Cost Pressures: Supply chain transformation key to protecting EPC profit margins

Supply chain transformation key to protecting EPC profit margins

The year 2022 will be the year of infrastructure development for India. The road ahead for EPC companies in 2022 presents several revenue growth opportunities. However, input cost pressures will play catch-up and can cause significant profit margin erosion for EPC companies. Supply chain transformation is the key for EPC companies to protect their profit margin.

Supply chain solutions for EPC companies to enable profitable revenue growth

New supplier discovery and substitution to manage cyclicality in metal prices

The metals and mining industry, which is a major input lever for EPC companies, has traditionally suffered from cyclicality in output and prices. Steel costs have inflated by 50 per cent year on year and by 116 per cent in the past six years. EPC companies need to pursue supplier discovery and supplier substitution opportunities more aggressively. Procurement enterprises that have multi-geography supplier bases and offer global sourcing expertise can enable EPC companies to realise this objective by zeroing down the asymmetries of information on input costs and exploring arbitrage opportunities across locations in India.

Monitoring consumption to reduce wastage and cut project costs

Misalignment at the design stage, and frequent changes in specifications lead to material wastage in the EPC industry. Take the case of metal cutting, where suppliers need to en­sure complete adherence to specifications and physical configuration for ZED (zero defect zero effect) standards. A major reason behind such wastage is poor data quality in the bill of materials that creates ambiguity on product codes, physical dimensions, grades and quality standards. EPC companies can switch to catalogue-based buying, which is driven by clean procurement data and therefore reduces order delivery mismatches. Tapping into high quality supplier networks across India can enable EPC companies to discover greater efficiencies by reducing wastage.

Focus on procurement innovation and rate contracts as opposed to the RfQ model

Cement and ready-mix concrete costs have inflated by 35-40 per cent in the past year. EPC companies can unlock cost savings by switching from an RfQ-based model that runs on spot rates to rate contract models that lock prices for a range of -5 per cent to +5 per cent bandwidth. An RfQ model relies on maverick and un­­planned spending and leads to suboptimal use of resources, logistics modes and plant capacity. Digital supply chain solution providers can enable EPC companies to pursue such a migration seamlessly by consolidating their pur­­chase orders, order volumes and non-stra­tegic supplier codes. Doing so, EPC companies can leverage strategic supplier relationships for greater bargaining power to get reba­tes on turnover owing to economies of scale through bulk demand generation. For instance, one of India’s premier EPC companies has been able to unlock 20 per cent product cost savings th­rou­gh supplier base consolidation.

Explore opportunities for green material substitution in construction

After the Glasgow Pact for transition to net zero emissions, the infrastructure industry should be on track to adjust to the new regulatory gui­delines and environmental standards that may start rolling out from 2022 onwards. Gr­een construction materials such as fly ash, bamboo, precast concrete slabs, cork and recycled plastic offer great avenues to combine economic and technical efficiencies in one metric. The key for EPC companies to adopt these green construction materials is to explore the best possible value engineering solutions to optimise the source-to-site supply chain journey. Supply chain experts with experience in value engineering and an analytical approach can enable EPC companies to reimagine the way the numbers add up across the full stack of cost drivers in their supply chain and go green with agility.

Digital track and trace of logistics for better project management and planning

Logistics expenses account for approximately 10-15 per cent of total costs incurred by the top 10 EPC companies in India. They have been hit by an increase in fuel and power costs, strained logistics capabilities, port congestion, and hikes in freight costs. Their logistics strategy has to be based on greater diversification across multiple modes of transport, multiple routes, multiple material bundling options, and multiple logistics partners. One way to optimise these costs is to adopt a digital supply chain that enables better tracking and tracing of the logistics journey. Smart algorithms to explore competitive bids from logistics partners can unlock cost savings for EPC companies through better project management and planning.

Opportunities for revenue growth galore

Infrastructure development is the way forward as India is set on its path to become a global manufacturing hub. The government can stimulate demand through higher infrastructure sp­en­ding, but EPC companies need to solve supply chain challenges facing them in the real economy to protect profit margins from input cost pressures.

Based on inputs from Abheet Dwivedi, Director, Infra Vertical, Moglix