Supply Chain Management in Construction

NICMAR

ASSIGNMENT

PAPER PRESENTATION

ON

SUPPLY CHAIN MANAGEMENT IN CONSTRUCTION INDUSTRY

MCM 111: MANAGEMENT THEORY-PRINCIPLES AND PRACTICE

Submitted To: Submitted By:

Prof. Dr. T.K. Ganguli Apoorva Ajmera (G03103)

K A Chiganshi (G03126)

T Dinesh Kumar (G03156)

N A T I O N A L I N S T I T U T E O F C O N S T R U C T I O N

M A N A G E M E N T A N D R E S E A R C H

G O A C A M P U S

Supply Chain Management In Construction

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Management Theory-Principles and Practices

1

Table of Contents

1. Introduction ....................................................................................1

2. Origin Of Supply Chain Management.............................................. 2

3. What is Supply Chain Management................................................ 3

4. Supply Chain Drivers and Matrix .................................................... 5

5. Network Design in Supply Chain..................................................... 10

6. Demand in Supply Chain................................................................. 13

7. Planning in Supply Chain................................................................. 14

8. Transportation in Supply Chain....................................................... 16

9. Information Technology (IT) in Supply Chain.................................. 19

10. Supply Chain Management in Construction................................... 21

11. Role of Supply Chain Management in Construction....................... 27

12. Summery........................................................................................ 30

13. Bibliography ...................................................................................31


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1. INTRODUCTION

Supply chain management (SCM) is a concept that has flourished in manufacturing,

originating from Just-In-Time (JIT) production and logistics. Today, SCM represents an

autonomous managerial concept, although still largely dominated by logistics. SCM

endeavours to observe the entire scope of the supply chain. All issues are viewed and

resolved in a supply chain perspective, taking into account the interdependency in the

supply chain. SCM offers a methodology to relieve the myopic control in the supply chain

that has been reinforcing waste and problems.

Construction supply chains are still full of waste and problems caused by myopic control.

Comparison of case studies with prior research justifies that waste 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 construction supply chain reinforce the problems in the construction

supply chain, and may well hinder the application of SCM to construction.

The generic methodology offered by SCM contributes to better understanding and

resolution of basic problems in construction supply chains, and gives directions for

construction supply chain development. The practical solutions offered by SCM, however,

have to be developed in construction practice itself, taking into account the specific

characteristics and local conditions of construction supply chains.

Until now, in construction, initiatives belonging to the domain of SCM have been rather

partial covering a subset of issues (e.g., transportation costs) in a limited part of the

construction supply chain (e.g., the construction site). In most cases, the issues are regarded

from a main contractor’s point of view.

Statistical figures show that main contractors are purchasing more labor and material than

previously. For instance, in 1994, in Dutch construction industry (i.e. residential, commercial

and industrial building), the main contractors’ share in the total national turnover had

decreased to 24% (Scholman 1997). Thus, suppliers and subcontractors represented about

75% of turnover. Currently, this is expected to be more.

As a consequence, main contractors become more and more reliant on other actors in the

construction supply chain (e.g., suppliers and subcontractors). Therefore, they need to

revise their supply strategies and trading relations with subcontractors and suppliers. Thus,

the goal of this paper is to clarify the roles and possibilities of SCM in construction. Starting

from the lessons learnt and methodological development of SCM in manufacturing, present

supply chains in construction are observed, and recommendations for SCM in construction

are presented.

The focus of this paper is on the supply chain of a main contractor. It has to be noted that in

construction, real estate owners also may drive supply chain development.


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2. ORIGIN OF SUPPLY CHAIN MANAGEMENT

SCM is a concept that has originated and flourished in the manufacturing industry. The first

signs of SCM were perceptible in the JIT delivery system as part of the Toyota Production

System (Shingo 1988). This system aimed to regulate supplies to the Toyota motor factory

just in the right - small - amount, just on the right time. The main 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 production system, the

conceptual evolution of SCM has resulted in an autonomous status of the concept 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., value chain, extended enterprise) have

been influencing the conceptual evolution towards the present understanding of SCM.

In a way, the concept of SCM represents a logical continuation of previous management

developments (Van der Veen and Robben 1997). Although largely dominated by logistics,

the contemporary concept of SCM encompasses more than just logistics (Cooper et al.

1997).

Actually, SCM is combining particular features from concepts including Total Quality

Management (TQM), Business Process Redesign (BPR) and JIT (Van der Veen and Robben

1997).


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3. WHAT IS SUPPLY CHAIN MANAGEMENT?

Supply chain management (SCM) is a process used by company's to ensure that their supply

chain is efficient and cost-effective. A supply chain is the collection of steps that a company

takes to transform raw components into the final product. Typically, supply chain

management is comprised of five stages: plan, develop, make, deliver, return.

Plan: A plan or strategy must be developed to address how a given good or service will

meet the needs of the customers. A significant portion of the strategy should focus on

planning a profitable supply chain.

Develop: It involves building a strong relationship with suppliers of the raw materials

needed in making the product the company delivers. This phase involves not only identifying

reliable suppliers but also planning methods for shipping, delivery, and payment.

Make: the product is manufactured, tested, packaged, and scheduled for delivery.

Deliver: customer orders are received and delivery of the goods is planned.

Return: during this stage, customers may return defective products. The company will also

address customer questions in this stage.

Another model for understanding supply chain management is grouping all management

activities into three categories: strategic, tactical, and operational.

Strategic: strategic activities include building relationships with suppliers and

customers, and integrating information technology (IT) within the supply chain.

Tactical: Studying competitors and making decisions regarding production and

delivery.

Operational: Operational category includes the daily management of the supply

chain, including the making of production schedules.


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Objective of Supply Chain

The objective of every supply chain should be to maximise the overall value generated. The

value a supply chain generates is the difference between what the final product is worth to

the customer and the costs the supply chain incurs in filling the customer’s request. For

most commercial supply chains, value will be strongly correlated with supply chain

profitability (also known as supply chain surplus), the difference between the revenue

generated from the customer and the overall cost across the supply chain.

Supply chain profitability or surplus is the total profit to be shared across all supply chain

stages and intermediaries. The higher the supply chain profitability, the more successful is

the supply chain. Supply chain success should be measured in terms of supply chain

profitability not in terms of the profit at an individual stage.

The next logical step is to look for sources of revenue and cost. For any supply chain, there is

only one source of revenue: the customer. At Wal-Mart, a customer purchasing detergent is

the only one providing positive cash flow for the supply chain. All other cash flows are

simply fund exchanges that occur within the supply chain, given that different stages have

different owners. When Wal-Mart pays its suppliers, it is taking a portion of the funds the

customer provides and passing that money on to the supplier. All flows of information,

product, or funds generate costs within the supply chain. Thus, the appropriate

management of these flows is a key to supply chain success. Effective Supply Chain

Management involves the management of supply chain assets and product, information,

and fund flows to maximize total supply chain profitability.


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4. SUPPLY CHAIN DRIVERS AND METRIX

Supply Chain Drivers:-

The supply chain has advanced or, if you will, come of age, evolving from a tentative theory

in the 1980s to, through furious activity, the SCOR model in the 1990s. It now has steadily

increasing acceptance by companies here and abroad.

The supply chain has changed from a near whim to an active business strategy. For some

enterprises, it has become the core to their strategic advantage or to the development of

such an advantage.

Supply chain usually looks at satisfying the demands of a company’s long term progress,

some of which includes are:

� Demanding Customers

� Shrinking product life cycle

� Proliferating product offerings

� Growing retailer power

Supply chain management essentially means transformation of a company’s

supply chain into an efficient customer satisfying process, where the effectiveness of the

whole supply chain is more important than the effectiveness of each individual department.

Four steps can be considered:

Step1 - Designing the supply chain

� Determine the supply chain network

� Identify the levels of service required

Step 2 - Optimizing the supply chain

� Determine pathways from suppliers to the end customer.

� Customer markets to Distribution centres.

� Distribution centres to production plants.

� Raw material sources to production plants.

� Identify constraints at vendors, plants and distribution centres

� Get the big picture.

Plan the procurement, production and distribution of product groups rather than individual

products in large time periods- quarters or years.

Step 3- Material flow planning

1. Determine the exact flow and timing of materials.


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2. Arrive at decisions by working back from the projected demand through the supply

chain to the raw material resources.

3. Techniques:-

� DRP

� MPS

� MRP II

� ERP

Step 4 - Transaction processing and short term scheduling

� Customer orders arrive at random.

� This is a day to day accounting system which tracks and schedules every order to

meet customer demand.

� Order entry, order fulfillment and physical replenishment.

� Organize transactions so that effective utilization of resources is facilitated

Information Flows In Supply Chain Management

� Information is overriding element.

� Need for databases.

� Master files: Information about customers, products, materials, suppliers,

transportation, production and distribution data do not require frequent processing.

� Status files- heart of transaction processing- track orders and infrastructure status-

updated daily.

� Essentially using the same information to make all plans right from structuring the

network to processing every day supply chain tasks.

The Changing Role Of Dealers

� Conventional functions.

� Inventory ownership and management.

� Sales and technical support.

� Order handling.

� Credit.

New trends in dealer management

Channels being divided into two- Fulfilment and Franchised agent.

Fulfilment channel - responsible for getting the manufacturer’s product from the plant to

the end user through a highly efficient logistics and inventory management system.

Fulfilment channel may not take ownership of the product but may perform these functions

on a per box fee structure.


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Franchised agents - Responsible for sales and sales support but will not write the order or

supply the product.

The Virtual Value Chain

The value chain connects a company’s supply side with its demand side. Traditionally

information has been a supporting function. Information however can be managed far more

creatively.

There are various stages of using value added information processes:

Visibility: - See physical operations more effectively through information. Information can

be used for effective coordination of value chain activities.

Mirroring Capability: - In this stage, virtual activities are substituted for physical ones. A

parallel value chain is created.

New Customer Relationships: - The company can draw on the flow of information in the

virtual value chain to deliver value to customers in new ways.

Strategic Options In Supply Chain Management

It makes sense to segment customers based on service needs. The supply chain then can be

modified to me these service requirements profitably.

The logistics network can be customized to meet the service requirements and

profitability of individual segments. Sales and operations planning have to transcend

company boundaries to involve every link of the supply chain in developing forecasts

collaboratively and then maintaining the required capacity across operations.One useful

strategy is to delay product differentiation till the last possible moment.

It is important to locate the leverage point where the product is unalterably configured to

meet a single requirement. We need to assess options such as postponement, modularized

design or modification of manufacturing processes that can increase flexibility. Suppliers’

costs are company’s costs. Hence companies need to cultivate warm relationships with

suppliers. Efficient supply chain management has to be accompanied by a technology

strategy.


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SUPPLY CHAIN MATRIX

What is Supply Chain Matrix?

Matrix is a service offered to standardise the collection and collation of information.

Members of the Supply Chain like the contractors, suppliers, consultants and

manufacturers, along with the Prime Contractor upload information directly into templates

within Matrix.

Supply chain Matrix customises the templates, and project manages the data collection.

Many types of information can be uploaded, including:

a) Maintenance schedules Operational instructions Mechanical & Electrical schematics

b) Process descriptions Layout drawings Training aids, e.g. video clips. As well as a

generic template, as the developing market sector specifies templates for the power,

construction and water industries. To meet the relevant industry standards, and can

also be further tailored to suit individual client needs.

One frequent use of Matrix is the preparation of Operation & Maintenance (O&M) and

Health & Safety (H&S) manuals. Once the information has been uploaded into Matrix, it is

simple to publish by exporting to Content Management Systems. The information can also

be exported for use in other business systems, such as asset management, maintenance

scheduling and investment planning systems.


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Benefits the Client; Benefits of the Supply Chain

The delivery of a major project generally involves numerous organisations, including the

Client (often the End-User of the building or plant), the Prime Contractor (tasked with

delivering the project on-time) and numerous suppliers, manufacturers, consultants and

sub-contractors, i.e. the Supply Chain. Matrix provides real benefits to all parties.

How does Matrix benefit the Client?

Early visibility of

information

Information is uploaded during the project, not in a rush at the end, you

have early access to important information.

Improved quality Matrix provides a clear specification to information providers in the Supply

Chain, reducing uncertainties and decreasing the risk of error.

Cost benefits of

standardisation

Matrix specification helps you to standardise on information types,

nomenclature and procedures, across the organisation.

Re-use of the

information

Having one source of up-to-date information allows it be exported to be

used in many business information systems.

How does Matrix benefit the Supply Chain?

Cost reduction by

automation

The templates are defined the Supply Chain uploads the information,

without the involvement of the Prime Contractor, reducing effort and cost.

Reduction of errors The Prime Contractor has full visibility of all information as it is uploaded,

allowing errors to be isolated and removed.

Lower cost of

information provision

Quite simply, it is easier to supply information when the requirements

clearly and accurately specified.

Win more business! Electronic data collection information is increasingly seen as a

Differentiator between Prime Contractors. It also provides a way to offer

value-added services.

Technical Details

Matrix is a service offered by, using Web-based software built upon an SQL Server database.

Members of the Supply Chain view Matrix via the Internet and can clearly see what they are

required to provide, when, and in what format. Matrix is an effective tool, both when used

alone or alongside a project extranet or similar collaborative tool. Data and documents are

uploaded directly into customisable templates within Matrix, which define the requirements

for different levels in the information hierarchy.

Examples of levels could be equipment [e.g. a motor], systems [e.g. cooling water] or an

area within a building or complex. Within each level, Matrix demands that the Supply Chain

enter the required information, such as maintenance schedules, operational instructions,

mechanical and electrical schematics.


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5. NETWORK DESIGN IN SUPPLY CHAIN

Profit Point's Supply Chain Design and Infrastructure Planning services help you solve

complex manufacturing and distribution footprint and utilization problems. These services

help you develop capital investment, product mix and asset utilization strategies that will

enable profitable growth in a changing business environment.

Benefits of Network Planning

Designing your supply chain network involves numerous decisions. And, each of these

decisions will impact your services, profitability and business potential. To ensure an optimal

design, it is critical that key business data from your information systems and your

intangible business insights are included. By combining your real world knowledge with your

data, Profit Point is able to model numerous scenarios and optimize your design to meet

your specific requirements.

As a business manager the ultimate responsibility over these critical infrastructure

decisions. We combine our extensive experience in supply chain design with best of breed

optimization technology to ensure that your plan will lead you to the best infrastructure

decisions.

Our Supply Chain Improvement Process

A robust infrastructure plan must take in to account all of the business requirements for

years to come. To optimize your plan, the consultants begin by understanding your growth

strategy and the logistical challenges that the organization faces. We lead you through a

proven five-step supply chain analysis and improvement process that will enable your

business to consider total supply chain cost, customer service and strategic business

initiatives.

Through this process we help you determine the optimal infrastructure plan to support your

business operations including critical decisions related to:

� plant, warehouse and distribution centre locations and utilization

� the capacity that should be available at each of these locations

� the transportation modes and lanes that should be used to move product through

your network

� which customers should be served from each facility and by which modes of

transportation

� when is expansion of capacity needed and where and how it should occur

� when merging business or operations across subsidiaries, which facilities should be

used and at what levels, and which ones should be closed


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What You Can Expect

Once the network plan completed, you will have a clear roadmap for aligning your supply

chain to the business needs - a plan that that will guide the business processes for years to

come. We use advanced mathematical optimization techniques to ensure that your plan:

� Minimizes your total supply chain costs, including transportation, manufacturing,

inventory and raw material supply

� Maximizes your organization's customer service potential

� Improves profitability by identifying how to service your customer demand through

your Supply Chain network

� Avoids or delays capital investments by maximizing the utilization of your existing

assets and minimizes enterprise capital expense by ensuring that capacity

investments are targeted for the right place at the right time

� Minimizes excess infrastructure and realizes synergistic opportunities when merging

discrete business operations

Supply Chain Design Studies

When it comes to designing an optimized supply chain network, there are no cookie-cutter

solutions. Every business has a unique set of requirements and those requirements shift

often.

Profit Point has been optimizing infrastructure plans across a wide variety of industries and

for businesses of all sizes. Below is a sampling of just a few success stories:

� Learn about how the Coca-Cola Philippines infrastructure plan yielded $20 million in

cost reductions using our Supply Chain network design software.

� Read about how the Rohm and Haas network optimization plan was able to achieve

a 38% reduction in the total number of shipping sites used, resulting in annual

savings of several millions of dollars.

� Find out how a Global Beverage Bottler improved their infrastructure planning

decisions using Profit Point's products and services.

� Discover how a Roofing Materials Manufacturer's Supply Chain Infrastructure was

changed to generate achievable annual savings of $1M.

Understand how a Specialty Chemicals Company identified $700,000 in annual savings by

using analytics and optimization-based technologies to support the rationalization of a

global warehouse locations and distribution network.

Information technology can serve the following functions

Handle day to day transactions and electronic commerce across the supply chain and help

align demand and supply by sharing information on orders and daily scheduling.


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Network Design A New Formula For Success

Network design help manufacturers serve better changing consumer and customer needs

by consistently having the right products on the shelf at the moment the purchaser wants

them. It enables the delivery of more and higher-margin products while reducing inventory

and costs. This facilitates revenue-generating product and service innovations that result in

customer service excellence and higher profits. Network design is not one thing or one

capability. It is not a destination, but rather a journey. It comprises a group of capabilities

that enable a company to achieve the results possible at each stage of the evolution toward

a full demand-driven model. While most organizations have some Design elements in place,

no company today has the full network up and functioning. To begin the journey, it is

important to recognize the end state and work methodically toward that goal as your

organization, your trading partners, and the underlying technology evolves. Consider the

following steps.

Stage 1: Harmonization – The first step in becoming demand-driven is to standardize

processes, data, and technology within your current environment. This would typically start

with establishing performance management and the alignment of master data.

Stage 2: Advanced planning – The second step still focuses on the internal organization

and requires the integration of key supply and demand elements. That integrates all parties

such as logistics, production, new-product introduction, and trade management.

Furthermore, this step includes the refinement of forecasting techniques and the

implementation of advanced planning and scheduling processes – that is, using optimization

algorithms.

Stage 3: Increased responsiveness – The third step extends the focus beyond the

enterprise to the network as a whole. On the customer side, this means driving forecasting

and visibility past the distribution centre to the source of demand. On the supply side, this

means extending past traditional purchase orders to supplier availability and capability.

Stage 4: Adaptability – The fourth step takes the integrated network and refines its

capabilities to adapt effectively and quickly to changes. This may require new levels of data,

new time considerations, and increased flexibility across the network. By becoming more

adaptive, the network can increase its ability to fulfill demand while removing waste from

the entire supply chain. By progressing through each of these stages and integrating

processes such as sales, marketing, R & D, financials, sourcing, analytics, and customer data

to create a seamless value chain, manufacturers can reduce costs, optimize assets, and

increase revenue. A company can make the transition from a linear chain to a virtual

network, especially when trading partners integrate at the same time. This requires enabling

networked infrastructures and a willingness to share information freely among partners.


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6. DEMAND IN SUPPLY CHAIN

a) Supply chain is unique, but it is possible to classify them generally by their stability or

uncertainty on both the supply side and the demand side. Consider the following

table – where would your company fit in? See Table

b) On the supply side, low uncertainty refers to stable processes, while high uncertainty

refers to processes which are rapidly changing or highly volatile. On the demand

side, low uncertainty would relate to functional products in a mature phase of the

product life cycle, while high uncertainty relates to innovative products.

c) Once your chain has been categorized, you can select the most appropriate tools for

improvement.

d) For example, if your chain is in box 4, with a dynamic demand and highly uncertain

supply, then creating a “virtual supply chain” like that of Cisco would make sense. On

the other hand, if your chain was in box 1, with stable demand and stable supply,

you would like to avoid the bullwhip and would use strategies to counter the

bullwhip effect.


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7. PLANNING IN SUPPLY CHAIN MANAGEMENT

For many companies, putting together a supply chain can be an easy part of supply chain

management. The real difficult parts often seem to come from adequate supply chain

planning. The difficulties that often arise as a result of poor planning can be extremely

problematic for a business. The following sections will explain some of these problems and

will seek to address their root causes.

First, businesses need to understand exactly what the term supply chain planning means.

Supply chain planning refers to a company’s ability to make accurate forecasts regarding

their demands in the near future. For example, the company may forecast X amount of sales

and may order enough goods from vendors to cover those sales. However, if fewer sales are

the reality, the company could end up with excessive inventory and may see a l;arge,

sudden decrease in profits. Likewise, too many sales could cause the company to need to

order additional shipments of goods at the last minute which may force vendors to need

additional materials and to pay overtime to their workers. These costs will usually be passed

on to the buyer and will also reduce profits. Also, too many sales may mean companies

cannot meet the end-user demand and distributors may be left with no product to sell to

waiting customers.

Obviously, supply chain planning is important to a company's success. Poor planning will

result in a loss of profits and/or revenue while accurate planning allows the company to

operate smoothly and to minimize expenses. The question then is how to more effectively

create business forecasts for supply chain activities.

Many companies have turned to their customers for help. By communicating directly with

customers about what they want and by getting their feedback on existing products,

businesses are able to more accurately understand the needs and wants of their target

audiences. With this information, they can make a forecast that reflects customer reality,

not the hopeful expectations of marketing and sales teams. Furthermore, improved

technology has made it even easier for businesses to get their hands on customer feedback.

The Internet, for example, makes it possible for companies to communicate with customers

in real-time, so they can then use the data immediately in their forecasts.

Supply chain planning can be made easier by technology in other ways as well. For example,

cash-to-cash cycle time is an important part of supply chain planning because it impacts the

revenue of the business. Cash-to-cash cycle time refers to the time span between the

purchase of the raw materials and the sale of the finished product. The faster the cash-to-

cash cycle the better. On average, 26% of businesses have been able to reduce their cash-

to-cash cycle time to under 30 days thanks in part to improved technology.

Information technology advancements such as payment processing, procurement of direct

supplies, and customer order entry have helped significantly reduce the length of the cash-

to-cash cycle for many of these businesses. In fact, less than 25% of the businesses today

have a cash-to-cash cycle time of more than 90 days.


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These technology improvements along with real-time customer feedback have made it

possible to more accurately predict revenue, profit, and sales in the near future. More

accurate planning means that businesses can work together with their vendors and

distributors to outline a plan that makes sense based on those forecasts so that no one is

put into a negative situation.

Overall, supply chain planning is a critical component of any business's supply chain

management. Without accurate planning abilities, businesses end up cutting into their

revenue unnecessarily and possibly putting vendors and distributors into difficult situations

that may strain the supply chain relationships in the long run. Only by communicating with

customers directly and in real-time can businesses have a solid, reliable foundation on

which to base their supply chain planning forecasts. Likewise, they need to use technology

to free up revenue from the supply chain by reducing their cash-to-cash cycle time.

For decades, supply chains have been viewed as simply a way to reduce costs and to get

goods to the right people at the proper time. While these ideas are still possible and are

true of supply chains today, they also have the potential to achieve greater importance with

the companies who use them effectively. First, these companies must be willing to

implement supply chains in the business and/or to improve their existing supply chain in

order to really reduce costs, receive materials more quickly, and get products out the door

on time.

Creating an efficient supply chain can be quite difficult and requires complex software.

Implementing this software is often not cheap. Integrated, Internet-based supply chains, for

example, also require the installation of costly hardware. Training for employees so that

they can use the software is also a critical, and costly, element in the supply chain picture.

All employees who will be using the system need to be thoroughly trained so that they

understand how to use the supply chain planning system in the more optimal manner.

Furthermore, there may be a period of adoption to the system that may cause a slight

reduction in profits or an increase in expenses. Even with these initial expenses, supply

chains are a wise long-term investment for companies.

Regardless of these costs, many companies already have a supply chain in place. However,

the supply chain may need some improvements if it is to help them achieve additional

benefits and to drive the overall value of their business. One of these changes is that all

vendors, suppliers, and related businesses need to be included in the supply chain. If even

one element is missing from the puzzle, then the results will never reach their maximum

possible potential. Another improvement is that the supply chain needs to be brought onto

the Internet. Web-based supply chain management allows the business to work on a more

global level that can further drive down prices and increase profit margins.

Once the supply chain software is either implemented or upgraded, the company can then

use it to achieve even greater benefits. As the business's use of the supply chain gets better,

the company will gradually see even greater benefits. For example in the beginning, the

supply chain may simply help the company achieve stability. Their demands and their supply

become more predictable but the supply chain itself only plays a minimal role in the

company's overall strategy.


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8. TRANSPORTAION IN A SUPPLY CHAIN MANAGEMENT

In this chapter, we discuss the role of transportation within a supply chain and identify

trade-offs that must be considered when making transportation decisions. Our goal is to

enable managers to make transportation strategy and design, planning, and operational

decisions with an understanding of all the important pros and cons of their choices.

The Role Of Transportation In A Supply Chain

Transportation refers to the movement of product from one location to another as it makes

its way from the beginning of a supply chain to the customer. Transportation is an important

supply chain driver because products are rarely produced and consumed in the same

location. Transportation is a significant component of the costs incurred by most supply

chains. In fact, transportation activity represented more than 10 percent of the GDP of the

United States in 2002.1 Only three sectors —housing, health care, and food —contributed a

larger share to GDP than transportation. Transportation-related jobs employed nearly 20

million people in 2002, accounting for 16 percent of U.S. total occupational employment.

The role of transportation is even more significant in global supply chains. Dell currently has

suppliers worldwide and sells to customers all over the world from just a few plants.

Transportation allows products to move across Dell's global network. Similarly, global

transportation allows Wal-Mart to sell products manufactured all over the world in the

United States.

International trade is becoming a bigger part of the world's economic activity. According to

the Bureau of Transportation Statistics, total international merchandise trade to and from

the United States increased at an average annual rate of 9.3 percent between 1990 and

2001.The growth in international merchandise trade was more than three times the growth

of the U.S. economy over the same period. Between 1970 and 2001, U.S. international

merchandise trade grew by over 20 times, whereas the U.S. economy grew about 10 times

over the same period. With the rapid growth in international trade, good multimodal freight

transportation systems to move the resulting cargo have become even more significant.

Any supply chain's success is closely linked to the appropriate use of transportation. IKEA,

the Scandinavian home furnishings retailer, has built a global network with about 180 stores

in 23 countries primarily on the basis of effective transportation. IKEA's sales for the year

ending August 2004 reached 12.8 billion euros. IKEA's strategy is built around providing

good-quality products at low prices. Their goal is to cut prices by 2 to 3 percent each year.

As a result, IKEA works hard to find the most inexpensive global source for each of its

products. Modular design of its furniture allows IKEA to transport its goods worldwide much

more cost effectively than a traditional furniture manufacturer. The large size of IKEA stores

and shipments allows inexpensive transportation of home furnishings all the way to the

retail store. Effective sourcing and inexpensive transportation allow IKEA to provide high-

quality home furnishings at low prices globally.


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Seven-Eleven Japan is another firm that has used transportation to achieve its strategic

goals. The company has a goal of carrying products in its stores to match the needs of

customers as they vary by geographic location or time of day. To help achieve this goal,

Seven-Eleven Japan uses a very responsive transportation system that replenishes its stores

several times a day so that the products available match customers' needs. Products from

different suppliers are aggregated on trucks according to the required temperature to help

achieve very frequent deliveries at a reasonable cost. Seven-Eleven Japan uses a responsive

transportation system along with aggregation to decrease its transportation and receiving

costs while ensuring that product availability closely matches customer demand.

Supply chains also use responsive transportation to centralize inventories and operate with

fewer facilities. For example, Amazon.com relies on package carriers and the postal system

to deliver customer orders from centralized warehouses. Dell manufactures in a few

locations in the United States and uses responsive transportation provided by package

carriers to provide customers with highly customized products at a reasonable price.

The shipper is the party that requires the movement of the product between two points in

the supply chain. The carrier is the party that moves or transports the product. For example,

when Dell uses UPS to ship its computers from the factory to the customer, Dell is the

shipper and UPS is the carrier. Two other parties have a significant impact on

transportation: the owners and operators of transportation infrastructure such as roads,

ports, canals, and airports; and the bodies that set transportation policy worldwide. Actions

by all four parties influence the effectiveness of transportation.

To understand transportation in a supply chain it is important to consider the perspective of

all four parties. A carrier makes investment decisions regarding the transportation

equipment (locomotives, trucks, airplanes, etc.) and in some cases infrastructure (rail), and

then makes operating decisions to try to maximize the return from these assets. A shipper,

in contrast, uses transportation to minimize the total cost (transportation, inventory,

information, sourcing, and facility) while providing an appropriate level of responsiveness to

the customer.

We can think of a transportation network as a collection of nodes and links. Transportation

originates and ends at nodes and travels on links. For most modes of transportation,

infrastructure such as ports, roads, waterways, and airports is required both at the nodes

and links. Most transportation infrastructure is owned and managed as a public good

throughout the world. It is very important that infrastructure be managed in such a way that

monies are available for maintenance and investment in further capacity as needed.

Transportation policy sets direction for the amount of national resources that go into

improving transportation infrastructure. Transportation policy also aims to prevent abuse of

monopoly power, promote fair competition, and balance environmental, energy, and social

concerns in transportation.


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Modes of Transportations:-

Supply chains use a combination of the following modes of transportation:

� Air

� Package carriers

� Truck

� Rail

� Water

� Pipeline

� Intermodal


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9. INFORMATION TECHNOLOGY IN A SUPPLY CHAIN MANAGEMENT

Information is crucial to the performance of a supply chain because it provides the basis on

which supply chain managers make decisions. Information technology consists of the tools

used to gain awareness of information, analyze this information, and execute on it to

increase the performance of the supply chain. In this chapter we explore the importance of

information, its uses, and the technologies that enable supply chain managers to use

information to make better decisions.

The Role of IT in A Supply Chain

Information is a key supply chain driver because it serves as the glue that allows the other

supply chain drivers to work together with the goal of creating an integrated, coordinated

supply chain. Information is crucial to supply chain performance because it provides the

foundation on which supply chain processes execute transactions and managers make

decisions. Without information, a manager cannot know what customers want, how much

inventory is in stock, and when more product should be produced or shipped. In short,

without information, a manager can only make decisions blindly. Therefore, information

makes the supply chain visible to a manager. With this visibility, a manager can make

decisions to improve the supply chain's performance.

Given the role of information in a supply chain's success, managers must understand how

information is gathered and analyzed. This is where IT comes into play. IT consists of the

hardware, software, and people throughout a supply chain that gather, analyze, and

execute upon information. IT serves as the eyes and ears (and sometimes a portion of the

brain) of management in a supply chain, capturing and analyzing the information necessary

to make a good decision. For instance, an IT system at a PC manufacturer may tell a

manager how many processors are currently in stock. IT is also used to analyze the

information and recommend an action. In this role, an IT system could take the number of

processors in inventory, look at demand forecasts, and determine whether to order more

processors from Intel.

Using IT systems to capture and analyze information can have a significant impact on a

firm's performance. For example, a major manufacturer of computer workstations and

servers found that most of its information on customer demand was not being used to set

production schedules and inventory levels. The manufacturing group lacked this demand

information, which essentially forced them to make inventory and production decisions

blindly. By installing a supply chain software system, the company was able to gather and

analyze demand data to produce recommended stocking levels. Using the IT system enabled

the company to cut its inventory in half, because managers could now make decisions based

on customer demand information rather than manufacturing's educated guesses. Large

impacts like this underscore the importance of IT as a driver of supply chain performance.

Information is the key to the success of a supply chain because it enables management to

make decisions over a broad scope that crosses both functions and companies. successful

supply chain strategy results from viewing the supply chain as a whole rather than looking

only at the individual stages. By considering a global scope across the entire supply chain, a


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manager is able to craft strategies that take into account all factors that affect the supply

chain rather than just those factors that affect a particular stage or function within the

supply chain. Taking the entire chain into account maximizes the profit of the total supply

chain, which then leads to higher profits for each individual company within the supply

chain.

How does a manager get this broad scope? The supply chain scope is made up entirely of

information, and the breadth of this information determines whether the scope is global or

local. To obtain a global scope of the supply chain, a manager needs accurate and timely

information on all company functions and organizations in the supply chain. For example, in

trying to determine production schedules, it is not enough for the workstation manufacturer

mentioned earlier to know how much inventory is on hand within the company. The

manager also needs to know the downstream demand and even the upstream supplier lead

times and variability. With this broader scope, the company is able to set production

schedules and inventory levels that maximize profitability.

Information must have the following characteristics to be useful when making supply chain

decisions:

1. Information must be accurate. Without information that gives a true picture of the

state of the supply chain, it is very difficult to make good decisions. That is not to say

that all information must be 100 percent correct, but rather that the data available

paint a picture that is at least directionally correct.

2. Information must be accessible in a timely manner. Often, accurate information

exists, but by the time it is available, it is either out of date or, if it is current, it is not

in an accessible form. To make good decisions, a manager needs to have up-to-date

information that is easily accessible.

3. Information must be of the right kind. Decision makers need information that they

can use. Often companies have large amounts of data that is not helpful in making a

decision. Companies must think about what information should be recorded so that

valuable resources are not wasted collecting meaningless data while important data

goes unrecorded.

Information is a key ingredient not just at each stage of the supply chain, but also within

each phase of supply chain decision making—from the strategic phase to the planning phase

to the operational phase (see Chapter 1). For instance, information and its analysis play a

significant role during the formulation of supply chain strategy by providing the basis for

decisions such as the location of the push/pull boundary of the supply chain. Information

also plays a key role at the other end of the spectrum, is operational decisions such as what

products will be produced during today's production run. Managers need to be able to

understand how to analyze information to make good decisions. Much of this book deals

with just that idea —how to identify a supply chain problem that needs to be solved, obtain

information, analyze it, and then make s good decision to act on that information.


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10. SUPPLY CHAIN MANAGEMENT IN CONSTRUCTION

ASSESSING CONSTRUCTION SUPPLY CHAINS THROUGH CASE STUDIES

In this section, three case studies that were executed in the Netherlands and Finland are

being described, representing three exercises of supply chain assessment. The case studies

represent three separate analyses of different supply chains. The case studies give some

insight in the waste, problems and causes, and their interdependence presently existing in

construction supply chains.

Case Study Methodology

Method Case study 1 Case study 2 Case study 3

Quantitative

analysis

Measurement Waste:

Time buffers

Quantitative

analysis

Observations,

Interviews etc.

Problems:

Controllability problems

Implicit analysis Impressions etc. Causes:

Traditional trading

The case studies merely applied to the part of the supply chain coordinated by the main

contractor. The first case study represented a measurement (i.e. quantitative analysis) of

time buffers along a part of a chain process of concrete wall elements in residential building.

The second case study represented a problem analysis (i.e. qualitative analysis) to identify

and locate controllability problems in a chain process of omposite façade elements in

residential building. The third case study represented a quick scan of the cost impact of

trading methods used by a main contractor to purchase materials. The scan was an

undercurrent part (i.e. implicit analysis) of a larger research program to investigate new

ways of materials management by a main contractor.

The case studies represent some good examples of the effects of interdependency in the

construction supply chain. Time buffers, as observed in the first case study, were mainly

located in between the sub-processes, separating the sub-processes in order to cope with

variability and non-synchronicity. The time buffers were having a large impact on time

buildup in the total process. Controllability problems, as observed in the second case study,

mostly stemmed from earlier activities in the chain, performed by prior actors . The

controllability problems caused much waste, including time buffers.


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Generic configuration of a traditional supply chain in residential building

Overview of the First Two Case Studies


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From the case studies three main conclusions can be drawn:-

First, even in normal situations much waste and problems exist in the construction supply

chain. However, this is not seen or often ignored. In the chain, most actors (separate

companies and divisions of the same company) appear to be managing just their own parts,

securing their own businesses.

Second, most of the waste and problems are caused in another (i.e. earlier) stage of the

construction supply chain other than where they are found. The root causes of the waste

and problems were rarely found in the activity where they were encountered, but rather in

a previous activity executed by a prior actor, often operating on a higher organizational

level.

Third, waste and problems are largely caused by myopic control of the construction supply

chain. Many actors in the chain seem to be not able or interested to see the impact of their

behaviour on other (i.e. later) activities in the chain. In most cases, actors are not prompted

to consider the effects of their activities. Instead, they are encouraged to optimize their own

part of the chain, not taking into account other activities and actors in the supply chain.

The conclusions are based on three case studies. In order to underpin the conclusions, the

case study results are being compared to findings in existing research.

Case-1 : Time measurement of concrete wall elements


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Case-2 : Problem analysis of composite facade elements


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Comparison Of Case Study Results With Findings In Existing Research

Jarnbring (1994) found in his study on material flows in Swedish construction that the value

added time of those flows is only 0.3% to 0.6% of the total flow time. Various studies show a

cost reduction potential varying from 10% to 17% of the material costs (i.e. purchasing

price) by means of improved logistics (e.g., Asplund and Danielson 1991, Jarnbring 1994,

Wegelius-Lehtonen 1995). Most researchers argue that chances for these cost savings

would increase if contractors and suppliers would co-operate to identify joint opportunities

to improve logistics. However, in a study into construction logistics, Wegelius et al. (1996)

found that the purchasing price is still the dominating criterion for supplier selection, which

is confirmed by Jarnbring (1994). Särkilahti (1993) found that, in general, subcontractors are

also selected on the basis of price.

The tenor of these findings support the conclusion from the case studies as for the existence

of considerable waste in construction supply chains (i.e. the part of the chain involving

contractors and suppliers). Also, the argument that joint improvement of logistics would be

more efficient (i.e. less costly) when actors in the supply chain would cooperate

demonstrates the fact that adversarial bargaining is wasteful. When taking the whole supply

chain into consideration, and all possibilities for improvement, the amount of avoidable

waste and problems must be considerably higher.

Laitinen (1993) found that each actor of the supply chain adds a time buffer for himself in

the schedule, and often produces in a different sequence or speed than the next or previous

actor, optimizing just his own activities. It is also customary to use material inventories as

buffers against variations and uncertainties in the supply chain (O’Brien 1995). In a study on

deliveries of concrete façade components, Laitinen (1993) found several problems causing

variation and uncertainty in the delivery process. For instance, design information was often

deficient, and difficult design issues were often not detailed. In addition, design changes

were caused by non-available, late, wrong or incomplete information, and they were often

not being communicated to the factory.

The case studies showed that most of the waste and problems found were caused by

another actor in another stage in the supply chain. The case studies as well as the findings in

existing research indicate the causal relationship between problems in one stage of the

supply chain causing waste in another (i.e., the next) stage.

Jarnbring (1994) found that deficient planning and deficient information on the needed

amount of material are characteristic for materials purchasing in construction. In a study on

the implementation of lean production in construction component manufacturing, Koskela

and Leikas (1997) found that there is a tendency to place construction component orders

with missing information due to incomplete design. According to Jarnbring (1994), decision

making on logistical solutions is often constrained to those solutions one has experience of

or insight in.


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Thus, the causes of waste and problems in construction supply chains, as mentioned earlier,

include decisions that are made with a lack of information or understanding. This appears to

be valid for operating the supply chain itself, but also for finding solutions (e.g., for logistics).

Comparison of the results of the case studies with prior research justifies that waste and

problems in construction supply chains appear to be extensively present and persistent. Due

to interdependency in the supply chain, the occurrence of waste and problems is

interrelated with causes in other stages and levels of the supply chain. Myopic control of the

construction supply chain reinforces waste and problems, and complicates their resolution.


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11. ROLES OF SUPPLY CHAIN MANAGEMENT IN CONSTRUCTION

The generic concepts, methods and lessons learnt, which have been developed in the

framework of SCM, can be used in different ways for the improvement of construction

supply chains. In the following, we illustrate how the methodology of SCM can contribute to

the understanding of construction supply chain problems, and in giving direction to

improvement efforts. The bottom-line is the effective resolution of interdependency-caused

issues in the construction supply chain, including basic problems and myopic control.

SUPPLY CHAIN MANAGEMENT’S CONTRIBUTION TO RESOLVE BASIC

PROBLEMS IN CONSTRUCTION: UNDERSTANDING CONSTRUCTION SUPPLY

CHAIN PROBLEMS

The case studies and existing research show that problems in construction supply chains are

largely characterized by interdependency. Myopic control of the construction supply chain,

combined with traditional trading and non-cooperative relationships, reinforces the

problems, and complicates their resolution.

Above, SCM has been introduced including an appropriate methodology to resolve the basic

problems in the construction supply chain. The first step of the methodology suggests a

chain assessment to uncover the nature and causality of the problems, which has been

demonstrated earlier in the case studies. Understanding existing problems is an absolute

necessity to be able to resolve them effectively. The goal is to become totally aware of the

real basics of the problems, and approaching the issue properly in order to unlock

possibilities for effective improvement of the supply chain. In fact, it’s a matter of making

waste and problems visible and tangible, and identifying and detecting the root causes to

make it possible to resolve them all.

ARGUMENT FOR SUPPLY CHAIN MANAGEMENT IN CONSTRUCTION:

FULFILLING THE SUPPLY CHAIN METHODOLOGY

Based on the insight gained by means of supply chain assessment, the SCM methodology

needs to be fully applied to resolve the problems that were found in the construction supply

chain. Because most problems spread across (a considerable part of) the supply chain,

solutions are needed that equally cover multiple stages of the supply chain, including the

actors involved. The range of the solutions and the part of the supply chain involved depend

on the scale of the problems.

After having assessed the supply chain, the SCM methodology suggests redesign

(reconfiguring the supply chain’s structure), control (coordinating the supply chain

according to the new configuration) and continuous improvement. For instance, towards


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suppliers, the methodology could include reengineering the procurement process, installing

joint coordination of logistics and recurring product development programs. Typically, such

activities include joint activities between separate actors in the supply chain.

Supply chain arrangements counteracting adversarial relations with other actors (e.g.,

partnership) are needed to enlarge the magnitude of the SCM methodology, and clear the

way for resolution of interdependency-based problems and myopic control. In fact, actors

are dependent on each other for implementing the supply chain methodology successfully.

Supply chain development should take place in co-operation with a growing number of

actors tackling a growing number of issues. The actors involved should have a common

development goal, share the same view on the development, and adopt the same approach

to issues such as grasping concrete and objective performance information, and searching

for improvement opportunities cooperatively. It is interesting to compare the development

issues of SCM, as defined by Lin and Shaw (1998), to the actual practice of construction.

General Approach to Supply Chain Development


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Development Issues of SCM according to Lin and Shaw (1998)


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12. SUMMARY

Actual practice in construction not only fails to address issues of supply chain, but rather

follows principles that make supply chain performance worse. SCM can play major roles in

construction. The principle roles of SCM are covered by the generic SCM methodology. The

SCM offers general guidelines that can be used to analyze, re-engineer, properly coordinate,

and constantly improve virtually the complete construction supply chain, resolving basic

problems and the myopic control that have been plaguing the supply chain. This would be

practically impossible to realize in the short term. Therefore, initially, the SCM methodology

is properly deployed on a lower scale, addressing partial supply chain problems, involving a

limited number of supply chain actors. Due to its recurring character, the SCM methodology

implies a continuous improvement process of which the scope can be enlarged over time,

involving an increasing number of areas of application.

Some areas of application, which may be, and to a certain extent have been subjected to

SCM, include the reduction of costs (especially logistical costs), lead-time and inventory 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 the supply chain on site

activities. Here, the goal is to reduce site costs and duration. In this case, the primary

consideration is to ensure material (and labor) flows to the site for the sake of avoiding

disturbances in the workflow. Thirdly, the focus may be on transferring activities from the

site to upstream stages of the supply chain. The rationale may simply be to avoid the

inferior conditions of site, or to achieve wider concurrency between activities, which is not

possible in site construction with its many technical dependencies. Here, the goal is again to

reduce the total costs and duration.

In practice, these areas are intimately interrelated. It is often difficult to improve the

dependability of the deliveries of a supply chain without addressing the total supply chain. If

activities are transferred from site upstream the supply chain, it is requisite that the

resultant, more complex supply chain is orderly managed and improved in order to have the

benefits intended.

In view of these roles, gaps in prior initiatives to advance the supply chain can be identified.

For instance, the logistics initiatives, stressing (average) costs, have often failed to address

the impact of supply chain variability on site assembly. In addition, industrialized

construction, with its long and complex supply chain, has often been lacking even basic

principles of SCM.

The generic body of knowledge accrued in the framework of SCM leads to improved

understanding of the characteristics of construction supply chain problems, and gives

direction for action. However, the practical roles for SCM have to be developed in

construction practice itself, taking into account the characteristics of construction and the

specific situation.


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13. BIBLIOGRAPHY

� Supply Chain Management Theory & Practices By R.P. Mohanthy and S.G.

Deshmukh.

� Supply Chain Management Strategy, Planning & Operation By Sunil Chopra and

Peter Meindl.

� www.citeman.com

� www.cognica.com

� www.nzbcsd.org.nz/supplychain

Supply Chain Management in Construction

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