Construction Innovation: Information, Process, Management

Emerald Article: Supply chain management in an uncertain economic climate: a UK perspective Andrew Ross

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To cite this document: Andrew Ross, (2011),"Supply chain management in an uncertain economic climate: a UK perspective", Construction Innovation: Information, Process, Management, Vol. 11 Iss: 1 pp. 5 - 13 Permanent link to this document: http://dx.doi.org/10.1108/14714171111104600 Downloaded on: 07-11-2012 References: This document contains references to 39 other documents To copy this document: [email protected] This document has been downloaded 1161 times since 2011. *

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EDITORIAL

Supply chain management in an uncertain economic climate: a UK perspective

Andrew Ross
School of the Built Environment, Liverpool John Moores University, Liverpool, UK
Abstract
Purpose The purpose of the paper is to consider whether the benets that construction organisations achieve by adopting a supply chain management approach to their specialist partners outweigh those that are derived from a market-driven approach. Design/methodology/approach This editorial adopts a transaction economics perspective to evaluate the external environment facing contracting organisations within the UK, especially as a result of the recent economic downturn. One of the consequences of the reduced demand for construction work is that clients now prefer a market-based approach to the procurement of their contractors; this assertion is supported by analysis of recently published survey data on client procurement approaches and price and cost data. Findings The transactional economic implications of these changes to the supplier/contractor relationship are presented for discussion. The research implications of this indicate that further empirical data is required on: the economic benets of supply chain management, how the benets are derived from the different sub markets that exist in construction, and the inuence the external economic environment has upon the contractor/subcontractor transaction interface. Originality/value This work seeks to encourage researchers to empiricise the theoretical constructs of new institutional economics in line with the dynamics of the subcontracting/supplier market. In doing so, a better understanding of the economic factors that can inuence the bilateral dependencies that exist between large and small organisations may result. Keywords Supply chain management, Transactional analysis, Market forces Paper type Conceptual paper

Supply chain management

Introduction The factors that can often inuence the formation of construction teams which are geographically distant and functionally disparate have been a feature of research for over 30 years. Extant literature has considered the inuence of organisational structures (Shirazi et al., 1996), the inuence of project environmental variables (Hughes, 1989), social factors ( Jennings and Kenley, 1996), the role of transaction costs (Winch, 1989) and management approaches such as supply chain management (London and Kenley, 2001). In this respect, effective relationships between team members have been identied as a prerequisite for meeting client requirements. For example, one of the major barriers to performance improvement and most cited reasons for the failure of construction teams to meet time, quality and cost objectives, is that the industry is still predominantly fragmented, with differing communities of practice operating in the many sectors that make up the construction industry. It is also important to acknowledge that the output of

Construction Innovation Vol. 11 No. 1, 2011 pp. 5-13 q Emerald Group Publishing Limited 1471-4175 DOI 10.1108/14714171111104600

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a countrys construction industry is usually strategically signicant to a countrys economy; for example, the UK construction industrys output is approximately 100 billion per year, or 7 per cent of the gross domestic product, so improvement to industry practice could have a signicant impact. There has also been a signicant change in the way the industry is structured, including how clients procure resources in order to design, construct and operate its product, along with changes in legislation and policy, including environmental requirements and new demands for its products. This editorial continues the call for more empirical and theoretical research in this area in order to further understand the level of embeddedness and impact these factors have team formation, and in particular, whether the espoused benets of supply chain management are robust enough to withstand critique. The move from subcontracting to supply chain management Supply chain management has been advocated as a way of: developing more integration between organisations (Cox, 2004); establishing trust (McDermott, 1999); reducing the distance between rms; improving communication (London and Kenley, 2001); engaging early collaborative involvement (Humphreys et al., 2003), as well as the alignment of systems and processes. The rise in the interest in supply chain management in the UK commenced at a similar time to the publication of the Latham report in 1994, followed by the Egan report (1998) and restated by Egan in (2002). The raison detre of these reports suggested that integrated teams and trust-based approaches were a means of improving the performance of an industry that had many examples of cost and time overruns and evidence of poor quality. In this respect, the UK public sector adopted more integrated procurement approaches and used its inuence via prequalication processes to create conditions that were conducive to second and third tier supply chain partnering. However, the benets of supply chain management are difcult to establish, due in part to the rhetoric adopted by organisations who present an approach of compliance (Green, 1999; Akintoye et al., 2000). The partnering approach has been supported by a number of new contractual arrangements such as PPC 2000 and the New Engineering Contract; though it has been suggested that partnering of the supply chain lacks a strong theoretical basis upon which to build better arrangements (Cox and Townsend, 1998). Furthermore, there has been little empirical analysis of the effectiveness of the differing arrangements (Bresnen and Marshall, 2000), and the majority of work in this area has predominantly employed descriptive action research, focusing upon the contractor/client interface (Eriksson and Laan, 2007; Eriksson, 2008). Therefore, there is an exigent need to develop a stronger theoretical understanding of the role that the supply chain plays in project teams, as highlighted by Holti et al. (1999):
There is ample evidence that the foundation of construction industry reform must come from importation of supply chain management techniques and strategic supply chain partnerships that have been the foundation of success in other industries.

Research has also evidenced a lack of theoretical and empirical research investigating supply chain relationships in construction (Anumba, 2000; Bresnen and Marshall, 2000; Cox, 2004; Cox and Thompson, 1997, 1998; Cox and Townsend, 1998; Dainty et al., 2001; Greenwood, 2001; London and Kenley, 2001); the ndings of which advocate the need to consider the structural, economic and organisational nature of the industrys supply chains in order to develop a better appreciation of the role of subcontractors. For example,

Anumba et al. (2002) identied that there was a growing need to integrate all members of the supply chain in order to unlock the innovation that is presently kept isolated by current procurement and management practices. In addition, it has been acknowledged that main contractors have become mainly management contractors, providing only management resources to coordinate subcontract organisations (Abdel-Razek and McCaffer, 1987; Nobbs, 1993). Therefore, the relationships that an organisation has with its supply organisations have been suggested to be a function of its management strategies. Similarly, the size of organisations has also been identied as a factor that can inuence management strategies (Langford and Male, 2001; Lansley, 1987), as large rms usually have greater access to resources, which enables them to dominate the production and market environments and occupy more favourable positions along industry value chains. In this way, they have been considered to act as market makers for their supply chains (Lansley, 1987). Whereas, smaller rms often lack the capital and skills needed to compete in more sophisticated segments of the market are consequently limited to strategies that are focused upon price competition and cost reduction (Hillebrandt et al., 1995). On this premise, it could be argued that the current focus on national UK public sector procurement practice of aggregated single sourcing and long-term contracts creates a high level of dependency on smaller numbers of larger organisations, and as a consequence, could be considered to increase the barriers for small enterprises to gain access to a market. Following this theme, the diversity of markets that exists within the construction industry makes the implementation of pan-sector initiatives somewhat problematic, as differing communities of practice are present; and, although the main focus of past government initiatives has been upon large organisations with the objective of disseminating good practice, little emphasis has been placed on how it has inuenced the subcontractor. It is only relatively recently (within the last six years) that the focus of procurement research and practice has been upon supply chain organisations. Therefore, clients should take account of the structural characteristics of the supply chain and develop procurement approaches that reect their nature (Cox and Townsend, 1998). However, one of the limiting factors to developing better awareness of the structural characteristics of the industry and associated economic behaviour is the lack of data that can be disaggregated to a ne enough level of detail. Small scale research which focuses on the transactions that take place between the contractor at different stages of team formation and operation would help provide a richer picture of how organisational size, proximity, function and competition inuences the bilateral nature of organisational relationships. Such that, bilateral dependence is often a pre-requisite of supply chain management practice, which requires a proximity of relationship that is difcult to maintain. However, benets derived from increasing the proximity of relationship with suppliers can be economic, and relate to the quality of service. Contractors have successfully embraced this approach with their clients; and Green (1999) suggests that this was a rhetorical device in order to win work the view which was supported by Akintoye et al. (2000) who identied that construction rms did value the connections they made with their supply chain organisations, but that contractors were more oriented towards clients than their supply chain. In addition, Akintoye et al.s (2000) survey identied that the benets identied by the contractors were: benets to the client, improved customer service, reduction in paperwork, increased protability, cost reductions within organisations and increased market competitiveness.

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Therefore, the benets to the supplier and quality assurance were the objectives to developing supply chain collaborations. This was endorsed by Dainty et al. (2001), who concurred with this orientation and identied that there was a great deal of suspicion about the motives of the main contractors to enter into partnerships, and advocated that open book accounting was perceived as a means of driving down prots, and that competitive tendering remained the principal approach to a subcontracting organisations selection. Furthermore, research ndings also suggested that programming was difcult, with little or no time given to subcontractors, so that the risks were passed down in an inequitable manner; and that data passed to the subcontractor was often of poor quality, thereby creating signicant barriers to supplier integration and to the development of supply chain alliances the mistrust of which required leadership to drive the integration process and move towards a more transparent approach to the governance of supply chain relationships. Greenwood (2001) identied that despite the recommendations of Latham (1994) for a code of practice for subcontractor procurement, and the consequent publication of such a code by working group no. 3 (CIB, 1997), that few contractors were complying with this code. This research also noted that there was little evidence of subcontractor partnering and that the traditional arms-length, cost-driven approach was adopted from the commencement of trading. However, it should be noted that these large-scale empirical studies were carried out when integrated procurement approaches and supply chain management were relatively new to the industry. Notwithstanding this, it would, however, be expected at the time of writing that these relationships would have matured and differing approaches would be evidenced. However, Kale and Arditi (2001), noted that there was a positive and strong association between economic performance and the quality of relationship, with attributes of longevity, openness of communication and mutual trust being key drivers, such that these relationships were strategic assets to a contractor. These empirical studies were undertaken prior to the economic downturn, and it may be expected that given the attitudes of client organisations to promote integration that things may have changed, especially as anecdotal evidence to developing long-term relationships with rms by client organisations have come under pressure due to the availability of cheaper prices within the market place (Gardiner, 2009; Bingham, 2008). Integrated procurement One of the most important factors in the development of integrated teams was the procurement route used by the client (Cox, 2004; Humphreys et al., 2003). Procurement routes adopted by the UK clients during 2000-2007 became more integrated, as did design and build, and the reduction in the traditional routes created conditions whereby integrated teams were encouraged. However, the approach the UK construction clients have taken to the procurement of projects has changed considerably in recent years the driver of which has been predominantly led by public sector clients, who have taken up a more management-oriented approach, such as partnering agreements and frameworks. The Royal Institution of Chartered Surveyors (RICS) has been monitoring the methods of procurement in use since 1993 (Table I). The most recent data analysis reported by the RICS (2010) was from projects that commenced in 2007. This, however, excludes overseas work, civil engineering and heavy engineering projects as well as some repair and maintenance contracts.

1985 1987 1989 1991 1993 1995 1998 2001 2004 2007 (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) Lump sum rm BQ 42.8 35.6 39.7 29 34.5 39.2 30.8 19.6 31.1 20 Lump sum spec and drawings 47.1 55.4 49.7 59.2 45.6 43.7 43.9 62.9 42.7 47.2 Lump sum design and build 3.6 3.6 5.2 9.1 16 11.8 20.7 13.9 13.3 21.9 Target contracts 6 4.5 Re-measurement Approx. BQ 2.7 1.9 2.9 1.5 2.3 2.1 1.9 1.7 2.9 1.7 Prime cost plus xed fee 2.1 2.3 0.9 0.2 0.3 0.7 0.3 0.2 0.2 0.5 Management contract 1.7 1.2 1.4 0.8 0.9 1.2 1.5 0.6 0.2 0.7 Construction management 0.2 0.2 0.4 1.3 0.8 0.4 0.9 1.1 Partnering agreements 0.6 2.7 2.4 Total 100 100 100 100 100 100 100 100 100 100

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Table I. RICS contracts in use survey (2007)

The survey captured data from 1,370 projects in 2007 (which was lower than in previous years but the value of projects within the survey increased to a point where it represented 17.4 per cent of the total value of new orders). Whilst acknowledging temporal limitations when comparing the results over time, it was found that two stage tendering approaches had doubled in use from 2004. This increase reects local UK Government procurement practice which promotes lean supply which includes long-term contracts, single sourcing and two-stage tendering. The RICS survey collected data when the UK construction industry was in a position of growth. In the second quarter of 2008, the UK economy went into a recession, which was quickly followed by the construction industry. A fall of 14 per cent in output was observed when measured over four successive quarters of negative growth between second quarter of 1998 and rst quarter of 1999, and the output of the industry fell from 104.89 billion in 2007 to 91.86 billion in 2009. However, recent data supplied by Ofce of National Statistics suggests modest growth in the later quarters of 2010. In this respect, one impact of the reduced demand for construction is the reduction in tender prices (Figure 1). This identies a close relationship between costs and prices until 2008, where at this point, contractors could be assumed to be absorbing cost increases and reducing tender margins in order to maintain turnover. If, as Kale and Arditi (2001) suggest that supply chain alliances provide an economic advantage, it would be useful to start to test this premise, cognisant of the current economic downturn. Furthermore, the impact of external factors on supply chain alliances is also unknown in an economic downturn. Therefore, the conceptual work of Winch (2001) and Turner (2004) on the relevance of transaction cost economics and the governance of construction projects may provide a useful framework for the understanding of relationships between organisations and the development of project teams. Where, Winch (2001) elaborates on Williamsons (1996) earlier work by identifying three fundamental elements that effect organisations relationships during an exchange of goods/service across a technologically separable interface the factors of which identied contingency (which relates to a transaction, and includes uncertainty, frequency and asset specicity); behavioural (that include bounded rationality, learning and opportunism); and context. Williamson (1981) identied that goods and services can be produced more efciently if parties invest in transaction specic assets, which cannot easily be put to other uses if the buyer/seller relationship breaks down. The value of the transaction-specic asset depends on the continued existence of the buyer/seller

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400

BCIS general building cost index

BCIS All-in TPI

Forecast boundary

10
Index

300

200

100

Figure 1. Comparison of BCIS tender price and general building cost index

0 Jan-2000 Jan-2001 Jan-2002 Jan-2003 Jan-2004 Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014

Month

relationship; consequently, one party that has not invested in the relationship may appropriate value by using the asset in another context. Therefore, the inuence of reduced demand upon the propensity of parties to invest in relationships would be an area worthy of study, particularly, as the move towards single stage tendering would appear to be counter to increasing organisations specicity towards each other. In this respect, specicity relates to the ability to replace a supplying organisation. Whilst this is not usually an issue for a construction client, it may be for a contractor who regularly enters into post-contract negotiations with subcontractors in order to reduce price. Pre-contract, specicity relates to the dependence that an organisation places upon another in developing a tender; post-contract, it could relate to the temporal specicity[1]. Specicity can be considered to be both organisational or project related (Kale and Arditi, 2001). Conclusion The asset specicity of a supply chain organisation is likely to vary with the extent of organisational specicity (Kale and Arditi, 2001), and different client procurement approaches can have a signicant effect upon ex ante and ex post behaviour of contractors towards their subcontractors (Ross and Goulding, 2007). There is, therefore, a need to examine the changing landscape of strategic alliances formed over the last 12 years (post Egan). Whilst it is acknowledged that differences are likely to exist regarding organisational size, competition and subcontractor technology; more fundamentally, it is equally important to understand the impact and pervasiveness of theoretical approaches impinging upon transaction economics and supply chain management, especially, how different subcontract sectors are integrated into construction teams. Similarly, there is also a need to examine contractual boundaries which facilitate lean approaches (Green and May, 2005), along with the different

communities of practice that exist within the supply chain. In this respect, a greater understanding of tender and governance behaviour may help inform the rearrangement of these contractual barriers.
Note 1. Temporal specicity the ability of suppliers to hold up the programme and hence disrupt production. (The strength of this specicity will relate to the subcontractor inuence/power, which must relate to their technology, who employs them and the governance mechanisms, which exist). References Abdel-Razek, R. and McCaffer, R. (1987), A change in the UK construction industry structure: implications for estimating, Construction Management and Economics, Vol. 5, pp. 227-42. Akintoye, A., McIntoch, G. and Fitzgerald, E. (2000), A survey of supply chain collaboration and management in the UK construction Industry, European Journal of Purchasing & Supply Management, Vol. 6, pp. 159-68. Anumba, C.J. (2000), Intergrated systems for construction: challenges for the millennium, Proceedings of the International Conference on Construction Information Technology, Hong Kong, Vol. 17-18, pp. 78-92. Anumba, C.J., Baugh, C. and Khalfan, M.M.A. (2002), Organisational structures to support concurrent engineering in construction, Industrial Management & Data Systems, Vol. 102, pp. 260-70. Bingham, T. (2008), All over bar the shooting: frameworks, Building Magazine, 21 November. Bresnen, M. and Marshall, N. (2000), Motivation, commitment and the use of incentives in partnerships and alliances, Construction Management and Economics, Vol. 18, pp. 587-98. Cox, A. (2004), The art of the possible: relationship management in power regimes and supply chains, Supply Chain Management: An International Journal, Vol. 9, pp. 346-56. Cox, A. and Thompson, I. (1997), Fit for purpose contractual relations: determining a theoretical framework for construction projects, European Journal of Purchasing & Supply Management, Vol. 3, pp. 127-35. Dainty, A.R.J., Briscoe, G.H. and Millett, S.J. (2001), Subcontractor perspectives on supply chain alliances, Construction Management and Economics, Vol. 19, pp. 841-8. Egan, J. (1998), Rethinking Construction: The Report from Construction Task Force, Department of the Environment, Transport and the Regions, London. Egan, J. (2002), Rethinking Construction: Accelerating Change, Strategic Forum for Construction, London. Eriksson, P.E. (2008), Procurement effects on coopetition in client-contractor relationships, Journal of Construction Engineering and Management, Vol. 134 No. 2, pp. 103-11. Eriksson, P.E. and Laan, A. (2007), Procurement effects on trust and control in client-contractor relationships, Engineering, Construction and Architectural Management, Vol. 14 No. 4, pp. 387-99. Gardiner, J. (2009), Hells clients: whatever happened to frameworks?, Building Magazine, 12 June. Green, S. and May, S. (2005), Lean construction: arenas of enactment, models of diffusion, and the meaning of leanness, Building Research and Information, Vol. 33 No. 6, pp. 498-511. Green, S.D. (1999), Partnering: the propaganda of corporatism?, in Ogulana, S. (Ed.), Protable Partnering in Construction Procurement, E & FN Spon, London.

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Greenwood, D. (2001), Subcontract procurement: are relationships changing?, Construction Management and Economics, Vol. 19, pp. 5-7. Hillebrandt, P., Cannon, J. and Lansley, P. (1995), The Construction Industry In and Out of Recession, Macmillan, Basingstoke. Holti, R., Nicolini, D. and Smalley, M. (1999), Prime Contractor Handbook of Supply Chain Management, The Tavistock Institute, London. Hughes, W. (1989), Identifying the environment of construction projects, Construction Management and Economics, Vol. 7, pp. 29-40. Humphreys, P., Matthews, J. and Kumaraswamy, M. (2003), Pre-construction project partnering: from adversarial to collaborative relationships, Supply Chain Management: An International Journal, Vol. 8, pp. 166-78. Jennings, I.C. and Kenley, R. (1996), The social factor of project organisation, North Meets South: Proceedings of CIB W92 Procurement Systems Symposium, University of Natal, Durban, South Africa, pp. 169-78. Kale, S. and Arditi, D. (2001), General contractors relationships with subcontractors: a strategic asset, Construction Management and Economics, Vol. 19, pp. 541-54. Langford, D. and Male, S. (2001), Strategic Management in Construction, Blackwell Science, Oxford. Lansley, P. (1987), Corporate strategy and survival in the British construction industry, Construction Management and Economics, Vol. 5, pp. 141-55. Latham, M. (1994), Constructing the Team: Joint Review of the Procurement and Contractual Arrangements in the UK Construction Industry, Department of the Environment, HMSO, London. London, K.A. and Kenley, R. (2001), An industrial organisation economic supply chain approach for the construction industry: a review, Construction Management and Economics, Vol. 19, pp. 777-88. McDermott, P. (1999), Strategic and emergent issues in construction procurement, in Rowlinson, S. and McDermott, P. (Eds), Procurement Systems: A Guide to Best Practice in Construction, E & FN Spon, London. Nobbs, H. (1993), Future Role of Construction Specialists, Business Round Table, London. RICS (2010), A survey of building contracts in use in 2007, available at: www.rics.org/ contractsinusesurvey (accessed 29 September 2010). Ross, A.D. and Goulding, J.S. (2007), Transactional barriers to design cost management, Construction Innovation, Vol. 7 No. 3, pp. 274-87. Shirazi, B., Langford, D.A. and Rowlinson, S.M. (1996), Organisational structures in the construction industry, Construction Management and Economics, Vol. 14, pp. 199-212. Turner, J.R. (2004), Farsighted project contract management: incomplete in its entirety, Construction Management and Economics, Vol. 22, pp. 75-83. Williamson, O.E. (1981), The economics of organisation; the transaction economics approach, American Journal of Sociology, Vol. 87, pp. 548-77. Williamson, O.E. (1996), The Mechanisms of Governance, Oxford University Press, Oxford. Winch, G. (1989), The construction rm and the construction project: a transaction cost approach, Construction Management and Economics, Vol. 7, pp. 331-49.

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Further reading Gray, C. and Flanagan, R. (1989), The Changing Role of Specialist and Trade Contractors, The Chartered Institute of Building, Ascot. Hinze, J. and Tracey, A. (1994), The contractor-subcontractor relationship: the subcontractors view, Journal of Construction Engineering and Management ASCE, Vol. 120, pp. 274-87. Lansley, P. (1994), Analysing construction organisations, Construction Management and Economics, Vol. 12, pp. 337-48. Corresponding author Andrew Ross can be contacted at: [email protected]

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