Procurement and Supply in Projects

Misunderstood and Under Researched

Douglas Macbeth, Terry Williams, Stuart Humby, Ken James

• Publisher: Project Management Institute
• Year: 2012
• Print ISBN:
  9781935589549
• eBook ISBN:
  9781628250114
• Topic: Business
• Subtopic: Management
• Index: Business

Procurement Management is one of the nine Knowledge Areas of the PMBOK® Guide, but it is a relatively recent focus of academic study and in many business sectors the contribution of procurement is not fully realized or integrated into the strategic considerations of the business. Procurement and Supply in Projects: Misunderstood and Under-Researched examines this inconsistency.

Chapter 1

Introduction and Research Questions

The Project Management Institute's A Guide to the Project Management Body of Knowledge (PMBOK® Guide) recognizes Procurement Management as one of its nine Knowledge Areas, and it features in a number of the Process Groups, either directly or by association.

The issues are captured in a quote from the cover of Kwak and Anbari (2008): “Project management is greatly affected by allied disciplines and in return, it influences them. Therefore, innovative theories, trends and challenges discovered through investigating allied disciplines of project management could have important implications and allocations in the future of project management.”

This project looks to the broad reach of procurement and supply management to investigate the processes involved in interacting with the variety of disciplines and experience brought to bear from the suppliers to projects, in order to better understand the impact of and opportunities from the management of the supply side to the project.

However, given that procurement is itself a relatively recent focus for academic development and that in many business sectors the contribution of procurement is not fully realized or integrated into the strategic considerations of the business, it is the starting hypotheses of this project that (1) project managers are unlikely to have fully accounted for the problems produced by an incompletely considered procurement process, and (2) that the opportunities of operating with participative and cooperative procurement strategies will not have been recognized. The implication of these hypotheses is that when projects go wrong it is likely that at least some of the blame can be attributed to the failure to plan and manage the procurement agendas appropriately.

This project investigated the current levels of understanding of the procurement (later standardized to a generic term of supply) management dimension in major projects and the impact that supply performance has on successful project completion. The approach was a mixture of methodologies, initially using a qualitative approach involving interviewing senior persons involved in projects, followed by a quantitative phase to survey a wider group to test out the indicators from the qualitative phase, supported by SPSS analysis.

1.1 Research Questions

1. To what extent are the issues of procurement management understood by project managers?
2. What are the relative importance and activity levels of the different disciplines involved in the supply-side activities?
3. Is there a relationship between project managers who are active in the procurement process and project success (including completion on time, within cost, and with quality, but also success in its broader perspectives)?
4. Is there evidence to suggest that Procurement Management in the PMBOK® Guide needs to have a more strategic role, in particular coming earlier in project planning?

There is at least anecdotal evidence (some of it gained through pilot study work undertaken by two members of the team) that the provision in the PMBOK® Guide is not well understood or put into action in major projects. If this is true, the projects are liable to additional risks of failure to meet overall targets through failures in supply areas distant from observation at the project site. If this is the case, there are major opportunities to improve project success rates by managing the supply side in the same way as successful manufacturing and service companies are already doing and these lessons may apply to the project area as well. In these other sectors, best practice suggests different modes of interaction and relationship building and earlier involvement in decision making, among other issues. The project aimed to explore these issues in practice.

1.2 Specific Aims

• Understand the role of procurement thinking and processes in project success or failure
• Examine the nature of interdisciplinary working and the impact it creates
• Examine the relative position of Procurement Management in the PMBOK® Guide, and if the arguments of early supplier involvement can be usefully applied to improved performance

Chapter 2

Literature Review

2.1 Introduction

Steiner (1969) defined a project as “an organization of people dedicated to a specific purpose or objective. Projects generally involve large, expensive, unique or high risk undertakings which have to be completed by a certain date, for a certain amount of money, within some expected level of performance.”

The interaction of project management with the supply function (procurement, purchasing, supply chain, and logistics, referred to here as supply) has been coming under more critical analysis in recent years but not much empirical research has yet been undertaken or reported. Both disciplines are evolving as the business world becomes more complex but perhaps now is the time to examine whether their previously parallel development paths should be more interactive and coordinated.

The field of procurement and supply chain management has been evolving, most notably since the Toyota Production system began to be studied and the results transferred into sector after sector, and many authors trace the movement of supply from transactional buying to a more strategic role inside organizations and between them in the chain. Cousins, Lamming, Lawson, and Squire (2008, p. 21) discussed the evolution in terms of viewing the “…supply structure as a network. Truly, firms compete as extended enterprises, constellations of collaborating firms competing with other networks.” Ford, Gadde, Hakansson, and Snehota (2003) saw the whole network as the unit of analysis, and this was the stance of Gadde and Hakansson (2001) who argued that

“it is crucial for a company to relate its activities to those of other firms in order to enhance its performance, and it is through the continuous combining and recombining of existing resources that new resource dimensions are identified and further developed within business relationships. From the standpoint of a single company, strategizing from an industrial network perspective implies that the heterogeneity of resources and interdependencies between activities across company boundaries, as well as the organized collaboration among the companies involved, must be considered simultaneously.” (Gadde & Hakansson, 2001, p. 257)

Hines (2004) talked about the same issues but from a more explicitly customer-focused and marketing-influenced approach. A range of authors reflect this debate, including Monczka, Trent, and Handfield (2005), Rhodes, Warren, and Carter (2006), and Van Weele (2005).

In summary, the key messages coming out of the newer approaches are the possibility (even necessity) of collaborative working, the need for early supplier involvement in design and other decisions where they have an interest and expertise, and the need for closer management of the flows of information and materials.

Kwak and Anbari (2008) stated on the cover of their book that “Project management is greatly affected by allied disciplines and in return, it influences them. Therefore, innovative theories, trends and challenges discovered through investigating allied disciplines of project management could have important implications and allocations in the future of project management.” This project was constructed to explore this.

The PMBOK® Guide (Project Management Institute, 2008) recognized Procurement Management as one of its nine Knowledge Areas, and it features in a number of the Process Groups, either directly or by association. However, given that procurement or supply is itself a relatively recent focus for academic development and that in many business sectors the contribution of supply is not fully realized or integrated into the strategic considerations of the business, the base thesis of this research is that this will be worse in project management.

As one instance, Falagario, Raffa, Chikan, Costantino, and Humby (2008) looked at the relationships between purchasing and other professional disciplines, together with discussing how supply and other disciplines interact in key processes, and concluded that supply is often excluded from strategic processes.

Given the starting propositions for this project given above, we look at the literature to see:

1. To what extent are the issues of procurement management comprehended in the project management literature and understood by project managers?
2. What are the relative importance and activity levels of the different disciplines involved in the supply side activities?
3. Is there any indication of a relationship between project managers who are active in the procurement process and project success?

This literature will lay the basis for the research by setting out some economic theory, then look at the issues of procurement from the project management literature, and then compare this with a look at the supply chain literature.

2.2 Economic Foundations

There is literature in the field of economics that addresses supply in relation to projects and more generally. Transaction cost economics (TCE) is especially relevant in these fields, particularly in relation to outsourcing and make-buy processes and their associated decisions.

The discussion below looks at a small amount of this literature.

Coase (1937) was the seminal paper on the nature of the firm, which was later developed by Williamson (Williamson, 1979). The basic premise is that the firm exists because of transaction costs in a market (the scale of the cost values varies depending on the market). It is stated that these costs can be larger than the costs of running a hierarchy within a firm. In this case the activity will be internalized.

The primary reasons for transaction costs are bounded rationality (lack of market information ex ante sufficient for the rational economic man hypothesis to be possible in practice); opportunism, which includes adverse selection, that is, wrong choice of partner through the impact of insufficient information; and moral hazard, that is, when one partner does not take responsibility for the effects of his or her behavior on the other party. Such behavior leads to costs of information gathering and monitoring against the possibility of opportunism. Another feature is asset specificity, in which specific investments in equipment or personal involvement and understanding cannot be used to satisfy any other demands. The outcome of this is “lock-in,” in which customers and suppliers are bound to each other with no real opportunity to form new relationships. This can be good, as when it reduces search costs for other partners, but also can limit the opportunity to tap into new innovations from other parties.

There are also concerns about the ability of contracts to capture all of the contingent factors that can emerge over the course of an extended project, and so more flexible relationship-based approaches have been developed to allow for this complexity.

For example, public projects are often long term and contracts are necessarily incomplete because of incomplete information about the future. In the United Kingdom these are covered by varieties of Public Private Partnerships (PPP), in which whole hospital or school complexes are contracted for as Design, Build, and Maintain agreements over some 30 years. With the best will in the world, surely no one can anticipate all possible future circumstances to build into the contract definition, and so a more flexible and developmental approach is required.

These basic concepts from economics are embedded into a number of the issues covered later as businesses put them into practice consciously, or not, in their dealings with providers of goods and services to the project.

2.3 The Project Management Literature

2.3.1 The PMBOK® Guide and Other Standard Guidance

The Project Management Institute's A Guide to the Project Management Body of Knowledge (PMBOK® Guide)—the main international (and indeed, ANSI) standard on project management—has developed over the years. The first edition (1987) appeared to be geared around projects done either within an organization or by one organization for another. With the growth of globalized supply chains, the need to encompass this area has been recognized, and Project Procurement Management is represented by the ninth of nine Knowledge Areas within the latest edition (Project Management Institute, 2008). The development of the PMBOK® Guide can be seen in the key Project Management Process Groups Interactions and Processes diagram, which accompanies the PMBOK® Guide: here, supply-chain issues appear in one planning process, one executing process, one monitoring process, and one closing process (and presumably comes part of the initiating “identify stakeholders” process. Chapter 12 describes where Project Procurement Management fits within the project management process, but this is expressed merely as a process to be followed, with some of the very basic techniques. The chapter is written largely as the involvement of suppliers by a buyer, and there is little sense of a chain or hierarchy in the chapter.

Other standards, such as PRINCE2 (OGC, 2011), say no more about supply chains. The standard textbooks do now include some material. Perhaps one of the main standard handbooks is The Wiley Guide to Managing Projects, and a chapter on supply-chain management in this (Venkataraman, 2004) gave the basic concepts, identified the complexities, and looked at the value drivers. However, it is only towards the end of this chapter that the material becomes project-centric, much of the material being true of any supply chain. The work it points to is general logistics work, and it is only in the occasional paper, notably Yeo and Ning (2002) that the supply-chain operations aspects and the project-driven objectives are oriented.

Research was undertaken to develop the UK APM (Association of Project Management) Body of Knowledge, discussed in Morris, Jamieson, and Shepherd (2006), although it is not clear whether this research will actually be taken up in this book. But one of the key findings is that “procurement should be enlarged to cover capability acquisition and supply chain management”—noting that “the workshops and steering groups felt particular emphasis needed to be given to supply chain management, and within this (i) the role of the client as sponsor/project manager and (ii) the importance of partnering.” Of those surveyed, 77% felt that supply chain management would be a relevant or highly relevant topic to bring in (but 88% in aerospace and defense and 85% in process engineering, compared to, say, 65% for financial services—showing the importance of domain in the question).

2.3.2 Recognition of Procurement's Role

Even to those using the PMBOK® Guide, just as this was the most recent Knowledge Area to be developed within the PMBOK® Guide, it seems likely that this is the least regarded. Zwikael (2009) looked at the relative importance of the PMBOK® Guide's nine Knowledge Areas during project planning. He found that Procurement was considered to be the least used of the Knowledge Areas, and also after analysis found to have the least effect on project success. However, in (rather curious) results classified by project industry, procurement is found to be unimportant in software, but important in production or, surprisingly, services. So these are mixed results.

The role of procurement does not seem to be significant in project management literature either. Few textbooks see the significance of it (Walker & Rowlinson, 2008, being a notable example). It is only more recently, as the project management community has realized the increasing complexity of modern multi-stakeholder projects, that the importance of procurement has been realized.

But the main question of whether procurement is seen as imp...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Table of Contents
• Acknowledgments
• 1. Introduction and Research Questions
• 2. Literature Review
• 3. Methodology
• 4. Fieldwork
• 5. Discussion
• 6. Limitations
• 7. Conclusions and Recommendations
• References
• Appendices