1. T.C.
SAKARYA UNIVERSITY
INSTITUTE OF SOCIAL SCIENCES
SUPPLY CHAIN MANAGEMENT IN CONSTRUCTION
INDUSTRY
MASTER DEGREE PROJECTS
OKAN EKER
Department in the Institute: Business Non-Thesis Master Degree
Project Advisor : Prof. Dr. Erman COŞKUN
JANUARY 2014

2. T.C.
SAKARYA UNIVERSITY
INSTITUTE OF SOCIAL SCIENCES
SUPPLY CHAIN MANAGEMENT IN CONSTRUCTION
INDUSTRY
MASTER DEGREE PROJECTS
OKAN EKER
Department in the Institute: Business Non-Thesis Master Degree
This project is accepted unanimously by the jury presented below on …/…/20....
President of the Jury Jury Member Jury Member
Acceptance Acceptance Acceptance
Rejection Rejection Rejection
Correction Correction Correction

3. TABLE OF CONTENT
SUMMARY…………………………………………………………………………………... i
INTRODUCTION…………………………………………………………………………….1
CHAPTER 1: THE CONSTRUCTION INDUSTRY…………………………….………...2
1.1.Characteristic of the Construction Industry……………………………………………… 2
1.1.1. Uniqueness…………………………………………………………………………… 2
1.1.2. Temporary Nature……………………………………………………………………. 3
1.2.Types of Construction Projects…………………………………………………………… 3
1.2.1. Building Construction…………………………………………………………………4
1.2.2. Infrastructure Construction…………………………………………………………… 4
1.2.3. Industrial Project………………………………………………………………………4
1.3.Procurement Strategies in Construction Industry………………………………………… 5
1.3.1. Traditional (Design-Bid-Build)………………………………………………………..5
1.3.2. Design – Build……………………………………………………………………….. 6
1.3.3. Management Contracting…………………………………………………………… 6
1.3.4. Construction Management………………………………………………………….. 6
1.4.Procurement Differences Between Construction Projects……………………………….. 7
CHAPTER 2: SUPPLY CHAIN IN CONSTRUCTION………………………………….. 8
2.1.Historical Development……………………………………………………………………8
2.2.Characteristic of Construction Supply Chain …………………………………………….. 9
2.2.1. Fragmentation………………………………………………………………………… 9
2.2.2. Adversarial Relationship………………………………………………………………9
2.2.3. Project Uniqueness…………………………………………………………………….10
2.2.4. Separation of Design and Production………………………………………………… 11
2.2.5. Competitive Tendering……………………………………………………………… 11
2.3.Roles of Supply Chain Management in Construction……………...…………………… 12
2.4.Waste and Problems in Construction Supply Chain…………………………….……… 14
2.5.The Ways of Improving Construction Supply Chain……………………………………. 15
2.5.1. Improving The Interface Between Site Activities and Supply Chain… …....…...….. 15

4. 2.5.2. Improving The Supply Chain……………………………………………………… 15
2.5.3. Transferring Activities From The Site to Supply………………………………….. 15
2.5.4. Integration of Site and Supply Chain……………………………………………… 16
CHAPTER 3: AN EXAMPLE OF PROCUREMENT IN OIL & GAS INDUSTRY …....17
3.1. Package Sharing Among Procurement Engineers…………………………….. 18
3.2. Technical Documents Issued Up to the Procurement Stage…………………. 19
3.2.1. IDC - Internal Discipline Check…………………………………………….. 19
3.2.2. IFR - Issued For Review……………………………………………………….. 20
3.2.3. AFB - Approved For Bid……………………………………………………….. 20
3.3. The Procurement Stage…………………………………………………………… 20
3.3.1. The ways of finding vendor………………………………………………….. 20
3.3.2. Request for quotation from vendors…………………………………………. 21
3.3.3. Technical Clarification………………………………………………………… 21
3.3.4. Technical Bid Evaluation …………………………………………………….. 24
3.3.5. Inspection Test Plan & Vendor Document Requirement………………… 25
3.3.6. Factory Acceptance Test………………………………………………………. 26
3.3.7. Final Data Book………………………………………………………………… 26
3.4. Release the goods and shipment.………………………………………………. 26
3.5. Commissioning……………………………………………………………………… 27
CONCLUSION…………………………………………………………………………….. 28
REFERENCES…………………………………………………………………………… 30
APPENDICES
CURRICULUM VITAE

5. SAU, Institute of Social Sciences Master Degree Project Summary
Project Title: Supply Chain Management In Construction Industry
Project Writer: Okan Eker Advisor: Prof. Dr. Erman COŞKUN
Acceptance Date: 03 Jan 2014 Page Number: I + 29 (project) + 3 (appendices)
Department: Business Division: Non-Thesis Master Degree
The project targeted to explaning the role of supply chain management within the
construction industry, and to explore the difficulties encountered during the
process of integration of Supply Chain Management. As a means of doing this,
also exploring the complexity of the procurement procedure of an offshore petrol
platform project as a part of the construction industry.
Key words: Supply Chain Management, Construction Industry, Oil and Gas Industry, Procurement,

6. 1
INTRODUCTION
Supply chain management (SCM) is a concept originating from the supply system by
which Toyota was seen to coordinate its supplies, and manage its suppliers. In terms
of lean production, SCM is closely related to lean supply. The basic concept of SCM
includes tools like Just-In-Time delivery (JIT) and logistics management. The current
concept of SCM is somewhat broader but still largely dominated by logistics.( Ruben
Vrijhoef and Lauri Koskela,1999)
Until now, in construction, initiatives belonging to the domain of SCM have been
rather partial covering a subset of issues (e.g., transportation costs) in a limited part
of the construction supply chain (e.g., the construction site). In most cases, the issues
are regarded from a main contractor’s point of view (e.g., Asplund and Danielson
1991, Wegelius- Lehtonen et al. 1996).
Statistical figures show that main contractors are purchasing more labor and
material than previously. For instance, in 1994, the construction industry (i.e.
residential, commercial and industrial building), the main contractors’ share in the
total national turnover had decreased to 24% . Thus, suppliers and subcontractors
represented about 75% of turnover. Currently, this is expected to be more. ( Ruben
Vrijhoef and Lauri Koskela,1999)
As a consequence, main contractors become more and more reliant on other actors in
the construction supply chain (e.g., suppliers and subcontractors). Therefore, they
need to revise their supply strategies and trading relations with subcontractors and
suppliers.
The goal of this paper is to explain the role of supply chain management within the
construction industry, and to explore the difficulties encountered during the process of
integration of SCM. As a means of doing this, we will also explore the complexity of
the procurement procedure of an offshore petrol platform project as a part of the
construction industry.

7. 2
CHAPTER 1: THE CONSTRUCTION INDUSTRY
1.1. Characteristic of the Construction Industry
The Construction industry is one of the key sectors in the world. According to the
EUROSTAT report in 2010, construction activities in the EU-27 provided employment
to an estimated 14.8 million persons in 2007 (some 11.5 % of the non-financial
business economy workforce), while generating an estimated EUR 562 billion of value
added (9.3 % of the non-financial business economy’s total value added). (EUROSTAT,
2010) However, the construction industry is accused of being, at its worst, a wasteful,
inefficient and ineffective industry (Stephen Pryke, 2009) because of each project’s
uniqueness and temporary nature.
1.1.1. Uniqueness
Each construction project has its own uniqueness given by construction type, the size
of the project, location, complexity of design and completion period. Each of these
changeable factors affects contractors’ project costs and creates inefficiency within the
industry. Even when faced with similar types of projects, all contractors take these
factors into consideration when they bid on a project. For example, being awarded a
project in a country which is industrially developed will help the contractor to supply
equipment, find skilled labors and subcontractors more easily than in a country where
these resources are less accessible. As a result, contractors add different equipment
transportation costs for projects in different countries. Another example is the
completion period; a simple design will help the contractor find the project materials
in the market more easily and supply them in within a short time with at a lower
cost. However, with a complex design, the contractor will get most of the equipment
custom made and this will add extra cost to the price and extend the delivery time of
the equipment. Any equipment delay may extend the completion time of the project,
and create significant extra costs for the contractor. The uniqueness of each project
makes it difficult to keep the construction industry under control and to increase its
efficiency while eliminating waste.

8. 3
1.1.2. Temporary Nature
By nature, construction projects have different completion times and contractors are
asked to finish each project within the required time frame while maintaining the
requested standards of quality; otherwise the contractor might be subjected to huge
penalties.
Creating long-term partnerships with subcontractors and suppliers, as well as
working with permanent employees are the most important factors in completing a
project on time and increasing efficiency. However, the temporary nature of the
construction industry is the biggest obstacle for the creation of long-term
partnerships. For example, contractors decide on the number of employees that they
will need according to the size and completion time of a project. However, when the
project gets closer to the end, the contractor won’t need the same number of
employees as was needed at the beginning of the project. During this time when they
are not needed, some employees will find another company to work for, thus the
contractor will lose their skilled employee. On the other hand, creating long-term
partnerships with suppliers decreases the price of the goods and the lead-time, at the
same time increasing the quality of the goods. Because, the mistakes that was done
with first order by the manufacturer won’t be done again. The automotive industry is
the best example of a sector in which the benefits of long-term partnerships are
evident. In this industry the supplier is able to foresee the outcome and know which
products will be produced in what quantity. However, because of the uniqueness and
temporary nature of the construction industry, this kind of planning is not easily
achievable.
1.2. Types of Construction Projects
There are a lot of completed and ongoing construction projects all around the world
such as schools, hospitals, bridges, stadiums, roads, dams, power plants, petrol
platforms, private houses, dormitories, etc. In the construction industry these projects
are collected under four titles.

9. 4
1.2.1. Building Construction
Building construction is the largest segment of construction. Buildings can be divided
into two categories; residential buildings and commercial buildings. Residential
housing construction includes single-family houses and multi-family dwellings such
as duplexes and apartment buildings.
Commercial building construction includes such structures as schools and
universities, medical clinics and hospitals, recreational facilities and sports stadiums,
retail chain stores and large shopping centers, warehouses and light manufacturing
plants, and sky-scrapers for offices and hotels.
1.2.2. Infrastructure Construction
Infrastructure Constructions are capital intensive and heavy equipment oriented
works which involve movement of large quantity of bulk materials like earth, steel and
concrete.
These works include highways, railways and bridges, airports, dams and canals,
oil/gas pipelines and transmission lines, large water supply and sewage disposal
networks, docks, harbors, nuclear and thermal power plants, and other activities
which build up the infrastructure for the growth of the economy. This type
of construction typically serves public interest and is undertaken most often by large
private corporations and government agencies.
1.2.3. Industrial Project
These works include construction of manufacturing, processing and industrial plants
like oil refineries, steel mills, chemical processing plants and consumer-goods
factories. These projects are very complex and specialized. The ultimate owner will
need to be very involved in every stage of project development from site selection and
design to engineering and construction. (http://constructionfield.net/major-types-of-
construction-projects/)

10. 5
1.3. Procurement Strategies in Construction Industry
Procurement is the process of purchasing goods or services. There are many different
routes by which the design and construction of a building can be procured. The
selected procurement route should follow a strategy which fits the long-term
objectives of the client's business plan. Considerations are likely to include;
 Speed
 Cost
 Quality
 Specific project constraints
 Risk
 Asset ownership
 Financing (http://www.designingbuildings.co.uk/wiki/Procurement_route)
1.3.1. Traditional (Design – Bid – Build)
This is the most commonly used method among small and middle sized construction
projects. This method is used on 43% of construction projects (according to RICS 2003
data).
In the traditional method, the client is responsible for the design of the project.
Therefore, the client uses their in-house design team or provides a brief and budget to
a team of consultants who in turn prepare a design and tender documentation
including drawings, work schedule, and bill of quantities. After the tender
documentations are completed, contractors are then invited to submit their proposals
to construct the project. In this method, the consultant administers the project and
design on behalf of the client.
This method has cost and design quality certainty, time predictability, and low risk on
design failure. However, it is not appropriate for fast tracking a project.

11. 6
1.3.2. Design – Build
This method is becoming more and more popular in middle sized and larger projects.
It was first introduced in the 1980s and is now applied on 42% of projects (according
to RICS 2003 data).
The Design – Build method of procurement carries design and construction
responsibilities together. Therefore, the contractor needs to use either in-house
engineering or hire consultants to execute the design. This method is appropriate for
fast tracking a project and is recommended for less complex construction projects
where design quality is not the main consideration. However, this method can create
significant additional costs for the client in case of changes in design, because it
affects the whole design – build contract.
1.3.3. Management Contracting
In this method, a Management Contractor is hired by the client early in the design
stage to use their experience to reduce costs, improve build ability and enable to
contract some work without waiting for the completion of the design. This method
shortens the design and construction period, however, at the same time it creates
price uncertainty until the design is completed.
In this method, the management contractor doesn’t carry out the construction work,
but is authorized to contract work to subcontractors directly and be responsible for all
of the construction activities. The management contractor’s payment is made on the
basis of the cost of the subcontractor work and agreed fee. This method is suitable for
experienced clients, fast track projects and complex building.
1.3.4. Construction Management
The construction manager is hired by the client for the same reasons as the
management contractor. However, there is a difference between construction
management and management contracting. In construction management, the client
directly contracts work to other contractors. However, in management contracting,

12. 7
the client only hires the management contractor who then proceeds to hire the sub-
contractors.
Construction Management is only an appropriate solution for experienced clients,
because the constant involvement of the client is necessary to create a high quality
project.
1.4. Procurement Differences Between Construction Projects
Building construction projects are usually not as complex as infrastructure and
industrial projects, and there is not much of a demand for custom equipment. The
equipment and material used in these types of projects are easily found in the market
with a short delivery time. Therefore, the project completion time is only as long as
the equipment manufacturing time. Applying supply chain management in this kind
of project is easier than in more complex projects, because most of the equipment and
materials can be found easily in most countries.
Infrastructure projects are heavy equipment oriented and require a high level of
investment, therefore some infrastructure projects might be complex and high
technology equipment might be used. However, procurement procedures in
infrastructure project are still easier than in building projects because usually bulk
materials like earth, steel and concrete used to build such structures as dams and
canals, oil/gas pipelines etc. are easy to find.
Industrial projects are the most complex projects because they require high levels of
engineering and custom made equipment requests. For example, off-shore petrol
platform projects supplying custom made equipment usually take longer than building
the structural part of the platform, which uses materials readily available on the
market. Most industrial project equipment and materials are custom-made on special
request. In this case, a strong supply chain management system is necessary is to
increase efficiency throughout the construction process.

13. 8
CHAPTER 2: SUPPLY CHAIN IN CONSTRUCTION
2.1. Historical Development
SCM is a concept that originated and has flourished in the manufacturing industry.
The first signs of SCM were perceptible in the JIT delivery system as part of the
Toyota Production System (Shingo 1988). This system aimed to regulate supplies to
the Toyota motor factory just in the right - small - amount, just at the right time. The
main goal was to decrease inventory drastically, and to regulate the suppliers’
interaction with the production line more effectively.
After its emergence in the Japanese automotive industry as part of a production
system, the conceptual evolution of SCM has resulted in an autonomous status of the
concept in industrial management theory, and a distinct subject of scientific research,
as discussed in literature on SCM (e.g., Bechtel and Yayaram 1997, Cooper et al.
1997). Along with original SCM approaches, other management concepts (e.g., value
chain, extended enterprise) have been influencing the conceptual evolution towards
the present understanding of SCM.
In the construction industry, an increasing number of construction organizations have
started showing a realization towards the importance of the SCM concept. However,
unlike retail and manufacturing sectors, the construction industry has been slow and
reluctant in employing the concept of SCM (Love, 2000). According to Ofori (2001) by
using an SCM philosophy, various problems associated with traditional practices in
the construction industry can be resolved. These problems may arise due to the
presence of win-lose arrangements; uncertainties encountered by various construction
processes; lack of exchange of information and knowledge; increasing price
competition due to the purchases of supplies from numerous suppliers; and the
existence of an environment of fear, dishonesty, and frustration (Peter McDermott
and Malik M A Khalfan).

14. 9
Construction supply chain management is the integration of key construction
business processes, including the demands of the client, from design to construction,
and key members of the construction supply chain, including client/owner, designer,
contractor, subcontractor and supplier. CSCM focuses on how firms utilize their
suppliers’ processes, technology and capability to enhance competitive advantage. It is
a management philosophy that extends traditional intra-enterprise activities by
bringing trading partners together with the common goal of optimization and
efficiency. CSCM emphasizes on long-term win-win, cooperative relationships
between stakeholders in systemic perspective. Its ultimate goal is to improve
construction performance and add client value at less cost.
2.2. Characteristic of Construction Supply Chain
2.2.1. Fragmentation
The construction industry has long been recognized as having problems in its
structure, particularly with fragmentation, which has resulted in poor performance
(Latham, 1994; Egan, 1998). Uniqueness, immobility and variety are three distinctive
features of construction output that flow from the fragmentation in construction.
These features, it is argued, are factors in the tendency of the construction industry
towards low productivity, poor value for money and mediocre overall client
satisfaction (Latham, 1994), especially when compared with other industry sectors.
As a consequence of the uncertainty for the main contractor in obtaining continuous
work, with the need to accommodate the different features and requirements of each
project, subcontracting has been adopted as the dominant approach (Cox and
Townsend 1998, p. 21), which by its very nature, results in further fragmentation.
2.2.2. Adversarial Relationship
The construction supply chain has become increasingly fragmented for the reasons
outlined above. Increased fragmentation brings increased transaction volumes at
lower average values and inevitably higher levels of opportunism, particularly in the
context of low barriers to entry. The industry had become less trusting, more self-

15. 10
interested and adversarial. The adversarial attitude of the UK construction industry
has been a recognized problem for many years (Cox and Townsend 1998, p. 29).
Performance and innovation in construction are significantly hindered by adversarial
relationships and fragmented processes. In order to minimize their own exposure to
risk, each party in the supply chain attempts to extract maximum reward for
minimum risk that is normally achieved by means of non-legitimate risk transfer
(passing risk down to the next level in the supply chain). This way of thinking has
resulted in an industry structure with various interfaces, which are points of tension
and conflict, which eventually leads to increased cost and reduced efficiency (Cox and
Townsend 1998, p. 31).
2.2.3. Project Uniqueness
The construction industry (with the possible exception of some responsive repairs) is a
project-based industry. The characteristics of a specific project, and hence its degree of
uniqueness, is determined by a number of factors. Consequently, the assessment of
these project features determines the resources needed for a project, and selection of
the most appropriate supply chains needed to deliver clusters (Gray, 1996) of
resources and services for the project as a whole. This diversity and uniqueness
means that construction projects are very often ‘bespoke’ as the requirements and
specifications of technologies for specific clients determine their characteristics.
Projects involve assembling materials and components designed and produced by a
multitude of suppliers, working in a diversity of disciplines and technologies in order
to produce a product for a particular client. This diversity of product technologies,
which has to be reorganized with each new construction project, coupled with
discontinuous demand from a large percentage of construction clients, accounts for
the transient nature of the relationships between the demand and supply side of the
industry. In addition, with the increasing shift from on-site to off-site production,
managing construction projects involves integrating diverse and complex supply
systems in which a growing amount of value of the product is added (Stephen Pryke,
2009).

16. 11
2.2.4. Separation of Design Production
One of the main problems in construction is the extent to which the industry
separates design from production. This particular characteristic of the industry is still
common in spite of the deficiencies of traditional procurement and the benefits offered
by newer and more flexible approaches. The separation of the design and production
process in the construction industry, particularly in the building sector the
consequent difficulties that can arise during construction projects, has been the
subject of wide criticism by a number of industry reports such as Latham (1994) and
Egan (1998). Consequently, there have been many calls to bridge this gap by creating
a seamless supply chain whereby the interface between various phases of the project’s
life cycle are integrated with one another. It is an anomaly that design and production
are commonly separated at the highest tier of the supply chain (main contractor) but
commonly integrated in the tiers below this. (Stephen Pryke, 2009).
2.2.5. Competitive Tendering
In most countries, construction companies are selected to undertake construction
projects and the price for their work is established by competition (Griffith et al.
2003). Unlike manufacturing, construction projects are not priced and advertised for
sale (manufactured speculatively, without prior orders from customers), but instead
uniquely priced after a negotiation or bidding process. Since the mid 1990s joint
government and construction industry initiatives (Latham 1994; Egan 1998) have
encouraged construction clients to adopt different strategies to procure work. Whilst
regular, experienced and informed construction clients have begun to adopt
alternative procurement strategies, there is little evidence to show that the majority
of inexperienced irregular purchasers have done so. By far the dominant strategy
adopted is the traditional design-bid-build approach with the lowest bidder winning
the work (RICS 2006). There is no doubt that competition used in this way serves to
drive down prices.

17. 12
Adopting “low bid wins” strategies results in a number of undesirable outcomes,
particularly where the design is already established. These are:
 production processes that are geared to lowest cost rather than to ‘right first
time’ or to ‘best value’;
 bidding processes that encourage opportunism - where suppliers will agree to
almost any conditions and requirements to get the work and attempt to
improve profit levels on the project through reductions in quality of materials,
or the negotiation of disproportionately high rates for variation works;
 an inability and unwillingness to cooperate in specialist design, innovation or
collaborative problem solving.
‘Low bid wins’ procurement has been blamed for, amongst others, late completion,
overspends on client budgets and product / workmanship. Alternatives do exist, but
require attitude change within the construction sector and its professions. (CSCM-
Stephen Pryke)
2.3. Roles of Supply Chain Management in Construction
Actual practice in construction not only fails to address issues of supply chain, but
rather follows principles that make supply chain performance worse. However, many
benefits can be achieved through SCM including (Cheng et al, 2010):
 Reduced costs
 Improved responsiveness and ability to change
 Reduced uncertainty for project owners in cost savings
 Increased service level
 Facilitate decision making
SCM can play major roles in construction. The principle roles of SCM are covered by
the generic SCM methodology. SCM offers general guidelines that can be used to
analyze, reengineer, properly coordinate, and constantly improve virtually the
complete construction supply chain, resolving basic problems and the myopic control
that have been plaguing the supply chain. This would be practically impossible to
realize in the short term. Therefore, initially, the SCM methodology is properly

18. 13
deployed on a lower scale, addressing partial supply chain problems, involving a
limited number of supply chain actors. Due to its recurring character, the SCM
methodology implies a continuous improvement process of which the scope can be
enlarged over time, involving an increasing number of areas of application.
Some areas of application, which may be, and to a certain extent have been subjected
to SCM, include the reduction of costs (especially logistical costs), lead-time and
inventory in the supply chain. In view of the large share of these costs in construction,
this focus is often fully appropriate. Secondly, the focus may be on the impact of the
supply chain on site activities. Here, the goal is to reduce site costs and duration. In
this case, the primary consideration is to ensure material (and labor) flows to the site
for the sake of avoiding disturbances in the workflow. Thirdly, the focus may be on
transferring activities from the site to upstream stages of the supply chain. The
rationale may simply be to avoid the inferior conditions of site, or to achieve wider
concurrency between activities, which is not possible in site construction with its
many technical dependencies. Here, the goal is again to reduce the total costs and
duration.
In practice, these areas are intimately interrelated. It is often difficult to improve the
dependability of the deliveries of a supply chain without addressing the total supply
chain. If activities are transferred from site upstream the supply chain, it is requisite
that the resultant, more complex supply chain is orderly managed and improved in
order to have the benefits intended.
In view of these roles, gaps in prior initiatives to advance the supply chain can be
identified. For instance, the logistics initiatives, stressing (average) costs, have often
failed to address the impact of supply chain variability on site assembly. In addition,
industrialized construction, with its long and complex supply chain, has often been
lacking even basic principles of SCM.
The generic body of knowledge accrued in the framework of SCM leads to improved
understanding of the characteristics of construction supply chain problems, and gives
direction for action. However, the practical roles for SCM have to be developed in

19. 14
construction practice itself, taking into account the characteristics of construction and
the specific situation. (Ruben Vrijhoef and Lauri Koskela,1999)
2.4. Waste and Problems In Construction Supply Chain
Because of a lot of input and difficult controllability, every construction project is a
cause of waste. Knowing the reason why the waste is generated in the first place is
the key to reducing it. It may not be possible in all cases to reduce the waste or waste
reduction may be the responsibility of someone other than the waste producer. The
source of the waste and its cause can be attributed to all stages of construction as
shown by Table 1. (http://www.wrap.org.uk)
Table 1: Examples of common sources and causes of construction waste

20. 15
2.5. The Ways of Improving Construction Supply Chain
Subjective limitations are due to a deficiency in conceptualization; objective
limitations are caused by the characteristics of the environment of the problem
addressed or peculiarities of construction in general. It can be assumed that these
limitations have thwarted progress in developing construction supply chains.
2.5.1. Improving The Interface Between Site Activities and Supply Chain
It is a subjective limitation that the logistics initiatives have stressed (average) costs
particularly, and thus failed to address the impact of supply chain variability on site
assembly. In this regard, the last planner method provides an appropriate
augmentation. In addition, there is an objective limitation due to the narrow focus of
this role in relation to the whole supply chain. For instance, it is quite possible to
improve the dependability of the deliveries of a supply chain through buffering,
without addressing the whole supply chain, but the improvement of the dependability
of the total supply chain would be a more efficient and effective solution.( Ruben
Vrijhoef and Lauri Koskela)
2.5.2. Improving Supply Chain
Regarding this role, the erratic and undisciplined nature of customer activities causes
objective limitations. There are problems at both ends of the delivery process. At the
beginning, the product definition is incomplete or capricious, and at the end, the
delivery date often changes and the installation conditions are chaotic. As far as
possible, the supply chain should be shielded from these problems or made robust in
relation to them.
2.5.3. Transferring Activities From The Site to Supply
Transferring activities off site yields objective limitations. In industrialization, the
structure and behavior of the total process changes: the process is longer, the amount
of design required more substantial, the error correction cycle longer, and
requirements for dimensional accuracy usually higher. Thus the total process of
industrialized construction tends to become complex and vulnerable to variability,

21. 16
even if the part of the process located on site becomes less complex (Koskela, 2000).
The inevitable penalties for variability (Hopp and Spearman, 1996) may grow on
account of this. Indeed, if activities are transferred off site, the complexity that results
in the supply chain must be managed well and be improved in order to profit from the
intended benefits. However, industrialized construction, with its long and complex
supply chain, seems often to have suffered from a lack of basic SCM; a matter of
subjective limitation. It seems that in badly controlled design, fabrication and site
processes the increase in costs due to non-value-adding activities has often nullified
the theoretical benefits to be gained from industrialization. As the study by Luhtala
et al. (1994) shows, manufacturing-oriented make-to-order supply chains are also
plagued by problems and waste if managed in the traditional way.
2.5.4. Integration of Site and Supply Chain
Objective limitations can be discerned in many initiatives, related to the nature of
constructed objects. The logic of many existing initiatives is based on the idea that
SCM is more effective with stable supply chains and with standardized (even if
customized) products. However both features, stable chains and standardized
products, are restrictive to some extent in respect of market opportunities and the
broad spectrum of demand for construction. From this point of view, Naim et al.
(1999) suggest developing construction supply chains also in the framework of the
“agile paradigm” using market knowledge and a virtual corporation to exploit
profitable opportunities in a volatile marketplace.
In terms of subjective limitations, design-build is a particular example that shows
integration to have often been merely partial or superficial. Studies (e.g. Bennett et
al., 1996; Konchar and Sanvido, 1998) show that the benefits of design-build, even if
statistically observable, are minor. The most plausible reason for this is that the
control and improvement of design-build processes have been poor. Presumably, it
had been thought that mere improvement of the organizational structure would
suffice. (Ruben Vrijhoef and Lauri Koskela)

22. 17
CHAPTER 3: AN EXAMPLE OF PROCUREMENT IN OIL & GAS
INDUSTRY
Oil and gas projects are characterized by increasing project complexity, varying sizes
and intensified international involvement. (3R international – 2010 pg: 33)
Therefore, investors/owners in the oil and gas industry usually prefer to award their
contracts to an EPC contractor (Engineering, Procurement, and Construction), which
offers turnkey solutions. However, sometimes it is possible to see that contracts are
awarded without engineering/design.
In order to better understand the complexity involved in an oil and gas project, one
must look at the specifications of one of these projects. Below is an explanation of the
complexity involved in the construction of an off-shore petrol platform including
numbers:
- There are approximately 73 instrument packages and 13 bulk material
packages in a project.
- These products are supplied from 25 different countries.
- An average of 250 purchase orders are issued.
- The lead time of the 25 packages is more than 30 weeks.
- The longest lead time is 52 weeks.
As it is understood from the numbers mentioned above and by looking at the time
schedule in Table 2 below, it becomes clear that investors/owners prefer to work with
EPC contractors to allocate all the risk of a project to the contractor.
Table 2: Qualitative Time Schedule (3R international – 2010 Pg: 34)

23. 18
As it is known, all construction projects have a tight completion schedule, because
owners want to get their projects completed in a short time to turn their investment
to cash. However, a petrol platform project owner is less patient than other project
owners because of the vast amount of time and money that has been spent on finding
an oil-well. For example, during the last 13 years, 50 billion dollars were spent to
discover the 5th biggest petrol reserve in the world which is located in Kazakhstan.
For this reason, petrol platform project owners put a lot of pressure on the contractors
to deliver each project on time, and any delay in the project creates huge penalties.
From the point of view of the contractor, to have the right product, at the right
moment is the most important thing in preventing any delays, therefore supply chain
management plays a very important role in oil and gas projects.
3.1. Package Sharing Among Procurement Engineers
In petrol platform projects the procurement team is divided into two sections;
mechanical and electrical. Each section has their own packages to share among their
team members. Generally, these packages are shared by the procurement manager
and each engineer usually gets up to 10 packages. (Table 3)
Table 3: Package sharing example
After receiving the packages, each procurement engineer becomes part of the supply
chain, and starts to look for the most competitive vendors all around the world. If the

24. 19
contractor is experienced with petrol platform projects, most likely there will be a
vendor list to help the procurement engineers.
3.2. Technical Documents Issued Up to the Procurement Stage
Design engineers start to prepare technical documents of each product for bidding and
issue them in the order that follows:
3.2.1. IDC - Internal Discipline Check
Initially, the design engineers prepare technical specifications and datasheets for the
IDC of each instrument. These documents are then sent to the procurement team, the
construction manager, the project manager and other related people to see if they
have any comments.
The reason that these documents are issued for the IDC first is to prevent the
creation of unrealistic specifications that manufacturers can’t meet or that will end up
creating extra costs.
To better understand the need for an IDC, firstly, let’s take a look at an example of an
unrealistic specification. In one of the petrol platform projects in Turkmenistan a
design company requested a pedestal crane with 6.0m minimum radius, because there
was a portable toilet 6m away from the pedestal and the crane was supposed to lift it.
However, in reality, it was technically not possible to get a pedestal crane
manufactured with this minimum radius. After completing an internal check, the
location of the portable toilet was changed and the unrealistic specification was
updated.
The other side of the coin relates to requests that create extra costs. For example,
design engineers usually try to choose the cheapest material that meets the design
specifications. However, if the design engineer is not aware of the products available
on the market, ordering a product made from a cheaper material, might end up
costing more than ordering the same product made from a more expensive material.
For example, a data sheet can specify A105 as the cheapest material that can be used
to manufacture a connector. However, such a connector is currently unavailable on

25. 20
the market and must be custom made. The cost of ordering the custom made A105
connector could end up being ten times more expensive than ordering a stainless steel
connector which has been mass produced and is readily available on the market.
3.2.2. IFR - Issued For Review
After the IDC documents have been approved by the procurement team, they are
reissued for the investor/owner to get their comments if there are any. This is done
because the designer needs the investor/owners’ approval on technical specifications
before issuing the final document.
3.2.3. AFB - Approved For Bid
When the package is ready for bid, the documents are issued one last time with all
IFR comments included. At this stage, the document is labeled AFB and the
procurement team starts to research the equipment with the shortest lead time and
the most competitive price to keep the project within budget.
3.3. The Procurement Stage
3.3.1. The ways of finding vendor
Working with a vendor who is familiar with petrol platform projects lets engineers
save time. However, because of tight schedules and long lead time packages,
engineers may have to work with an unfamiliar vendor. In order to find the most
competitive and experienced vendors, engineers use one of the three following ways;
a. Check previous projects’ purchase orders.
b. Check contractors’ or investor/owner’s vendor lists.
c. Search online.
Searching online is the riskiest way of finding an experienced vendor, because
sometimes well-designed websites don’t reflect the manufacturers’ real capabilities
and one might just spend their efforts for nothing. However, it is better to keep in
mind that there is always a possibility of finding the most competitive company
online.

26. 21
The advantage of using previous projects’ purchase orders and working with a known
vendor, is that it takes some of the weight off the shoulders of the engineers, it is
likely that the quality of the product has been proved and the vendor is probably
familiar with your company’s and the investor/owners’ working rules. This kind of
vendor will be able to shorten the period between placing an order and starting the
manufacturing process. (Table 4)
Table 4: Time period
Supplying equipment from the investor/owner’s vendor list takes some pressure off
the engineers as well, but this kind of vendor might be more expensive than the
others just because they are an approved vendor of the investor/owner. Therefore, in a
product comparison table, all three types of vendors should always be present.
Otherwise, it is not possible to supply high quality products at the most competitive
prices.
3.3.2. Request for quotation from vendors
Engineers would always like to have as many vendors as possible to get the
competitive price. At the same time engineers need to think about the time that
design engineers spend on each vendor’s quotations. Therefore, the number of vendors
passed to the TBE stage is usually restricted in numbers. In our case this quantity is
five vendors. In order to come up with a limited number of vendor quotations,
procurement engineers examine the quotation from a technical and commercial
perspective before the technical offers are examined by design engineers. This
procedure is explained further in Table 5 below.

27. Procurement
Engineer
Send RFQ form and find out if
vendors bid or not.
Check Previous
Project Purchasing
Check Vendor List
(Contractor or Owner)
Online Search
1. Vendor
2. Vendor
YES
NO QUOTE
1. Vendor
2. Vendor
YES
YES
1. Vendor
2. Vendor YES
NO QUOTE1. Vendor
2. Vendor
YES
NO QUOTE
1. Vendor
2. Vendor
YES
YES
1. Vendor
2. Vendor YES
NO QUOTE
NO QUOTEYES
Send all data sheets, specifications, and PTS related to the
package. Confirm reason for "NO QUOTE" in RFQ form
Keep form in
package file
Send all data sheets, specifications, and PTS related to the
package. Confirm reason for "NO QUOTE" in RFQ form
Keep form in
package file
Determine final response date for quotation and inform
vendors.
IT IS
WORTHQuotation is RECIEVED until final
reponse date.
Quotation is NOT RECIEVED until
final response date.
Talk with vendor and find out reason
for delay.
Vendor asked additional days to
be able to quote because they are
busy.
Discuss with procurement manager to decide if it 's worth the wait or not. Before
visiting your manager, determine the points below
*Is it a new vendor or has your company done bussiness with them berfore?
* Is the lead time on the package your are supplying long or short?
* According to project schedule, are you able to meet the ROS date
IT IS
WORTH
IT IS NOT
Commercial Proposal Technical Proposal
Vendor asked additional days to
be able to quote because they are
busy.
Discuss with procurement manager to decide if it 's worth the wait or not. Before
visiting your manager, determine the points below
*Is it a new vendor or has your company done bussiness with them berfore?
* Is the lead time on the package your are supplying long or short?
* According to project schedule, are you able to meet the ROS date
Commercial Proposal Technical Proposal
Check if commercial proposal covers the subjects below.
*Check if vendor quoted for all the items requested
*Price
*Lead Time
*Shipment Terms
*Two years spare part is quoted as optinal.
*Commisioning & Start-up parts are included.
*VDRL documentation price is included.
*Export packing price is included
Check if technical proposal covers the subjects below.
*Drawing
*Deviation List
*Datasheet of quoted product.
*Commissioning and Start-Up spare parts
*Two years operation spare parts
Check if commercial proposal covers the subjects below.
*Check if vendor quoted for all the items requested
*Price
*Lead Time
*Shipment Terms
*Two years spare part is quoted as optinal.
*Commisioning & Start-up parts are included.
*VDRL documentation price is included.
*Export packing price is included
Check if technical proposal covers the subjects below.
*Drawing
*Deviation List
*Datasheet of quoted product.
*Commissioning and Start-Up spare parts
*Two years operation spare parts
YES NO YES NO
Ask vendor to
provide missing
information.
Ask the vendor to
provide missing
information.
Ask vendor to
provide missing
information.
The vendor is ready for
TBE (Technical Bid Evaulation) stage.

28. 23
3.3.3. Technical Clarification(TC)
In the Technical Clarification stage, design engineers’ aim is to bring up the unclear
points in the vendors’ offers and get confirmation of the vendors’ understanding of
every specification. There might be more than one TC, because sometimes, for
complicated packages, all points can’t be cleared in one TC. (A TC sample can be seen
in Appendix 1)
The TC period depends on the vendors’ and design engineers’ experience. Therefore,
in some cases the TC period might extend for three months and cause delays in the
project completion time. As it is known, any delay in the oil and gas industry creates
thousands of dollars of losses. Therefore, the TC stage is one of the most important
stages to improve the supply chain in the construction industry.
In order to better understand the importance of the TC stage in regards to the time
frame of the project, let us look more closely at an example involving the construction
of a petrol platform, which was awarded an EPC contractor, with a completion time of
15 months. (It is important to note that, sometimes contractors accept a project even
if they know the project will be delayed, because the penalty of the delay might be
covered by the profit of the or they really trust their supply chain.)
- The issuing of AFB document for a pedestal crane takes three months.
- The TC stage is three months.
- The production of the pedestal crane is completed a minimum of 11 months
after all financial and technical agreements have been arranged.
- Delivery to the site: minimum 1 month. (Depends on where the project is
located.)
- The total delivery time is 18 months.
In this case, the total delivery time is greater than the project completion time. This
problem only can be solved by reducing the period of the stages above with a supply
chain management strategy. With a supply chain management strategy, the EPC
contractor’s design engineers, the manufacturer, the manufacturer’s suppliers, and
logistics must work in harmony to reduce the total delivery time.

29. 24
3.3.4. Technical Bid Evaluation (TBE)
After all the unclear points in the vendors’ offer are cleared, a Technical Bid
Evaluation table is issued. The TBE table shows vendor’s compliance with each
specification and if the vendor has technically accepted these specifications or not.
Sometimes vendors can be technically accepted with some “area of concern” points.
Area of concern means that the vendor is technically accepted but the vendor has to
address all of the concerns highlighted in the TBE table before the contractor issues a
purchase order. (A TBE sample can be seen in Appendix 2)
The procurement engineer creates a commercial comparison table that includes the
technically accepted vendors. The points below must be clearly indicated in the
comparison table and considered when purchasing decisions are made.
- Price
o Product price
o Commissioning spare parts price
o Two years spare parts price
o Inspection & Certification price
o Packing price
- Delivery Time
- Shipping Terms
- Payment Terms
- Vendor’s experience – Reference List
* Beside the points listed above, the site-supervisor daily rate is considered as well.

30. 25
PEDESTAL CRANE
COMPARISON TABLE
COMPANY 1
(MALAYSIA)
COMPANY 2
(ITALY)
COMPANY 3
(ITALY)
COMPANY 4
(USA)
Price / EURO 999,000.00€ 1,415,000.00€ 1,090,000.00€ 1,000,000.00€
Commissionig Spares included included included included
Two years spare parts not included not included not included not included
Inspection & Certification included included included included
Packing included included included included
Shipping Terms EXW-MALAYSIA EXW/ITALY FCA/ITALY EXW - LA / USA
Delivery Time 46 weeks 36 weeks 40 weeks 36 weeks
Technically not accepted Technically Accepted Technically Accepted Technically Accepted
Table 6: Sample Comparison Table
As the sample comparison table above, the winning vendor is the company with the
3rd best price. The cheapest company, Company 1, does not technically satisfy the
contractor, the second best priced company, Company 4, lost the tender because of the
late delivery in previous petrol platform projects of same contractor. If the tight
schedule of oil and gas projects is taken into consideration, Company 2 could be
chosen but the price differences is significant and not worth the cost for a project with
a four week time frame. Therefore, the winner of this bid is Company 3.
This is another stage where the supply chain management strategy may reduce the
cost of a product and the delivery time for similar projects in the future.
3.3.5. Inspection Test Plan (ITP) & Vendor Document Requirement (VDR)
The Inspection Test Plan (Appendix 3) is the first thing requested from a vendor after
the purchase order issuance. The ITP document provides a framework for the stages
in which the client, the contractors or other parties will witness or review the
procedures followed in the manufacturing process.
VDR is the stage where all document requirements are collected from the vendor.
These documents start with an inspection test plan, general arrangement drawings,
material test certificates, a painting report, warranty certificates, a spare parts list,
user manuals, etc. and end with the Factory Acceptance Test. Each of these

31. 26
documents should be approved by the design engineers and the client before any
action is taken.
Because of the need for approval of design engineers and the client on each VDR
document, this stage may extend the manufacturing period. This is because design
engineers and the client might comment on a document, which in turn might cause
delays in manufacturing. For example, a comment made by the client on welding
procedures might cause delays on fabrication starting and result in late delivery.
3.3.6. Factory Acceptance Test (FAT)
FAT is the last stage before the release of the goods. Factory Acceptance Tests are
done at the factory to make sure that certain requirements are met, which results in
high quality products. The tests are normally done with the client, and also, in certain
more demanding cases, with a third party inspection agency.
At a FAT, installations are double checked so that they match the drawings for the
specific project. All possible faults, deviations and wishes are also noted in a punch
list. The punch list has to be closed before the release of the goods.
3.3.7. Final Data Book
The final data book is an identity card of products and includes all the approved
original documents. Usually, more than two hard and soft copies are required. At the
commissioning stage final documents are asked from the contractor for acceptance.
3.4. Release the goods and shipment
After closing all of the points in the punch list, the contractor’s logistics department
makes every effort for the item to arrive on site as soon as possible in the cheapest
and safest way. The pressure on the logistics department is really high because in the
construction industry the manufacturing of a product usually takes longer than
expected and it is expected that the delay can be covered by fast shipment.

32. 27
3.5. Commissioning
Commissioning is a systematic process of ensuring that all building systems perform
interactively according to the contract documents, the owner’s objectives and
operational needs. This is achieved ideally by developing and documenting the
Owner’s Project Requirements beginning in the pre-design phase; continuing through
design, with reviews of design and contract documents; and continuing through
construction and the warranty period with actual verification through review, testing
and documentation of performance. Therefore, for the process to work successfully, it
is important that the owner, commissioning provider, design team, contractors, and
operators work together as a team throughout their involvement with the project.
After this stage, the project is completed, but the responsibility of the contractor
continues until the end of the warranty period.

33. 28
CONCLUSION
The purpose of this conclusion is to summarize the key points of offshore petrol
platform projects as a part of the construction industry, and to point out the
difficulties of positioning supply chain management.
Supply chain starts from design and ends after the commissioning & start-up stage in
a petrol platform project. Managing all of these points is important to increase the
efficiency of the project and shorten the completion time.
Design: supply chain management has to involve the design stage to choose available
material in the market and create a buildable design.
Procurement stage: supply chain management has to involve the procurement stage
to reduce equipment costs and shorten the delivery time.
Release of goods and transportation: supply chain management has to involve the
release of goods and transportation to produce all equipment on site on time without
any damage.
Commissioning & Start-Up: supply chain management has to involve the
commissioning & start-up to solve the problems occurred at these stages.
However, for a contractor it is not easy to focus on just one type of project in one
specific area, because of the temporary nature of such projects. The contractor might
get awarded a petrol platform project in Turkmenistan, but next time they might be
awarded a thermal power plant project in Libya. This changes all of the supply chain
and requires the contractor to create a new one in a short time frame. Changing the
location and the type of project will change the client, suppliers, types of
transportation, employees, etc. Working with the same supplier might be possible for
another project but the supplier might not fulfill the client’s requirement for the new
product or transportation might cost more than expected. In that case, another

34. 29
experienced supplier has to be found, but probably the supplier would think this is a
win - lose opportunity, because nobody knows the locations of the next project.
Petrol platforms are designed considering environmental conditions, facilities to be
installed on top side (oil rig, living quarters, helipad, etc.), platform type and capacity
of platform, therefore these changeable points give each project uniqueness. This is
another obstacle to positioning supply chain management in the construction
industry. The uniqueness of each project creates different capacity and material needs
for equipment, therefore finding a vendor who is capable of manufacturing a full
range of equipment is not possible and does not let the contractor create long-term co-
operation with vendors. However, in the automotive industry, the manufacturer
makes a production plan and is able to see how many of the same cars they will
produce over the next few years. Therefore, they can invest money and develop their
relationships with suppliers to decrease their costs.
However, there are good opportunities for contractors if they are well-mobilized in a
country where there is potential to work on the same kind of project again. For
example, a contractor who is experienced in offshore petrol platform projects can
position supply chain management in their project because most of the equipment
used in their project will have similar design conditions. Therefore, there will be
opportunity to improve vendors’ capabilities and create win-win partnerships. Supply
chain management will shorten the completion time of projects and, most
importantly, it will reduce the overall cost.

35. REFERENCES
Books
1- Asplund, E., and Danielson, U. (1991). Räta ut Byggsvängen (Straightening
the Building Roundabout). SBUF, Stockholm, Sweden.
2- Bechtel, C., and Yayaram, J. (1997). “Supply Chain Management: a Strategic
Perspective.” Intl. J. of Logistics Mgmt., 8 (1) 15-34
3- Pryke Stephen, Senior Lecturer in Construction and Project Management,
Bartlett School of Graduate Studies, University College London, 2009
4- Peter McDermott and Malik M A Khalfan, Achieving supply chain integration
within construction industry, University of Salford, Salford, Greater
Manchester, UK
5- Ruben Vrijhoef and Lauri Koskela, Roles of Supply Chain Management in
Construction, July 1999, University of California, Berkeley, CA, USA
Internet Sources
1- Major Types of Construction Projects, September,2013
http://constructionfield.net/major-types-of-construction-projects/
2- Designing Buildings Wiki,
http://www.designingbuildings.co.uk/wiki/Procurement_route
3- Waste Minimization Accross the Supply Chain Areas to focus on,
www.constructionwaste.info