PT 172 RESEARCH REPORT: IMPROVING
CONSTRUCTION SUPPLY CHAIN PERFORMANCE
Iris D. Tommelein
Kenneth D. Walsh
James C. Hershauer
Professor
Construction Engineering and
Management Program
University of California at
Berkeley
Associate Professor
Del E. Webb School of
Construction
Arizona State University
Professor and Acting Chair
Ford Honors Fellow
Department of Management
Arizona State University
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EXECUTIVE SUMMARY
Supply-chain Management (SCM) is recognized as a leading process improvement, cost
saving, and revenue-enhancing business strategy. It applies to all businesses involved in
the delivery of capital facilities. SCM requires a corporate initiative, supported by
strategic and tactical planning, to instill systems thinking and promote a new discipline
that companies must master.
Examples of SCM tools and techniques are presented in this document. SCM requires
a good understanding of production management, planning and design, and business
incentives. Like other disciplines within an organization, such as structural-, mechanical-,
electrical-, or process engineering, accounting, and materials management, SCM must
have a champion who can drive the ideas across disciplines within the organization as
well as across organizational boundaries.
SCM may be practiced on a single project, but it results in the greatest benefits when
it is practiced at the enterprise level, when it involves multiple companies, and when it
gets applied to multiple projects over an extended period of time. Successful application
of SCM to the delivery of capital projects therefore requires a major shift in mindset from
all participants involved in the delivery of capital projects. Companies not engaging in
SCM may find themselves falling rapidly behind in performance relative to their supplychain conscious competitors.
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SUPPLY CHAIN MANAGEMENT CHALLENGE
Managing a supply chain requires adopting a global systems perspective, rather than the
traditional, often short-sighted view of a single stakeholder. In the construction industry,
traditional managerial approaches emphasize: management of individual projects;
separation of design, installation, and operation functions; uniquely engineered facilities
and components; competitive bidding; early delivery of all materials at construction sites;
and information hoarding. These practices characteristically result in late payments and
retainers, negative incentives (e.g., liquidated damages), and long and uncertain lead
times with extensive use of expediting.
With the application of SCM to the delivery of capital projects, managerial
approaches will emphasize: supply-based management; life-cycle costing; assembly of
unique facilities from standardized modules and components; problem solving through
strategic partnering; emphasis on long-term working relationships; extensive use of
communication and information technology so that the value chain supports the supply
chain; short and reliable cycle times from raw materials to site (and/or strategic
placement of inventory in critical material supply chains); phased delivery of materials to
the construction site to match installation rates; and information visibility that allows
efficiencies such as risk pooling, logistics optimization, and Supplier Managed Inventory.
Industry leaders will effectively manage their supply chains and thereby gain
significant competitive advantage. All key stakeholders in the construction supply chain
must understand the opportunities offered by SCM and jointly take advantage of them, or
those left behind will be unable to compete in the long term.
It is necessary to reconfigure supply chain power through strategic innovation and
alignment. Existing boundaries of firms need to become relatively porous and flexible.
Capital-projects markets require a focus on building collaboration in relationships within
and across key industry players.
Application of supply chain concepts and practices in the construction industry can
lead to:
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Cost
1. Compression of payment times to supply chain members and thus reduction in the
cost of capital for project delivery.
2. Reduction of negative incentive payments and premium charges for extra
services, such as rush orders.
3. Increased net present value (NPV) due to saving in maintenance, repair, and
operation of facilities (MRO).
4. Additional income to all stakeholders from earlier turnover, startup, and full
commercial operation.
Time
5. Compression in the longest paths of a supply chain by a factor ten or more,
suggesting that project delivery schedules can be dramatically compressed.
6. Compression in supply chain length for single projects by strategic ownership of
materials and information.
Quality (reliability)
7. Compression in variability of lead times,
8. Elimination of communication errors, delays, and rework,
9. Reduction in wastes caused by inefficiencies in material and labor.
Safety
10. Reduction in near misses and in recordables.
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TABLE OF CONTENTS
TABLE OF FIGURES
TABLE OF TABLES
ACKNOWLEDGMENTS
CII
PT172
Companies that provided input into the case studies, several of which were not CII
members.
Last but not least, our students.
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1 INTRODUCTION
1.1
Research Motivation
SCM is new, exciting, breakthrough, revolutionary, unavoidable, and … unstoppable.
Major drivers in the global emergence of SC analyses are:
1. Emphasis on industry-level optimization through collaboration and integration.
2. Effective use of power in supply chains through rapid formation of alliances and
interfirm relationships.
3. Emphasis on global environmental concerns and sustainability
4. Acceptance of the need for concurrent engineering and cross-functional team
work to avoid sub-optimization and to compete in a global marketplace.
5. Visibility of information across processes that span internal and external
organizational boundaries (enabled by “standard” ERP systems).
6. Information and communication technology developments that have enabled eCommerce/e-Business.
7. Development of life-cycle analysis and costing.
8. Explicit consideration of risks and potential reallocations of the costs and benefits
of shared risks.
SCM equally applies to the delivery of capital projects as it applies to any other industry.
The research team therefore set out to explain the underlying concepts and principles that
drive SCM practices today, then to investigate and document current understanding and
practices of SCM in the delivery of capital projects.
The purpose of this document is to introduce Supply Chain Management (SCM)
concepts to owners, engineers, contractors, and suppliers to the construction industry, and
to assist them in using proven supply chain management tools and techniques to improve
the performance of the delivery of capital projects (CP). In addition, this document is to
help motivate the industry, including owners, engineers, contractors, and suppliers, to
fully exploit the potential of SCM for improving the delivery of capital facilities.
Especially engineering-procurement-construction (EPC) firms may find themselves
increasingly under pressure both from their customers—the owners and operators of
capital facilities (the demand side)—as well as from their suppliers (the supply side) to
improve their SC skills and capabilities.
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This Research Report of CII Project Team 172 “Improving Construction Supply
Chain Performance” explains how supply chain management is practiced in the
engineering and construction industry today, identifies tools and techniques for
improving capital-projects SCM, and describes what may be expected of highperformance construction supply chains tomorrow. It includes detailed case studies from
the capital projects industry, illustrating the concepts presented here. It also includes a
brief supply chain implementation guide, a set of definitions, and references on supply
chain management.
1.2
Capital Projects Supply Chain Management (CPs SCM)
What is Supply Chain Management? What is Capital Projects Supply Chain
Management? Supply Chain Management (SCM) is the practice of a group of
companies and individuals working collaboratively in a network of interrelated processes
structured to best satisfy end-customer needs while rewarding all members of the chain.
While SCM may be practiced on a single project, its greatest potential benefits come
when it is practiced at the enterprise level, when it involves multiple companies, and
when it gets applied to multiple projects over an extended period of time. Note therefore
the consistent use of the plural ‘projects’ in this research on Capital Projects Supply
Chain Management (CPs SCM).
CPs SCM is recognized as a leading process improvement, cost saving, and revenueenhancing business strategy practiced in today’s business world. All disciplines within a
business
(conceptual
design,
engineering,
procurement,
fabrication,
logistics,
construction, accounting, and legal council, to name but a few) can be, and most often
are, involved in CPs SCM.
What is the challenge? Managing a supply chain is difficult because it involves
managing a complex and dynamic network of organizations that operate to meet
numerous different, conflicting business objectives. Managing not only the processes
within individual organizations, but also considering the chain of processes while aiming
for global system optimization is what is known as supply chain management. The key to
success in SCM is aligning the objectives and the corresponding production systems of
all organizations in the supply chain to the fullest extent possible.
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Why is SCM important? Effective integration and optimization of supply chains can
have a tremendous, positive impact on project schedules, delivery time from concept
development to turn-over, costs, customer satisfaction, and, ultimately, the bottom-line
success of each project as well as the long-term success of every participant in the supply
chain. Companies not engaging in SCM may find themselves falling rapidly behind in
performance relative to their supply-chain conscious competitors. While supply-chain
managers aim to reward all members of the chain, they do not guarantee that all of
today’s players to be in the game.
1.3
Illustrative Case Studies
While CPs SCM may be new to the reader, it is already being successfully practiced to
various degrees in the engineering and construction industry today. A survey of owners,
contractors, and suppliers conducted by PT-172 members showed that few are aware of
CPs SCM opportunities in the delivery of capital projects, and the implementation of CPs
SCM practices varies widely. To document the range of practices and potential
opportunities, the research team conducted eight case studies, namely:
1. Preferred Supplier for Electrical Bulks and Commodities - Indy Electric Case
2. Supplier Managed Inventories for an Owner Organization - US Steel case
3. Supplier Performance Evaluation - Intel Case
4. Web-based Project Management eBuild - Intel 2 Case
5. Owner-acquired Raw Materials - Light Industrial Case
6. Owner vs. Contractor Alliance for Engineered Materials - Transformer Case
7. Engineered Materials at the Interface between Disciplines - Pipe Hanger Case
8. Lean Production ‘Flow’ in a Vertically Integrated Organization - Preengineered Metal Buildings Case
These cases are presented in detail respectively in Chapters 3 through 10 of this Report.
They span a range of SCM practices with improvements already achieved or being
achieved in the engineering and construction industry today. Nevertheless, the list is by
no means exhaustive or even representative of all initiatives undertaken by engineering
and construction practitioners at large. Rather, the cases were chosen because PT172
team members thought they would be interesting to document and their companies were
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willing to support the data collection, interpretation, and reporting efforts. Each case thus
mentions the name of the sponsoring company unless the company requested to remain
anonymous.
The researchers investigates each of these cases by applying the following
methodology:
1. Identification of case-study opportunities
2. Mapping and Data Collection
3. Metrics
4. Detailed data collection
5. Assessment
6. Modeling and suggestions for improvement
7. Implementation
1.4
SCM as a Business Driver
SCM covers an extremely broad set of business issues. Figure 1 shows SCM as a central
driver to many business decisions and methods. SCM is shown as the integration of
operations management, logistics, procurement, and information technology and includes
links to corporate strategy and customer relationships. Much of the prior research at CII
has dealt with elements of SCM. The unique aspect of SCM as a whole is the emphasis
on synthesis across all of the areas shown.
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Customer Relationships
Management (CRM)
Enterprise Resource
Planning (ERP)
Corporate Strategy
Project Management
Multi-project Strategy
e.g., make or buy
(outsourcing)
Internet-based Systems
e-Business Systems
Standardization of Products
and Processes
DFX
Design Management
Modularization
Databases
Operations Management
Construction Management
Simulation
PEpC
Mapping Tools
Process Mapping
Organizational Mapping
Information Technology
SCM
Logistics
Transportation
Decision-support Systems
Expediting
Procurement
Customs Clearance
Optimization
Warehousing
Materials Management
Sourcing
NOTES:
Blue denotes original basis on which SCM has historically built
Supplier Managed Inventory
Purchasing
Figure 1: Corporate Systems View of SCM: Multi-project and Enterprise-wide
1.5
Who is the Customer? Who Benefits from SCM?
Gains are systemic for entire supply chains. It is not clear up front how a particular
company will gain. It depends on what they do and how it relates to what others in the SC
and industry at large do, plus how successful they are.
SCM is all about business opportunities to deliver customer value, but who is the
customer? From the perspective of an EPC firm, for example, is the customer the
producer of pharmaceutical products, the doctor prescribing them, or the person taking
medication? Clearly, the immediate customers for EPC firms are owner-operator
organizations, but these organizations themselves are increasingly focusing on delivering
value to their own customers. The owner-operator thus receives value from construction
supply chains based on the ultimate value delivered to the consumer of products and
services.
Today’s owner-operator organizations are changing rapidly in order to remain
competitive in the new economy. They are, accordingly, reshaping their own supply
chains. Change often happens out of necessity, when an organization faces a crisis. It is
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understandable that successful businesses prefer a status quo over a change. Change is
always perceived as risky and maintaining a status quo may not be perceived as such.
Nevertheless, there always are some companies within any industry that have to face
change, be it out of necessity or opportunity, and their industry as a whole will therefore
be subject to change. Rules of thumb that were appropriate in the old economy, such as
“if it ain’t broke, don’t fix it”, therefore, may cause more harm than good in the new
economy.
To illustrate the dramatic changes owner-operator organizations may encounter,
consider the case of the London Underground. Bouverie-Brine and Macbeth (1995)
described the change in thinking and the resulting realignment within their organization
as well as the realignment of their organization’s supply chain over a 10-year period.
Figures 2 through 6 depict these changes cogently. Their organization continues to
undergo change in order to better meet customer demand. Supply chain relationships are
seldom constant as needs, responsibilities and power in the chain instigate
reconfiguration.
Traditional domination of the construction
supply chain by engineering. Suppliers are
kept at an arm’s length.
Figure 2: London Underground’s Supply Chain pre 1988
(Figure 7.1 in Lamming and Cox 1995)
Shared responsibility by engineering and
operations. Note the continued exclusion of
suppliers but some direct linkage of
engineering with ultimate customers.
Figure 3: London Underground’s Supply Chain post Kings Cross
(Figure 7.2 in Lamming and Cox 1995)
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Primary authority shifted to operations
with links to all supply chain members.
Procurement role shifts to coordinating
engineering with operations and suppliers.
Engineering interface with customers is
eliminated once again.
Figure 4: London Underground’s Supply Chain Post Company Plan
(Figure 7.3 in Lamming and Cox 1995)
Customers become a dominant force with
operations linking suppliers, procurement,
and engineering. Procurement continues to
coordinate engineering with operations
and suppliers.
Figure 5: London Underground’s Supply Chain Post Introduction of Supplier Managers
(Figure 7.5 in Lamming and Cox 1995)
Domination by overlap of direct supply
chain of customers/operations/suppliers.
Engineering and procurement move to
support roles and minimal direct interface.
Figure 6: London Underground’s Supply Chain of the Future
(Figure 7.8 in Lamming and Cox 1995)
Other cases, including the 8 conducted by this research team, illustrate that revolutionary
changes are taking place in the EPC industry. The case of Butler (case 8) and Shaw
(described in some detail in case 7, the pipe support case study) illustrates that the drivers
for change need not necessarily be owner-operators. Organizational change takes place
over an extended period of time – adoption of SCM techniques also is done in phases.
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2 LITERATURE REVIEW
2.1
Different Views on SCM
Figure 1 illustrated the view that SCM is the combination of the traditional functions of
operations, logistics, and purchasing with information technology. Operations has
traditionally focused on inventories, logistics, on transportation of materials, and
purchasing on managing first-tier suppliers. Integrating these three views only tells part
of the SCM story. Incorporating information technology provides a more complete
picture; however other views must also be accommodated in our understanding of supply
chains. The traditional areas are reviewed briefly and then the related concepts of lean
supply chains, power in chains, mass customization, alliances, and market structures are
reviewed. One must consider all these views when evaluating supply chain management
in construction.
2.1.1 Inventories
If one views supply chains as a collection of related inventories, then the analysis of a
supply chain focuses on inventory location and optimization of quantities and tradeoffs to
achieve desired supply chain delivery and cost. The six types of supply chain inventory
are (1) cycle inventory, (2) safety stock inventory, (3) market inventory, (4) pipeline or
systemic inventory, (5) anticipation inventory, and (6) coordination inventory.
Historically, the emphasis has been on minimizing cycle, safety, coordination, and
anticipation inventory. A supply chain perspective changes the focus to eliminating
market inventory and drastically reducing pipeline inventory. For example, reducing the
total supply chain length from 500 to 50 days reduces total inventory by 90% and makes
an obvious reduction in response time. Eliminating market inventory completely by direct
shipment from the first-tier supplier may revolutionize an entire supply chain (personal
computers for example). Figure 7 depicts the typical supply chain used for analyzing
inventories.
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Raw Material 1
Supplier 1
Market Research:
Surveys, Focus Groups, etc.
Raw Material 3
Manufacturer
Distributer
Retailer
Supplier 2
Customer
Raw Material 2
Supplier 3
Figure 7: Typical Retail Supply Chain
2.1.2 Global Logistics and Management: Location and Movement
(www.ipsera.org)
If one views supply chains as the “movement” of physical goods, then the analysis of a
supply chain can focus primarily on the logistics of getting goods to the ultimate
consumer. There has been a strong focus on customer service in the logistics literature for
many years. The emphasis in this view is on determining where actual “consumption” of
the good occurs and then figuring out the optimal configuration of the network of
transport arrows and transformation nodes to move raw material from the source location
to the sink location of consumption. Obviously, there are usually multiple source
locations and multiple (sometimes almost infinite) consumption points.
Algorithmic methods are often applied to relatively small and simple networks with
limited sources, intermediate nodes, and a few consumption points. Approximation and
simulation models are often applied to explore strategic decisions in more realistic and
complex networks. Supply chain issues to explore can involve a very complex global
environment dealing with multiple issues such as tax, duty, tariff, exchange rate, law,
belief, culture, climate, politics, and so forth. As a simple example, if you have a product
that contains a high amount of stainless steel, do you locate the transformation facilities
near the mills to reduce the transport time and cost from the mill? If mills are not located
near actual use of the final product, do you instead locate transformation facilities near
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the user nodes? The supply networks and costs will differ dramatically between these two
approaches.
2.1.3 Buyer/Supplier Dyadic Management
This is a key carryover from years of North American research in purchasing on
managing first tier suppliers (www.ISM.ws and www.capsresearch.org). The emphasis is
on supplier qualification, reduction in the supplier base, managing the buyer/supplier
interaction, supplier development, and long-term supplier alliances. Supply chain
implications focus on the move to single sourcing, supplier pre-qualification, and specific
programs by buyers to develop the capabilities of suppliers for high quality at low cost.
The use of just-in-time (JIT) deliveries and vendor- or supplier managed inventory
(VMI or SMI) in the USA have developed in relation of this movement. JIT requires that
suppliers provide non-inspected components that work just as they are needed. Time and
costs are compressed for the buyer and the supplier has a regular customer at a fair price.
Supplier managed inventories place the emphasis on savings and efficiency for the
supplier. The supplier recruits many customers to serve using SMI. This allows the
supplier to optimize logistics costs and to have full visibility to all demand. By pooling
variability across buyers, stable production and minimal inventories can be maintained
while minimizing transportation costs for the supplier. Buyers do not have to manage the
component in any manner; the component is always available at minimal inventory costs
and unit price.
Research has now moved toward the issues surrounding triad relationships at the first
tier level and extension of first tier relationships to second and third tier suppliers.
2.1.4 Communication and the Internet
Under this view, supply chains are simply about communication among all of the
stakeholders in a supply chain. Many of the traditional problems in supply chains are the
direct result of lack of a common information base and lack of timely delivery of
information. The Internet has created a revolution in the reach and richness of
information (Evans and Wurster 2000). Historically, one could have richness in
communication with one other member of the supply chain or one could have reach to
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many with broadcasted impersonal communication. The Internet has provided the
medium with minimal barrier to entry for accomplishing both richness and reach. Thus it
is possible for 3,000 retail outlets, 50 retail distributors, 10 manufacturers, 100
commodity distributors, and 5 mills to all have access to exactly the same information on
material and product movement and demand concurrently. The implications for
managing the supply chain are enormous. This is especially true in industries that have
traditionally seen every member of the chain hold information very tightly.
2.1.5 Lean Supply Chains
The emphasis in lean supply chain practice (www.cf.ac.uk/carbs/lom/lerc, www.ame.org,
and www.lean.org) is on extending lean manufacturing practices (Ohno ##, Shingo ##,
Womack et al. 1991, Womack and Jones 1996, Rother and Shook 1998, Rother and
Harris 2000) to first-tier suppliers and other SC participants (Jones and Womack 2002).
With an emphasis on elimination of wastes and managing the value stream, the main
objective is working upstream with first tier suppliers and beyond to compress lead time
by eliminating “flat spots.” Flat spots refer to time periods with no value-adding activity.
For example, Peter Summerfield (2001), Rolls-Royce Managing Director –
Transmissions & Structures, recently explained the efforts at Rolls Royce to compress
total cycle time (including time to receive all materials and components, manufacture,
and assemble) to produce an engine to 40 days. Rolls-Royce is compressing supplier lead
time from 138 days to 40 days, manufacturing time from 54 days to 30 days, and
assembly time from 42 days to 10 days. The 40, 30, and 10 day lead times are overlapped
by making processes completely transparent using e-commerce, so that the total cycle
time is 40 days. Using similar concepts, the time from idea acceptance to first unit has
been reduced to 24 months (including a maximum of 8 months for any new
manufacturing facility). Suppliers are guaranteed a viable margin and prompt payment
and involvement in the next jet or engine is assumed. Figure 8 depicts a supply chain for
the aircraft industry.
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Internal
Business
Unit
Owner
Aircraft
$
Requirements
Aircraft
Supplier
Design Division
Supplier a
Manufacturing
Division
Supplier b
$
Supplier c
Figure 8: Typical Aircraft Supply Chain
2.1.6 Power and Relationships
Working from basic economic theory, Andrew Cox, Professor and Director, CSPM,
University of Birmingham (www.business.bham.ac.uk/business/page539.htm), evaluates
supply chains through the lens of market maturity and power. The focus moves from
leveraging existing suppliers to building trust and collaboration to evaluating critical
assets and who has power over supply chain resources to reconfiguring supply chain
power through strategic innovation and realignment. Under this view, the primary
analytical component is at the strategic level for a specific market or industry
(www.m4i.org.uk/). Existing boundaries of firms may become relatively porous and
flexible before strategic realignment resulting from disintermediation and deconstruction.
2.1.7 Mass Customization
Another way to view developments in supply chains (or demand chains) is through the
lens of mass customization (www.mass-customisation.org). The basic concept in mass
customization is to produce and deliver products and services with the same speed and
efficiency as mass-produced standard products. Marketing and advertising as they are
known today could die completely if this model dominates since there would be no
standard product to market (no one really expects this to happen completely).
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By focusing on ultimate consumer or customer specifications to meet need, by
focusing on order fulfillment in a pull structure, and by having flexible and agile
operations and logistics, the emphasis is on delivering quality at low cost in a rapid
response environment. This requires full transparency upstream from the ultimate
customer through the supply chain and short response times. Often, emphasis is placed on
postponement of customer-specific modifications as far downstream as possible so that
standardization can be accomplished upstream. Concurrent engineering is a must in this
environment. Even the customer is involved in new product idea generation.
2.1.8 Relationships and Alliances
Under this view, the emphasis is on gathering the right group of players together to strike
out on new approaches to a demand- or supply chain using e-business. Virtual networks
and supply chains can be formed and reformed at a rapid rate to find new markets or
revolutionize old markets or become a new supply chain alternative to a traditional
market. The emphasis is on strategic partnering and working relationships rather than
obsessive concern for merger, acquisition, or other traditional forms of reconfiguration.
According to Segil (2001 p.23) “the trend is toward large numbers of alliances that are
nonexclusive rather than small numbers of alliances that are exclusive.”
Internal alliances may be just as important as external ones in many large
corporations. Informal cooperation and consortium arrangements may be more prevalent.
For example, an intermediate manufacturer and a software company may join together to
develop collaboration tools for a particular supply chain. This may involve sharing
employees whether or not equity positions are established.
An intriguing approach to creating new relationships is the private finance initiative
in the UK concerning highway construction. By changing to purchasing a flow of
services from capital assets rather than the capital asset itself, alliances of suppliers have
formed into DBFO companies to design, build, finance, and operate the highways.
“Where previously suppliers’ attention was paid to claims positioning and the potential
for leveraging profit through the identification of liabilities, under the DBFO problemsolving attitudes overrode those of problem avoidance.” (Hall et al. 2000 p. 227). Figure
9 displays a similar set of complex relationships in the marine industry.
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Internal
Business
Unit
Owner
Internal
Programming
Unit
Vessel
$
Requirements:
Performance
Characteristics,
Conceptual Design
Supplier
a1
Shipyard
Supplier a
Design Yard
Production
Division
Supplier
a2
Supplier b
Marine
Architecture
Supplier
a3
$
Supplier c
Figure 9: Typical Marine Supply Chain
2.1.9 Information Access, Market Structures, and Control
Looking at market structures for supply chains from roots in economic and organization
theories, one can envision different substructures for physical transactions and
information transactions as (1) hierarchical structures, (2) centralized markets, (3)
decentralized markets, and (4) hybrid structures. Changes are the result of greater access
to complete information and use of information brokers for control and efficiency of the
market. Hybrid structures are enabled by information technology and can be understood
through the lens of coordination theory (Lewis and Talalayevsky 1997). Hybrid structures
tend to use third-party information brokers, exchanges, auctions, and so forth to move
markets to commodity relationships where possible and to very specialized hierarchical
markets with dynamic fast alliances for unique needs.
2.2
Evolution of SCM in Construction
SCM has been practiced widely in the manufacturing industry since the mid-1980s. It has
resulted in major performance improvements, such as reduced product cycle time (time to
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market), more reliable product quality and dependability, reduced inventory, less waste,
increased throughput, and it has generally driven down costs. In some markets,
manufacturing is now moving from mass production (one size fits all) to masscustomization of goods to better meet the buyer’s specific expectations. This new
manufacturing model in many ways resembles the customized nature of individual capital
projects.
Figure 10 shows the added complexity of the supply chain model for the construction
industry. The active role of the owner in managing the entire supply chain is different
than the typical retail supply chain as shown in Figure 7. In the retail supply chain,
thousands of customers initiate the demand chain pull in an indirect manner. While the
demand for products or services from the retail unit to be built comes from thousands of
customers, the immediate demand for a capital facility generally comes from a single
owner firm. This single customer has a significant role to play in the entire supply chain
as shown in Figure 10.
Internal
Business
Unit
Requirements
Internal
Facilities
Unit
Facility
$
Sub
Designer
Bids, Specs, Pay Requests, ...
Owner
$
Design Docs
Contractor
$
Sub
Designer
Designer
RFI
Sub
Designer
Submittals
Supplier 1
Sub
Contractor
Sub
Contractor
Sub
Contractor
$
Supplier a
Supplier b
Supplier 2
Supplier c
Supplier 3
Figure 10: Typical Construction Supply Chain
Several decades ago, most procurement for capital projects was achieved through a
traditional purchasing process: a series of one- off, one-to-one transactions between a
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buyer and a seller in order to meet individual project needs. A broader view on
purchasing responsibility and value emerged in the 1970s and the concept of Materials
Management evolved in the 1980s.
Studies in the construction industry in the 1980s and 1990s (BRT 1982, CII 1986,
1988, 1999) have shown the practical value of materials management as an approach to
reduce the total installed cost of capital facilities in a number of ways, including
increased field productivity. CII’s Implementation Resource 7-3 on ‘Procurement and
Materials Management: A Guide to Effective Project Execution’ (CII 1999 p. 1-6)
concluded that, among other benefits of materials management, “A basic materials
management system can be expected to produce a six percent improvement in craft labor
productivity. When sophisticated computer controls are implemented and the crafts use
the system to plan their work around material availability, an additional four to six
percent in craft labor savings can be expected.”
Materials management includes the functions of identifying, acquiring, distributing,
and disposing of equipment and materials needed on a construction project. Just as sound
purchasing practices are integral to effective materials management, the implementation
of sound materials management practices is are integral to effective SCM.
Specialization drove performance improvement in the early part of the 1900s but it
also resulted in industry fragmentation and longer, more complex supply chains. The
integration efforts that started in the 1970s, including materials management, reflected an
increase in awareness of, and reaction against the detrimental impact of fragmentation inhouse (functional stove-piping) and across organizational boundaries. Owners
increasingly focused on Total Cost of Ownership of their capital facilities.
Companies had long tried to increase performance by pursuing a divide-and-conquer
approach, assuming that they could break down a problem into pieces, develop a solution
for each piece, then put together the piecemeal solutions to result in a solution for the
problem as a whole. This is more easily said than done. They further optimized these
piecemeal solutions (e.g., by improving direct work) but thereby inadvertently caused the
combination of pieces to be less optimal (e.g., by increasing the amount of indirect work).
In doing so, they overlooked the flows of resources in-between project participants and
organizations, and sometimes lost sight of what was really valued by the customer in the
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process overall. In order to continue to improve performance, a paradigm shift is
necessary from a pure divide-and-conquer, transformation view, to a more holistic view
that balances transformation, flow, and value generation (Koskela 2000). SCM adopts
such a holistic view.
Companies have traditionally focused their materials management efforts on in-house
resources and processes, creating internal organizational boundaries based on functional
specialization. This has resulted in stove-piped disciplines such as project acquisition,
engineering (mechanical, electrical, process, structural, etc.), estimating, purchasing,
construction, legal council, and accounting, with poor communication channels and
coordination processes among them.
In the 1990s, construction companies began to implement integrated materials
management practices inside their companies in order to achieve internal integration.
Likewise, engineering and construction firms integrated their materials management
practices with their direct suppliers’ in order to achieve external integration. It is now
recognized that individuals firms and all companies involved in capital projects
delivery—the entire enterprise—must be involved for SCM to achieve success.
SCM offers a dramatically different and broader set of opportunities for
improvement, as compared to materials management, because it simultaneously considers
multiple projects and multiple organizations. SCM manages all flows of resources,
namely information, materials and services including craft labor, and capital services.
Figure 11 illustrates these flows by straight arrows. Even though they rarely are linear,
these flows of demand, supply, information, materials and services, and capital interact as
they drive the myriad of construction supply chains. The delaying and detrimental effects
of non-linear flows of capital are well-known and common in the construction industry.
Systems, such as new electronic payment methods, that improve the speed and reliability
of these flows can have dramatic effects on the entire supply chain.
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MA
ND
OWNER
DE
EPC FIRM
ARCHITECT/
ENGINEER
ER
VIC
E
S
specialists
dS
PIT
AL
an
CA
RIA
LS
TE
MA
INF
SUBCONTRACTOR
tier 1
tier 2
tier 3
tier ...
SUPPLIER
tier 1
tier 2
tier ...
OR
MA
T
ION
GENERAL
CONTRACTOR
SU
PP
LY
...
tier ...
RAW MATERIALS
PROVIDER
Figure 11: Flows of Information, Materials and Services, and Capital in the Supply Chain
for the Delivery of Capital Projects
SCM focuses on the management of external resources as well as the linkages to and
across internal work processes, capitalizing on the opportunities provided by managing
across companies. SCM considers multi-project and pre-project agreements as well as
project-specific agreements to support a company’s core competencies.
Areas for improvement also span all resources and link to the long-term use of the
capital facility. Areas for improvement are as extensive as the myriad of supply chains
involved. Symptoms of the need for improvement in construction supply chains include
common issues such as: payment timing, excessive engineering change orders,
expediting, liquidated damages, surcharges, shortages, unavailability, excessive lead
times, communication errors and delays, and unnecessary engineering specifications
length and complexity. Table 1 provides a comprehensive set of measures that must be
considered in construction supply chains and further demonstrates the systemic nature of
SCM.
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Table 1: Family of Measures for Construction Supply Chains
1.
Elapsed time from funding through facility start up (lost sales for lateness)
2.
Elapsed time from start up to uninterrupted full production (market share implications)
3.
Capability of facility (throughput rate, quality, and cost)
4.
Total cost of materials and equipment (total purchase price)
5.
Total cost of services (architects, engineers, construction management, etc.)
6.
Total cost of construction equipment use (cranes, earth moving equipment, etc.)
7.
Total cost of trades and labor (electrical, welding, plumbing, mechanical, etc.)
8.
Total cost of inventory and storage (all locations in the chain to raw material)
9.
Total cost of transportation (all movements to and at site)
10.
Total capital burden (credit, cash flow, taxes, insurance, bonds, etc.)
11.
Environmental costs (permitting, compliance, design, liability, cleanup, etc.)
12.
Safety (recordables, lost days, prevention, training, design)
2.3
Related CII Research
Figure 12 repeats the four principal areas on which SCM builds, namely operations
management, logistics, procurement, and information technology, as were shown in
Figure 1. However, this new figure augments Figure 1: it also shows CII’s knowledge
areas (green text) and selected ‘best practices’ (blue text) within those.
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Safety, Health, and
Environment
KA 11
People
KA 6
Contracts
KA 10
Pre-Project Planning - KA3.1
Organization
KA 7
Alignment - KA3.2
Corporate Strategy
Customer Relationships
Management (CRM)
Internet-based Systems
e-Business Systems
Standardization of Products
and Processes
Early Estimating - KA3.3
Scope Definition and Control
Multi-project Strategy
e.g., make or buy
(outsourcing)
Front-end Planning
KA1
2.4 Design Standards
Enterprise Resource
Planning (ERP)
Project Processes
KA 8
Project Controls
KA 9
International Standards
KA 13.1
Design
KA 2
Globalization Issues
KA 13
Planning for Startup KA 5.1
DFX: Design for
- Maintainability KA 5.2
- Safety KA 11.3
Modularization 2.1
Construction
KA 4
Manufacturing
Fabrication
Constructability
Operations Management
Startup and Operations
KA 5
Databases
PEpC
Information/Technology
Systems
KA 12
Simulation
SCM
Logistics
Mapping Tools
Process Mapping
Organizational Mapping
Transportation
3rd Party Logistics Providers
Procurement
KA 3
Decision-support Systems
Expediting
Warehousing
Optimization
Materials Management
KA 3.1: RS7-1, RS7-2, IR73
NOTES:
Blue boxes denote original basis on which SCM has historically built
Green text denotes CII knowledge area (not all subareas are shown)
Customs Clearance
Sourcing
Supplier Managed Inventory
Supplier Relationships
KA 3.2
Purchasing
Figure 12: Corporate Systems View of SCM as Related to CII Knowledge Areas
This makes it clear that many if not all CII research findings can be leveraged in one way
or another by the adoption of comprehensive SCM practices.
2.4
Supply Chain Operations Reference (SCOR) Model
2.4.1 Learning from Other Industries
Companies involved in the delivery of capital facilities trying the gauge the benefits and
costs of implementing SCM may want to be aware of the lessons learned by practitioners
in other industries. Understanding the SC practices in other industries is valuable for
several reasons. First, many if not all SC lessons learned by others apply equally in the
delivery of capital projects. Second, many owner organizations already practice SCM in
the delivery of their manufactured products and services, so they may have in-house
SCM staff (possibly members of SCOR) that can serve as a resource to those delivering
capital projects. Third, as companies that deliver capital facilities expand their SC
practices beyond first-tier suppliers and customers, sooner or later they will have to reach
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PT172 Research Report – 7/5/02
into manufacturing and other industry supply chains, and optimize SC practices in
alignment with those.
2.4.2 SCOR Model Description and Objectives
The Supply-Chain Council (SCC) is a non-profit organization comprising more than 700
member companies including manufacturers, distributors, and retailers. It was created to
promote the best practices in SCM. SCC has developed and endorsed the Supply Chain
Operations Reference-model (SCOR) as the cross-industry standard for supply-chain
management. The SCOR model includes several levels, as documented in Figure 13.
Figure 13: Supply Chain Operations Reference (SCOR) Model (Supply Chain Council
http://www.supply-chain.org/)
The SCOR model presently applies to sourcing, making, and delivering products but it
does not include the processes pertaining to product and process design and development,
sales administration, technology development, or post-delivery customer support
operations including technical support. It thus supports a narrow view on SCM. In
contrast, Project Team 172 saw the application of SCM to the engineering and
construction industry more broadly. The Team included product and process design of
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PT172 Research Report – 7/5/02
facilities and the corresponding development processes in its scope because these are an
integral part of the project delivery process.
Organizations in the SCC are seeking to improve supply chain performance in terms
of speed, increased reliability, lower operating cost, and lower inventories. Their
investments are expected to realize a return in terms of revenue, profit margin, and cash
flow. Table 3 quantifies some of these benefits. It is likely that gains similar to—if not
greater than—these obtained in manufacturing are achievable in the engineering and
construction (E&C) industry. The E&C industry is more fragmented and therefore more
prone to local sub-optimization leading to waste. By including design in E&C SCM, a
broader view is taken on project delivery, which makes it possible to achieve more global
performance optimization than may be achievable in manufacturing.
Table 3: Typical Quantified Benefits from Integrating Supply Chains
(1997 PRTM ISC Benchmark Study)
Benefit
Improvement
Delivery Performance
16% – 28%
Inventory Reduction
25% – 60%
Fulfillment Cycle Time
30% – 50%
Forecast Accuracy
25% – 80%
Overall Productivity
10% – 16%
Lower Supply-Chain Costs
25% – 50%
Fill Rates
20% – 30%
Improved Capacity Realization
10% – 20%
Figure 14 presents SCOR process steps for implementation of SCM. They apply equally
to the engineering and construction industry. These steps are mainly strategic and
tactical; they do not detail the execution level of SCM.
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Develop
Enterprise
Supply Chain
Scorecard
Identify Business
Improvement
Targets
SCOR and Tool
Training
Identify team ,
Baseline
Existing Baseline charter, mission
and scope
Processes
Define
Scorecard
Identify
Performance
Improvements
Develop AS
IS model
Identify
metrics and
gaps
Review
models
for supply
chain
optimization
Refine AS IS
Model
Gather Data
for AS IS
/TO BE
Develop
TO BE models
and identify
gaps
Plan
supply chain
optimization
strategies
Figure14: SCOR Process Model (Supply Chain Council)
2.5
SUPPLY CHAIN LEADERSHIP
As a final commentary on the literature and its application by organizations, Table 4
highlights the phases of maturity in the application of supply chain concepts. Most firms
in the construction industry fit into the ‘pretender’ category. Many of the firms involved
in the case studies in this research fit into the ‘follower’ category. One or two are close to
the ‘thinker’ category. There are probably no construction industry firms in the ‘leader’
category at this time.
Table 4: Categories of Supply Chain Leadership
After Cox, A. (1997), Business Success: A Way of Thinking About Strategy, Critical
Supply Chain Assets and Operational Best Practice, Earlsgate Press: Bath, U.K.
Supply
Chain
Level
0: Pretender
Key Operational Characteristics
Treatment of Corporate
Boundaries
1. You have renamed your procurement function
“Supply Chain Management”
2. You have a formal definition of SCM
Existing corporate boundaries are
fixed. Relations with others are
kept at arms-length. Punitive
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Supply
Chain
Level
1: Follower
2: Thinker
Key Operational Characteristics
3. Your definition is the same as materials
management
4. Your purchasing objective is lowest price
5. You cannot assume functional integration
within projects will exist
1. SCM is a strategic initiative in your company
2. The SCM initiative has a formal owner with
authority and accountability
3. Your definition of SCM includes supplier and
customer relations
4. You view SCM as a competitive weapon
5. You have a good understanding of your core
competencies
6. You have specific SCM goals, but they change
frequently
7. Your purchasing objective is cost, but other
factors are considered
8. You are very concerned with improving
margins for existing products and services
9. You are engaged in SCM pilots
10. You have mapped some supply chains, and
you have a process for mapping them.
11. You have functional integration within a
project environment
12. You align value and process goal
measurements with strategic suppliers and
customers
1. You have efforts underway to outsource noncore activities
2. You have specific SCM goals, which are stable
3. You have a technology strategy to enable SCM
activities
4. Your purchasing objective is best overall value
to the customer
5. You have alliance guidelines to determine and
define supplier relationships and status
6. You have linked information/collaboration
systems with strategic suppliers and
customers.
7. You receive forecast demand data from your
customers, and analyze and provide to your
key suppliers
8. You have functional integration across multiple
projects
9. You have well-defined maps of your supply
chains
10. You benchmark SCM performance
11. You have a formal supplier assessment and
development process to determine and
improve supplier capabilities
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Treatment of Corporate
Boundaries
actions are taken in response to
performance below expectations.
Existing corporate boundaries are
fixed. Relations with others are
closer. Punitive actions are rare,
and trust is developing with key
suppliers.
Corporate boundaries are flexible
and relatively porous. Relations
with others are collaborative.
Performance below expectations is
met with development activities in
an environment of trust.
PT172 Research Report – 7/5/02
Supply
Chain
Level
3: Industry
Leader
Key Operational Characteristics
Treatment of Corporate
Boundaries
1. You have supply chain activities not billed to a
specific project
2. Your purchasing objective is best overall value
to the entire supply chain
3. Functional groups are not siloed, and chain
relationships are integrated
4. You have well-defined maps of an integrated
supply chain
5. You recognize the critical assets in your supply
chain
6. Power relationships are reconfigured
dynamically to create needed functionality
Corporate boundaries are
malleable, and determined by
entrepreneurial action. Equity
positions may be shared, and/or
subsidiaries created for key supply
chain purposes of competencies.
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