For Manufacturing and Distribution Companies, Post-COVID Return to Business Is a Timely Opportunity to Optimize Facilities Management

Jon Critelli, Managing Director Internal Audit and Financial Advisory – Capital Projects
Sarah Tuchler, Associate Director Internal Audit and Financial Advisory – Capital Projects

The onset of COVID-19 and subsequent lockdowns that shut down business across the globe forced organizations to quickly adapt to a new reality. But it also allowed companies to view their operations from a new, albeit difficult, vantage point. As a result, many companies are reevaluating space needs and operations in order to trim costs amid widespread adoption of a hybrid working model, onshoring activity, and the reconfiguration of supply chains.

For manufacturing and distribution (M&D) companies performing this assessment, it is an ideal time to examine their facilities management practices, performance and needs. Conducting an audit of current facilities management practices can uncover any number of potential opportunities to cut expenses and enhance efficiency. Asking the following questions is useful at any time, but especially now:

  • Do we understand what we’re paying for, and are vendors providing all the services that are spelled out in the contract?
  • Are vendors meeting the minimum performance standards called for in the contract?
  • Are vendors staffing jobs appropriately? For example, are they bringing in more resources than needed at a higher cost to the organization, or are staff shortages reducing the quality of service?
  • Is it possible to consolidate the number of vendors to generate economies of scale?

Vast and varied

Because large M&D companies tend to have many and different types of facilities that are often located around the globe, a facilities assessment is not a straightforward task. In addition to production plants, a typical M&D facilities portfolio may include warehouses, service centers, and logistics hubs, as well as local sales offices, regional offices, and a corporate headquarters. It’s not unusual for certain facilities to operate in remote locations.

Outsourcing parts of production to third parties is also common. Although these are third party-run facilities, manufacturers may ultimately be responsible for ensuring that the facilities are adequately managed in accordance with industry regulations or the manufacturer’s own production standards.

Management of these assets can span a wide range of activities as well. Building maintenance, cleaning and sanitation, landscaping, security, utilities, and space configuration and planning are all services that manufacturers need and pay for. Minimum performance standards vary depending on the building’s function; for example, sterility and HVAC performance are much more important in microchip plants and biotechnology labs than in everyday office environments or factories that produce nuts and bolts, notwithstanding the extra focus on cleaning over the last 18 months.

In general, the greater the size, diversity and geographical footprint of an M&D organization’s real estate portfolio, the more varied the scope of services needed and the more challenging the tracking of costs and effectiveness of service providers.

Decentralized operations also may prevent manufacturers from realizing economies of scale. It can be difficult, for example, to find a single vendor that can cover a large number of regions, and finding service providers in far-flung locations can be even more of a struggle.

Well-intentioned as internal facility management functions are, they are typically focused on keeping the organization’s operations running by addressing immediate problems, often pushing strategic management decisions to a later date. Consequently, strategically thinking about a facilities management assessment and planning process – and the benefits it could provide in the form of cost-cutting or achieving greater value at current cost – seldom leads to action.

Understand and prepare

M&D organizations that are ready to initiate such a process, however, can start by taking several smaller preparatory steps. Here are a few thoughts on what to focus on:

  • Data gathering. It sounds simple in theory but gathering facilities management data can be a time-consuming task because such data is rarely consolidated, especially when multiple vendors service multiple sites. Cost data may be found in financial reporting but comparing it across facilities can be difficult if the financial systems used are disparate. Sometimes such data resides in a computerized maintenance management system, which essentially captures information regarding the health of facilities, response times to resolve problems and other measures. This is another source from which data needs to be extracted. Needless to say, a roster of all facilities, from the smallest sales office to the largest factory, is needed to collect all data. And it’s not uncommon for manufacturers with changing operations to have facilities rosters that are out of date.
  • Contract scrutiny. Contractual requirements for various vendors set the baseline for service levels and costs. Understanding service level agreements helps facilities managers extract maximum value from their vendors per contract terms and weed out inefficient performers. Knowing the length and scope of each facilities-related contract is a key piece of information which will influence the timing of consolidating and replacing vendors.
  • Business strategy focus. It’s important for the facilities management function to have a clear understanding of the role it plays in the manufacturing company’s short- and long-term business goals. If a manufacturer is planning to exit a line of business in the near term, then it makes no sense to put a new 30-year roof on that plant if it cannot be refitted for another product or use.

Enacting change

Having access to the information above – facilities data, contracts and business strategy – can provide confidence to M&D companies that they can begin to formally assess their facilities management operations and identify opportunities for cost savings. We recommend a three-part action plan:

  • Conduct a facilities management process audit – An audit utilizing a risk-based framework documents the facilities-related processes, risks and controls, and control gaps. Meanwhile, process testing will reveal whether vendors are fulfilling their contractual obligations and meeting the organization’s requirements.
  • Benchmark facilities management costs – In this step, square-foot costs are calculated for each facility type and by category, such as operations and maintenance, janitorial and utilities. These metrics are then benchmarked against industry peers and standards established by the International Facilities Management Association to assess operational efficiency.
  • Perform a facilities management strategy review – A review of the current operating model helps identify the best approach to align the facilities strategy to corporate strategy and to industry best practices. This includes a cost analysis of the service provider base, which can guide decisions on whether to consolidate spending on third parties – and how best to do it – and how to optimize vendor relationships.

For much of 2020 and into 2021, companies of all types were operating in crisis mode, or close to it. As cities reopened and businesses returned this year, many have returned with a markedly different physical environment compared to pre-pandemic. They are also using lessons learned to enact cost-savings changes. For M&D organizations in particular, there may be no better time to reevaluate facilities management and related services to ensure efficiency and growth in the months ahead.

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