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Pain Points in Material Procurement

Pain Points in Material Procurement. Contractors’. Price Volatility Timely Availability Limited Storage Space Competitive Bidding. Producers’. Over capacity due to 9 years of expansions. Price Volatility. Steel accounts for 20% and lumber 17% of ENR's Building Cost Index

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Pain Points in Material Procurement

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  1. Pain Points in Material Procurement Contractors’ • Price Volatility • Timely Availability • Limited Storage Space • Competitive Bidding Producers’ • Over capacity due to 9 years of expansions

  2. Price Volatility • Steel accounts for 20% and lumber 17% of ENR's Building Cost Index • Lumber: Hefty quota on Canadian lumber (34% of U.S. market) raised prices for 33% in 1996 and 20% in early part of 1997. Price then collapsed in summer of 1998, rebounded significantly in 1999 and tumbled again in 2000 due to over capacity. • Steel: Price peaked in summer 1998 before import drives it down 13% in 1999. Then anti-dumping duties, increase in nickel prices, and strong demand in Asia, Europe and North America drives it back up before diving again due to over capacity

  3. Availability • In order to produce more steel, mills who are at full capacity, adopts longer runs. Lead time is as long as 6 months. Competitive Bidding • As many as 10 contractors bidding • 5% margin for a big project and 2-2.5% margin for a small one—lower than yield of risk free treasure bonds

  4. Options • Option is the right but not the obligation to do certain things • Similar to financial options, real options provide a decision maker flexibility to adapt his future actions to market conditions in order to capture upside potential while limit downside loss.

  5. Potential Types of Real Options • Options to defer delivery in case weather is bad or there is a delay in obtaining building permits, signing off of a design, the predecessor step, etc. • Option to alter scale of procurement when market changes • Option to switch to substitute products in fast-track projects

  6. Benefits of Real Options • Risk sharing similar to insurance. Contractors pay small premium to suppliers minimized risks. Payment is smoothed out, reducing financial distress, and delivery is accurate due to better capacity planning. • Locking in prices without hassle of inventory due to flexibility of options.

  7. Deliverables • Final CIFE Technical Report on types of materials and types of real options applicable • One to two journal articles at the conclusion of the research • Web documentation of the ongoing and finished research • At least one workshop for CIFE members • Real-life supply contracts if time allows

  8. Future Plans • Seeks further funding from NSF and Sweden

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