-
7 Design of Competitive IndianConstruction Supply
ChainNetworks
N Viswanadham and Vinit Kumar
7.1 Introduction
Construction industry is the second largest economic activity in
India. Ac-cording to the latest CRISINFAC report, construction
investments in thecountry account for nearly 11% of the GDP and
around 50% of the GrossFixed Capital Formation. During the period
2002-05, investments in theconstruction industry grew at a CAGR of
11% and are expected to grow ata CAGR of 8% during the period
2006-08. Over this period constructioninvestments will grow to a
level of Rs 8300 billion. Also the constructionindustry is the
second largest employment provider. There are around 3million
small, medium and large contractors in India.
Indian Construction Industry can be divided into three market
segments:Infrastructure, Industrial and Real Estate. Infrastructure
constitutes of roads,ports, airports, irrigation, railway, and
power projects etc. Infrastructureinvestment has a share of 25% in
the total construction investments andis expected to rise at a CAGR
of 9% over the period 2006-08. Especiallygovernments focus on
roads, water supply and sanitation, and irrigationwould be the key
derivers. Industrial construction includes both public andprivate
industries in steel, textiles, refineries, petrochemicals etc.
Investmentin this segment is around 10% of the total construction
investment and isexpected to rise at a CAGR of 33% during the
period 2006-2008. With theglobalization effect and increasing local
demand, this segment is expectedto grow with the investments in
oil, gas and metals being the key drivers.Real estate investment is
around 60% of the total construction investmentand is expected to
grow at a CAGR of 5% during the period 2006-2008.It constitutes
residential, commercial and retail construction.
Commercialconstruction includes hotels, office space, hospitals,
schools etc. while re-tail sector includes malls and multiplexes.
90% of real estate developed is
153
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154 Design of Competitive Indian Construction Supply Chain
Networks
from residential sector. The persistent demand-supply gap in
residentialsector, rising affordability levels, attractive
financing options, fiscal bene-fits on availing the home, and
favorable demographics are the key driverssupporting the real
estate segment.
Looking at the ubiquitous construction activity in the country
and strongfuture prospects, it is important to devise the
strategies to enhance the pro-ductivity in construction activity
which seems to lag far behind in compar-ison to other manufacturing
and service industries. While auto and othermanufacturing
industries in India are using advance technologies to managetheir
supply chains, construction industry has not yet adopted the
change.Other construction firms like that of UK and Australia are
far more efficientthan Indian firms. With the change in government
foreign investment poli-cies (effective from February, 2005) in the
country which allowed 100 percentFDI in construction, Indian
construction firms are under global pressure andneed operational
reforms to match international standards.
Delays, cost overruns and material wastage are commonplace in
con-struction projects. These consequences are resulted mainly by
the tempo-ral characteristic of construction supply chains and the
short-term projectmentality of construction firms. In comparison to
other industries, con-struction firms have been slow in using
Information Technology and SupplyChain Management principles in
their operations which have transformedthe manufacturing sector
during last fifty years. While it is important toidentify the
reasons which are preventing construction firms from stimulat-ing
this innovation, finding the effective and feasible solutions to
increasethe productivity is a key issue today.
In the lack of construction firms initiative for higher
productivity and betterquality, construction industry has seen
commoditization; where contracts areawarded on the basis of minimum
bid. This in turn has reduced the profitmargins and industry
players have been averse of making investments for pro-ductivity
enhancement. Current firm-specific cost reduction doesnt confer
anysustainable advantage in the global market. With the increasing
global com-petition, Indian firms need to involve all the
stakeholders of the constructionsupply chain who influence the
productivity of the project. This is possible onlythrough greater
coordination among various players. Firms need to follow asupply
chain approach to achieve global standards. Rising revenues of
con-struction industry and strong future prospects would encourage
constructionfirms to make investments to achieve higher
productivity.
There is a lot which can be learnt from other manufacturing and
serviceindustries but it can not be done with the ignorance towards
the characteris-tics of construction operations which
differentiates it from other industries.The issue of delays, cost
over-runs and quality non-conformance is closelyrelated to the
Supply Chain Management (SCM) and we believe that apply-
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Construction Supply Chains: Characteristics 155
ing SCM principles, Use of Information Technology (IT) and
supply chainintegration can bring significant increase in the
productivity in constructionprojects. Cases from other countries
show that the savings with the applica-tion of Supply Chain
Management tools can be as significant as 35%.
This report suggests strategies for Indian construction firms to
managetheir supply chains better. Our analysis of Indian
construction is based onour interviews with industry people, the
information available in the com-pany web-sites and a literature
survey covering the research in constructionoperations.
7.2 Construction Supply Chains: Characteristics
The temporal characteristic of construction supply chains and
demand drivennature of industry makes it very different from other
manufacturing andservice industry. In order to devise the feasible
and effective Supply ChainManagement strategies, it is important to
understand the characteristics ofconstruction supply chains which
may limit the scope of implementation.This chapter illustrates the
characteristics of construction supply chains.
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Construction supply chain involves stakeholders who are
individual ser-vice providers such as subcontractors, designers,
engineering consultants,transporters etc. and manufacturers of
materials and equipments. On anaverage material cost contributes
50% to the project cost and hundreds ofmaterial and equipment
suppliers take part in the supply chain. Apart fromthese suppliers,
activities of the construction projects are subcontracted
tospecialty contractors such as designers, electrical, engineering,
plumbingetc. Being a demand driven industry owners involvement in
the projectremains crucial and continuous information flow from
client is essential.Figure 7.1 shows the highly non-linear
characteristic of construction sup-ply chains where strong supply
chain information and material linkages areshown.
Construction can be viewed as a complex of manufacturing and
services.In this sense, many of the operations involved in
manufacturing have sim-ilarity with construction projects in their
characteristics. As an example,procuring materials and assembling
them to make a product is common inboth manufacturing and
construction. This is the reason why Toyota, theleading Japanese
auto manufacturer, has entered into housing constructionand
applying mass production and lean manufacturing techniques
there.
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156 Design of Competitive Indian Construction Supply Chain
Networks!
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7.1 Construction supply chain
Likewise some characteristics of services can be seen in
construction. Forexample, construction involves project management
techniques as do manyof the software services firms. Satyam
Computer Services, the lead softwareservices firm in India entered
into construction business with their core com-petency in Project
Management. Basic characteristics of construction supplychains are
as follows.
Temporal supply chains: With each new project, the location of
projectchanges and a new supply chain network has to be designed.
Projectplanning incorporates scheduling, logistics planning, and
strategic de-cisions pertaining to the supplier and subcontractor
selection. The lifeof the temporal supply chain ends with the
contract. This temporalcharacteristic of construction supply chains
causes aversion of con-struction firms towards investments in
Supply Chain Management asReturn On Investments (ROI) remains a
concern.
Demand driven industry: Unlike many product-based firms,
con-struction projects are demand driven. Construction firms are
awardedthe contract to finish a project on the basis of a contract
model (cashcontract, BOT, BOO, BOOT etc.). Based on the type of
contract, firmsare responsible for activities like designing,
material procurement,construction and other supporting activities
like project management,waste management etc. Each project is
customized and hence thestructure of supply chain changes.
Long and short-term relationships: For a construction project
short-term relationships last for the project life cycle. For
example localsuppliers, workers, transportation services for a
project usually end
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Indian Construction Supply Chains: Status, Issues & Scope
157
with the project life cycle. Long-term relationships can be with
largematerial manufacturers, infrastructure and technical support
organi-zations such as research institutes, insurance agencies, and
financingfirms etc (refer Appendix on Indian construction system,
page 187).
Fragmented industry: Construction industry is highly
fragmented.In 2004, there were a total of three million small,
medium and largecontractors in India and only 28,000 of them were
registered. Espe-cially Real Estate segment, which requires
comparatively low technicalskills, has many small and medium-sized
players.
Capacity is not a constraint: Construction is working capital
inten-sive, and fixed capital requirement is quite less as compared
to othermanufacturing industries. This behavior has a parallelism
with otherservice-based businesses. As a result capacity is not a
constraint. Sup-ply can be increased by mobilizing the skilled
labor.
Financing constraints: Most of the firms are not listed and
creditprofiles of contractors are not available. These firms could
receivea short-term asset-based financing from banks, but, as fixed
capitalis not sufficient with most of the firms, it is hard for
them to get anasset-based loan. The problem is very severe in India
because recordsof contractors are not available. Construction
Industry DevelopmentCouncil (CIDC) has taken up this issue and they
are categorizing thecontractors in grades, but these grades are
meant for a different pur-pose (qualification criteria for a
contract bidding), and we would needa credit rating for these firms
for financing purpose. High risk andshrinking profit margins are
other issues in financing.
7.3 Indian Construction Supply Chains: Status, Issues
&Scope
Current status of Supply Chain Management (SCM) in the
construction in-dustry shows that the pace of innovation has really
been slow and firmsstill have a lot to learn from the tools
available in SCM literature. Whiletalking to industry people, we
realized that most of the industry people areignorant about SCM
approach and follow traditional project managementtools. As
illustrated in the subsequent part of this section, current
industrypractices are highly infective and lead to delays, cost
overrun and wastage.Apart from this, various characteristics of
construction supply chains makeit difficult for construction firms
to invest in SCM practices. This sectiongives an insight into the
status of supply chain management practices and
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158 Design of Competitive Indian Construction Supply Chain
Networks
the related issues. We cover three important dimensions here:
Project plan-ning, Logistics, and use of IT.
7.3.1 Project Planning
Project planning consists of mainly three activities:
scheduling, resourceallocation, and risk management.
Scheduling
Status: Current industry practices for scheduling use precedence
relation-ships of various processes and use tools such as Program
Evaluation and Re-viewing Techniques (PERT) charts, Gantt Charts
and Critical Path Method(CPM). Most of the large and medium sized
firms use some software basedon the above mentioned tools. Leading
construction firm Larsen & Toubrouses software PRIMAVERA which
incorporates planning or scheduling ac-tivities using CPM, Gantt
charts, and risk management tools. These plan-ning tools take
process constraints into account based on the previouslyavailable
data on the time consumed in each process but ignore resourceand
information constraints.
Issues:
Scheduling modules dont consider resource and information
con-straints (such as what information is required before an
activity canbe started) into account.
As many important causes of uncertainties remain unconsidered
dur-ing scheduling, project schedules remain unrealistic.
Planning modules dont consider risk and uncertainty involved in
de-lays of material and service procurement which lead to project
delays.
With unrealistic scheduling and hence frequent changes in
projectschedule, proper allocation of resources remains much below
the op-timal level and causes waste of material and
underutilization of ma-chines and human resources.
Resource Allocation
Status: Most of the lead firms in India have a resource
allocation unit,where the resources are allocated to various
projects. The asset base includesHeavy Duty Cranes, Heavy
Earthmovers, Asphalt, Batching & CrushingPlants, Asphalt &
Concrete Pavers, Vibratory Compactors, Concrete Pumps,
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Indian Construction Supply Chains: Status, Issues & Scope
159
Boom Placers, Drilling Jumbos, Rock bolting machines, On /
Offshore Hy-draulic Drilling Rigs, Core Drilling Machines, Winders,
Compressors, D.G.Sets and Mobile Crushing units etc. Apart from
machineries and equip-ments, human resources like engineers,
managers, subcontractors and laborsetc. have also to be mobilized
to various sites to maximize productivity bymaintaining a balance
between the availability, requirement and utilizationof resources.
Lead players like L&T, Gammon, and HCC etc. undertake sev-eral
projects at a time in the Indian as well as overseas markets. For
themresource identification and allocation becomes highly complex.
As the leas-ing of equipments often cuts into the margins of the
companies, more andmore firms are trying to increase their asset
base. Nagarjuna ConstructionsOperating Profit Margins (OPM) was as
low as 5 per cent in 2004. Sincethen, with a ramp-up in asset base
by over 80 per cent and an ability toundertake more projects, the
companys OPM is close to 9 per cent. Withthe increasing complexity
of resource allocation process and increasing or-der book, firms
need to adopt new resource allocation strategies. This taskremains
more crucial for small and medium sized firms who try to
takevariety of projects and dont have enough resources.
Issues:
With the increasing demand in construction industry, resource
alloca-tion is becoming more and more difficult.
Firms with a low resource base need to device strategies to
acquirerequired resources to complete a project, either through
purchase orlease, which can give them a balance of OPM and
order-book. Financ-ing remains a major concern especially for small
firms which hinderthe purchase of resources.
Resource allocation is done in suboptimal levels. Resources
remainunderutilized and the problem of shortage of resources still
persists toa great extent.
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160 Design of Competitive Indian Construction Supply Chain
Networks
rate, foreign exchange, payment, regulatory and political risks.
Risk mitiga-tion involves the allocation of various risks to the
supply chain stakeholderwho can manage them best. While this risk
allocation helps in removingthe burden from a single party, it
never ensures the effective interceptiveand preventive risk
management actions that have to be taken in order tohandle these
risks. Current industry practices of documenting various risksand
calculating risk exposure values and impact on the cost over-runs
& de-lays; along with brain storming sessions dont provide an
effective solutionto manage risks. As risk management is highly
experience intensive, many atimes critical risk factors remain
untouched and degenerate into huge lossesduring the project
life.
Issues:
Through out the industry, focus is on risk allocation and risk
manage-ment practices are still ineffective which cause delays and
cost over-run. Firm level focus of risk management is important at
this juncture.
Firms ignore the importance of Knowledge Management and vari-ous
supply chain risk events occured during projects remain
undocu-mented.
As the risk management activity is highly experience and
informationintensive industry needs to build Decision Support
Systems which canbe used in the risk management.
Risk management activity restricted in the planning stage where
manycritical uncertainties can not be realized. Firms need to
develop inter-ceptive risk management tools which can support
managers in thedecision making on the appropriate actions that have
to be taken sub-sequent to a risk event.
Scope of improvement: It is not difficult to realize that
resource manage-ment and scheduling practices can not ignore the
uncertainties involved inprojects. Also scheduling should
incorporate resource and information con-straints not only the
process constraints. Big firms who undertake multipleprojects at a
time should take a multi-project planning approach so as tomake
resource allocation effective. Decisions taken in such a way will
allowthe decision makers to arrive at optimal solutions and can
bring enormoussavings.
Risk management should be an integral part through out the
project life.Presently most of the small and medium-sized players
in the industry donot incorporate risk management in their planning
stage. While some ofthe large firms use a methodical approach for
risk management, the process
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Indian Construction Supply Chains: Status, Issues & Scope
161
is limited to planning phase only. Because of these practices
many risksremain unconsidered and degenerate into huge losses. Risk
managementis domain dependent and experience intensive and there is
a need for theindustry people to codify the knowledge and maintain
a useful database ofsuccessful experiences which can be used to
handle various risks. Followingpoints serve the purpose of
illustrating the scope of improvement in theproject planning and
the techniques which can be used by the industrypeople.
Scheduling should incorporate resource and information
constraints.We find constraint programming a useful tool to solve
such problems
Risk allocation should be on the multi-project basis and should
incor-porate uncertainties involved.
As the work in construction projects is experience intensive and
do-main dependent. Codification of knowledge would be useful in
deci-sion making. For this purpose Decision Support Systems based
on theKnowledge Engineering tools should be used.
With the use of IT-enabled services, construction firms should
look forcustomized softwares which are pertinent to their domain of
construc-tion projects. These softwares can integrate the
Scheduling, resourceallocation, and risk management processes which
have to be treatedtogether as mentioned above. In the next section
we propose one suchintegrated module.
Industry should start using real-time information transfer
systemswhich make the visibility of resource usage clear. These
systemswould certainly help firms to increase the resource utility
and removeuncertainties involved.
7.3.2 Logistics
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162 Design of Competitive Indian Construction Supply Chain
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Table 7.1 Break-up of construction costs
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-
Indian Construction Supply Chains: Status, Issues & Scope
163
various ordering models and consolidating delivery loads to
maximizevehicle fill and hence reduce transportation cost.
Many lorries have to wait for unloading. There are hardly any
deliverytime slots assigned to suppliers.
Use of equipments for loading and unloading of materials is
lim-ited and mostly done for delicate and heavy components. The
useof skilled labor for unloading and movement of material on site
canbe seen frequently.
Inventory management is not given importance as compared to
othermanufacturing and retail industries. Materials have to wait
for a longtime before they are used. Also material storage location
is not as-signed prior to unloading which results in waste of time
and resourcesfor movement to appropriate location.
While manufacturing and other services (retail etc.) use
real-time in-formation sharing tools today, information flow in
construction supplychains is extremely poor. Supplies before the
schedule, arrival of sub-contractor with its resources when he is
not needed etc. are commonin construction industry.
As compared to manufacturing industries, wastage of material
andmaterial damage in construction is huge.
There is apparently little effort on material tracking in
construction,as a result visibility is lost, which causes cost
over-run and materialwastage.
Above mentioned evidences are conspicuous. Industry still seems
re-luctant to agree upon the importance of Logistics Management.
Given thedeadlines for the project, most projects are completed in
a rush with theprime focus being the dead-lines. Industry people
are either unaware of theexpected savings that the proper logistics
may bring or are ignorant.
Issues:
Logistics and Supply Chain Management techniques are still
abstractconcepts in the construction industry. Even the lead firms
of the in-dustry are not using these techniques to transform their
business pro-cesses. The main reason is the short-term project
thinking of the in-dustry people and temporal nature of supply
chains.
Construction firms are not giving attention to collaborations
and properinformation sharing with the supply chain stakeholders.
To enable
-
164 Design of Competitive Indian Construction Supply Chain
Networks
Supply Chain Management cooperation of all the stakeholders is
manda-tory.
Most firms are benefited with the methods available in Project
Man-agement literature, which is slowly incorporating the SCM
techniquesin it.
Low entry barriers in the industry have given entrance to many
smallcontractors who are not aware of current technology and have
poorProject Management skills. These small firms have to be
educated.
Fragmented nature of the industry and heterogeneous culture of
sup-ply chain stakeholders make it difficult for construction firms
to alignthe work culture and practices.
There are hurdles in implementing the SCM concepts in the
constructionindustry: conflicting interests, lack of trust due to
short-term relationships,improper scheduling requiring flexibility
in operations, short-term projectthinking, and difference in work
cultures of stakeholders etc. Also it isvery much unclear who gets
benefited. Any feasible solution for the better-ment of the
logistics in construction should take these hurdles into
account.Presently the industry needs to handle some strategic
issues and hence wefocus on strategic issues more than
technological opportunities. The scopeof improvement in this
context is as follows.
Scope of Improvement:
The gains that can be achieved by proper logistics are
impossible with-out supply chain integration. Proper match of
demand and supply hasto be followed by integrating the supply chain
stakeholders.
Use of supply hubs can allow firms to utilize the expertise of
logisticsfirms. As mentioned later in this report, this strategy is
feasible forIndian construction firms and would be a key in
controlling projectcosts and removing delays.
An industry wide collaboration can be used for pooled
procurement.Procurement exchanges can be helpful, especially in
reducing the costand time of procurement of imported materials.
Main hurdle in the management of on-site operations is that all
thematerials have to be assembled on site which makes the process
com-plex. As has been seen in the case of manufacturing and service
sec-tors, outsourcing would help in the management of logistics
easier inconstruction.
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Indian Construction Supply Chains: Status, Issues & Scope
165
Material tracking and visibility, being the key to logistics
holds aprominent position in this context. In the wake of favorable
gov-ernment policies for the use of Radio Frequency Identification
(RFID)technology, construction firms should exploit this technology
for im-proving the visibility in their projects.
7.3.3 Use of Information Technology (IT)
IT has changed the way information is stored and transferred
from oneplace to the other and construction is no exception; but
the use of IT inconstruction is limited in firm level operations,
such as accounting, projectcontrol, drafting, wireless
communication etc. Conflicting interests begetlack of cooperation
and firms are averse of sharing information with othersupply chain
stakeholders. The real exploitation of IT is possible only ifit is
used for proper information flow across the supply chain. One
justhas to observe the success of the firms in other industries
that have usedIT to achieve radical transformation in growth.
Examples include Wal-Martwho realized overwhelming cost advantages
in supply chain optimization,and Dell Computer who cut out
intermediaries in retail computer sales.To really exploit the IT in
an effective manner one needs a strategy thatprovides incentives to
stakeholders for sharing information. For small andmedium sized
firms the use IT is hindered by lack of scales and huge set-upcosts
involved for some of the latest technologies.
Status: In each of the sectors, IT systems and tools are used
today whichdirectly assist in the specialist tasks. These systems
and tools have allowedfirms to automate various error-prone and
time consuming tasks and gainbenefits in cycle-time, productivity,
and accuracy. As an example, the use ofCAD for drafting has allowed
firms to reduce cycle-time, productivity andaccuracy when any
design changes are required. Automation of manualtasks is the first
phase of IT adoption.
Some firms have started to leverage the information in their
businessprocesses. The process of storing the information and
exchanging it withinthe boundaries of the firm and, to a limited
extent, outside has started.IT has been used to add value beyond
its role in reducing the cost. E-transactions, e-tendering etc. are
the examples of this phase and a fractionof lead firms are using
some other e-commerce applications as well. Useof IT to transform
firms internal processes is the second phase of IT adop-tion in
India. Generic benefits from the use of IT are productivity
gains,shorter cycle time, capacity to manage larger and more
complex projects,and improved accuracy and consistency of
documentation.
-
166 Design of Competitive Indian Construction Supply Chain
Networks!
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Fig. 7.2 L&T Case Study
The third phase of IT adoption in India will come when the firms
willstart transforming their core business processes using IT. This
will includeintegrating the supply chain through IT, and use of
stored information incritical decision making.
While large firms are investing in various IT solutions, medium
andsmall-sized firms are still avoiding the change in their working
practices.Since most of the infrastructure projects have high
upfront cost and longpayback periods, there are real cost savings
to be gained by reducing projectcycle time. Even a small time
overrun can mean a loss of crores of rupees.This is the reason why
construction firms want to capture the expenditureincurred at every
stage of the project, and are demanding software to in-
-
Indian Construction Supply Chains: Status, Issues & Scope
167
tegrate construction design with material, equipment, capital
and humanresources. Lead players use productivity and cost
reduction software appli-cations like PRIMAVERA, CAD design tools,
Enterprise Information Portals(EIP) for multi-project visibility,
and other costing and scheduling modules.
Industry leaders in public as well as private sectors are
investing heav-ily on Enterprise Application Software (EAS) for
tracking expenditure in-curred on infrastructure projects across
sectors such as power, highways,shipping, railways and telecom. The
software integrates project manage-ment and budgeting of projects.
Industry heavyweights such as L&T, ABB,BHEL, Reliance, ONGC,
Indian Oil and Tata power are investing in EAS.
Up to 80% of inputs into buildings are repeated. Therefore a
Enter-prise Application System is required to keep track of the
past information,which in turn will require codification of
knowledge. Such a system usesthe knowledge from past in future
projects and reduces project costs.
Many IT firms in India have already launched their software
packagesfor different purposes. But it seems that most of the firms
are hesitant touse these software solutions especially in Real
Estate segment. It is foundthat lead players of the industry are
investing in these solutions and theirexperience has been really
good. It is expected that, in future small andmedium sized firms
will learn from these success stories and start investingin IT
solutions for their projects.
Issues:
Construction firms are not IT savvy and only lead firms are
trying toexploit the benefits.
Lead players are using IT for project management and the use of
ITis mostly at the firm level. Proper information flow across the
supplychain is absent.
Planning and productivity modules such as PRIMAVERA, are
help-ing only a few individuals as these applications require a
significantamount of investment with lack of scales for small &
medium-sizedfirms and hence the current practices dont tend to
optimize the wholesystem.
With the lack of a clear strategy for incentive allocation among
thesupply chain stakeholders and the presence of conflicting
interests, ITsolutions which can improve the information flow
across the supplychain remain unsuccessful.
Scope of improvement:
-
168 Design of Competitive Indian Construction Supply Chain
Networks
A successful IT strategy for Indian construction industry should
tryto provide the solutions which are feasible to not only big
players butsmall and medium sized players as well.
It can be achieved in the leadership of lead players who can
aggregatethe supply chain stakeholders and ensure the incentives
for informa-tion sharing.
The effort of the lead firms along with the favorable government
poli-cies would homogenize the IT infrastructure in the industry
which,in turn, would facilitate the supply chain integration and
use of IT incritical decision making.
7.4 Indian Construction Supply Chains: Strategies
This section aims to provide strategies for construction
industry in threeareas: project planning, Logistics, and Use of IT.
As mentioned earlier, anyfeasible and potential strategy would take
the characteristics of constructionsupply chains into account. The
technologies which can be used are alsosuggested to complement the
strategies with appropriate solutions.
7.4.1 Integrated Supply Chains
Any Supply Chain Management initiatives would fail unless and
until thestakeholders are willing to share information and
cooperate in an integratedmanner. This can be done if and only if
there are incentives for individualsupply chain stakeholders for
cooperation and there are mechanisms to con-trol risks associated
with information sharing.
Dell, Wal-Mart and some Indian manufacturing firms have been
success-ful in achieving supply chain integration because they
could propagate theincentives through out the supply chains. The
key difference in any con-struction firm and the above mentioned
firms is Relationship Management.Changing the industry attitude
from adversarial to cooperative is a chal-lenge before construction
industry. There are four main strategic steps thathave to be taken
to form integrated supply chains. Figure 7.3 shows thesesteps and
benefits which would follow from integrated supply chains.
-
Indian Construction Supply Chains: Strategies 169
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-
170 Design of Competitive Indian Construction Supply Chain
Networks
Small and medium-sized enterprises (SMEs) have to see their core
com-petencies and join an appropriate supply chain. They should be
a part ofthe policy-making process for information and profit
sharing.
Under the relationship-based approach, suggested strategies are
as fol-lows.
A. Strategic Alliances Firms from different sectors who act as
stakeholdersin construction supply chains need to collaborate in
order to coordi-nate for their mutual benefits. These strategic
alliances, having part-ners with their individual knowledge and
expertise, can contribute inachieving a higher productivity in
construction projects. This inter-sectoral cooperation would help
all the partners in making better de-cisions through
knowledge-sharing and will bring systemic develop-ments in the
industry. With this model the benefits of specializationare fully
retained and there are economic incentives to individual
part-ners.
Current practices in the industry maintain project contracts for
a par-ticular project. As mentioned earlier, these short-term
relations haveto be converted into long-term partnerships. In that
sense, selection ofa new supplier or subcontractor should be based
on the benefits thatcan be achieved through the long-term
relationship with the stake-holder. The idea of integrated supply
chain relies on long-term strate-gic alliances, where the
stakeholders can perceive their incentives forcooperation and
knowledge-sharing. The lack of common technologicalinfrastructure
and inter-operability standards can be maintained if the long-term
relationships are maintained.
B. Performance-driven supply chains Present industry practices
are basedon the competitive bidding process. Construction industry
has seenthe commoditization because for a long time innovation for
higherproductivity has been absent and product differentiation was
absent inthe Indian market. As a result the bidder with minimum bid
gets thecontract even today. This contractor selection approach has
worsenedthe situation and with the reducing margins it has been
difficult forfirms to invest on new technologies. How can we bring
a culture ofinnovation in the construction ? is a critical
question.
The motivation for innovation to achieve higher standards of
produc-tivity and quality can come only if the incentives are
ensured to indi-vidual players. The supply chain optimization,
which has been usedin some manufacturing industries, should be
applied to construction.Government has taken this initiative to
increase the private partner-ship in construction. Many projects:
most of the projects under theNational Highway Development Program
(3rd phase) are on Build-
-
Indian Construction Supply Chains: Strategies 171
Own-Transfer (BOT) basis, Hyderabad & Bangalore
international air-port projects were awarded on the
Built-Own-Operate (BOO) basisetc. The use of such contracts is a
sign of performance-driven ap-proach. These contracts have been
designed to shift the principal con-tractors focus to the
performance of the asset. Similar incentive allo-cation schemes
should be devised for other supply chain stakeholdersto promote
innovation for better productivity.
The firms who would be able to motivate the critical players
involvedin the project for greater cooperation and innovation would
be able toreduce the project cost to a great extent and compete in
global markets.This can not be done without a performance-driven
approach withproper incentives allocated to individual players.
C. Effective inter-organizational processes Once the cooperative
culture ofintegrated supply chain is developed, the effectiveness
and efficiencyof inter-organizational processes has to be ensured.
Following ap-proaches should be followed for the same.
Firms need to ensure that an integrated database of design
andother construction information is provided appropriately to
eachof the critical supply chain members. This can be done
usinginternet with the password protection. The information
shouldbe shared in real-time by individual members of the supply
chain:suppliers, consultants, design professionals, and contractors
etc.It ensures the consistency in collaborating effort by sharing
andmanaging data.
Before maintaining the databases it is important to find out
infor-mation linkages between supply chain members. Which meansthat
what information is required, at what time, in what format,and by
whom should be clear.
Standard formats and practices would help in homogenizing
thepractices in the supply chain and would be easy to use as
well.
Information sharing process has to be supported with proper
ITinfrastructure. A proper IT strategy needs to be worked out
tohandle various challenges related to the fragmented structure
ofthe construction supply chains. We will take this issue later
inthis report.
7.4.2 Improving Project Planning
Reliable planning improves project coordination and reduces
disruptionsand delays. Status and issues related to current
industry practices for project
-
172 Design of Competitive Indian Construction Supply Chain
Networks
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Fig. 7.4 Planning deficiencies
planning were discussed in Section 7.3.1. Current industry
planning proce-dures include scheduling based on process
constraints (PERT, CPM etc.),risk management, and resource
allocation in separation. It is widely ac-cepted that the schedules
which dont consider resource and informationconstraints, and dont
take into account the possible risk events are unre-alistic and the
Indian industry is full of such examples where firms hadto bear
huge losses and delays because of poor plannig. Though the
casestudies which can highlight the causes of delays are not easily
available forIndian industry, improper planning and ignorance of
critical risks can eas-ily be seen. Several NHPC projects, Narmada
Dam, Pradhan Mantri GramSadak Yojana (PMGSY), and the latest delay
in Bangalore-Mysore highwayare a few examples. Although many of
these delays can be associated withpolitical and legal risk events,
poor feasibility study, financial delays, cli-matic problems,
scarcity of materials and labor and change in work cultureare
prevalent causes of delays (refer Appendix on government
infrastructureprojects, page 185).
Case study in Figure 7.4 shows that resource, and information
con-straints should be included in scheduling. And output of risk
analysisshould be used in project planning.
We make the following recommendations for the improvement of
projectplanning modules.
A firm needs to consider the resource constraints (equipments,
ma-chines, labor etc.) while scheduling the project to make the
schedulesrealistic. For the firms who are involved in multiple
projects, it ismandatory to find out which resources can be
allocated to the sched-
-
Indian Construction Supply Chains: Strategies 173
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Fig. 7.5 An integrated planning module for construction
firms
uled project. In that sense, resource allocation should be a
part ofproject scheduling.
The Scheduling module should also consider the information
con-straints. Information constraints include the equations which
considerthe critical information that must be available before a
process canstart. As an example if the information regarding
inventory for a ma-terial is not available, the process using that
material can be hinderedand may cause delays. With the integrated
supply chains it would beeasier to find out real constraints
regarding material lead times.
Risk analysis should be paralleled by scheduling and appropriate
riskmanagement schemes should be devised to avoid the future
changesin the schedule. [21] describes how a CBR-based Decision
SupportSystem can be used for construction supply chain risk
management.
With the scheduling and risk management module, a Knowledge
Man-agement module which can store the knowledge and experiences
ofon-site operations, would help project planners to identify and
man-age critical risks in planning.
Figure 7.5 illustrates the framework of the proposed planning
module.Constraint-based programming is a good choice for handling
various con-straints (process, resource and information) in
scheduling. Constraint-based
-
174 Design of Competitive Indian Construction Supply Chain
Networks
programming also helps identifying critical bottlenecks
(critical constraints)in the project. These bottlenecks can be
dealt with, using Lean principals(in case of resource constraints)
and Information Technology (in case of in-formation constraints).
Also the CBR-based Decision Support System forrisk management [21]
can be used to take strategic decisions on the supplychain design
and resource allocation.
7.4.3 Focus on Logistics
As mentioned earlier, no one part of the construction supply
chain can im-prove logistics on its own. All the stakeholders have
their roles to playand a collective effort of information sharing
would be required. Currentlythe industry is ignorant about the
logistics and evidences illustrated in theprevious section support
that.
With the integrated supply chains, logistics focus can be easily
achieved.The focus on logistics should start right at the designing
phase of the project.
7.4.3.1 Design for Logistics Design professionals need to be
more awareof logistics costs. This can be done by involving
logistics managers in thedesign phase. Design for logistics would
mean that a process map for pack-ing, transportation, order
quantity etc. is specified during the design phaseitself. Design
for logistics would help in reducing material wastage and costin
the following way.
Design professionals would include the packing and lot size
instructionsto ensure the optimal loading of transport vehicles.
This would reducethe material wastage and save transportation cost.
Packaging instruc-tions should also ensure ease of packaging and
site storage constraintsto save storage space.
Kitting is a useful tool for construction industry. Kitting
opportunitycan best be seen at designing level. Using the bill of
materials anddrawings, design professionals should see which
components/materialsshould arrive at the site at the same time and
can be supplied to-gether. As an example, a modular door assembly
can arrive with allthe components arriving at the site as a kit.
Such a kitting would helpsynchronization of material procurement
and reduce the chances ofdelays.
It would be easier to decide about the site layout and location
of storehouse/s during the design phase. Design professionals
should work to-gether with project managers and work on the site
layout. This wouldhelp in double handling of materials.
-
Indian Construction Supply Chains: Strategies 175
Standardization of logistics processes would help in applying
the designfor logistics for the products of similar nature which
are used in sep-arate locations and purposes. This would reduce the
cost of designfor logistics itself.
7.4.3.2 Pooled Procurement through SupplyHubs According to
overall indus-try estimates transportation (35%), inventory (25%)
costs contribute a totalof 60% of the total logistics cost. A few
Indian lead firms have started usinge-commerce applications for
online material procurement. These solutionsrely on firms supplier
networks and reduce process and transaction costs tosome level.
Also only a few firms are benefited through these
e-commercesolutions.
Following two observations are keys in developing the strategy
whichreduces the above mentioned costs.
As is well known, transportation cost can be reduced by
increasing thescales, i.e. by more and more material supplied from
the same sup-plier, cost of transportation per unit comes down. But
for individualfirms optimal lot size remains fixed. An individual
firm can not affordto order more than required as it would cause
high inventory levelsand material wastage in many cases.
Inventory costs and delay in material procurement are the result
of in-formation gap between the suppliers and the contractor. In
construc-tion projects, many a times subcontractors are responsible
for theirown material procurement and the quality of information
flow, backand forth, from the supplier and to the supplier remains
in the handsof subcontractors, who have a variety of work cultures.
Due to thesereasons, demand distortion (as known as bull-whip
effect in SupplyChain Management literature) remains a challenge
for constructionindustry.
Pooled procurement is a strategy that can handle both the issues
men-tioned above. Typically the pooled procurement arrangements
work in frag-mented industries where the end-customers dont have a
bargaining powerand the demand is uncertain. Healthcare industry is
one such examplewhere this kind of arrangement has gained a huge
success. There are over550 group purchasing organizations in
healthcare in US, which account for80% of the total annual spending
by hospitals and nursing homes. Construc-tion industry has both the
characteristics mentioned above and we think thatpooled procurement
strategy enabled by internet can bring huge cost reduc-
-
176 Design of Competitive Indian Construction Supply Chain
Networks
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Strategic suggestions for pooled procurement are as follows:
Small and medium sized firms who lack the bargaining power can
jointogether to form a supply hub, which with the increased scales
wouldhave the bargaining power. This will reduce not only the
logistics costbut also the material cost as a whole.
A supply hub can be shared by contractors as well as suppliers
if thelong-term relationships are maintained. As happens in supply
hubsof manufacturing, suppliers would take the responsibility of
contractfulfillment and inventory levels until the material arrives
at the site.
Lead firms dealing with multiple projects at a time, can create
theirprivate supply hub and get benefited but the information
confiden-tiality can be an issue. They are suggested to contact a
third partywho can act as an intermediary and maintains the
confidentiality ofsuppliers information. Also, none of the lead
firms in India seems tohave a core competency in Supply Chain
Management. It should bebest for these firms to outsource the
material procurement to a thirdparty.
An IT-enabled procurement with real-time information sharing at
sup-ply hub would minimize the demand distortion to a great extent
andhence would reduce the procurement delays.
Supplier-side investment on the required IT infrastructure is
not highand hence several small and medium-sized players are
expected toparticipate.
The selection of a third party for supply hubs should be based
on Sup-ply chain Management skills, breadth of network and market
credibil-ity.
-
Indian Construction Supply Chains: Strategies 177
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Fig. 7.6 A supply hub model for construction firms
Many areas of India are attracting firms for commercial
activities. Exam-ples include Hyderabad, Gurgaon, and Hariyana. A
lot of real estate con-struction is expected in these areas in
coming years. A supply hub in theseareas would reduce the
construction costs of the projects. As building ma-terials for
residential and commercial complexes are almost common, sucha
supply hub can provide a total solution for materials if planned
properly.
Software firms like i2 technologies, IBM and Oracle etc. are
capableof providing the required IT infrastructure for such a
pooled procurementarrangement. Figure 7.6 shows a supply hub model
for construction firms.
Limitations & challenges:
Such an arrangement for pooled procurement requires the use of
In-formation Technology in construction industry. Although firms
aregearing up in this area, it will take time to grow the
supplier-customernetwork.
As construction industry requires a huge number of various
differentgoods for various different projects, it is hard to
believe that supplyhubs can provide a total solution for material
procurement.
Some contractors might be unwilling to share the information
neces-sary for the great impact of such an arrangement.
-
178 Design of Competitive Indian Construction Supply Chain
Networks
7.4.3.3 Goods Tracking & Visibility Visibility of goods in
construction is notgiven importance. Material visibility is scarce
on site and negligible off site.Material visibility in various
stages of supply chain and its importance is asfollows.
Visibility in warehouses enables labor cost minimization and
ware-house management.
Transportation visibility enables in-transit inventory
management andtrailer/asset management.
Supplier visibility enables vendor managed inventory and
suppliercollaborative replenishment.
On-site visibility enables work-in-process material management
andreplenishment planning.
Demand visibility enables order fulfillment, vendor drop-ship,
anddirect to store delivery.
Material tracking is of fundamental importance for critical
materials andcomponents. Critical goods include materials such as
cement; concrete; as-phalt; bricks etc. which need to be supplied
continuously, High value com-ponents such as baggage handling
systems; industrial turbine; and equip-ments (earthmovers, machines
etc.), and imported materials which have riskof damage and/or
stealing in procurement etc.
Radio Frequency Identification (RFID) technology provides a
wirelessmeans of communication between objects and readers. It
involves the use oftags, or transponders, that collect data and
manage it in a portable, change-able database. Unlike bar codes,
RFID has the ability to identify and trackproducts and equipments
in real-time without contact or line-of-sight andthe tags can
withstand harsh, rugged environments.
The materials in construction are used in a rough environment,
wheredirt, dust and other contaminations are present. Sensing and
reading oflabels in such environments is not possible through
optical sensing. RFIDis a tracking technology that can be used in
construction. A lot of researchis going on in this area around the
world [7, 8] and there are some successstories outside India [29,
30], where RFID has been used for the tracking ofmaterials in
construction projects.
Construction materials (ex. steel beams) can have RFID tags so
that man-ufacturing, transporting, storing, and installation of
materials are monitoredby construction engineers. This will have a
great benefit in reducing fieldoverhead costs which accounts for
the major portion of project expenses.
-
Indian Construction Supply Chains: Strategies 179!
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Fig. 7.7 RFID case studies in construction
-
180 Design of Competitive Indian Construction Supply Chain
Networks
Indian governments Wireless Planning and Development Authority
hasreleased radio frequency in the UHF 865 - 867 MHz band. This
move isexpected to encourage the use of RFID in the supply chains.
A number ofmanufacturing firms: Mahindra & Mahindra, Honda
Siel, and Abhishek In-dustries etc. are using RFID for various
logistics operations. Similar imple-mentations are under way in
Ashok Leyland, Pantaloons, Arvind Mills andother firms. A group of
public and private professionals joined together andformed RFID
Association of India (RFIDAI), a not-for-profit organization
topromote rapid and responsible adaptation of RFID in India.
Conditions forthe use of RFID are favorable in India and
construction firms should adoptthis technology for better goods
tracking.
7.4.3.4 Lean Construction: Lean Production is the generic
version of theToyota Production System, recognized as the most
efficient production sys-tem in the world today. Lean Thinking
describes the core principles under-lying this system that can also
be applied to every other business activity- from designing new
products and working with suppliers to processingorders from
customers.
The starting point is to recognize that only a small fraction of
the totaltime and effort in any organization actually adds value
for the end customer.By clearly defining value for a specific
product or service from the endcustomers perspective all the non
value activities, often as much as 95% ofthe total, can be targeted
for removal step by step.
Few products or services are provided by one organization alone,
sothat waste removal has to be pursued throughout the whole value
stream -the entire set of activities across all firms involved in
jointly delivering theproduct or service. New relationships are
required to eliminate inter-firmwaste and to manage the value
stream as a whole.
Instead of managing the workload through successive departments,
pro-cess are reorganized so that the product design flows through
all the valueadding steps without interruption, using the toolbox
of lean techniques tosuccessively remove the obstacle to flow.
Activities across each firm are syn-chronized by pulling the
product or design from upstream steps just whenrequired in time to
meet the demand from the end customer.
Removing wasted time and effort represents the biggest
opportunity forperformance improvement. Creating flow and pull
starts with radically re-organizing individual process steps, but
the gains become truly significantas all the steps link together.
As this happens more and more layers ofwaste become visible and the
process continues towards the theoretical endpoint of perfection,
where every asset and every action adds value for theend customer.
Lean Thinking represents a path of sustained performanceimprovement
and not a one-off programme.
-
Indian Construction Supply Chains: Strategies 181!
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7.8 Case study of lean thinking in construction
A lean construction approach would be similar to lean
manufacturingwhere, value-adding processes would be clearly defined
and a continuouseffort to remove the waste would be made. This can
reduce material wastageand project cycle time, and allow proper
utilization of resources.
7.4.4 IT Strategy
We discussed the status of Information Technology application in
construc-tion industry in the previous section 7.3.3). Use of IT
applications gainedthe attention nearly five years back when lead
firms started adopting vari-ous IT-enabled solutions for their
internal operations (as mentioned in Sec-tion 7.3.3). As the
industry is not that IT-savvy and requires investmentswhich many
small and medium-sized contractors cant make, the
Indianconstruction industry still needs to go a long way in the IT
applications.
As mentioned in Section 7.3.3, it is because of the fragmented
structureof the industry that IT capabilities of Indian firms are
heterogeneous. Thereal exploitation of the benefits of IT will come
through industry-wide ho-mogenized use of IT; where suppliers,
subcontractors and other stakehold-ers of supply chain will have a
common IT infrastructure to speed up theinformation flow and use
the stored information in critical decision makingprocesses of
business.
Our approach in this report is towards the use of IT in
integration ofconstruction supply chains and critical decision
making. We believe that this
-
182 Design of Competitive Indian Construction Supply Chain
Networks
approach would be responsible for Indian firms to derive
systemic radicalchanges and greater benefits.
In Section 7.4.1 we discussed the concept of Integrated Supply
Chains.This section takes this idea further and introduces a
strategic path whichwould lead to greater cross-sectoral
coordination in the construction indus-try using IT.
7.4.4.1 Developing Awareness, Skills, and IT Infrastructure: IT
skill base inconstruction industry is quite low. While big
suppliers, consultants, con-tractors are gaining the benefits of
IT, many small players are not even awareof these benefits. First
step towards the supply chain integration should beincreasing the
awareness of IT applications and its benefits.
Many manufacturing firms have a regular education and awareness
pro-grams for their vendors and suppliers. Construction firms need
to start sim-ilar programs for their supply chain partners. It
should be mentioned herethat it is possible only if long-term
relationships are expected and the inten-tion is to form an
integrated supply chain for multiple projects. The statusof IT and
computer education in India is in a good shape. If the awarenessof
the IT benefits is spread in the industry, it is expected that
various smalland medium-sized players can adopt the IT-enabled
practices. Construc-tion Industry Development Council (CIDC) and
other public organizationsare expected to take initiative in this
direction, who can publicize indus-try best practices as case
studies on their web-sites, organize educationalconferences for
SMEs, and assist them in forming the right IT strategy.
Gov-ernments favorable policies for the use of IT in construction
would helpSMEs in bringing up the change in this work culture.
In the integrated supply chain approach, lead contractors would
educatethe firms to develop the required IT infrastructure. The
tools which areto be used and the systems which are required can be
suggested by leadfirms IT consultants so that a common IT
infrastructure, maintaining inter-operability standards, can be
built.
7.4.4.2 StandardizedDatabase: Once the required IT
infrastructure and skillhas been acquired by the supply chain
stakeholders, the next step wouldbe to find the information
linkages between various players and creatingstandard systems and
procedures for storing and sharing the information.These systems
should be able to provide real-time information sharing. Asan
example, a material supplier should be aware of delivery dates;
inven-tory levels of the customer; customer schedule; lot size
information; de-sign changes etc. on the real-time basis, and the
customer of that suppliershould be aware of capacity constraints;
failures and disruptions; quality
-
Indian Construction Supply Chains: Strategies 183!
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7.9 Motivation for IT strategy
constraints etc. of the supplier. For the security concerns best
solution is touse password protected web-based systems.
Standardized databases would help individual supply chain
members toplan their production and services in an effective
manner. Inter-organizationalprocesses would become a standard
practice and can be used if any changein the supply chain is
introduced. For example it would be easy for a newfirm to join an
integrated supply chain and become a part of it.
7.4.4.3 Decision Support Systems: Construction Management is
experienceintensive. The knowledge gained on site is hardly stored
and used for thefuture decision making. Also individuals in the
supply chain do not havethe information which is critical in the
decision making. In an integratedsupply chain, individual firms
will have an opportunity to gather the infor-mation relevant to
them and this information can then be used in makingcritical
business decisions.
A Decision Support Systems (DSS) provides a standard way of
storingthe information and using this information in various
decision making pro-cesses. As an example: a contractor can use a
DSS for risk managementin construction projects, which uses the
chances of occurrence of varioussupply chain risks and knowledge
stored from the previously handled riskmanagement cases, to make a
risk management plan for new projects. In-
-
184 Design of Competitive Indian Construction Supply Chain
Networks
dividual firms need to identify critical decision making
processes of theirbusiness: supplier selection, material selection,
waste management etc. andbuild Decision Support Systems to use the
information gathered from otherplayers in making better
decisions.
7.5 Conclusions
We found that efforts in the construction industry to achieve
higherlevels of productivity have been much slower as compared to
othermanufacturing an