How FM firms are struggling with supply chain challenges
By Tariq Chauhan
Published: Mon 14 Aug 2017, 5:04 PM
Last updated: Tue 15 Aug 2017, 2:17 PM
All supply chain functions ranging from sourcing supplier services, OEM (original equipment manufacturers) management and purchasing goods to their storage and distribution form essential levers in the business of facilities management (FM).
The current state of supply chain management is in poor shape and challenges are mounting each day due to the largely fragmented nature of both purchasing and sourcing of services. Small and medium sized enterprises (SMEs) dominate the industry in general, thriving because few existing service providers meet the parameters in terms of their capability and necessary standards.
An ideal supply chain partner must not only demonstrate pricing edge but must also ensure efficient service and financial robustness. Additionally, their internal supply chains must have a proven track record of delivering consistent results in challenging environments.
The fundamental issue challenging the supply chain is achieving value for money in markets with low margins and long payment tenures. The FM industry seeks competitive, flexible and extended credit terms, which are confronted with the realities of market segmentation and domination by SMEs. As a result, most SMEs are not able to offer comprehensive value add in context to required standard services, extended tenure and meeting timelines.
SMEs are mostly undercapitalised with limited resources to offer long credit terms, meet extended credit terms, compliance and research and development-oriented work culture, which are much needed to strengthen their services aligned to desired standards. However, there are few select companies that have the requisite fundamentals and capability but they often have rigid conditions with little room to meet back-to-back terms of principals.
This predicament hinders FM companies' flexibility to streamline their supply chains. There is limited room for adjustment in this scenario for FM providers which have a minimum critical mass. These constraints (especially for small FM service providers) present roadblocks in getting back-to-back terms against master contracts, often leaving them with high cost or cash flow issues with many supplier conflicts.
The very nature of the business and the changing market landscape is posing significant obstacles to build an efficient and hassle-free supply chain. Factors such as a minimum required critical mass, SME market segmentation, continuous demand from principals for extended credit terms, logistics inefficiencies, lack of technology, requisite financial strength that can only be achieved through additional investments, market growth and innovation must be dealt with to create an efficient logistics system.
The failure to achieve critical mass often results in many difficulties such as a common issue of maintaining inventories for many stock keeping units (SKUs), which is a logistic, operational and financial nightmare. For e.g., in the FM business, we generally deal with 5,000 to 8,000 SKUs which are regularly sourced. A considerably large number of SKUs often need to be procured in limited quantities, which results in bottlenecks in areas such as critical mass, efficient pricing, storage, logistics, inventory and stock management. An analysis on each on these key factors would help in fostering a better understanding on the dynamics of supply chain challenges.
Due to the inability to achieve a critical mass, both in terms of either top line or even specific service lines due to specialised/select categories, more than 75 per cent of typical supplies and consumables are sourced through a highly-fragmented supplier base. Due to this fragmentation, it becomes almost impossible to achieve parity in delivery timelines, quality of products, uniform volume of orders, amongst other areas. The need to cultivate a trusted supplier base is a bare essential to cope with the current market challenges.
In essence, all three key players (clients, FM companies and their supply chain) are suffering from systemic inefficiencies. It clearly demonstrates the FM industry's failure to build sustainable supply chains that utilise a well-diversified and competent select supplier base. Dealing with the paucity of choice along, with the arm-twisting tactics due to the monopolies in market segments, must be negated on priority.
The necessity of dealing with OEMs is another source of constant struggle for FM service providers. OEMs are usually deeply embedded in most client organisations from the very early stages of commissioning. FM providers are forced to deal with their terms that are rigid with limited flexibility involved and client sensitivities due to their nature of business continuity of those assets.
The FM industry unfortunately has very limited influence on OEM pricing and any intervention is often met with stiff resistance from OEMs and clients alike. The rigid agreement terms practised by OEMs affect the FM industry's keenness to ensure the desired level of quality, thus altering and affecting the supply chain process. FM companies should, therefore, build sound in-house capabilities that can provide an alternate to the OEM model, without compromising on key deliverables, KPIs and service level agreements.
The overall key to negate these persistent challenges is to build in-house sound supply chain capabilities that are technically sound, forward-thinking, proactive and well-defined. A structured approach, as opposed to incessant fire-fighting, often goes a very long way in creating a smooth and efficient supply chain that works perfectly.
The writer is Group CEO of EFS Facilities Services. Views expressed are his own and do not reflect the newspaper's policy.