According to a report from the McKinsey Global Institute, labor productivity in the construction industry has lagged behind labor productivity in almost every other sector over the last two decades. While overall labor productivity has grown 2.8 percent a year in that timeframe, construction productivity has averaged only 1 percent growth per year. When analyzing investments in capital projects, manufacturing companies are likely to be particularly frustrated with this figure. The manufacturing sector has managed to average 3.6 percent per year productivity growth in the same time period in which construction productivity has lagged.
The critical differences between manufacturing and capital construction productivity are automation and supply chain optimization. Capital projects rarely take advantage of an integrated supply chain. Typically, in capital projects, hundreds (if not thousands) of individual transactions are undertaken, each transaction individually optimized at significant extra expense to the entire capital delivery process. Each transaction attempts to allocate risk, costs and liabilities to the supplier, forcing them to protect their interests, quite often putting suppliers at odds with each other, as well as with the capital asset owner.
Leading companies have cracked the code by aligning procurement efforts with overall business strategies. But there is still work to be done. A global survey from Supply Management found that while adding value to the organization is the top priority for procurement specialists, more than half say that their business’ top priority is cost-savings. But how organizations measure cost-savings is as varied as the capital assets they deploy. If one commodity’s cost savings comes at the expense of another, ARE there truly cost savings? For those in capital procurement, what measure could be more important than return on invested capital? Whether or not this actually reflects business priorities, it’s clear that reconciling disconnects in the entire supply chain process is critical.
In order to drive more value in capital projects and ensure increased labor productivity, the entire supply chain for a capital asset must be considered. This is a very complex problem, but to start, plant management and supply chain professionals can collaborate to identify a shared set of expectations and goals when engaging with outside partners. Supply Management's global survey indicates that procurement is craving an opportunity to provide strategic leadership to its organization. By creating better lines of communication, plant management can help supply chain professionals achieve that goal while helping themselves achieve better results. There’s no better time than the end of the year to start this effort in earnest.