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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
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
Equipment
Procurement Supply
Chain Management
Obtained
Approval
5
0 1 2 3 4 6 8 9
Receive Vendor’s
Drawings/Specs
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
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
80
70
Production Time (*10days)
and Buffer Time (days) 60
50
30
20
10
0
1 2 3 4 5
Fig. 6. Buffer time and production time vs. supply chain layers.
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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