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Improving Capital Projects Supply Chain Performance

Publication No
RR172-11
Type
Academic Document
Publication Date
May 01, 2003
Pages
245
Research Team
RT-172
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DOCUMENT DETAILS
Abstract
Key Findings
Filters & Tags
Abstract

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 projects. 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 capital projects SCM (CPs SCM) tools and techniques are presented in this document. CPs SCM requires a good understanding of production management; planning, design, and construction; and business drivers. 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 supply-chain conscious competitors.

Managing a supply chain is challenging. It requires adopting a global systems perspective, rather than the traditional, often shortsighted 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 fail to capture the advantages of synergies and leverage that may be obtained by taking a multi-project perspective.

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 optimize supply chain leadership 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 and often multiple industry players.

Application of supply chain concepts and practices in the construction industry—the industry that delivers capital projects—can lead to improvements in the following areas:

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 savings in maintenance, repair, and maintenance, repair, and operation (MRO) of facilities.
  4. Additional income to all stakeholders from earlier turnover, startup, and full commercial operation.

Time
  1. Compression in the longest paths of a supply chain by a factor ten or more, suggesting that some project delivery schedules can be dramatically compressed.
  2. Compression in supply chain length for single projects by strategic ownership of materials and information.

Quality
(reliability)
  1. Compression in variability of lead times,
  2. Reduction of communication errors, delays, and rework,
  3. Reduction in wastes caused by inefficiencies in material and labor.

Safety
  1. Reduction in near misses and in recordables.
Key Findings
Research Team 172 found that using Supply Chain Management practices (taking a longer-term view of the supplier and buyer relationship and working collaboratively to improve processes) can lead to shorter fabrication durations. The findings from Case Study 7 highlighted lead-time reduction in the procurement of pipe supports. Through SCM, the project case study realized schedule improvement of from three to six weeks, but further along in Case Study 6 there was greater schedule savings of eight to 12 weeks. (RR172-11, p. 123)
Research concluded that using SCM tactics to standardize products will have benefits for all stakeholders on the project. In Case Study 7, standardization led to reduced lead-times as illustrated in Figures 9.19 and 9.20,  shown below. In Case Study 1, standardization led to reduction of inventory and shortened the procurement cycle time. In Case Study 8, Butler Manufacturing Company used SCM tactics to standardize its product offerings, which led to less customized products and more efficiency. Ultimately, standard materials allows for greater manufacturing efficiency by the seller, less design review and approval cycles by the EPC, and ultimately better price, schedule, and quality for the end user. The pitfall is sub-optimization, which is where design changes required by the project outweigh any savings at the equipment level. (RR172-11, p. 123)
Case Study 2 discussed the advantages of using SMI on projects. Some of the advantages documented were: reduction in buyer’s inventory, supplier can provide better quality service at less cost, and multiple suppliers tiers are funneled through the tier 1 supplier reducing administrative efforts. The case study was based on an owner organization and not a project. If SMI is used on a project-by-project basis, the case states that some difficulties may arise in forecasting demand for SMI materials and adapting to an ever-changing project schedule. (RR172-11, p. 47) 

Case Study 1 illustrates the benefits of forming preferred supplier relationship with key suppliers. The buying organization in this case study was able to achieve the following goals by initiating a preferred supplier relationship: (RR172-11, p. 27)

  • Reduce non-value adding activities (Table 3.3 below)
  • Assure only owner-approved materials are supplied
  • Implement Just-in-Time (JIT) deliveries through greater flexibility in warehousing, expedited delivery and access to inventory
  • Reduce internal overhead cost
  • Reduce total cost to the owner
Case Study 6 illustrates how using PEpC SCM tactics can improve the lead time of engineered-to-order (ETO) equipment. In this case study the buyer had an alliance agreement with the seller which led to reduced lead times because the terms of the agreement do not have to be re-negotiated with the supplier. Instead of taking a month or more to negotiate an agreement, alliance agreements can allow contracts to be placed in as little as a day and a half. Time is further reduced by shortening the engineering and information exchange time. Overall, using PEpC and Alliance agreements can reduce the lead time of ETO equipment by two to three months. (RR172-11, p. 90)
Case Study 5 reviews a scenario where project schedule and cost were ultimately improved through owner procurement of stainless steel piping material. The study begins by discussing a pinch in the supply of stainless steel piping materials, which was causing risk in cost and schedule to the end user. The owner procured these materials from mills, then paid a distributor to receive, manage, and store the materials. Economies of scale and positive relationships with the supply chain enabled this situation (PEpC). RT-172 also reviewed the benefits of collaborative information technology systems (isolated shared networks or webpages). (RR172-11, p. 67)
Filters & Tags
Knowledge Area
Materials Management, Procurement & Contracts, Project Planning
Project Phase
Feasibility, Concept, Detailed Scope, Detailed Design (Engineering), Procurement
Project Function
Project Business Sponsor, Project Management, Procurement & Contracts, Construction, Risk Management, Business Development & Proposals, SBU or Corporate Functions, External Stakeholders
Industry Group
Light Industrial, Heavy Industrial, Buildings, Infrastructure
Research Topic
Supply Chain Management Concepts
Keywords
Supply Chain Management, Moduralization, Alliance Agreements, Fast Track, Standardization, Cycle Time Reduction, Inventory Management, PEpC, Supplier Managed Inventory, preferred supplier relationship, rt172

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