The construction and building research conference of the Royal Institution of Chartered Surveyors

Georgia Tech, Atlanta USA, 6-7 September 2007

COBRA 2007
Proceedings published by: RICS 12 Great George Street London SW1P 3AD United Kingdom In association with: College of Architecture Georgia Institute of Technology Atlanta United States of America RICS, Georgia Tech and the contributors First published 2007

ISBN 978-1-84219-357-0

The illustrations used on the front cover are the winners of the 2007 Picturing the Built Environment photograph competition. From the top: Arthur Pichler: Brad Layton: Adam Blacklay: People and Places (overall winner) Heritage Works The Shock of the New

Integrated Supply Chain An Example from the UK Construction Industry

Dr Malik M A Khalfan and Prof Peter McDermott University of Salford 4th Floor, Maxwell Building, Salford, M5 4WT, UK m.m.a.khalfan@salford.ac.uk

ABSTRACT Old concept of working together with new name of integrated supply chain is among one of the hot research topics in the recent years within construction management. Researchers have looked at the traditional ways of procurement within construction and identified the problems, and solutions in terms of better ways of working. Similarly, practitioners have informed the researchers their initiatives within the industry to bring improvements within the industry through construction procurement process. Supply chain integration project at SCRI research centre was one of the projects, which combined both the research and the practice within the UK construction industry in order to look at the effects of the newer ways of procuring construction projects, especially by the public sector clients. This paper will briefly outline the main objectives of the research, followed by understanding the concept and methodology adopted. Second half of the paper will present some of the final findings from one of the four case studies carried out as part of the research within the UK construction industry related to the current practices and its effectiveness within the broader procurement process. Keywords: Innovative construction integration, UK construction industry. procurement, supply chain

1.1 INTRODUCTION The recent moves, with respect to procurement, within the UK construction industry, have resulted into innovative and new arrangements of supply chain partners. Recent policies, by the Central Government, have now being adopted by local authorities and other governmental organisations to ensure that the best value is achieved through these new procurement initiatives. Moves within the UK construction industry from the traditional way of procurement to the new and innovative methods including partnering, private finance initiatives (PFI), project alliances, framework

Integrated Supply Chain An Example from the UK Construction Industry

agreements, prime contracting, etc. have already started realising the potential benefits (McDermott et al. 2004). The drive to change and promote innovation in the construction sector including how to procure in better and more efficient ways in order to bring improvements within the construction industry, was provided by government supported reports (Latham 1994) and Egan (1998, 2002) . As a result of the Egan Report (1998), the Movement for Innovation (M4I) came into existence, which then helped different companies within the industry to realise the importance of innovation, and encouraged them to come up with innovative ways of procurement within the industry. The Egan Report, for example, stressed the importance of innovation within the industry, and proposed that continuous service and product improvement and company profitability can only be achieved through innovation. Other benefits include improved leadership, customer focus, integrated processes, integrated project supply chain, improved quality, and firm commitment of parties involved. The public sector has been seen to embrace new procurement methods based on partnering concepts in last few years, following strategy documents such as Achieving Excellence (HM Treasury, 1999), and direction from both the Office of Government Commerce (OGC Report, 2003) and the National Audit Office (NAO Report, 2001). In the wake of the Egan Report, Rethinking Construction (Egan, 1998), which highlighted partnering as one of many options to improve the construction industry as discussed earlier, the UK Government Construction Clients Panel responded with Achieving Excellence (HM Treasury, 1999), which laid down targets for the number of projects which should be procured through integrated supply chain and partnering. This has been followed by the National Audit Office identifying new procurement routes based on partnering approaches as a key tool in delivering better public projects (NAO Report, 2001). It later followed this report up with a data that suggested that innovative procurement approaches, which tend to encourage partnering and supply chain integration, had a demonstrable benefit within the public sector (NAO Report, 2005). This paper will present the moves by a public sector client for implementing the supply chain integration in construction. The paper will also sum up some of the key findings from the case study analysis, to show that how this integration is received by different participants of the supply chain within the industry, and how it has affected them, on individual, project, and organisation levels, and its effects on the overall construction industry. 1.2 INNOVATIVE PROCUREMENT Let us look at the transition from traditional to best practice. In traditional procurement, projects are awarded individually and contractors have to submit tenders for each project separately, which then result into formation of a project based organisation or one-off supply chain where project

Integrated Supply Chain An Example from the UK Construction Industry

participants are taken on board for that specific project. Research shows that, in this type of procurement arrangement, when projects are completed, the supply chain partners usually disperse and move to other projects immediately, without giving enough time and attentions to post project reviews. Therefore, knowledge gained in the whole process is taken away by the individuals involved in the project, and in very rare cases become part of organisational knowledge for any of the companies involved. If those individuals are moved to a different type of project then their knowledge even does not get utilise on other similar projects either. Since, knowledge was neither captured, nor retained, nor shared, therefore, remains as a past experience in the minds of individuals with no productive utilisation. The new innovative procurement initiatives also take the above issues in account and bring solutions with it. Therefore, now the way in which work is awarded is changed from one-off project to a stream of similar projects, sometimes called framework agreements. Relationship of client and contractor has now moved from short term period to long term period with continuous flow of similar type of projects. This has also resulted into change in the structure of project team, which in traditional model, work on one project and usually called project-based organisation, to a set of partnering organisations which would now work together with each other on a long term bases on several projects, usually called integrated supply chain. The authors observed during the case study reported here, that as far as adopting innovative procurement strategies and partnering concepts are concerned, the case study participants demonstrated great motivation to move from adversarial relationships to more collaborative ones. The basis of all these innovative relationship models is the concept of partnering, resulting in the development of trust (Latham, 1993; McDermott et al. 2005), and long-term collaborative and integrated relationships among different organisations throughout the supply chain (Khalfan et al. 2001). Cox and Townsend (1998) define this relationship as follows: Partnering is a long term commitment between two or more organisations for the purpose of achieving specific business objectives by maximising the effectiveness of each participants resources. . .The relationship is based on trust, dedication to common goals and an understanding of each others individual expectations and values. Expected benefits include improved efficiency and cost effectiveness, increased opportunity for innovation, and the continuous improvement of quality products and service. In the UK, the National Audit Office (NAO report, 2001) has endorsed the public sector moves away from lowest cost and adversarial approaches towards the newer forms of procurement. In particular, it calls for the entire supply chain, including clients, to be integrated. Through Achieving Excellence (HM Treasury, 1999), the Government had already committed all government departments to:

Integrated Supply Chain An Example from the UK Construction Industry

To work with industry to reduce waste in all aspects of construction procurement and management; To enter co-operative relationships with their suppliers to ensure an open and mutually productive environment, and To ensure an integrated supply chain. Building Down Barriers (Holti et al., 2000) has investigated the Ministry of Defence Prime Contracting procurement policy, another innovative procurement route. While concerned with project specific partnering, it suggested that there was some anecdotal evidence that the members of the successful project teams had kept together and moved on to other projects with other clients. The Department of Health response to Achieving Excellence came through NHS Estates They established NHS ProCure 21, a strategy for Supply Chain Management and Integration that involves developing longterm relationships with those companies that will be their major suppliers of products and services. In order to study the changes occurring within the industry, the introduction of innovative ways of procuring the construction works, the motivation to adopt these new procurement models, the potential benefits and bottlenecks experienced during the whole process, and changes within organisational cultures and personal attitudes, the SCRI Research Centre carried out a research project, called the Supply Chain Integration Project. The project was to investigate the changes that are occurring in the supply of consultancy and contracting services in response to innovative client procurement initiatives. It is particularly timely now with not only private sector clients, but public sector clients being driven towards partnering and the wider Egan Agenda. Through the Achieving Excellence initiative the Treasury/Government Construction Clients Panel, the Demonstration Projects of the Local Government Task Force (LGTF), and leading Central Government policies (such as the "Building Down Barriers"/Prime Contracting of the Ministry of Defence and NHS ProCure 21), government sector clients have required change the way they procure construction services. It is anticipated that specific advice and guidance for clients, practitioners and professional institutions will be developed through the adoption of the following methodology. The main aim of this research is to determine if there are ways of integrating the supply chain that will ensure service and product quality whilst still supporting the government and client initiatives, aimed at increasing the competitiveness of the construction sector. Specifically this project has the following broad objectives: Identify current international and national best practice in supply chain integration; Reveal the critical success factors for the establishment of effective and efficient supply chain integration the behaviours/ responses to the new means of procurement made by successful firms in innovative supply chains. How successful firms are coping

Integrated Supply Chain An Example from the UK Construction Industry

through individual and corporate responses (change programmes/change agents, training, alliancing, merging, new ventures etc. will be revealed); and Test the proposition that the effective configuration of long-term supply chains will be different for different kinds of construction.

1.3 THE CASE STUDY The case study presented here attempted to uncover the perceptions of firms within the construction industry with regard to the existing partnering arrangements they currently undertake. The research used multiple methods to collect qualitative and quantitative data. Basic quantitative data and company documentation were used to provide research context while qualitative data, collected in the form of a number of unstructured interviews, sought to understand how innovative procurement was viewed by different supply chain partners. The case study approach followed the protocol developed by Yin (1994) in order to improve the validity of the research. As a result, the research included a number of key elements such as clear and concise research objectives, research propositions, case study selection criteria, unit of analysis, a structured questionnaire, semistructured questionnaire for interview, a predetermined case study procedure, and an interview guide (Yin, 1994). The study involved multiple visits to each organization involved, including an average of three interviews with the Managing Directors of these companies and other staff and a few other interviews with their supply chain members in North West of England. All interviews lasted for at least 1 hour. An assumed name for each company has been adopted for the purpose of confidentiality, when reporting the case study. One of four case studies from the project are reported here. The case study explores the initiatives taken by a public sector client to motivate main contractors and their supply chain participants to adopt innovative ways of working within a project team. The senior management of each of the above-mentioned organisations was interviewed. Soft System Methodology (SSM), along with case study research method, is being used to analyse the interviews, used for organisational analysis. For the social and organisational aspects, the research draws on contextually rich modelling techniques of SSM (Checkland, 1981) with its emphasis on a stream of cultural analysis within construction organisations, and the industry overall. The SSM is selected because the research is dealing with the softer social issues and phenomena such as changes in the behaviour of people and companies in response to the changed in procurement routes. The whole idea to adopt soft system methodology to carry out this qualitative research revolves around the advantages of using SSM. Once the interviews were carried out, the rich pictures were developed and these pictures helped us to identify the issues and areas which have been affected by the change in procurement strategies. The root definitions and CATWOEs were then developed from the rich pictures which helped us to

Integrated Supply Chain An Example from the UK Construction Industry

understand the transformation of past situations and circumstances to the present scenarios. Some of the results are reported in this paper as observations of changes due to the innovative procurement, and motivational issues affecting the adoption of innovative ways of working. The case study was done with a public sector client, a local council, which has developed a Framework Agreement to construct educational buildings (primary school in the first phase) in the value range 500,000 to 5 m. For this client-led innovative and new way of developing educational infrastructure, which basically aims at the process of getting product developed, three Constructor Partners were appointed in 2004 for three years initially. Since the appointment, a number of educational projects have already been delivered, some recently started, and some of them are in the early stages of design. 1.3.1 Benefits from the Innovative Framework The core values of framework agreement, which are based on the partnering concept, agreed by the client and all other participants, include: Trust; Honesty; Openness; Commitment; Co-operation; and Respect. The councils vision is that this framework agreement will deliver good quality school buildings that will lead to (Khalfan and McDermott, 2006): Better educational results; Greater inclusion within the community; Better safety and environmental performance; and Reduced demand on future school budgets by addressing whole life cycle costing at the inception of the projects. The major benefits are being and would be achieved in the following broad area by adopting the strategic partnering framework for the development of Primary Schools: Improved design; Less waste and duplication; Improved delivery; Greater quality; Greater certainty of cost; Better whole life cycle costing; Building of trusting relationships; and Bringing of all project knowledge together at the inception of a project. 1.3.2 Examples of Innovation The council has changed the mechanism of selection for contractors and sub-contractors. It used to be the case that the small companies were rejected based on their turnover. Now the turnover figure is not used as part of the selection criteria and is considered afterwards when the percentage of the work is being allocated. Therefore, those companies, which used to be left out (specially the SMEs) because of their small turnover, are now able to pass through the initial two-stage selection process of the council, and then they are awarded work which is equivalent

Integrated Supply Chain An Example from the UK Construction Industry

of 25 % of their turnover (irrespective of how much it is!). On the other hand, the selection is now moved from traditional to Quality-Price Mechanism. The council uses 70% - 30% respectively for the selection. The council also uses a specific quality and performance criteria to select the companies for the framework agreement during the selection process. A selection process for supply chain participants to enable the best value for client rather than lowest price in order to bring more value for money and better quality facilities for the client and end users.

Actors: Government, Clients, Procurement managers, Construction companies

Owners: Government and other clients

Transform

Selecting lowest price tenders selecting proposals which deliver best value to the clients
Government policies and Government as a client will continue to encourage and support the contractor/supplier selection process based on the best value rather than on the lowest price. The Government needs to establish effective processes and set up best practices to achieve best Value tendering culture. Customers: End-users, Payer of building costs, Government and other clients

Environmental Pressure on the activity: Continued use of traditional tendering process based on lowest price Existence of big players who oppose the change in tendering practices Simple and easy to implement policies are not available
Figure 1.1: Transition from lowest price selection to selection of best value proposals

The above CATWOE (Figure 1.1) shows the move by clients in general, and especially public sector clients as mentioned above, from accepting the lowest bids to awarding contracts that show best value. This is termed as price-quality mechanism in some cases, where tenders are

Assuming

Integrated Supply Chain An Example from the UK Construction Industry

judged based more on the quality than price. This has enabled the clients to look at previous or ongoing construction works of the contractors in order to verify the quality, in addition to the references. This is one of the major findings during the case study, which shows that more and more clients, and contractors for the selection of their supply chain, use pre qualification questionnaire (PQQ), which includes questions related to quality, health and safety, turnover, references, etc. Some other examples of innovative thinking to integrate supply chain are listed here: All three contractors have come with an integrated supply chain for the 1st tier including the Design team and M & E Contractors. They all involved with the client to develop the plans for the school development. Introduction of post-construction Snag Period (12 month) would reduce the complaints from the end users (head and building in charge of the schools), resulting into much better response and solution to any problems occurring in the school building. Client driven initiative, which is bringing all the parties involved including three main contractors, resulting into sharing of knowledge and experiences on different platforms including project meetings. Innovation within the construction is that representatives of all three contractors sit down together for selecting the standardised material e.g. windows, doors, etc.; architects of all contracting organisations working together to learn from each others design experiences; and the learning from one project within the framework is taken back to the new projects through capturing the experiences and feedback of the people involved by all three supply chains. 1.4 FINDINGS Some of the findings from the above case study are listed below. The findings refer to the best practices done at the under consideration organisation: Strong and committed leadership and steering from client is observed to get integrated supply chain; Firm commitment of the main contractors is seen vital to integrate the supply chain; There is a true understanding of what does partnering mean by the entire supply chain participants; Long-term relationship among supply chain members, which was due to trust and open communication; Processes are in place to incentivise for good performance as part of the supply chain; Appropriate strategies are in place for main contractors to use local suppliers, subcontractors, and work force; There is a commitment of client to provide long term work (work continuity) for enhancing supply chain integration; Strong commitment of clients and main contractors to invest in training and development of their supply chain organisations;

Integrated Supply Chain An Example from the UK Construction Industry

Early payments of services provided is observed; Involvement of downstream suppliers and subcontractors at the beginning to understand the buildability and interface issues, is not very common; Learning is taken from one project to the new projects; Improved KPIs have resulted into more integrated supply chain; Support is provided from main contractors to their supply chain partners if any one of them are in troubled water either financially or skill shortage-wise, etc; and All supply chain participants are practicing the partnering ethos both in the office as well as on construction and development site.

1.5 GENERAL CONCLUSION The results from the case study are showing savings in time and cost. To maintain the momentum of these gains there must be a continuation of the positive attitude amongst the partners in sharing their knowledge and experiences on future projects. By this approach, further benefits will be passed onto the client and end users. At this point, there is a positive approach by all partners to take the innovative approaches forward to achieve its targets. All the partners in the supply chain are committed to the innovative ways of solving problems, and new methods of working with each other as an integrated team. The supply chain partners in the case study are highly motivated to the framework agreement because of the continuity of work, agreed profit margin, long- term relationship with client and other supply chain members, and recognition of their quality services in response to the invitation to work with the clients, fully subscribed to innovate the processes related to procurement and supply chain integration within the construction industry. Money saving through reducing cost is another motivating factor for being part of such framework agreements especially for main contractors and subcontractors. One of the biggest cost reductions is achieved through not incurring cost in tendering for jobs for the same client for a period of say 3 5 years. 1.6 SUMMARY This paper presented one case study, showing how a public sector organisation established their procurement processes on innovation, and innovative thinking in management and integration of their supply chain. The case study revealed the role of the client organisations in introducing the innovation procurement and role of these initiatives to integrate the supply chain participants within the construction industry. The findings have also revealed some of the factors underpinning the motivation of those companies working within the new procurement environment, including both the client and contractors. This includes the

Integrated Supply Chain An Example from the UK Construction Industry

continuity of work for both the contracting companies and their supply chain partners; transparent and open book accounting system which give added value to the clients; long term relationship among all the supply chain partners; definite profit margin for a longer term period for the contracting organizations; visibility of the future work with the existing clients; over all growth of companies involved in terms of turn over and profit margin; job security for directly employed people by sub-contractors; recognition as forward thinking contractors and client within UK construction community trough news and presentations; training for staff employed by these companies as part of their skill enhancement programme; and self satisfaction from the quality work done and services provided. 1.7 REFERENCES Checkland, P., 1981, Systems Thinking, Systems Practice, Wiley, Chichester Cox, A and Townsend, M., 1998, Strategic procurement in construction, Thomas Telford Publishing, London. Egan, J., 1998, Rethinking Construction, HMSO, London. Egan, J., 2002, Accelerating change, A Report by Strategic Forum for Construction, 2002, London. HM Treasury, 1999, Achieving Excellence Constructing the Best Government Client, HM Treasury. Holti, R, Nicolini, D. and Smalley, M., 2000, The handbook of supply chain management: The Essentials, CIRIA Publication C546. Khalfan, M. M. A., Anumba, C. J., Siemieniuch, C. E. and Sinclair, M. A., 2001, Readiness Assessment of the Construction Supply Chain A Necessity for Concurrent Engineering in Construction, European Journal of Purchasing and Supply Management, 7 (2), 141-153. Khalfan, M. M. A., and McDermott, P., 2006, Innovating for supply chain integration within construction, Journal of Construction Innovation, 6, 43 157. Latham, M., 1993, Trust and Money, Interim Report, Joint Government/ Industry Review of Procurement & Contractual Arrangements in UK. Latham, M., 1994, Constructing the team, Final Report on Joint Review of Procurement and Contractual Agreements in the UK Construction Industry, HMSO, London. McDermott, P., Khalfan, M. M. A. and Swan, W., 2004, An exploration of the relationship between trust and collaborative working in the construction sector, Construction Information Quarterly, 6 (4), 140 146. McDermott, P., Khalfan, M. M. A. and Swan, W., 2005, Trust in Construction Projects, Journal of Financial Management of Property and Construction, 10 (1), 19 31. NAO Report, 2001, Modernising construction, The Stationary Office, London. NAO Report, 2005, Improving Public Services through better construction, National Audit Office: 87, London.

Integrated Supply Chain An Example from the UK Construction Industry

OGC Report, 2002, Aggregation, OGC Report. OGC Report, 2003, Building on Success, Office of Government Commerce, London. Yin, R. K., 1994, Case study research: Design and methods, 2nd ed. London: Sage Publications.