Construction SCM

7 Design of Competitive IndianConstruction Supply ChainNetworks

N Viswanadham and Vinit Kumar

7.1 Introduction

Construction industry is the second largest economic activity in India. Ac-cording to the latest CRISINFAC report, construction investments in thecountry account for nearly 11% of the GDP and around 50% of the GrossFixed Capital Formation. During the period 2002-05, investments in theconstruction industry grew at a CAGR of 11% and are expected to grow ata CAGR of 8% during the period 2006-08. Over this period constructioninvestments will grow to a level of Rs 8300 billion. Also the constructionindustry is the second largest employment provider. There are around 3million small, medium and large contractors in India.

Indian Construction Industry can be divided into three market segments:Infrastructure, Industrial and Real Estate. Infrastructure constitutes of roads,ports, airports, irrigation, railway, and power projects etc. Infrastructureinvestment has a share of 25% in the total construction investments andis expected to rise at a CAGR of 9% over the period 2006-08. Especiallygovernments focus on roads, water supply and sanitation, and irrigationwould be the key derivers. Industrial construction includes both public andprivate industries in steel, textiles, refineries, petrochemicals etc. Investmentin this segment is around 10% of the total construction investment and isexpected to rise at a CAGR of 33% during the period 2006-2008. With theglobalization effect and increasing local demand, this segment is expectedto grow with the investments in oil, gas and metals being the key drivers.Real estate investment is around 60% of the total construction investmentand is expected to grow at a CAGR of 5% during the period 2006-2008.It constitutes residential, commercial and retail construction. Commercialconstruction includes hotels, office space, hospitals, schools etc. while re-tail sector includes malls and multiplexes. 90% of real estate developed is

153

154 Design of Competitive Indian Construction Supply Chain Networks

from residential sector. The persistent demand-supply gap in residentialsector, rising affordability levels, attractive financing options, fiscal bene-fits on availing the home, and favorable demographics are the key driverssupporting the real estate segment.

Looking at the ubiquitous construction activity in the country and strongfuture prospects, it is important to devise the strategies to enhance the pro-ductivity in construction activity which seems to lag far behind in compar-ison to other manufacturing and service industries. While auto and othermanufacturing industries in India are using advance technologies to managetheir supply chains, construction industry has not yet adopted the change.Other construction firms like that of UK and Australia are far more efficientthan Indian firms. With the change in government foreign investment poli-cies (effective from February, 2005) in the country which allowed 100 percentFDI in construction, Indian construction firms are under global pressure andneed operational reforms to match international standards.

Delays, cost overruns and material wastage are commonplace in con-struction projects. These consequences are resulted mainly by the tempo-ral characteristic of construction supply chains and the short-term projectmentality of construction firms. In comparison to other industries, con-struction firms have been slow in using Information Technology and SupplyChain Management principles in their operations which have transformedthe manufacturing sector during last fifty years. While it is important toidentify the reasons which are preventing construction firms from stimulat-ing this innovation, finding the effective and feasible solutions to increasethe productivity is a key issue today.

In the lack of construction firms initiative for higher productivity and betterquality, construction industry has seen commoditization; where contracts areawarded on the basis of minimum bid. This in turn has reduced the profitmargins and industry players have been averse of making investments for pro-ductivity enhancement. Current firm-specific cost reduction doesnt confer anysustainable advantage in the global market. With the increasing global com-petition, Indian firms need to involve all the stakeholders of the constructionsupply chain who influence the productivity of the project. This is possible onlythrough greater coordination among various players. Firms need to follow asupply chain approach to achieve global standards. Rising revenues of con-struction industry and strong future prospects would encourage constructionfirms to make investments to achieve higher productivity.

There is a lot which can be learnt from other manufacturing and serviceindustries but it can not be done with the ignorance towards the characteris-tics of construction operations which differentiates it from other industries.The issue of delays, cost over-runs and quality non-conformance is closelyrelated to the Supply Chain Management (SCM) and we believe that apply-

Construction Supply Chains: Characteristics 155

ing SCM principles, Use of Information Technology (IT) and supply chainintegration can bring significant increase in the productivity in constructionprojects. Cases from other countries show that the savings with the applica-tion of Supply Chain Management tools can be as significant as 35%.

This report suggests strategies for Indian construction firms to managetheir supply chains better. Our analysis of Indian construction is based onour interviews with industry people, the information available in the com-pany web-sites and a literature survey covering the research in constructionoperations.

7.2 Construction Supply Chains: Characteristics

The temporal characteristic of construction supply chains and demand drivennature of industry makes it very different from other manufacturing andservice industry. In order to devise the feasible and effective Supply ChainManagement strategies, it is important to understand the characteristics ofconstruction supply chains which may limit the scope of implementation.This chapter illustrates the characteristics of construction supply chains.

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Construction supply chain involves stakeholders who are individual ser-vice providers such as subcontractors, designers, engineering consultants,transporters etc. and manufacturers of materials and equipments. On anaverage material cost contributes 50% to the project cost and hundreds ofmaterial and equipment suppliers take part in the supply chain. Apart fromthese suppliers, activities of the construction projects are subcontracted tospecialty contractors such as designers, electrical, engineering, plumbingetc. Being a demand driven industry owners involvement in the projectremains crucial and continuous information flow from client is essential.Figure 7.1 shows the highly non-linear characteristic of construction sup-ply chains where strong supply chain information and material linkages areshown.

Construction can be viewed as a complex of manufacturing and services.In this sense, many of the operations involved in manufacturing have sim-ilarity with construction projects in their characteristics. As an example,procuring materials and assembling them to make a product is common inboth manufacturing and construction. This is the reason why Toyota, theleading Japanese auto manufacturer, has entered into housing constructionand applying mass production and lean manufacturing techniques there.

156 Design of Competitive Indian Construction Supply Chain Networks!

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Likewise some characteristics of services can be seen in construction. Forexample, construction involves project management techniques as do manyof the software services firms. Satyam Computer Services, the lead softwareservices firm in India entered into construction business with their core com-petency in Project Management. Basic characteristics of construction supplychains are as follows.

Temporal supply chains: With each new project, the location of projectchanges and a new supply chain network has to be designed. Projectplanning incorporates scheduling, logistics planning, and strategic de-cisions pertaining to the supplier and subcontractor selection. The lifeof the temporal supply chain ends with the contract. This temporalcharacteristic of construction supply chains causes aversion of con-struction firms towards investments in Supply Chain Management asReturn On Investments (ROI) remains a concern.

Demand driven industry: Unlike many product-based firms, con-struction projects are demand driven. Construction firms are awardedthe contract to finish a project on the basis of a contract model (cashcontract, BOT, BOO, BOOT etc.). Based on the type of contract, firmsare responsible for activities like designing, material procurement,construction and other supporting activities like project management,waste management etc. Each project is customized and hence thestructure of supply chain changes.

Long and short-term relationships: For a construction project short-term relationships last for the project life cycle. For example localsuppliers, workers, transportation services for a project usually end

Indian Construction Supply Chains: Status, Issues & Scope 157

with the project life cycle. Long-term relationships can be with largematerial manufacturers, infrastructure and technical support organi-zations such as research institutes, insurance agencies, and financingfirms etc (refer Appendix on Indian construction system, page 187).

Fragmented industry: Construction industry is highly fragmented.In 2004, there were a total of three million small, medium and largecontractors in India and only 28,000 of them were registered. Espe-cially Real Estate segment, which requires comparatively low technicalskills, has many small and medium-sized players.

Capacity is not a constraint: Construction is working capital inten-sive, and fixed capital requirement is quite less as compared to othermanufacturing industries. This behavior has a parallelism with otherservice-based businesses. As a result capacity is not a constraint. Sup-ply can be increased by mobilizing the skilled labor.

Financing constraints: Most of the firms are not listed and creditprofiles of contractors are not available. These firms could receivea short-term asset-based financing from banks, but, as fixed capitalis not sufficient with most of the firms, it is hard for them to get anasset-based loan. The problem is very severe in India because recordsof contractors are not available. Construction Industry DevelopmentCouncil (CIDC) has taken up this issue and they are categorizing thecontractors in grades, but these grades are meant for a different pur-pose (qualification criteria for a contract bidding), and we would needa credit rating for these firms for financing purpose. High risk andshrinking profit margins are other issues in financing.

7.3 Indian Construction Supply Chains: Status, Issues &Scope

Current status of Supply Chain Management (SCM) in the construction in-dustry shows that the pace of innovation has really been slow and firmsstill have a lot to learn from the tools available in SCM literature. Whiletalking to industry people, we realized that most of the industry people areignorant about SCM approach and follow traditional project managementtools. As illustrated in the subsequent part of this section, current industrypractices are highly infective and lead to delays, cost overrun and wastage.Apart from this, various characteristics of construction supply chains makeit difficult for construction firms to invest in SCM practices. This sectiongives an insight into the status of supply chain management practices and


the related issues. We cover three important dimensions here: Project plan-ning, Logistics, and use of IT.

7.3.1 Project Planning

Project planning consists of mainly three activities: scheduling, resourceallocation, and risk management.

Scheduling

Status: Current industry practices for scheduling use precedence relation-ships of various processes and use tools such as Program Evaluation and Re-viewing Techniques (PERT) charts, Gantt Charts and Critical Path Method(CPM). Most of the large and medium sized firms use some software basedon the above mentioned tools. Leading construction firm Larsen & Toubrouses software PRIMAVERA which incorporates planning or scheduling ac-tivities using CPM, Gantt charts, and risk management tools. These plan-ning tools take process constraints into account based on the previouslyavailable data on the time consumed in each process but ignore resourceand information constraints.

Issues:

Scheduling modules dont consider resource and information con-straints (such as what information is required before an activity canbe started) into account.

As many important causes of uncertainties remain unconsidered dur-ing scheduling, project schedules remain unrealistic.

Planning modules dont consider risk and uncertainty involved in de-lays of material and service procurement which lead to project delays.

With unrealistic scheduling and hence frequent changes in projectschedule, proper allocation of resources remains much below the op-timal level and causes waste of material and underutilization of ma-chines and human resources.

Resource Allocation

Status: Most of the lead firms in India have a resource allocation unit,where the resources are allocated to various projects. The asset base includesHeavy Duty Cranes, Heavy Earthmovers, Asphalt, Batching & CrushingPlants, Asphalt & Concrete Pavers, Vibratory Compactors, Concrete Pumps,


Boom Placers, Drilling Jumbos, Rock bolting machines, On / Offshore Hy-draulic Drilling Rigs, Core Drilling Machines, Winders, Compressors, D.G.Sets and Mobile Crushing units etc. Apart from machineries and equip-ments, human resources like engineers, managers, subcontractors and laborsetc. have also to be mobilized to various sites to maximize productivity bymaintaining a balance between the availability, requirement and utilizationof resources. Lead players like L&T, Gammon, and HCC etc. undertake sev-eral projects at a time in the Indian as well as overseas markets. For themresource identification and allocation becomes highly complex. As the leas-ing of equipments often cuts into the margins of the companies, more andmore firms are trying to increase their asset base. Nagarjuna ConstructionsOperating Profit Margins (OPM) was as low as 5 per cent in 2004. Sincethen, with a ramp-up in asset base by over 80 per cent and an ability toundertake more projects, the companys OPM is close to 9 per cent. Withthe increasing complexity of resource allocation process and increasing or-der book, firms need to adopt new resource allocation strategies. This taskremains more crucial for small and medium sized firms who try to takevariety of projects and dont have enough resources.

Issues:

With the increasing demand in construction industry, resource alloca-tion is becoming more and more difficult.

Firms with a low resource base need to device strategies to acquirerequired resources to complete a project, either through purchase orlease, which can give them a balance of OPM and order-book. Financ-ing remains a major concern especially for small firms which hinderthe purchase of resources.

Resource allocation is done in suboptimal levels. Resources remainunderutilized and the problem of shortage of resources still persists toa great extent.

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rate, foreign exchange, payment, regulatory and political risks. Risk mitiga-tion involves the allocation of various risks to the supply chain stakeholderwho can manage them best. While this risk allocation helps in removingthe burden from a single party, it never ensures the effective interceptiveand preventive risk management actions that have to be taken in order tohandle these risks. Current industry practices of documenting various risksand calculating risk exposure values and impact on the cost over-runs & de-lays; along with brain storming sessions dont provide an effective solutionto manage risks. As risk management is highly experience intensive, many atimes critical risk factors remain untouched and degenerate into huge lossesduring the project life.

Issues:

Through out the industry, focus is on risk allocation and risk manage-ment practices are still ineffective which cause delays and cost over-run. Firm level focus of risk management is important at this juncture.

Firms ignore the importance of Knowledge Management and vari-ous supply chain risk events occured during projects remain undocu-mented.

As the risk management activity is highly experience and informationintensive industry needs to build Decision Support Systems which canbe used in the risk management.

Risk management activity restricted in the planning stage where manycritical uncertainties can not be realized. Firms need to develop inter-ceptive risk management tools which can support managers in thedecision making on the appropriate actions that have to be taken sub-sequent to a risk event.

Scope of improvement: It is not difficult to realize that resource manage-ment and scheduling practices can not ignore the uncertainties involved inprojects. Also scheduling should incorporate resource and information con-straints not only the process constraints. Big firms who undertake multipleprojects at a time should take a multi-project planning approach so as tomake resource allocation effective. Decisions taken in such a way will allowthe decision makers to arrive at optimal solutions and can bring enormoussavings.

Risk management should be an integral part through out the project life.Presently most of the small and medium-sized players in the industry donot incorporate risk management in their planning stage. While some ofthe large firms use a methodical approach for risk management, the process


is limited to planning phase only. Because of these practices many risksremain unconsidered and degenerate into huge losses. Risk managementis domain dependent and experience intensive and there is a need for theindustry people to codify the knowledge and maintain a useful database ofsuccessful experiences which can be used to handle various risks. Followingpoints serve the purpose of illustrating the scope of improvement in theproject planning and the techniques which can be used by the industrypeople.

Scheduling should incorporate resource and information constraints.We find constraint programming a useful tool to solve such problems

Risk allocation should be on the multi-project basis and should incor-porate uncertainties involved.

As the work in construction projects is experience intensive and do-main dependent. Codification of knowledge would be useful in deci-sion making. For this purpose Decision Support Systems based on theKnowledge Engineering tools should be used.

With the use of IT-enabled services, construction firms should look forcustomized softwares which are pertinent to their domain of construc-tion projects. These softwares can integrate the Scheduling, resourceallocation, and risk management processes which have to be treatedtogether as mentioned above. In the next section we propose one suchintegrated module.

Industry should start using real-time information transfer systemswhich make the visibility of resource usage clear. These systemswould certainly help firms to increase the resource utility and removeuncertainties involved.

7.3.2 Logistics

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Table 7.1 Break-up of construction costs

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various ordering models and consolidating delivery loads to maximizevehicle fill and hence reduce transportation cost.

Many lorries have to wait for unloading. There are hardly any deliverytime slots assigned to suppliers.

Use of equipments for loading and unloading of materials is lim-ited and mostly done for delicate and heavy components. The useof skilled labor for unloading and movement of material on site canbe seen frequently.

Inventory management is not given importance as compared to othermanufacturing and retail industries. Materials have to wait for a longtime before they are used. Also material storage location is not as-signed prior to unloading which results in waste of time and resourcesfor movement to appropriate location.

While manufacturing and other services (retail etc.) use real-time in-formation sharing tools today, information flow in construction supplychains is extremely poor. Supplies before the schedule, arrival of sub-contractor with its resources when he is not needed etc. are commonin construction industry.

As compared to manufacturing industries, wastage of material andmaterial damage in construction is huge.

There is apparently little effort on material tracking in construction,as a result visibility is lost, which causes cost over-run and materialwastage.

Above mentioned evidences are conspicuous. Industry still seems re-luctant to agree upon the importance of Logistics Management. Given thedeadlines for the project, most projects are completed in a rush with theprime focus being the dead-lines. Industry people are either unaware of theexpected savings that the proper logistics may bring or are ignorant.

Issues:

Logistics and Supply Chain Management techniques are still abstractconcepts in the construction industry. Even the lead firms of the in-dustry are not using these techniques to transform their business pro-cesses. The main reason is the short-term project thinking of the in-dustry people and temporal nature of supply chains.

Construction firms are not giving attention to collaborations and properinformation sharing with the supply chain stakeholders. To enable


Supply Chain Management cooperation of all the stakeholders is manda-tory.

Most firms are benefited with the methods available in Project Man-agement literature, which is slowly incorporating the SCM techniquesin it.

Low entry barriers in the industry have given entrance to many smallcontractors who are not aware of current technology and have poorProject Management skills. These small firms have to be educated.

Fragmented nature of the industry and heterogeneous culture of sup-ply chain stakeholders make it difficult for construction firms to alignthe work culture and practices.

There are hurdles in implementing the SCM concepts in the constructionindustry: conflicting interests, lack of trust due to short-term relationships,improper scheduling requiring flexibility in operations, short-term projectthinking, and difference in work cultures of stakeholders etc. Also it isvery much unclear who gets benefited. Any feasible solution for the better-ment of the logistics in construction should take these hurdles into account.Presently the industry needs to handle some strategic issues and hence wefocus on strategic issues more than technological opportunities. The scopeof improvement in this context is as follows.

Scope of Improvement:

The gains that can be achieved by proper logistics are impossible with-out supply chain integration. Proper match of demand and supply hasto be followed by integrating the supply chain stakeholders.

Use of supply hubs can allow firms to utilize the expertise of logisticsfirms. As mentioned later in this report, this strategy is feasible forIndian construction firms and would be a key in controlling projectcosts and removing delays.

An industry wide collaboration can be used for pooled procurement.Procurement exchanges can be helpful, especially in reducing the costand time of procurement of imported materials.

Main hurdle in the management of on-site operations is that all thematerials have to be assembled on site which makes the process com-plex. As has been seen in the case of manufacturing and service sec-tors, outsourcing would help in the management of logistics easier inconstruction.


Material tracking and visibility, being the key to logistics holds aprominent position in this context. In the wake of favorable gov-ernment policies for the use of Radio Frequency Identification (RFID)technology, construction firms should exploit this technology for im-proving the visibility in their projects.

7.3.3 Use of Information Technology (IT)

IT has changed the way information is stored and transferred from oneplace to the other and construction is no exception; but the use of IT inconstruction is limited in firm level operations, such as accounting, projectcontrol, drafting, wireless communication etc. Conflicting interests begetlack of cooperation and firms are averse of sharing information with othersupply chain stakeholders. The real exploitation of IT is possible only ifit is used for proper information flow across the supply chain. One justhas to observe the success of the firms in other industries that have usedIT to achieve radical transformation in growth. Examples include Wal-Martwho realized overwhelming cost advantages in supply chain optimization,and Dell Computer who cut out intermediaries in retail computer sales.To really exploit the IT in an effective manner one needs a strategy thatprovides incentives to stakeholders for sharing information. For small andmedium sized firms the use IT is hindered by lack of scales and huge set-upcosts involved for some of the latest technologies.

Status: In each of the sectors, IT systems and tools are used today whichdirectly assist in the specialist tasks. These systems and tools have allowedfirms to automate various error-prone and time consuming tasks and gainbenefits in cycle-time, productivity, and accuracy. As an example, the use ofCAD for drafting has allowed firms to reduce cycle-time, productivity andaccuracy when any design changes are required. Automation of manualtasks is the first phase of IT adoption.

Some firms have started to leverage the information in their businessprocesses. The process of storing the information and exchanging it withinthe boundaries of the firm and, to a limited extent, outside has started.IT has been used to add value beyond its role in reducing the cost. E-transactions, e-tendering etc. are the examples of this phase and a fractionof lead firms are using some other e-commerce applications as well. Useof IT to transform firms internal processes is the second phase of IT adop-tion in India. Generic benefits from the use of IT are productivity gains,shorter cycle time, capacity to manage larger and more complex projects,and improved accuracy and consistency of documentation.

166 Design of Competitive Indian Construction Supply Chain Networks!

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Fig. 7.2 L&T Case Study

The third phase of IT adoption in India will come when the firms willstart transforming their core business processes using IT. This will includeintegrating the supply chain through IT, and use of stored information incritical decision making.

While large firms are investing in various IT solutions, medium andsmall-sized firms are still avoiding the change in their working practices.Since most of the infrastructure projects have high upfront cost and longpayback periods, there are real cost savings to be gained by reducing projectcycle time. Even a small time overrun can mean a loss of crores of rupees.This is the reason why construction firms want to capture the expenditureincurred at every stage of the project, and are demanding software to in-


tegrate construction design with material, equipment, capital and humanresources. Lead players use productivity and cost reduction software appli-cations like PRIMAVERA, CAD design tools, Enterprise Information Portals(EIP) for multi-project visibility, and other costing and scheduling modules.

Industry leaders in public as well as private sectors are investing heav-ily on Enterprise Application Software (EAS) for tracking expenditure in-curred on infrastructure projects across sectors such as power, highways,shipping, railways and telecom. The software integrates project manage-ment and budgeting of projects. Industry heavyweights such as L&T, ABB,BHEL, Reliance, ONGC, Indian Oil and Tata power are investing in EAS.

Up to 80% of inputs into buildings are repeated. Therefore a Enter-prise Application System is required to keep track of the past information,which in turn will require codification of knowledge. Such a system usesthe knowledge from past in future projects and reduces project costs.

Many IT firms in India have already launched their software packagesfor different purposes. But it seems that most of the firms are hesitant touse these software solutions especially in Real Estate segment. It is foundthat lead players of the industry are investing in these solutions and theirexperience has been really good. It is expected that, in future small andmedium sized firms will learn from these success stories and start investingin IT solutions for their projects.

Issues:

Construction firms are not IT savvy and only lead firms are trying toexploit the benefits.

Lead players are using IT for project management and the use of ITis mostly at the firm level. Proper information flow across the supplychain is absent.

Planning and productivity modules such as PRIMAVERA, are help-ing only a few individuals as these applications require a significantamount of investment with lack of scales for small & medium-sizedfirms and hence the current practices dont tend to optimize the wholesystem.

With the lack of a clear strategy for incentive allocation among thesupply chain stakeholders and the presence of conflicting interests, ITsolutions which can improve the information flow across the supplychain remain unsuccessful.

Scope of improvement:


A successful IT strategy for Indian construction industry should tryto provide the solutions which are feasible to not only big players butsmall and medium sized players as well.

It can be achieved in the leadership of lead players who can aggregatethe supply chain stakeholders and ensure the incentives for informa-tion sharing.

The effort of the lead firms along with the favorable government poli-cies would homogenize the IT infrastructure in the industry which,in turn, would facilitate the supply chain integration and use of IT incritical decision making.

7.4 Indian Construction Supply Chains: Strategies

This section aims to provide strategies for construction industry in threeareas: project planning, Logistics, and Use of IT. As mentioned earlier, anyfeasible and potential strategy would take the characteristics of constructionsupply chains into account. The technologies which can be used are alsosuggested to complement the strategies with appropriate solutions.

7.4.1 Integrated Supply Chains

Any Supply Chain Management initiatives would fail unless and until thestakeholders are willing to share information and cooperate in an integratedmanner. This can be done if and only if there are incentives for individualsupply chain stakeholders for cooperation and there are mechanisms to con-trol risks associated with information sharing.

Dell, Wal-Mart and some Indian manufacturing firms have been success-ful in achieving supply chain integration because they could propagate theincentives through out the supply chains. The key difference in any con-struction firm and the above mentioned firms is Relationship Management.Changing the industry attitude from adversarial to cooperative is a chal-lenge before construction industry. There are four main strategic steps thathave to be taken to form integrated supply chains. Figure 7.3 shows thesesteps and benefits which would follow from integrated supply chains.

Indian Construction Supply Chains: Strategies 169

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Small and medium-sized enterprises (SMEs) have to see their core com-petencies and join an appropriate supply chain. They should be a part ofthe policy-making process for information and profit sharing.

Under the relationship-based approach, suggested strategies are as fol-lows.

A. Strategic Alliances Firms from different sectors who act as stakeholdersin construction supply chains need to collaborate in order to coordi-nate for their mutual benefits. These strategic alliances, having part-ners with their individual knowledge and expertise, can contribute inachieving a higher productivity in construction projects. This inter-sectoral cooperation would help all the partners in making better de-cisions through knowledge-sharing and will bring systemic develop-ments in the industry. With this model the benefits of specializationare fully retained and there are economic incentives to individual part-ners.

Current practices in the industry maintain project contracts for a par-ticular project. As mentioned earlier, these short-term relations haveto be converted into long-term partnerships. In that sense, selection ofa new supplier or subcontractor should be based on the benefits thatcan be achieved through the long-term relationship with the stake-holder. The idea of integrated supply chain relies on long-term strate-gic alliances, where the stakeholders can perceive their incentives forcooperation and knowledge-sharing. The lack of common technologicalinfrastructure and inter-operability standards can be maintained if the long-term relationships are maintained.

B. Performance-driven supply chains Present industry practices are basedon the competitive bidding process. Construction industry has seenthe commoditization because for a long time innovation for higherproductivity has been absent and product differentiation was absent inthe Indian market. As a result the bidder with minimum bid gets thecontract even today. This contractor selection approach has worsenedthe situation and with the reducing margins it has been difficult forfirms to invest on new technologies. How can we bring a culture ofinnovation in the construction ? is a critical question.

The motivation for innovation to achieve higher standards of produc-tivity and quality can come only if the incentives are ensured to indi-vidual players. The supply chain optimization, which has been usedin some manufacturing industries, should be applied to construction.Government has taken this initiative to increase the private partner-ship in construction. Many projects: most of the projects under theNational Highway Development Program (3rd phase) are on Build-


Own-Transfer (BOT) basis, Hyderabad & Bangalore international air-port projects were awarded on the Built-Own-Operate (BOO) basisetc. The use of such contracts is a sign of performance-driven ap-proach. These contracts have been designed to shift the principal con-tractors focus to the performance of the asset. Similar incentive allo-cation schemes should be devised for other supply chain stakeholdersto promote innovation for better productivity.

The firms who would be able to motivate the critical players involvedin the project for greater cooperation and innovation would be able toreduce the project cost to a great extent and compete in global markets.This can not be done without a performance-driven approach withproper incentives allocated to individual players.

C. Effective inter-organizational processes Once the cooperative culture ofintegrated supply chain is developed, the effectiveness and efficiencyof inter-organizational processes has to be ensured. Following ap-proaches should be followed for the same.

Firms need to ensure that an integrated database of design andother construction information is provided appropriately to eachof the critical supply chain members. This can be done usinginternet with the password protection. The information shouldbe shared in real-time by individual members of the supply chain:suppliers, consultants, design professionals, and contractors etc.It ensures the consistency in collaborating effort by sharing andmanaging data.

Before maintaining the databases it is important to find out infor-mation linkages between supply chain members. Which meansthat what information is required, at what time, in what format,and by whom should be clear.

Standard formats and practices would help in homogenizing thepractices in the supply chain and would be easy to use as well.

Information sharing process has to be supported with proper ITinfrastructure. A proper IT strategy needs to be worked out tohandle various challenges related to the fragmented structure ofthe construction supply chains. We will take this issue later inthis report.

7.4.2 Improving Project Planning

Reliable planning improves project coordination and reduces disruptionsand delays. Status and issues related to current industry practices for project


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Fig. 7.4 Planning deficiencies

planning were discussed in Section 7.3.1. Current industry planning proce-dures include scheduling based on process constraints (PERT, CPM etc.),risk management, and resource allocation in separation. It is widely ac-cepted that the schedules which dont consider resource and informationconstraints, and dont take into account the possible risk events are unre-alistic and the Indian industry is full of such examples where firms hadto bear huge losses and delays because of poor plannig. Though the casestudies which can highlight the causes of delays are not easily available forIndian industry, improper planning and ignorance of critical risks can eas-ily be seen. Several NHPC projects, Narmada Dam, Pradhan Mantri GramSadak Yojana (PMGSY), and the latest delay in Bangalore-Mysore highwayare a few examples. Although many of these delays can be associated withpolitical and legal risk events, poor feasibility study, financial delays, cli-matic problems, scarcity of materials and labor and change in work cultureare prevalent causes of delays (refer Appendix on government infrastructureprojects, page 185).

Case study in Figure 7.4 shows that resource, and information con-straints should be included in scheduling. And output of risk analysisshould be used in project planning.

We make the following recommendations for the improvement of projectplanning modules.

A firm needs to consider the resource constraints (equipments, ma-chines, labor etc.) while scheduling the project to make the schedulesrealistic. For the firms who are involved in multiple projects, it ismandatory to find out which resources can be allocated to the sched-


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Fig. 7.5 An integrated planning module for construction firms

uled project. In that sense, resource allocation should be a part ofproject scheduling.

The Scheduling module should also consider the information con-straints. Information constraints include the equations which considerthe critical information that must be available before a process canstart. As an example if the information regarding inventory for a ma-terial is not available, the process using that material can be hinderedand may cause delays. With the integrated supply chains it would beeasier to find out real constraints regarding material lead times.

Risk analysis should be paralleled by scheduling and appropriate riskmanagement schemes should be devised to avoid the future changesin the schedule. [21] describes how a CBR-based Decision SupportSystem can be used for construction supply chain risk management.

With the scheduling and risk management module, a Knowledge Man-agement module which can store the knowledge and experiences ofon-site operations, would help project planners to identify and man-age critical risks in planning.

Figure 7.5 illustrates the framework of the proposed planning module.Constraint-based programming is a good choice for handling various con-straints (process, resource and information) in scheduling. Constraint-based


programming also helps identifying critical bottlenecks (critical constraints)in the project. These bottlenecks can be dealt with, using Lean principals(in case of resource constraints) and Information Technology (in case of in-formation constraints). Also the CBR-based Decision Support System forrisk management [21] can be used to take strategic decisions on the supplychain design and resource allocation.

7.4.3 Focus on Logistics

As mentioned earlier, no one part of the construction supply chain can im-prove logistics on its own. All the stakeholders have their roles to playand a collective effort of information sharing would be required. Currentlythe industry is ignorant about the logistics and evidences illustrated in theprevious section support that.

With the integrated supply chains, logistics focus can be easily achieved.The focus on logistics should start right at the designing phase of the project.

7.4.3.1 Design for Logistics Design professionals need to be more awareof logistics costs. This can be done by involving logistics managers in thedesign phase. Design for logistics would mean that a process map for pack-ing, transportation, order quantity etc. is specified during the design phaseitself. Design for logistics would help in reducing material wastage and costin the following way.

Design professionals would include the packing and lot size instructionsto ensure the optimal loading of transport vehicles. This would reducethe material wastage and save transportation cost. Packaging instruc-tions should also ensure ease of packaging and site storage constraintsto save storage space.

Kitting is a useful tool for construction industry. Kitting opportunitycan best be seen at designing level. Using the bill of materials anddrawings, design professionals should see which components/materialsshould arrive at the site at the same time and can be supplied to-gether. As an example, a modular door assembly can arrive with allthe components arriving at the site as a kit. Such a kitting would helpsynchronization of material procurement and reduce the chances ofdelays.

It would be easier to decide about the site layout and location of storehouse/s during the design phase. Design professionals should work to-gether with project managers and work on the site layout. This wouldhelp in double handling of materials.


Standardization of logistics processes would help in applying the designfor logistics for the products of similar nature which are used in sep-arate locations and purposes. This would reduce the cost of designfor logistics itself.

7.4.3.2 Pooled Procurement through SupplyHubs According to overall indus-try estimates transportation (35%), inventory (25%) costs contribute a totalof 60% of the total logistics cost. A few Indian lead firms have started usinge-commerce applications for online material procurement. These solutionsrely on firms supplier networks and reduce process and transaction costs tosome level. Also only a few firms are benefited through these e-commercesolutions.

Following two observations are keys in developing the strategy whichreduces the above mentioned costs.

As is well known, transportation cost can be reduced by increasing thescales, i.e. by more and more material supplied from the same sup-plier, cost of transportation per unit comes down. But for individualfirms optimal lot size remains fixed. An individual firm can not affordto order more than required as it would cause high inventory levelsand material wastage in many cases.

Inventory costs and delay in material procurement are the result of in-formation gap between the suppliers and the contractor. In construc-tion projects, many a times subcontractors are responsible for theirown material procurement and the quality of information flow, backand forth, from the supplier and to the supplier remains in the handsof subcontractors, who have a variety of work cultures. Due to thesereasons, demand distortion (as known as bull-whip effect in SupplyChain Management literature) remains a challenge for constructionindustry.

Pooled procurement is a strategy that can handle both the issues men-tioned above. Typically the pooled procurement arrangements work in frag-mented industries where the end-customers dont have a bargaining powerand the demand is uncertain. Healthcare industry is one such examplewhere this kind of arrangement has gained a huge success. There are over550 group purchasing organizations in healthcare in US, which account for80% of the total annual spending by hospitals and nursing homes. Construc-tion industry has both the characteristics mentioned above and we think thatpooled procurement strategy enabled by internet can bring huge cost reduc-


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Strategic suggestions for pooled procurement are as follows:

Small and medium sized firms who lack the bargaining power can jointogether to form a supply hub, which with the increased scales wouldhave the bargaining power. This will reduce not only the logistics costbut also the material cost as a whole.

A supply hub can be shared by contractors as well as suppliers if thelong-term relationships are maintained. As happens in supply hubsof manufacturing, suppliers would take the responsibility of contractfulfillment and inventory levels until the material arrives at the site.

Lead firms dealing with multiple projects at a time, can create theirprivate supply hub and get benefited but the information confiden-tiality can be an issue. They are suggested to contact a third partywho can act as an intermediary and maintains the confidentiality ofsuppliers information. Also, none of the lead firms in India seems tohave a core competency in Supply Chain Management. It should bebest for these firms to outsource the material procurement to a thirdparty.

An IT-enabled procurement with real-time information sharing at sup-ply hub would minimize the demand distortion to a great extent andhence would reduce the procurement delays.

Supplier-side investment on the required IT infrastructure is not highand hence several small and medium-sized players are expected toparticipate.

The selection of a third party for supply hubs should be based on Sup-ply chain Management skills, breadth of network and market credibil-ity.


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Many areas of India are attracting firms for commercial activities. Exam-ples include Hyderabad, Gurgaon, and Hariyana. A lot of real estate con-struction is expected in these areas in coming years. A supply hub in theseareas would reduce the construction costs of the projects. As building ma-terials for residential and commercial complexes are almost common, sucha supply hub can provide a total solution for materials if planned properly.

Software firms like i2 technologies, IBM and Oracle etc. are capableof providing the required IT infrastructure for such a pooled procurementarrangement. Figure 7.6 shows a supply hub model for construction firms.

Limitations & challenges:

Such an arrangement for pooled procurement requires the use of In-formation Technology in construction industry. Although firms aregearing up in this area, it will take time to grow the supplier-customernetwork.

As construction industry requires a huge number of various differentgoods for various different projects, it is hard to believe that supplyhubs can provide a total solution for material procurement.

Some contractors might be unwilling to share the information neces-sary for the great impact of such an arrangement.


7.4.3.3 Goods Tracking & Visibility Visibility of goods in construction is notgiven importance. Material visibility is scarce on site and negligible off site.Material visibility in various stages of supply chain and its importance is asfollows.

Visibility in warehouses enables labor cost minimization and ware-house management.

Transportation visibility enables in-transit inventory management andtrailer/asset management.

Supplier visibility enables vendor managed inventory and suppliercollaborative replenishment.

On-site visibility enables work-in-process material management andreplenishment planning.

Demand visibility enables order fulfillment, vendor drop-ship, anddirect to store delivery.

Material tracking is of fundamental importance for critical materials andcomponents. Critical goods include materials such as cement; concrete; as-phalt; bricks etc. which need to be supplied continuously, High value com-ponents such as baggage handling systems; industrial turbine; and equip-ments (earthmovers, machines etc.), and imported materials which have riskof damage and/or stealing in procurement etc.

Radio Frequency Identification (RFID) technology provides a wirelessmeans of communication between objects and readers. It involves the use oftags, or transponders, that collect data and manage it in a portable, change-able database. Unlike bar codes, RFID has the ability to identify and trackproducts and equipments in real-time without contact or line-of-sight andthe tags can withstand harsh, rugged environments.

The materials in construction are used in a rough environment, wheredirt, dust and other contaminations are present. Sensing and reading oflabels in such environments is not possible through optical sensing. RFIDis a tracking technology that can be used in construction. A lot of researchis going on in this area around the world [7, 8] and there are some successstories outside India [29, 30], where RFID has been used for the tracking ofmaterials in construction projects.

Construction materials (ex. steel beams) can have RFID tags so that man-ufacturing, transporting, storing, and installation of materials are monitoredby construction engineers. This will have a great benefit in reducing fieldoverhead costs which accounts for the major portion of project expenses.

Indian Construction Supply Chains: Strategies 179!

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Fig. 7.7 RFID case studies in construction


Indian governments Wireless Planning and Development Authority hasreleased radio frequency in the UHF 865 - 867 MHz band. This move isexpected to encourage the use of RFID in the supply chains. A number ofmanufacturing firms: Mahindra & Mahindra, Honda Siel, and Abhishek In-dustries etc. are using RFID for various logistics operations. Similar imple-mentations are under way in Ashok Leyland, Pantaloons, Arvind Mills andother firms. A group of public and private professionals joined together andformed RFID Association of India (RFIDAI), a not-for-profit organization topromote rapid and responsible adaptation of RFID in India. Conditions forthe use of RFID are favorable in India and construction firms should adoptthis technology for better goods tracking.

7.4.3.4 Lean Construction: Lean Production is the generic version of theToyota Production System, recognized as the most efficient production sys-tem in the world today. Lean Thinking describes the core principles under-lying this system that can also be applied to every other business activity- from designing new products and working with suppliers to processingorders from customers.

The starting point is to recognize that only a small fraction of the totaltime and effort in any organization actually adds value for the end customer.By clearly defining value for a specific product or service from the endcustomers perspective all the non value activities, often as much as 95% ofthe total, can be targeted for removal step by step.

Few products or services are provided by one organization alone, sothat waste removal has to be pursued throughout the whole value stream -the entire set of activities across all firms involved in jointly delivering theproduct or service. New relationships are required to eliminate inter-firmwaste and to manage the value stream as a whole.

Instead of managing the workload through successive departments, pro-cess are reorganized so that the product design flows through all the valueadding steps without interruption, using the toolbox of lean techniques tosuccessively remove the obstacle to flow. Activities across each firm are syn-chronized by pulling the product or design from upstream steps just whenrequired in time to meet the demand from the end customer.

Removing wasted time and effort represents the biggest opportunity forperformance improvement. Creating flow and pull starts with radically re-organizing individual process steps, but the gains become truly significantas all the steps link together. As this happens more and more layers ofwaste become visible and the process continues towards the theoretical endpoint of perfection, where every asset and every action adds value for theend customer. Lean Thinking represents a path of sustained performanceimprovement and not a one-off programme.


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6(-&+$7!!8$#1!"4!"%)+(",#&-+#!("9)#1$)&$.()(*)#1$)+(",#&-+#!(")#',4)*(&+$9):;9)Fig. 7.8 Case study of lean thinking in construction

A lean construction approach would be similar to lean manufacturingwhere, value-adding processes would be clearly defined and a continuouseffort to remove the waste would be made. This can reduce material wastageand project cycle time, and allow proper utilization of resources.

7.4.4 IT Strategy

We discussed the status of Information Technology application in construc-tion industry in the previous section 7.3.3). Use of IT applications gainedthe attention nearly five years back when lead firms started adopting vari-ous IT-enabled solutions for their internal operations (as mentioned in Sec-tion 7.3.3). As the industry is not that IT-savvy and requires investmentswhich many small and medium-sized contractors cant make, the Indianconstruction industry still needs to go a long way in the IT applications.

As mentioned in Section 7.3.3, it is because of the fragmented structureof the industry that IT capabilities of Indian firms are heterogeneous. Thereal exploitation of the benefits of IT will come through industry-wide ho-mogenized use of IT; where suppliers, subcontractors and other stakehold-ers of supply chain will have a common IT infrastructure to speed up theinformation flow and use the stored information in critical decision makingprocesses of business.

Our approach in this report is towards the use of IT in integration ofconstruction supply chains and critical decision making. We believe that this


approach would be responsible for Indian firms to derive systemic radicalchanges and greater benefits.

In Section 7.4.1 we discussed the concept of Integrated Supply Chains.This section takes this idea further and introduces a strategic path whichwould lead to greater cross-sectoral coordination in the construction indus-try using IT.

7.4.4.1 Developing Awareness, Skills, and IT Infrastructure: IT skill base inconstruction industry is quite low. While big suppliers, consultants, con-tractors are gaining the benefits of IT, many small players are not even awareof these benefits. First step towards the supply chain integration should beincreasing the awareness of IT applications and its benefits.

Many manufacturing firms have a regular education and awareness pro-grams for their vendors and suppliers. Construction firms need to start sim-ilar programs for their supply chain partners. It should be mentioned herethat it is possible only if long-term relationships are expected and the inten-tion is to form an integrated supply chain for multiple projects. The statusof IT and computer education in India is in a good shape. If the awarenessof the IT benefits is spread in the industry, it is expected that various smalland medium-sized players can adopt the IT-enabled practices. Construc-tion Industry Development Council (CIDC) and other public organizationsare expected to take initiative in this direction, who can publicize indus-try best practices as case studies on their web-sites, organize educationalconferences for SMEs, and assist them in forming the right IT strategy. Gov-ernments favorable policies for the use of IT in construction would helpSMEs in bringing up the change in this work culture.

In the integrated supply chain approach, lead contractors would educatethe firms to develop the required IT infrastructure. The tools which areto be used and the systems which are required can be suggested by leadfirms IT consultants so that a common IT infrastructure, maintaining inter-operability standards, can be built.

7.4.4.2 StandardizedDatabase: Once the required IT infrastructure and skillhas been acquired by the supply chain stakeholders, the next step wouldbe to find the information linkages between various players and creatingstandard systems and procedures for storing and sharing the information.These systems should be able to provide real-time information sharing. Asan example, a material supplier should be aware of delivery dates; inven-tory levels of the customer; customer schedule; lot size information; de-sign changes etc. on the real-time basis, and the customer of that suppliershould be aware of capacity constraints; failures and disruptions; quality


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constraints etc. of the supplier. For the security concerns best solution is touse password protected web-based systems.

Standardized databases would help individual supply chain members toplan their production and services in an effective manner. Inter-organizationalprocesses would become a standard practice and can be used if any changein the supply chain is introduced. For example it would be easy for a newfirm to join an integrated supply chain and become a part of it.

7.4.4.3 Decision Support Systems: Construction Management is experienceintensive. The knowledge gained on site is hardly stored and used for thefuture decision making. Also individuals in the supply chain do not havethe information which is critical in the decision making. In an integratedsupply chain, individual firms will have an opportunity to gather the infor-mation relevant to them and this information can then be used in makingcritical business decisions.

A Decision Support Systems (DSS) provides a standard way of storingthe information and using this information in various decision making pro-cesses. As an example: a contractor can use a DSS for risk managementin construction projects, which uses the chances of occurrence of varioussupply chain risks and knowledge stored from the previously handled riskmanagement cases, to make a risk management plan for new projects. In-


dividual firms need to identify critical decision making processes of theirbusiness: supplier selection, material selection, waste management etc. andbuild Decision Support Systems to use the information gathered from otherplayers in making better decisions.

7.5 Conclusions

We found that efforts in the construction industry to achieve higherlevels of productivity have been much slower as compared to othermanufacturing an

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