When industrial engineering and construction firm Fluor Corp. designed and implemented its strategic sourcing program five years ago, things were different. The company's industry was in something of a slump but on the verge of a major boom. Despite the dramatic shift in the market, Fluor's strategic sourcing initiative is not only meeting its original purpose but it is helping to manage shortages and constraints now common in the marketplace.

According to Jim Scotti, vice president and CPO responsible for the company's $10 billion in annual spend, none of Fluor's markets is in a down mode. The company is keeping busy with projects for customers in oil/gas, chemicals, power, alternative power, infrastructure, mining, and government sectors. "Everything is booming," he says, which is good, but also presents a unique challenge. "All of our businesses are fighting for the same materials and resources."

While the majority of what Fluor sources is engineered equipment, the company was impacted by commodity shortages for materials such as cement and rebar, which both saw constrained supply markets. In addition, Fluor's suppliers are facing shortages for materials such as steel which is integral to Fluor's projects. These shortages ultimately impact what Fluor can get, when it can get it, and at what price.

"We saw some steep price increases from 2004 to 2006 for a lot of the equipment we purchased, especially those made from steel," says Scotti. "We expect to see prices for materials and equipment continue to rise through 2007, and hopefully level off in 2008."

While commodity availability and pricing are challenges, delivery is more of a challenge, according to Scotti. "Shop capacities are extremely tight because of the engineering construction boom worldwide, including both industrial and commercial construction. We are stretching the capacity of the shops we deal with, especially in the structural steel and pressure vessel areas."

Some of these shops are close to 100% full and Scotti expects these levels to continue into 2008.

"Five years ago, we never paid a lot of attention to purchasing structural steel early in a project," he points out. "We usually engineered what we needed, put out an RFQ, and purchased it in a normal procurement cycle." In a typical project, it might have taken six months for engineering, inquiry, order placement and delivery of structural steel. These days, Fluor is looking at nine to 12 months. "We now know we need to purchase steel earlier in the project," he adds.

“We expect to see prices for materials continue to rise through 2007, and hopefully level off in 2008.” —Jim Scotti

Another challenge has been logistics—the need to move material and equipment all over the world. "Just as capacity is being strained in the shops and manufacturing facilities we buy from, so are the transportation challenges, such as ocean-going vessels," says Scotti.

Three years ago, Fluor implemented the Procurement, Engineering, procurement and Construction process (PEpC), which was based primarily on research done at the Construction Industry Institute. Prior to PEpC, the traditional process involved the procurement of critical materials and equipment following the engineering work on a project.

With PEpC, "big P" procurement, which focuses on strategic supplier involvement, precedes engineering activity. The strategy is designed to integrate Fluor's strategic suppliers earlier in the project cycle which provides opportunities to better manage cost.

While the ability to influence the cost of a project is greatest during the engineering phase, it then usually takes months before the critical equipment and material are actually purchased, and this is just in time for construction to begin. PEpC arranges for strategic suppliers to work with engineering during the design phase in order to reduce cost and cycle time.

Fluor has found that, by moving strategic purchasing activities ("big P") ahead of engineering, and leaving nonstrategic purchasing ("small p") until after engineering, the company and its clients can save between 4% and 10%, as well as achieve shorter leadtimes. With procurement cost representing 60–70% of a project, these savings can be substantial.

The timing of the PEpC implementation came just at the dawn of the worldwide business/industry boom and the resulting shortages and capacity constraints. "When we started using the concept five years ago, we didn't think that it would specifically come into play during shortages and capacity constraints," says Scotti. "We implemented it to reduce costs and create shorter engineering schedules. However, it really has helped us in these other areas."

One reason is that, as a byproduct of PEpC, Fluor's internal engineers and suppliers have gotten to know each other much better and have become very comfortable dealing with each other as they have worked on projects in the past three years using the PEpC formula.