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Chapter 2 of Managing Project Supply Chains (978-1-4094-2515-1) by Ron Basu

The Building Blocks of a Project Supply Chain

2

Introduction

In Chapter 1 we discussed the need for a Total Supply Chain Management approach and introduced the concepts of building blocks. The importance of each building block is explained in this chapter. No block stands alone but, rather, each is a component of the whole. In combination these bricks show the activities, stages and processes of the extended supply chain. The sequence of practices creates a flow between different stages to fulfil a customer’s need for a product or service. Therefore we aim to explain in this chapter:

  1. What are the building blocks of a Project Supply Chain?

  2. Are all the building blocks suited to every project?

 

What are the Building Blocks of a Project Supply Chain?

It is important that a ‘total supply chain management approach’ is applied and all the building blocks of the supply chain are examined. The synergy that results from the benefits contributed by all elements as a whole far exceeds the aggregate of gains achieved for an individual element. The integrated approach is truly more than the sum of its parts. If one concentrates exclusively on isolated areas, a false impression may be inevitable and inappropriate action taken.

This maxim can be illustrated by the Indian folk tale of four blind men who were confronted with a new phenomenon – an elephant! As none of the men could see what was in front of them, each tried to ascertain the situation in their own way. The first man, by touching its ear, assumed that the elephant was a fan. A second was hit by the elephant’s tail and concluded that it was a whip. The third man bumped into a leg and thought it was a column, while the fourth, on holding the trunk, decided that it was an over-sized hose. Each man, on the evidence he had, came to a logical conclusion. However their deductions were the result of looking at only partial data and in fact all had made an erroneous judgement by failing to construe that the total object was an elephant. As with all feedback devices where a basic message is given, inferences and decisions may be drawn from isolated data which will be false and misleading.

A story in a business context will further underline the limitation of tackling only one part of the whole problem. Following attending a conference, the project director of a multinational company, decided that Earned Value Management (EVM) must be the best way forward in a major project. So he organised his project team, called in experts from a big consulting firm and set up an earned value management training programme. The team did an excellent job on two labour-intensive work packages by systematically reviewing Earned Values, Planned Values and Actual Spends at the critical stages of those work packages. As a result the two enterprises were progressing well and fortunately both were on time and in budget. However, it soon transpired that it was very difficult to estimate the planned values and actual spends of many critical work packages governed by procurement schedules. Furthermore, EVM failed to take into account the impact of risks and issues related to quality and safety. Therefore, in isolation the EVM programmes did not improve the overall performance of Project Management.

As we mentioned in Chapter 1, our model for total supply chain management comprises six building block configurations, viz:

  • Customer focus and stakeholders

  • Resources and time management

  • Procurement and supplier focus

  • Supply and stock management

  • Building and installation

  • Handover and closure.

 

In addition there are three cross-functional integrating processes:

  • Systems and procedures

  • Regular reviews

  • Quality and performance management.

 

This model is illustrated in Figure 2.1. Each of the building blocks is briefly described below.

It is also important to point out that there are three streams or categories in Figure 2.1, depending on the affinity of the building blocks. These are:

  1. Project Planning Chain: in this stream the building blocks are dealing with project planning activities and information flow. The building blocks in this stream are:

    • Customer focus and stakeholders

    • Resources and time management

    • Procurement and supplier focus.

     

  2. Project Delivery Chain: here, the building blocks relate to the project implementation and closure activities and physical flow of materials on site. The building blocks in this stream are:

    • Supply management

    • Building and installation

    • Handover and closure.

     

  3. Project Integration: at this stage the building components of project supply chain are acting as the integrators of other building blocks at various stages of the project life cycle. The building components in this stream are:

    • systems and procedures

    • Regular reviews

    • Quality and performance management.

     

 

Each of the project supply chain building blocks, described briefly below, will be covered in more detail in Chapters 3, 4, 5, 6 and 7 as part of the above three streams.

 
Figure 2.1 Project supply chain building blocks

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Customer Focus and Stakeholders

Customers exist both at the start and end of the supply chain. A customer is the person who is paying for the goods or services or is most affected by the outcome of the process. In a project supply chain a customer could be a sponsor, an investor or an end user. Let us not forget that the demand for a product or service is created by customers.

The basis of all supply chain planning and decisions is underpinned by the forecast of future demand. A supply chain process cannot exist without knowledge and planning for the future. All ‘push’ processes are executed in anticipation of customer demand and all ‘pull’ processes are carried out in response to customer demand. It is a misconception that demand forecast is not required in a pull or just-in-time procedure. Without a forecast of future demand in a pull system, a manager cannot plan the capacity and have the resources required to respond to a customer order. For a traditional push process a manager arranges the level of production and capacity based on the forecast of future demand. Even in a service industry, where the demand is not discrete, business planning will be unsatisfactory without an estimate of future requirement. In a not-for-profit organisation, demand is unpredictable but it does have customers and it has a core budget based on demand forecast.

In all instances of a supply chain the first step is to forecast what the customer exigency will be in the future. It is important to note that is not possible to produce a perfect forecast as there are so many variables affecting a future demand – such as past need, promotion and advertising of the product, market share, state of the economy, price discounts, competition and the introduction of new products. Peter Drucker once said, ‘The best way to predict the future is to create it.’ There are also some recognised characteristics of forecasts: e.g. there will always be a forecast error, longer-term predictions are less accurate than short-term estimates and aggregate projections are usually more accurate than individual calculations. In a project supply chain also the importance of demand forecasts cannot be underrated. Without a good forecast or materials, resources and third party services the forward planning of resources and procurement schedules would be inadequate and expensive.

It is recognised that a critical determinant of project success is agreeing the success criteria with key stakeholders before any design or planning activity. Stakeholders comprise many people, in addition to customers, whose lives are affected by the outcomes of the project. The demand forecast actually depends on project deliverables. This is due to the fact that the outcomes are project deliverables and they determine the success criteria. Therefore the demand forecast is also dependent on the agreement with key stakeholders.

Resources and Time Management

A primary objective of supply chain management is to optimise supply capacity to fulfil demand in time. In the real world, resources are not infinite. Satisfying customers on time can be crucial. However an increase in capacity is expensive, be it machines and equipment, warehouse space, transport, stocks of input materials and finished product, or, of course, people. Therefore a supply chain manager must make decisions regarding capacity levels and buffer them to meet the variation in demand. This can be achieved either by adjusting capacity or production in order to hold output stocks of goods. An organisation may provide excess capacity to satisfy demands for peak periods or set an upper limit of the capacity based on the average demand. This allows them to balance the cost of holding excess inventory on one hand or losing sales on the other.

There are a few options for capacity optimisation open to a manager and there are proven processes to assist him or her. One such process is aggregate planning, where an organisation determines levels of capacity, production and inventory over a planning horizon to maximise the profit. Another established process in operations management is Enterprise Resource Planning (ERP), which has evolved from Materials Requirement Planning (MRP) and Manufacturing Resource Planning (MRPII). ERP is closely linked with Sales and Operations Planning (S&OP) and comprises a series of sequential processes by using a single set of databases – viz. demand planning, rough cut capacity planning, master operations scheduling, materials requirement preparation, detailed capacity planning, purchase scheduling and production scheduling. Number crunching is done using a computer system such as SAP R/3. The success of ERP depends on the structured review process by planners, managers and users.

In project management, Critical Path Scheduling and Earned Value Management are popular tools for assigning resources and time. The planning processes are supported by software such as Microsoft® Project and Oracle® Primavera. However the application of ERP in major projects is now assisting resources planning and procurement schedules and is interfaced with Enterprise Project Management (EPM) systems.

Procurement and Supplier Focus

Project procurement is often considered the focal point of project supply chain and the supply chain manager is usually selected from a procurement background. The procurement activities in projects have two main subdivisions: the buying of materials and placing contracts with suppliers and contractors. Hence procurement and supplier focus are interconnected. The optimisation of internal capacity can be supplemented by buying in external capacity and resources. As Reid and Sanders (2002) say: ‘Make or buy is a type of backward integration decision, where the company decides whether to purchase certain materials or tasks or perform the operation itself. Often this is called outsourcing. Many companies routinely out-source certain services, such as janitorial services, repair, security, payroll, or records management’ (p. 56). For the supply chain, the procurement of external capacity and resource could include packaging materials, part built-up assemblies, contracting out utilities and maintenance, hiring contract or casual labour, selecting approved suppliers and outsourcing. An example of part built-up assemblies is where an American car typically consists of 25,000 components to be constructed on the manufacturing line, while a Japanese car of a similar class might only consist of 12,000.

In a typical manufacturing organisation the cost of bought-in resources accounts for 60 to 90 per cent of the cost of goods sold (CoGs). Thus a powerful way to improve shareholder returns is to address the reduction of purchasing costs. A proper purchasing and supply management also in a project can give a network of suppliers capable of delivering service quality. At the same time, this will allow them to beat competitors, in addition to securing cost reduction over a period. In a market-driven competitive world, businesses are continuously seeking new suppliers and partners, including outsourcing.

The Internet has provided new challenges and potential solutions and has enabled extensive connectivity. These new capabilities of e-commerce offer the facility for supply chain partners to share information in real time. Companies have now recognised that great improvements in value can be attained by coordinating and cooperating the efforts along the supply chain. These real-time advantages of the Internet are now being achieved in major projects. In short, projects that collaborate, sharing plans and information, are able to improve the overall supply chain performance to their mutual benefit.

The development of a professional service industry has also in recent years increased considerably; however, as observed by Mitchell (1998), purchasing teams appear to have made less effort to reduce costs by outsourcing services. Nonetheless the importance of service level agreements and supplier partnerships is growing in the global supply chain. A survey by Wade (2003) showed that 31 per cent of the total procurement cost is for bought-in services.

The selection of appropriate or preferred suppliers should involve alternative and complementary attributes between those suppliers and the receiving organisation. Slack et al. (2006) suggest four basic capabilities to make sensible trade-offs:

  • Technical capability – the product or service knowledge to deliver sustainable quality

  • Operations capability – the process knowledge to ensure effective supply

  • Financial capability – the financial strength to fund the business

  • Managerial capability – the management talent to develop future business.

 

It is important to raise the standards of suppliers as well as to learn from them by working in partnership with them. Tightly controlled service level contracts are being replaced by joint service agreements with the free exchange of data and knowledge. Success will depend on mutual trust, a highly developed commercial relationship and an efficient system of data exchange.

Supply Management

Physical inventory – whether equipment or material – must be controlled in projects. Although this is an area of neglect in many undertakings, the good practice of operations in assets and stock management should be applied to projects. The purpose of inventories or stocks in operations is to buffer against variations in demand and supply. Inventories usually reside in three stages of a manufacturing process: input stocks (e.g. raw and packaging materials); process stocks (e.g. semi-finished products); and output stocks (e.g. finished products). Wild (2002) introduced the concept of consumed and non-consumed stocks. Consumed articles (such as materials or products) are used by the process or customers and must be replenished in shorter cycles. Non-consumed items (for instance capital equipment and labour) are repeatedly used by the process, needing repair and maintenance, and are replaced at longer intervals.

Inventories could be allocated either by design or can accumulate as a result of poor planning and scheduling. Generally inventory is viewed as a negative impact on business, incurring the costs of capital (interest paid or interest foregone), storage space, handling, insurance, increased risk of damage and theft, and obsolescence. On the other hand, lack of inventory leads to lost production in the factory and unrealised sales at the end of the supply chain. Holding an inventory of materials and finished products can be seen as an insurance against the uncertainty of supply and a means to overcome unforeseen variations in demand.

Inventory management is a good indicator of the effectiveness of supply chain management. It is relatively easy to achieve higher levels of customer service by accumulating excessive stocks. It will also obscure short-term operational problems. But this is a costly and risky option in terms of cash flow. Obsolete inventory – be it caused by changes in technology, fashion or due to foodstuffs past their use-by date – clearly has little salvage value. Therefore it is vital to optimise the inventory level.

In thus optimising inventory levels, two types of stocks are considered: cycle stock and safety stock. Firstly, cycle stock depends on costs associated with ordering, transportation, quantity discount, lead times from suppliers and customer demand.

On the other hand, safety stock is the buffer against the variation of demand during the lead time and depends on forecast accuracy, the reliability of suppliers and customer service level.

Project Managers might have a nonchalant attitude towards inventories, but not so for Accountants. The deliveries from suppliers, whether material or equipment, must be received, inspected and possibly stored before use. The same attention to records and the control of goods from external suppliers should also be applied to internal suppliers.

Building and Installation Management

In a project supply chain, ‘building and installation’ is the building block that makes things happen. It is where plans are executed in sites and facilities to produce goods or services for customers. This stage is comparable to operations management in manufacturing industries. Operations Management is the activity of managing resources and processes that produce goods and services. Input resources (viz. information, materials and utilities) are transformed by three converting components (people, process and technology) into the desired outputs. Along with distribution management, operations management accounts for the physical flow of the supply chain; however most texts on operations management give only scant coverage to the topic of supply chain management.

Operations exist in all types of supply chain, whether it is for delivering a product or a service: a popular perception of an operation is that it is where physical activities or transformations are involved, e.g. manufacturing. If you think that you do not have an operation if you are involved, e.g. in the field of sales and marketing, banking or insurance, or the health service or charity organisations, then you are incorrect. In actual fact you will always have an operation as long as you use resources to produce products, services or a mixture of both. In other words, if you have input, process and output – you have an operation.

During the 1960s and earlier, operations management was exclusively the domain of the manufacturing industries. Since the 1970s it has been used in both the manufacturing and service sectors, and it also implies that a service operation can be decoupled as repetitive and non-repetitive operations and that manufacturing principles and techniques can be applied to repetitive service operations. More recently the term ‘operations and process management’ has been used to cover all parts of the organisation. For clarity, in the context of this book operations management will include all types or parts of organisations.

Handover and Closure

There is no doubt that supply chain order fulfilment is the Achilles heel of the e-business economy. At the end of every e-commerce, online trading and virtual supply chain there is a factory, a warehouse and a transport. The Internet has elevated the performance of information accessibility, currency transactions and data accuracy; but the real effectiveness of supply chain from the source to customer cannot be achieved without the physical efficiency of the supply chain.

In the context of project management, the final handover and closure process determines the success and sustainability of project outcomes. The skill with which the closure is managed has a great deal to do with the quality of life after the project. A successful closure is the destination of the project supply chain. The closure stage of the project may have less impact on technical success or failure, but it has huge influence on the residual attitudes of the client and end users toward the project.

Systems and Procedures

Systems and procedures are essential components to integrate the building block configurations of the total supply chain. There are three major categories of systems and procedures:

  • External regulatory and internal quality standards

  • Financial and accounting procedures

  • Information and communication technology.

 

The activities of a supply chain are affected by both national and international regulatory requirements on packaging, storage, pallets, vehicles, working hours, tariffs and many other issues. In addition an organisation maintains its own quality standards and service level agreements with its suppliers and partners. The bodies of knowledge and project methodologies such as PMBOK (2008) and PRINCE2 (2009) are powerful guidelines to integrating the building blocks of project supply chain in order to successfully deliver a project.

Another important issue is improving the financial performance of the company. Under pressure to participate in fashionable improvement activities, or to become involved in the newest business wisdom, management may lose sight of the real issue – improving profitability. In response to pressures from stakeholders there is a risk of overemphasis on short-term financial performance. Consequently this myopic approach results in overinvestment in short-term fixers and underinvestment in longer-term development plans. There is a need for a balanced approach.

The Internet, now taken for granted, has seen the use of technologies to create electronic communication networks within and between organisations and individuals. The implementation of Enterprise Resource Planning (ERP), websites, e-commerce, electronic data interchange and email systems has transformed the process of the exchange of ideas. It has allowed individuals within organisations, and both business-to-business as well as business-to-customer, to communicate freely together and to share data in ‘real time’. Information Technology (IT) has now grown into Information and Communication Technology (ICT). In this ICT domain we consider two broad areas:

  • Information technology and systems

  • E-business.

 

There is a visible absence of a dedicated chapter on systems and procedures in the published books on supply chain management, which this volume aims to rectify.

Regular Reviews

Regular reviews of project supply chain are comparable to sales and operations planning (S&OP) in operations management. Sales and operations planning is a cross-functional management review process to integrate the activities of the total supply chain. The classical concept of sales and operations planning is rooted to the Manufacturing Resource Planning (MRPII) process. In basic S&OP, the company operating plan (comprising sales forecast, production plan, inventory plan and shipments) is updated on a regular monthly basis by the senior management of a manufacturing organisation. The virtues, application and training of S&OP have been promoted by Oliver Wight Associates (see Ling and Goddard, 1988) since the early 1970s.

Project review gatherings are held regularly, and their frequency and participation depend on the type of meeting. Project team meetings by work packages or task groups are generally held every week and led by the Team Manager. Project progress groups (also known as ‘gateway’ review meetings) usually take place every month and are led by the project manager. Milestone review meetings are convened at predetermined dates and participated by the Project Board and project manager. In addition ad hoc review groups (e.g. pre-audit, health safety and environment etc.) are also scheduled with specific agenda.

Quality and Performance Management

Quality and performance management acts both as a driving force of improvement and a fact-based integrating agent to support the planning, operations and review processes. The foundation of performance management is rooted in quality management principles supported by key performance indicators.

There are many different definitions and dimensions of quality to be found in books and academic literature. Basu (2004) defines quality with three dimensions, such as design quality (specification), process quality (conformance) and organisation quality (sustainability). When an organisation develops and defines its quality strategy, it is important to share a common definition of quality, and each department within a company can work towards a common objective. The product quality should contain defined attributes of both numeric specifications and perceived dimensions. The process quality, whether it relates to manufacturing or service operations, should also comprise some defined criteria of acceptable service levels so that the conformity of the output can be validated against these criteria. Perhaps the most important determinant of how we perceive sustainable quality is the functional and holistic role we fulfil within the establishment. It is only when an organisation begins to change its approach to a holistic culture, emphasising a single set of numbers based on transparent measurement with senior management commitment, that the ‘organisation quality’ germinates.

A good reference line of key performance indicators of a supply chain is the ‘Balanced Scorecard’ by Kaplan and Norton (2004). Kaplan and Norton argue that ‘a valuation of intangible assets and company capabilities would be especially helpful since, for information age companies, these assets are more critical to success than tradition al physical and tangible assets’ (p. 52). The Balanced Scorecard retains traditional financial measures, customer services and resource utilisation (Internal Business Process) and includes additional measures for learning (people) and growth (innovation). This approach complements measures of past performance with drivers for future development.

Are all the Building Blocks Suited to all Projects?

The objectives of supply chain management – to balance the demand and supply for the right product or service on time and at an affordable price – remain the same for all businesses. However it is also true that supply chains serving different markets should be managed in different ways. Both Fisher (1997) and Christopher (2000) have drawn the distinction between ‘lean supply chain’ and ‘agile supply chain’. Agility should not be confused with lean or leanness. ‘Lean’ is about doing more with less, often with minimum inventory and by placing the emphasis on efficiency. On the other hand, the key characteristics of an ‘agile’ supply chain include responsiveness and flexibility.

As shown in Figure 2.2 the approaches for an agile or lean supply chain are determined by the volume and variety/variability. An agile supply chain responds quickly to changes in demand – whether this is caused by a low volume for high variety products or the unpredictability of demand. By contrast a lean supply chain works very efficiently when the volume is high and variability is low. The occasions for a purely agile or purely lean supply chain are likely to be infrequent. It is a popular perception, though not always validated, that functional or commodity products need a lean supply chain and innovative and new products require agile supply chain management. As Christopher (2000) points out, there will often be situations for a ‘hybrid strategy’ where a combination of the two may be appropriate.

 
Figure 2.2 Lean and agile supply chain (reproduced from page 228, Total Supply Chain Management, R. Basu and J.N. Wright, 2008)

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Our building blocks of the total supply chain will apply to both lean and agile supply chains, but their end objectives require different ways of using these building blocks. In a lean supply chain, emphasis will be on accurate demand and capacity planning, keeping the inventory low and running the plant efficiently. However in an agile supply chain the weight will be given to high service levels by responding rapidly to the end customers. This will require flexibility in process and plant capacity and a higher inventory, usually of semi-finished products, nearer the demand point.

The supply chain in the service sector will also need all the building blocks of the total supply chain, although they should be used and managed differently depending on services. For example in an insurance service industry the approach to inventory management would be different from that adopted in an automobile manufacturing business. In the service sector the variation in demand is buffered by managing ‘non-consumed’ stock (such as people and databases), while in the manufacturing sector the emphasis is on consumed stock (e.g. materials).

Project Supply Chain Building Blocks and Project Life Cycle

The life cycle of a project (Figure 2.3) typically goes through four stages, viz. initiation, design, execution and closure (Turner, 1999). It is important to note, as shown in Figure 2.4, that these four aspects of project life cycle are also in congruence with the eight processes of PRINCE2 (2009). The nomenclature of each phase of the project life cycle often varies from Turner’s given names in many project applications (e.g. definition, design, implementation and handover) or it may have more stages (e.g. concept, feasibility, implementation, operation and termination in BS 6079). However alternative periods of project life cycle can be easily aligned to Turner’s given names. Hence the ‘building blocks’ of the project supply chain is aligned to Turner’s project life cycle as shown in Figure 2.5.

 
Figure 2.3 Project life cycle (with kind permission of Rodney Turner)

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Figure 2.4 PRINCE2 and project life cycle

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Figure 2.5 Project supply chain building blocks and project life cycle

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In Figure 2.5 project supply chain building blocks have been presented as an ‘open bracelet’ against the four stages of the project life cycle. The building blocks of the project planning chain (viz. customer focus and stakeholders, resources and time management and procurement and supplier focus) align with the first two stages of project life cycle (proposal and initiation, design and appraisal). The project planning chain constitutes ‘pre-contract’ planning activities managed by the customer of the project, often referred to as the ‘Intelligent Client’ (APM, 2006). The project delivery chain encompasses ‘post-contract’ delivery activities managed by a consortium of main suppliers and contractors in collaboration with the customer or client. The integrating functions (systems and procedures, quality and performance management and regular reviews) span all building blocks of the project supply chain and the four stages of the project life cycle.

Summary

In this chapter we have explained the characteristics and roles of supply chain building blocks in total supply chain management. The building blocks consist of nine components, out of which six are for supply chain configuration (customer focus and stakeholders, resources and time management, procurement and supplier focus, supply management, building and installation and handover and closure). Three components are for supply chain integration (systems and procedures, quality management and regular reviews). These building blocks will be applicable, to a varying degree, to all types and strategies of supply chains regardless of whether they are primarily pull or push processes, agile or lean supply chains or if in they are within the construction, manufacturing, technology or service sector of projects.

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