By Mason Brady, Brady CFO

The year 2020 served as a stark reminder that supply chain disruptions can happen without warning. For subcontractors, these disruptions can quickly escalate from a minor inconvenience to a severe threat to project timelines and profitability. By implementing strategic procurement and inventory management tactics, you can fortify your business against the next unforeseen crisis.

Strategic Procurement: Building a Resilient Supply Chain

A proactive procurement strategy is your first line of defense. It starts with a rigorous, data-driven assessment of your material needs and extends into deep collaboration with your suppliers.

1. Needs Assessment: Know Your Materials

A needs assessment helps you understand not just what you need, but how critical and difficult each item is to source.

•     Analyze Your Work: Compile a comprehensive list of materials used in past jobs, current projects, and open bids/specs. Group similar items into aggregate batches to keep the list manageable.
•     Rank by Risk: Rank every material on two critical criteria:

○     Difficulty in Sourcing: Past and present challenges in acquiring the material.

○     Demand Volume: The level of quantity you require.

•   Determine Focus: Your main focus should be on materials ranked with High Demand and High Difficulty in Sourcing. Surprisingly, you should also pay close attention to Low Demand and High Difficulty items. These are often specialty products that many suppliers do not prioritize, which can create disproportionately large bottlenecks for your business.

2. Planning and Partnership with Suppliers

Once your material ranking is complete, use this insight to collaborate with your supply partners.

•     Prioritize Discussion: Discuss your high-risk material priorities (high demand/high difficulty and low demand/high difficulty) with both current and alternative suppliers. Seek their insights on their own sourcing and inventory strategies. If they aren’t willing to be transparent and share insights, it might mean they don’t have a strong plan/system in place, which should concern you. On the other hand, you want to really understand your potential risk. For example, you would want to understand if the wholesalers you buy from all procure their supply from the same single source. That would represent a significant risk concentration you want to manage.
•     Understand Their Needs: Ask your suppliers what they require from you—the customer—to efficiently and accurately fulfill your orders. Develop an internal plan to meet these communication needs, and establish a series of recurring check-in meetings to troubleshoot issues and identify successes.
• Identify Shared Risks: Gain insight into which materials your suppliers are also struggling to source. If these align with your needs, develop a contingency plan, such as submitting orders earlier or, if you have the capability, maintaining a small buffer stock of these critical items in-house.

3. Tactical Tips for Contractors

For sustained stability, diversify your supplier relationships and formalize your bidding process.

•     Maintain Three Suppliers at Minimum: It is best practice to regularly maintain a relationship with three suppliers for any particular material or supply. This ensures diversification of supply in the event of a major disruption.
•     Formalize Bids and Negotiate: Whenever possible, have your suppliers submit formal bids or proposals. Use these to negotiate your final pricing. Remember, a price listed on a website or price sheet is often not the final price available. Logistics, volume, and long-term partnership are all factors open to negotiation. As Wayne Gretzky is often quoted, “You miss 100% of the shots you don’t take!”—so ask for better pricing.
•     Concentrate the Majority of Business: Select one supplier to receive the majority of your business. This high volume incentivizes them to provide superior service and makes you a priority client.
• Keep Minority Accounts Active: Procure smaller, minority items from your two alternative suppliers. This is not just about price; it’s about validating their service—how they accept Purchase Orders, handle logistics, communicate, and invoice. Crucially, this keeps your account active with them. During a critical supply chain disruption, most suppliers only service active customers to protect existing relationships, making an active account an invaluable asset for rapid recovery.

4. Relationship Management Considerations

While business is conducted with people and relationships matter deeply, this relational approach must be balanced with developing your own robust disruption plan.

• Honor Relationships, but Be Vigilant: Many contractors place significant trust in a single supplier to avoid damaging the relationship, only to be disrupted when that supplier makes difficult business decisions. Honor partners who go above and beyond, and seek to give your business to those who can meet your needs today and in the future.
• Develop Your Own Contingency: Be aware that suppliers, despite their best intentions, are making business and strategic decisions that may impact your supply. I have witnessed scenarios where a materials supplier went bankrupt or a vendor ceased working with entire business models, forcing subcontractors into desperate, poor negotiation positions.
• Assess and Adjust: Honor your past and current relationships, but continually assess if they can reasonably meet your needs going forward. Do not pay above-market prices merely to honor a past relationship. Additional value that commands a premium must be based on a current value proposition—superior service, better logistics, or inventory management with minimal stock-outs.

Inventory Management: Strategic Stock vs. Overhead Cost

Considering a small stock of high-demand items is a logical step after a thorough material review, but this is only recommended if you have existing, robust inventory management systems in place.

•  The Cost of Inventory: Inventory management is a high-cost function. You must account for the overhead of ordering, counting, tracking, and issuing materials. Furthermore, consider shrink (loss/damage), transportation, logistics, and the security required to guard your stock.
•  The 10% Rule of Thumb: It is reasonable to assume that the cost of all associated overhead (the hidden costs of holding inventory) is, on average, a minimum of 10% of the cost of the goods themselves.
• The Strategic Question: If you procure $20 million in supplies, the additional cost of managing a buffer inventory could be $2 million. You must seriously weigh the question: Is this additional cost worth it versus maintaining a highly refined, strategic procurement and multi-supplier strategy? For many, the strategic procurement path offers a higher return on investment and a more agile defense against disruption than building a costly, in-house warehousing system.

By combining proactive strategic procurement, multi-source supplier tactics, and a realistic assessment of inventory costs, subcontractors can minimize risk and ensure continuous operation even when the supply chain is under stress.

About the Author

Mason Brady is the Founder and President of Brady CFO, a Fractional CFO practice specializing with construction businesses. Brady CFO works with construction business owners to optimize their accounting, develop strategic growth plans, forecast and secure needed cash flow, and build long-term equity value. Mason is the proud husband to Giovanna, and 3x girl dad to Olivia, Giovanna, and Grace.