Essay: Advancements in Procurement Practices and Supply-Chain Management…

Advancements in Procurement Practices and Supply-Chain Management in the Construction Industry
Table of Figures
FIGURE 1 – CONSTRUCTION GLOBAL LABOR-PRODUCTIVITY GROWTH 5
FIGURE 2 – POTENTIAL GLOBAL PRODUCTIVITY IMPROVEMENT FROM IMPLEMENTATION OF BEST PRACTICES 6
FIGURE 3 – ROOT CAUSES FOR LOW CONSTRUCTION PRODUCTIVITY 8
FIGURE 4 – BIM DIMENSIONS 19
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I. Abstract
The objective of this research paper is to explore the potential impacts of
advancements in construction procurement practices and management. According to
the report Reinventing Construction: A Route to Higher Productivity elaborated by
McKinsey, the implementation of procurement and best practices can result in 5 to 10
percent of productivity improvement and 3 to 5 percent of cost savings at the
construction industry.
To better understand why improvements in procurement practices and supply-
chain can be disruptive for the construction industry, this report will present a
background section explaining how the historical conjuncture in this sector resulted in a
scenario where construction companies did not experience a productivity boom in the
most recent decades. Furthermore, in this same section, this paper will compare the
construction industry productivity evolution to the progress experienced by other
industries, especially the manufacturing sector. The idea is to create a benchmark of the
best practices currently being used and indicate which of them have the greatest
potential and applicability to be implemented in the construction sector.
Considering preliminary researches, the author intends to explain in another
section of this paper the advantages and disadvantages of each of the following
advancements: online live procurement bidding system, advanced intelligent automated
systems in the procurement process, advanced analytics to create predictive construction
resources demand models, use of the Internet of Things in the construction site, and 6-D
BIM to manage site stock. It is believed that these tools have the potential to
substantially fulfill the productivity gap that exists in the construction industry by
stimulating better procurement practices and improving the supply-chain management.
Besides presenting the historical, the current scenario and the advancements that
can be a breakthrough in the construction industry, this paper will discuss how these
changes can impact and modernize the relationship between owners, contractors, sub-
contractors, and suppliers regarding procurement process. The expectation is that they
have the potential to improve transparency and instigate long-term relations among
them.
The contribution of this paper will be a brief research about how advancements
in procurement practices and supply-chain management can improve the construction
industry productivity and, therefore, generate a significantly positive impact to the
global economy.
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II. Introduction
When comparing the Civil Engineering field to other sectors in the global
economy such as manufacturing, it looks like construction productivity gains have
frozen in time. Luckily, many analyzes suggest that the use of best practices from other
industries have the potential to fulfill the productivity gap that exists and, furthermore,
lead to a better management process.
According to a research published by McKinsey Global Institute in 2017, whose
part of the results is presented in Figure 1, between 1995 and 2014 construction had an
inferior labor-productivity growth when compared to the total economy and to
manufacturing. While these sectors had a 2.7% and a 3.6% compound annual growth
rate, respectively, the construction industry only experienced a 1.0% growth due to
many factors such as lack of investments in innovation, pour project management, and a
highly fragmented industry.
Figure 1 – Construction Global Labor-productivity growth
After extensive analysis, McKinsey’s research suggests that if the sector
implements advancements in seven key areas, presented in Figure 2, we can expect a
cumulative productive gain of 48% to 60%, and a cost saving of 27% to 38%,
depending on whether the improvements are applied to an emerging market or a
developed market.
Figure 2 – Potential Global Productivity Improvement from Implementation of Best Practices
By observing Figure 2, we can see that the construction industry dynamic in the
last decades has resulted in a productivity gap of 50% compared to the total economy
productivity. Fortunately, the expected productivity improvement cumulative impact of
the seven key areas presented can revert this situation and eliminate this contrast.
In this research paper, the objective is to investigate only one of these seven key
areas: procurement and supply-chain management. Over the report it will be discussed
five advancements in procurement practices and supply-chain management with the
potential to reshape the construction industry:
* Online Live Procurement Bidding System;
* Advanced Intelligent Automated Systems in the Procurement Process;
* Advanced Analytics to Create Predictive Construction Resources
Demand Models;
* Use of the Internet Of Things in the Construction Site;
* 6-D BIM to Manage Site Stock.
The expectation is that improvements in this area can result in more
transparency among contractors and suppliers, reduce delays, economies of scale for
certain products, and better logistics management with just-in-time delivery.
The intent is that, by the end, this paper can contribute to highlight what are the
advantages of these advancements and why construction companies should seek to
incorporate them to improve their productivity.
A final and important observation about the data presented in this report section
is that it considers the average situation of the construction industry in the world. If one
is to analyze this sector for a specific location or for a specific construction part, such as
heavy construction or subcontractors, the results discussed may not apply and a
different study should be used.
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III. Background
In the Introduction section of this report it was presented some data to
demonstrate that, nowadays, the construction industry productivity is lagging behind
many other industries productivity. As an aggravating factor, this industry percentage
productivity growth is usually running below when compared to the same index for
other sectors.
In order to understand the current scenario, it is important to study the historical
conjuncture of the construction sector and the root causes of this productivity problem.
A study elaborated by McKinsey and published at the report “Reinventing
Construction: A Route To Higher Productivity” (2017) has identified that, overall, there
are ten root causes responsible for productivity problem and they can be categorized
into three areas: external forces, industry dynamics, and firm-level operational factors.
Figure 3 is a framework presenting all these root causes and its divisions.
Figure 3 – Root Causes for Low Construction Productivity
When we analyze the information in Figure 3 we can correlate a few problems
with construction procurement and supply-chain lack of advancements. First, the fact
that this industry is highly fragmented. On the one hand, you large heavy construction
firms that can benefit from a gain of scale, that uses a lot of technology, whose work is
very productive, and that have a long-term relationship with suppliers. On the other
hand, you have small trades and subcontractors that cannot benefit of scale, who hire a
lot of manual roughly trained workers, almost do not use technology or any
management strategy, and who have a one-time relation with random suppliers. In most
of the time that a small player tries to offer a more productive solution, he suffers from
the competition of less productive but cheaper firm.
Second, the lack of investments in digitization and innovation. As this report
will explain in the next section, Advancements in Procurement Practices and Supply-
Chain Management, the use of a digital system to manage procurement and supply-
chain can reflect in a lot of productivity gains. For instance, Online Live Procurement
Bidding System, and Advanced Intelligent Automated Systems in the Procurement
Process are just two examples of advancements.
To make the situation more critical, for many contractors it has become a normal
practice to issue change-order and claims as a method to increase profit due to the
construction industry regulation problems.
When we investigate the historical factors that affect the current construction
productivity index, the most important root cause is that, while many sectors have
benefited from investments in technology and digital tools in previous years, the
dynamic of constructions companies work and investments helped to create a lagging in
this sector. While manufacturing companies had a necessity to invest in automation,
digitization and better management process to reduce their costs and thus increase their
profits, construction companies were still making a considerable profit due to its cheap
workforce and did not have to invest in these advancements.
A problem resulting from this conjuncture is that, nowadays, the relationship
between suppliers and contractors are not long-term relations. Instead, in most of the
times, it is a one-time job relationship. As a consequence, neither of them are working
towards the construction of a sustainable relation because most of the times they are
both only concerned about the profits for a single specific project. The manufacturing
sector, in an opposite way, has created an environment where producers (contractors)
and suppliers have a transparent reliable longstanding relation. The intent when
negotiating is to establish an optimized long-term deal that benefits both of them for not
only one project but for many that are yet to come.
To propose and investigate what solutions can and should be applied in the
construction industry, this research aims to benchmark the best practices of procurement
and supply-chain being used in other sectors, especially at the manufacturing sector.
Highlighting the main advantages and disadvantages of each practice and discussing
their applicability for civil engineering daily practices can help to enlighten a path to
improve the construction productivity.
According to surveys conducted by McKinsey’s Procurement Practice and
presented at the report “Reinventing Construction: A Route To Higher Productivity”
(2017), the construction industry has one of the least sophisticated procurement process
and supply-chain practices compared to other industries. As a consequence,
construction companies profit is affected because they can overpay materials and
services by up to 15 percent. Furthermore, a poor supply-chain management system can
affect the project total duration increasing total project indirect cost.
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IV. Advancements in Procurement Practices and Supply-Chain Management
Many researches, when studying procurement practices and supply-chain
management in the construction industry, like to emphasize that this industry has a lot
of its own peculiarities that affect how these processes are performed. Koskela (1992),
quoted in the article “Supply chains in the construction industry”, suggests that this
industry one-of-a-kind products, temporary organization, and site production, are
responsible for preventing the achievement of flows as efficient as in manufacturing
Although this industry, in fact, has some singularities that should be considered,
many advancements in the sector are occurring and it is reasonable and feasible to
suggest that the adaptation and implementation of other industries best practices,
especially manufacturing, can result in a breakthrough for the construction sector. To
support this assumption, this section of this report will present a detailed discussion of
five best practices that can be applied for constructions.
Online Live Procurement Bidding System
In the last few years, the construction industry started to experience some
changes in the way contractors, owners and suppliers interact in a bidding process. The
traditional opaque bidding process is losing space for online live procurement bidding
systems, more known as e-auctions.
To understand why this changing is happening we need to understand the
principles of each kind of process.
At the traditional bidding process, the owner or the contractor creates an auction
to find, in most of the times, the cheapest supplier for a product or service. The
suppliers are informed about the bidding specific requirements and then, within a
predetermined date range, each supplier must submit in paper or as a digital document
their bidding proposal. After the bidding process deadline is over, the cheapest proposal
is selected. From the owner’s perspective, the problem with this system is that since
suppliers do not know the other competitor’s bidding price, the price competition
between suppliers is jeopardized. From the supplier point of view, this static system
does not allow any changes in price after the bid is submitted.
At the e-auction process, the major disadvantages of the traditional bidding
process have been corrected. By using web-based live online platforms this system
allows suppliers to see other competitor’s bidding price and if within the bidding period,
change their own price to try to win the bid. This is a tremendous advantage because, by
instigating suppliers competition, the owner can achieve savings of 10 to 20 percent.
The best way to guarantee this will occur is to set a small limited time frame in which
suppliers can review their bid. Forcing quick responses is a way to ensure supplier will
not communicate with each other to combine high prices.
Another important and significant advantage of using online live procurement
bidding system is that you are able to reduce frauds, to increase transparency in the
negotiations, and ensure confidentially when necessary.
Although this new process has addressed the traditional system problems,
according to Emiliani (2005), quoted in the book “Best Practices for Online
Procurement Auctions”, there are some potential issues that may occur with this e-
auction process:
* Allowing unqualified suppliers to bid;
* Showing the identities of the bidders and their bids;
* Post-auction renegotiation;
* Forcing supplier to honor unreasonably low prices;
* Providing incomplete or inaccurate specifications;
* Repetitive rebidding to drive down prices;
* Not informing bidders of outcomes.
To conclude, overall, it is possible to affirm the e-auctions will increase its
presence and role in the construction industry even with its limitations. The new system
is becoming more popular due to the use of new technology and it is a better tool to for
procurement process.
Advanced Intelligent Automated Systems in the Procurement Process
The construction industry has one the lowest automation level in all of its
process and, with construction procurement practices, the situation is not different. On
average, companies in this industry do not make use of computer integration and
advanced intelligent automated systems differently than what happens in
manufacturing, where these tools are used on a daily basis.
The use of more technology in the construction can help to automate its
procurement process. Systems considering variables like weather condition, delays, lead
time, delivery logistics, market trend, supplier risk, and historical data will be capable of
predicting buyers (contractors) demand and automatically reorder supplies to guarantee
that construction remains on the critical path. For suppliers, a system like this can
optimize the production reducing costs and waste.
An example of how historical data and market trend can be used to improve
procurement is by predicting a yet unknown future demand to allow a construction firm
to order a large quantity of material in advance. This can result in cost reduction due to
the gain of scale that was made based on a reliable intelligent system analysis. Another
example is that an advanced software like this can inform the construction team about
procurement best practices for a specific location which will allow them to copy and
adapt successful approaches.
An intelligent automated procurement system can help a construction company
to foresee what are the schedule risks that can delay the entire project. For instance, a
common problem when requesting very specific materials is that the ordering team does
not have enough knowledge about customs process, which can then result in customs
holds and delays in the delivery time. When using an intelligent process this issue can
be avoided because the system has a database that can indicate what are the required
documents for a specific material at a specific country customs.
One challenge that can arise when implementing and using more technological
procurement process is that, nowadays, the construction dynamic in most construction
companies does not favor the use of such system. In today’s practice, it is normal to
occur communication failure between those responsible to manage an automated
procurement system and those working on-site. The consequences of this asymmetry is
a possible disconnection between what is actually ordered and what should have been
ordered, for example, quantity and specifications mistakes are likely to occur.
To solve and prevent that problems like this impair the implementation of an
advanced procurement system, contractors should invest in better communication
channels. In addition, McKinsey’s report “Reinventing Construction: A Route To
Higher Productivity” (2017) suggests that assigning an employee on-site to coordinate
the procurement process between procurement team and actual job site demand is
essential to guarantee effective communication and avoid misunderstandings.
A second challenge is related to a very typical problem in the construction
industry: lack of or bad planning. This flaw is responsible for many last minute
procurement changes and is an important cause of why contractors have a severe
difficult to stay on the original plan. An intelligent automated system can act on two
fronts to fix this issue: first, keep live track of any change that occur and update it on the
current schedule; second, compare required change-orders against historical data to
check whether they really make sense and cannot be prevented – comparing current
project to previous similar projects is always a good method to check large
discrepancies.
Last but not least, advanced intelligent automated procurement systems can
integrate the procurement process of both buyers and suppliers. This means that each
part will be able to account for the other part unforeseen delay, which usually does not
happen today. In the standard procedure, neither contractor or supplier knows when a
delay occurs in the construction schedule or in the material production, respectively.
With an integrated system, this will not occur and the entire procurement process will
become more transparent and reliable, instigating better partnerships.
Advanced Analytics to Create Predictive Construction Resources Demand Models
Another advancement to improve procurement and supply-chain is the use of
advanced analytics to create predictive models that can allow procurement teams to plan
in advance what they need to buy.
Nowadays, constructions companies have started to collect data about almost
everything, however, without powerful and useful analyzes many insights that could
come from this data are lost. For procurement teams, interpreting this data can result in
more effective analyzes – the potential is enormous.
With a perspective on procurement, the use of advanced analytics to predict
future material, equipment, and services demand can allow ordering teams to have more
time to calmly search for the best supplier. Increasing the float time between looking for
a supplier and placing an order increases the probability of achieving the optimal trade-
off among time, cost and quality.
The use of big data analysis can lead to a situation where it is possible for buyers
to predict, using historical data and market trend, what material the construction
company will need for future projects that they do not even have yet. Knowing their
highly probable material need for the next 3 months, 6 months, or even 1 year or more
can result in a large in advanced purchase which will reduce costs due to the gain of
scale. For suppliers, a powerful system like this can allow them to estimate their future
demand more effectively.
Besides material demand models, advanced analytics can be used in many ways
to improve the construction supply-chain. For instance, this technology can be used to
compare and validate material costs between different suppliers, explore quality-cost
trade-off analysis, predict future resource price fluctuations (inflation or deflation),
investigate different delivery options and its costs, rank suppliers by risk, identify
opportunities based on previous project data, and improve cash-flow predictability.
Use of the Internet of Things in the Construction Site
The Internet of Things (IoT) has the potential to be a disruptive technology for
the supply-chain management and procurement process in the construction industry. At
other industries, IoT is successfully being applied for a while and, due to its great
results, the forecast is that its use will increase more and more in the near future.
IoT relies on the use of sensors and wireless technologies to connect equipment,
materials, and assets to one another and, in many times, to a central management system
to make them smart. For the construction industry, this technology can track and collect
critical information about equipment, materials, machinery, and structures at a
construction site.
Most IoT sensors are based on near-field-communication (NFC) devices and the
most used form of NFC technology is the radio-frequency identification (RFID).
Although still considered an innovation at the construction, there are reports of firms
using RFID since the 1990s to track materials and automate on-site stock management.
According to McKinsey’s article “Imagining construction’s digital future”
(2016), there are five significant advancements that this IoT can provide to a
construction site:
* Equipment monitoring and repair;
* Inventory management and ordering;
* Quality assessment;
* Energy efficiency;
* Safety.
This report will focus on discussing only the applications for inventory
management and ordering, which are directly related to the procurement process and
supply-chain management.
According to Lu et al. (2011), RFID tags should be attached, whenever it is
possible, to all materials at a construction site. To ensure that this occurs, materials must
be tagged as soon as they arrive on site before they are moved to the storage area or, as
an alternative, the contractor should find suppliers who can attach RFID to materials
during the manufacturing phase. In either case, RFID readers located at storage area
entrance will automatically update the inventory database adding the delivered material.
When a worker takes a material out of the storage area, those same RFID readers will
automatically deduct the specific material from the database. Knowing which materials
you have in stock can help procurement teams to predict when they will be running
short of material and, therefore, negotiate and order more material in advance which can
avoid construction delays and save costs.
Another advantage of using this technology is to pinpoint where materials are
located. This makes it easier for workers to find the right material and for site managers
to ensure physical and electronic inventory are the same.
In addition, the IBM article “Can the Internet of Things breathe new life into
brick and mortar retail?”, written by Jacqi Levy (2017), suggest that RFID can also be
used to measure parameters about the environment around a material, like temperature,
humidity, and lighting, which can help to prevent possible damages and waste.
For the last, IoT can be a great source of data for advanced analytics. Tagging
materials, equipment, machinery, and even workers can generate a significant amount
of data that can and should be analyzed to bring insights that help managers make better
decisions. Since this technology is getting cheaper and more efficient, IoT should be
present at constructions sites on a daily basis.
6-D BIM to Manage Site Stock
Building Information Modeling, BIM, is defined by Autodesk as “an intelligent
3D model-based process that gives architecture, engineering, and construction
professionals the insight and tools to more efficiently plan, design, construct, and
manage buildings and infrastructure”. Nowadays, BIM technology has had many
developments and can be used not only to manage project physical interrelations among
different structural components but also to improve construction overall management
and productivity.
The most commonly used is the three dimensions (3-D) BIM. It allows users to
work with a three-dimensional computer model of a building to check, ideally in
advance, if there is any physical conflict of components, especially mechanical
(HVAC), plumbing and electrical components. Ensuring that there is no overlap of
pieces can help to keep the schedule on the original critical path and avoid on-site
problems and rework.
Some advancements in the BIM technology includes adding to the 3-D
computational model a scheduling dimension (4-D), a cost estimating dimension (5-D),
and a sixth dimension (6-D). While the fourth and fifth dimensions are almost always
time and cost, respectively, the sixth dimension can vary according to contractors and
engineer’s needs. For this study, the sixth dimension will be Procurement and Supply-
chain. Figure 4 presents a summary of the BIM dimensions.
Figure 4 – BIM Dimensions
The main idea behind using Procurement and Supply-chain as a 6-D BIM is that
it can help manage site stock and thus improve procurements practices. Site managers,
procurement teams, contractors and sub-contractors, and suppliers will be able to plan
and predict their material demand to make more accurately orders or production. As a
result of a better material resource management, waste reduction can be achieved and
delays avoided.
In order to improve supply-chain and procurement productivity, 6-D BIM has to
ensure that the interface between structural components that have been installed at the
job site is updated in the BIM model and in the resource database (preferably linked to
the BIM model). According to Brad Hardin (2009), each dimension of a BIM file is
only useful if it can be regularly and accurately updated.
McKinsey’s report “Reinventing Construction: A Route To Higher Productivity”
(2017) suggests that the contractor should be the owner of the BIM model and ensure it
is always updated. A good idea would be for contractors and suppliers to have a shared
model where one can see the other updates. For instance, the contractor would know
instantly when any change to delivery date occurs or even the exact position of a
supplier delivery truck. Predictability is a key factor for an efficient stock management
and procurement process.?
V. Conclusion
This research tried to present an overview of the productivity in the construction
sector with a focus on procurement and supply-chain. According to many research data
discussed in the report, there is room for a significant productivity improvement and
relevant cost reduction.
Although in the last decades the construction sector did not invest as much as
other sectors in improvements, this situation is changing and, if advancements are
correctly implemented, it is possible to make a disruptive progress in this industry in the
following years.
To further investigate which advancements should be implemented and how this
should occur, this report benchmarked five different solutions that can be applied in the
construction industry to improve its procurement process and supply-chain
management. Implementing the use of Internet of Things (IoT), for example, can
improve how companies keep track of their inventory.
Overall, the five advancements discussed in this study follow the same principle
of implementing more technology, digitization and management at the construction
industry processes. To support a sustainable resumption of productivity growth,
contractors and suppliers must work together to change this industry dynamic and
ensure that from now on they will always be seeking new advancements that can
increase productivity.
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VI. References
Books
* McKinsey Global Institute (2017). Reinventing Construction: A Route To
Higher Productivity.
* Diane H. Parente (2008). Best Practices for Online Procurement Auctions.
Information Science Reference.
* Brad Hardin (2009). BIM and Construction Management: Proven Tools,
Methods, and Workflows. Sybex.
Articles
* Anders Segerstedt Thomas Olofsson, (2010), Supply chains in the construction
industry, Supply Chain Management: An International Journal, Vol. 15 Iss 5 pp.
347 – 353.
* Koskela, L. (1992), Application of the New Production Philosophy to
Construction, CIFE Technical Report No. 72, Stanford University, Palo Alto,
CA.
* Emiliani, M.L. (2005). Regulating b2b online reverse auctions through
voluntary codes of conduct. Industrial Marketing Management, 34(5), 526-534.
* Rajat Agarwal, Shankar Chandrasekaran, Mukund Sridhar (2016). Imagining
construction’s digital future. McKinsey Productivity Sciences Center,
Singapore.
* Lu, W., Huang, G., Heng, L. (2011). Scenarios for applying RFID technology in
construction project management. Automation in Construction, 20 (2011), 101-
106.
* Jacqi Levy (2017). Can the Internet of Things breathe new life into brick and
mortar retail?. IBM Internet of Things blog.
Website
* https://www.autodesk.com/solutions/bim, accessed on April 28, 2018, at 15:57.
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