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For most manufacturers and retailers, supply chain management has centered on minimizing costs through such strategies as offshore sourcing, production in low-cost countries, inventory optimization and cutting logistics costs. In fact, top management routinely measures operational success by how well supply chain costs are minimized on the operating statement.
For project-centric industries, however, supply chain costs are among many operating factors that often are over-shadowed by the need to avoid risk, meet tight deadlines or avoid complete disaster. For example, asset-heavy industries such as oil drilling, shipbuilding and defense are focused on 100-percent uptime-not on saving a few dollars in redundant inventory. Construction operations can only function without stoppages if subcontractors and suppliers are able to precisely coordinate deadlines, so high transportation spend is often a necessary cost of doing business.
Certainly cost management is important for these industries, but only in the context of the entire project, not necessarily for daily operations. The penalties of shutting down operations or not meeting deadlines for supply chain failures makes all other costs pale by comparison.
Richard Cork is a veteran of the construction business in the U.K. and now serves as the construction business development manager for IFS Worldwide, the Swedish enterprise software company. According to Cork, project-centric industries such as construction, shipbuilding and offshore oil rig erection have very different business challenges from any other manufacturing or process industry. Each project is unique, so each is literally started anew from the ground up. The ranks of subcontractors and suppliers are dominated by thousands of small businesses with limited resources and high risk. But the biggest difference is the multitude of variables beyond cost that influence every decision. Cork says that five drivers describe all challenges faced by project-centric businesses:
• Cash flow
All five of these variables must constantly be weighed against each other before a major decision is made. For example, a general contractor can reduce risk of missing a project deadline by increasing resources such as materials and labor. That decision will increase costs and reduce cash flow, perhaps jeopardizing the ability to pay key suppliers who could delay further shipments. All factors need to be weighed.
"The way in which these drivers interact differs by the type of project and the strategies of companies involved, but they are ever present," says Cork.
The complexity of dealing with these multiple variables has made it difficult for project-centric industries to adopt supply systems and processes commonly used by manufacturing companies. In fact, the construction industry long operated using a wide variety of separate systems focused on the needs of single-function silos such as purchasing, engineering, scheduling, payroll, and so on.
"If each application has a different database run by different departments, it is not surprising that information cannot be shared in a timely manner and is too inconsistent to support effective management of the project or the supply chain," says Cork.
This limitation is rapidly changing. Leading ERP vendors, including IFS Worldwide, with years of experience in manufacturing have developed integrated ERP and supply chain applications specifically for project-centric industries. IFS Applications for the construction industry, for example, is designed around the need to balance the five key variables across all functions in the firm.
"The agility of its architecture allows it to fit each business rather than forcing the business to change," says Cork, "The single biggest benefit of IFS Applications to this sector is a single application on a single database allowing all users to manage these five drivers."
This shift to integrated IT systems is happening none too soon. Project-centric industries are increasingly facing the same challenges as their manufacturing brethren such as tighter completion deadlines, offshore competition, material cost inflation, labor shortages and pricing compression. From a supply chain perspective, Cork says that these business challenges are forcing project-centric industries to take very different approaches in three areas:
• Visibility and control of the supply chain
• Communication and trust among the partners
• Risk management
Visibility and Control
Large construction project supply chains usually have three, four or more tiers amounting to hundreds if not thousands of suppliers and subcontractors. The visibility and control that the general contractor has over its project diminishes the farther back in the tier structure the supply chain goes. As the visibility and control are reduced, risk increases.
Take, for example, a typical office building with hundreds of windows. To block the sun and glare, all of the glass is coated with a reflective material. The window manufacturer buys custom-cut glass from a manufacturer that in turn goes to a coating supplier that in turn uses another provider that actually applies the coating and then delivers the finished windows to the site. That tier four supplier now has complete control over the water tightness of that building. If that supplier fails to deliver the windows on time, the building is not watertight. No further work that is sensitive to moisture, such as electrical connections and interior finishes, can be started. Millions of dollars of work is directly dependent on the reliability of that one small supplier.
"Low-tier suppliers can have a dramatic impact on risk and the success of the entire project," says Cork. "The more of these suppliers that you have, the more things can go wrong that will have an unfortunate ripple effect."
The solution to the problem is to reduce the number of suppliers, but the reduction process must begin at the top tier. Each tier one supplier will have its own tier twos, and so on. By the time the supply chain gets down to the tier threes and fours, there may be thousands of suppliers on a major project, and each adds a great deal of risk. By consolidating the number of tier one and two suppliers, the downstream supply chain is reduced considerably.
"We are seeing much tighter supplier chains with fewer tier ones and closer relationships with the tier twos and threes to minimize the danger of a downstream supplier causing nasty surprises," says Cork.
Communication and Trust
Whittling down the list of suppliers and subcontractors from hundreds to a few dozen regular partners not only reduces risk, but the project manager is also able to develop meaningful supply chain collaboration. By opening up portions of its IT system to trusted supply chain partners, the project leader can fully leverage the power of its systems and its IT investment.
The use of portals to allow these partners into the appropriate parts of the system is now finally gaining momentum in the construction industry, says Cork. Such collaboration with suppliers in extended supply chains has been well established for several years in many global manufacturing industries, but it is relatively new to construction.
"Its use is rapidly going beyond just ordering materials," says Cork. "Contractors and subcontractors are sharing designs and signing off drawings to a point where most aspects of a project are handled electronically, so unnecessary delays are completely avoided."
In addition to the drawings and designs, keeping a project moving requires the supporting metadata such as the lists of materials and the schedules of deliveries. Electronic systems must have all of this information in a signal database, in a signal application, and in a form that is accessible to every key partner.
"If there is a holdup or a question, it is easy to see who is holding up and what must be done to solve the issue," says Cork.
Collaboration-capable systems are not new. Stand-alone hosted collaboration systems were bolted onto ERP systems years ago to allow outside users to access certain information, but today's project-centric companies need collaboration functionality built into core systems to allow maximum access-and control-of data to outside users. IFS and other agile ERP suppliers have all built collaborative functionality into their products. With these agile collaboration systems, access can be provided to any outside party, even down to tier three or four suppliers if their role is critical at any point in time.
"Collaboration is usually limited to as few tiers as possible for control purposes," says Cork, "but the benefits of these collaboration portals extend past their actual hands-on use. The shortening of the lines of communication at the top levels brings the smaller players closer to what is happening on the job."
The reduction of supply chain partners to a trusted few has the added benefit of developing much closer relationships with the suppliers and subcontractors. The benefits of these closer relationships work both ways.
"The project owner is more comfortable with the familiar suppliers and contractors who have proved themselves," says Cork. "The suppliers and contractors know that they will be paid on time, which is a bugbear for subcontractors these days. Trust is greatly enhanced for everyone."
A related trend is that project owners are looking to their contractors for longer and deeper relationships that go beyond the construction phase. A large building project might take a year or two to build, but the asset management for the project goes on for many years beyond the construction phase. The contractors that worked on the job have important project knowledge that can extend their role.
"It used to be that you would hire a contractor for 18 months for the life of the project, and afterwards they were gone," says Cork. "Increasingly, the same suppliers that built part of the project are maintaining the assets for the project owner. There are real benefits to that relationship."
For example, Debut Services is a property management company that is a joint venture of a large construction company and another property management firm. Debut takes care of 40 percent of the building infrastructure that one of its parent firms may have constructed for the U.K. defense ministry. The property management function includes long-term maintenance of more than 9,000 individual assets from barracks to entire garrison towns, including roads, buildings, communications and mechanical items.
"There are real benefits to having supply chain partners that not only are involved in the construction phase, but also are long-term partners in the maintenance of the project," says Cork. "Deeper, longer relationships improve communication and control, and reduce overall risk."
Tighter supply chain relationship also pay off when business cycles overheat and skill shortages become a serious problem. For example, London will be holding the 2012 Olympics and every good contractor, subcontractor and supplier is lining up for the huge building boom that is unfolding.
"It is very difficult for any supplier or contractor to pass on bidding for a job," says Cork. "It is not in their nature."
Contractors hope that if they get all the business they bid on, somehow they will be able to manage the process. Too often, they are awarded more jobs than they can handle. It soon becomes apparent to the general contractor that they are stretched too far, but it may be too late.
"Project managers with close relationships with a limited number of long-term partners should not have this problem," says Cork. "The subcontractors will depend on these relationships for new jobs and will take on new clients only when they are able to satisfy the long-term clients."
The greatest risk for any project is the failure of a key player to perform, which is why every major partner in the supply chain of a project signs some sort of service level agreement. But such SLAs provide little real risk protection.
"If you ever have to pull the SLA out of the drawer and look at it in any detail, you already have a problem," says Cork. "Something serious has gone wrong with that partner."
While SLAs will never go away, Cork sees the construction industry focusing more on better validation of subcontractors and suppliers before they are taken on, and then monitoring performance of these partners on a regular basis.
Every new supplier or subcontractor has to be validated as being both competent in its specialty and safe in its work history. While every project leader must painstakingly go through this validation process, the cost and time involved is making the whole industry look for ways to minimize the resources needed.
"The cost and time of validation has become another reason for maintaining a small supply chain where you work with the same partners again and again," says Cork. "When a new partner is needed, the plan is always to find one that has the profile to be a keeper."
There is also a trend toward centralized supplier validation. On a regional basis, the construction industry is creating organizations whose sole role is to validate suppliers and subcontractors. Such organizations benefit all parties. A small contractor with sales of $10m does not have the time or resources to go through a validation process with 20 prospective prime contractors. Rather than repeat the vetting process that other companies have already done, project owners much prefer relying on an independent body working on behalf of the whole industry to manage this process.
"If a contractor is looking for a specific capability, the database is there for fast, easy review," says Cork.
Every project manager will have key performance metrics that it uses to measure and monitor its subcontractor and supplier over time, and such KPIs can be tracked with most of the newer integrated IT platforms.
"The real value for such performance measurement is best used for benchmarking improvement, rather than as a punitive type of checklist," says Cork. "By improving the performance of subcontractors and suppliers, the number of supply chain partners can be maintained, turnover reduced and overall risk minimized. Keeping track of 50 partners is also a lot easier than trying to monitor a list of 250 or more."
Risk on a project is also managed by having the right materials available. But managing material risks has been a long-time conflict between two operational strategies for large construction projects. On the one hand, a guiding principle has always been to avoid double handling of materials on a job site because of the waste of manpower and the increased likelihood of loss and damage to materials.
"The term 'just in time' is not used in construction, but it is the same concept," says Cork. "Materials should be delivered to the job site as close to when and where they are needed as possible."
At the same time, buyers on projects are always seeking the lowest price for materials, so there is an incentive to order full truckloads of bricks, blocks, insulation and other materials. But by taking delivery of volume quantities of building materials, there is always a problem in finding a place to put the goods, especially in a crowded city center site. The materials inevitably end up being moved two, three or more times during which time they get damaged.
Consolidation centers are now the most popular approach to material risk management. This concept is being showcased with the massive Olympic projects getting under way in London, but it is becoming popular with many large projects.
For big projects in the London area like the Olympics and Heathrow Airport Terminal Five, large deliveries are taken at what is a temporary distribution center relatively near the job site. As needed, small vehicles move manageable quantities of materials to exactly where they are needed. Even tradesmen's tools can be stored centrally and delivered to the job site, so dozens of workers don't have to park their vans at the job site.
"In London, it is increasingly common for tradesmen to take public transportation to a construction project knowing that everything they need will be there when they arrive," says Cork. "That level of coordination requires a tight supply chain, and a great deal of trust all the way down to the worker level."
As traffic and environmental concerns increasingly become issues for the construction industry, Cork sees the use of consolidation centers expanding because they reduce trips for heavy trucks in crowded city centers.
"The double handling at first seems counterintuitive, but it has proven to be the right approach," says Cork.
Running such consolidation centers is not a traditional activity for general contractors, so IFS has built a certain amount of logistics capability into its construction industry applications.
"General contractors are also finding themselves in the manufacturing business these days," says Cork.
"To minimize the work on crowed job sites, contractors are doing a lot of pre-assembly off site. To meet these expanded needs, we have pulled together all of the functionality normally seen in manufacturing, distribution and logistics industries into the construction industry systems."
Reconciling Cost, Value
One of the most difficult tasks in construction management is monitoring project finances as the job progresses. So-called cost-value reconciliation (CVR) keeps track of the costs to date on a project as well as the value that can be charged back to the client. Reconciling the cost and value simultaneously shows how the project is doing at any point in time. However, meaningful reconciliation is virtually impossible with disparate systems because of the manual work necessary to bring all the data together.
"You have many systems on site and others at the head office, all counting the expenses and expected revenue," says Cork. "It may take six weeks to compare the figures, at which time the numbers are no longer relevant. The best you could know was whether the project was making money six weeks earlier."
With integrated systems such as IFS Applications, cost and such financials as invoicing, payroll and billing use the same database. CVR is available at any point at any level of detail. For example, CFOs may want to see details of the cash flow. Project managers may want to see if the project is adhering to the budget and schedule. The CEO may only want to see a dashboard with green, amber and red lights to indicate the level of profitability.
Near real-time CVR is especially important for the project-centric industries, says Cork, because projects can change so quickly. With traditional manufacturing, the cost and revenue figures are usually developed when the product first comes off the line. These calculations should not change significantly as long as the product is made and distributed in the same manner. For projects, however, critical changes happen on site every single day, which can drastically alter the CVR.
"If the CVR numbers start to go down, action must be taken immediately to turn things around," says Cork. "The sooner any unfavorable shift is known, the sooner problems can be addressed."
Shipyard Keeps Its Projects on Time
For Todd Pacific Shipyards in Seattle, everything the company does is a project, whether the job is a quick $10,000 repair on a fishing trawler or a $50m overhaul on a Navy warship. And while project-centric IT systems are relatively new to U.S.-based users, Todd Pacific has been using its IFS suite of project-centric applications for several years. The integrated IT system manages the scheduling, procurement, subcontractor management, supplier collaboration and all financials for every ship that comes into the yard.
IFS Worldwide, www.ifsworld.com/us/
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