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University of Illinois at Urbana–Champaign

CEE 420 – Construction Productivity – Spring 2018

Advancements in Procurement Practices

and Supply-Chain Management in the

Construction Industry

Fourth Credit Project

Due: 05/01/2018

Samuel Russi e Sousa

([email protected])?

Table of Content
















Table of Figures






I. Abstract

    The objective of this research paper is to explore the potential impacts of

advancements in construction procurement practices and  management. According to

the report Reinventing Construction: A Route to Higher Productivity elaborated by

McKinsey, the implementation of procurement and  best practices can result in 5 to 10

percent of productivity improvement and 3 to 5 percent of cost savings at the

construction industry.

    To better understand why improvements in procurement practices and supply-

chain can be disruptive for the construction industry, this report will present a

background section explaining how the historical conjuncture in this sector resulted in a

scenario where construction companies did not experience a productivity boom in the

most recent decades. Furthermore, in this same section, this paper will compare the

construction industry productivity evolution to the progress experienced by other

industries, especially the manufacturing sector. The idea is to create a benchmark of the

best practices currently being used and indicate which of them have the greatest

potential and applicability to be implemented in the construction sector.

    Considering preliminary researches, the author intends to explain in another

section of this paper the advantages and disadvantages of each of the following

advancements: online live procurement bidding system, advanced intelligent automated

systems in the procurement process, advanced analytics to create predictive construction

resources demand models, use of the Internet of Things in the construction site, and 6-D

BIM to manage site stock. It is believed that these tools have the potential to

substantially fulfill the productivity gap that exists in the construction industry by

stimulating better procurement practices and improving the supply-chain management.

    Besides presenting the historical, the current scenario and the advancements that

can be a breakthrough in the construction industry, this paper will discuss how these

changes can impact and modernize the relationship between owners, contractors, sub-

contractors, and suppliers regarding procurement process. The expectation is that they

have the potential to improve transparency and instigate long-term relations among


    The contribution of this paper will be a brief research about how advancements

in procurement practices and supply-chain management can improve the construction

industry productivity and, therefore, generate a significantly positive impact to the

global economy.


II. Introduction

    When comparing the Civil Engineering field to other sectors in the global

economy such as manufacturing, it looks like construction productivity gains have

frozen in time.  Luckily, many analyzes suggest that the use of best practices from other

industries have the potential to fulfill the productivity gap that exists and, furthermore,

lead to a better management process.

    According to a research published by McKinsey Global Institute in 2017, whose

part of the results is presented in Figure 1, between 1995 and 2014 construction had an

inferior labor-productivity growth when compared to the total economy and to

manufacturing. While these sectors had a 2.7% and a 3.6% compound annual growth

rate, respectively, the construction industry only experienced a 1.0% growth due to

many factors such as lack of investments in innovation, pour project management, and a

highly fragmented industry.


Figure 1 – Construction Global Labor-productivity growth

    After extensive analysis, McKinsey's research suggests that if the sector

implements advancements in seven key areas, presented in Figure 2, we can expect a

cumulative productive gain of 48% to 60%, and a cost saving of 27% to 38%,

depending on whether the improvements are applied to an emerging market or a

developed market.


Figure 2 – Potential Global Productivity Improvement from Implementation of Best Practices

    By observing Figure 2, we can see that the construction industry dynamic in the

last decades has resulted in a productivity gap of 50% compared to the total economy

productivity. Fortunately, the expected productivity improvement cumulative impact of

the seven key areas presented can revert this situation and eliminate this contrast.

    In this research paper, the objective is to investigate only one of these seven key

areas: procurement and supply-chain management. Over the report it will be discussed

five advancements in procurement practices and supply-chain management with the

potential to reshape the construction industry:

* Online Live Procurement Bidding System;

* Advanced Intelligent Automated Systems in the Procurement Process;

* Advanced Analytics to Create Predictive Construction Resources

Demand Models;

* Use of the Internet Of Things in the Construction Site;

* 6-D BIM to Manage Site Stock.

    The expectation is that improvements in this area can result in more

transparency among contractors and suppliers, reduce delays, economies of scale for

certain products, and better logistics management with just-in-time delivery.

    The intent is that, by the end, this paper can contribute to highlight what are the

advantages of these advancements and why construction companies should seek to

incorporate them to improve their productivity.

    A final and important observation about the data presented in this report section

is that it considers the average situation of the construction industry in the world. If one

is to analyze this sector for a specific location or for a specific construction part, such as

heavy construction or subcontractors, the results discussed may not apply and a

different study should be used.


III. Background

    In the Introduction section of this report it was presented some data to

demonstrate that, nowadays, the construction industry productivity is lagging behind

many other industries productivity. As an aggravating factor, this industry percentage

productivity growth is usually running below when compared to the same index for

other sectors.

    In order to understand the current scenario, it is important to study the historical

conjuncture of the construction sector and the root causes of this productivity problem.

    A study elaborated by McKinsey and published at the report “Reinventing

Construction: A Route To Higher Productivity” (2017) has identified that, overall, there

are ten root causes responsible for productivity problem and they can be categorized

into three areas: external forces, industry dynamics, and firm-level operational factors.

Figure 3 is a framework presenting all these root causes and its divisions.


Figure 3 – Root Causes for Low Construction Productivity


    When we analyze the information in Figure 3 we can correlate a few problems

with construction procurement and supply-chain lack of advancements. First, the fact

that this industry is highly fragmented. On the one hand, you large heavy construction

firms that can benefit from a gain of scale, that uses a lot of technology, whose work is

very productive, and that have a long-term relationship with suppliers. On the other

hand, you have small trades and subcontractors that cannot benefit of scale, who hire a

lot of manual roughly trained workers, almost do not use technology or any

management strategy, and who have a one-time relation with random suppliers. In most

of the time that a small player tries to offer a more productive solution, he suffers from

the competition of less productive but cheaper firm.

    Second, the lack of investments in digitization and innovation. As this report

will explain in the next section, Advancements in Procurement Practices and Supply-

Chain Management, the use of a digital system to manage procurement and supply-

chain can reflect in a lot of productivity gains. For instance, Online Live Procurement

Bidding System, and Advanced Intelligent Automated Systems in the Procurement

Process are just two examples of advancements.

    To make the situation more critical, for many contractors it has become a normal

practice to issue change-order and claims as a method to increase profit due to the

construction industry regulation problems.

    When we investigate the historical factors that affect the current construction

productivity index, the most important root cause is that, while many sectors have

benefited from investments in technology and digital tools in previous years, the

dynamic of constructions companies work and investments helped to create a lagging in

this sector. While manufacturing companies had a necessity to invest in automation,

digitization and better management process to reduce their costs and thus increase their

profits, construction companies were still making a considerable profit due to its cheap

workforce and did not have to invest in these advancements.

    A problem resulting from this conjuncture is that, nowadays, the relationship

between suppliers and contractors are not long-term relations. Instead, in most of the

times, it is a one-time job relationship. As a consequence, neither of them are working

towards the construction of a sustainable relation because most of the times they are

both only concerned about the profits for a single specific project. The manufacturing

sector, in an opposite way, has created an environment where producers (contractors)

and suppliers have a transparent reliable longstanding relation. The intent when

negotiating is to establish an optimized long-term deal that benefits both of them for not

only one project but for many that are yet to come.

    To propose and investigate what solutions can and should be applied in the

construction industry, this research aims to benchmark the best practices of procurement

and supply-chain being used in other sectors, especially at the manufacturing sector.

Highlighting the main advantages and disadvantages of each practice and discussing

their applicability for civil engineering daily practices can help to enlighten a path to

improve the construction productivity.

    According to surveys conducted by McKinsey's Procurement Practice and

presented at the report “Reinventing Construction: A Route To Higher Productivity”

(2017),  the construction industry has one of the least sophisticated procurement process

and supply-chain practices compared to other industries. As a consequence,

construction companies profit is affected because they can overpay materials and

services by up to 15 percent. Furthermore, a poor supply-chain management system can

affect the project total duration increasing total project indirect cost.


IV. Advancements in Procurement Practices and Supply-Chain Management

    Many researches, when studying procurement practices and supply-chain

management in the construction industry, like to emphasize that this industry has a lot

of its own peculiarities that affect how these processes are performed. Koskela (1992),

quoted in the article “Supply chains in the construction industry”, suggests that this

industry one-of-a-kind products, temporary organization, and site production, are

responsible for preventing the achievement of flows as efficient as in manufacturing

    Although this industry, in fact, has some singularities that should be considered,

many advancements in the sector are occurring and it is reasonable and feasible to

suggest that the adaptation and implementation of other industries best practices,

especially manufacturing, can result in a breakthrough for the construction sector. To

support this assumption, this section of this report will present a detailed discussion of

five best practices that can be applied for constructions.

Online Live Procurement Bidding System

    In the last few years, the construction industry started to experience some

changes in the way contractors, owners and suppliers interact in a bidding process. The

traditional opaque bidding process is losing space for online live procurement bidding

systems, more known as e-auctions.

    To understand why this changing is happening we need to understand the

principles of each kind of process.

    At the traditional bidding process, the owner or the contractor creates an auction

to find, in most of the times, the cheapest supplier for a product or service. The

suppliers are informed about the bidding specific requirements and then, within a

predetermined date range, each supplier must submit in paper or as a digital document

their bidding proposal. After the bidding process deadline is over, the cheapest proposal

is selected. From the owner's perspective, the problem with this system is that since

suppliers do not know the other competitor's bidding price, the price competition

between suppliers is jeopardized. From the supplier point of view, this static system

does not allow any changes in price after the bid is submitted.

    At the e-auction process, the major disadvantages of the traditional bidding

process have been corrected. By using web-based live online platforms this system

allows suppliers to see other competitor's bidding price and if within the bidding period,

change their own price to try to win the bid. This is a tremendous advantage because, by

instigating suppliers competition, the owner can achieve savings of 10 to 20 percent.

The best way to guarantee this will occur is to set a small limited time frame in which

suppliers can review their bid. Forcing quick responses is a way to ensure supplier will

not communicate with each other to combine high prices.

    Another important and significant advantage of using online live procurement

bidding system is that you are able to reduce frauds, to increase transparency in the

negotiations, and ensure confidentially when necessary.

    Although this new process has addressed the traditional system problems,

according to Emiliani (2005), quoted in the book “Best Practices for Online

Procurement Auctions”, there are some potential issues that may occur with this e-

auction process:

* Allowing unqualified suppliers to bid;

* Showing the identities of the bidders and their bids;

* Post-auction renegotiation;

* Forcing supplier to honor unreasonably low prices;

* Providing incomplete or inaccurate specifications;

* Repetitive rebidding to drive down prices;

* Not informing bidders of outcomes.

    To conclude, overall, it is possible to affirm the e-auctions will increase its

presence and role in the construction industry even with its limitations. The new system

is becoming more popular due to the use of new technology and it is a better tool to for

procurement process.

Advanced Intelligent Automated Systems in the Procurement Process

    The construction industry has one the lowest automation level in all of its

process and, with construction procurement practices, the situation is not different. On

average, companies in this industry do not make use of computer integration and

advanced intelligent automated systems differently than what happens in

manufacturing, where these tools are used on a daily basis.

    The use of more technology in the construction can help to automate its

procurement process. Systems considering variables like weather condition, delays, lead

time, delivery logistics, market trend, supplier risk, and historical data will be capable of

predicting buyers (contractors) demand and automatically reorder supplies to guarantee

that construction remains on the critical path. For suppliers, a system like this can

optimize the production reducing costs and waste.

    An example of how historical data and market trend can be used to improve

procurement is by predicting a yet unknown future demand to allow a construction firm

to order a large quantity of material in advance. This can result in cost reduction due to

the gain of scale that was made based on a reliable intelligent system analysis. Another

example is that an advanced software like this can inform the construction team about

procurement best practices for a specific location which will allow them to copy and

adapt successful approaches.

    An intelligent automated procurement system can help a construction company

to foresee what are the schedule risks that can delay the entire project. For instance, a

common problem when requesting very specific materials is that the ordering team does

not have enough knowledge about customs process, which can then result in customs

holds and delays in the delivery time. When using an intelligent process this issue can

be avoided because the system has a database that can indicate what are the required

documents for a specific material at a specific country customs.

    One challenge that can arise when implementing and using more technological

procurement process is that, nowadays, the construction dynamic in most construction

companies does not favor the use of such system. In today's practice, it is normal to

occur communication failure between those responsible to manage an automated

procurement system and those working on-site. The consequences of this asymmetry is

a possible disconnection between what is actually ordered and what should have been

ordered, for example, quantity and specifications mistakes are likely to occur.

    To solve and prevent that problems like this impair the implementation of an

advanced procurement system, contractors should invest in better communication

channels. In addition, McKinsey's report “Reinventing Construction: A Route To

Higher Productivity” (2017) suggests that assigning an employee on-site to coordinate

the procurement process between procurement team and actual job site demand is

essential to guarantee effective communication and avoid misunderstandings.

    A second challenge is related to a very typical problem in the construction

industry: lack of or bad planning. This flaw is responsible for many last minute

procurement changes and is an important cause of why contractors have a severe

difficult to stay on the original plan. An intelligent automated system can act on two

fronts to fix this issue: first, keep live track of any change that occur and update it on the

current schedule; second, compare required change-orders against historical data to

check whether they really make sense and cannot be prevented – comparing current

project to previous similar projects is always a good method to check large


    Last but not least, advanced intelligent automated procurement systems can

integrate the procurement process of both buyers and suppliers. This means that each

part will be able to account for the other part unforeseen delay, which usually does not

happen today. In the standard procedure, neither contractor or supplier knows when a

delay occurs in the construction schedule or in the material production, respectively.

With an integrated system, this will not occur and the entire procurement process will

become more transparent and reliable, instigating better partnerships.

Advanced Analytics to Create Predictive Construction Resources Demand Models

    Another advancement to improve procurement and supply-chain is the use of

advanced analytics to create predictive models that can allow procurement teams to plan

in advance what they need to buy.

    Nowadays, constructions companies have started to collect data about almost

everything, however, without powerful and useful analyzes many insights that could

come from this data are lost. For procurement teams, interpreting this data can result in

more effective analyzes – the potential is enormous.

    With a perspective on procurement, the use of advanced analytics to predict

future material, equipment, and services demand can allow ordering teams to have more

time to calmly search for the best supplier. Increasing the float time between looking for

a supplier and placing an order increases the probability of achieving the optimal trade-

off among time, cost and quality.

    The use of big data analysis can lead to a situation where it is possible for buyers

to predict, using historical data and market trend, what material the construction

company will need for future projects that they do not even have yet. Knowing their

highly probable material need for the next 3 months, 6 months, or even 1 year or more

can result in a large in advanced purchase which will reduce costs due to the gain of

scale. For suppliers, a powerful system like this can allow them to estimate their future

demand more effectively.

    Besides material demand models, advanced analytics can be used in many ways

to improve the construction supply-chain. For instance, this technology can be used to

compare and validate material costs between different suppliers, explore quality-cost

trade-off analysis, predict future resource price fluctuations (inflation or deflation),

investigate different delivery options and its costs, rank suppliers by risk, identify

opportunities based on previous project data, and improve cash-flow predictability.

Use of the Internet of Things in the Construction Site

    The Internet of Things (IoT) has the potential to be a disruptive technology for

the supply-chain management and procurement process in the construction industry. At

other industries, IoT is successfully being applied for a while and, due to its great

results, the forecast is that its use will increase more and more in the near future.

    IoT relies on the use of sensors and wireless technologies to connect equipment,

materials, and assets to one another and, in many times, to a central management system

to make them smart. For the construction industry, this technology can track and collect

critical information about equipment, materials, machinery, and structures at a

construction site.

    Most IoT sensors are based on near-field-communication (NFC) devices and the

most used form of NFC technology is the radio-frequency identification (RFID).

Although still considered an innovation at the construction, there are reports of firms

using RFID since the 1990s to track materials and automate on-site stock management.

    According to McKinsey's article “Imagining construction's digital future”

(2016), there are five significant advancements that this IoT can provide to a

construction site:

* Equipment monitoring and repair;

* Inventory management and ordering;

* Quality assessment;

* Energy efficiency;

* Safety.

    This report will focus on discussing only the applications for inventory

management and ordering, which are directly related to the procurement process and

supply-chain management.

    According to Lu et al. (2011), RFID tags should be attached, whenever it is

possible, to all materials at a construction site. To ensure that this occurs, materials must

be tagged as soon as they arrive on site before they are moved to the storage area or, as

an alternative, the contractor should find suppliers who can attach RFID to materials

during the manufacturing phase. In either case, RFID readers located at storage area

entrance will automatically update the inventory database adding the delivered material.

When a worker takes a material out of the storage area, those same RFID readers will

automatically deduct the specific material from the database. Knowing which materials

you have in stock can help procurement teams to predict when they will be running

short of material and, therefore, negotiate and order more material in advance which can

avoid construction delays and save costs.

    Another advantage of using this technology is to pinpoint where materials are

located. This makes it easier for workers to find the right material and for site managers

to ensure physical and electronic inventory are the same.

   In addition, the IBM article “Can the Internet of Things breathe new life into

brick and mortar retail?”, written by Jacqi Levy (2017), suggest that RFID can also be

used to measure parameters about the environment around a material, like temperature,

humidity, and lighting, which can help to prevent possible damages and waste.

    For the last, IoT can be a great source of data for advanced analytics. Tagging

materials, equipment, machinery, and even workers can generate a significant amount

of data that can and should be analyzed to bring insights that help managers make better

decisions. Since this technology is getting cheaper and more efficient, IoT should be

present at constructions sites on a daily basis.

6-D BIM to Manage Site Stock

    Building Information Modeling, BIM, is defined by Autodesk as “an intelligent

3D model-based process that gives architecture, engineering, and construction

professionals the insight and tools to more efficiently plan, design, construct, and

manage buildings and infrastructure”. Nowadays, BIM technology has had many

developments and can be used not only to manage project physical interrelations among

different structural components but also to improve construction overall management

and productivity.

    The most commonly used is the three dimensions (3-D) BIM. It allows users to

work with a three-dimensional computer model of a building to check, ideally in

advance, if there is any physical conflict of components, especially mechanical

(HVAC), plumbing and electrical components. Ensuring that there is no overlap of

pieces can help to keep the schedule on the original critical path and avoid on-site

problems and rework.

    Some advancements in the BIM technology includes adding to the 3-D

computational model a scheduling dimension (4-D), a cost estimating dimension (5-D),

and a sixth dimension (6-D). While the fourth and fifth dimensions are almost always

time and cost, respectively, the sixth dimension can vary according to contractors and

engineer's needs. For this study, the sixth dimension will be Procurement and Supply-

chain. Figure 4 presents a summary of the BIM dimensions.



Figure 4 – BIM Dimensions

    The main idea behind using Procurement and Supply-chain as a 6-D BIM is that

it can help manage site stock and thus improve procurements practices. Site managers,

procurement teams, contractors and sub-contractors, and suppliers will be able to plan

and predict their material demand to make more accurately orders or production. As a

result of a better material resource management, waste reduction can be achieved and

delays avoided.

In order to improve supply-chain and procurement productivity, 6-D BIM has to

ensure that the interface between structural components that have been installed at the

job site is updated in the BIM model and in the resource database (preferably linked to

the BIM model). According to Brad Hardin (2009), each dimension of a BIM file is

only useful if it can be regularly and accurately updated.

McKinsey's report “Reinventing Construction: A Route To Higher Productivity”  

(2017) suggests that the contractor should be the owner of the BIM model and ensure it

is always updated. A good idea would be for contractors and suppliers to have a shared

model where one can see the other updates. For instance, the contractor would know

instantly when any change to delivery date occurs or even the exact position of a

supplier delivery truck. Predictability is a key factor for an efficient stock management

and procurement process.?

V. Conclusion

    This research tried to present an overview of the productivity in the construction

sector with a focus on procurement and supply-chain. According to many research data

discussed in the report, there is room for a significant productivity improvement and

relevant cost reduction.

    Although in the last decades the construction sector did not invest as much as

other sectors in improvements, this situation is changing and, if advancements are

correctly implemented, it is possible to make a disruptive progress in this industry in the

following years.

    To further investigate which advancements should be implemented and how this

should occur, this report benchmarked five different solutions that can be applied in the

construction industry to improve its procurement process and supply-chain

management. Implementing the use of Internet of Things (IoT), for example, can

improve how companies keep track of their inventory.

    Overall, the five advancements discussed in this study follow the same principle

of implementing more technology, digitization and management at the construction

industry processes. To support a sustainable resumption of productivity growth,

contractors and suppliers must work together to change this industry dynamic and

ensure that from now on they will always be seeking new advancements that can

increase productivity.


VI. References


* McKinsey Global Institute (2017). Reinventing Construction: A Route To

Higher Productivity.

* Diane H. Parente (2008). Best Practices for Online Procurement Auctions.

Information Science Reference.

* Brad Hardin (2009). BIM and Construction Management: Proven Tools,

Methods, and Workflows. Sybex.


* Anders Segerstedt Thomas Olofsson, (2010), Supply chains in the construction

industry, Supply Chain Management: An International Journal, Vol. 15 Iss 5 pp.

347 – 353.

* Koskela, L. (1992), Application of the New Production Philosophy to

Construction, CIFE Technical Report No. 72, Stanford University, Palo Alto,


* Emiliani, M.L. (2005). Regulating b2b online reverse auctions through

voluntary codes of conduct. Industrial Marketing Management, 34(5), 526-534.

* Rajat Agarwal, Shankar Chandrasekaran, Mukund Sridhar (2016). Imagining

construction's digital future. McKinsey Productivity Sciences Center,


* Lu, W., Huang, G., Heng, L. (2011). Scenarios for applying RFID technology in

construction project management. Automation in Construction, 20 (2011), 101-


* Jacqi Levy (2017). Can the Internet of Things breathe new life into brick and

mortar retail?. IBM Internet of Things blog.


*, accessed on April 28, 2018, at 15:57.



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