“top 10” Key Issues Principles In Logistic And Supply Chain Management And Apply To A Real World Situation

Task: Discuss what you consider to be the “top 10” key issues / principles in Logistic and Supply Chain Management and apply to a real world situation. The present practice of Engineer-Procure-Construct –Commissioning (EPCC) oil & gas projects in the engineering and construction industry receives many criticisms and requires improvement. Based on my previous onshore & offshore project experiences and current on-going North Sea process platform project, allows me to examine the nature and characteristic of oil & gas EPC projects with special interest in logistics and supply chain. Construction logistic and supply chain still in full of waste and problems caused by myopic control. Mostly, the issues and problems in construction supply chains are extensively present and persistent, and due to interdependency largely interrelated with causes in other stages of the supply chain. The characteristics of the oil & gas project construction supply chain reinforce the problems in the construction supply chain, and may well hamper the application of SCM to construction [1]. A critical aspect of project failure due to poor logistic & SCM is construction delay, which often results in construction claims. Another survey in UK shows that 52% of UK construction projects end up with claims of some type [2]. Statistical figures show that main contractors are purchasing more labour and material than previously. As a consequence, main contractors become more and more reliant on other actors in the construction supply chain (e.g., suppliers and subcontractors). Lim’s study on construction productivity in Singapore shows that the industry is perceived as a lowproductivity sector [3]. Personally, my own investigation on time waste reveals that site work-force spends a considerable amount of time waiting for approval or for materials to arrive on site. The amount of work of non-value adding activities was found to be as high as 40% of the overall project duration from inception to completion. There is plenty of non-quantified evidence that demonstrates the inadequacy of logistics in the construction process, whilst in other industry sectors there are increasing examples of how they are addressing logistics. This can be illustrated in a number of ways. • A high proportion of lorries in the construction industry move around the road network either empty or with part-loads, whereas the retail sector and wider manufacturing industry are continually working to consolidate delivery loads to maximise vehicle fill, and reduce transport costs. • Many lorries arriving at construction sites have to wait to gain access or be unloaded, whereas retail and other sectors designate time slots for supplier deliveries. Late or early deliveries can be turned away and suppliers charged a penalty. • In construction & commissioning, skilled craftsmen are often using their skills for less than 50% of their time on site. Amongst the non-skilled tasks they are

involved in are moving tools/equipments around and finding/sourcing items around yard. Other sectors use special equipments and designated trained teams to deal with material handling activities. • Construction materials are often stored on site for long periods of time and have to be moved to other parts of the site when they are eventually needed. Higher man-hours and cost spent in preservation of these materials. Retailers and those under other industries are continually trying to reduce inventories and at least ensure they are held in the most appropriate location. Effort goes into delivering the right quantities at the right time. • In oil & gas construction, specialist contractors sometimes arrive on site when they are not expected or when job is not ready for them. Good manufacturers would ensure they had the right information flows about work progress to ensure this never happened. • There continues to be much secondary working on site, whereas other sectors implement or make every effort to get it right first time and avoid multiple handling. • There would appear to be a much higher proportion of damaged and waste product removed from site. • There is little formal training in logistics and yet there are a large number of tasks that fall within a logistics umbrella. An oil & gas EPC project can be a complex one-of-a-kind product development, made up of a large number of interconnected sub-systems and components, requiring considerable human efforts and financial commitment. The EPC activities are time phased according to specified precedence and resource requirements and constraints. Engineering/Design (E) is the process by which the needs, wishes, and desires of an owner or Oil & Gas operator defined, quantified, qualified into clear requirements which will be communicated to the builders/contractors. This phase has the highest level influence to make key decision which will be made for planning. These decisions will lead to the commitment of a large sum of the funds and other resources necessary for the successful implementation and completion of the project which will be accomplished through a series of steps to include conceptual design, preliminary design and detail design [4]. Most of the work involved in an O&G projects is carried out by specialists in the design process, usually employed as engineering contractor to a main contractor. It is at this design stage that the involvement of specialist can be most beneficial. If the benefits of specialist involvement in the design process, including increased innovation and collaboration, are to be achieved through supply management,

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traditional processes and attitudes will have to be abandoned with a new culture focused on primary objectives and ‘worth’ of the project to client. Strategies that may be adopted to facilitate supply management throughout design and construction phases of a project include the strategies where the client can participate or strategies facilitating collaboration. I propose the suitable procurement strategy, which will enable client participation in managing the supply chain; where the client or his project manager employs trade contractors direct. This approach will, however require constant participation by the client who may not wish or be technically competent enough to have that level of involvement. In such a case that employment of a client’s project manager is vital. Experienced clients or operators who can lever advantage through repeat business so as to offset the extra fees incurred therefore mainly adopt this strategy. The engineering and design phase is closely followed by the procurement (P) phase. A contractor begins to procure project equipment and construction/commissioning materials upon receipts of engineering drawings, specifications and other relevant documents. The main procurement/logistics activities include sourcing, purchasing, contracting, and on-site materials management. Since the mid 1990, EPC contractors have adopted different strategies to procure sub-contractors. Whilst regular, experience and informed EPC contractor have begun to adopt different strategies, there is a little evidence to show that the numerically dominant inexperienced irregular purchaser have done so. By far the dominant strategy adopted is bid-build with the lowest bidder winning the work. Adopting ‘low bid win’ strategies results in a number of well documented and inevitable outcomes, particularly where the design is already established. They are; • Construction & Commissioning process that are geared to lowest cost rather than to ‘right first time’ or to ‘best value’. • Bidding processes that encourage a culture where suppliers or sub-contractors will agree to almost any parameter to get the work, later strive to achieve a cheaper solution or a higher price. • Inability and unwillingness to cooperate in specialist design, innovation or collaborative problem-solving. Many of the weakness associated with such an approach include late completion, budgets overspend and mechanical completion punches/defects which can usually be attributed to the rigid adoption of the ‘low bid’ strategy. There is a tendency for construction professionals and in particular contractors to focus on cost and it is this focus which underpins and dominates the strategies adopted in managing the existing supply chain. Whilst cost is not irrelevant, most clients usually focus upon the value of their project in terms of the business case for it. This value or ‘worth’ which will form the key success factor for the project. Alternatives do exist but require cultural change 3

within the oil & gas project sectors and its professions and critically in relation to the advice offered, particularly to inexperienced clients. A contractor begins to construct and commission specified facilities in platforms construction (C) phase according to work packages prepared during the engineering phase, and use equipment and materials obtained during procurement phase. The sequencing of construction will be initially planned to reflect the most logical and costeffective approach to meet start-up and handover dates [5]. This projects face a number of challenges namely, inter-dependence of activities, complex organizational structure, and uncertainty in accurate prediction of desired outcomes. In the oil & gas projects, larger firms usually use matrix organization for the management of projects. Matrix organization remains a complex structure. Authority and responsibility for project task accomplishment are shared between the project manager and the functional manager. There is a mutual commitment in fulfilling project requirements. But, the balance of power between the project and the functional organization must be clear defined initially and closely monitored afterwards. Depending on the strength and weakness of the individual managers, the power and influence can shift to detriment of the overall company organization. From the perspective of individual worker, there is often a split in the chain of command for reporting purposes. The individual is sometimes “pulled” between project boss and the functional boss. There is no integrated team between end-user/operators, client, EPC contractor, and sub-contractor/suppliers. Logistics within these kinds of projects will not be adequately addressed until the teams’ works in more integrated way, with all parts of the supply chain, including specialist contractors and key manufacturers / suppliers, involved at the outset of projects. In terms of improving logistics, a more integrated approach will help break down the barriers that the current contractual relationships impose and help encourage greater cost transparency on projects. It brings together the design and construction activities, with maintenance considered as well, whether or not to integrated project team will be responsible for the ongoing maintenance of the facility; it involves valued input from all parties in the supply team. The process and the team are integrated around the construction project. Team working is characterized by mutual trust and openness, where problems and risks are shared and resolved collectively by the integrated project team-easy in principle, more difficult to achieve in practice, especially where one or more of the parties have not worked in that way before. But, team working is simply common sense.

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Model of Integrated Project Team Project activities are highly inter-dependent as they are intricately connected and have a complex process relationship. For example, it is not only upstream activities, which affect the downstream activities, but the reverse is also true. Austin [6] gives an example on the interdependence of the design activities, as illustrated below.

Interdependence of activities Thousands of these interdependent activities make up an intricately linked human activity system, in the case of a large project. Information transfer is essential and iterations typical. It is a major challenge to consider work fragmentation involving multiple organizations. Owners, design team, construction team, equipment and material suppliers, end users, facility operators, maintenance teams are some of the participants involved in the life cycle of any constructed O&G facility. The large number of participant in the project will cause the problems of fragmentation. Project participants exchange information back-and-four at all times. Adversarial relationships between organizations may also arise due to work fragmentation.

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The duration of some activities in unpredictable, especially in negotiation, obtaining approval from authorities, and in international suppliers usually has longer lead-time, and hence, higher uncertainty in timely arrival on site. The need to exchange information and drawings between suppliers may further delay the procurement time. The technical specifications of capital equipment may interrelate with other equipment and subsystems from different suppliers. Phase overlaps of engineering or design, procurement and construction as shown in figure below increase the risk of project overruns in schedule and cost, due to the lack of complete information and frequent changes, especially those attributed to external factors.

Phase Overlaps [7] Surveys by Chan [8] demonstrate that the project changes and variations are critical factors that cause project delay and failure. It is generally perceived that the engineering construction industry has become inflexible and unresponsive to the needs of its customers, which caused project changes and rework. It has been estimated by the US’s Construction Industry Institute that rework constitutes 12.4% of the total installed-project cost in O&G projects. These project challenges always act together, and further complicate the project execution. The management of interdependence of project activities will become increasingly critical as the phases are extensively overlapped in order to compress schedule. I am interested in emphasizing on the importance of procurement and logistics to meet on-site requirements as a major area of constraint and opportunity, which can be exploited to dramatically improve the overall performance of project delivery. Engineering project procurement covers bulk construction materials, major equipment and services. The critical importance of procurement is due to following facts:

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i. Material costs represent a major portion of total costs in projects ii. Procurement needs more communication and negotiation with these external companies whom are suppliers and subcontractors; iii. The control is not as strong as in the case of engineering and construction, especially in outsourcing and purchasing long lead-time equipment; iv. Unlike other industry, neither the major equipment supplier nor the client keeps the buffer inventory for the project; v. The major equipments such as power generator, diesel generator, pumps is very costly and requires long lead time to manufacture vi. Suppliers and prime contractors separately use time buffers to protect themselves from uncertainty due to unforeseen circumstances Everyone shall understand that each O&G project is unique even if similar design is involved. Procurement planning is unique for each project. As all the experienced team members always assume a lot of things from their previous projects and applying the same to the new one. These usually destroy the project as this assumption always doesn’t meet the particular project requirements. A new site condition, a new client in a different country or new suppliers can lead to new project requirements. The considerable overlaps of engineering/design phase with the procurement phase increase uncertainties. The procurement decisions on long leadtime items are usually made soon after the preliminary designs are finished and before the construction designs and drawings are completed. The uncertainty of procurement may affect the entire project process and overall project schedule. Involvement of suppliers or equipment manufacturer in engineering stage is very much limited in Singapore. They have been delivering whatever requested by EPC contractor based on the minimal information that is required from the particular package. Let’s take an example of my recent encounter with a well established pipeline Hydrogen Sulphide Analyzer whom have been supplying to us for numerous project undertaken with different clients. Their design has been standardized for Australasia & Middle East projects undertaken with us. We had a North Sea project, the supplier has supplied the analyzer to the usual standards, and wherelse the requirement differs from norm. The material, design temperature and etc do not met to client standards. The process was only between Procurement team and Supplier, where the related documents and drawings submitted to supplier from Design team. Few mails related to design issues was interacted and that was all the communications between EPC contractor and supplier apart from commercial issues. During final inspection, there were Client, EPC Engineer, User, 3rd party inspector; QA personnel have rejected the product due to several non-conformances to the project requirements. This was due to no proper communication between buyer and supplier in the terms of what is required, does it serves the purpose, meet the operations

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requirement and etc. No involvement from client as well as supplier’s wrong assumption had created long delay and additional cost. The following are lesson learned for me from project SCM; • Develop strategic and tactical plans to ensure timely delivery of materials and equipment to protect project completion date. •

Develop a networked information system to ensure timely information on project schedule, site requirements, tracking material movement, and the latest promised delivery dates;

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Process redesign to reduce the length of the procurement pipeline;

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Continuously improve to remove process bottlenecks or constraints and to increase project throughput, by eliminating supply and demand uncertainties;

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Improve supply chain relationship management; select reliable and quality supply chain partners who have the capabilities and commitment; protect the partner’s interests and be sensitive to their needs, and demand the same of your partners if necessary.

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Achieve Just-In-Time (JIT) logistics for on-site material delivery to avoid temporary on-site storage, double handling and maintenance.

I would suggest for a positive partnering relationship requires carefully prequalifying and the selection of reliable materials and equipment suppliers. The logistics and supply chain can be extended and built around them. Such a partnering relationship may be selectively cultivated in which partners can negotiate and make strategic contracts flexibly and rapidly. Purchasing commitment may be negotiated and made even before a project starts. Upon building the trust and information systems integration among partners, certain intermediate processes can be eliminated or simplified. For example, the sourcing, negotiating and contracting procedures may be streamlined and made simple. Suppliers will be in better position to provide inputs to project planning and improve the planning efficiency and project performance due to timely availability of more accurate information. Conclusively, performance in terms of productivity and profitability of engineering, procurement, construction and commissioning Oil & Gas projects has not been satisfactory; there is a strong belief that there is a room for further improvement. A key part of logistics and supply chain management for O&G projects is to ensure that the products and materials arrive on-site at the time and in the quantities that are required. This does not just depend on the efficiency of supply network, but it also relies on the pre-planning of those on the project site, as well as the quality of the communication between those planning the project and those supplying the products and materials.

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The broad proposals have three streams of approach; cultural, process, and technology (IT). Culturally, the proposal hinges on the management of partnering and trusting relationships with project stakeholders, particularly vendor and subcontractors in supplies and supports of equipments/materials and services. The trust among internal team members also shall be high and spirited. The emphasis is to create an outward-looking and extended value system that leverages on the resources and strengths of external partner. It requires major change in corporate mindset. Systemically, it is to take a holistic view of the project chain as a process with associated risk and uncertainties caused by time and resource constraints. Suppliers can make a significant contribution to efficiency of the logistics on a project if they are involved early enough in the process. Technologically, information and communication technologies, especially Internet technology and related e-commerce, should be exploited to elevate or overcome major systemic constraints.

The whole summary of the report been defined as illustrated below;

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References [] Bechtel, C., and Yavaram, J. (1997). “Supply Chain Management: a Strategic Perspective.” Intl. J. of Logistics Mgmt., 8(1) 15-34. [2] Conlin J. The application of project management software and advanced IT techniques in construction delays investigation. International Journal of Project Management 1997;15(2):107-20.

[3] Lim X. Construction productivity issues encountered by Contractors in Singapore. International Journal of Project Management 1995;13(1):51-8 [4] Blanchard BS, Logistic Engineering & Management, Prentice Hall, Upper Saddle River, NJ, 2004. [5] Nethery SK, Model planning and controlling system for engineering, procurement and construction of industrial projects, 1989. [6] Austin S. Manipulating the flow of design information to improve the programming of building design. Construction Management and Economics 1994;12:445-55

[7] Nethery SK, Model planning and controlling system for engineering, procurement and construction of industrial projects, 1989. [8] Chan DWM, Kumaraswamy MM. A comparative study of causes of time overruns in projects. International Journal of Project Management 1998;15(1):55-63 Readings: KT Yeo and J.H. Ning, Integrating Critical Chain Concepts in EPC projects. Project Management 2002; 253-262

International Journal of

Koskela, L., (1992). Application of the New Production Philosophy to Construction. Technical Report 72, Center of Integrated Facility Engineering, Department of Civil Eng, Stanford University, CA.

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