Construction Supply Chain Economics

Kerry London

• Publisher: Routledge
• Year: 2007
• eBook ISBN: 9781134130306
• Edition: 1
• Topic: Commerce
• Subtopic: Gestion de la chaîne d'approvisionnement

This is the first comprehensive investigation of the industrial sourcing and procurement practices throughout sixty-eight construction industry supply channels across seven major commodity sectors at all levels. London presents real-world case studies tocombine theory and practice to describe the economic structural and behavioural characteristics of sectors integral to the construction industry performance. Construction Supply Chain Economics details 'everyday' experiences and procurement decisions made by people in firms in the industry related to projects as they seek out other firms to work with during the tendering stage. London creates a language that enables us to classify and understand behaviour and recognise the impact of our decisions on firms and projects within the industry.

Construction Supply Chain Economics introduces a new model for mapping the construction sector of particular interest to construction management and economic researchers and to procurement decision makers, including policymakers and clients, as well as industry practitioners, such as contractors, consultants and materials suppliers.

1 Introduction to supply chain economics and procurement

What is supply chain economics and how does it relate to procurement?

1.0 Orientation

Box 1.1 Chapter orientation

WHAT: Chapter 1 introduces ideas and concepts about the supply chain, supply chain economics and procurement in relation to project-based environments for construction systems.

HOW: It describes the rationale for the text, highlights of past research, the key ideas explored and how the text is structured. It takes the reader from some observations about the industry to the research response which is then encapsulated in the research questions and the research strategy. Finally, the chapter provides summaries of each of the subsequent chapters.

WHO: The focus is on supply chains in relation to project-based industries and constructed systems. It is particularly relevant to those students, academics and practitioners (including industry participants and government decision makers) who are involved in the property and construction industry. However, the underlying theory and practice is relevant and applicable to a much wider group. Those involved in mining, shipping, aerospace and information technology will find ideas and examples which resonate and are readily applicable.

1.1 Rationale for text

The construction of any built system is a complex problem involving numerous firms who temporarily work together in response to individual projects – or so it seems. This text is focused particularly on the property and construction industry; however, the principles and practices are widely applicable to project-based industries where there is a life cycle process of design, construction and maintenance of an object. Therefore, many of the concepts and case studies that are described throughout this text are intended to provide a trigger for the student, academic or practitioner’s thinking in the application to their own situation. The supply chains and the ensuing customer–supplier relationships that are explored in this text are initiated in the project environment, but we soon travel down the chain into a variety of different sectors, and associated procurement scenarios, linking numerous industries.

It is well accepted in the property and construction industry as well as in academia that the practice of continual association and disassociation – that is, forming and reforming for individual projects – is the common mode of economic organization within the property and construction industry. Many of the functional and technical specializations required for project contracts reside within numerous individual firms which are co-ordinated on a project-by-project basis. Firm interdependencies can become particularly critical since construction industry firms rarely act as isolated and independent entities. The degree to which co-ordination is required may vary from project to project and from country to country, as the degree of specialization and vertical integration can differ across locations and projects.

As highlighted, although this text is written based upon case studies from the property and construction industry and in particular case studies of supply chains associated with buildings, the underlying theory and practices which are described are equally applicable to many constructed systems and the sectors associated with them; for example, civil, mining, industrial design, shipping, aerospace, information technology and asset management. The theoretical principles can be extrapolated and applied to many sectors and indeed, because the supply chains extend into numerous sectors, the firms encountered in the case studies do supply to not only more than one sector, but also because ‘project thinking’ and ‘procurement’ permeates many of our business systems. The text is concerned with developing theory and providing practical examples to support an area of study I have termed supply chain economics and this is of fundamental importance to all firms who engage suppliers in contractual relationships to assist them in their own core business practices. Supply chain economics is a new term – the most common term we have heard of previously is supply chain management.

So what is construction supply chain economics? I suppose the motivation to coin the term has grown out of a very simple idea that I had which was that the supply chain metaphor was a useful way to understand the structural and behavioural characteristics of the construction industry – the economic market structural characteristics and the firm and sector behavioural characteristics. As a past policymaker and now an academic, I found it a useful way to organize my thoughts about this large and diverse industry and its fundamental makeup. As it happens, industrial organization economic theory is a branch of economics that provides some quite useful thinking towards market structure, firm conduct and industry performance. I have used industrial organization economics theory to provide some background theory towards developing a conceptual framework. Of course, I feel nervous and presumptive about defining this term… as soon as one defines a term someone challenges it – but that is largely a major goal of research and scholarship – to be constantly developing new ideas and pushing the boundaries of our current knowledge base.

Box 1.2 Supply chain economics

Supply chain economics is the manner in which the economic market structural characteristics and the firm and sector behavioural characteristics interact to produce attributes which describe types of supplier firms, procurement relationships, supply chain industrial organization and supply chain performance.

Structural and behavioural characteristics produce

– supplier firm classes which rely upon two key related attributes of commodity significance and countervailing power in the customer–supplier relationship.

– procurement relationship classes which rely upon three key interconnecting attributes of formation based upon risk and expenditure, transaction significance based upon control requirements and then negotiation strategies based upon strategies.

– supply chain classes which are reliant upon four key attributes of uniqueness, sector type, internationalization and fragmentation.

The act of procurement is a fundamental building block of supply chain economics. Supply chain economics provides the context for supply chain management decision making.

This definition is loaded with specific terms that at this stage have not been explained. It is ‘put up front’ and the remainder of the text is concerned with exploring and explaining how I arrived at this definition.

I am ultimately interested in the way we can make better procurement and management decisions in the supply chain on a large scale thus improving the performance of a sector and region as a whole. To achieve this I felt that it was important to begin by understanding and describing what and who makes up the chain and how some of those decisions are made and then move into developing a model which represents the negotiation and formation process of links in the chain. The research which I have conducted in this area and which forms the basis of this text does take that next step; however, it does so by exploring another body of literature, namely object oriented modelling and using concepts from that knowledge domain. The logic and argument and discussion towards constructing that model and then taking the empirical findings and refining that model is set aside for now and not presented in this text. That area has been published in my doctoral dissertation and I suspect by the time this book is published will be more accessible in journal papers or books. First, let us dig deeply and explore the links in the chains, how they came to be and what was their context in an economic sense – as this is lacking in both economic policy decision making in practice and in the academic research.

The text focuses upon the simple act of procurement – sourcing of suppliers – how this comes about at each tier and the context of these decisions – and how this is one way we can build an holistic picture of an industry. I would not want to limit what construction supply chain economics can be to what I have discussed in this text – this text represents my thinking and my interpretation and there are various diverse aspects and paths which can and will more than likely be explored – and I discuss some of these in the final chapter.

Procurement by an upstream customer of a downstream supplier, and all the associated negotiation and engagement activities, is always embedded within a structural and behavioural context that is impacted upon by the industrial organization economic system. It is these systems that are explored and described in this text – the ability to understand the structural and behavioural context and the industrial organization economic environment allows customers and suppliers to apply strategic procurement practices suitable to their own firm. I have typically focused upon ‘the project’ as the starting point for the supply chains – but it soon becomes evident that, as we move down the chain, there are different economic environments other than the project environment. This mix of short- and long-term business environments is perhaps common to most industries but is rarely considered.

Currently, one of the pervading perceptions in the construction industry is that a lack of cohesion and vertical co-ordination between firms during the project contract is a problem. Indeed, it is often argued that the lack of integration between firms is probably the cause of low industry productivity. There is discourse on construction industry productivity and how it is measured and comparisons against other industries – this is a worthy debate but left for another time.

It is well acknowledged that the acute degree of specialization of the productive functions and the distillation of associated functions into separate firms appears to produce a fragmented, unpredictable and high-risk environment. The construction industry is often associated with adversarial and opportunistic relationships, lack of continuity between projects and firms and low industry productivity. The temporary project organization that characterizes the construction industry is seemingly unstructured, fragmented, chaotic and fractious and is cited as a cause for a poor performing industry. However, it is the mode of organization that is typically fairly common and I have taken the stance that it might be interesting and perhaps more productive to move beyond these arguments and explore a little more what really does go on at each tier between firms during the highly dynamic period of procurement.

Almost pendulum like, in recent times larger industry clients, particularly public sector organizations, have sought out more collaborative relationships for projects as the ideal model to solve these perceived problems. Developing more harmonious business relationships between the key firms in the project team – for example, the client and the contractor – has been a keen consideration in recent years. To this end, various alternative strategies have been sought; for example, the partnering style model of the 1980s and, more recently, the project alliances have been attempts to create environments of trust and longer-term business relationships within a project environment. Even the rhetoric surrounding public and private consolidated financial strategies is ‘public–private partnerships’, giving the impression at least of the creation of a harmonious business relationship.

The early collaborative nature of the project partnering model has now been extended beyond the individual project to include such concepts as: strategic partnering, alliancing or sequential contracting, which aim to develop long-term relationships between clients and selected firms outside the boundaries of the individual project. These types of alliancing contracts were first borrowed by the construction industry from the mining sectors: oil, gas and mineral. These so-called long-term collaborative relationships between clients and contractors help to create an illusion of more stable long-term relationships within the short-term environment. It helps to create the illusion of stability in the sector at the project level. It is anticipated that with such stability shall come higher productivity.

Examples of long-term relations between firms have been prevalent in manufacturing, retail, mining, electronics and information and communications technology sectors. Some of the most famous are those in the automobile industry originating in Japan. If we look to Japan for such firm-to-firm relationships in the construction sector, we find that such long-term relationships exist outside the boundaries of the individual project and extend beyond the individual projects. The Japanese ‘kieretsus’ system is a governance structure whereby major contractors often have long-term vertical relationships with key materials suppliers/equipment installers and specialist subcontractors based upon part-ownership or long-standing ‘special’ relationships (Hasegawa et al., 1978). This so-called stability sits within an economic environment which relies heavily upon the support of major financial institutions having a financial stake in the sector.

However, simplistically appropriating a model of behaviour is fraught with difficulties without understanding the political, cultural, technological and economic context that gives rise to those relationships. It is problematic to attempt to recreate the kieretsus from the Japanese construction environment without this contextualization. Equally, it can be said that the application of the strategic partnering or alliancing concept can be problematic, since successful firm-to-firm relationships is contingent upon understanding the underlying structural and behavioural char...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• 1 Introduction to supply chain economics and procurement
• 2 The rationale for the modelling of procurement in the construction supply chain
• 3 Supply chain theory and models
• 4 Industrial organization economics methodology and supply chain industrial organization approaches
• 5 Project-oriented industrial organization economics supply chain procurement model
• 6 Multiple project environment chain structural organization
• 7 Case study
• 8 Case study
• 9 Case studies
• 10 Conclusions and future directions
• Bibliography
• Index