A recent report published by consultancy McKinsey Global says major changes must come to construction material supply management and distribution systems in the very near future.
Based on conversations with over 100 experts and executives and a survey of 400 global industry leaders, the report was written by managers of several McKinsey offices in Europe and North America.
The report reiterates the industry’s need to improve productivity and profitability. Despite its standing in the world economy — 13 per cent of global GDP by McKinsey’s reckoning — construction’s productivity and profitability lags behind most other industries.
“Construction has seen a meagre productivity growth of one per cent annually for the past two decades. Time and cost overruns are the norm, and overall earnings before interest and taxes (EBIT) are only around five per cent despite the presence of significant risk in the industry.”
Of course, change is a challenge for an industry as risk-averse, fragmented and complex as construction. COVID-19 has, however, forced a new look at previous business models and construction processes.
“The COVID-19 pandemic may be yet another crisis that wreaks havoc on an industry that tends to be particularly vulnerable to economic cycles,” the authors say. In fact, the most recent U.S. Chamber of Commercial Construction Index indicates supply problems may persist well into 2021.
McKinsey believes “bold, strategic” decisions will be required for those companies who wish to emerge as winners.
McKinsey acknowledges new technologies and digitization are already making an impact on the industry. Going forward, over 60 per cent of survey respondents cited new production technology, digitization of products and sales channels, new materials, and disruptive market entrants as forces that must be dealt with. Furthermore, approximately 75 per cent feel these changes will occur within the next five years.
“To survive and thrive, incumbents must respond. All of the players in the construction value chain will need to develop their strategies for dealing with or leading disruption,” says McKinsey. In particular, commoditization and declining value share will affect engineering, design, material distribution and logistics, and specialized contracting unless new strategies are developed.
One example McKinsey cites as a positive sign of change is the increased use of modularization. McKinsey says that in North America alone, “permanent modular construction” has grown by 50 per cent from 2015 to 2018. Similarly, research and development spending among the leading 2500 construction companies has increased by over 75 per cent since 2013.
One sector within the construction process chain that faces severe challenges is material distribution, described by McKinsey as those who, “procure basic materials, components, and equipment and then resell them to consumers and businesses.” While today they may represent up to 17 per cent of the construction ecosystem, their value could erode significantly unless changes are made to their business models.
McKinsey offers specific areas that need to be addressed: Greater standardisation and “productization”, increased use of digital twins and building managements system (BIMS), and improved off-site efficiencies and construction.
Twenty per cent of respondents to McKinsey’s survey believe that failure to change could result in material distributors declining to the point of non-existence within 10 years.
On the other hand, McKinsey says, “distributors could reposition themselves as industrial-grade logistics hubs for the construction setup of the future. In this scenario, distributors become even more effective as catalysts for productivity at sites, generating substantial value for the entire industry by cutting time and effort now wasted in searching for, waiting for and moving materials onsite.”
Material distributors could even add new value by assisting with international sourcing, credit finance and providing various forms of assistance to smooth onsite logistics involving assembly-order packing, day-before delivery and basic preassembly.
Similar challenges will be faced by others in the system and will need solutions, says McKinsey.
“As disruption creates a new ‘ecosystem of the future,’ all players in the value chain will need to reposition or reinvent themselves.”
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Inside Innovation column ideas to editor@dailycommercialnews.com.
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