T.C.

SAKARYA UNIVERSITY

INSTITUTE OF SOCIAL SCIENCES

SUPPLY CHAIN MANAGEMENT IN CONSTRUCTIONINDUSTRY

MASTER DEGREE PROJECTS

OKAN EKER

Department in the Institute: Business Non-Thesis Master Degree

Project Advisor : Prof. Dr. Erman COŞKUN

JANUARY 2014

T.C.

SAKARYA UNIVERSITY

INSTITUTE OF SOCIAL SCIENCES

SUPPLY CHAIN MANAGEMENT IN CONSTRUCTIONINDUSTRY

MASTER DEGREE PROJECTS

OKAN EKER

Department in the Institute: Business Non-Thesis Master Degree

This project is accepted unanimously by the jury presented below on …/…/20....

President of the Jury Jury Member Jury Member

Acceptance Acceptance Acceptance

Rejection Rejection Rejection

Correction Correction Correction

TABLE OF CONTENT

SUMMARY…………………………………………………………………………………... i

INTRODUCTION…………………………………………………………………………….1

CHAPTER 1: THE CONSTRUCTION INDUSTRY…………………………….………...2

1.1. Characteristic of the Construction Industry……………………………………………… 2

1.1.1. Uniqueness…………………………………………………………………………… 2

1.1.2. Temporary Nature……………………………………………………………………. 3

1.2. Types of Construction Projects…………………………………………………………… 3

1.2.1. Building Construction………………………………………………………………… 4

1.2.2. Infrastructure Construction…………………………………………………………… 4

1.2.3. Industrial Project……………………………………………………………………… 4

1.3. Procurement Strategies in Construction Industry………………………………………… 5

1.3.1. Traditional (Design-Bid-Build)………………………………………………………..5

1.3.2. Design – Build……………………………………………………………………….. 6

1.3.3. Management Contracting…………………………………………………………… 6

1.3.4. Construction Management………………………………………………………….. 6

1.4. Procurement Differences Between Construction Projects……………………………….. 7

CHAPTER 2: SUPPLY CHAIN IN CONSTRUCTION………………………………….. 8

2.1. Historical Development……………………………………………………………………8

2.2. Characteristic of Construction Supply Chain …………………………………………….. 9

2.2.1. Fragmentation………………………………………………………………………… 9

2.2.2. Adversarial Relationship………………………………………………………………9

2.2.3. Project Uniqueness…………………………………………………………………….10

2.2.4. Separation of Design and Production………………………………………………… 11

2.2.5. Competitive Tendering……………………………………………………………… 11

2.3. Roles of Supply Chain Management in Construction……………...…………………… 12

2.4. Waste and Problems in Construction Supply Chain…………………………….……… 14

2.5. The Ways of Improving Construction Supply Chain……………………………………. 15

2.5.1. Improving The Interface Between Site Activities and Supply Chain… …....…...….. 15

2.5.2. Improving The Supply Chain……………………………………………………… 15

2.5.3. Transferring Activities From The Site to Supply………………………………….. 15

2.5.4. Integration of Site and Supply Chain……………………………………………… 16

CHAPTER 3: AN EXAMPLE OF PROCUREMENT IN OIL & GAS INDUSTRY …....17

3.1. Package Sharing Among Procurement Engineers…………………………….. 183.2. Technical Documents Issued Up to the Procurement Stage…………………. 193.2.1. IDC - Internal Discipline Check…………………………………………….. 193.2.2. IFR - Issued For Review……………………………………………………….. 203.2.3. AFB - Approved For Bid……………………………………………………….. 203.3. The Procurement Stage…………………………………………………………… 203.3.1. The ways of finding vendor………………………………………………….. 203.3.2. Request for quotation from vendors…………………………………………. 213.3.3. Technical Clarification………………………………………………………… 213.3.4. Technical Bid Evaluation …………………………………………………….. 243.3.5. Inspection Test Plan & Vendor Document Requirement………………… 253.3.6. Factory Acceptance Test………………………………………………………. 263.3.7. Final Data Book………………………………………………………………… 263.4. Release the goods and shipment.………………………………………………. 263.5. Commissioning……………………………………………………………………… 27

CONCLUSION…………………………………………………………………………….. 28

REFERENCES…………………………………………………………………………… 30

APPENDICES

CURRICULUM VITAE

SAU, Institute of Social Sciences Master Degree Project Summary

Project Title: Supply Chain Management In Construction Industry

Project Writer: Okan Eker Advisor: Prof. Dr. Erman COŞKUN

Acceptance Date: 03 Jan 2014 Page Number: I + 29 (project) + 3 (appendices)

Department: Business Division: Non-Thesis Master Degree

The project targeted to explaning the role of supply chain management within theconstruction industry, and to explore the difficulties encountered during theprocess of integration of Supply Chain Management. As a means of doing this,also exploring the complexity of the procurement procedure of an offshore petrolplatform project as a part of the construction industry.

Key words: Supply Chain Management, Construction Industry, Oil and Gas Industry, Procurement,

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INTRODUCTION

Supply chain management (SCM) is a concept originating from the supply system bywhich Toyota was seen to coordinate its supplies, and manage its suppliers. In termsof lean production, SCM is closely related to lean supply. The basic concept of SCMincludes tools like Just-In-Time delivery (JIT) and logistics management. The currentconcept of SCM is somewhat broader but still largely dominated by logistics.( RubenVrijhoef and Lauri Koskela,1999)

Until now, in construction, initiatives belonging to the domain of SCM have beenrather partial covering a subset of issues (e.g., transportation costs) in a limited partof the construction supply chain (e.g., the construction site). In most cases, the issuesare regarded from a main contractor’s point of view (e.g., Asplund and Danielson1991, Wegelius- Lehtonen et al. 1996).

Statistical figures show that main contractors are purchasing more labor andmaterial than previously. For instance, in 1994, the construction industry (i.e.residential, commercial and industrial building), the main contractors’ share in thetotal national turnover had decreased to 24% . Thus, suppliers and subcontractorsrepresented about 75% of turnover. Currently, this is expected to be more. ( RubenVrijhoef and Lauri Koskela,1999)

As a consequence, main contractors become more and more reliant on other actors inthe construction supply chain (e.g., suppliers and subcontractors). Therefore, theyneed to revise their supply strategies and trading relations with subcontractors andsuppliers.

The goal of this paper is to explain the role of supply chain management within theconstruction industry, and to explore the difficulties encountered during the process ofintegration of SCM. As a means of doing this, we will also explore the complexity ofthe procurement procedure of an offshore petrol platform project as a part of theconstruction industry.

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CHAPTER 1: THE CONSTRUCTION INDUSTRY

1.1. Characteristic of the Construction Industry

The Construction industry is one of the key sectors in the world. According to theEUROSTAT report in 2010, construction activities in the EU-27 provided employmentto an estimated 14.8 million persons in 2007 (some 11.5 % of the non-financialbusiness economy workforce), while generating an estimated EUR 562 billion of valueadded (9.3 % of the non-financial business economy’s total value added). (EUROSTAT,2010) However, the construction industry is accused of being, at its worst, a wasteful,inefficient and ineffective industry (Stephen Pryke, 2009) because of each project’suniqueness and temporary nature.

1.1.1. Uniqueness

Each construction project has its own uniqueness given by construction type, the sizeof the project, location, complexity of design and completion period. Each of thesechangeable factors affects contractors’ project costs and creates inefficiency within theindustry. Even when faced with similar types of projects, all contractors take thesefactors into consideration when they bid on a project. For example, being awarded aproject in a country which is industrially developed will help the contractor to supplyequipment, find skilled labors and subcontractors more easily than in a country wherethese resources are less accessible. As a result, contractors add different equipmenttransportation costs for projects in different countries. Another example is thecompletion period; a simple design will help the contractor find the project materialsin the market more easily and supply them in within a short time with at a lowercost. However, with a complex design, the contractor will get most of the equipmentcustom made and this will add extra cost to the price and extend the delivery time ofthe equipment. Any equipment delay may extend the completion time of the project,and create significant extra costs for the contractor. The uniqueness of each projectmakes it difficult to keep the construction industry under control and to increase itsefficiency while eliminating waste.

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1.1.2. Temporary Nature

By nature, construction projects have different completion times and contractors areasked to finish each project within the required time frame while maintaining therequested standards of quality; otherwise the contractor might be subjected to hugepenalties.

Creating long-term partnerships with subcontractors and suppliers, as well asworking with permanent employees are the most important factors in completing aproject on time and increasing efficiency. However, the temporary nature of theconstruction industry is the biggest obstacle for the creation of long-termpartnerships. For example, contractors decide on the number of employees that theywill need according to the size and completion time of a project. However, when theproject gets closer to the end, the contractor won’t need the same number ofemployees as was needed at the beginning of the project. During this time when theyare not needed, some employees will find another company to work for, thus thecontractor will lose their skilled employee. On the other hand, creating long-termpartnerships with suppliers decreases the price of the goods and the lead-time, at thesame time increasing the quality of the goods. Because, the mistakes that was donewith first order by the manufacturer won’t be done again. The automotive industry isthe best example of a sector in which the benefits of long-term partnerships areevident. In this industry the supplier is able to foresee the outcome and know whichproducts will be produced in what quantity. However, because of the uniqueness andtemporary nature of the construction industry, this kind of planning is not easilyachievable.

1.2. Types of Construction Projects

There are a lot of completed and ongoing construction projects all around the worldsuch as schools, hospitals, bridges, stadiums, roads, dams, power plants, petrolplatforms, private houses, dormitories, etc. In the construction industry these projectsare collected under four titles.

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1.2.1. Building Construction

Building construction is the largest segment of construction. Buildings can be dividedinto two categories; residential buildings and commercial buildings. Residentialhousing construction includes single-family houses and multi-family dwellings suchas duplexes and apartment buildings.

Commercial building construction includes such structures as schools anduniversities, medical clinics and hospitals, recreational facilities and sports stadiums,retail chain stores and large shopping centers, warehouses and light manufacturingplants, and sky-scrapers for offices and hotels.

1.2.2. Infrastructure Construction

Infrastructure Constructions are capital intensive and heavy equipment orientedworks which involve movement of large quantity of bulk materials like earth, steel andconcrete.

These works include highways, railways and bridges, airports, dams and canals,oil/gas pipelines and transmission lines, large water supply and sewage disposalnetworks, docks, harbors, nuclear and thermal power plants, and other activitieswhich build up the infrastructure for the growth of the economy. This typeof construction typically serves public interest and is undertaken most often by largeprivate corporations and government agencies.

1.2.3. Industrial Project

These works include construction of manufacturing, processing and industrial plantslike oil refineries, steel mills, chemical processing plants and consumer-goodsfactories. These projects are very complex and specialized. The ultimate owner willneed to be very involved in every stage of project development from site selection anddesign to engineering and construction. (http://constructionfield.net/major-types-of-construction-projects/)

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1.3. Procurement Strategies in Construction Industry

Procurement is the process of purchasing goods or services. There are many differentroutes by which the design and construction of a building can be procured. Theselected procurement route should follow a strategy which fits the long-termobjectives of the client's business plan. Considerations are likely to include;

Speed Cost Quality Specific project constraints Risk Asset ownership Financing (http://www.designingbuildings.co.uk/wiki/Procurement_route)

1.3.1. Traditional (Design – Bid – Build)

This is the most commonly used method among small and middle sized constructionprojects. This method is used on 43% of construction projects (according to RICS 2003data).

In the traditional method, the client is responsible for the design of the project.Therefore, the client uses their in-house design team or provides a brief and budget toa team of consultants who in turn prepare a design and tender documentationincluding drawings, work schedule, and bill of quantities. After the tenderdocumentations are completed, contractors are then invited to submit their proposalsto construct the project. In this method, the consultant administers the project anddesign on behalf of the client.

This method has cost and design quality certainty, time predictability, and low risk ondesign failure. However, it is not appropriate for fast tracking a project.

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1.3.2. Design – Build

This method is becoming more and more popular in middle sized and larger projects.It was first introduced in the 1980s and is now applied on 42% of projects (accordingto RICS 2003 data).

The Design – Build method of procurement carries design and constructionresponsibilities together. Therefore, the contractor needs to use either in-houseengineering or hire consultants to execute the design. This method is appropriate forfast tracking a project and is recommended for less complex construction projectswhere design quality is not the main consideration. However, this method can createsignificant additional costs for the client in case of changes in design, because itaffects the whole design – build contract.

1.3.3. Management Contracting

In this method, a Management Contractor is hired by the client early in the designstage to use their experience to reduce costs, improve build ability and enable tocontract some work without waiting for the completion of the design. This methodshortens the design and construction period, however, at the same time it createsprice uncertainty until the design is completed.

In this method, the management contractor doesn’t carry out the construction work,but is authorized to contract work to subcontractors directly and be responsible for allof the construction activities. The management contractor’s payment is made on thebasis of the cost of the subcontractor work and agreed fee. This method is suitable forexperienced clients, fast track projects and complex building.

1.3.4. Construction Management

The construction manager is hired by the client for the same reasons as themanagement contractor. However, there is a difference between constructionmanagement and management contracting. In construction management, the clientdirectly contracts work to other contractors. However, in management contracting,

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the client only hires the management contractor who then proceeds to hire the sub-contractors.

Construction Management is only an appropriate solution for experienced clients,because the constant involvement of the client is necessary to create a high qualityproject.

1.4. Procurement Differences Between Construction Projects

Building construction projects are usually not as complex as infrastructure andindustrial projects, and there is not much of a demand for custom equipment. Theequipment and material used in these types of projects are easily found in the marketwith a short delivery time. Therefore, the project completion time is only as long asthe equipment manufacturing time. Applying supply chain management in this kindof project is easier than in more complex projects, because most of the equipment andmaterials can be found easily in most countries.

Infrastructure projects are heavy equipment oriented and require a high level ofinvestment, therefore some infrastructure projects might be complex and hightechnology equipment might be used. However, procurement procedures ininfrastructure project are still easier than in building projects because usually bulkmaterials like earth, steel and concrete used to build such structures as dams andcanals, oil/gas pipelines etc. are easy to find.

Industrial projects are the most complex projects because they require high levels ofengineering and custom made equipment requests. For example, off-shore petrolplatform projects supplying custom made equipment usually take longer than buildingthe structural part of the platform, which uses materials readily available on themarket. Most industrial project equipment and materials are custom-made on specialrequest. In this case, a strong supply chain management system is necessary is toincrease efficiency throughout the construction process.

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CHAPTER 2: SUPPLY CHAIN IN CONSTRUCTION

2.1. Historical Development

SCM is a concept that originated and has flourished in the manufacturing industry.The first signs of SCM were perceptible in the JIT delivery system as part of theToyota Production System (Shingo 1988). This system aimed to regulate supplies tothe Toyota motor factory just in the right - small - amount, just at the right time. Themain goal was to decrease inventory drastically, and to regulate the suppliers’interaction with the production line more effectively.

After its emergence in the Japanese automotive industry as part of a productionsystem, the conceptual evolution of SCM has resulted in an autonomous status of theconcept in industrial management theory, and a distinct subject of scientific research,as discussed in literature on SCM (e.g., Bechtel and Yayaram 1997, Cooper et al.1997). Along with original SCM approaches, other management concepts (e.g., valuechain, extended enterprise) have been influencing the conceptual evolution towardsthe present understanding of SCM.

In the construction industry, an increasing number of construction organizations havestarted showing a realization towards the importance of the SCM concept. However,unlike retail and manufacturing sectors, the construction industry has been slow andreluctant in employing the concept of SCM (Love, 2000). According to Ofori (2001) byusing an SCM philosophy, various problems associated with traditional practices inthe construction industry can be resolved. These problems may arise due to thepresence of win-lose arrangements; uncertainties encountered by various constructionprocesses; lack of exchange of information and knowledge; increasing pricecompetition due to the purchases of supplies from numerous suppliers; and theexistence of an environment of fear, dishonesty, and frustration (Peter McDermottand Malik M A Khalfan).

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Construction supply chain management is the integration of key constructionbusiness processes, including the demands of the client, from design to construction,and key members of the construction supply chain, including client/owner, designer,contractor, subcontractor and supplier. CSCM focuses on how firms utilize theirsuppliers’ processes, technology and capability to enhance competitive advantage. It isa management philosophy that extends traditional intra-enterprise activities bybringing trading partners together with the common goal of optimization andefficiency. CSCM emphasizes on long-term win-win, cooperative relationshipsbetween stakeholders in systemic perspective. Its ultimate goal is to improveconstruction performance and add client value at less cost.

2.2. Characteristic of Construction Supply Chain

2.2.1. Fragmentation

The construction industry has long been recognized as having problems in itsstructure, particularly with fragmentation, which has resulted in poor performance(Latham, 1994; Egan, 1998). Uniqueness, immobility and variety are three distinctivefeatures of construction output that flow from the fragmentation in construction.These features, it is argued, are factors in the tendency of the construction industrytowards low productivity, poor value for money and mediocre overall clientsatisfaction (Latham, 1994), especially when compared with other industry sectors.

As a consequence of the uncertainty for the main contractor in obtaining continuouswork, with the need to accommodate the different features and requirements of eachproject, subcontracting has been adopted as the dominant approach (Cox andTownsend 1998, p. 21), which by its very nature, results in further fragmentation.

2.2.2. Adversarial Relationship

The construction supply chain has become increasingly fragmented for the reasonsoutlined above. Increased fragmentation brings increased transaction volumes atlower average values and inevitably higher levels of opportunism, particularly in thecontext of low barriers to entry. The industry had become less trusting, more self-

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interested and adversarial. The adversarial attitude of the UK construction industryhas been a recognized problem for many years (Cox and Townsend 1998, p. 29).Performance and innovation in construction are significantly hindered by adversarialrelationships and fragmented processes. In order to minimize their own exposure torisk, each party in the supply chain attempts to extract maximum reward forminimum risk that is normally achieved by means of non-legitimate risk transfer(passing risk down to the next level in the supply chain). This way of thinking hasresulted in an industry structure with various interfaces, which are points of tensionand conflict, which eventually leads to increased cost and reduced efficiency (Cox andTownsend 1998, p. 31).

2.2.3. Project Uniqueness

The construction industry (with the possible exception of some responsive repairs) is aproject-based industry. The characteristics of a specific project, and hence its degree ofuniqueness, is determined by a number of factors. Consequently, the assessment ofthese project features determines the resources needed for a project, and selection ofthe most appropriate supply chains needed to deliver clusters (Gray, 1996) ofresources and services for the project as a whole. This diversity and uniquenessmeans that construction projects are very often ‘bespoke’ as the requirements andspecifications of technologies for specific clients determine their characteristics.Projects involve assembling materials and components designed and produced by amultitude of suppliers, working in a diversity of disciplines and technologies in orderto produce a product for a particular client. This diversity of product technologies,which has to be reorganized with each new construction project, coupled withdiscontinuous demand from a large percentage of construction clients, accounts forthe transient nature of the relationships between the demand and supply side of theindustry. In addition, with the increasing shift from on-site to off-site production,managing construction projects involves integrating diverse and complex supplysystems in which a growing amount of value of the product is added (Stephen Pryke,2009).

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2.2.4. Separation of Design Production

One of the main problems in construction is the extent to which the industryseparates design from production. This particular characteristic of the industry is stillcommon in spite of the deficiencies of traditional procurement and the benefits offeredby newer and more flexible approaches. The separation of the design and productionprocess in the construction industry, particularly in the building sector theconsequent difficulties that can arise during construction projects, has been thesubject of wide criticism by a number of industry reports such as Latham (1994) andEgan (1998). Consequently, there have been many calls to bridge this gap by creatinga seamless supply chain whereby the interface between various phases of the project’slife cycle are integrated with one another. It is an anomaly that design and productionare commonly separated at the highest tier of the supply chain (main contractor) butcommonly integrated in the tiers below this. (Stephen Pryke, 2009).

2.2.5. Competitive Tendering

In most countries, construction companies are selected to undertake constructionprojects and the price for their work is established by competition (Griffith et al.2003). Unlike manufacturing, construction projects are not priced and advertised forsale (manufactured speculatively, without prior orders from customers), but insteaduniquely priced after a negotiation or bidding process. Since the mid 1990s jointgovernment and construction industry initiatives (Latham 1994; Egan 1998) haveencouraged construction clients to adopt different strategies to procure work. Whilstregular, experienced and informed construction clients have begun to adoptalternative procurement strategies, there is little evidence to show that the majorityof inexperienced irregular purchasers have done so. By far the dominant strategyadopted is the traditional design-bid-build approach with the lowest bidder winningthe work (RICS 2006). There is no doubt that competition used in this way serves todrive down prices.

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Adopting “low bid wins” strategies results in a number of undesirable outcomes,particularly where the design is already established. These are: production processes that are geared to lowest cost rather than to ‘right first

time’ or to ‘best value’; bidding processes that encourage opportunism - where suppliers will agree to

almost any conditions and requirements to get the work and attempt toimprove profit levels on the project through reductions in quality of materials,or the negotiation of disproportionately high rates for variation works;

an inability and unwillingness to cooperate in specialist design, innovation orcollaborative problem solving.

‘Low bid wins’ procurement has been blamed for, amongst others, late completion,overspends on client budgets and product / workmanship. Alternatives do exist, butrequire attitude change within the construction sector and its professions. (CSCM-Stephen Pryke)

2.3. Roles of Supply Chain Management in Construction

Actual practice in construction not only fails to address issues of supply chain, butrather follows principles that make supply chain performance worse. However, manybenefits can be achieved through SCM including (Cheng et al, 2010):

Reduced costs Improved responsiveness and ability to change Reduced uncertainty for project owners in cost savings Increased service level Facilitate decision making

SCM can play major roles in construction. The principle roles of SCM are covered bythe generic SCM methodology. SCM offers general guidelines that can be used toanalyze, reengineer, properly coordinate, and constantly improve virtually thecomplete construction supply chain, resolving basic problems and the myopic controlthat have been plaguing the supply chain. This would be practically impossible torealize in the short term. Therefore, initially, the SCM methodology is properly

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deployed on a lower scale, addressing partial supply chain problems, involving alimited number of supply chain actors. Due to its recurring character, the SCMmethodology implies a continuous improvement process of which the scope can beenlarged over time, involving an increasing number of areas of application.

Some areas of application, which may be, and to a certain extent have been subjectedto SCM, include the reduction of costs (especially logistical costs), lead-time andinventory in the supply chain. In view of the large share of these costs in construction,this focus is often fully appropriate. Secondly, the focus may be on the impact of thesupply chain on site activities. Here, the goal is to reduce site costs and duration. Inthis case, the primary consideration is to ensure material (and labor) flows to the sitefor the sake of avoiding disturbances in the workflow. Thirdly, the focus may be ontransferring activities from the site to upstream stages of the supply chain. Therationale may simply be to avoid the inferior conditions of site, or to achieve widerconcurrency between activities, which is not possible in site construction with itsmany technical dependencies. Here, the goal is again to reduce the total costs andduration.

In practice, these areas are intimately interrelated. It is often difficult to improve thedependability of the deliveries of a supply chain without addressing the total supplychain. If activities are transferred from site upstream the supply chain, it is requisitethat the resultant, more complex supply chain is orderly managed and improved inorder to have the benefits intended.

In view of these roles, gaps in prior initiatives to advance the supply chain can beidentified. For instance, the logistics initiatives, stressing (average) costs, have oftenfailed to address the impact of supply chain variability on site assembly. In addition,industrialized construction, with its long and complex supply chain, has often beenlacking even basic principles of SCM.

The generic body of knowledge accrued in the framework of SCM leads to improvedunderstanding of the characteristics of construction supply chain problems, and givesdirection for action. However, the practical roles for SCM have to be developed in

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construction practice itself, taking into account the characteristics of construction andthe specific situation. (Ruben Vrijhoef and Lauri Koskela,1999)

2.4. Waste and Problems In Construction Supply Chain

Because of a lot of input and difficult controllability, every construction project is acause of waste. Knowing the reason why the waste is generated in the first place isthe key to reducing it. It may not be possible in all cases to reduce the waste or wastereduction may be the responsibility of someone other than the waste producer. Thesource of the waste and its cause can be attributed to all stages of construction asshown by Table 1. (http://www.wrap.org.uk)

Table 1: Examples of common sources and causes of construction waste

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2.5. The Ways of Improving Construction Supply Chain

Subjective limitations are due to a deficiency in conceptualization; objectivelimitations are caused by the characteristics of the environment of the problemaddressed or peculiarities of construction in general. It can be assumed that theselimitations have thwarted progress in developing construction supply chains.

2.5.1. Improving The Interface Between Site Activities and Supply Chain

It is a subjective limitation that the logistics initiatives have stressed (average) costsparticularly, and thus failed to address the impact of supply chain variability on siteassembly. In this regard, the last planner method provides an appropriateaugmentation. In addition, there is an objective limitation due to the narrow focus ofthis role in relation to the whole supply chain. For instance, it is quite possible toimprove the dependability of the deliveries of a supply chain through buffering,without addressing the whole supply chain, but the improvement of the dependabilityof the total supply chain would be a more efficient and effective solution.( RubenVrijhoef and Lauri Koskela)

2.5.2. Improving Supply Chain

Regarding this role, the erratic and undisciplined nature of customer activities causesobjective limitations. There are problems at both ends of the delivery process. At thebeginning, the product definition is incomplete or capricious, and at the end, thedelivery date often changes and the installation conditions are chaotic. As far aspossible, the supply chain should be shielded from these problems or made robust inrelation to them.

2.5.3. Transferring Activities From The Site to Supply

Transferring activities off site yields objective limitations. In industrialization, thestructure and behavior of the total process changes: the process is longer, the amountof design required more substantial, the error correction cycle longer, andrequirements for dimensional accuracy usually higher. Thus the total process ofindustrialized construction tends to become complex and vulnerable to variability,

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even if the part of the process located on site becomes less complex (Koskela, 2000).The inevitable penalties for variability (Hopp and Spearman, 1996) may grow onaccount of this. Indeed, if activities are transferred off site, the complexity that resultsin the supply chain must be managed well and be improved in order to profit from theintended benefits. However, industrialized construction, with its long and complexsupply chain, seems often to have suffered from a lack of basic SCM; a matter ofsubjective limitation. It seems that in badly controlled design, fabrication and siteprocesses the increase in costs due to non-value-adding activities has often nullifiedthe theoretical benefits to be gained from industrialization. As the study by Luhtalaet al. (1994) shows, manufacturing-oriented make-to-order supply chains are alsoplagued by problems and waste if managed in the traditional way.

2.5.4. Integration of Site and Supply Chain

Objective limitations can be discerned in many initiatives, related to the nature ofconstructed objects. The logic of many existing initiatives is based on the idea thatSCM is more effective with stable supply chains and with standardized (even ifcustomized) products. However both features, stable chains and standardizedproducts, are restrictive to some extent in respect of market opportunities and thebroad spectrum of demand for construction. From this point of view, Naim et al.(1999) suggest developing construction supply chains also in the framework of the“agile paradigm” using market knowledge and a virtual corporation to exploitprofitable opportunities in a volatile marketplace.

In terms of subjective limitations, design-build is a particular example that showsintegration to have often been merely partial or superficial. Studies (e.g. Bennett etal., 1996; Konchar and Sanvido, 1998) show that the benefits of design-build, even ifstatistically observable, are minor. The most plausible reason for this is that thecontrol and improvement of design-build processes have been poor. Presumably, ithad been thought that mere improvement of the organizational structure wouldsuffice. (Ruben Vrijhoef and Lauri Koskela)

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CHAPTER 3: AN EXAMPLE OF PROCUREMENT IN OIL & GASINDUSTRY

Oil and gas projects are characterized by increasing project complexity, varying sizesand intensified international involvement. (3R international – 2010 pg: 33)Therefore, investors/owners in the oil and gas industry usually prefer to award theircontracts to an EPC contractor (Engineering, Procurement, and Construction), whichoffers turnkey solutions. However, sometimes it is possible to see that contracts areawarded without engineering/design.

In order to better understand the complexity involved in an oil and gas project, onemust look at the specifications of one of these projects. Below is an explanation of thecomplexity involved in the construction of an off-shore petrol platform includingnumbers:

- There are approximately 73 instrument packages and 13 bulk materialpackages in a project.

- These products are supplied from 25 different countries.- An average of 250 purchase orders are issued.- The lead time of the 25 packages is more than 30 weeks.- The longest lead time is 52 weeks.

As it is understood from the numbers mentioned above and by looking at the timeschedule in Table 2 below, it becomes clear that investors/owners prefer to work withEPC contractors to allocate all the risk of a project to the contractor.

Table 2: Qualitative Time Schedule (3R international – 2010 Pg: 34)

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As it is known, all construction projects have a tight completion schedule, becauseowners want to get their projects completed in a short time to turn their investmentto cash. However, a petrol platform project owner is less patient than other projectowners because of the vast amount of time and money that has been spent on findingan oil-well. For example, during the last 13 years, 50 billion dollars were spent todiscover the 5th biggest petrol reserve in the world which is located in Kazakhstan.For this reason, petrol platform project owners put a lot of pressure on the contractorsto deliver each project on time, and any delay in the project creates huge penalties.From the point of view of the contractor, to have the right product, at the rightmoment is the most important thing in preventing any delays, therefore supply chainmanagement plays a very important role in oil and gas projects.

3.1. Package Sharing Among Procurement Engineers

In petrol platform projects the procurement team is divided into two sections;mechanical and electrical. Each section has their own packages to share among theirteam members. Generally, these packages are shared by the procurement managerand each engineer usually gets up to 10 packages. (Table 3)

Table 3: Package sharing example

After receiving the packages, each procurement engineer becomes part of the supplychain, and starts to look for the most competitive vendors all around the world. If the

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contractor is experienced with petrol platform projects, most likely there will be avendor list to help the procurement engineers.

3.2. Technical Documents Issued Up to the Procurement Stage

Design engineers start to prepare technical documents of each product for bidding andissue them in the order that follows:

3.2.1. IDC - Internal Discipline Check

Initially, the design engineers prepare technical specifications and datasheets for theIDC of each instrument. These documents are then sent to the procurement team, theconstruction manager, the project manager and other related people to see if theyhave any comments.

The reason that these documents are issued for the IDC first is to prevent thecreation of unrealistic specifications that manufacturers can’t meet or that will end upcreating extra costs.

To better understand the need for an IDC, firstly, let’s take a look at an example of anunrealistic specification. In one of the petrol platform projects in Turkmenistan adesign company requested a pedestal crane with 6.0m minimum radius, because therewas a portable toilet 6m away from the pedestal and the crane was supposed to lift it.However, in reality, it was technically not possible to get a pedestal cranemanufactured with this minimum radius. After completing an internal check, thelocation of the portable toilet was changed and the unrealistic specification wasupdated.

The other side of the coin relates to requests that create extra costs. For example,design engineers usually try to choose the cheapest material that meets the designspecifications. However, if the design engineer is not aware of the products availableon the market, ordering a product made from a cheaper material, might end upcosting more than ordering the same product made from a more expensive material.For example, a data sheet can specify A105 as the cheapest material that can be usedto manufacture a connector. However, such a connector is currently unavailable on

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the market and must be custom made. The cost of ordering the custom made A105connector could end up being ten times more expensive than ordering a stainless steelconnector which has been mass produced and is readily available on the market.

3.2.2. IFR - Issued For Review

After the IDC documents have been approved by the procurement team, they arereissued for the investor/owner to get their comments if there are any. This is donebecause the designer needs the investor/owners’ approval on technical specificationsbefore issuing the final document.

3.2.3. AFB - Approved For Bid

When the package is ready for bid, the documents are issued one last time with allIFR comments included. At this stage, the document is labeled AFB and theprocurement team starts to research the equipment with the shortest lead time andthe most competitive price to keep the project within budget.

3.3. The Procurement Stage3.3.1. The ways of finding vendor

Working with a vendor who is familiar with petrol platform projects lets engineerssave time. However, because of tight schedules and long lead time packages,engineers may have to work with an unfamiliar vendor. In order to find the mostcompetitive and experienced vendors, engineers use one of the three following ways;

a. Check previous projects’ purchase orders.b. Check contractors’ or investor/owner’s vendor lists.c. Search online.

Searching online is the riskiest way of finding an experienced vendor, becausesometimes well-designed websites don’t reflect the manufacturers’ real capabilitiesand one might just spend their efforts for nothing. However, it is better to keep inmind that there is always a possibility of finding the most competitive companyonline.

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The advantage of using previous projects’ purchase orders and working with a knownvendor, is that it takes some of the weight off the shoulders of the engineers, it islikely that the quality of the product has been proved and the vendor is probablyfamiliar with your company’s and the investor/owners’ working rules. This kind ofvendor will be able to shorten the period between placing an order and starting themanufacturing process. (Table 4)

Table 4: Time period

Supplying equipment from the investor/owner’s vendor list takes some pressure offthe engineers as well, but this kind of vendor might be more expensive than theothers just because they are an approved vendor of the investor/owner. Therefore, in aproduct comparison table, all three types of vendors should always be present.Otherwise, it is not possible to supply high quality products at the most competitiveprices.

3.3.2. Request for quotation from vendors

Engineers would always like to have as many vendors as possible to get thecompetitive price. At the same time engineers need to think about the time thatdesign engineers spend on each vendor’s quotations. Therefore, the number of vendorspassed to the TBE stage is usually restricted in numbers. In our case this quantity isfive vendors. In order to come up with a limited number of vendor quotations,procurement engineers examine the quotation from a technical and commercialperspective before the technical offers are examined by design engineers. Thisprocedure is explained further in Table 5 below.

ProcurementEngineer

Send RFQ form and find out ifvendors bid or not.

Check PreviousProject Purchasing

Check Vendor List(Contractor or Owner)

Online Search

1. Vendor

2. Vendor

YES

NO QUOTE

1. Vendor

2. Vendor

YES

YES

1. Vendor

2. Vendor YES

NO QUOTE1. Vendor

2. Vendor

YES

NO QUOTE

1. Vendor

2. Vendor

YES

YES

1. Vendor

2. Vendor YES

NO QUOTE

NO QUOTEYES

Send all data sheets, specifications, and PTS related to thepackage. Confirm reason for "NO QUOTE" in RFQ form Keep form in

package file

Send all data sheets, specifications, and PTS related to thepackage. Confirm reason for "NO QUOTE" in RFQ form Keep form in

package file

Determine final response date for quotation and informvendors.

IT ISWORTHQuotation is RECIEVED until final

reponse date.Quotation is NOT RECIEVED until

final response date.

Talk with vendor and find out reasonfor delay.

Vendor asked additional days tobe able to quote because they are

busy.

Discuss with procurement manager to decide if it 's worth the wait or not. Beforevisiting your manager, determine the points below

*Is it a new vendor or has your company done bussiness with them berfore?* Is the lead time on the package your are supplying long or short?* According to project schedule, are you able to meet the ROS date

IT ISWORTH

IT IS NOT

Commercial Proposal Technical Proposal

Vendor asked additional days tobe able to quote because they are

busy.

Discuss with procurement manager to decide if it 's worth the wait or not. Beforevisiting your manager, determine the points below

*Is it a new vendor or has your company done bussiness with them berfore?* Is the lead time on the package your are supplying long or short?* According to project schedule, are you able to meet the ROS date

Commercial Proposal Technical Proposal

Check if commercial proposal covers the subjects below.

*Check if vendor quoted for all the items requested*Price*Lead Time*Shipment Terms*Two years spare part is quoted as optinal.*Commisioning & Start-up parts are included.*VDRL documentation price is included.*Export packing price is included

Check if technical proposal covers the subjects below.

*Drawing*Deviation List*Datasheet of quoted product.*Commissioning and Start-Up spare parts*Two years operation spare parts

Check if commercial proposal covers the subjects below.

*Check if vendor quoted for all the items requested*Price*Lead Time*Shipment Terms*Two years spare part is quoted as optinal.*Commisioning & Start-up parts are included.*VDRL documentation price is included.*Export packing price is included

Check if technical proposal covers the subjects below.

*Drawing*Deviation List*Datasheet of quoted product.*Commissioning and Start-Up spare parts*Two years operation spare parts

YES NO YES NO

Ask vendor toprovide missinginformation.

Ask the vendor toprovide missinginformation.

Ask vendor toprovide missinginformation.

The vendor is ready forTBE (Technical Bid Evaulation) stage.

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3.3.3. Technical Clarification(TC)

In the Technical Clarification stage, design engineers’ aim is to bring up the unclearpoints in the vendors’ offers and get confirmation of the vendors’ understanding ofevery specification. There might be more than one TC, because sometimes, forcomplicated packages, all points can’t be cleared in one TC. (A TC sample can be seenin Appendix 1)

The TC period depends on the vendors’ and design engineers’ experience. Therefore,in some cases the TC period might extend for three months and cause delays in theproject completion time. As it is known, any delay in the oil and gas industry createsthousands of dollars of losses. Therefore, the TC stage is one of the most importantstages to improve the supply chain in the construction industry.

In order to better understand the importance of the TC stage in regards to the timeframe of the project, let us look more closely at an example involving the constructionof a petrol platform, which was awarded an EPC contractor, with a completion time of15 months. (It is important to note that, sometimes contractors accept a project evenif they know the project will be delayed, because the penalty of the delay might becovered by the profit of the or they really trust their supply chain.)

- The issuing of AFB document for a pedestal crane takes three months.- The TC stage is three months.- The production of the pedestal crane is completed a minimum of 11 months

after all financial and technical agreements have been arranged.- Delivery to the site: minimum 1 month. (Depends on where the project is

located.)- The total delivery time is 18 months.

In this case, the total delivery time is greater than the project completion time. Thisproblem only can be solved by reducing the period of the stages above with a supplychain management strategy. With a supply chain management strategy, the EPCcontractor’s design engineers, the manufacturer, the manufacturer’s suppliers, andlogistics must work in harmony to reduce the total delivery time.

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3.3.4. Technical Bid Evaluation (TBE)

After all the unclear points in the vendors’ offer are cleared, a Technical BidEvaluation table is issued. The TBE table shows vendor’s compliance with eachspecification and if the vendor has technically accepted these specifications or not.Sometimes vendors can be technically accepted with some “area of concern” points.Area of concern means that the vendor is technically accepted but the vendor has toaddress all of the concerns highlighted in the TBE table before the contractor issues apurchase order. (A TBE sample can be seen in Appendix 2)

The procurement engineer creates a commercial comparison table that includes thetechnically accepted vendors. The points below must be clearly indicated in thecomparison table and considered when purchasing decisions are made.

- Price

o Product priceo Commissioning spare parts priceo Two years spare parts priceo Inspection & Certification priceo Packing price

- Delivery Time

- Shipping Terms

- Payment Terms

- Vendor’s experience – Reference List

* Beside the points listed above, the site-supervisor daily rate is considered as well.

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PEDESTAL CRANECOMPARISON TABLE

COMPANY 1(MALAYSIA)

COMPANY 2(ITALY)

COMPANY 3(ITALY)

COMPANY 4(USA)

Price / EURO 999,000.00€ 1,415,000.00€ 1,090,000.00€ 1,000,000.00€

Commissionig Spares included included included included

Two years spare parts not included not included not included not included

Inspection & Certification included included included included

Packing included included included included

Shipping Terms EXW-MALAYSIA EXW/ITALY FCA/ITALY EXW - LA / USA

Delivery Time 46 weeks 36 weeks 40 weeks 36 weeks

Technically not accepted Technically Accepted Technically Accepted Technically Accepted

Table 6: Sample Comparison Table

As the sample comparison table above, the winning vendor is the company with the3rd best price. The cheapest company, Company 1, does not technically satisfy thecontractor, the second best priced company, Company 4, lost the tender because of thelate delivery in previous petrol platform projects of same contractor. If the tightschedule of oil and gas projects is taken into consideration, Company 2 could bechosen but the price differences is significant and not worth the cost for a project witha four week time frame. Therefore, the winner of this bid is Company 3.

This is another stage where the supply chain management strategy may reduce thecost of a product and the delivery time for similar projects in the future.

3.3.5. Inspection Test Plan (ITP) & Vendor Document Requirement (VDR)

The Inspection Test Plan (Appendix 3) is the first thing requested from a vendor afterthe purchase order issuance. The ITP document provides a framework for the stagesin which the client, the contractors or other parties will witness or review theprocedures followed in the manufacturing process.

VDR is the stage where all document requirements are collected from the vendor.These documents start with an inspection test plan, general arrangement drawings,material test certificates, a painting report, warranty certificates, a spare parts list,user manuals, etc. and end with the Factory Acceptance Test. Each of these

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documents should be approved by the design engineers and the client before anyaction is taken.

Because of the need for approval of design engineers and the client on each VDRdocument, this stage may extend the manufacturing period. This is because designengineers and the client might comment on a document, which in turn might causedelays in manufacturing. For example, a comment made by the client on weldingprocedures might cause delays on fabrication starting and result in late delivery.

3.3.6. Factory Acceptance Test (FAT)

FAT is the last stage before the release of the goods. Factory Acceptance Tests aredone at the factory to make sure that certain requirements are met, which results inhigh quality products. The tests are normally done with the client, and also, in certainmore demanding cases, with a third party inspection agency.

At a FAT, installations are double checked so that they match the drawings for thespecific project. All possible faults, deviations and wishes are also noted in a punchlist. The punch list has to be closed before the release of the goods.

3.3.7. Final Data Book

The final data book is an identity card of products and includes all the approvedoriginal documents. Usually, more than two hard and soft copies are required. At thecommissioning stage final documents are asked from the contractor for acceptance.

3.4. Release the goods and shipment

After closing all of the points in the punch list, the contractor’s logistics departmentmakes every effort for the item to arrive on site as soon as possible in the cheapestand safest way. The pressure on the logistics department is really high because in theconstruction industry the manufacturing of a product usually takes longer thanexpected and it is expected that the delay can be covered by fast shipment.

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3.5. Commissioning

Commissioning is a systematic process of ensuring that all building systems performinteractively according to the contract documents, the owner’s objectives andoperational needs. This is achieved ideally by developing and documenting theOwner’s Project Requirements beginning in the pre-design phase; continuing throughdesign, with reviews of design and contract documents; and continuing throughconstruction and the warranty period with actual verification through review, testingand documentation of performance. Therefore, for the process to work successfully, itis important that the owner, commissioning provider, design team, contractors, andoperators work together as a team throughout their involvement with the project.

After this stage, the project is completed, but the responsibility of the contractorcontinues until the end of the warranty period.

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CONCLUSION

The purpose of this conclusion is to summarize the key points of offshore petrolplatform projects as a part of the construction industry, and to point out thedifficulties of positioning supply chain management.

Supply chain starts from design and ends after the commissioning & start-up stage ina petrol platform project. Managing all of these points is important to increase theefficiency of the project and shorten the completion time.

Design: supply chain management has to involve the design stage to choose availablematerial in the market and create a buildable design.

Procurement stage: supply chain management has to involve the procurement stageto reduce equipment costs and shorten the delivery time.

Release of goods and transportation: supply chain management has to involve therelease of goods and transportation to produce all equipment on site on time withoutany damage.

Commissioning & Start-Up: supply chain management has to involve thecommissioning & start-up to solve the problems occurred at these stages.

However, for a contractor it is not easy to focus on just one type of project in onespecific area, because of the temporary nature of such projects. The contractor mightget awarded a petrol platform project in Turkmenistan, but next time they might beawarded a thermal power plant project in Libya. This changes all of the supply chainand requires the contractor to create a new one in a short time frame. Changing thelocation and the type of project will change the client, suppliers, types oftransportation, employees, etc. Working with the same supplier might be possible foranother project but the supplier might not fulfill the client’s requirement for the newproduct or transportation might cost more than expected. In that case, another

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experienced supplier has to be found, but probably the supplier would think this is awin - lose opportunity, because nobody knows the locations of the next project.

Petrol platforms are designed considering environmental conditions, facilities to beinstalled on top side (oil rig, living quarters, helipad, etc.), platform type and capacityof platform, therefore these changeable points give each project uniqueness. This isanother obstacle to positioning supply chain management in the constructionindustry. The uniqueness of each project creates different capacity and material needsfor equipment, therefore finding a vendor who is capable of manufacturing a fullrange of equipment is not possible and does not let the contractor create long-term co-operation with vendors. However, in the automotive industry, the manufacturermakes a production plan and is able to see how many of the same cars they willproduce over the next few years. Therefore, they can invest money and develop theirrelationships with suppliers to decrease their costs.

However, there are good opportunities for contractors if they are well-mobilized in acountry where there is potential to work on the same kind of project again. Forexample, a contractor who is experienced in offshore petrol platform projects canposition supply chain management in their project because most of the equipmentused in their project will have similar design conditions. Therefore, there will beopportunity to improve vendors’ capabilities and create win-win partnerships. Supplychain management will shorten the completion time of projects and, mostimportantly, it will reduce the overall cost.

REFERENCES

Books

1- Asplund, E., and Danielson, U. (1991). Räta ut Byggsvängen (Straighteningthe Building Roundabout). SBUF, Stockholm, Sweden.

2- Bechtel, C., and Yayaram, J. (1997). “Supply Chain Management: a StrategicPerspective.” Intl. J. of Logistics Mgmt., 8 (1) 15-34

3- Pryke Stephen, Senior Lecturer in Construction and Project Management,Bartlett School of Graduate Studies, University College London, 2009

4- Peter McDermott and Malik M A Khalfan, Achieving supply chain integrationwithin construction industry, University of Salford, Salford, GreaterManchester, UK

5- Ruben Vrijhoef and Lauri Koskela, Roles of Supply Chain Management inConstruction, July 1999, University of California, Berkeley, CA, USA

Internet Sources

1- Major Types of Construction Projects, September,2013http://constructionfield.net/major-types-of-construction-projects/

2- Designing Buildings Wiki,http://www.designingbuildings.co.uk/wiki/Procurement_route

3- Waste Minimization Accross the Supply Chain Areas to focus on,www.constructionwaste.info