Six Methods to Reduce Construction Supply Chain Lead Times
Since large electrical and mechanical equipment requires components from other suppliers and are oftentimes shipped from overseas, lead times have increased tremendously amid an already constrained supply chain. For example, large electrical generators typically took 35 to 40 weeks for delivery from an approved submittal — today, the lead time is an astounding 65 to 75 weeks. The same is true for custom air handling units, which in the past took around 15 weeks from submittal approval to delivery. Now the lead time is closer to 30 weeks.
So how can health systems better handle these types of delays? Below, we discuss six methods to reduce construction supply chain lead times.
Supplier standardization
One of the best methods to reduce lead times is to standardize the materials and equipment an organization procures and installs while establishing meaningful and strategic supplier/partner relationships. Healthcare supply chain departments’ primary objectives are to standardize clinical supplies and reduce costs, which can translate to construction departments’ goals as well. A value analysis team (VAT) can be formed that includes key stakeholders (project managers, architects, facilities end-users) to review current equipment and future requirements. Through a robust evaluation process, owners and providers can identify suppliers that they want to standardize, which leads to benefits from metrics such as cost savings, improved lead times and best-in-class supplier/partner relationships. When a supplier knows that they are your organization’s standard and will receive a significant amount of business, they ensure metrics adherence.
One recent example is that of a healthcare system in the southwest that standardized on a large custom air handling manufacturer. As factory delays started to pile up, the manufacturer moved the system’s order to the front of the production line because of the commitment and standardization. This resulted in the expected lead time being reduced by nearly 20%.
Early purchase order (PO) release
Another great method for mitigating equipment lead times is to adopt an early PO release process. It’s essential that owners/providers and the design team they’re working with include the supplier early in the design process. Not only can they provide meaningful value engineering options based on their expertise, but they also can assist with early procurement. When a supplier becomes involved at the schematic design phase, they are aware of the general project needs and can reduce the overall lead times. With the owner/provider’s direction, a supplier can release materials before contractors are awarded and the value of the released material is transferred to the awarded contractor later (the owner/provider does not need to receive any invoices in the process). Another significant benefit is that this process will set the price and avoid any potential increases due to market volatility. One of Vizient’s most strategic suppliers, who specializes in the electrical space, has helped owners reduce lead times by up to four months through an early PO release process.
Conduct different analysis and reference checks
If an owner/provider has a value added tax established, there are several types of due diligence the team can perform on supplier qualifications. One of the best exercises is a SWOT (strengths, weaknesses, opportunities, threats) analysis of suppliers. The SWOT analysis should include costs and lead times as critical metrics for evaluating and comparing suppliers. Another metric to consider is a reference check. This can shed light on a supplier’s past and current performance for healthcare providers, which can be eye-opening.
For example, there was a situation in the southwest where a provider decided to procure equipment from a particular supplier due to promised costs and lead times. A few short weeks before the scheduled delivery, the supplier said they were running three months behind schedule and could not fulfill their initial promise. The provider then went back to the previously completed analysis and noticed the second-choice supplier had a similar lead time when accounting for the additional three months. The provider decided to reach out to a few references and realized that the initial supplier was providing false lead times to gain a competitive edge. Safe to say, the provider now performs reference checks for all candidates.
Communication, communication, communication
Communicating with suppliers is critical. Many times, important information is lost in multiple communication channels by the time it reaches the owner/provider. Usually, a contractor is the one working with a supplier on procuring equipment, which does not have as big an impact as when a owner/provider is engaged and communicating with the supplier. Depending on the supplier and equipment category, owners should perform monthly or even weekly check-ins to stay properly informed. An example of a successful owner-supplier communication was demonstrated in a California-based project where equipment was needed that required the supplier to procure components from outside sources. The owner had biweekly check-ins with the supplier to understand progress and how the supply chain was performing. When a supplier of a critical component fell behind, the team was able to identify an alternative supplier to provide the component in less time.
Warehousing
Another option for reducing lead times is to store equipment and materials in a warehouse if an opportunity exists to procure early. Contractors sometimes have warehouses they use for their own needs — if there’s an opportunity to receive a shipment of equipment for a project that is not needed for several months, then that can be a great solution. One example occurred in the south where a contractor did not need roofing materials for six months, but material shortages were starting to occur. By the time that material order would actually be placed, the lead time would have increased to one year and the cost would have increased by nearly 30%. Through the owner’s partnership with Vizient and the supplier, they were able to receive an allocation of materials that could be shipped to the contractor’s warehouse in one month. Not only did this reduce the lead time by six months, but the materials were purchased at today’s low price.
Incentives
One last option for reducing lead times is to provide suppliers financial incentives for early delivery. With so many owner/providers restarting their large construction projects in 2021 and 2022, there are long queues for equipment demand. The cost for a financial incentive to a supplier will significantly outweigh the potential cost impact of a significantly delayed overall project schedule. This could be a critical method for a project completing on time, especially if a project is expected to complete by a set date and the provider expects to start seeing patients and making revenue.