Everyone within the project business knows that the main criterion for having your project offer accepted is always the same – price. Undercutting your competitors is the only way to win a bid. This is true for almost all project-driven industries, be it construction, software development, manufacturing or others.
By doing this, customers and suppliers alike are neglecting one crucial aspect, as Dr. Eliyahu Goldratt explains in a lively presentation. Once you have understood this, you will realize that you have within your grasp what every business wants: a decisive competitive edge and convincing arguments to wipe out your entire competitive field – without having to bargain, grapple with tight margins or live constantly on the edge of bankruptcy.
Looking at the relationships between customers and suppliers, a few things immediately become clear:
- Like any other business, the customer wants to maximize profits.
- Therefore, he will try to keep his costs as low as possible when awarding project contracts.
- Expertise and quality tend to be taken for granted or given little attention – suppliers are all too similar in this regard (so it is unlikely you will obtain a competitive edge on these aspects).
- There is something else all suppliers have in common: they almost universally deliver late. In most project environments, delays of several months are the norm.
And this is where the crucial fallacy lurks, as Dr. Goldratt explains:
- Like any other business, the customer wants to maximize profits.
- When deciding whether to make a major new expense (e.g. a new plant), his main criterion will be: Return on Investment (ROI).
- Customers and suppliers alike assume that in this transaction, the supplier will only have an influence on the price of the project (the Investment), but not on the Return.
Here is a graphical representation of the situation:
Own representation based on Dr. Eliyahu Goldratt, Identifying the Need of the Customer1
The interaction between the customer and the supplier begins shortly after the investment decision has been made and ends upon project completion, i.e. before the “Return” phase of the project. But what about project delays? Each day the plant is not completed and thus not operational is a lost day for production. Are there no costs involved with this?
Of course there are: less throughput, less turnover, less revenue. Dr. Goldratt was shocked to find in conversations with suppliers that no one had thought to make this simple calculation, even though all the necessary data was available. Had they done this, they would have found that the production losses caused by the delays very quickly exceeded the entire initial investment! They would immediately have realized the substantial competitive edge hidden in this fact.
Instead of competing on price with other suppliers and trying to deliver the project for less, they could show to the customer the considerable sums that were being lost due to the delays common in their industry. It would then be easy to demonstrate how reliable, timely project completion would lead to a much higher Return on Investment.
Of course Dr. Goldratt knew that this was not a trivial thing to achieve, but with his Critical Chain Project Management (CCPM) he had created a robust and tested method to shorten project durations and become a reliable partner in the project business. My book Projects That Flow offers a clear, hands-on guide to implementing this process and will be released in English in the near future.
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