managing uncertainty in major equipment procurement in engineering projects

European Journal of Operational Research 171 (2006) 123–134

www.elsevier.com/locate/ejor

Production, Manufacturing and Logistics

Managing uncertainty in major equipment procurementin engineering projects

K.T. Yeo *, J.H. Ning

Division of Systems and Engineering Management, School of Mechanical and Production Engineering,

Nanyang Technological University, 50 Nanyang Avenue, Singapore 639798, Singapore

Received 8 April 2003; accepted 18 June 2004Available online 13 October 2004

Abstract

A better management of time uncertainty in major equipment procurement in engineering construction projects cansignificantly contribute to project performance. A survey study shows that time buffer is a popularly used approach toprotect project schedule from activity duration variation and uncertainty. The problem is that there are repetitive timeallowances inserted in the procurement supply chain process and these time buffers are used ineffectively, thus leading toconsiderable time wastage. Relevant lessons from supply chain management and critical chain project management arecombined and applied to create an enhanced critical supply chain management model for major equipment procure-ment to achieve better management of time uncertainty. This model does not perceive uncertainty purely as a threat,but also as an opportunity to reduce procurement cycle times.� 2004 Elsevier B.V. All rights reserved.

Keywords: Supply chain management; Project management and scheduling; Critical chain project management

1. Introduction

Engineering construction projects play animportant role in national economic development.Yet the construction industry as a whole faces for-midable challenges and suffers from poor perform-ance and low profit margin. Project schedule slips,

0377-2217/$ - see front matter � 2004 Elsevier B.V. All rights reservdoi:10.1016/j.ejor.2004.06.036

* Corresponding author. Tel.: +65 799 5502; fax: +65 7911859.

E-mail address: [email protected] (K.T. Yeo).

budget overruns, compromised quality, resultingclaims and counter-claims problems have plaguedthe industry. The reasons for poor project perform-ances abound. Previous researches have dealt muchwith the problems of project risk and uncertainty,variations in project outcomes, work fragmenta-tion, complex relationships among stakeholdersand activities, and excessive phase overlaps ingeneral. This paper will concentrate specificallyon the problems of uncertainty and variation inthe procurement process of major equipment. Spe-cial interest is given to engineer–procure–construct

ed.

mailto:[email protected]

124 K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134

(EPC) projects and other process plant construc-tion projects.

With a view to improve productivity in engi-neering construction projects, there is no lack ofprevious research efforts being devoted to develop-ing new models, approaches and techniques. Con-struction process redesign and improvement,integrated design and construction with concur-rent engineering (Jaafari, 1997), lean constructiontechniques (Ballard, 1999), widespread IT applica-tions (Oxman, 1995), partnering approach (Loveet al., 1998; Bresnen, 2000), construction logisticsand supply chain management (Vrijhoef, 1997;O�Brien, 2000), and new project schedulingmethod like critical chain project managementbased on the theory of constraints (Goldratt,1997) are just some of the examples of suchimprovement efforts.

This paper will focus on improvements in majorequipment procurement process. The procurementperformance and delivery processes can be definedboth at the corporate and project levels. Theseprocesses can be partly represented as corporatesystems, policies and procedures which are influ-enced by the prevailing organizational structure,functional units, resource allocation strategiesand policies, planning and controlling systemsand procedures, production workflow, and otherauxiliary processes.

2. Major equipment procurement

In most EPC projects, the importance of majorequipment procurement has received relatively lessattention. Major equipment such as process equip-ment in this context refers to the capital equipmentthat will be assembled or installed to form anintegral part of the constructed system or facility.Fig. 1 illustrates a generic network of engineer–procure–construct process for the procurement ofmajor equipment. The engineering and designphase is the pre-procurement phase while the con-struction phase represents the post-procurementphase.

The procurement processes include receipt ofengineering or process data and drawings fromengineering/design departments, documentation

and issuing request for proposal (RFP) or requestfor quotation (RFQ), receipt of bids from vendors,bid summary, bids evaluation and approval, orderplacement with equipment manufacturer, equip-ment fabrication and assembly, testing of theassembled equipment, expediting by customer,packaging and shipping arrangement, delivery ofinstallation drawings and test data, and actualshipping or delivery of major equipment, and re-ceipt of equipment on site. This paper will concen-trate on the post-order placement procurementphase and consider this portion of the procure-ment phase as the focus where significant improve-ment can be made.

Major equipment procurement has its own spe-cial characteristics and requirements and is signif-icantly different from bulk materials procurement.The major equipment procurement lead-time isusually longer, the unit procurement cost consider-ably higher, and usually embedded with complexor specialized technology. There will be no inven-tory buffer for major equipment kept either atthe customer, main contractor or vendor site. Thisone-time procurement characteristic makes themajor equipment procurement a critical activityand a source of major constraint and uncertaintyin engineering construction projects. The improve-ments of long lead-time critical equipment pro-curement especially in time and risk reductionand the predictability in delivery to meet on-siterequirement in a near just-in-time (JIT) manner,can contribute significantly to the overall perform-ance of the project.

Though the importance of major equipmentprocurement in construction is easily recognized,there is however relatively little published workthat scrutinizes the problems and uncertainties inthe procurement process and a lack of relevantand adequate framework to base on for furtherimprovement in major equipment procurement.Ballard (1998) admits that when he advocates a�pull� mechanism in materials supply in construc-tion industry based on tight on-site requirement,many items of process equipment have so long alead-time that they do not offer themselves as ini-tial candidates for reducing delivery time, andmust continue to be coordinated by �push� sched-ules. It is clear that the practices of major equip-

5

Receive Process

Data

Prepare Specification

Raise Requisitions

Issue Enquiry

Receive Bids

Manufactured--Packed

Shipped to Site

Planned Installation

Place Order

0 1 2 3 4 6 8 9

7

ObtainedApproval

Receive Vendor’s Drawings/Specs

Equipment Procurement Supply Chain Management

Procurement Phase

Engineering & Design Phase

Construction Phase

Fig. 1. A mini-network for equipment engineer–procure–construct process.

K.T. Yeo, J.H. Ning / European Journal of Operational Research 171 (2006) 123–134 125

ment procurement need to be scrutinized, and amodel for improvement is needed.

3. Two relevant propositions

Industry practices, with the use of standard pro-curement lead-times according to equipment clas-sification, would typically use insertion of timebuffers as a protective measure against variationin promised delivery by equipment manufacturers.Two simple but relevant propositions are selectedto examine the practices and issues of using timebuffers in major equipment procurement.

Proposition 1. Engineering construction companies

use time buffer between ‘‘promised delivery’’ (PD)

date and ‘‘required-on-site’’ (ROS) date as a com-

mon approach to manage time uncertainty.

Generally, the major equipment manufacturingand delivery time can be protracted from severalmonths to over a year, especially for the over-seas-procured items. There are various internaland external factors that can impact the equipmentmanufacturing and delivery schedules, which willin turn have an impact on the site constructionschedule. Time buffer is not only used by the main

contractor, but also used by the equipment manu-facturers to protect their parts or componentsdelivery schedule from uncertainty. In contrast,in the consumer product manufacturing industry,part and component inventories are usually usedto protect the production schedule from variation,and the finished product inventory buffers are alsoused to protect demand uncertainty.

In order to protect the construction schedule,project managers usually plan for the major equip-ment to arrive on-site considerably earlier than re-quired in a �play safe� mode. This time allowance isa ‘‘time buffer’’ inserted between the ‘‘promiseddelivery’’ and ‘‘required-on-site’’ dates as shownin Fig. 2.

The buffer allowance has been adopted as asafety measure to avoid disruption in the construc-tion workflows. The size of the estimated bufferallocation depends on the project planner�s percep-tion of risk with respect to a particular type ofequipment or reliability of an equipment supplier.The required buffer time may be small if the deliv-ery lead-time is short or if the procurer is very con-fident of the supplier�s reliability in its promiseddelivery.

On a typical process plant project, a multitudeof major equipment will arrive on site. A series

Manufacturing/Shipment Site ConstructionBuffer

Promised Delivery

Date

Required-on-Site

Date

Order Placement

Fig. 2. Insertion of Time Buffer.


of �feeding buffers� are inserted to protect the crit-ical construction activity chain by preventing latedelivery of equipment to penetrate and disruptthe critical construction chain.

Proposition 2. The feeding buffer time (tb) assigned

in major equipment procurement is positively pro-

portional to the major equipment procurement lead-

time (tp) as quoted and promised by the

manufacturer:

tb ¼ a � tp: ð1Þa is a correlation coefficient between procurement

lead-time and buffer time and is decided by the

equipment buyer or construction planner.

A survey was conducted within the construc-tion industry in Singapore targeting mainly atthe higher-grade engineering and constructioncompanies to provide supporting evidence ofPropositions 1 and 2.

4. A survey on procurement practices

Construction companies in Singapore are cate-gorized into eight grades (G1,G2, . . .,G7 andG8). Companies in lower grades are not eligibleto tender for larger projects. The limits are shownin Table 1 (BCA, 1999).

Table 1Grading of construction companies

Company grade

G1 G2 G3 G4 G5 G6 G7 G8

Project valuelimit (million S$)

0.5 1 3 5 10 30 50 NA

US$1 = S$1.75 mid-2003 rate.

The target respondents are procurement man-agers of G6, G7 and G8 companies (totally 189companies). The names, addresses of these compa-nies are listed on the website of Singapore Buildingand Construction Authority (BCA) <http://dir.bca.gov.sg>. In the survey, respondents are askedto base their responses on a recently completed(within last five years) engineering project valuedat least S$10 million and involving major equip-ment procurement.

The objective is to collect information relevantto the current major equipment procurement prac-tices in the engineering construction industry inorder to investigate:

• major equipment supply uncertainty;• use of procedure in buffer time allocation for

major equipment procurement;• relationship between buffer time and procure-

ment lead-time.

Out of the 189 companies contacted, 52 validreturns were received. Incomplete returns were dis-carded. The survey data were analyzed with theSPSS (Statistical Programs for Social Science)software. Below are the relevant statistics of theprojects surveyed.

• The surveyed projects include industrial/processplant, building, civil construction and complexproduct system. The project value ranges fromS$10 million to more than S$100 million. And48% of the projects have value exceeding S$50million. 92% of the projects have a durationexceeding one year and 29% with longer dura-tion of two years and above.

• 64% of respondents said that their projectsexperienced schedule overrun. 34% of respond-ents suffered at least 10% overrun. 69% of the

http://www.dir.bca.gov.sg


Lead Time (weeks)80706050403020100

Buffe

r tim

e (w

eeks

)

10

9

8

7

6

5

4

3

2

1

0

Legend: Regression analysis of Buffer time and Lead time

Unstandardised Coefficients

Std. Error Standardised Coefficients

Significance

Constant 0.661 0.182 0.001

Lead Time (weeks) 7.86E-02 0.005 0.931 0.000

Fig. 3. Procurement buffer time vs. lead-time.


respondent perceived their projects as havinglow profit margin. The average profit marginis about 3.75%.

• The survey shows that about 88% of the pro-jects surveyed have an overall procurement costat 20% or more of the project value, and about70% of the projects with procurement cost at30% or more. For about 23% of the projectssurveyed, the procurement cost is more than50% of the project value.

• The survey shows that the average percentageof major equipment cost to overall procurementcosts for all projects is about 36%.

This survey shows that, among the projects sur-veyed, about half of the equipment are deliveredJIT (just-in-time), 20% are delivered later than re-quired with a mean late time of 3 weeks, and about30% are delivered earlier than required with amean early time of 2 weeks (Table 2).

The survey also shows that 87% of the respond-ents indicated that they have an on-going practiceof adding time buffer between ‘‘promised delivery(PD)’’ date and ‘‘required on site (ROS)’’ date asa safety measure to protect construction schedule;whereas 13% of the respondents said that they donot add any time buffer. The binominal method inSPSS is used to analyze the buffer-adding practice.The analysis shows that more than 75% of projectssurveyed add time buffer between PD date andROS date for major equipment procurement.The significance level of this conclusion is 0.039,which is less than the criterion 0.05. The confi-dence level is 96.1%.

Further analysis shows that the ‘‘buffer time’’and ‘‘lead-time’’ are correlated, which means thatthe variation exhibited by one variable is patternedin such a way that its variance is not randomly

Table 2Major equipment delivery uncertainty

Late delivery JIT Early delivery

% Distributionof equipment

19.8% 50.6% 28.6%

Degree of lateness(mean time)

3.05 weeks – 1.98 weeks

Standard deviation 1.95 weeks – 1.08 weeks

distributed in relation to the other variable. Theoutput of SPSS shows that the Pearson�s r is0.931. The significance level is 0.000, which is lessthan 0.01.

The regression analysis shows that proportionalcoefficient of buffer time and lead-time is +0.0786.The best-fit line is shown in Fig. 3. The regressionanalysis output is shown in the legend. The signif-icance level is 0.000, which is less than 0.01.

The survey has also highlighted that majorequipment procurement represents a critical con-necting function between engineering and con-struction, as procurement equipment provide theanchors for the constructed facilities. Materialcosts represent a major portion of the totalconstruction costs, and in turn, a high percentageof procurement expenses goes into equipmentpurchases. Equipment procurement requires expe-diting on the manufacturers� progress to ensureon-time delivery and regular communication andoccasional re-negotiation with the vendors. It isalso generally agreed that successful procurementmanagement can lead to improved performancein overall project cost and delivery.


5. Problems of time waste

The two propositions demonstrate only two rel-evant aspects of major equipment procurementand associated uncertainty management. This sec-tion is to investigate the current practice of addi-tion of buffer in proportion to the equipmentdelivery lead-time that may in fact contribute totime waste from a supply chain point of viewinvolving a constellation of suppliers and suppli-ers� suppliers.

The practice of time buffer allocation seems rea-sonable and easy to use, but is highly inefficient. Itcontributes to time waste as too much buffer timesmay be distributed in the procurement supply chainprocess. The buffer time is used inefficiently due totask fragmentation and problems in interfaces orboundaries along the supply chain. Current uncer-tainty management practices pay too much atten-tion to prevent the negative impact of uncertainty,but give too little attention to exploit the positive as-

Fig. 5. Time buffering in major

Detailed Parts& Components

Sub-Assembly

MajorAssembly

Fig. 4. Stepped equipment m

pect of uncertainty as opportunity. The theory ofaggregation (Goldratt, 1997) of pluses and minusesof time variation may allow considerably shorteroverall procurement lead-time.

The current approach and problems in manag-ing uncertainty in major equipment procurementand potential for time waste due to the practiceof time-buffering validated in the test of twohypotheses, is illustrated in Figs. 4 and 5. Fig. 4shows the fragmentation and multiple interfacesor boundaries in a cascaded supply chain relation-ship where the main contractor�s construction crit-ical chain is fed by the equipment manufacturer�ssupply chain, which is in turn supplied by itsown sub-suppliers in sub-assembly and parts, ina multi-staged manufacturing, assembly and ship-ment process.

Fig. 5 shows that the closer the supply chainactivities to the main construction contractor, thelonger is the aggregated procurement time, andthe larger the buffer time is allocated. The buffer

equipment procurement.

FinalAssembly &Test

Pack and Ship to Site

anufacturing processes.

Table 3Relationship of buffer time, production time and supply chainlayers

Layers

1 2 3 4 5

Tc (days) 50 100 150 200 250Tbuffer (days) 4 12 25 43 67RBP 0.08 0.12 0.17 0.22 0.27


time tends to be amplified in the later phase of thesupply chain constellation, which is used to protectall the previous activities and sub-processes thathave already been protected by their own individ-ually allocated buffers by the supplier�s suppliers.

The above illustration is a case of multiple pro-tections due to duplication of buffers, which leadto excessive redundancy. One of the reasons forthe ‘‘duplication of buffers’’ is that the companieson the supply chain make contracts separatelyand independently with their own suppliers andmanage their own procurement processes. Thesemultiple layers of buffers contribute to the overallprocurement lead-time or ‘‘bucket time’’ for a par-ticular range of equipment. Engineering compa-nies over the years have developed standard�bucket times� for purchasing a range of majorequipment, which would incorporate time buffers.

The following formulation gives a more accu-rate representation of the buffer allocation forthe whole supply chain. Suppose there is a seriesof companies Ci (i = 0, . . ., I) in the major equip-ment supply chain. Total number of suppliers is‘‘I’’ and the resulting total number of companiesinvolved is (I + 1). Company Ci+1 procures partsor components from Ci. Company CI is the maincontractor at the final stage of the value chain,which procures the major equipment for site con-struction. C0 is the starting point of the supplychain and does not involve in any procurementprocess. The procurement time (lead-time) of com-panies Ci is tip ði ¼ 1; . . . ; IÞ, the buffer time istib ði ¼ 1; . . . ; IÞ, the time for manufacturing,assembly and delivery is tic ði ¼ 1; . . . ; IÞ.

The formulated relationships are

tip ¼ ti�1p þ ti�1

b þ ti�1c ; ð2Þ

tib ¼ ai � tip; ð3Þ

t1p ¼ t0c : ð4Þ

From Eqs. (2)–(4), the following two equationscan be deduced:

tip ¼ ti�1c þ

Xi�2

n¼0

tncYi�1

m¼nþ1

ð1þ amÞ !

; ð5Þ

tib ¼ ai ti�1c þ

Xi�2

n¼0

tncYi�1

m¼nþ1

ð1þ amÞ ! !

: ð6Þ

The m and n in the equations are two intermediatevariables. The n represents the layer from com-pany C 0 to company C i�2. The procurement timeof company C i is decided by the procurementtime, buffer time and manufacturing or assemblytime of these intermediate companies. The m rep-resents the layer from C n+1 to C i�1. Procurementtime of these companies will be affected by themanufacturing or assembly time of company C n.

The total buffer is the summary of each com-pany�s built-in buffers:

T buffer ¼XIi¼1

tib; ð7Þ

T buffer ¼ a1 � t0c þXIi¼2

ai

� ti�1c þ

Xi�2

n¼0

tncYi�1

m¼nþ1

ð1þ amÞ ! !

: ð8Þ

The following is an illustrative example. To sim-plify the calculation, suppose tic ¼ 50 days andai = 0.08 for all companies Ci (i = 0, . . ., (I � 1)).The total production time (Tc) is the sum of allmanufacturing and assembly time of each com-pany. The ratio of the total buffer time to totalproduction time is RBP (ratio of buffer time toproduction time). The relationship of ‘‘Tp’’,‘‘Tc’’, ‘‘Tbuffer’’, ‘‘RBP’’ and ‘‘i’’ is illustrated inTable 3. The ‘‘I’’ is total layers of supplier chain.

From Table 3, it can be seen that, for a one- ortwo-layered supply chain, the buffer time is aboutone-tenth of the production time; whereas for afive-layered supply chain, the total buffer time is

0

10

20

30

40

50

60

70

80

1 2 3 4 5

Supply Chain Layers

Prod

uctio

n Ti

me

(*10

days

) an

d B

uffe

r Tim

e (d

ays)

Total Production Time

Total Buffer Time

Fig. 6. Buffer time and production time vs. supply chain layers.


amplified to over one-quarter of the overall pro-duction time. From Fig. 6, it can be seen that theaggregated buffer time increases faster than the to-tal production time when the number of supplylayers increases. Fig. 6 highlighted a serious prob-lem caused by the traditional un-coordinated prac-tice in the duplication of time buffers foruncertainty management in major equipment pro-curement. A better approach to managing risk anduncertainty in major equipment procurement man-agement is needed.

PROCESS:Integrated dynamic

planning process

TECHNOLOGY:Inter-enterprise

information system

PEOPLE:Partnering

Relationship

CSCM

Fig. 7. Critical supply chain management (CSCM) model.

6. A critical supply chain management model

6.1. Description of the model

In order to eliminate the time waste in the ma-jor equipment procurement process caused by theineffective use of time buffers, it is proposed thatthe concept and method of critical chain projectmanagement be integrated with the supply chainmanagement and brought to bear on the procure-ment of major equipment (Yeo and Ning, 2002).The result is a critical supply chain management(CSCM) model for major equipment procurement.The model has three components: an inter-enter-prise information system, a partnering relationshipamong the participating organizations and an inte-grated dynamic planning process (Fig. 7). The ide-alized model is further described below.

6.1.1. The process

(1) A project procurement planner takes a supplychain perspective with the aid of an inter-organizational information system that couldbe made responsible for overall scheduling ofall the activities in the equipment supplychains based on on-site requirements.

(2) Each supplier will inform the project supplychain planner its ‘‘promised duration’’ with-out time buffering of particular componentor equipment instead of the traditional‘‘promised delivery date’’. This is to de-emphasise the idea of having fixed due-dates


and give emphasis on accurate durationestimates.

(3) The task starting time of each of the subse-quent layer companies is to be made flexibleor floating, depending on the time the lastcompany finishes its task. It encourages‘‘resource alert’’ like in a relay race. The plan-ner need not be rigid in deciding and fixingtask starting times. It means the starting timesof later layer tasks need not be decided accu-rately from the very beginning.

(4) The supply chain schedule is refreshed andupdated whenever an activity in supply chainis completed.

(5) The supply chain planner systematically man-ages time buffers in the supply chain. All sep-arately padded intermediate buffers areremoved. A feeding buffer is inserted at theend of each equipment supply chain to protectthe construction critical chain from any vari-ations as illustrated in Fig. 8.

The commencement of construction, ‘‘C ’’, is acritical �merge-event�, where multiple equipmentdeliveries are converging. Feeding buffers areadded discretely in place of the traditional �freefloats� derived from critical path analysis. Thelength of the feeding buffers is determined by thelevel or classification of risk pre-assigned to the aparticular class of major equipment. The feeding

Fig. 8. Buffer insertion in procurement chain.

buffers should be controlled not to be excessivein order to avoid unnecessary early deliveries ofequipment which will cause the troubles and wast-age of temporary storage and double-handling onsites. Conversely, inadequate feeding buffers mayrun the risk of the construction schedule being dis-rupted. Besides the insertion of feeding buffers forthe individual major equipment, a project buffer isincorporated to protect the required or committedconstruction completion date.

Fig. 8 illustrates an improved buffer manage-ment incorporated within the critical supply chainmanagement (CSCM) framework. The focus is ondynamically managing the feeding buffers insertedbetween the two important sets of control datesnamely, the �Promised Delivery (PD)� dates bythe equipment vendors and the �Required-on-Site(ROS)� dates according to the master constructionschedule.

The main benefits of time saving are firstly, atighter and shorter procurement cycle is made pos-sible which contributes to the reduction of time-re-lated costs; secondly, excessively early delivery tosite is avoided to reduce the problems of work-in-process, waiting and wasting in on-site materi-als movement; thirdly, risk, uncertainty and bur-den of coordination for project and constructionmanagers are minimized; and finally, the partner-ing relationship among the prime contractor andequipment manufacturers is improved. This willof course bring ultimate benefits to the client andgive opportunity for future businesses for all.Incentive clauses may be built in the procurementcontracts to reward vendors who are able toaccommodate and achieve reliable and tight deliv-ery schedules. Similarly, the prime contractor canbuild in incentive clauses for early project comple-tion with the client.

The buffers, both feeding and project bufferscan be used as a basis for both as an early warningsystem and an incentive bonus system to rewardschedule performance. The level of each bufferallocation can be monitored to track any earlyand dangerous depletion of buffer to give earlywarning of impending time overrun when a safetythreshold is violated. Early project completion canbring considerable early cash-flow benefits to theclient or operator. The early completion incentive


bonus can be substantial and a portion of thisbenefit can be passed on to the major equip-ment vendors and their downstream componentssuppliers.

6.1.2. People

The human side of the supply chain manage-ment plays an important role in ensuring supplychain performance.

(1) A sustainable partnering relationship is builtwith major equipment suppliers who in turnbuild relationships with their own suppliers.The subtle control of coordination, communi-cation and collaboration of the suppliersensure success in project procurement anddelivery.

(2) The supply chain members are made stake-holders who will share the benefits from costand time savings, and be accountable for fail-ure. In the traditional procurement supplychain, the closer to the top layer (main con-tractor), the more benefit a supplier can get.An integrated benefit management system isto ensure that the lower layers of parts andcomponents suppliers also share the benefits.

(3) The proposed model emphasises the impor-tance of stakeholders� benefit management inorder to exploit positive sides of variations.The up-stream layer of the supply chainshould not be perceived to exploit the lowerlayers of the supply chain. The CSCM systememphasises a win–win relationship.

(4) There must be subtle supply chain controlwith open and transparent communication,coordination and cooperation and a buildingof trust among supply chain members.

6.1.3. Technology

Information technology especially an inter-organizational information system (IOIS) will bean important part of the proposed system. TheIOIS integrates the individual information systemsof the participating companies. It can contributeto cutting waste and streamlining the processes(Hammer, 2001). The key idea is to leverage oninformation technology, especially the Internet,

to simplify and tighten the procurement supplychain and allow the on-site requirements to �pull�the equipment deliveries in a timely manner.

The main characteristics of this model are man-ifested in its integrated and synchronized schedul-ing and the continuous and dynamic scheduleadjustments for the entire supply chain. The uncer-tainty and buffer allocation are managed for eachequipment supply chain, which feeds into the over-all site construction schedule.

6.2. Improvement mechanisms

This CSCMmodel can shorten the major equip-ment procurement time without increasing the riskdue to the following fundamentals:

6.2.1. Aggregation of variations

The concept of uncertainty does not always im-ply threat or negative outcomes. The activity dura-tion variations may be positive and allow theactivity to be finished earlier than the scheduleddate. By the theory of aggregation (Goldratt,1997), since the uncertainties or variations of a ser-ies of activities occur independently from eachother, the finished-earlier-than-scheduled activitiescan compensate the finished-later-than-scheduledactivities. The power of aggregation of uncertain-ties must be appreciated and exploited. Perceptionof uncertainty as always negatively contributes tounnecessary and excessive ‘‘paddings’’ or alloca-tion of ‘‘safety’’ buffers.

If the major equipment supply chain is managedwith the traditional ‘‘disaggregated’’ procurementmodel using fixed due-dates, the ‘‘savings’’achieved by earlier activities are not passed on,whilst delays are. In the critical supply chainmodel, the use and importance of intermediatedue-dates are de-emphasised. Each equipment sup-ply chain schedule is independently drawn upbased on ‘‘promised durations’’ of activities in-stead of ‘‘promised delivery dates’’.

In the aggregated supply chain, time saved by thefinished-earlier-than-scheduled activities can betransferred, as a contingency bonus to the lateractivities in that particular equipment supply chain.The critical supply chain works like a relay racewhere the baton is passed on without interruption.


Rigid intermediate due-dates cause interruptionsand complacency. Early timesavings are particu-larly useful as they contribute to the feeding buffersand hence help in risk reduction in the events of neg-ative variations in subsequent activities. The criticalsupply chain approach can and should contribute toshorter procurement lead-time without increasingthe risk of schedule overruns.

6.2.2. Accuracy of forecast and resource alertness

In the critical supply chain approach, the actualprogress of earlier sub-processes will become moretransparent to the later sub-processes. The im-proved transparency increases resource alertnessof the later processes. This also contributes to thereduction in the burden in and need for expediting.The later layer suppliers can now have more accu-rate forecast on supply deliveries and better plantheir production schedules. For instance, in theevent that company C2 is going to take one monthlonger than originally promised, then the subse-quent companies after C2 will be alerted with therisk of time overrun. With this transparency actingas an early warning signal, affected companies cantake proactive actions to recover any time loss.Such proactive actions must of course be reinforcedby a comprehensive benefits management system toprovide incentives in the form of reward or com-pensation to the affected members.

In the traditional procurement practice, as eachcompany manages its suppliers separately, it isquite possible that the companies far after C2,say, the main contractor, knows nothing aboutthe problems generated by C2. Late delivery mayoccur without prior knowledge or early warningto the main contractor.

O�Brien (2000) gives an example to illustratesuch a problem of traditional approach in his casestudy of an engineering project in United King-dom. There was a material supply delay to a steelfabricator, who in turn, is a supplier to the maincontractor. The material delay resulted in a 6-weekdelay to deliver the steel products on-site. This de-lay was not anticipated and did not become appar-ent until it occurred on-site. To avoid liquidateddamages and complete the project on time, thecontractor resorted to work acceleration at an ex-tra cost of £1/4 million.

The CSCM model aims at addressing problemsof such nature where the project main contractorcan obtain prior information or an early warningof an adverse trend and initiate proactive actionseither to prevent the problem or to minimize anynegative consequences. The aggregated systemwith an early warning mechanism can contributesignificantly to better management of uncertaintiesand reduction of risks.

7. Conclusions

Major equipment procurement is an integratedpart of engineering project management. It tiesup a large proportion of construction cost, andhas long lead-time. The major equipment manu-facturing itself is an engineering project. Majorequipment procurement generally has high deliv-ery time uncertainty, which may disrupt the con-struction schedule. This study shows that timebuffer is popularly used to protect project schedulefrom activity uncertainty. If the equipment pro-curement lead-time is long, a large time buffer isinserted between promised-delivery date and re-quired-on-site date by the main contractor. Theequipment manufacturer also need to procure ma-jor components from suppliers and may insert sep-arate time buffers. This results in excessive buffertime insertion in the major equipment procure-ment process. These time buffers are used ineffec-tively due to fragmentation and complex projectstructure and adversary relationship. The ineffec-tively used time buffers contribute to significanttime waste. The more supply chain layers are in-volved, the more time waste occurs.

By integrating the supply chain and criticalchain management concepts, a CSCM model isproposed to overcome the above mentioned prob-lems in order to improve the performance of majorequipment procurement. The model requires thecompanies on the supply chain to re-examine theproblems of work and organizational fragmenta-tion, multi-layer interfaces, un-coordinated pro-duction scheduling and controlling practices.The model advocates that critical supply chainshould be scheduled, synchronized and controlledflexibly and dynamically. The separately inserted


intermediate buffers should be removed to tightenthe production and delivery schedule. A separatesupply chain buffer can be added to protect theequipment supply chain from any negative varia-tion and to meet on-site requirement just in time.This model not only can prevent the negative as-pect of variation but can also exploit the positiveaspect of uncertainty. The CSCM will work andreap benefits if the dynamic planning and deliveryprocess has the support of people and technology.

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http://www.ce.berkeley.edu/~tommelein/cemworkshop/obrien.pdf

http://www.ce.berkeley.edu/~tommelein/cemworkshop/obrien.pdf

managing uncertainty in major equipment procurement in engineering projects

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