Case Study: New Plymouth District Council - Supply Chain Leadership

New Plymouth District Council transitioned from using traditional and transactional procurement processes to a supply chain leadership approach to maintain and improve the quality of New Plymouth's infrastructure – allowing it to deliver projects that prioritise safety and protect the financial health of its contractors.

Background

New Plymouth District Council found that traditional and transactional procurement processes were not delivering high quality, cost-effective projects for its ratepayers. Suppliers were kept at arm's length and relationships were only managed according to contract terms, which meant each party was bound to what was written down and there was little flexibility to achieve anything outside of the contract. The Council needed to develop longer-term relationships with partners across its supply chain – based on a better understanding of each supplier's needs and goals.

The Council will always be held accountable by the public for the outcome of a project – no matter the reasons for successes or failures. Therefore, it needs to embrace its accountability by playing a more influential role and launching a supply chain leadership approach. To help achieve this, the Council removed itself from the role of 'client' and instead allocated this to the New Plymouth community. The team learned how to become the leader of its supply chain that's made up of various separate, yet dependent, links.

David Langford, the Council's Group Manager of Infrastructure and Planning, motivated his team to try a different approach while procuring infrastructure maintenance services that focused on understanding its suppliers' needs, instead of forcing them to meet Council requirements.

Project overview

The case for supply chain leadership

New Plymouth District Council is responsible for delivering construction, maintenance and upgrade works for roads, three waters infrastructure (drinking, waste and stormwater), and other services and networks that support the Taranaki region. The supply chain required to achieve this includes a broad range of contractors, subcontractors and professional services.

For a business to survive it needs customers, an ability to transact, a healthy and capable workforce, and supporting processes and systems – all delivered through a profitable business model. With these foundations in place, businesses can consider less fundamental needs, such as increasing employee engagement, achieving a positive brand and attaining professional recognition, acquiring a leadership role within the industry, and giving back to their community.

The typical tender process does not require a client, such as the Council, to empathise with its partners. The process is designed to determine whether the organisation is suitable to deliver on the client's needs and complete a project on time and on budget. Research, such as in the McKinsey report from 2016, suggests that construction projects procured in this manner rarely achieve these objectives – so the Council was motivated to try something different. The supply chain leadership concept requires a client to understand the needs of the businesses it partners with before forming a relationship that will benefit all parties and help achieve shared goals.

Management skills, such as planning, organising and coordinating, are different from leadership skills, such as defining a vision, inspiring, influencing and changing culture. The same can be said about the difference between supply chain leadership and supply chain management.

Traditional procurement models are deeply rooted in transactional management behaviour and focus on clearly defining task parameters and supervisory controls to manage performance. The use of rewards and/or penalties to improve productivity is common, and is often combined with 'management-by-exception', where a client only intervenes if a supplier's performance drops below the expected standard.

Supply chain managers (clients) that are more transactional typically make no effort to assess or improve the values or practices of the organisations they work with and only focus on their contractual relationships.

Supply chain leaders possess a transformational skill set that focuses on fundamentally changing the aspirations, goals and values of their supply chain partners. These leaders will articulate a vision, express high-performance expectations, provide intellectual stimulation and understand the needs of each supply chain partner. Performance specifications are often less defined than those of a supply chain management organisation. However, the influence of a supply chain leader will be present throughout the supply chain – inspiring and motivating partners to focus on the larger goals of the supply chain and the end customer's needs.

Approach

To become a supply chain leader, the Council needed to learn how its procurement processes and systems contributed to each partner's challenges and understand the delivery failures of its projects. The team needed to ensure that its partners were set up to thrive and deliver excellent services for the community.

The Council started applying its internal leadership skills – to motivate, inspire and care for its own team – to the organisations within its supply chain. Applying the psychology framework of Maslow's hierarchy of needs helped the team to better understand its partner organisations and how they could help them to evolve.

The Council also analysed some of the common features of its procurement approach and the likely impact. It found that the approach was having unintended consequences on the timeliness, quality and safety of its delivery. As a result, they implemented a number of measures to put supply chain leadership at the forefront of its procurement process.

Redefining 'value-for-money'

One element of the internal review considered how the Lowest Price Conforming evaluation method and its application might be contributing to poor outcomes. Lowest Price Conforming is a tender evaluation methodology that prioritises proposals that meet the minimum requirements at the cheapest value. The Council found that the culture of 'lowest price' led to a destructive cycle that stripped all of the added value that it could receive from its partners and undermined the sector’s long-term sustainability.

Many contractors were experiencing the effects of low margins, inappropriate risk allocation and underinvestment in skills and quality control. This contributed to project delivery challenges – resulting in high levels of realised risk, rework and reduced profitability, which in turn contributes to poor practices and increased risk for workers, and then cycles back to project delivery challenges.

In more extreme cases, organisations use debt to cover their losses – locking them into a cycle of chasing greater volumes of work to sustain cash flow and service an ever-growing pile of debt.

The Council redefined its interpretation of value for money. Instead of basing its value benchmark on a supplier meeting the minimum requirements for the lowest cost, the team started to look for opportunities to maximise the added value partners could create for each dollar spent. This included a particular focus on creating positive social, environmental and economic outcomes.

Rethinking contract terms

Issuing infrastructure maintenance contracts with an initial three-year term and two renewal options of two years each was meant to encourage good performance, but it wasn't obvious to the Council that this approach wasn't having the intended impact on their projects. The Council found that the initial three-year period was spent mobilising and stabilising service delivery, and the relationship was still focussed on meeting the needs at the bottom of the hierarchy. As performance levels headed towards their peak, the first extension option came up and the supplier was reset to the bottom of the pyramid as they apply for the extension.

While tendering for its $156m infrastructure maintenance contract, the Council set a 10-year term to be awarded in a single block without any performance-based extensions. Performance was instead safeguarded by contract provisions that allowed it to reduce the term of the contract if the supplier significantly underperforms.

The approach provided confidence and surety for the contractor and delivered value in other ways including:

• Capital investment recovered over a longer period – making it more affordable for the contractor to invest in modern, safer equipment – such as chip sealing trucks that can spread chip in forward gear (eliminating a critical risk of workers being hit by reversing trucks on sites).
• Greater job security for people working on the contract and a larger incentive for contractors to invest in training and developing their workforce.
• Investment by contractors and others further down the supply chain in key facilities that support service delivery, for example a bitumen import facility was developed at Port Taranaki so that bitumen could be delivered directly into the region rather than trucked in from another port in the North Island. This created jobs and boosted regional economic activity, while also cutting greenhouse gas emissions by removing long haulage trucks from the roads.

Adopting more collaborative standard contract forms

In searching for a contract that aligns with this change in behaviours, the Council adopted NEC4 as its standard form. NEC is a family of contracts that help apply good project management principles and practices, while fostering trusting and collaborative relationships between the parties.

The contracts include:

• Measures to stimulate good management of the relationship between two parties, including a balanced allocation of risk.
• Clear and simple language to ensure all parties have a good understanding of their obligations.
• Early warning processes that require parties to work together to mitigate emerging risks before other contract measures are applied.

The market's response to the Council changing its standard contract form of was positive. Suppliers acknowledged the simplicity and clarity of the contract, which helped them become familiar with NEC.

Removing the tension between profitability and safety

The Council removed key safety controls from the activity schedules that contractors price during the tender stage. Instead, these items are included as a provisional sum and are paid for on a cost reimbursable basis, as well as a fixed-fee percentage for overheads.

This ensured that there is no commercial advantage to be gained by under-pricing these items to become the cheapest bid and win the tender. If the successful contractor gets into difficulty delivering the project, the cost of key safety controls is always covered and safety isn't compromised by commercial tensions.

Traffic control hierarchy

As a Road Controlling Authority (RCA), the Council regulates the Code of Practice for Temporary Traffic Management and approves all temporary traffic management plans for contractors wanting to work on the District's roads. After engaging with local roading contractors, the Council developed the Temporary Traffic Management Hierarchy to model different traffic management approaches and the impact it has on productvity and risk.

The traffic hierarchy prioritises the use of full road closures because they completely isolate the workforce from moving traffic risks, while also being highly efficient and often a lower cost option. Conversely, Stop/Go traffic control, which exposes workers to the risks of standing and working close to moving traffic, is seen as a last resort option.

Reducing the reliance on Stop/Go traffic control, which is inherently labour intensive, has also freed up workers so they can be re-trained into higher skilled roles in construction works.

Fatigue management

The Council was concerned about the safety and social impacts of out-of-region teams working extremely long hours (between 60 and 70 hours per week) and spending long periods away from home, so the team re-evaluated how it delivered its road re-sealing programmes. The first step was to set a limit on the number of hours per week the Council would allow its contractors to work. Considering that this change would reduce contractor productivity and utilisation of plant and equipment, the Council worked with its suppliers on an open-book basis to re-price the work and mitigate any negative commercial impacts.

The second step was to incorporate the chip sealing programme into the new 10-year maintenance contract. When included in a larger programme of different types of seasonal work, the contractor has enough flexibility to deliver this work through multi-skilled operators that are New Plymouth residents – rather than relying on transient, out-of-region work crews.

Outcomes and benefits

Increased productivity

The Council has measured the productivity impact of this new approach with its project reconstructing the Dawson Street Roundabout in New Plymouth. Contractors originally bid for the work under the assumption it would use a Stop/Go traffic control. After the Council awarded the contract, it requested that the successful bidder switch to using a full road closure and offered to cover traffic control on a cost reimbursable basis.

As a result of this change:

• The project was delivered two weeks ahead of schedule (on what was originally a nine-week programme)
• Costs were reduced by 15%, compared to the original tender price
• Operators increased labour productivity on the site by 39%, due to removing the non-productive Stop/Go traffic control (measured as total project cost per person, per hour worked).

Environmental benefits

Using a more collaborative contract form has increased innovation, including a trial to use recycled household plastic as a bitumen substitute in road asphalt. The initial trial saw the equivalent of 83,000 plastic yogurt pots shredded and mixed into the new asphalt road surface.

In addition, the Council has worked with contractors to use bitumen emulsions as a substitute for traditional bitumen road binders. These emulsions don't include volatile and flammable agents, such as kerosene, and can be sprayed at much lower temperatures – typically about 80 degrees Celsius compared to 140+ degrees for normal bitumen.

The risk of truck fires and workers getting serious burns from hot materials were significantly reduced, and the lower application temperature means less heat energy is required. The Council estimates that the switch has reduced its CO2 footprint by about 500 tonnes of carbon per annum.

Lessons learnt

Getting a mandate from senior leaders

Gaining support from the Council's elected members and making sure they understand the case for change was key to getting a mandate to do things differently. Once confronted with the challenges faced by the construction sector and how the Council's historic procurement practices were perpetuating negative outcomes, elected members were quick to accept the new ways of working.

Making the case for the role of the client as a 'change agent'

To get senior leaders onboard, the Council had to present a clear story about why leading change was its responsibility as a client organisation and why suppliers couldn't fix many of the issues in the industry themselves. As the head of the supply chain, the Council controls critical factors, such as risk allocation and the flow of revenue through the supply chain. This means clients can influence the way businesses invest, for example facilitating investment in workforce capability and capacity. This type of investment is difficult in a competitive, lowest-price tender environment.

Working with suppliers to explain the change in approach

Suppliers appreciated the opportunity to discuss the change in ethos with the Council before implementation. However, some suppliers still saw the changes as a threat rather than an opportunity. Discussions with suppliers allowed the Council to explain the purpose of the approach and ensure all parties' values aligned, which created a foundation for better working relationships.

Starting small with low-risk opportunities

The new approach was trialed on small projects, allowing the Council to test its thinking with suppliers and their comfort with the implementation. For example, the rollout of the new contract form NEC4 meant carefully choosing an appropriate project to test its implementation. This approach contributed significantly to the adoption of the new contract form and now the Council estimates that NEC-type agreements make up more than 90% of the Council's infrastructure contracts.