CHAPTER- 3

SUPPLY CHAIN MANAGEMENT CONCEPTS

What is Supply Chain?

The supply chain involves all the parties involved, directly or indirectly, in fulfilling a customer
request. The supply chain not only includes the service providers, manufacturers ,executers,
and the suppliers, but also the transporters, logistic managers, vendors, subcontractors,
warehouses, retailers and the customers themselves. Within each organization, the supply
chain includes all functions which are involved in receiving and filling the customer request.
These functions include, but are not limited to, delivery of services, product development,
marketing, operations, distribution, execution, and finance and customer service.

The primary purpose for the existence of any supply chain is to satisfy customer needs, in the
process generating profits for itself. The supply chain conjures up images of product and
services or supply moving from suppliers to executers or manufacturers to distributers to
retailers to customers along the chain. The term supply chain in the context of a manufacturing
or a service provider is a misnomer as it may imply that only one player is involved at every
stage. In reality the supply chain is actually a network of various entities at various stages. It is
more accurate to use supply chain network or supply chain web for most of the supply chains as
shown in Figure 3.1. It is important to realize the continuous flow of information, funds,
material and services along the supply chain. The practical supply chains are complex networks
and a broad supply chain network as depicted in the figure can further be subdivided in to the
small supply chain networks of the each entity of supply chain. e.g. the suppliers may have their
own network of sub-vendors and suppliers, likewise distributors manufactures may have cross
linked networks existing in their supply chain. There is no commonly accepted definition of
supply chain management - it means many different things to many different people and
numerous, overlapping definitions exist: Few of them are enumerated as under:
SUPPLIER MANUFACTURER DISTRIBUTER RETAILER CUSTOMER

SUPPLER MANUFACTURER DISTRIBUTER RETAILER CUSTOMER

SUPPLER MANUFACTURER DISTRIBUTER RETAILER CUSTOMER

FUNDS,MATERIAL, PRODUCT,SERVICES,INFORMATION FLOW

Figure :3.1 A Typical supply chain network of a manufacturing industry

 The supply chain is the combination of all parties (e.g. external suppliers, partner
organisations, internal corporate services units) both inside and outside the
organisation, involved in delivering the inputs, outputs or outcomes that will meet a
specified organizational requirement.
 Supply chain is the term used to describe the linkage of companies that turns a series of
basic materials, products or services into a finished product for the client.
 All construction companies, be they client, main contractor, designer, surveyor, sub-
contractor, or supplier are therefore part of a supply chain. Because of the project based
nature of construction and the way that procurement normally operates, they are
usually members of different supply chains on different projects.
 Each company in the chain has a client – the organisation to which the services are
provided – but an integrated supply chain will have the objective of understanding and
working wholly in the interests of the ‘project client’.
 The supply chain may be inbound into the organization – an operational requirement
for internal customers for example, or it may be outbound from the organisation – in
 place to deliver wider organisational objectives to provide services for delivery to
citizens, or a combination of both.
 The shape of the supply chain employed will vary considerably depending on a range of
different considerations.
 The focus of SC can differ from industry sector-to-sector. In construction, the focus is

on the early establishment of a fully integrated client-supplier project team. In IT

projects, the focus may be on building scope for innovation and flexibility into the SC to
cater for changing requirements and rapidly evolving information and communications
technologies.
 SCs can be long-term, strategic sets of relationships between multiple, diverse organizations
which are carried from project to project, or they can be ad-hoc structures established post-
contract award to deliver a discrete, one-off objective.
 SCs can be fully integrated, networks of interconnected companies with common performance
and relationship management processes, or they could be characterized by arms length
contractor-subcontractor relationships. Each link within the chain can differ in the nature of the
interdependencies and the way in which the relationship needs to be managed.
 SCs can be inbound to the organisation – suppliers delivering goods and services into
the organisation to support its operational objectives e.g. office furniture provision for
an organisation.

Objectives of Supply Chain

The objective of the supply chain is to maximize the overall value generated. The value of the
supply chain is the difference between what the final product is worth to the customer and the
effort the supply chain expends in filling the customer request or the services demanded.. For
the most of the supply chains the value will be strongly correlated with supply chain
profitability, the difference between the revenue generated from the customer and the overall
cost across the the supply chain. The supply chain profitability is the total profit to be shared
across the supply chain. The supply chain success should be measured in terms of supply chain
profitability and not in terms of the profits at an individual stage.
 Supply Chain Management

All the flows of the information, product or funds generate costs while source of revenue is only
the customer. The supply chain management involves the management of these flows between
and amongst the stages of the supply chain to maximize total supply chain profitability.

Supply Chain Management is primarily concerned with the efficient integration of suppliers,
factories, warehouses and stores so that merchandise is produced and distributed in the right
quantities, to the right locations and at the right time, and so as to minimize total system cost
subject to satisfying service requirements. - Simchi-Levi

Call it distribution or logistics or supply chain management. By whatever name, it is the sinuous,
gritty, and cumbersome process by which companies move, materials, parts, and products to
customers.: Fortune (1994)

Supply Chain Management deals with the management of materials, information, and financial
flows in a network consisting of suppliers, manufacturers, distributors and customers. :
Stanford Supply Chain Forum

Supply Chain Management encompasses every effort involved in producing and delivering a
final product or service, from the supplier’s supplier to the customer’s customer. Supply Chain
Management includes managing supply and demand, sourcing raw materials and parts,
manufacturing and assembly, warehousing and inventory tracking, order entry and order
management, distribution across all channels, and delivery to the customer. : The Supply Chain
Council, U.S.A

Supply Chain Management: Schools Of Thought

Supply chain management as a concept is viewed by different businesses differently. The varied
view on SCM are classified broadly under following school of thought.

 Functional school
 Logistics school
  Information school
 Integration/process school

Functional school

This view concentrates on the material flow and the value addition process in the different
functional departments of the firm and other players in supply chain. This school of thoughts
holds the following basic view of the supply chain- the supply chain consists of the the
individual organization needed to procure material suppliers, transportation providers and
other groups. The main concern of supply chain management according to this view is reducing
costs in the primary functions. Some of the definitions in this school of thought are as under:-

 Supply chain management deals with the total flow of materials from the suppliers
through end users.: Jones & Riley(1985)
 Supply chain management covers the flow of goods from suppliers through
manufacturer and distributer to the end user.:Houlihan(1988)
 Supply chain management focuses attention on the interactions of channel members to
produce an end product/service that will provide best comparative value for the end
user.:Cavinato(1991)
 Supply chain management covers the flow of goods from the supplier through the
manufacturer and distributer to the end user.: Novack and simco(1991)
 Control the flow of material from the suppliers, through the value adding processes and
distribution channels to customers.: Stevens(1990)
 Networks of manufacturing and distribution sites that procure raw materials, transform
them into intermediate and finished products and distribute the finished products to
customers.:Lee and Billington(1992)

Logistics School

The logistics school of thought concentrates on the linkages between the different functional
areas of the supply chain. The supply chain is the set of the facilities through which a product
passes on its way to end customers. The objective of this school of thought is to lower the
logistics costs. Some of the definitions in this school of thought are as under:-

 Supply Chain is used to refer the chain linking each element of the production and
supply process from raw material through to the end Customers.: Scott &
Westbrook(1992)
 Technique that looks at all the links in the chain from raw material suppliers through
various levels of manufacturing to warehousing and distribution to the final customer.
;Turner(1993)

Information School

This school of thought concentrates on the flow on information up and down the supply chain.
This information may be demand and the sales data or advances shipment notices invitatory
availability etc. The objective here is to minimize the information processing cost. Some of the
definitions in this school of thought are as under:-

 SCM is really an operations approach to procurement. It requires all participants of the

supply chain to be properly informed. With SCM, the linkage and the information flow
between various members of the supply chain are critical to overall performance:
Johannson(1994)
 A supply chain is a system, the constituent parts of which include materials suppliers,
production facilities, distribution services, customers linked together via the thje feed-
forward of materials and the feedback flow of the information.:Towill, Naim & Wikner
(1992)

Integration view

This is the most comprehensive view of the supply chain which brings all the activities involved
in serving the customer for the point of origin to the point of customer. The school of thought
advocates that business processes should be integrated across the supply chain to serve
customers cost effectively. One of the definitions in this school of thought is as under:-
Supply chain Management is an approach whereby the entire network from suppliers to the
ultimate customer, is analyzed and an managed in order to achieve the best outcome for the
whole system: Ellram & Cooper(1993)

Decision Phases in a Supply Chain

Successful supply chain management requires many decisions relating to the flow of
information, product and funds. These decisions fall into three categories or phases, depending
on the frequency of each decision and the time frame over which a decision phase has an
impact.

Supply Chain strategy or design

During this phase, accompany decides how to structure the supply chain over the several years.
It decides what the chain’s configuration will be, how the resources will be allocated and what
processes each stage will perform. Strategic decisions made by companies include the location
and capacities of production and ware-housing facilities, the products to be manufactured or
stored at various locations the mode of transportation to be made available along different
shipping legs and the type of information system to be utilized. The firm must ensure that the
supply chain configuration supports its strategic objectives during this phase. Supply chain
design decisions are typically made for the long term and are very expensive to alter on short
notice. Consequently when the companies make these decisions, they must take into account
uncertainly in anticipated market conditions over the next few years.

Supply Chain planning

For decisions made during this phase, the time frame considered is a quarter to a year.
Therefore the supply chain configuration determined in the strategic phase is fixed. This
configuration establishes constraints within which planning must be done. Companies start the
planning phase with a forecast for the coming year of demand in different markets. Planning
includes decisions regarding which markets will be supplied from which locations
subcontracting, inventory of policies to be followed and the timing and size of marketing
promotions. Planning establishes parameters within the supply chain will function over a
specified period of time. In planning phase the companies must include uncertainty in demand,
exchange rate, completion over this time horizon in their decision. Given a shorter time horizon
and better forecasts than the design phase , the companies in the planning phase try to
incorporate any flexibility built into the supply chain in the design phase and exploit it to
optimize performances. As a result of planning phase, companies define a set of operating
policies that govern short term operations.

Supply Chain Operations

The time horizon here in weekly or daily and during this phase companies make decisions
regarding individual customer orders. At the operational level, supply chain configuration is
considered fixed and planning policies are already defined. The goal of supply chain operations
is to handle incoming customer’s orders in the best possible manner. During this phase firms
allocate inventory or production to individual orders, set a date that an order is to be filled,
generate pick lists at a warehouse, allocate an order to a particular shipping mode and
shipment, set deliveries schedules of trucks, and place replenishment orders. Because
operational decisions are being made in short term, there is uncertainty about demand
information. Given the constraints established by the configurations and planning policies, the
goal during the operation phase is to exploit the reduction of uncertainty and optimize
performance.

The design, planning and operations of a supply chain have a strong impact on overall
profitability and success. The close coordination between the design and management of
supply chain flows (product/services, information and cash) is essential for the success of the
supply chain.
 Supply Chain Performance: Achieving Strategic Fit

Competitive and Supply Chain Strategies

A company’s competition strategic defines the set of customer needs that it seeks to satisfy
through its products and services. The company’s competitive strategy will be defined based
upon the customer priorities. Competitive strategy targets one or more customer segments and
aims to provide products and services and satisfy the customer needs.

A supply chain strategy determines the nature of procurement of raw materials, transportation
of materials to and from the company, manufacture of the product or operation to provide the
service and the distribution of the product and services to the customer, along with any follow
up service. Additionally, in each company, the strategies will also be devised for finance,
accounting, information technology, and human resources. Supply chain strategy includes what
many traditionally calls supply strategy, operations strategy, and logistics strategy, decisions
regarding inventory, transportation, operating facilities, and information flows in the supply
chain are all part of supply chain strategy.

Achieving strategic fit

For any company to be successful, its supply chain strategy and competitive strategy must fit
together. Strategic fit means that both the competitive and supply chain strategies have the
same goal. It refers to consistency between the customer priorities that the competitive
strategy hopes to satisfy and the supply chain capabilities that the supply chain strategy aims to
built. The issue of achieving strategic fit is key consideration during the supply chain strategy or
design phase.

To achieve strategic fit, a company must ensure that it supply chain capabilities support its
ability to stisfy the targeted customer segments. There are three basic steps to achieve
strategic fit.

 Understanding the customer and supply chain uncertainty

  understanding the supply chain capabilities
 Achieving strategic fit;

Understanding the customer and supply chain uncertainty: First a company must
understand the customer needs for each targeted segment and the uncertainty the supply
chain faces in satisfying these needs. These needs help the company define the desired cost
and the service requirements. The supply chain uncertainty helps the company identify the
extent of disruptions and delay the supply chain must be prepared for. To understand the
customer, a company must identify the needs of the customer being served. In general the
customer demand from different segments may vary along several attributes as follows.

 The quantity of product and services required in each lot or order

 The response time or the time of execution of a service that a customer is willing
to tolerate.
 The variety of product or services needed
 The service level required
 The price of product or service.
 The desired rate of innovation in the product
 The desired level of quality of the product or service.

Understanding the supply chain capabilities: There are many are types of supply chains,
each of which is designed to perform different tasks well. A company must understand what its
supply chain is designed to do well. The study of the characteristics of the supply chain and its
capabilities is very important. The sigle idea o which all the characteristics of the supply chain
contribute is the idea of a tradeoff between responsiveness and efficiency. The supply chain
responsiveness includes a supply chain to do the following:

 Respond to the wide range and attributes of products or services demanded.

 Meet the strict deadlines and short lead times
 Handle large quantities of orders or a large project for execution.
 Meet a high service level
  Handle supply uncertainty.

The responsiveness comes at cost. Higher is the responsiveness of the supply chain higher is
cost and lower is the efficiency of the supply chain. For every strategic choice to increase
responsiveness, there are additional costs that reduce the efficiency.(Figure 3.2 & 3.3)

High

Responsiveness

Efficiency

Low High

Figure 3.2 :Responsiveness Efficiency Frontier

High

Responsiveness

Cost

High Low

Figure 3.3 : Responsiveness - Cost Frontier

Finding a Zone of Strategic Fit: This the third and final step in achieving the strategic fit
which is to ensure that the capabilities of the supply chain is consistent with the need of the
customer. If a mismatch exists between what the supply chain does particularly well and the
desired customer needs, the company will either need to restructure the supply chain to
support the competitive strategy or alter its strategy.

To achieve complete strategic fit, a firm must consider all functional strategies within the value
chain; it must ensure that all functions in the value chain have consistent strategies that
support the competitive strategy. All functional strategies must support the goals of the
competitive strategy and all sub-strategies within the supply chain such as the manufacturing,
inventory, and purchasing must also be consistent with the supply chain’s level of
responsiveness.

Thus, firms with different locations along the responsive spectrum must have different
functional strategies that support their responsiveness. A highly responsive supply chain must
devote all its functional strategies to responsiveness, where as an efficient supply chain must
focus all its functional strategies on efficiency.(Figure: 3.4). Changing the strategies to achieve
strategic fit may sound easy enough to do, but in reality it can be quite difficult. It is
established that:

 There is no right supply chain strategy independent of the competitive strategy.

 There is a right supply chain strategy for a given competitive strategy.
 The drive for strategic fit should come from the highest levels of the organization. In
many companies different group devise competitive and functional strategies. Without
proper communication between the groups and coordination by high level management
such as the CEO these strategies are not likely achieve the strategic fit. For many firms,
the failure to achieve the strategic fit is a key reason for their inability to succeed.
 Responsive supply chain

Responsiveness spectrum

Efficient supply chain

Implied
uncertainty
spectrum
Certain Demand Uncertain Demand

Figure 3.4: Finding the zone of strategic fit

Supply Chain Management Concepts in Construction

Industry
What is Construction SCM?

As we have witnessed the discussion of construction supply chain management (SCM) is usually
informed by a wide range of definitions. This diversity of definitions and understanding
presents a challenge, which this section addresses. In this section the effort has been made to
explore wide range of conceptual issues that help understand the nature of supply chains in
construction. The premise for this chapter is the move from the project and its management, as
the main focus for the management of the construction process, towards the supply chain and
its management as the main focus. The supply chain is the focus for more effective ways of
creating value for clients; as a vehicle for innovation and continuous improvement, integration
of systems and perhaps even improved, industry-wide, profitability levels.
Value creation is increasingly viewed as a process facilitated through a supply chain – a network
of relationships within which firms are positioned. New and Westbrook (2004) suggest that
firms in supply chains must build networks so as to provide complementariness between inner
and external abilities, that is to say, effective supply chains need to be supported in networks
that extend beyond the immediate linkages of exchange in order to create the value in each
link. In the same way that individuals are drawn to, or naturally seek, other individuals with
skills, knowledge and attributes that they themselves lack, firms are drawn to form
collaborative relationships with other firms with skills, knowledge, attributes and perhaps
resources that are complementary to the first firm. Just as individuals in society find it difficult
to survive isolated from others, isolates in business are vulnerable and may fail in time unless
they possess a unique skill or talent which gives them market power (for example a monopoly
supplier or oligopoly of few suppliers in a market of buoyant demand). The term supply chain
implies a linear process. This linearity, however, exists only at a high level of abstraction. At an
applied level, when we explore the nature and operation of supply management, there is
limited linearity, clusters of suppliers coming together in series of dyadic exchanges. Social and
market exchanges create social and technical systems which, once in place, are observed as
dynamic networks of relationships. The juxtaposition of these two aspects of supply chains is
shown in Figure 3.5. In construction we observe clients, consultants, contractors and suppliers
in the broadest sense positioned as nodes connected by linkages comprising knowledge
transfer, information exchange, directions and financial and contractual relationships. These
networks are transitory (Pryke and Smyth,2006) and the flows are iterative (Pryke, 2001); like
neural networks the nodes are continually linking and disconnecting depending on the project
function to be performed. Each linkage involves flows that produce a response and generate a
succession of dyadic or multi-directional flows until a particular function is satisfied and specific
issues are resolved.
Fig.3.5: A typical supply chain network in a construction industry
It would be not out of con text to site the example from the UK construction industry to bring
home the development of SCM in construction industry. During the early stages of post-Latham
(1994) reform in UK construction, major clients were working hard to find better ways to
procure and manage construction services. Partnering had real application for the large,
experienced clients that had the resources to experiment with innovative systems. British
Airports Authority and Slough Estates plc provided corporate and developer client examples of
what the industry was striving for during the mid-1990s. The large number of arguments in
support of less adversarial relations and partnering arrangements in supply chains have been
advocated post-Latham and post-Egan (DETR, 1998), particularly for the large client. And yet
the down side of partnering can potentially be a recipe for complacency on the part of service
providers (which might include consultants, contractors, subcontractors and material and
component suppliers); and higher outturn costs for clients. Large clients were not slow to
realise the vulnerable position that they individually and their organisations found themselves
in as a result of abandoning the ‘comfort zone’ of traditional competitive price bidding on a
contract-by-contract basis. The Machine that Changed the World (Womack et al., 1990) which
was a seminal work did not deal with construction at all – it referred to a post-mass-production
motor manufacturing industry and embraced and expounded lean thinking. The existence of
long-term supplier relationships and the relatively intense management of these relationships
were central. Major construction clients began to realise that partnering provided a threat and
an opportunity – the threat of escalating costs and poor performance from service providers,
but the opportunity to collaborate and integrate within the context of long-term relationships.
The construction design and production process has some activities that non-construction
manufacturers would recognise immediately – standard and semi-standard components
incorporated into a system to provide for example heating, ventilation, lift Installations or
perhaps suspended ceilings; these components are delivered to site and fixed together to form
a system or sub-system within the building. The management of the design and supply of
standard and semi-standard components, assembled at the final assembly place (in our case,
the site) enables the principles found in manufacturing to be fairly simply applied to these parts
of the construction scheme. Yet the construction team has to deal with an additional, slightly
less ordered type of process, which might be referred to as site crafted work. Figure 3.6
illustrates this point through an adaptation of Harland’s (1996) work.

Fig: 3.6 An inter business construction supply chain: Harland(1996)

A slightly uneasy relationship has developed between construction project management and
SCM. The problem remained, and still persists, of how the site-crafted element of new buildings
is managed – SCM in its purest form does not really help us to procure and organise brickwork
and plastering, for example, the so-called ‘wet trades’. Observers (Green, 2006, for example)
might dismiss SCM as the current fad or fashion. Yet, casual enquiry with many construction
firms confirms a commitment to SCM. But so often organisations have simply changed the titles
given to their procurement staff using the words ‘supply chain managers’. SCM involves
intensive management activity from a central position within the construction coalition or
network either by the client organisation, or by another organization acting as the client’s
agent. The time consuming and demanding activities comprising effective supply chain
management in construction involve everything ‘from the quarry to the finished project’. It
requires capacity and knowledge at the centre and a certain commitment from client
organisations to make it effective. Recent research carried out at UCL and involving a number of
major UK construction client organisations, indicated that the examination of sub-supply chain
elements to investigate the incremental accumulation of both cost and value proved extremely
instructive. Identifying and mapping small sections of the overall supply chain for a construction
project and isolating the costs and value added by each actor’s involvement provides the basis
for a more enlightened understanding of cost and value in construction projects.
It is now established that SCM in construction is more than a management fad and provides the
opportunity for substantial improvements in client and stakeholder value and/or reductions in
overall costs. It is commonly debated in the construction echelons, whether the SCM is
regarded as a new way of conceptualizing the management of projects or whether SCM is
regarded as a new technique to be learned. Either way, it is beneficial to from acquire an
understanding of some of the basics of SCM and its application in construction industry.t
Supply Chain Management & Project Management
Project management has evolved through several stages of development, each adding
complementary understanding to the existing bodies of knowledge (Pryke and Smyth, 2006):

Traditional Project Management Approach – techniques and tools for application (for
example Turner, 1999; cf. Turner and Mûller, 2003;and Koskela, 1992; 2000), which tend to
have a production or assembly orientation focused upon efficiency.
Functional Management Approach – strategic, ‘front-end’ management of projects
(Morris, 1994; cf. Morris and Pinto, 2004), for example programme and project strategies, and
partnering (Egan, 1998) and supply chain management (see Green and May, 2003) and other
task driven agendas which dovetail with the traditional approach, for example the waste
elimination application of lean production (Koskela, 1992;2000)
Information Processing Approach – technocratic input–output model of managing
projects (Winch, 2002) .
Relationship Approach – project performance and client satisfaction, achieved through an
understanding of the way in which a range of relationships between people, between people
and firms, and between firms as project actors operate and can be managed. Relations are
context specific (Pryke and Smyth, 2006). There are different contexts for relationships, which
operate at different levels:
 Business-to-business or organisation-to-organisation;
 Organisation-to-individual representing the business: market and other societal
relations (see Gummesson, 2001);
 Individual-to-individual: personal and social relations. Personal relations can be
characterised as (Pryke and Smyth, 2006):
 Authority: management and leadership;
 Task related: function and role;
 Acquaintance: social obligation;
 Friendship: social bonding and reciprocation;
 Sense of identity: who you are (not what you do), such as inheritance and
societal recognition – through ownership in business for example. Organisational
relations can be characterised as:
 Individual or personal: the individual represents the organisation;
 Systematic or procedural: personal relations have been enshrined into an
approach or systematic way of proceeding in order that the essence of a
relationship is replicated at a general level in the future through social or legal
obligation (cf. Wenger, 1998);
 Strategies and culture help guide the context in which systems operate, guiding
the thinking and behaviour of individuals in order that relations through
individuals and systems are aligned;
 Structure of an organisation both refl ects relations and governs relations
through hierarchy, function and proximity.
The quality of relationships is a key element in the success of a project. The quality may be the
product of a range of factors and therefore a consequence of a whole series of dynamic issues.
In this way a project team is merely the recipient of those relationships and how they develop
both within the project team and with those who are externally feeding into the project.
However, relationships are also managed. The study of projects and their supply chains
provides an appropriate context for the analysis of construction projects and programmed
within a partnering framework.
Origins of SCM in Construction
SCM is inextricably linked with partnering but whether partnering creates the need for SCM or
vice versa is a debatable point. It is clear, however, that the discussion of SCM needs to be
preceded by a definition of partnering.

Partnering In Construction Industry

‘Partnering involves two or more organisations working together to improve performance
through agreeing mutual objectives, devising a way of resolving any disputes and committing
themselves to continuous improvements, measuring progress and sharing gains’ Egan (DETR,
1998, page 9)
Loraine (1994), suggests that modern partnering has its origins in the Japanese motor
manufacturing of the 1960s and 1970s.The US construction industry began to use partnering in
the 1980s, commencing with Shell Oil and Parsons SIP in 1984. Bovis (now Bovis Lend Lease) is
credited as being the first construction organisation to be involved in a partnering arrangement
(Loraine, 1994) in UK. The characteristics of these partnering arrangements appear to have
been long term relationships between manufacturers and key suppliers, and often included
maintenance as well as initial installation (similar in concept to the operation of the lift
installation sector of the UK construction industry). The process of selecting a contractor on the
basis of lowest competitive tender is at the heart of what Winch (2000) describes as the
professional system. Winch identifies the way that activities facing the highest uncertainty in
the design stages are insulated from the market by the employment of a consultant,
reimbursed on a (non-performance related) fee basis. The industry has seen the evolution of
control actors (quantity surveyors and clerks of works principally) whose role it was to regulate
the activities that remained subject to market forces (Winch, 2000). The industry developed
during the latter part of the twentieth century into a low-trust system, in which consultants
spent too much of their time ensuring that their professional indemnity insurance cover was
not exposed to unnecessary risk, and contractors and their subcontractors adopted
opportunistic behaviour as a means of recovering from unacceptably low tendered profit
margins in a context of inappropriately allocated project risks. The motivation for the
introduction of partnering, in this case, was related
to the need to drive down costs in order to exploit resources that would otherwise have been
unprofi table. The broad principles of trust and maximization of each participant’s resources
and expertise have become the main focus of partnering agreements used within the industry.
Barlow et al. (1997) suggest that there are three main perspectives on partnering:

 A construction process, performance-enhancing tool which draws upon synergy and

the maximisation of the effectiveness of each participant’s resources (Barlow et al.,
1997).
 A management process involving strategic planning to improve efficiency in large
projects, or perhaps a variant of total quality management. Others have emphasised
the common goals aspect and partnering as an aid to collaboration.
 The non-contractual governance of construction projects school: Barlowet al., (1997)
referred to ‘putting the handshake back into doing business’ implying a move
towards trust and informal arrangements (or what is referred to as ‘keeping the
contract in the drawer’).
The unique division of labour operating in the construction industry involving
designers, contractors and materials suppliers has been cited as a central theme and
a focus for reform (see Higgin and Jessop, 1965; Cherns and Bryant, 1984; and
Bresnen, 1997, for example). The construction project coalition is a temporary
coalition of firms (see Winch, 1989 and 2000). Each fi rm represents a discrete
(contractually defined) role, and when these roles work together, we hope that
partnering will modify the roles and the relationships between them. We might,
therefore, regard the construction project as a role system (Simon, 1976). A number
of the perceived benefits from partnering arise from the ability of this system of
roles to improve organisational learning. Partnering is seen by some as a means of
removing these artifi cial divisions, yet the evidence of the effects on actor roles and
 relationships is difficult to locate (Bresnen, 2000). There are also varying views about
the precise role that contracts and charters play in partnering. One group (notably
Quick, 1994; ACTIVE, 1996; Green and McDermott, 1996; cited in Bresnen, 2000)
asserts that partnering agreements prevail over the building contract conditions,
because of the improved understanding arising out of cross-disciplinary
communications. Others (notably Loraine, 1994, referred to above and Roe, 1996,
cited in Bresnen, 2000) regard contractual forms of governance as an essential
safety net in the event that partnering might fail. The move towards informality in
the governance of construction projects – the move away from contract
management towards relationship management, has bought with it a demand for
methods of effectively managing these new types of linkages between project
actors. One of these initiatives was supply chain management.
Parternering to Supply Chain Management in Construction
SCM in construction is arguably a more recent innovation than partnering. The Egan report
relating to UK construction industry (DETR, 1998) was quite specific in its reference to SCM. The
report recommends the adoption of the following features of SCM:

 Acquisition of new suppliers through value based sourcing;

 Organisation and management of the supply chain to maximise innovation, learning
and efficiency;
 Supplier development and measurement of suppliers’ performance;
 Management of workload to match capacity and incentivisation of suppliers to
improve performance;
 Capture of suppliers’ innovations in components and systems.

Some Definitions Of Supply Chain Management Relevant To Construction

Industry.
Partnering in its most simple form asks little more of the project actors other than co-
operation. Arguably, the industry should be encouraged to abandon the futile pursuit of
adversarial and non-collaborative relationships within the context of a system that will never
deliver the customer delight to which the construction industry’s clients aspire and are so often
frustrated in
achieving. Howell et al. (1996) argue that partnering should be used to facilitate major process
re-engineering rather than easing the difficulties encountered in inappropriate systems for the
procurement of construction work. This realignment should focus upon the needs of a
concurrent design and productionprocess. In order to achieve an output, this re-engineered
process must include the management of the various actors in the product supply chain. Views
differ as to the nature of this supply chain and it is arguable whether a complex network of
organisations working together in a number of non-trade related clusters, are best described as
chains and this was referred to at the beginning of this chapter. Figure 1.2 illustrates the
relationship between the
supply chain and the network of relationships overlaying it. The term supply chain management
tends to be used to refer to management processes as well as structures of organisations.
Harland (1996) classifies SCM into four categories of use:
 Internal Supply Chain – this view of SCM owes a great deal to the work of Porter, (1985)
on value chains and is concerned with an intra-firm approach to supply chains that
involves the management of materials.
 Dyadic relationships with immediate suppliers.
 The management of a chain of businesses with which you have no direct contractual
relationship (suppliers’ suppliers and a customer’s customer, for example).
 The management of a network of interconnected businesses involved in the ultimate
provision of a product . . . (to) end customers (Harland,1996).
Cox and Townsend (1998) cite the activities of Gazeley Properties Ltd as a good example of
partnering and SCM. Gazeley, we are informed, ‘. . . attemptsto manage the development
supply chain in such a way as to maximise itsmargin while satisfying its clients’ aspirations in
terms of utility and cost’. If we replace the words development supply chain with project, we
have a description of what all developers must be doing to remain competitive and satisfy their
clients. It is, however, recognised that there is an implication that by using SCM on a
construction project we are doing something more complex than managing a group of
subcontractors and suppliers.
The relevance of SCM to construction (Pryke, 2001) lies not in the existence of supply chains,
but in their exploitation. The management of a supply chain by a developer or contractor,
implies the management of actors far removed from the dyadic contractual relationships
inherent in construction contracts. Traditional (pre PPC 2000) forms of contract are based on
the premise that, as an actor, one is in a relationship with another actor that instructs, pays, has
control of a range of performance incentives and therefore manages ones activities. Each actor
therefore is managed by the actor above in the supply chain, and in turn manages the actor or
tier of actors below. Exploiting the supply chain involves communication with other actors that
have been artificially separated from us by inhibiting contractual conditions. This leads us
towards the concept of centrality and SCM. In order to successfully manage any supply chain
we need a single actor with the authority to deal with all actors within the supply chain.
Cox and Townsend (1998) distinguish the system used by Gazeley Properties (using SCM) and
those used by other, more traditional approaches, in the following terms:
 Separation of roles between end-user and fund provider and balancing the needs of
these two actors;
 Use of project managers as interface with consultants and contractors;
 Concept design carried out in close consultation with end-users;
 Detailed design may involve input from key suppliers;
 Early participation of main contractors in design.

If we paraphrase slightly Christopher’s definition (see above) we have:

The management of . . . relationships with suppliers . . . and customer to achieve greater
customer value at less cost.
It is argued that this management process becomes supply chain management when it is
carried out within a partnering context.
Stevens (1989), offers us a model of the transition of the firm from stand-alone organisation to
supply chain partners. The four stages are as follows:
  Baseline organisation – classical management; motivation by profit maximisation;
functional specialisation; slow to adapt to market and slow to exploit innovative
opportunities.
 Functionally integrated company – starting to focus on customer service; competitive
advantage achieved through some internal integration of disparate functions.
 Internally integrated company – systems approach to customer service; optimal
information fl ow between departments; medium-term planning; cross-functional
management – product focused structure.
 Externally integrated company – transparent system of materials and information
exchange internally and externally; long-term planning andlong-term relationships with
partners; use of internal cross-functional management structures, product related;
supplier networking groups implemented (Stevens, 1989).
Much of the literature dealing with the subject of SCM, including Stevens (1989), is not related
to construction. Relating the four categories of transition to the current construction industry is
disconcerting. It is argued that the vast majority of the industry falls fi rmly into the baseline
category. Even those construction organisations where SCM is fi rmly on the agenda, show only
very limited integration of disparate internal functions. In particular, cross-functional
management within the organisation and the use of supplier networking groups, are
particularly difficult to observe.
‘Bottom–Up’ Design
One of the most important changes that the construction industry must deal with in its
evolution into SCM organisations is the recognition of the most appropriate location of
specialist knowledge in a number of fields. Applying the principles of lean production to
construction must move the location of the leadership in design from the relevant consultant to
the most appropriate subcontractor, supplier or group of same. The CRINE report
(http://www.crine-network.com/) borne out of the need of the North Sea Oil industry to
drastically reduce its costs in the face of plummeting world oil prices, identified some important
principles, which many have sought to apply to the UK construction industry. These principles
were, in summary:
  Use of performance specifications to communicate interpretation of client’s brief by
consultant to subcontractor or supplier;
 Standard forms of contract to emphasise mutuality rather than adversarial positions;
 Use of incentives to deal more fairly with risk allocation within these non-adversarial
alliances;
 Simplification of the tendering protocol and the documentation with which it is
associated.

SCM articulates a process of design and financial management, the need for which must always
have been present. But management of any process or system requires some focal point from
which the manager can operate. The division of labour within the construction industry has
meant previously that management of the whole process has been fragmented. Design, site
production and component manufacture have each been managed separately. The
management of these sectors have been poorly coordinated and this is partly because the
conditions of contract have traditionally distinguished and separated these sectors. This tends
to point to a growing need for one actor to manage the whole design/site
production/component manufacture process. In terms of capacity and authority, this actor
would need to be either the client or the contractor. SCM introduces a fundamental shift in
focus of responsibility and authority within the overall network of project roles. This system of
evolving project roles sits within a context of competing and perhaps conflicting governance
patterns. A dynamic exists between formal, contractual relationships (which initially define
roles and relationships) and the less structured and formalised project management policies,
such as partnering and work clusters (which both ultimately shape project roles and the way in
which they are connected). These managerial approaches have a fundamental affect on actor
roles and the nature and patterns of interactions between these roles. There is a plethora of
material exploring the importance and application of project management to construction
projects. Increasingly, there is emphasis upon managing programmes of projects. Perhaps the
emphasis must now change from the management of projects and programmes to the
management of standing supply chains. Many would argue that integration of process,
innovation and radical change in cost and value are only possible through a focus upon the
activities of the supply chain.
Characteristics of Construction Industry
The construction industry exhibits characteristics that differentiate it from other industrial
sectors. Competitive pressures from within the industry, as well as external political, economic
and other considerations are forcing the industry to re-examine and improve its performance
An analysis of the key characteristics of the construction industry indicates that the problems
facing construction can be categorised into the following five broad areas.
Fragmentation
The construction industry has long been recognised as having problems in its structure,
particularly with fragmentation, which has resulted in poor performance (Latham, 1994; Egan,
1998). Uniqueness (see also below), immobility and variety are three distinctive features of
construction output that fl ow from the fragmentation in construction. These features, it is
argued, are factors in the tendency of the construction industry towards low productivity, poor
value for money and mediocre overall client satisfaction (Latham, 1994), especially when
compared with other industry sectors. As a consequence of the uncertainty for the main
contractor in obtaining continuous work, with the need to accommodate the different features
and requirements of each project, subcontracting has been adopted as the dominant approach
(Cox and Townsend 1998, p. 21), which by its very nature, results in further fragmentation.

Adversarial relationships
The construction supply chain has become increasingly fragmented for the reasons outlined
above. Increased fragmentation brings increased transaction volumes at lower average values
and inevitably higher levels of opportunism, particularly in the context of low barriers to entry.
The industry had become less trusting, more self-interested and adversarial. The adversarial
attitude of the UK construction industry has been recognised problem for many years (Cox and
Townsend 1998, p. 29). Performance and innovation in construction are significantly hindered
by adversarial relationships and fragmented processes. In order to minimise their own exposure
to risk, each party in the supply chain attempts to extract maximum reward for minimum risk
that is normally achieved by means of non-legitimate risk transfer (passing risk down to the
next level in the supply chain). This way of thinking has resulted in an industry structure with
various interfaces, which are points of tension and confl ict, which eventually leads to increased
cost and reduced effi ciency (Cox and Townsend 1998, p. 31).

Figure 3.7 A typical traditional construction Industry structure. Source: Cox and Townsend
(1998, p. 33).
Part A
Project Uniqueness
The construction industry (with the possible exception of some responsive repairs) is a project-based
industry. The characteristics of a specific project, and hence its degree of uniqueness, is determined by a
number of factors. Consequently, the assessment of these project features determines the resources
needed for a project, and selection of the most appropriate supply chains needed to deliver clusters
(Gray, 1996) of resources and services for the project as a whole. This diversity and uniqueness means
that construction projects are very often ‘bespoke’ as the requirements and specifications of
technologies for specifi c clients determine their characteristics. Projects involve assembling materials
and components designed and produced by a multitude of suppliers, working in a diversity of disciplines
and technologies
in order to produce a product for particular client. This diversity of product technologies, which has to
be reorganised with each new construction project, coupled with discontinuous demand from a large
percentage of construction’s clients, accounts for the transient nature of the relationships between the
demand and supply side of the industry. In addition, with the increasing shift from on-site to off-site
production, managing construction projects involves integrating diverse and complex supply systems in
which a growing amount of value of the product is added (Jones and Saad 2003,p. 12).

Separation of design and production

One of the main problems in construction is the extent to which the industry separates design from
production. This particular characteristic of the industry is still common in spite of the deficiencies of
traditional procurement and the benefits offered by newer and more flexible approaches (Cooke and
Williams 2004, p. 2) The separation of the design and production process in the construction industry,
particularly in the building sector, and the consequent difficulties that can arise during construction
projects, has been the subject of wide criticism by a number of industry reports such as Latham (1994)
and Egan (1998). Consequently, there have been many calls to bridge this gap by creating a seamless
supply chain whereby the interface between various phases of the project’s life cycle are integrated with
one another. It is an anomaly that design and production are commonly separated at the highest tier of
the supply chain (main contractor) but commonly integrated in the tiers below this.

Competitive tendering
In most countries, construction companies are selected to undertake construction projects and the price
for their work is established by competition (Griffith et al. 2003). Unlike manufacturing, construction
projects are not priced and advertised for sale (manufactured speculatively, without prior orders from
customers), but instead uniquely priced after a negotiation or bidding process. Since the mid 1990s joint
government and construction industry initiatives (Latham 1994; Egan 1998) have encouraged
construction clients to adopt different strategies to procure work. Whilst regular, experienced and
informed construction clients have begun to adopt alternative procurement strategies, there is little
evidence to show that the majority of inexperienced irregular purchasers have done so. By far the
dominant strategy adopted is the traditional design-bid-build approach with the lowest bidder winning
the work (RICS 2006). There is no doubt that competition used in this way serves to drive down prices.
Adopting ‘low bid wins’ strategies results in a number of undesirable outcomes, particularly where the
design is already established. These are:

 Production processes that are geared to lowest cost rather than to ‘right first time’ or to ‘best
value’;
 Bidding processes that encourage opportunism - where suppliers will agree to almost any conditions
and requirements to get the work and attempt to improve profit levels on the project through
reductions in quality of materials, or the negotiation of disproportionately high rates for variation
works;
 An inability and unwillingness to cooperate in specialist design, innovation or collaborative problem
solving. ‘Low bid wins’ procurement has been blamed for, amongst others, late completion,
overspends on client budgets and product / workmanship. Alternatives do exist, but require attitude
change within the construction sector and its professions.

Need of SCM in Construction Industry

SCM has a critical role to play in improving overall performance in construction, but remains at
a very early stage of development (Jones and Saad 2003, p. 219). However, the industry is
becoming increasingly aware of the necessity to change current working practices and the
attitudes they represent (Pearson 1999). A number of organisations (for example; Balfour
Beatty and Tarmac) within the construction industry and their clients have developed SCM
techniques to rationalise their supplier base. Unlike in the construction industry, SCM has been
practised widely for many years in other industries, particularly in the manufacturing sector.
Effective SCM has helped numerous industry sectors to improve their competitiveness in an
increasingly global market place. The SCM in these industries encompasses all those activities
associated with processing from raw materials to completion of the end product for the client
or customer.
It is usually an on-going process focused upon specific products that are repeatedly
manufactured or purchased. SCM consists of a stable group of interacting partners with a
mutual interest in improving product quality and process efficiency. Unlike the manufacturing
industry, the construction industry lacks standardisation. Through the use of standard parts and
components, the manufacturing industry has been successfully generating greater levels of
productivity and quality control. The construction site is effectively an ad hoc factory,
temporarily created to manufacture a prototype product (Cox and Townsend 1998, p. 255). To
what extent the construction industry can standardise its product is essential to the
development of effective SCM. The Supply Chain Council, an independent non-profit
organisation, has developed a SCM maturity model (McCormack et al. 2004). The model defines
the following SCM maturity levels:
• Level 1 – Ad hoc – The supply chain and its practices are unstructured and ill-defined.
Processes, activities and organisational structures are not based on horizontal processes, while
process performance is unpredictable. SCM costs are high, customer satisfaction is low,
functional cooperation is also low.
• Level 2 – Defined – Basic SCM processes are defined and documented, but the activities and
organisation basically remain traditional. SCM costs remain high, customer satisfaction has
improved, but is still low.
• Level 3 – Linked – This level can be considered a breakthrough where cooperation between
company departments, vendors and customers is established. SCM costs begin decreasing and
customer satisfaction begins to show a marked improvement.
• Level 4 – Integrated – The company, its vendors and suppliers co-operate on the process level.
Organisational structures are based on SCM procedures; SCM performance measures and
management systems are applied. Advanced SCM practices, like collaborative forecasting with
other members of a supply chain, form. As a consequence, SCM costs are dramatically reduced.
• Level 5 – Extended – Competition is based on supply chains. Collaboration between
companies is on the highest level, multi-firm SCM teams with common processes, goals and
broad authority form.
The five stages of maturity show the progression of activities toward effective SCM and process
maturity. Each level contains characteristics associated with process maturity such as
predictability, capability, control, effectiveness and efficiency. Placing the construction industry
within the five levels described above, it can be argued that the construction industry has to
some extent utilised SCM techniques for years where ad hoc supply chains of subcontractors
are assembled and then disassembled at the end of each project. This basically can be
attributed to the one-off nature of construction projects coupled with discontinuous demand. It
can be argued that this type of traditional supply network is unlikely to maximise the value for
parties involved in the supply chain. The traditional construction project supply chain can be
described as a series of sequential operations by groups of people who have limited concern
about other stakeholders. Most construction projects are procured through a method by which
a defined project forms the focus for a building process carried out by a contractor, who
traditionally obtains the work by bidding the lowest price for carrying out the project. The
appointed contractor will outsource or subcontract the majority of the work to a number of
relatively small subcontractors who will usually win the work on exactly the same basis. The
number of subcontractors will vary with the complexity and nature of the project. These
contractors and subcontractors typically focus upon meeting their contractual requirements for
the lowest possible cost. There may be limited commitment to the client’s primary objectives or
to any perceived project team. A parallel, but separate supply chain managed by the client, or
client’s project manager, will in most cases include the procurement of the financial resources
to support the project and the procurement of the design process itself. Traditional unmanaged
supply chains are characterised by short-term focus, with little concern for mutual long-term
success; adversarial relationships between customers and suppliers, including ‘win-lose’
negotiations; little regard for sharing benefits and risks; and primary emphasis on cost and
delivery, with little concern for added value. As a consequence, the traditional supply chains in
a construction project are complex and temporary, involving participants who may not
contribute, other than to complete their small, often isolated, part of a one-off project. A team
culture focused on the particular needs of the client or the project rarely exists. Different
approaches to managing such a supply chain are therefore required if the potential benefits are
to be achieved. The culture within which SCM can be developed may not exist in traditional
procurement methods, but can be created if the value of such change can be shown to be
significant. Despite the limited value and benefits of the ad hoc supply chain structure, it has
worked with varying degrees of success in construction projects, owing to the unpredictable
nature of the construction process (Cartlidge, 2004: p. 127). According to Vrijhoef and Koskela
(2000), there are four levels, termed ‘roles of SCM’, of implementation of SCM in construction,
depending on whether the focus is on the supply to the site, the construction site, or both.
Levels of implementation are not mutually exclusive, and in fact, they are often pursued jointly
and the descriptions below paraphrase them. One or several supply chain (SC) participants
could lead each level of implementation.

 SCM focuses on the impact of the SC on construction site activities and aims to reduce
the cost and duration of those activities. The primary concern, therefore, is to establish
a reliable flow of materials and labour to the site.
 SCM focuses on the SC itself and aims to reduce costs, especially those related to
logistics, lead time, and inventory.
 SCM focuses on transferring activities from the site to earlier stages in the SC.
 SCM focuses on the integrated management and improvement of the SC and site
production, that is, site production is subsumed by SCM.
The application of SCM to the construction industry requires a huge effort. It entails developing
vertical integration in the design and production process and operations to link the process into
a chain focusing on maximizing opportunities to add value while minimising total cost. As this
application requires a significant shift in the mind-set of the participants towards collaboration,
teamwork and mutual benefits, it is hardly surprising that only few sophisticated applications
have been reported in the construction industry (Saad et al. 2001).The extent to which any
supply chain performs its functions depends very much on its nature, and the market in which it
operates. Hoekstra and Romme (1992, p. 7) provided the following classification of supply
chains:
Make-and-ship-to-stock. Products are manufactured and distributed to stock points, which are
spread out and located close to the customer.
Make-to-stock. End products are made and held in stock at the end of the production process
and from there are sent directly to customers who are scattered geographically.
Assemble-to-order. Only system elements or subsystems are held in stock in the manufacturing
centre, and the final assembly takes place on the basis of a specific customer order.
Make-to-order. Only raw materials and components are kept in stock and each order for a
customer is a specific project.
Purchase-and-make-to-order. No stocks are kept at all, and purchasing takes place on the basis
of the specific customer order; furthermore, the whole project is carried out for one specific
customer.
These different classes correlate quite well with different types of market, ranging from the
large volume markets such as retail to ‘one-of-a-kind’ markets such as the construction
industry. According to Anumba et al. (2000), in the large volume markets it is the supply issues
rather than the product development issues which assume greater importance most of the
time, whereas in the one-of-a-kind markets the focus is on the product development issues. As
a consequence to this, the structure of the company will necessarily have to adapt to these
priorities. For example, the large supermarket chains in the UK, in general, have a much larger
proportion of resources devoted to supply and forecasting, as opposed to product
development, whereas engineering companies in the construction industry have a much larger
proportion of resources devoted to engineering and project management. There is a tendency
for some construction professionals, and in particular contractors, to focus on capital (or initial
construction) cost and it is this focus which underpins and dominates the strategies adopted in
managing the existing supply chain. Whilst capital cost is not irrelevant, most clients usually
focus upon the value of their project in terms of the business case. It is this value which will
form the key success factor for the project.
The value may relate to the performance of the new facility in terms of its function or its worth
as an asset. Additionally, it may have a value in the market place at a particular time or over
many years. There is a tendency for the long-term objectives of project worth or value to
become refocused on the short-term objectives of cost and time once the project or strategic
brief has been established (for a discussion on this see Ashworth and Hogg 2000). In SCM, real
competition is not between organisations but rather between supply chains. In this way
organisations seek to make the supply chain as a whole more competitive through the value it
adds and the costs it reduces overall. Reducing cost and improving value are both important
aspects of gaining competitive advantage. The traditional procurement approach sought to
achieve cost reductions or profit improvement at the expense of other parties in the supply
chain. The approach of transferring costs upstream or downstream does not add any
competitive advantage as all costs are ultimately passed to the end user (Jones and Saad
2003,p. 231).
2.7 Supply5 Summary