There is a crisis in the construction industry: Supply chains and procurement continue to be plagued by unpredictable global and economic factors. In addition, compared to other industry segments, they are blighted by a significant lag in productivity and processes that are unnecessarily mired in time-consuming manual tasks.
These challenges are worsened by the fact there are simply fewer people coming into the industry, large infrastructure projects are either underfunded or not getting launched, and the industry has been resistant to change. While the industry is trying to overcome these hurdles, analysts are predicting rapid growth in demand. This is already resulting in an existential conflict: A need to meet growing demand, while still being bogged down with inadequate levels of productivity and supply chain processes that have not changed in 50 years.
Construction is one of the largest and most influential industries in the world. Global construction output is expected to reach $12.7 trillion by 2022, up from $10.7 trillion in 2017. The United States has one of the largest construction segments in the world, with massive volumes of construction materials being shipped to thousands of locations throughout the country from sources around the world. Because of its sheer size, the industry’s relative success impacts nearly every other sector of the economy, a factor that makes its digital transformation all the more essential, not just to the industry itself, but to the entire global economy.
The construction supply chain still experiences waste and inefficiency. More than any other industry, construction is in need of a transformation. Despite the industry’s size and share of the economy, it faces a pressing need to reinvent itself. Many organizations fall into the trap of thinking that because “everything works” now, change is not needed; however, there will come a time when every company will need real, meaningful and lasting savings to be achieved—and quickly. When that happens, only companies that have prepared will survive.
From 1987 to 2018, productivity continued to rise in the majority of industries, according to the Bureau of Labor Statistics, increasing an average of 2.7% annually in wholesale, 2.9% in retail and 0.5% in food service—all industries that have wholeheartedly embraced digitization and modernization of their supply chains. Also, over the same period, productivity rose in 83 of the 90 manufacturing and mining industries. The construction industry, however, lags behind every other sector in terms of productivity.
Just one example of inefficiency is paper delivery tickets. The industry seems to have a love of putting things on paper—and not just a single sheet, often five or six copies of one paper are passed around the jobsite and manually re-keyed. It may seem shocking, but it evolved out of necessity. Since construction often occurs in remote locations away from headquarters, paper tickets were essential—that is, until the invention of smartphones. Construction sites seldom take advantage of this widespread innovation, which would allow the jobsite to remain connected to back-end systems without having to move physical paper and re-key information from suppliers coming to the site. The underlying capabilities are there, giving no excuse for a remotely located or temporary jobsite to be disconnected from back-end systems when a simple mobile phone app would address the problem.
If the construction industry does manage to transform itself, there is great potential. McKinsey points to a $1.6 trillion opportunity to close the productivity gap if the industry is willing to embrace new technologies, update processes and adopt a new working culture.
Yet while any other industry would react with glee to such a forecast of growth and opportunity, the construction industry will have a hard time meeting the growing demand for its services and the positive forecast comes with a caveat. The existing environment and lack of modernization and digitization could easily throw the industry into a tailspin and reverse the positive predictions if investors see outdated supply chain processes failing to meet demand, resulting in fewer projects being funded, combined with endangered profits for contractors.
Some of the factors leading to the negative potential are out of the industry’s control: Steel and aluminum tariffs, for example, and severe price volatility have created a massive impact on construction driving up costs for American construction companies, while putting pressure on earnings before interest, tax, depreciation and amortization.
Even if construction companies cannot do anything about tariffs or the prospect of a recession, there are things they can do to mitigate the risks. Companies are starting to pay attention to risk management, with 60% of respondents in the U.K. survey indicating their contracts set out details on how to identify and manage risks during each stage of the project. Digitization has been embraced by other industries, and the technology is mature and widely available for the construction industry to take advantage of.
These solutions lie in several distinct areas, including:
Yet, despite these mature and ready to use solutions, much of the response from the industry has taken a traditional turn, with basic ideas such as purchasing in bulk, which is only a partial solution that in turn requires more costs in storage and warehousing and will not address all of the problems and challenges at hand. The truth is that many construction companies are preparing for the 2020s with 19th century approaches.
The construction industry is particularly resistant to change, and while other industries have seen significant advantages from embracing the digital supply chain, construction supply chains still tend to be relationship-based, with everyone from the foreman to the president buying from relationships rather than critically evaluating suppliers. This is not how professionals in other industries survive. While the construction industry does show some positive indicators at the present time, the future is uncertain—and industry executives must be prepared for that uncertainty.
Digital transformation is the path to survival. Specifically, embracing the digital supply chain in the construction industry means not just a technological transformation, but a cultural one as well. Rather than relationship-based decision-making, supply chain decisions and procurement must be based on appropriate data and analytics that inform decisions, and a foundation in Total Value Optimization, or the process of dynamically anticipating and meeting demand by synchronizing the buy-make-move-fulfill digital supply chain to deliver the greatest value to stakeholders at the lowest cost to business.
In addition to being receptive to change and digitization, embracing a new level of openness, transparency and collaboration is key, as is a continuous re-evaluation of what has been largely a bidding and contract process marked by long-standing insider relationships as opposed to meaningful evaluation.
In the very near future, a data-driven contracting environment with a “single source of truth” will replace outdated manual, paper-driven processes. This, combined with collaboration and digital technology, metrics and analytics will more accurately monitor progress, performance and alignment among all stakeholders on each project’s outcome.
A cultural change and willingness to embrace new processes—and an increased transparency among contractors and suppliers with a more highly-skilled procurement team enabled by a data-driven sourcing model—will prepare the industry to meet rapidly-growing demand, while reacting to inevitable disruptions in the global marketplace.
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