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  1. 1. The World Conference on Accelerating Excellence in the Built Environment Birmingham, UK 2-4 October 2006 EFFICIENCY VERSUS EFFECTIVENESS IN CONSTRUCTION – THE CASE FOR AGILE SUPPLY CHAINS Dr Andrew Fearne Kent Business School, UK ( Nicholas Fowler Centre for Performance Improvement, UK ( Jonathan Gosling Cardiff Business School, UK ( Abstract This paper is based on research carried out into Construction Logistics. The research explored issues relating to how supply chains are managed and construction sites organised in the areas of transportation, stockholding and the efficiency of on-site labour. One of the areas explored in the research was the extent to which the discrete and indiscriminate application of lean operations in construction supply chains can reduce the ability of the industry to deliver schemes effectively. Efficiencies in one part of the supply chain are having unintended consequences further down the chain. Clients could be waiting longer for their building projects to be completed and both main contractors’ and trade contractors’ profit margins could be squeezed because the completion of site operations is being disrupted. The research highlighted a number of key issues relating to projects in general and construction in particular that make the discrete application of ‘Lean’ operations inappropriate. These issues include the relatively high level of uncertainty that exists in construction operations, the rapidly changing profile of activity over the course of the life of a project and the fact that transactional relationships tend to be relatively short-lived and adversarial. This paper focuses on the issue of efficiency versus effectiveness in construction operations and makes the case for Agile supply chains as an effective way to deal with the uncertain nature of project environments. 1
  2. 2. 1. Introduction Interest in operational aspects of supply chains within the UK construction industry has grown considerably over last 5 years. This has coincided with the application of ‘Lean Thinking’ in both project delivery and supply chain logistics. ‘Lean thinking’ seeks to remove or significantly reduce variability in the operating environment, to highlight and remove inefficiencies in the production process, reduce buffer stocks and streamline capacity. While the application of ‘Lean thinking’ has generally been highly beneficial in focusing attention on inefficient operational practices there is a danger that it can have negative unforeseen consequence for effective project delivery. Material suppliers have been pursuing a policy of reducing stockholdings of finished goods. Trade contractors are focusing on achieving high utilisation rates for their labour and paying too little attention to completing tasks against programme. The highly cost competitive nature of the construction industry is driving material suppliers and trade contractors down a ‘lean agenda’ that is primarily (if not exclusively) focussed on efficiency and capacity utilisation rather than on what the clients want – projects completed on budget, on time, every time. In summary, the discrete and indiscriminate application of ‘Lean thinking’ is resulting in the removal of capacity from the system. This in turn is making the system vulnerable to the impact of uncertainty. The research lead us to contend that Agile rather than Lean supply chains could be most suited to supporting effective project delivery. 2. Characteristics of the construction industry Construction is essentially a project based industry operating within an environment of considerable complexity and uncertainty. This complexity is due to the fragmented structure of the supply chains, short term and adversarial trading relationships, poor information flows, a high degree of dependency between tasks and relatively long durations for individual task activities. In terms of the dependency between activities there are very often multiple resource inputs that need to be satisfied simultaneously for an activity to be completed. For any activity there are generally up to nine inputs that are required: 1. Output from preceding task 2. Materials 3. Labour 4. Plant 5. Information – what is needed to be done 6. Space – access to the working area and space in which to work 7. Method – as in how the works is to be done 8. Permissions – in terms of planning, building regulation and statutory authority approvals 9. Environment - as in weather conditions 2
  3. 3. Therefore, even with a relatively high level of certainty of each resource being available the overall level of certainty of a task being able to commence when planned is surprisingly low. For example, assuming that each of the nine inputs listed above has a probability of occurrence of 97%, the overall probability that the task will be successfully completed is only 76%. It can be argued that the coordination of these resources or inputs is essentially the process of logistics management. Improving information flow and checking resource availability will clearly have a major benefit in improving the effectiveness of the system. However the application of discrete lean approaches very often has the opposite affect. This is due to the tendency of removing capacity within the system and hence reducing its ability to deal with uncertainty. Capacity in these circumstances means under-utilised productive resources or stocks of materials, plant and labour. The Lean agenda will very often drive out under-utilised capacity and reduce stock, as they are seen as waste. Driving efficiencies in these areas will risk reducing effectiveness in overall project delivery. One notable feature of the project environment is the asymmetric impact of variability in task durations. Any late completion of a task on the critical path will immediately impact on the programme by delaying the start of the succeeding task. However, an early completion of a task on the critical path will very likely have no corresponding beneficial effects on the rest of the programme. This is due to the fact that the resources required to perform the next task will very often not be available any earlier than had been scheduled. Agile supply chains can respond to opportunities to benefit from earlier than anticipated completions, so potentially removing some of the asymmetry. Given the complex nature of projects, characterised by a vast network of inter-related activities, the biggest challenge is to find a way of managing the project in such a way that is can be delivered effectively – that is within time, budget and specification. It is against this background that we need to assess the suitability of Lean methods as a tool to assist with delivering projects. 3. Case study findings Key findings from two major construction projects undertaken on behalf of a major private residential developer by a regional contractor provide evidence of the potentially detrimental impact that an exclusive focus on efficiency can have on effective project delivery1. The fist project consisted of the construction of 146 one and two bedroom apartments in three blocks, and fourteen town houses. The project was undertaken on a design & build basis using traditional brick and block construction. The project commenced in December 2003 and delivered to 1 This study was funded by the UK CITB-ConstructionSkills. 3
  4. 4. programme in September 2005. The second project consisted of 3 blocks of flats ranging from 4 to 5 stories constructed with a reinforced concrete frame and a block of three storey flats built using brick and block construction. This project commenced in July 2004 and was completed in December 2005. The information collected through this research was based on observational studies undertaken from a series of site visits. This was supported by interviews with members of the site management teams, trade contractors, material suppliers and a number of personnel involved with logistical operations such as lorry drivers, gatekeepers and forklift truck drivers. The management on the two sites chosen for this research project could both be regarded as examples of good practice in the industry. Thus, the problems identified are likely to be reflected to an even greater extent across the construction industry as a whole. The case studies focussed on three areas of construction operations: transportation, stockholding and on-site labour. In this paper we review the findings on stockholding. Stockholding Stockholding describes the process of holding materials in readiness for a subsequent activity. This process forms part of a chain of activities that eventually leads to the final incorporation of the material within a building. This chain of activity can be taken right back to the stockholding of raw materials and then forward to the stockholding of finished goods through the distribution chain form manufacturer, distributor to end user. A Lean approach to stockholding, without due consideration of the project environment, would have stock reduced to a minimum. Stock is regarded as a source of waste that is relatively easy to remove (as it is visible for all to see) and hardest to justify in an efficient production process. There has been a general move by construction material suppliers to reduce stockholdings of finished goods. This move has been spurred-on by the desire to achieve cost savings and improved cash-flow. What might have been a standard stock item are now offered on a make-to-order basis. This move has resulted in lead-times increasing and becoming more variable. There is also a move to reduce stockholdings on site in favour of just-in-time deliveries. This can be seen as a high-risk strategy with a limited up-side given relatively high levels of delivery unpredictability. When materials are delivered to site they are either put into stock for use at a future time or immediately incorporated into the building. The majority of materials are put into stock. This could be in a temporary holding location for a couple of hours or in a storage area where they might be held for days if not weeks. When materials are put into stock they will require additional handling before their incorporated into the building. This double handling adds costs and increases the risk of damage. However, this research highlighted the 4
  5. 5. important role that stockholding plays in regulating the flow of materials and ensuring that materials are available when needed. The decision on the timing of calling in materials to site has to take into account a number of factors. These include: i) Stocks as a buffer against uncertainty – uncertainty is in terms of when materials will be delivered, the completeness of the order and when they will be needed. The timely availability of materials at the workface is clearly an essential requirement for the delivery of construction tasks. Stockholding is a means of ensuring that materials are available when required. ii) The economics of purchasing in batches - significant discounts are offered for purchasing in full loads. This means that there is a tendency for more materials to be purchased than are needed for immediate use. iii) Controlling vehicle movements – limiting vehicle movements favours larger and less frequent deliveries. This is an important consideration when there is limited unloading space and areas for vehicles to wait. iv) Availability of storage space - the majority of sites have limited storage space. This situation is also dynamic with the positioning and availability of storage space changing over the course of the project. v) Different parties being responsible for ordering materials – many of the materials on construction sites are provided on a supply and fix basis by trade contractors. This means that the main contractor does not directly control all aspects of materials management. The majority of materials are handled more than once prior to their incorporation into the building. In some instances double handling can occur as a result of poor planning. This is where material has to be moved to gain access to other material or where they have been placed in an inappropriate location. This is usually a symptom of poor logistics planning and lack of coordination with the trade contractors. However, managing materials effectively on site often involves a degree of double handling. This is because material storage plays an important role in regulating the flow of materials to the work area. Wherever there is material storage there will be some element of double handling. The case study findings highlight many examples of practices or events that could be described as inefficient in the sense that they involved ‘waste’. However, in a project environment, which is subject to considerable levels of uncertainty, many of these practices were logical and enabled the projects to be delivered effectively by providing a buffer against uncertainty. 5
  6. 6. Two issues in particular were found to be worthy of closer examination on a theoretical level. These were the impact of lead-times of materials on project delivery and variability in output. Both these concepts are central to the Lean vs. Agile debate. 4. Issues with regard to lead-time The goal of a project is to get it completed to programme, cost and quality. In order to achieve the goal we need to have a system that can deliver throughput at an appropriate rate. In a project environment, in order to ensure that the system can deliver the necessary throughput, we must have the necessary capacity to protect the system from the shocks that it will be exposed to. The Lean approach applied to construction will often focus on reducing lead- times. The question is will this approach necessarily help achieve the goal of the project? The issue with regard to lead-times can be examined in terms of an example. Which supplier should be selected – Supplier A who has a lead-time of 2 day or Supplier B, whose lead-time is two weeks. The answer is the one who can satisfy my demand. If I have a demand for 150 units for delivery in five days and Supplier A can only produce and deliver 10 units per day and Supplier B can produce and deliver 200 units in 2 weeks then neither supplier can help. If I can stagger my demand then supplier A can clearly start delivering much early than supply B. Supplier B will be the first to be able to satisfy project demand. So what about ‘inefficient’ supplier C, with an overall lead-time of 4 weeks and a capacity to produce and deliver 20 units per day. Recognising his competitive disadvantage with regard to lead-times this supplier invests in stock. He has the relative additional cost of holding 250 units in stock and the cost of periodic right-downs. But in this instance he is able to satisfy my demand. So what is Supplier A to do to counter this stock holding strategy of Supplier C? Quadruple its capacity so as to be able to deliver 40 units with a lead-time of 2 days? Under this scenario Supplier A could now satisfy the demand, but how ‘Lean’ would it now be. It would have short lead-times but it would have potentially a high level of under-utilised resource. Supplier C would have potentially far lower levels of under-utilised resource. Not only is it carrying less productive capacity, its stock holding strategy means that its is using its under-utilised capacity during slack periods to build up its stock so as to be able to respond to peak market demand. 5. Issues with regard to variability Construction can be characterised by high levels of variability of output. A system that has high levels of dependencies between trades and combined with high levels of uncertainty will tend to be difficult to plan and manage. So what is the answer? A ‘Lean’ response would be to reduce variability. For example, the Last Planner approach uses a system of look ahead planning to 6
  7. 7. check that resources are going to be available when needed. This is clearly a sensible approach and is perhaps a little surprising that it is not used more often. However, the underlying drive behind Last Planner is to reduce variability. The question then has to be, is a reduction in variability per se that important? As an example, lets take two trade contractors, trade contractor A and trade contractor B. Trade contractor A can deliver output with a low variability and Trade contractor B can deliver output with a high level of variability. Which one should be chosen? To answer this we need to check on the project objective. The project objective is to ensure sufficient throughput to achieve the goal of delivering the project to programme, cost and quality. Trade contractor A, with low variability, produces between 500 and 550 units of output per day. Trade Contractor B, with high variability, can produce between 350 and 1,000 units per day. If the required throughput rate is 600 units per day, trade contractor A is not going to be able to help. What about trade contractor B? It depends on the probability profile of trade contractor B’s output and the impact of delivering below the required output levels. 6. Area for future research As part of the research we are looking into the lead-times of key building materials and components to better understand the impact of their variability on project delivery. Each lead-time can be split into individual elements covering procurement, order processing, design, approvals, manufacture and delivery. Each component can be treated as a stochastic entity which can be modelled on the basis of a three point estimate. This estimate looks at best case, average case and worst case scenarios. As part of this process we are identifying the resource inputs that are needed for each component of the lead-time. These inputs will be classified into labour, plant, materials, information etc categorised as in-house or external to the supplier company. We are then looking to establish a sensitivity factor for each lead-time component. These will indicates the degree to which the lead-time for that component can be shortened by investment in process improvement measures or the application of additional resource. An optimisation model will then allow the identification of areas of supply chain vulnerability. It will also be able to indicate what is the most appropriate action to take. This could be to i) allow more time by focusing the placement of key orders earlier, ii) improve monitoring and feedback, iii) improve processes or iv) add additional resource. All these improvement strategies cost money. The issue that this model will seek to address is what action will give the greatest return in terms of improving the performance of the project. The objective function of the mathematical model is the minimisation of cost subject to achieving programme. Variables taking into account the relationship between cost and delay are factored into the model. This allows an analysis of what investment would be justified to avoid delays. 7
  8. 8. Outline of mathematical model Minimize TC + DC × eps + RC(i) × red(i) Subject to: Total Time + delay(i) - red(i) <= Tmax + eps TC = total cost without project overrun DC = cost of delaying the whole project by 1 time unit RC(i) = cost for reducing the completion time of activity i by 1 unit eps = total project delay delay(i) = expected delay for activity i red(i) = time reduction for activity i 6. Conclusions In each of the three areas of construction operations that were examined in the research there was evidence that the need for delivering projects effectively was being undermined by a focus on efficiency considerations stemming from Lean operational thinking. Efficiency in the use of resources was undermining effectiveness in delivering projects. When reviewing site logistics it can be easy to lose sight of the fact that efficiencies in operational matters does not necessarily improve the effectiveness of the construction process. The effectiveness of the construction process can best be judged by how well the project is able to deliver against the objectives of building to budget, programme and quality. The Agile approach within supply chains recognises that capacity can play a major role in improving the robustness and effectiveness of project delivery. 7. Acknowledgements CITB-ConstructionSkills for supporting the original research Paola Scaparra of Kent Business School for her work on mathematical modelling 8. References 1. Christopher M et al., (2000) Supply Chain Migration from Lean and Functional to Agile and Customised, International Journal of Supply chain management, Vol.5, n0.4, pp206-213. 2. Fowler N., (2006) Efficiency vs. Effectiveness in Construction Logistics, report to CITB ConstructionSkills, March 2006. 3. Koskela L., (1997). Lean production in construction. In Alarcon, L. (ed.) Lean Construction. Rotterdam: A.A.Balkema Publishers, pp1-10. 4. Strategic Forum for Construction, (2005) Improving Construction Logistics 5. Womack J. et al., (1996) Lean thinking. Simon and Schuster, New York. 8