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European Journal of Operational Research 171 (2006) 123–134

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Production, Manufacturing and Logistics

Managing uncertainty in major equipment procurement


in engineering projects
K.T. Yeo *, J.H. Ning
Division of Systems and Engineering Management, School of Mechanical and Production Engineering,
Nanyang Technological University, 50 Nanyang Avenue, Singapore 639798, Singapore

Received 8 April 2003; accepted 18 June 2004


Available online 13 October 2004

Abstract

A better management of time uncertainty in major equipment procurement in engineering construction projects can
significantly contribute to project performance. A survey study shows that time buffer is a popularly used approach to
protect project schedule from activity duration variation and uncertainty. The problem is that there are repetitive time
allowances inserted in the procurement supply chain process and these time buffers are used ineffectively, thus leading to
considerable time wastage. Relevant lessons from supply chain management and critical chain project management are
combined and applied to create an enhanced critical supply chain management model for major equipment procure-
ment to achieve better management of time uncertainty. This model does not perceive uncertainty purely as a threat,
but also as an opportunity to reduce procurement cycle times.
 2004 Elsevier B.V. All rights reserved.

Keywords: Supply chain management; Project management and scheduling; Critical chain project management

1. Introduction budget overruns, compromised quality, resulting


claims and counter-claims problems have plagued
Engineering construction projects play an the industry. The reasons for poor project perform-
important role in national economic development. ances abound. Previous researches have dealt much
Yet the construction industry as a whole faces for- with the problems of project risk and uncertainty,
midable challenges and suffers from poor perform- variations in project outcomes, work fragmenta-
ance and low profit margin. Project schedule slips, tion, complex relationships among stakeholders
and activities, and excessive phase overlaps in
general. This paper will concentrate specifically
*
Corresponding author. Tel.: +65 799 5502; fax: +65 791
on the problems of uncertainty and variation in
1859. the procurement process of major equipment. Spe-
E-mail address: mktyeo@ntu.edu.sg (K.T. Yeo). cial interest is given to engineer–procure–construct

0377-2217/$ - see front matter  2004 Elsevier B.V. All rights reserved.
doi:10.1016/j.ejor.2004.06.036
124 K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134

(EPC) projects and other process plant construc- and issuing request for proposal (RFP) or request
tion projects. for quotation (RFQ), receipt of bids from vendors,
With a view to improve productivity in engi- bid summary, bids evaluation and approval, order
neering construction projects, there is no lack of placement with equipment manufacturer, equip-
previous research efforts being devoted to develop- ment fabrication and assembly, testing of the
ing new models, approaches and techniques. Con- assembled equipment, expediting by customer,
struction process redesign and improvement, packaging and shipping arrangement, delivery of
integrated design and construction with concur- installation drawings and test data, and actual
rent engineering (Jaafari, 1997), lean construction shipping or delivery of major equipment, and re-
techniques (Ballard, 1999), widespread IT applica- ceipt of equipment on site. This paper will concen-
tions (Oxman, 1995), partnering approach (Love trate on the post-order placement procurement
et al., 1998; Bresnen, 2000), construction logistics phase and consider this portion of the procure-
and supply chain management (Vrijhoef, 1997; ment phase as the focus where significant improve-
OÕBrien, 2000), and new project scheduling ment can be made.
method like critical chain project management Major equipment procurement has its own spe-
based on the theory of constraints (Goldratt, cial characteristics and requirements and is signif-
1997) are just some of the examples of such icantly different from bulk materials procurement.
improvement efforts. The major equipment procurement lead-time is
This paper will focus on improvements in major usually longer, the unit procurement cost consider-
equipment procurement process. The procurement ably higher, and usually embedded with complex
performance and delivery processes can be defined or specialized technology. There will be no inven-
both at the corporate and project levels. These tory buffer for major equipment kept either at
processes can be partly represented as corporate the customer, main contractor or vendor site. This
systems, policies and procedures which are influ- one-time procurement characteristic makes the
enced by the prevailing organizational structure, major equipment procurement a critical activity
functional units, resource allocation strategies and a source of major constraint and uncertainty
and policies, planning and controlling systems in engineering construction projects. The improve-
and procedures, production workflow, and other ments of long lead-time critical equipment pro-
auxiliary processes. curement especially in time and risk reduction
and the predictability in delivery to meet on-site
requirement in a near just-in-time (JIT) manner,
2. Major equipment procurement can contribute significantly to the overall perform-
ance of the project.
In most EPC projects, the importance of major Though the importance of major equipment
equipment procurement has received relatively less procurement in construction is easily recognized,
attention. Major equipment such as process equip- there is however relatively little published work
ment in this context refers to the capital equipment that scrutinizes the problems and uncertainties in
that will be assembled or installed to form an the procurement process and a lack of relevant
integral part of the constructed system or facility. and adequate framework to base on for further
Fig. 1 illustrates a generic network of engineer– improvement in major equipment procurement.
procure–construct process for the procurement of Ballard (1998) admits that when he advocates a
major equipment. The engineering and design ÔpullÕ mechanism in materials supply in construc-
phase is the pre-procurement phase while the con- tion industry based on tight on-site requirement,
struction phase represents the post-procurement many items of process equipment have so long a
phase. lead-time that they do not offer themselves as ini-
The procurement processes include receipt of tial candidates for reducing delivery time, and
engineering or process data and drawings from must continue to be coordinated by ÔpushÕ sched-
engineering/design departments, documentation ules. It is clear that the practices of major equip-
K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134 125

Engineering & Procurement Construction


Design Phase Phase Phase

Equipment
Procurement Supply
Chain Management

Obtained
Approval
5

Receive Prepare Raise Issue Receive Place Manufactured Shipped Planned


Process Specification Requisitions Enquiry Bids Order --Packed to Site Installation
Data

0 1 2 3 4 6 8 9

Receive Vendor’s
Drawings/Specs

Fig. 1. A mini-network for equipment engineer–procure–construct process.

ment procurement need to be scrutinized, and a contractor, but also used by the equipment manu-
model for improvement is needed. facturers to protect their parts or components
delivery schedule from uncertainty. In contrast,
in the consumer product manufacturing industry,
3. Two relevant propositions part and component inventories are usually used
to protect the production schedule from variation,
Industry practices, with the use of standard pro- and the finished product inventory buffers are also
curement lead-times according to equipment clas- used to protect demand uncertainty.
sification, would typically use insertion of time In order to protect the construction schedule,
buffers as a protective measure against variation project managers usually plan for the major equip-
in promised delivery by equipment manufacturers. ment to arrive on-site considerably earlier than re-
Two simple but relevant propositions are selected quired in a Ôplay safeÕ mode. This time allowance is
to examine the practices and issues of using time a ‘‘time buffer’’ inserted between the ‘‘promised
buffers in major equipment procurement. delivery’’ and ‘‘required-on-site’’ dates as shown
in Fig. 2.
Proposition 1. Engineering construction companies
The buffer allowance has been adopted as a
use time buffer between ‘‘promised delivery’’ (PD)
safety measure to avoid disruption in the construc-
date and ‘‘required-on-site’’ (ROS) date as a com-
tion workflows. The size of the estimated buffer
mon approach to manage time uncertainty.
allocation depends on the project plannerÕs percep-
Generally, the major equipment manufacturing tion of risk with respect to a particular type of
and delivery time can be protracted from several equipment or reliability of an equipment supplier.
months to over a year, especially for the over- The required buffer time may be small if the deliv-
seas-procured items. There are various internal ery lead-time is short or if the procurer is very con-
and external factors that can impact the equipment fident of the supplierÕs reliability in its promised
manufacturing and delivery schedules, which will delivery.
in turn have an impact on the site construction On a typical process plant project, a multitude
schedule. Time buffer is not only used by the main of major equipment will arrive on site. A series
126 K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134

Promised Required-
Order Delivery on-Site
Placement Date Date

Manufacturing/Shipment Buffer Site Construction

Fig. 2. Insertion of Time Buffer.

of Ôfeeding buffersÕ are inserted to protect the crit- The target respondents are procurement man-
ical construction activity chain by preventing late agers of G6, G7 and G8 companies (totally 189
delivery of equipment to penetrate and disrupt companies). The names, addresses of these compa-
the critical construction chain. nies are listed on the website of Singapore Building
and Construction Authority (BCA) <http://dir.
Proposition 2. The feeding buffer time (tb) assigned
bca.gov.sg>. In the survey, respondents are asked
in major equipment procurement is positively pro-
to base their responses on a recently completed
portional to the major equipment procurement lead-
(within last five years) engineering project valued
time (tp) as quoted and promised by the
at least S$10 million and involving major equip-
manufacturer:
ment procurement.
tb ¼ a  tp : ð1Þ The objective is to collect information relevant
to the current major equipment procurement prac-
a is a correlation coefficient between procurement tices in the engineering construction industry in
lead-time and buffer time and is decided by the order to investigate:
equipment buyer or construction planner.
• major equipment supply uncertainty;
A survey was conducted within the construc- • use of procedure in buffer time allocation for
tion industry in Singapore targeting mainly at major equipment procurement;
the higher-grade engineering and construction • relationship between buffer time and procure-
companies to provide supporting evidence of ment lead-time.
Propositions 1 and 2.
Out of the 189 companies contacted, 52 valid
returns were received. Incomplete returns were dis-
4. A survey on procurement practices carded. The survey data were analyzed with the
SPSS (Statistical Programs for Social Science)
Construction companies in Singapore are cate- software. Below are the relevant statistics of the
gorized into eight grades (G1, G2, . . ., G7 and projects surveyed.
G8). Companies in lower grades are not eligible
to tender for larger projects. The limits are shown • The surveyed projects include industrial/process
in Table 1 (BCA, 1999). plant, building, civil construction and complex
product system. The project value ranges from
S$10 million to more than S$100 million. And
Table 1
Grading of construction companies 48% of the projects have value exceeding S$50
million. 92% of the projects have a duration
Company grade
exceeding one year and 29% with longer dura-
G1 G2 G3 G4 G5 G6 G7 G8
tion of two years and above.
Project value 0.5 1 3 5 10 30 50 NA • 64% of respondents said that their projects
limit (million S$)
experienced schedule overrun. 34% of respond-
US$1 = S$1.75 mid-2003 rate. ents suffered at least 10% overrun. 69% of the
K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134 127

respondent perceived their projects as having 10

low profit margin. The average profit margin 9


is about 3.75%.
8
• The survey shows that about 88% of the pro-

Buffer time (weeks)


7
jects surveyed have an overall procurement cost
at 20% or more of the project value, and about 6

70% of the projects with procurement cost at 5


30% or more. For about 23% of the projects 4
surveyed, the procurement cost is more than
3
50% of the project value.
• The survey shows that the average percentage 2

of major equipment cost to overall procurement 1


costs for all projects is about 36%. 0
0 10 20 30 40 50 60 70 80
This survey shows that, among the projects sur- Lead Time (weeks)
veyed, about half of the equipment are delivered Legend: Regression analysis of Buffer time and Lead time
JIT (just-in-time), 20% are delivered later than re- Unstandardised Standardised
Std. Error Significance
quired with a mean late time of 3 weeks, and about Coefficients Coefficients
Constant 0.661 0.182 0.001
30% are delivered earlier than required with a
Lead Time
mean early time of 2 weeks (Table 2). (weeks) 7.86E-02 0.005 0.931 0.000
The survey also shows that 87% of the respond-
ents indicated that they have an on-going practice Fig. 3. Procurement buffer time vs. lead-time.
of adding time buffer between ‘‘promised delivery
(PD)’’ date and ‘‘required on site (ROS)’’ date as
a safety measure to protect construction schedule; distributed in relation to the other variable. The
whereas 13% of the respondents said that they do output of SPSS shows that the PearsonÕs r is
not add any time buffer. The binominal method in 0.931. The significance level is 0.000, which is less
SPSS is used to analyze the buffer-adding practice. than 0.01.
The analysis shows that more than 75% of projects The regression analysis shows that proportional
surveyed add time buffer between PD date and coefficient of buffer time and lead-time is +0.0786.
ROS date for major equipment procurement. The best-fit line is shown in Fig. 3. The regression
The significance level of this conclusion is 0.039, analysis output is shown in the legend. The signif-
which is less than the criterion 0.05. The confi- icance level is 0.000, which is less than 0.01.
dence level is 96.1%. The survey has also highlighted that major
Further analysis shows that the ‘‘buffer time’’ equipment procurement represents a critical con-
and ‘‘lead-time’’ are correlated, which means that necting function between engineering and con-
the variation exhibited by one variable is patterned struction, as procurement equipment provide the
in such a way that its variance is not randomly anchors for the constructed facilities. Material
costs represent a major portion of the total
construction costs, and in turn, a high percentage
Table 2 of procurement expenses goes into equipment
Major equipment delivery uncertainty purchases. Equipment procurement requires expe-
Late delivery JIT Early delivery diting on the manufacturersÕ progress to ensure
% Distribution 19.8% 50.6% 28.6% on-time delivery and regular communication and
of equipment occasional re-negotiation with the vendors. It is
Degree of lateness 3.05 weeks – 1.98 weeks also generally agreed that successful procurement
(mean time) management can lead to improved performance
Standard deviation 1.95 weeks – 1.08 weeks
in overall project cost and delivery.
128 K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134

5. Problems of time waste pect of uncertainty as opportunity. The theory of


aggregation (Goldratt, 1997) of pluses and minuses
The two propositions demonstrate only two rel- of time variation may allow considerably shorter
evant aspects of major equipment procurement overall procurement lead-time.
and associated uncertainty management. This sec- The current approach and problems in manag-
tion is to investigate the current practice of addi- ing uncertainty in major equipment procurement
tion of buffer in proportion to the equipment and potential for time waste due to the practice
delivery lead-time that may in fact contribute to of time-buffering validated in the test of two
time waste from a supply chain point of view hypotheses, is illustrated in Figs. 4 and 5. Fig. 4
involving a constellation of suppliers and suppli- shows the fragmentation and multiple interfaces
ersÕ suppliers. or boundaries in a cascaded supply chain relation-
The practice of time buffer allocation seems rea- ship where the main contractorÕs construction crit-
sonable and easy to use, but is highly inefficient. It ical chain is fed by the equipment manufacturerÕs
contributes to time waste as too much buffer times supply chain, which is in turn supplied by its
may be distributed in the procurement supply chain own sub-suppliers in sub-assembly and parts, in
process. The buffer time is used inefficiently due to a multi-staged manufacturing, assembly and ship-
task fragmentation and problems in interfaces or ment process.
boundaries along the supply chain. Current uncer- Fig. 5 shows that the closer the supply chain
tainty management practices pay too much atten- activities to the main construction contractor, the
tion to prevent the negative impact of uncertainty, longer is the aggregated procurement time, and
but give too little attention to exploit the positive as- the larger the buffer time is allocated. The buffer

Detailed Parts Sub- Major Final Pack and


& Components Assembly Assembly Assembly &Test Ship to Site

Fig. 4. Stepped equipment manufacturing processes.

Fig. 5. Time buffering in major equipment procurement.


K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134 129
!!
time tends to be amplified in the later phase of the X
i2 Y
i1

supply chain constellation, which is used to protect tib ¼ ai ti1


c þ tnc ð1 þ am Þ : ð6Þ
n¼0 m¼nþ1
all the previous activities and sub-processes that
have already been protected by their own individ- The m and n in the equations are two intermediate
ually allocated buffers by the supplierÕs suppliers. variables. The n represents the layer from com-
The above illustration is a case of multiple pro- pany C 0 to company C i2. The procurement time
tections due to duplication of buffers, which lead of company C i is decided by the procurement
to excessive redundancy. One of the reasons for time, buffer time and manufacturing or assembly
the ‘‘duplication of buffers’’ is that the companies time of these intermediate companies. The m rep-
on the supply chain make contracts separately resents the layer from C n+1 to C i1. Procurement
and independently with their own suppliers and time of these companies will be affected by the
manage their own procurement processes. These manufacturing or assembly time of company C n.
multiple layers of buffers contribute to the overall The total buffer is the summary of each com-
procurement lead-time or ‘‘bucket time’’ for a par- panyÕs built-in buffers:
ticular range of equipment. Engineering compa- X
I
nies over the years have developed standard T buffer ¼ tib ; ð7Þ
Ôbucket timesÕ for purchasing a range of major i¼1
equipment, which would incorporate time buffers.
The following formulation gives a more accu- X
I
T buffer ¼ a1  t0c þ ai
rate representation of the buffer allocation for
i¼2
the whole supply chain. Suppose there is a series !!
of companies Ci (i = 0, . . ., I) in the major equip- X
i2 Y
i1
 ti1
c þ tnc m
ð1 þ a Þ : ð8Þ
ment supply chain. Total number of suppliers is n¼0 m¼nþ1
‘‘I’’ and the resulting total number of companies
involved is (I + 1). Company Ci+1 procures parts The following is an illustrative example. To sim-
or components from Ci. Company CI is the main plify the calculation, suppose tic ¼ 50 days and
contractor at the final stage of the value chain, ai = 0.08 for all companies Ci (i = 0, . . ., (I  1)).
which procures the major equipment for site con- The total production time (Tc) is the sum of all
struction. C0 is the starting point of the supply manufacturing and assembly time of each com-
chain and does not involve in any procurement pany. The ratio of the total buffer time to total
process. The procurement time (lead-time) of com- production time is RBP (ratio of buffer time to
panies Ci is tip ði ¼ 1; . . . ; IÞ, the buffer time is production time). The relationship of ‘‘Tp’’,
tib ði ¼ 1; . . . ; IÞ, the time for manufacturing, ‘‘Tc’’, ‘‘Tbuffer’’, ‘‘RBP’’ and ‘‘i’’ is illustrated in
assembly and delivery is tic ði ¼ 1; . . . ; IÞ. Table 3. The ‘‘I’’ is total layers of supplier chain.
The formulated relationships are From Table 3, it can be seen that, for a one- or
two-layered supply chain, the buffer time is about
tip ¼ tpi1 þ ti1 i1 one-tenth of the production time; whereas for a
b þ tc ; ð2Þ
five-layered supply chain, the total buffer time is
tib ¼ ai  tip ; ð3Þ

t1p ¼ t0c : ð4Þ Table 3


Relationship of buffer time, production time and supply chain
layers
From Eqs. (2)–(4), the following two equations
Layers
can be deduced:
1 2 3 4 5
!
X
i2 Y
i1 Tc (days) 50 100 150 200 250
tip ¼ tci1 þ tnc ð1 þ am Þ ; ð5Þ Tbuffer (days) 4 12 25 43 67
n¼0 m¼nþ1 RBP 0.08 0.12 0.17 0.22 0.27
130 K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134

80

70
Production Time (*10days)
and Buffer Time (days) 60

50

Total Production Time


40
Total Buffer Time

30

20

10

0
1 2 3 4 5

Supply Chain Layers

Fig. 6. Buffer time and production time vs. supply chain layers.

amplified to over one-quarter of the overall pro- 6.1.1. The process


duction time. From Fig. 6, it can be seen that the
aggregated buffer time increases faster than the to- (1) A project procurement planner takes a supply
tal production time when the number of supply chain perspective with the aid of an inter-
layers increases. Fig. 6 highlighted a serious prob- organizational information system that could
lem caused by the traditional un-coordinated prac- be made responsible for overall scheduling of
tice in the duplication of time buffers for all the activities in the equipment supply
uncertainty management in major equipment pro- chains based on on-site requirements.
curement. A better approach to managing risk and (2) Each supplier will inform the project supply
uncertainty in major equipment procurement man- chain planner its ‘‘promised duration’’ with-
agement is needed. out time buffering of particular component
or equipment instead of the traditional
‘‘promised delivery date’’. This is to de-
6. A critical supply chain management model emphasise the idea of having fixed due-dates

6.1. Description of the model


PROCESS:
In order to eliminate the time waste in the ma-
Integrated dynamic
jor equipment procurement process caused by the planning process
ineffective use of time buffers, it is proposed that
the concept and method of critical chain project
management be integrated with the supply chain
management and brought to bear on the procure-
ment of major equipment (Yeo and Ning, 2002). CSCM
The result is a critical supply chain management
(CSCM) model for major equipment procurement.
The model has three components: an inter-enter-
prise information system, a partnering relationship PEOPLE: TECHNOLOGY:
Partnering Inter-enterprise
among the participating organizations and an inte-
Relationship information system
grated dynamic planning process (Fig. 7). The ide-
alized model is further described below. Fig. 7. Critical supply chain management (CSCM) model.
K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134 131

and give emphasis on accurate duration buffers should be controlled not to be excessive
estimates. in order to avoid unnecessary early deliveries of
(3) The task starting time of each of the subse- equipment which will cause the troubles and wast-
quent layer companies is to be made flexible age of temporary storage and double-handling on
or floating, depending on the time the last sites. Conversely, inadequate feeding buffers may
company finishes its task. It encourages run the risk of the construction schedule being dis-
‘‘resource alert’’ like in a relay race. The plan- rupted. Besides the insertion of feeding buffers for
ner need not be rigid in deciding and fixing the individual major equipment, a project buffer is
task starting times. It means the starting times incorporated to protect the required or committed
of later layer tasks need not be decided accu- construction completion date.
rately from the very beginning. Fig. 8 illustrates an improved buffer manage-
(4) The supply chain schedule is refreshed and ment incorporated within the critical supply chain
updated whenever an activity in supply chain management (CSCM) framework. The focus is on
is completed. dynamically managing the feeding buffers inserted
(5) The supply chain planner systematically man- between the two important sets of control dates
ages time buffers in the supply chain. All sep- namely, the ÔPromised Delivery (PD)Õ dates by
arately padded intermediate buffers are the equipment vendors and the ÔRequired-on-Site
removed. A feeding buffer is inserted at the (ROS)Õ dates according to the master construction
end of each equipment supply chain to protect schedule.
the construction critical chain from any vari- The main benefits of time saving are firstly, a
ations as illustrated in Fig. 8. tighter and shorter procurement cycle is made pos-
sible which contributes to the reduction of time-re-
The commencement of construction, ‘‘C ’’, is a lated costs; secondly, excessively early delivery to
critical Ômerge-eventÕ, where multiple equipment site is avoided to reduce the problems of work-
deliveries are converging. Feeding buffers are in-process, waiting and wasting in on-site materi-
added discretely in place of the traditional Ôfree als movement; thirdly, risk, uncertainty and bur-
floatsÕ derived from critical path analysis. The den of coordination for project and construction
length of the feeding buffers is determined by the managers are minimized; and finally, the partner-
level or classification of risk pre-assigned to the a ing relationship among the prime contractor and
particular class of major equipment. The feeding equipment manufacturers is improved. This will
of course bring ultimate benefits to the client and
give opportunity for future businesses for all.
Incentive clauses may be built in the procurement
contracts to reward vendors who are able to
accommodate and achieve reliable and tight deliv-
ery schedules. Similarly, the prime contractor can
build in incentive clauses for early project comple-
tion with the client.
The buffers, both feeding and project buffers
can be used as a basis for both as an early warning
system and an incentive bonus system to reward
schedule performance. The level of each buffer
allocation can be monitored to track any early
and dangerous depletion of buffer to give early
warning of impending time overrun when a safety
threshold is violated. Early project completion can
bring considerable early cash-flow benefits to the
Fig. 8. Buffer insertion in procurement chain. client or operator. The early completion incentive
132 K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134

bonus can be substantial and a portion of this to simplify and tighten the procurement supply
benefit can be passed on to the major equip- chain and allow the on-site requirements to ÔpullÕ
ment vendors and their downstream components the equipment deliveries in a timely manner.
suppliers. The main characteristics of this model are man-
ifested in its integrated and synchronized schedul-
6.1.2. People ing and the continuous and dynamic schedule
The human side of the supply chain manage- adjustments for the entire supply chain. The uncer-
ment plays an important role in ensuring supply tainty and buffer allocation are managed for each
chain performance. equipment supply chain, which feeds into the over-
all site construction schedule.
(1) A sustainable partnering relationship is built
with major equipment suppliers who in turn 6.2. Improvement mechanisms
build relationships with their own suppliers.
The subtle control of coordination, communi- This CSCM model can shorten the major equip-
cation and collaboration of the suppliers ment procurement time without increasing the risk
ensure success in project procurement and due to the following fundamentals:
delivery.
(2) The supply chain members are made stake- 6.2.1. Aggregation of variations
holders who will share the benefits from cost The concept of uncertainty does not always im-
and time savings, and be accountable for fail- ply threat or negative outcomes. The activity dura-
ure. In the traditional procurement supply tion variations may be positive and allow the
chain, the closer to the top layer (main con- activity to be finished earlier than the scheduled
tractor), the more benefit a supplier can get. date. By the theory of aggregation (Goldratt,
An integrated benefit management system is 1997), since the uncertainties or variations of a ser-
to ensure that the lower layers of parts and ies of activities occur independently from each
components suppliers also share the benefits. other, the finished-earlier-than-scheduled activities
(3) The proposed model emphasises the impor- can compensate the finished-later-than-scheduled
tance of stakeholdersÕ benefit management in activities. The power of aggregation of uncertain-
order to exploit positive sides of variations. ties must be appreciated and exploited. Perception
The up-stream layer of the supply chain of uncertainty as always negatively contributes to
should not be perceived to exploit the lower unnecessary and excessive ‘‘paddings’’ or alloca-
layers of the supply chain. The CSCM system tion of ‘‘safety’’ buffers.
emphasises a win–win relationship. If the major equipment supply chain is managed
(4) There must be subtle supply chain control with the traditional ‘‘disaggregated’’ procurement
with open and transparent communication, model using fixed due-dates, the ‘‘savings’’
coordination and cooperation and a building achieved by earlier activities are not passed on,
of trust among supply chain members. whilst delays are. In the critical supply chain
model, the use and importance of intermediate
due-dates are de-emphasised. Each equipment sup-
6.1.3. Technology ply chain schedule is independently drawn up
Information technology especially an inter- based on ‘‘promised durations’’ of activities in-
organizational information system (IOIS) will be stead of ‘‘promised delivery dates’’.
an important part of the proposed system. The In the aggregated supply chain, time saved by the
IOIS integrates the individual information systems finished-earlier-than-scheduled activities can be
of the participating companies. It can contribute transferred, as a contingency bonus to the later
to cutting waste and streamlining the processes activities in that particular equipment supply chain.
(Hammer, 2001). The key idea is to leverage on The critical supply chain works like a relay race
information technology, especially the Internet, where the baton is passed on without interruption.
K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134 133

Rigid intermediate due-dates cause interruptions The CSCM model aims at addressing problems
and complacency. Early timesavings are particu- of such nature where the project main contractor
larly useful as they contribute to the feeding buffers can obtain prior information or an early warning
and hence help in risk reduction in the events of neg- of an adverse trend and initiate proactive actions
ative variations in subsequent activities. The critical either to prevent the problem or to minimize any
supply chain approach can and should contribute to negative consequences. The aggregated system
shorter procurement lead-time without increasing with an early warning mechanism can contribute
the risk of schedule overruns. significantly to better management of uncertainties
and reduction of risks.
6.2.2. Accuracy of forecast and resource alertness
In the critical supply chain approach, the actual
progress of earlier sub-processes will become more 7. Conclusions
transparent to the later sub-processes. The im-
proved transparency increases resource alertness Major equipment procurement is an integrated
of the later processes. This also contributes to the part of engineering project management. It ties
reduction in the burden in and need for expediting. up a large proportion of construction cost, and
The later layer suppliers can now have more accu- has long lead-time. The major equipment manu-
rate forecast on supply deliveries and better plan facturing itself is an engineering project. Major
their production schedules. For instance, in the equipment procurement generally has high deliv-
event that company C2 is going to take one month ery time uncertainty, which may disrupt the con-
longer than originally promised, then the subse- struction schedule. This study shows that time
quent companies after C2 will be alerted with the buffer is popularly used to protect project schedule
risk of time overrun. With this transparency acting from activity uncertainty. If the equipment pro-
as an early warning signal, affected companies can curement lead-time is long, a large time buffer is
take proactive actions to recover any time loss. inserted between promised-delivery date and re-
Such proactive actions must of course be reinforced quired-on-site date by the main contractor. The
by a comprehensive benefits management system to equipment manufacturer also need to procure ma-
provide incentives in the form of reward or com- jor components from suppliers and may insert sep-
pensation to the affected members. arate time buffers. This results in excessive buffer
In the traditional procurement practice, as each time insertion in the major equipment procure-
company manages its suppliers separately, it is ment process. These time buffers are used ineffec-
quite possible that the companies far after C2, tively due to fragmentation and complex project
say, the main contractor, knows nothing about structure and adversary relationship. The ineffec-
the problems generated by C2. Late delivery may tively used time buffers contribute to significant
occur without prior knowledge or early warning time waste. The more supply chain layers are in-
to the main contractor. volved, the more time waste occurs.
OÕBrien (2000) gives an example to illustrate By integrating the supply chain and critical
such a problem of traditional approach in his case chain management concepts, a CSCM model is
study of an engineering project in United King- proposed to overcome the above mentioned prob-
dom. There was a material supply delay to a steel lems in order to improve the performance of major
fabricator, who in turn, is a supplier to the main equipment procurement. The model requires the
contractor. The material delay resulted in a 6-week companies on the supply chain to re-examine the
delay to deliver the steel products on-site. This de- problems of work and organizational fragmenta-
lay was not anticipated and did not become appar- tion, multi-layer interfaces, un-coordinated pro-
ent until it occurred on-site. To avoid liquidated duction scheduling and controlling practices.
damages and complete the project on time, the The model advocates that critical supply chain
contractor resorted to work acceleration at an ex- should be scheduled, synchronized and controlled
tra cost of £1/4 million. flexibly and dynamically. The separately inserted
134 K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134

intermediate buffers should be removed to tighten Bresnen, M., 2000. Partnering in construction: A critical review
the production and delivery schedule. A separate of issues, problems and dilemmas. Construction Manage-
ment and Economics 18, 229–237.
supply chain buffer can be added to protect the Goldratt, E.M., 1997. Critical Chain. The North River Press.
equipment supply chain from any negative varia- Hammer, M., 2001. The Superefficient Company, Harvard
tion and to meet on-site requirement just in time. Business Review, September, pp. 82–91.
This model not only can prevent the negative as- Jaafari, A., 1997. Concurrent construction and life cycle project
pect of variation but can also exploit the positive management. Journal of Construction Engineering and
Management 123 (4), 427–436.
aspect of uncertainty. The CSCM will work and Love, P., Gunasekaran, A., Li, H., 1998. Concurrent engineer-
reap benefits if the dynamic planning and delivery ing: A strategy for procuring construction projects. Inter-
process has the support of people and technology. national Journal of Project Management 16 (6), 375–383.
OÕBrien, 2000. Construction supply chain management: A
vision for advanced coordination, costing and control
(Downloadable from website <http://www.ce.berke-
ley.edu/~tommelein/cemworkshop/obrien.pdf>).
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