Managing Uncertainlty In Procurement

European Journal of Operational Research 171 (2006) 123–134 www.elsevier.com/locate/ejor

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 procurement 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 Engineering construction projects play an important role in national economic development. Yet the construction industry as a whole faces formidable challenges and suffers from poor performance and low profit margin. Project schedule slips,

*

Corresponding author. Tel.: +65 799 5502; fax: +65 791 1859. E-mail address: [email protected] (K.T. Yeo).

budget overruns, compromised quality, resulting claims and counter-claims problems have plagued the industry. The reasons for poor project performances abound. Previous researches have dealt much with the problems of project risk and uncertainty, variations in project outcomes, work fragmentation, complex relationships among stakeholders and activities, and excessive phase overlaps in general. This paper will concentrate specifically on the problems of uncertainty and variation in the procurement process of major equipment. Special 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 construction projects. With a view to improve productivity in engineering construction projects, there is no lack of previous research efforts being devoted to developing new models, approaches and techniques. Construction process redesign and improvement, integrated design and construction with concurrent engineering (Jaafari, 1997), lean construction techniques (Ballard, 1999), widespread IT applications (Oxman, 1995), partnering approach (Love et al., 1998; Bresnen, 2000), construction logistics and supply chain management (Vrijhoef, 1997; OÕBrien, 2000), and new project scheduling method like critical chain project management based on the theory of constraints (Goldratt, 1997) are just some of the examples of such improvement efforts. This paper will focus on improvements in major equipment procurement process. The procurement performance and delivery processes can be defined both at the corporate and project levels. These processes can be partly represented as corporate systems, policies and procedures which are influenced by the prevailing organizational structure, functional units, resource allocation strategies and policies, planning and controlling systems and procedures, production workflow, and other auxiliary processes.

2. Major equipment procurement In most EPC projects, the importance of major equipment procurement has received relatively less attention. Major equipment such as process equipment in this context refers to the capital equipment that will be assembled or installed to form an integral part of the constructed system or facility. Fig. 1 illustrates a generic network of engineer– procure–construct process for the procurement of major equipment. The engineering and design phase is the pre-procurement phase while the construction phase represents the post-procurement phase. The procurement processes include receipt of engineering or process data and drawings from engineering/design departments, documentation

and issuing request for proposal (RFP) or request for quotation (RFQ), receipt of bids from vendors, bid summary, bids evaluation and approval, order placement with equipment manufacturer, equipment fabrication and assembly, testing of the assembled equipment, expediting by customer, packaging and shipping arrangement, delivery of installation drawings and test data, and actual shipping or delivery of major equipment, and receipt of equipment on site. This paper will concentrate on the post-order placement procurement phase and consider this portion of the procurement phase as the focus where significant improvement can be made. Major equipment procurement has its own special characteristics and requirements and is significantly different from bulk materials procurement. The major equipment procurement lead-time is usually longer, the unit procurement cost considerably higher, and usually embedded with complex or specialized technology. There will be no inventory buffer for major equipment kept either at the customer, main contractor or vendor site. This one-time procurement characteristic makes the major equipment procurement a critical activity and a source of major constraint and uncertainty in engineering construction projects. The improvements of long lead-time critical equipment procurement especially in time and risk reduction and the predictability in delivery to meet on-site requirement in a near just-in-time (JIT) manner, can contribute significantly to the overall performance of the project. Though the importance of major equipment procurement in construction is easily recognized, there is however relatively little published work that scrutinizes the problems and uncertainties in the procurement process and a lack of relevant and adequate framework to base on for further improvement in major equipment procurement. Ballard (1998) admits that when he advocates a ÔpullÕ mechanism in materials supply in construction industry based on tight on-site requirement, many items of process equipment have so long a lead-time that they do not offer themselves as initial candidates for reducing delivery time, and must continue to be coordinated by ÔpushÕ schedules. It is clear that the practices of major equip-

K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134 Engineering & Design Phase

Procurement Phase

125

Construction Phase

Equipment Procurement Supply Chain Management

Obtained Approval 5

Receive Process Data

0

Prepare Specification

1

Raise Issue Receive Requisitions Enquiry Bids

2

3

4

Place Manufactured Shipped Planned Order --Packed to Site Installation

6

8

9

7

Receive Vendor’s Drawings/Specs

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

ment procurement need to be scrutinized, and a model for improvement is needed.

3. Two relevant propositions Industry practices, with the use of standard procurement lead-times according to equipment classification, would typically use insertion of time buffers as a protective measure against variation in promised delivery by equipment manufacturers. Two simple but relevant propositions are selected to examine the practices and issues of using time buffers in major equipment procurement. Proposition 1. Engineering construction companies use time buffer between ‘‘promised delivery’’ (PD) date and ‘‘required-on-site’’ (ROS) date as a common approach to manage time uncertainty. Generally, the major equipment manufacturing and delivery time can be protracted from several months to over a year, especially for the overseas-procured items. There are various internal and external factors that can impact the equipment manufacturing and delivery schedules, which will in turn have an impact on the site construction schedule. Time buffer is not only used by the main

contractor, but also used by the equipment manufacturers to protect their parts or components delivery schedule from uncertainty. In contrast, in the consumer product manufacturing industry, part and component inventories are usually used to protect the production schedule from variation, and the finished product inventory buffers are also used to protect demand uncertainty. In order to protect the construction schedule, project managers usually plan for the major equipment to arrive on-site considerably earlier than required in a Ôplay safeÕ mode. This time allowance is a ‘‘time buffer’’ inserted between the ‘‘promised delivery’’ and ‘‘required-on-site’’ dates as shown in Fig. 2. The buffer allowance has been adopted as a safety measure to avoid disruption in the construction workflows. The size of the estimated buffer allocation depends on the project plannerÕs perception of risk with respect to a particular type of equipment or reliability of an equipment supplier. The required buffer time may be small if the delivery lead-time is short or if the procurer is very confident of the supplierÕs reliability in its promised delivery. On a typical process plant project, a multitude 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 Delivery Date

Order Placement

Manufacturing/Shipment

Requiredon-Site Date

Buffer

Site Construction

Fig. 2. Insertion of Time Buffer.

of Ôfeeding buffersÕ are inserted to protect the critical construction activity chain by preventing late delivery of equipment to penetrate and disrupt the critical construction chain. Proposition 2. The feeding buffer time (tb) assigned in major equipment procurement is positively proportional to the major equipment procurement leadtime (tp) as quoted and promised by the manufacturer: tb ¼ a  tp :

ð1Þ

a is a correlation coefficient between procurement lead-time and buffer time and is decided by the equipment buyer or construction planner. A survey was conducted within the construction industry in Singapore targeting mainly at the higher-grade engineering and construction companies to provide supporting evidence of Propositions 1 and 2.

4. A survey on procurement practices Construction companies in Singapore are categorized into eight grades (G1, G2, . . ., G7 and G8). Companies in lower grades are not eligible to tender for larger projects. The limits are shown in Table 1 (BCA, 1999). Table 1 Grading of construction companies Company grade G1 G2 G3 G4 G5 G6 G7 G8 Project value limit (million S$)

0.5 1

US$1 = S$1.75 mid-2003 rate.

3

5

10

30

50

NA

The target respondents are procurement managers of G6, G7 and G8 companies (totally 189 companies). The names, addresses of these companies are listed on the website of Singapore Building and Construction Authority (BCA) . In the survey, respondents are asked to base their responses on a recently completed (within last five years) engineering project valued at least S$10 million and involving major equipment procurement. The objective is to collect information relevant to the current major equipment procurement practices in the engineering construction industry in order to investigate: • major equipment supply uncertainty; • use of procedure in buffer time allocation for major equipment procurement; • relationship between buffer time and procurement lead-time. Out of the 189 companies contacted, 52 valid returns were received. Incomplete returns were discarded. The survey data were analyzed with the SPSS (Statistical Programs for Social Science) software. Below are the relevant statistics of the projects surveyed. • The surveyed projects include industrial/process plant, building, civil construction and complex product system. The project value ranges from S$10 million to more than S$100 million. And 48% of the projects have value exceeding S$50 million. 92% of the projects have a duration exceeding one year and 29% with longer duration of two years and above. • 64% of respondents said that their projects experienced schedule overrun. 34% of respondents suffered at least 10% overrun. 69% of the

K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134 10 9 8

Buffer time (weeks)

respondent perceived their projects as having low profit margin. The average profit margin is about 3.75%. • The survey shows that about 88% of the projects surveyed have an overall procurement cost at 20% or more of the project value, and about 70% of the projects with procurement cost at 30% or more. For about 23% of the projects surveyed, the procurement cost is more than 50% of the project value. • The survey shows that the average percentage of major equipment cost to overall procurement costs for all projects is about 36%.

7 6 5 4 3 2 1 0 0

This survey shows that, among the projects surveyed, about half of the equipment are delivered JIT (just-in-time), 20% are delivered later than required with a mean late time of 3 weeks, and about 30% are delivered earlier than required with a mean early time of 2 weeks (Table 2). The survey also shows that 87% of the respondents indicated that they have an on-going practice of adding time buffer between ‘‘promised delivery (PD)’’ date and ‘‘required on site (ROS)’’ date as a safety measure to protect construction schedule; whereas 13% of the respondents said that they do not add any time buffer. The binominal method in SPSS is used to analyze the buffer-adding practice. The analysis shows that more than 75% of projects surveyed add time buffer between PD date and ROS date for major equipment procurement. The significance level of this conclusion is 0.039, which is less than the criterion 0.05. The confidence level is 96.1%. Further analysis shows that the ‘‘buffer time’’ and ‘‘lead-time’’ are correlated, which means that the variation exhibited by one variable is patterned in such a way that its variance is not randomly

Table 2 Major equipment delivery uncertainty

% Distribution of equipment Degree of lateness (mean time) Standard deviation

Late delivery

JIT

Early delivery

19.8%

50.6%

28.6%

3.05 weeks

–

1.98 weeks

1.95 weeks

–

1.08 weeks

127

10

20

30

40

50

60

70

80

Lead Time (weeks) Legend: Regression analysis of Buffer time and Lead time Std. Error

Constant

Unstandardised Coefficients 0.661

Lead Time (weeks)

7.86E-02

0.005

Standardised Coefficients

0.182

Significance 0.001

0.931

0.000

Fig. 3. Procurement buffer time vs. lead-time.

distributed in relation to the other variable. The output of SPSS shows that the PearsonÕs r is 0.931. The significance level is 0.000, which is less than 0.01. The regression analysis shows that proportional coefficient of buffer time and lead-time is +0.0786. The best-fit line is shown in Fig. 3. The regression analysis output is shown in the legend. The significance level is 0.000, which is less than 0.01. The survey has also highlighted that major equipment procurement represents a critical connecting function between engineering and construction, as procurement equipment provide the anchors for the constructed facilities. Material costs represent a major portion of the total construction costs, and in turn, a high percentage of procurement expenses goes into equipment purchases. Equipment procurement requires expediting on the manufacturersÕ progress to ensure on-time delivery and regular communication and occasional re-negotiation with the vendors. It is also generally agreed that successful procurement management can lead to improved performance 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 The two propositions demonstrate only two relevant aspects of major equipment procurement and associated uncertainty management. This section is to investigate the current practice of addition of buffer in proportion to the equipment delivery lead-time that may in fact contribute to time waste from a supply chain point of view involving a constellation of suppliers and suppliersÕ suppliers. The practice of time buffer allocation seems reasonable and easy to use, but is highly inefficient. It contributes to time waste as too much buffer times may be distributed in the procurement supply chain process. The buffer time is used inefficiently due to task fragmentation and problems in interfaces or boundaries along the supply chain. Current uncertainty management practices pay too much attention to prevent the negative impact of uncertainty, but give too little attention to exploit the positive as-

Detailed Parts & Components

SubAssembly

Major Assembly

pect of uncertainty as opportunity. The theory of aggregation (Goldratt, 1997) of pluses and minuses of time variation may allow considerably shorter overall procurement lead-time. The current approach and problems in managing uncertainty in major equipment procurement and potential for time waste due to the practice of time-buffering validated in the test of two hypotheses, is illustrated in Figs. 4 and 5. Fig. 4 shows the fragmentation and multiple interfaces or boundaries in a cascaded supply chain relationship where the main contractorÕs construction critical chain is fed by the equipment manufacturerÕs supply chain, which is in turn supplied by its own sub-suppliers in sub-assembly and parts, in a multi-staged manufacturing, assembly and shipment process. Fig. 5 shows that the closer the supply chain activities to the main construction contractor, the longer is the aggregated procurement time, and the larger the buffer time is allocated. The buffer

Final Assembly &Test

Pack and 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

time tends to be amplified in the later phase of the supply chain constellation, which is used to protect all the previous activities and sub-processes that have already been protected by their own individually allocated buffers by the supplierÕs suppliers. The above illustration is a case of multiple protections due to duplication of buffers, which lead to excessive redundancy. One of the reasons for the ‘‘duplication of buffers’’ is that the companies on the supply chain make contracts separately and independently with their own suppliers and manage their own procurement processes. These multiple layers of buffers contribute to the overall procurement lead-time or ‘‘bucket time’’ for a particular range of equipment. Engineering companies over the years have developed standard Ôbucket timesÕ for purchasing a range of major equipment, which would incorporate time buffers. The following formulation gives a more accurate representation of the buffer allocation for the whole supply chain. Suppose there is a series of companies Ci (i = 0, . . ., I) in the major equipment supply chain. Total number of suppliers is ‘‘I’’ and the resulting total number of companies involved is (I + 1). Company Ci+1 procures parts or components from Ci. Company CI is the main contractor at the final stage of the value chain, which procures the major equipment for site construction. C0 is the starting point of the supply chain and does not involve in any procurement process. The procurement time (lead-time) of companies Ci is tip ði ¼ 1; . . . ; IÞ, the buffer time is tib ði ¼ 1; . . . ; IÞ, the time for manufacturing, assembly and delivery is tic ði ¼ 1; . . . ; IÞ. The formulated relationships are i1 tip ¼ tpi1 þ ti1 b þ tc ;

ð2Þ

tib ¼ ai  tip ;

ð3Þ

t1p ¼ t0c :

ð4Þ

From Eqs. (2)–(4), the following two equations can be deduced: tip ¼ tci1 þ

i2 X n¼0

tnc

i1 Y m¼nþ1

! ð1 þ am Þ ;

ð5Þ

þ tib ¼ ai ti1 c

i2 X

i1 Y

tnc

n¼0

129

!! ð1 þ am Þ

ð6Þ

:

m¼nþ1

The m and n in the equations are two intermediate variables. The n represents the layer from company C 0 to company C i2. The procurement time of company C i is decided by the procurement time, buffer time and manufacturing or assembly time of these intermediate companies. The m represents the layer from C n+1 to C i1. Procurement time of these companies will be affected by the manufacturing or assembly time of company C n. The total buffer is the summary of each companyÕs built-in buffers: T buffer ¼

I X

tib ;

ð7Þ

i¼1

T buffer ¼ a1  t0c þ

I X

ai

i¼2



ti1 c

þ

i2 X

tnc

n¼0

i1 Y

!! m

ð1 þ a Þ

ð8Þ

:

m¼nþ1

The following is an illustrative example. To simplify the calculation, suppose tic ¼ 50 days and ai = 0.08 for all companies Ci (i = 0, . . ., (I  1)). The total production time (Tc) is the sum of all manufacturing and assembly time of each company. The ratio of the total buffer time to total production time is RBP (ratio of buffer time to production time). The relationship of ‘‘Tp’’, ‘‘Tc’’, ‘‘Tbuffer’’, ‘‘RBP’’ and ‘‘i’’ is illustrated in Table 3. The ‘‘I’’ is total layers of supplier chain. From Table 3, it can be seen that, for a one- or two-layered supply chain, the buffer time is about one-tenth of the production time; whereas for a five-layered supply chain, the total buffer time is

Table 3 Relationship of buffer time, production time and supply chain layers Layers

Tc (days) Tbuffer (days) RBP

1

2

3

4

5

50 4 0.08

100 12 0.12

150 25 0.17

200 43 0.22

250 67 0.27

130

K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134 80

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

70 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 production time. From Fig. 6, it can be seen that the aggregated buffer time increases faster than the total production time when the number of supply layers increases. Fig. 6 highlighted a serious problem caused by the traditional un-coordinated practice in the duplication of time buffers for uncertainty management in major equipment procurement. A better approach to managing risk and uncertainty in major equipment procurement management is needed.

6. A critical supply chain management model

6.1.1. The process (1) A project procurement planner takes a supply chain perspective with the aid of an interorganizational information system that could be made responsible for overall scheduling of all the activities in the equipment supply chains based on on-site requirements. (2) Each supplier will inform the project supply chain planner its ‘‘promised duration’’ without time buffering of particular component or equipment instead of the traditional ‘‘promised delivery date’’. This is to deemphasise the idea of having fixed due-dates

6.1. Description of the model In order to eliminate the time waste in the major equipment procurement process caused by the 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 procurement of major equipment (Yeo and Ning, 2002). The result is a critical supply chain management (CSCM) model for major equipment procurement. The model has three components: an inter-enterprise information system, a partnering relationship among the participating organizations and an integrated dynamic planning process (Fig. 7). The idealized model is further described below.

PROCESS: Integrated dynamic planning process

CSCM

PEOPLE: Partnering Relationship

TECHNOLOGY: Inter-enterprise information system

Fig. 7. Critical supply chain management (CSCM) model.

K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134

and give emphasis on accurate duration estimates. (3) The task starting time of each of the subsequent layer companies is to be made flexible or floating, depending on the time the last company finishes its task. It encourages ‘‘resource alert’’ like in a relay race. The planner need not be rigid in deciding and fixing task starting times. It means the starting times of later layer tasks need not be decided accurately from the very beginning. (4) The supply chain schedule is refreshed and updated whenever an activity in supply chain is completed. (5) The supply chain planner systematically manages time buffers in the supply chain. All separately padded intermediate buffers are removed. A feeding buffer is inserted at the end of each equipment supply chain to protect the construction critical chain from any variations as illustrated in Fig. 8. The commencement of construction, ‘‘C ’’, is a critical Ômerge-eventÕ, where multiple equipment deliveries are converging. Feeding buffers are added discretely in place of the traditional Ôfree floatsÕ derived from critical path analysis. The length of the feeding buffers is determined by the level or classification of risk pre-assigned to the a particular class of major equipment. The feeding

Fig. 8. Buffer insertion in procurement chain.

131

buffers should be controlled not to be excessive in order to avoid unnecessary early deliveries of equipment which will cause the troubles and wastage of temporary storage and double-handling on sites. Conversely, inadequate feeding buffers may run the risk of the construction schedule being disrupted. Besides the insertion of feeding buffers for the individual major equipment, a project buffer is incorporated to protect the required or committed construction completion date. Fig. 8 illustrates an improved buffer management incorporated within the critical supply chain management (CSCM) framework. The focus is on dynamically managing the feeding buffers inserted between the two important sets of control dates namely, the ÔPromised Delivery (PD)Õ dates by the equipment vendors and the ÔRequired-on-Site (ROS)Õ dates according to the master construction schedule. The main benefits of time saving are firstly, a tighter and shorter procurement cycle is made possible which contributes to the reduction of time-related costs; secondly, excessively early delivery to site is avoided to reduce the problems of workin-process, waiting and wasting in on-site materials movement; thirdly, risk, uncertainty and burden of coordination for project and construction managers are minimized; and finally, the partnering relationship among the prime contractor and 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 delivery schedules. Similarly, the prime contractor can build in incentive clauses for early project completion 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 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 benefit can be passed on to the major equipment vendors and their downstream components suppliers. 6.1.2. People The human side of the supply chain management plays an important role in ensuring supply chain performance. (1) A sustainable partnering relationship is built with major equipment suppliers who in turn build relationships with their own suppliers. The subtle control of coordination, communication and collaboration of the suppliers ensure success in project procurement and delivery. (2) The supply chain members are made stakeholders who will share the benefits from cost and time savings, and be accountable for failure. In the traditional procurement supply chain, the closer to the top layer (main contractor), the more benefit a supplier can get. An integrated benefit management system is to ensure that the lower layers of parts and components suppliers also share the benefits. (3) The proposed model emphasises the importance of stakeholdersÕ benefit management in order to exploit positive sides of variations. The up-stream layer of the supply chain should not be perceived to exploit the lower layers of the supply chain. The CSCM system emphasises a win–win relationship. (4) There must be subtle supply chain control with open and transparent communication, coordination and cooperation and a building of trust among supply chain members.

6.1.3. Technology Information technology especially an interorganizational information system (IOIS) will be an important part of the proposed system. The IOIS integrates the individual information systems of the participating companies. It can contribute to cutting waste and streamlining the processes (Hammer, 2001). The key idea is to leverage on information technology, especially the Internet,

to simplify and tighten the procurement supply chain and allow the on-site requirements to ÔpullÕ the equipment deliveries in a timely manner. The main characteristics of this model are manifested in its integrated and synchronized scheduling and the continuous and dynamic schedule adjustments for the entire supply chain. The uncertainty and buffer allocation are managed for each equipment supply chain, which feeds into the overall site construction schedule. 6.2. Improvement mechanisms This CSCM model can shorten the major equipment procurement time without increasing the risk due to the following fundamentals: 6.2.1. Aggregation of variations The concept of uncertainty does not always imply threat or negative outcomes. The activity duration variations may be positive and allow the activity to be finished earlier than the scheduled date. By the theory of aggregation (Goldratt, 1997), since the uncertainties or variations of a series of activities occur independently from each other, the finished-earlier-than-scheduled activities can compensate the finished-later-than-scheduled activities. The power of aggregation of uncertainties must be appreciated and exploited. Perception of uncertainty as always negatively contributes to unnecessary and excessive ‘‘paddings’’ or allocation of ‘‘safety’’ buffers. If the major equipment supply chain is managed with the traditional ‘‘disaggregated’’ procurement model using fixed due-dates, the ‘‘savings’’ achieved by earlier activities are not passed on, whilst delays are. In the critical supply chain model, the use and importance of intermediate due-dates are de-emphasised. Each equipment supply chain schedule is independently drawn up based on ‘‘promised durations’’ of activities instead of ‘‘promised delivery dates’’. In the aggregated supply chain, time saved by the finished-earlier-than-scheduled activities can be transferred, as a contingency bonus to the later activities in that particular equipment supply chain. The critical supply chain works like a relay race where the baton is passed on without interruption.

K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134

Rigid intermediate due-dates cause interruptions and complacency. Early timesavings are particularly useful as they contribute to the feeding buffers and hence help in risk reduction in the events of negative variations in subsequent activities. The critical supply chain approach can and should contribute to shorter procurement lead-time without increasing the risk of schedule overruns. 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 transparent to the later sub-processes. The improved transparency increases resource alertness of the later processes. This also contributes to the reduction in the burden in and need for expediting. The later layer suppliers can now have more accurate forecast on supply deliveries and better plan their production schedules. For instance, in the event that company C2 is going to take one month longer than originally promised, then the subsequent companies after C2 will be alerted with the risk of time overrun. With this transparency acting as an early warning signal, affected companies can take proactive actions to recover any time loss. Such proactive actions must of course be reinforced by a comprehensive benefits management system to provide incentives in the form of reward or compensation to the affected members. In the traditional procurement practice, as each company manages its suppliers separately, it is quite possible that the companies far after C2, say, the main contractor, knows nothing about the problems generated by C2. Late delivery may occur without prior knowledge or early warning to the main contractor. OÕBrien (2000) gives an example to illustrate such a problem of traditional approach in his case study of an engineering project in United Kingdom. There was a material supply delay to a steel fabricator, who in turn, is a supplier to the main contractor. The material delay resulted in a 6-week delay to deliver the steel products on-site. This delay was not anticipated and did not become apparent until it occurred on-site. To avoid liquidated damages and complete the project on time, the contractor resorted to work acceleration at an extra cost of £1/4 million.

133

The CSCM model aims at addressing problems of such nature where the project main contractor can obtain prior information or an early warning of an adverse trend and initiate proactive actions either to prevent the problem or to minimize any negative consequences. The aggregated system with an early warning mechanism can contribute significantly to better management of uncertainties and reduction of risks.

7. Conclusions Major equipment procurement is an integrated part of engineering project management. It ties up a large proportion of construction cost, and has long lead-time. The major equipment manufacturing itself is an engineering project. Major equipment procurement generally has high delivery time uncertainty, which may disrupt the construction schedule. This study shows that time buffer is popularly used to protect project schedule from activity uncertainty. If the equipment procurement lead-time is long, a large time buffer is inserted between promised-delivery date and required-on-site date by the main contractor. The equipment manufacturer also need to procure major components from suppliers and may insert separate time buffers. This results in excessive buffer time insertion in the major equipment procurement process. These time buffers are used ineffectively due to fragmentation and complex project structure and adversary relationship. The ineffectively used time buffers contribute to significant time waste. The more supply chain layers are involved, the more time waste occurs. By integrating the supply chain and critical chain management concepts, a CSCM model is proposed to overcome the above mentioned problems in order to improve the performance of major equipment procurement. The model requires the companies on the supply chain to re-examine the problems of work and organizational fragmentation, multi-layer interfaces, un-coordinated production scheduling and controlling practices. The model advocates that critical supply chain should be scheduled, synchronized and controlled 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 the production and delivery schedule. A separate supply chain buffer can be added to protect the equipment supply chain from any negative variation and to meet on-site requirement just in time. This model not only can prevent the negative aspect of variation but can also exploit the positive aspect of uncertainty. The CSCM will work and reap benefits if the dynamic planning and delivery process has the support of people and technology.

References Ballard, G., 1998. Implementing pull strategies in the EPC industry. In: 8th Annual Conference of International Group for Lean Construction. Ballard, G., 1999. Lean construction and EPC performance improvement. In: 9th Annual Conference of International Group for Lean Construction. BCA, 1999. Building and Construction Authority, Singapore (website ).

Bresnen, M., 2000. Partnering in construction: A critical review of issues, problems and dilemmas. Construction Management and Economics 18, 229–237. Goldratt, E.M., 1997. Critical Chain. The North River Press. Hammer, M., 2001. The Superefficient Company, Harvard Business Review, September, pp. 82–91. Jaafari, A., 1997. Concurrent construction and life cycle project management. Journal of Construction Engineering and Management 123 (4), 427–436. Love, P., Gunasekaran, A., Li, H., 1998. Concurrent engineering: A strategy for procuring construction projects. International 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 ). Oxman, R., 1995. Data, knowledge and experience in multiuser information systems. Construction Management and Economics 13, 401–409. Vrijhoef, R., 1997. Roles of supply chain management in construction. In: 7th Annual Conference of International Group for Lean Construction. Yeo, K.T., Ning, J.H., 2002. Integrating the supply chain and critical chain concepts in engineer–procure–construct (EPC) projects. International Journal of Project Management 20, 253–262.