Effective Supply Chain Management in the Construction Industry

Aims and Objectives

The present thesis aims to investigate the various significant impacts that supply chain

management (SCM) has in the construction industry. The main goal of this piece of research

is to discover, to understand and to predict which, more precisely, are the most important

and impacting aspects of SCM that dictate projects’ success in the construction industry. In

order to achieve this goal, an assessment of a number of theories explaining different SCM

aspects of the strategic management of the construction industry will be performed.

The emerging objectives of this research are:

Research and scrutinize the conventional SCM strategies applied in the construction

industry.

Examine and review different strategies for internal and external constructions SCMs

and investigate different business intelligence solutions adapted for the construction

SCM.

Analyse the impact of potential business intelligent systems (BIS) designed to tackle

the SCM and analyse their role and possibilities in the Constructions Industry.

Critically investigate the basic problems encountered by construction supply chains.

Research and examine to which extent SCM is offering practical solutions for an

effective development of the Constructions Industry.

Gather information via desk-based research from a wide range of SCM representative

studies and perform a qualitative analysis.

Make recommendations about a number of potential directions for effective SCM in

the constructions field.

Observe and mention potential improved strategies for further studies and researches.

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Introduction

Background

In present days, the ability to deliver personalised products and services rapidly and in time

all over the world is considerably significant for the performance of any company. As a

result, companies have focused their attention to supply chains solutions in order to satisfy

their clients. A company’s ability to create unquestionable and timeless business connections

with all their specific partners, such as clients or contractors, proved to be a decisive

competitive characteristic (Jespersen, Skjott-Larsen, 2005). Many corporations increased

their activity and compete in an environment surrounded by changeable and chaotic markets;

customers’ necessities change frequently, in different conditions generated by fragmented

markets, where most customers have a lot of demands for products and services, determined

by markets’ continuous need for product diversity and characteristic services. In conclusion,

global competition determines businesses to produce superior but cheaper products and to

have faster services. Based on these difficulties, supply chain management (SCM) was

considered by the corporatist world to be a very useful management tool and a competitive

must have (Jespersen, Skjott-Larsen, 2005). For the last few decades, the examination of

supply chain management (SMC) has been increasing, becoming an intricate discipline on

which many researchers pointed their attention (Mentzer, 2001). The importance and value of

the SCM forced companies to become more alert and, as a result, “there has been increasing

interest in supply chain reporting and enterprise analysis towards establishing the factors that

may be used to achieve business-related goals, such as the control of costs, customer

satisfaction, and the optimisation of resources good relationships with business partners”

(Mentzer, 2011, p 234).

Construction industry’s growing Interest of the in Modern SCM Facilities

The economic literature shows that supply chain management refers to the administration of

interconnected different businesses requesting the supplying of a number of products

packages and services demanded by a particular end customer within a supply chain (Wisner,

Tan and K. Leong, 2008). While the end customers try to remain focused on its main field of

activity, attempting to be more flexible to clients’ demands, they keep under control their

possession of raw materials, collaborating for any necessity with different supply channels

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(Jones& Hill, 2009). The raw material transport and procurement is attributed to outsourcing

entities that have the possibility to execute these actions more effectively and with smaller

financial investments. “The main consequence is a bigger number of organisations concerned

to satisfy the customer demands, while the management authority of basic logistic operations

is reduced” (Vercellis, 2011, p 139). All these activities conducted to the appearance of

supply chain management strategy (SCM), which has as a main purpose the improvement of

flexibility and confidence among partners making part from the same supply chain (Jones&

Hill, 2009).

The typical competitive nature of the constructions industry and its inherent complexity

generated the necessity of successful supply chain management strategies based on balanced

approaches. The majority of experts in the field suggest that subcontractor involvement and

closer relationships between partners could lead to effective improvement solutions of the

SCM within the constructions industry. Nevertheless, relationships between parties seem to

remain quite traditional and “at arm’s length” in this field (Blayse& Manley, 2004, p 146).

Specialists in the field suggested that SCM initiatives within the constructions industry have

been quite superficial and limited (for instance they addressed transportation costs), being

restricted only to a certain part of the supply chain (for instance the construction site). The

most common problem is the fact that the majority of the existing problems are only regarded

from the main contractor’s perspective. Statistical studies demonstrate that in most cases the

main contractor has the most powerful decision because it purchases more material and

labour (Cabinet Office, 2011). Consequently, main contractors become more and more

powerful and subcontractors, suppliers or any other actors in the construction supply chain

have to adapt to their imposed conditions. This situation generates various malfunctions in

the SCM, because the other actors have to reconsider their supply strategies and revise their

trading contracts with suppliers and subcontractors.

The Construction Industry has particular characteristics that demand specific SCM strategies,

different from some other industries. These refer to “the physical nature of the product, the

structure of the industry and the organisation of the construction process” (Petrovic-Lazarevic

& Djordjevic, 2006, p 2). Products in the construction industry are generally large and more

difficult to transport. Considering all the aforementioned characteristics, the interest for

appropriate SCM strategies is growing. Some other global factors such as increasing

competition in the market place, are also contributing to the growing necessity of SCM

strategies. Consequently, nowadays there are more and more organisations which are

choosing to employ business intelligent systems (BIS) in order to address different problems

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in their supply chain. Over the time, BIS had a tremendous evolution, from the basic

assistance of only a few decision makers to the point in which these systems are offering

management services to thousands of users such as companies from the construction industry,

companies that are operating with internal databases or make use of external information

(Moss and Ate, 2003).

Additionally, global consultancy corporations such as “ IBM Business Consulting

Services”, “A.T. Kearney”, “ Ernst & Young”, “KPMG”, “Accenture” or “Cap Gemini” have

also decided to use supply chain management solutions, considering that SCM represents a

significant business tool. Also, a great amount of schools and universities, counting the

Copenhagen Business School Cranfield Scool of Management, University of Cologne or

Erasmus University started to include supply chain management classes in their curricula

(Chopra and Meindl, 2007).

Literature review

Theoretical Framework and Transformation of supply chain management (SCM)

Nowadays, it is a common fact that the increasingly globalising industry generates new ideas

or concepts, which consequently generates constantly misunderstanding about their content,

definitions and fields of applications. The notion of “supply chain management (SCM)” had

appeared in the 1980s, but it began to be acknowledged within the business environment after

the 1990s (Leeman, 2010). Until then, notions such as “logistics” and “operations

management” were being used as being similar and the changeover to modern SCMs raised

many controversies and arguments. Due to fact that this notion covers a very large area in

which it can be applied, the subject of SCM is highly studied and there is a large number of

theories in the literature review. The definitions that have been found in the research studies

on SCM may be helpful for a more profound and holistic understanding of this concept

(Leeman, 2010). While researchers and specialist from all economic areas tried to come up

with a definition for the notion of SCM, more detailed literature investigation is mandatory,

because there are many approaches which are presenting only some specific characteristics of

the SCM.

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Logistic-related approaches:

“A supply chain is the alignment of firms that bring products or services to market.”

(Lambert et al., 1998, p. 307).

“A supply chain is a network of facilities and distribution options that performs the functions

of procurement of materials, transformation of these materials into intermediate and finished

products, and the distribution of these finished products to customers.” (Ganeshan and

Harrison, 1995, p. 1).

“Supply chain management is the coordination of production, inventory, location, and

transportation among the participants in a supply chain to achieve the best mix of

responsiveness and efficiency for the market being served.” (Hugos, 2011, p. 80)

“The Supply Chain encompasses all organisation and activities associated with the flow and

transformation of goods from the raw materials stage through to the end user, as well as the

associated information flows. Material and information flows both up and down the supply

chain. Supply Chain Management (SCM) is the integration and management of supply chain

organisations and activities through cooperative organisational relationships, effective

business processes and high levels of information sharing to create high-performing value

systems that provide member organisations a sustainable competitive advantage” (Jespersen

and Skjott-Larsen, 2005, p. 11).

Other experts in the field (Boyer and Verma, 2009; Handfield and Nichols, 2002) claim that

the notion of supply chain management differs from the logistics one. A supply chain refers

to a whole network of companies that collaborate in order to deliver a product to the market

and logistics means that the activities are taking place in a single company. Furthermore,

dissimilarity between the two notions is that logistics deals mostly with inventory

management, procurement, maintenance and distribution, while SMC also deals with

marketing, customer service, finance development of new products and other related interest

that include fulfilling the customers’ requests. The company and the supply chain are

considered a single unit, according to the instructions of supply chain management (Boyer,

Verma, 2009).

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However, finding themselves in a continual changing process, the constructions industry is

faced with the necessity to rely on efficient supply chains, beyond their theoretical

definitions. They need effective SCM strategies in order to respond to the increasing

competition generated by the global market economy. This different management paradigm

and business network concept transcends the frontiers of any classic enterprise and attempts

to systemise the whole business level throughout the value of chain of a number of

companies (Blecker, Kersten& Herstatt, 2007).

Activities and Functions of SCM

Supply Chain Management Systems (SCM) hold a wide range of functions and purposes

helping managers and other professionals in the supply chain business to develop new

methods to improve their operations (Basu and Wright, 2012). SCM’s are usually

commissioned to: a) offer suppliers and production planners ways for developing their

strategies and programmes and allow a more efficient way of reacting; b) enable executives

to examine essential elements of the supply chain, such as warehouse inventories, transport

operations, material requests or outstanding balances; d) examine an enterprise’s status

regarding present stock or the costs of stock on location with distribution information as well;

e) supervise stock variation that reflects on customer demand; f) create statements of the

company’s productivity and efficiency or costs involved; g) evaluate product cycles, use of

material, routing configurations or inventory age; h) establish tendencies and operate areas of

distribution or inventory for developing the supply chain; i) estimate the progress of

supply/demand balance; j) provide the monitoring of the supply chain system and provide

automated alerts that offer decision makers the possibility to solve issues in their incipient

phases (Basu and Wright, 2012).

The literature search in field of supply chain management revealed several important models

used by companies and organisations. Among them, SCOR (issued and supported by Supply

Chain Councils) and GSCF’s model (issued by the Global Supply Council). CSCMP

(Council of Supply Chain Management Professionals) sustains the American Productivity &

Quality Centre (APQC) (Leeman, 2010).

Creating an efficient supply chain management involves the conveying of individual

functions management into the supply chain system. The way in which the system functions

involves placing the orders by the purchasing department when they receive the client’s

request. The marketing department which addresses client’s demands forwards their requests

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to other retailers and distributors so that their requirements can be fulfilled. The information

within the supply chain system can be controlled only through the integration of all services

and departments a company relies on for its performance. It is evident that in order to achieve

a competent supply chain application it is crucial to develop a strong relationship between

buyers and suppliers while in the same time sharing systems and information and a joint

approach for product development. Hugos (2011) advises on the criteria for working with an

established prosperous supply chain is the constant exchange of information. Global

management has come after decades of experience to the conclusion that in order to enhance

the circulation of a product there is need for the implementation of a process strategy within

the company.

The procedures involved in the main supply chain include:

a) Offering support for the preservation and development of the relationship between the

company and its customers. This refers to the use of interfaces for providing the

customer up-to-date information about product availability. This process depends on

the company’s operations regarding manufacture and distribution. Strategies chosen

by organisations to shape their relation with the clients are:

- Identifying goals that need to be achieved by both the company and the

client

- Applying a constant customer rapport

- Developing a confident and optimistic environment within the company

and in the relation with clients (Hugos, 2011).

b) The purchasing process involves the development of thorough plans constructed in

partnership with suppliers in order to ensure the production flow. Managing

development approaches and designing original products are also elements of the

procurement process. For companies that function on a global level it is important for

the sourcing process to be based on a global foundation. The main goal is to obtain

advantages for both partners and to optimise time resources which are invested in

cycle design and product launch. The purchase function also enhances the growth of

fast communication chains such as Internet tools used for managing potential

demands in a fast pace or the electronic data interchange (EDI).

c) The process of developing and selling a product involves integrating customers and

suppliers in activities that will lead to the decrease of time spent for launching the

product out on the market. In order to maintain competitiveness products need to be

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designed and successfully launched in a very short period of time. The decision

makers that work at developing and selling a product need to find themselves in a

constant communication process with the customer support department. This will

bring valuable information concerning the client’s needs and requirements and

through an assessment process will generate the selection of suitable materials from

appropriate suppliers. These stages will ensure the production and integration of

products in an efficient supply chain (Hugos, 2011).

d) Administering the production process has as purpose the creation of products that

will reach the distribution market after analysing previous forecasts. Flexibility is

required in this particular stage as market fluctuations need to be considered for

adjusting to mass customisation. The continuous changing of the market reduces the

life cycle of a product; therefore adaptability of companies is required as well as

enhanced skills for responding to its customer’s requirements (Hugos, 2011).

e) Distribution is a procedure specific to supply chains which entails delivering the

finalised product or service to the customer who represents the endpoint of marketing

chain (Leeman, 2010).

f) Another practice in the supply chain process is outsourcing. Companies choose to

externalise a part of their services that until then have been delivered by their own

company in order to create a focused approach on services that can be better handled

by their organisation and in the same time are crucial the effectiveness of the chain.

Secondary services are directed towards other companies who are specialised in

particular domains and who can offer high quality consultancy and expertise. This

strategy is often used in construction industry where activities such as transport,

storage or inventory control are forwarded to logistic suppliers. In order to be able to

manage the wide network of suppliers and collaborators central as well as local

involvement and partnership is required. In most supply chains important strategic

decisions are made by central management, while local management is left with

making decisions regarding secondary issues (Leeman, 2010).

g) Assessing performance relies mainly on the relationship quality between supplier and

client, their insertion in the market as well as the company’s profit and performance.

In order for a company to be profitable it is important to make use of supplier services

and to create a stable relationship with the client. Logistics are today one of the most

influential factors in the development and protection of competitive benefits. When

undergoing an internal evaluation factors such as costs, quality, productivity are taken

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into consideration. External evaluation on the other hand relies solely on the effect

internal procedures have on the client. Therefore, the customer’s interpretations and

opinions regarding the product or the services delivered to him are essential in

creating a realistic assessment (Leeman, 2010).

h) In the process of finding efficient methods for reducing costs and expenses,

warehousing management became a useful strategy for diminishing manpower costs,

providing appropriate storing, monitoring the promptness of delivery activities and

offering a stock management area (Leeman, 2010).

After analysing and understanding the complex process of supply chain management

activities conclusions can be drawn on the density of management tasks. However,

supply chain management is today a vital approach for companies worldwide no

matter the industry they operate in (Wang, Heng and Chau, 2007).

Supply Chain Management in Constructions

The Construction Industry

The construction industry represents a particular form of business because of its

divided specific which generates important negative effects such as decreased

productivity, exceeding of costs and timeframes, various conflicts and disagreements.

All of these issues lead very often to legal claims and lawsuits that exhaust financial

and time resources and are considered to be the crucial elements of performance-

related difficulties which the construction industry is confronted with. Fragmentation

in the construction industry makes the delivery process to be considered inefficient in

comparison with other industry segments (Fernie and Thorpe, 2007).

Among consequences that rise from the fragmentation issues, the most recurrent ones

are:

- Poor identification, ranking and implantation of client’s needs

- Creating design solutions which are under the level expected by the client

- Fragmentation of construction data, design and fabrication

- Inadequate integration and partnership between operations which are part

of the project’s life cycle

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- Feeble communication of the design plan and the reasoning for undergoing

a certain process. This generates design changes, liability claims and

overrunning the time and cost frame (Lavelle, Hendry and Steel, 2007).

Under these circumstances the application of a supply chain management can generate

vertical integration in the design and production process. This function would connect the

process to a chain with the purpose of exploiting opportunities for increasing value and

diminishing total costs. As adopting this kind of application calls for a change in the

perception of teamwork, collaboration and shared benefits, the construction industry has

limited examples of applications registered. Integration methods have been used so far in the

attempt to surmount industry fragmentation. These strategies have been used as a practice

model because of their success in the manufacturing or other industries. Among them, the

most recurrent one have been “design-and-construct, design-for-construction, concurrent

engineering, lean construction and business process reengineering” (Fernie and Thorpe, 2007,

p.321). Nonetheless, lacking the support of information technology these methods didn’t

adapt to the growing complexity of construction projects. Research addressing the causes of

inefficiency in construction projects has revealed the fact that the issues that generate

conflicts waste are related to the process and not the product. The above mentioned

approaches are known for their focus on aspects of times, costs or quality. This could also

explain the failure of adopting these strategies in the construction industry (Hughes, et.al,

2006).

In the process of delivering a construction project there are multiple stages and people

involved. The professionals gathered to work on the project come from different backgrounds

and from diverse areas of expertise. The project organisation, also known as a “temporary

multiple organisation” is what defines the process of delivering a construction project. Being

a project-focused organism the organisation has a limited life expectancy and is based on

competitive bidding as the main means of communication and assessment. As a consequence,

the relationships between supplier and client are not stable or strong. The competition

through bidding generates an awareness of the fact that future work cannot be assured in a

system where the lowest bidder wins the project (Lavelle, Hendry and Steel, 2007).

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