.

“This is a roadmap on how to turn the supply chain into a value chain,” Vick said. “We expect that forward-thinking contractors, wholesalers and manufacturers will begin to implement these recommenda-
tions.”

At its national convention in late February in Scottsdale, Ariz., MCAA presented a program, “Leveraging the Value Chain to Become More Competitive,” which included members of the supply chain task force. The session used a skit format to demonstrate that streamlining work processes, building stronger relationships with manufacturers and wholesalers and using electronic technology more effectively can improve a contractor’s profitability.

The increased availability of technology can facilitate the shift from a traditional supply chain to a more effective and efficient value chain, Placko noted.

PHCC’s Carder recommended additional steps that contractors can take to help cut costs from the supply chain:

  • Plan ahead. As soon as a contractor gets a signed contract, he should look at his schedule for when the material needs to be on the job and can be invoiced to the owner. Then, he should arrange for it to be delivered by the wholesaler to the jobsite at the right time. This eliminates the need for the parts to be financed.
  • Ship out-of-stock items direct. If a contractor needs non-standard material that a wholesaler has to order from a manufacturer, the wholesaler may be able to arrange for the manufacturer to ship directly to the jobsite. This saves time and cost for the wholesaler to receive, stock and ship the material.
  • Order online. Internet ordering cuts time and cost by eliminating the time it takes for a salesperson to take and process orders.
  • E-mail or fax invoices. Getting wholesalers to fax or e-mail invoices at the end of each day via their computers saves the time and cost associated with them having to mail them.

Contractors that standardize their purchases of certain products represent one of the biggest cost-saving opportunities, said Bill Sanford, executive vice president and chief operating officer for Interline Brands. Distributors that report purchases by contractors can act as a conduit between the manufacturers and contractors to create incentive programs that reward contractors for their loyalty.

Sanford noted that many companies among the three supply chain partners have been engaged in cost-cutting initiatives for some time, but not in a coordinated fashion, Nevertheless, he added that he is beginning to see signs of all three partners working together in a three-way team initiative.

One contractor that already has taken a number of steps to reduce supply-chain cost by improving efficiency is J.F. Ahern Co. in Fond du Lac, Wis. For example, Ahern has consolidated some of its purchasing across divisions (mechanical contractor, fire protection, pipe fabrication) to gain volume discounts, said Michael Krueger, executive vice president/finance and corporate services, and a member of MCAA’s supply chain task force.

“In some cases, we have gone to monthly invoices, rather than separate invoices for each shipment of product,” Krueger said. “We have also created some vendor-managed inventory programs, which involve having some inventory at our locations that still belongs to the vendor.”

With fluctuations in commodity prices these days, J.F. Ahern purchases some material in advance of the need in order to lock in price. This helps vendors plan, and it also helps Ahern get discounts, which the contractor can share with its customers, Krueger said.

Other contractors may have been slow to embrace these changes because they may not see a direct benefit to them in the form of lower prices. Still, they do stand to gain long-term advantages.

“Contractors won’t see a lot of reductions in the price of products, but I’m sure that any wholesaler that enjoys a significant amount of a contractor’s business will work to improve wholesaler/contractor services to take advantage of value chain opportunities,” Placko said. “Then, the wholesaler will make sure the contractor is kept very competitive in the marketplace.”

To get a copy of MCAA’s supply chain report, visit www.mcaa.org.