Winning work in global supply chains

Key features of global supply chains operating on major Australian projects

An established supply chain (SC) exists when a buyer develops relationships with suppliers underpinned by agreements and experience, to their mutual benefit. Suppliers are chosen for their globally competitive capability, whether that capability is based on cost, special knowledge or risk profile. Key features of major project GSCs are:

Each member of a GSC leverages the information and knowledge, essential to its competitiveness that resides in the organisation through the use of globally accessible databases of information accumulated on projects. The database includes detailed records of competitive worldwide pricing and supplier performance, including that of benchmark suppliers, amongst other items.

The GSC suppliers have longstanding relationships with project execution companies.

The upper tiers of the GSC are able to financially absorb significant levels of project risk. Their sophisticated and robust business management systems permit them to deliver products and services competitively world-wide.

Project owners (private, corporatised or government entities) and project financiers lay off as much risk as possible to the project's main contractor and key suppliers.

Project owners purchase plants defined in terms of performance specifications, as strictly interpreted from the project business case, with aggressive performance guarantee requirements at a fixed cost delivered within a highly compressed timeframe.

Global supply chains and major project procurement

The supply chain of any project is a negotiated combination of the global supply chains of the major parties to the project, i.e. project owner, engineering company, engineering contractor, contractor, and major equipment suppliers.

The involvement of global supply chains is not project size dependent. Small projects reliant on key technologies are as reliant on global sourcing for technology as large projects.

There is no consistent procurement strategy/process for major projects. It is highly influenced by the nature of the project, the amount of laid off risk, the aggressiveness of the plant performance guarantees, and the project delivery structure.

The ability to provide competitive delivered cost to site, a quality product and to meet project delivery schedule requirements is no longer a significant differentiator for some HEI services / products in the major projects marketplace. Factors such as sophistication of business systems, ability to absorb risk, relationships and network, take on greater importance.

Participation in global supply chains - opportunities for Australian heavy engineering industry

The Queensland heavy engineering industry has an opportunity to participate in global supply chains not available in other countries by riding an experience curve provided by the current mining and infrastructure boom.

To take advantage of this opportunity, the heavy engineering industry and government need to develop proactive strategies to facilitate the entry of members of the industry into global supply chains and to support continued participation in these chains. The strategies must address the following issues:

Increasing the heavy engineering industry's overall level of business management system sophistication and robustness.

Identifying and establishing relationships with new players, e.g. companies that package plants and embed technology within them. The supply chains of these companies are the most likely home for the specialist element of the Australian heavy engineering industry.

The ability of the industry to absorb project risk, develop new expertise and meet the increasing demands for business innovation required to support ongoing participation in global supply chains.

On every project, the need for strong, high level champions of local industry participation within each organisation participating in project execution and the facilities' ongoing operation, i.e. through life support services.

Key success factors for participation in major global supply chains

Project owners no longer go out to obtain a plant with a set of engineering specifications defining what they want in the plant. They wish to purchase a plant with performance defined in terms that are meaningful to them and the project financier, for a fixed cost within a fixed implementation schedule.

Provision of competitive delivered to site pricing, quality and on-time delivery are now the very minimum requirements for any supplier to a major project, (capital cost > AUD $ 500M). While not denying the challenge it poses to all businesses to meet this goal consistently, major project executors and global equipment manufacturers demand much more of the members of their supply chains. Factors such as sophistication of business systems, ability to absorb risk, relationships and network have taken on greater importance.

Factors vital to successful entry by a supplier into, and long term participation in, a major project's global supply chain are:

• The ability to articulate and demonstrate where the supplied service/product adds value and supports the project's risk mitigation strategy.
• Past experience that demonstrates the sophistication and robustness of the supplier's business systems, and a process for continually improving the delivery capability of these systems.
• Past project performance that demonstrates willingness and ability to respond rapidly to the needs of the project execution team, to meet schedule and to resolve problems that arise.
• Demonstrating continuous innovation in all aspects of business affecting the efficient functioning of the project supply chain.
• Networking with upstream and downstream members of the chain to find and create opportunities to add value to the 'business' of the supply chain.
• On-going marketing within and outside of the supply chain to bring business to the chain.

The following sections expand further on these factors highlighted above.

Understanding where the Queensland heavy engineering industry 'adds value'

An explicitly stated expectation of project team members during the study interviews is that HEI suppliers must demonstrate that they have an understanding of the value of their contribution to project and plant performance. Understanding customer needs and how a particular company's value proposition meets those customer needs is central to any attempt to break into global supply chains.

A company's value proposition depends upon their knowledge resources and how they are applied to meet customer needs. The graphic in Figure 1-1 illustrates the effect on buyer/supplier power, of project risk for product supplied and the "value add" contribution of the product supplied. It is a useful tool, for a supplier in developing an understanding of the value of its product or service, and likely power balance in other supply chain relationships.

Specialised products or technology knowledge are obvious areas of value-added and differentiation. For example, Warman Pumps (profiled in Appendix D) is highly regarded in the major projects marketplace for: the superior quality of its pumps, its materials application expertise that allows it to specialise in the difficult applications, e.g. pumping of slurries and its willingness to 'hold inventory' to reduce the on-site spares requirements of its customers.

Low value-added services can also be differentiated. For example, a supplier of commodity items may differentiate itself from other suppliers if it works with plant operators to forecast requirements, maintains inventory for its customers and provides Just-In-Time (JIT) shipment of replacements.

Price competitiveness

Price competitiveness must take into consideration national policy issues in the host country and the project site location specifics, in addition to raw material and transportation, labour costs and price escalation concerns.

National border issues include: local industry participation policies, tariff implications for shipping fabricated products to the project, local content in manufactured goods policies, existence of custom free zones in the host country.

Project site location specifics include consideration of accessibility, space available for the construction camp and skilled local workforce availability. Bids that offer a competitive delivered cost to site are the ones considered to merit first attention.

Performance

Established global supply chain members have a demonstrable history of on-time delivery of the required product at a quality equal to or greater than that required.

These companies have in-house technical competency that allow them to understand the performance of the products/systems they are supplying, e.g Warman Pumps' materials development programs and metallurgical/technical capability to provide products for difficult applications. In addition, they are capable of providing and delivering on guarantees for the portion of the products/systems that they supply, in support of the overall performance warranty to be provided.

These suppliers have an acknowledged reputation in the industry of responsiveness to the needs of the project execution team, particularly when things go wrong.

Sophistication of Business Systems and Processes

The management of a successful supply chain member company has an appreciation of how major projects are developed and structured. It creates opportunities to express an interest in the project at the appropriate time in the project implementation cycle and with the appropriate parties.

Successful supply chain members are continuously working to improve their key delivery systems: business planning, procurement, financial management, production and safety. This improves the overall effectiveness and competitiveness of the whole supply chain.

Due attention is given to the long term stability and growth of the business by the management of companies belonging to competitive, stable global supply chains. To this end, companies wishing to join these groups must be able to demonstrate that they have a plan for long term business growth, predicated on the stability that membership in the chain brings.

This plan should include development of new competencies, evidence that it is investing its resources for the best return for the company and ultimately for the supply chain. If it is a small family business, then succession planning may be an issue that needs to be addressed.

Queensland heavy engineering industry - positioning strategy

Strategies must be focused towards customers' needs that have been noted in this study. Strategic positioning requires a strategy for differentiated value. Mining and metals projects are still the most "customised" of the infrastructure projects. There are three possible positioning strategies for members of the industry to take advantage of the growth of the metals sector and secondary cluster industries that may develop. These strategies are supported by the study interviews:

• Specialisation in niche areas to increase relationship power.
• Through life support capability.
• Capability to supply modular process plants that have embedded technologies obtainable under license, e.g. acid and synthesis gas plants, and to absorb the associated risk. Without this capability, Queensland heavy engineering industry will not be able to make the leap to become international HEI suppliers.

Queensland heavy engineering industry - business process improvements

Business processes need to emulate the success factors for global supply chain participation. The study interviews highlighted the need for the Queensland heavy engineering industry to make significant strides in developing more sophisticated business systems, especially in the area of project information gathering and business development. Queensland heavy engineering industry suppliers should:

• Form strong networks with related suppliers and buyers.
• Develop the ability to leverage knowledge within their organisations and network.
• Improve delivery systems, especially for rapid response in providing pricing information and deployment of people and product to support projects throughout Australia or within a defined region.
• Increase capacity to manage and absorb risk.

Queensland heavy engineering industry supply chain targets

Targeting of supply chains should take advantage of natural strengths. There are opportunities in Australia's traditional expertise in mining and significant new industry clusters.

Target industries where local knowledge and experience is strong and where regional opportunities are strong, e.g. mining and metals projects, in particular light metals and nickel projects.

Target industries and supply chain participants where global supply chains are formative or loosely bound, e.g. mining, domestic construction companies, domestic engineering companies.

Target second tier decision makers such as suppliers of modular process plants.

The role of government and others

Government and other groups supporting the Queensland heavy engineering industry can underpin these strategies by:

• Identification and development of potential champions of local industry participation within the organisations of project developers and executors of major projects.
• Determining what are the policies and actions being taken by governments in other countries in Asia Pacific to support their heavy engineering sector.
• This information can be used to guide Australian policy development and programs to assist the Australian heavy engineering sector in maintaining a competitive position in the region.
• Continuing to support the efforts of ISO in facilitating the entry of the Queensland heavy engineering industry I into projects at an earlier stage in their development.
• Accessing and monitoring market intelligence on behalf of Queensland heavy engineering industry, e.g. trends in global procurement and major project supply chain target companies. These activities provide cost effective market intelligence for the industry.
• Undertaking marketing activities on behalf of the sector that include:
• Telling Australian HEI success stories to global project developers, engineering firms, engineering contractors and major plant/technology suppliers.
• Promoting the capabilities and experience of the Queensland heavy engineering industry to this audience.

Supporting carefully targeted trade missions, i.e. visits by Queensland heavy engineering industry members to the Tier 1 and Tier 2 suppliers of modular process plant suppliers and major equipment providers.

Providing workshops and seminars on:

• Developing appropriate business systems.
• E-procurement and E-transaction readiness.
• Understanding globally accepted industry standards in the mining and metals, oil and gas, power and environmental sectors.
• Bid preparation.

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