Description
More than forty years has passed since the start of the North Sea oil and gas developments. On the managerial side of the projects there have been large cost overruns, project planning and control measures developed to avoid these, initiatives to improve the industry's competitiveness in the North Sea, as well as measures to improve the supply chains contribution in the projects.
Project Supply Chain Management
From Agile to Lean
A thesis to apply for the dr.ing. degree,
at the Norwegian University of Science and Technology
by
Bjørn Egil Asbjørnslett
‘The fact that Alexander [the Great] so capably directed [the warfare’s]
operation that logistics scarcely seems to have affected any of his strategic
decisions. ... Supply was indeed the basis of Alexander’s strategy’.
‘Alexander where able to overcome these [logistics] obstacles where other
armies had failed because of his superior abilities in gathering
intelligence, planning, preparation, and organisation’
(Engels 1978, pp.119 & 123).
Preface
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Preface
This thesis marks the end of a long research journey, with as in most projects, many
unforeseen elements that have impacted and changed the approach of the research. Now
at the end it is though fruitful to look back and acknowledge the process, as well as all
support and help from colleagues and friends, without which this research would never
have been possible.
First of all I would like to thank Professor Asbjørn Rolstadås, my adviser on this thesis,
for his contribution in providing the doctoral scholarship, valuable comments and
guidance.
I will also specifically thank Professor Marvin Rausand, for his help and contribution in
bringing me into the academic ‘art’ of scientific publishing.
Financial funding was provided by the research programme Project 2000, and many
thanks go to the companies providing funding and a constructive research environment
for this programme. I will also thank all my colleagues and friends in this programme
for interesting and challenging discussions, as well as the social part. A specific thank
goes to the programme co-ordinator, Halvard Kilde, for his inspiration, help, and for
bringing me into contact with the European Institute of Advanced Project and Contract
Management, Epci.
From Epci I would like to thank Dr. Per Willy Hetland, Odd Instefjord, and Dr. Bjørn
Kolltveit for their challenging and fruitful discussions, comments and guidance. It is not
too much to say that they have had a great influence on this thesis.
I would also like to thank all the people working in or related to the oil and gas supply
chain that I have had contact with through this research, no name mentioned and no one
forgotten. They have shared much knowledge and given me insight into an interesting
and challenging context. Thank you.
Finally, many thanks goes to you Grete, for your support and understanding during this
period.
Trondheim, November, 2002.
Bjørn Egil Asbjørnslett
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Summary
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Summary
Background
More than forty years has passed since the start of the North Sea oil and gas
developments. On the managerial side of the projects there have been large cost
overruns, project planning and control measures developed to avoid these, initiatives to
improve the industry’s competitiveness in the North Sea, as well as measures to
improve the supply chains contribution in the projects. We have seen a focus first and
foremost on the CAPEX side of the projects, which still is the public measure of a
‘project’s’ success as seen in medias coverage. However, the operation side of the
project has been given extended focus, especially through life-cycle cost measures, and
life cycle value measures trying to balance out the CAPEX, OPEX and income sides of
the project to obtain the most commercial value enhancement from each project. At the
same time there has been an increasing focus on the core business among the project
demand and supply chain actors in this industry as in most other industries.
Our belief is that this necessitates an enhanced focus on the project demand and supply
chains of the industry, both for the projects development and operations phases. A
question is whether the project demand and supply chain developments are approached
appropriately according to the characteristics of the industry’s project context?
Research topic
This research commenced with an initial assignment of ‘looking into logistics and
logistics management in the project context and as part of project management’. The
project context addressed here is that of the oil and gas industry, i.e. the development
and operation of an object where the production by that object generate income for the
owner(s) of the oil and gas reserves, while taking part in development and operations of
the object generate business for the supply chain actors.
The focus on logistics and supply chain management in most industries is as means for
improving the competitiveness of the industry or companies. This is the same for the oil
and gas industry. Therefore, an approach to supply chain management in the project
context of the oil and gas industry should aim to address logistics’ contribution to
industrial competitiveness in the oil and gas industry.
The objective of this thesis is to bring a contribution to the project management of
large-scale development and operation projects from concepts and thoughts within
logistics and supply chain management. The objective is to develop and outline supply
chain management within the project-oriented context as a particular and conscious
knowledge area of project management. Through developing a concept that approaches
projects and project management from a logistics and supply chain management
perspective, and through outlining what is important/specific for logistics and supply
chain management within the project context. The objective is as such related to
developing conceptual and methodological frameworks that may be used as basis for
specific developments and application in specific industrial and project-oriented
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Summary
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contexts. The objective is as such not to develop and give specific solutions to specific
problems.
Perspective for addressing the research topic
The added value of logistics and supply chain management in general is found within
the logistical mission elements, namely the supply chain cost and service position
achieved through the ‘best’ alignment of supply and demand. Then to approach logistics
and supply chain management within the project context, we have three conditions that
our perspective rests on;
- The project as the business opportunity.
- The supply chain as the competitive entity.
- Competitiveness through logistics and supply chain management, focused on
alignment of supply and demand.
The project is regarded as a business opportunity, where each actor will make business
out of it and gain from participating in it. It is also assumed that a project will not be
realised if it is not possible to make business out of it, i.e. it is not a realisable business
opportunity. Though, technology, competence, capability and capacity of the supply
chain actors organised into the specific project supply chain construction, is what may
make the project available to realise as a business opportunity. Therefore the project
supply chain may be regarded as the competitive entity. Competitiveness or value
enhancement for the project, through the supply chain is assumed to be achieved
through logistics and supply chain management, specifically through the logistics aim
of alignment of supply and demand.
Scientific approach
The approach taken in this research follows Arbnor and Bjerke’s (1997) system
approach. They say that the systems approach is related to determining the type of a
system, by characterising and categorising the object under study, in our case the
‘system type’ of logistics and supply chain management in the project context of the oil
and gas industry;
Following Arbnor et al.’s definition of the systems approach our aim of this study is;
To determine the type of the system (from a logistics point of view)
To describe the system (from a logistics point of view)
To guide in approaching how we see the system (from a logistics point of view).
The scientific approach to this research is based on theoretical studies and open sources
of information, interviews with representatives from the industry, and participation in
meetings and workshops related to the research topic.
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Theoretical platform
Our theoretical platform is based on theory from the domains of project management,
logistics and supply chain management, manufacturing theory, and theory related to
vulnerability and robustness.
From the project management theory we have focused on the aspects of the project,
such as the project context, the differing characteristics of the project life cycle, and the
element of uncertainty in projects. Further the theoretical focus has been on the choices
that has to be made in the project processes of determining ‘what to do’, i.e. the scope
of work of the project, and ‘how to do it’, i.e. the projects development and execution
model, and how these set different alternatives for approaching a project. We explore
three different strategies for undertaking a project development, as well as establish a
project atlas that may be used to explain and understand the choices of developing a
project along different routes from front-end to operations.
From logistics and supply chain management theory we focus on the difference between
supply chain management and demand chain management, as two similar concepts, but
with strong resemblance with the two main phases, development and operations, of the
project life cycle. Uncertainty is addressed related to the processes of demand and
supply, and with the concepts of resilience and robustness to address the service aspect
of the supply chains. From manufacturing theory we borrow the concepts of lean and
agile, to address what should guide organisational processes in the different phases of
the project life cycle.
Within logistics and supply chain management most of the conducted research and
development have focused on repetitive and continuous types of industries and
businesses. There is a difference between the repetitive context and the project context
with respect to logistics and supply chain management. Through a literature review of
earlier approaches to logistics in different project contexts, we found no one that
addressed how the logistics and supply chain management concepts apply to the
different needs of large-scale development projects throughout the project phases,
development and operations, and the differing characteristics of these two phases, the
one-of-a-kind development phase, and the repetitive operations phase.
Main findings and conclusions
Technology development is regarded as the most contributing factor for further
improvements in the Norwegian oil and gas industry. With respect to demand and
supply chain management in this project context a question is how new technology or
technology developments shall be taken into new project developments? The old
principle was that technology development was conducted as part of the project
development, while the contemporary principle is that technology development shall be
conducted between project, and be ready to use for new project developments.
The challenge of the oil and gas supply chain in this setting is two-fold. First it is the
ability to be able to support and take advantage of innovations and technological
development that may keep up the competitiveness of the oil and gas region. The other
is related to managing risk and thereby keeping the most ‘optimal’ execution time. Both
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are aimed at competitiveness, and were among the focus areas for the NORSOK
initiative. Competitiveness has to be achieved through inter-organisational capabilities
and capacities, where the project specific demand and supply chains has to be
competitive both in enabling use of innovative technologies, and without extending the
development time, and this should be made manageable in a planned and controlled
way. This is given in the table below.
Challenge Description
Innovations and technology
development
[Cost and income impact on value]
Being able to develop relationships in the industry
demand/supply chains that enables and sustains the
initiation and use of innovations and technology
development.
Project development execution time
[Time impact on value]
Being able to establish extended project organisations that
are able to execute the project development in a ‘correct’
scheduled time, and in a controlled manner.
Pre-NORSOK, technology development came to a large extent through a broad base of
small and medium sized enterprises, SME’s, working tightly to the technological
problem core and the operator. This could be regarded as a ‘rich’ supply chain
approach. In the same era the approach was to have the project demand, i.e. scope of
work, specified in detail before the supply chain was committed to the project. We have
called this stage two of the development history of the Norwegian petroleum industry.
Then, with NORSOK came the third stage of the development of the Norwegian
petroleum industry. It was a need for improved competitiveness, through reduced
project development CAPEX and execution time. Some of the answers to this challenge
was a reduced number suppliers, i.e. a lean supply chain approach, with more
responsibility for project object development placed with contractors, and committing
the supply chain earlier into the project, at a time when the project is less defined.
In other words, we may say that in stage two the focus was on closing the project
through strict project planning and control means, especially before committing the
supply chain, but having a multitude of potential supply chains (and thereby
technology) to develop from. Then in stage three we may say that the project is opened
up, especially to the contribution of the supply chain and even when committing the
supply chain, but the portfolio of supply chains to develop from is reduced due to lean
supply developments. This benefited the execution time, but at the sacrifice of the
(potential) opportunity value of alternative technology. In summary we may say that;
Stage 2; Approach a closed project, with a rich (open) supply chain.
Stage 3; Approach an open project, with a lean (closed) supply chain.
The consequence may be that when opening up the demand processes, concurrently
with applying lean supply, as in stage three, one may see that technology development
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in is danger of being lost, with its potential value enhancement contribution. At the
same time the concurrent execution process, with a lean supply chain seeks to manage
the time element of the value enhancement process in a controlled manner. However, if
project value enhancement from both technology (cost and income), as well as time
shall become an opportunity, then one may seek to combine the approaches of stage two
and three. Combining the steps from stage two and three could e.g. for a stage four
mean to;
Stage 4: Approach an open project, with a rich (open) supply chain.
Approach a closed project with a lean (closed) supply chain.
This means that new project planning and control concepts and means should be
established that enables to up-keep and manage the option of a rich and open supply
chain for an open project setting, though still keeping manageable control of the time
processes of the project development and execution. We have called this opportunity
seeking and value enhancing project strategies.
To develop a demand and supply chain management concept for this challenge we have
focused on the characteristics of five aspects of the two main project phases. The project
context focused on here is primarily characterised by being a unique business
opportunity, with two distinct phases, development and operation, that again are unique
with respect to the characteristics that describe the supply chains and processes. The
first characteristic is the project life cycle, stating the importance of being aware of the
differences in characteristics between the two phases, development and operations. The
second characteristic is the supply chain focus, driven by the targeted, one-of-a-kind
demand/supply in the development phase, versus the repetitive demand/supply in the
operations phase. Then the third characteristic is the logistics drivers, or whether the
main driver of the supply chains should be demand or supply in the development phase
versus the operations phase respectively. Then come the organisational processes,
characterised by agile characteristics in the development phase and lean characteristics
in the operations phase. The final characteristic is then related to the service quality, an
important logistics mission, focusing on resilience in the development phase and
robustness in the operations phase. These are presented in the table below.
Aspect Characteristics
1. The project life cycle Development Operations
2. The supply chain focus One-of-a-kind Repetitive
3. Logistics drivers Demand chain management Supply chain management
4. Organisational processes Agile Lean
5. Service quality Resilient Robust
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The development phase is a phase were the project and the project object is to be
developed, i.e. the aim is to define and specify the demand that in sum through the
fabrication and construction activities will become the project object. Therefore we have
chosen to emphasise demand chain management specifically for the development phase.
We have used the term agile to point to the importance of seeking and evaluating
opportunities that could bring value enhancement to the project. The project
development context is also defined by a high degree of uncertainty so that
opportunities as well as risks will emerge, necessitating an agile approach either
explicitly or implicitly. The term resilient is also used to reflect the uncertainty in the
development phase, and when uncertainty mature, the demand/supply chains has to be
able to ‘get back on track’, i.e. be resilient, to aim for the final objective.
The terms supply, lean, and robust is what we mean should characterise the operations
phase of the project life cycle. The operations context is one of repetitiveness, keeping
focus on the supply so that the whole ‘machinery’ goes like ‘clockwork’. This is the
ultimate basis for lean thinking where not only the potential for waste reduction could
be discovered through incremental rounds of continuous improvement, but also making
the whole supply operations more robust through revealing elements that could be a risk
factor. We have used the term supply specifically for the operations phase because it is a
repetitive supply operation. The demand is already defined and the supply chains should
be robust so that they do not contribute to disturbing the production. The term robust is
used specifically to indicate that although the supply chains should be lean, that should
never compromise their service quality, because a stop in the revenue generation of the
production by the project object in most cases far outweighs the incremental supply
cost.
We then have a demand and supply chain management concept that ‘obey’ the logistics
objectives of alignment of supply and demand. That takes account of the specialities of
the project context’s development and operations phases, and is aimed at value
enhancement for the project as a business opportunity realised through the project
supply chain as a competitive entity throughout the lifecycle of the project. That is the
concept of project supply chain management, PSCM, presented in the table below.
Principles Characteristics
The project as the business
opportunity
Development Operations
The supply chain as the
competitive entity
One-of-a-kind Repetitive
Demand chain management Supply Chain Management
Agile Lean
Competitiveness through
logistics and supply chain
management, focused on
alignment of supply and demand
in the project context
Resilient Robust
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To support the PSCM concept we have developed methodological guidelines for project
supply chain management as we have approached it. The intention with the guidelines is
that they shall be a guide to address the questions that is important with respect to the
context and the characteristics of the demand and supply chains that are approached, as
well as the mission of those demand and supply chains. When approaching project-
oriented demand and supply chains one have to take both the specific context of the
project as well as the supply chain approach into account. The PSCM guidelines are
based on nine steps that follow the project from initiation to revision of the operations
supply chain, as presented in the table below.
1. Establish project vision
and definition
5. Develop project
supply chain strategy
8. Preparation for and start-up
of the operations supply-chain
2. Clarify project development
and operations alternatives
4. Analyse the
demand/supply networks
9. Re-configure and improve
the operations supply chain
7. Activate and execute
the project development
supply chain
6. Select project development
and operations alternative
Project related
Project supply chain related
Order of methodology
Impacts
Selection point
3. Analyse the market
1. Establish project vision
and definition
5. Develop project
supply chain strategy
8. Preparation for and start-up
of the operations supply-chain
2. Clarify project development
and operations alternatives
4. Analyse the
demand/supply networks
9. Re-configure and improve
the operations supply chain
7. Activate and execute
the project development
supply chain
6. Select project development
and operations alternative
Project related
Project supply chain related
Order of methodology
Impacts
Selection point
Project related
Project supply chain related
Order of methodology
Impacts
Selection point
3. Analyse the market
The PSCM concept and methodological guidelines has been developed to meet
challenges of the project demand and supply chain context, as described by industrial
actors. However, we have in this research not been able to apply and demonstrate
neither the concept nor the guidelines in relation to real cases. This is a drawback of this
research, and has to be left for further studies.
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Table of Contents
PREFACE.....................................................................................................................III
SUMMARY................................................................................................................... IV
TABLE OF CONTENTS............................................................................................. XI
LIST OF FIGURES................................................................................................... XIV
LIST OF TABLES..................................................................................................... XVI
1. INTRODUCTION.................................................................................................. 1
1.1 HISTORICAL BACKGROUND................................................................................ 1
1.1.1 Forty years of development in the North Sea. .......................................... 1
1.1.2 Development, operations and the supply chain focus .............................. 7
1.2 THE FUTURE.................................................................................................... 10
1.3 OUTLINE.......................................................................................................... 11
2. THE RESEARCH DOMAIN.............................................................................. 14
2.1 THE RESEARCH TOPIC ...................................................................................... 14
2.2 CONTRIBUTIONS AND OBJECTIVES................................................................... 16
2.3 ASSUMPTIONS AND LIMITATIONS..................................................................... 18
2.4 SCIENTIFIC APPROACH..................................................................................... 19
2.4.1 Initial approach and changes................................................................. 19
2.4.2 Chosen approach.................................................................................... 21
3. PROJECTS AND PROJECT MANAGEMENT............................................... 28
3.1 INTRODUCTION................................................................................................ 28
3.2 THE DEVELOPMENT OF PROJECT MANAGEMENT............................................... 28
3.3 DEFINITIONS OF PROJECT................................................................................. 29
3.4 ASPECTS OF PROJECTS ..................................................................................... 31
3.4.1 The project context ................................................................................. 31
3.4.2 The project object ................................................................................... 32
3.4.3 The project life-cycle .............................................................................. 34
3.4.4 Projects means uncertainty .................................................................... 36
3.5 PROJECT PROCESSES ........................................................................................ 41
3.5.1 PMI’s project processes and knowledge areas ...................................... 41
3.5.2 What’s and how’s ................................................................................... 42
3.6 DIFFERENCES FROM STRATEGY TO OPERATIONS.............................................. 46
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3.6.1 Strategies are different ........................................................................... 46
3.6.2 The Project Atlas .................................................................................... 49
3.6.3 Routes are different ................................................................................ 51
4. LOGISTICS AND SUPPLY CHAIN MANAGEMENT. ................................. 54
4.1 INTRODUCTION................................................................................................ 54
4.2 LOGISTICS AND SUPPLY CHAIN MANAGEMENT ................................................ 54
4.2.1 Logistics functions .................................................................................. 57
4.2.2 Logistics Engineering............................................................................. 58
4.2.3 Logistics management/ Integrated logistics ........................................... 59
4.2.4 Supply chain management / Integrated SCM......................................... 60
4.2.5 Demand chain management ................................................................... 62
4.2.6 Extended or virtual enterprises .............................................................. 65
4.2.7 Future developments of logistics concepts ............................................. 66
4.2.8 Summary of logistics and supply chain management............................. 68
4.3 UNCERTAINTY IN LOGISTICS AND SUPPLY CHAIN MANAGEMENT ..................... 70
4.3.1 Demand................................................................................................... 70
4.3.2 Supply ..................................................................................................... 71
4.3.3 Growing opportunities and controlling risks ......................................... 72
4.4 SOME LESSONS FROM MANUFACTURING.......................................................... 74
4.4.1 Lean Production ..................................................................................... 75
4.4.2 Agility and Agile Manufacturing............................................................ 79
4.4.3 Lean versus agile.................................................................................... 83
4.5 LOGISTICS AND SUPPLY CHAIN MANAGEMENT IN THE PROJECT CONTEXT ....... 86
4.5.1 Earlier approaches................................................................................. 87
4.5.2 Has project management and supply chain management been
integrated?.............................................................................................................. 92
4.5.3 Project Supply Chain Management........................................................ 92
5. THE PROJECT SUPPLY CHAIN CHALLENGE........................................... 94
5.1 INTRODUCTION................................................................................................ 94
5.2 THE BUSINESS CONTEXT................................................................................. 94
5.2.1 Competitiveness in the macro perspective.............................................. 94
5.2.2 Competitiveness in the inter-organisational perspective ....................... 95
5.2.3 Competitiveness in the micro perspective .............................................. 96
5.3 THE OIL AND GAS SUPPLY CHAIN................................................................... 96
5.3.1 General ................................................................................................... 96
5.3.2 The roles of inter-organisational PSC actors ........................................ 99
5.3.3 The roles of intra-organisational PSC actors ...................................... 103
5.4 EXTERNAL BODIES – LAW AND LEGISLATION ............................................... 110
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5.5 THE CHALLENGE OF THE OIL AND GAS PROJECT SUPPLY CHAIN...................... 111
5.5.1 Cost and income – Value of technology ............................................... 112
5.5.2 Time – Value of the execution process ................................................. 115
5.6 SUMMARIZING THE CHALLENGE .................................................................... 118
6. PROJECT SUPPLY CHAIN MANAGEMENT – THE CONCEPT ............ 121
6.1 INTRODUCTION.............................................................................................. 121
6.2 PRINCIPLES AND CHARACTERISTICS OF PROJECT SUPPLY CHAIN MANAGEMENT
122
6.2.1 The Principles of PSCM....................................................................... 122
6.2.2 The Characteristics of PSCM............................................................... 123
6.2.3 PSCM characteristics in summary ....................................................... 136
6.3 PSCM – CONCEPT AND DEFINITION.............................................................. 138
6.3.1 Project Supply Chain Management – The Concept ............................. 138
6.3.2 Project Supply Chain Management – A Definition .............................. 141
7. METHODOLOGICAL GUIDELINE FOR PSCM ANALYSIS................... 143
7.1 INTRODUCTION.............................................................................................. 143
7.2 METHODOLOGICAL GUIDELINES FOR PSCM ANALYSIS................................ 145
7.2.1 Establish project vision and definition................................................. 148
7.2.2 Clarify project development and operations alternatives. ................... 153
7.2.3 Analyse the market................................................................................ 163
7.2.4 Analyse the demand/supply networks................................................... 166
7.2.5 Develop project supply chain strategy ................................................. 189
7.2.6 Select project development and operations alternative........................ 190
7.2.7 Activate and execute the project development supply chain ................ 192
7.2.8 Preparation for and start-up of operations supply chain..................... 195
7.2.9 Re-configure and improve operations supply chain............................. 200
7.3 SUMMARY ..................................................................................................... 203
8. CONCLUSIONS................................................................................................. 204
8.1 PSCM – ”OLD WINE IN A NEW BOTTLE”?...................................................... 204
8.2 RECAPTURING THE OBJECTIVES..................................................................... 205
8.3 USEFULNESS OF THE PROJECT SUPPLY CHAIN MANAGEMENT CONCEPT.......... 206
8.3.1 The PSCM development versus theory ................................................. 206
8.3.2 The PSCM development versus the industry’s challenges ................... 210
8.4 CLOSURE ....................................................................................................... 217
REFERENCES AND SUPPORT LITERATURE .................................................. 218
APPENDIX A – FINDINGS IN AGILE MANUFACTURING. ............................ 231
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APPENDIX B – CRINE NETWORK’S SCOR’S AND CAR’S. ........................... 233
APPENDIX C – CRINE’S SUPPLY CHAIN STRATEGY SETUP. .................... 244
APPENDIX D – EPCI FRONT END OPPORTUNITIES WORKSHOP. ........... 246
APPENDIX E – EPCI CONTRACT STRATEGIES WORKSHOP..................... 253
APPENDIX F – AGILE VIRTUAL ENTERPRISE REFERENCE MODEL. .... 269
List of Figures
FIGURE 1.1. A TWO-PARTED CAPEX AND OPEX SUPPLY CHAIN PERSPECTIVE................ 8
FIGURE 1.2. THE DEVELOPMENTS IN BUSINESS FOCUS FROM INVESTMENT TO BUSINESS
COMPETITIVENESS. .................................................................................................... 8
FIGURE 1.3. OUTLINE OF THE THESIS............................................................................... 12
FIGURE 2.1. THE ORDER PENETRATION POINT’S INTERVENTION IN THE DEMAND/SUPPLY
CHAIN (ROLSTADÅS, 1997-B). ................................................................................ 15
FIGURE 2.2. THE ‘GOAL-MEANS ORIENTATION’ OF THE STUDY (REVISED FROM ARBNOR &
BJERKE, 1997, P.302). ............................................................................................. 26
FIGURE 3.1. AVERAGE COST AND COST DISTRIBUTION FOR SOME REFERENCE PROJECTS. 34
FIGURE 3.2. THE APPROACH TO UNCERTAINTY MANAGEMENT STARTS IN THE FRONT-END
PHASE. ..................................................................................................................... 38
FIGURE 3.3. SHARING OF FINANCIAL RISK/REWARD AMONG THE NEREFCO ALLIANCE
PARTNERS. ............................................................................................................... 40
FIGURE 3.4. THE PROJECT SPACE. .................................................................................... 44
FIGURE 3.5. CONSTRUCTION PROJECTS MOVES WITHIN THE PROJECT SPACE AS THEY
BECOME MORE COMPLEX. ........................................................................................ 45
FIGURE 3.6. PROJECT’S DEGREE OF OPENNESS THROUGHOUT THE PROJECT PHASES. ...... 46
FIGURE 3.7. DIFFERENT PROJECT STRATEGIES AND THE PROJECT SPACE. ........................ 49
FIGURE 3.8. THE EPCI PROJECT ATLAS. .......................................................................... 50
FIGURE 3.9. A ROUTE MOVING THROUGH SEVERAL CATEGORIES OF THE PROJECT ATLAS.51
FIGURE 3.10. A TO C STRATEGIES BETWEEN ORDER AND DISORDER. .............................. 52
FIGURE 3.11. THREE DIFFERENT ROUTES FROM INITIATION TO COMPLETION (1). ............ 52
FIGURE 3.12. THREE DIFFERENT ROUTES FROM INITIATION TO COMPLETION (2). ............ 53
FIGURE 4.1. SPAN IN PARTS VOLUME AND VARIETY, DEPENDENT ON TYPE OF
‘MANUFACTURING’.................................................................................................. 70
FIGURE 4.2. THE CUSTOMER SERVICE PYRAMID. ............................................................. 74
FIGURE 4.3. INDICATIVE PROPORTIONS AMONG LEAN THINKING ACTIVITY TYPES
THROUGHOUT PROJECT PHASES. .............................................................................. 77
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FIGURE 5.1. THE OIL AND GAS SUPPLY CHAIN................................................................. 97
FIGURE 5.2. FOCUS OF THE OIL AND GAS SUPPLY CHAIN THROUGHOUT THE LIFECYCLE
(BASED ON FIGURE BY IPA, 1995). .......................................................................... 98
FIGURE 5.3. THE ENGINEER’S ROLE IN A PROJECT’S DEMAND AND SUPPLY PROCESSES. 106
FIGURE 5.4. THE OPTIMUM EXECUTION TIME (BASED ON FIGURE IN TIKO-II, 1998). ... 117
FIGURE 5.5. THE THREE STAGES AND THEIR USE OF RICH OR LEAN SUPPLY CHAIN
CONCEPTS, TO APPROACH CLOSED OR OPEN PROJECTS........................................... 119
FIGURE 6.1. ORGANISATIONAL DEMAND AND SUPPLY ALIGNMENT IN THE DEVELOPMENT
PHASE. ................................................................................................................... 127
FIGURE 6.2. ALIGNMENT OF DEMAND AND SUPPLY IN THE DEVELOPMENT PHASE. ........ 128
FIGURE 6.3. ALIGNMENT OF DEMAND AND SUPPLY IN THE OPERATIONS PHASE. ............ 129
FIGURE 6.4. AN EXAMPLE OF AN OFFSHORE SUPPLY PROCESS AND SUPPLY CHAIN. ....... 129
FIGURE 6.5. ENHANCE THE AGILITY IN PROJECT DEVELOPMENT................................... 131
FIGURE 6.6. RESILIENCE AS THE ABILITY TO CONVERT TO A NEW SOLUTION AND
CORRESPONDING SUPPLY CHAIN (READ TEXT IN FIGURE FROM BOTTOM UPWARDS).
.............................................................................................................................. 135
FIGURE 6.7. AN AGILE SUPPLY CHAIN ALLOWS DESIGN CHANGES TO BE MADE LATER
(BASED ON GORANSON 1999, P.187). .................................................................... 136
FIGURE 7.1. THE OUTLINE OF THE PSCMMETHODOLOGICAL GUIDELINE. .................... 146
FIGURE 7.2. THE STARTING POINT OF THE BUSINESS OPPORTUNITY. .............................. 148
FIGURE 7.3. ALTERNATIVE ROUTES AND STATES IN PROJECT DEVELOPMENT AND
OPERATIONS. ......................................................................................................... 153
FIGURE 7.4. DIFFERENT POSITIONS FOR THE OPERATIONS ALTERNATIVES. .................... 154
FIGURE 7.5. VALUE IMPROVING PRACTICES (IPA, 1995). .............................................. 159
FIGURE 7.6. THE OPPORTUNITIES IN THE MARKET TO REALISE AN OPPORTUNITY........... 163
FIGURE 7.7. PROVIDER CAPABILITY MAPPING (CRINE NETWORK (1999)). .................. 165
FIGURE 7.8. ANALYSING THE PROJECT’S DEMAND AND SUPPLY CHAIN CONSTRUCTIONS.
.............................................................................................................................. 167
FIGURE 7.9. THE FIVE SCOR PROCESSES (SUPPLY CHAIN COUNCIL 2002, SCOR VER.
5.0). ....................................................................................................................... 168
FIGURE 7.10. BREAKDOWN OF THE MAIN SCOR PROCESSES (SUPPLY CHAIN COUNCIL
2002, SCOR VER. 5.0). ........................................................................................ 169
FIGURE 7.11. HORIZONTAL VERSUS VERTICAL PARTNERING. ........................................ 172
FIGURE 7.12. CHOICE OF OPERATOR CONTRACTOR RELATIONSHIP BASED ON BUSINESS
CHALLENGE AND BUSINESS CULTURE (HETLAND, 1999). ...................................... 173
FIGURE 7.13. ALIGNING CLIENT AND CONTRACTOR THROUGH THE CONTRACT
(INSTEFJORD, 1999)............................................................................................... 174
FIGURE 7.14. MAJOR LIFE CYCLE CATEGORIES OF A VIRTUAL ENTERPRISE. .................. 175
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FIGURE 7.15. DIFFERENCE BETWEEN A RISK ANALYSIS AND A VULNERABILITY ANALYSIS.
.............................................................................................................................. 186
FIGURE 7.16. DEVELOP PROJECT DEMAND AND SUPPLY CHAIN STRATEGY. ................... 189
FIGURE 7.17. SELECT PROJECT DEVELOPMENT AND OPERATIONS CONCEPT. .................. 190
FIGURE 7.18. ACTIVATE AND EXECUTE THE PROJECT DEVELOPMENT SUPPLY CHAIN..... 192
FIGURE 7.19. PREPARATION FOR AND START-UP OF OPERATIONS SUPPLY CHAIN. .......... 196
FIGURE 7.20. RECONFIGURATION AND CONTINUOUS IMPROVEMENT OF THE OPERATIONS
SUPPLY CHAIN AS THE SUPPLY CONTEXT CHANGES. ............................................... 200
List of Tables
TABLE 1.1. PROJECT MANAGEMENT CHALLENGES AND PRACTICES – NORTH SEA CAPITAL
PROJECTS. .................................................................................................................. 2
TABLE 1.2. SOME OF THE MAIN CHANGES RESULTING FROM THE NORSOK PROCESS....... 3
TABLE 1.3. MAIN AREAS FOR FURTHER IMPROVEMENTS POST-NORSOK. ........................ 6
TABLE 2.1. CRINE’S SUPPLY CHAIN MANAGEMENT INITIATIVE VERSUS PROJECT SUPPLY
CHAIN MANAGEMENT AS OUTLINED IN THIS THESIS. ................................................ 16
TABLE 2.2. ARBNOR AND BJERKE’S THREE METHODOLOGICAL APPROACHES IN RELATION
TO PARADIGMATIC CATEGORIES (FROMARBNOR ET AL., P.44). ............................... 22
TABLE 2.3. TWO IDEALISTIC APPROACHES OF THE RESEARCH PROCESS (ANDERSEN ET AL.
1992, TRANSLATED BY AUTHOR). ............................................................................ 23
TABLE 2.4. ARBNOR ET AL.’S PLAN FOR A SYSTEM STUDY THAT DETERMINES RELATIONS,
WITH COMMENTS FROM THIS ACTUAL RESEARCH..................................................... 24
TABLE 3.1. SOME DEFINITIONS OF THE TERM PROJECT. ................................................... 30
TABLE 3.2. COST ACCOUNTS FOR SOME REFERENCE PROJECTS DEVELOPED IN RELATION TO
THE NORWEGIAN CONTINENTAL SHELF IN THE LATE 1990’S (FIGURES IN MILL.
NOK). ..................................................................................................................... 33
TABLE 3.3. PERCENTUAL COST DISTRIBUTION FOR SOME REFERENCE PROJECTS
DEVELOPED IN RELATION TO THE NORWEGIAN CONTINENTAL SHELF IN THE LATE
1990’S. .................................................................................................................... 33
TABLE 3.4. THE PROJECT LIFE CYCLE. ............................................................................. 35
TABLE 3.5. UNCERTAINTY MANAGEMENT MEANS BALANCING OPPORTUNITIES AND RISKS
ALONG THE PROJECT SUPPLY CHAIN......................................................................... 36
TABLE 3.6. THE NATURE OF UNCERTAINTY. SUGGESTED TAXONOMY (HETLAND 1999
(A)). ........................................................................................................................ 37
TABLE 3.7. NEREFCO ALLIANCE PROJECT; ALLIANCE PARTNERS – UNDER-RUN SHARES. 40
TABLE 3.8. OBENG’S FOUR PROJECT CATEGORIES. .......................................................... 43
TABLE 3.9. OBENG’S CATEGORIES, WITH HETLAND’S SUGGESTED NAMING................... 44
TABLE 4.1. DEVELOPMENT OF LOGISTICS’ CONCEPTS. .................................................... 56
xvi
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TABLE 4.2. FROM LOGISTICS FUNCTIONS TO LOGISTICS MANAGEMENT (FROM ROSS 1998,
P.26). ....................................................................................................................... 58
TABLE 4.3. THE DEVELOPMENT IN CLM’S DEFINITION OF LOGISTICS MANAGEMENT. ..... 62
TABLE 4.4. FOUR TYPES OF VIRTUAL ENTERPRISES, AS DEFINED BY GORANSON (1999). 66
TABLE 4.5. FUTURE THEMES FOR LOGISTICS AND SUPPLY CHAIN MANAGEMENT............ 67
TABLE 4.6. THE RELATION BETWEEN UNCERTAINTY AND THE ‘SERVICE PYRAMID’. ....... 72
TABLE 4.7. UNCERTAINTY ELEMENTS AND THE ‘REVISED’ SERVICE PYRAMID’. .............. 73
TABLE 4.8. THREE TYPES OF ACTIVITY WITH EXPERIENCE BASED PROPORTIONS. ............ 77
TABLE 4.9. THE FOUR PRINCIPAL ELEMENTS OF AGILITY (PREISS, 1995). ....................... 81
TABLE 4.10. THREE AGILE CAPABILITIES, (CLM) AND THEIR RELATION TO THE PROJECT
CONTEXT. ................................................................................................................ 82
TABLE 4.11. MASS, LEAN, AND AGILE WORK PROCESSES (BASED ON PREISS 1995-A,
P.15). ....................................................................................................................... 84
TABLE 4.12. DIFFERENCES BETWEEN LEAN AND AGILE AS SEEN BY GORANSON (1999). . 85
TABLE 4.13. SOME DIFFERENCES BETWEEN LEAN AND AGILE.......................................... 85
TABLE 5.1. ROLES OF THE INTER-ORGANISATIONAL PSC ACTORS. ................................. 99
TABLE 5.2. STRENGTHS OF OWNER ORGANISATION VERSUS CONTRACTOR ORGANISATION
(IPA 1995). ........................................................................................................... 101
TABLE 5.3. A CONTRACTOR’S SUPPLIER STRATEGY WITH RESPECT TO TYPE OF SUPPLIES
(LL 990614).......................................................................................................... 102
TABLE 5.4. ROLES OF THE INTRA-ORGANISATIONAL PSC ACTORS. ............................... 103
TABLE 5.5. ROLES AND COMPETENCE DISTRIBUTION AMONG ENGINEERING AND
PROCUREMENT....................................................................................................... 106
TABLE 5.6. WHO’S SUPPLY CHAIN TO USE IN DEVELOPMENT......................................... 116
TABLE 5.7. SUMMARIZING THE CHALLENGES OF THE OIL AND GAS [PROJECT] SUPPLY
CHAIN IN THE NORTH SEA REGION......................................................................... 118
TABLE 5.8. THE THREE STAGES AND THEIR USE OF RICH OR LEAN SUPPLY CHAIN
CONCEPTS, TO APPROACH CLOSED OR OPEN PROJECTS........................................... 120
TABLE 6.1. THE CHARACTERISTICS OF PROJECT SUPPLY CHAIN MANAGEMENT. ............ 124
TABLE 6.2. LOGISTICS SERVICE MEASURES. .................................................................. 134
TABLE 6.3. THE BUILDING BLOCKS OF THE PSCMCONCEPT. ........................................ 138
TABLE 6.4. THE PSCMCONCEPT. ................................................................................. 140
TABLE 7.1. THE PRINCIPLES OF AN AGILE VIRTUAL ENTERPRISE (GORANSON 1999). .... 151
TABLE 7.2. REPRESENTATION OF STATIC NET PRESENT VALUE MEASURE PER
ALTERNATIVE. ....................................................................................................... 156
TABLE 7.3. IMPORTANT ELEMENTS FOR LIFE CYCLE COSTING. ...................................... 156
TABLE 7.4. OPERATOR SHOULD CONTROL FRONT END LOADING (IPA 1995)................. 160
TABLE 7.5. WHY IS TECHNOLOGY SELECTION IMPORTANT? (IPA 1995). ...................... 161
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TABLE 7.6. RESULTS OF USING CONVENTIONAL VERSUS NEW TECHNOLOGY (IPA 1995).
.............................................................................................................................. 161
TABLE 7.7. CRINE NETWORK’S SCMMETHODOLOGY – ANALYSE THE MARKET......... 164
TABLE 7.8. THE CAPABILITY OF AN ACTOR IN A VIRTUAL ENTERPRISE (GORANSON, 1999).
.............................................................................................................................. 166
TABLE 7.9. VALUE STREAM MAPPING AND THE PROJECT SITUATION (BASED ON BICHENO,
2000). .................................................................................................................... 170
TABLE 7.10. MAJOR HEADINGS OF THE AGILE VIRTUAL ENTERPRISE REFERENCE MODEL
(FOR THE STRUCTURE OF THE FULL MODEL, SEE APPENDIX F). .............................. 176
TABLE 7.11. SUMMARY OF THE INTERMEDIATE METRICS (GORANSON 1999, P.186). .... 177
TABLE 7.12. THE FIVE LEAN PRINCIPLES AND RELATION TO THE PROJECT OPERATIONS
PHASE. ................................................................................................................... 179
TABLE 7.13. LEAN CHARACTERISTICS AND RELATION TO THE PROJECT OPERATIONS PHASE.
.............................................................................................................................. 180
TABLE 7.14. TYPES OF WASTE (MUDA) IN THE PROJECT OPERATIONS SUPPLY CHAIN..... 182
TABLE 7.15. LEAN PLANNING ELEMENTS AND THE PROJECT OPERATION SUPPLY CHAIN.183
TABLE 7.16. DEFINITIONS RELATED TO RESILIENCE AND ROBUSTNESS (ASBJØRNSLETT ET
AL., 1999).............................................................................................................. 185
TABLE 7.17. DIFFERENCES BETWEEN A RISK AND A VULNERABILITY ANALYSIS. ........... 186
TABLE 7.18. VULNERABILITY ANALYSIS PART 1; ESTABLISHING SCENARIOS AND THEIR
ATTRIBUTES. .......................................................................................................... 187
TABLE 7.19. VULNERABILITY ANALYSIS PART 2; QUANTITIVE ASSESSMENT BASED ON
SCENARIO CRITICALITY.......................................................................................... 188
TABLE 7.20. MATERIALS MANAGEMENT CHECKLIST – MATERIALS OF CONSTRUCTION. 193
TABLE 7.21. MATERIAL MANAGEMENT RESPONSIBILITIES. ........................................... 194
TABLE 8.1. THE FULFILMENT OF THE PART OBJECTIVES SET FOR THIS THESIS................ 205
xviii
1 Introduction
1. Introduction
___________________________________________________________________________________
1
1.1 Historical background
The oil and gas industry in the North Sea has a history that stretches about forty years
back. When it commenced, tremendous technical, organisational and managerial
challenges lay in front to be able to undertake the development and exploitation of the
hydrocarbon reserves that were located below the seabed. However, although there were
tremendous challenges and risks involved, the financial opportunities were very large
1
.
The ‘price’ or CAPEX
2
cost, of developing and installing the first offshore facilities
were regarded as ‘enormous’ and the cost estimates had to be increased several times,
leading to considerable budget overruns. Though, the oil price was so high that the
payment period needed to pay off the CAPEX costs was short.
1.1.1 Forty years of development in the North Sea.
Hetland (1999)
3
has made a reflection over the developments within project execution
and project management practice that has developed since the first North Sea offshore
oil and gas developments began and such projects emerged. Table 1 gives a summary of
these developments.
In Table 1 there are three events that should be given further attention. The first event is
the Moe report
4
(Moe, 1980) that among others concluded that the cost control of the
first generation offshore development projects had come out of control. The result was
that project planning and control was tightened up, leaving ‘closed’ projects where
every party in the project knows what to do and how to do it, as they are told in detail.
This development is by Hetland (1999) referred to as the start of using strategies
focusing to gain control over and manage tightly all risks, so that the project meets its
cost and schedule targets, without addressing whether these targets have room for
improvement. The type of risk reducing strategies as were developed in this stage of the
project management development is still active today, and contribute constructively in
their kind of project context.
1
For an interesting description of the early phases of the development of the Norwegian oil and gas
industry see Stinchcombe et al. (1985).
2
CAPEX = Capital expenditure, the investment cost for developing the facilities.
3
The content in this sub-chapter is a short summary of some reflections made by Dr. Per Willy Hetland
(Hetland 1999) on the historical development with respect to project and contract management
developments that has been seen throughout forty years of oil and gas developments in the North Sea.
4
The Moe Report = ‘Kostnadsanalysen norsk kontinentalsokkel’ (Moe, 1980).
1 Introduction
___________________________________________________________________________________
2
Table 1.1. Project management challenges and practices – North Sea capital projects.
STAGE 1 1965 – 80
Major challenge: Keep CAPEX escalation under control
Results: Major cost overruns in Norway and in the UK
THE MOE REPORT 1980
Conclusions: 176% cost overrun (average 1
st
generation projects).
Recommendations: Detailed definitions, tight change control.
STAGE 2 1975 – 90
Major challenge: Making the recommendations in the Moe report work.
Initiatives, Shell: CTR-catalogues (tell contractor what to do).
Conoco: FEL, Front End Loading.
Mobil: Incentives (contractor control his own costs).
Results: Generally good.
STAGE 3 1990 – 2000
Major challenge: Reduce costs by 40%
Initiatives, UK: CRINE.
Norway: NORSOK.
Results, UK: Generally good, some disappointing.
Norway: Some good, generally disappointing.
THE KAASEN REPORT 1999
Conclusion: 27% cost overrun (average of 13 projects).
Recommendations: ‘Continue the NORSOK process’.
STAGE 4 2000 -
Major challenge: Keep life-cycle cost reductions under control.
Enhanced life-cycle value through the project supply chain.
Initiatives, UK: Crine Network -> Logic
5
.
Norway: Kon-Kraft
6
.
5
Logic – Leading Oil and Gas Companies Competitiveness (www.logic-oil.com).
6
Kon-Kraft – www.olf.no/konkraft/.
1 Introduction
___________________________________________________________________________________
3
The second event is what in Hetland’s outline is referred to as stage 3. In the early
nineties the oil and gas industry was in a downturn with few development projects in the
pipeline. The whole industry was on low speed, and the main question was about the
competitiveness of the North Sea continental shelves. To address and improve this
situation and the competitiveness of the oil and gas industries based around the North
Sea some national initiatives were established. First the British CRINE initiative was
formed, then the Norwegian NORSOK initiative (www.nts.no/norsok/). Both were
cross-industry initiatives, aimed at improving the industry competitiveness to bring the
continental shelves to a competitive level, and this is reflected in the initiatives names,
‘Cost Reduction Initiative for the New Era’ or CRINE, and ‘norsk sokkels
konkurranseposisjon’ (‘the competitive standing of the Norwegian continental shelf’) or
NORSOK.
Both the CRINE and the NORSOK initiatives set tough ambitions for their
achievements to come. They were both going to achieve substantial reductions both in
CAPEX cost expenditure and in project execution time. Improvement targets were high,
on the British side they were not made ‘tangible’, as the improvements were said to be
substantial, while on the Norwegian side it was ‘promised’ improvements in the range
of 40-50%.
‘The main target for NORSOK was to achieve improvements in work processes and external conditions
that would make the Norwegian Continental Shelf competitive compared to other petroleum producing
countries. Two important sub-goals were especially emphasized;
A reduction in time and cost consumption with 40-50% within the end of 1998, compared with best
practice in 1993.
Maintain the leading position in health, environment and safety work.
[Seven topics with work groups] were established to achieve these targets. [The seven topics were] cost
analysis and target figures, standardisation, the relationship between operator and supplier, documentation
and information technology, base- and logistics, HES, and external conditions’ (Kaasen 1999, p.20).
In table 1.2 we have listed some important changes that the NORSOK process lead to,
as presented by Kaasen (1999, pp.20-22), changes that have direct effect on the project
supply chain.
Table 1.2. Some of the main changes resulting from the NORSOK process.
Structures and roles A new project execution model where the operators to a larger extent
procure complete products, and that these products increasingly are openly
described based on functional requirements for function and performance.
This means that the contractor to a larger extent must take the full
responsibility for engineering and execution of a larger part of the
development. As the contractor in this model has taken over tasks and
responsibilities prior handled by the operator, this has lead to a real
demand for adjustment and learning in the project supply chain, e.g.
project planning and control, detailed design, and interface control.
1 Introduction
___________________________________________________________________________________
4
New project execution
model/shorter
development time
The old, sequential execution model is replaced with a more concurrent
model, including the main phases of the development, reservoir planning,
design and construction of the production facilities, drilling, and the
overall decision process.
The project supply chain is also involved earlier in this model. This has the
effect that the supply chain may contribute with its knowledge and
competence early on, but also that it is activated at a stage where the
definition of the project is still in an early phase, which may give rise to
challenges with respect to contractual relations.
Diversity in co-operative
relations
The requirement for shorter development times and a new execution model
has developed co-operative relations in two dimensions. One focus on
more long term engagement between contractor and suppliers, this is often
seen in the increase in frame contracts and agreements. The other focus on
more committed engagement in customer and supplier relationships, e.g.
through integrated execution (e.g. operator/ contractor/ supplier integrated
teams), alliances, or joint ventures.
The development of committed engagement needs forms of contractual
incentives, and further development of contractual models. The use of
frame contracts and agreements is intended to make ordering of standard
components more cost effective over several project, as well as
standardisation and cost efficiency in operations.
New risk-picture for
contractor
The new structures and roles of the contractor, together with the new
execution model have collectively made up a new risk-picture for the
contractor. Although the contractor has increased his risk exposure, the
operator still owns the ultimate risk, and as such the risk management
should be a joint effort from both stakeholders.
NORSOK standards A common set of industry standards were developed and used (to a
varying degree, often with operator specific additions). The NORSOK
standards replaces (to a certain degree) the operator specific standards,
with a set of common standards. The specifications in the NORSOK
standards are functional for some areas, and detailed for others.
The focus on Norwegion, i.e. NORSOK, standards, is an element that has
been ‘criticized’ by the British industry, as they don’t see the benefit of
having national industry standards in an international industry, when there
are international standards available.
7
Legislation A change made in the legislation through the Petroleum Law is that the
licensee may enter into substantial contractual obligations or start
fabrication or construction before approval of PDO. The contractual
obligations are entered into at the licensee’s own risk. This has made
possible shorter development time, and has become a much applied
practice. A possible drawback on this is that contractual obligations are
made on a weak engineering (demand) basis, leading to changes and cost
escalation.
7
Comment given in interview with Olav Andenæs, after a meeting with British CRINE representatives.
1 Introduction
___________________________________________________________________________________
5
When the results started to emerge one saw that improvements had been made, but were
the improvements as good as expected? On the British side they saw results that was
better than what had been achieved in earlier, comparable projects, while on the
Norwegian side one saw that improvements had been made, but not in the scale, at least
with respect to costs, as was ‘promised’. For many within the oil and gas industry, both
on the operator and contractor side the results of the CRINE and Norsok initiatives were
perceived to be; on the British side; ‘generally good, but some disappointing’, and on
the Norwegian side; ‘some good, but generally disappointing’
8
. This could of course be
a source of different opinion, but should rather be perceived as the importance in
understanding between setting quantitative benchmarks versus the process to achieve
radical changes. The difference in ‘benchmarks’ used to reach these conclusions, were
on the British side that they were going to achieve substantial improvements compared
to earlier development projects, while on the Norwegian side that they were going to
achieve tangible improvements in the range of 40-50%.
In the Norwegian Public Study 1999:11 (Kaasen, 1999), they give the following
summarising comment with respect to the results of the NORSOK process, versus the
CRINE process (translated by the author);
‘Based on the comparisons made between the two periods [projects developed pre or post 1994] regarding
costs and development time, we see a considerable improvement. The improvements have though not
been of the magnitude that was estimated as NORSOK’s targets of 40-50% reduction in time and costs
spent, but the improvement must though be said to be substantial. Comparisons with British projects and
the latest cost estimates for projects on the Norwegian Continental Shelf, indicates that a major share of
the cost increases is a result of too ambitious targets, rather than of bad project execution. Maybe was
even the ambitious targets a mean for reaching the improvements seen. … The British project are on the
same level both cost and schedule wise as the Norwegian projects of the same period’ (Kaasen 1999,
pp.81-2).
The second event lead to the third event, which is related to the Norwegian industry.
The third event came in February 1999 when a committee appointed by the Norwegian
Ministry of Oil and Energy published a report regarding cost overruns in projects
executed in the 1990’s on the Norwegian continental shelf (Kaasen 1999). The report
states that on average 13 later development projects related to the Norwegian
continental shelf had a cost overrun of 27%. The budgeted basis that the cost overrun
was calculated from was the figures stated in the government approved plan for
Development and Operation, PDO, which had discounted the 40%-50% cost
improvements ‘promised’ through the Norsok initiative. However, the report concludes
also that;
‘Although the study, according to its mandate, has concentrated to shed light on and consider the cost
overruns for the projects approved in the period 1994-98, it is reason to remind that;
The figures analysed show that the 13 projects have on the whole had a significant cost reduction
[costs per production capacity or per weight unit] and reduced development time compared to pre
1994 projects.
8
This was summarised by Per Willy Hetland at a workshop by the ‘European institute of advanced
project and contract management’, after a long discussion between representatives from the industry both
on the British and Norwegian side.
1 Introduction
___________________________________________________________________________________
6
It is indication that the results achieved on the Norwegian Continental Shelf is comparable with the
results achieved on the British Continental Shelf in the same period.
The results are achieved by that the actors in the industry together set ambitious targets with respect to
cost and development time. New solutions for development were being used as well as new means and
incentives in execution. The targets gave the incentives for renewal that were necessary to achieve
substantial improvement’ (Kaasen 1999, p.94).
Some of the reasons for the cost overruns [final cost control estimate versus budgeted
(PDO) CAPEX] as well as further areas for improvements listed in the study (Kaasen
1999) are given in table 1.3.
Table 1.3. Main areas for further improvements post-NORSOK.
Five main areas to be
focused
Sub-elements
Attitude and cooperation Basic change in attitude; Greater openness, less positioning.
The stakeholders should collaborate about contractual risk management.
Better quality early The projects should be developed so far that development elements may
be estimated with sufficient degree of safety before PDO approval.
The estimates should be based on a more thorough evaluation of
remaining risk elements.
Estimation of drilling and completion must be given a more secure
basis.
Efforts should be made to visualize and deal with strains regarding
HES.
Decision processes in
development projects
It should be clarified which formal and real function the PDO
9
shall
have in the decision process.
The committee recommends that the criteria for revision of the PDO is
clarified.
Support further
improvements
Establish a basic fundament for continuous improvements.
Further develop work processes and competence based on learning from
executed development projects.
Challenge established practices.
Invest in development of competitive solutions.
Level of activity The stakeholders should pay greater attention to the consequences that
start up of new development project will have for the level of activity in
the industry.
9
PDO = Plan for Development and Operations.
1 Introduction
___________________________________________________________________________________
7
The focus is aimed at continuing and refining the processes started with the Norsok
initiatives, i.e. focusing on continuous improvements. To answer these challenges a
‘revised’ Norwegian initiative has been established named ‘Kon-Kraft’. Kon-Kraft
(www.olf.no/konkraft) involves companies from the whole range of the Norwegian oil
and gas industry value chain. There are four main initiatives (sub-projects) in Kon-
Kraft; (i) how to involve the [supply] industry earlier in the project development life-
cycle, (ii) industry collaboration on the Norwegian continental shelf, (iii)
internationalisation through foreign companies present on the Norwegian continental
shelf, and (iv) collaboration in the value chain. In the UK the government supported
work of the CRINE Network has been brought over to the industry funded organisation
LOGIC (www.logic-oil.com), ‘that will work with companies throughout the industry to
stimulate collaboration and radically improve competitiveness’. The main initiatives of
LOGIC are related to collaboration about wells and drilling, supply chain management
and e-Business.
As both the Kon-Kraft and LOGIC initiatives address the challenges for the future, they
comprise among others how to best utilise and benefit from the supply chain actors and
processes throughout the life-cycle of the project object.
1.1.2 Development, operations and the supply chain focus
To develop and operate the offshore facilities that exploit the hydrocarbon resources
from the continental shelf and processes them for further distribution, the owner(s) of
the facilities, represented by the petroleum company acting as Operator, have to procure
external resources, competence and services. The ‘chain’ of companies that is necessary
to bring forward the goods and services required may be referred to as a supply chain.
The supply chain processes and interaction among the supply chain actors was raised as
issues both in the Norsok Collaboration Panel (NORSOK, 1998) and in the Kaasen
report (Kaasen, 1999). Both addressed that this was an issue that should be given
increased emphasis.
A supply chain is needed both for the development of the facilities as well as keeping
the facilities in operation. The costs of developing and operating the facilities are to a
large extent procured costs, i.e. costs inherent in the supply chains. The costs
materialised through the development supply chain are referred to as capital
expenditures, CAPEX, while the costs of the operations supply chain may be referred to
as operational expenditures, OPEX. The development and operations supply chains may
be used to refer to a two-parted supply chain scheme for the project object. The two-
parted supply chain scheme reflects that one supply chain is needed for the project
object development, while another supply chain is needed for the operations of the
project object, as outlined in figure 1.
1 Introduction
___________________________________________________________________________________
8
Operations
OPEX
Development
CAPEX
Operations
OPEX
Development
CAPEX
Figure 1.1. A two-parted CAPEX and OPEX supply chain perspective.
A two-parted approach to the supply chain for the project context as presented in Figure
1.1 may be related to the developments in business focus that has emerged in project
and contract management. In figure 1.2 a four-staged approach is outlined. The
development in business focus has commenced from a single focus on the investment
cost of developing the project object. Then the operation costs came into focus through
life-cycle cost approaches. Though, it was not possible to fully leave out the
development cost focus under the cover of improved life-cycle cost, and to get a balance
between CAPEX and OPEX focus life cycle value approaches came forward. With
strong fluctuations in oil prices, and a capital market with many alternative
opportunities to invest, the oil and gas industry now has to focus on business
competitiveness with the supply chain as one mean to extract value as a competitive
entity.
Development
Operations
Development
Operations
Development
Operations
Development
Operations
Investment Operations Value Business
Competitiveness
Figure 1.2. The developments in business focus from investment to business
competitiveness.
Investment
The first or initial business focus is the investment of developing the facilities. With the
investment of developing the facilities as the business focus it is the investment ‘price’
of realising the project object that is in focus. As shown in Figure 2 it is the investment
‘cost position’ of the development supply chain that is in focus, the operations supply
chain is not regarded as a business related issue. We have tried to emphasise this
1 Introduction
___________________________________________________________________________________
9
through highlighting the development supply chain (thick), while de-emphasising the
operations supply chain (dotted). The business focus is related to realising a facility that
meets the requirements at a best (lowest) possible CAPEX, within the given time limits,
through a prescriptive and controlled process. This may be related to stage 2 in Table 1.
The message in stage 2 was that the price had been escalating, and had to be brought
under control.
Operations
The second type of business focus is ‘operations’, or the life cycle cost of developing
and operating the project object. In a life-cycle perspective both the development and
operations costs throughout the life-cycle of the object shall be taken into consideration.
Though, in such a perspective there may be easy to shift focus to more or less
exclusively addressing operations aspects and costs, and emphasising the operations
chain and even use this as an ‘excuse’ to cover escalations in CAPEX. This is illustrated
through the dotted line of the development supply chain and the thick line of the
operations supply chain in Figure 2.
Value
The third business focus put equal emphasis on both the development supply chain as
well as the supply chain for operations. The business focus has moved towards ‘life
cycle value’, addressing the supply chains for the two phases equally. The perspective is
still that of the operator, in that what is addressed is life-cycle value for the operator of
the project over the life-time of the project object, i.e the net present value of the
project. The emphasis for the operator is strong both with respect to the development
supply chain, and the operations supply chain. The actors in the supply chains of the
two phases are still ‘separated’. The value oriented business type, focusing on value
enhancement, sets the project as the business opportunity, from which value should be
enhanced for the owners of the business opportunity.
Business competitiveness
The last business type reflects the aspect of competitiveness. This type extends that of
the value focus presented above, and moves on to focus on the chain of actors that
creates value and consumes cost and time. As such this business type reflects that the
supply chains for development and operations should merge. This means that the upper-
tier supply chain actors in the development phase ‘convert’ to become actors in the
operations supply chain, and that this conversion is intended and planned already from
the initiation of the project and reflected in the approach to project organisation,
execution and incentive mechanisms. Given such a perspective the contractors and
suppliers become part in not only developing the project object, but also in operating it,
and gaining remuneration based on the production by the project object. The business
focus has now become a ‘business opportunity’ not only for the operator, but also for
the supply chain actors. The underlying concept is that of competitiveness, with the
project and the facilities, or the project object, as the business opportunity or entity, and
with the supply chain(s) for development and operations as the ‘competitive entity’.
1 Introduction
___________________________________________________________________________________
10
The four stages outlined above may now be brought together. From an approach to
business focus limited to focus on the initial investment in the product that is used to
exploit and process the well-stream of oil and gas the focus has developed seeing the
project object as a part in a life-cycle perspective of being competitive and generating
value. The development and operations supply chains has to be balanced in a cost and
value perspective, and these supply chains constitute the competitive entity which
establish the competitive position of the project. As such we may say that the supply
chain and thereby supply chain management are issues that should be of interest for the
oil and gas industry, in developing competitiveness. Before we proceed with outlining
supply chain management in the project context of the oil and gas industry and the
outline of this thesis, let us briefly re-visit the two competitiveness initiatives for the oil
and gas industry referred to in stage three in Table 1.
1.2 The Future
The imperative for projects of this kind is business. That is the reason for investing
money to finance the CAPEX and partly OPEX costs for developing and commence
operations. For the Operator it is about being able to exploit and make a profit out of
selling the oil and gas. The oil price is set in the international marketplace, and is more
or less given for the operators except for different contractual terms for selling that to
some degree hedges short- and medium-term fluctuations in price development. To
develop and operate, sometimes marginal, oil and gas fields are very capital intensive.
For the supply chain actors the business lies in developing the facilities and supporting
the operations of the Operator’s facilities. The shared challenge for both operators and
supply chain actors is to be part of, develop and manage competitive supply chains for
the project context of development and operations, and thereby strengthen business for
all. Much of the strategic imperative behind the drive towards the supply chain
management approach in general is that the supply chain is regarded as the ‘competitive
unit’.
‘Integrated supply chain management implements a co-ordinated total supply or value chain from
determination of external customer needs through product/service development, manufacturing/operations
and internal/external distribution, including first, second and third tiers customers/suppliers. The objective
is to provide the highest customer service and satisfaction levels and make the most effective use of the
competencies of all organisations in the supply chain. The supply chain, versus the single business unit, is
positioned as the competitive unit.’ (Frayer et al. CLM 1997, pp.346-7).
That is the same for the oil and gas industry, and may be seen underlying the CRINE
and NORSOK initiatives. Stage two of the CRINE initiative, CRINE Network, are
directly addressing the importance of a holistic view of the supply chain and how to
apply supply chain management to the context of the North Sea oil and gas industry.
If one were to draw a scenario for the future it may be built on the trends and
developments as laid out by the references given above;
- Business value enhancement orientation.
- Value through projects.
1 Introduction
___________________________________________________________________________________
11
- The project as a business opportunity.
- The supply chain as the competitive entity.
- Logistics and supply chain management as one issue for competitiveness.
This thesis is built on the belief of this scenario. As this is one out of several scenarios,
that will reflect the assumptions and limitations of this thesis.
1.3 Outline
This thesis is built up of three parts, and eight chapters. Part one, setting the scene,
outlines the background, topic, objectives and approach taken in the research presented
in this thesis. Part two, theoretical background, outlines aspects within projects, project
management, logistics and supply chain management, as a basis for the developments
and concepts presented in this thesis. Part three, project supply chain management,
presents different sides of the project supply chain management concept that is the main
message of this thesis. Figure 7 presents the outline of the thesis.
Part I – Setting the scene
Chapter one has set the scene for the topic of this thesis through outlining different
perspectives on the developments in the business regimes of the type of projects that is
found within the offshore oil and gas industry. CRINE and NORSOK is central in this
development, and especially the attention that both give to the importance of the supply
chain and its inherent inter-organisational processes.
Chapter two presents the topic of the research to a fuller extent. The problem addressed
is outlined, together with objectives and the contribution of this thesis. Finally
assumptions and limitations are presented, and the scientific approach that lay behind
the research presented in this thesis.
1 Introduction
___________________________________________________________________________________
12
Ch. 3
Projects &
Project Management
Ch. 4
Logistics &
Supply Chain Management
Ch.5 The Project Supply Chain Challenge
Ch. 6 Project Supply Chain Management -
The Concept
Ch. 7
Methodological Guidelines for
Project Supply Chain Management
Ch. 8
Conclusion
Ch. 1
Introduction
Ch. 2
The Research Domain
Ch. 3
Projects &
Project Management
Ch. 4
Logistics &
Supply Chain Management
Ch. 3
Projects &
Project Management
Ch. 4
Logistics &
Supply Chain Management
Ch.5 The Project Supply Chain Challenge
Ch. 6 Project Supply Chain Management -
The Concept
Ch. 7
Methodological Guidelines for
Project Supply Chain Management
Ch. 8
Conclusion
Ch. 1
Introduction
Ch. 2
The Research Domain
Ch. 1
Introduction
Ch. 2
The Research Domain
Figure 1.3. Outline of the thesis.
Part II – Theoretical background
Chapter three outlines aspects of projects and project management. The emphasis is laid
on the differences of projects, their inherent uncertainty and complexity, and the impact
this has on approaches to project management.
Chapter four outlines aspects of logistics and supply chain management. First an outline
of the development within logistics and supply chain management is given. Uncertainty
within logistics and the supply chain is presented, linking it to the demand and supply
side of the supply chain, and to the uncertainties of the project context. Then some
concepts borrowed from the manufacturing domain are visited, before chapter three and
four is brought together towards logistics and supply chain management in the project
context.
Part III – Project Supply Chain Management
The third part of the thesis is written with project executives, project managers, people
involved in project core teams (operator), and integrated teams (operator, contractor
and/or supplier(s)), as well as people involved and/or interested in procurement,
logistics and supply chain management in mind. This part is also the main part or
contribution of this thesis, as it set out to outline and develop a conceptual basis and
some methodological guidelines for logistics and supply chain management as an
approach in the project context of large-scale development and construction projects,
1 Introduction
___________________________________________________________________________________
13
including the operations of the project object, and the project management of such
projects.
Chapter five outlines the project supply chain challenge in the oil and gas industry.
Initially the business context is elaborated a bit further than in this chapter. Then the
supply chain actors in the intra- and inter-organisational perspective of the project
supply chain context are outlined. finally the challenge of the oil and gas demand and
supply chain is outlined as we see it here.
Chapter six outlines the concept of project supply chain management, to give company
and project executives a new frame of mind to use to address the undertaking of large-
scale development and construction projects. First some principles from the project
context are outlined. Then some characteristics of project supply chain management is
outlined and discussed, before the project supply chain management concept is outlined
and defined.
Chapter seven outlines some methodological guidelines for supply chain management,
SCM, and SCM analysis in the project context. The methodological guidelines is set to
follow the life cycle of a project, from vision and initiation, to the operations supply
chain and revisions of that.
Finally chapter eight concludes and discuss the work presented. The validity of the
result is discussed, whether the proposed concept is something new or just ‘old wine in
a new bottle’, seen against the objectives of this thesis. Finally the usefulness of this
work is discussed.
2 The research domain
2. The research domain
___________________________________________________________________________________
14
2.1 The research topic
‘The fact that Alexander [the Great] so capably directed its [the warfare’s] operation that logistics
scarcely seems to have affected any of his strategic decisions … supply was indeed the basis of
Alexander’s strategy. … Alexander was able to overcome these [logistics] obstacles where other armies
had failed because of his superior abilities in gathering intelligence, planning, preparation, and
organisation’ (Engels 1978, pp.119 & 123).
To successfully execute his warfare operations and reach his objectives Alexander the
Great knew that he had to draw and rely on resources outside his own ‘organisation’.
These external resources had again to be different based on the situation he and his
army were in, and he had to take this into account prior to execution. Projects are, as
warfare, unique endeavours with a given start and finish, objective-oriented, of
significant size, value and complexity, under time pressure to complete, developed and
executed based on inter-organisational capabilities, capacity and integration. If the
supply chains were fundamental for Alexander’s successes, then it could bear success as
well in the project context to use the supply chain perspective as an approach.
Both logistics management and project management are managerial topics that have
gained increased attention in later years. The project approach is often referred to as the
future way of organising work, while the supply chain is approached as the competitive
entity of the future. Neither logistics nor projects are new inventions. Logistics have
been central to human settlement and especially warfare since ancient times. Alexander
the Great used logistics directly as a central aspect in strategic and tactical planning of
his warfare, and did not move until his logistical resources were in place to support his
fighting resources (Engels 1978). Projects have also been undertaken since ancient
times, since building the first city wall of Jerico 9000 B.C, although the term project
management has emerged after the 2
nd
World War (Hetland 1998). The question then is
whether it would be constructive to bring the two together?
This thesis outline and describe the development of a concept named ‘project supply
chain management’. The background for this work was an initial assignment of
‘looking into logistics and logistics management in the project context and as part
of project management’. The project context addressed here is that of the oil and gas
industry, i.e. developing and operating an object where the production by that object
generate income for the owner(s) of the oil and gas reserves, while taking part in
developing and operations of the object generate business for the supply chain actors.
Within logistics and supply chain management most of the conducted research and
development have focused on repetitive and continuous types of industries and
businesses. There is a difference between the repetitive context and the project context
with respect to logistics and supply chain management, as for the latter the following
apply;
One of a kind product and supply chain, that must concurrently develop inter-
organisational competence.
2 The research domain
___________________________________________________________________________________
15
Long lead items lock-in the design.
Long time frame from initial design to construction, often with many design
changes.
Most value is engineered into the project in its early phases.
High cost consumption over a rather short period of time, where missing material
give rise to high quality costs.
Few opportunities for continuous development.
Complexity in product and organization.
Technological developments that must be integrated into solutions already
established or to be established through project development.
We may use the order penetration point to visualise, as in Figure 2.1, how the project
context comprises the whole cycle, as compared to most repetitive industries. The
project context is represented by the ‘one-of-a-kind production’ context.
Design Procurement Manufacturing Assembly Sale
Demand/Supply Chain
One-of-a-kind Production
Procure and produce to order
Standard order production
Produce
for stock
Assemble to order
Order Penetration Point
Design Procurement Manufacturing Assembly Sale
Demand/Supply Chain
Design Procurement Manufacturing Assembly Sale
Demand/Supply Chain
One-of-a-kind Production
Procure and produce to order
Standard order production
Produce
for stock
Assemble to order
One-of-a-kind Production
Procure and produce to order
Standard order production
Produce
for stock
Assemble to order
Order Penetration Point Order Penetration Point
Figure 2.1. The order penetration point’s intervention in the demand/supply chain
(Rolstadås, 1997-B).
Of the research and approaches to logistics and supply chain management in the
construction or project context no references is found that try to conceptualise and
describe the key characteristics of logistics and supply chain management in the project
context. As the project context described above is both a special type of business
situation, as well as characterised by differing characteristics throughout its life cycle
2 The research domain
___________________________________________________________________________________
16
that will influence the management of the supply chain processes, logistics and supply
chain management should be worthwhile to examine for this context.
The focus on logistics and supply chain management in most industries is as means for
improving the competitiveness of the industry or companies. This is the same for the oil
and gas industry. Therefore, an approach to supply chain management in the project
context of the oil and gas industry should aim to address logistics’ contribution to
industrial competitiveness in the oil and gas industry. This means, the problem of this
research is to show how concepts and principles of logistics and supply chain
management, may be applied to address competitiveness in the project context of
the oil and gas industry.
The problem, or rather the challenge, related to the oil and gas supply chain, that states
the requirements of logistics concepts for this context is further explained in chapter
five.
2.2 Contributions and objectives
The aim of the different domains of management is to create value beyond what would
have been created without a given management approach. As such the aim of the
concept of project supply chain management is to show how logistics and supply chain
management may contribute to enhance the value that project management have on
developing and operating the object which the project is established for. The added
value of logistics and supply chain management in general is found within the logistical
mission elements, namely the supply chain cost (or maybe more appropriate; value) and
service position achieved through the ‘best’ alignment of supply and demand.
The contribution of this thesis may be seen in relation to the three elements that CRINE
Network (1998) addressed as aims for their supply chain management initiative. The
three aims of CRINE’s supply chain management initiative were (CRINE 1998): (i)
Awareness and potential contribution, (ii) Assessment of SCM status in the British oil
& gas industry, and (iii) Delivery of means and training. The relation between this
research and CRINE’s SCM initiative may be presented as in Table 2.1.
Table 2.1. CRINE’s supply chain management initiative versus project supply chain
management as outlined in this thesis.
CRINE Supply Chain Management Initiative This thesis; ‘Project Supply Chain Management’
Awareness and potential contribution Project Supply Chain Management – The Concept; Chapter 6.
Assessment Earlier Approaches; Chapter 4.5.1.
The Project Supply Chain Challenge; Chapter 5.
Delivery of means and training Project Supply Chain Management – Methodological
Guidelines; Chapter 7.
2 The research domain
___________________________________________________________________________________
17
The contribution of this research is both wide and narrow. Wide in the sense that
it contributes to applying knowledge from the field of logistics and supply chain
management to the field of project management. Narrow or specific in the sense
that it outlines what should be the core focus (or most characteristic) for logistics
and supply chain management within the project context and project management
of the oil and gas industry. The ‘wide contribution’ is presented through the
conceptual development in chapter six, while the ‘narrow contribution’ is presented
through the methodological guidelines for analysis in chapter seven. The project
supply chain management concept and methodological guidelines should as such
be regarded as the original contribution of this thesis.
Not only project management, but also logistics and supply chain management may
gain from this work. Logistics and supply chain management become more project- and
network-oriented and -dependent, as businesses need to focus on establishing specific
supply chains for specific customers and as the move towards core competence and the
use of contracting develops. The ability to plan, establish, manage and close temporary
supply chains as a way to conduct business will therefore become more important. This
research may help to build knowledge about that.
The objective of this thesis is to bring a contribution to project management of large-
scale development and operation projects from concepts and thoughts within logistics
and supply chain management. The objective is to outline supply chain management
within the project-oriented context as a particular and conscious knowledge area of
project management. Through developing a concept that approaches projects and
project management from a logistics and supply chain management perspective, and
through outlining what is important/specific for logistics and supply chain management
within the project context. Therefore the objective of this thesis may be summarised to;
- Develop principles, concepts and a framework of logistics and supply chain
management in the project context.
- Demonstrate these principles and concepts through theoretical and empirical
examples.
- Apply these principles and concepts, through methodological guidelines for
analysis.
The objective is as such related to developing conceptual and methodological
frameworks that may be used as basis for specific developments and application in
specific industrial and project-oriented contexts. The objective is as such not to develop
and give specific solutions to specific problems.
To support the main objective to ‘develop, demonstrate, and apply’ principles and
concepts within the area studied, the following part objectives may be formulated;
- Determine if there exists present work or approaches that are suitable to use with
respect to developing and proposing the use of logistics and supply chain
2 The research domain
___________________________________________________________________________________
18
management within the project-oriented context of the oil & gas industry, through a
survey of existing research on project management and supply chain management.
- Determine competitive aspects or elements of logistics and supply chain
management that are more important than others to relate to and use within the
project context as found in the oil & gas industry.
- Structure and adapt existing theory as a guidance to practical use – formulate a
concept (or ‘frame of mind’) and develop methodological guidelines for an
approach to logistics and supply chain management within the project context of the
oil & gas industry.
The concept of project supply chain management presented is developed to outline key
describing characteristics of logistics and supply chain management within the project
context. Although this is not a complete approach to undertake the project management
of large-scale construction projects it may contribute to enhance the awareness and
understanding for the importance of the extended ‘procurement’ function, moving from
procurement to project supply chain management, PSCM.
As a part of developing the concept one should aim at defining what the specific focus
of supply chain management should be within the project context. For instance the five
aspects that could be agreed to be the most important and characteristic for supply chain
management within the project-oriented context. An example of such a focus may be
found in an analysis methodology used for analysing supply chains for car
manufacturers (Schneider et al., 1994). This methodology focus on finding critical
elements within the supply chains with respect to important objectives of key
customers, and whether these supply chains are robust with respect to up-keeping their
mission under different circumstances. As such the focus of this methodology (for lean
car manufacturing supply chains) is robustness
10
. A similar focus point for a PSCM
methodology should be established through this research.
2.3 Assumptions and limitations
Supply chain management is concerned with integrating, aligning and managing the
inter-organisational supply chain regarded as the competitive entity, included internal
integration in each single company that is part of a given supply chain. The aspect of the
supply chain as the competitive entity and supply chain management as the managerial
aspects related to such chains, means that supply chain management will comprise a
large number of issues and thereby a large number of alternative and possible
approaches
11
. In this thesis the approach or focus is ‘logistics and supply chain
10
Robustness may be defined as ‘a system’s ability to resist an accidental event and return to do its
intended mission and retain the same stable situation as it had before the accidental event’ (Asbjørnslett et
al. 1999).
11
See Stock (199x) for a broad description of theories that relate to logistics. Stock (op cit.) tries to
establish a broad view of logistics to make it clear that ‘logistics is … a boundary-spanning activity’ (op
cit., p.184). He does so by evaluating more than 50 theories to see how they may contribute to logistics.
2 The research domain
___________________________________________________________________________________
19
management within the project context’. The main assumptions that underlie this thesis
may be presented as the three elements of;
- The project as the business opportunity.
- The supply chain as the competitive entity.
- Competitiveness through logistics and supply chain management, focused on
alignment of supply and demand.
The project is regarded as a business opportunity, where each actor will make business
out of it and gain from participating in it. It is also assumed that a project will not be
realised if it is not possible to make business out of it, i.e. it is not a realisable business
opportunity. Though, technology, competence, capability and capacity of the supply
chain actors organised into the specific project supply chain construction, is what may
make the project available to realise as a business opportunity. Therefore the project
supply chain may be regarded as the competitive entity. Competitiveness or value
enhancement for the project, through the supply chain is assumed to be achieved
through logistics and supply chain management, specifically through the logistics aim at
alignment of supply and demand.
The last assumption element may also be regarded as the main limitation of this thesis.
Logistics and supply chain management is a broad field of knowledge, with several
possible approaches. Limiting the perspective here to ‘alignment of demand and supply’
is therefore a limitation. The project itself and the project context may also be regarded
as many different constructions, as well as be found in many different industries, as well
as both in the private and public sector. The type of projects aimed at in this thesis is
projects as represented by field development projects in the oil and gas industry, i.e. a
project object that is developed and operated to exploit oil and gas resources located
offshore.
2.4 Scientific approach
2.4.1 Initial approach and changes
In the early phase of this research the intention was to use a set of three case studies as
the basis for the research. The intention was to make descriptive case studies as
described by Yin (1994), describing the supply chains of the projects and the
management of them. The three cases and the corresponding project-oriented supply
chains and supply chain actors were selected from three different offshore development
projects. Three projects (cases) were initially chosen due to the long duration of
offshore petroleum development projects. Two of the projects to be used were
This is a honourable effort aiming at strengthening logistics both for scholars and practitioners. If viewed
by a person external to the logistics domain it may be seen as an attempt to make logistics an all-
embracing domain of management, which may be seen as a destructive attempt both for the logistics
management domain as well as the relationships between different perspectives on management.
2 The research domain
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20
combinations of modifications and developments tied in to existing offshore
infrastructure. The third project was a complete development project. The two
modification projects were, for this research, similar in scope-of-work, but in two
different phases of their lifecycle. The first was in the planning phase and the supply
chains were not yet fully developed and initiated, while the other was in the execution
phase, where most of the supply chains were initiated and in operation.
Initially, in January 1997, contact was established with a petroleum company to explore
whether they found interest in the topic of the research, to check whether they had
projects that could be used as cases for empirical research of the topic, and if it would
be possible to get access to do research within these projects. Due to reorganisation and
people changing positions in the petroleum company, it took a year from the initial
contact to a meeting was arranged with the central procurement and supply chain
department of the petroleum company. This was in January 1998. Based on this meeting
the three projects to be used as cases were established. Due to a large workload on the
project teams and progress demands in the projects it took four months from this
meeting, to the initial contact with the first project in May 1998.
After this initial meeting with the first case project, interest for the research was
established in another part of the petroleum company. They wanted to extend the study,
and have a group of consultants working in parallel and together with the research. We
saw this as an opportunity to get a better basis for the research and agreed to this. This
also led to a revision of some of the initial research questions, as well as an extension of
the research area to be covered.
Then from June to December 1998 a set of meetings and interviews were held with the
petroleum company’s project teams for each project, as well as the joint project teams
of the petroleum company and the main contractor of each project. The time schedule of
these meetings and interviews became quite long due to a full agenda for these project
teams. The aim of these meetings and interviews was to establish understanding in the
projects for the research, and to establish initial information about the projects and their
supply chains. During these meetings and interviews we obtained some basic
information, as well as individual comments with respect to logistics and supply chain
management in petroleum development projects in general. Then, at the end of 1998 we
had established a good basis for starting more thorough analysis of specific elements
within the project’s supply chains.
In the same period, the price of oil had fallen, and the license that covered the cost of
the consultants and the travelling expenditures was asking questions about the relevance
of this project for them as a license. As these project teams were located at five
geographically different locations, financial support for travelling expenditures was
important to be able to undertake the studies. The result was that this research project
had to be terminated, at the point in time when a good basis was established for specific
studies, but without having the necessary material to develop good descriptive case
studies. Another point worth mentioning is that the workload on the project teams made
it hard to get appointments and sufficient time for the research. This is an
understandable situation seen from the priorities of the project organisations, but with a
negative impact on our research.
2 The research domain
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21
The question was then how to proceed, based on non-complete case material, but with
the good basis understanding it had given? One alternative would have been to conclude
the cases as they were, but this was not regarded as a satisfactory solution due to the
insufficient material. Another alternative could be to take a conceptual orientation and
approach to the research topic, and a third alternative could be to find other cases. It was
decided to follow the second alternative, a conceptual orientation to the research topic,
and in parallel search for opportunities to find other opportunities for case studies.
Based on a relation to a project management institue, Epci
12
, we found that it could be
possible to take a higher-level and more general conceptual approach to the topic. And
through their network find material of relevance to the research. In September 1998, the
CRINE Network, the British parallel to NORSOK, started up their supply chain
management initiative, ‘Supply Chain Management in the UK Oil and Gas Sector’. This
was also an initiative that could be followed as a source of information. CRINE network
were positive to send written material, but it was not possible to get a direct relation to
their initiative. Several other attempts were also made towards engineering companies
to be allowed to come into some of their projects as a research case setting. We were
able to get high-level contacts and interviews, but they were not interested in ‘opening
up’ on-going projects for casework. This was mainly due to the workload and time
pressure on the project teams.
The research was therefore continued based on the conceptual orientation, and when the
conceptual development was developed it was ‘put on hold’, to see whether it was
possible to get a case to test the conceptual material.
As a follow up to NORSOK, a Norwegian initiative was established in year 2000 and
named KONKRAFT. When this initiative came up we took contact with the
KONKRAFT secretariat to present the conceptual development we had made, and
check whether it could be an opening for testing these developments through activities
in KONKRAFT. This contact was up-kept through 2000 and 2001. It was interest and
positive feedback on the conceptual developments, but the stakeholders in KONKRAFT
wanted the developments to be based on internal resources in the participating
companies, not through external resources.
As a summary, we decided medio 2002 to sum up the conceptual developments made
and present them in this thesis. The approach to this study as it resulted is described
below.
2.4.2 Chosen approach
Supply chain management and this research belong to the field of applied science, i.e.
research aimed at the practical applicability of the results;
12
Ecpi, the European Institute of Advanced Project and Contract Management.
2 The research domain
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22
‘Applied science is activity of original character to gain new knowledge and insight, primarily aimed at
certain practical goals and applications’ (as defined by the OECD, in NOU 1988, p.181, translated from
Norwegian).
The approach taken in this research follows Arbnor and Bjerke’s (1997) system
approach. They say that the systems approach is related to determining the type of a
system, by characterising and categorising the object under study, in our case the
‘system type’ of logistics and supply chain management in the project context of the oil
and gas industry;
‘In [the case of the systems approach], however, the researchers/consultants/investigators do not begin by
trying to come up with an interesting and testable suggestion for a producer-product connection
(equivalent to formulating a hypothesis in the analytical approach), but instead try to determine the type
(of a system). This means attempting to categorise the object under study in terms of, say, complexity,
age, degree of openness, type of environment, and so on. The type of system present will determine such
aspects as where to seek inspiration from other creators of knowledge and the design of the rest of the
study: to describe, to determine a relation, to forecast, and to guide’ (Arbnor et al. 1997, p.149-150).
Arbnor et al. presents three approaches for creating business knowledge. The analytical,
systems and actors approach, moving from the more ‘objective’, quantifiable analytical
approach, to the subjective and intentionally influenced actors approach. The systems
approach’s place among these is presented in table 2.2.
Table 2.2. Arbnor and Bjerke’s three methodological approaches in relation to
paradigmatic categories (from Arbnor et al., p.44).
1 2 3 4 5 6
Reality as a
concrete and
conformable
law from a
structure
independent of
the observer
Reality as a
concrete
determining
process
Reality as
mutually
dependent
fields of
information
Reality as a
world of
symbolic
discourse
Reality as a
social
construction
Reality as a
manifestation
of human
intentionality
The ANALYTICAL Approach
The SYSTEMS Approach
The ACTORS Approach
The differences in approaches to studies of business knowledge is also commented by
Andersen et al. (1992). Andersen et al. differentiate between two types of processes, a
rational process and a learning process (see table 2.3). We regard our research to be part
of a learning process.
2 The research domain
___________________________________________________________________________________
23
Table 2.3. Two idealistic approaches of the research process (Andersen et al. 1992,
translated by author).
Rational Process Learning Process
Goal Clear, defined in advance Tentatively formulated in
advance
Goal Function Establishing the frames of the
research, excludes “noise”, may
be changed marginally
Heuristic mean, commences
research and discovery, can be
changed
Theory, Models, Concepts Established and made
operational in advance
Adaptive, plastic
Process dominated by Calculation and evaluation Inspiration and evaluation
The process’ function A mean to answer the questions
raised in advance
A mean to ‘force’ knowledge out
of the field, and develop research
competence
The researcher’s learning process Perfection within the frames of a
paradigm
Development of a personal
method for production of
knowledge between two cultures,
learning about the borders of a
paradigm
The researcher’s self-perception Distant observer, expert Existentialist, craftsman
Related to the methodics of the systems approach, Arbnor et al. states that;
‘Success is associated with imagination, alertness, and awareness when facing the complex reality
postulated by this approach’ (Arbnor et al. 1997, p.294).
Following Arbnor et al.’s definition of the systems approach our aim of this study is;
To determine the type of the system (from a logistics point of view)
To describe the system (from a logistics point of view)
To guide in approaching how we see the system (from a logistics point of view).
Through our assumptions
13
we may say that we have taken what Arbnor et al. names a
‘goal-means orientation’ in our research. This means that the goal for both the study
and the system should be stated at an early stage in the study. We say ‘should’ because
this is an iterative process, as also was experienced through the research. What was
stated early was that the contribution of logistics and supply chain management in the
13
Our three assumption were; (i) The project as the business opportunity, (ii) The supply chain as the
competitive entity, and (iii) Competitiveness through logistics and supply chain management, focused on
alignment of supply and demand.
2 The research domain
___________________________________________________________________________________
24
project context of the oil and gas industry should be improved competitiveness, as this
is the contribution that is sought from the same in other contexts. The goal of the study
was also stated early on, but as we learnt through the study process, the means for
reaching that goal had to be changed during the study. Further, our research followed
the main headings of Arbnor et al.’s description of a system study to determine
relations, describe and to guide.
‘Systems analysis is conducted using traditional data collecting techniques that are adapted to the specific
study situation and made into methods via methodical procedures; that is by using secondary material,
direct observations [e.g. case studies], and interviews’ (op cit p. 302).
As explained above, the process that the research takes, may often be influenced by
situations in the study context, and may therefore have to be altered during the research
process. This may lead to revised and other goals and levels of the research. Table 2.4
give a short outline of how our research developed due to the changes that were
necessary to make when the cases fell out, seen in relation to Arbnor et al.’s plan for a
study to determine relations.
Table 2.4. Arbnor et al.’s plan for a system study that determines relations, with
comments from this actual research.
System study plan Comments from actual research
14
Formulating
possible finality
relations
This is by A&B said to be developed in an iterative way through direct ‘dialogue’
with the system(s) under study. The way that was developed in our study is
outlined below;
(1) The first contact with the system was with a strategic adviser from an Operator
company, and that gave a strategic focus on the role of the supply chain and
supply chain management as an approach for improvements for an Operator. As
this did not lead to any formal continuation of the study, this was kept as part of
the background material of the study.
(2) Then for the second contact with the system, the focus was on the importance
to secure the supply of goods for the construction of the project object, not to
delay the scheduled progress of the development project. This may be regarded as
a project planning and control perspective.
(7) When the case studies had to be terminated, we had learnt that;
Technology development is the main driver for value enhancement in future
projects.
Changes are an important element to control in the demand/supply processes
of the development phase of the project, and that the changes come late in the
development process.
Then we started to work with the value perspective of the demand and demand
chain processes in the development, especially through the importance of
technology and the impact of changes. This may be regarded as a project
14
The numbers show the relations in progress of the study, and the development of the focus of the study.
To understand the development of the study, the reader should follow the numbers, i.e. not reading the
table from top to bottom, but in stead follow the number indication.
2 The research domain
___________________________________________________________________________________
25
management perspective. Further for the operations phase of the project we
started to gather information and knowledge from secondary sources, as well as
from other studies external to this study.
Planning the
continuation
(3) Based on this and an extension of a study, a set of case studies was
established. Three case studies was made available, all three with different
characteristics as projects, that could shed light to different elements of the
problem complex. The case studies was developed as descriptive case studies
along the prescriptions of Yin (1994), and supported by aspects from Dyer et al.
(1991), Eisenhardt (1989 A & B, 1991), Flyvbjerg (1991), Leonard-Barton (1990)
and Merriam (1994).
(8) We now had some information from three unfinished case studies, but for the
rest of the study we had to rely on second hand material, and interviews when we
where able to get such. In summary we had to take a higher magnifying level on
our study.
Designing methods
for collecting data
(4) These case studies started with interviews with actors from the operators
project teams, and the operator/contractor integrated project teams, as well as
interviews with personnel from contractors. It was also planned to have interviews
and follow-up with a set of sub-contractors and suppliers. It was also developed a
method and format for collecting information about the project (case) specific
supply chains, and the logistics processes involved
(9) The methods now had to turn to a more theoretical analysis and development
of a system construction that focused on the characteristics and the high level
problem complex of the system, and how these were theoretically to be met by
logistics and supply chain management theory.
Collecting data (5) Data were collected to a certain extent from some of the actors in the cases,
but due to external circumstances that influenced the financing of these case
studies, they had to stop when the understanding of the sub-systems started to
grow, as well as the contact and relations with the actors had been established.
Are you satisfied as
a creator of
knowledge?
(6) Then the question was whether we as researcher were satisfied with the data
and knowledge gathered this far? We were not! We had not enough data to call
the started case studies for real case studies. We had not been able in the time
available to map the demand and supply chain of the cases, and far from having a
material that was sufficient for data analyses and being able to go further into
detailed studies of aspects of special interest or importance.
Though, we had learnt some, and were able to review and revise our finality
relations.
(10) Without having been able to test the results of our system analysis and
theoretical construction and check the validity of this, there is still uneasy to be
satisfied as a creator of knowledge. Arbnor et al. call it the expert variant, when a
theoretical solution is developed, without the researcher being in place to check
out the practical validity of the results. This is especially so for the development
phase of the project life cycle.
Coding and
arranging data
(11) The data material from the case studies where not sufficient, and therefore no
data analysis were conducted based on that material.
Controlling finality (12) We have not been able to control the finality relations for the development
phase of the project life-cycle. Though, from a theoretical point of view we have
this far not seen any aspect that should tell otherwise, given the preconditions of
the result, i.e. the results are context or system specific. For the operations phase
2 The research domain
___________________________________________________________________________________
26
of the project life-cycle we have gathered information from secondary material, as
well as from studies external to this study, and these other studies have confirmed
our proposed theoretical results.
Reporting (13) This thesis is the final reporting of this study.
Then, let us go back to the objectives of this research;
- Develop principles, concepts and a framework of logistics and supply chain management in the
project context.
- Demonstrate these principles and concepts through theoretical and empirical examples.
- Apply these principles and concepts, through methodological guidelines for analysis.
To address these objectives we have taken a ‘goal-means orientation’ as described by
Arbnor et al. and as presented in figure 2.2.
Theory
Practice
Problem
Systems
analysis
Systems
construction
Implementing
new proposal
CRINE
NORSOK
Crine Network
KonKraft
Incomplete cases
Secondary material
Observations
Interviews
PSCM;
-Concept
- Methodological guidelines
Future studies
Theory
Practice
Problem
Systems
analysis
Systems
construction
Implementing
new proposal
CRINE
NORSOK
Crine Network
KonKraft
Incomplete cases
Secondary material
Observations
Interviews
PSCM;
-Concept
- Methodological guidelines
Theory
Practice
Problem
Systems
analysis
Systems
analysis
Systems
construction
Systems
construction
Implementing
new proposal
Implementing
new proposal
CRINE
NORSOK
Crine Network
KonKraft
Incomplete cases
Secondary material
Observations
Interviews
PSCM;
-Concept
- Methodological guidelines
Future studies
Figure 2.2. The ‘goal-means orientation’ of the study (revised from Arbnor & Bjerke,
1997, p.302).
We started with a specific problem statement for the oil and gas industry. This problem
description is given in chapter five. Based on this problem statement we have done a
systems analysis based on input from secondary material, observations, as well as
participation in meetings and interviews with actors related to the problem complex in
the oil and gas industry. Based on this we have proposed a system construction through
a theoretical concept and methodological guidelines for what we have named ‘project
supply chain management’. As the case studies terminated and it has not been able to
test out the theoretical solutions fully in practice, we have a study that is mostly
theoretical, in some areas on the philosophical side, but that seeks to answer how we
perceive a theoretical answer to the problem complex of supply chain management
focusing on the logistical side of the oil and gas industry. Therefore, we believe that the
scientific approach taken in this thesis is in line with the systems approach from Arbnor
and Bjerke.
2 The research domain
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27
Now, let us turn the attention to part two and the theoretical background for this thesis.
First, projects and project management is addressed in chapter three, then logistics and
supply chain management in chapter four.
3 Projects and project management
3. Projects and project management
___________________________________________________________________________________
28
3.1 Introduction
Project management is a domain of management knowledge and theory that has
emerged after the term project started to be used consciously about different forms of
objective oriented endeavours of a temporary character. As such projects will be
different, especially in the context surrounding and the aspects underlying the project.
Though there may be project processes and project management processes that are
similar across a range of projects, and that may seem very similar in a project execution
perspective, there may be more interesting differences to find in the more strategic
aspects of projects and project management. This is especially so as the logistics and
supply chain management perspective to the project context taken in this thesis, may be
seen as a deliberate, strategic choice with respect to approach to projects and project
management. This chapter seeks to outline aspects and elements related to projects and
project management that is perceived to be of relevance for logistics and supply chain
management within the project context. The aim is to outline some differences of
projects and the approach to them that influence logistics and supply chain management
as an approach to project management.
3.2 The development of project management
The project as an object of management goes back to the time period 9000 B.C. as we
referred to in chapter two. However the conscious treatment of project management as a
specific topic arose later in time. One author, Morris (1994) says that the historical
developments of project management emerged between the 1930s and 1950s, and to be
closely related to;
- ‘the developments of system engineering in the US defence/aerospace industry and to engineering
management in the process engineering industries,
- developments in modern management theory, particularly in organisation design and team building,
and
- the evolution of the computer, on which project management’s planning and control systems are now
generally run’ (Morris 1994, p.2).
Though, project management is an area that touches onto many aspects and as such has
to take account of developments in general that will influence the project context and
the management of project;
‘Despite its long development, the concepts and techniques of project management now available to the
general practitioner, however advanced and specific they may be, are often inadequate to the overall task
of managing projects successfully. … [T]he successful accomplishment of a project may well require
attention to a range of factors not treated by the traditional project management literature. Design and
3 Projects and project management
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29
technology management, …,and even contract strategy and administration
15
: all these are frequently
ignored in the professional and academic writings and teachings of today’s project management’ (Morris
1994, p.2).
Project management is based on an approach to or a perspective of what a project is. A
critical part of an approach’s usefulness to model the project, or the ‘reality’, is its
ability to enable the analyst or researcher to ‘move into’ the ‘reality’ to address and
create a better understanding of critical details per se, without loosing the details place
in the totality. As the models of the reality will be simplified representations of the
reality this is an important point to remember. The different approaches or perspectives
taken towards project management will, as Morris states, necessitate that concepts,
methodologies and techniques from several other ‘sources’ of knowledge is brought into
and adapted to the project context and the project management domain. The
contemporary understanding of projects and project management is represented by a
multitude of different approaches and perspectives. Gareis (1999, in Hetland 2000)
group these into three main areas;
1. ‘The traditional project management approach – mainly task-oriented and related to planning and
control of activities.
2. The organisation theory project management approach – mainly actor-oriented, focusing specifically
on the project as temporary organisations.
3. The systemic constructivistic project management approach – distinctly moving the focus from what
a project is to what we want a project to be. We are intentional in choosing the project as way of
working because we believe this will give a better result than if we had used another way of working’
(Hetland 2000, p. 1.1-18).
A professional project management organisation working within the first area of project
management understanding is the Project Management Institute, PMI. Some of PMI’s
approaches will be further outlined and discussed below. The approach to projects and
project management developed in this thesis follows the lines of the third area above.
Though, we believe that this area comprises the preceding two, and as such they should
be regarded as a basis to develop upon, and for this thesis, especially the organisation
theory project management approach, seeing the project as a temporary organisation or
more specifically a temporary business opportunity. This is again an intentionally made
choice.
3.3 Definitions of project
The term project has been given many, and different definitions. Table 3.1 presents
some definitions of the term project.
15
As an example of a subject that falls within the logistics and supply chain management approach of this
thesis.
3 Projects and project management
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30
Table 3.1. Some definitions of the term project.
Source Definition
Project 2000
(1998)
An effort that has character of being a one-time undertaking, with given
objectives and limited scope of work, that is executed within time and cost limits.
PMI (1996) A project is a temporary endeavour undertaken to create a unique product or
service. Temporary means that every project has a definite beginning and a
definite end. Unique means that the product or service is different in some
distinguishing way from all similar products and services.
Harrison (1992) ‘[The project] is a discrete undertaking, that is, it has a start and a finish. It has
finite objectives, often including time, cost, and performance goals.
[The project] is of significant size, value, and complexity, and is under time
pressure for completion.
[The project] involves the integration across organisational boundaries of
groups, departments, organisational units and companies. ‘
The definitions of projects presented in Table 3.1 shows that a project may be perceived
in many ways. Common for most is the notion about the temporary aspect. It needs
temporarily to pull together and group resources from different professions, and often
from different ‘parent’ organisations. It is objective-oriented, and intentionally chosen.
Finally it may be of varying complexity and scope. Though, the definitions listed do not
mention the life cycle of the project. The life-cycle is only referred to as a ‘time-limit’
or a ‘definite end’, but what defines the end of a project? Is it e.g. the end of the
development phase in a oil and gas field development project, i.e. when the project
object is handed over to operations and operations commences? Or is it for the same
type of projects the point in time when the project object is ‘abandoned’ and the
production and value flow from the reservoirs is stopped? The first end point reflects
the intention in the project definitions above, the classical development activity of a
project managed within the project planning and control scope. The latter end point
reflects the project as a value generating entity, where both the investment, or enabling,
part (development) and revenue generation (operations) is part of the project life cycle.
Therefore, of the definitions above e.g. Project 2000’s and PMI’s are examples of good
definitions for the project development phase, and Harrison’s definition further points to
the scope and complexity, and the need for inter-organisational integration. Though, to
cover the complete life cycle of the project as a business opportunity, these definitions
have to be extended. There is no aim in this thesis to propose a new project definition,
but at this point state that the definitions above have to be extended to comprise the
business opportunity context of the project, e.g. as in an oil field development
comprising both the development and operations of the project object.
3 Projects and project management
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31
3.4 Aspects of projects
Below four aspects of projects and project management are outlined. The aspects are not
meant to be generic for all projects, but are aspects that should be understood as a basis
for the approach developed in this thesis. The four aspects are the project context, the
project object, the project life cycle, and the uncertainty within projects.
3.4.1 The project context
The project context is what makes projects’ a special managerial object. Turner (1993)
sets projects into an environment and a context. Turner says that:
‘A project is not an island; the work is not done for its own sake, although traditional approaches to
project management often treat it as such. The project exists within a context. I should say that, …, I
differentiate between the project’s environment and its context. The environment is a physical concept. It
is the neighbourhood in which the facility is built. The context is an abstract concept, but includes the
environment. It is the complete economic, human social and ecosystem in which the project exists.
The context has three primary elements; (i) projects and corporate strategy, (ii) the parties involved, and
(iii) strategic management of projects’ (Turner 1993, p.18)
The Project Management Institute, (PMI 1996), states that the project context comprises
the topics of;
‘Projects and project management operate in an environment broader than that of the project itself. … The
topics included here are; (i) Project Phases, and Project Life Cycle, (ii) Project Stakeholders, (iii)
Organisational Influences, (iv) Key General Management Skills, and (v) Socio-economic Influences (PMI
1996, p.11)’.
We can see that both Turner and PMI let the context comprise general and strategic
management topics and skills. Hetland
16
states that the project context comprises;
‘(i) Business practice; ‘arms-length’, co-operation, collaboration, co-opetition, (ii) Culture; e.g.
Norwegian – short front end, many changes, versus Japanese – long front end, few (‘no’) changes, and
(iii) Other project specific contextual issues, e.g. Physical location, Political issues, Financing, and
Resourcing’.
We can see that Hetland sees ‘physical location’ as a project-specific contextual issue,
while Turner sees that as a project’s environment. A part of a project’s context will
therefore be the trends that are influencing the development of execution models and
related elements. Therefore, part of the context are the developments that are related to
making use of concepts, models and methodologies from other knowledge areas. One
such influential factor is the emphasis and developments of logistics and supply chain
management that is made use of in continuous and repetitive processes and industries.
How the project context is defined and delineated may be an intentional choice, as
described in the system constructivistic project management approach. The project
context as it is to be understood in this thesis is;
16
Based on a presentation by and discussion with Hetland in 1999.
3 Projects and project management
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32
- The project as a business opportunity for the project supply chain actors, and
- The project supply chains as the entity to make the project competitive.
Development projects of the kind that is found in the oil and gas industry need large
financial resources to be realised, i.e. they may be regarded as being part of a generic
class of investment projects. Financial resources are often scarce, and each development
project must compete against other projects, and firms within the oil and gas industry
for financial funds. In addition the oil and gas industry has to compete against other
types of industries, which may give better or more secure returns on the financial funds
invested. Therefore the project context addressed here is that of the project as a business
opportunity, with the project’s supply chain and the management thereof as the
competitive entity, both in development and operations.
3.4.2 The project object
As some definitions of the term project states, a project is aimed at bringing by a
‘unique product or service’. If we look at offshore field development projects we may
say that they both are product and service oriented. The ultimate product the project
develops is the oil and gas to be sold in the marketplace. These oil and gas derivatives
may also be regarded as a ‘service’, e.g. as part of the gas-supply agreements to the
European continent, i.e. an energy supply-service. A part of the field development
project itself is the development of the infrastructure that enables the exploitation of the
oil and gas resources at a competitive cost. This infrastructure may be regarded as the
project object.
At this point it is important to separate the project from the project object. The project is
the whole setting concerned with exploiting and gaining value from a business
opportunity. The project object is the infrastructure that shall make it possible to
exploit, process, refine and distribute the oil and gas resources from the reservoir,
through it stages of refining, to the marketplace. The project is concerned with value or
financial benefit, the project object is related to the revenue, i.e. production capacity,
regularity and recovery rate, and cost side, CAPEX and OPEX, of the value equation.
This distinction between the project and the project object is important, as the project
seen from the side of an operator is, as a business opportunity, not completed before the
project object is removed. Seen from the side of the actors in the project supply chain,
their involvement in the project may be limited to a certain phase or a set of phases of
the project life cycle. With respect to the logistics and supply chain approach to this
project context, the project object, comprising both its development and operations, is
the focus of the approach.
Table 3.2 and 3.3 below show the cost estimate and cost distribution for six reference
project developed in relation to the Norwegian Continental Shelf in the late 1990’s. The
names of the projects are hidden due to confidentiality.
3 Projects and project management
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33
Table 3.2. Cost accounts for some reference projects developed in relation to the
Norwegian Continental Shelf in the late 1990’s (figures in mill. NOK).
Projects
A B C D E F Average
Management 942 104 322 179 314 957 470
Engineering and procurement 2 031 207 674 211 976 2 438 1 090
Material deliveries 4 225 547 2 564 1 463 1 337 9 247 3 231
Construction 6 448 758 2 274 441 1 226 5 989 2 856
Operations 509 149 320 252 78 477 298
Unit work activities 0 0 10 0 995 0 168
General -191 29 2 0 -90 0 -42
SUM 13 964 1 794 6 166 2 546 4 836 19 108 8 069
Table 3.3. Percentual cost distribution for some reference projects developed in relation
to the Norwegian Continental Shelf in the late 1990’s.
Projects
A B C D E F Average
Management 7 6 5 7 6 5 6
Engineering and procurement 15 12 11 8 20 13 14
Material deliveries 30 30 42 57 28 48 40
Construction 46 42 37 17 25 31 35
Operations 4 8 5 10 2 2 4
Unit work activities 0 0 0 0 21 0 2
General -1 2 0 0 -2 0 -1
SUM 100 100 100 100 100 100 100
Wee see that on average approximately seven out of eight billion NOK’s are related to
the EPC element of the project object. That is almost ninety percent of the total cost
account for the project object. Engineering, which is heading the demand process for
procurements and material deliveries, as well as construction requirements, consumes
fourteen percent of the project object cost accounts, to initiate supply consuming forty
3 Projects and project management
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34
percent of the cost accounts, and construction activities consuming thirty-five percent of
the cost accounts. In other words, for every 1.000 NOK spent for external supplies and
construction, 187 NOK’s have to be spent for engineering and procurement activities to
define, initiate and follow-up.
-500
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3 500
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Figure 3.1. Average cost and cost distribution for some reference projects.
3.4.3 The project life-cycle
The life cycle of a project should be elaborated further than as the development of the
project object. The life cycle of a project may be regarded in several ways. PMI have
defined;
‘the project life cycle as a collection of phases whose number and names are determined by the control
needs of the performing organisation’ (PMI 1996, p.vii).
This approach to the project life cycle is much related to a view of projects that see
them as developing and ‘physically’ creating a unique product or service. The project
life cycle may also be seen as the life cycle of an object, from ‘birth’ to ‘death’, as
discussed above regarding the definitions of projects. Especially the development
projects of the oil and gas industry were the project object is the ‘cornerstone’, as the
‘enabling tool’ for revenue generation. This may be seen as a process consisting of four
major steps as outlined in Table 3.4.
This four-step approach to the project life cycle is also compatible with the first
definition, as it may be that all these four steps are necessary for the ‘control needs of
the performing organisation’. All these four steps have influence on the financial
objectives of the project, both for the owner and the contractors and suppliers. For the
project owner, CAPEX is involved in step one, two and four, while the revenue
generation is ‘limited’ to step three. For the contractors, revenue is generated primarily
3 Projects and project management
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35
in steps one and two, but also for some in step three, although in a smaller scale. For the
suppliers the revenue is generated in steps two and three, dependent on their
involvement in either object realisation or supporting ‘consumables’ for object
utilisation.
Table 3.4. The project life cycle.
Project life-cycle stages Description
Project development The front-end phase, up to the point in time when
the project has been defined and evaluated as a
project, and the project basis been examined
thoroughly and developed so far as to start the
specific development of the project object i.e. ‘up
to big spending’.
17
Project object development The main investment phase of the project,
including, detail engineering, procurement,
fabrication, construction and commissioning of
the project object. Up to the point when the
responsibility of the project object is handed over
to operations.
Project object utilisation Operations of the project object to produce the oil
and gas resources.
Termination of the project. Closure of the project, including investments in
removal of the project object after the operations
of the oil and gas resources has come to an end.
In general, for a logistics and supply chain approach, the life cycle of the project object
is in this thesis focused on two main phases. The first main phase comprises the
development phases of the project and the project object, comprising every sub-phase
up to the project object is ready for hand-over to operations. The second main phase is
the operations of the project object. The role of the supply chains in these two phases is
in the development phase to contribute with competence, technology and resources to
enable and realise, i.e. design, specify, produce and fabricate parts, and construct the
project object, then in the operations phase the role of the supply chains is to enable,
support and secure the operations of the project object.
The two phases of the project life cycle are important as the logistics and supply chain
management approach to the two phases should be guided by distinctively different
characteristics. This will be elaborated through developing the project supply chain
management concept in chapter six.
17
For a further discussion of the challenges of the project front end, see appendix D.
3 Projects and project management
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36
3.4.4 Projects means uncertainty
As we saw from the definitions of projects above they are characterised as ‘one-time
undertakings’, ‘unique’, and ‘of special character’;
‘The principal identifying characteristic of a project is its novelty. It is a step into the unknown, fraught
with risk and uncertainty. No two projects are exactly alike, and even a repeated project will differ in one
or more commercial, administrative, or physical aspect from its predecessor’ (Lock 1992, pp.2-3).
The larger the project is, both in scope of work, geographical distribution, and
organisation, and the more stakeholders involved in the project, the number of factors
that will influence the project increases. The globalisation of business, and therewith the
spread of potential project actors and stakeholders, lead to a geographically dispersed
supply network involved in a project, supplying for and to the project object. This
increases the basis of uncertainty and complexity in the project. With a logistics and
supply chain management approach to projects and project management uncertainty and
complexity of both the project product, the extended project organisation or the project
supply chain, as well as the related processes necessitate to be dealt with.
Uncertainty in projects
As stated above, a project is an endeavour characterised by uncertainty. Uncertainty is
on the top level related to the value of the business opportunity to be exploited and the
risk to the financial and resource commitments needed to exploit the business
opportunity. This two-sided picture of uncertainty, balancing business opportunity and
risk, is essential for understanding supply chain management in the project-oriented
context addressed in this thesis. The reason for this is the project supply chain actors’
influence both on the opportunity as well as the risk side of the inherent project
uncertainty. Further, the uncertainty both evolves through and have to be dealt with by
the supply chain actors. As such the uncertainty picture may be presented as in Table
3.5 below.
Table 3.5. Uncertainty management means balancing opportunities and risks along the
project supply chain.
Uncertainty
Opportunity Risk
Check project challenges with respect to
consequences in the sense that the conditions are
arranged to exploit opportunities – to increase the
value of the project.
Reduce and control to be within an acceptable risk
exposure for the project.
Risk and reward shared among the project supply chain actors based on willingness and ability to bear.
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Uncertainty originates due to whether data is known or unknown or whether the state is
closed or open. This is presented in Table 3.6 as a suggested taxonomy (Hetland 1999).
Table 3.6. The nature of uncertainty. Suggested taxonomy (Hetland 1999 (A)).
STATE
Closed Open
Known Deterministically uncertainty Variability
DATA
Un-known Lack of information Undetermined uncertainty
The importance of the content in Table 3.6 is not the taxonomy itself, rather to
understand the sources of uncertainty, and how the types of uncertainty may be
approached and dealt with for the best of the project. Another quote that is related to
data as a source of uncertainty is;
‘Uncertainty is given by the difference between the information that is necessary to make a reliable
decision and the information that is available’ (Project 2000, 1998).
A common source of this type of uncertainty is engineering decisions taken on an early
information basis, leading to changes that again may lead to alterations in the project
supply chains, e.g. termination of one supply chain and activation of another.
Uncertainty has to be dealt with actively, and that has given rise to uncertainty
management as a specific topic within project management. Though, the most important
aspect related to uncertainty is that it is treated consciously and proactively, it should
not be allowed to just ‘happen’;
‘Our success derived from deliberate front end planning – not from good luck randomly drawn from
possible future states of nature. We were lucky in the sense that we were not hit by randomly drawn states
of seriously bad luck’ (Heyerdahl 1999).
As stated above, uncertainty management should be deliberate and start early in the
project, or even before one has defined a project, i.e. in the front-end phase. It should be
part of ‘good management’, not left to ‘luck’, i.e. bad management. As such the
approach to uncertainty management should be developed and established already in the
front-end phase.
In figure 3.2, this is presented through three different approaches to treatment of
uncertainty in front end planning in a project; no, traditional and proactive. No front
end planning may be regarded as what happens in a Monte Carlo simulation. The future
contains thousands of different outcomes, and in each draw in the Monte Carlo
simulation a state is ‘picked’ that may either represent good or bad luck with respect to
the parameter in focus. Underlying is the assumption that there is no active management
involvement that will influence the outcome. Then there is the traditional approach to
front end planning, or ‘the accountants scenario’. This approach is characterised by risk
3 Projects and project management
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reduction, trying to reduce the number of possible outcomes as much as possible, so that
one ultimately is left with one option. In relation to the project space that will be
described below, we have a ‘closed’ project. By following the ‘accountants scenario’
one seeks to eliminate possible risks, but at the same time one forego potential
opportunities. The question then is whether this is good, value enhancing management?
The third and final approach to front end planning try to ‘play’ proactively on the
uncertainty inherent in the project, as a business opportunity, both to ‘eliminate states of
seriously bad luck’, as well as ‘add value’ through ‘added states of good management’.
Then we are down to what management is about, creating value beyond what would
have been created if management was not active. The case here is that management
emphasises the ability to proactively exploit uncertainty as a source of value
enhancement, not just a source of risks to protect against.
Good Bad
Thousands of
possible tomorrows
May happen
Bad luck
Good Bad
Thousands of possible
tomorrows
Will happen
Eliminated
downside risks
Sacrificed
upside potentials
Good Bad
Added states of
good management
Eliminated states of
seriously bad luck
No front end planning:
The Monte Carlo scenario
Traditional front end planning:
The accountants scenario
Proactive front end planning:
The business scenario
Figure 3.2. The approach to uncertainty management starts in the front-end phase
18
.
But projects are not static, stationary constructs. Project are more like ‘moving targets’.
This should be reflected in a dynamic development of uncertainty management in the
project;
‘Projects are born and developed under a high degree of uncertainty. A project may be planned with
realistic targets and assumptions, and one can establish time schedules and cost estimates based on
experience, knowledge and available information. But, the project develops continuously due to increased
knowledge and insight that is won through the planning processes’ (Husby et al. 1999).
Therefore the uncertainty management process established in the front-end have to be
dynamic, in addition to being proactive. But, uncertainty management comes at a cost,
and future opportunities and actions has to be weighed against historic commitments;
‘The significance of uncertainty for a decision situation depends on the cost of reversing a commitment
once made, the volatility of the environment, and the sensitivity of benefits to the occurrence of the
unpredicted’ (Rosenhead 1989, p.194).
18
Summary from ‘Front End Opportunities’ workshop, Epci, 10-11 March 1999, see Appendix D.
3 Projects and project management
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This is especially important for supply chain management, as the uncertainty when
commitments have been made down through the supply chain may have consequences
for the whole supply chain, and in the worst case even lead to termination of a whole
supply chain.
Uncertainty and the project supply chain
Husby et al. (1999, p.14) regarded uncertainty management to cover; ‘exploiting
opportunities, reducing risk, accepting uncertainty, and transfer of uncertainty’. This is
the same as we presented in the introduction to uncertainty and in Table 3.6, except for
the last aspect, transfer of uncertainty. Regarding this aspect there may be raised a
question with respect to where to transfer given uncertainty? Should it be transferred
from the project owner to a project contractor or supplier, or vice versa? Or should it be
kept within the actors of the project supply chain, and distributed and dealt with among
them? Distributed and dealt with in such a way that the uncertainty is transferred
among the project supply chain actors in a best possible way for dealing with the
uncertainty, both with respect to exploiting opportunities and reducing risks or the
consequence of them within the project supply chain actors as a whole. However, as
Husby et al. (1999, pp.122-3) states, uncertainty is ultimately owned by the project
owner, though the uncertainty may be handled by the project supply chain as a whole,
or by parts of it;
‘Uncertainty costs; Uncertainty in a project does not change after a contract is signed; Uncertainty should
be reflected in the actors’ objectives and limits; Uncertainty may be a competitive advantage; Uncertainty
is ultimately owned by the client’.
Changes are related to technical risk. Changes comes both from that complete
information is not available, or through that degrees of freedom’ have been transferred
down the supply chain. Degrees of freedom may be transferred (delegated), e.g. via
functional specifications, which moves the ‘ownership of freedom’ to choose a specific
technology or solution from the operator to the contractor, as long as it meets the
functional specifications set by the operator. However, the operator still has the final
responsibility, and financial consequences of changes in degrees of freedom must be
born by the operator as principal. Therefore;
‘Risk may be divided in two:
- technical risk where decisions about technological choices affects a large scope of entities, and
together with the fact that nobody have full overview of the product, then this will influence the
- financial risk’ (OA 990614).
An example of coping with uncertainty through the project supply chain in the
development phase of a project is taken from Nerefco, a restructuring project of a
petrochemical plant in the Netherlands. The project was owned and financed by British
Petroleum (65%) and Texaco (35%). The project was executed as an alliance project
between the owners, hereafter referred to as Nerefco, and the two contractors Raytheon
and Fabricom (participated with two divisions) and suppliers. The starting point was
that the project did not have ‘robust’ financials, and therefore had to show cost effective
3 Projects and project management
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strategies and execution. It did also have construction challenges as it was complex
restructuring that was going to take place within an already existing plant. The
competence of the fabrication and construction contractor would therefore be essential.
To be able to keep the shut-down of production to a minimum the project had to have a
short installation schedule. These factors gave rise to several uncertainty factors.
To cope with these uncertainty factors an alliance contract was developed and agreed to
between the owners and the contractors and suppliers. As part of the alliance agreement,
a financial risk/reward incentive was developed. The risk/reward shares was distributed
among the project supply chain actors in relation to their impact on the solution, and
their willingness and ability to bear the risk. From the vendor side the engineering,
fabrication and construction contractors participated, and the supplier of one of the main
equipment-modules. The risk/reward shares of each partner in the project supply chain
is given in Table 3.7.
Table 3.7. Nerefco alliance project; Alliance partners – under-run shares.
Partner Nerefco Raytheon Fabricom
(M)
Fabricom
(E&I)
NBM Total
Share 35% 25% 23% 6% 11% 100%
We see from table 3.7 that the owners carry only 35% of the risk/reward incentive
within the alliance contract, while the contractors and one supplier carry 65%. Though,
this distribution does need some explanation, which is based on Figure 3.3.
Over-run
Under-run
Contractor risk
capped
65%
Target cost
NLG 290.3M
Nerefco
share
35%
Alliance contractors
share of underruns
65%
Nerefco share
of overruns
Figure 3.3. Sharing of financial risk/reward among the Nerefco alliance partners.
3 Projects and project management
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Figure 3.3 shows the distribution of incentive between the project owners and the
contractors/supplier. The basis for the incentive is a target cost on CAPEX, set to NLG
290.3 million. This was a target set based on cost estimation after a sufficient degree of
information and information confidence had been established in the project. With
respect to the resulting cost position after the project was completed (CAPEX account)
it could either be higher or lower than the target cost. If the final project cost accounts
showed an under-run versus the target cost, the cost differential would be shared with
35% to the owners and 65% to the contractors/supplier. That means that if the owner,
contractors and suppliers are able to develop the project using less money than the target
cost, the contractors and the supplier in the incentive contract will earn 65% of that
under-run, and the owners will save 35% of the under-run. If on the contrary there is an
over-run, the contractors and the supplier in the incentive contract will have to cover
65% of the additional cost, up to a certain amount over-run. If the over-run exceeds a
fixed amount above the target cost the contractors and supplier will only cover 65% of
that fixed amount, i.e. the contractors’ upside risk is ‘capped’. The remaining over-run
has to be covered by the owners. This is in accordance with the ability to bear risk, and
thereby the willingness to try new approaches in dealing with the project supply chain
to seek additional value, and thereby be able to make the project financially viable.
3.5 Project processes
Project processes may be regarded in several ways. One way is to try to define them
along the project timeline, and towards the different functions and activities involved in
project and project management work. Another is to try to approach them a bit more
broadly, in researching the underlying uncertainty involved in ‘what to do’ and ‘how to
do’ it in a project. Below we will give examples of two approaches along these two
lines.
3.5.1 PMI’s project processes and knowledge areas
The Project Management Institute, PMI, is one of the larger international interest
organisations for developing project management as a body of knowledge and as a
profession. To help create understanding for the process of managing projects, as well
as the functional areas involved, PMI has developed a set of project management
processes and knowledge areas.
With respect to project processes, PMI separates between project management
processes, ‘…describing and organising the work of the project’ (PMI 1996) and
product-oriented processes, ‘… specifying and creating the project product
19
’ (op cit.).
A supply chain management approach may be seen as a part of the product-oriented
processes, as it is focused towards the product of the project, but should also be seen as
a project management process, as it is a way of ‘describing and organising the work of
the project’. The duality of the product-oriented processes versus the project
19
The term ‘project product’ used by PMI is the same as the term ‘project object’ used in this thesis.
3 Projects and project management
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management processes is an interesting one. This duality becomes even more
interesting and important as uncertainty with respect to ‘what to do’ and ‘how to do it’,
i.e. uncertainty in the product oriented processes, has to be combined with different, or
targeted, project management processes. This is further described below, in the
description of the project space and the differences in approach to project strategy and
execution.
PMI’s project management processes are ‘phase-oriented’ and grouped into five phase-
related groups; initiating, planning, executing, controlling, and closing processes. These
processes are further oriented towards the development phase of the project object, not
taking the operations phase and the life-cycle perspective of the project object into
account. The initiating processes act as ‘commitment achievers’, i.e., their role is to
commit actors to their involvement in the project. The planning processes are concerned
with the means and ends of the project, i.e. defining and specifying the ‘what to do’ and
‘how to do it’ elements of the development project. The executing processes focus on
the execution of the project plan, with corrections made by the controlling processes.
Linking the project oriented supply chain is part of the executing processes. The
controlling processes are aimed at identification of variances between actual and
planned performance. Change control is part of the controlling processes. The objective
of the closing processes are to close-out contracts with external project supply chain
actors, as well as nest up all information to formalise the completion of a project phase
or the whole project.
Within the project processes there will be functional activities related to PMI’s nine
project management knowledge areas. These knowledge areas comprise the functional
management elements for development of project integration, scope, time, cost, quality,
human resources, communications, risk and procurement management.
The product-oriented processes are related to the ‘what’s’ and ‘how’s’ of ‘what to do’
and ‘how to do it’ in developing the project object. Below we will present another more
overriding approach to the product-oriented processes, though not as broadly recognised
as the work of PMI, it address some interesting aspects especially regarding the inherent
uncertainty in the processes.
3.5.2 What’s and how’s
Projects are different with respect to their degree of specification of ‘what to do’ and
‘how to do’ it. Obeng (1996) proposes four generic categories to explain and group
projects based on these two parameters. The four categories are differentiated by the
knowledge or familiarity about the ‘what’ and ‘how’ endeavours of the project, and
each category is given a descriptive name; Painted by Numbers, Going on a Quest,
Making a Movie, and Lost in the Fog.
In the first instance you have full familiarity and knowledge about both what to do and
how to do it. This is the first category ‘painted by numbers’, characterised by
‘knowing’. One know what, i.e. the project object, or result, and know how, i.e. the
tasks to be performed to reach the desired end. Uncertainty is involved, but that is on
3 Projects and project management
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the level of uncertainty in specific scope of work, schedule or cost for specific tasks.
The ‘painted by numbers’ category is characteristic of the project planning and control
situation. Then in the next category ‘going on a quest’, you know what to achieve, e.g.
exploiting some oil and gas resources located under the seabed in an offshore
environment, but you don’t know how to exploit them, i.e. the conceptual and
technological basis to be used is not known. This category may be suitable for the early
stages of complex development and construction projects, especially when new,
advanced technology has to be developed or tried out. The third category ‘making a
movie’ takes advantage of familiarity or knowledge about a way to, or the process of
realising something, you know how, but you don’t know what business potential it may
be applied to. The name of the category implies that this may be seen as making a
movie, i.e. you know how a movie is created, but you don’t know what kind of movie it
will be. This category may also be used for actors that seek business opportunities
where their own competence or technology may be applied. The final category ‘lost in
the fog’ may both be seen as the ultimate opportunity where all possibilities are open to
you, but also as the opposite characterised by that you ‘don’t know where you are, and
not where you are going’, i.e. you are lost in the fog. An example of the first is that you
have in your possession some money that you want to develop further, and where you
yourself have to act as the agent for finding a business opportunity, going from ‘don’t
know what’ to ‘know what’. Then when you know what, you have to establish the way
of realising or exploiting the business opportunity and the ‘organisation’ to do it, i.e.
move from ‘don’t know how’ to ‘know how’.
Table 3.8. Obeng’s four project categories.
Project category Know what? Know how? Closed or open?
Painted by numbers Yes Yes Closed project
Going on a quest Yes No
Making a movie No Yes
Lost in the fog No No
Open projects
Hetland (Epci 1999-B) has defined Obeng’s four project categories as a ‘project space’,
consisting of ‘open’ projects and ‘closed’ projects. Related to Obeng’s four categories,
Hetland (op cit.) defines projects in category one as closed projects, while he defines
projects in category two to four as open projects. Few projects may completely be put
into one of the four categories, but the degree of openness will be greater the more one
moves from a project characterised by category one, towards category four. The
difference between open and closed projects is found in the projects inherent degree of
uncertainty. A closed project has few loose ends and may be quantified and measured
by numbers for its means and objectives. Open projects on the other hand have a large
degree of uncertainty that have to be dealt with both to be able to pursue opportunities
3 Projects and project management
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still not closed and manage inherent risks. Figure 3.4 presents the ‘project space’,
comprising Obeng’s four project categories.
A
B
D
C
Risk Reduction
Mission Critical
Searching for Direction
Functional Requirements
Closed projects Open projects
A
B
D
C
Risk Reduction
Mission Critical
Searching for Direction
Functional Requirements
A
B
D
C
A
B
D
C
A
B
D
C
Risk Reduction Risk Reduction
Mission Critical Mission Critical
Searching for Direction Searching for Direction
Functional Requirements Functional Requirements
Closed projects Open projects
’Painted by Numbers’
’Making a Movie’
’Going on a Quest’
’Lost in the Fog’
A
B
D
C
Risk Reduction
Mission Critical
Searching for Direction
Functional Requirements
Closed projects Open projects
A
B
D
C
Risk Reduction
Mission Critical
Searching for Direction
Functional Requirements
A
B
D
C
A
B
D
C
A
B
D
C
Risk Reduction Risk Reduction
Mission Critical Mission Critical
Searching for Direction Searching for Direction
Functional Requirements Functional Requirements
Closed projects Open projects
’Painted by Numbers’
’Making a Movie’
’Going on a Quest’
’Lost in the Fog’
Closed
How?
Open
What?
Closed
How?
Open
What?
Closed Closed
How? How?
Open Open
What? What?
Closed
How?
Open
What?
Closed
How?
Open
What?
Closed Closed
How? How?
Open Open
What? What?
Figure 3.4. The project space.
In stead of using Obeng’s figurative category names, Hetland proposes to use names as
indicated in Figure 3.4 and Table 3.9.
Table 3.9. Obeng’s categories, with Hetland’s suggested naming.
Obeng Hetland Comment
Painted by numbers Risk reduction Reduce risks, leave opportunities un-
examined. The project planning and control
context.
Making a movie Functional requirements The contractor are open to suggest and use
how to best solve the needs (what?) of the
client. Technological development driven.
Going on a quest Mission critical Project execution process development. The
value lies in the project management
processes directing the search, because ‘the
journey is the mission’.
Lost in the fog Searching for direction Is this the really the right concept to follow? Is
there another business that could be more
worth while to pursue? E.g. total change of
technological development concept, that could
be e.g. from platform concepts, to sub-sea
developments and down-hole processing.
3 Projects and project management
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Projects of a given type may move within the project space, e.g. due to involvement of
new technology or new organisational constructions chosen deliberately to pursue
opportunities inherent in an open ‘approach’, resulting that the project context is more
characterised by uncertainty. An example of such a move within the project space may
be taken from the construction industry, as described by the British Department of
Trade and Industry, DTI;
‘The traditional model of construction views the construction process as the purchase of a product
governed by legal contracts. This provides a small level of uncertainty about project ends, but uncertainty
about the means by which it is implemented is passed on to contractors and sub-contractors as risk. …
However, when projects are more complex and uncertain … The construction process is described more
like a prototyping operation where the needs and means are continually negotiated’ (DTI 1998, p.22).
Risk Reduction
Mission Critical
Searching for Direction
Functional Requirements
1
2
Closed
How?
Open
What?
Figure 3.5. Construction projects moves within the project space as they become more
complex.
This quotation show that the projects in the construction industry move within the
project space as the projects becomes more complex. First the projects are a bit into the
open area as they have an element of going on a quest within them. They know what
(‘this provides a small level of uncertainty about project ends’, position 1 in Figure 3.5),
although there are some uncertainties with respect to how it shall be implemented. As
the construction projects become more complex and the construction process become
more prototyping based, the projects move within the project space from the closed
domain, towards the open domain adding on elements of ‘don’t know what’ (adding
elements from ‘making a movie’) and ‘don’t know how’ (position 2 in Figure 3.5). A
project will also be more and more closed as it develops throughout its life-cycle, from
development to termination, e.g. as showed in Figure 3.6 below.
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Open
Closed
Project
Development
Project Object
Development
Operations Termination
1 2 3 4 5
Open
Closed
Project
Development
Project Object
Development
Operations Termination
1 2 3 4 5
Figure 3.6. Project’s degree of openness throughout the project phases.
By itself, Obeng’s project categories contributes to developing a basis from which one
may better start to understand the interaction between product-oriented processes and
project management processes, as defined by PMI, under the influence of degree and
form of uncertainty. This will be further outlined below.
3.6 Differences from strategy to operations
There are several alternatives to choose as an approach to develop a project. There are
different strategies, tactics, as well as operational forms. Below we will first address
some differences with respect to project strategy, contract strategy and procurement
strategy. Then an ‘project atlas’ is outlined, and approached as a tactical issue with
respect to applying different types of strategies to outline the project ‘route’ from start
of the front end, to completed development.
3.6.1 Strategies are different
As stated above one of the most used and understood perspectives on projects is the
development and construction of a unique product or service. This perspective shows
the temporary or finite nature of the projects organisational construction. Organising to
undertake a project of the category treated in this thesis is dependent on the internal
competence and capacity of the operator. Behind the organisation of the project lie the
business strategy (that among other establishes the company internal competence
‘profile’) and the project strategy, i.e. the strategy about realising the business
opportunity. The project strategy will lay the guidelines for establishing the project
organisation, ‘brought together’ through contract strategies, and procurement
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strategies. Besides from the project execution phase of realising the project object, these
strategies may or will directly or indirectly have relevance for the object utilisation
phase, i.e. the operations of the project object. Project organisation is important as the
supply chains and the management of them is to a large part dependent on the project’s
organisational construction. The life cycle aspect has also an important influence on
how the organisational issues should be approached.
Some say that there is a need to change how we perceive and approach the management
of large, complex development projects;
‘We are currently facing the need for major shifts in the way we run complex capital projects, which are
“complex inter-organisational business processes” of a finite nature. The traditional focus on costs and
discrete contracts are no longer adequate to deliver profitable developments. These parameters need to be
replaced by life cycle costs (or life cycle value) – i.e. we are more interested in the total costs of
construction and operation rather than piecemeal costs as such. Detailed specifications are being replaced
by functional requirements – i.e. we are buying performance rather than hardware. Contractors and
suppliers are considered as potential partners, not as crooks – i.e. the contract terms are used as
constructive tools and not as destructive weapons. Vendors are contracted earlier, far before
comprehensive scope definitions can and should be produced’ (Hetland, 1999-B).
As part of developing new approaches to project strategies, Epci
20
proposed three
different types of project strategy approaches; (i) risk reducing, (ii) opportunity seeking,
and (iii) value enhancing. These three types were used as an approach to see what actors
from project-oriented industries meant when addressing project strategy
21
. When a
group of representatives from the oil and gas industry were asked which of these types
of project strategy that best reflected their own approach, most of them stated that the
risk reducing type was the most common, though several pointed to the value enhancing
type as a concept that was sought e.g. through alliance contracts and incentive contracts.
Within this lies a difference between what is felt needed, due to ‘old arm-length’
transactional principal/agent relationships, versus what was believed to be the best form
for enhancing value through project work. When asked what types of measures they
believed were necessary to move towards more value enhancing project strategies, the
answers may be summarised into three points;
Linking inter-organisational value enhancement with intra-organisational profitability and risk.
Transparent measures along supply chain to ensure that actors and stakeholders targets and
objectives are clear, visible and understood.
Dynamic measurements that reflects changing needs over time.
Value enhancement has to be shared, i.e. the inherent risk and profitability in a project
has to be shared among the project supply chain actors for them to be focused on value-
enhancement for the project as an inter-organisational business opportunity, e.g. as in
the Nerefco case described above. The issue of transparency into the project supply
chain came also up (this is also an important part of all logistics and supply chain
20
Epci, the European Institute for Advanced Project and Contract Management.
21
These three approaches to project strategy were used in an Epci workshop to address project and
contract strategy. The questionnaire used for the workshop and a summary of the responses can be found
in Appendix E.
3 Projects and project management
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management). Then the project issue of dynamics came up, to meet the dynamic context
of project, not least due to their inherent uncertainty which trigger the need for dynamic
measures. All these remarks are related to project supply chain relationships, and
thereby a project’s contract strategy.
‘Contracts are used to procure people, plant, equipment, materials and services. Contracts are therefore
fundamental to the management of almost all engineering projects. The type of contract should be
selected only after consideration of the nature of the parties to the project, the project objectives and the
equitable allocation of duties, responsibilities and risk. [This chapter] outlines the main components of the
process used to determine how the project will be procured, usually referred to as the contract strategy’
(Smith 1995, p.188).
As it comprises ‘the processes used to determine how the project will be procured’, the
contract strategy may be regarded as ‘a tool’ for establishing and managing the project’s
inter-organisational supply chain. As such the mission of the contract strategy may be
regarded as ‘an enabler to align and optimise inter-organisational value enhancement
and intra-organisational profitability given inherent opportunities and risks’. Related to
the input from the industry, they meant that the contract strategy should support the
project objectives through;
Complementing the project supply chain with the project objectives.
Reduce imbalances along the project supply chain.
Align and commit the supply chain to deliver.
Increase the likelihood of project success.
The choice of contract strategy is in large dependent on to which extent what’s and
how’s of the project is defined, as outlined in the project space, i.e. the knowledge and
experience with respect to what to be done and how it is to be done, and the contextual
influence on this. When asked about the relationship between the project strategies and
contract strategies the answers from the industry may be grouped into the following;
Well defined what’s and how’s lead to risk reducing strategies, well suited for securing delivery in
accordance with promises. Fixed price type of strategies, lump sum, with strong risk transfer
motivation between actors is characteristic.
Less defined what’s and how’s may open up for creativity and utilising the full potential of the
project supply chain, especially in opportunity seeking contexts.
Value enhancement strategies will have to utilise risk reduction and opportunity seeking strategies
targeted in parts and phases of the project.
Therefore, the project strategy has to be aligned with the procurement strategy and
contract strategy, and it has to be known to all the actors in the project supply chain.
Below we will outline an approach or a ‘tool’ that may be used to develop a project
strategy, the project atlas.
3 Projects and project management
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3.6.2 The Project Atlas
The objectives of the project stakeholders may be seen in relation to the ambition levels
of the industry and the actors. One may say that there are four different ambition levels
involved in an approach to a project. The first being status quo, i.e. approaching the
project as one has approached projects previously. Secondly, continuous improvement,
i.e. try to improve on the ‘what’s’ and ‘how’s’ previously used. The third is radical
change, i.e. one tries more or less completely new approaches to the what’s and how’s
earlier used. And finally the fourth, quo vadis, i.e. one question what one does.
Closed Open
What?
How?
Closed Open
What?
How?
Improvement
Status Quo Radical Change
Quo Vadis Improvement Improvement
Status Quo Status Quo Radical Change Radical Change
Quo Vadis Quo Vadis
Figure 3.7. Different project strategies and the project space.
The level of ambition increases, e.g. due to market or industry pressure, as one moves
from the retaining ‘status quo’ towards the ‘quo vadis’ situation. The latter one could
for this discussion be left out as it often may involve a complete strategic shift, e.g.
shifting the line of industry one is involved in. As one shifts ambition levels one may
also need to change the approach one takes to the management of a project, as it leads to
new ‘what’s’ and ‘how’s’ previously ‘unknown’ or unfamiliar. This means that one has
to acknowledge that there is a need for different project strategies. As a start we may
relate four different project strategies to each of the four ambition levels above. The
‘status quo’ situation may be termed A-type of project strategies, ‘improvement’ B-type
project strategies, ‘radical change’ C-type project strategies, and ‘quo vadis’ D-type
project strategies. These four different project strategies are related to the degree of
openness in the ‘what’ and ‘how’ characteristics of the project space. Based on the
project space and these four different types of project strategies, Epci has started
working on a ‘project atlas’, to try to establish a ‘tool’ for ‘navigation’ from project
strategies and further into contract and procurement strategies. The ‘project atlas’ is
shown in Figure 3.8, and shows how the project strategies take different ‘form’
dependent on the clearness or unclearness of the project objectives ‘what’s’ and the
project processes ‘how’s’.
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Figure 3.8. The Epci Project Atlas.
Let us now look into the different project strategy types and their segments, as they are
proposed in the project atlas. The A-type of project strategies are characterised by clear
specifications with no or very small room for seeking opportunities. As such the A-type
of strategy is a risk reducing type of strategy often copying previously used concepts
and methods. The B-type of project strategies is as the A-type characterised by clear
objectives and processes. There has though been opened up a bit, in that the objectives
have become functional in stead of detailed, and the processes are meant to be of
guidance in stead of prescriptive. The B-type of strategies may again be divided further
into three groups, B
W
, B
WH
, and B
H
, dependent on the degree of openness in objectives
or processes. B
W
is characterised by that one is able to choose how to do it (i.e. one
knows how to do) as the what to do is given as functional specifications. The room for
improvement is through challenge prevailing work processes to continuously develop to
stay competitive. Moving from B
W
to B
WH
is characterised by opening up on the
functional specifications that defines the ‘what’s’ of the project object, while slightly
starting to define (preferable or competitive) work processes. Still there is room for
challenging the prevailing work processes, but the trend is moving towards improving
the current work processes. Moving further to B
H
leaves more room for challenging the
functional specifications of the project objectives, but tightens up the work processes to
be applied, using a guidance approach. An example could be to follow the principles
that CRINE Network has established, in the supply chain management initiative.
Approaching the C-type of strategies we move into the unclear area characterised by
fuzziness and ambiguity. Further dividing the C-type of strategies into C
W
, C
WH
, and
C
H
, we moves from challenging the fundamental statements and objectives of the
project, through to taking technological step changes in applying next generation
technology. Finally the D-type of strategies is completely open in that the objectives are
undefined and the processes to be applied are undetermined.
The project atlas and the different project strategy segments may now be used to outline
a tactical approach to project execution, i.e. the different routes that may be chosen
through execution.
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3.6.3 Routes are different
From a business opportunity is identified, via project initiation and development,
through to the project object is completed and set into operations there are a number of
alternative routes that may be pursued to complete that process. Common for all routes
is that they will be within the confines of the project strategies comprised by the project
atlas. If we leave out the D-type strategies, as they are mostly found in the phase
searching for a business opportunity, we have the three strategies A, B and C left.
Therefore, the choice of a route through the development phase of the project is what
links the project development strategy with the execution of the project development
phase. The strategy may be seen as the basis underlying the approach to a route.
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Figure 3.9. A route moving through several categories of the project atlas.
From the ‘start’ point of the project development to the ‘stop’ point, that for the type of
projects addressed in this thesis, i.e. oil and gas development projects, may be defined
as the point where the project object is set into operations, there may be several routes
to pursue, dependent on the ambitions of the project or project stakeholders. The start
point will most probably be located somewhere within the B or C region of the ‘project
atlas’, as what may become a project in its origin as a business idea or opportunity is
related with a large portion of uncertainty. At the ‘stop’ point when most of the degrees
of freedom have been set, the project will ultimately have been brought into a phase of
order, i.e. closed, and the degrees of freedom still open is there to bring elements of
flexibility into the operations of the project object. As such we may say that all routes
will move from the ‘open’ part of the project atlas to the ‘closed’ part of the project
atlas, where the elements still ‘open’ are defined to be so within given limits. We could
alternatively present this as a matrix orientation, where one axis follows the timeline
from ‘start’ to ‘stop’, and the other axis goes from ‘open’ to ‘closed’ in the project
space, or from disorder to order. This is presented in Figure 3.10 below.
3 Projects and project management
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Figure 3.10. A to C strategies between order and disorder.
If we look closer into three different routes we may say that they relate to three different
strategies. We may say that the routes start in the B
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category, and ends in the A
category.
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Figure 3.11. Three different routes from initiation to completion (1).
The first may be seen as the risk reducing type of route, seeking to exploit, or copy,
concepts, products and processes previously used. The main aspect in this route is to
‘close’ the project as fast as possible, i.e. bringing it to a ‘painted by numbers’ type of
project as soon as possible, and thereafter using A-type strategies. The second route
requires that the degrees of freedom are opened up to explore possible approaches,
through improving the current work processes, i.e. moving to B
WH
, before closing the
3 Projects and project management
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53
project and exploiting A-type strategies. The third route goes further than the second
route in opening up the degrees of freedom. From the start point, the route searches into
the ‘radical improvement’ area, first generally (C
WH
) then trying to challenge or
reformulate the objectives or the specifics of the objective of the project. Then the
routes start closing the project, through returning to the segment it started, i.e. see what
has been learnt from relaxing the requirements or limits of the project (the tour into the
C-segments), before closing the project completely and moving into the A-segment.
The three routes could also be represented in the project atlas, as in Figure 3.12 below.
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Figure 3.12. Three different routes from initiation to completion (2).
The different project strategies and the different routes outlined are an important aspect
when approaching projects from the supply chain and supply chain management
perspective. The different strategies applied and the routes that are outlined, will impact
the demand and supply chains that is necessary to realise the project. This will again
impact the contractual relationships to be developed in the project supply chains. These
are one of the factors that differentiate project-oriented supply chains and supply chain
management from the context of the continuous industry and operations. This will be
further developed through the agile concept outlined in chapter four, and brought
together in the project supply chain management concept in chapter six.
4 Logistics and supply chain management.
4. Logistics and supply chain management.
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4.1 Introduction
In the last chapter projects and project management were outlined and discussed. In this
chapter the focus is turned towards the other aspect of this thesis, the developments of
logistics and supply chain management. First the theoretical developments of logistics
and supply chain management as a domain of managerial knowledge are outlined and
discussed. Then uncertainty as it emerges and is handled in logistics and supply chain
management is addressed. Two aspects of manufacturing management theory are then
described and discussed as they are seen as relevant for logistics and supply chain
management in the project-oriented context of developing and operating a project
object. Finally the previous parts of this chapter and the last chapter on projects and
project management are brought together to approach supply chain management in the
project context.
4.2 Logistics and Supply chain management
Logistics management may simply stated be said to be the managerial practice about
bringing something or someone that is needed from the place where it origins to the
place where it is needed, when and in the form it is needed. The term itself originates
from military operations, together with the related terms procurement and supply.
22
Logistics; ’(1) the aspect of military science dealing with the procurement, maintenance, and
transportation of military material, facilities, and personnel, or (2) the handling of the details of an
operation’.
Procure ‘(1) to get possession of: obtain by particular care and effort, (2) bring about’;
Supply: ‘(1) to provide for, (2) to make available for use, (3) the act or process of filling a want or need’.
Documentation of one of history’s first uses of logistics management as a strategic
driving force is given by Engels (1978) in his description of Alexander the Great and
how Alexander planned and conducted his warfare, in the time period 340-323 B.C.
Even earlier than Alexander the Great Sun Tzu a Chinese General, 500 B.C., wrote a
collection of essays named ‘The Art of War’
23
. ‘The Art of War’ has come to be
recognised as the oldest military treatise outlining warfare strategy, and does also
contain aspects of logistics and logistics management. Creveld (1977) gives another
reference to logistics role in warfare, in a later, but longer historical time-perspective.
As part of later military warfare, Pagonis (1992) gives us insight into the role of
logistics and logistics management in the Gulf War often referred to as the largest
logistics operation in history taking the time-frame into account.
22
As defined in the Encyclopædia Britannica.
23
See e.g. http://pubweb.ucdavis.edu/Documents/ROTC/suntzu/szbook1.htm.
4 Logistics and supply chain management.
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Commercial use of many of the concepts and methodologies developed within military
applications of logistics goes often under the name of logistics engineering. Logistics
engineering takes a maintenance or operability focus in its approach to logistics. A
definition of logistics engineering is given by the Society of Logistics Engineers, SOLE
(www.sole.org);
‘[Logistics engineering is] the area of support management used throughout the life of the product or
system to efficiently utilise resources assuring the adequate consideration of logistics elements during all
phases of the life cycle so that timely influence on the system assures an effective approach to resources
expenditure’ (www.sole.org).
The other main branch within logistics is named ‘business logistics’. Business logistics
focuses more broadly on the whole supply chain from the initial source to the final
consumer and the elements that have to be managed to secure a correct flow along these
chains to meet service and cost requirements. One definition of business logistics is
given by the Council of Logistics Management, CLM (www.clm1.org);
‘Logistics is that part of the supply chain process that plans, implements, and controls the efficient,
effective flow and storage of goods, services, and related information from the point-of-origin to the
point-of-consumption in order to meet customer requirements’ (www.clm1.org).
The mission of logistics is on the upper-most level service and total-cost (Bowersox et
al. 1997, pp.8-13).
24
The service element is related to availability, operational
performance, and reliability. All three aimed at the ability of getting an object into a
place where it is needed, when it is needed, given that internal and/or external elements
may impact the supply chain and disturb or threaten its ability to meet its service
requirements. The total cost element is related to all costs accrued up through the supply
chain, from ‘point of origin to final point of consumption’. That means the costs
necessary to bring the object from its raw material bases through its development stages
and finally into the ‘hands of the customer’ or ready for final ‘consumption’. The total
cost aspect focuses specifically on elements that may be improved through a holistic
approach to the supply chains. Finally there must be a balance between service and total
costs, given the needs and requirements to be fulfilled.
‘The challenge is to balance service expectations and cost expenditures in a manner that achieves
business objectives’ (Bowersox et al. 1997, p.9).
The contribution and recognition of the importance of managing the external supply
chain has been known and acknowledged all since the days of Alexander the Great
(Engels 1978). As a management topic logistics got foothold after the Second World
War. The period up to the 1970’s was characterised by logistics functions, e.g. physical
distribution, warehousing, and purchasing. Then in the 1970’s and 1980’s the focus
became optimisation of the balance of customer service and operations cost, often
addressed as materials management. The focus was still on internal functions that was
‘optimised’ within their boundaries, e.g. through the use of quantitative calculations for
predicting optimum stock levels. The next logistical period that emerges in the 1980’s
commenced with the focus towards internal integration between company internal
24
‘[T]he logistics of an enterprise is an integrated effort aimed at helping create customer value at the
lowest total cost’ (Bowersox et al. 1997, p.8).
4 Logistics and supply chain management.
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56
functions, as well as the move to integrate, or synchronise, inbound activities with
outbound activities. In this period the integrated logistics concept emerges, which
integrates internal activities from the supplier interface to the customer interface around
the two flows of material and information
25
. The information flow is the holder/carrier
of requirements and demand, originating in the customer interface, to pull the value-
added materials flow from the supplier interface, through the organisation and up to the
customer interface. The 1980’s were as such characterised by internal integration,
integrating internal functions related to the logistics flow, as well as the integration of
the flows of material and information as two mutually dependent flows.
Then in the 1990’s the focus on integration continued, but now the focus was broader,
taking external elements into account, extending the holistic focus to embody both
customers and suppliers as part of the managerial context. The flow aspects was also
extended as in addition to the flows of material and information, the flows of services
and funds became important elements of the logistical flow.
Table 4.1 outlines the developments of logistics management up till now, as well as
suggests a scenario for further development of the logistics management domain.
Table 4.1. Development of logistics’ concepts.
26
Stage 1 2 3 4 5
Timeframe To 1960s 1970s-1980s 1980s-1990s 1990s-2000 2000 -
Concept Warehousing
and
Transportation
Total Cost
Management
Integrated
Logistics
Management
Supply Chain
Management/
Demand Chain
Management
Context
dependency
Management
focus
Operations
performance
Optimising
operations
cost &
customer
service
Tactics/
Strategies
Logistics
planning
Supply Chain
Visions,
Objectives &
Goals
Supply Chain
Context
Mastering
flexibility and
uncertainty
Interconnectedn
ess &
Dependency
Competitive
aspect
Internal
competitiveness
Supply chain
competitiveness
Supply network
competitiveness.
Organisation
al design
Decentralised
functions
Centralised
functions
Integration of
logistics
functions
around logistical
flows
Partnering,
“Virtual”
organisation,
Market co-
evolution
Co-opetition
e-linkages in the
network
25
See e.g. the article ‘Materials logistics management’ by Bowersox et al. in Christopher (1992), pp.38-
48.
26
This table is a revised and extended version of Ross 1998, p.78.
4 Logistics and supply chain management.
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flows Outsourcing
Insourcing
Logistical
flows
Material Material
(Information)
Material
Information
Material
Information
Services
Funds
Information
Funds
Services
Material
The specifics of this development is further outlined below where the developments
from logistics functions, through logistics engineering, logistics management,
integrated logistics, supply chain management and integrated supply chain
management, up to demand chain management and extended or virtual enterprises are
described.
4.2.1 Logistics functions
To bring goods from the ‘point of origin’ to the ‘point of consumption’ there is a need
for transportation. The demand for goods from one ‘point of origin’ may be
geographically distributed over a wide area. To cover the demand that arises in one area
within the timeframe available before the demand disappears, the transportation time
from the ‘point of origin’ to the ‘point of consumption’ has to be less than the
timeframe of the demand. If the transportation time is longer than this, then a new ‘point
of origin’ has to be located closer to the potential demand area, so that the transportation
time becomes shorter than the timeframe of the demand. This new ‘point of origin’ may
be a warehouse located to be better able to service the customers, i.e. cover the demand.
Thereby a chain of transportation and warehousing is established between the initial
‘point of origin’ for the goods and the final ‘point of consumption’. This may be
referred to as a physical distribution chain and the management of it may be referred to
as it is done in the definition of physical distribution management given by the
American Marketing Association in 1948:
‘The movement and handling of goods from the point of production to the point of consumption or use’
(Robeson 1994, p.4).
Already in this early phase the ‘work of logistics’, as described by Bowersox (1997),
are seen to emerge. The ‘work of logistics’ are defined as the five elements of (1)
network design, (2) information, (3) transportation, (4) inventory, and (5) warehousing,
material handling, and packaging.
Except from physical distribution the work of logistics comprises the management of
materials that are needed to produce or construct the goods. This is often referred to as
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materials management
27
. Now we see two ‘schools’ of logistics emerge. First the intra-
organisational focus, focused at the flow of information and goods related to the
manufacturing of goods, often termed material and production planning and control or
materials management. Secondly, the flow of information and goods between
organisations, or inter-organisational, i.e. inbound and outbound transportation focusing
on the transportation aspects, or physical distribution management. Table 4.2 gives an
overview of how the logistical functions may be grouped into materials management
and physical distribution management, and finally into logistics management.
Table 4.2. From logistics functions to logistics management (from Ross 1998, p.26).
Purchasing Receiving Manu-
facturing
Ware-
housing
Trans-
portation
Demand
forecasting
1
Inventory
mgmt.
Material
handling
Value
added
processing
Finished
goods
inventory
Supply
channel
mgmt.
Order
processing/
services
2 Materials Management Physical Distribution Management
3 Logistics management
Before we move on to the ‘all-embracing’ logistics management, we shall look into
logistics engineering.
4.2.2 Logistics Engineering
As described in the historical retrospect of the reliance on logistics, its origins may be
found within the military context, and later came to be developed and known as
logistics engineering. A well-known textbook within the area of logistics engineering is
‘Logistics Engineering and Management’ written by Benjamin Blanchard (1992).
‘Logistics engineering is defined by the Society of Logistics Engineers, SOLE, as ‘the art of science and
management, engineering, and technical activities concerned with requirements, design, and supplying
and maintaining resources to support objectives, plans, and operations’ (Blanchard 1992, p.4).
Logistics engineering is different from the business or industrial logistics approach in
that it focuses on continued operations of a piece of equipment or a system and how this
is prepared for in the design process of the system. As such logistics engineering is
more concerned with analysis of the system (facilities) capabilities per se, and not so
much the analysis of the supply chains – from point-of-origin to point-of-consumption –
bringing forward the necessary support. There is also a focus today within e.g. the
27
Materials management may also refer to the wider domain of logistics management as presented later.
This view is especially distinctive in the school of thoughts that emerged in the Nordic countries, see e.g.
Persson et al. 1993.
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defence organisations to use and rely more on commercial items, more or less freely
available in the marketplace, and less on specifically designed items only to be used in
defence equipment or facilities. The background for this being the cost position of using
a specific, proprietary supply chain for defence material, versus a supply chain based on
open-market goods and services. This may also be seen in what is emphasised in what
Blanchard (1992) refers to as the ‘language of logistics’
28
. As the ‘language of logistics’
comprise a large number of elements a dedicated, proprietary supply chain will need its
own resources for all elements, in stead of having the opportunity to base and rely on
resources shared with a number of other application areas. This may improve on both
cost and service factors. The downside may be increased vulnerability for the supply
chain as part of defence operations, but that is part of the analysis to address and
evaluate.
The system or facilities is the point-of-consumption or ‘consumer’ in the logistics
engineering approach. The demand side of logistics engineering is to a large extent
given in the design process of the facilities, and one may also say that the demand side
(the demand for support to make the facilities operate and do their mission) is the core
focus of logistics engineering. Of the two logistical mission elements, service and total
cost, logistics engineering focus on both taking the given service level required by the
mission of the system or facilities as a basis requirement. The service level shall secure
the uptime of the system or facilities. The required service-level is given and logistics
engineering must focus on how to make the logistics support cost-effective. The
emphasis on maintaining continuous operations and the required service of the support
‘structure’ is by Blanchard’s (1992) referred to as ‘measures [or factors] of logistics’
where also the order of the factors should be noted
29
. First one should be able to rely on
it (reliability), then be able to fix it and continue operations (maintainability). Total cost
in the logistics engineering approach is seen in the life-cycle perspective while business
logistics sees it in a supply chain perspective throughout the actors in the supply chain.
Balancing investments, i.e. design of facilities, against operational cost is therefore at
the core of logistics engineering.
4.2.3 Logistics management/ Integrated logistics
The mission of logistics management is related to two elements. First is the service
element that addresses the alignment of demand and supply, i.e., to have supply
available to fulfil a given demand within a pre-defined time. The other is cost, i.e., the
28
Blanchard (1992) names the following twenty areas to be part of the ‘language’ of logistics: (1) systems
engineering, (2) concurrent engineering, (3) logistics support, (4) integrated logistics support, (5) logistics
engineering, (6) logistics support analysis, (7) reliability, (8) maintainability, (9) maintenance, (10)
maintenance level, (11) maintenance concept, (12) maintenance plan, (13) total productive maintenance,
(14) supportability, (15) human factors, (16) producibility, (17) total quality management, (18) system
effectiveness, (19) life-cycle cost, and (20) cost effectiveness.
29
Blanchard (1992, pp.26-93) give the following list of measures or factors of logistics: (1) reliability, (2)
maintainability, (3) supply support, (4) test and support equipment, (5) organisational, (6) facility, (7)
transportation and handling, (8) software, (9) availability, (10) economic, and (11) effectiveness factors.
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total cost position of obtaining the alignment of demand and supply throughout the
whole supply chain. Thus, supply chain management is concerned with matching
demand and supply in the most cost-effective way, taking a holistic view of the supply
chain from ’point-of-origin’ to ’point-of-consumption’.
Logistics management is based on the interdependent logistical flows of material and
information. The duality of the material and information flows is in the logistical theory
known as the integrated logistics concept
30
. Among the information and material flows
the information flow is the driver and the one to focus on if one is to improve the supply
chain dramatically. It is often said that ‘the flow of material can not be better then the
flow of information’. This may be true, but the flow of materials is though the one
needed to understand to start creating knowledge. The flow of information may be a
supply chain in itself, e.g. in the supply chains of the financial services where the ‘flow
of material’ or the products, which are financial derivatives, are in themselves
information or virtual/intangible objects.
31
As was shown in Table 4.2 above, logistics management comprises materials
management and physical distribution management. Thereby logistics management
connects the inbound side with the outbound side of the company, and integration is a
key subject in logistics management and integrated logistics. The core of the integration
is to align the inbound side of the company with the outbound side as cost-effective as
possible to meet service requirements. The means to obtain this is intra-organisational
integration along the logistical flows, i.e. the flows of material and information, and
integration of the logistical flows themselves. Integrated logistics is then a concept by
itself, as it presents the core of the logistical thought in aligning both resources and
flows towards the mission of serving a stated need with a given level of service in a cost
effective way.
As the use of information technology and broad world wide networks increases, there
becomes a need to make the information flow more ‘transparent’ so that it is easier for
the actors along the supply chain to make use of information to enhance the physical
supply chain. Transparency of information has raised the possibilities and challenges
within logistics management to a new level. The emergence of ‘e-‘type of solutions is
an example of this.
4.2.4 Supply chain management / Integrated SCM
Supply chain management extends logistics management to comprise external
integration of logistics oriented processes among several individual companies and
organisations that as a whole make up the total supply chain from point of origin to
30
See e.g. Bowersox et al. 1996, pp.33-40.
31
Financial systems are referred to by Meister (1991) as an example of idealised logistics systems.
‘Financial institutions may seem like odd man out in this company [distribution systems], but systems
such as banks and the stock market essentially store and distribute wealth in various forms’ (Meister
1991, p.105).
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61
point of consumption. As such supply chain management takes logistical management
and integrated logistics into the inter-organisational context.
‘To be fully effective in today’s competitive environment, firms must expand their integrated behaviour
to incorporate customers and suppliers. This extension, through external integration, is referred to as
supply chain management’ (Bowersox 1997, p.34)
32
.
The term supply chain management has been used at least since 1982, when Oliver and
Webber published their article “Supply chain management: logistics catches up with
strategy” (Christopher 1992). The terms used are both supply chain management and
integrated supply chain management, but they are both inter-organisational concepts
that comprise the same elements. Some authors use supply chain management, while
others use integrated in addition to emphasise the focus on integration.
With supply chain management, i.e. an inter-organisational context, a new competitive
entity is born. The supply chain has been raised as the competitive business entity to
address, where it is the combined resources and competence of the supply chain that
brings competitiveness, not the single firm or business unit.
‘Integrated supply chain management implements a co-ordinated total supply or value chain from
determination of external customer needs through product/service development, manufacturing/operations
and internal/external distribution, including first, second and third tiers customers/suppliers. The objective
is to provide the highest customer service and satisfaction levels and make the most effective use of the
competencies of all organisations in the supply chain. The supply chain, versus the single business unit, is
positioned as the competitive unit.’ (Frayer et al. CLM 1997, pp.346-7).
Copper et al. (1997) and Lambert et al. (1998) published in two articles the idea of
supply chain management extending beyond logistics, and draws the integration aspect
further into that supply chain management is about integration of business processes;
‘Based on the review of literature and management practice, it is clear that there is a need for some level
of co-ordination of activities and processes within and between organisations in the supply chain that
extends beyond logistics. … The integration of business processes is what we call supply chain
management’ (Copper et al. 1997, pp.1-2).
Though, there may be a danger in presenting supply chain management as the
integration of business processes view in that what originated from logistics
management may be led to comprise all aspects of inter-organisational management.
That may contribute to undermine the specific contribution of logistical concepts and
logistics and supply chain management as a domain of knowledge.
The definitions of logistics has though been influenced by the ongoing development in
supply chain management definitions and practice. The Council of Logistics
Management, CLM, changed their definition of logistics management to apply to the
developments of SCM;
32
‘From the perspective of the total supply chain, efficiency is improved by eliminating duplication and
waste. However, cross-organisational co-ordination requires joint planning and relationship management’
(Bowersox 1997, p.26).
4 Logistics and supply chain management.
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Table 4.3. The development in CLM’s definition of logistics management.
Year Definition (see www.clm1.org)
1986 ‘Logistics is the process of planning, implementing and controlling the efficient, cost-effective
flow and storage of raw materials, in-process inventory, finished goods, and related
information flow from point-of-origin to point-of- consumption for the purpose of conforming to
customer requirements’
1998 ‘Logistics is that part of the supply chain process that plans, implements, and controls the
efficient, effective flow and storage of goods, services, and related information from the point-
of-origin to the point-of-consumption in order to meet customer requirements’
The change in CLM’s definition of logistics management shows the transformation of
logistics management from being its own entity, to becoming part of a greater set of
business processes in the inter-organisational context.
The commonalties of the supply chain management literature are by Cooper et al.
described to be:
- ‘It evolves through several stages of increasing intra- and inter-organisational integration and co-
ordination; and, in its broadest sense and implementation, it spans the entire chain from initial source
(supplier’s supplier, etc) to ultimate consumer (customer’s customer, etc.).
- It potentially involves many independent organisations. Thus, managing intra- and inter-
organisational relationships is of essential importance.
- It includes the bi-directional flow of products (materials and services) and information, the associated
managerial and operational activities.
- It seeks to fulfil the goals of providing high customer value with an appropriate use of resources, and
to build competitive chain advantages’ (Cooper et al. 1997, p.4).
As a last comment with respect to the correlation among logistics and supply chain
management, the following quote from Ross (1998) may draw it all together;
‘It has already been discussed that integrated logistics management constitutes the tactical side of the
SCM concept. In addition, there can be no denying that in the emergence of modern logistics can be
found the seedbed of SCM. As the role of logistics has expanded from a preoccupation with warehousing
and transportation to today’s concern with integrating the logistics operations of the entire supply
channel, SCM has been instrumental in merging the marketing and manufacturing with the distribution
functions to provide the enterprise with new sources of competitive strength. In addition, the application
of SCM can be seen in the integration of logistics activities among supply chain partners in the pursuit of
shorter cycle times and reduced channel costs’ (Ross 1998, p.24).
4.2.5 Demand chain management
Within logistics there is a demand side and a supply side. Logistics and supply chain
management comprise both sides in their approaches. As the requests for customer
specific products and solutions increases, and with increased complexity in many
products among others in the consumer markets, as well as logistics and supply chain
4 Logistics and supply chain management.
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63
management concepts being applied to new areas, the management of the demand side
has been elevated. Demand chain management, DCM, is a concept that has been taken
into use to address this, but for practical purposes it may be said to be another name for
supply chain management;
‘Is SCM the best term for this integrated management form? SCM was first proposed in 1982. More
recently, the term demand chain has been suggested to provide additional focus on the customer. Since
the end consumer is the focus of the entire supply chain, all members of the chain are suppliers to the end
user. Hence supply chain may still be the appropriate terminology’ (Cooper et al. 1997, p.10).
If demand chain management is just another name for supply chain management it
could have been presented together with supply chain management and integrated
supply chain management. In this overview of the developments in logistics and supply
chain management it is presented on its own. Demand chain management as a concept
have aspects that are important specifically for supply chain management within the
project context.
The concept of demand chain management was first used by a group of researchers and
academics at the International Institute for Management Development, IMD (see
Vollmann et al. 1995). However, the focus on the demand side, e.g. in production
planning and control, is not new which may be seen through the development of the
quantitative planning and control approach to materials requirements e.g. as presented
in Orlicky (1975). As with supply chain management the objective of demand chain
management is to;
‘develop synergy along the whole supply and delivery chain, from your suppliers’ suppliers, to your
customers’ customers in order to satisfy the demand of the end customer’ (Vollmann et al. 1995 p.2).
The contributions of demand chain management is as supply chain management related
to the logistical mission. Although the service element is left out, the element of value
enhancement is kept, as was seen in the commonalities of SCM literature as presented
by Cooper above;
’The DCM synergies are twofold: a reduction of cost and an increased value of the bundle of goods and
services provided’ (op cit.).
Although demand chain management on first sight may be seen to be very closely
related to supply chain management it addresses an aspect that is worth while to
consider. By addressing the demand it gives emphasis to what is the driver of the supply
chains and the process that lies behind developing and fulfilling that demand, and the
impact that the supply chain, i.e., the supply chain actors, has in that process. Especially
for more complex products, where the design and engineering processes of developing
or customising a product to its need (the demand) is important with respect to the value
that the product will have as part of the customer’s business.
‘The application of demand-driven techniques is most appropriate in situations where requirements are
independent. … to provide maximum response to what occurs in the marketplace …’ (Bowersox et al.
1997, pp. 491-492).
Although this quote is related to the consumer market it may still be appropriate to use
it for the project context. It is in this context that the requirements are most independent,
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i.e. the ‘one-of-a-kind’, ‘unique’ characteristics of the project object and the project-
oriented context.
The design and engineering processes are the demand generating processes in the
project context of the oil and gas industry. The design and engineering processes have
impact on the supply chains both for fabrication and construction, as well as operations.
The focus within demand chain management on the customers demand side help to
integrate supply chain management more with total quality management, in realising the
product that meets the demand, i.e. the customer’s specifications and requirements, this
is e.g. described in Kanji et al. (1998).
The importance of addressing demand as part of the alignment of demand and supply is
found in another recent supply chain management source (Gattorna 1998). They say
that;
‘Most of the material presented in this book is new and previously unpublished. It reflects next-generation
thinking about management of the supply chain for success. And while there will be many differing
perspectives on the issues, some key themes emerge. Most powerful of them all is the message of
alignment [of demand and supply in the supply chain] – a message about the sophisticated integration of
all the attributes so that the supply chain operates as a single, integrated, cost-effective system’.
Demand chain management is also seen to emerge in another, more agile or fast and
flexile oriented perspective
33
. This approach assumes among others that it should be
possible, through smart use of information technology, to anticipate the customer
demand prior to him ordering. I.e., when the demand arises, the goods or service needed
is in place to cover the demand, without the customer ordering it;
‘A first step in releasing the value locked away in inefficient supply chain practices is to pose the problem
in terms of the "demand chain", say Thomas Vollmann and Carlos Cordon. Demand chain thinking starts
from the customer's needs and works backwards, replacing narrow focus on transport costs with
consideration of how to achieve "mass customisation". This entails ever more precise, swift and efficient
delivery of product/service bundles, which in turn places considerable demands on the information
systems along the chain. But given good management of the right systems, suppliers should be able to
anticipate customer companies' needs and deliver what is needed without the need for ordering. Internet
technology -- via which suppliers can hook up to customers' intranets at very little cost -- can play a big
part in this. Such approaches require companies continuously to transform the way they work together.
Information systems are important but are best seen as a fast follower of this strategic process rather
than as a driver’ (Vollmann et al., 1999).
As the quote above mentions, there are new concepts and strategies that lead, with
technology as an enabler and adding value when being used to realise a strategy. This is
followed up by a quote about ‘hyper-competitive’ markets, where the emphasis is put
on the demand chain to be able to become customer-oriented in a fast and flexible
context.
‘Many manufacturing companies are implementing new information systems to improve their supply
chain management. These projects typically cost tens or hundreds of millions of dollars and take four or
five years to complete. This is fine in moderately competitive markets, says Donald Marchand, but in
hypercompetitive markets, where competitive advantage is sustained by continuous short-term changes,
33
See Financial Times series on ‘Mastering information management’, ‘Information in the
demand/supply chain’, Monday February 22
nd
1999.
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the time and expense are likely to be excessive. Such markets require a "demand chain" approach, which
focuses on fast, responsive interactions with the customer; unlike moderate markets, standardisation of
data upstream -- in financial and inventory management systems, say -- is not the main source of
advantage (and may even be a hindrance as the competitive environment evolves)’ (Marchand, 1999).
As discussed above demand chain management may comprise many of the elements of
supply chain management. It should not be a competing approach to supply chain
management, rather a complementary approach. I.e., the context in which each should
be applied should be governing which approach to use. In the discussion of supply chain
management in the project context, the discussion of the context influence on the choice
of a supply chain or a demand chain approach will be further elaborated. The project
context of the oil and gas industry could utilise both approaches in a constructive way.
4.2.6 Extended or virtual enterprises
The supply or demand chain management concepts, and their ‘integrated’ focus, base
much of their perspectives on what may be termed extended or virtual enterprises.
However, there are, or maybe more correctly should be, differences between the use of
the two terms extended enterprise and virtual enterprise. Both are inter-organisational
constructions, comprising the several organisations taking part in, or being the analysis
focus of, the larger supply chain or supplier and producer network. The differences
between the two should be in their duration and focus. As such a virtual enterprise may
be said to be a sub-set of extended enterprises. Let us use one definition of a virtual
enterprise that we feel addresses this point (Goranson 1999, p.65 and p.66);
‘Our virtual enterprises are opportunistic aggregations of smaller units that come together and act as
though they were a larger, long-lived enterprise. The virtual here is meant to convey that many of the
advantages of a larger enterprise are synthesised by its members. In the most interesting case, this
synthesis is temporary, built around a specific opportunity. … A virtual enterprise is a temporary
aggregation of core competencies and associated resources collaborating to address a specific situation,
presumed to be a business opportunity’ (Goranson 1999, pp.65-6).
Another quote reflecting the difference between extended and virtual enterprises is
given by Jagdev et al. (1998);
‘To some extent, it is a question of semantics, and perhaps the degree of integration between the
enterprises and the objectives of the co-operating partners. One could state that, relatively speaking, in a
virtual enterprise the degree of integration is closer and especially its scope of co-operation is wider. The
extended enterprise can be considered as a special case (and a subset) of the virtual enterprise. Virtual
enterprises usually operate in niche markets, are project based and tend to have, relative to extended
enterprises a shorter life span. They form and reform based on market needs’ (Jagdev et al., p.227).
We see that Jagdev et al. take the opposite position from us. They say that the extended
enterprise is a sub-set of the virtual enterprise, as we said the opposite. We still believe
that the virtual enterprise is a sub-set of the extended enterprise. However, as Jagdev et
al. say, this is (to a large extent) semantics.
Further, Goranson defines four types of virtual enterprises that meet his view and
definition of a virtual enterprise. These four types are given in Table 4.4 below.
4 Logistics and supply chain management.
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66
Table 4.4. Four types of virtual enterprises, as defined by Goranson (1999).
Type 1; An aggregation formed in response to an opportunity.
Type 2; A relative permanent aggregation of core competencies that largely pre-exists, and which
is seeking an opportunity.
Type 3; A supplier chain which, while using relatively conventional business relationships,
exhibits agility
34
in responding to market needs.
Type 4; A bidding consortium.
As such an extended enterprise could be said to comprise much of what we think of
when talking about the repetitive, long-term supply chains of e.g. a car manufacturer.
On the other side, a virtual enterprise could also e.g. be seen as the extended project
organisation or the project supply chains of a large-scale development project.
4.2.7 Future developments of logistics concepts
As the historical outline of the developments of logistics management and its
derivatives shows, the trend goes from specific functions that has or had to be
performed and was regarded as part of the overriding term logistics. The conceptual
developments have ended with bringing the mission of logistics into the larger inter-
organisational and integrated context of the supply chain, to be able to analyse the
totality and its inter-relationships and cost position.
‘Originally, logistics had a transportation and warehousing focus, which has gradually evolved into a
“customer driven” integrated management system focus’ (Novack et al. 1995, p.27).
The search has gone from the functional view to the view of competitiveness, where one
seek to develop concepts that contributes to make visible the impact that elements and
concepts from logistics may have on business competitiveness. In addition the
organisational scope and context that is necessary to address and enhance the value that
logistics may bring. In summary one may say that the focus is turned towards the
environment and context, that logistics and supply chain management concepts and
methodologies are to be applied to, as well as the core contributing elements of logistics
and supply chain management in the given environment and context.
34
We will return to the term agility below.
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Table 4.5. Future themes for logistics and supply chain management.
Author Emerging important aspects and elements
Novack et al. (1995) Six emerging themes; Leadership and differentiation, marketing, scientific
management, capability to integrate, ownership of responsibility, and value
enhancement focus internally and externally.
CLM (1998) Positioning, integration, agility, and measurement.
Gattorna (1998) Alignment of demand and supply.
Goranson (1999) The Agile Virtual Enterprise. Risk and reward sharing, light contractual
formats.
As stated above the Council of Logistics Management has contributed to bringing
forward much knowledge and theoretical aspect concerning logistics management, and
primarily business logistics. They have also given their contribution to outlining
emerging perspectives and concepts within the logistics management domain (CLM
1995). CLM outlines four perspectives/concepts as important to be able to keep up with
the challenge of continuous change. The four concepts are; (i) positioning, (ii)
integration, (iii) agility, and (iv) measurement.
One may say that what CLM proposes with their four concepts is to make better use of
some core elements to understand and elevate the role and development that logistics
and supply chain management has to focus on in a context where uncertainty and
change are aspects that have to be dealt with specifically and proactively.
Focusing more specifically on alignment of demand and supply is another emerging
aspect (Gattorna 1998), especially driven by the emerging ‘e-‘type solutions, which will
become ‘natural’ business processes. As well as CLM’s four concepts to survive and
thrive in a changing world, the alignment aspect brings with it a need to better
understand the core drivers or fundamentals that lie behind logistics and supply chain
management. I.e., to know what the strategic basis is, as well as knowing which
concepts and approaches to apply when and where, so that all relevant ‘attributes’ are
integrated to make an ‘optimal’ supply chain.
‘And while there will be many differing perspectives on the issues, some key themes emerge. Most
powerful of them all is the message of alignment [of demand and supply in the supply chain] – a message
about the sophisticated integration of all the attributes so that the supply chain operates as a single,
integrated, cost-effective system’ (Gattorna 1998).
More specifically one may say that the future development of logistics concepts will
clarify and make more and better distinct use of the core concepts of logistics and the
supply chain derivatives. That means that the further developments will address core
concepts used in a context specific way. By contextually dependent is to be understood
that the characteristics of the context will guide the development of specific logistics
management derived solutions and ‘concepts’, based on a set of clearer and better
understood core concepts.
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‘A final, and perhaps the most significant, reason for integration is that the complexity of future logistics
will require innovative arrangements. The challenge for the new millennium is to develop new ways of
satisfying logistical requirements, not simply using technology to perform old ways more efficiently‘
(Bowersox 1997, p.695).
As many developments in the future is seen to be more temporary and flexible in
utilising upcoming, and often short term business opportunities this should also be seen
as an upcoming element of logistics management developments. This is presented
through Goranson’s focus on the agile virtual enterprise (Goranson 1999).
The temporary aspects should open up for bringing aspects and elements from the
project context into developing logistics concepts further. Aspects and elements from
the project context and project management could contribute especially with focus on
the ability to integrate organisation and business in the temporary, short-term
perspective. Integrating organisations and people in the short term view may draw on
both the channel oriented thinking of logistics with the objective orientation of the
project context. Integrating business in the short term may draw on developments from
the project context and project management within e.g. contract strategy and contractual
relationships.
4.2.8 Summary of logistics and supply chain management
Above the development of logistics and supply chain management from its functional
origins to its current status as a management concept has been presented. These
developments have brought logistics and supply chain management back to the strategic
importance as Alexander the Great gave it as a ‘winning strategy’ in his warfare.
Supply chain management has originated from developments within logistics
management. From its origin logistics was concerned with the movement and storage of
goods to bring the goods from the place where they originated to the place where they
were ‘consumed’, this is named the logistical material flow. Later the focus of logistics
came to include the flow of information that underlies the flow of materials, i.e. the
logistical information flow.
The mission of logistics management is related to two elements. First is the service
element that addresses the alignment of demand and supply, i.e., to have supply
available to fulfil a given demand within a pre-defined time. The other is the cost
element, i.e., the total cost position of obtaining the alignment of demand and supply
throughout the whole supply chain. Thus, supply chain management is concerned with
matching demand and supply in the most cost-effective way, taking a holistic view of
the supply chain from ’point-of-origin’ to ’point-of-consumption’.
Logistics management is concerned with obtaining the logistical mission based on
integration of logistical material and information flows and organisational functions.
Integration of flows means to see the logistical flows of material and information as
interdependent processes. Organisational integration means to integrate the
organisational functions into processes supporting the logistical flows, of material and
information. The flow of material was the object of managerial attention, and the cost-
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bearing element, but the flow of information comprised the mechanisms used to initiate
and control the flow of material. In logistics management this is all seen within the
boundaries of a given organisation (firm).
With the move towards businesses focusing on core competence and as the value of
externally procured goods and services increased compared to the value created
internally, the need arose to extend the logistics management into the suppliers on the
inbound logistics side. The importance of conforming to the operations and
requirements of the customer established the need to bring the actors on the outbound
logistics supply chain into developing and improving logistics management. Thereby
supply chain management was developed as a concept.
Supply chain management brings logistics management into the inter-organisational
context by addressing the logistical flows and organisational integration in the
perspective of the supply chain, comprising several independent actors (firms). An
important aspect here is that the supply chain is regarded as the competitive unit, i.e.,
each firm is competing as part of a supply chain and the objective is to establish supply
chain relationships and processes that give the actors an asset compared to other supply
chains. In the theory of supply chain management the flow of services and funds
between the supply chain actors are added as the third and fourth logistical flow. As the
flow of funds comprises much of the incentive mechanisms in making the supply chain
operate it should be given special emphasis. Especially in the project context where the
flow of funds is comprised in contract strategies, payment formats and payment
schedules. Risk and reward sharing schemes are also part of the flow of funds, and are
important elements to obtain supply chain management schemes in the project context.
Demand chain management is the latest term that have emerged in the academic world
of logistics and supply chain management. For most practical purposes it may be
regarded as the same as supply chain management, but as described, dependent on the
context in which supply chain management shall be approached it may be useful to give
special emphasis to demand chain management.
Logistics engineering focuses still more on the supply chains role in the life cycle
perspective of an object. With a basis from defence applications that addressed the
necessary logistical resources needed to maintain the combat responsiveness and
availability of military equipment, it gained attention in industrial context where an
object has to be developed taking the resources necessary to support its operation into
account.
Further developments within the domain of logistics and supply chain management has
been suggested should extend along the lines of focusing more directly on the core,
contributing elements of logistics and supply chain management, and how these may be
differentiated in use to apply to the specifics of given environments and contexts. I.e.
contextually dependent logistics and supply chain management.
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4.3 Uncertainty in logistics and supply chain management
Uncertainty in logistics and supply chain management is primarily related to the
processes taking place between the two logistical ‘end-points’, i.e. the ‘point-of-origin’
and the ‘point-of-consumption’, where most of these processes are related to the
alignment of supply and demand. The demand and supply processes will take different
forms and rely on different formats and technologies when being ‘transported’ through
the supply chains, dependent on the range of manufacturing types from one-off to
continuous process. There is a large span in both volume and part variety among the
different ‘manufacturing’ types, as seen from Figure 4.1.
High
volume
continuous
manufacture
Semi
continuous
manufacture Large
batch Small
batch
One-off
manufacture
Part variety
V
o
l
u
m
e
Figure 4.1. Span in parts volume and variety, dependent on type of ‘manufacturing’.
It will be differences in the demand and supply processes dependent on the
manufacturing type. These differences will also differentiate the type of uncertainties
that may affect the logistics and supply chain processes. Uncertainty in the logistics and
supply chain focus of demand/supply alignment, may also be related to the project
context and the ‘what’s’ and ‘how’s’ of the project space. In such a perspective the
uncertainty with respect to demand and supply may be seen as;
- Demand uncertainty - uncertainty with respect to ‘what’.
- Supply uncertainty – uncertainty with respect to ‘how’.
In addition to these, there are the issue of the meeting point between demand and
supply, i.e. the aspect of time – uncertainty with respect to when. Then uncertainty may
relate to what is needed, how to get hold of it, and when it is needed.
4.3.1 Demand
Demand processes vary from re-ordering mechanisms to replenish standard consumer
goods or industrial parts, to interactive processes aimed at specifying what is needed to
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build complex one-of-a-kind products, e.g. project objects in oil and gas development
projects.
Many of the demand triggering mechanisms in e.g. the fast-moving consumer goods,
FMCG, market today are using point-of-sale type of technologies to catch and use
demand information as close to the end-user, or point of consumption, as possible. As
products in the FMCG market are examples of high volume and semi-continuous
manufacturing type of products, they have a short time-scale from indication of need to
delivery or replenishment. The demand processes in consumer goods markets are more
characterised by which amount, where, rather than what, to which specifications that is
more characteristics for determining the demand in the project context.
‘The future it has been suggested, is a combination of the known and the unknowable. The proportion of
the latter tends to rise as the time-scale extends’ (Rosenhead 1989, p.194).
Uncertainty with respect to the demand in the future increases the longer into the future
we see, or the longer time there is from the initial time a demand is set and until
delivery is done. In the continuous and repetitive type of industries pull-oriented
systems, often enabled through electronic re-ordering or replenishment systems have
short response times, and the question is not so much what to replenish, rather how
much and where to. Another situation is that of the one-off type of manufacturing. Such
products are often large, e.g. like offshore oil and gas development projects, and there is
long development and specification processes that underlay the demand definition of
such manufacturing types. There is a long time-span from the initial demand
specification up to the point when the goods or service has been delivered and the
demand is fulfilled. Throughout the time cycle from the initial demand to delivery, there
is possible to alter the initial demand specifications and thereby initiate change
processes, as is familiar in engineering in the development phase of the project life
cycle.
4.3.2 Supply
Supply processes in the high-volume setting of continuous and repetitive types of
manufacturing often make use of already established supply and distribution processes
and services. The question is often how much to replenish, of which products to which
location. For the one-off situation in the project context the ability to supply, within the
time frame available after the demand is specified, is the important issue. In the
development phase of the project context many suppliers have one delivery, and then it
is often of critical importance for the progress of the project object development that
delivery take place as scheduled, otherwise the whole project schedule may be
postponed. This is often part of the project planning and control activities, to monitor
each supplier to see that their progress is so that they will be able to deliver on or before
schedule.
If there are critical items, but of a nature so that there are several suppliers to choose
among and reasonable cost compared to the value of having it on time, e.g. some
welded steel items, then e.g. more orders have been made than actually needed. An
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example is that when twenty items were needed, five items were ordered from each of
five suppliers. That was an excess of five items, but in the end one of the suppliers were
not able to deliver in accordance with the schedule and the added insurance of having
one supplier in excess proved to be a well suited supply insurance.
Below we will address uncertainty in the logistics and supply chain domain through a
three-staged pyramid approach.
4.3.3 Growing opportunities and controlling risks
When describing uncertainty in the project context the difference and importance of the
two sides of uncertainty, opportunity and risk was stressed. Uncertainty comprised both
a wanted side, given by business oriented opportunities, as well as an unwanted side
given by the presence, occurrence and materialisation of risk elements. Also within
supply chains and supply chain management the two-sided uncertainty perspective
could be useful. The two-sided aspects of uncertainty may be related to the logistics and
supply chain context by Copacino’s (1997) ‘customer service pyramid’. In the
‘(customer) service pyramid’ service elements are divided into three categories and
related to the financial and market share impact of each. The first category is reliability,
which constitute the basis, but that by itself will make you lose in the marketplace. The
second category is resilience that enables you to adapt to the situation and be able to
resume the supply chains mission if brought out of ‘balance’. Resilient aspects will
enable a company or supply chain to maintain its financial and market position. The
third and final category is creativity, where you use new and improved ways of
working, and thereby gain on both your financial and market position.
Table 4.6. The relation between uncertainty and the ‘service pyramid’.
The two aspects of uncertainty The elements of the ‘service pyramid’.
Dealing with opportunities Creativity
Resilience Dealing with risks
Reliability
If we relate the elements of the ‘service pyramid’ to the two aspects of uncertainty, we
may say that the reliability and resilience part is related to risk aspects, or dealing with
such, and that creativity is related to the opportunity side, or the ability to dealing with
opportunities. The ‘service pyramid’ thereby becomes an approach to supply chain
management in the uncertainty of the project context. This may be developed further by
rewriting the ‘service pyramid’s’ classification of reliable, resilient and creative supply
chains and transferring them to the project context. Following the outline of the ‘service
pyramid’, the supply chains related to a project may be divided into three groups:
active, reactive, and pro-active supply chains. The difference between these three
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groups may be said to be that the active supply chains are those that are planned and
executed as planned, while the latter two are not executed as planned, but are
proactively planned for uncertainty situations, i.e. to handle risk or opportunity
elements. The reactive supply chains are activated due to an ‘emergency’ situation, as
contingency for unforeseen events. The pro-active supply chains are also activated
based on an emerging need or request, though they are not initiated due to an
‘emergency’-like situation, but because they may improve time, cost or qualitative
aspects of the project’s product, e.g. as part of design changes. Table 4.6 above then
have to be revised as presented in table 4.7.
Table 4.7. Uncertainty elements and the ‘revised’ service pyramid’.
Uncertainty related aspects Elements of the ‘revised service pyramid’
Focusing on opportunity elements Pro-active
Focusing on risk elements Re-active
A certain world, i.e. no uncertainty. Active
Figure 4.2 juxtaposes Copacino’s ‘service pyramid’ and the ‘revised service pyramid’,
aimed at the project context. The active supply chains may then be seen as the reliability
element, i.e., those supply chains that must be a basis to realise the project’s product.
The reactive supply chains may be seen as the resilient element, i.e., the supply chains
that shall get the project back on track if something happens to the active supply chains,
e.g. a supplier that is not able to deliver. The proactive supply chains are then those
supply chains that will be necessary if the project is to be able to pursue better
opportunities during the project’s life. The proactive supply chains are as such the
creativity that shall enable the project, or its product to gain value above what is
planned.
As shown in Figure 4.2 the two lower groups of supply chains may together be termed
as giving ‘operational robustness’, while all three groups of supply chains together may
be termed as giving ‘business robustness’ or ‘project value robustness’. We have then
ended with this three-class separation of supply chains taking the aspects of uncertainty
into account, and how these may be seen to contribute to robustness on two levels.
A question may then be raised whether this is important for logistics and supply chain
management in the project context? Projects are temporary undertakings, with given
time and cost targets, but with an emerging trend to regard value enhancement
throughout the development phase. To become ‘operationally robust’ there is important
that the processes that are about to realise the project’s product are robust, so that
‘nothing’ may prevent the creation from taking place, and the project’s product will be
realised within time and cost targets. Seen from the perspective of ‘business robustness’
the project shall be value generating, so the upside of uncertainty – the value generating
opportunities – must also be secured within the supply chain approach. The “business
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robustness” perspective may also be seen in the life-cycle perspective of the project
object. The opportunity side of uncertainty is often related to elements that bring about
improved operational performance of the project object, but although the creativity of
the supply chains are aimed at the operations phase they often have to be implemented
in the development phase.
Financial and
Market Share Impact
Gain
Maintain
Lose
Creativity
Resilience
Reliability
Customer Service
Pyramid
Proactive
Reactive
Active
Project Supply Chain
Pyramid
O
p
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r
a
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B
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Copacino, W.C., 1997. Supply chain Management: The Basics and Beyond. St. Lucie Press, Boca Raton, Florida.
Copacino Asbjørnslett
Figure 4.2. The customer service pyramid
35
.
4.4 Some lessons from manufacturing
Several management concepts have emerged from the manufacturing domain. Among
others the car manufacturing industry has been central in many of these developments.
That many of these have been regarded as important may be seen in Fortune Magazine’s
rating of the businessman of the century (Fortune 1999), where Henry Ford of Ford and
Albert P. Sloan of General Motors were among the four top contenders
36
.
35
Source: Revised from Copacino, C.W. 1997. Supply Chain Management. The Basics and Beyond. St.
Lucie Press, Boca Raton, Florida.
36
Among Henry Ford’s new ideas and concepts was the concept of mass-production and the assembly-
line to the manufacturing of ‘complex’ products, in Ford’s case the automobile, for consumer use. Albert
P. Sloan is said to have ‘invented the art of organising and managing a large corporation’ through a group
model with a corporate office supporting autonomously operating divisions, co-ordinated through a set of
‘standard procedures’.
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Among concepts developed within among others the car manufacturing industry are the
two concepts lean and agile. We may now raise a question regarding why we address
these, and what development projects can learn from manufacturing. A project, through
its life cycle has phases with different characteristics, from the one-of-a-kind situation,
and rather short and temporary timeframe of development, to the repetitive processes
and longer time frame of operations. The two manufacturing concepts lean and agile
represents, in our view, two opposite approaches to manufacturing. Therefore, within
these two concepts we want to address elements and aspects that could have a
contribution to developing logistics and supply chain management in the project
context.
Central to lean management is the elimination of waste. Thereby the focus is set on cost
effectiveness and cost efficiency. This has particular importance in an operations
setting, were a repetitive setting makes up the ground for continuous improvements.
Central to agile management is mastering change and uncertainty. Change and
uncertainty come by because there are business opportunities that we want to follow,
but following these opportunities mean that we have to take the inherent risks into
account. The supply chains and each actors role in them have particular influence on
how agile we are or may be, and how well we are prepared for mastering this situation.
The project-oriented context of the upstream oil & gas industry has been known for,
especially technological, discontinuous improvements, and agile characteristics are
important in such situations, as well as approaching the extended project organisation as
an agile virtual enterprise.
4.4.1 Lean Production
Lean manufacturing or ‘lean thinking’ was brought to the public by the book ‘The
Machine that Changed the World’ (Womack et al. 1990). The book was one of the
deliverables from the International Motor Vehicle Program. The sub-title of this book
has a quite far-reaching hypothesis as it says that;
‘The story of lean production – How Japan’s secret weapon in the global auto wars will revolutionise
western industry’.
Lean production methods as we have been used to know them were pioneered by
Toyota in Japan, often referred to as the Toyota Production System. However, many of
the underlying thoughts that led to lean concepts originated outside of Japan, and were
imported to and refined in Japan under the build-up of the Japanese industry after World
War II. One of these sources of knowledge was the North American movie industry,
that in the 1930’s was configured much as the industries we learn as lean today;
‘The market was dominated by a few large, stable companies. … They were deeply vertically integrated,
… . Competition among them drove them to what we today call lean manufacturing practices; flat
organisations, pre-qualified suppliers, a version of just in time practices’ (Goranson 1999, p.38).
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Some claim that the success of developing lean concepts and organisational principles
in Japan were due to their special way of organising into keiretsu’s
37
, based on their old
feudal system, but in a ‘democratic’ form and focused on the market pull of business
(Goranson 1999, p.38-9). The extended keiretsu ‘organisation’ could make it easier to
obtain the necessary integration between inter-organisational entities that is necessary to
‘drive out’ as much waste as possible, in the search for cost efficiency;
‘Japanese manufacturers were able to excel because their monolithic, vertically-integrated keiretsu were
able to gather and lock in the majority of suppliers and dictate integration standards to the remainder. It is
a crude way to integrate an enterprise; it trades agility for integration’ (Goranson 1999, p.56).
The thoughts and concepts proposed by lean manufacturing have found foothold in
western industry and are becoming more important as industries mature, margins are set
under pressure, with an increasing pressure for cost effectiveness and efficiency, as
sources of value enhancement. This is reflected in the five lean principles (Hines et al.
2000, p.4);
1. ‘Specify what does and does not create value from the customer’s perspective and not from the
perspective of individual firms.
2. Identify all the steps necessary to design, order and produce the product across the whole value
stream to highlight non value adding waste.
3. Make those actions that create value flow without interruption, detours, backflows, waiting or scrap.
4. Only make what is pulled by the customer.
5. Strive for perfection by continually removing successive layers of waste, as they are uncovered’.
As can be seen from the lean principles, the aim is value enhancement based on cost
effectiveness and efficiency, i.e. using costs effectively and efficiently to enhance value
as perceived by the customer. This should be obtained through waste reductions refined
through continuous improvements. As with the developments within logistics
management lean thinking starts within the confines of the single company, but then
extends into the inter-organisational arena of customers and suppliers, just as logistics
management extends to supply chain management. The term used in lean thinking is not
the supply chain, but the ‘value stream’
38
that is found within the supply chain;
‘In order to go lean, you need to understand customers and what they value. To get your company
focused on these needs you must define the value streams inside your company and, later, the value
streams in your wider supply chain as well’ (Hines et al. 2000, p.4).
What is not perceived to bring value is perceived to be waste. Lean thinking make use
of the seven wastes as defined within the Toyota Production System; (i) overproduction,
(ii) defects, (iii) unnecessary inventory, (iv) inappropriate processing, (v) excessive
transportation, (vi) waiting, and (vii) unnecessary motion. Both value creation and
37
Keiretsu: A network of businesses that own stakes in one another as a means of mutual security,
especially in Japan, and usually including large manufacturers and their suppliers of raw materials and
components. (www.dictionary.com).
38
The term ‘value stream’ is linked to the supply chain and supply chain management in Hines et al.
(2000:2).
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waste is generated through activities performed within a company. Lean thinking
focuses on three types of activities within a company or between companies in a supply
chain; (i) value adding, (ii) non value adding, and (iii) necessary non value adding
activities. Value adding activities are those activities that are perceived by the customer
to give value enhancement to a product or service. Non-value adding activities are
activities that do not enhance the value in a product or service, and are regarded by the
customer as not necessary. Necessary non value adding activities are activities that are
necessary as support for the value adding activities, as the current supply process is
constructed. Hines et al. (2000, p.10) gives some experience based proportions of these
three types of activities to be found within a company.
Table 4.8. Three types of activity with experience based proportions.
Environment
Activity types
Physical product
environment
(e.g. manufacturing)
Information
environment
(e.g. office,
distribution, or retail)
Value adding activity 5% 1%
Non value adding activity 60% 49%
Necessary non value adding activity 35% 50%
An interesting thought had been to estimate how such proportions would be throughout
the different phases of a project’s lifecycle.
0%
20%
40%
60%
80%
100%
I
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Necessary non value
adding activity
Non value adding activity
Value adding activity
Figure 4.3. Indicative proportions among lean thinking activity types throughout
project phases.
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Figure 4.3 above show some indicative proportions among the lean thinking activity
types. The proportions are based on the results presented by Hines et al., comparing the
operations phase with the proportions from the manufacturing domain. The figure
reflects that the value adding activities decreases from the initiation phase throughout to
the operations phase. Though, the value adding activities have a rather large proportion
in the early project phases as compared to the situation in the ‘static’ manufacturing
domain. The project is in its early phases very much influenced by the ‘customer’, and
as such value as perceived by the customer is engineered into the project object. It
should also be noted that the ‘necessary non value adding activities’ have a rather large
proportion, though decreasing, in the project phases leading up to operations. This may
be said to be so because in the project front end there are a large number of ‘creative’
and value searching processes going on, needed to support the value adding activities.
The activities related to bringing the value-contributing actors in to organise the larger
project organisation, or project supply chain, may also be regarded as part of the
‘necessary non value adding activities’. Finally one may say that the non-value adding
activities get a larger share of the total number of activities performed as the project
matures into the operations phase. This should not be so as the operations phase is a
context characterised by repetitiveness and has the ability for continuous improvements;
‘Removing wasted time and effort represents the biggest opportunity for performance improvement.
Creating flow and pull starts with radically reorganising individual process steps, but the gains become
truly significant as all the steps link together. As this happens more and more layers become visible and
the process continues towards the theoretical end point of perfection, where every asset and every action
adds value for the end customer. In this way, lean thinking represents a path of sustained performance
improvement – and not a one off programme’ (www.cf.ac.uk/carbs/lerc/about/ leanthink.html).
The outline of lean thinking presented above shows that repetitiveness as the basis for
underlying continuous improvements is central. Authors and researchers working within
the lean thinking concept says that it may be applied to different industries and contexts.
E.g. Womack et al. (1996) uses lean thinking towards the construction industry, but
ends up with trying to make the construction industry into a repetitive context, with the
manufacturing context as its ideal. Though, they address one point that is worth
mentioning;
‘While a few buyers enjoy the complexities of today’s construction industry, including the ability to
change their minds about the details of their building during the six months to a year of typical contract-
to-close cycles, most buyers would like to get exactly the building they need as quickly as possible at the
lowest price’ (Womack et al. 1996, p.291-2).
They here see value creation as minimising cost (or price) and short delivery time from
the demand is defined. For the project context in general, the definition of value is hard
and is often harder when it has to be converted to a specific demand that shall create and
deliver the value. A central aspect of the demand process, and its search for ‘value’ is
shown above with the point about the lead time of the ‘contract-to-close’ cycle and the
customer’s ability to influence the demand process throughout this cycle. For the project
context though, the central aspects of ‘business opportunity’, ‘temporarily’,
‘uniqueness’ and ‘one-of-a-kind’ could stress or stretch the lean concept. Another
concept form the manufacturing domain is based on agility and is termed agile
manufacturing. The relationships and differences between lean and agile have been
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debated among researchers and practitioners, and we will revert to that after our outline
and discussion of agility below.
4.4.2 Agility and Agile Manufacturing
Agility or the quality of being agile is often regarded as a quality or characteristic of a
person or an animal;
Agile: Having the faculty of quick motion in the limbs; apt or ready to move.
Agility: The quality of being agile (Webster's Revised Unabridged Dictionary (1913), web1913).
As agile and agility often is referred to as aspects characterising a person or an animal,
it may both be with respect to physical, as well as mental capabilities. Within the project
context it is approached with respect to organisational and inter-organisational aspects.
Agility is in itself not a step on the development ‘ladder’ of the domain of logistical and
supply chain management, though it has great influence on and similarities with
developments within the domain, and is therefore presented here.
Agility and agile manufacturing came to be known after the publication in 1991 of the
U.S. report 21
st
Century Manufacturing Enterprise Strategy: An Industry-Led View. The
report was one of the deliverables from an industry-led U.S. Presidential Commission
established to address how to make U.S. industry regain its global competitiveness. As a
result of the report the Agility Forum was established with an aim to;
‘Facilitate the return of the U.S. industry to global competitiveness through the adoption of the “agile”
organisational paradigm’ (Preiss, 1995).
As an organisational paradigm agility is related to the inter-organisational context, and
is related to the product’s lifecycle from design through to final disposal;
‘Agility is an umbrella term. It extends over a broad spectrum of correlated developments that together
define a comprehensive change in the prevailing system of competition. …At the level of design, agile
competition is characterised by a holistic methodology that integrates supplier relations, production
processes, business processes, customer relations, and the products use and eventual disposal’ (Goldman
et al. 1995, p.xvi).
This approach to agility within the design element makes it applicable to the
development phase of, and a life cycle approach to the project context, as it takes a
holistic approach both to the supply chain and the life cycle. In an alliance contract,
both related to the development and operations phase, both the alliance and agile
organisational paradigm have as a core the holistic perspective on competition that
involves all actors in a common competitive unit. This is similar to the supply chain as
the competitive entity. As in an alliance contract, based on risk- and gain-sharing
mechanisms, the first principal element of agility is related to ‘enriching customers’.
Participants gain a ‘reward’ for delivering value to customers, where in the project
context the ‘customer’ may be seen as the owner of the oil and gas resources – the basic
business opportunity. Agility has further relations to the project context in that it is
based on organisations coming together and creating an inter-organisational
construction, or a virtual enterprise, adapted to exploit a temporary business opportunity
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(an entrepreneurial approach), i.e. new, emerging business opportunities implies the
establishment of a new, temporary inter-organisational entity that will pursue and
exploit the opportunity;
‘Agile involves the ability to optimise resources within, and to get external resources integrated into, your
enterprise to be able to respond to an unanticipated spectrum of product needs [the opportunity]’
(Goranson 1999, p.90).
As agile manufacturing is based on temporary inter-organisational constructions, in a
setting characterised by change and uncertainty, where the organisational construction
will change over time, dependent on business opportunities, an important ability is the
ability to get new actors into the temporary ‘virtual enterprise’, make use of their
value contribution, and then end the specific relationship for the specific situation;
‘The important differentiator is the ability to develop new relationships with suppliers and customers’
(Preiss 1995-A, p.9).
Just like a project organisation the agile virtual enterprise has the up-front
understanding of ‘working relationships coming to an end’. Maybe not directly with a
planned end date as a project, but the awareness and preparedness that closing a
relationship is a natural end;
‘A virtual enterprise is an agile virtual enterprise if it is formed with the intent of dissolving or quickly
and cheaply reconfiguring in direct response to a change in the opportunity’ (Goranson 1999, p.68).
We see here that the emphasis is on the ability to develop new relationships, i.e. the
ability to initiate and operate in a project context. The project context is also
characterised by uncertainty, which leads to changes, due both to materialisation of
risks and opportunities. Mastering of change and uncertainty is the second principal
element of agility, and by some regarded as the original idea of agility.
‘[T]he original idea of agility: The ability to engineer your enterprise to respond well to unexpected
change, to even leverage that ability as a competitive strategy. Engineering is a key term here, since it
implies formal management principles rather than vague concepts’ (Goranson 1999, p.xiii).
Change and uncertainty has to be both acknowledged and dealt with. In the oil and gas
industry exploitation of given oil and gas resources is the business opportunity, and
several organisations have to come together and blend their competence to develop and
operate a project object that can exploit the oil and gas resources profitably. In agility
terms it relates to the third principal element of agility – ‘co-operating to enhance
competitiveness’. The inter-organisational project organisation is ‘constructed’ to
leverage the competence of each individual organisation, and as such becomes a
‘knowledge driven enterprise’, which is the fourth principal dimension of agility. The
third and fourth dimension of agility brings us back to the virtual enterprise;
‘A virtual enterprise is a temporary aggregation of core competencies and associated resources
collaborating to address a specific situation, presumed to be a business opportunity’ (Goranson 1999,
p.66).
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Table 4.9. The four principal elements of agility (Preiss, 1995).
Enriching customers –
Products vs. Solutions
In an agile world, customers pay either a fee for skills, materials and
a modest profit for products, or they pay a percentage of the
perceived value for solutions. Companies adopt a value-based
strategy to configure products and services into solutions which
enrich their customers.
Mastering change and
uncertainty – Entrepreneurial
organisation
Agile competition is based on the ability to thrive on change and
uncertainty. Companies use an entrepreneurial organisational
strategy, which can respond more quickly than a hierarchical
structure to changing conditions.
Co-operating to enhance
competitiveness – Virtual
organisation
In an agile organisation, co-operation enhances competitive
capability. Companies use the virtual company model inside and
outside to share responsibility and enhance co-operation
opportunistically across organisational lines.
Knowledge-Driven Enterprise:
Leveraging the impact of
people and information
In an agile environment, organisations sell skills, knowledge and
information over time. Companies make investments to increase the
strategic impact of their people and information on their bottom line.
As many of the developments within logistics and supply chain management, agility is
based on information technology as an enabler. The management of information
therefore becomes an important asset, and may be regarded as objects to be developed,
stored and put into use. In relation to the manufacturing context where work-in-process,
WIP, is used to secure and improve the material flow, the information counterpart is
information-in-process, IIP;
‘For an agile system WIP (work-in-process) is not required, but IIP (information-in-process) is required
everywhere. … An agile system is coupled by information (IIP), not by material WIP’ (Preiss 1995-A,
pp.11-12).
When information-in-process is used in the flow of information as work-in-process in
the material flow, it may improve the organisation’s ability to respond. A relation to the
material flow may be the bottleneck principle
39
, where WIP should be stored before
bottlenecks to keep them working, and thereby not influenced by distortions elsewhere
in the system that would have a negative impact on the systems time response or
throughput. In the agile domain, IIP may be used to make the system time responsive.
‘In agile, or dynamic, coupled systems, the capability for time response is a critical competitive factor’
(Preiss 1995-A, p.13).
As a relation to the material flow, information could be stored at locations in the supply
chain, where it made best use to facilitate timely response, when response where
wanted, i.e. to best align supply and demand. Preiss (1995-A) addresses this in relation
to the scheduling problem in the inter-organisational supply chain;
39
See e.g. Goldratt and Cox (1984), Goldratt (1990-A) and Goldratt (1990-B)
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‘The scheduling problem in a total value-adding chain includes two interesting decisions. The first is; up
to which point in the chain to bring catalogue products and at which point to invoke customised work.
The second is; if a time-dependent response is required, where to locate inventory and surge machine
capacity and how the payment for these should be equitably shared among all the companies in the value
adding chain’.
With respect to the inter-organisational project supply chains there will be points in the
chains that could be referred to as project de-coupling points, i.e. points above which
the ‘product’ is specific and ‘unique’, and below which standard components are
brought forward. Preiss (op cit.) does also refer to another important aspect in such agile
virtual enterprises related to distribution of costs and financial gains between the actors
involved. This is what we know from the project context as ‘risk/reward’ sharing
schemes.
Agility is also found in the domain of logistics and supply chain management. The
Council of Logistics Management, CLM, defined agility as one of four core logistics
competencies to substantiate ‘world class logistics’. The other three competencies were
positioning, integration and measurement, though agility was regarded as the ‘essential
end state’ of logistics performance;
‘Thus, it is safe to conclude that agility is the essential end state of world class logistics performance. …
Agility is the competency that sustains world class performance over time [author: i.e. the ability to
change to pursue new, temporary business opportunities]. It is extremely important to stress the inter-
connectiveness between agility, positioning and integration’ (CLM 1995, p.185).
CLM uses three terms to describe agile capabilities; relevancy, accommodation and
flexibility. These are other terms than is used in the manufacturing context to describe
agility. The terms as defined and used by CLM, and their respective logistical drivers
are presented in Table 4.10.
Table 4.10. Three agile capabilities, (CLM) and their relation to the project context.
Capability Relevancy:
The ability to maintain focus
on the changing need of
customers.
Accommodation:
The ability to respond to
unique customer requests.
Flexibility:
The ability to adapt to
unexpected circumstances.
Drivers Customer cocooning
Dominant logistics franchise
End-casting
Order-to-delivery alignment
Synchronisation
Cross-shipment
Routinization
Postponement
Time
Form
Relation to the
project context
The demand processes and
proactive demand chain
management.
The ability to align the
demand and supply chains
The ability to deal with
changes due to emerging
opportunities and risk.
Service
pyramid
Resilience and reliability. Creativity. Resilience and creativity.
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The agile capability flexibility is related to mastering the change and uncertainty
element of agility.
‘Flexibility concerns a firm’s [author: maybe more importantly a supply chain’s] capability to encounter,
resolve and, when appropriate, exploit the unexpected emergency or opportunity that confronts logistical
operations’ (CLM 1995, p.187).
Above we have presented some aspects of agility that we mean have relevance for the
project context, and logistics and supply chain management within that context.
Especially for the development phase we mean that agility is important as a concept,
and we will revert to that when developing the project supply chain management
concept in chapter six. Now we would like to address some of the differences between
the two concepts discussed above, lean and agile.
4.4.3 Lean versus agile
As part of developments within the manufacturing domain, agility follows the trend
from mass production and lean manufacturing. Mass production was suitable in a
competitive and market situation where there was a demand for common, standardised
products. Special requests where few and could be covered by small craft shops. Each
actor could in this setting act as one independent actor. Lean systems came into order in
the mass production setting when outsourcing, and thereby a larger dependency on
external organisations to produce standardised products came into place. Lean systems
have to be cost-effective and not least cost-efficient. Still, in lean systems the demand
(business opportunity) is more or less given in a longer-term setting, and the system
may opt for continuous improvements. In the lean system the actors are linked and act
as one competitive unit, as e.g. in the supply chain management context. In the agile
setting the business opportunity is shorter-term, temporary with not the same possibility
and rationale for continuous development, it should be ‘right the first time’. Cost
effectiveness and efficiency is still important, but has to be obtained through
discontinuous improvements. The senior vice president of procurement in a larger EPC
contractor said it like this;
‘Developments and improvements must be made between projects. We have to go through discontinuous
improvements both with respect to technologies applied, products developed, and work processes. …
This includes establishing new relationships and developing old ones, and it all must be right the first
time out [i.e. when a new project (business opportunity) shall be executed]’.
The actors are also in the agile setting linked together, but in a dynamic context they
have to be able to re-configure themselves to meet new demands, which may involve
taking new actors into the competitive unit, as described above from the project context.
Table 4.11 outline some differences between mass, lean and agile systems, and may be
used to outline the contributions for supply chain management in the project-oriented
context.
The characteristics of the agile context given above are to a large extent applicable to
the project context and specifically for supply chain management within the project-
oriented context. Work processes as outlined above have to be formed and managed as
relationships among several organisations. Developing inter-organisational relationships
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needs time and needs managerial attention. A main difference between lean and agile is
found with respect to how such relationships are regarded;
Table 4.11. Mass, lean, and agile work processes (based on Preiss 1995-A, p.15).
Type of system Mass Lean Agile
Characteristic Uncoupled, static Coupled, static Coupled, dynamic
Internal
differentiating
attribute
Every station a
statistically random
constraint
One permanent constraint Never any constraining
resource
Operational
management goal
Utilisation factor of each
individual resource
Utilisation of the whole
plant = utilisation of the
constraining resource
Able to exploit change as
opportunities.
Material inventory
location
Everywhere To serve the constraint None – all make to
customer-individualised
order
Information
inventory distribution
Local Across processes Wide variety of
unpredictable subjects in
the Information in Process
(IIP)
Knowledge required Local Only of given processes Entrepreneurial turning of
information into profitable
knowledge
Executive
management goal
Utilisation of each
individual resource
Utilisation factor for plant
seen as a whole
Be a permanent part of the
customers’ customer
satisfaction process
Interactions with
customers’ and
suppliers’ processes
None – connection is via
product only
Processes linked in static
business relationships
Processes linked in easily
changeable relationships
‘Agility has been expressed as having four underlying principles; (i) delivering value to customers, (ii)
being ready for change, (iii) valuing human knowledge and skills, and (iv) forming virtual partnerships.
Of these, the first three can be found within the operating philosophies of companies generally thought to
be “lean” … The fourth principle is different. In fact, agile and lean take quite different attitudes towards
partnerships, and here is where an important research and practical challenge may lie. Companies like
Toyota stress how long it takes to develop effective partnerships for procurement of complex automobile
assemblies. Relationships of 20+ years are typical. In the world of agility, where such partnerships are
predicted to be of dramatically shorter duration, extra attention will have to be paid to launching and
maintaining supplier relationships’ (Whitney et al. 1995, pp.2-3).
Table 4.12 below gives a summary of remarks given by Goranson (1999) on how they
see the differences between lean and agile (the remarks is drawn from several, different
pages in their book).
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Table 4.12. Differences between lean and agile as seen by Goranson (1999).
Lean Agile
Lean is a state Agility is strategic, system-wide set of capabilities
Lean means integration Agility means loose couplings
Lean optimises processes Agility optimises the ability to adapt processes to
new conditions
Lean focuses on profitability today Agility focuses on profitability tomorrow
Lean is static Agility is dynamic
Lean means just-in-time-manufacturing Agility means just-in-time-organisation
Lean means flat organisations Agility means virtual organisations
Lean means a decreased supplier base Agility means a larger set of potential suppliers in
a loosely coupled network
Finally we would like to summarise the differences between lean and agile as we see
them in Table 4.13.
Table 4.13. Some differences between lean and agile.
Lean Agile
Going concern, long term view Temporary, shorter term view
Improving business Realising business – business opportunities
Continuous improvements Discontinuous improvements
Developing supplier relationships Launching and maintaining supplier relationships
‘Reactive’ – develops, then improve Proactive – develop/improve concurrently
Extended enterprise Virtual enterprise
Improving over time First time capability
Cost efficient Cost effective
Then, after we now have outlined elements related to the development of logistics and
supply chain management, and related issues, we will now look into how this has been
addressed in theory related to the project context.
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4.5 Logistics and Supply chain management in the project context
There are supply chains in many environments and supply chain management is
conducted within several contexts. Supply chains may be found in the financial
marketplace, where financial information is moving the goods, i.e. financial objects or
derivatives. Supply chain management may also be applicable public services, e.g. in
healthcare. The patients may be perceived as the ‘material’, information regarding the
criticality of a patient’s illness may state the ‘delivery’ time and the demand for support.
Services may be perceived as the personnel attending the patients (i.e. physicians,
nurses, etc.), and funds, e.g. through public funding, membership or insurance, may
decide where, when or whether you are treated.
Logistics and supply chain management are though most known from the industrial
context where it varies from highly repetitive, high-volume supply chains found in the
consumer goods markets, to the one-of-a-kind project context of engineering,
constructing and operating large-scale, complex objects (i.e. industrial plants, offshore
installations, etc.). In the supply chains of the development phase in the project context,
engineers try to establish the demand in developing an object that is suitable to fit a
purpose in a ‘best possible way’.
In the project context large amounts of information, people, equipment and materials, as
well as several fabrication and construction sites are part of the supply chains that
realises the project’s product. They are themselves actors in the supply chain and part of
the logistics processes. Logistics and supply chain management is not an explicit project
process in itself or part of project management as it is published today, e.g. in the
Project Management Institute’s knowledge area. This is so although several experienced
professionals and authors within the project management domain have pointed to its
importance, and that it should be given due attention in accordance with its importance
for project realisation, both with respect to schedule and cost impacts.
40
Project management has as a domain of knowledge developed, often based on using
concepts and methodologies from other domain of managerial knowledge. Hetland
(1999) says it like this;
‘On good and bad we may say that project management is a subject that draws extensively on other
subjects. The development of project management over time will therefore be extensively influenced by
development in other subjects. The choice of other subjects is although not given once and for all. What is
perceived as currently relevant is evaluated by active project management environments’.
An example that is relevant in this context is the focus that CRINE Network give supply
chain management as a competitiveness factor for the British oil and gas industry.
Below an outline is given of earlier approaches to logistics and supply chain
management in the project-oriented context, before a basis for supply chain
management in the project context is outlined.
40
Both Kerridge (1987) and Harrison (1992) points to the impact that materials management may have on
schedule and cost in realisation of the projects product. Harrison (1992) points further to the mismatch
between its importance and the attention it is given within project management.
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4.5.1 Earlier approaches
Logistics and supply chain management related to the project-oriented context has been
addressed by several authors approaching the topic from different angles, and with
different objectives. Logistics and supply chain management in the oil & gas industry
(Silver 1986, 1988, CRINE 1998 & 1999, Burton et al. 1999), materials management in
construction projects (Kerridge 1987, O’Brien 1995, Stukhart 1995, CII 1988),
materials management as part of project management (Harrison 1992, Lock 1994,
Rolstadås 1997), within the landbased construction industry (Byggforskningsrådet
1991, SBI 1995, Pahkala et al. 1997), partnering and alliances in the oil and gas
industry (Schultzel et al. 1996, Vollmann et al. 1995), benchmarking of oil & gas
procurement functions (CAPS 1997), partnering and total quality management
(Oberlender 1993, Kanji et al. 1998), and project-oriented supply chain management
(Asbjørnslett 1998).
Issues related to logistics and supply chain management has been addressed within the
oil and gas industry for some year. Silver (1986 & 1988) address materials management
(as he calls it), or logistics or supply chain management as it would have been called
using current terminology, to the different phases of large-scale construction projects.
Through several case studies and question based interviews he finds out how materials
management is perceived and its different aspects dealt with, within the organisations,
owners and contractors, involved in such large-scale construction projects. Based on his
findings Silver outlines some concerns, suggestions for improvement, and potential
research topics. All in all Silver touches into several aspects that make logistics
management within the project context different from the continuous supply,
manufacturing and distribution context. Among the aspects that Silver raises we find
uncertainty and the design change process, responsibility along the supply chain,
degree of reactive versus proactive attitude towards logistics and supply chain
management, early involvement of logistics functions and suppliers, and the long-term
perspective of supply chain relationships versus the one-of-a-kind context of projects.
Though Silver touches into many interesting aspects and elements, he raises more
questions than attempts to address approaches to manage the consequences involved in
the questions raised. Silvers research report and article is the first one that publishes a
search into the relationship between logistics management and the project context.
A new initiative within the area of supply chain management in the oil and gas industry
was presented in a newsletter from CRINE Network (CRINE 1998), they state that
supply chain management developments within the British oil and gas industry is their
primary focus element for a year to come. The aims they outline are related to
awareness, assessment, and implementation (CRINE 1998, p.3).
‘The focus of CRINE’s effort is specifically to bring about: ‘(i) Broad awareness of the potential
contribution of SCM to increased effectiveness and efficiency; (ii) Focused awareness for selected
companies; (iii) An assessment of where the industry stands yielding identified and prioritised
opportunities; (iv) The identification of projects to address these main opportunities; (v) The delivery of
means and training for the industry to apply SCM techniques.’
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In sum the aim is ‘to have a programme that gets companies beyond awareness and into
improvement for their own activities, both internally and with their contractors and
suppliers.’ (CRINE 1998, p.3). A first deliverable from this initiative was a booklet
titled; ‘How Supply Chain Management Works’ (DTI 1998) that outlines how supply
chain management is approached in different types of industries, and what is
characteristic of and the main focus to achieve through supply chain management
approaches in these industries. CRINE Network further published the results of a study
about the contemporary practice of supply chain management in the British oil and gas
industry (CRINE 1999-A) and a supply chain improvement methodology (CRINE
1999-B). All of CRINE Network’s publications are good in bringing understanding of
what supply chain management is about, as well as building awareness around current
aspects and challenges as perceived by the industry. Their methodology brings a good
balance between the context (the demand and supply market and its actors and
stakeholders) and approaches to gain knowledge about your own supply chain and your
part in the bigger project-oriented supply chains. All in all CRINE Network manages to
raise important issues of supply chain management to give raised awareness as well as
means to approach it, to build competitive advantage for the British oil and gas industry.
A later article (Burton et al. 1999) approaches supply chain management or strategic
supply initiatives in the oil and gas industry and the relation these have on business
success and shareholder returns. Burton addresses several aspects and elements that are
regarded as strategically important by the industry actors. He then compares the
applicability of these elements as strategic drivers with the level of implementation that
these elements have reached in the companies studied. They show that there is a
discrepancy between what is perceived to be of strategic applicability and what is being
implemented, together with what is perceived to be the greatest barriers to achieving the
intended strategic supply initiatives. The article gives a good impression of what is
perceived by the industry to be of value to pursue, but also the current status and what is
keeping the industry from reaching the potential benefits inherent in a strategic
approach to procurement and supply chain management.
If we move to the functional area of materials management in construction projects we
find that this is an area that has been addressed thoroughly from several sources.
Kerridge (1987-I & -II) outlines in two journal articles a guideline perspective to
materials management within the context of large-scale construction projects. The
articles are planning and control oriented and relate to the project control domain, and
are limited to functional relationships internally in the executing company (the
contractor) of engineering, procurement, and construction contracts. As such the
emphasis is on internal dependency and integration,
41
and not on external integration
and supply chain management aspects.
During the four years 1985 through 1988 the Construction Industry Institute, CII, an
interest organisation of the North-American construction industry, conducting their
work based on industrial and academic participants, undertook a research programme
into materials management in the construction industry. The research was published in
several publications, where the two most comprehensive are CII (1988) and Stukhart
41
The term ‘internal integration’ is not used in the articles.
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(1995). Stukhart was the lead researcher, and involved in all CII-internal publications
from the research. The publications give a deep and thorough presentation of the
functional elements within the subject. On the other hand the publications do not take
the supply chain management perspective nor do they address the specific
characteristics related to the project context.
Within project management literature the area of logistics management have achieved
some attention, though from different aspects and with differing thoroughness. Harrison
(1992) points to the importance of the subject and that it receives far less attention than
it should be given due to its importance. Besides pointing to the ‘fact’ that logistics
management is important and outlining the interfaces between a materials management
system and other project management systems, Harrison does not give any approaches
to enhance the subject as part of project management. Lock (1994) look into some
functional elements of materials management – none of which addresses the project’s
dependence on its supply chains. The focus is introvert, which may be correct if one at
the same time relate the internal aspects and functions to the whole of the inter-
organisational supply chains bringing forward the project’s physical resources.
Rolstadås (1997) addresses procurement, contract administration, and materials
management, but as the rest of the project management literature Rolstadås present an
introvert and classic project control focus. The focus is on the internal functional
process and on the formal process between owner (buyer) and contractor (seller) and the
different contractual forms that may be built between the two. Supply chain related
aspects is nor a subject in Rolstadås’ book.
Within the construction industry in the Nordic countries some research has been
undertaken related to logistics management in construction projects. In Sweden
Byggforskningsrådet (1991) published the results of a research effort aimed at testing
how manufacturing based approaches to and methods of logistics management (material
flow) could be transformed to suit the needs of the construction industry. The rationale
for the research was the improvements obtained within the manufacturing industry and
the possibility of obtaining the same standards within the construction industry. The
publication of the research points to the elements of integrated logistics and the need to
manage down through the different actors of the supply chain.
42
The research report
does both in approach as well as in its outline reflect that an effort is made to adjust
concepts and methods from industrial logistics management to the material flows of the
construction industry. This may also be expected as the research and report was outlined
by a logistics specialist from the car manufacturing industry.
A later Danish report SBI (1995) takes a broader view of logistics management within
the construction industry. It does not take a certain approach to it as
Byggforskningsrådet (1991) did, but in stead tries to define what logistics management
is about and which experiences has been drawn from logistics management efforts
within the construction industry. The objective is to inspire to a continuing effort to seek
improvements through logistics management in the construction industry. The report
focuses on establishing a common understanding of what logistics management is all
42
The term ‘supply chain’ is not used directly in the report, but the organisational construction they
describe is an inter-organisational supply chain.
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about, and how (on an overall level) it may be used to enhance the construction
industry. Logistics and logistics management is presented as a holistic perspective on
the material flows of the project. It is also interesting to see that they focus on the
impact and importance that the supply chains have on the realisation process of the
project’s product, and that they see the project’s product as the ‘consumer’ in the supply
chain process.
43
The report does also point to the importance of the relationships
between the actors in the supply chain to obtain good logistics management, or supply
chain management that may be a more correct term in this respect. They also address
that the total cost aspects of logistics management is related to finding and eliminating
non-value adding cost elements down through the supply chain, in stead of chasing best
prices in an adversarial buyer-seller relationship. All in all a report that both comprises
good logistics management as well as relating it to the specific characteristics of the
project context and the construction process.
Through a case-study based research O’Brien (1995) addresses the relationships in the
trade-off between transportation, inventory and production costs in the supply chains for
a small construction project. Among other aspects he raises the importance of
uncertainty in timing on supply-chain costs and performance, and the impact this has on
a project specific analysis versus a manufacturing analysis in a continuous
manufacturing context. Thereby O’Brien raises the difference and difficulties that lies in
using lean manufacturing oriented concepts like just in time, in a non-repetitive context
like the one found in project context.
The term ‘construction logistics chain’ is introduced by Pahkala et al. (1997) as
partnering in a supplier network, consisting of contractors, sub-contractors and
suppliers. The focus is partnering within the supplier and contractor network as an
aspect brought forward with the total-quality movement of the eighties. Although the
article does not directly state logistics management or supply chain management
specifically the context of their research are construction logistics, and they bring
forward the basis for externally integrated logistics management within the construction
industry, i.e. construction supply chain management.
Vollmann et al. (1995) introduces the concept ‘demand chain management’ to focus
specifically on buyer-supplier relationships. They relate the concept demand chain
management to an offshore oil and gas development project that was executed as an
alliance between the operator, contractor and a few suppliers. As they use the concept
demand chain management they relate it to the design, planning and development
processes that were undertaken by the alliance partners in developing the project object
and the supply chain to realise it that in a best possible way met the operators demand.
As such they compare the alliance with a demand chain approach to the project, which
resulted in improved cost and schedule parameters, compared to a comparative project
undertaken with ‘arm-length’ relationships with the suppliers. Partnering as it is used in
this article is often termed horizontal partnering to reflect the horizontal partnership
43
They do not say specifically the project’s product is the consumer, but they say that the materials
brought forward through the supply chains are ‘consumed’ when installed into the project’s product at the
construction site.
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among the top-level tiers of the supply chain, a partnership aimed at the demand
processes, more than the supply processes.
Another aspect to partnering is presented by Schultzel et al. (1996). Here it is supplier
partnering seen from an EPC
44
contractor’s point of view, i.e. partnering down into the
contractor’s supply chain. It is an approach that focus on total installed costs, and how
these may be reduced through multi-project acquisition agreements that brings
repetitiveness into the supply chain relationships of the contractor. Again a lean
manufacturing oriented approach. It also shows the contractor’s reliance on its lower-
tier supply chain actors in becoming a competitive supply chain to realise solutions for
the contractor’s customers;
‘In summary, the program to reduce TIC [total installed cost] and schedule by quantity buying of
common commodities through establishing strategic multi project aquisition agreements (MPAA’s) has
demonstrated that it can be extremely successful. The partnering agreements have all of the necessary
elements – vision, mission, trust, open communication, mutual benefit, and continuous improvement –
that one would find between two parties, and in this case it was the vendors who became part of an
alliance that would help Bechtel with its clients’ (Schultzel 1996, p. 137).
This type of partnering is often termed vertical partnering as it goes down into the
supply chain, focusing more on the supply side than on the demand side.
As with all managerial aspects there is a question to quantify and show results of
improvements made. Benchmarking is a technique used extensively in different
industries to compare one’s results with the best or average in the industry. CAPS (1997
I & II) show results of a benchmarking effort undertaken in the oil and gas as well as
the construction industry. The benchmarking parameters are related to purchasing
activities and costs.
Total quality management equalling supply chain management in the project context
may sound like odd man out. Kanji et al. (1998) presents an approach where supply
chain management is presented as a ‘facilitator’ of achieving the goals of partnering,
and at the same time be focused on the aims of total quality management. This approach
is quite interesting as it brings with it the merging of ideas and the focus that has to be
obtained in a partnering construction. Especially in the development phase of a project
object to develop an object that fulfils the functional specifications and requirements of
the owner, and at the same time does it based on the principles of total quality
management to make an object without ‘extra fat’. The last is an important requirement
in the partnering and alliance concept, as the incentive mechanisms are often based on
some sort of risk-/reward-sharing mechanism between the owner and the other actors in
the alliance (partners).
An early version of the concept presented in this thesis, project supply chain
management, was presented at a doctorate workshop arranged by the European
Logistics Association, ELA, June 10-12, 1998 (Asbjørnslett 1998-A). A presentation
(Asbjørnslett 1998-B) based on this article and further developments in the author’s
work was given after invitation at the 15
th
German Logistics Congress, October 22
nd
44
EPC = Engineering, Procurement and Construction, i.e. a contractor able to and committed to perform
both engineering, procurement and construction of a project object for a client.
4 Logistics and supply chain management.
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92
1998. This was done before CRINE Network presented their supply chain management
initiative in the September 1998 issue of the CRINE Network newsletter.
4.5.2 Has project management and supply chain management been
integrated?
The forefront of logistics management is contextually related to the inter-organisational
aspects of supply chain management. There is still some ambiguity with respect to the
extent of the number of integrating processes between the actors of the supply chain, i.e.
which has their core within logistics management and which has not. Though, the
supply chain has become the new unit of competitive analysis, i.e. companies are not
competing against each other, but supply chains are.
The basic elements of logistics management are found within the integrated logistics
concept, with its focus on both flows of information and physical goods, supporting the
logistical mission elements service and total cost positioning. Although several concepts
may be used to support or illuminate the key perspectives and concepts of logistics
management, one should distinguish between the core logistical contribution and the
contribution or support that may be found in other perspectives. Finally agility is found
as a new and emerging concept within logistics management. With agility logistics is
approaching the project-oriented context, with its unique and temporary characteristics.
As agility is focusing on the ability to be fast and flexible, i.e. the ability to adapt to new
possibilities and supply chain structures, it is bringing logistics closer to the project
context with the project’s need to establish and operate temporary supply chains.
Logistics and supply chain management within the project-oriented context has
emerged both from the logistics domain and from the project management domain.
There has though not been much integrative effort undertaken to combine the two.
Much is based on functional elements of logistics and materials management, much
related to the project planning and control perspective. Authors and lecturers address its
importance, but does not outline the concept with its full implications, and give a rather
introvert view of the topic. Finally, examples of good efforts to bring logistics and
supply chain management into industries within the project context are found with
examples from the construction industry in the Nordic countries, and the British oil and
gas industry.
What is still missing is an outline of what are the main characteristics and drivers of
logistics and supply chain management in the project-oriented context. Especially, how
does the project-oriented context set different conditions for supply chain management,
as opposed to the repetitive context of the consumer and capital goods industries, e.g.
the context of the car manufacturing industry.
4.5.3 Project Supply Chain Management
In Part III of this thesis the concept project supply chain management, PSCM is
outlined. PSCM may be regarded as part of the systemic constructivistic project
4 Logistics and supply chain management.
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93
management approach. Hetland (2000) regards the systemic constructivistic project
management approach like (translated from Norwegian);
‘The main point is partly that we (1) see the world through individual “glasses” and partly that we (2) are
free to choose which “glasses” we want to use to perceive the world. The latter open for that we may
create “project constructs” in such a way that they fit our way of working, i.e. we choose to delimit actor
structures and work processes in such a way that the project’s value added becomes as large as possible’.
The systemic constructivistic project management approach means that the supply chain
management approach is intentionally chosen to approach the project context and
project management, because of a belief that this approach may enhance the value of
project management. The project becomes an intentional construction regarded as the
business opportunity, and the supply chain approach becomes an intentional
construction regarding the supply chain as the competitive entity, to increase the
project’s competitiveness.
The definition of project supply chain management as it is defined in this thesis is;
Project supply chain management seeks value
enhancement in projects through logistics’ focus on
demand and supply alignment. This is met through the
characteristics of logistics throughout the project life
cycle with an agile approach to demand chain
management in the development phase and a lean
approach to supply chain management in the operations
phase. Thereby meeting the need for value enhancement
through engineering and the supply chains contribution in
developing demand for the project object, and creating
value through cost efficiency in the operations supply
chains.
5 The Project Supply Chain Challenge
5. The Project Supply Chain Challenge
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94
5.1 Introduction
The aim of this chapter is to outline the challenge of the oil and gas supply chain. First
we shortly discuss the business context, a driver for change in project strategy,
execution and organisation, both from the macro perspective, the inter-organisational
industry perspective, and the micro perspective of the firm. Secondly we outline and
seek references to the challenge of the oil and gas supply chain, as we see it. Then we
shortly outline and discuss the oil and gas supply chain stakeholders and actors. Finally
we relate the challenge of the oil and gas supply chain to aspects presented in chapter
three and four.
5.2 The Business Context
Projects of the type focused in this thesis are realised because they constitute a business
opportunity. The project or the business opportunity is influenced by and realised within
a business context. Related to the project supply chain context, one may say that the
competitiveness of the business context is made up of three levels;
1. Competitiveness in the macro perspective
2. Competitiveness in the inter-organisational perspective
3. Competitiveness in the micro perspective
These contextual levels increase the complexity of project management, and in addition
there is an increasing rate of change that has to be taken into account;
‘Nothing ever remains stationary. The context in which projects are being formed and managed is
constantly changing, and indeed in the 1990s it is changing at a rate not experienced in over 40 years. The
political situation of the 1990s is dramatically new and fluid. Business and finance have to operate in
conditions of unprecedented uncertainty. Social pressures are mounting sharply. A number of
environmental issues have become very serious. Technology continues to develop rapidly. And the
practice of management is changing’ (Morris 1994, p.273).
5.2.1 Competitiveness in the macro perspective
The oil and gas industry is an industry in which the competitiveness to a large extent is
dependent upon the CAPEX and OPEX needed to become able to exploit the
hydrocarbon resources. The up-front capital disbursements, both needed in exploration
and in CAPEX, are high, and as such the industry is very capital intensive and funds
often need to be obtained from several sources. The CAPEX level are again to a large
extent dependent on the geographical location of the hydrocarbon resources, e.g.
whether they are located below the seabed in the Gulf of Mexico, the North Sea, under
5 The Project Supply Chain Challenge
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95
the Siberian permafrost in Russia, or below the desert in the Middle East. I.e., whether
the hydrocarbon resources are located offshore, in shallow or deep waters, or onshore,
in difficult or simple terrain and climate. The consequence of this is that industry
competitiveness is dependent upon the area in which the industry is to operate. That will
often impact the industry’s approach to projects dependent on geographic region and
terrain. A quote by a General Manager for the British branch of an international
engineering contractor may be used to support this;
‘To be able to compete for projects in the North Sea area, we have to present and work under novel
approaches to project strategy and management. When competing for projects in areas that are more
competitive, e.g. in the Middle East, we can use ‘old’ approaches’ (R.L., Epci Advisory Council meeting,
London, 23 April, 1999).
This was as well the background for the CRINE and NORSOK initiatives to develop the
competitiveness of the British and Norwegian Continental Shelves.
‘Early in the 1990’s it became evident that the cost position that was established in the oil and gas
industry was too high to ensure that the fields on the Norwegian Continental Shelf would be competitive
against oil and gas developments in other regions’ (Kaasen 1999, p.19).
Among the initiatives raised through CRINE and NORSOK were changes in the inter-
organisational working relationships among the actors of the oil and gas project supply
chain.
5.2.2 Competitiveness in the inter-organisational perspective
Large-scale projects of the type found in the oil and gas industry are inter-organisational
endeavours. What is needed is competitiveness in the inter-organisational domain, as
e.g. CRINE Network and the NORSOK Collaboration Panel has addressed through
CRINE Network’s supply chain management initiative (CRINE 1998 & 1999) and the
NORSOK Collaboration Panel’s acknowledgement of the ‘[inter-organisational]
procurement processes as the most important processes among operator, contractors and
suppliers’ (NORSOK 1998).
The underlying aspect of supply chain management is that the supply chain is the
competitive entity. This is due to the fact that the share of value contribution from
contractors and suppliers to an end product is increasing, and that there are many
sources of synergies to exploit for both development and operations through the
interfaces of the supply chain. In the development phase of the project context the
supply chain is focused towards a temporary setting where there is a large degree of
uncertainty and high complexity both with respect to the scope and technical issues of
the project object, as well as in the organisational domain. However, there is and will be
a continuous search for enhanced ‘value added’, both through cost reductions and
improved income, e.g. through technology development;
‘[R]equiring competitors to intensify their efforts at cost leadership, while also seeking to boost revenues
through the deployment of innovative technologies and processes. Many look to market innovations,
while others seek to unlock “supply chain” value through innovative relationships with suppliers’ (Burton
et al. 1999, p.54).
5 The Project Supply Chain Challenge
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96
The key is to bring new concepts and approaches to the project context, and to enable
the industries and actors operating in project contexts to make use of approaches applied
successfully for increased competitiveness in other industries. As said above, the British
CRINE Network addressed supply chain management in the oil and gas industry
through their initiative, and thereby opened up to further explore the possibilities and
new approaches needed for this. The Norwegian NORSOK Collaboration panel on the
other hand, just stated that this was important, maybe even the most important inter-
organisational issue for competitiveness, though they did not address it further. The
question then is how the characteristics of logistics and supply chain management
processes change to be suitable for the purposes of the competitiveness of the oil and
gas industry?
5.2.3 Competitiveness in the micro perspective
Though the supply chain is regarded as the competitive entity, the supply chain is an
inter-organisational construction of individual firms. As such each firm must be
competitive by itself, as well as have ‘equal’ competitive opportunity to become part of
the supply chain, and be competitive as part of a supply chain. Competitiveness in the
micro perspective then become competitiveness of each actor in being attractive as a
supply chain actor, both able to quickly adapt to a supply chain context and uphold its
attractiveness and contribution as a supply chain actor.
Though, there are differences between the different types of actors in a project supply
chain. Most of the differences are related to differences in what is the core business of
each related to a project, i.e. the difference to whether the development or operations
phase is their core business. These differences are acknowledged, and have to be dealt
with. Especially this is related to the relationship between the Operator and the
contractor, which have the following (simplified) differences in profit schemes of a
project;
Operator’s profit = Life-cycle Income – CAPEX – OPEX
Contractor’s profit = Contract Price – Contractor’s Cost
Some requirements that address how actors should position themselves and behave to
optimise a project supply chain, and to be an attractive supply chain member is given in
Appendix B.
5.3 The Oil and Gas Supply Chain
5.3.1 General
Figure 5.1. below illustrate the supply chains of the oil and gas project, or more
correctly the relationship between the project value chain, the services and goods
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97
supply chains of the development phase, and the operations, maintenance and
modifications supply chains of the operations phase.
Develop
& Plan
R & D
FEED &
Sales
Receive,
Schedule
& plan
Buy/make/
assemble
Pack &
transport
Complete
GOODS;
Suppliers’ part of PSC
Receive
Schedule &
Plan Project
Engineer
& Design
Acquire
Goods &
Services
Execute Complete
Develop
& Plan
Acquire/
maintain
Assets
Sales &
Marketing
SERVICES;
Contractors’
part of PSC
Plan &
Design
Complete Operate Maintain
Sales &
Abandon
PROJECT VALUE CHAIN
Specify
Demand
Plan &
Schedule
Supply Use (Return) OPERATIONS
Piping &
Equipment
Spec.s
RCM or
Time-based
Maintenance
Plan
Supply &
Supply
Start-up Return MAINTENANCE
Given
Infra-
structure
Plan &
Design
Complete MODIFICATIONS
Shutdown
&
Maintain
Develop
& Plan
R & D
FEED &
Sales
Receive,
Schedule
& plan
Buy/make/
assemble
Pack &
transport
Complete
Develop
& Plan
R & D
FEED &
Sales
Receive,
Schedule
& plan
Buy/make/
assemble
Pack &
transport
Complete
GOODS;
Suppliers’ part of PSC
Receive
Schedule &
Plan Project
Engineer
& Design
Acquire
Goods &
Services
Execute Complete
Develop
& Plan
Acquire/
maintain
Assets
Sales &
Marketing
Receive
Schedule &
Plan Project
Engineer
& Design
Acquire
Goods &
Services
Execute Complete
Develop
& Plan
Acquire/
maintain
Assets
Sales &
Marketing
SERVICES;
Contractors’
part of PSC
Plan &
Design
Complete Operate Maintain
Sales &
Abandon
PROJECT VALUE CHAIN
Specify
Demand
Plan &
Schedule
Supply Use (Return) OPERATIONS
Piping &
Equipment
Spec.s
RCM or
Time-based
Maintenance
Plan
Supply &
Supply
Start-up Return MAINTENANCE
Given
Infra-
structure
Plan &
Design
Complete MODIFICATIONS
Shutdown
&
Maintain
Figure 5.1. The oil and gas supply chain.
The project value chain is in the development phase (‘Plan & Design’ and ‘Complete’)
supported by the contractors’ part of the project supply chain, PSC, through engineering
(demand development) and construction ‘services’ (supply consumption). Then both
indirectly through the contractors’ service chain, and directly through e.g. the operator’s
frame contracts and agreements, the suppliers supply ‘goods’, equipment and bulk, to
meet the engineered demand at the construction site. In the operations phase we may
say that three different supply chains are involved. The first is the operations supply
chain, bringing in all supply needed for drilling, process plant operations, and catering,
both rental equipment, bulk chemicals, and other consumables. The other is the
maintenance supply chain, involved both in unplanned and planned maintenance. The
planned is shown in figure 5.x. The last supply chain is the modifications
demand/supply chain. This is to a large extent a development demand/supply chain,
though with the extra factor of having to take the opportunities and limitations of the
existing infrastructure into account. One may say that the modification demand/supply
chain covers the remaining openness of the project (refer to the project atlas in chapter
three).
Then what is the focus of the oil and gas supply chain throughout the project lifecycle?
Figure 5.2 below is revised from IPA (1995), with some comments to its message.
5 The Project Supply Chain Challenge
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98
Business &
Project
Development
Project
Planning
Project
Definition
Engineering
Procurement
Construction
Commissioni
ng &
Startup
Operation &
Maintenance
Front End Loading
B = Business T = Technical O = Operations P = Project Team C = Contractor
Lead
role
Moderate role
or co-lead
Minor
role
B
T
B
P C O
O
B C
T
O
C P O
B
C
B B
In the ’old’ execution
model, this was the
operator’s role as ’builder’.
The contrators’ role in
operations could be
larger, dependent on
operations strategy
The project is initiated as a business
opportunity, but the direct role of ’business’
thereafter diminishes. We believe that for the
operations phase, business play a greater role,
especially if each object is managed as an own
business unit. This may impact lean operation
strategies.
T
’Technical’ should have role also
in operations, w,r,t, modifications
for further value enhancement
(link to ’Business’)
’Technical’ and
’Operations’ having
equal role in front
end. Balancing out
Contractor time
effectiveness and
Operator’s lean
operation
requirements?
Business &
Project
Development
Project
Planning
Project
Definition
Engineering
Procurement
Construction
Commissioni
ng &
Startup
Operation &
Maintenance
Front End Loading
B = Business T = Technical O = Operations P = Project Team C = Contractor
Lead
role
Moderate role
or co-lead
Minor
role
B
T
B
P C O
O
B C
T
O
C P O
B
C
B B
Business &
Project
Development
Project
Planning
Project
Definition
Engineering
Procurement
Construction
Commissioni
ng &
Startup
Operation &
Maintenance
Business &
Project
Development
Project
Planning
Project
Definition
Engineering
Procurement
Construction
Commissioni
ng &
Startup
Operation &
Maintenance
Front End Loading
B = Business T = Technical O = Operations P = Project Team C = Contractor B = Business T = Technical O = Operations P = Project Team C = Contractor
Lead
role
Moderate role
or co-lead
Minor
role
Lead
role
Lead
role
Moderate role
or co-lead
Moderate role
or co-lead
Minor
role
Minor
role
B
T
B
P C O
O
B C
T
O
C P O
B
C
B B
B
T
B
P C O
O
B C
T
O
C P O
B
C
B B
In the ’old’ execution
model, this was the
operator’s role as ’builder’.
The contrators’ role in
operations could be
larger, dependent on
operations strategy
The project is initiated as a business
opportunity, but the direct role of ’business’
thereafter diminishes. We believe that for the
operations phase, business play a greater role,
especially if each object is managed as an own
business unit. This may impact lean operation
strategies.
T
’Technical’ should have role also
in operations, w,r,t, modifications
for further value enhancement
(link to ’Business’)
’Technical’ and
’Operations’ having
equal role in front
end. Balancing out
Contractor time
effectiveness and
Operator’s lean
operation
requirements?
Figure 5.2. Focus of the oil and gas supply chain throughout the lifecycle (based on
figure by IPA, 1995).
The message of figure 5.2 is the changing focus on different roles throughout the
project’s lifecycle. ‘Business’ is the main focus in the front end of the project, to be
realised through value enhancing solutions for ‘technical’ and ‘operations’. However,
‘business’ has a role all through the project lifecycle, though diminishing relative to
other roles. A question is though whether ‘business’ should have been given a larger
role in the operations phase, as each installation often is managed as unique business
units, thereby they may have an impact on synergy potentials for lean operations among
several installations. The major role of the contractor(s) is found in the EPC part,
though this role was the Operator’s role, as the ‘builder’, in previous execution models
(not integrated EPC type models). Also in operations, the role of contractors could have
been elevated, as many operations models use an outsourcing approach with a set of
contractors with specific responsibility for different parts of the operation. Finally,
‘technical’ could or should have a stronger role in operations, as ‘technical’ linked with
‘business’ are the basis for further value enhancements, e.g. extending the plateau
production of an installation, realised through modifications projects.
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5.3.2 The roles of inter-organisational PSC actors
In table 5.1 below we have described the actors of the inter-organisational project
supply chain, as we see their role and objective as part of the project demand/supply
chain.
Table 5.1. Roles of the inter-organisational PSC actors.
Phase Actors Roles Objective
License owners Owner and sponsor. Ensure that the project
meets the profit required.
Operator Project manager and value enhancement
responsible.
Strategic and tactical demand/supply chain
manager.
As license owner.
Develop own operator
competence.
Project success.
Contractors
(1
st
tier suppliers)
Solution providers.
Tactical and operative demand/supply chain
manager.
Project object(s)
delivered and accepted,
giving a profit.
Project success.
Sub-contractors
(2
nd
tier suppliers)
System and technology suppliers.
Demand and supply chain contributors.
Development,
acknowledgement of
solution and competence.
Commercial, increased
business in industry.
D
e
v
e
l
o
p
m
e
n
t
Suppliers
(3
rd
tier suppliers)
Component suppliers.
Minor role in demand chain, major impact on
supply chain.
Commercial.
Increased business with
operator.
License owners Owner and stakeholder. Ensure that the project
meets the profit required.
Operator “Operator”, i.e. operations value enhancement
responsible.
Actor may change from development.
Meeting production
targets and targets for
installation up-time.
Cost effectiveness.
HES focus.
O
p
e
r
a
t
i
o
n
s
Contractors Responsible for functional progress, e.g.
length of drilled hole per day.
Commercial.
Meet incentives and
measures in own
contracts.
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100
Suppliers Rental equipment and consumables. Commercial.
Logistics service
providers
Transport from suppliers to supply base.
Supply base services and warehousing.
Offshore transport.
Commercial.
Increased business, scope
of work and number of
installations covered.
Solutions developer.
Development
The license partners are the owners of the petroleum field to be developed and
exploited. As owners the license partners have several roles;
‘Generally, owners have three roles. The first is to ensure that the project is conceived and realised meets
its objectives. This is the sponsor’s role: that of ensuring that the plant makes the profit required or the
weapons system performs properly, or that the aid or welfare programme delivers real benefit. The second
is the task of ensuring that once handed over to operations, the product will perform optimally. This is the
operator’s role: it covers a variety of factors, by far the most critical of which are technical efficiency,
safety and environmental performance. The third is that of the builder, or project manager: ensuring that
the project is realised effectively and efficiently. It seems to me that in principle these duties should be
performed entirely by the owner, subject only to the extent to which he does not – or should not – have
the resources or skills, outlook or experience to perform them adequately’ (Morris 1994, p.252).
Another issue that is related to the role clarification and influence between owners and
the Operator, is the issue of split operatorship between the development and operations
phase. If one owner company act as Operator during the development phase, and
another owner company take over as Operator after operations has commenced, this
may have a rather big impact on an approach to the project supply chain construct. E.g.
if the operator for development takes a lean approach to the development, making the
project object fit with the other installations in his portfolio, then that may become or
bring a ‘richer’ set of supply chains to the company taking over as operator in the
operations phase.
To be competitive the supply chain actors must posses different strengths. In the upper-
level project supply chain relationship between the Operator and contractor
organisations, the following differences in strengths has been outlined;
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101
Table 5.2. Strengths of owner organisation versus contractor organisation (IPA 1995).
Owner organisation Contractor (1
st
tier supplier) organisation
Identification of customer needs
Feasibility/economic analysis R&D capability
for project basic data and piloting issues
Knowledge of plant conditions and needs
Process expertise, maintenance know-how
and operability information
Equipment specifications and vendor
inspections
Detailed knowledge of vendor standards and
capabilities
Advanced project scheduling and tracking
systems
Contracting and procurement planning
Extensive experience with construction
management
As Table 5.2 shows, the main strengths of the owner organisation, i.e. the Operator, is
seen to be that of ‘sponsor’ and ‘operator’. The ‘sponsor’ role of the owner organisation
is primarily a part of the front-end phase of the project, while the ‘operator’ role is part
of operating the project object. The main strengths of the contractor organisation are
regarded to be related to an owner’s ‘builder’ role. The contractor is seen as project
manager, or maybe more precisely project planner and controller. As Morris (1994)
stated above the role of the ‘builder’ is a role that the owner should hold himself.
The contractor(s) are brought into the project supply chain to support the Operator with
the ‘builder’ role. The contractor could also take part in and support the Operator in
fulfilling his role as project sponsor, i.e. in ensuring that most value enhancement is
taken out of the project. The difference between the contractor’s support to the Operator
in these two roles give room for some reflection. What is the role of the contractor? Is it
to be a supplier of capacity, i.e. people with a competence to ‘help’ the Operator’s
‘builder’ role, or as a supplier of capability, i.e. helping the Operator making the most
out of the business opportunity?
In an EPC or EPCI project the contractor may be regarded as the demand and supply
chain co-ordinator, establishing and co-ordinating the development supply chains on
behalf of the operator. Or as a contractor’s procurement executive stated;
‘The contractor is the hub in a network, which mission is to specify the elements and parts of the whole
[the demand and demand chain process], as well as obtain and compound the elements and parts into a
whole [the supply and supply chain processes]’.
The contractor use sub-contractors that are providers and fabricators of e.g. systems.
These sub-contractors have in many cases taken over parts of the contractor’s scope of
work, often through that the contractor have transferred engineering capabilities and
software to sub-contractors with which the contractor has long term agreements.
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Thereby the sub-contractors take active part not only in the contractor’s supply chain, as
well as the contractor’s demand chain.
Several of the sub-contractors focus on standardisation of their products and systems,
and simplification of their deliverables so that they can improve their time
competitiveness, i.e. become ‘quick response’ suppliers. Quick response strategies may
enhance the sub-contractor’s position in the supply chain, both schedule and cost
position. The sub-contractors’ position then become much like suppliers of systems or
modules e.g. in the car manufacturing industry. They have to provide their share of new
technology and value enhancement as part of the demand chain, and then they have to
be good at their supply side so that they are able to meet new delivery schemes in trying
to reduce the length of the development schedule. The sub-contractor role fit as such
into a development towards more segmentation of the project objects.
At the end of the demand/supply chains we find the part suppliers. They take part in
both the demand chain and the supply chain. They do also often have a role both in
development as well as in operations. There are two main categories of goods that the
suppliers provide, equipment and bulk. Below in table 5.3 an engineering and
construction contractor’s supplier strategy with respect to supply category is listed. We
see that there are three categories of supplies, critical, standardised and other, which are
separated based on criticality both for the;
demand chain – ‘critical’ impacting the execution model and value through
technology, and ‘standardised’ impacting technology.
supply chain – ‘critical’ with respect to securing availability, ‘standardised’ based
on lead time, and ‘other’ based on the supply chain cost position.
Table 5.3. A Contractor’s supplier strategy with respect to type of supplies (LL
990614).
Type of supplies # of suppliers
per product
Focus Drivers
Critical 1 Product development,
standardisation,
communication, cost
efficiency programmes
Major impact on design,
interface documentation from
suppliers crucial for
finalisation of design, high
cost, complex manufacture
and/or technology,
availability in market
Standardised 2 – 3 Standardisation and use of
suppliers product range.
Challenging from a technical
point of view, long delivery or
high cost.
Other Many Selection based on
commercials
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Operations
In the operations phase, the license owners continue their role as owner and sponsor of
the project, with the objective of ensuring that the project delivers its required profit.
This is from a cost efficiency (lean) perspective an interesting constellation, as the
license owners may be operators for other fields in a region, so that a driving
mechanism for utilising synergies through collaboration among several installations and
operators, is directly linked to the sponsor role of the license owners.
The Operator will either continue to be the same as the owner-company having the
operator role through the development phase, or it could be changed so that another
owner-company take over the role in the operation phase, e.g. when the installation has
come in stable production. This may be a challenge for the project supply chain, as it is
one operator that will have to operate supply chains partly established by another
operator. The development operator could e.g. choose project supply chains based on
long-term synergies across installations were he himself is operator. Then for the
owner-company taking over in the operations phase, the supply chains established to
give the development operator synergies could result in the opposite for the operations
operator.
Contractors in the operations phase are responsible both for completing the
development of the project (not the project object), e.g. drilling, and as part of long-term
operations, e.g. maintenance contractors.
Suppliers could be linked to the contractors, e.g. for supply of rental equipment to be
used by the contractor on the installation offshore. Or they may be part of the Operator’s
supply chain, e.g. through long-term contracts and agreements, and often supplying to
several installations that the Operator operates.
The logistics service providers make up the link between the suppliers and the offshore
installations. They are more becoming integrated logistics service companies that
provide full scale of logistics or supply chain services, including transport from
suppliers to the offshore supply base, base services, and offshore transport. The logistics
service providers may either operate the services fully on behalf of an operator, or offer
part services to the operators. The logistics service providers are following the general
trend in the logistics service industry in developing and offering complete services.
They are also in a good position to develop solutions that extract synergies across
several operators.
5.3.3 The roles of intra-organisational PSC actors
The role and objectives of some key actors and stakeholders in the internal project
organisation are listed in figure 5.x.
Table 5.4. Roles of the intra-organisational PSC actors.
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Phase Actors Roles Objective
Management Demand and supply context
regulators.
Deliver a project object according
to expectations.
Meeting the financial basis on
which the project was sanctioned.
Engineering Demand generators – ‘point of
origin’.
Demand chain managers of the
project supply chain.
Designing an object based on
available options to best meet the
business requirements of the
owners.
Procurement Demand fulfillers – tactical and
operational supply and demand
alignment.
Making best possible use of long
term supply chain relationships,
and the market to cover
engineering’s requirements
Construction Supply consumers – ‘point of
consumption’.
Realising the project object
according to schedule.
D
e
v
e
l
o
p
m
e
n
t
Project control Demand/supply co-ordination –
Value enhancement through time-
and cost-wise control of the project
demand and supply chains.
Giving a best possible status and
future estimate, cost and
schedule-wise, to help guide
decisions and actions in E, P, and
C.
Offshore
operations
Planning and optimisation of
production.
Plan and initiate supply requirements.
Meet or exceed production rate
and up-time of facilities.
Onshore
support
Order and administer the commercial
side of supplies.
Improve effectiveness, contracts
and terms, and efficiency, internal
process, of administrative supply
process.
O
p
e
r
a
t
i
o
n
s
Supply
organisation
The demand/supply chain coordinator
and single point of contact.
Establish and commit demand and
supply side, periodically.
Optimise supply operations long
and short term to meet offshore
requirements.
Development
For the development phase there is five actors or functions that have a central role in the
project demand/supply chain, i.e. management, engineering, procurement, construction
and project control.
Management is set to manage the project under the context given by the company
strategy, project strategy, and the broader project context. The strategies that are part of
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the managerial context are further specified into aims, means and measures relevant to
the project construct, and as a managerial tool to manage the project forward. The term
‘budget’ is a good example of how management is given focus and set to ‘operate’. Is
the budget a cost or value measure, to be kept within, met exactly, or tried to challenge?
If the budget is a maximum cost level, not to be exceeded in any circumstances, then
that will influence how the project supply chain actors have to approach the project.
Risk reduction and cost minimising is the name of the game, i.e. the project has to be
‘closed’. On the other side, if the budget is a type of ‘value’ measure, then it may be
something that should at least be met, but preferably exceeded. This will challenge the
demand side of the project supply side, setting the frame to work within towards new
opportunities and seeking value, taking both life cycle income and cost profiles into
account, i.e. the project should work at least initially in the ‘open’ part of the project
atlas. However, management will often (always?) move towards securing some
‘expected’ results or measures related to the project objectives.
The second function is engineering. Engineering has an important, and maybe the most
important role, seen from the demand side of logistics in large-scale development and
construction projects. Earlier, the engineer got an assignment, with a given
specification, and designed out of own experience and competence, with rather large
degrees of freedom. Today, the engineer must to a larger extent take given terms, e.g.
frame agreements, into account, leading to a more predefined and ’lean’ approach. The
engineer’s role in this new situation becomes important to develop and improve the
processes of realising a qualitative product based on the engineers understanding of the
demand and the options available in the ‘lean’ supply chain.
Within such a framework the engineer may be viewed as both an artist as well as a
craftsman. As an artist the engineer want to have a large action or freedom space with
respect to the design that he creates. He will also retain the option to change or alter his
design as he develops his understanding, or as new information (or new technology)
become available. The artist is mostly represented in the early conceptual development
phase of the project object. The solution created by the artist, although rough, will
establish a basis for the demand that will ultimately trigger the supply chains. With a
lean approach to a project’s supply chain the engineer’s freedom space in developing
his solution is limited.
As a craftsman the engineer use his functional knowledge and competence in
developing, or bringing together the details of the conceptual solution developed by the
artist. In doing this he has to apply to the rules and specifications given for his function.
In designing the details of the object/product he is guided by a set of choices with
respect to equipment and materials to be used, as outlined e.g. through frame contracts
and agreements. The aim of frame contracts or agreements may be regarded as moving
the ‘openness’ of the artist’s role through to meet the cost-effective and cost-efficient
needs of operations of the project object, often based on utilising synergies across a
portfolio of project object’s to be operated, thereby ‘closing’ the degrees of freedom
available for the engineer to use.
As such the engineering role is twofold. First it is developing the demand, i.e. the
functionally oriented engineer, often seen as the optimal technological solution to the
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problem. Then there is to define the specifications needed from the product that shall
fulfil that demand, i.e. the product-oriented engineer. One approach to balancing the
technological development role versus the commercial, or business oriented demand
fulfilment role of the engineer is presented in Figure 5.3.
problem. Then there is to define the specifications needed from the product that shall
fulfil that demand, i.e. the product-oriented engineer. One approach to balancing the
technological development role versus the commercial, or business oriented demand
fulfilment role of the engineer is presented in Figure 5.3.
After the demand has been defined and specified by engineering, procurement comes
into the picture to close the commercial commitments and delivery schedules with
suppliers, and thereby activating and committing the supply chain downwards, as well
as upwards (towards the engineers) committing the demand chain. The roles and
functions between procurement and engineering may be regarded as in Table 5.5 below.
After the demand has been defined and specified by engineering, procurement comes
into the picture to close the commercial commitments and delivery schedules with
suppliers, and thereby activating and committing the supply chain downwards, as well
as upwards (towards the engineers) committing the demand chain. The roles and
functions between procurement and engineering may be regarded as in Table 5.5 below.
E1: Engineering 1 - “R&D”
E2: Engineering 2 - Making use of available technology
P&L: Procurement & Logistics
Logistics Technology
Supply Demand
Market
Suppliers
Technological
Developments
P&L E2 E1
Figure 5.3. The engineer’s role in a project’s demand and supply processes. Figure 5.3. The engineer’s role in a project’s demand and supply processes.
Table 5.5. Roles and competence distribution among engineering and procurement. Table 5.5. Roles and competence distribution among engineering and procurement.
Engineering Procurement
Demand oriented.
Technical competence.
Product-market competence.
Supply oriented.
Relational and commercial competence.
Market-availability competence.
Procurement is in relatively continuous contact with the suppliers in the market. Then
when a demand is specified from engineering, a matching supply process is activated
and directed through procurement to the suppliers in the market. Finally delivery is
brought back to the engineering domain, now in the fabrication or construction context.
However, procurement is related to logistics, but there is a difference between the
procurement role and the role of logistics in the supply process. A commissioning
executive for a major field development project on the Norwegian Continental Shelf
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gave his comments with respect to procurement’s contemporary ‘standing’ related to a
project’s needs;
‘Procurement is not flexible enough to cover the dynamic needs of the project;
- Procurement: Static, manages based on rules and principles.
- Projects: Dynamic, strategic guidelines, with dynamic execution.
Projects runs fast, and they don’t stop when started, the project just look for solutions.’
The difference between the perceived static position of procurement versus the dynamic
needs of the project bring with it a need to develop dynamic supply chain relationships.
Dynamic will in this context mean the ability to balance and search for good
demand/supply alignment together with the engineers and the supply market. As such
the ongoing dialogue within the triangle between engineering, procurement and
suppliers is in the longer-term view aimed at influencing suppliers in the market to
develop new technology, concepts and solutions. Or, how engineering may be
integrated with the suppliers so that new developments ‘continuously’ become available
for the product-oriented engineer to be applied in the demand/supply process – when
needed in a dynamic or agile manner. This outlines the role for the ‘logistics’
professional on the project team. There is then a need to broaden the procurement
competence to further incorporate logistics and supply chain management competence,
or as a logistics responsible in a project team said;
‘Procurement is all routines, rules, systems, and commercial and contractual aspects – i.e. focus on
“local” price, not “global flow”. Logistics is experience based, to secure “global flow and
commissioning”, comprising everything not covered in “local” focuses. Logistics is co-ordinating
procurements between demand, availability and “transport”’.
The fourth project internal function is construction. Construction may be regarded as the
consumer or customer of the demand generated by engineering. In construction all
material, pre-fabricated items and equipment are brought together into the whole and
final project object. As such construction involves a vast number of resources, and
‘consumes’ vast resources such as man-hours, fabrication and construction drawings,
materials and equipment. Thornton et al. (1996) address assembly, which may be
regarded as construction in this project context, as the organisational point that is the
‘proof of the pudding’ with respect to seeing whether the demand and supply chains
perform as expected;
‘In virtually every site in our project, the people pushing most strongly for new design, procurement and
production methods are those responsible for performing assembly’ (Thornton et al. 1996).
At the assembly point, or for the project context the fabrication and ultimately the
construction point(s), all pieces come together and weaknesses in the demand and
supply processes and chains will be revealed, as items may be wrong, e.g. changes has
happened that has not been communicated to all relevant actors in the supply chain,
does not fit, or are not available when needed. The assembly/fabrication/construction
point may as such be regarded as the ‘point of consumption’ in the demand/supply chain
perspective.
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As such the consequences are that construction may both be impacted by, as well as
may impact the supply chains. The supply chains delivery service to construction in
accordance with schedule and construction programs are important for schedule
adherence and progress for the project in meeting milestones. Good delivery service is
also important with respect to construction costs, as the construction-staff will not be
able to perform their work if materials and equipment is not available when promised
and needed. This means increased costs without increase in progress, giving rise to
contractual issues regarding responsibility and payment for lost construction man-hours.
As such construction is dependent on timely and secure deliveries to make construction
cost- and time-efficient, meaning that the logistics service aspect is important for
construction.
Then again construction may be the ‘source’ of or detect necessary changes, and thereby
impact the demand/supply chain(s). E.g. if construction detects a design ‘error’ making
something ‘impossible’ to construct, or place into the bigger construction, then changes
have to be made that may affect several tiers down into the supply chain. These changes
have to be effected rapidly, not to delay the construction or even the total project
schedule un-necessary. As such a change will have effect as the domino principle down
through the supply chain.
The last function described here is project planning and control. The project planning
and control functions are mainly related to structuring, sequencing and estimating the
scope of work, time schedule and cost budgets, as well as the important function of
measuring and controlling the progress in scope of work versus the progress in
accumulated cost and schedule. As such one may say that project planning and control
is related to structuring, quantifying and updating the coordinating structures and
quantities of the project as it moves from the ‘open’ to the ‘closed’ mode, and as it
moves from planning to and through execution.
Project planning and control comprises two central functions with the role to co-
ordinate the different elements and interrelationships of the holistic perspective of the
project, i.e. the planner and the cost engineer. As the ‘single point of contact’ for the
project’s planning and control information the planner and cost engineer have a central
and co-ordinating role in and for the project demand/supply chains. As the planner and
cost engineer have a comprehensive overview of the parts and relationships of and
among the project’s parts and actors, and are strictly dependent on complete and regular
data and information about status and progress, they need extensive communication
with the project supply chain actors, both internally and externally in the extended
project organisation. Through their role as a point for collecting data, the planner and
cost engineer analyse and present information that are valuable and necessary for all
actors in the project supply chains. The planning and control information is important
for the project as a whole and for each of the project supply chain actors, as it is the
medium that relates local aspects and status to the overall aspects and status, thereby
communicating consequences that could have commercial effect for both the project
and project supply chain actors, hopefully in due time so that corrective action could be
taken if necessary.
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Operations
The intra-organisational operations of the project object comprises the operations
organisation that take over the project object after it is developed and commissioned. To
make the picture simple let us focus on three different parts that are relevant for
logistics and supply chain management in the operations of the project object. These
three parts are; (i) the offshore operations organisation, (ii) the onshore support
organisation, and (iii) the operations logistics support organisation.
The offshore operations is the direct operations organisation located on and operating
the offshore installation, i.e. the project object. The onshore support organisation and
the offshore operations organisation is often termed the project’s ‘operations
organisation’
45
, but here we have chosen to separate the offshore and onshore part, as
they have different roles as part of the operations supply chain and logistics
management. The third and last, the logistics support organisation, may be regarded as
the hub in the operations supply chain and logistics management, namely the ‘base’
operations. The ‘oil bases’ as they are often termed are partly operated by the operators
themselves, or by third party logistics providers which the operator have outsourced
base and logistics services partly or fully to.
The demand generator in the operations phase is the offshore operations organisation.
The demand information goes through the onshore support organisation, the operations
logistics support organisation, or directly to the supplier. The flow of goods then goes
from the supplier, transported via the supply bases and the logistics support
organisation, out to the offshore installation by supply vessel or helicopter. For some
goods a return process is also included, e.g. for rental equipment, as the goods are
returned to the supplier after being used offshore.
Though, the operations organisation, or the operations experience of the operator do
also take directly part in the project object development. Then their role is to bring
operational experience with respect to choices of equipment and solutions, so that use
and operations of equipment and systems functions well in the offshore operations
environment, as well for later maintenance and modifications. Thereby one may say that
the offshore operations organisation directly influences the demand management in the
project development phase.
‘Operations influence the choice of components directly in the contractors purchasing organisation, and
may thereby influence the use of the frame agreements’ (JMP, 990124).
However, the main importance of the different parts of the operations organisations is in
the operations phase. The onshore support organisation is the administrative and
commercial management centre for the operations phase of the project. In the supply
chain their role is in managing the contractual terms and conditions, as well as other
both tactical and operational procurement issues. E.g. much of the offshore procurement
demand is led through procurement in the onshore support organisation, then further
down the supply chain to the supplier.
45
In Norwegian; Prosjektets ‘driftsorganisasjon’.
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The logistics support organisation is an important part in the operations supply chain as
it is the link in the logistics chain between the offshore installation and the onshore
suppliers. The supply chain management role is often divided between the onshore
support organisation and the logistics support organisation at the bases. The onshore
support organisation is often tied to the information based demand side of the offshore
supply operation, while the logistics support organisation is tied to both the flow of
information and goods in the offshore supply chain, from the offshore demand to the
supplier and out to offshore delivery of the goods.
5.4 External Bodies – Law and legislation
External to the project and the internal and external actors of the project supply chain
there are national, multi- and inter-national ‘bodies’ that may have influence on the
project supply chain. These bodies may influence the ability to construct and develop
project supply construction, e.g. laws and regulations to secure that competitiveness is
upheld, i.e. to prevent cartels, monopolies etc., in industries and markets. Here we will
just show a couple of examples on the influence such may have on project supply chain
constructions.
‘It is obviously easier to build an alliance on the back of an existing relationship, or to roll over from one
contract to the next, and a longer-term relationship can save time in setting up new projects. However,
there are some issues which cannot be ignored here. The European Union Procurement Directives impose
strict requirements on procurement by Government or public authorities and on procurement by “utilities”
companies (including oil companies operating under Government franchises). On the face of it, these
directives may make it difficult – if not impossible – to restrict bid lists to a select few, or to select
suppliers on a basis other than the lowest price, or the most “economically advantageous” bid. Similar
regulations may apply in other countries. World Bank procurement procedures are widely applied by state
enterprises in the Third World, even where no World Bank money is involved. Partnering arrangements
have been criticised for becoming too cosy and being insulated from the pressure of competitive pricing.
In the longer term, if owners and suppliers pair off this will reduce market capacity and competitiveness’
(Pritchard 1994).
If we e.g. go to the Norwegian petroleum industry, some Norwegian petroleum
companies come under the definition of “utility” company, i.e. it is a company
controlled by the Norwegian Government, and EU’s Procurement Directive has to be
adhered to;
‘The European Union’s Purchasing Directive are based on paragraph eighty in their Treaty of Rome,
which states that along a supply or procurement chain there shall be competitive selection in at least one
link’ (Instefjord, 30.06.99).
An example of a supply or procurement chain where the initial link was established in
accordance with the competitiveness rules of the Treaty of Rome for thereafter to make
use of that and thereby have more degrees of freedom in selecting actors for and
constructing the project supply chain;
‘All procurement in this development project is contractually executed through the Contractor. The
Contractor was chosen after competitive bidding in accordance with the European Union’s purchasing
directives, and therefore we are free to select sub-contractors and suppliers without taking EU’s
purchasing directives into account’.
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From the industries side the European Union’s purchasing directives may be met
through conscious distribution and use of roles between the Operator and the
Contractor. From the other side, the European Union may give their opinion about the
petroleum industry’s use of the market for procurements;
‘EU’s purchasing directives point out that the petroleum industry must be better at:
- specifying and use what is available in the marketplace today,
- not specifying what is ‘just not’ in the market place – that should be developed continuously and
brought to the market place to be used in future projects’ (OA, 990614).
This is important seen from the view of up-keeping competitiveness in the market-
place, as one in specifying product details, especially that needs to be developed may
favour specific suppliers or lock out others that have ‘similar’ products.
Another dimension to the level of competitiveness in the marketplace, is the ability to
develop project supply chain constructions that are competitive, as well as keeping the
construction within legally defined constraints. As well as EU’s Procurement Directive
that shall secure to up-keep competitiveness in market-places, there are directives and
rules that define how a company are defined, or more precisely in which category a
company is to be placed e.g. for taxation purposes. A question may be asked whether a
change in organisational structure and formal business relationship does change how a
company are ‘defined’ by legal interpretation of terms. An example may be taken from
the offshore petroleum field Yme
46
. In Yme two oilfield services companies have
incentive contracts related to the production capacity of the Yme project object. The
question then is whether the two service companies are service companies as defined by
legal terms, or whether they are to be regarded as a production company. The core of
this question is the difference in taxation between service companies and production
companies. A production company is due to pay a production tax of 78%, which is
considerably higher than the normal business tax level of a service company. To keep
this type of incentive contractual arrangement under surveillance, bureaucrats monitor
the incentive arrangement to see whether the contractual arrangement make the service
companies legally regarded as production companies. This is an example of the
influence that ‘governing bodies’ have on the ability to create competitive project
supply chain arrangements based on the core competencies and capabilities of each
actor in the supply chain.
5.5 The challenge of the oil and gas project supply chain
One may say that value enhancement in oil and gas projects are ‘engineered’ into the
project, either through project processes or through novel technology. The demand
definition and specification process in project development is directly related to the
value positioning of the project. This demand process is both established through and
will commit the supply chain when the defined demand shall be supplied. This is
46
Based on a discussion with Mr. Odd Instefjord, June 2000.
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established through the contract execution model
47
. During the last decade there has
been changes in the contract execution models from the operator being the hub and
using function specific contractors for specific functions and parts of the project scope
of work. The operator did also have closer contact with a broader set of technology
providing suppliers, and an extensive technology development dialogue was present
among the operator’s engineering functions and the same of contractors’ and suppliers’.
Then in the late nineteen eighties this was believed to be a costly set-up. This was to a
large extent the same as the situation found in the defence industry.
During the cold war the defence budgets were more or less ‘limitless’. Cost should not
be an issue that could give the opponents an edge in the weapon technological advances,
and thereby lead to disturb the power-balance in an unwanted direction. As in the oil
and gas industry this gave rise to an entire culture where engineering and demand
definition meant technological development, which again meant new, specific supply
chains to cover the demand both in manufacturing and support. After the cold war the
defence budgets has been exposed to dramatic cuts and costs both in development and
support has become an issue;
‘The United States still desires to maintain a technological edge over potential enemies, but cost is now as
important as performance. Therefore, the pressures to use unproven, high-risk, and potentially expensive
advances in weapons are reduced. Whereas the unknowns associated with designing cutting edge
technologies are lowered, other factors increase the difficulties of decision-making by the IPPD
[Integrated Product and Process Development] team. The long duration of the Cold War gave rise to an
entire culture; one that saw generations of military leaders and weapons designers matured in an
atmosphere where the issue of cost was secondary to performance. No longer!’ (Usher et al. 1998, p.286).
This may also be used to reflect the current situation in the offshore petroleum industry.
With the focus on being competitive and profitable, and thereby able to meet very low
oil prices, the focus on development and operations has become a cost-conscious one.
This is a situation that leads to new challenges for the engineering community of the
offshore petroleum engineers. The mental adjustments necessary for engineering may in
many respects be found to be that of the defence industry community. Although the cost
issue has gained a strong foothold, the question in the end is project value. And value
in a project is dependent in income, costs, and time. Technological choices, as well as
models for project development and execution may influence all these three.
5.5.1 Cost and income – Value of technology
Then, how does the above relate to the challenges of the oil and gas supply chain? Let
us refer to two, possibly counter argumentative, quotes by the British Department of
Trade and Industry;
47
The TIKO-II (Kinn et al., 1998) report written jointly by a group of representatives from the operator
Statoil and the contractor Kværner, gives a thorough analysis of the challenges and problems of contract
execution models for Norwegain offshore development projects, and the related elements in the
relationship between the operator and the main contractor.
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’Over the last four years, with a fairly stable, relatively low oil price, there has been a drive to reduce
costs in the partly-depleted North Sea oil province. The multinational oil companies operating on the UK
Continental Shelf (Operators) are changing the pattern of business relationships within the industry
network. Instead of dealing directly with a large number of subcontractors as they previously did when
the main concern was to get the oil flowing, regardless of cost, most are progressively moving to a “lean
supply” approach. In its most extreme form, this means drawing up a single contract with a prime
contractor or “alliance” group of contractors, which takes responsibility for constructing and managing a
major production facility. Prime contractors in their turn have publicly announced that they are seeking to
reduce the number of subcontractors and to develop long term relationships with a smaller number of
favoured partners and most have taken steps to implement this policy’ (DTI, 1997).
‘In the face of reducing margins and increasingly difficult and expensive exploration and production
challenges, reduction of activity is a real possibility unless there is a constant stream of innovative
ideas and technologies feeding through from indigenous supply firms, particularly those in the small to
medium-sized (SME) bracket, to enable continuous cost reductions’ (DTI, 1998).
So the challenge of the oil and gas industry was to increase the competitiveness of the
North Sea oil province, especially to meet lower oil prices. The answer was a ‘lean
supply’ approach towards the oil and gas supply chain, both for development and
operations. But, at the same time it is estimated that innovation and technology
development will stand for approximately 50% of the future value enhancement
48
in the
oil and gas industry. In this situation, the oil and gas industry has tried to copy lean
practices, e.g. as found in the automotive industry
49
. As the oil and gas industry of the
North Sea area are becoming mature, they are focusing more on cost efficiency, than on
cost effectiveness and value enhancements through e.g. a rich set of suppliers with
technology development capabilities.
‘A substantial group of indigenous technology-based oil-related companies has been formed since the
discovery of oil on the UK continental shelf. … These SMEs have been contributing to the flow of new
technology, and this was originally promoted by their close relationships with the Operators, and end-
users. The close relationship which previously existed between the Operators and the technology-based
oil-related companies permitted close integration of their operations and R&D. However, this has been
substantially lost now that most Operators tend to confine their direct interactions to the large integrated
service contractors and have, indeed, closed many of the functional departments which used to interact
with suppliers. Now most responsibility for managing innovations lies with the contractors, with whom
many SME’s have not had dealings in the past. The continued growth of the smaller, innovative
companies in a highly competitive global market is dependent on maintaining their technological
competitiveness, but the perception is that changing contracting practice is threatening this’ (DTI
1997).
So, due to the need for improved competitiveness, the answer was ‘lean supply’, which
is a good strategy in a repetitive context were it is about refinement of already
established processes. In the project atlas presented in chapter three we called this a
closed state. The cost of such a strategy could be that the many SME’s
50
that provided
48
Presentation given by INTSOK.
49
The automotive industry does also have a challenge in getting more innovations and technological
development through the supply chain from 2
nd
tier suppliers, i.e. suppliers below the system suppliers
developing and delivering systems to the automotive assembler. See e.g. DTI 1998 for a discussion of
this.
50
SME, small and medium-sized enterprise.
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the necessary innovations and technology developments are lost from the marketplace,
with the effect that new innovations could be reduced, with the ultimate consequence
that fewer new projects would come on stream due to not having access to technology
that could make the projects cost effective.
Below we have taken a set of quotes from a ‘discussion’ by the British Department of
Trade and Industry (DTI, 1998), outlining the development of the lean supply concept
in the oil and gas industry versus the degree of innovations and technology
development, and shortened them into the following list;
The initiative Win 90s established lean supply practices; operators moving to closer relationships
with one or two main contractor(s) to exploit interface synergies.
The main contractor began to form the whole interface between the operator and the rest of the
supply chain.
Operators’ downsizes their technical departments, reducing their ability to undertake research and
development and their ability to evaluate new technologies.
A view is that operators have lost their ability to evaluate new technologies. Taken over by main
contractors.
Whereas SMEs could approach engineering departments in operators and find ‘product champions’
they now have to identify project teams, which may consist of operator and contractor engineers, and
who are essentially mobile.
Win 90s continued by CRINE.
Industrial stakeholders agree that these various changes in supply methods are having, or may have
an adverse effect on innovation.
There is a shared perception that the largest percentage of new technologies have come from SMEs.
Cost cutting initiatives often embodied in alliancing agreements, usually transfer increased risks onto
the contractor, making the contractors highly reluctant to take on any new ideas since innovation
means greater risks, and they therefore tend to stick with tried and tested technology.
Contractors may not be accessing best technologies when these are available in the market place, due
to preferring to source tried and tested technology rather than risk using an innovation despite it
having the potential to reduce costs for the operator; and demanding excessively large cost reductions
before considering an idea.
In order to cut costs operators and contractors have to seek innovation from SMEs.
It seems clear that also contractors will pass down the responsibility for technology identification and
development to SMEs.
Pre-CRINE and pre-NORSOK, technology development happened to a large extent
through a broad base of SME’s working tightly to the technological problem core. This
could be regarded as a ‘rich’, not ‘lean’ approach. Some say that even in the post-
NORSOK period, the improvements in cost and execution time were due to
technological developments.
‘Although the actual performance [‘NORSOK-performance’] represents a considerable achievement
compared with traditional budgets and development schedules, it is more likely that these achievements
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are caused by more cost effective technical concepts than by the use of the NORSOK … contract
execution principles’ (Kinn et al. 1998, p.1).
The ‘lean supply’ approach may be very well suited for the repetitive context of the
operations phase, when the supply chains are established and the demand is prescribed
for a longer term, but it may be a wrong concept to pursue for the one of a kind, new
technology dependent context of the project development phase. When the context is
such that new technology is needed to make smaller reservoirs financially exploitable,
the question may more be about the ability to in an engineered way being able to
manage the search or development of new technology and/or processes that may make
a new project feasible or enhances the value of the project.
5.5.2 Time – Value of the execution process
What was said above about the main contractor filling the ‘whole’ interface between the
operator and the rest of the supply chain is a modifiable truth. The operators’ does also
have their long-term frame agreements and frame contracts with their own suppliers,
which the operator often demand that the main contractor use in a specific project. This
may again be the basis for discussions between the operator and the contractor,
regarding whose supply chain to use, the operator’s or the contractor’s to get the most
time-effective execution.
When the development phase with its demand and supply chain processes is completed,
the operator will therefore in the operations phase be making use of operations supply
chains established partly by the operator and partly by the contractor. Use of frame
agreements for long-term demand and supply chain relationships as sources of
effectiveness and efficiency both for the development phase as well as the operations
phase of the project life-cycle, become central in the relationship and distribution of
roles between the Operator and contractor as project supply chain actors. A central
question is whether it is the Operator’s or the contractors frame agreements and
contracts that are to be used, and why. A contractor procurement executive said it like
this;
‘Our [the contractor’s] claim is that we as contractor develop concepts, products and solutions together
with our sub-contractors and suppliers, and that it therefore is necessary that it is us [the contractor] that
possess the long-term, development oriented agreements and contacts with these. The petroleum
companies counter-argument is that they need the long term agreements and contract due to the need for
simplification and efficiency in operations’.
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Table 5.6. Who’s supply chain to use in development.
Operator’s supply chain Contractor’s supply chain
Could effect in leaner operations (not necessarily
if change in operatorship)
Potential for supply synergies across operator’s
installations.
Higher execution time risk.
Improving network relations in the industry
(indirectly improving contractor’s agile
capabilities).
Shorter execution time, due to using ‘pre-defined’
and established demand/supply chains, with a
potential for continuous development.
Less execution risk.
Strengthening contractor’s lean execution model.
As such the main question for whose frame agreements to use is whether one is aiming
for effectiveness and value enhancement through the operator’s frame agreements,
which should result in shorter development execution time, or aiming for value
enhancement through efficiency in the operations phase. Another dimension used by the
Operator is that they want to exploit and enhance the effect of operational synergies
between several licences. The background for the use of frame agreements is the aspect
of development of competitive products and solutions, as well as the efficiency element
of reuse.
Seen from the contractor’s point of view this is much about whether the contractor has
to establish new relationships when executing a project based on the operator’s supply
chain, or whether the contractor may use its own supply chain relationships;
‘There has also been a change in when developments should take place in the industry. The old approach
was that developments should take place within the projects. This takes more time in the projects, as well
as it brings more uncertainty into the project. The new approach is that developments should take place
outside of and between projects. This approach differentiates more clearly between product development
and product execution’ (meeting with a contractor representative, 990614).
Then we are into the effect that time has on the value enhancement through project
execution. As was stated in chapter one describing the main changes resulting from the
NORSOK process, the overlap between the project phases is increased, contracts are
placed early, and work is commenced based on preliminary technical information, in
order to reduce the project execution time. The importance of reducing the project
execution time is due to the value position of the project for the project owners. The net
present value of the project is improved by reduced execution time, due to earlier
income from operations, and shorter time between the large cost spending of the
execution phase and start of operations and income. This positive effect is to some
degree counteracted by increased costs, when the execution time becomes too short and
the quality costs start to raise due to more concurrent activity than what the project
organisation is able to manage. The question therefore is what is the most optimal
execution time?
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Figure 5.4 shows the declining life cycle income, LCI, as a function of the execution
time. The CAPEX cost curve, here given without risk measures, is also shown, with the
minimum point of the curve showing the optimal execution time from a CAPEX cost
point of view. By bringing the CAPEX costs curve and the LCI income curve together,
this gives us the net present value curve of the project, with its highest point marking
the optimal execution time from a net present value point of view. A natural question to
ask is whether it is the same life cycle income curve or CAPEX curve that applies for
both ‘execution times’, or whether it is possible to ‘lift’ the LCI curve with a longer
execution time due to improved time for design optimisation or use of new technology,
or lower the CAPEX curve?
Project
execution
time =
Time from
investment
to income
Income curve;
Present value of
project life cycle income (LCI)
Result-curve;
Net present value
of the field development
CAPEX (budget);
Built into the CAPEX
is an efficiency cost,
which is at a minimum
with a certain
execution time
0
Cost
Income
Optimum execution time from
net present value point of view
Optimum execution time from
Executin efficiency point of view
?
The optimum execution time:
A compromise between different needs.
Where in the range should it be?
Project
execution
time =
Time from
investment
to income
Income curve;
Present value of
project life cycle income (LCI)
Result-curve;
Net present value
of the field development
CAPEX (budget);
Built into the CAPEX
is an efficiency cost,
which is at a minimum
with a certain
execution time
0
Cost
Income
Optimum execution time from
net present value point of view
Optimum execution time from
Executin efficiency point of view
?
The optimum execution time:
A compromise between different needs.
Where in the range should it be?
Project
execution
time =
Time from
investment
to income
Income curve;
Present value of
project life cycle income (LCI)
Result-curve;
Net present value
of the field development
CAPEX (budget);
Built into the CAPEX
is an efficiency cost,
which is at a minimum
with a certain
execution time
0
Cost
Income
Optimum execution time from
net present value point of view
Optimum execution time from
Executin efficiency point of view
?
The optimum execution time:
A compromise between different needs.
Where in the range should it be?
Figure 5.4. The optimum execution time (Based on figure in TIKO-II, 1998).
This opens up for alternatives, and alternative supply chains. Being able to establish
new supply chains if new opportunities or risks are uncovered through uncertainty
management of the project, then being able to undertake evaluations that could answer
whether the value position of the project would be enhanced, i.e. pre-evaluating the
changed cost position and changes in execution time if going for alternative
technologies and/or processes.
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5.6 Summarizing the challenge
The challenge of the oil and gas supply chain in the North Sea region, as presented
above, is two-fold. First it is the ability to be able to support and take advantage of
innovations and technological development that may keep up the competitiveness of the
oil and gas region. The other is related to finding the most ‘optimal’ execution time,
taking the option of alternative routes into account. Both are aimed at macro
competitiveness, through inter-organisational capabilities and capacities, where the
project specific supply chain has to be competitive, both in enabling use of innovative
technologies, and without compromising on the execution time. And this should be
made manageable in a planned and controlled way.
Table 5.7. Summarizing the challenges of the oil and gas [project] supply chain in the
North Sea region.
Challenge Description
Innovations and technology
development
[Cost and income impact on value]
Being able to develop relationships in the industry
demand/supply chains that enables and sustains the
initiation and use of innovations and technology
development.
Project development execution time
[Time impact on value]
Being able to establish extended project organisations that
are able to execute the project development in a ‘correct’
scheduled time, and in a controlled manner.
In chapter one we presented the developments of project execution and management
through four stages in the North Sea oil and gas industry. There we saw that improved
project planning and control, through CTR-catalogues, ‘Front End Loading’, and
incentives for the contractor to control his own costs were means applied in ‘stage two’
to meet the recommendations from ‘stage one’; detailed definitions and tight change
control. Then in ‘stage three’ new project and contract execution models were
introduced, with a lean supply approach to the supply chain. Together with bringing the
supply chain earlier into the project, to take part in project definition and project object
specification, together with committing the supply chain earlier, in a still open project
context, through placing contracts with larger contractor risks on a less defined basis
(more degrees of freedom, both on the contractor and operator side), resulted in an
‘open’ situation to be developed based on a lean supply chain.
In other words, we may say that in stage two the focus was on closing the project
through strict project planning and control means, especially before committing the
supply chain, but having a multitude of potential supply chains (and thereby
technology) to develop from. Then in stage three we may say that the project is opened
up, especially to the contribution of the supply chain and even when committing the
supply chain, but the portfolio of supply chains to develop from is reduced due to lean
supply developments. This benefited the execution time, but at the sacrifice of the
(potential) opportunity value of alternative technology. In summary we may say that;
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Stage 2; Approach a closed project, with a rich (open) supply chain.
Stage 3; Approach an open project, with a lean (closed) supply chain.
The consequence may be that when opening up the demand processes, concurrently
with applying lean supply, as in stage three, one may see that technology development
in is danger of being lost, with its potential value enhancement contribution. At the
same time the concurrent execution process, with a lean supply chain seeks to manage
the time element of the value enhancement process in a controlled manner. However, if
project value enhancement from both technology (cost and income), as well as time
shall become an opportunity, then one may seek to combine the approaches of stage two
and three in one way or another. Combining the steps from stage two and three could
e.g. for stage four mean to;
Stage 4: Approach
51
an open project, with a rich (open) supply chain.
Approach a closed project with a lean (closed) supply chain.
This means that new project planning and control concepts and means should be
established that enables to up-keep and manage the option of a rich and open supply
chain for an open project setting, though still keeping manageable control of the time
processes of the project development and execution.
So then what we have defined for the three stages could be shown as in figure 5.5.
Closed Open
Stage 2;
-Close!
-’Rich supply’
Stage 3;
-Open!
-Lean supply
Closed Open
Stage 3;
-Open!
-Lean supply
Stage 4;
-Open to closed!
-’Rich’ to lean
Lean
supply,
...
... for
an open
situation
Lean
supply,
...
... for
an open
situation
Rich
supply,
...
... for a
closed
situation
Lean supply,
for a closed
situation
’Rich’ supply,
for an open
situation
Closed Open
Stage 2;
-Close!
-’Rich supply’
Stage 3;
-Open!
-Lean supply
Closed Open
Stage 3;
-Open!
-Lean supply
Stage 4;
-Open to closed!
-’Rich’ to lean
Closed Open
Stage 2;
-Close!
-’Rich supply’
Stage 3;
-Open!
-Lean supply
Closed Open
Stage 2;
-Close!
-’Rich supply’
Stage 3;
-Open!
-Lean supply
Closed Open
Stage 3;
-Open!
-Lean supply
Stage 4;
-Open to closed!
-’Rich’ to lean
Closed Open
Stage 3;
-Open!
-Lean supply
Stage 4;
-Open to closed!
-’Rich’ to lean
Lean
supply,
...
... for
an open
situation
Lean
supply,
...
... for
an open
situation
Rich
supply,
...
... for a
closed
situation
Lean supply,
for a closed
situation
’Rich’ supply,
for an open
situation
Figure 5.5. The three stages and their use of rich or lean supply chain concepts, to
approach closed or open projects.
To use some terms that we defined in chapter four, we may say that the ‘rich’ or open
supply chain approach may be supported by the concept of agility and lessons from
51
Here we have used the term ‘approach’, but what should be more appropriate is to say ‘optimise’ in the
sense that one will seek the solutions that give the most project value to the project owner, but were the
supply chain also make a reasonable profit taking their risk exposure into account.
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agile manufacturing. This has direct relations to the project development phase as
described above. However, the project operations phase is both a closed project state, as
well as have a ‘closed’, repetitive supply chain, i.e. a context suitable for lean supply
chain approaches.
If we now summarise what we have said regarding the three stages of developments of
project execution and management in the North Sea, then it may be presented as in table
5.8. below.
Table 5.8. The three stages and their use of rich or lean supply chain concepts, to
approach closed or open projects.
Stage Project Supply chain Operations Supply chain
Stage 2
52
Closed “Agile” Closed “Agile”
Stage 3 Open Lean Closed Lean
Stage 4 – Alt 1 Open Agile Closed Lean
Stage 4 – Alt 2 Closed Lean Closed Lean
Taking the conclusion from table 5.8 with us, we will now move to the third part of this
thesis. The development of the project supply chain management concept, PSCM.
The development of the PSCM concept and the related methodological guidelines seek
to meet the challenges of the project context or state, in both the development and
operation phase, with appropriate logistics approaches to the corresponding supply
chains.
52
We have for the operations phase of stage two said that it is following an agile approach. This is not the
fully correct use of terms. What we mean by using that term is that at that point in time there were still not
that much focus on utilising synergies for supply across several offshore installations. This means that
each offshore installation was still being supplied from its own supply ‘warehouses’, with its own
material. This is a ‘rich’ (cost un-efficient) rather than an agile approach.
6 Project Supply Chain Management – The Concept
6. Project Supply Chain Management – The Concept
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121
6.1 Introduction
This chapter outlines and discusses the concept of project supply chain management,
PSCM. PSCM may be regarded as an artificial construction as defined by Simon
(1990);
‘The thesis is that certain phenomena are “artificial” in a very specific sense: they are as they are only
because of a system being moulded, by goals or purposes, to the environment in which it lives. If natural
phenomena have an air of “necessity” about them in their subservience to natural law, artificial
phenomena have an air of “contingency” in their malleability by environment. … artificiality is
interesting principally when it concerns complex systems that live in complex environments. The topics
of artificiality and complexity are inextricably interwoven. … Fulfilment of purpose or adaptation to a
goal involves a relation among three terms: the purpose or goal, the character of the artefact, and the
environment in which the artefact performs’ (Simon 1990, pp. ix-xi, 8).
As stated by a Norwegian Public Study [NOU 1988] there is a need for system
knowledge when new facts or trends are emerging;
‘New facts need system knowledge … Shortly said: the basic theoretical foundations of learning is vital
both for the interpretation of new information and as a guide to direct the search for new facts. The better
the theories are, the longer they last. And it is those concepts, models and theories that one is familiar
with that decides what one may conceive of the unknown. The production of new knowledge makes it
more necessary than ever to know such fundaments of understanding. The large flow of explorations and
findings necessitates fundamental knowledge – systems for interpretation and action – now more than
ever. Without systems knowledge the explosion of knowledge will lead to greater confusion and
perplexity. The flood of impressions becomes fuzziness if the frames of reference that can give them
meaning, are missing’ (NOU 1988, p.9).
With respect to supply chain management in the project context of the oil and gas
industry, it is being perceived as a new, emerging competitive aspect of the oil and gas
industry, e.g. as addressed through CRINE Network’s supply chain management
initiative. To be able to ‘navigate’ in this new world of words, concepts, models and
theories, there should be outlined how logistics and supply chain management is
different from and focus as compared to other industries. The concept of project supply
chain management, PSCM, is set to outline that.
Before we start looking into PSCM as a concept, a short introduction to some terms is
needed. First the term concept, which may be defined as;
‘Concept: a word or phrase used in propositions to describe real world relationships; concepts are
neither true nor false, only more or less useful’
53
.
53
‘Concept: a word or phrase used in propositions to describe real world relationships; concepts are
neither true nor false, only more or less useful; the cognitive meaning of a term and the smallest unit of
(conscious) thought processes; concepts are neither true nor false but more or less applicable (a) to
recognise an object as an instance of the concept, (b) to produce or to understand sentences in which the
concept is expressed and (c) to develop constructs or cognitive systems using the concept in question’
(Web Dictionary of Cybernetics and Systems, http://pespmc1.vub.ac.be/ASC/Concept.html).
6 Project Supply Chain Management – The Concept
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The main idea behind developing the PSCM concept has been to outline a concept that
is ‘neither true nor false, only more or less useful’ to understand ‘the character of the
artefact’ as Simon says above, and that thereby could act as a ‘fundament for
understanding’ and a ‘system for interpretation’ as the needs stated by NOU. Then
PSCM may be the frames that could guide logistics and supply chain management in
this project context. The concept should again be based on some principles;
‘Principle: a basic generalisation that is accepted as true and that can be used as a basis for reasoning or
conduct’
54
To develop knowledge takes time and a concept built on a set of principles could be
useful in that process;
‘As with almost all innovations, implementation precedes understanding. The aircraft industry, to cite
one example, was decades old before a theoretical basis for designing aircraft began to develop, and
decades more passed before theoretical models were mature enough to allow new designs to be deducted
from them. Agility is happening. This book is an attempt to understand what is happening and to capture
that understanding in a first-generation model’ (Goldman et al. 1995, p.xvii).
As with the aircraft industry and the concept of agility, supply chain management in the
project context of the oil and gas industry is ‘happening’, i.e. the awareness of its
impact is becoming more clear. The project supply chain management concept, PSCM,
is an attempt to try to capture the characteristics of that through a conceptual
development.
6.2 Principles and Characteristics of Project Supply Chain Management
Now we will start with stating the principles that PSCM is built on, and then describe
the characteristics of PSCM. First the characteristics will be outlined and described per
se, before the characteristics is ‘summarised’ in two ‘statements’ one for the
development phase and the operations phase of the project respectively.
6.2.1 The Principles of PSCM
The principles of project supply chain management is outlined to be the basis for
developing the key describing characteristics of logistics and supply chain management
within the project context. The underlying assumptions for the principles is the notion
of the project as a business opportunity, with the project supply chains as a competitive
entity that may enhance the value of the project, i.e. the business opportunity. Value
enhancement through the project supply chain may then be explained through a logistics
and supply chain management approach. As such the principles of project supply chain
management are the same as the three underlying assumptions of this thesis;
- The project as the business opportunity.
54
From Webster Unabridged Dictionary/WordNet, http://work.ucsd.edu:5141/cgi-bin/http_webster/ .
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- The supply chain as the competitive entity.
- Competitiveness through logistics and supply chain management, focused on
alignment of supply and demand in the project context.
We then have a set of principles that build up the foundation from both the project as
well as the logistics and supply chain side. Within the project context addressed here,
the project is a business opportunity that has to attract investors able and willing to
invest the necessary financial means to realise the project. The supply chain is as
described in the previous chapter the extended entity that make the owners of the project
able to realise the scope of work and technological content of the project. The last
principle is the principle that takes the contribution from logistics into account.
Logistics is ultimately about aligning the supply with the demand in a best possible
way, and in the project context that has to be done throughout the life-cycle of the
project and the project object. Aligning demand and supply in this project context is
driven by engineering processes, within an open context in the development phase,
meaning that uncertainty is an important aspect to take into account. In the operations
phase the project is in a closed state, and the processes and uncertainty changes
character. This necessitates that the characteristics of PSCM change from the
development phase to the operations phase. Together with the characteristics of PSCM
(described below) these principles will be the basis for the PSCM concept.
6.2.2 The Characteristics of PSCM
As a business opportunity and a value generating ‘entity’, the project could be separated
into a development phase and an operations phase. These two phases have distinctly
different characteristics, which should be reflected in the characteristics of a logistics
and supply chain management approach to this context, i.e. the characteristics of PSCM.
As described earlier, a key describing characteristic of the inbound supply chains of car
manufacturers is robustness (Schneider et al., 1994). Their processes have a high degree
of repetitiveness and delivery frequency, with tight interrelationships and connection
within the inter-organisational supply and system manufacturing network. Further the
automotive supply network is characterised by lean use of resources so that if one
supply chain stopped, the whole supply network would stop within a short period of
time. The supply chains therefore have to be robust.
The project context focused on here is primarily characterised by being a unique
business opportunity, with two distinct phases that again are unique with respect to the
characteristics that describe their supply chains and processes. In table 6.1 below we
present the characteristics of project supply chain management, as we propose them,
related to five different aspects describing the project supply chains.
The first characteristic is the project life cycle, stating the importance of being aware of
the differences in characteristics between the two distinct phases, development and
operations. The second characteristic is the supply chain focus, driven by the targeted,
one-of-a-kind demand/supply in the development phase, versus the repetitive
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demand/supply in the operations phase. Then the third characteristic is the logistics
drivers, or whether the main driver of the supply chains should be demand or supply in
the development versus the operations phase respectively. Then come the organisational
processes, characterised by agile characteristics in the development phase and lean
characteristics in the operations phase. The final characteristic is then related to the
service quality, an important logistics mission, focusing on resilience in the
development phase and robustness in the operations phase. Each of the PSCM
characteristics is described more thoroughly below.
Table 6.1. The characteristics of project supply chain management.
Aspect Characteristics
1. The project life cycle Development Operations
2. The supply chain focus One-of-a-kind Repetitive
3. Logistics drivers Demand chain management Supply chain management
4. Organisational processes Agile Lean
5. Service quality Resilient Robust
The project life cycle
The project life cycle is characterised by the two distinctly different phases development
and operations. The development phase is focused on developing a business opportunity
and the project object enabling the owner to exploit the business opportunity. The focus
is on developing the business opportunity in a context that is influenced by a high
degree of uncertainty, where value enhancement has to be developed through combined
knowledge, competence and cost effectiveness in the extended, or ‘virtual’ organisation
that comprise all the actors taking part in the development (demand) and supply
operations. The operations phase on the other hand have to generate the income that the
project object is set to do, and do that in the most cost efficient way. The uncertainty is
reduced to an operation risk management aspect. While the development phase is
temporary and working under limited time, the operation context is repetitive, with
ample time for refinement.
The origin of the project is when knowledge about a business opportunity starts to
emerge. In the context of development projects in the oil and gas industry that is when
geological data is collected, refined, analysed and interpreted. The first time period of
the project is known as the project’s front-end, or ‘project development’ as we said in
chapter three. This is the time period from the point in time when the first data is found
‘describing’ whether hydrocarbon reserves are present below the seabed, and a business
opportunity starts to emerge, up to the point in time when the project has been defined
and acknowledged as a project and ‘big spending’ starts. ‘Big spending’ may be
regarded as the point in time of placing and committing to contracts with contractors,
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sub-contractors and suppliers, i.e. the start of the major capital expenditures of the
project object development phase.
The development phase of the project is characterised by bringing it from an open state,
towards closing several degrees of uncertainty, both risks and opportunities. The high
degree of uncertainty that characterises this phase is related both to opportunities for
value generation that the project owner want to take advantage of, and at the same time
risks that should be hedged against. The development phase ends when the project
object is commissioned, set into operation and reviewed for a period to see that it is able
to deliver as specified.
In the commissioning phase, when the development phase ends and operations
commence, a rather radical change occurs in the logistics and supply chain management
setting for the project object. At this point in time the project object has been developed
and all needs generated by the technical and support processes are defined, and the
project object shall be operated for a longer period of years to exploit the reserves in the
reservoir and produce the oil and gas resources and generate value for the project
owners. The objective has changed from being cost-effective in using costs for life cycle
value enhancement in the development phase, to becoming cost-efficient with respect to
operations and value seeking in enhancing the options available to enhance the
production.
The supply chain focus
A logistics and supply chain management concept aimed at this project context has to
focus in on the specifics of each of the two phases, i.e. the ‘unique, one-of-a-kind’
project object to be developed in the development phase, and the repetitiveness in the
operations of the project object.
In a logistics and supply chain perspective the project object development means first
and foremost the development, i.e. engineering, fabrication, construction and
commissioning of a ‘one-of-a-kind’ project object. The processes involved in the
development phase are directly influenced by the development setting, i.e. developing
and constructing a unique object. The setting is moving from an ‘open’ area with rather
wide degrees of freedom available, through specifying, committing and thereby
‘closing’ the project, in creating a specific object with all its detail, to exploit the
business opportunity in an ‘optimal’ way.
The project object development is characterised by a large scope of engineering. The
project object to be developed is unique, and therefore the engineering is targeted at
specifying specific materials and equipment to be used. At the same time one may say
that engineering comprises the value enhancement processes that shall make use of the
opportunities inherent in the uncertainty of the ‘what’s’ and ‘how’s’ of the object
development processes. The engineering processes therefore have to balance the search
for value enhancement through making use of new, state-of-the-art technology and
solutions, against the time frame available to establish specific needs, that again can be
committed to deliverables from actors further down in the supply chain. This is a
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demand specification process, which we prefer to use the term demand chain
management for.
In the operations phase, the supply chain focus is characterised by repetitiveness. The
logistical drivers are repetitive, driven by technical processes and predefined operations
schedules. This accounts for ‘more of the same’, where reliable replenishment when
needed is in focus. Replenishment from a supply base and through a supply system that
is characterised by efficiency, both with respect to cost and time, and reliability. This is
a process where supply is in focus, and we prefer to use the term supply chain
management for. The repetitiveness of operations establishes the ground for fine tuning
and through that making the organisational processes lean. And as for the supply chains
of the car manufacturing suppliers, lean supply chains need to focus on the robustness
of their service quality. These are the characteristics that characterise the operations
phase and that will be further described below.
Logistics drivers
In chapter four, in the outline of the developments in logistics and supply chain
management theory, we stated that there were maybe only a conceptual difference
between supply chain management and demand chain management. Though, we stated
also that there could be reasons to separate the usage of the two terms when addressing
logistics and supply chain management in the project context. Here we emphasise the
term demand chain management in the development phase, and the term supply chain
management in the operations phase. The reason for this dual use of terms and their
differences are outlined and discussed below.
Demand chain management in the development phase
The objective of the development phase is to develop a project object that in a best
possible way creates value for the owners in a life cycle perspective. This means that the
capital expenditure laid out during the development phase should be kept low, but at the
same time should give value enhancement in the life-cycle, i.e. it should be cost-
effective. As inn all supply chains there is an initial demand that triggers the supply
processes, whether there is a pull (given demand) or push (estimated demand)
orientation. The demand in the development phase is defined, and redefined through
change processes, and set by engineers, through the engineering processes in conceptual
and detail engineering. The demand may further be changed during the fabrication and
construction activities, to suit exact fabrication or construction needs that have not been
adequately covered in detail engineering.
Horizontal alliances between the operator and one or more contractors have been used
to support the demand chain management objective and function as described here.
These are often referred to as alliance contracts. In such horizontal alliances it is the two
upper-most tiers of organisations in the project supply chain that are the anchorage point
of the demand chain management processes. The operator and the contractor(s) may be
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regarded as a ‘horizontal alliance’ construction in establishing and defining the
demand
55
.
Operator
Contractors
Sub-contractors
Suppliers
‘Horizontal alliance’
‘Vertical alliances’
w/ different origins
Demand
S
u
p
p
l
y
S
u
p
p
l
y
S
u
p
p
l
y
S
u
p
p
l
y
Figure 6.1. Organisational demand and supply alignment in the development phase.
Figure 6.1 illustrates how a horizontal alliance may be seen as the cornerstone of a
demand chain management approach. The operator and the contractor(s) constitute the
main node in the demand chain, in managing and being the ultimate generator and
customer of the outcome of the demand processes. Each of the actors have again
relationships with suppliers of both short and long term duration. In the process of
engineering value into and specifying the project object and establishing the demand,
each actor draws on his set of supplier relationships. As such these suppliers not only
take part in supplying, when a demand is specified, but also in specifying the demand,
as they support their higher tier customers with knowledge and competence in finding
e.g. the most optimal and value enhancing technology, given the time available within
the schedule. One may then say that the extended project organisation, as a demand
chain, comprises the horizontal alliance of the operator and contractor(s), and their
vertical supplier alliances or relationships, of which the ones are used that contribute
most to the value enhancement of the project through the project object development.
Though there is a primary focus on demand chain management in the development
phase, the supply chains does also play an important part. Although the demand
processes establishes the potential for value enhancement and cost effectiveness, the
supply chains and the supply processes are necessary to realise the development, i.e.
supply the demanded (engineering specified) material and equipment, fabricate and
construct. In figure 6.2 below we see that the demand chain originates in the horizontal
alliance (whether formal or informal) between the operator and the contractor(s). From
55
See e.g. the description of the Cleeton Compression Project in Harrison et al. 1996, and the reference
to British Petroleum in Vollmann et al. 1995.
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the top-level demand stipulation the demand processes moves downwards to sub-
contractors and suppliers, and ultimately to sub-suppliers. The demand processes are
commitment intensive in that the operator and contractor specifies the initial demand,
that again may be adjusted (due to changes) through product-oriented processes with
sub-contractors, suppliers or sub-suppliers, for at the end to be committed through
contractual bindings.
Operator &
Contractors
Sub-
contractors/
Suppliers
Sub-
suppliers
Demand chain:
Downwards.
Engineering and design
Demand is specified
Procurement
Commitments made
Ordering mechanisms activated
Costs accrue
Supply chain:
Upwards
Equipment and material
Fabricate and construct
Capacities and capabilities
Documentation
Figure 6.2. Alignment of demand and supply in the development phase.
Supply chain management in the operations phase
When the project object is developed and operations commence, the setting becomes
repetitive with respect to the logistics operations and supply chain management. The
demand processes goes from being defined by engineering in the development phase, to
becoming defined by technical processes and work plans, i.e. the demand is more or less
given, except for contingencies and incidents that ‘disturb’ what is planned. The focus is
oriented towards the supply as compared to the development phase’s demand focus. The
focus is therefore towards the supply chains, and project value shall be enhanced
through cost efficiency and reliable logistics support for the operations.
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Offshore
installation
Operators
onshore
organisation &
supply base s
Suppliers &
Logistics service
providers
Operations demand chain:
Planned or unplanned
Critical or non-critical
Need date
Operations supply chain:
Responsiveness
Lead time
Capacities
Documentation
Figure 6.3. Alignment of demand and supply in the operations phase.
An example of a supply chain from supplier to an offshore oil & gas platform is shown
below. The chain shows goods ordered from the platform, via procurement in the
operator’s onshore operations organisation, and supplied from the supplier, through
using a logistics service provider to the offshore supply base, and then offshore
transport to the platform via a supply ship.
Demand/
request
Order to
supplier
Packing
and shipping
goods
Transport
to supply
base
Supply
base
operations
Offshore
transport
Installation
receipt
Retour
to supplier
Installation Operators
onshore
organisation
Supplier Logistics
service
provider
Operator’s
supply base
Supply
ship or
helicopter
Installation E.g. leased
equipment
returned to
supplier
after use.
Figure 6.4. An example of an offshore supply process and supply chain.
Organisational processes
The objective of logistics management is to align supply with demand in a cost and time
effective way. What becomes an additional point in the project context is that the
demand/supply processes in the development phase play an essential part in the value
enhancement of the project value through the engineering of the project object. In
seeking the most value, i.e. engineering value into the project object, the processes have
to be adaptable to accommodate the opportunities that arise throughout the development
of the project object. Therefore the logistics alignment of demand and supply in the
development phase should be characterised by agility.
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When the project object is fully developed and set into operations, further value
enhancement could be achieved through seeking cost efficiency in the supply system.
Therefore the logistics alignment of demand and supply in the operations phase should
be characterised by being lean, removing waste from the supply chains through the
supply system, though keeping it reliable.
Agile (development phase)
Value enhancement in the oil and gas industry is to a large extent dependent on
technological progress and innovations. It has been estimated that approximately fifty
percent of future improvements in cost position and competitiveness will come from
improvements in technology. As such there will be an important aspect of supply chain
management to address the technological development capacity both within and outside
an inter-organisational supply chain construction, e.g. the portfolio of long-term frame
agreements;
‘From the 1990s on, everyone working on the design and definition of projects should be aware of the
need for and benefit of forecasting likely technological change over the following five to ten years. Very
simply, if managed technology forecasting is not performed then future competitiveness will be
diminished’ (Morris 1994, p.297).
These technological changes has to be accounted for through the engineering processes
in developing the project object, and thereby engineering value into the project, i.e. the
engineering processes have to account and employ opportunities that emerges due to
technological developments. This will often require changes, which requires that the
extended or virtual project organisation is able to meet these. This is the core of agility
and the agile virtual enterprise;
‘The agile virtual enterprise is one that simply responds well (at low time and cost) to unexpected change’
(Goranson 1999, p.67).
However, changes are a costly process, and as CAPEX costs should be kept as low as
possible, one should approach building agility into the parts of the organisation where
changes are likely to occur, in stead of trying to hedge all risks (i.e. risks of not being
able to pursue a wanted opportunity), so that resources are not wasted;
‘Agility is insurance, and investment decisions need to be made accordingly. … The ability to
accommodate change that is unimportant or unlikely to occur represents the wasting of resources’
(Goranson 1999, p.77).
In terms of being able to exploit technological opportunities, without wasting resources
necessitates blending technology development and organisational agility as part of
project management;
‘Future products are managed as portfolios according to their degree of technological uncertainty and the
organisational relationships needed to bring them ‘to market’. The organisational and control attributes of
project management have a major role in accomplishing this successfully’ (Morris 1994, p.297).
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If organisational agility is left out, this necessitates managing development within the
project demand/supply chain between projects, so that new technology and processes
are ready to be used for new, upcoming projects, but that is a lean approach;
‘There has also been a change in when developments should take place in the oil and gas industry. The
old approach was that developments should take place within the projects. This takes more time in the
projects, as well as it brings more uncertainty into the project. The new approach is that developments
should take place outside of and between projects. This approach differentiates more clearly between
product development versus the fabrication of a product’ (A Norsok representative, June 1999).
As the quote above states, a lean approach seeks to reduce risk. An agile approach does
also try to reduce risk, but does it in another way. The agile risk reducing approach is
aimed at trying to use resources to hedge the possibility to capture the opportunities
where they are most likely to emerge, i.e. reducing the risk to miss opportunities, but in
a cost-effective way.
As such agility needs to be ‘engineered’ into the project organisation, to make it work
as an agile virtual enterprise. The result of agility will be that the virtual enterprise are
able to proactively manage ‘moving targets’, as new opportunities arise where the
organisation must decide whether to follow the opportunity or leave it due to either cost
or time constraints. As it often is a time pressure for developing the project object, the
old or ‘classic’ model acting much like a ‘relay race’ has been left for more concurrent
processes, where much work is done in parallel. This puts even greater stress on the
agile ability of the project organisation, as the available time to cost effectively follow
opportunities become reduced. The difference between the classical model and a
generic, concurrent model, with an increased need for interrelationships is shown in
figure 6.5 below.
Classic model:
“Relay race”
Development Operations
Generic model:
Must see both
forward, as well
as sideways to see
interdisciplinary
relations
Decisions made on lack of “perfect information”,
and searching for better opoprtunities;
=> Proactive management
=> Managing moving targets
=> Calculating value versus organisational cost
and time of change (agile quality)
From ...
… to
Figure 6.5. Enhance the agility in project development.
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In addition to the generic, functional model above, highlighting internal agility, there is
a need for the extended project organisation to be agile in itself;
‘Overall, there are these four contexts of agility: (1) The sum of internal agility of each of the
components. (2) The (probably quite different) agility of the Virtual Enterprise as a whole. (3) The ability
of each component to quickly/cheaply aggregate. (4) The ability of each component to quickly/cheaply
change the aggregation boundary. … This is to say that the agility of the virtual enterprise comes from the
ability of each component to be added, or subtracted, and to fluidly change its relationship with the
partners, plus the skill of the virtual enterprise organizer’ (Goranson 1999, p.70).
As an agile virtual enterprise, the extended project organisation needs to be able to
reconfigure itself, amongst other establishing new supply chains through bringing new
partners and suppliers in as needed when new opportunities emerges. The question then
is how this could be made practical?
Lean (operations phase)
Central in lean concepts stands waste reductions through continuous improvements. A
necessary basis for this is that there is a repetitive context, so that there is at least a
minimum of continuity for improvements to be carried out within. In chapter four we
outlined three different types of activities that lean thinking focuses on; value adding
activities, non-value adding activities, and necessary non-value adding activities. As we
also pointed out in chapter four, these activities should be approached and focused in
the whole supply chain, not only per actor in the chain. The chain focus is easier when
the chain, or more appropriate the network of chains, is stable over time.
The operations phase of the project life cycle has the necessary continuity and
repetitiveness for lean thinking to be applied. It does also have supply chains that are
stable over time, i.e. both the production processes to be supported and supplied and the
supply network can for this purpose be regarded as constant over time. There are also
both value adding, as well as necessary non-value adding activities, and naturally non-
value adding activities, or waste in the total supply chain network and the inherent
processes. As such the operations context and its supply chains are so that ‘lean
thinking’ may be a natural approach for value enhancement.
Lean thinking is focused around the five lean principles value, the value stream, flow,
pull, and perfection (Womack et al. 1996). These principles may be regarded as a serial
development from initially starting with defining value as perceived by the customer of
the product and/or service that is delivered, then mapping the chain of actors and
functions that take part in delivering the product or service. Then the chain should be
‘re-engineered’ to establish a ‘flow’ bringing the product or service through to the final
customer, ‘pulled’ by the customer so that it only ‘flows’ when the customer wants
something. That means a tightly coordinated chain that works as one entity. This
requires transparency into the elements and processes of the chain, so that the actors
involved could improve the chain as one entity. This leads to the final principle of lean
thinking, the continuous improvements.
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If we see this in the operations phase of the project context, this means that the operator
should define what type of value that the supply chains delivers to the operations of the
project object, then map all the supply chains delivering specific products or services to
get a ‘transparent’ mapping of the chain as a basis for co-operative improvement work
among the actors in the supply chains. Then the demand and supply processes of the
supply chains should be re-engineered to get efficient and effective pull-based flow
from the initial supplier to the final customer, i.e. the project object in this case.
However, the operations phase is more or less similar for several offshore installations,
i.e. project object for different projects, as well as for several operators. This means that
the potential for waste reductions is not only along the whole supply chain, and in
treating it as one entity, but also synergies across several installations and operators
should be aimed for. For the oil and gas industry and the offshore installations, the
supplier base may be varying a bit, but still it is the same type of products being
supplied from the same type of suppliers, through more or less identical supply
schemes, so that the potential for cross-installation and –operator synergies should be
apparent. This type of synergies seeking to develop lean solutions not only for a single
installation (project object), but for several installations e.g. in a geographic area, may
be regarded as what we referred to as competitiveness in the macro perspective in
chapter five.
Examples of lean thinking along these lines may be found among others in Ernst et al.
(1997) in their description of potential types of alliances in upstream oil and gas
industry. Among the types of alliances they propose are ‘consolidation joint ventures’,
‘enhanced supplier relationships and outsourcing alliances’, and ‘advantaged networks
of producers and suppliers’ that cover elements of lean thinking and the utilisation of
synergies for improved value/cost ratio in the upstream oil and gas industry. Further the
CRINE Network in the UK has proposed similar initiatives among others in their ‘Pan
Industry Initiatives’ as part of their supply chain management initiative (CRINE 1999-
A).
Service quality
The service quality of supply chain management is one of the key aspects of logistics.
The term ‘service quality’ itself, may not be the best to use in this respect, but it is a
term that help to address what is sought to point out. Bowersox et al. (1997) say that
basic logistics service is measured in terms of availability, operational performance, and
service reliability, defined as in table 6.2.
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Table 6.2. Logistics service measures.
Measure Description
Availability Having inventory to consistently meet customer material or product requirements
(demand).
Operational
performance
Deals with the elapsed time from order receipt to delivery, and is further defined
through; Speed and consistency – first consistency of service, then improving
delivery speed; Flexibility – able to accommodate unusual and unexpected customer
requests; and finally malfunction and recovery – required time to recover when a
malfunction occur in the supply chain, affecting the delivery.
Service
reliability
Logistics quality and the ability to accurately measure inventory availability and
operational performance.
We have used two terms here, resilience for the development phase and robustness for
the operations phase. In relation to Bowersox’s definitions they are first and foremost
related to service reliability, but with some differences regarding the operational
performance measures, and ultimately aimed at availability. As will be explained below,
resilience is used to reflect the ability to adapt, while robustness is used to reflect the
ability to withstand. Resilience and robustness has as such quite similar objectives in
their core, though they have at least a theoretical difference in their approach and
meaning that is useful for pointing out the differences in the characteristics of project
supply chain management in the development phase versus the operations phase, and
the related agile and lean organisational processes.
Resilience (development phase)
The reason for choosing resilience as the describing characteristic for service quality in
the development phase, is the terms focus on the ability to be able to come ‘back on
track’ after a ‘disturbance’. Changes may e.g. be perceived as ‘disturbance’ for demand
and supply chain management during the engineering development processes.
‘[T]he true vulnerability of technological and social systems cannot always be predicted. Since this has
been demonstrated repeatedly, it becomes obvious that resilience, that is the ability to accommodate
change without catastrophic failure, must be given greater cognisance in decision-making. … Resilience,
for better or for worse, leads to greater permanence in a world of flux’ (Foster 1993, p.36).
As the quote above from Foster shows, there is a direct relation between resilience and
agility, which may be seen as an other reason for choosing to focus on resilence as a
service quality characteristic;
‘An agile response might be required concerning a negative change as well as to address a positive
opportunity. For example, a positive opportunity would be a newly identified customer niche, or a
leveragable technology. A negative change may be a new restrictive law, a raw material that disappears,
or a customer who has been enticed away’ (Goranson 1999, p.68).
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With an agile approach to engineering and value enhancement in the development
phase, the exploitation of opportunities inherent in the open setting and the involved
uncertainty, there is a large chance that the means sought does not lead to the desired
end. That means that if one seeks to exploit novel technology and solutions, one cannot
predict that they will give the desired outcome, or an outcome at all. But if one follows
such a path one has to activate a supply chain to research and develop the needed or
wanted technology. However, if one sees that it does not lead to the desired end, the
established supply chain has to be ‘terminated’, and another solution chosen and the
corresponding supply chain activated. This means that the approach to service quality
has to be resilient, so that one is aware that a solution may not lead to the desired end,
and therefore the corresponding supply chain has to be ‘terminated’, but due to a
resilient approach this is accounted for and a ‘procedure’ for an alternative solution and
activation of the corresponding supply chain is in place. This is shown in figure 6.6.
TIME
Solutions and technology concepts are chosen … and ‘re-chosen’
… but the initial solution , and/or supply chain
does not reach the desired end, ...
With a new supply chain activated,
to realise the new solution.
Figure 6.6. Resilience as the ability to convert to a new solution and corresponding
supply chain (read text in figure from bottom upwards).
Reference to this type of reasoning may also be found in Goransson (1999);
‘Our case study addressed lowering the cost of getting it right the second (or third) time, by relaxing the
period of time that design decisions need to be frozen. Typically, in the defense environment, all major
design decisions are made in the very early phases, because of the perceived need to lock in suppliers
(and their processes). It’s the way the system works. We change that.’ (Goranson 1999, p.187).
Goransson (op cit.) seeks to play time against cost, through relaxing the time constraint.
As Figure 6.7 below shows cost commitments, and thereby e.g. technology
commitments, are delayed in time, which may be possible if one have business and
work processes in the project extended enterprise that fit the requirements needed to be
able to bring forward a necessary end within an ultimate time frame.
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Time
C
o
m
m
i
t
m
e
n
t
o
f
C
o
s
t
Delaying cost commitments in time,
i.e. larger freedom in seeking and
evaluating opportunities.
Figure 6.7. An agile supply chain allows design changes to be made later (based on
Goranson 1999, p.187).
Robust (operations phase)
The reason for choosing robustness as the describing characteristic for service quality in
the operations phase is that the supply chains shall not be the cause for interruption or
stop in production by the project object. I.e. value of break in production is so high that
one should seek to eliminate all possible causes for that. Therefore we use the rather
strong term robustness, as they did for the supply chains of the car manufacturing
industry.
The project object that ‘produces’ the hydrocarbon resources have given delivery
service targets. This service target is 98% up-time
56
of the facilities, i.e. the facilities
should be able keep up production for 98% of the planned production time, i.e. except
for planned shutdowns. Such a service measure may be weakened if the supply chains
that shall supply the facilities with needed supplies break down for any reason.
As there is limited storage space on the offshore infrastructure itself, there is a need to
store needed goods at different locations onshore and that requires good and robust
supply chains from suppliers all the way to the offshore infrastructure.
6.2.3 PSCM characteristics in summary
The characteristics of project supply chain management may be summarised into one
‘statement’ for each of the two main phases of the project, development and operations;
- Agile and resilient demand chain management in the development phase.
- Lean and robust supply chain management in the operations phase.
56
Ref. O. Instefjord, Statoil.
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Development phase; Agile and resilient demand chain management
To summarise the project supply chain management characteristics for the development
phase the terms demand, agile, and resilient are the three that should be given attention.
For both the development phase and the operations phase the chain perspective should
be taken as the basis for value creation and value enhancement. However, the
development phase is a phase were the project and the project object is to be developed,
i.e. the aim is to define and specify the demand that in sum through the fabrication and
construction activities will become the project object. Therefore we have chosen to
emphasise demand chain management specifically for the development phase. We have
used the term agile to point to the importance of seeking and evaluating opportunities
that could bring value enhancement to the project. The engineering processes are
concurrent and they have an underlying mission to engineer project value into the
project object within the time and cost frames set. The context is defined by a high
degree of uncertainty so that opportunities as well as risks will emerge, necessitating an
agile approach either explicitly or implicitly. The term resilient is used to reflect the
uncertainty in the development phase, and some of it will mature, so that the
demand/supply chains has to be able to ‘come back again’, i.e. be resilient, to aim for
the final objective.
Before we move to the operations phase let us use one quote to point to the difference
between the development versus the operations context;
‘ince World War II, manufacturers of complex products like air-planes and cars operate in a defense-
industry manner. These people who worry more about managing a supply chain rather than supporting a
more profitable virtual enterprise with the same players’ (Goranson 1999, p.29).
The context of the development phase is that of the virtual enterprise aimed at meeting
and generating a project object that could realise a business opportunity, i.e. demand
ultimately set by the context that the business opportunity is to be realised within is in
focus. This as opposed to the operations phase where it is ‘only’ about ‘managing a
supply chain’, though that is in itself very important, given the mission and objective of
the operations phase and the supply chains part of it.
Operations phase; Lean and robust supply chain management
As for the development phase, the operations phase does also have three terms that we
would like to summarise the attention around. The terms supply, lean, and robust is
what we mean should characterise the operations phase of the project life cycle. The
operations context is one of repetitiveness, keeping focus on the details so that the
whole ‘machinery’ goes like ‘clockwork’. This is the ultimate basis for lean thinking
where not only the potential for waste reduction could be discovered through
incremental rounds of continuous improvement, but also making the whole supply
operations more robust through revealing elements that could be a risk factor. We have
used the term supply specifically for the operations phase because it is a repetitive
supply operation. The demand is already defined and the supply chains should be robust
so that they do not contribute to disturbing the production. The term robust is used
specifically to indicate that although the supply chains should be lean, that should never
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compromise their service quality, because a stop in the revenue generation of the
production by the project object in most cases far outweighs the incremental supply
cost. I.e. the service quality in operation should strive for a 100% service degree.
6.3 PSCM – Concept and Definition
The characteristics of project supply chain management outlined above show that we
have a project supply chain that is built up of one branch for the project object
development and another branch for the project object operations. Seen as one, these
two project supply chain branches constitute the entity that shall make the project as a
business opportunity competitive.
6.3.1 Project Supply Chain Management – The Concept
Project supply chain management is a concept, i.e. ‘a word or phrase used in
propositions to describe real world relationships’, being ‘neither true nor false, only
more or less useful’. The basis for the project supply chain management concept has
been laid in the previous parts and chapters of this thesis. Table 6.3 lists the “building
blocks” for the PSCM concept as it has been developed this far.
Table 6.3. The building blocks of the PSCM concept.
“Building block” Contribution
Ch.3 Projects and Project
Management
A value enhancement focus for a business opportunity.
The ‘openness’ of project development – uncertainty and degrees of
freedom with respect to what’s and how’s; The basis of agility.
The project lifecycle – starting with the front end, ending with the end of
operations; Taking the whole life of the business opportunity into account.
Strategies and routes are different; Being aware of the underlying
characteristics and choices.
Ch. 4 Logistics and
Supply Chain
Management
Alignment of supply and demand in an inter-organisational chain
perspective – demand and supply chain management.
Lean – Adding value through removing waste (cost efficient).
Agile – Adding value through pursuing opportunities (cost effective).
Ch.5 The Project Supply
Chain Challenge
The business context – competitiveness as the underlying driver.
The challenges of the oil and gas supply chain – value enhancement
through technology and execution models, measured in cost, income and
time.
Ch. 6.2.1 The Principles
of PSCM
The project as the business opportunity.
The supply chain as the competitive entity.
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Alignment of supply and demand for competitiveness.
Ch.6.2.2/3 The
Characteristics of PSCM
Agile and resilient demand chain management in the development phase.
Lean and robust supply chain management in the operations phase.
The building blocks of the PSCM concept start with discussions of projects and project
management outlined in chapter three. Projects are ‘open’, they have inherent
uncertainty and complexity, as well as degrees of freedom, both in scope and the
organisational construction developed to undertake it. The uncertainty is reflected with
respect to what to do and how to do it, and that has to be defined and decided on in the
project front end, to have the right basis and approach for managing it through the
execution part of the development phase. The supply chain actors are important in this,
and has to be brought into the extended project organisation, or the project supply chain
at an appropriate point in time. Therefore, projects of the type addressed here are not
‘rushed into’, i.e. they comprise a front end in their lifecycle that shall both secure the
business basis for realising the project, as well as preparing for both the execution part
of developments, and the operations and continuous development of the project object
and the project. We questioned whether a value enhancement approach to project
management was in place, and which perspectives that are necessary for such a
perspective to gain foothold. How a value enhancement perspective is approached is
dependent on the level of ambition, or needed ambition e.g. due to competitive
pressures, among the project’s owners and stakeholders. This again have to be reflected
in the project strategy, and will have an impact on the approach to and the construction,
selection of actors to and development of the project supply chain, through the
contracting, procurement and operations strategy. When these strategies is laid, this
again will have impact on the routes that is to be followed through the project execution
phase.
The development of logistics has brought the logistics concepts to the inter-
organisational domain, with the demand/supply chains as the competitive entity. There
is a distinction in the use of the terms supply chain versus demand chain that should be
clear as they have their distinct roles in value enhancement processes. The logistics
objective is alignment of supply and demand through the inter-organisational demand
and supply chains. The project inherent uncertainty with respect to ‘what’s’ and ‘how’s’
will influence the logistics uncertainty in that the demand processes is influenced by the
degree of uncertainty in what’s and uncertainty in the supply processes is influenced by
the degree of uncertainty in how’s. We also found the concepts agile and lean from the
manufacturing domain. These concepts created a background for two different
‘manufacturing’ contexts. The first, agile, aimed at the context of temporary business
opportunities that need several companies connecting together to be able to exploit the
temporary business opportunity. The other one, lean is aimed at continuous
improvements in an inter-organisational setting of repetitive operations. The agile
concept with strong similarities to a project’s development phase, and the lean concept
with strong similarities to a project’s operations phase.
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In the project business context we saw that competitiveness is driven by macro forces,
demanding competitiveness to be developed through demand/supply chain
constructions that compete against other demand/supply chains. Each company have to
take their role and contribution as a chain actor into account in developing their own
competitive strengths and capabilities related to organisational issues.
Drawing all this together we came up with the principles of project supply chain
management. The project as the business opportunity, with a value enhancement focus
and approach, playing with the uncertainties of the project in a proactive management
approach that seeks to develop the opportunities and control the risks. The project
supply chains constitute the competitive entity that shall undertake the project,
throughout its lifecycle, and it is through the project supply chains that one are able to
enhance the value of the project. The project supply chain play on utilising the logistics
supply and demand alignment objective in searching for value in and through the
project object.
The characteristics of project supply chain management have their root in agile demand
chain management in the development phase and lean supply chain management in the
operations phase. As such the concept of project supply chain management take the
openness and uncertainty of the project development context, with respect to ‘what’s’
and ‘how’s’, through to dealing with uncertainty in the logistics perspective related to
demand and supply aspects, i.e. we have a situation in need of agile qualities. Bringing
the project’s openness towards a closed state through the development phase, to the
operations phase that are ‘closed’, but with defined degrees of freedom to exploit further
opportunities (through modifications), developed through lean approaches to value
enhancement. This again has to be seen in the project chain construct, as it is the project
chain that is the developing, executing and operating entity of the project and the project
object. We then have the project supply chain management concept as given in Table
6.4;
Table 6.4. The PSCM concept.
Principles Characteristics
The project as the business
opportunity
Development Operations
The supply chain as the
competitive entity
One-of-a-kind Repetitive
Demand chain management Supply Chain Management
Agile Lean
Competitiveness through
logistics and supply chain
management, focused on
alignment of supply and demand
in the project context
Resilient Robust
We then have a logistics and supply chain management concept that ‘obey’ the logistics
objectives of supply/demand alignment. That takes account of the specialities of the
project context’s development and operations phases, and is aimed at value
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enhancement for the project as a business opportunity realised through the project
supply chain as a competitive entity throughout the lifecycle of the project. That is the
concept of project supply chain management.
6.3.2 Project Supply Chain Management – A Definition
To make up a new concept a definition is often needed to communicate with
stakeholders within the different domains, both theoretically and practically.
The definition of project supply chain management as it is defined in this thesis is;
Project supply chain management seeks value
enhancement in projects through logistics’ focus on
demand and supply alignment. This is met through the
characteristics of logistics throughout the project life
cycle with an agile approach to demand chain
management in the development phase and a lean
approach to supply chain management in the operations
phase. Thereby meeting the need for value enhancement
through engineering and the supply chains contribution in
developing demand for the project object, and creating
value through cost efficiency in the operations supply
chains.
Why then may we say that PSCM is an important new approach? Logistics and supply
chain management is already taking place in the oil and gas industry. As the quote from
Goldman (1995) in the introduction to this chapter stated; ‘As with almost all
innovations, implementation precedes understanding’. To answer the question we
therefore have to go back to what was stated in the Norwegian Public Study (NOU
1988) also referred to in the introduction; ‘New facts need system knowledge. … Shortly
said: the basic theoretical foundations of learning is vital both for the interpretation of
new information and as a guide to direct the search for new facts’. Project supply chain
management is happening today. However, to further develop supply chain
management in the project context of the oil and gas industry, there is a need to lay out
what should be the core guidelines for this development, where to seek new knowledge
for improving. This is what the development of the PSCM concept is one contribution
to.
Above we have outlined project supply chain management as a concept that meets the
characteristics that logistics and supply chain management sets in aligning supply with
demand in the project context of developing and operating a project object, to enhance
the value of the project as a business opportunity. Project supply chain management is
as a concept not viable unless it is supported by structures that may help to put it into
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practical use. The next chapter aim to do that, in outlining methodological guidelines
along the line of the PSCM concept.
7 Methodological Guideline for PSCM Analysis
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7.1 Introduction
What is the intention with methodological guidelines for supply chains? It shall be a
guide to address the questions that is important with respect to the context and the
characteristics of the supply chains that are approached, as well as the mission of those
supply chains. When approaching project-oriented supply chains one have to take both
the specific context of the project as well as the supply chain approach into account.
Methodological guidelines for analysis of supply chains are as such both of general
character, to be applied in a variety of contexts, as well as of specific character,
developed and aimed for use within a specific context.
This chapter outlines a methodological guideline for project supply chain management,
PSCM. The emphasis is put on describing elements and aspects that should be part of
PSCM for the development and the operations phase. The description does not aim to be
exhaustive or complete, but aim to address a set of elements and aspects that we regard
to be important following the concept presented in this thesis. Methodological
developments within project management and logistics and supply chain management
has also been commented upon by authors representing management professionals and
academics.
’The methodology used is actually much more important than which technique is used. Methodology is
defined as ‘the system of methods and principles used in a particular discipline’ and methodical is defined
as ‘characterised by method and orderliness: systematic’. Both are required in the planning and control of
projects, and they are independent of the techniques used. Methodology is concerned with how you go
about planning and controlling a project in a systematic manner, that is, the process rather than the
ingredients’ (Harrison 1992, p.105).
Commenting on the future research topics and areas within supply chain management,
Lambert et al. states the following;
‘A top priority should be research to develop a normative model that can guide managers in the effort to
develop and manage their supply chains’ (Lambert et al. 1998, p.14).
The methodological guideline developed here is an attempt to ‘guide managers in the
effort to develop and manage their supply chains’ in the project context. Then, how
shall methodology and guideline be understood in this chapter? Methodology and
guideline shall be seen in relation to the two definitions below;
‘A methodology is a kind of "coaching" -- not a formula for producing a result, but a set of practices that
can lead to appropriate questioning and to appropriate change’
57
.
‘Guideline; a rule or principle that provides guidance to appropriate behaviour’.
57
Web Dictionary of Cybernetics and Systems, http://pespmc1.vub.ac.be/ASC/Methodology.html
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Methodological guidelines should as such meet the aim of the future research proposals
set out by Lambert et al. to ‘guide managers in the effort to develop and manage their
supply chains’, in this case in the project context.
Given that a project’s supply network is not fully developed the methodological
guidelines should help to build an understanding of important aspects to address up-
front. The methodological guidelines should as well be of help in the process of
developing and analysing the supply network and processes that will be activated when
the development and operations phases of the project starts. As such the methodological
guidelines for PSCM analysis should be regarded as a central part of ‘front end
loading’
58
of a project. The methodology should take the life cycle approach to the
project, comprising demand/supply chains for the development and operations phase.
The approach should be characterised by a pre rather than a post analysis.
In itself a supply chain analysis may bring forward new knowledge, or present
knowledge in a new way for actors involved in the supply chain. In another research
project (Schneider et al. 1994) they refer to the benefits that were achieved through
applying a supply chain analysis methodology within the network of part suppliers for
car manufacturing, as well as for after-sale support of the cars manufactured;
‘Application of the supply chain methodology has provided the following results to user companies:
- The identification of a mismatch of strategy between the chain players.
- The recognition that measures of performance in the chain conflicted with satisfaction of end
customers.
- Appreciation of the lack of knowledge of chain players about activities occurring elsewhere in the
chain that could have yielded business benefits.
- Better understanding of customer requirements further upstream in the supply chain.
- Recognition that certain replenishment policies caused distortion of true requirements.
- The appreciation that, in some cases, different routes were required for materials, order information,
technical support and end customer feedback’ (Schneider et al. 1994, p.151).
To explore what stakeholders from the industry itself felt about the need for a
methodology for approaching the supply chains of the project in development and
operations, the project director of a development project stated his wishes with respect
to a ‘model’ related to PSCM as;
- ‘A simple model or concept for demand/supply chain management in a project.
- To be applied in the front-end of the project.
- A ‘tool’ that shows the whole value or demand/supply chain in one, that gives a ‘total overview’.
- A structural approach: Understand and present the whole structure, given inherent uncertainty.
58
‘Front end loading’ is a concept that comprises the activities to secure that all elements necessary to
explore up-front of a project is necessarily researched and defined to secure a good project development
basis.
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- Focus to understand the totality, not advanced details.
- A proactive approach – where are the critical elements or areas?
- I.e., a project management tool with a demand/supply chain approach, that is not too advanced, but
that address overview, understanding, and guidance.’
Based on these remarks and discussions with a logistics advisor in a petroleum
company, we decided that the following list of items should be addressed as part of
developing knowledge that could be useful for supply chain management in the project
context;
1. An ‘ideology’, for SCM in the project context, should be established as a basis.
2. The ideology should derive five core aspects that specifically characterises SCM in the project
context, or PSCM, i.e. the five most descriptive factors for PSCM.
3. Which demands do these five characteristics describe for methodological guidelines for analysis of
PSCM?
4. Should the methodology be applicable for all types of supply chains, i.e. development and
construction (substructure/hull, topside), sub-sea, modifications, drilling, and operations?
5. Supply chains versus project phases – the methodology must cover and determine supply chain
management activities in each project phase.
6. How to use the methodological guidelines to make PSCM activities become part of the project
processes at the correct time?
The two first points were addressed through the PSCM principles, characteristics and
concept outlined in chapter six. Then, the third point is addressed in the development of
the methodological guidelines. Point number four has been discussed throughout this
thesis and comply with the concept and principles of PSCM, in focusing on the project
as a business opportunity comprising both development and operations, but without
giving to much emphasis on specific areas as e.g. type of construction, sub-sea or
drilling. The fifth and sixth point is then discussed in sub-chapter 7.2. However, the
guideline is developed to follow the lifecycle of a project, though the methodology will
not go more specifically into the project phases than the split between development and
operations.
7.2 Methodological Guidelines for PSCM Analysis
The PSCM methodological guidelines are intended for project-specific use. This means
that e.g. compared to CRINE Network’s SCM methodology, this one is not meant for
general supply chain improvements per se, but meant as part of ‘front-end loading’ of a
project. Compared to CRINE’s methodology we may say that CRINE has a general
supply chain improvement focus, and that this PSCM methodology should have a
project management emphasis, but from the side of logistics and the supply chain.
This PSCM methodological guideline is built up of nine basic steps, as illustrated in
figure 7.1. Figure 7.1 shows the process flow, as well as the impact from one step on
other steps of the guideline.
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1. Establish project vision
and definition
5. Develop project
supply chain strategy
8. Preparation for and start-up
of the operations supply-chain
2. Clarify project development
and operations alternatives
4. Analyse the
demand/supply networks
9. Re-configure and improve
the operations supply chain
7. Activate and execute
the project development
supply chain
6. Select project development
and operations alternative
Project related
Project supply chain related
Order of methodology
Impacts
Selection point
3. Analyse the market
1. Establish project vision
and definition
5. Develop project
supply chain strategy
8. Preparation for and start-up
of the operations supply-chain
2. Clarify project development
and operations alternatives
4. Analyse the
demand/supply networks
9. Re-configure and improve
the operations supply chain
7. Activate and execute
the project development
supply chain
6. Select project development
and operations alternative
Project related
Project supply chain related
Order of methodology
Impacts
Selection point
Project related
Project supply chain related
Order of methodology
Impacts
Selection point
3. Analyse the market
Figure 7.1. The outline of the PSCM methodological guideline.
Each of the nine steps of the methodological guideline is described further below.
However, before we start a comment should be given to the process of the guideline
itself. The methodological guideline consists of steps that are both related to the project
itself, as well as specifically to the project supply chain. Step number one, two and six
are related to the project itself, in developing the project strategy and vision, and
evaluating and selecting the project development and operations alternative. Step three
and four are then related to general analysis of the market, as well as analysis of the
demand and supply chain constructions necessary or available for the different project
development and operations concepts. Step five is development of the supply chain
strategy. However, step five should be seen as done in parallel and as part of the
definition and selection of the project development and operations concept. As such
steps two, three and four, should be done iteratively with step five. That means that the
project vision and definition, the analysis of the project development and operations
alternatives, together with the analysis of the market, and the demand/supply chain
constructions, should be the basis for an iterative evaluation and selection of project
supply chain strategy. The results of step three, four and five, together with step one and
two are the basis for selecting the project development and operations concept in step
six. Then, in step seven the project supply chain is activated as part of the extended
project organisation. It is here necessary with a comment to the supply chain’s
involvement in the process prior to step seven. Often several ‘supply chains’ are
involved in the development and analysis of alternative project development and
operations concept. This may be seen as part of step two, where the ‘supply chains’
related to the different concepts take part in developing and analysing the concepts
together with the project owner(s). Then in parallel to the different (and alternative)
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supply chains taking part in developing alternative project development and operations
alternatives, the project owner(s) and/or operator internally analyse the market and the
demand/supply networks related to the alternative concepts. Then in step six, one of the
project development and operations concepts are chosen. Then with the project supply
chain strategy developed concurrently, the demand/supply chain related to the chosen
development and operation concept are selected and activated, and made able to start
executing the project development. With the project object development taking place,
one has to start preparing the operations of the project object. That is the objective of
step eight and nine. Step eight prepares and establishes the operations supply chain,
while step nine cover the continuous improvement and re-configuration of the
operations supply chain. The shut-down and removal of the installation is not covered.
1 Establish project vision and definition
Up front of the project it is important to establish a ‘problem statement’ for the project,
to be used as a unifying element for the project supply chain. The ‘vision’ should be a
guide for the project development and as such be in accordance with the project
strategy.
2 Clarify project development and operations alternatives
The project could be developed and operated based on a portfolio of different
technological and organisational concepts. It is therefore important to establish an
overview of those alternatives, so that comparative analyses may be done among them
for later selection of the best alternative for the project.
3 Analyse the market
This is a collection of activities that should take place project independently, as a
normal part of supply chain evaluation and improvements.
4 Analyse the demand/supply networks
The demand and supply chains for the different alternatives in step two has to be
mapped and analysed to be able to evaluate their comparative advantages.
5 Develop project supply chain strategy
Here the supply chain strategy for the development and the operations phase of the
project should be established and documented. An agile and resilient demand chain
strategy for the development phase, and a lean and robust supply chain strategy for the
operations phase, that supports and leverages the chosen development and operations
concept.
6 Select alternative for project development and operation
This is a selection point, where the outcome is a selected concept for development and
operations of the project and the project object.
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7 Activate and execute the project supply chain
This is where the project supply chain is selected, then activate and execute the
development of the project object. The focus is now on the logistics and materials
management involved in development and execution.
8 Preparation for and start-up of operations supply chain
Up-front of commissioning and start-up of operations the operations supply chains must
be developed and activated. This must take both the requirements of the project object,
as well as the opportunities for use of existing infrastructure and supply chains, and
collaboration with other offshore installations.
9 Re-configure and improve operations supply chain
The project object offshore is seldom operating as the only installation being supplied.
There is most often a portfolio of installations and the supply need of this portfolio of
installations will change over time. To get the best cost/service position for the supply
chain, it therefore has to be re-configured according to changes in the supply
requirements.
Throughout the methodology the project atlas is used as a common denominator for
bridging the steps of the methodology. Through the project atlas we show for each step
which elements within the project atlas that is in focus, and how the project supply
chain link to this.
7.2.1 Establish project vision and definition
The first stage in a project is to establish and define the business opportunity as a
project, a unique business opportunity, in need of inter-organisational capacities and
capabilities to be able to realise it. This could be regarded as a definition of a ‘problem
statement’, i.e. the project to be solved. The project is a business opportunity for both
the owner(s) as well as the companies in the project supply chain, and the problem
statement will as such have implications for both those two groups of stakeholders.
Closed Open
What?
How?
i
ii
iii
Closed Open
What?
How?
Closed Open
What?
How?
Closed Open
What?
How?
i
ii
iii
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.2. The starting point of the business opportunity.
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In the project atlas, the “project”
59
owner are in the ’open’ end, able to choose whether
to go for the potential business opportunity, and develop it into a project, or not, i.e
invest his financial means in another opportunity. If the owner chooses to start
developing the business opportunity further he may choose among several alternative
routes. He may either (i) seek a radical change, e.g. utilising new, innovative technology
not used before, (ii) go for a continuous development approach, e.g. well known
technology, but a novel approach to project execution processes, or (iii) seek to ‘copy’
both the technology and project execution processes of an earlier, successful project.
Whatever the owner chooses, if he want to develop the opportunity into a project he
needs to establish and communicate the vision of the business case, as well as develop
and define the business case.
Project vision and concept
The project vision may be regarded as the problem statement of the business case that
the project owner(s) have developed for the potential business opportunity. The vision
should communicate; What is the business case, and what is needed from those involved
in developing it for it to become a business opportunity?
An ‘instrument’ that originated in and is used with success in the movie industry is the
‘High Concept’. The ‘High Concept’ was developed with the purpose of being the
bearer and communicator of the ‘vision’ of a movie as a tool for aligning and focusing
the supply chain around the movie’s objective and ‘message’ to the customers.
‘A high concept film is one that is based on a succinct and detailed description of the product, including
all features of the product that would be valued by the customer’ (Goranson 1999, p.40).
The method/technique of the ‘high concept’ was developed in the movie industry after
the movie enterprises in the United States were broken up due to antitrust concerns in
the late 1930’s. The ‘High Concept’ evolved to understand and deal with the customer
after the prior connection was broken, due to the break-up of the vertical integration in
the movie enterprises that included the theatres and the customer contact
60
. When the
period with the vertically integrated movie enterprises ended, a system known as the
‘packet unit system’ developed. This system was based on establishing a unique
collection of companies to produce each movie. It may be regarded much like a project,
with a prime contractor (the production company) that identifies the market need,
establishes the plan and intellectual property that states that need, arranges financing
etc, and then the necessary production assets are owned by many small companies that
are assembled to produce a film. The ‘high concept’ is then;
59
”Project” is put in brackets as the potential business opportunity it is still not defined as a project.
60
The movie industry in the United States of the nineteen thirties was configured much like the present
car and aerospace industries. The market was dominated by a few large stable companies, deeply
vertically integrated, including control of distribution through ownership of the theatres. Due to intense
competition among the movie enterprises, they developed and applied what today is known as lean
principles and practices; flat organisations, pre-qualified suppliers, and versions of just-in-time practices
(Goranson 1999).
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‘… so named because it ties all elements across these media [theatre, TV, video, domestic and foreign
distribution] and all elements within the product (story, stars, and such) into one clear statement of
philosophy and style. … The underlying assumption is that the customer can be tersely, understandably,
and logically characterised; that is modelled. That understanding, however broad and involved, has a
simple core, which by itself covers all the important elements of the project. … The notion of High
Concept is thoroughly studied in film schools, and consistently practiced by producers, who are
organisers of the virtual enterprise. It is also considered difficult to master’ (Goranson 1999, p.40).
The methods and techniques concerning the ‘High Concept’ are something that could be
beneficial as a source of new knowledge for the traditional project industries, and
especially for seeking to find something that may be used to focus and align, on a high
level, the project demand and supply chain.
Some important aspects to remember about the use of High Concept like approaches in
establishing a vision (derived from Goranson 1999);
Success on a film, including keeping costs low, depends heavily on everyone having the same idea of
style and purpose of the product.
A way to build and establish a clear definition of the business opportunity, where the strategy
anticipates to address the business opportunity, and the ersatz corporate culture of the virtual
enterprise [or the extended project organisation/supply chain].
A way of modelling the customer’s need/desires; managing constraints, and coordinating a coherent,
understandable approach.
A description of a strategy to reach customers in terms of understandable to the customers, which the
producers use to form a profitable link with the customers.
A High Concept description should be succinct.
A High Concept description almost always builds in prior experience.
Familiarity with the precedents is culturally necessary for membership in the community.
High Concept is composed by agents.
Agents are evaluated based on their experience with and understanding of elements in the High
Concept.
Trust is relative and High Concept gives a calibrating foreground against which trusted agents can be
evaluated.
Goranson (1999, pp.43-44) summarises his discussion about the ‘High Concept’ to
develop agile virtual enterprises, AVE’s, or agile supply chains, into three AVE
principles;
You must have a robust system of agents that autonomously act to configure and optimise their
system, not because you so direct them, but because they are acting in their own best interest.
You must have a way of providing a common goal to the diverse agents so that their efforts optimally
converge on what you want, and what the customer needs. So far, we’ve been calling that High
Concept, but a better term is feature-based modelling.
You must have a way for all the components of the enterprise to be rewarded and punished by
contracts, but you cannot rely on predefined, static business boundaries, nor expensive, static, old-
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style contracts. You need to be able to have fuzzy business boundaries, even perhaps having the
original corporate identities essentially vanish for the project. (Goranson 1999, p.44).
These lead to the principles underlying an agile virtual enterprise, of which the ‘High
Concept’ is one of the principles.
Table 7.1. The principles of an agile virtual enterprise (Goranson 1999).
Agents to certify and indemnify Lightweight contracts
A coordinating mechanism
(High Concept)
Trust
Now we have presented a concept that have a high level bearing in establishing a good
basis for an extended project organisation, that is focused towards developing a project
aimed at the project as a business case for the owner, and to focus and lock-in the
project demand and supply chains accordingly. Then, based on this high-level vision,
we have to define the project more formally.
Project definition
Following up on the approach to establishing a vision for the project along the lines of
the High Concept presented above, a more formal definition of the objectives of the
project is in place. The ACTIVE initiative, Achieving Competitiveness Through
Innovation and Value Enhancement, in the British construction industry, states that
project definition is;
‘Project definition: The need to articulate, test and communicate the commercial, technical and regulatory
objectives of a project. … A project will only meet the owner’s business requirements and deliver cost
effective solutions if the objectives, scope and the basis for performing the work are explicitly defined
with a clear success criteria articulated. It is important that this process should be completed before the
execution phase of the project’ (ACTIVE 1998, VEP 1.2).
ACTIVE further states the following essential activities that need to be undertaken to
during project definition;
‘Establish and define the project’s objectives, based upon the business case made for the project by
the project owner, rigorously test project assumptions and review their options.
Clearly define the boundaries of the project.
Develop and test the scope of the project in sufficient detail to assess technical and commercial
feasibility.
Develop and define the strategy for executing the project.’ (ACTIVE 1998, VEP 1.2)
In more detail that cover the whole project team and project supply chain, i.e:
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‘In order to ensure that the subsequent project definition and development of an execution strategy are
focused on meeting the requirements of a project in full, a detailed statement which clearly explains the
key business drivers, project objectives and potential constraints and variables is required for
communication throughout the project team. The key success factors of the project owner should be
stated openly to all participants. The key measures of success must be clear prior to the start of any
design, procurement, construction or other activity. Typical project parameters which must be clearly
understood before definition proceeds include:
The key programme requirements including key events, milestones and any interdependencies
Key supply chain relationship requirements
Constraints on cost
Broad scope of project in terms of functionality and operability, defining inclusions and exclusions
External factors which may impact on the project
Key technologies which will be employed
Product quality output targets
Design standards
Safety, health and environmental requirements
Availability and reliability requirements for plant operating at design capacity
Without definition or appreciation of these parameters at the outset of the work, difficulties and
inefficiencies will be encountered during project execution in relation to developing procurement
strategies, resource plans, mobilisation plans, arrangements with vendors and subcontractors, and other
activities which can directly influence the outcome of the project (ACTIVE 1998, VEP 1.2).
‘For supply chain partners working with the project owner, a statement of the boundaries for the project is
essential for the accurate determination of scopes of work, budgets, programmes, liabilities, and
recognition of interdependencies’ (ACTIVE 1998, VEP 1.2).
One may ask whether the notion building a business case vision like a High Concept for
a project is just of theoretical interest, or whether one may find examples that show that
such constructions, or similar, are used. In the Cleeton project British Petroleum gave a
set of key success criteria as the vision or guideline for the project supply chains to
develop the business opportunity towards;
‘In essence all that was said was that BP would like to have Front End Engineering and Design for a
compressor platform and these are the Key Success Factors we wish you to address; Safety, Capital
Expenditure, First Gas Date, Availability, Constructability (later incorporated within Capital
Expenditures), Fitness for Purpose (life cycle based assessment), Operations Interface (making most
effective use of the existing operations team), and External Opportunities (flexibility to incorporate the
addition of new gas reception options). … [BP requested] just to demonstrate how these factors would be
met, what rates would be charged, and, importantly, who would be performing the work. … In best
practice terms these Key Success Factors clearly defined the objectives of the project’ (Harrison et al
1996, pp.1-2).
BP’s key success criteria, may not directly be seen as a High Concept like vision, but
follows many of the same underlying drivers of the High Concept, as well as meet e.g.
the requirements set by ACTIVE for good definition of the project.
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One may also say that the drive that came with the CRINE and NORSOK initiatives
acted as a top-level ‘High Concept’. The vision was aimed at the industry as a whole,
leaving more or less a ‘mass suggestive’ effect. As such that ‘High Concept’ worked
well, with respect to uniting the whole industry.
Further readings;
Goranson (1999); Chapters 1-5, 7.
Vollmann et al. (1995). Article.
Harrison et al (1996). Article.
Active (1998). Section 3, AP1, VEP 1.2, and 1.3.
EPCI (1999). Presentation; ‘Front End Opportunities’.
7.2.2 Clarify project development and operations alternatives.
The basis for developing the project is the project vision and definition. These are the
frames and references that shall guide the project owner(s)’s internal team, as well as
the supply chain that take place in developing the alternative project development and
operations concepts. In the project atlas one is now in the position of how the open
business opportunity shall be realised, and brought into a closed operation position. The
question is how to best close the open opportunity, enhancing most value out of the
opportunity, at the same time remaining openness and flexibility to deal with the
inherent uncertainty of the development process.
Closed Open
What?
How?
i
ii
iii
Closed Open
What?
How?
i
ii
iii
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.3. Alternative routes and states in project development and operations.
Harrison (1995) presents a decision making process consisting of six steps, where steps
two and three are related to searching for and comparing and evaluating alternatives;
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2. Searching for alternatives. In the decision making process, search involves scanning the internal
and external environments of the organisation for information. Relevant information is
formulated into alternatives that seem likely to fulfil the objectives.
3. Comparing and evaluating alternatives. Alternatives represent various courses of action that
singly or in combination help attain the objectives. By formal and informal means alternatives
are compared based on the certainty or uncertainty of cause-and-effect relationships and the
preferences of the decision maker for various probabilistic outcomes’ (Harrison 1995, pp. 37-8).
Closed
i
ii
iii Closed
i
ii
iii
Status Quo Status Quo
Figure 7.4. Different positions for the operations alternatives.
In the project atlas above, we have one end point for the project development in the
operations phase (closed segment). This may not be the case, as each alternative
(‘route’) may end up in different positions with respect to remaining openness in
operations, e.g. additional infrastructure (deck space available, weight resources) to take
later extensions and/or modifications of the project object into account, and/or
additional processing capacity to cover ‘adding on’ e.g. new sub-sea developments. In
figure 7.4. we have shown this by letting the alternatives i, ii and iii end up in different
‘positions’.
Comparative value analysis of alternatives
The main criteria for evaluation of a set of development and operation alternatives in
these types of projects is the commercial value enhancement the project owners obtain
by the different alternatives, corrected for the inherent risk profile of each alternative.
The net present value, NPV, criterion is a measure for this. Another criteria are the
social economics measures that the national government is seeking through the project.
We will leave the latter out of the discussion, except for commenting that it is a part of
the evaluation of the project’s plan for development and operations, PDO, when handed
over to the government by the project owners.
ACTIVE (1998) has defined the value analysis process to consist of two stages, value
planning and value engineering;
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‘The value analysis process comprises two broad stages. The first stage, known as value planning, seeks
to verify the critical performance objectives that must be met and then identify conceptual options that
best meet them. Once a broad option has been selected, value engineering then aims to optimise capital
efficiency by seeking design solutions which maximise benefit (both in financial and non-financial terms)
while minimising through-life costs. Value engineering is more technical and takes place during design
development when sufficient information is available to compare different solutions to the project's
functional objectives’ (ACTIVE 1998, VEP 1.2).
The purpose and benefit of the value analysis process is by ACTIVE said to be;
‘Value analysis is a value enhancing process for analysing systems, equipment, facilities, services and
supplies with the aim of achieving the essential functions of a facility at the lowest life cycle or through-
life cost. While cost reduction is the primary goal, the functions of the facility must meet the required
performance and standards of quality and safety. The value analysis process is used to identify alternative
design solutions or strategies using numerical models to compare through-life costs and benefits, and to
assess the optimum level of capital efficiency. In this way, informed and objective decisions may be made
regarding alternative development options and the provision of facilities which maximise value. It must
be recognised that the potential for improving long term value reduces as the project proceeds through its
life cycle and hence the value analysis technique is most effective when applied during the definition
stage of projects. Nevertheless there is benefit to be gained by applying the process at other stages of the
project life cycle’ (ACTIVE 1998, VEP 1.2).
ACTIVE states the following as essential activities of the value analysis;
‘Establish performance requirements and project objectives
These should include financial and non-financial parameters, for example costs and revenue data,
schedule and resource constraints, and targets for reliability, availability, safety and environmental
performance of the facility.
Identify the options and assess life cycle costs
Determine which options are likely to achieve the project's goals and measure their relative value by
assessing benefits and technical performance against whole life costs and risks. Select the options which
present the optimum value.
Seek continuous improvement
As the project progresses, effort should be made to improve the selected options by continuously
comparing functional requirements against objectives’ (ACTIVE 1998, VEP 1.2).
For our approach, we may say that there is a three stage value analysis and evaluation
process;
1. Static net present value, as presented in ACTIVE’s approach.
2. Value of flexibility – seeking the options and analyse how their use may be
optimised actively throughout the project development phase.
3. Flexible or agile demand chain management – which is the result when this
process is brought into the scope of work development.
Initially, some form of a static net present value analysis is made for each alternative for
development and operation of the project and the project object. This could e.g. result in
a comparison as given in table 7.2.
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Table 7.2. Representation of static net present value measure per alternative.
Alt. 1 Alt. 2 Alt. 3 …
Project income PI1 PI2 PI3 Risk impact
adjusted
Project costs LCC1 LCC2 LCC3
Time impact
adjustments
Static NPV measure NPV 1 NPV 2 NPV 3 …
The cost side of the project value equation is made up of costs covering the whole life
cycle of the project. As rough overview of such costs are given in table 7.3.
Table 7.3. Important elements for life cycle costing.
Main group of costs Cost elements
Investment costs Design and engineering
CAPEX
Spare parts
Documentation
Logistics and transport
Stock-keeping at suppliers
Installation and commissioning Carry-over work
Operations and maintenance Preventive and corrective maintenance
Consumables (incl. spares)
Immediate maintenance / shut-down of operations
Repairs
Warehousing, logistics, transport
Other costs Cost of capital, financing
Abandonment costs
Environmental costs
Taxes, legal duties
Risk premiums
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The value of flexibility is an important aspect in value analyses of the alternative
development and operations alternatives. Trigeorgis (1997) presents the real options
concept and methods used as a tool in resource allocation, i.e. which possibilities shall a
company pursue given one or several possible routes. Route is used as a term to show
that the real options concept enables active management. Trigeorgis says that;
‘[This] calls for an expanded or strategic investment criterion, reflecting both value components: the
traditional (or static) NPV of direct cash flows and the option value of operating flexibility and strategic
interaction’ (Trigeorgis 1997, p.4).
What is interesting here is operating flexibility as a strategic aspect, and how strategic
operating flexibility should be planned and prepared for in advance of development and
operations, and allocating and committing demand/supply chains to the project. It is
important to remember that it must be thought of in advance, and that this strategic
operating flexibility has a cost, i.e. an option price.
‘Many of these real options occur naturally; others may be planned or built in at some extra cost from the
outset (e.g., to expand capacity, or build growth opportunities, to default when investment is staged
sequentially, or to switch between alternative inputs or outputs)’ (op cit., p.4).
Trigeorgis lists a series of real options that could be used in a project development
analysis. The different options are options to defer, time-to-build options, options to
alter, options to abandon, option to switch, growth options, as well as multiple
interaction options of the ones mentioned. Below follows a description of how each of
the types of real options may be defined and understood as options to be used when
approaching the topic of project demand chain management. The options are listed as
they are presented in Trigeorgis (1997, pp.2-3).
An option to defer gives the holder the possibility to wait a certain time period before
making a decision, e.g., to choose between two emerging technologies.
Time-to-build options, or staged investments, may in this regard be seen as a series of
deliveries. The buyer has an option to abandon his interest in the development if he
means that it is not leading to the results he planned with, and may do so at predefined
milestones, i.e., maturity dates. This is an option to be used to be able to choose
between two or more emerging technologies.
Options to alter operating scale may be perceived as an option to buy more or less per
time period of, e.g., bulk materials, or may be used to alter the rate of production of an
equipment item so that it may be delivered earlier or later. This is as such an option to
make use of changes in the market, as well as gain flexibility in speeding up, or
postponing the project schedule. This option could be used for purchasing bulk
materials or pre-fabricated elements.
Option to abandon should in this respect be seen as flexibility to move away from a
given technology, when this is not leading to the wanted or promised goal, or it is
inferior to another available technology, e.g. in relation to one of the options above. It
could also be used for purchasing bulk materials (to secure the availability when
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needed), e.g. together with a futures contract to secure the possibility to sell the bulk
material that is not needed.
Option to switch is the possibility to move from one type of technology to another
technology, i.e. switch from one supplier of technology to another. This may be seen as
one of the options above, but undertaken after the main project has started, i.e. the
option is used during the construction of the project’s product.
Growth options may be seen as a pre-investment (the prerequisite) undertaken to secure
the ability, at a later point in time to be able to pursue a given possibility for ‘growth’.
With regard to project procurement this option could also be seen in relation to growth
in the scope of work or changes under construction of the project’s product. Growth
may not be due to added possibilities, but changes in the project may, or should, be due
to new and better possibilities. The growth option used for changes may as such be seen
as an option to switch.
Multiple interacting options where several of the above-mentioned options are used
together to make up a targeted, made-to-purpose option to enhance and secure
managerial flexibility. These purpose-made options may be constructed out of several
‘tools’ as long as they give added flexibility, and may be viewed and valued as options
related to procurement that give access to the underlying assets cash flow.
Scope of work development
Development of the project scope of work, SoW, is the main demand chain
management activity in the project. This is a ‘chain’ activity as it is based on interaction
between the operator, his direct supply chain relations, and contractor(s) and his (their)
supply chain relations. This is a process that should be given sufficient attention, and
where a question raised is better than a question not raised;
‘The most successful projects are those where the team has applied a rigorous process for reviewing
assumptions and assertions in the scoping exercise. Contractors and suppliers working in the project team
are sometimes reluctant to do this on the mistaken assumption that the 'client is always right' but much
value can be added at this stage by a questioning approach by the team. A good supplier at this stage
can often persuade the buyer to check within their own organisation on whether the proposed scoping
assumptions are secure. It has been traditional in the industry for operating companies to define
requirements for scope of supply in great detail, leaving little room for suppliers to develop ways of
meeting requirements more cost effectively. Functional specifications, where the buyer defines
functionality requirements but leaves the vendor to define how that functionality is achieved, has been
used to great effect within the offshore industry's CRINE initiative as a way of simplifying the
procurement process, encouraging innovation by suppliers and reducing overall costs. Where possible, it
is recommended that this functional approach should be adopted’ (ACTIVE 1998, VEP 1.2).
The scope of work development is started in the project front end, where the focus is on
balancing opportunities and risks. This was a topic in a workshop arranged by Epci, the
European Institute of Advanced Project and Contract Management. The summary of
that workshop is given in Appendix D. In summary the conclusions of the workshop is
given below;
‘The project front end is;
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balancing opportunities and risk;,exploring and acting on potentials, clarifying contextual
differences and implications, understand – focus – check.
getting the project beyond sanction points and up to “big spend; financial justification, technical
development (opportunity realisation), supply chain involvement.
enhancing the ability to master speed and flexibility in project execution; mental conflicts, classic to
generic model, decision making under uncertainty, and
enhancing the ability to reach or exceed an expected result; proactive front end planning, build on
experience, seek and understand current challenges, align challenges and means’.
Front end loading is an approach, or a collection of methods that may apply to secure
and improve the scope of work development process. Value improving practices are a
group of methods within front end loading, that may have a considerable contribution to
the value improvement of the project. Figure 7.5 show ten value improving practices
and their value impact in the project development life-cycle.
A question is then who should be responsible for controlling the front end loading of a
project, the operator or the contractor(s)? Table 7.4 show some results of a study
between projects where the operator or the contractor has been responsible for front-end
loading. The conclusion form the study is that the operator should control front end
loading, as that resulted in reduced cost growth, reduced cycle time, and improved
attainment.
R&D Front End Loading Detail Design Construction Start-up
Authorization
Technology selection
Process simplification (value analysis)
Classes of plant quality
Waste minimisation
Process reliability modelling
Minimum STDs & specs
Predicitive maintenance
Design-to-capacity
Value engineering
Constructability review timeframe
Time
Value
improvement
potential
R&D Front End Loading Detail Design Construction Start-up
Authorization
Technology selection
Process simplification (value analysis)
Classes of plant quality
Waste minimisation
Process reliability modelling
Minimum STDs & specs
Predicitive maintenance
Design-to-capacity
Value engineering
Constructability review timeframe
Time
Value
improvement
potential
Figure 7.5. Value improving practices (IPA, 1995).
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Table 7.4. Operator should control front end loading (IPA 1995).
Outcomes Contractor FEL projects Operator FEL projects
Cost growth from authorisation 60% 15%
Cycle time (FEL through start-up) 70 months 54 months
Time for start-up 11 months 7 months
Attainment in the second six months after
mechanical completion
41 percent of design 73 percent of design
However, although the operator should control front-end loading, the operator does
have an important responsibility in being clear in their definitions and requirements of
scope of work and interfaces with the project supply chain. This is important for the
demand and supply chain to be able to work and deliver within the functional
requirements given, and to meet the financial basis on which the project was sanctioned.
The basis for this is established through the project vision and definition, e.g. as
described above;
Companies must clearly define the scope of the goods and services to be procured as well as the
responsibilities of the contracting parties, including defining interfaces. Scoping will focus on defining
functional requirements, thereby encouraging innovative ways of meeting the performance criteria.
Successful contracts clearly define the roles and responsibilities of all the parties to the contract. Clarity
of the scope of supply (and also defining that which is not to be supplied) is crucial to effective
performance by suppliers. Problems with scoping often have their root cause in inadequate definition
within client organisations. Sometimes this is because the overall objectives for the project have not been
properly thought through and articulated by the client resulting in scope growth as the contract proceeds’
(ACTIVE VEP 3.1.8).
Dealing with innovations and technology development.
As was commented as a challenge in chapter five, the use of technology may prove to
be value enhancing for the project, though it may be a risky endeavour to go for
unproven technology, in stead of technology proven either within your organisation or
outside within the same industry. However, searching for new technology is in the long-
term perspective a necessity, and the use of it have to be part of the project decision
process or development concept.
Technology selection may be defined as (IPA 1995);
‘A formal, systematic process to search for process technology outside your site that may be superior to
that currently anticipated for your site.’
Although applying new technology is concerned with a considerable portion of
uncertainty, both with respect to ability to make it work and regarding the impact on the
project schedule if it does not work and alternatives have to be used, one should
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remember that the opportunity side of new technology is the driver for using new
technology. An illustration of the opportunity side is shown in table 7.5 below.
Table 7.5. Why is technology selection important? (IPA 1995).
Position of firm in its industry. Percent of current sales from products
introduced in the last five years.
Most successful in industry 49%
In top third of industry 34%
In middle third of industry 27%
In bottom third of industry 11%
However, technology selection and implementation has to be conducted wisely. As
table 7.6 shows, new technology could have a negative impact both on cost growth, the
start up time of the installation (thereby affecting the project schedule), as well as the
production regularity after production commences.
Table 7.6. Results of using conventional versus new technology (IPA 1995).
Conventional technology New technology
Cost growth 15% 33%
Start-up time 2 months 15 months
Production (6-12 months) 88% 53%
To be able to meet the challenges that new technology presents IPA (1995) proposes the
following list:
‘Identify technological advance correctly.
Good engineering will not overcome poor basic data.
Don’t short-cut piloting for processes were recycle streams or solids handling issues are involved.
FEL for new technology projects will take longer.
Start-up planning should begin during FEL.
Team continuity is essential‘ (IPA 1995).
Also the ACTIVE initiative for the British construction industry has addressed the
aspect of innovations and use of new technology in project development, and how the
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project supply chain may contribute in that respect. Their guidelines for ‘harnessing
innovations in the supply chain’ are;
‘Since most suppliers and contractors work across a number of operating companies, the supply chain
provides a rich, and often untapped, source of experience and knowledge which can be harnessed in
improving project performance. Whether this experience is available through improved products and
equipment or in the methods and processes of project delivery, early involvement of the supply chain at
the conceptual and definition stages of projects can often bring considerable benefit.
Unfortunately, many traditional working practices within the industry make it difficult to involve the
supply chain early in the project process. Operating companies have been reluctant to involve suppliers
and contractors at this early stage, fearing loss of confidentiality and prejudicing subsequent fixed price
tendering. Suppliers, on the other hand, are wary of putting forward innovative ideas through fear of lack
of protection of intellectual property and the concern that ideas generated at the pre-contract stage will not
be rewarded.
Much, however, can be done by adopting a different approach to supply chain relationships and many
traditional contractual practices can and must be challenged. Alliance and partnering arrangements make
it much easier to encourage the sharing of ideas between parties without loss of commercial protection.
Much more has yet to be done to define commercial arrangements which positively encourage an early
contribution from the supply chain. The increasing use of integrated project teams does much to foster the
introduction of new ideas to facilitate the achievement of project objectives. Within such teams, new
ideas need to be encouraged and properly rewarded while confidentiality and intellectual property rights
are upheld.
To encourage innovation, consideration should be given to different contractual arrangements, for
example:
At an early stage in the project, select a contractor or supplier on the basis of a paid study which
culminates in a priced tender. The vendor with the most innovative and cost effective proposal should
be rewarded with the contract.
Encourage innovation by linking payment of a fixed sum for bid costs against savings produced by
the vendor. The most attractive offer should win the contract but the other vendors could be paid a
proportion of the fixed bid sum in relation to their cost difference from the successful vendor.
At all phases of the supply chain cycle it is important that vendors are given positive incentives to be
creative and innovative in their proposals since there are often risks in innovation which can lead to
caution or conservatism on the part of the vendor.
For the buyer to benefit from an innovative approach there are issues of intellectual property ownership
and value which need to be protected if novel solutions and ideas are to be shared in the supply chain.
Confidentiality agreements are needed on both sides but this can be difficult at the pre-contract stage
where sometimes the novel approach of one bidder is shared, to his disadvantage, with other competitors
in the bid process. This practice, besides being unethical, stifles innovation and leads to
uncompetitiveness. A way of dealing with this is for the parties to define some form of agreement which
will protect the bidders position. For example, vendors might be rewarded for innovation by retaining
ownership of intellectual property in exchange for the buyer's free and unrestricted use of the innovation’
(ACTIVE 1998, VEP 6.2).
Further readings;
Active (1998). Section 3, VEP 1.4, 1.7, 7.4.
CRINE Network (1999); Chapter 7.
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Harrison (1995).
IPA (1995). Presentation.
Lund (1997). Dr.ing. thesis.
Mikulski, 1993.
Stukhart (1995). Chapter 7.3.
Trigeorgis (1997). Chapter 1–5, 7 and 11.
7.2.3 Analyse the market.
Independent of project activities one have to know what the market has to offer, how we
are able to benefit from the market, and how we are able to realise the market’s
offerings? In the project atlas this is about how the market may be of help in realising a
potential business opportunity, i.e. the market’s opportunities to close the space in
between open and closed projects.
Closed Open
What?
How?
i
ii
iii
Closed Open
What?
How?
i
ii
iii
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.6. The opportunities in the market to realise an opportunity.
Many logistics and purchasing factors are project independent, aimed at research and
preparation. Silver (1986) proposes the following list of such factors.
i) ‘General information on commodity lead times and costs (including trends)
ii) Supply sources with associated lead times
iii) Quality and capacity surveys of manufacturing facilities
iv) Development of new sources of supply
v) Information on new equipment and materials’.
In this part we rely mostly on CRINE Network’s supply chain (CRINE 1999-B)
methodology and their section about analysing the market. We have summarised
CRINE’s focus into a matrix, presented in table 7.7.
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Table 7.7. CRINE Network’s SCM methodology – analyse the market.
Understand company’s position Best practice.
Existing dimensions and future trends.
Industry competition – forces driving
competition in the supply market
The provider’s position.
Sources of supply/sourcing options
Provider capability mapping.
Industry mapping
Benchmarking.
CRINE has split the market analysis into two categories, first understanding the
company’s position versus the market, secondly understanding the company’s and the
market actor’s maturity with respect to supply chain management best practices.
In the first category it is first of all necessary to understand the existing market
dimensions of a particular goods or service, as well as future and current trends in the
market, as these may impact such an analysis. Then, understanding industry
competition, CRINE uses Porter (1990) and his five forces that may drive competition
in the supply market, industry competitors, bargaining power of buyers, bargaining
power of providers, potential entrants, and substitutes. Then, it is important to
understand the provider’s position versus company as a business potential. This may be
done through a matrix with the two sides of ‘account attractiveness’ and ‘value of
business’. For the provider the company (buyer) may then in the matrix be classified as
a nuisance, a developing relationship, to be exploited, or as a core customer. Then
blending the provider’s matrix with the role of the goods that company will procure
from the provider, a routine, leverage, bottleneck, or critical product or service, one
may see or estimate the position of each before one come into a specific business
situation. Sources of supply should be evaluated, e.g. through the British based ‘First
Point Assessment’ or the Norwegian based ‘Achilles’. Finally one should map the
provider’s capability versus the ‘ideal’ provider. This is shown in figure 7.7 below.
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Product quality
Delivery lead-times
Reliability
Relationship quality
Responsiveness
Price
Market reputation
Customer service
Ideal provider
Actual provider
Product quality
Delivery lead-times
Reliability
Relationship quality
Responsiveness
Price
Market reputation
Customer service
Product quality
Delivery lead-times
Reliability
Relationship quality
Responsiveness
Price
Market reputation
Customer service
Ideal provider
Actual provider
Ideal provider
Actual provider
Ideal provider
Actual provider
Figure 7.7. Provider capability mapping (CRINE Network (1999)).
In the second category, ‘best practice’, CRINE proposes initially to use industry maps,
which are graphical methods of describing current and future dimensions of competition
in a particular industry, and how a given set of companies are placed in the given
dimensions. One representation is using a spider diagram with a branch for each factor
or dimensions that effect performance. E.g. one may be analysing ‘degree of excellence’
with respect to; services, terms and conditions, availability, marketing channels,
relationship building, assurance testing, international presence, supply guarantee, …
others that could vary due to type of industry. Then finally one should benchmark ones
supply chain management practices against acknowledged best practices. Benchmarking
should be conducted both within ones industry as well as outside. Investigation into the
procurement practices of other companies and industries may be useful in providing
guidance.
Regarding capability mapping and benchmarking of supply chain operations of
providers, CRINE Network’s SCOR’s and CAR’s as presented in Appendix B should
also be noted. These may be used for improving company and provider’s position as
supply chain actors and in supply chain management practices. In addition to the
SCOR’s and CAR’s, Goranson (1999) proposes an analysis for actors to become part of
an agile virtual enterprise that also may support this type of analysis. This is given in
table 7.8.
‘If one is creating an information base on potential partners, it should gather these six types of
information, each with a temporal modifier’ (Goranson 1999, p.69).
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Table 7.8. The capability of an actor in a virtual enterprise (Goranson, 1999).
Characterisation of
what it does
What it adds to the whole
What it makes
Characterisation of
how good it is
Internal agility
Internal performance
(quality, etc.)
Characterisation of
how well it partners
In a static situation – to
respond to initial change
In a dynamic situation – to
respond to continual change
+ Temporal modifier,
i.e. how the baseline
information is compromised, so
that the actor’s agility may be
situation specifically or
temporarily modified.
Further readings;
DTI (1997). Article.
CRINE Network (1999). Chapter 4.
Active (1998). Section 3, VEP 2.1, 6.2.
1
st
Point Assessment.
Achilles.
www.capsresearch.org – Benchmarking of procurement practices. .
7.2.4 Analyse the demand/supply networks
In the project atlas we have now come to analysing the demand and supply chain
constructions that the different development and operations concepts rely on. In figure
7.8 this is presented with a focus on the demand and supply chain constructions moving
from the project from the opens space to the closed space. In addition it should be
mentioned that also the supply chains of the closed space, the operations situation, are
object for such analyses.
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Closed Open
What?
How?
i
ii
iii
Operator
Contractors
Sub-contractors
Suppliers
Closed Open
What?
How?
i
ii
iii
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.8. Analysing the project’s demand and supply chain constructions.
The demand and supply chain constructions covering the development and operations
phases of a project’s lifecycle is a comprehensive network. As an object of analysis the
networks could be approach in several ways, and below we will present an approach
and give reference to some methods that we believe may be constructive to use in such
analyses. The approach covers the five issues of;
Mapping the demand/supply chains.
Relationships in the demand/supply chains.
Agile development.
Lean operations.
Resilient and robust – a vulnerability analysis.
Map the demand/supply chains
Mapping of demand and supply chains are often the starting point of logistics analysis.
It may often seem ‘easy’ and regarded as not useful, because ‘we know the supply chain
in detail’, but do we? However, there are several possible approaches to demand and
supply chain mapping. Here we will give a short introduction to three different
approaches. First a general supply chain reference model (SCOR, 2000), then a
reference model for ‘agile virtual enterprises’ that are based on and follow a life cycle
approach and infrastructure that may be suitable for the project situation (Goransson,
1999), and finally a scheme that give an explanation to several types of value stream
mapping originating from lean thinking (Bicheno, 2000).
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The SCOR model, or the ‘Supply Chain Operations Reference Model’, is a reference
model for supply chain analysis that are developed by the Supply Chain Council, a
professional interest organisation for supply chain management, with several hundred
member companies from different types of industry.
Supplier
Plan
Customer
Customer’s
Customer
Suppliers’
Supplier
Make
Deliver Source Make
Deliver Make Source Deliver Source Deliver
Internal or External Internal or External
Your Company
Source
Return Return Return
Return Return
Return
Return Return
Supplier
Plan Plan
Customer
Customer’s
Customer
Suppliers’
Supplier
Make
Deliver Source Source Make
Deliver Make Source Deliver Source Deliver Deliver
Internal or External Internal or External
Your Company
Source
Return Return Return Return Return Return
Return Return Return Return
Return Return
Return Return Return Return
Figure 7.9. The five SCOR processes (Supply Chain Council 2002, SCOR Ver. 5.0).
The SCOR model focus on the flow of goods through the supply chain, covering e.g.
the supply chain from your supplier’s supplier to your customer’s customer. The focus
is on five processes; plan, source, make, deliver, and return. Five processes that cover a
natural segregation of the work of the supply chain. This is shown in figure 7.9.
Further the SCOR processes differentiate between three types of products; stocked,
make-to-order (MTO) and engineer-to-order (ETO). This is shown in figure 7.10. This
grouping of products is related to where the product order penetrates into the supply
chain, i.e. the order penetration point. As the SCOR model focus on the flow of goods
through the supply chain, the differentiation of the product types is important also with
respect to the treatment of the products through the supply chain. This may best be
explained by an example. Given that a product is ordered as an engineer to order
product, then one may follow how this product is treated down through the tiers of the
demand/supply chain, e.g. to find the point in the chain where the product is treated as
an make-to-order product, i.e. the point in the demand chain where the customer may no
longer specify the product. Such analysis could also be interesting in the project
development demand chain to see where e.g. the core technology of a product enters the
chain, e.g. to give that leg of the chain special attention.
The SCOR processes are further broken down from the segregation given in figure 7.10,
into suggestions for specific processes on a very detailed level. As such the intention
with the SCOR model is to bring the best generic knowledge from the participating
companies into a set of suggestions for generic supply chain processes, that may be used
as a basis for company internal developments of demand and supply chain processes.
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C
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s
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o
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s
S
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p
p
l
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e
r
s
P1 Plan Supply Chain
Plan Plan
P2 Plan Source P3 Plan Make P4 Plan Deliver
Source Make Deliver
S1 Source Stocked Products M1 Make-to-Stock
M2 Make-to-Order
M3 Engineer-to-Order
D1 Deliver Stocked Products
D2 Deliver MTO Products
D3 Deliver ETO Products
S2 Source MTO Products
S3 Source ETO Products
Return Source
P5 Plan Returns
Return Deliver
Enable
SR1- Return Defective Product DR1- Return Defective Product
SR2- Return MRO Product
SR3- Return Excess Product
DR2- Return MRO Product
DR3- Return Excess Product
C
u
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t
o
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r
s
S
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p
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l
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P1 Plan Supply Chain
Plan Plan
P2 Plan Source P3 Plan Make P4 Plan Deliver
Source Make Deliver
S1 Source Stocked Products M1 Make-to-Stock
M2 Make-to-Order
M3 Engineer-to-Order
D1 Deliver Stocked Products
D2 Deliver MTO Products
D3 Deliver ETO Products
S2 Source MTO Products
S3 Source ETO Products
Return Source
P5 Plan Returns
Return Deliver
Enable
SR1- Return Defective Product DR1- Return Defective Product
SR2- Return MRO Product
SR3- Return Excess Product
DR2- Return MRO Product
DR3- Return Excess Product
Figure 7.10. Breakdown of the main SCOR processes (Supply Chain Council 2002,
SCOR Ver. 5.0).
It should also be mentioned that the SCOR reference model does also give suggestions
to key performance indexes, KPI’s, related to the different processes of the model.
These KPI’s may be a good starting point for establishing own KPI’s for ones own
demand/supply chains.
The second reference model that we would like to draw attention to is Goranson’s
(1999) ‘agile virtual enterprise (AVE) reference model’. The structure of the reference
model is given in Appendix F. We will come further back to some specific analysis that
Goranson proposes below, but first we would like to draw attention to the detailed
structure of the AVE reference model. The structure of the model is developed along
two axis, a decision point breakdown, following the life cycle of the enterprise or in our
case a project, and the infrastructure breakdown that cover elements that should be
given attention to secure a good development. The message that we would like to
convey here is that the AVE reference model give a structure that could be used as a
check list for analysis of the demand and supply chains in the project context, especially
as the model is aimed at the virtual enterprise, where the life cycle cover much the same
as the project situation.
Then finally we would like to give an overview of some different types of demand and
supply chain mapping, or value stream mapping as it is named within lean theory. The
overview is based on a list by Bicheno (2000), but similar lists could have been taken
from other authors within the lean manufacturing domain. Based on the listed types of
value stream mapping we have tried to relate each to the project situation. This is
presented in table 7.9 below.
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Table 7.9. Value stream mapping and the project situation (based on Bicheno, 2000).
Overall lead
time
mapping
An overall mapping to see the general lead-time per stage of a demand and supply
chain. E.g. the lead-time for rental equipment could be made up of the following
elements; order planning, order generation, order receipt and entry, prepare and pack
equipment, pre-transport to base, base-handling, supply vessel, use at base, return to
base, and transport back to supplier. This is a longer lead-time than the time from
demand is known until demand Is covered, but e.g. for rental equipment the total lead
time could be interesting as that could have price and contractual implication versus
the supplier.
The lead times could either be presented as a Gantt chart, displaying how each element
in total add up to the total lead-time, or as a Pareto distribution diagram showing the
lead-time elements from the longest to the shortest. The Pareto distribution is important
to use to address the areas where there are most to gain in reducing the lead-time, and
not addressing elements that are un-important lead-time wise.
The lead-time map could be especially important to use for schedule purposes, e.g.
schedule compression or activity interaction, or for improving operations response
times, e.g. for special services.
Order
mapping
Order mapping is done to focus specifically on special customer orders, to be able to
uncover elements in the order’s demand and supply chain that could improve customer
service and/or lead-time. The focus in order mapping is the clerical process, or the full
order management cycle from planning to payment and post-completion services.
There are to approaches to order mapping. The first is to ‘staple yourself to an order’,
where an analyst follow an order through all its stages, and records the time each stage
takes, and if possible the reasons for eventual delays in a stage. The other is ‘tagging’
an order, i.e. make a tag on an order that follow the order an where employees dealing
with the order should record data as they deal with the order. The intention is to collect
a representative sample of data that helps tracking variation in both time and routing of
orders. For the tagging approach, one should also follow it up with physical tracking to
get a better picture of the situation.
Customer
mapping
Customer mapping is the process of identifying your customers, and their influence,
along the demand chain. This mapping give insight into who makes decisions to
activate the demand chain, not only the direct customer, but the ‘ultimate’ customers,
e.g. the operations management of an installation. Customers could for this purpose
e.g. be grouped as ‘buyer’, ‘decider’, ‘user’, or ‘specifier’. Customer mapping could be
useful e.g. as background for establishing supply agreements with customers.
“Learning to
see mapping”
The ‘learning to see map’ draw an illustrative map of both the material flow and the
information flow. Such maps are often used to illustrate the current and future state of a
process. The mapping makes use of simple boxes and illustrative symbols related to the
process, to show the material flow. The information flow may be fitted into the
material flow picture through lines with explaining text, and schedule information may
be shown by using lines with arrows to explain that process. Lead-time information
could also be set into the process picture to clearly show the relation between processes
and time. As this type of mapping is very illustrative, it is often termed as a ‘process
cartoon’.
Process
activity
mapping
The process activity map is the same as the process flow chart. Most importantly,
process activity mapping shall help in identifying opportunities, especially with respect
to improving the ratio among value adding and non-value adding time. The mapping
should be available for operators to use themselves
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should be available for operators to use themselves.
The process chart lists every step that is involved e.g. in the delivery of a service.
Standard symbols are used to indicate ‘operation’, ‘delay’, ‘move’, ‘store, and
‘inspect’. The process chart helps to identify wasteful actions, and documents the
process completely. Such a systematic record should help reveal the possible sources
of quality and productivity problems. The process is first to document the process map.
Documenting the process map should be done based on the current situation and not be
based on ‘old’ process maps, as these may give another picture than the current
situation as working in practice. What should be mapped is the actual, not the ideal
situation. After the process map has been developed, then it should be analysed. The
map could both be used for time (valuable time) analysis, as well as if cost data is
connected to the processes, a cost analysis could also be made.
Product
variety
funnel
The product variety funnel is useful in understanding where variety is added along a
supply chain. This is especially used for retaining flexibility and variety as long as
possible in a production chain, but could also be used in a services or product supply
chain, e.g. in planning warehousing and base services for the offshore petroleum
installations. For production processes variety should be added as late in the process as
possible, as this improves responsiveness and flexibility, and reduces inventory. For
supply services the situation does also have another dimension. In the supply services
context it is also important that variety, e.g. variety for use at several installations of
rental equipment, is kept early in the supply chain, and that the supply and return
processes are effective so that alternative use is not hindered. Equipment and material
stored later in the supply chain, e.g. at a specific base or at the installation should have
variety in use.
Quality filter
mapping
Quality filter mapping aims to pick up the rate and sources of defects along a demand
and supply chain. Defects may impact the customer, but it is also wasting resources.
The defects should be mapped and linked directly to all operations steps where they
occur. The result will as such be a figure showing the supply chain stages along a
horizontal axis and number of defects in equivalent units along the vertical axis. In
particular, such mapping can highlight defects that are passed over long distances
along a supply chain only to be rejected beyond the point where correcting the defect is
not economic.
Demand
amplification
mapping
Demand amplification mapping models the amplification of demand disturbances
along the supply chain. This type of mapping may be more essential for production
oriented supply chains, but could also have benefit for the operations supply context,
especially with respect to seeing how the ultimate demand may be visualised better
along the whole demand and supply chain, and to address what can be done to improve
the demand response along the supply chain.
Push pull
mapping
Push pull mapping identifies the points or buffers at which supply push takes over for
demand pull. Such mapping is useful as the pull point generally should be moved
further back along the supply chain, or one should be conscious with respect to where
the push pull point is placed. A long term strategy should be established to challenge
the push pull points, and long term moving them backwards in the supply chain. The
vision is to synchronise the demand and supply chain through conscious push pull
points.
Physical
structure
mapping
Physical structure mapping helps set the policy for suppliers and customers
rationalisation. Such mapping is a useful basis for periodic changes to the supply
system configuration.
Capacity
mapping
Capacity demand mapping looks at the ratio of capacity demanded to total capacity
available. The idea is to identify the physical bottlenecks and constraints along the
supply chain. Such mapping is relevant for the periodic reconfiguration of the supply
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system scheme, both for optimising the standard supply service and preparing for
special supply services.
Cost time
profile
A cost time profile is a graph showing accumulated cost against accumulated time for a
supply chain. It gives a visual presentation that has a powerful effect in conveying a
message. Could e.g. be effective when analysing the demand and supply chain for
rental equipment, where a rental price often is directly linked to time spent from
delivery to base until return to supplier.
Relationships in the demand/supply chain
We have earlier mentioned the relationships in the project demand and supply chains as
some type of horizontal alliances for the demand setting, and some type of vertical
alliances, through frame agreements and contracts, for the supply setting. Example of
horizontal versus vertical partnering is shown in figure 7.11 below. As part of an
analysis of a project’s demand and supply chain structure it could be wise to see how
the configuration of horizontal and vertical alliance or partnering will be for the
different project development and operations alternatives. E.g. how the use of operator’s
versus the contractor(s)’s frame agreements and contracts. i.e. vertical alliances, impact
the demand and supply chain constructions.
HORIZONTAL PARTNERING VERTICAL PARTNERING
Contractor
Engineering
Contractor
Construction
Client/Owner
Sub-
contractor
Supplier
Contractor
HORIZONTAL PARTNERING VERTICAL PARTNERING
Contractor
Engineering
Contractor
Construction
Client/Owner
Sub-
contractor
Supplier
Contractor
Contractor
Engineering
Contractor
Construction
Client/Owner
Contractor
Engineering
Contractor
Construction
Client/Owner
Sub-
contractor
Supplier
Contractor
Figure 7.11. Horizontal versus vertical partnering.
The relationship between the operator and contractor(s) will not always take form as an
horizontal alliance structure. The choice of formal relationship structure between the
operator and the contractor(s) may be dependent both on the business challenge,
whether that is simple or complex, and the business culture in the market or between the
stakeholders, whether that is characterised by adversarial behaviour or by trust and
mutual respect. A matrix to guide the choice of formal relationship structure between
the operator and the contractor(s) based on position with respect to business challenge
and business culture, is presented in figure 7.12. The matrix is developed by Hetland
(1999).
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RELATIONAL
CONTRACTS
•High definition
•Target Sum bidding
•Proactive behaviour
•Focus on efficiency
AD HOC ALLIANCES
•Goal alignment
•Early involvement
•“Beauty contest”
•High interaction
•Gain-sharing
•Focus on effectiveness
CONVENTIAL
CONTRACTS
•High definition
•Lump sum bidding
•Reactive behaviour
(Claim mentality/
Defence strategies)
Change
Culture
Reduce
Complexity
Simple Complex
BUSINESS CHALLENGE
A
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RELATIONAL
CONTRACTS
•High definition
•Target Sum bidding
•Proactive behaviour
•Focus on efficiency
AD HOC ALLIANCES
•Goal alignment
•Early involvement
•“Beauty contest”
•High interaction
•Gain-sharing
•Focus on effectiveness
CONVENTIAL
CONTRACTS
•High definition
•Lump sum bidding
•Reactive behaviour
(Claim mentality/
Defence strategies)
Change
Culture
Reduce
Complexity
Simple Complex
BUSINESS CHALLENGE
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Figure 7.12. Choice of operator contractor relationship based on business challenge and
business culture (Hetland, 1999).
As figure 7.12 shows one moves from conventional contracts where the challenge is
simple and there may be no or (assumed) adversarial relation between the operator and
contractor, to alliance type of contracts when the challenge is complex and the
relationship is characterised by trust and mutual benefit
61
. There is one quadrant of the
matrix that possess a challenge. That is if the challenge is complex and the culture is
adversarial. Then one either must reduce the complexity, e.g. through reducing
contracted scope of work, or change the culture. The first could be an example of
returning to earlier execution models where the operator had a larger scope of work and
interface control, while changing culture could be regarded as what was necessary
through the NORSOK and CRINE initiatives.
Figure 7.12 segregated business culture between ‘adversarial’ and ‘trust’. Maybe a
better distinction is between ‘misaligned’ and ‘aligned’. The interesting question is
whether the contractual relationship between the operator and the contractor is such that
there is a common benefit in achieving the clients objectives. A representation of this is
given in figure 7.13.
61
Maybe mutual benefit could be a stronger and more appropriate incentive than mutual respect.
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“Misaligned” “Aligned”
Client
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The contractual challenge;
How does the contract format help to
align the focus of the client (operator)
and contractor?
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The contractual challenge;
How does the contract format help to
align the focus of the client (operator)
and contractor?
Figure 7.13. Aligning client and contractor through the contract (Instefjord, 1999).
A further progress of the topic addressed through the figures 7.12 and 7.13 are given in
Appendix E, which summarises a workshop on contract strategies arranged by the
European institute of advanced project and contract management.
Through their supply chain initiative, CRINE Network established two sets of
requirements for companies to become interesting partners in oil and gas supply chain
constructions. The two sets of requirements are first ‘supply chain optimisation
requirements’, SCOR’s and secondly ‘critical attractiveness requirements’, CAR’s. The
SCOR’s and CAR’s are presented in full in Appendix B.
SCORs are those things that a customer (operator or contrator) should be doing to
ensure they maximise the potential for the supply chain to provide appropriate
technologies for the future at the right time and quality. CARs are those things which
make a supplier or a contractor highly attractive to a customer, i.e. they appropriately
‘magnetise’ the supplier in order to enable him effectively to move closer to the
customer. For more details we refer to Appendix B.
Agile development
Agility is in the literature to a large extent conceptually described, missing out on
methods to analyse the agile capabilities and capacities of virtual enterprises or
demand/supply chains. Goranson (1999) seek to make agility analysable in an
engineering oriented way. To bring the concepts of agility into use, this is needed as the
methods and techniques of project planning and control were developed and applied in
the second phase of the North Sea oil and gas development history as explained in
chapter one.
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175
The tools used and proposed by Goranson (1999) are based on a breakdown of the
enterprise, e.g. the project organisation, into a set of key processes. To define and focus
on a set of few critical processes that will help to define the enterprise’s agility barriers
and levers, the ‘agile virtual enterprise reference model’ is developed. To help in
analysing the processes a set of metrics is developed based on a theoretical basis of
information theory and communicative acts, and with a simplified approach suitable for
direct calculations.
The tools used and proposed by Goranson (1999) are based on a breakdown of the
enterprise, e.g. the project organisation, into a set of key processes. To define and focus
on a set of few critical processes that will help to define the enterprise’s agility barriers
and levers, the ‘agile virtual enterprise reference model’ is developed. To help in
analysing the processes a set of metrics is developed based on a theoretical basis of
information theory and communicative acts, and with a simplified approach suitable for
direct calculations.
The focus for the reference model and metrics that Goransson (1999) propose is on
analysing processes to evaluate their agility, their ability to adapt. The method is based
on models of ordinary processes within an enterprise or across partners in a
demand/supply chain. The result of the method are numbers or functions which indicate
the time and cost of change. The results could be used to address change in one of two
ways;
The focus for the reference model and metrics that Goransson (1999) propose is on
analysing processes to evaluate their agility, their ability to adapt. The method is based
on models of ordinary processes within an enterprise or across partners in a
demand/supply chain. The result of the method are numbers or functions which indicate
the time and cost of change. The results could be used to address change in one of two
ways;
1. Comparing a pair of processes, resulting in the time and cost of changing from
one to another. This could e.g. be between new, unproved technology and old,
well-known technology, and the degrees of freedom available with respect to
trying the new technology before having to revert to the old if the new is not
delivering results as promised, and the time and cost for such a change
compared to the time available, and the value/cost ratio of the inherent
opportunity of using new technology.
1. Comparing a pair of processes, resulting in the time and cost of changing from
one to another. This could e.g. be between new, unproved technology and old,
well-known technology, and the degrees of freedom available with respect to
trying the new technology before having to revert to the old if the new is not
delivering results as promised, and the time and cost for such a change
compared to the time available, and the value/cost ratio of the inherent
opportunity of using new technology.
2. Evaluating a single process against a threat and/or opportunity, or a spectrum of
threats and/or opportunities to determine how agile the process is. The metrics
can here be used to evaluate the time and cost of adapting from an existing or
potential process design, to a new process that can deal with the threat and/or
opportunity.
2. Evaluating a single process against a threat and/or opportunity, or a spectrum of
threats and/or opportunities to determine how agile the process is. The metrics
can here be used to evaluate the time and cost of adapting from an existing or
potential process design, to a new process that can deal with the threat and/or
opportunity.
Below we will describe and explain the AVE reference model and the metrics used to
calculate the agile ‘position’. The AVE reference model is based on matching the
opportunity with partners able to realise the opportunity, throughout the life-cycle
phases of the opportunity from enterprise formation to enterprise reconfiguration. This
is shown in figure 7.14.
Below we will describe and explain the AVE reference model and the metrics used to
calculate the agile ‘position’. The AVE reference model is based on matching the
opportunity with partners able to realise the opportunity, throughout the life-cycle
phases of the opportunity from enterprise formation to enterprise reconfiguration. This
is shown in figure 7.14.
Enterprise
Formation
Enterprise
Operation
Enterprise
Reconfiguration
Opportunity
Identification
Partner
Identification
Figure 7.14. Major life cycle categories of a virtual enterprise. Figure 7.14. Major life cycle categories of a virtual enterprise.
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The life-cycle elements of the reference model as shown in figure 7.14. above, is in the
reference model termed ‘decision point breakdown’. The decision point breakdown
constitutes the rows in the model. The columns of the reference model is termed
‘infrastructure breakdown’. There are four main infrastructure elements, information,
social/cultural, legal/explicit, and physical. The matrix given by the decision point
breakdown and the infrastructure breakdown (except the information infrastructure) is
presented in table 7.10.
Table 7.10. Major headings of the agile virtual enterprise reference model (for the
structure of the full model, see Appendix F).
Infrastructure Breakdown
Social/Cultural Legal/Explicit Physical
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VE Reconfig/Dissolution
Based on the main structure the reference model is broken further down into twenty-one
decision point (life-cycle) processes and thirty-three infrastructure processes, resulting
in matrix with a total of six hundred and ninety-three cells. The matrix of the full model
is presented in appendix F. The total number of cells in the reference model is due to its
use for reference purposes, established to cover both the whole life-cycle of an AVE, as
well as the infrastructure elements that could be important from an agile analysis point
of view. However, for practical analysis purposes only a smaller number of cells will
most often be necessary to achieve the wanted analysis. Goransson refers to ‘twenty
high value cells’ that based on their research were seen to be important.
To support the ‘engineering of AVE’s’ Goransson has developed a set of metrics’ that
shall help in pre-analysis of the time and cost associated with the potential that a system
has to accommodate future change. The metrics’ are based on the cells of the reference
model, and the communicative acts that take place between the cells in the model. The
communicative acts is based on results from information theory, that calculate the cost
and time of adapting an algorithm to address a new problem, but in this case it is used
on processes that are the tactical means of a strategy. A graphical representation of the
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communicative acts process called a Dooley graph is used to enable a simplified
calculation of the metrics. The Dooley graph is a way of representing the process of a
‘dialogue’ among actors taking place in a cell in the reference model, using the
utterances between each actor. The type of utterances could either be a question or to
inform. The utterances will again be a respond or reply to earlier utterances, or to
resolve or complete earlier utterances. The dialogue will in the Dooley graph be
represented by nodes for each actor’s involvement in an utterance, and directed arrows
between nodes that reflect the direction of the utterance between the actors. Through
this process of utterances between actors in a process the main important elements to be
used in the metrics are the number of nodes, the number of loops between the nodes,
and the type of nodes and loops, i.e. how many loops corresponds to a node and vice
versa. For a thorough explanation of this process, see Goranson (1999) pp. 157-210.
There are five metrics that may be derived by the use of the Dooley graph. Those
metrics are termed distance, time delay, moveability, importance, and frequency. Each
metric is explained in table 7.11 below.
Table 7.11. Summary of the intermediate metrics (Goranson 1999, p.186).
Distance Total number of weighted nodes. This is the simple sum of the number of nodes
raised to the power of its type, i.e. the number of loops of those nodes.
The metric say that the more actors involved, and the more each actor does, the
harder it will be to change the process. The higher the sum of the metric, the
higher the cost or time of changing the process.
Time delay Total number of weighted loops. This is the simple sum of the number of loops
raised to the power of its type.
The metric say that the more tasks a subconversation has to do, i.e. the more
actors involved in the subconversation, the harder it will be to change it. The
higher the sum of the metric, the higher the cost or time of changing the
process.
Moveability Topology match, internal. This measures the structural difference between two
processes, i.e. ratio of nodes in a process that match the nodes of a ‘baseline’
process.
A greater number indicates a greater match, and a lowered time and cost to
adjust.
Importance Nodes compared to the VE’s total. This metric is the ratio of weighted nodes in
a process, compared to the weighted sum of all nodes in the whole AVE, or in
e.g. a part sub-infrastructure, from the reference model, of the AVE.
This gives an indication about whether a given process help to make the total
system of process more agile or not, i.e. whether it help the system agility. a
process may be more agile than another in itself, though may contribute less to
system agility.
The higher the number the higher contribution to the overall system’s agility.
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Frequency Loops compared to the VE’s total. This metric is the ratio of weighted loops in a
process, compared to the weighted sum of all loops in the whole AVE, or in e.g.
a part sub-infrastructure, from the reference model, of the AVE.
The higher the number the higher the cost and time of change.
The aim of using the metrics is, e.g. from a project planning and control point of view,
to develop and build a project demand/supply chain with a specific type and extent
of agility. An example is e.g. that the total development time could be longer than the
rate at which new, important technology evolve. Best practice dictates that you build
and involve your demand/supply chain early, but as the development evolves, the
demand/supply chain should be agile, not artificially limiting the development due to
commitments made too early. The metrics should tell you which processes, among
those available to you, are more agile, and with respect to the project demand/supply
chain, they can tell which supplier’s processes give you the agility needed.
Then, in summary the method proposed by Goransson could be outlined as follows;
Assess the spectrum of opportunities or threats, e.g. based on a context dependent
taxonomy.
Determine an agility strategy or candidate strategies, e.g. based on intelligence
about technology development and/or potential partners.
Brake down the related processes of your enterprise or project demand/supply
chain, e.g. using the AVE reference model as a guideline.
Within the break-down of the processes identify the few key cells that are relevant
to the agility opportunity or threat and your possible options in addressing that
opportunity or threat.
Breakdown of the communicative acts between actors through utterances in the
processes, e.g. through the use of Dooley graphs.
Calculating the metrics.
However, agility has a cost and there is always a limited amount of resources available.
Therefore one has to decide how to use one’s ‘agility budget’, e.g. based on the results
of the metrics. Examples of how to spend the agility budget could be (Goranson 1999,
p.190);
- Increasing you internal ability to support the change, for example, in acquiring specifications
related to [alternative materials] so that you can direct un-knowledgeable suppliers.
- As contract termination fees to discontinued suppliers, so that a simple supplier swap is feasible.
- As fees to keep suppliers hot, in which case you are buying capability that you may never use, like
an alternative to the existing supplier.
- As funding to help suppliers learn/hire consultants or insource skills.
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- As funding for your cost to transfer skills, processes and equipment to a supplier.
Whitney (1995) defined some aspects of agility, which we related to the project context.
These are presented in Appendix A.
Lean operations
Whereas the project development phase should have agile characteristics, the project
operations phase should possess lean characteristics. Here we presents four lists
covering lean principles, characteristics, types of waste (muda), and planning elements,
and their relation to the project operation supply chain. The bullet points of the lists are
taken from Bicheno (2000), but could also have been taken from other sources within
lean literature.
There are five lean principles; customer value, the value stream, flow, pull, and
perfection. Below in table 7.12 we have listed these with an explanation to each
regarding the project operations supply chain.
Table 7.12. The five lean principles and relation to the project operations phase.
Customer
value
Customer value from the operations supply system comes when the customer get
confidence to the supply system, the correct supply system is periodically established
in accordance with the customer’s change in needs, and there is a continuous focus to
improve the cost and service position of the supply system.
The value
stream
The value stream of the operations supply system goes from the demand initiation at
the offshore installation, through to return of e.g. rental equipment to the supplier. This
value stream should be mapped for the major supply categories.
Flow The base is a central point in the value stream where the goods coming in from several
suppliers are stowed onto several supply vessels, and return cargo shall be shipped
back to suppliers. The base is also the point in the value flow where there is a potential
for break in the flow of goods through the supply system. This may be due to break
load units to separate cargo to diverse offshore installations, or just to assure the
content of load units before shipping it offshore.
Pull A good system for pulling, in stead of pushing cargo through the supply system, should
be based on periodic plans and agreements that adjust to the periodic change in needs,
and then spread information about this need across the demand/supply network. Then,
based on these plans and supply agreements …
Perfection Each year the consulting company McKinsey makes a benchmark study of a.o. the
logistics and operations cost per offshore installation and company in the North Sea
basin. This benchmark study establishes a theoretical best position, as well as the best
operator in the basin. In a strive for perfection it is important to remember that e.g. in
logistics it is not possible to always be no.1, as demand and supply configuration per
operator will change periodically e.g. giving some a very cost-effective supply vessel
scheme. What is important for perfection is that one optimises within ones periodic
limitations, and continuously seek for improvements within the supply chains.
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Bicheno (2000) states fourteen lean characteristics; customer, simplicity, visibility,
regularity, synchronisation, pull, waste, process, prevention, time, improvement,
partnership, gemba, and variation. Below in table 7.13 we have listed these with a
comment of each regarding the operation supply chain.
Table 7.13. Lean characteristics and relation to the project operations phase.
Customer The uppermost customer is each license, i.e. each unique ‘profit center’. However,
each company to be served by a supply scheme does also want to optimise the supply
service for all its licenses, as such each company could also be regarded as a customer.
Finally, each installation is the direct customer for the supply service, as it is first and
foremost dependent on the direct supply service, not its related cost position.
Simplicity The services provided through the supply scheme should be simple in the sense that
they are predictable. That could e.g. be achieved through a split between standard and
special services, where the standard services is a group of services covering a given
scope of work and conducted within a specified and fixed schedule. The special
services cover speciality services needed on an ad hoc basis, as well as for unforeseen
or accidental situations.
Visibility Visibility of the supply services could be achieved through setting the supply services
as an agenda issue for the continuous improvement for each license, e.g. through
supply agreements between the license and the supply organisation. Another,
organisational, issue that could improve visibility is to have some sort of ‘supply
operations centre’ for each supply region, a centre acting as a single point of contact
for all supply services. Then again, for the operations centre all parts of the supply
chain should be ‘visible’, e.g. through systems for monitoring status of orders and
tracking movements and localisation of goods.
Regularity The context of the supply services is such that there will be changes both in the scope
and type of services needed, as well as the scope of installations covered, and volumes
for each installation. To make the supply services predictable within this context, the
services have to be predictable within periodic schemes. This means that the scheme of
the standard services has to be adjusted, or optimised, periodically, to fit to the
contextual changes.
Synchroni-
sation
Synchronisation is achieved when there is ‘one-piece’ flow through the supply system.
To achieve this it is important that all goods coming form suppliers into the supply
base is packed into load units that could be directly loaded onto the supply vessel, or
into consolidated load units for one installation. Tagging of goods and content of load
units from the suppliers is important to achieve this, and if there is mistakes in the
tagging that will be a hindrance to synchronisation, as the load units has to be re-
checked at the base. Further the timing of when the goods from the supplier arrive at
the supply base has to be coordinated with the schedule of the supply vessel so that the
base organisation are able to organise and load the goods onto the supply vessels in an
effective and secure way. To achieve the latter the demand ordering process from the
installation itself has to be in accordance with the time needed for preparation and
transport from the supplier to the base.
Pull The periodic optimisation and planning of the supply services will establish the overall
and specific demand of each installation for specific product categories. This will be
used to prepare and plan the scope of the supply system. Then again the specific
demand of the installations will activate a pull based flow of goods from the suppliers
through the supply system to the installation. A reverse pull system should also be in
place to secure that equipment to be used only for a short period of time at the
installation is pulled through the reverse supply system back to the supplier, so that the
use of the equipment will not add more cost than necessary. The latter is the case e.g.
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for rental equipment.
Waste Waste could be related to an inappropriate supply system scheme. This should be
helped through adjusting the supply system scheme periodically to the changes in
demand and supply context. Waste could also mature from a supply system scheme
that covers ‘all in one’. i.e. try to cover all supply needs, both planned and unplanned,
through the same system and administrative approach. By separating the supply
system into two, one standard covering the planned demand, and a system or approach
covering the special demands. The latter do not necessarily need to be a single system,
but another approach in dealing with the specific special situations, either through the
standard system or through other, purpose specific systems.
Waste could also be regarded with respect to the consequences of breakage in the
supply system, e.g. when an installation has to stop production due to not getting
supplies needed. This show that preparing a supply system scheme is a balancing act
between ‘over’- and ‘underproduction’. However, this should be handled effectively
through a good approach to special services taking care of special situations.
See further elements of waste in the ‘muda’ table below.
Process Organising the services along groups of processes that have different characteristics,
e.g. the different product groups as such as consumables, rental equipment, and others.
Another type of processes that should be separated are the difference in processes for
standard and special services. For the latter response time will be an important issue.
Prevention Through a focus on processes and periodic adjustments of the supply services scheme,
one should get a proactive attitude to being in front of problems, through focusing on
the means of solutions, not the specific problem.
Time Being able to reduce the total lead-time in the demand and supply chains should focus
separately on the standard and special services. For the standard services the lead-time
of the total demand and supply processes for the different supply categories should be
in focus. In addition for rental equipment is the return chain back to supplier important.
In addition for special services the response time is important. Being able to establish
and produce a special service based on the portfolio of resources available will for
many situations be time-critical, as well as may need to be produced through different
alternatives.
Improvement ‘Improvements’ should be made periodically through ‘forced’ periodic adjustments
and optimisation of the supply system scheme. These periodic revisions call for
‘innovative’ improvements. The analysis leading up to these periodic revisions should
also comprise analysis for continuous improvements of the supply system. The focus
of the continuous improvements should be made for the different supply processes, but
could well originate from functional areas along these processes. The analysis process
should also seek to track these improvements, to see the impact of them. This lead up
to the fact-based management as described under ‘gemba’ below.
Partnership Each installation and each company has a demand for supply services. In optimising
the supply system scheme one should look for potential synergies in collaborating with
other, both on installation and company level, to optimise the supply system for
common, shared benefit. This may even mean that the management of the supply
system could for given areas, situations, or periods be partly or fully outsourced to
other petroleum companies, or logistics service providers.
Gemba Gemba stands for ‘management based on facts and managerial presence’. With respect
to fact-based management, the cost-position of the North Sea operations, included the
logistics and supply operations, is benchmarked yearly by a consultancy company
(McKinsey). This give high level facts that are acknowledged among the petroleum
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companies to give a comparative status. This benchmark study should again be
supported by internal analysis so that one know the reason for one’s position, and may
predict how this may change, both due to improvements, as well as contextual changes.
Presence need direct involvement in the supply chain, decisions based on first hand
knowledge, often starting by supply chain mapping, ‘see to learn’.
Variation Variations are a normal part of supply services, and should be treated as such. This
means that special services, as commented above, should be planned and prepared for
in advance as standard services are, though with the difference that the execution of
them will not follow fixed schemes. As such the special services could e.g. be planned
for through a vulnerability analysis.
Among the lean characteristics presented above we found waste. Reducing waste, in its
different forms, is one of the main focuses of lean thinking. Below we present six types
of waste as presented in Bicheno (op cit.) and relate each to the operations supply chain.
Table 7.14. Types of waste (muda) in the project operations supply chain.
Over-
production
Overproduction in the operations supply context may mostly be related to making use
of more resources than optimally needed to cover the demand requirements. This could
be related to the demand side, e.g. in the planning process from the customer’s side
increasing the demand estimate to bring some slack into the system. Another may be
that the supply vessel size is not suited to need, e.g. there is lack of suitable vessels in
the market. Also not utilising the potential for supply synergies across installations or
companies, could be a source for overproduction. In addition, external factors may
have an impact on the scope of resources used for the supply operations. On the
Norwegian Continental Shelf each license has in its concession requirements about
how the supply arrangement shall be, including which base to be used and level and
location of onshore support organisation. Such concession based requirements could
add considerably to the ‘overproduction’ in the system.
Waiting Waiting in the operations supply context could both be related to goods waiting in the
system, e.g. rental equipment waiting to be shipped back to the supplier. This could
also be regarded as temporarily unnecessary inventory. Another form of waiting could
be supply vessels waiting for inbound goods. This could happen due to incidents or
accidents earlier in the supply chain, or could be a system failure e.g. due to a
mismatch in aligning lead-times along the supply chain.
Transporting
and
unnecessary
motion
Waste of transporting could e.g. mean non-optimal or not situation adapted supply
vessel routes. That means not adjusting the supply vessel routes, the size or number of
vessels as the supply demand changes. Unnecessary transportation could also mean
supply vessels that have to return back to an installation due to that the installation was
not ready to handle inbound goods when the vessel arrived on its scheduled time.
Inappropriat
e processing
Inappropriate processing could mean re-packing load units at base, instead of packing
directly into customer specific load-units at supplier. This does not mean loading the
supplier load-unit into load unit for supply vessel, e.g. container. Another, more
directly waste of processing resources and time is the need for extra check of content
of load-unit versus tagging at base. This could e.g. be due to suppliers not being correct
in tagging the orders, or putting several orders, for several customers into the same
load-unit, with only one customer specific tag. This could lead to the customer not
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getting the goods needed, thereby initiating a new supply need.
Unnecessary
inventory
Unnecessary inventory could be related to several elements;
e.g. short-term due to early ordering, e.g. due to doubt about the supply chains
ability to supply on time,
keeping additional spares than required e.g. due to doubts about suppliers’
ability to supply when needed,
keeping rental equipment longer than needed, e.g. due to a non-effective or
non-existing return process,
or not having a process to periodically remove items from inventory that are
no longer needed.
Defects Defects in the supply system could e.g. be load-units that are defect when arriving at
the supply base, so that they are not able or allowed to be loaded onto the vessel or
lifted onboard the installation offshore. Missing or to old certificates on the load units
could also be regarded as defects.
Lean thinking does not happen by itself. To start preparing for lean thinking and realise
its potential some elements of planning could be worth while to bring along. Below we
present seven lean planning elements as listed in Bicheno (op cit.) and relate each to the
operations supply chain.
Table 7.15. Lean planning elements and the project operation supply chain.
Scenarios Scenarios are often used to prepare for different possible situation s in the future, and
how one may go about dealing with such situations. For the context of the supply
service scenarios may especially be useful for dealing with a differentiation between
standard versus special services. Planning a standard supply services scheme is rather
straight forward given a static demand for a given period of time. Based on this a
standard supply scenario may be developed that cover the time-phased demand of each
installation, set into a fixed set of supply vessel routes and schedules.
However, the supply situation will both be impacted by events and special situations
that do not fit into the standard supply scheme. The question then becomes whether
one should try to cover all situations through ‘stretching’ the capability and capacity of
the standard supply system scheme, or whether one should separate and deal with
special situations in another, ‘special’ supply system scheme, adopted for different and
specific situations, and planned through scenario developments. Then it will be easier
for all stakeholders of the supply services to see impacts and consequences of
situations that come on top of the value optimisation of the standard supply services. In
addition the special situations will be own ‘objects’ for value optimisation.
Time pacing Time pacing in this respect may be seen as adjusting the supply system scheme to
periodic changes in supply requirements. The supply service scheme cover several
installations, often in different phases of the project operations life-cycle, and thereby
with differing supply demands. As an installation come into a new phase with respect
to supply demand, there may (will) be changes to the optimal configuration of the
supply system scheme, and this should be reflected through periodic re-planning and
re-configuration to optimise the supply system scheme to the new supply demands.
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Periodic shut-downs, maintenance and modification projects including extra supply
needs, will also be a subject for time pacing. Such time pacing should however be
treated through the supply system for special situations.
Value
focused
thinking
Value focused thinking is to a large extent driven by the yearly North Sea Operations
benchmarking studies. In these the operators get a relative measure of their own
position versus other operators, per installation. If one through the planning processes
aims to understand the mechanisms that produce value, and the cost structure and cost
drivers related to this, the benchmarks could be used as a top-level driver for
uncovering value. Examples of value improvements that could be directly related to the
benchmarking exercise is e.g. operator collaboration in supply base services and supply
vessel utilisation. Such collaboration will increase the value/cost ratio of producing the
supply services through leveraging on the potential for synergy through shared
resources that exists in the supply chain cost structure. However, what is important to
remember in value-focused thinking is that one should start improvement work as free
from constraints as possible, e.g. not only see potential in improving already
established partnerships and collaborations, but analyse based on the full set of
opportunities, including ending established collaborations and establishing new ones, if
that enhances value contribution the most.
Policy
deployment
Policy deployment means the few, critical breakthroughs or goals required to be
achieved to meet the overall development plan. The policy deployment should be
customer focused. Two high-level, critical breakthroughs needed for development of
the operations supply chain is first the ability to commit the customer into taking
proactive part in developing, planning, and following up the operations supply chain
schemes. To be able to realise the benefit in ‘optimised’ supply schemes, customer
commitment is an absolute necessity. The other critical breakthrough needed to make
optimal use of resources for supply services adopted to the changes in the demand
situation is collaboration among installations and across operator companies. This
gives a much wider set of opportunities to optimise within, but need to establish a form
of consensus within the business that such is beneficial.
Cross-
functional
management
A good example of cross-functional management within the operations supply chain is
e.g. regional supply chain operations centres that cover all operational demand/supply
activities within one supply region, e.g. related to one supply base. Such operations are
known e.g. from other transport network management contexts, e.g. the air transport
industry. Representatives from all functions are co-located in one room, supported by
technology to give their customers and supply chain stakeholders a single point of
contact.
Target
costing
Target costing in this context could e.g. be related to the costing differentiation
between standard and special supply services. The standard services should have a
cost-minimising aim. The standard supply services scheme should be the services that
aim to meet the estimated and planned supply demand requirements within a given
period of time, and for a given supply scheme configuration. To achieve this it is
important that it is true commitment to the system from each customer, and that the
customers accept and adhere to the level of service that they are given true the standard
system. The target costing of the standard supply system scheme is as such proactively
engineered based on a periodic optimisation of the supply system scheme to fit the
predicted demand.
For the special supply services the customer, and activator, of such need to pay the
additional cost of establishing and operating such services when needed. However, it
should also be some form of incentive for the operational managers of the overall
supply system to make additional use of special supply services when such are
established and if this is cost and service effective.
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In sum the target costing should aim to price standard versus special services so that
there is a true incentive in choosing and following the scheme of the standard services,
as well as a disincentive in breaking the standard scheme, and an incentive to paying an
additional price to get special services when such is required.
To facilitate and support lean thinking in the operations supply chain we have above
listed lean principles, characteristics, types of waste and planning elements, and related
these to the operations supply chain. The literature on lean thinking is rich and
comprehensive, and we suggest the interested reader to look into e.g. Bicheno (2000) as
he presents good lists of references for further reading.
Resilient and robust – A vulnerability analysis
A supply chain must be able to keep up its mission, i.e., it has to be robust with respect
to factors that may ‘disturb’ the supply chain from fulfilling its mission. This is related
to the logistical service element. Another aspect of the logistical service element is the
supply chains ability to retain to do its mission if it has been brought out of ‘balance’,
i.e. the resilient aspect of service. The mission of the supply chain may itself be object
to changes, and then the resilient characteristics or abilities of the supply chain must be
leveraged. This was seen in Copacino’s (1997) approach to differentiate between
reliable, resilient and creative supply chain management elements.
Whether it is the robust or resilient characteristics that are most important or if it is a
combination of the two will be contextually dependent. But as important parts of the
logistical service element, robustness and resilience should be addressed in a supply
chain or SCM analysis methodology. An example of this is presented in the CMSO
methodology (Schneider et al. 1994), which emphasised robust lean supply chains for
the automotive supply industry.
Before we proceed to a methodological approach to a vulnerability analysis, let us
define some related terms.
Table 7.16. Definitions related to resilience and robustness (Asbjørnslett et al., 1999).
Mission The system’s ability to deliver products and services according to demand. In
addition to make contemporary good performance, it is also part of the
system’s mission to prepare for its position in tomorrow’s market. The
mission covers both the systems vulnerability to deliver, as well as the
vulnerability of the larger system due to the performance of the given system.
Resilient A systems ability to absorb change without catastrophic failure, i.e. its ability
to return to a stable state (still persist).
Robust A systems ability to resist shock and return to do its intended mission and gain
the same market position as it had before the shock.
Damage tolerance A measure of a systems robustness w.r.t. a specific damage, i.e. the reduction
in reliability of a system that has a specific damage but has not failed.
Threat A stable, latent, adverse factor that may manifest itself in an accidental event.
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Risk Combination of the frequency, or probability, of occurrence and the
consequences of a specified hazardous event.
A vulnerability analysis is aimed at a system’s ability to up-keep its mission, i.e. the
survivability of the system. This is different from a risk-analysis which focus on the
consequences of human, environmental and property impacts of an accident.
Table 7.17. Differences between a risk and a vulnerability analysis.
Risk analysis Vulnerability analysis
Focus; Human, environmental and property
impacts.
What can go wrong?
How likely is it to happen?
What are the consequences?
Focus; The survivability of the system.
Extended set of threats and consequences.
Are there adequate resources to mitigate and bring
the system back to stability?
When will new stability be reached?
In this respect a vulnerability analysis needs to focus on a greater set of threats than a
risk analysis. The threats could be the direct causes of an accidental event, or they could
be threats to barriers or safety functions that should prevent or reduce the consequence
chain of the accidental event in developing. After the direct chain of consequences
following from the accidental event has stabilised, the risk analysis ends, but then the
vulnerability analysis focus on how one may bring the system back to a position in
which it may up-keep its intended mission. This is presented below.
Accidental
event
Accident
causes
Consequence
chains
= Barrier or Safety function
T
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Threats
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Vulnerability analysis
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event
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causes
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chains
= Barrier or Safety function
T
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Threats
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Vulnerability analysis
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event
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causes
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= Barrier or Safety function
T
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Vulnerability analysis
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Figure 7.15. Difference between a risk analysis and a vulnerability analysis.
For analysis purposes, both robustness and resilience comes within the confines of
vulnerability. The methodology described below outline the main elements of a
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vulnerability analysis that is suitable for analysing systems as found in the supply chain
context
62
.
The vulnerability analysis is based on a taxonomy of factors or threats that may
contribute to the vulnerability of the system. The taxonomy is then used as basis when
approaching the system through an input/output model that view the input and output
from the system as either wanted or unwanted. On the input side there are required input
and hostile input. The required input is what is needed to make the system function, and
the hostile input is one part of what may threaten the system. On the output side the
wanted output is related to the systems products and/or services, i.e. the mission of the
system, and unwanted outputs that may naturally follow from the systems internal
processes or due to internal malfunctions.
The vulnerability analysis is made up of two parts. The first part shall establish an
overview of the potential scenarios, their immediate effects, and resources, systems and
plans for mitigation, restoration, rebuilding etc. The second part is a quantitative
analysis to establish an internal ranking of the scenarios, ranked by how critical they are
(emergency to attend to).
Table 7.18. Vulnerability analysis part 1; Establishing scenarios and their attributes.
Resources/systems/plans
for mitigation, restoration,
rebuilding, etc.
Threat
Scenario
(Emergency)
Likely?
(Yes/No)
Potential
immediate
affects? Internal External Remarks
The sequence of the analysis follows a potential route of an accident
63
. Identify threats,
based on a taxonomy for the specific context in question, and describe scenarios. Rule
out those scenarios which are not likely to occur (yes/no). Identify and describe
potential immediate effects. Establish which internal and external resources, systems
and plans are present to mitigate, restore or rebuild after an accident. The result is a list
of scenarios that give a rough, overall picture of the vulnerability situation of the project
demand/supply chain system.
62
For a more detailed description about the vulnerability analysis methodology see Asbjørnslett et al.
(1999) and Einarsson et al. (1998).
63
The use of the term ‘accident’ shall here be regarded as both a wanted change, e.g. new technology, or
unwanted change, e.g. due to the fall out of an established supply chain.
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Table 7.19. Vulnerability analysis part 2; Quantitive assessment based on scenario
criticality.
Scenario
(Emergency)
Consequence of scenario Resource to
mitigate, rebuild,
restore, etc.
No. Description
Likelihood
of
scenario
Human
impacts
Environmental
impacts
Business
impacts
Property
impacts
Internal External
Total
(4-1) (4-1) (4-1) (4-1) (4-1) (4-1) (4-1)
The second part of the vulnerability analysis establishes a criticality ranking of the
scenarios. Each input is given a weight from four to one (the lower the rank, the better).
The ranking of the scenarios are based on the sum (‘Total’). Selective analysis can be
performed by e.g. adding a factor to selective inputs. Time is an important factor with
respect to all consequences, e.g. for the project context both in the development phase to
secure schedule adherence and in the operations phase to re-establish production. The
result is a list of critical scenarios that may be used ‘backwards’ to guide actions, e.g.
how to reduce the likelihood and consequences of each scenario. With respect to
reduction of likelihood measures to avoid or reduce a threat and measures to reduce the
probability of an accidental event should be addressed. Then, with respect to reduction
of consequences, measures related to design and passive barriers, then operations and
active barriers, and finally measures to mitigate and restore should be addressed.
The result of the analysis should help in a proactive way to address how to deal with
threats, events and consequences before they occur.
A good example of resilience (unplanned?) is the Sleipner substructure accident, were a
new substructure had to be built after the original one sank, to secure the deliverables of
the project object (1
st
mission – project development execution mission), and secure the
committed deliveries of gas by the project object (2
nd
mission – project mission).
Further readings;
Asbjornslett et al. (1999). Article.
Bicheno, 2000.
CLM (1995). Chapter 9.
Cooper (1997). Article.
CRINE Network (1999); Chapter
Goranson (1999); Chapters 7, 9-12, and 14.
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Lambert (1998). Article.
Schneider et al. (1994). Article.
SCOR (2000).
7.2.5 Develop project supply chain strategy
In the project atlas the project supply chain strategy shall guide both the development
phase as well as the operations phase of the project demand/supply chain.
Closed Open
What?
How?
i
ii
iii
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Closed Open
What?
How?
i
ii
iii
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.16. Develop project demand and supply chain strategy.
Here we have deliberately chosen the PSCM strategies, agile and resilient demand chain
management and lean and robust supply chain management, for the development and
operations phase respectively. Alternative strategies could be a lean supply chain
management strategy for the development phase, e.g. as some operators propose with
predefined ‘packages’ of technological solution and project supply chain. For the
operations phase we believe that there will be one variant or another over the strategy
chosen here, i.e. lean and robust supply chain management. The strategic choices will
mostly be related to the operator’s involvement and commitment as supply chain
manager of the operations supply chain, i.e the spectrum of options between being fully
in charge and operating every step of the supply chain himself, or fully outsourcing the
supply chain management activities, thereby creating an outsourced gap between the
suppliers and the operator’s own project object in operation. This is in accordance with
the proposal as set forth in the conclusion of chapter five;
Stage 4: Approach an open project, with a rich (open) supply chain.
Approach a closed project with a lean (closed) supply chain.
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The supply chain strategy is the responsibility and task of the operator, but the rest of
the demand/supply chain should be involved as the strategy should be open, and used as
part of the project vision and definition as laid out in part one above. The strategy is
also to be established concurrently and in interaction with the four parts above.
Further readings;
ACTIVE 1998. VEP 1.7, 3.1, 5.2, 6.1, 6.2, 7.2, 7.4
Burton et al. (1999). Article.
CRINE Network (1999); Chapter 7.
Harrison et al. (1996). Article.
Trigeorgis (1997). Chapter 8–9.
7.2.6 Select project development and operations alternative
In the project atlas we have now come to the point where both the development and
operations strategy is to be committed to through selecting project development and
operation alternative. This is a selection point where each company among the license
owners have their own agenda in optimising the outcome as part of their own portfolio
of stakes in licenses.
‘[A decision] is simply a moment in an ongoing process of evaluating alternatives for meeting an
objective. It is the moment when a decision maker selects the course of action that appears most likely to
result in the attainment of the objective’ (Harrison 1995, p. 27).
Closed Open
What?
How?
i
ii
iii
Closed Open
What?
How?
i
ii
iii
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.17. Select project development and operations concept.
In this decision point there are a set of stakeholder interests that has to meet and be
aligned. Among the directly involved stakeholders are the government of the nation
where the petroleum resources are located, the license owners, the company(ies) that
shall develop and operate the license as Operator(s), and the actors of the demand and
supply chain of the industry.
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The nation’s interest are with respect to the long term development of the continental
shelf and depletion of the hydrocarbon resources, e.g. future opportunities in the field
region, growth national and regional of suppliers, future development of related onshore
industry due to field development (e.g. base and supply activities, or industry using gas
or oil as feed-stock). The nations interest in the development of the license is formalised
in the concession process. The programmed
64
decision process in the oil and gas
context;
1. Concession round – concessions to develop a field are given to licensees and
operator(s) for development and operations is (are) nominated.
2. Development and operations alternatives are researched and decided upon
(supply chain actors may be selected, committed and work commenced pending
on approval of PDO).
3. Plan for development and operations (PDO)
65
are sent to the Governments for
approval.
Especially point two above should be noted with respect to project supply chain
management as this enables the project demand and supply chain to commence the
work, pending on the approval of the concession. However, the risk for sunk cost if the
concession is not approved has to be covered by the project owner(s).
This formal concession process and the underlying interests of the nation, handled by
the Government, has to be acknowledged by the companies in their decision making
process, or as Harrison states;
‘Because organisations exists within the society’s economic system, managers need to be responsive to
the total society’s decisions and the reasons for them’ (Harrison 1995, p.17).
The interest of the licensees’ lies among others in the potential for synergies across own
operator licensees with new field development. The operator(s) have interest in
developing and benefiting from synergies across several of the operator’s own operated
installations. While the demand and supply chain’s involvement and interest lies in
developing own solutions, products and supply chain capabilities and competence.
Further readings;
Harrison (1995).
64
Programmed according to Herbert A. Simon in Harrison (1995, p.17).
65
In Norwegian; Plan for utbygging og drift, PUD.
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7.2.7 Activate and execute the project development supply chain
In the project atlas the focus is now on the execution, or the project planning and control
domain. The focus should as such be on logistics and materials management. This may
typically be presented as a check list set-up, and we will here present two check lists
from one source (Kerridge, 1987), some general considerations from a researcher
(Silver, 1986), and some experiences from an alliance project (Harrison et al., 1996).
Closed Open
What?
How?
i
ii
iii
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Closed Open
What?
How?
i
ii
iii
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.18. Activate and execute the project development supply chain.
Silver (1986) has given the following list of procurement and logistics activities in project
development phases;
‘Feasibility: estimate cost of major items, estimate availability and lead times of critical items.
Bid preparation: Identify long lead items, do logistics study, develop list of vendors for project,
determine an order of magnitude budget.
Planning (owners): Contribute to specifications of requirements, pre-screen contractors, evaluate bids,
take part in negotiations, review material management organization and procedures of selected EPC’s,
develop material management plan for owner procurement/ logistics.
Planning (contractors): Prepare project procurement plan of execution, firm up long lead items, interface
with scheduling, identify oversize equipment.
Detailed design: Have design done as quickly as possible on long lead items, work with engineers in the
timely development of requisitions, review inspection needs with engineering, advise engineering of
weight and size limitations from the standpoint of logistics.
Procurement: Receive requests for quotations, prepare and process purchasing/subcontract requisitions,
receive and evaluate bids, write purchase orders, expedite, inspect, arrange and monitor transportation,
prepare material receiving reports, maintain appropriate documentation, (owner) monitor contractor’s
material management activities.
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Construction: Check when installation of key equipment is possible and how it will be handled,
influence construction schedule when appropriate, receive goods, warehouse and manage inventories on
site.
Commissioning: Dispose of surplus, roll over history of equipment to operations (ability to track back to
vendors and specifications), ensure availability of spare parts, operating and maintenance instructions,
make appropriate back-charges to suppliers for field corrections’ (Silver, 1986).
A more thorough check list for materials management in project execution is given by
Kerridge (1987). Kerridge’s check list is presented in table 7.20 below. For a full and
specific discussion of each bullet point in the check lists see Kerridge (1987).
Table 7.20. Materials management checklist – Materials of construction.
Material cost optimisation
Engineer vs. procure vs. construct
Vendor engineering
Component standardisation/rationalisation
Shop vs. field fabricate
Material responsibility
Material take-off (MTO)
Requisitioning
Purchasing
Expediting
Inspection
Installation
Material control planning
Quantity take-offs (prelim/intermediate)
Material quantity trending
Growth allowance
Construction allowance
Surplus material disposal
Spare parts
Material sourcing
Local vs. world supply
Mill vs. stock supply
Package deals
Sole source negotiations
Blanket orders
Package plant
Modular design
Project financing constraints
Material shipping
Protective packaging
Containerisation
Assembly and marshalling
Material scheduling
Field need date
Critical material items
Early vendor selection
Schedule vs. cost considerations
Early bulk ordering
Subcontracts
Subcontracted engineering
Subcontracted material supply
Combined subcontracts
Field material control
Field warehousing
Field material purchasing
Damaged/missing material replacement
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Kerridge has also established a check or reference list over materials management
responsibilities in the project execution phase. That list is presented in table 7.21 below.
Table 7.21. Material management responsibilities.
Engineering
Material selection and specification
Material quantities by drawing, by line and by item
Material quality control
Technical and drawing review of vendor information
Application of material identification codes
Material cost control with regard to quality and quantity
Material quantities and requisitions to schedule requirements
Procurement
Vendor selection
Issuance of inquires and commercial review of bids
Purchase orders, subcontracts and purchase order changes
Vendor expediting and inspection
Transportation logistics
Specification of packing, tagging and identification requirements
Material cost control with regard to overall cost and unit rates
Delivery of materials to schedule requirements
Construction
Establishing onsite required dates for all materials
Setting erection sequences
Field receipt, inspection and/or rejection
Field warehousing
Field identification coding and tagging
Issuance of material shortage, damage and excess notifications
Purchase of field sourced materials
Installation of materials to specifications and drawings
Installation to schedule requirements
Project controls
Establish scheduled dates for material acquisition cycles
Issue approved budgets for materials – quantities, unit rates, costs
Maintain approved equipment list
Establish material tagging and identification codes
Monitor, track material performance (quantities and costs)
Issue material status/exception reports
Receive, verify invoices vs. purchase orders
Pay approved invoices
In addition to Kerridge’s check list a sum up of purchasing and materials management
from an alliance project should be mentioned (Harrison et al., 1996).
Bulk steel procurement was better carried out by the fabricator, and not by the design office, as the
fabricator is better placed to perform material take-offs, knowing his own approach to nesting and
hence judging cut and waste.
Late arrival of quality vendor documentation (as usual on a project).
Look at the procurement process to take into account data which could be provided at order, data
which is unavailable until the item is built, and that the vendor has also to go through a design,
procure and manufacture cycle.
For significant packages, have much closer peer-to-peer interaction in the early stages of an order,
rather than waiting until drawings appear and it is too late.
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offer appropriate incentive schemes – delaying payment only works if the amount are significant, and
penalties are difficult to enforce, particularly if the item is delivery critical.
Make greater use of long-term call-off supply agreements – especially as individual projects get
smaller and their ability to influence becomes more marginal.
Establishing and maintaining a good relationship between engineering, procurement and the
construction site(s) pays off many-fold (Harrison et al., 1996).
Logistics and materials management in project execution is a comprehensive field,
where both the ‘devil is in the details, but so is also salvation’. In the references under
further readings you will find a comprehensive coverage of the topic, from different
approaches and industries.
Further readings;
ACTIVE 1998. AP7.
Burton et al. 1999.
CAPS 1997, I and II.
CII 1988.
CRINE 1999-B.
Harrison et al. 1996.
IPA 1995.
Kerridge 1987.
O’Brien 1995.
Pahkala, 1997.
SBI, 1995.
Stukhart, 1995.
7.2.8 Preparation for and start-up of operations supply chain.
The main structure of the operations supply chain was established through the
concession for the license that the project was developed to exploit, as well as when the
concept for development and operations were chosen. Spare parts programmes and
related supplier contracts are also part of the scope of work of the development phase.
However, the operations supply chain has to be configured, planned and established
before operations commence.
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The project is now brought into a closed mode and the focus is on the operational
supply chain, from suppliers via pre-transport into the supply base, supply base
operations, offshore transport, and the demand situation at the offshore installation. This
is shown in figure 7.19.
Closed Open
What?
How?
i
ii
iii
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Closed Open
What?
How?
i
ii
iii
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.19. Preparation for and start-up of operations supply chain.
Operations programmes
The demand requirements have already been established for the offshore installation,
through spare parts programmes, number of personnel located offshore. In addition one
now have to plan the operations programme, including drilling programmes. This will
impact the deck space needed for drilling tubes, equipment, and general operations
supplies, as well as bulk products such as concrete, drilling chemicals, etc.
Good planning and communication of the operations programmes are a prerequisite to
be able to establish a cost-effective and robust supply services scheme.
Supply categories, supply volumes and service requirements
The operations supply chain cover several categories of supply. The supply could be
grouped into the following six categories:
Food and consumables.
Operations supplies.
Drilling material.
Drill-tubes.
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General bulk.
Operations chemicals.
Each category will have its specific demand characteristics and supply service
requirements, therefore they should be treated independently for planning purposes, but
collectively for developing the total scope of the supply services infrastructure and
resources. E.g. could the volume demand for supply of food and consumables be treated
as a constant, except for e.g. maintenance periods with increased manning offshore.
Drilling equipment, or more specifically all rental equipment, will also have a return
process, as it is important to bring the rented equipment back onshore after it has been
used offshore to prevent unnecessary costs through increasing the rental period.
Approaching the different service requirements per supply category has many
similarities with the CMSO methodology (Schneider et al. 1994) and could be used
accordingly for the operations supply chain categories.
Establish supply chain
The supply chain infrastructure has partly been established through the concession and
the development and operations concept. The localisation of the supply base(s), and
suppliers for spare parts has been established, as well as drilling and maintenance and
modification contractors would also be committed to. Then one have to establish the
warehousing nodes and transport modes to link the supply chain together.
Storage of spare parts, consumables, equipment and bulk material could be at
warehouses at suppliers site, at base, or offshore. The criticality of the goods and the
lead-time from storage to offshore use, the potential for shared use and synergy will
decide where the different goods should be stored.
For all goods stored before the supply base in the supply chain, pre-transport is needed
to bring the goods from the supplier or external warehouse and to the supply base. In
addition, the same mode of transport or transport system may have to be used for ‘post-
transport’ back to the supplier or external warehouse, e.g. for rental equipment.
The supply base must be equipped to handle the goods needed for the installations it is
set to serve, e.g. storage of drill-tubes, storage tanks for different types of bulk products,
repair shop for small repairs, and if required a sub-sea equipment pool.
To bring the goods from the supply base to the offshore installation in a cost-effective
manner an appropriate supply vessels scheme is needed. First the total demand for
supply vessel capacity, both with regard to deck-space and bulk storage capacity has to
be levelled. This should be done to optimise the number and size of vessels needed to
cover the whole supply operation, both for the specific installation and for other
installations that go in the same supply vessel scheme. When the overall capacity is
established one need to plan the sailing routes and schedules of the supply vessels, so
that it will cover the service requirements of the specific installations, e.g. needed
frequency of vessel calls per week, as well as give the installations a fixed and known
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schedule to plan from. The schedule must also meet specific time related requirements
of the installations, e.g. installations that are closed during night hours for vessel calls.
The vessel capacity levelling and the route planning and fixing of schedules need to be
revised periodically to optimise the supply vessel scheme as requirements changes.
Then the loading of each vessel needs to be planned on a daily basis. This cover both
planning of the deck space and the bulk tanks. Specifically stowage and segregation
plans need to obey the rules for dangerous goods, as well as prepare for safe and easy
un-loading and loading offshore in accordance with the route of installations that are
called.
So in summary for the supply vessel operations, there are three main elements;
Capacity levelling
Route planning and fixing schedules
Deck and bulk planning – stowage and segregation.
Operations supply chain management
Operations supply chain management is an important role for the operator. Much of the
scope of work in the operations supply chain may be outsourced to actors that have
specific functions as their core business, but the management role of the supply chain
should be kept as the operator’s role and responsibility. Below we list and comment
some elements that we mean are relevant for the management role.
Customer supply agreements
The customer, i.e. here the offshore operations organisation, is maybe the one actor and
stakeholder in the operations supply chain that could contribute the most in the
continuous development of the supply chain, and the management of it. To make the
customer a committed part of the supply chain, that understand and take a responsible
role in the continuous development and improvement of the supply chain, supply
agreements should be established between the provider of the supply services and the
customer(s).
Standard and special services
Some of the actors within the operations supply context has said that ‘10% of the
supplies on a daily basis are controlled or controllable, 90% is a “surprise”’ – this put a
considerable amount of stress on the standard supply system, and necessitates that the
situation is turned around so that one get a 90/10 situation in stead of a 10/90 situation.
This should be achieved through better commitment from all actors in and stakeholders
to the supply system, as well as separating clearly between standard supply services to
cover the planned situations and special supply services that cover requirements and
situations that will put to much strain on the standard system. This means that the
standard supply system should cover the 90% controllable situations + 5% of the
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special, uncontrollable situations, and that special supply configurations should cover
the remaining 5% of the special, incontrollable situations so that these does not destroy
the ‘optimal’ standard supply system. Special requirements e.g. due to incidents in the
supply chain, specific one-off demand etc., should not penalise all customers of the
supply system depending on the service level of the standard supply system scheme.
A differentiation between standard and special services may be seen as optimising a
lean basis, with an agile top. Establishing the special services as a specific element, to
be treated separately, but not necessarily executed separately, shall also secure that the
standard operations are kept as an element for optimisation on its own, not to be overly
disturbed by ‘special’ requirements and ad-hoc ‘requests’. This should also contribute to
focusing the customers, i.e. the offshore installations, on utilising the standard system to
its full extent, and thereby improve their own cost position with respect to logistics
services.
Operations supply centre
Each installation could come in contact with the supply chain through several points of
contact. They could either go through the procurement part of the onshore operations
organisation, the base organisation, or directly to the suppliers. These points of contact
with the supply chain could also be reached through various means, e.g. phone, fax, e-
mail, or through information and communication systems. All these contact points and
means make the supply ordering and contact process rather diverse, with many
potentials for mistakes and with the potential for loosing overview of the supply
situation.
Such an operation supply centre should be organised with various functions co-located
to facilitate short communication lines and ‘hands-on’ management from the team
operating the centre. Communication wise, the centre should be supported by
technological means so that all order and supply information is routed through the
centre, and with ‘single points of contact’, e.g. specific phone and fax number, e-mail
and system access so that a ‘one-number’ principle lead directly to the centre, but with
multiple line access to avoid bottlenecks.
Such an organisation would enhance the ‘visibility’ of the supply chain operations. Both
for the customers and suppliers interacting with the demand and supply chain through a
single point of contact, and for the supply services that bring the operational
management of the demand and supply chains into one cross-functional unit. It should
be noted that the intention should not be to have one centre for all supply operations on
the continental shelf, but one centre per supply base.
Further readings:
Bicheno (1999); Chapters ‘Philosophy’, pp.12-29, ‘Planning’, pp.30-40, ‘Analysis
and mapping’, pp.67-109, ‘Improvement’ pp.110-134, and ‘Suppliers and
distribution’, pp.178-183.
CRINE Network (1999-B). Chapters 1-6, and 8.
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Fagerholt et al. (2000); Article.
Schneider et al. (1994). Article.
Statoil Operations Supply Strategy, 2002.
7.2.9 Re-configure and improve operations supply chain
After the project object or installation is set into operations, and operations programmes
develop, the supply requirements will change. So will the supply requirements of other
installations, both of the same operator, as well as for other operators. As the supply
requirements change with time, this has to be paid attention to, to continuously develop
and improve the operations supply chain along lean principles. In the project atlas the
focus is now not only on the operations supply chain of the one installation, but also on
synergies with other installations.
Closed Open
What?
How?
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Closed Open
What?
How?
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.20. Reconfiguration and continuous improvement of the operations supply
chain as the supply context changes.
A question in this respect is what is changing. There could be:
Changes in supply volumes and requirements, e.g. due to end of drilling
programmes, or changes in production programmes.
Installations in the same supply system configuration close down.
New installations, or modifications, that commence operation.
Changes in the supplier base, old ones are terminated, new ones established.
Changes in supply requirements across supply regions.
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Given such periodic changes, what should be done to adapt to them and to make sure
that one are able to optimise to the changing situation and draw benefit from new
opportunities;
Analysis of the changes in the supply demand requirements. Both for the installation
in focus, but also across installations within the supply region, for existing and
potentially new partners.
Mapping of changes in the demand/supply chains.
Analysis of resource utilisation; suppliers, pre-transport, supply bases, and supply
vessels.
Analysing potential for new synergy driven collaboration across operators.
Address limiting factors.
Demand analysis
Periodic updating of the demand for supply services per installation is the basis for
adjusting and adapting the supply services. The demand analysis is especially important
to set the scheme for and optimise the ‘standard’ supply services.
Supply chain mapping
Above we gave reference to a set of approaches to mapping the demand and supply
chain. Most of these have continuous improvement as their aim, and the project
operations supply chain as it was mapped when it was established may be used as a
baseline. However, as the operations supply chain develop with the progress and
development of the offshore operations and supply requirements, there is needed to do
revised mapping of the operations supply chain.
The mapping should be the basis for the continuous development activities of the
operations supply chain. The continuous development activities comprise improvement
of the supply processes as part of the operations supply chain management activities,
both for standard and ‘special’ services, adapted and improved utilisation of the supply
infrastructure as the supply requirements and cross-installation supply configuration
changes, as well as understanding the potential for and initiating synergies across
installations and operators.
Optimised utilisation of infrastructure and resources
Along with the offshore oil and gas field developments, the infrastructure of the
operations suppliers and the supply bases are being developed. Much of these
developments are due to regional, geographic reasons, to be able to supply and reach the
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offshore installation(s) with a supply vessel from a supply base, within time- and cost-
effective acceptable limits.
The supplier and supply base infrastructure is also part of the concessions of each field
development. This is often the Government’s way of securing regional benefit of
offshore field developments. However, there may be situations where the onshore
supply infrastructure has to be the target for reconfiguration to secure the profitability
and lifespan of the offshore installations. As such the conditions stated in the
concessions may have to be challenged. This is further addressed below.
Collaboration and alliances
Changing supply requirements does often open up for co-operating with new partners to
exploit new potentials of synergy. E.g. new supply requirements could mean that new
supply vessel routes and schedules could be improved through establishing
collaborative sailing schemes with other operators, or others than the operators one are
presently collaborating with. This presumes an understanding among operators that the
basis for collaboration will change, and that periodic analysis and adjustments to the
collaborative configuration have to be made, including termination of old
collaborations.
Limiting factors
In realising the potential for supply synergies across installations and operators, one will
eventually find potential for synergies in the scope of work and structure of the supply
bases. This could e.g. mean that some services could be located at one or a few bases, or
e.g. that the operations of several bases within one region could be gathered at one or a
fewer set of bases, e.g. as the supply volumes are reduced and fewer bases are capable
of covering all supply operations in one region. This could mean substantial
improvement in the supply cost position.
However, the scope of work and supply structure of the supply bases for the Norwegian
Continental Shelf is part of the concession for each installation. This means that e.g. it is
specifically stated in the concession from which base each installation shall be supplied,
and there is also stated what scope of work shall be covered from each base for each
installation, as well as the amount of personnel resources of different categories, e.g.
procurement, that shall serve a specific installation from a specific base. This will
eventually become a limiting factor for realising supply potential as the supply
requirements are reduced.
This means that the concession based requirements for the supply services structure will
eventually become a cost disadvantage for operations of the offshore installations and
should therefore at one time be evaluated against the initial intentions of the concession.
This means that even the concession requirements should be a factor for revision as the
supply situation of the offshore installations change.
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Further readings;
See under 7.2.8 above.
7.3 Summary
Above in the introduction to this chapter we stated that:
‘Methodological guidelines should as such meet the aim of the future research proposals set out by
Lambert et al. to ‘guide managers in the effort to develop and manage their supply chains’, in this case in
the project context. Given that a project’s supply network is not fully developed the methodological
guidelines should help to build an understanding of important aspects to address up-front. The
methodological guidelines should as well be of help in the process of developing and analysing the supply
network and processes that will be activated when the development and operations phases of the project
starts’.
The guidelines given above should help in this. They are not comprehensive in all
aspects, it could also be improved in its form, but should help in understanding the
process as well as address some constructive elements in demand and supply chain
analysis for the project setting. That was also the intention.
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This chapter concludes this thesis by asking whether something new has been brought
forward through this work, assessing how the objectives are met and assessing the
applicability of this work.
8.1 PSCM – ”Old wine in a new bottle”?
Within the wine industry, old grapes have been ’exported’ to new areas, developed and
resulted in good wine. Though the grapes are ‘old’ they still have ’capacity’ to develop
and make good results in a new area, and be acknowledged by the consumers – often
based on a quality to price ratio. In this thesis supply chain management may be
regarded as grapes. The new area, the ‘Promised Land’ for supply chain management to
make a contribution, is the project-oriented context and within project management. As
old grapes in a new area makes a wine that have similarities with wine based on the old
grapes in their area of origin, it still has its own characteristics that make it unique. The
same may be said about project supply chain management in the project context.
There are many similarities between supply chain management in the repetitive,
continuous business and industrial context and in the project-oriented context. Though,
there are certain characteristics that are more important, or should be given more
emphasis in the project-oriented context than in the business or industrial context, and
vice versa. Therefore, project supply chain management may be said to be “new wine in
a new bottle”. On the other side, if the wine is seen as a remedy or cure or to improve
something, project supply chain management may be “old wine in a new bottle”. The
wine, now seen as supply chain management, i.e. the remedy, is old, but it needs a new
bottle, here seen as a format, to fit the remedy to the project-oriented context. In either
way, supply chain management has become a necessity. Organisations focus more on
their core competence and out-source the rest, there is a need or desire to be able to plan
and execute faster, though at the same time relying more on the external supply chain
than before. Thereby the supply chain becomes the competitive unit, not only the
individual company.
However, project supply chain management is only one approach to fit supply chain
management to the project-oriented context in such a way that it leads attention to what
is important in the different phases of the project or the life-cycle of the project object.
As business value for all supply chain actors is the aim, the right analogy to use should
therefore be “new wine based on old grapes in a new area gives value to both customer
and suppliers”. To summarise, ‘old wine in a new bottle’, is not to be regarded as just
brushing up some old ideas, but rather a necessity to bring ideas, concepts and methods
from one domain of knowledge and application to another. That could give results and
benefit both to the ‘adopting’ domain of application, as well as the ‘parent’ domain of
application.
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8.2 Recapturing the objectives
In chapter two the objectives of this thesis was summarised as to;
- ‘Develop principles and concepts of logistics and supply chain management in the project context.
- Demonstrate these principles and concepts through theoretical and empirical examples.
- Apply these principles and concepts, through methodological guidelines for analysis.’
Now it is time to ask whether we have obtained these objectives? The first objective, to
develop, is obtained through the development of the PSCM concept and guidelines. The
second objective, to demonstrate, is done to some extent through the text, but we still
miss a full demonstration through one or more case studies. That is a weakness with this
research. The third objective, to apply, has been covered as it is formulated above,
‘through methodological guidelines for analysis’. However, the PSCM development,
both the concept and the guidelines, should have been applied to a real case, to test and
revise elements of both the concept and the guidelines. We have not been able to do
this, and it must therefore be left for further studies.
We did also formulate three part objectives to support the main objectives;
1. ‘Determine if there exists present work or approaches that are suitable to use with respect to
developing and proposing the use of logistics and supply chain management within the project-
oriented context of the oil & gas industry, through a survey of existing research on project
management and supply chain management.
2. Determine competitive aspects or elements of logistics and supply chain management that are more
important than others to relate to and use within the project context as found in the oil & gas industry.
3. Structure and adapt existing theory as a guidance to practical use – formulate a concept (or ‘frame of
mind’) and develop methodological guidelines for an approach to logistics and supply chain
management within the project context of the oil & gas industry.
Below in Table 8.1 we have summarised how and where these part objectives has been
covered in this thesis.
Table 8.1. The fulfilment of the part objectives set for this thesis.
Part objectives, covered in;
1 This is covered in chapters 3 and 4, specifically in the earlier developments in sub-chapter 4.5.
2 This is covered through the outlining of the oil and gas supply chain challenge in chapter 5,
preceded through the theoretical outlining in chapters 3 and 4.
3 This is covered in the development of the project supply chain management concept in chapter
6, and the methodological guidelines in chapter 7. The methodological guidelines in chapter 7
are sought developed along the life-cycle of a project.
If we return to the aim of this study as set by Arbnor & Bjerke’s (1997) systems
approach and presented in chapter two, we have determined the type of the system, not
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fully described the system in detail, but given a guide in how to approach to see the
system from a logistics point of view.
The basis of this research has been theoretical studies, and empirical input and
reflections about demand and supply chain issues given by several actors related to the
project demand and supply chain in the petroleum industry around the North Sea basin,
as well as open empirical sources of information. The studies of the project-oriented
supply chains and the other sources of empirical material may be regarded as one ‘case’.
This is due to the nature of the research, which are conceptual development as well as
methodological outlining. The ‘case’ as such is not specific projects and supply chains
per se, but the ‘industry’ of the project context, its actors and processes that are involved
in the ‘problem’ and context to be studied. This may be said to be in line with the
research approach as given by Arbnor et al. (1997).
‘Let us only say that it is important to understand historical material from its own contemporary
perspective, which often requires extensive studies of the spirit of the times in the environment of the
system being moulded’ (Arbnor & Bjerke, 1997, p. 241).
8.3 Usefulness of the project supply chain management concept
‘The requirement [for validation in the systems approach] is not so much that definitions must correspond
with existing theory or be operational, as that they are perceived to be important and relevant to the
creator of knowledge as well as to other participants from the real system engaged in the process of
creating knowledge’ (Arbnor & Bjerke, 1997, p.234)
As outlined in chapter two and above, we have not been able to demonstrate or apply
the PSCM development versus one or more real cases. But following Arbnor &
Bjerke’s comment above, we will here relate the PSCM development to some
theoretical and empirical sources that we have had access to. On the theoretical side we
relate the PSCM developments to the earlier approaches to logistics and supply chain
management as given in chapter four, and the areas for further improvements post-
NORSOK as given in chapter two. To discuss the PSCM developments against practical
challenges in the industry we use the results of two industry workshops that we
arranged, given in appendix D and E, and some challenges and recommendations that
we got in interviews with actors and stakeholders in the project demand and supply
chain of the petroleum industry.
8.3.1 The PSCM development versus theory
PSCM versus earlier approaches
Here we will compare the earlier approaches to logistics and supply chain management
in different project contexts, as outlined in chapter four, with the project supply chain
management concept and guidelines, as presented in chapter six and seven.
Silver (1986 & 1988) is the first author we found to address the logistics and supply
chain management challenges of the project context of the petroleum industry. Silver
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raises some questions or challenges related to the subject. Among them he raises the
aspect of uncertainty and the design change process, which is the basis for the agile and
resilient demand chain management perspective of the development phase in the PSCM
concept, supported by the agile development aspect in the PSCM guidelines. It is also
an aim of the PSCM development that it shall contribute to the degree of a more
proactive attitude towards logistics and supply chain management in the project context,
as Silver questions.
The supply chain management initiative of the CRINE Network was established two
years after this research commenced. CRINE Networks treatment of the subject is
comprehensive and interesting, and the PSCM development has many similarities with
their objectives. The contribution that the PSCM development bring along that CRINE
Network does not address is the distinction between the characteristics and approaches
to the two phases, development and operations, of the project life cycle, that should help
in focusing the difference in the challenge. Further, the PSCM guidelines bring in
addition to CRINE Networks methodology, another perspective on the project vision
process, and its relation to the project supply chain, the guidelines to agile development,
as well as the specific guidelines to the operations phase. The resilient versus robust
dimensions of the service aspect is neither addressed by CRINE Network. However,
CRINE Network’s supply chain management initiative comprised a broad industry
initiative, and as such has covered more practical elements that we have been able to in
this study. The CRINE Network initiative has also been established as an independent
entity through the Logic-Oil establishment.
Burton et al. (1999) address the aspect of strategic supply initiatives in the oil and gas
industry, and its relation to financial advantage. This is an element that is not covered
through the PSCM developments. One relation may though be found in the operations
phase, e.g. collaboration between installations and operators for supply vessel services
and supply base services. Operator frame agreements and contracts do also fall within
this category, but has not been treated specifically in the PSCM developments.
The PSCM development does neither address the specific material administration part
of the development phase of the project, as e.g. Kerridge (1987-I & -II), CII (1988) and
Stukhart (1995) does. Especially CII and Stukhart’s contributions are comprehensive in
this field. This field is also partly covered in the textbooks on project management,
planning and control, Harrison (1992), Lock (1994) and Rolstadås (1997), though not to
the same extent as the aforementioned authors. In relation to the text-books on project
management, planning and control, the PSCM development could contribute with a new
perspective on the challenges of management of the project and its demand and supply
chains.
Three more authors, Byggforskningsrådet (1991), SBI (1995), and O’Brien (1995)
address aspects of logistics and supply chain management within the construction
industry. Compared to Byggforskningsrådet’s industrial approach in trying to copy
repetitive industrial logistics processes to the construction project context, the PSCM
development break with that approach in separating between the one-of-a-kind
development phase, from the repetitive operations phase. The total cost aspect as
addressed by SBI, and further specified by O’Brien has not been specifically addressed
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in the PSCM development. However, the PSCM development is founded on the
assumption that the underlying driver for the demand and supply chains contribution to
the project should be value focused, through cost effectiveness in the development
phase, i.e. cost is a generator of future value, not only a cost, and cost efficiency in the
operations phase, i.e. the focus on the lean concept.
Pahkala et al. (1997) and Kanjii et al. (1998) address the total quality management
aspect that underlay the lean development within supply chain management. This is
only partly and indirectly addressed in the PSCM developments, as part of the
guidelines for the operations phase.
Vollmann et al. (1995) introduced the demand chain management concept. This concept
is taken directly into the PSCM development, and used specifically to address the
development phase, as the demand management processes in this phase are regarded as
the key driver for understanding the supply chain management challenge of this phase.
Therefore we have used the term demand chain management specifically. We have also
used horizontal partnering for the type of demand chain partnering between operator
and a set of contractors and main suppliers in an alliance as Vollman et al. uses, as well
as vertical partnering for the supply chain partnering from the contractor and
downwards into the supply chain, as e.g. Schultzel et al. (1996) does in their description
of Bechtel’s multi project supplier agreements.
Vollmann’s use of demand chain management could be furthered by the discussion of
the differences between ‘agile’ and ‘lean’ approaches, and their reliance on the English
and French engineering traditions respectively. From Goransson’s (1999) discussion
of these one could argue that ‘supply chain management’ is a wrong term to use for the
development phase. It could rather act as a ‘contradiction in terms’, as the most
important part of the development phase is to enable value enhancement based on an
agile, extended, or ‘virtual’ enterprise, within a short scope of time available for
developing the project. This is in line with the commercially oriented, solution seeking
English engineering tradition. A good example of this could be British Petroleum’s
Cleeton project (Harrisson et al. 1996), conducted as an alliance, where the prime
objective for creating the alliance was to become able to enhance the value of the
project and make it financially viable. The project, with British petroleum as Operator,
that Vollman et al. comment in their article is developed in the same period and
tradition as the Cleeton project in Harrison et al.
66
Compared to the earlier theoretical approaches the PSCM development has generally
contributed with some new thoughts and perspectives, and specifically with the focus on
the different characteristics of the development versus the operations phase of the
project life-cycle, and some of the related methodological guidelines. There are
however many aspects and areas that not has been covered by the PSCM development,
especially the detailed studies of the material management processes.
66
See Goranson (1999) for a discussion of the origin and differences between the British and French
engineering traditions, and how these influenced the development of the North American engineering
schools and their engineering tradition.
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PSCM versus post-NORSOK recommendations
In chapter one we pointed to some of the main areas for improvement post-NORSOK,
as presented by Kaasen (1999). These were the five areas of attitude and cooperation,
better quality early, decision processes in development projects, support for further
improvements, and level of activity.
For the first, attitude and cooperation, the PSCM concept and guidelines as developed
here have a rather small contribution. There are however a couple of elements that could
be useful. One is the first element of the PSCM guidelines in establishing a project
vision. Establishing a project vision may unite the project supply chain, and especially
regarding collaboration about contractual risk, which need the right attitude among the
project stakeholders about the project’s degree of openness. Another is use of the PSCM
concept to build understanding, and thereby attitude about the challenge of the project
demand and supply chain context and one approach to deal with this.
The second, better quality early, is a challenge for the more concurrent processes of the
contemporary development and execution practice. The PSCM concept may help in this
through the sharper focus on the need for agile capabilities in the demand processes and
resilient capacities in the supply processes of the project development phase. Better
quality early may as an alternative lead to a return to the earlier practices of the relay
type of development and execution processes, were one may get improved control of the
demand when orders are placed and the supply chain involved, but at a cost of longer
duration. The PSCM development regard it as important, as a support to ‘better quality
early’, that one see and acknowledges that in practice it is not possible to control all
uncertainty, i.e. risk and opportunity elements, before committing the supply chain, and
that one has to take account of this and be prepared and able to handle the remaining
uncertainty in an ‘engineering type’ of approach. This is the basis for the agile and
resilient demand chain management aspect of the development phase of the PSCM
concept. This is also the aim of the ‘agile development’ part based on Goransson
(1999), in step four of the PSCM guidelines.
The third, decision processes in development project, was related to the real function of
the plan for development and operations, PDO. When the regulatory framework is such
that one is allowed to make commitments with the project supply chain before PDO
approval, then in practice the PDO is only a formal milestone for the demand and
supply chain management in this project context. The PSCM development has no
impact on this.
For the fourth area, support further improvements, the PSCM development in itself may
contribute with a new way of thinking and bringing other dimensions into the
improvement processes. As such the PSCM development could be one element in
challenging established practice, and supporting further improvements. For the
operations part of the PSCM concept and guidelines, they could directly contribute in
establishing a basic fundament for continuous improvement, especially through step
eight and nine of the PSCM methodological guidelines, but also with the concept’s
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focus on lean and robust operations. The PSCM development could also contribute as
part of competence development in being a framework to analyse previously executed
development projects in, and for projects in operation.
For the fifth area, the level of activity in the industry, the market analysis part of the
PSCM guidelines could be used. An even better source would be CRINE Network’s
methodology on this aspect. They have a good analysis of buyer versus provider
positioning.
To conclude, the PSCM development does not cover all areas for further improvements
post-NORSOK, but contribute with some elements that could give a constructive
contribution, among others, to the ongoing improvement efforts of the competitiveness
of the project context of the petroleum industry. These contributions does both bring
new elements to and build on the earlier approaches presented in theory, as well as may
give a contribution to the areas for further improvement post-NORSOK.
8.3.2 The PSCM development versus the industry’s challenges
As stated above, we had to move away from developing three descriptive case studies.
However, empirical material was collected through interviews, participation in
meetings, as well as through two workshops that we arranged. The two workshops were
related to topics that have impact on supply chain management within the project
context of the petroleum industry. The first workshop was related to the project front
end, the other to contract strategies. Below we will first discuss the PSCM development
in relation to the front-end workshop, then the contract strategies workshop, and finally
in relation to empirical input collected in some interviews.
Both workshops gathered representatives from several petroleum companies and
contractors. The summary presentation of the front-end workshop is given in Appendix
D, while the questionnaire and summary of the contract strategies workshop is given in
Appendix E.
PSCM versus project front end workshop
The objective of the project front-end workshop was to establish recommendations for
improving the awareness of the importance and challenges of the project front-end. The
workshop was based on the assumption that the main objective of the project front-end
is to develop the opportunity that the project shall realise, while concurrently reducing
the inherent risk. Risk come as a result of something. This something is related to
obtaining or reaching an expected end result, where the expected end result is the
developed opportunity. The front-end must therefore balance the development of
opportunities against risk reduction.
The main messages from the participants of the workshop was summarised into the
following:
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1. Balancing opportunities and risks; exploring and acting on potentials, clarifying
contextual differences and implications, and understand-focus-check.
2. Getting the project beyond sanction points and up to “big spend”; financial
justification, technical development (opportunity realisation), and supply chain
involvement.
3. Enhancing the ability to master speed and flexibility in project execution; mental
conflicts, classic to generic model, and decision making under uncertainty.
4. Enhance the ability to reach or exceed an expected result; proactive front end
planning, build on experience, seek and understand current challenges, and align
challenges and means.
Let us now relate these ‘conclusions’ from the workshop participants with the PSCM
development. We refer to Appendix D for more details under each of the four points
above that we bring into this discussion.
Regarding the first point the focus was on being able to act on potentials, when they
were present, i.e. one should have agile capabilities and capacities. Developing
opportunities is also a matter for the supply chain, or more precisely the demand chain
in this phase, in developing the demand for supplies for the project object development.
As such, developing the opportunity and reducing risks is a matter to be managed by the
demand chain construction, involving both operator(s), contractor(s), and even suppliers
of major or critical items. Another element under this point is the need to understand the
project’s position with respect to degree of openness. We have in the PSCM guidelines,
used the project space as help in visualising this. Understanding the project’s degree of
openness, and relating this to the choice of execution model and demand and supply
chain involvement, was also discussed in chapter five under the challenge of the oil and
gas supply chain.
The second point addresses first the element of financial justification, and the stepwise
process through sanction points. In the guidelines we referred to evaluation based on
real option concepts that could fit a stepwise sanction process, and that at the same time
could cover uncertainty, and take elements of flexibility into account. With respect to
the technical side the focus was on how requirements change over time, which need
support of an agile approach to the demand processes. It was also remarked that
technological choices lead to commitment, and that if these are to be changed the supply
chain should be resilient to be able loose up commitments made, and seek and make
required new commitments. This point is only indirectly mentioned in the PSCM
developments. Also in this point the involvement of the supply chain was mentioned as
an important part, i.e. not the operator as one demand actor, but the operator and the
‘supply chain’ actors as a demand chain construction.
The third point, address first the engineering roles of the demand chain management
construction. We discussed this in chapter five, in the roles of the intra-organisational
project supply chain actors. Then the focus was on the transfer from a classic, relay
oriented development process, to a more generic, concurrent process. In a generic,
concurrent process one should prepare for flexibility, being able to manage both
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uncertainties and risks. The workshop participants stressed further that this necessitates
decision-making under uncertainty, making decisions in spite of lack of complete
information. The question then became how one could become confident about such a
context? In the PSCM development we have taken the demand chain focus on this
management setting, as outlined by the workshop participants. We have further pointed
to the need for agile and resilient capabilities, capacities and methods, both directly and
as sources of knowledge about how to cope with the given project context.
The fourth and last point focus on enhancing the ability to reach the expected result, i.e.
being able to take the developments into the execution phase, and being able to manage
the development all the way to and commence operations as planned. The focus is
further on having a proactive attitude towards front end planning. As Silver (1986 &
1988) questioned the reactive versus proactive attitude, the workshop participants
stressed proactive planning, including the project demand and supply chain. Being
proactive includes planning for and managing moving targets, and aligning challenges
and means, as we stated in chapter five, under the challenges of the oil and gas project
supply chain. Our answer in the PSCM developments became, agile and resilient
demand chain management for the project development phase.
A final point or message from the workshop participants was ‘planning for success’.
The message was that one should aim for;
‘a good model of how to “move through” in a rational way, i.e. aligning and balancing based on an
understanding of scope of work and the way of execution’.
The PSCM development follows the messages and meet some of the aspects as laid out
by the workshop participants. The PSCM development, with the concept and guidelines,
may therefore be one contribution to a ‘good model’ for developing the project
together with the demand and supply chain, taking the inherent uncertainty, comprising
both opportunities to be developed and risks to be managed into account. This should in
the development phase be based on a conscious focus of the demand processes and
demand chains, understanding the required agile needs and preparing for agile
capabilities in a proactive way, including the demand chain, and resilient capacity in the
supply chains.
PSCM versus the contract strategies workshop
The objective of the contract strategies workshop was to address and discuss the types
and roles of contract strategies, in relation to the project context and the attitudes of the
participants and stakeholders in the project value chain. As an assumption the workshop
rested on a split between three generic groups of project strategies, namely;
1. Risk reducing strategies.
2. Opportunity seeking strategies.
3. Value enhancing strategies.
8 Conclusions
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213
Up-front of the workshop the participants in the workshop got a questionnaire to use as
preparation for the workshop, and to be discussed in the workshop. We will here discuss
the PSCM development in relation to some of the main messages in the feedback that
the workshop participants gave.
The mission of a contract strategy was seen to be a ‘communication tool’ internally and
with the market, to signal the given approach to procurement and demand and supply
chain management. In relation to the project management activities the contract strategy
shall align and co-ordinate the project demand and supply chain with the project
objectives, and supporting the project strategy. As such the contracts strategy shall be a
‘tool’ for establishing and managing the project’s inter-organisational demand and
supply chain. Then how does this fit with the three generic project strategies and the
PSCM development?
Of the three generic project strategies, the PSCM development seeks primarily to
address opportunity seeking strategies. Value enhancing project strategies could both be
risk reducing and opportunity seeking, as to balance out the realisation of the business
opportunity that the project shall undertake and the inherent risks, as stated by the
project front-end workshop. It should be noted that risk reducing project strategies were
the ones felt necessary to use, but that the portfolio of contract strategies should be
elevated. It was also said that the portfolio of different contract strategies should be
elevated carefully. This is due to being sure that the division of risk among the project
demand and supply chain, that a given type of contract strategy lead to, does not bring
any stakeholder into a position not manageable. As the workshop participants stated,
risk drives behaviour. If we relate this to the project strategies then one may say that the
risk reducing strategy is a ‘safe’ choice for minimising and handling risk in the short
term, i.e. for the given project. However, for the longer term, opportunity seeking
project strategies drives further development, which supports long term
competitiveness. As such the opportunity seeking strategies should, balanced against
risk reducing strategies for parts of the project, be elevated with a good division of risk
between the actors. This supports the common objectives between the operator and
contractors, as future projects are their mutual source of future business. Therefore to
meet both short and long-term needs a balanced attitude and ability should be developed
to being able to handle both risk reducing approaches and opportunity seeking
approaches, including the right type of contract strategy.
A risk reducing project strategy could be regarded as a lean approach. If the ‘lean
supply’ philosophy should be carried out as a supply chain strategy for the development
phase, then one may think of two scenarios. The first is the case of copying. A new
project is developed based on copying an existing project and project object. This is a
scenario that is much discussed, as it will always be considerable differences between
two developments, both with respect to supply requirements and process, which make
the ’copy’ into a ‘prototype’ of its own, i.e. the ordinary project situation. The other
scenario is the one where an operator orders a product, i.e. a ‘project object’ from a
fully integrated contractor. Then there are again two possibilities. The operator gives the
contractor full freedom to develop based on the contractors own demand and supply
chains. This may give lean supply execution both cost and time wise, seen from the side
of the development phase. However, this may not bring with it a lean supply set-up for
8 Conclusions
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214
operations. To overcome the last one the operator often want the contractor to use the
operator’s supply chain, i.e. the operator’s long term contracts and agreements. Then
there is hardly possible for the contractor to achieve its intention of lean supply for the
project object developments, but the operator come closer to achieving lean supply in
the operations phase. Therefore, in sum it is possible to achieve lean supply in the
operations phase, but that must be handled through taking the specifics of novelty and
uncertainty in the project situation into account in the project development phase.
To be able to reuse approaches to project and contract strategies, it was stated that the
principles that underlay almost all projects had to be addressed. Such principles were
seen to be the primary conditions for re-use and continuous development, with
secondary conditions that could be taken further from one project to another, but with
correction for specialities in the new project context. The PSCM development is based
on the opportunity seeking strategy as part of a value seeking project strategy. The
development is based on a set of principles derived from the challenge of the project
demand and supply chain, and the characteristics of the project. Related to contract
strategies, in hindsight we believe that these should have been more strongly focused,
and that this could have been a help to improve the PSCM development, through the use
of a concept that most actors and stakeholders in the project demand and supply chain
are familiar with.
PSCM versus comments from interviews with industrial representatives
Here we will discuss the PSCM development versus a set of interviews we have
conducted with representatives related to the demand and supply chain of the project
context of the petroleum industry. The representatives are from operators, contractors,
and an interest organisation for the industry. The focus of the discussions is how their
comments support the PSCM development.
The first interview we refer to was with a representative from an operator. This is
another representative than the two referred to in the introduction to chapter seven. The
representative’s position was as head of procurement and demand and supply chain
relations development within an operator, i.e. petroleum company. The interview was
based on a discussion of the relations between the operator and the operators project
specific demand and supply chains, and how a PSCM development should focus to
become a basis to address this. The main message from the interview was that the
PSCM development should be based on some underlying principles for demand and
supply chain management in the project context of the petroleum industry. Based on the
principles a concept should be developed that pursue these principles. Then
methodological guidelines should be developed that they do not intent to be specific,
but rather could act as a framework for developing more specific methodologies for
demand and supply chain management in this project context. These recommendations
were also in line with the recommendations from the supervisor of this research. We
have followed these recommendations in the PSCM development, and believe that the
PSCM concept meet these recommendations in a good manner, and that the PSCM
guidelines meet them to some extent. However, especially the guidelines could have
8 Conclusions
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215
been revised and improved if they could have been applied in a specific setting. If they
had been tested out, i.e. applied, in some specific project settings, than this could have
given important information about their relevance for specific developments, as well as
given a basis for revision of the guidelines. Therefore, the inability to test the guidelines
is a shortcoming of this research.
The second interview we refer to was a set of interviews with a representative from an
interest organisation of the Norwegian petroleum industry. The representative is a
senior representative with long experience from working within a contractor company,
and has followed the developments within project development and execution models
within the industry for many years. The setting of the interviews was around a meeting
he had with representatives from the British CRINE Network. As a basis for the
discussions he referred to what was estimated to have the main contribution for further
improvements in competitiveness for the Norwegian petroleum industry. The main
contributions were estimated to based 50% on technology development, 30% on work
process development, and 20% on change of contextual limitations. Being able to make
use of technology development in project development has a relation to the work
processes, and technology development will impact the demand processes and demand
chain processes. Technology development could either take place between project, i.e.
the contemporary principle, or in a project, either partly or fully, which was the ‘old’
principle. The ‘old’ principle of technology development within the projects, lead to
longer duration of development, as well as brought more risk into the project. However,
what should be remembered is that although the contemporary ‘established’ principle is
that technology development shall take place between projects, in practice this will be
challenged, both from the operator’s and contractor’s side. This lead to a degree of
moving targets, or openness in the project, which change throughout the project
development. A development and execution model that is based on moving targets is
OK as such, but have to be reflected in the decision processes of the development and
execution model. This requires a good communication between operator and
contractor(s) and the rest of the supply chain. The representative gave example from a
contemporary project, under development in 1999, where new demand in a rather large
scale came up after demand decisions and specifications had been made and supply
chains were activated. Then resilient processes had to come into effect, that revised the
demand, closed down the existing supply chain, and established a new supply chain.
These comments are important to remember when addressing the PSCM development,
because although the contemporary principle is to conduct technology development
between projects, in practice this has been hard to achieve. Therefore, in the
development phase of the PSCM concept, we have focused on this through a specific
awareness on the demand chain and the demand processes, the need for agile
capabilities and capacities to meet such moving targets, and the need for resilient
approaches and capacities towards the supply chains, to be able to secure the logistics
service aspects for the project. We believe that we met this representatives comments in
the PSCM development, however there are many aspects that was mentioned that we
have not covered extensively, as e.g. the role of standards where e.g. NORSOK and
CRINE has chosen quite different approaches, or the use of systems to support these
processes, e.g. as the First Point Assessment system used by the British petroleum
industry or the Norwegian Achilles system.
8 Conclusions
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216
Then we would like to refer to an interview with a senior vice president of procurement
and supply chain management with a major engineering and construction contractor.
This representative supported the view above, with technology development as the main
contribution to future competitiveness for the Norwegian petroleum industry, quote:
‘Price adjustments will not be most important in the future, but the ability to bring
forward new technology that give stepwise improvements in both CAPEX and OPEX’.
He further focused on the demand development and specification process that lay
behind making new technology available to use in a project. The contractor develop
technology and solutions with their supply chain, and when this is brought into a project
there is often a requirement that the operator’s supply chain agreements and contracts
shall be used, leading to changes and often starting a process of moving targets in the
demand development process. This leads to a focus on criticality in the project, with
respect to two elements, new technology and project execution. The criticality will have
a balancing challenge of applying new technology, an opportunity and a source of added
risk, versus the criticality of keeping the project development schedule. If new
technology, leading to a process of moving targets shall not disturb the execution of the
project, then this has to be acknowledged and treated correctly. The development and
execution models should therefore take the practical reality into account, not only the
aim of letting contractors use their own technology, solutions and supply chains, when
this is not possible in practical project development together with the operator. As
above, the PSCM development tries to address this and principally give an outline for
this in the PSCM concept.
An interview with the procurement responsible in a development project confirmed this
focus on moving targets even further. He said that, quote: ‘It seems that engineering
representatives from both the operator, the contractor and even suppliers try to exceed
each other in smartness, even after a contract is placed. This leads to many changes, and
have to be dealt with in an [agile] way to deal with the moving targets in the demand
processes, as well as dealt with in a [resilient] way when consequences have effect
down into the supply chain, and in some cases even necessitates change of supply
chain’. The focus further was that a PSCM development had to take this into account, so
that it could be possible to address this as a basis for dialogue between the engineering
and procurement representatives.
As the messages from the interviews with the representatives from the petroleum
industry above show, we have tried to guide the PSCM development along the
challenges and recommendations given, so that the requirement for validation of the
systems approach according to Arbnor & Bjerke given above are met. The PSCM
development followed the messages that were seen as important and relevant from the
side of the industrial representatives for demand and supply chain management
development in the project context of the petroleum industry. We as creators of
knowledge feel the PSCM development address important and relevant subjects, but
still regret being able to demonstrate and apply the development through real cases.
8 Conclusions
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217
8.4 Closure
In the early phase of the work with this thesis, a project planning and control executive
from a petroleum company said;
‘Logistics? There is no logistics in a project! Well, we have some barges, so maybe there are some
logistics after all, but that is not much!’.
As part of the developments within the project context of the oil and gas industry as
presented in table one in chapter one, it is our hope that the results from this thesis may
inspire and strengthen the supply chain management developments in the oil and gas
industry. For the development phase, new projects may draw lessons from this work, as
for the operations phase even ongoing projects could have potential for supply chain
improvements.
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230
Appendix A
___________________________________________________________________________________
Appendix A – Findings in agile manufacturing.
Appendix A presents a list of observations of situations, operating patterns and
problems that has been found at an early stage in the U.S. agile manufacturing research
programme (Whitney 1995). This is presented in the table below, together with some
reflections based on the project-oriented context of the oil and gas industry.
MIT’s research findings
(Whitney 1995)
The changing operating
pattern of the web
Pervasiveness of the web
environment
Dispersal of the design and
production
Relation to the project-oriented context
The project development execution process is becoming more
concurrent, thereby getting more agile characteristics, e,g, as seen in
figure 6.5.
How well do you manage your portfolio of suppliers, so that they are
manageable as part of a ‘web’? E.g. operators and contractors use of
frame agreements and frame contracts, to develop long-term
relationships. Through several and different options of
operator/contractor(s) constellations, this make a considerable (agile)
web environment. However, a project specific web will be project
unique.
Ability to bring specific requirements and choices made on a high level
tier in the project supply chain down into lower tiers, and the result back
again in accordance with the requirements. As e.g. in Whitney’s
discussion of assembly as the proactive part to establish better
manufacturing and demand/supply models, due to its position as ‘proof
of pudding’ with respect to seeing whether theory and practice match in
bringing everything together when needed and of correct quality at the
fabrication and construction sites.
Growth of hierarchical
supplier relationships
Do the top-tier actors in the project supply chain, e.g. the operator, want
to control all lower supply chain tiers, or do they only ‘control’ the first
tier below themselves? E.g. through the use of frame contracts and frame
agreements that penetrate several supply chain tiers below themselves, as
well as the option to ‘control’ contractor’s and subcontractors’ choice
and use of suppliers, the operators grow hierarchical supplier
relationships.
Loss, omission, obscurity,
or misinterpretation of
information
E.g. the increased focus on use of standards, e.g. the NORSOK
standards, as well as use of functional specifications could help to ease
this. Further information is an important part of the supply chain, to
secure that all specification and certificates necessary for commissioning
to take place are available together with the supplied goods or
equipment. I.e. the proof of pudding of the information supply chain.
Lack of first time capability In the project context a product or an assembly has to be a ‘first time
performer’, as it is a one-time undertaking. This is central for the project
context, and as such an aspect that separates the project context from the
repetitive manufacturing context. However, the agile manufacturing
approach has the same basis as the project context, as reflected in
Goranson’s (1999) Agile Virtual Enterprise Reference Model.
Lack of visibility into the This is the same for the project context. The consequences may in the
231
Appendix A
___________________________________________________________________________________
cost or performance
consequences of a design or
production choice
project context be seen in the design of incentive schemes that shall try
to capture and distribute risk and profit among the actors. However, this
is an important aspect that is sought to be covered in the selection of
development and operations alternative, based on a type of value
criterion, e.g. NPV.
Local solutions The situation that only present, local connections are dealt with when
problems occur. May lead to reduced ‘lean’ ability in the operations
phase due to local ‘smart’ solutions, e.g. is change of operatorship a
situation that could be an offer for such solutions.
Complexity of the product The ability and difficulty of gathering all the knowledge and
competence, located in the heads of geographically and culturally
dispersed people, to capture the design and construction processes
needed to realise a product, increases with increased product complexity.
The products developed in oil and gas development projects are often
very complex, often separated into programs, projects, sub-projects, and
modules to become manageable throughout the ‘web’.
Long design cycles The problem with long design cycles is that people, and thereby
knowledge and competence, moves around, organisations changes, and
that the project demand/supply chain corresponding to long-lead items
has to be committed early, and much development have to take that into
account.
Inadequacy of current
design methods
The move from the ‘relay race’ of the previous development and
execution models of the North Sea oil and gas industry, to the
concurrent, early demand/supply chain lock-in of the CRINE/NORSOK
models, showed that further improvements have to be made to them.
Need for more attention
early in the process
Lack of adequate cost
models
Cost estimating techniques are well developed in the project context,
however should models that calculate the value, cost and time impact of
changing from one process or technology to another be further
developed. This is important for enabling the use of methods for agile
approaches.
The front-end is the most important phase also of a project. The
uncertainty is then highest (most open project situation), but so are also
the opportunities available for designing value into the project. The
project context do among other apply front end loading, as one
methodology to improve the quality of the front-end processes.
232
Appendix B
___________________________________________________________________________________
Appendix B – CRINE Network’s SCOR’s and CAR’s.
Appendix B presents a set of supply chain optimisation requirements, SCOR’s and
critical attractiveness requirements, CAR’s, for companies to become interesting
partners in oil and gas supply chain constructions. The SCOR’s and CAR’s are
developed through the British Department of Trade and Industry supply chain initiative
(DTI, 1999).
SCORs are those things that a customer (operator or contrator) should be doing to
ensure they maximise the potential for the supply chain to provide appropriate
technologies for the future at the right time and quality.
CARs are those things which make a supplier or a contractor highly attractive to a
customer, i.e. they appropriately ‘magnetise’ the supplier in order to enable him
effectively to move closer to the customer.
233
Appendix B
___________________________________________________________________________________
Supply Chain Optimisation Requirements (SCORs)
SCORs are those things that a customer (operator or contrator) should be doing to
ensure they maximise the potential for the supply chain to provide appropriate
technologies for the future at the right time and quality.
Table. SCORs that operators and contractors should do to optimise the supply chain.
Operator Contractor
Communications
- Give suppliers more opportunity to talk to
them
- Give clear forecasts, 5 year demand horizon
- Explain new organisation structures and who
does what, to suppliers
- Listen to suppliers and contractors (including
constructive criticism)
- Discuss with contractors and suppliers the
role of each party with respect to the supply
chain activities
- Tell suppliers who to talk to within their
organisations about different issues
- Provide feed-back to suppliers on equipment
performance, how they could do better etc
- Keep an open door to suppliers
- Ask operators how they used to manage
supplier relationships and learn from this
- Publish details of procurement mechanisms
- Tell suppliers what is expected of them
- Give suppliers a forum for open discussion
- Listen to and act on constructive criticism
Procurement
- Do not insist on performance bonds from
small suppliers
- Adequately reward contractors for bringing
forward new innovation
- Ensure fair and open gainshare contracts
- Be a good customer (this gives an operator an
edge) – pay on time, be open and easy to do
- Get suppliers involved in FEED and bid
stages
- Do not ask for performance bonds
- Recognise and reward good suppliers
- Look for value rather than the lowest unit
cost
- Keep tender lists down to sensible numbers
- Maintain links with the industry, keep in
touch with the supply chain
- Publish details of projects won and what
technologies are sought
- Provide feed-back to suppliers on equipment
provided and how they can do better
- Improve dissemination within organisations
as to what suppliers can offer and who to
contact
- Adequately motivate contractors to take on
supply management role
- Operate 2-way supplier/customer assessment
234
Appendix B
___________________________________________________________________________________
business with
- Support ‘First Point Assessment’
- Operate 2-way supplier:customer assessment
- Recognise and reward good suppliers
- Mutually set target costs on gainshare
contracts
- Adopt functional specifications
- Adequately reward contractors for costs
incurred entering design competitions
- Use standard CRINE contracts
of companies
- Be aware of supplier difficulties when faced
with larger, fewer contracts
- Insist on a flow-through of good contractual
relations with contractors - Address the lack of trust between contractors
and suppliers (IPR etc)
- Consider framework/partnering arrangements
with suppliers
- Recognise that squeezing suppiers and not
paying on time etc affects the availability of
that supplier service in the future
- Support First Point Assessment
- Be prepared to consider companies and
technologies that do not have track record
- Treat suppliers as you expect to be treated as
operators
- Be a good customer in terms of paying on
time, not insisting on achievable targets
- Appoint account managers (single point of
contact) for suppliers or groups of suppliers
Technical
- Publish details of R&D budgets and
evaluation criteria for investing in suppliers
ideas
- Tell the world what their technology
requirements and priorities are, and how they
might change
- Retain capability to be an informed buyer or
ensure contractors have this capability and an
incentive to act as such
- Encourage a spirit of continuous technical
improvement
- Use functional specifications
- Publish details of what R&D support they are
willing to give
- Source best technology, not just use own sub-
divisions, e.g. access specialisms in the
market
- Publish criteria for considering applying new
technologies/innovations
- Keep abreast of new technologies/technology
suppliers in the market place
- Use functional specifications
- Use standard CRINE contracts
- Support JIPs and other collaborative
initiatives
- Continue to sponsor JIPs
- Increase in-house ability to be an informed
buyer
- Arrange technology forums/brainstorming
sessions to develop step changes open to UK
suppliers only
235
Appendix B
___________________________________________________________________________________
Table. Operator SCOR’s.
Communications Procurement Technical
- Give suppliers more
opportunity to talk to them
- Maintain links with the
industry, keep in touch with
the supply chain
- Give clear forecasts, 5 year
demand horizon
- Explain new organisation
structures and who does
what, to suppliers
- Listen to suppliers and
contractors (including
constructive criticism)
- Provide feed-back to
suppliers on equipment
provided and how they can
do better
- Do not insist on
performance bonds from
small suppliers
- Adequately reward
contractors for bringing
forward new innovation
- Ensure fair and open
gainshare contracts
- Support ‘First Point
Assessment’
- Insist on a flow-through of
good contractual relations
with contractors
- Recognise and reward good
suppliers
- Mutually set target costs on
gainshare contracts
- Be prepared to consider
companies and technologies
that do not have track
record
- Adequately reward
contractors for costs
incurred entering design
competitions
- Publish details of R&D
budgets and evaluation
criteria for investing in
suppliers ideas
- Tell the world what their
technology requirements
and priorities are, and how
they might change
- Retain capability to be an
informed buyer or ensure
contractors have this
capability and an incentive
to act as such
- Encourage a spirit of
continuous technical
improvement
- Use functional
specifications
- Adequately motivate
contractors to take on
supply management role
- Continue to sponsor JIPs
- Be a good customer (this
gives an operator an edge) –
pay on time, be open and
easy to do business with
- Discuss with contractors
and suppliers the role of
each party with respect to
the supply chain activities
- Arrange technology
forums/brainstorming
sessions to develop step
changes open to UK
suppliers only
- Operate 2-way
supplier/customer
assessment
- Adopt functional
specifications
- Use standard CRINE
contracts
236
Appendix B
___________________________________________________________________________________
Table. Contractor SCOR’s.
Communications Procurement Technical
- Publish details of what
R&D support they are
willing to give
- Tell suppliers who to talk to
within their organisations
about different issues
- Get suppliers involved in
FEED and bid stages
- Do not ask for performance
bonds - Support JIPs and other
collaborative initiatives
- Source best technology,
not just use own sub-
divisions, e.g. access
specialisms in the market
- Provide feed-back to
suppliers on equipment
performance, how they
could do better etc
- Keep an open door to
suppliers
- Operate 2-way
supplier/customer assessment
- Recognise and reward good
suppliers
- Look for value rather than the
lowest unit cost
- Publish criteria for
considering applying new
technologies/innovations
- Ask operators how they
used to manage supplier
relationships and learn from
this
- Keep tender lists down to
sensible numbers of
companies
- Be aware of supplier
difficulties when faced with
larger, fewer contracts
- Increase in-house ability
to be an informed buyer - Publish details of projects
won and what technologies
are sought
- Keep abreast of new
technologies/technology
suppliers in the market
place
- Publish details of
procurement mechanisms
- Address the lack of trust
between contractors and
suppliers (IPR etc)
- Tell suppliers what is
expected of them
- Consider
framework/partnering
arrangements with suppliers
- Give suppliers a forum for
open discussion
- Listen to and act on
constructive criticism
- Recognise that squeezing
suppiers and not paying on
time etc affects the availability
of that supplier service in the
future
- Support First Point
Assessment
- Improve dissemination
within organisations as to
what suppliers can offer
and who to contact
- Treat suppliers as you expect
to be treated as operators
- Be a good customer in terms
of paying on time, not insisting
on achievable targets
- Appoint account managers
(single point of contact) for
suppliers or groups of
suppliers
- Use standard CRINE contracts
- Use functional
specifications
237
Appendix B
___________________________________________________________________________________
Critical Attractiveness Requirements (CARs)
CARs are those things which make a supplier or a contractor highly attractive to a
customer, i.e. they appropriately ‘magnetise’ the supplier in order to enable him
effectively to move closer to the customer.
Table. CARs Contractors and Suppliers should have to be attractive to Operators and
Contractors.
Contractors Suppliers
People
- Professionalism and reliability such as to
engender trust
- Culture fit with client
- Open behaviour
- Easy to deal with
- Professionalism, so as to be able to put trust
in company - Adequate resources and back up
- Depth of quality personnel throughout
company
- Good middle management
- Overall quality of personnel
- Leadership qualities
- Good vertical alignment of management
ethics
- ‘Can do’ attitude
- Full time staff rather than large proportion of
agency staff
Marketing
- Keep operators and contractors informed of
new products
- Ability to communicate well
- Taking trouble to find out exactly what client
wants in order to understand his needs - Present ideas in terms of financial benefit to
the customer
- Ability to think like an operator (put oneself
in his shoes) - Ability to communicate well
- Track record of satisfied customers and
market reputation
- High degree of visible strategy and planning
- Awareness of life cycle issues
- Understanding of market place and market
conditions
- Knowledge of operators business
Technical
- Leaders in their industry area - In-house quality of products and services
i hi h lit d t d i
238
Appendix B
___________________________________________________________________________________
ensuring high quality products and services
- Familiarity with operations processes
- Competitive on a world scale
- Quality systems and reliability
- Design for safety
- Track record of successful performance
- Good finishers
- Recognition of own limitations
- High level of technical competence
- Commitment to continuous improvement
- Environmental awareness in design and
operations
- Innovative technology
- Awareness of innovations available in the
market place
Operations
- Value for money
- Willingness to join alliances, develop mutual
relationships
- Track record of successfully maintaining long
term relationships
- Innovative approach to projects, bright ideas
- Positive and focused
- Site safety management
- Trouble shooting and problem solving
- Objectivity
- Alignment with project/client objectives
- Willingness to put reputation at stake
- Support of client
- Willingness to link profit to performance
(take risks)
- Reduced delivery times and delivery on time
- Capacity/plant availability
- Good relationships with the supply sector
- Speed and quality of response to customer
requirements
- Reduced delivery times and accuracy of
deliveries, on equipment and projects
- Post delivery support/spares and service
support
- Anticipating and solving problems
- Good working practices (e.g. safety and
environment)
- Delivering of promises with minimum
involvement of client (i.e. zero expediting,
progress chasing)
- Financial stability
- Flexibility to react quickly to changing
market conditions
- Evaluating and recording performance (and
making visible to customers)
- Track record in delivering to time and cost
239
Appendix B
___________________________________________________________________________________
Table. CARs Technical Suppliers and Commodity SMEs should have to be attractive to
Operators and Contractors.
People
- Multi-tasking personnel
- Cultural fit with customers (sharing same
company values)
- Good management at all levels plus
commercial skills
- Develop good working relationships with
customers
-
Marketing
- Visibility, in general
- Ability to understand customers’ position
- Focused and targeting marketing, rather than
blanket selling
-
Technical
- Track record of innovative products that
work
- Design capability
- In-depth technical knowledge of own sphere,
ability to answer detailed questions
- Understanding of local conditions for a
particular project or development
- Provision of specialised skill sets missing
from contractors and now not normally found
- Wide range of products and willingness to
extend range
Technical Suppliers Only Commodity SMEs Only
- Energy, dynamism, willingness to ‘go the
extra mile’
- Low personnel turnover rate/core of
experienced personnel who understand the
company
- Openness
- Be part of a larger trade association
- Strategic or project/operations critical
products
240
Appendix B
___________________________________________________________________________________
in operators
- Value added products and capability
- Innovative approach to projects and ways of
working
- Good co-ordination, project management
skills (e.g. visible planning systems)
- Alignment and focus on the objectives of the
project
- Willingness to work together to find solutions
to problems
- ‘No job too small’ attitude
- Unit cost
- Stock-holding or evidence of ability to supply
on demand
Operations
- Provision of independent and unbiased advice
- Willingness to join and/or contribute to
operator:contractor alliances
241
Appendix B
___________________________________________________________________________________
Table. Actions for SME’s to develop specific CAR’s
Actions
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Quality/quantity retention of personnel x
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Presenting financial benefit to customers x x x x
Good communicators x x x x x x
Reputation and visibility x x x
Market/customer understanding x
Competitiveness on a world-wide scale x x x x x x
Targeted marketing x x x x x
Product/service packages x x x x x x x
In-house quality systems x x x x x x
Continuous improvement culture x x x x x x
Strategic or project/operations critical products x x x x x x
Specialist skill-sets x x x x x x
Value added products/capability x x x x x x x x
Participation in operator/contractor alliances x x x
Innovative approaches/ideas x x x x x x
Strong project management skills/system x x
242
Appendix B
___________________________________________________________________________________
Reduced lead times for delivery x x x x
Willingness to work together to solve problems x x x x x
Speed/quality of response to customer requirements x x x x x x x x x
Post delivery support x x x
Performance evaluation x x x x
Reliability x x x x x x
243
Appendix C
___________________________________________________________________________________
Appendix C – CRINE’s supply chain strategy setup.
Appendix C presents a set-up for documentation of supply chain strategy as given in
CRINE Network (1999-B). The set-up consists of five elements to be documented;
- Vision
- Supply Scope
- Provider/Customer Relationship
- Source Selection
- Performance Measurement
VISION – Describe;
The high level objective of your supply chain initiative
The scope of your initiative
The key people and processes that are involved
Cost/benefit statement
SUPPLY SCOPE – Describe;
The good or service you are purchasing
How it is used
The main customer contacts
The expected volume, and the historical expenditure trend
The expected changes in scope (e.g. technology, specifications, demand)
The strategy – local, regional, corporate, global
How long the customer will require the good or service
Lease options (where appropriate)
The current market conditions (e.g. price, elasticity, supply and demand, economic trends, provider
profitability, cost of production)
PROVIDER/CUSTOMER RELATIONSHIP – Describe;
What kind of relationship best suits this good or service
How the identified strategy works towards creating the identified relationship
If there is a commitment to communicate openly with the provider/customer about the plan, and stick to
the plan
244
Appendix C
___________________________________________________________________________________
How long are you committed to the relationship
How the strategy will change if the relationship creates less value than is available in the marketplace
SOURCE SELECTION – Describe;
The right number of providers
Whether the plan rationalises (i.e. “right sizes”, and not necessarily reduces) the provider base to
maximum leverage
How the business will be allocated
How the providers will be selected
How the providers will be evaluated
Whether the good or service be sole, multiple or parallel-sourced
Whether you need back-up providers, and how reliable the supply is
Whether you have explored contract consolidation or outsourcing options
PERFORMANCE MEASUREMENTS – Describe;
Whether you need a measurement or continuous improvement process
If providers should be involved in developing the performance measurement system, and how they should
be involved
The elements (for all involved parties) which should be measured
Whether all stakeholders mutually agree to the measurement elements
Whether the measurements are meaningful/specific
Whether the measurements are realistic to capture
Whether the measurement elements are tied to performance targets
Whether measurement frequency and review method have been established
Whether measurements for market comparisons have been considered
The measurement elements designed for continuous improvement and corrective action
245
Appendix D
___________________________________________________________________________________
Appendix D – Epci Front End Opportunities workshop.
Appendix D is a summary presentation from a workshop arranged by the European
Institute of Advanced Project and Contract Management. The topic of the workshop
was the project front end, and its focus on balancing opportunities and risks. The
workshop was arranged and documented by the author.
Figure App. D-1. Workshop Front End Opportunities, Foil 1 of 7.
246
Appendix D
___________________________________________________________________________________
Figure App. D-1. Workshop Front End Opportunities, Foil 2 of 7.
247
Appendix D
___________________________________________________________________________________
Figure App. D-1. Workshop Front End Opportunities, Foil 3 of 7.
248
Appendix D
___________________________________________________________________________________
Figure App. D-1. Workshop Front End Opportunities, Foil 4 of 7.
249
Appendix D
___________________________________________________________________________________
Figure App. D-1. Workshop Front End Opportunities, Foil 5 of 7.
250
Appendix D
___________________________________________________________________________________
Figure App. D-1. Workshop Front End Opportunities, Foil 6 of 7.
251
Appendix D
___________________________________________________________________________________
Figure App. D-1. Workshop Front End Opportunities, Foil 7 of 7.
252
Appendix E
Appendix E – Epci Contract Strategies workshop.
Appendix E is a summary of a workshop arranged by the European Institute of
Advanced Project and Contract Management. The topic of the workshop was contract
strategies. The appendix show the questionnaire used up-front of the workshop, as well
as the summary of the feed-back from the questionnaire and the workshop. The
questionnaire and the workshop was prepared, arranged and documented by the author.
253
Appendix E
Workshop
CONTRACT STRATEGIES
‘Contracts are used to procure people, plant, equipment, materials and
services. Contracts are therefore fundamental to the management of
almost all engineering projects. The type of contract should be
selected only after consideration of the nature of the parties to the
project, the project objectives and the equitable allocation of duties,
responsibilities and risk. This chapter outlines the main components of
the process used to determine how the project will be procured,
usually referred to as the contract strategy’
(N.J.Smith, 1995, Engineering Project Management, p.188. Blackwell
Science Ltd., Oxford).
Interview guide to background document.
The questions below will be the basis for this interview. The questions are meant to be guiding,
i.e. they shall act as a basis upon which the framework related to contract strategies is to be
discussed in the workshop.
Interviewer from Epci: Mr. Bjorn Egil Asbjornslett,
Telephone: +47 – 51 87 66 92, Fax: +47 – 51 87 17 11
E-mail: [email protected], Internet: http://www.epci.org
1. GENERIC PROJECT STRATEGIES
One may state that there are three generic strategies underlying project development and
execution. These three generic project strategies are:
- Risk reducing strategies
- Opportunity seeking strategies
- Value enhancing strategies
Which type of project strategies do you consider is most used by the company you
represent?
Do you believe it could be of value to try to follow another project strategy than the one
most currently used? If so, where do you see the potential for improvements?
254
Appendix E
What could be potential drawbacks of using another project strategy?
What kind of measures would be necessary to focus on if other project strategies were to be
pursued?
2. CONTRACT STRATEGY MISSION
What is a contract strategy, and company’s preferred contract strategy?
What is the basic mission of the contract strategy?
How is the contract strategy related to project and project management activities?
3. TYPES AND USE OF CONTRACT STRATEGIES
Is there a portfolio of different contract strategies?
When and where are the different contract strategies useful – given project type, project
context, market situation and cultural locations?
Could you give your subjective perception of where different contract strategies would be
placed in relation to the three project strategies listed above?
4. RATIONALE FOR CHOICE
What have been the reasons behind the choice of a given project strategy (or strategies)?
Do you have any examples?
What have been the outcome of the given project strategy (or strategies)? (Your
experiences/perception).
Did it (or they) work out for the assumed reasons or not?
5. THE MATCH BETWEEN THE ELEMENTS
How does the selected contracting strategy match the environment experienced during
execution? I.e. the ‘match’ between the;
Project’s context or external environment, the
Project strategy, and the
Contract strategy?
How does the contracting strategy support the project objectives?
6. SUCCESS FACTORS
What are the ‘factors’ that determine the success of a contract strategy – as seen
both from a client’s and contractor’s point of view?
What are the success factors of the client’s attitude?
What are the success factors of the contractor’s attitude?
255
Appendix E
7. ARE THERE COMMON OBJECTIVES?
Are there common objectives among the actors in the project value chain?
Are there elements or aspects that may be improved in each actor’s approach to contracting
strategies?
How could these be leveraged?
8. RE-USE AND POTENTIAL FOR IMPROVEMENT
Is it possible to ‘copy’ a ‘successful’ contract strategy from one project to the next?
Or is the combination of contract strategy and project context unique so that more basic
aspects have to be addressed? If so, do you have examples of relevant aspects?
Then, how should we proceed to bring more knowledge about this area, to make up
‘guidelines’ for contract strategies in the project context for the future?
9. INCENTIVES
Do you have any experience from the use of incentive-based contracts?
What kind of incentives and/or incentive mechanisms do you believe to be best to support a
win/win situation for both clients and contractors?
Could incentive mechanisms be counter-effective?
Thank you for letting us share your time, knowledge and experience, and for taking part in
preparing this ‘Contract Strategies’ workshop!
September 17
th
1999
The Epci Project Processes Workgroup
256
Appendix E
CONTRACT STRATEGIES
Proceedings,
Epci workshop,
23-24 November 1999
EXECUTIVE SUMMARY
This is the summary of a workshop on ‘contract strategies’ arranged by the European
Institute of Advanced Project and Contract Management, Epci, November 23-24, 1999.
The workshop was based on a set of nine subjects related to contract strategies. A
questionnaire related to these nine aspects was distributed to the workshop participants
and others prior to the workshop. The nine subjects and the questions related to each
subject are presented in Table 1.
Table 1. The nine initial contract strategy subjects.
1. Generic project strategies. 4. Rationale for choice. 7. Common objectives.
2. Contract strategy mission. 5. The match between the elements. 8. Incentives
3. Types of contract strategy. 6. Success factors. 9. Re-use and improvement.
An initial approach taken up-front was that project strategies, or the strategic guidelines
underlying the decision making in the project, might be characterised and divided into
three categories;
1. Risk reducing strategies
2. Opportunity seeking strategies
3. Value enhancing strategies
Dependent on the underlying approach taken to project strategies, whether explicit or
implicit, the contract strategy and other project management activities will be
influenced. Below the input and reflections from the contributors and participants in the
workshop are summarised.
The approach made up by the generic project strategies was regarded as a constructive
approach. Risk reducing strategies were the type mostly used, or felt necessary to use,
but the trend is towards emphasising value enhancement aspects within the project per
se, as well as within and among the actors of the project supply chain. A value
257
Appendix E
enhancement approach necessitates that both risk reducing and opportunity seeking
strategies are pursued in a balanced way dependent on the project context.
Taking new project strategies into use demands that one understands the impact that
change of strategy has in relation to each actor’s commercial aspects, and not to ‘loose
focus on value enhancement and profitability at the same time’.
The mission of the contract strategy is to be the project’s guidance, communication and
alignment tool for establishing and operating the project’s supply chain. As such the
contract strategy is the basis for carrying out the project’s procurement, from the lowest
supplier tier, through all supply chain tiers and actors till the final ‘assembly’ of the
project product. The contract strategy will communicate internally and externally with
the market the approach taken to procurement and supply chain management in the
project. As a guidance to and together with the other project and project management
activities, the contract strategy shall ‘increase the probability of meeting intra- and inter-
organisational project objectives’.
The types and use of the contract strategy reflects the potential to elevate the use of the
portfolio of contract strategies available. Though there is a portfolio of different contract
strategies, they are perceived to be under-utilised to their optimum, which may lead to a
loss of value enhancement and profitability due to a mismatch between strategy and
context. As the contract strategy as a basis will drive different behaviours within the
project supply chain, the possibilities within the portfolio of contract strategies should
be elevated carefully. Especially understanding how the use of the strategy to impact the
division of risk among the actors drives behaviour.
When it comes to the rationale for choice of a strategy it is very much seen as following
and adapting to the choice made by the client. Important in this respect is the client’s
approach to the actors in the project supply chain, and the division of roles, work and
risk among the actors and the client’s ability to manage the project supply chain as an
entity, given the project context. The context of both the project and the supply market
will impact the ability and necessity of managing the project supply chain as an entity.
Especially with respect to the need for speed or the inherent complexity in the project
that will need different governing mechanisms within the project supply chain to elevate
inherent capabilities and value contributions.
Matching the contract strategy with the context and the objectives of the project could
easily become a theoretical exercise. Therefore the contract strategy should match the
project’s context and environment as far as practically feasible with options for
additional flexibility as required. The contract strategy should aim to support and meet
the project objectives through reducing imbalances along the project supply chain,
aligning and committing the supply chain to deliver, to increase the likelihood of project
success.
Then, what are the success factors of clients and contractors attitude in the project
supply chain. The client should be non-adversarial, commercially oriented and fair, and
be the supply chain manager of the project supply chain, i.e. have the ability to manage
contractual interfaces, enable the supply chain to perform through giving it sufficient
freedom to act, though setting guidelines to meet objectives. The contractors’ attitude
258
Appendix E
should be characterised by being non-adversarial and co-operative, pro-active, as well
as integrity to deliver in accordance with promises.
Common objectives between clients and contractors are based in the project as a mutual
source of present and future business. The contract strategy and formats of payment
may help to address and balance sources of risk and profitability, but managing the total
risk that is comprised by and that will influence the success of the total project supply
chain and its actors should be elevated as a common objective. The success lies not with
each actor, but in supply chains competing against other supply chains. Therefore a
supply chain management framework should be developed to suit the project context.
The contract strategy should be regarded as the strategic ‘tool’ to develop and manage
the project supply chain, that through transparency into the project supply chain help to
elevate the understanding of common business objectives, with ‘visible’ incentives and
remuneration linked to ‘visible’ performance.
Incentives used should reflect an understanding of the dependency to the project
context, and dynamic in reflecting changes in the project context that may distort the
function of the incentives. The incentives should be linked to areas where the project
supply chain actors would be in a position to influence, and towards essential business
parameters that are possible to commit to. All in all the incentives should be aimed at
“making the important measurable, and not the measurable important”. Incentives could
also be counter-effective if they are too complex and focused on details, unrealistic and
static, and is felt to address things that doesn’t matter,
The potential for re-use and improvement for contract strategy from one project to the
next lies in addressing the principles that are underlying more or less all developments.
Such principles are both generic as well as company specific, and may be regarded as
the primary conditions to be re-used and improved over time. Around these primary
conditions there are secondary conditions that have to be adjusted to the “specialities”
of the given project context. To better understand these principles an approach would be
through improved understanding of the business processes (work and commercial
processes) within and between the project supply chain actors. Such process analysis
could bring with it increased understanding among the project supply chain actors.
Through elevated understanding the primary and secondary conditions underlying the
development of the contract strategy could be addressed and be used as guidelines for
developing contract strategies in given project contexts.
259
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7
Appendix E
___________________________________________________________________________________
Participants & Contributors
Those that contributed up-front to the workshop with input to the questionnaire and/or
participated in the workshop were:
Name
Company
Mr. Mike Abramczyk ESSO Norge
Mr. Johan Almen Aker Maritime
Mr. Thor Chr. Andvik Statoil
Mr. Bjorn Egil Asbjornslett Epci
Ms. Hege Blom Norsk Hydro
Mr. Chris Bruke Foster Wheeler
Mr. Imre Csoti Raytheon Engineers & Constructors B.V.
Mr. Henk Dolman Raytheon Engineers & Constructors B.V.
Mr. Herman Jan van Driel Raytheon Engineers & Constructors B.V.
Mr. Eric F. Ekern Telenor
Mr. Steinar Fagerland Statoil
Mr. Svein Gjeraker Statoil
Mr. Harald Graff-Andresen Aker Maritime
Aker Maritime
Phillips Petroleum Company
Mr. Ole Hausken Statoil
Dr. Per Willy Hetland Epci / Statoil
Mr. Magne Holta Statoil
Mr. Mark Iden Preussag
Mr. Odd Instefjord Epci / Statoil
Mr. Phillip Jellard BP Amoco
Mr. Magnus Johansen Norsk Hydro
Ms. Kari Gro Johanson Statoil
Mr. Arnt Knudsen
Dr. Bjorn Johs. Kolltveit BI, Norwegian School of Management
Mr. Jan Larsen Phillips Petroleum Company
Dr. Jon Lereim BI, Norwegian School of Management
Mr. Odd Mosbergvik Statoil
Mr. Sverre Myklebust Aker Maritime
Mr. Hogne Pedersen Statoil
Mr. Malcolm J. Sheperd Foster Wheeler
Mr. Knut Skarestad
Ms. Mette Sundholm Statoil
Mr. Oliver N. Utoy Statoil
Mr. Raj Verma Norsk Hydro
Mr. Rolf Vestre Norsk Hydro
268
Appendix F
___________________________________________________________________________________
Appendix F – Agile Virtual Enterprise Reference Model.
Appendix F gives the full structure of the Agile Virtual Enterprise Reference Model
(Goransson, 1999). The full structure of the reference model is not presented as a
matrix in Goransson (1999).
269
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C . a . a S t r a t e g y D e v e l o p m e n t
C . a . b S u p e r v i s e R i s k / R e w a r d P r o c e s s
C . a . c S u p e r v i s e E n g i n e e r i n g Q u a l i t y
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C . b . d A s s i g n m e n t o f N e w T e c h n o l o g y
C . b . e L a b o u r A g r e e m e n t s
C . c . a P l a n n i n g W o r k B r e a k d o w n A s s i g n m e n t
C . c . b W o r k B r e a k d o w n R e s p o n s i b i l i t i e s
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doc_149215016.pdf
More than forty years has passed since the start of the North Sea oil and gas developments. On the managerial side of the projects there have been large cost overruns, project planning and control measures developed to avoid these, initiatives to improve the industry's competitiveness in the North Sea, as well as measures to improve the supply chains contribution in the projects.
Project Supply Chain Management
From Agile to Lean
A thesis to apply for the dr.ing. degree,
at the Norwegian University of Science and Technology
by
Bjørn Egil Asbjørnslett
‘The fact that Alexander [the Great] so capably directed [the warfare’s]
operation that logistics scarcely seems to have affected any of his strategic
decisions. ... Supply was indeed the basis of Alexander’s strategy’.
‘Alexander where able to overcome these [logistics] obstacles where other
armies had failed because of his superior abilities in gathering
intelligence, planning, preparation, and organisation’
(Engels 1978, pp.119 & 123).
Preface
___________________________________________________________________________________
Preface
This thesis marks the end of a long research journey, with as in most projects, many
unforeseen elements that have impacted and changed the approach of the research. Now
at the end it is though fruitful to look back and acknowledge the process, as well as all
support and help from colleagues and friends, without which this research would never
have been possible.
First of all I would like to thank Professor Asbjørn Rolstadås, my adviser on this thesis,
for his contribution in providing the doctoral scholarship, valuable comments and
guidance.
I will also specifically thank Professor Marvin Rausand, for his help and contribution in
bringing me into the academic ‘art’ of scientific publishing.
Financial funding was provided by the research programme Project 2000, and many
thanks go to the companies providing funding and a constructive research environment
for this programme. I will also thank all my colleagues and friends in this programme
for interesting and challenging discussions, as well as the social part. A specific thank
goes to the programme co-ordinator, Halvard Kilde, for his inspiration, help, and for
bringing me into contact with the European Institute of Advanced Project and Contract
Management, Epci.
From Epci I would like to thank Dr. Per Willy Hetland, Odd Instefjord, and Dr. Bjørn
Kolltveit for their challenging and fruitful discussions, comments and guidance. It is not
too much to say that they have had a great influence on this thesis.
I would also like to thank all the people working in or related to the oil and gas supply
chain that I have had contact with through this research, no name mentioned and no one
forgotten. They have shared much knowledge and given me insight into an interesting
and challenging context. Thank you.
Finally, many thanks goes to you Grete, for your support and understanding during this
period.
Trondheim, November, 2002.
Bjørn Egil Asbjørnslett
iii
Summary
___________________________________________________________________________________
Summary
Background
More than forty years has passed since the start of the North Sea oil and gas
developments. On the managerial side of the projects there have been large cost
overruns, project planning and control measures developed to avoid these, initiatives to
improve the industry’s competitiveness in the North Sea, as well as measures to
improve the supply chains contribution in the projects. We have seen a focus first and
foremost on the CAPEX side of the projects, which still is the public measure of a
‘project’s’ success as seen in medias coverage. However, the operation side of the
project has been given extended focus, especially through life-cycle cost measures, and
life cycle value measures trying to balance out the CAPEX, OPEX and income sides of
the project to obtain the most commercial value enhancement from each project. At the
same time there has been an increasing focus on the core business among the project
demand and supply chain actors in this industry as in most other industries.
Our belief is that this necessitates an enhanced focus on the project demand and supply
chains of the industry, both for the projects development and operations phases. A
question is whether the project demand and supply chain developments are approached
appropriately according to the characteristics of the industry’s project context?
Research topic
This research commenced with an initial assignment of ‘looking into logistics and
logistics management in the project context and as part of project management’. The
project context addressed here is that of the oil and gas industry, i.e. the development
and operation of an object where the production by that object generate income for the
owner(s) of the oil and gas reserves, while taking part in development and operations of
the object generate business for the supply chain actors.
The focus on logistics and supply chain management in most industries is as means for
improving the competitiveness of the industry or companies. This is the same for the oil
and gas industry. Therefore, an approach to supply chain management in the project
context of the oil and gas industry should aim to address logistics’ contribution to
industrial competitiveness in the oil and gas industry.
The objective of this thesis is to bring a contribution to the project management of
large-scale development and operation projects from concepts and thoughts within
logistics and supply chain management. The objective is to develop and outline supply
chain management within the project-oriented context as a particular and conscious
knowledge area of project management. Through developing a concept that approaches
projects and project management from a logistics and supply chain management
perspective, and through outlining what is important/specific for logistics and supply
chain management within the project context. The objective is as such related to
developing conceptual and methodological frameworks that may be used as basis for
specific developments and application in specific industrial and project-oriented
iv
Summary
___________________________________________________________________________________
contexts. The objective is as such not to develop and give specific solutions to specific
problems.
Perspective for addressing the research topic
The added value of logistics and supply chain management in general is found within
the logistical mission elements, namely the supply chain cost and service position
achieved through the ‘best’ alignment of supply and demand. Then to approach logistics
and supply chain management within the project context, we have three conditions that
our perspective rests on;
- The project as the business opportunity.
- The supply chain as the competitive entity.
- Competitiveness through logistics and supply chain management, focused on
alignment of supply and demand.
The project is regarded as a business opportunity, where each actor will make business
out of it and gain from participating in it. It is also assumed that a project will not be
realised if it is not possible to make business out of it, i.e. it is not a realisable business
opportunity. Though, technology, competence, capability and capacity of the supply
chain actors organised into the specific project supply chain construction, is what may
make the project available to realise as a business opportunity. Therefore the project
supply chain may be regarded as the competitive entity. Competitiveness or value
enhancement for the project, through the supply chain is assumed to be achieved
through logistics and supply chain management, specifically through the logistics aim
of alignment of supply and demand.
Scientific approach
The approach taken in this research follows Arbnor and Bjerke’s (1997) system
approach. They say that the systems approach is related to determining the type of a
system, by characterising and categorising the object under study, in our case the
‘system type’ of logistics and supply chain management in the project context of the oil
and gas industry;
Following Arbnor et al.’s definition of the systems approach our aim of this study is;
To determine the type of the system (from a logistics point of view)
To describe the system (from a logistics point of view)
To guide in approaching how we see the system (from a logistics point of view).
The scientific approach to this research is based on theoretical studies and open sources
of information, interviews with representatives from the industry, and participation in
meetings and workshops related to the research topic.
v
Summary
___________________________________________________________________________________
Theoretical platform
Our theoretical platform is based on theory from the domains of project management,
logistics and supply chain management, manufacturing theory, and theory related to
vulnerability and robustness.
From the project management theory we have focused on the aspects of the project,
such as the project context, the differing characteristics of the project life cycle, and the
element of uncertainty in projects. Further the theoretical focus has been on the choices
that has to be made in the project processes of determining ‘what to do’, i.e. the scope
of work of the project, and ‘how to do it’, i.e. the projects development and execution
model, and how these set different alternatives for approaching a project. We explore
three different strategies for undertaking a project development, as well as establish a
project atlas that may be used to explain and understand the choices of developing a
project along different routes from front-end to operations.
From logistics and supply chain management theory we focus on the difference between
supply chain management and demand chain management, as two similar concepts, but
with strong resemblance with the two main phases, development and operations, of the
project life cycle. Uncertainty is addressed related to the processes of demand and
supply, and with the concepts of resilience and robustness to address the service aspect
of the supply chains. From manufacturing theory we borrow the concepts of lean and
agile, to address what should guide organisational processes in the different phases of
the project life cycle.
Within logistics and supply chain management most of the conducted research and
development have focused on repetitive and continuous types of industries and
businesses. There is a difference between the repetitive context and the project context
with respect to logistics and supply chain management. Through a literature review of
earlier approaches to logistics in different project contexts, we found no one that
addressed how the logistics and supply chain management concepts apply to the
different needs of large-scale development projects throughout the project phases,
development and operations, and the differing characteristics of these two phases, the
one-of-a-kind development phase, and the repetitive operations phase.
Main findings and conclusions
Technology development is regarded as the most contributing factor for further
improvements in the Norwegian oil and gas industry. With respect to demand and
supply chain management in this project context a question is how new technology or
technology developments shall be taken into new project developments? The old
principle was that technology development was conducted as part of the project
development, while the contemporary principle is that technology development shall be
conducted between project, and be ready to use for new project developments.
The challenge of the oil and gas supply chain in this setting is two-fold. First it is the
ability to be able to support and take advantage of innovations and technological
development that may keep up the competitiveness of the oil and gas region. The other
is related to managing risk and thereby keeping the most ‘optimal’ execution time. Both
vi
Summary
___________________________________________________________________________________
are aimed at competitiveness, and were among the focus areas for the NORSOK
initiative. Competitiveness has to be achieved through inter-organisational capabilities
and capacities, where the project specific demand and supply chains has to be
competitive both in enabling use of innovative technologies, and without extending the
development time, and this should be made manageable in a planned and controlled
way. This is given in the table below.
Challenge Description
Innovations and technology
development
[Cost and income impact on value]
Being able to develop relationships in the industry
demand/supply chains that enables and sustains the
initiation and use of innovations and technology
development.
Project development execution time
[Time impact on value]
Being able to establish extended project organisations that
are able to execute the project development in a ‘correct’
scheduled time, and in a controlled manner.
Pre-NORSOK, technology development came to a large extent through a broad base of
small and medium sized enterprises, SME’s, working tightly to the technological
problem core and the operator. This could be regarded as a ‘rich’ supply chain
approach. In the same era the approach was to have the project demand, i.e. scope of
work, specified in detail before the supply chain was committed to the project. We have
called this stage two of the development history of the Norwegian petroleum industry.
Then, with NORSOK came the third stage of the development of the Norwegian
petroleum industry. It was a need for improved competitiveness, through reduced
project development CAPEX and execution time. Some of the answers to this challenge
was a reduced number suppliers, i.e. a lean supply chain approach, with more
responsibility for project object development placed with contractors, and committing
the supply chain earlier into the project, at a time when the project is less defined.
In other words, we may say that in stage two the focus was on closing the project
through strict project planning and control means, especially before committing the
supply chain, but having a multitude of potential supply chains (and thereby
technology) to develop from. Then in stage three we may say that the project is opened
up, especially to the contribution of the supply chain and even when committing the
supply chain, but the portfolio of supply chains to develop from is reduced due to lean
supply developments. This benefited the execution time, but at the sacrifice of the
(potential) opportunity value of alternative technology. In summary we may say that;
Stage 2; Approach a closed project, with a rich (open) supply chain.
Stage 3; Approach an open project, with a lean (closed) supply chain.
The consequence may be that when opening up the demand processes, concurrently
with applying lean supply, as in stage three, one may see that technology development
vii
Summary
___________________________________________________________________________________
in is danger of being lost, with its potential value enhancement contribution. At the
same time the concurrent execution process, with a lean supply chain seeks to manage
the time element of the value enhancement process in a controlled manner. However, if
project value enhancement from both technology (cost and income), as well as time
shall become an opportunity, then one may seek to combine the approaches of stage two
and three. Combining the steps from stage two and three could e.g. for a stage four
mean to;
Stage 4: Approach an open project, with a rich (open) supply chain.
Approach a closed project with a lean (closed) supply chain.
This means that new project planning and control concepts and means should be
established that enables to up-keep and manage the option of a rich and open supply
chain for an open project setting, though still keeping manageable control of the time
processes of the project development and execution. We have called this opportunity
seeking and value enhancing project strategies.
To develop a demand and supply chain management concept for this challenge we have
focused on the characteristics of five aspects of the two main project phases. The project
context focused on here is primarily characterised by being a unique business
opportunity, with two distinct phases, development and operation, that again are unique
with respect to the characteristics that describe the supply chains and processes. The
first characteristic is the project life cycle, stating the importance of being aware of the
differences in characteristics between the two phases, development and operations. The
second characteristic is the supply chain focus, driven by the targeted, one-of-a-kind
demand/supply in the development phase, versus the repetitive demand/supply in the
operations phase. Then the third characteristic is the logistics drivers, or whether the
main driver of the supply chains should be demand or supply in the development phase
versus the operations phase respectively. Then come the organisational processes,
characterised by agile characteristics in the development phase and lean characteristics
in the operations phase. The final characteristic is then related to the service quality, an
important logistics mission, focusing on resilience in the development phase and
robustness in the operations phase. These are presented in the table below.
Aspect Characteristics
1. The project life cycle Development Operations
2. The supply chain focus One-of-a-kind Repetitive
3. Logistics drivers Demand chain management Supply chain management
4. Organisational processes Agile Lean
5. Service quality Resilient Robust
viii
Summary
___________________________________________________________________________________
The development phase is a phase were the project and the project object is to be
developed, i.e. the aim is to define and specify the demand that in sum through the
fabrication and construction activities will become the project object. Therefore we have
chosen to emphasise demand chain management specifically for the development phase.
We have used the term agile to point to the importance of seeking and evaluating
opportunities that could bring value enhancement to the project. The project
development context is also defined by a high degree of uncertainty so that
opportunities as well as risks will emerge, necessitating an agile approach either
explicitly or implicitly. The term resilient is also used to reflect the uncertainty in the
development phase, and when uncertainty mature, the demand/supply chains has to be
able to ‘get back on track’, i.e. be resilient, to aim for the final objective.
The terms supply, lean, and robust is what we mean should characterise the operations
phase of the project life cycle. The operations context is one of repetitiveness, keeping
focus on the supply so that the whole ‘machinery’ goes like ‘clockwork’. This is the
ultimate basis for lean thinking where not only the potential for waste reduction could
be discovered through incremental rounds of continuous improvement, but also making
the whole supply operations more robust through revealing elements that could be a risk
factor. We have used the term supply specifically for the operations phase because it is a
repetitive supply operation. The demand is already defined and the supply chains should
be robust so that they do not contribute to disturbing the production. The term robust is
used specifically to indicate that although the supply chains should be lean, that should
never compromise their service quality, because a stop in the revenue generation of the
production by the project object in most cases far outweighs the incremental supply
cost.
We then have a demand and supply chain management concept that ‘obey’ the logistics
objectives of alignment of supply and demand. That takes account of the specialities of
the project context’s development and operations phases, and is aimed at value
enhancement for the project as a business opportunity realised through the project
supply chain as a competitive entity throughout the lifecycle of the project. That is the
concept of project supply chain management, PSCM, presented in the table below.
Principles Characteristics
The project as the business
opportunity
Development Operations
The supply chain as the
competitive entity
One-of-a-kind Repetitive
Demand chain management Supply Chain Management
Agile Lean
Competitiveness through
logistics and supply chain
management, focused on
alignment of supply and demand
in the project context
Resilient Robust
ix
Summary
___________________________________________________________________________________
To support the PSCM concept we have developed methodological guidelines for project
supply chain management as we have approached it. The intention with the guidelines is
that they shall be a guide to address the questions that is important with respect to the
context and the characteristics of the demand and supply chains that are approached, as
well as the mission of those demand and supply chains. When approaching project-
oriented demand and supply chains one have to take both the specific context of the
project as well as the supply chain approach into account. The PSCM guidelines are
based on nine steps that follow the project from initiation to revision of the operations
supply chain, as presented in the table below.
1. Establish project vision
and definition
5. Develop project
supply chain strategy
8. Preparation for and start-up
of the operations supply-chain
2. Clarify project development
and operations alternatives
4. Analyse the
demand/supply networks
9. Re-configure and improve
the operations supply chain
7. Activate and execute
the project development
supply chain
6. Select project development
and operations alternative
Project related
Project supply chain related
Order of methodology
Impacts
Selection point
3. Analyse the market
1. Establish project vision
and definition
5. Develop project
supply chain strategy
8. Preparation for and start-up
of the operations supply-chain
2. Clarify project development
and operations alternatives
4. Analyse the
demand/supply networks
9. Re-configure and improve
the operations supply chain
7. Activate and execute
the project development
supply chain
6. Select project development
and operations alternative
Project related
Project supply chain related
Order of methodology
Impacts
Selection point
Project related
Project supply chain related
Order of methodology
Impacts
Selection point
3. Analyse the market
The PSCM concept and methodological guidelines has been developed to meet
challenges of the project demand and supply chain context, as described by industrial
actors. However, we have in this research not been able to apply and demonstrate
neither the concept nor the guidelines in relation to real cases. This is a drawback of this
research, and has to be left for further studies.
x
Table of Contents
___________________________________________________________________________________
Table of Contents
PREFACE.....................................................................................................................III
SUMMARY................................................................................................................... IV
TABLE OF CONTENTS............................................................................................. XI
LIST OF FIGURES................................................................................................... XIV
LIST OF TABLES..................................................................................................... XVI
1. INTRODUCTION.................................................................................................. 1
1.1 HISTORICAL BACKGROUND................................................................................ 1
1.1.1 Forty years of development in the North Sea. .......................................... 1
1.1.2 Development, operations and the supply chain focus .............................. 7
1.2 THE FUTURE.................................................................................................... 10
1.3 OUTLINE.......................................................................................................... 11
2. THE RESEARCH DOMAIN.............................................................................. 14
2.1 THE RESEARCH TOPIC ...................................................................................... 14
2.2 CONTRIBUTIONS AND OBJECTIVES................................................................... 16
2.3 ASSUMPTIONS AND LIMITATIONS..................................................................... 18
2.4 SCIENTIFIC APPROACH..................................................................................... 19
2.4.1 Initial approach and changes................................................................. 19
2.4.2 Chosen approach.................................................................................... 21
3. PROJECTS AND PROJECT MANAGEMENT............................................... 28
3.1 INTRODUCTION................................................................................................ 28
3.2 THE DEVELOPMENT OF PROJECT MANAGEMENT............................................... 28
3.3 DEFINITIONS OF PROJECT................................................................................. 29
3.4 ASPECTS OF PROJECTS ..................................................................................... 31
3.4.1 The project context ................................................................................. 31
3.4.2 The project object ................................................................................... 32
3.4.3 The project life-cycle .............................................................................. 34
3.4.4 Projects means uncertainty .................................................................... 36
3.5 PROJECT PROCESSES ........................................................................................ 41
3.5.1 PMI’s project processes and knowledge areas ...................................... 41
3.5.2 What’s and how’s ................................................................................... 42
3.6 DIFFERENCES FROM STRATEGY TO OPERATIONS.............................................. 46
xi
Table of Contents
___________________________________________________________________________________
3.6.1 Strategies are different ........................................................................... 46
3.6.2 The Project Atlas .................................................................................... 49
3.6.3 Routes are different ................................................................................ 51
4. LOGISTICS AND SUPPLY CHAIN MANAGEMENT. ................................. 54
4.1 INTRODUCTION................................................................................................ 54
4.2 LOGISTICS AND SUPPLY CHAIN MANAGEMENT ................................................ 54
4.2.1 Logistics functions .................................................................................. 57
4.2.2 Logistics Engineering............................................................................. 58
4.2.3 Logistics management/ Integrated logistics ........................................... 59
4.2.4 Supply chain management / Integrated SCM......................................... 60
4.2.5 Demand chain management ................................................................... 62
4.2.6 Extended or virtual enterprises .............................................................. 65
4.2.7 Future developments of logistics concepts ............................................. 66
4.2.8 Summary of logistics and supply chain management............................. 68
4.3 UNCERTAINTY IN LOGISTICS AND SUPPLY CHAIN MANAGEMENT ..................... 70
4.3.1 Demand................................................................................................... 70
4.3.2 Supply ..................................................................................................... 71
4.3.3 Growing opportunities and controlling risks ......................................... 72
4.4 SOME LESSONS FROM MANUFACTURING.......................................................... 74
4.4.1 Lean Production ..................................................................................... 75
4.4.2 Agility and Agile Manufacturing............................................................ 79
4.4.3 Lean versus agile.................................................................................... 83
4.5 LOGISTICS AND SUPPLY CHAIN MANAGEMENT IN THE PROJECT CONTEXT ....... 86
4.5.1 Earlier approaches................................................................................. 87
4.5.2 Has project management and supply chain management been
integrated?.............................................................................................................. 92
4.5.3 Project Supply Chain Management........................................................ 92
5. THE PROJECT SUPPLY CHAIN CHALLENGE........................................... 94
5.1 INTRODUCTION................................................................................................ 94
5.2 THE BUSINESS CONTEXT................................................................................. 94
5.2.1 Competitiveness in the macro perspective.............................................. 94
5.2.2 Competitiveness in the inter-organisational perspective ....................... 95
5.2.3 Competitiveness in the micro perspective .............................................. 96
5.3 THE OIL AND GAS SUPPLY CHAIN................................................................... 96
5.3.1 General ................................................................................................... 96
5.3.2 The roles of inter-organisational PSC actors ........................................ 99
5.3.3 The roles of intra-organisational PSC actors ...................................... 103
5.4 EXTERNAL BODIES – LAW AND LEGISLATION ............................................... 110
xii
Table of Contents
___________________________________________________________________________________
5.5 THE CHALLENGE OF THE OIL AND GAS PROJECT SUPPLY CHAIN...................... 111
5.5.1 Cost and income – Value of technology ............................................... 112
5.5.2 Time – Value of the execution process ................................................. 115
5.6 SUMMARIZING THE CHALLENGE .................................................................... 118
6. PROJECT SUPPLY CHAIN MANAGEMENT – THE CONCEPT ............ 121
6.1 INTRODUCTION.............................................................................................. 121
6.2 PRINCIPLES AND CHARACTERISTICS OF PROJECT SUPPLY CHAIN MANAGEMENT
122
6.2.1 The Principles of PSCM....................................................................... 122
6.2.2 The Characteristics of PSCM............................................................... 123
6.2.3 PSCM characteristics in summary ....................................................... 136
6.3 PSCM – CONCEPT AND DEFINITION.............................................................. 138
6.3.1 Project Supply Chain Management – The Concept ............................. 138
6.3.2 Project Supply Chain Management – A Definition .............................. 141
7. METHODOLOGICAL GUIDELINE FOR PSCM ANALYSIS................... 143
7.1 INTRODUCTION.............................................................................................. 143
7.2 METHODOLOGICAL GUIDELINES FOR PSCM ANALYSIS................................ 145
7.2.1 Establish project vision and definition................................................. 148
7.2.2 Clarify project development and operations alternatives. ................... 153
7.2.3 Analyse the market................................................................................ 163
7.2.4 Analyse the demand/supply networks................................................... 166
7.2.5 Develop project supply chain strategy ................................................. 189
7.2.6 Select project development and operations alternative........................ 190
7.2.7 Activate and execute the project development supply chain ................ 192
7.2.8 Preparation for and start-up of operations supply chain..................... 195
7.2.9 Re-configure and improve operations supply chain............................. 200
7.3 SUMMARY ..................................................................................................... 203
8. CONCLUSIONS................................................................................................. 204
8.1 PSCM – ”OLD WINE IN A NEW BOTTLE”?...................................................... 204
8.2 RECAPTURING THE OBJECTIVES..................................................................... 205
8.3 USEFULNESS OF THE PROJECT SUPPLY CHAIN MANAGEMENT CONCEPT.......... 206
8.3.1 The PSCM development versus theory ................................................. 206
8.3.2 The PSCM development versus the industry’s challenges ................... 210
8.4 CLOSURE ....................................................................................................... 217
REFERENCES AND SUPPORT LITERATURE .................................................. 218
APPENDIX A – FINDINGS IN AGILE MANUFACTURING. ............................ 231
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APPENDIX B – CRINE NETWORK’S SCOR’S AND CAR’S. ........................... 233
APPENDIX C – CRINE’S SUPPLY CHAIN STRATEGY SETUP. .................... 244
APPENDIX D – EPCI FRONT END OPPORTUNITIES WORKSHOP. ........... 246
APPENDIX E – EPCI CONTRACT STRATEGIES WORKSHOP..................... 253
APPENDIX F – AGILE VIRTUAL ENTERPRISE REFERENCE MODEL. .... 269
List of Figures
FIGURE 1.1. A TWO-PARTED CAPEX AND OPEX SUPPLY CHAIN PERSPECTIVE................ 8
FIGURE 1.2. THE DEVELOPMENTS IN BUSINESS FOCUS FROM INVESTMENT TO BUSINESS
COMPETITIVENESS. .................................................................................................... 8
FIGURE 1.3. OUTLINE OF THE THESIS............................................................................... 12
FIGURE 2.1. THE ORDER PENETRATION POINT’S INTERVENTION IN THE DEMAND/SUPPLY
CHAIN (ROLSTADÅS, 1997-B). ................................................................................ 15
FIGURE 2.2. THE ‘GOAL-MEANS ORIENTATION’ OF THE STUDY (REVISED FROM ARBNOR &
BJERKE, 1997, P.302). ............................................................................................. 26
FIGURE 3.1. AVERAGE COST AND COST DISTRIBUTION FOR SOME REFERENCE PROJECTS. 34
FIGURE 3.2. THE APPROACH TO UNCERTAINTY MANAGEMENT STARTS IN THE FRONT-END
PHASE. ..................................................................................................................... 38
FIGURE 3.3. SHARING OF FINANCIAL RISK/REWARD AMONG THE NEREFCO ALLIANCE
PARTNERS. ............................................................................................................... 40
FIGURE 3.4. THE PROJECT SPACE. .................................................................................... 44
FIGURE 3.5. CONSTRUCTION PROJECTS MOVES WITHIN THE PROJECT SPACE AS THEY
BECOME MORE COMPLEX. ........................................................................................ 45
FIGURE 3.6. PROJECT’S DEGREE OF OPENNESS THROUGHOUT THE PROJECT PHASES. ...... 46
FIGURE 3.7. DIFFERENT PROJECT STRATEGIES AND THE PROJECT SPACE. ........................ 49
FIGURE 3.8. THE EPCI PROJECT ATLAS. .......................................................................... 50
FIGURE 3.9. A ROUTE MOVING THROUGH SEVERAL CATEGORIES OF THE PROJECT ATLAS.51
FIGURE 3.10. A TO C STRATEGIES BETWEEN ORDER AND DISORDER. .............................. 52
FIGURE 3.11. THREE DIFFERENT ROUTES FROM INITIATION TO COMPLETION (1). ............ 52
FIGURE 3.12. THREE DIFFERENT ROUTES FROM INITIATION TO COMPLETION (2). ............ 53
FIGURE 4.1. SPAN IN PARTS VOLUME AND VARIETY, DEPENDENT ON TYPE OF
‘MANUFACTURING’.................................................................................................. 70
FIGURE 4.2. THE CUSTOMER SERVICE PYRAMID. ............................................................. 74
FIGURE 4.3. INDICATIVE PROPORTIONS AMONG LEAN THINKING ACTIVITY TYPES
THROUGHOUT PROJECT PHASES. .............................................................................. 77
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FIGURE 5.1. THE OIL AND GAS SUPPLY CHAIN................................................................. 97
FIGURE 5.2. FOCUS OF THE OIL AND GAS SUPPLY CHAIN THROUGHOUT THE LIFECYCLE
(BASED ON FIGURE BY IPA, 1995). .......................................................................... 98
FIGURE 5.3. THE ENGINEER’S ROLE IN A PROJECT’S DEMAND AND SUPPLY PROCESSES. 106
FIGURE 5.4. THE OPTIMUM EXECUTION TIME (BASED ON FIGURE IN TIKO-II, 1998). ... 117
FIGURE 5.5. THE THREE STAGES AND THEIR USE OF RICH OR LEAN SUPPLY CHAIN
CONCEPTS, TO APPROACH CLOSED OR OPEN PROJECTS........................................... 119
FIGURE 6.1. ORGANISATIONAL DEMAND AND SUPPLY ALIGNMENT IN THE DEVELOPMENT
PHASE. ................................................................................................................... 127
FIGURE 6.2. ALIGNMENT OF DEMAND AND SUPPLY IN THE DEVELOPMENT PHASE. ........ 128
FIGURE 6.3. ALIGNMENT OF DEMAND AND SUPPLY IN THE OPERATIONS PHASE. ............ 129
FIGURE 6.4. AN EXAMPLE OF AN OFFSHORE SUPPLY PROCESS AND SUPPLY CHAIN. ....... 129
FIGURE 6.5. ENHANCE THE AGILITY IN PROJECT DEVELOPMENT................................... 131
FIGURE 6.6. RESILIENCE AS THE ABILITY TO CONVERT TO A NEW SOLUTION AND
CORRESPONDING SUPPLY CHAIN (READ TEXT IN FIGURE FROM BOTTOM UPWARDS).
.............................................................................................................................. 135
FIGURE 6.7. AN AGILE SUPPLY CHAIN ALLOWS DESIGN CHANGES TO BE MADE LATER
(BASED ON GORANSON 1999, P.187). .................................................................... 136
FIGURE 7.1. THE OUTLINE OF THE PSCMMETHODOLOGICAL GUIDELINE. .................... 146
FIGURE 7.2. THE STARTING POINT OF THE BUSINESS OPPORTUNITY. .............................. 148
FIGURE 7.3. ALTERNATIVE ROUTES AND STATES IN PROJECT DEVELOPMENT AND
OPERATIONS. ......................................................................................................... 153
FIGURE 7.4. DIFFERENT POSITIONS FOR THE OPERATIONS ALTERNATIVES. .................... 154
FIGURE 7.5. VALUE IMPROVING PRACTICES (IPA, 1995). .............................................. 159
FIGURE 7.6. THE OPPORTUNITIES IN THE MARKET TO REALISE AN OPPORTUNITY........... 163
FIGURE 7.7. PROVIDER CAPABILITY MAPPING (CRINE NETWORK (1999)). .................. 165
FIGURE 7.8. ANALYSING THE PROJECT’S DEMAND AND SUPPLY CHAIN CONSTRUCTIONS.
.............................................................................................................................. 167
FIGURE 7.9. THE FIVE SCOR PROCESSES (SUPPLY CHAIN COUNCIL 2002, SCOR VER.
5.0). ....................................................................................................................... 168
FIGURE 7.10. BREAKDOWN OF THE MAIN SCOR PROCESSES (SUPPLY CHAIN COUNCIL
2002, SCOR VER. 5.0). ........................................................................................ 169
FIGURE 7.11. HORIZONTAL VERSUS VERTICAL PARTNERING. ........................................ 172
FIGURE 7.12. CHOICE OF OPERATOR CONTRACTOR RELATIONSHIP BASED ON BUSINESS
CHALLENGE AND BUSINESS CULTURE (HETLAND, 1999). ...................................... 173
FIGURE 7.13. ALIGNING CLIENT AND CONTRACTOR THROUGH THE CONTRACT
(INSTEFJORD, 1999)............................................................................................... 174
FIGURE 7.14. MAJOR LIFE CYCLE CATEGORIES OF A VIRTUAL ENTERPRISE. .................. 175
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FIGURE 7.15. DIFFERENCE BETWEEN A RISK ANALYSIS AND A VULNERABILITY ANALYSIS.
.............................................................................................................................. 186
FIGURE 7.16. DEVELOP PROJECT DEMAND AND SUPPLY CHAIN STRATEGY. ................... 189
FIGURE 7.17. SELECT PROJECT DEVELOPMENT AND OPERATIONS CONCEPT. .................. 190
FIGURE 7.18. ACTIVATE AND EXECUTE THE PROJECT DEVELOPMENT SUPPLY CHAIN..... 192
FIGURE 7.19. PREPARATION FOR AND START-UP OF OPERATIONS SUPPLY CHAIN. .......... 196
FIGURE 7.20. RECONFIGURATION AND CONTINUOUS IMPROVEMENT OF THE OPERATIONS
SUPPLY CHAIN AS THE SUPPLY CONTEXT CHANGES. ............................................... 200
List of Tables
TABLE 1.1. PROJECT MANAGEMENT CHALLENGES AND PRACTICES – NORTH SEA CAPITAL
PROJECTS. .................................................................................................................. 2
TABLE 1.2. SOME OF THE MAIN CHANGES RESULTING FROM THE NORSOK PROCESS....... 3
TABLE 1.3. MAIN AREAS FOR FURTHER IMPROVEMENTS POST-NORSOK. ........................ 6
TABLE 2.1. CRINE’S SUPPLY CHAIN MANAGEMENT INITIATIVE VERSUS PROJECT SUPPLY
CHAIN MANAGEMENT AS OUTLINED IN THIS THESIS. ................................................ 16
TABLE 2.2. ARBNOR AND BJERKE’S THREE METHODOLOGICAL APPROACHES IN RELATION
TO PARADIGMATIC CATEGORIES (FROMARBNOR ET AL., P.44). ............................... 22
TABLE 2.3. TWO IDEALISTIC APPROACHES OF THE RESEARCH PROCESS (ANDERSEN ET AL.
1992, TRANSLATED BY AUTHOR). ............................................................................ 23
TABLE 2.4. ARBNOR ET AL.’S PLAN FOR A SYSTEM STUDY THAT DETERMINES RELATIONS,
WITH COMMENTS FROM THIS ACTUAL RESEARCH..................................................... 24
TABLE 3.1. SOME DEFINITIONS OF THE TERM PROJECT. ................................................... 30
TABLE 3.2. COST ACCOUNTS FOR SOME REFERENCE PROJECTS DEVELOPED IN RELATION TO
THE NORWEGIAN CONTINENTAL SHELF IN THE LATE 1990’S (FIGURES IN MILL.
NOK). ..................................................................................................................... 33
TABLE 3.3. PERCENTUAL COST DISTRIBUTION FOR SOME REFERENCE PROJECTS
DEVELOPED IN RELATION TO THE NORWEGIAN CONTINENTAL SHELF IN THE LATE
1990’S. .................................................................................................................... 33
TABLE 3.4. THE PROJECT LIFE CYCLE. ............................................................................. 35
TABLE 3.5. UNCERTAINTY MANAGEMENT MEANS BALANCING OPPORTUNITIES AND RISKS
ALONG THE PROJECT SUPPLY CHAIN......................................................................... 36
TABLE 3.6. THE NATURE OF UNCERTAINTY. SUGGESTED TAXONOMY (HETLAND 1999
(A)). ........................................................................................................................ 37
TABLE 3.7. NEREFCO ALLIANCE PROJECT; ALLIANCE PARTNERS – UNDER-RUN SHARES. 40
TABLE 3.8. OBENG’S FOUR PROJECT CATEGORIES. .......................................................... 43
TABLE 3.9. OBENG’S CATEGORIES, WITH HETLAND’S SUGGESTED NAMING................... 44
TABLE 4.1. DEVELOPMENT OF LOGISTICS’ CONCEPTS. .................................................... 56
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TABLE 4.2. FROM LOGISTICS FUNCTIONS TO LOGISTICS MANAGEMENT (FROM ROSS 1998,
P.26). ....................................................................................................................... 58
TABLE 4.3. THE DEVELOPMENT IN CLM’S DEFINITION OF LOGISTICS MANAGEMENT. ..... 62
TABLE 4.4. FOUR TYPES OF VIRTUAL ENTERPRISES, AS DEFINED BY GORANSON (1999). 66
TABLE 4.5. FUTURE THEMES FOR LOGISTICS AND SUPPLY CHAIN MANAGEMENT............ 67
TABLE 4.6. THE RELATION BETWEEN UNCERTAINTY AND THE ‘SERVICE PYRAMID’. ....... 72
TABLE 4.7. UNCERTAINTY ELEMENTS AND THE ‘REVISED’ SERVICE PYRAMID’. .............. 73
TABLE 4.8. THREE TYPES OF ACTIVITY WITH EXPERIENCE BASED PROPORTIONS. ............ 77
TABLE 4.9. THE FOUR PRINCIPAL ELEMENTS OF AGILITY (PREISS, 1995). ....................... 81
TABLE 4.10. THREE AGILE CAPABILITIES, (CLM) AND THEIR RELATION TO THE PROJECT
CONTEXT. ................................................................................................................ 82
TABLE 4.11. MASS, LEAN, AND AGILE WORK PROCESSES (BASED ON PREISS 1995-A,
P.15). ....................................................................................................................... 84
TABLE 4.12. DIFFERENCES BETWEEN LEAN AND AGILE AS SEEN BY GORANSON (1999). . 85
TABLE 4.13. SOME DIFFERENCES BETWEEN LEAN AND AGILE.......................................... 85
TABLE 5.1. ROLES OF THE INTER-ORGANISATIONAL PSC ACTORS. ................................. 99
TABLE 5.2. STRENGTHS OF OWNER ORGANISATION VERSUS CONTRACTOR ORGANISATION
(IPA 1995). ........................................................................................................... 101
TABLE 5.3. A CONTRACTOR’S SUPPLIER STRATEGY WITH RESPECT TO TYPE OF SUPPLIES
(LL 990614).......................................................................................................... 102
TABLE 5.4. ROLES OF THE INTRA-ORGANISATIONAL PSC ACTORS. ............................... 103
TABLE 5.5. ROLES AND COMPETENCE DISTRIBUTION AMONG ENGINEERING AND
PROCUREMENT....................................................................................................... 106
TABLE 5.6. WHO’S SUPPLY CHAIN TO USE IN DEVELOPMENT......................................... 116
TABLE 5.7. SUMMARIZING THE CHALLENGES OF THE OIL AND GAS [PROJECT] SUPPLY
CHAIN IN THE NORTH SEA REGION......................................................................... 118
TABLE 5.8. THE THREE STAGES AND THEIR USE OF RICH OR LEAN SUPPLY CHAIN
CONCEPTS, TO APPROACH CLOSED OR OPEN PROJECTS........................................... 120
TABLE 6.1. THE CHARACTERISTICS OF PROJECT SUPPLY CHAIN MANAGEMENT. ............ 124
TABLE 6.2. LOGISTICS SERVICE MEASURES. .................................................................. 134
TABLE 6.3. THE BUILDING BLOCKS OF THE PSCMCONCEPT. ........................................ 138
TABLE 6.4. THE PSCMCONCEPT. ................................................................................. 140
TABLE 7.1. THE PRINCIPLES OF AN AGILE VIRTUAL ENTERPRISE (GORANSON 1999). .... 151
TABLE 7.2. REPRESENTATION OF STATIC NET PRESENT VALUE MEASURE PER
ALTERNATIVE. ....................................................................................................... 156
TABLE 7.3. IMPORTANT ELEMENTS FOR LIFE CYCLE COSTING. ...................................... 156
TABLE 7.4. OPERATOR SHOULD CONTROL FRONT END LOADING (IPA 1995)................. 160
TABLE 7.5. WHY IS TECHNOLOGY SELECTION IMPORTANT? (IPA 1995). ...................... 161
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TABLE 7.6. RESULTS OF USING CONVENTIONAL VERSUS NEW TECHNOLOGY (IPA 1995).
.............................................................................................................................. 161
TABLE 7.7. CRINE NETWORK’S SCMMETHODOLOGY – ANALYSE THE MARKET......... 164
TABLE 7.8. THE CAPABILITY OF AN ACTOR IN A VIRTUAL ENTERPRISE (GORANSON, 1999).
.............................................................................................................................. 166
TABLE 7.9. VALUE STREAM MAPPING AND THE PROJECT SITUATION (BASED ON BICHENO,
2000). .................................................................................................................... 170
TABLE 7.10. MAJOR HEADINGS OF THE AGILE VIRTUAL ENTERPRISE REFERENCE MODEL
(FOR THE STRUCTURE OF THE FULL MODEL, SEE APPENDIX F). .............................. 176
TABLE 7.11. SUMMARY OF THE INTERMEDIATE METRICS (GORANSON 1999, P.186). .... 177
TABLE 7.12. THE FIVE LEAN PRINCIPLES AND RELATION TO THE PROJECT OPERATIONS
PHASE. ................................................................................................................... 179
TABLE 7.13. LEAN CHARACTERISTICS AND RELATION TO THE PROJECT OPERATIONS PHASE.
.............................................................................................................................. 180
TABLE 7.14. TYPES OF WASTE (MUDA) IN THE PROJECT OPERATIONS SUPPLY CHAIN..... 182
TABLE 7.15. LEAN PLANNING ELEMENTS AND THE PROJECT OPERATION SUPPLY CHAIN.183
TABLE 7.16. DEFINITIONS RELATED TO RESILIENCE AND ROBUSTNESS (ASBJØRNSLETT ET
AL., 1999).............................................................................................................. 185
TABLE 7.17. DIFFERENCES BETWEEN A RISK AND A VULNERABILITY ANALYSIS. ........... 186
TABLE 7.18. VULNERABILITY ANALYSIS PART 1; ESTABLISHING SCENARIOS AND THEIR
ATTRIBUTES. .......................................................................................................... 187
TABLE 7.19. VULNERABILITY ANALYSIS PART 2; QUANTITIVE ASSESSMENT BASED ON
SCENARIO CRITICALITY.......................................................................................... 188
TABLE 7.20. MATERIALS MANAGEMENT CHECKLIST – MATERIALS OF CONSTRUCTION. 193
TABLE 7.21. MATERIAL MANAGEMENT RESPONSIBILITIES. ........................................... 194
TABLE 8.1. THE FULFILMENT OF THE PART OBJECTIVES SET FOR THIS THESIS................ 205
xviii
1 Introduction
1. Introduction
___________________________________________________________________________________
1
1.1 Historical background
The oil and gas industry in the North Sea has a history that stretches about forty years
back. When it commenced, tremendous technical, organisational and managerial
challenges lay in front to be able to undertake the development and exploitation of the
hydrocarbon reserves that were located below the seabed. However, although there were
tremendous challenges and risks involved, the financial opportunities were very large
1
.
The ‘price’ or CAPEX
2
cost, of developing and installing the first offshore facilities
were regarded as ‘enormous’ and the cost estimates had to be increased several times,
leading to considerable budget overruns. Though, the oil price was so high that the
payment period needed to pay off the CAPEX costs was short.
1.1.1 Forty years of development in the North Sea.
Hetland (1999)
3
has made a reflection over the developments within project execution
and project management practice that has developed since the first North Sea offshore
oil and gas developments began and such projects emerged. Table 1 gives a summary of
these developments.
In Table 1 there are three events that should be given further attention. The first event is
the Moe report
4
(Moe, 1980) that among others concluded that the cost control of the
first generation offshore development projects had come out of control. The result was
that project planning and control was tightened up, leaving ‘closed’ projects where
every party in the project knows what to do and how to do it, as they are told in detail.
This development is by Hetland (1999) referred to as the start of using strategies
focusing to gain control over and manage tightly all risks, so that the project meets its
cost and schedule targets, without addressing whether these targets have room for
improvement. The type of risk reducing strategies as were developed in this stage of the
project management development is still active today, and contribute constructively in
their kind of project context.
1
For an interesting description of the early phases of the development of the Norwegian oil and gas
industry see Stinchcombe et al. (1985).
2
CAPEX = Capital expenditure, the investment cost for developing the facilities.
3
The content in this sub-chapter is a short summary of some reflections made by Dr. Per Willy Hetland
(Hetland 1999) on the historical development with respect to project and contract management
developments that has been seen throughout forty years of oil and gas developments in the North Sea.
4
The Moe Report = ‘Kostnadsanalysen norsk kontinentalsokkel’ (Moe, 1980).
1 Introduction
___________________________________________________________________________________
2
Table 1.1. Project management challenges and practices – North Sea capital projects.
STAGE 1 1965 – 80
Major challenge: Keep CAPEX escalation under control
Results: Major cost overruns in Norway and in the UK
THE MOE REPORT 1980
Conclusions: 176% cost overrun (average 1
st
generation projects).
Recommendations: Detailed definitions, tight change control.
STAGE 2 1975 – 90
Major challenge: Making the recommendations in the Moe report work.
Initiatives, Shell: CTR-catalogues (tell contractor what to do).
Conoco: FEL, Front End Loading.
Mobil: Incentives (contractor control his own costs).
Results: Generally good.
STAGE 3 1990 – 2000
Major challenge: Reduce costs by 40%
Initiatives, UK: CRINE.
Norway: NORSOK.
Results, UK: Generally good, some disappointing.
Norway: Some good, generally disappointing.
THE KAASEN REPORT 1999
Conclusion: 27% cost overrun (average of 13 projects).
Recommendations: ‘Continue the NORSOK process’.
STAGE 4 2000 -
Major challenge: Keep life-cycle cost reductions under control.
Enhanced life-cycle value through the project supply chain.
Initiatives, UK: Crine Network -> Logic
5
.
Norway: Kon-Kraft
6
.
5
Logic – Leading Oil and Gas Companies Competitiveness (www.logic-oil.com).
6
Kon-Kraft – www.olf.no/konkraft/.
1 Introduction
___________________________________________________________________________________
3
The second event is what in Hetland’s outline is referred to as stage 3. In the early
nineties the oil and gas industry was in a downturn with few development projects in the
pipeline. The whole industry was on low speed, and the main question was about the
competitiveness of the North Sea continental shelves. To address and improve this
situation and the competitiveness of the oil and gas industries based around the North
Sea some national initiatives were established. First the British CRINE initiative was
formed, then the Norwegian NORSOK initiative (www.nts.no/norsok/). Both were
cross-industry initiatives, aimed at improving the industry competitiveness to bring the
continental shelves to a competitive level, and this is reflected in the initiatives names,
‘Cost Reduction Initiative for the New Era’ or CRINE, and ‘norsk sokkels
konkurranseposisjon’ (‘the competitive standing of the Norwegian continental shelf’) or
NORSOK.
Both the CRINE and the NORSOK initiatives set tough ambitions for their
achievements to come. They were both going to achieve substantial reductions both in
CAPEX cost expenditure and in project execution time. Improvement targets were high,
on the British side they were not made ‘tangible’, as the improvements were said to be
substantial, while on the Norwegian side it was ‘promised’ improvements in the range
of 40-50%.
‘The main target for NORSOK was to achieve improvements in work processes and external conditions
that would make the Norwegian Continental Shelf competitive compared to other petroleum producing
countries. Two important sub-goals were especially emphasized;
A reduction in time and cost consumption with 40-50% within the end of 1998, compared with best
practice in 1993.
Maintain the leading position in health, environment and safety work.
[Seven topics with work groups] were established to achieve these targets. [The seven topics were] cost
analysis and target figures, standardisation, the relationship between operator and supplier, documentation
and information technology, base- and logistics, HES, and external conditions’ (Kaasen 1999, p.20).
In table 1.2 we have listed some important changes that the NORSOK process lead to,
as presented by Kaasen (1999, pp.20-22), changes that have direct effect on the project
supply chain.
Table 1.2. Some of the main changes resulting from the NORSOK process.
Structures and roles A new project execution model where the operators to a larger extent
procure complete products, and that these products increasingly are openly
described based on functional requirements for function and performance.
This means that the contractor to a larger extent must take the full
responsibility for engineering and execution of a larger part of the
development. As the contractor in this model has taken over tasks and
responsibilities prior handled by the operator, this has lead to a real
demand for adjustment and learning in the project supply chain, e.g.
project planning and control, detailed design, and interface control.
1 Introduction
___________________________________________________________________________________
4
New project execution
model/shorter
development time
The old, sequential execution model is replaced with a more concurrent
model, including the main phases of the development, reservoir planning,
design and construction of the production facilities, drilling, and the
overall decision process.
The project supply chain is also involved earlier in this model. This has the
effect that the supply chain may contribute with its knowledge and
competence early on, but also that it is activated at a stage where the
definition of the project is still in an early phase, which may give rise to
challenges with respect to contractual relations.
Diversity in co-operative
relations
The requirement for shorter development times and a new execution model
has developed co-operative relations in two dimensions. One focus on
more long term engagement between contractor and suppliers, this is often
seen in the increase in frame contracts and agreements. The other focus on
more committed engagement in customer and supplier relationships, e.g.
through integrated execution (e.g. operator/ contractor/ supplier integrated
teams), alliances, or joint ventures.
The development of committed engagement needs forms of contractual
incentives, and further development of contractual models. The use of
frame contracts and agreements is intended to make ordering of standard
components more cost effective over several project, as well as
standardisation and cost efficiency in operations.
New risk-picture for
contractor
The new structures and roles of the contractor, together with the new
execution model have collectively made up a new risk-picture for the
contractor. Although the contractor has increased his risk exposure, the
operator still owns the ultimate risk, and as such the risk management
should be a joint effort from both stakeholders.
NORSOK standards A common set of industry standards were developed and used (to a
varying degree, often with operator specific additions). The NORSOK
standards replaces (to a certain degree) the operator specific standards,
with a set of common standards. The specifications in the NORSOK
standards are functional for some areas, and detailed for others.
The focus on Norwegion, i.e. NORSOK, standards, is an element that has
been ‘criticized’ by the British industry, as they don’t see the benefit of
having national industry standards in an international industry, when there
are international standards available.
7
Legislation A change made in the legislation through the Petroleum Law is that the
licensee may enter into substantial contractual obligations or start
fabrication or construction before approval of PDO. The contractual
obligations are entered into at the licensee’s own risk. This has made
possible shorter development time, and has become a much applied
practice. A possible drawback on this is that contractual obligations are
made on a weak engineering (demand) basis, leading to changes and cost
escalation.
7
Comment given in interview with Olav Andenæs, after a meeting with British CRINE representatives.
1 Introduction
___________________________________________________________________________________
5
When the results started to emerge one saw that improvements had been made, but were
the improvements as good as expected? On the British side they saw results that was
better than what had been achieved in earlier, comparable projects, while on the
Norwegian side one saw that improvements had been made, but not in the scale, at least
with respect to costs, as was ‘promised’. For many within the oil and gas industry, both
on the operator and contractor side the results of the CRINE and Norsok initiatives were
perceived to be; on the British side; ‘generally good, but some disappointing’, and on
the Norwegian side; ‘some good, but generally disappointing’
8
. This could of course be
a source of different opinion, but should rather be perceived as the importance in
understanding between setting quantitative benchmarks versus the process to achieve
radical changes. The difference in ‘benchmarks’ used to reach these conclusions, were
on the British side that they were going to achieve substantial improvements compared
to earlier development projects, while on the Norwegian side that they were going to
achieve tangible improvements in the range of 40-50%.
In the Norwegian Public Study 1999:11 (Kaasen, 1999), they give the following
summarising comment with respect to the results of the NORSOK process, versus the
CRINE process (translated by the author);
‘Based on the comparisons made between the two periods [projects developed pre or post 1994] regarding
costs and development time, we see a considerable improvement. The improvements have though not
been of the magnitude that was estimated as NORSOK’s targets of 40-50% reduction in time and costs
spent, but the improvement must though be said to be substantial. Comparisons with British projects and
the latest cost estimates for projects on the Norwegian Continental Shelf, indicates that a major share of
the cost increases is a result of too ambitious targets, rather than of bad project execution. Maybe was
even the ambitious targets a mean for reaching the improvements seen. … The British project are on the
same level both cost and schedule wise as the Norwegian projects of the same period’ (Kaasen 1999,
pp.81-2).
The second event lead to the third event, which is related to the Norwegian industry.
The third event came in February 1999 when a committee appointed by the Norwegian
Ministry of Oil and Energy published a report regarding cost overruns in projects
executed in the 1990’s on the Norwegian continental shelf (Kaasen 1999). The report
states that on average 13 later development projects related to the Norwegian
continental shelf had a cost overrun of 27%. The budgeted basis that the cost overrun
was calculated from was the figures stated in the government approved plan for
Development and Operation, PDO, which had discounted the 40%-50% cost
improvements ‘promised’ through the Norsok initiative. However, the report concludes
also that;
‘Although the study, according to its mandate, has concentrated to shed light on and consider the cost
overruns for the projects approved in the period 1994-98, it is reason to remind that;
The figures analysed show that the 13 projects have on the whole had a significant cost reduction
[costs per production capacity or per weight unit] and reduced development time compared to pre
1994 projects.
8
This was summarised by Per Willy Hetland at a workshop by the ‘European institute of advanced
project and contract management’, after a long discussion between representatives from the industry both
on the British and Norwegian side.
1 Introduction
___________________________________________________________________________________
6
It is indication that the results achieved on the Norwegian Continental Shelf is comparable with the
results achieved on the British Continental Shelf in the same period.
The results are achieved by that the actors in the industry together set ambitious targets with respect to
cost and development time. New solutions for development were being used as well as new means and
incentives in execution. The targets gave the incentives for renewal that were necessary to achieve
substantial improvement’ (Kaasen 1999, p.94).
Some of the reasons for the cost overruns [final cost control estimate versus budgeted
(PDO) CAPEX] as well as further areas for improvements listed in the study (Kaasen
1999) are given in table 1.3.
Table 1.3. Main areas for further improvements post-NORSOK.
Five main areas to be
focused
Sub-elements
Attitude and cooperation Basic change in attitude; Greater openness, less positioning.
The stakeholders should collaborate about contractual risk management.
Better quality early The projects should be developed so far that development elements may
be estimated with sufficient degree of safety before PDO approval.
The estimates should be based on a more thorough evaluation of
remaining risk elements.
Estimation of drilling and completion must be given a more secure
basis.
Efforts should be made to visualize and deal with strains regarding
HES.
Decision processes in
development projects
It should be clarified which formal and real function the PDO
9
shall
have in the decision process.
The committee recommends that the criteria for revision of the PDO is
clarified.
Support further
improvements
Establish a basic fundament for continuous improvements.
Further develop work processes and competence based on learning from
executed development projects.
Challenge established practices.
Invest in development of competitive solutions.
Level of activity The stakeholders should pay greater attention to the consequences that
start up of new development project will have for the level of activity in
the industry.
9
PDO = Plan for Development and Operations.
1 Introduction
___________________________________________________________________________________
7
The focus is aimed at continuing and refining the processes started with the Norsok
initiatives, i.e. focusing on continuous improvements. To answer these challenges a
‘revised’ Norwegian initiative has been established named ‘Kon-Kraft’. Kon-Kraft
(www.olf.no/konkraft) involves companies from the whole range of the Norwegian oil
and gas industry value chain. There are four main initiatives (sub-projects) in Kon-
Kraft; (i) how to involve the [supply] industry earlier in the project development life-
cycle, (ii) industry collaboration on the Norwegian continental shelf, (iii)
internationalisation through foreign companies present on the Norwegian continental
shelf, and (iv) collaboration in the value chain. In the UK the government supported
work of the CRINE Network has been brought over to the industry funded organisation
LOGIC (www.logic-oil.com), ‘that will work with companies throughout the industry to
stimulate collaboration and radically improve competitiveness’. The main initiatives of
LOGIC are related to collaboration about wells and drilling, supply chain management
and e-Business.
As both the Kon-Kraft and LOGIC initiatives address the challenges for the future, they
comprise among others how to best utilise and benefit from the supply chain actors and
processes throughout the life-cycle of the project object.
1.1.2 Development, operations and the supply chain focus
To develop and operate the offshore facilities that exploit the hydrocarbon resources
from the continental shelf and processes them for further distribution, the owner(s) of
the facilities, represented by the petroleum company acting as Operator, have to procure
external resources, competence and services. The ‘chain’ of companies that is necessary
to bring forward the goods and services required may be referred to as a supply chain.
The supply chain processes and interaction among the supply chain actors was raised as
issues both in the Norsok Collaboration Panel (NORSOK, 1998) and in the Kaasen
report (Kaasen, 1999). Both addressed that this was an issue that should be given
increased emphasis.
A supply chain is needed both for the development of the facilities as well as keeping
the facilities in operation. The costs of developing and operating the facilities are to a
large extent procured costs, i.e. costs inherent in the supply chains. The costs
materialised through the development supply chain are referred to as capital
expenditures, CAPEX, while the costs of the operations supply chain may be referred to
as operational expenditures, OPEX. The development and operations supply chains may
be used to refer to a two-parted supply chain scheme for the project object. The two-
parted supply chain scheme reflects that one supply chain is needed for the project
object development, while another supply chain is needed for the operations of the
project object, as outlined in figure 1.
1 Introduction
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8
Operations
OPEX
Development
CAPEX
Operations
OPEX
Development
CAPEX
Figure 1.1. A two-parted CAPEX and OPEX supply chain perspective.
A two-parted approach to the supply chain for the project context as presented in Figure
1.1 may be related to the developments in business focus that has emerged in project
and contract management. In figure 1.2 a four-staged approach is outlined. The
development in business focus has commenced from a single focus on the investment
cost of developing the project object. Then the operation costs came into focus through
life-cycle cost approaches. Though, it was not possible to fully leave out the
development cost focus under the cover of improved life-cycle cost, and to get a balance
between CAPEX and OPEX focus life cycle value approaches came forward. With
strong fluctuations in oil prices, and a capital market with many alternative
opportunities to invest, the oil and gas industry now has to focus on business
competitiveness with the supply chain as one mean to extract value as a competitive
entity.
Development
Operations
Development
Operations
Development
Operations
Development
Operations
Investment Operations Value Business
Competitiveness
Figure 1.2. The developments in business focus from investment to business
competitiveness.
Investment
The first or initial business focus is the investment of developing the facilities. With the
investment of developing the facilities as the business focus it is the investment ‘price’
of realising the project object that is in focus. As shown in Figure 2 it is the investment
‘cost position’ of the development supply chain that is in focus, the operations supply
chain is not regarded as a business related issue. We have tried to emphasise this
1 Introduction
___________________________________________________________________________________
9
through highlighting the development supply chain (thick), while de-emphasising the
operations supply chain (dotted). The business focus is related to realising a facility that
meets the requirements at a best (lowest) possible CAPEX, within the given time limits,
through a prescriptive and controlled process. This may be related to stage 2 in Table 1.
The message in stage 2 was that the price had been escalating, and had to be brought
under control.
Operations
The second type of business focus is ‘operations’, or the life cycle cost of developing
and operating the project object. In a life-cycle perspective both the development and
operations costs throughout the life-cycle of the object shall be taken into consideration.
Though, in such a perspective there may be easy to shift focus to more or less
exclusively addressing operations aspects and costs, and emphasising the operations
chain and even use this as an ‘excuse’ to cover escalations in CAPEX. This is illustrated
through the dotted line of the development supply chain and the thick line of the
operations supply chain in Figure 2.
Value
The third business focus put equal emphasis on both the development supply chain as
well as the supply chain for operations. The business focus has moved towards ‘life
cycle value’, addressing the supply chains for the two phases equally. The perspective is
still that of the operator, in that what is addressed is life-cycle value for the operator of
the project over the life-time of the project object, i.e the net present value of the
project. The emphasis for the operator is strong both with respect to the development
supply chain, and the operations supply chain. The actors in the supply chains of the
two phases are still ‘separated’. The value oriented business type, focusing on value
enhancement, sets the project as the business opportunity, from which value should be
enhanced for the owners of the business opportunity.
Business competitiveness
The last business type reflects the aspect of competitiveness. This type extends that of
the value focus presented above, and moves on to focus on the chain of actors that
creates value and consumes cost and time. As such this business type reflects that the
supply chains for development and operations should merge. This means that the upper-
tier supply chain actors in the development phase ‘convert’ to become actors in the
operations supply chain, and that this conversion is intended and planned already from
the initiation of the project and reflected in the approach to project organisation,
execution and incentive mechanisms. Given such a perspective the contractors and
suppliers become part in not only developing the project object, but also in operating it,
and gaining remuneration based on the production by the project object. The business
focus has now become a ‘business opportunity’ not only for the operator, but also for
the supply chain actors. The underlying concept is that of competitiveness, with the
project and the facilities, or the project object, as the business opportunity or entity, and
with the supply chain(s) for development and operations as the ‘competitive entity’.
1 Introduction
___________________________________________________________________________________
10
The four stages outlined above may now be brought together. From an approach to
business focus limited to focus on the initial investment in the product that is used to
exploit and process the well-stream of oil and gas the focus has developed seeing the
project object as a part in a life-cycle perspective of being competitive and generating
value. The development and operations supply chains has to be balanced in a cost and
value perspective, and these supply chains constitute the competitive entity which
establish the competitive position of the project. As such we may say that the supply
chain and thereby supply chain management are issues that should be of interest for the
oil and gas industry, in developing competitiveness. Before we proceed with outlining
supply chain management in the project context of the oil and gas industry and the
outline of this thesis, let us briefly re-visit the two competitiveness initiatives for the oil
and gas industry referred to in stage three in Table 1.
1.2 The Future
The imperative for projects of this kind is business. That is the reason for investing
money to finance the CAPEX and partly OPEX costs for developing and commence
operations. For the Operator it is about being able to exploit and make a profit out of
selling the oil and gas. The oil price is set in the international marketplace, and is more
or less given for the operators except for different contractual terms for selling that to
some degree hedges short- and medium-term fluctuations in price development. To
develop and operate, sometimes marginal, oil and gas fields are very capital intensive.
For the supply chain actors the business lies in developing the facilities and supporting
the operations of the Operator’s facilities. The shared challenge for both operators and
supply chain actors is to be part of, develop and manage competitive supply chains for
the project context of development and operations, and thereby strengthen business for
all. Much of the strategic imperative behind the drive towards the supply chain
management approach in general is that the supply chain is regarded as the ‘competitive
unit’.
‘Integrated supply chain management implements a co-ordinated total supply or value chain from
determination of external customer needs through product/service development, manufacturing/operations
and internal/external distribution, including first, second and third tiers customers/suppliers. The objective
is to provide the highest customer service and satisfaction levels and make the most effective use of the
competencies of all organisations in the supply chain. The supply chain, versus the single business unit, is
positioned as the competitive unit.’ (Frayer et al. CLM 1997, pp.346-7).
That is the same for the oil and gas industry, and may be seen underlying the CRINE
and NORSOK initiatives. Stage two of the CRINE initiative, CRINE Network, are
directly addressing the importance of a holistic view of the supply chain and how to
apply supply chain management to the context of the North Sea oil and gas industry.
If one were to draw a scenario for the future it may be built on the trends and
developments as laid out by the references given above;
- Business value enhancement orientation.
- Value through projects.
1 Introduction
___________________________________________________________________________________
11
- The project as a business opportunity.
- The supply chain as the competitive entity.
- Logistics and supply chain management as one issue for competitiveness.
This thesis is built on the belief of this scenario. As this is one out of several scenarios,
that will reflect the assumptions and limitations of this thesis.
1.3 Outline
This thesis is built up of three parts, and eight chapters. Part one, setting the scene,
outlines the background, topic, objectives and approach taken in the research presented
in this thesis. Part two, theoretical background, outlines aspects within projects, project
management, logistics and supply chain management, as a basis for the developments
and concepts presented in this thesis. Part three, project supply chain management,
presents different sides of the project supply chain management concept that is the main
message of this thesis. Figure 7 presents the outline of the thesis.
Part I – Setting the scene
Chapter one has set the scene for the topic of this thesis through outlining different
perspectives on the developments in the business regimes of the type of projects that is
found within the offshore oil and gas industry. CRINE and NORSOK is central in this
development, and especially the attention that both give to the importance of the supply
chain and its inherent inter-organisational processes.
Chapter two presents the topic of the research to a fuller extent. The problem addressed
is outlined, together with objectives and the contribution of this thesis. Finally
assumptions and limitations are presented, and the scientific approach that lay behind
the research presented in this thesis.
1 Introduction
___________________________________________________________________________________
12
Ch. 3
Projects &
Project Management
Ch. 4
Logistics &
Supply Chain Management
Ch.5 The Project Supply Chain Challenge
Ch. 6 Project Supply Chain Management -
The Concept
Ch. 7
Methodological Guidelines for
Project Supply Chain Management
Ch. 8
Conclusion
Ch. 1
Introduction
Ch. 2
The Research Domain
Ch. 3
Projects &
Project Management
Ch. 4
Logistics &
Supply Chain Management
Ch. 3
Projects &
Project Management
Ch. 4
Logistics &
Supply Chain Management
Ch.5 The Project Supply Chain Challenge
Ch. 6 Project Supply Chain Management -
The Concept
Ch. 7
Methodological Guidelines for
Project Supply Chain Management
Ch. 8
Conclusion
Ch. 1
Introduction
Ch. 2
The Research Domain
Ch. 1
Introduction
Ch. 2
The Research Domain
Figure 1.3. Outline of the thesis.
Part II – Theoretical background
Chapter three outlines aspects of projects and project management. The emphasis is laid
on the differences of projects, their inherent uncertainty and complexity, and the impact
this has on approaches to project management.
Chapter four outlines aspects of logistics and supply chain management. First an outline
of the development within logistics and supply chain management is given. Uncertainty
within logistics and the supply chain is presented, linking it to the demand and supply
side of the supply chain, and to the uncertainties of the project context. Then some
concepts borrowed from the manufacturing domain are visited, before chapter three and
four is brought together towards logistics and supply chain management in the project
context.
Part III – Project Supply Chain Management
The third part of the thesis is written with project executives, project managers, people
involved in project core teams (operator), and integrated teams (operator, contractor
and/or supplier(s)), as well as people involved and/or interested in procurement,
logistics and supply chain management in mind. This part is also the main part or
contribution of this thesis, as it set out to outline and develop a conceptual basis and
some methodological guidelines for logistics and supply chain management as an
approach in the project context of large-scale development and construction projects,
1 Introduction
___________________________________________________________________________________
13
including the operations of the project object, and the project management of such
projects.
Chapter five outlines the project supply chain challenge in the oil and gas industry.
Initially the business context is elaborated a bit further than in this chapter. Then the
supply chain actors in the intra- and inter-organisational perspective of the project
supply chain context are outlined. finally the challenge of the oil and gas demand and
supply chain is outlined as we see it here.
Chapter six outlines the concept of project supply chain management, to give company
and project executives a new frame of mind to use to address the undertaking of large-
scale development and construction projects. First some principles from the project
context are outlined. Then some characteristics of project supply chain management is
outlined and discussed, before the project supply chain management concept is outlined
and defined.
Chapter seven outlines some methodological guidelines for supply chain management,
SCM, and SCM analysis in the project context. The methodological guidelines is set to
follow the life cycle of a project, from vision and initiation, to the operations supply
chain and revisions of that.
Finally chapter eight concludes and discuss the work presented. The validity of the
result is discussed, whether the proposed concept is something new or just ‘old wine in
a new bottle’, seen against the objectives of this thesis. Finally the usefulness of this
work is discussed.
2 The research domain
2. The research domain
___________________________________________________________________________________
14
2.1 The research topic
‘The fact that Alexander [the Great] so capably directed its [the warfare’s] operation that logistics
scarcely seems to have affected any of his strategic decisions … supply was indeed the basis of
Alexander’s strategy. … Alexander was able to overcome these [logistics] obstacles where other armies
had failed because of his superior abilities in gathering intelligence, planning, preparation, and
organisation’ (Engels 1978, pp.119 & 123).
To successfully execute his warfare operations and reach his objectives Alexander the
Great knew that he had to draw and rely on resources outside his own ‘organisation’.
These external resources had again to be different based on the situation he and his
army were in, and he had to take this into account prior to execution. Projects are, as
warfare, unique endeavours with a given start and finish, objective-oriented, of
significant size, value and complexity, under time pressure to complete, developed and
executed based on inter-organisational capabilities, capacity and integration. If the
supply chains were fundamental for Alexander’s successes, then it could bear success as
well in the project context to use the supply chain perspective as an approach.
Both logistics management and project management are managerial topics that have
gained increased attention in later years. The project approach is often referred to as the
future way of organising work, while the supply chain is approached as the competitive
entity of the future. Neither logistics nor projects are new inventions. Logistics have
been central to human settlement and especially warfare since ancient times. Alexander
the Great used logistics directly as a central aspect in strategic and tactical planning of
his warfare, and did not move until his logistical resources were in place to support his
fighting resources (Engels 1978). Projects have also been undertaken since ancient
times, since building the first city wall of Jerico 9000 B.C, although the term project
management has emerged after the 2
nd
World War (Hetland 1998). The question then is
whether it would be constructive to bring the two together?
This thesis outline and describe the development of a concept named ‘project supply
chain management’. The background for this work was an initial assignment of
‘looking into logistics and logistics management in the project context and as part
of project management’. The project context addressed here is that of the oil and gas
industry, i.e. developing and operating an object where the production by that object
generate income for the owner(s) of the oil and gas reserves, while taking part in
developing and operations of the object generate business for the supply chain actors.
Within logistics and supply chain management most of the conducted research and
development have focused on repetitive and continuous types of industries and
businesses. There is a difference between the repetitive context and the project context
with respect to logistics and supply chain management, as for the latter the following
apply;
One of a kind product and supply chain, that must concurrently develop inter-
organisational competence.
2 The research domain
___________________________________________________________________________________
15
Long lead items lock-in the design.
Long time frame from initial design to construction, often with many design
changes.
Most value is engineered into the project in its early phases.
High cost consumption over a rather short period of time, where missing material
give rise to high quality costs.
Few opportunities for continuous development.
Complexity in product and organization.
Technological developments that must be integrated into solutions already
established or to be established through project development.
We may use the order penetration point to visualise, as in Figure 2.1, how the project
context comprises the whole cycle, as compared to most repetitive industries. The
project context is represented by the ‘one-of-a-kind production’ context.
Design Procurement Manufacturing Assembly Sale
Demand/Supply Chain
One-of-a-kind Production
Procure and produce to order
Standard order production
Produce
for stock
Assemble to order
Order Penetration Point
Design Procurement Manufacturing Assembly Sale
Demand/Supply Chain
Design Procurement Manufacturing Assembly Sale
Demand/Supply Chain
One-of-a-kind Production
Procure and produce to order
Standard order production
Produce
for stock
Assemble to order
One-of-a-kind Production
Procure and produce to order
Standard order production
Produce
for stock
Assemble to order
Order Penetration Point Order Penetration Point
Figure 2.1. The order penetration point’s intervention in the demand/supply chain
(Rolstadås, 1997-B).
Of the research and approaches to logistics and supply chain management in the
construction or project context no references is found that try to conceptualise and
describe the key characteristics of logistics and supply chain management in the project
context. As the project context described above is both a special type of business
situation, as well as characterised by differing characteristics throughout its life cycle
2 The research domain
___________________________________________________________________________________
16
that will influence the management of the supply chain processes, logistics and supply
chain management should be worthwhile to examine for this context.
The focus on logistics and supply chain management in most industries is as means for
improving the competitiveness of the industry or companies. This is the same for the oil
and gas industry. Therefore, an approach to supply chain management in the project
context of the oil and gas industry should aim to address logistics’ contribution to
industrial competitiveness in the oil and gas industry. This means, the problem of this
research is to show how concepts and principles of logistics and supply chain
management, may be applied to address competitiveness in the project context of
the oil and gas industry.
The problem, or rather the challenge, related to the oil and gas supply chain, that states
the requirements of logistics concepts for this context is further explained in chapter
five.
2.2 Contributions and objectives
The aim of the different domains of management is to create value beyond what would
have been created without a given management approach. As such the aim of the
concept of project supply chain management is to show how logistics and supply chain
management may contribute to enhance the value that project management have on
developing and operating the object which the project is established for. The added
value of logistics and supply chain management in general is found within the logistical
mission elements, namely the supply chain cost (or maybe more appropriate; value) and
service position achieved through the ‘best’ alignment of supply and demand.
The contribution of this thesis may be seen in relation to the three elements that CRINE
Network (1998) addressed as aims for their supply chain management initiative. The
three aims of CRINE’s supply chain management initiative were (CRINE 1998): (i)
Awareness and potential contribution, (ii) Assessment of SCM status in the British oil
& gas industry, and (iii) Delivery of means and training. The relation between this
research and CRINE’s SCM initiative may be presented as in Table 2.1.
Table 2.1. CRINE’s supply chain management initiative versus project supply chain
management as outlined in this thesis.
CRINE Supply Chain Management Initiative This thesis; ‘Project Supply Chain Management’
Awareness and potential contribution Project Supply Chain Management – The Concept; Chapter 6.
Assessment Earlier Approaches; Chapter 4.5.1.
The Project Supply Chain Challenge; Chapter 5.
Delivery of means and training Project Supply Chain Management – Methodological
Guidelines; Chapter 7.
2 The research domain
___________________________________________________________________________________
17
The contribution of this research is both wide and narrow. Wide in the sense that
it contributes to applying knowledge from the field of logistics and supply chain
management to the field of project management. Narrow or specific in the sense
that it outlines what should be the core focus (or most characteristic) for logistics
and supply chain management within the project context and project management
of the oil and gas industry. The ‘wide contribution’ is presented through the
conceptual development in chapter six, while the ‘narrow contribution’ is presented
through the methodological guidelines for analysis in chapter seven. The project
supply chain management concept and methodological guidelines should as such
be regarded as the original contribution of this thesis.
Not only project management, but also logistics and supply chain management may
gain from this work. Logistics and supply chain management become more project- and
network-oriented and -dependent, as businesses need to focus on establishing specific
supply chains for specific customers and as the move towards core competence and the
use of contracting develops. The ability to plan, establish, manage and close temporary
supply chains as a way to conduct business will therefore become more important. This
research may help to build knowledge about that.
The objective of this thesis is to bring a contribution to project management of large-
scale development and operation projects from concepts and thoughts within logistics
and supply chain management. The objective is to outline supply chain management
within the project-oriented context as a particular and conscious knowledge area of
project management. Through developing a concept that approaches projects and
project management from a logistics and supply chain management perspective, and
through outlining what is important/specific for logistics and supply chain management
within the project context. Therefore the objective of this thesis may be summarised to;
- Develop principles, concepts and a framework of logistics and supply chain
management in the project context.
- Demonstrate these principles and concepts through theoretical and empirical
examples.
- Apply these principles and concepts, through methodological guidelines for
analysis.
The objective is as such related to developing conceptual and methodological
frameworks that may be used as basis for specific developments and application in
specific industrial and project-oriented contexts. The objective is as such not to develop
and give specific solutions to specific problems.
To support the main objective to ‘develop, demonstrate, and apply’ principles and
concepts within the area studied, the following part objectives may be formulated;
- Determine if there exists present work or approaches that are suitable to use with
respect to developing and proposing the use of logistics and supply chain
2 The research domain
___________________________________________________________________________________
18
management within the project-oriented context of the oil & gas industry, through a
survey of existing research on project management and supply chain management.
- Determine competitive aspects or elements of logistics and supply chain
management that are more important than others to relate to and use within the
project context as found in the oil & gas industry.
- Structure and adapt existing theory as a guidance to practical use – formulate a
concept (or ‘frame of mind’) and develop methodological guidelines for an
approach to logistics and supply chain management within the project context of the
oil & gas industry.
The concept of project supply chain management presented is developed to outline key
describing characteristics of logistics and supply chain management within the project
context. Although this is not a complete approach to undertake the project management
of large-scale construction projects it may contribute to enhance the awareness and
understanding for the importance of the extended ‘procurement’ function, moving from
procurement to project supply chain management, PSCM.
As a part of developing the concept one should aim at defining what the specific focus
of supply chain management should be within the project context. For instance the five
aspects that could be agreed to be the most important and characteristic for supply chain
management within the project-oriented context. An example of such a focus may be
found in an analysis methodology used for analysing supply chains for car
manufacturers (Schneider et al., 1994). This methodology focus on finding critical
elements within the supply chains with respect to important objectives of key
customers, and whether these supply chains are robust with respect to up-keeping their
mission under different circumstances. As such the focus of this methodology (for lean
car manufacturing supply chains) is robustness
10
. A similar focus point for a PSCM
methodology should be established through this research.
2.3 Assumptions and limitations
Supply chain management is concerned with integrating, aligning and managing the
inter-organisational supply chain regarded as the competitive entity, included internal
integration in each single company that is part of a given supply chain. The aspect of the
supply chain as the competitive entity and supply chain management as the managerial
aspects related to such chains, means that supply chain management will comprise a
large number of issues and thereby a large number of alternative and possible
approaches
11
. In this thesis the approach or focus is ‘logistics and supply chain
10
Robustness may be defined as ‘a system’s ability to resist an accidental event and return to do its
intended mission and retain the same stable situation as it had before the accidental event’ (Asbjørnslett et
al. 1999).
11
See Stock (199x) for a broad description of theories that relate to logistics. Stock (op cit.) tries to
establish a broad view of logistics to make it clear that ‘logistics is … a boundary-spanning activity’ (op
cit., p.184). He does so by evaluating more than 50 theories to see how they may contribute to logistics.
2 The research domain
___________________________________________________________________________________
19
management within the project context’. The main assumptions that underlie this thesis
may be presented as the three elements of;
- The project as the business opportunity.
- The supply chain as the competitive entity.
- Competitiveness through logistics and supply chain management, focused on
alignment of supply and demand.
The project is regarded as a business opportunity, where each actor will make business
out of it and gain from participating in it. It is also assumed that a project will not be
realised if it is not possible to make business out of it, i.e. it is not a realisable business
opportunity. Though, technology, competence, capability and capacity of the supply
chain actors organised into the specific project supply chain construction, is what may
make the project available to realise as a business opportunity. Therefore the project
supply chain may be regarded as the competitive entity. Competitiveness or value
enhancement for the project, through the supply chain is assumed to be achieved
through logistics and supply chain management, specifically through the logistics aim at
alignment of supply and demand.
The last assumption element may also be regarded as the main limitation of this thesis.
Logistics and supply chain management is a broad field of knowledge, with several
possible approaches. Limiting the perspective here to ‘alignment of demand and supply’
is therefore a limitation. The project itself and the project context may also be regarded
as many different constructions, as well as be found in many different industries, as well
as both in the private and public sector. The type of projects aimed at in this thesis is
projects as represented by field development projects in the oil and gas industry, i.e. a
project object that is developed and operated to exploit oil and gas resources located
offshore.
2.4 Scientific approach
2.4.1 Initial approach and changes
In the early phase of this research the intention was to use a set of three case studies as
the basis for the research. The intention was to make descriptive case studies as
described by Yin (1994), describing the supply chains of the projects and the
management of them. The three cases and the corresponding project-oriented supply
chains and supply chain actors were selected from three different offshore development
projects. Three projects (cases) were initially chosen due to the long duration of
offshore petroleum development projects. Two of the projects to be used were
This is a honourable effort aiming at strengthening logistics both for scholars and practitioners. If viewed
by a person external to the logistics domain it may be seen as an attempt to make logistics an all-
embracing domain of management, which may be seen as a destructive attempt both for the logistics
management domain as well as the relationships between different perspectives on management.
2 The research domain
___________________________________________________________________________________
20
combinations of modifications and developments tied in to existing offshore
infrastructure. The third project was a complete development project. The two
modification projects were, for this research, similar in scope-of-work, but in two
different phases of their lifecycle. The first was in the planning phase and the supply
chains were not yet fully developed and initiated, while the other was in the execution
phase, where most of the supply chains were initiated and in operation.
Initially, in January 1997, contact was established with a petroleum company to explore
whether they found interest in the topic of the research, to check whether they had
projects that could be used as cases for empirical research of the topic, and if it would
be possible to get access to do research within these projects. Due to reorganisation and
people changing positions in the petroleum company, it took a year from the initial
contact to a meeting was arranged with the central procurement and supply chain
department of the petroleum company. This was in January 1998. Based on this meeting
the three projects to be used as cases were established. Due to a large workload on the
project teams and progress demands in the projects it took four months from this
meeting, to the initial contact with the first project in May 1998.
After this initial meeting with the first case project, interest for the research was
established in another part of the petroleum company. They wanted to extend the study,
and have a group of consultants working in parallel and together with the research. We
saw this as an opportunity to get a better basis for the research and agreed to this. This
also led to a revision of some of the initial research questions, as well as an extension of
the research area to be covered.
Then from June to December 1998 a set of meetings and interviews were held with the
petroleum company’s project teams for each project, as well as the joint project teams
of the petroleum company and the main contractor of each project. The time schedule of
these meetings and interviews became quite long due to a full agenda for these project
teams. The aim of these meetings and interviews was to establish understanding in the
projects for the research, and to establish initial information about the projects and their
supply chains. During these meetings and interviews we obtained some basic
information, as well as individual comments with respect to logistics and supply chain
management in petroleum development projects in general. Then, at the end of 1998 we
had established a good basis for starting more thorough analysis of specific elements
within the project’s supply chains.
In the same period, the price of oil had fallen, and the license that covered the cost of
the consultants and the travelling expenditures was asking questions about the relevance
of this project for them as a license. As these project teams were located at five
geographically different locations, financial support for travelling expenditures was
important to be able to undertake the studies. The result was that this research project
had to be terminated, at the point in time when a good basis was established for specific
studies, but without having the necessary material to develop good descriptive case
studies. Another point worth mentioning is that the workload on the project teams made
it hard to get appointments and sufficient time for the research. This is an
understandable situation seen from the priorities of the project organisations, but with a
negative impact on our research.
2 The research domain
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21
The question was then how to proceed, based on non-complete case material, but with
the good basis understanding it had given? One alternative would have been to conclude
the cases as they were, but this was not regarded as a satisfactory solution due to the
insufficient material. Another alternative could be to take a conceptual orientation and
approach to the research topic, and a third alternative could be to find other cases. It was
decided to follow the second alternative, a conceptual orientation to the research topic,
and in parallel search for opportunities to find other opportunities for case studies.
Based on a relation to a project management institue, Epci
12
, we found that it could be
possible to take a higher-level and more general conceptual approach to the topic. And
through their network find material of relevance to the research. In September 1998, the
CRINE Network, the British parallel to NORSOK, started up their supply chain
management initiative, ‘Supply Chain Management in the UK Oil and Gas Sector’. This
was also an initiative that could be followed as a source of information. CRINE network
were positive to send written material, but it was not possible to get a direct relation to
their initiative. Several other attempts were also made towards engineering companies
to be allowed to come into some of their projects as a research case setting. We were
able to get high-level contacts and interviews, but they were not interested in ‘opening
up’ on-going projects for casework. This was mainly due to the workload and time
pressure on the project teams.
The research was therefore continued based on the conceptual orientation, and when the
conceptual development was developed it was ‘put on hold’, to see whether it was
possible to get a case to test the conceptual material.
As a follow up to NORSOK, a Norwegian initiative was established in year 2000 and
named KONKRAFT. When this initiative came up we took contact with the
KONKRAFT secretariat to present the conceptual development we had made, and
check whether it could be an opening for testing these developments through activities
in KONKRAFT. This contact was up-kept through 2000 and 2001. It was interest and
positive feedback on the conceptual developments, but the stakeholders in KONKRAFT
wanted the developments to be based on internal resources in the participating
companies, not through external resources.
As a summary, we decided medio 2002 to sum up the conceptual developments made
and present them in this thesis. The approach to this study as it resulted is described
below.
2.4.2 Chosen approach
Supply chain management and this research belong to the field of applied science, i.e.
research aimed at the practical applicability of the results;
12
Ecpi, the European Institute of Advanced Project and Contract Management.
2 The research domain
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22
‘Applied science is activity of original character to gain new knowledge and insight, primarily aimed at
certain practical goals and applications’ (as defined by the OECD, in NOU 1988, p.181, translated from
Norwegian).
The approach taken in this research follows Arbnor and Bjerke’s (1997) system
approach. They say that the systems approach is related to determining the type of a
system, by characterising and categorising the object under study, in our case the
‘system type’ of logistics and supply chain management in the project context of the oil
and gas industry;
‘In [the case of the systems approach], however, the researchers/consultants/investigators do not begin by
trying to come up with an interesting and testable suggestion for a producer-product connection
(equivalent to formulating a hypothesis in the analytical approach), but instead try to determine the type
(of a system). This means attempting to categorise the object under study in terms of, say, complexity,
age, degree of openness, type of environment, and so on. The type of system present will determine such
aspects as where to seek inspiration from other creators of knowledge and the design of the rest of the
study: to describe, to determine a relation, to forecast, and to guide’ (Arbnor et al. 1997, p.149-150).
Arbnor et al. presents three approaches for creating business knowledge. The analytical,
systems and actors approach, moving from the more ‘objective’, quantifiable analytical
approach, to the subjective and intentionally influenced actors approach. The systems
approach’s place among these is presented in table 2.2.
Table 2.2. Arbnor and Bjerke’s three methodological approaches in relation to
paradigmatic categories (from Arbnor et al., p.44).
1 2 3 4 5 6
Reality as a
concrete and
conformable
law from a
structure
independent of
the observer
Reality as a
concrete
determining
process
Reality as
mutually
dependent
fields of
information
Reality as a
world of
symbolic
discourse
Reality as a
social
construction
Reality as a
manifestation
of human
intentionality
The ANALYTICAL Approach
The SYSTEMS Approach
The ACTORS Approach
The differences in approaches to studies of business knowledge is also commented by
Andersen et al. (1992). Andersen et al. differentiate between two types of processes, a
rational process and a learning process (see table 2.3). We regard our research to be part
of a learning process.
2 The research domain
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23
Table 2.3. Two idealistic approaches of the research process (Andersen et al. 1992,
translated by author).
Rational Process Learning Process
Goal Clear, defined in advance Tentatively formulated in
advance
Goal Function Establishing the frames of the
research, excludes “noise”, may
be changed marginally
Heuristic mean, commences
research and discovery, can be
changed
Theory, Models, Concepts Established and made
operational in advance
Adaptive, plastic
Process dominated by Calculation and evaluation Inspiration and evaluation
The process’ function A mean to answer the questions
raised in advance
A mean to ‘force’ knowledge out
of the field, and develop research
competence
The researcher’s learning process Perfection within the frames of a
paradigm
Development of a personal
method for production of
knowledge between two cultures,
learning about the borders of a
paradigm
The researcher’s self-perception Distant observer, expert Existentialist, craftsman
Related to the methodics of the systems approach, Arbnor et al. states that;
‘Success is associated with imagination, alertness, and awareness when facing the complex reality
postulated by this approach’ (Arbnor et al. 1997, p.294).
Following Arbnor et al.’s definition of the systems approach our aim of this study is;
To determine the type of the system (from a logistics point of view)
To describe the system (from a logistics point of view)
To guide in approaching how we see the system (from a logistics point of view).
Through our assumptions
13
we may say that we have taken what Arbnor et al. names a
‘goal-means orientation’ in our research. This means that the goal for both the study
and the system should be stated at an early stage in the study. We say ‘should’ because
this is an iterative process, as also was experienced through the research. What was
stated early was that the contribution of logistics and supply chain management in the
13
Our three assumption were; (i) The project as the business opportunity, (ii) The supply chain as the
competitive entity, and (iii) Competitiveness through logistics and supply chain management, focused on
alignment of supply and demand.
2 The research domain
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24
project context of the oil and gas industry should be improved competitiveness, as this
is the contribution that is sought from the same in other contexts. The goal of the study
was also stated early on, but as we learnt through the study process, the means for
reaching that goal had to be changed during the study. Further, our research followed
the main headings of Arbnor et al.’s description of a system study to determine
relations, describe and to guide.
‘Systems analysis is conducted using traditional data collecting techniques that are adapted to the specific
study situation and made into methods via methodical procedures; that is by using secondary material,
direct observations [e.g. case studies], and interviews’ (op cit p. 302).
As explained above, the process that the research takes, may often be influenced by
situations in the study context, and may therefore have to be altered during the research
process. This may lead to revised and other goals and levels of the research. Table 2.4
give a short outline of how our research developed due to the changes that were
necessary to make when the cases fell out, seen in relation to Arbnor et al.’s plan for a
study to determine relations.
Table 2.4. Arbnor et al.’s plan for a system study that determines relations, with
comments from this actual research.
System study plan Comments from actual research
14
Formulating
possible finality
relations
This is by A&B said to be developed in an iterative way through direct ‘dialogue’
with the system(s) under study. The way that was developed in our study is
outlined below;
(1) The first contact with the system was with a strategic adviser from an Operator
company, and that gave a strategic focus on the role of the supply chain and
supply chain management as an approach for improvements for an Operator. As
this did not lead to any formal continuation of the study, this was kept as part of
the background material of the study.
(2) Then for the second contact with the system, the focus was on the importance
to secure the supply of goods for the construction of the project object, not to
delay the scheduled progress of the development project. This may be regarded as
a project planning and control perspective.
(7) When the case studies had to be terminated, we had learnt that;
Technology development is the main driver for value enhancement in future
projects.
Changes are an important element to control in the demand/supply processes
of the development phase of the project, and that the changes come late in the
development process.
Then we started to work with the value perspective of the demand and demand
chain processes in the development, especially through the importance of
technology and the impact of changes. This may be regarded as a project
14
The numbers show the relations in progress of the study, and the development of the focus of the study.
To understand the development of the study, the reader should follow the numbers, i.e. not reading the
table from top to bottom, but in stead follow the number indication.
2 The research domain
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25
management perspective. Further for the operations phase of the project we
started to gather information and knowledge from secondary sources, as well as
from other studies external to this study.
Planning the
continuation
(3) Based on this and an extension of a study, a set of case studies was
established. Three case studies was made available, all three with different
characteristics as projects, that could shed light to different elements of the
problem complex. The case studies was developed as descriptive case studies
along the prescriptions of Yin (1994), and supported by aspects from Dyer et al.
(1991), Eisenhardt (1989 A & B, 1991), Flyvbjerg (1991), Leonard-Barton (1990)
and Merriam (1994).
(8) We now had some information from three unfinished case studies, but for the
rest of the study we had to rely on second hand material, and interviews when we
where able to get such. In summary we had to take a higher magnifying level on
our study.
Designing methods
for collecting data
(4) These case studies started with interviews with actors from the operators
project teams, and the operator/contractor integrated project teams, as well as
interviews with personnel from contractors. It was also planned to have interviews
and follow-up with a set of sub-contractors and suppliers. It was also developed a
method and format for collecting information about the project (case) specific
supply chains, and the logistics processes involved
(9) The methods now had to turn to a more theoretical analysis and development
of a system construction that focused on the characteristics and the high level
problem complex of the system, and how these were theoretically to be met by
logistics and supply chain management theory.
Collecting data (5) Data were collected to a certain extent from some of the actors in the cases,
but due to external circumstances that influenced the financing of these case
studies, they had to stop when the understanding of the sub-systems started to
grow, as well as the contact and relations with the actors had been established.
Are you satisfied as
a creator of
knowledge?
(6) Then the question was whether we as researcher were satisfied with the data
and knowledge gathered this far? We were not! We had not enough data to call
the started case studies for real case studies. We had not been able in the time
available to map the demand and supply chain of the cases, and far from having a
material that was sufficient for data analyses and being able to go further into
detailed studies of aspects of special interest or importance.
Though, we had learnt some, and were able to review and revise our finality
relations.
(10) Without having been able to test the results of our system analysis and
theoretical construction and check the validity of this, there is still uneasy to be
satisfied as a creator of knowledge. Arbnor et al. call it the expert variant, when a
theoretical solution is developed, without the researcher being in place to check
out the practical validity of the results. This is especially so for the development
phase of the project life cycle.
Coding and
arranging data
(11) The data material from the case studies where not sufficient, and therefore no
data analysis were conducted based on that material.
Controlling finality (12) We have not been able to control the finality relations for the development
phase of the project life-cycle. Though, from a theoretical point of view we have
this far not seen any aspect that should tell otherwise, given the preconditions of
the result, i.e. the results are context or system specific. For the operations phase
2 The research domain
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26
of the project life-cycle we have gathered information from secondary material, as
well as from studies external to this study, and these other studies have confirmed
our proposed theoretical results.
Reporting (13) This thesis is the final reporting of this study.
Then, let us go back to the objectives of this research;
- Develop principles, concepts and a framework of logistics and supply chain management in the
project context.
- Demonstrate these principles and concepts through theoretical and empirical examples.
- Apply these principles and concepts, through methodological guidelines for analysis.
To address these objectives we have taken a ‘goal-means orientation’ as described by
Arbnor et al. and as presented in figure 2.2.
Theory
Practice
Problem
Systems
analysis
Systems
construction
Implementing
new proposal
CRINE
NORSOK
Crine Network
KonKraft
Incomplete cases
Secondary material
Observations
Interviews
PSCM;
-Concept
- Methodological guidelines
Future studies
Theory
Practice
Problem
Systems
analysis
Systems
construction
Implementing
new proposal
CRINE
NORSOK
Crine Network
KonKraft
Incomplete cases
Secondary material
Observations
Interviews
PSCM;
-Concept
- Methodological guidelines
Theory
Practice
Problem
Systems
analysis
Systems
analysis
Systems
construction
Systems
construction
Implementing
new proposal
Implementing
new proposal
CRINE
NORSOK
Crine Network
KonKraft
Incomplete cases
Secondary material
Observations
Interviews
PSCM;
-Concept
- Methodological guidelines
Future studies
Figure 2.2. The ‘goal-means orientation’ of the study (revised from Arbnor & Bjerke,
1997, p.302).
We started with a specific problem statement for the oil and gas industry. This problem
description is given in chapter five. Based on this problem statement we have done a
systems analysis based on input from secondary material, observations, as well as
participation in meetings and interviews with actors related to the problem complex in
the oil and gas industry. Based on this we have proposed a system construction through
a theoretical concept and methodological guidelines for what we have named ‘project
supply chain management’. As the case studies terminated and it has not been able to
test out the theoretical solutions fully in practice, we have a study that is mostly
theoretical, in some areas on the philosophical side, but that seeks to answer how we
perceive a theoretical answer to the problem complex of supply chain management
focusing on the logistical side of the oil and gas industry. Therefore, we believe that the
scientific approach taken in this thesis is in line with the systems approach from Arbnor
and Bjerke.
2 The research domain
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27
Now, let us turn the attention to part two and the theoretical background for this thesis.
First, projects and project management is addressed in chapter three, then logistics and
supply chain management in chapter four.
3 Projects and project management
3. Projects and project management
___________________________________________________________________________________
28
3.1 Introduction
Project management is a domain of management knowledge and theory that has
emerged after the term project started to be used consciously about different forms of
objective oriented endeavours of a temporary character. As such projects will be
different, especially in the context surrounding and the aspects underlying the project.
Though there may be project processes and project management processes that are
similar across a range of projects, and that may seem very similar in a project execution
perspective, there may be more interesting differences to find in the more strategic
aspects of projects and project management. This is especially so as the logistics and
supply chain management perspective to the project context taken in this thesis, may be
seen as a deliberate, strategic choice with respect to approach to projects and project
management. This chapter seeks to outline aspects and elements related to projects and
project management that is perceived to be of relevance for logistics and supply chain
management within the project context. The aim is to outline some differences of
projects and the approach to them that influence logistics and supply chain management
as an approach to project management.
3.2 The development of project management
The project as an object of management goes back to the time period 9000 B.C. as we
referred to in chapter two. However the conscious treatment of project management as a
specific topic arose later in time. One author, Morris (1994) says that the historical
developments of project management emerged between the 1930s and 1950s, and to be
closely related to;
- ‘the developments of system engineering in the US defence/aerospace industry and to engineering
management in the process engineering industries,
- developments in modern management theory, particularly in organisation design and team building,
and
- the evolution of the computer, on which project management’s planning and control systems are now
generally run’ (Morris 1994, p.2).
Though, project management is an area that touches onto many aspects and as such has
to take account of developments in general that will influence the project context and
the management of project;
‘Despite its long development, the concepts and techniques of project management now available to the
general practitioner, however advanced and specific they may be, are often inadequate to the overall task
of managing projects successfully. … [T]he successful accomplishment of a project may well require
attention to a range of factors not treated by the traditional project management literature. Design and
3 Projects and project management
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29
technology management, …,and even contract strategy and administration
15
: all these are frequently
ignored in the professional and academic writings and teachings of today’s project management’ (Morris
1994, p.2).
Project management is based on an approach to or a perspective of what a project is. A
critical part of an approach’s usefulness to model the project, or the ‘reality’, is its
ability to enable the analyst or researcher to ‘move into’ the ‘reality’ to address and
create a better understanding of critical details per se, without loosing the details place
in the totality. As the models of the reality will be simplified representations of the
reality this is an important point to remember. The different approaches or perspectives
taken towards project management will, as Morris states, necessitate that concepts,
methodologies and techniques from several other ‘sources’ of knowledge is brought into
and adapted to the project context and the project management domain. The
contemporary understanding of projects and project management is represented by a
multitude of different approaches and perspectives. Gareis (1999, in Hetland 2000)
group these into three main areas;
1. ‘The traditional project management approach – mainly task-oriented and related to planning and
control of activities.
2. The organisation theory project management approach – mainly actor-oriented, focusing specifically
on the project as temporary organisations.
3. The systemic constructivistic project management approach – distinctly moving the focus from what
a project is to what we want a project to be. We are intentional in choosing the project as way of
working because we believe this will give a better result than if we had used another way of working’
(Hetland 2000, p. 1.1-18).
A professional project management organisation working within the first area of project
management understanding is the Project Management Institute, PMI. Some of PMI’s
approaches will be further outlined and discussed below. The approach to projects and
project management developed in this thesis follows the lines of the third area above.
Though, we believe that this area comprises the preceding two, and as such they should
be regarded as a basis to develop upon, and for this thesis, especially the organisation
theory project management approach, seeing the project as a temporary organisation or
more specifically a temporary business opportunity. This is again an intentionally made
choice.
3.3 Definitions of project
The term project has been given many, and different definitions. Table 3.1 presents
some definitions of the term project.
15
As an example of a subject that falls within the logistics and supply chain management approach of this
thesis.
3 Projects and project management
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30
Table 3.1. Some definitions of the term project.
Source Definition
Project 2000
(1998)
An effort that has character of being a one-time undertaking, with given
objectives and limited scope of work, that is executed within time and cost limits.
PMI (1996) A project is a temporary endeavour undertaken to create a unique product or
service. Temporary means that every project has a definite beginning and a
definite end. Unique means that the product or service is different in some
distinguishing way from all similar products and services.
Harrison (1992) ‘[The project] is a discrete undertaking, that is, it has a start and a finish. It has
finite objectives, often including time, cost, and performance goals.
[The project] is of significant size, value, and complexity, and is under time
pressure for completion.
[The project] involves the integration across organisational boundaries of
groups, departments, organisational units and companies. ‘
The definitions of projects presented in Table 3.1 shows that a project may be perceived
in many ways. Common for most is the notion about the temporary aspect. It needs
temporarily to pull together and group resources from different professions, and often
from different ‘parent’ organisations. It is objective-oriented, and intentionally chosen.
Finally it may be of varying complexity and scope. Though, the definitions listed do not
mention the life cycle of the project. The life-cycle is only referred to as a ‘time-limit’
or a ‘definite end’, but what defines the end of a project? Is it e.g. the end of the
development phase in a oil and gas field development project, i.e. when the project
object is handed over to operations and operations commences? Or is it for the same
type of projects the point in time when the project object is ‘abandoned’ and the
production and value flow from the reservoirs is stopped? The first end point reflects
the intention in the project definitions above, the classical development activity of a
project managed within the project planning and control scope. The latter end point
reflects the project as a value generating entity, where both the investment, or enabling,
part (development) and revenue generation (operations) is part of the project life cycle.
Therefore, of the definitions above e.g. Project 2000’s and PMI’s are examples of good
definitions for the project development phase, and Harrison’s definition further points to
the scope and complexity, and the need for inter-organisational integration. Though, to
cover the complete life cycle of the project as a business opportunity, these definitions
have to be extended. There is no aim in this thesis to propose a new project definition,
but at this point state that the definitions above have to be extended to comprise the
business opportunity context of the project, e.g. as in an oil field development
comprising both the development and operations of the project object.
3 Projects and project management
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31
3.4 Aspects of projects
Below four aspects of projects and project management are outlined. The aspects are not
meant to be generic for all projects, but are aspects that should be understood as a basis
for the approach developed in this thesis. The four aspects are the project context, the
project object, the project life cycle, and the uncertainty within projects.
3.4.1 The project context
The project context is what makes projects’ a special managerial object. Turner (1993)
sets projects into an environment and a context. Turner says that:
‘A project is not an island; the work is not done for its own sake, although traditional approaches to
project management often treat it as such. The project exists within a context. I should say that, …, I
differentiate between the project’s environment and its context. The environment is a physical concept. It
is the neighbourhood in which the facility is built. The context is an abstract concept, but includes the
environment. It is the complete economic, human social and ecosystem in which the project exists.
The context has three primary elements; (i) projects and corporate strategy, (ii) the parties involved, and
(iii) strategic management of projects’ (Turner 1993, p.18)
The Project Management Institute, (PMI 1996), states that the project context comprises
the topics of;
‘Projects and project management operate in an environment broader than that of the project itself. … The
topics included here are; (i) Project Phases, and Project Life Cycle, (ii) Project Stakeholders, (iii)
Organisational Influences, (iv) Key General Management Skills, and (v) Socio-economic Influences (PMI
1996, p.11)’.
We can see that both Turner and PMI let the context comprise general and strategic
management topics and skills. Hetland
16
states that the project context comprises;
‘(i) Business practice; ‘arms-length’, co-operation, collaboration, co-opetition, (ii) Culture; e.g.
Norwegian – short front end, many changes, versus Japanese – long front end, few (‘no’) changes, and
(iii) Other project specific contextual issues, e.g. Physical location, Political issues, Financing, and
Resourcing’.
We can see that Hetland sees ‘physical location’ as a project-specific contextual issue,
while Turner sees that as a project’s environment. A part of a project’s context will
therefore be the trends that are influencing the development of execution models and
related elements. Therefore, part of the context are the developments that are related to
making use of concepts, models and methodologies from other knowledge areas. One
such influential factor is the emphasis and developments of logistics and supply chain
management that is made use of in continuous and repetitive processes and industries.
How the project context is defined and delineated may be an intentional choice, as
described in the system constructivistic project management approach. The project
context as it is to be understood in this thesis is;
16
Based on a presentation by and discussion with Hetland in 1999.
3 Projects and project management
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32
- The project as a business opportunity for the project supply chain actors, and
- The project supply chains as the entity to make the project competitive.
Development projects of the kind that is found in the oil and gas industry need large
financial resources to be realised, i.e. they may be regarded as being part of a generic
class of investment projects. Financial resources are often scarce, and each development
project must compete against other projects, and firms within the oil and gas industry
for financial funds. In addition the oil and gas industry has to compete against other
types of industries, which may give better or more secure returns on the financial funds
invested. Therefore the project context addressed here is that of the project as a business
opportunity, with the project’s supply chain and the management thereof as the
competitive entity, both in development and operations.
3.4.2 The project object
As some definitions of the term project states, a project is aimed at bringing by a
‘unique product or service’. If we look at offshore field development projects we may
say that they both are product and service oriented. The ultimate product the project
develops is the oil and gas to be sold in the marketplace. These oil and gas derivatives
may also be regarded as a ‘service’, e.g. as part of the gas-supply agreements to the
European continent, i.e. an energy supply-service. A part of the field development
project itself is the development of the infrastructure that enables the exploitation of the
oil and gas resources at a competitive cost. This infrastructure may be regarded as the
project object.
At this point it is important to separate the project from the project object. The project is
the whole setting concerned with exploiting and gaining value from a business
opportunity. The project object is the infrastructure that shall make it possible to
exploit, process, refine and distribute the oil and gas resources from the reservoir,
through it stages of refining, to the marketplace. The project is concerned with value or
financial benefit, the project object is related to the revenue, i.e. production capacity,
regularity and recovery rate, and cost side, CAPEX and OPEX, of the value equation.
This distinction between the project and the project object is important, as the project
seen from the side of an operator is, as a business opportunity, not completed before the
project object is removed. Seen from the side of the actors in the project supply chain,
their involvement in the project may be limited to a certain phase or a set of phases of
the project life cycle. With respect to the logistics and supply chain approach to this
project context, the project object, comprising both its development and operations, is
the focus of the approach.
Table 3.2 and 3.3 below show the cost estimate and cost distribution for six reference
project developed in relation to the Norwegian Continental Shelf in the late 1990’s. The
names of the projects are hidden due to confidentiality.
3 Projects and project management
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33
Table 3.2. Cost accounts for some reference projects developed in relation to the
Norwegian Continental Shelf in the late 1990’s (figures in mill. NOK).
Projects
A B C D E F Average
Management 942 104 322 179 314 957 470
Engineering and procurement 2 031 207 674 211 976 2 438 1 090
Material deliveries 4 225 547 2 564 1 463 1 337 9 247 3 231
Construction 6 448 758 2 274 441 1 226 5 989 2 856
Operations 509 149 320 252 78 477 298
Unit work activities 0 0 10 0 995 0 168
General -191 29 2 0 -90 0 -42
SUM 13 964 1 794 6 166 2 546 4 836 19 108 8 069
Table 3.3. Percentual cost distribution for some reference projects developed in relation
to the Norwegian Continental Shelf in the late 1990’s.
Projects
A B C D E F Average
Management 7 6 5 7 6 5 6
Engineering and procurement 15 12 11 8 20 13 14
Material deliveries 30 30 42 57 28 48 40
Construction 46 42 37 17 25 31 35
Operations 4 8 5 10 2 2 4
Unit work activities 0 0 0 0 21 0 2
General -1 2 0 0 -2 0 -1
SUM 100 100 100 100 100 100 100
Wee see that on average approximately seven out of eight billion NOK’s are related to
the EPC element of the project object. That is almost ninety percent of the total cost
account for the project object. Engineering, which is heading the demand process for
procurements and material deliveries, as well as construction requirements, consumes
fourteen percent of the project object cost accounts, to initiate supply consuming forty
3 Projects and project management
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percent of the cost accounts, and construction activities consuming thirty-five percent of
the cost accounts. In other words, for every 1.000 NOK spent for external supplies and
construction, 187 NOK’s have to be spent for engineering and procurement activities to
define, initiate and follow-up.
-500
0
500
1 000
1 500
2 000
2 500
3 000
3 500
M
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.
N
O
K
-5
0
5
10
15
20
25
30
35
40
45
%
Figure 3.1. Average cost and cost distribution for some reference projects.
3.4.3 The project life-cycle
The life cycle of a project should be elaborated further than as the development of the
project object. The life cycle of a project may be regarded in several ways. PMI have
defined;
‘the project life cycle as a collection of phases whose number and names are determined by the control
needs of the performing organisation’ (PMI 1996, p.vii).
This approach to the project life cycle is much related to a view of projects that see
them as developing and ‘physically’ creating a unique product or service. The project
life cycle may also be seen as the life cycle of an object, from ‘birth’ to ‘death’, as
discussed above regarding the definitions of projects. Especially the development
projects of the oil and gas industry were the project object is the ‘cornerstone’, as the
‘enabling tool’ for revenue generation. This may be seen as a process consisting of four
major steps as outlined in Table 3.4.
This four-step approach to the project life cycle is also compatible with the first
definition, as it may be that all these four steps are necessary for the ‘control needs of
the performing organisation’. All these four steps have influence on the financial
objectives of the project, both for the owner and the contractors and suppliers. For the
project owner, CAPEX is involved in step one, two and four, while the revenue
generation is ‘limited’ to step three. For the contractors, revenue is generated primarily
3 Projects and project management
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in steps one and two, but also for some in step three, although in a smaller scale. For the
suppliers the revenue is generated in steps two and three, dependent on their
involvement in either object realisation or supporting ‘consumables’ for object
utilisation.
Table 3.4. The project life cycle.
Project life-cycle stages Description
Project development The front-end phase, up to the point in time when
the project has been defined and evaluated as a
project, and the project basis been examined
thoroughly and developed so far as to start the
specific development of the project object i.e. ‘up
to big spending’.
17
Project object development The main investment phase of the project,
including, detail engineering, procurement,
fabrication, construction and commissioning of
the project object. Up to the point when the
responsibility of the project object is handed over
to operations.
Project object utilisation Operations of the project object to produce the oil
and gas resources.
Termination of the project. Closure of the project, including investments in
removal of the project object after the operations
of the oil and gas resources has come to an end.
In general, for a logistics and supply chain approach, the life cycle of the project object
is in this thesis focused on two main phases. The first main phase comprises the
development phases of the project and the project object, comprising every sub-phase
up to the project object is ready for hand-over to operations. The second main phase is
the operations of the project object. The role of the supply chains in these two phases is
in the development phase to contribute with competence, technology and resources to
enable and realise, i.e. design, specify, produce and fabricate parts, and construct the
project object, then in the operations phase the role of the supply chains is to enable,
support and secure the operations of the project object.
The two phases of the project life cycle are important as the logistics and supply chain
management approach to the two phases should be guided by distinctively different
characteristics. This will be elaborated through developing the project supply chain
management concept in chapter six.
17
For a further discussion of the challenges of the project front end, see appendix D.
3 Projects and project management
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3.4.4 Projects means uncertainty
As we saw from the definitions of projects above they are characterised as ‘one-time
undertakings’, ‘unique’, and ‘of special character’;
‘The principal identifying characteristic of a project is its novelty. It is a step into the unknown, fraught
with risk and uncertainty. No two projects are exactly alike, and even a repeated project will differ in one
or more commercial, administrative, or physical aspect from its predecessor’ (Lock 1992, pp.2-3).
The larger the project is, both in scope of work, geographical distribution, and
organisation, and the more stakeholders involved in the project, the number of factors
that will influence the project increases. The globalisation of business, and therewith the
spread of potential project actors and stakeholders, lead to a geographically dispersed
supply network involved in a project, supplying for and to the project object. This
increases the basis of uncertainty and complexity in the project. With a logistics and
supply chain management approach to projects and project management uncertainty and
complexity of both the project product, the extended project organisation or the project
supply chain, as well as the related processes necessitate to be dealt with.
Uncertainty in projects
As stated above, a project is an endeavour characterised by uncertainty. Uncertainty is
on the top level related to the value of the business opportunity to be exploited and the
risk to the financial and resource commitments needed to exploit the business
opportunity. This two-sided picture of uncertainty, balancing business opportunity and
risk, is essential for understanding supply chain management in the project-oriented
context addressed in this thesis. The reason for this is the project supply chain actors’
influence both on the opportunity as well as the risk side of the inherent project
uncertainty. Further, the uncertainty both evolves through and have to be dealt with by
the supply chain actors. As such the uncertainty picture may be presented as in Table
3.5 below.
Table 3.5. Uncertainty management means balancing opportunities and risks along the
project supply chain.
Uncertainty
Opportunity Risk
Check project challenges with respect to
consequences in the sense that the conditions are
arranged to exploit opportunities – to increase the
value of the project.
Reduce and control to be within an acceptable risk
exposure for the project.
Risk and reward shared among the project supply chain actors based on willingness and ability to bear.
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Uncertainty originates due to whether data is known or unknown or whether the state is
closed or open. This is presented in Table 3.6 as a suggested taxonomy (Hetland 1999).
Table 3.6. The nature of uncertainty. Suggested taxonomy (Hetland 1999 (A)).
STATE
Closed Open
Known Deterministically uncertainty Variability
DATA
Un-known Lack of information Undetermined uncertainty
The importance of the content in Table 3.6 is not the taxonomy itself, rather to
understand the sources of uncertainty, and how the types of uncertainty may be
approached and dealt with for the best of the project. Another quote that is related to
data as a source of uncertainty is;
‘Uncertainty is given by the difference between the information that is necessary to make a reliable
decision and the information that is available’ (Project 2000, 1998).
A common source of this type of uncertainty is engineering decisions taken on an early
information basis, leading to changes that again may lead to alterations in the project
supply chains, e.g. termination of one supply chain and activation of another.
Uncertainty has to be dealt with actively, and that has given rise to uncertainty
management as a specific topic within project management. Though, the most important
aspect related to uncertainty is that it is treated consciously and proactively, it should
not be allowed to just ‘happen’;
‘Our success derived from deliberate front end planning – not from good luck randomly drawn from
possible future states of nature. We were lucky in the sense that we were not hit by randomly drawn states
of seriously bad luck’ (Heyerdahl 1999).
As stated above, uncertainty management should be deliberate and start early in the
project, or even before one has defined a project, i.e. in the front-end phase. It should be
part of ‘good management’, not left to ‘luck’, i.e. bad management. As such the
approach to uncertainty management should be developed and established already in the
front-end phase.
In figure 3.2, this is presented through three different approaches to treatment of
uncertainty in front end planning in a project; no, traditional and proactive. No front
end planning may be regarded as what happens in a Monte Carlo simulation. The future
contains thousands of different outcomes, and in each draw in the Monte Carlo
simulation a state is ‘picked’ that may either represent good or bad luck with respect to
the parameter in focus. Underlying is the assumption that there is no active management
involvement that will influence the outcome. Then there is the traditional approach to
front end planning, or ‘the accountants scenario’. This approach is characterised by risk
3 Projects and project management
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reduction, trying to reduce the number of possible outcomes as much as possible, so that
one ultimately is left with one option. In relation to the project space that will be
described below, we have a ‘closed’ project. By following the ‘accountants scenario’
one seeks to eliminate possible risks, but at the same time one forego potential
opportunities. The question then is whether this is good, value enhancing management?
The third and final approach to front end planning try to ‘play’ proactively on the
uncertainty inherent in the project, as a business opportunity, both to ‘eliminate states of
seriously bad luck’, as well as ‘add value’ through ‘added states of good management’.
Then we are down to what management is about, creating value beyond what would
have been created if management was not active. The case here is that management
emphasises the ability to proactively exploit uncertainty as a source of value
enhancement, not just a source of risks to protect against.
Good Bad
Thousands of
possible tomorrows
May happen
Bad luck
Good Bad
Thousands of possible
tomorrows
Will happen
Eliminated
downside risks
Sacrificed
upside potentials
Good Bad
Added states of
good management
Eliminated states of
seriously bad luck
No front end planning:
The Monte Carlo scenario
Traditional front end planning:
The accountants scenario
Proactive front end planning:
The business scenario
Figure 3.2. The approach to uncertainty management starts in the front-end phase
18
.
But projects are not static, stationary constructs. Project are more like ‘moving targets’.
This should be reflected in a dynamic development of uncertainty management in the
project;
‘Projects are born and developed under a high degree of uncertainty. A project may be planned with
realistic targets and assumptions, and one can establish time schedules and cost estimates based on
experience, knowledge and available information. But, the project develops continuously due to increased
knowledge and insight that is won through the planning processes’ (Husby et al. 1999).
Therefore the uncertainty management process established in the front-end have to be
dynamic, in addition to being proactive. But, uncertainty management comes at a cost,
and future opportunities and actions has to be weighed against historic commitments;
‘The significance of uncertainty for a decision situation depends on the cost of reversing a commitment
once made, the volatility of the environment, and the sensitivity of benefits to the occurrence of the
unpredicted’ (Rosenhead 1989, p.194).
18
Summary from ‘Front End Opportunities’ workshop, Epci, 10-11 March 1999, see Appendix D.
3 Projects and project management
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This is especially important for supply chain management, as the uncertainty when
commitments have been made down through the supply chain may have consequences
for the whole supply chain, and in the worst case even lead to termination of a whole
supply chain.
Uncertainty and the project supply chain
Husby et al. (1999, p.14) regarded uncertainty management to cover; ‘exploiting
opportunities, reducing risk, accepting uncertainty, and transfer of uncertainty’. This is
the same as we presented in the introduction to uncertainty and in Table 3.6, except for
the last aspect, transfer of uncertainty. Regarding this aspect there may be raised a
question with respect to where to transfer given uncertainty? Should it be transferred
from the project owner to a project contractor or supplier, or vice versa? Or should it be
kept within the actors of the project supply chain, and distributed and dealt with among
them? Distributed and dealt with in such a way that the uncertainty is transferred
among the project supply chain actors in a best possible way for dealing with the
uncertainty, both with respect to exploiting opportunities and reducing risks or the
consequence of them within the project supply chain actors as a whole. However, as
Husby et al. (1999, pp.122-3) states, uncertainty is ultimately owned by the project
owner, though the uncertainty may be handled by the project supply chain as a whole,
or by parts of it;
‘Uncertainty costs; Uncertainty in a project does not change after a contract is signed; Uncertainty should
be reflected in the actors’ objectives and limits; Uncertainty may be a competitive advantage; Uncertainty
is ultimately owned by the client’.
Changes are related to technical risk. Changes comes both from that complete
information is not available, or through that degrees of freedom’ have been transferred
down the supply chain. Degrees of freedom may be transferred (delegated), e.g. via
functional specifications, which moves the ‘ownership of freedom’ to choose a specific
technology or solution from the operator to the contractor, as long as it meets the
functional specifications set by the operator. However, the operator still has the final
responsibility, and financial consequences of changes in degrees of freedom must be
born by the operator as principal. Therefore;
‘Risk may be divided in two:
- technical risk where decisions about technological choices affects a large scope of entities, and
together with the fact that nobody have full overview of the product, then this will influence the
- financial risk’ (OA 990614).
An example of coping with uncertainty through the project supply chain in the
development phase of a project is taken from Nerefco, a restructuring project of a
petrochemical plant in the Netherlands. The project was owned and financed by British
Petroleum (65%) and Texaco (35%). The project was executed as an alliance project
between the owners, hereafter referred to as Nerefco, and the two contractors Raytheon
and Fabricom (participated with two divisions) and suppliers. The starting point was
that the project did not have ‘robust’ financials, and therefore had to show cost effective
3 Projects and project management
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strategies and execution. It did also have construction challenges as it was complex
restructuring that was going to take place within an already existing plant. The
competence of the fabrication and construction contractor would therefore be essential.
To be able to keep the shut-down of production to a minimum the project had to have a
short installation schedule. These factors gave rise to several uncertainty factors.
To cope with these uncertainty factors an alliance contract was developed and agreed to
between the owners and the contractors and suppliers. As part of the alliance agreement,
a financial risk/reward incentive was developed. The risk/reward shares was distributed
among the project supply chain actors in relation to their impact on the solution, and
their willingness and ability to bear the risk. From the vendor side the engineering,
fabrication and construction contractors participated, and the supplier of one of the main
equipment-modules. The risk/reward shares of each partner in the project supply chain
is given in Table 3.7.
Table 3.7. Nerefco alliance project; Alliance partners – under-run shares.
Partner Nerefco Raytheon Fabricom
(M)
Fabricom
(E&I)
NBM Total
Share 35% 25% 23% 6% 11% 100%
We see from table 3.7 that the owners carry only 35% of the risk/reward incentive
within the alliance contract, while the contractors and one supplier carry 65%. Though,
this distribution does need some explanation, which is based on Figure 3.3.
Over-run
Under-run
Contractor risk
capped
65%
Target cost
NLG 290.3M
Nerefco
share
35%
Alliance contractors
share of underruns
65%
Nerefco share
of overruns
Figure 3.3. Sharing of financial risk/reward among the Nerefco alliance partners.
3 Projects and project management
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Figure 3.3 shows the distribution of incentive between the project owners and the
contractors/supplier. The basis for the incentive is a target cost on CAPEX, set to NLG
290.3 million. This was a target set based on cost estimation after a sufficient degree of
information and information confidence had been established in the project. With
respect to the resulting cost position after the project was completed (CAPEX account)
it could either be higher or lower than the target cost. If the final project cost accounts
showed an under-run versus the target cost, the cost differential would be shared with
35% to the owners and 65% to the contractors/supplier. That means that if the owner,
contractors and suppliers are able to develop the project using less money than the target
cost, the contractors and the supplier in the incentive contract will earn 65% of that
under-run, and the owners will save 35% of the under-run. If on the contrary there is an
over-run, the contractors and the supplier in the incentive contract will have to cover
65% of the additional cost, up to a certain amount over-run. If the over-run exceeds a
fixed amount above the target cost the contractors and supplier will only cover 65% of
that fixed amount, i.e. the contractors’ upside risk is ‘capped’. The remaining over-run
has to be covered by the owners. This is in accordance with the ability to bear risk, and
thereby the willingness to try new approaches in dealing with the project supply chain
to seek additional value, and thereby be able to make the project financially viable.
3.5 Project processes
Project processes may be regarded in several ways. One way is to try to define them
along the project timeline, and towards the different functions and activities involved in
project and project management work. Another is to try to approach them a bit more
broadly, in researching the underlying uncertainty involved in ‘what to do’ and ‘how to
do’ it in a project. Below we will give examples of two approaches along these two
lines.
3.5.1 PMI’s project processes and knowledge areas
The Project Management Institute, PMI, is one of the larger international interest
organisations for developing project management as a body of knowledge and as a
profession. To help create understanding for the process of managing projects, as well
as the functional areas involved, PMI has developed a set of project management
processes and knowledge areas.
With respect to project processes, PMI separates between project management
processes, ‘…describing and organising the work of the project’ (PMI 1996) and
product-oriented processes, ‘… specifying and creating the project product
19
’ (op cit.).
A supply chain management approach may be seen as a part of the product-oriented
processes, as it is focused towards the product of the project, but should also be seen as
a project management process, as it is a way of ‘describing and organising the work of
the project’. The duality of the product-oriented processes versus the project
19
The term ‘project product’ used by PMI is the same as the term ‘project object’ used in this thesis.
3 Projects and project management
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management processes is an interesting one. This duality becomes even more
interesting and important as uncertainty with respect to ‘what to do’ and ‘how to do it’,
i.e. uncertainty in the product oriented processes, has to be combined with different, or
targeted, project management processes. This is further described below, in the
description of the project space and the differences in approach to project strategy and
execution.
PMI’s project management processes are ‘phase-oriented’ and grouped into five phase-
related groups; initiating, planning, executing, controlling, and closing processes. These
processes are further oriented towards the development phase of the project object, not
taking the operations phase and the life-cycle perspective of the project object into
account. The initiating processes act as ‘commitment achievers’, i.e., their role is to
commit actors to their involvement in the project. The planning processes are concerned
with the means and ends of the project, i.e. defining and specifying the ‘what to do’ and
‘how to do it’ elements of the development project. The executing processes focus on
the execution of the project plan, with corrections made by the controlling processes.
Linking the project oriented supply chain is part of the executing processes. The
controlling processes are aimed at identification of variances between actual and
planned performance. Change control is part of the controlling processes. The objective
of the closing processes are to close-out contracts with external project supply chain
actors, as well as nest up all information to formalise the completion of a project phase
or the whole project.
Within the project processes there will be functional activities related to PMI’s nine
project management knowledge areas. These knowledge areas comprise the functional
management elements for development of project integration, scope, time, cost, quality,
human resources, communications, risk and procurement management.
The product-oriented processes are related to the ‘what’s’ and ‘how’s’ of ‘what to do’
and ‘how to do it’ in developing the project object. Below we will present another more
overriding approach to the product-oriented processes, though not as broadly recognised
as the work of PMI, it address some interesting aspects especially regarding the inherent
uncertainty in the processes.
3.5.2 What’s and how’s
Projects are different with respect to their degree of specification of ‘what to do’ and
‘how to do’ it. Obeng (1996) proposes four generic categories to explain and group
projects based on these two parameters. The four categories are differentiated by the
knowledge or familiarity about the ‘what’ and ‘how’ endeavours of the project, and
each category is given a descriptive name; Painted by Numbers, Going on a Quest,
Making a Movie, and Lost in the Fog.
In the first instance you have full familiarity and knowledge about both what to do and
how to do it. This is the first category ‘painted by numbers’, characterised by
‘knowing’. One know what, i.e. the project object, or result, and know how, i.e. the
tasks to be performed to reach the desired end. Uncertainty is involved, but that is on
3 Projects and project management
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the level of uncertainty in specific scope of work, schedule or cost for specific tasks.
The ‘painted by numbers’ category is characteristic of the project planning and control
situation. Then in the next category ‘going on a quest’, you know what to achieve, e.g.
exploiting some oil and gas resources located under the seabed in an offshore
environment, but you don’t know how to exploit them, i.e. the conceptual and
technological basis to be used is not known. This category may be suitable for the early
stages of complex development and construction projects, especially when new,
advanced technology has to be developed or tried out. The third category ‘making a
movie’ takes advantage of familiarity or knowledge about a way to, or the process of
realising something, you know how, but you don’t know what business potential it may
be applied to. The name of the category implies that this may be seen as making a
movie, i.e. you know how a movie is created, but you don’t know what kind of movie it
will be. This category may also be used for actors that seek business opportunities
where their own competence or technology may be applied. The final category ‘lost in
the fog’ may both be seen as the ultimate opportunity where all possibilities are open to
you, but also as the opposite characterised by that you ‘don’t know where you are, and
not where you are going’, i.e. you are lost in the fog. An example of the first is that you
have in your possession some money that you want to develop further, and where you
yourself have to act as the agent for finding a business opportunity, going from ‘don’t
know what’ to ‘know what’. Then when you know what, you have to establish the way
of realising or exploiting the business opportunity and the ‘organisation’ to do it, i.e.
move from ‘don’t know how’ to ‘know how’.
Table 3.8. Obeng’s four project categories.
Project category Know what? Know how? Closed or open?
Painted by numbers Yes Yes Closed project
Going on a quest Yes No
Making a movie No Yes
Lost in the fog No No
Open projects
Hetland (Epci 1999-B) has defined Obeng’s four project categories as a ‘project space’,
consisting of ‘open’ projects and ‘closed’ projects. Related to Obeng’s four categories,
Hetland (op cit.) defines projects in category one as closed projects, while he defines
projects in category two to four as open projects. Few projects may completely be put
into one of the four categories, but the degree of openness will be greater the more one
moves from a project characterised by category one, towards category four. The
difference between open and closed projects is found in the projects inherent degree of
uncertainty. A closed project has few loose ends and may be quantified and measured
by numbers for its means and objectives. Open projects on the other hand have a large
degree of uncertainty that have to be dealt with both to be able to pursue opportunities
3 Projects and project management
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still not closed and manage inherent risks. Figure 3.4 presents the ‘project space’,
comprising Obeng’s four project categories.
A
B
D
C
Risk Reduction
Mission Critical
Searching for Direction
Functional Requirements
Closed projects Open projects
A
B
D
C
Risk Reduction
Mission Critical
Searching for Direction
Functional Requirements
A
B
D
C
A
B
D
C
A
B
D
C
Risk Reduction Risk Reduction
Mission Critical Mission Critical
Searching for Direction Searching for Direction
Functional Requirements Functional Requirements
Closed projects Open projects
’Painted by Numbers’
’Making a Movie’
’Going on a Quest’
’Lost in the Fog’
A
B
D
C
Risk Reduction
Mission Critical
Searching for Direction
Functional Requirements
Closed projects Open projects
A
B
D
C
Risk Reduction
Mission Critical
Searching for Direction
Functional Requirements
A
B
D
C
A
B
D
C
A
B
D
C
Risk Reduction Risk Reduction
Mission Critical Mission Critical
Searching for Direction Searching for Direction
Functional Requirements Functional Requirements
Closed projects Open projects
’Painted by Numbers’
’Making a Movie’
’Going on a Quest’
’Lost in the Fog’
Closed
How?
Open
What?
Closed
How?
Open
What?
Closed Closed
How? How?
Open Open
What? What?
Closed
How?
Open
What?
Closed
How?
Open
What?
Closed Closed
How? How?
Open Open
What? What?
Figure 3.4. The project space.
In stead of using Obeng’s figurative category names, Hetland proposes to use names as
indicated in Figure 3.4 and Table 3.9.
Table 3.9. Obeng’s categories, with Hetland’s suggested naming.
Obeng Hetland Comment
Painted by numbers Risk reduction Reduce risks, leave opportunities un-
examined. The project planning and control
context.
Making a movie Functional requirements The contractor are open to suggest and use
how to best solve the needs (what?) of the
client. Technological development driven.
Going on a quest Mission critical Project execution process development. The
value lies in the project management
processes directing the search, because ‘the
journey is the mission’.
Lost in the fog Searching for direction Is this the really the right concept to follow? Is
there another business that could be more
worth while to pursue? E.g. total change of
technological development concept, that could
be e.g. from platform concepts, to sub-sea
developments and down-hole processing.
3 Projects and project management
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Projects of a given type may move within the project space, e.g. due to involvement of
new technology or new organisational constructions chosen deliberately to pursue
opportunities inherent in an open ‘approach’, resulting that the project context is more
characterised by uncertainty. An example of such a move within the project space may
be taken from the construction industry, as described by the British Department of
Trade and Industry, DTI;
‘The traditional model of construction views the construction process as the purchase of a product
governed by legal contracts. This provides a small level of uncertainty about project ends, but uncertainty
about the means by which it is implemented is passed on to contractors and sub-contractors as risk. …
However, when projects are more complex and uncertain … The construction process is described more
like a prototyping operation where the needs and means are continually negotiated’ (DTI 1998, p.22).
Risk Reduction
Mission Critical
Searching for Direction
Functional Requirements
1
2
Closed
How?
Open
What?
Figure 3.5. Construction projects moves within the project space as they become more
complex.
This quotation show that the projects in the construction industry move within the
project space as the projects becomes more complex. First the projects are a bit into the
open area as they have an element of going on a quest within them. They know what
(‘this provides a small level of uncertainty about project ends’, position 1 in Figure 3.5),
although there are some uncertainties with respect to how it shall be implemented. As
the construction projects become more complex and the construction process become
more prototyping based, the projects move within the project space from the closed
domain, towards the open domain adding on elements of ‘don’t know what’ (adding
elements from ‘making a movie’) and ‘don’t know how’ (position 2 in Figure 3.5). A
project will also be more and more closed as it develops throughout its life-cycle, from
development to termination, e.g. as showed in Figure 3.6 below.
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Open
Closed
Project
Development
Project Object
Development
Operations Termination
1 2 3 4 5
Open
Closed
Project
Development
Project Object
Development
Operations Termination
1 2 3 4 5
Figure 3.6. Project’s degree of openness throughout the project phases.
By itself, Obeng’s project categories contributes to developing a basis from which one
may better start to understand the interaction between product-oriented processes and
project management processes, as defined by PMI, under the influence of degree and
form of uncertainty. This will be further outlined below.
3.6 Differences from strategy to operations
There are several alternatives to choose as an approach to develop a project. There are
different strategies, tactics, as well as operational forms. Below we will first address
some differences with respect to project strategy, contract strategy and procurement
strategy. Then an ‘project atlas’ is outlined, and approached as a tactical issue with
respect to applying different types of strategies to outline the project ‘route’ from start
of the front end, to completed development.
3.6.1 Strategies are different
As stated above one of the most used and understood perspectives on projects is the
development and construction of a unique product or service. This perspective shows
the temporary or finite nature of the projects organisational construction. Organising to
undertake a project of the category treated in this thesis is dependent on the internal
competence and capacity of the operator. Behind the organisation of the project lie the
business strategy (that among other establishes the company internal competence
‘profile’) and the project strategy, i.e. the strategy about realising the business
opportunity. The project strategy will lay the guidelines for establishing the project
organisation, ‘brought together’ through contract strategies, and procurement
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strategies. Besides from the project execution phase of realising the project object, these
strategies may or will directly or indirectly have relevance for the object utilisation
phase, i.e. the operations of the project object. Project organisation is important as the
supply chains and the management of them is to a large part dependent on the project’s
organisational construction. The life cycle aspect has also an important influence on
how the organisational issues should be approached.
Some say that there is a need to change how we perceive and approach the management
of large, complex development projects;
‘We are currently facing the need for major shifts in the way we run complex capital projects, which are
“complex inter-organisational business processes” of a finite nature. The traditional focus on costs and
discrete contracts are no longer adequate to deliver profitable developments. These parameters need to be
replaced by life cycle costs (or life cycle value) – i.e. we are more interested in the total costs of
construction and operation rather than piecemeal costs as such. Detailed specifications are being replaced
by functional requirements – i.e. we are buying performance rather than hardware. Contractors and
suppliers are considered as potential partners, not as crooks – i.e. the contract terms are used as
constructive tools and not as destructive weapons. Vendors are contracted earlier, far before
comprehensive scope definitions can and should be produced’ (Hetland, 1999-B).
As part of developing new approaches to project strategies, Epci
20
proposed three
different types of project strategy approaches; (i) risk reducing, (ii) opportunity seeking,
and (iii) value enhancing. These three types were used as an approach to see what actors
from project-oriented industries meant when addressing project strategy
21
. When a
group of representatives from the oil and gas industry were asked which of these types
of project strategy that best reflected their own approach, most of them stated that the
risk reducing type was the most common, though several pointed to the value enhancing
type as a concept that was sought e.g. through alliance contracts and incentive contracts.
Within this lies a difference between what is felt needed, due to ‘old arm-length’
transactional principal/agent relationships, versus what was believed to be the best form
for enhancing value through project work. When asked what types of measures they
believed were necessary to move towards more value enhancing project strategies, the
answers may be summarised into three points;
Linking inter-organisational value enhancement with intra-organisational profitability and risk.
Transparent measures along supply chain to ensure that actors and stakeholders targets and
objectives are clear, visible and understood.
Dynamic measurements that reflects changing needs over time.
Value enhancement has to be shared, i.e. the inherent risk and profitability in a project
has to be shared among the project supply chain actors for them to be focused on value-
enhancement for the project as an inter-organisational business opportunity, e.g. as in
the Nerefco case described above. The issue of transparency into the project supply
chain came also up (this is also an important part of all logistics and supply chain
20
Epci, the European Institute for Advanced Project and Contract Management.
21
These three approaches to project strategy were used in an Epci workshop to address project and
contract strategy. The questionnaire used for the workshop and a summary of the responses can be found
in Appendix E.
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management). Then the project issue of dynamics came up, to meet the dynamic context
of project, not least due to their inherent uncertainty which trigger the need for dynamic
measures. All these remarks are related to project supply chain relationships, and
thereby a project’s contract strategy.
‘Contracts are used to procure people, plant, equipment, materials and services. Contracts are therefore
fundamental to the management of almost all engineering projects. The type of contract should be
selected only after consideration of the nature of the parties to the project, the project objectives and the
equitable allocation of duties, responsibilities and risk. [This chapter] outlines the main components of the
process used to determine how the project will be procured, usually referred to as the contract strategy’
(Smith 1995, p.188).
As it comprises ‘the processes used to determine how the project will be procured’, the
contract strategy may be regarded as ‘a tool’ for establishing and managing the project’s
inter-organisational supply chain. As such the mission of the contract strategy may be
regarded as ‘an enabler to align and optimise inter-organisational value enhancement
and intra-organisational profitability given inherent opportunities and risks’. Related to
the input from the industry, they meant that the contract strategy should support the
project objectives through;
Complementing the project supply chain with the project objectives.
Reduce imbalances along the project supply chain.
Align and commit the supply chain to deliver.
Increase the likelihood of project success.
The choice of contract strategy is in large dependent on to which extent what’s and
how’s of the project is defined, as outlined in the project space, i.e. the knowledge and
experience with respect to what to be done and how it is to be done, and the contextual
influence on this. When asked about the relationship between the project strategies and
contract strategies the answers from the industry may be grouped into the following;
Well defined what’s and how’s lead to risk reducing strategies, well suited for securing delivery in
accordance with promises. Fixed price type of strategies, lump sum, with strong risk transfer
motivation between actors is characteristic.
Less defined what’s and how’s may open up for creativity and utilising the full potential of the
project supply chain, especially in opportunity seeking contexts.
Value enhancement strategies will have to utilise risk reduction and opportunity seeking strategies
targeted in parts and phases of the project.
Therefore, the project strategy has to be aligned with the procurement strategy and
contract strategy, and it has to be known to all the actors in the project supply chain.
Below we will outline an approach or a ‘tool’ that may be used to develop a project
strategy, the project atlas.
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3.6.2 The Project Atlas
The objectives of the project stakeholders may be seen in relation to the ambition levels
of the industry and the actors. One may say that there are four different ambition levels
involved in an approach to a project. The first being status quo, i.e. approaching the
project as one has approached projects previously. Secondly, continuous improvement,
i.e. try to improve on the ‘what’s’ and ‘how’s’ previously used. The third is radical
change, i.e. one tries more or less completely new approaches to the what’s and how’s
earlier used. And finally the fourth, quo vadis, i.e. one question what one does.
Closed Open
What?
How?
Closed Open
What?
How?
Improvement
Status Quo Radical Change
Quo Vadis Improvement Improvement
Status Quo Status Quo Radical Change Radical Change
Quo Vadis Quo Vadis
Figure 3.7. Different project strategies and the project space.
The level of ambition increases, e.g. due to market or industry pressure, as one moves
from the retaining ‘status quo’ towards the ‘quo vadis’ situation. The latter one could
for this discussion be left out as it often may involve a complete strategic shift, e.g.
shifting the line of industry one is involved in. As one shifts ambition levels one may
also need to change the approach one takes to the management of a project, as it leads to
new ‘what’s’ and ‘how’s’ previously ‘unknown’ or unfamiliar. This means that one has
to acknowledge that there is a need for different project strategies. As a start we may
relate four different project strategies to each of the four ambition levels above. The
‘status quo’ situation may be termed A-type of project strategies, ‘improvement’ B-type
project strategies, ‘radical change’ C-type project strategies, and ‘quo vadis’ D-type
project strategies. These four different project strategies are related to the degree of
openness in the ‘what’ and ‘how’ characteristics of the project space. Based on the
project space and these four different types of project strategies, Epci has started
working on a ‘project atlas’, to try to establish a ‘tool’ for ‘navigation’ from project
strategies and further into contract and procurement strategies. The ‘project atlas’ is
shown in Figure 3.8, and shows how the project strategies take different ‘form’
dependent on the clearness or unclearness of the project objectives ‘what’s’ and the
project processes ‘how’s’.
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Figure 3.8. The Epci Project Atlas.
Let us now look into the different project strategy types and their segments, as they are
proposed in the project atlas. The A-type of project strategies are characterised by clear
specifications with no or very small room for seeking opportunities. As such the A-type
of strategy is a risk reducing type of strategy often copying previously used concepts
and methods. The B-type of project strategies is as the A-type characterised by clear
objectives and processes. There has though been opened up a bit, in that the objectives
have become functional in stead of detailed, and the processes are meant to be of
guidance in stead of prescriptive. The B-type of strategies may again be divided further
into three groups, B
W
, B
WH
, and B
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, dependent on the degree of openness in objectives
or processes. B
W
is characterised by that one is able to choose how to do it (i.e. one
knows how to do) as the what to do is given as functional specifications. The room for
improvement is through challenge prevailing work processes to continuously develop to
stay competitive. Moving from B
W
to B
WH
is characterised by opening up on the
functional specifications that defines the ‘what’s’ of the project object, while slightly
starting to define (preferable or competitive) work processes. Still there is room for
challenging the prevailing work processes, but the trend is moving towards improving
the current work processes. Moving further to B
H
leaves more room for challenging the
functional specifications of the project objectives, but tightens up the work processes to
be applied, using a guidance approach. An example could be to follow the principles
that CRINE Network has established, in the supply chain management initiative.
Approaching the C-type of strategies we move into the unclear area characterised by
fuzziness and ambiguity. Further dividing the C-type of strategies into C
W
, C
WH
, and
C
H
, we moves from challenging the fundamental statements and objectives of the
project, through to taking technological step changes in applying next generation
technology. Finally the D-type of strategies is completely open in that the objectives are
undefined and the processes to be applied are undetermined.
The project atlas and the different project strategy segments may now be used to outline
a tactical approach to project execution, i.e. the different routes that may be chosen
through execution.
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3.6.3 Routes are different
From a business opportunity is identified, via project initiation and development,
through to the project object is completed and set into operations there are a number of
alternative routes that may be pursued to complete that process. Common for all routes
is that they will be within the confines of the project strategies comprised by the project
atlas. If we leave out the D-type strategies, as they are mostly found in the phase
searching for a business opportunity, we have the three strategies A, B and C left.
Therefore, the choice of a route through the development phase of the project is what
links the project development strategy with the execution of the project development
phase. The strategy may be seen as the basis underlying the approach to a route.
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Figure 3.9. A route moving through several categories of the project atlas.
From the ‘start’ point of the project development to the ‘stop’ point, that for the type of
projects addressed in this thesis, i.e. oil and gas development projects, may be defined
as the point where the project object is set into operations, there may be several routes
to pursue, dependent on the ambitions of the project or project stakeholders. The start
point will most probably be located somewhere within the B or C region of the ‘project
atlas’, as what may become a project in its origin as a business idea or opportunity is
related with a large portion of uncertainty. At the ‘stop’ point when most of the degrees
of freedom have been set, the project will ultimately have been brought into a phase of
order, i.e. closed, and the degrees of freedom still open is there to bring elements of
flexibility into the operations of the project object. As such we may say that all routes
will move from the ‘open’ part of the project atlas to the ‘closed’ part of the project
atlas, where the elements still ‘open’ are defined to be so within given limits. We could
alternatively present this as a matrix orientation, where one axis follows the timeline
from ‘start’ to ‘stop’, and the other axis goes from ‘open’ to ‘closed’ in the project
space, or from disorder to order. This is presented in Figure 3.10 below.
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Figure 3.10. A to C strategies between order and disorder.
If we look closer into three different routes we may say that they relate to three different
strategies. We may say that the routes start in the B
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category, and ends in the A
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Figure 3.11. Three different routes from initiation to completion (1).
The first may be seen as the risk reducing type of route, seeking to exploit, or copy,
concepts, products and processes previously used. The main aspect in this route is to
‘close’ the project as fast as possible, i.e. bringing it to a ‘painted by numbers’ type of
project as soon as possible, and thereafter using A-type strategies. The second route
requires that the degrees of freedom are opened up to explore possible approaches,
through improving the current work processes, i.e. moving to B
WH
, before closing the
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project and exploiting A-type strategies. The third route goes further than the second
route in opening up the degrees of freedom. From the start point, the route searches into
the ‘radical improvement’ area, first generally (C
WH
) then trying to challenge or
reformulate the objectives or the specifics of the objective of the project. Then the
routes start closing the project, through returning to the segment it started, i.e. see what
has been learnt from relaxing the requirements or limits of the project (the tour into the
C-segments), before closing the project completely and moving into the A-segment.
The three routes could also be represented in the project atlas, as in Figure 3.12 below.
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Figure 3.12. Three different routes from initiation to completion (2).
The different project strategies and the different routes outlined are an important aspect
when approaching projects from the supply chain and supply chain management
perspective. The different strategies applied and the routes that are outlined, will impact
the demand and supply chains that is necessary to realise the project. This will again
impact the contractual relationships to be developed in the project supply chains. These
are one of the factors that differentiate project-oriented supply chains and supply chain
management from the context of the continuous industry and operations. This will be
further developed through the agile concept outlined in chapter four, and brought
together in the project supply chain management concept in chapter six.
4 Logistics and supply chain management.
4. Logistics and supply chain management.
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54
4.1 Introduction
In the last chapter projects and project management were outlined and discussed. In this
chapter the focus is turned towards the other aspect of this thesis, the developments of
logistics and supply chain management. First the theoretical developments of logistics
and supply chain management as a domain of managerial knowledge are outlined and
discussed. Then uncertainty as it emerges and is handled in logistics and supply chain
management is addressed. Two aspects of manufacturing management theory are then
described and discussed as they are seen as relevant for logistics and supply chain
management in the project-oriented context of developing and operating a project
object. Finally the previous parts of this chapter and the last chapter on projects and
project management are brought together to approach supply chain management in the
project context.
4.2 Logistics and Supply chain management
Logistics management may simply stated be said to be the managerial practice about
bringing something or someone that is needed from the place where it origins to the
place where it is needed, when and in the form it is needed. The term itself originates
from military operations, together with the related terms procurement and supply.
22
Logistics; ’(1) the aspect of military science dealing with the procurement, maintenance, and
transportation of military material, facilities, and personnel, or (2) the handling of the details of an
operation’.
Procure ‘(1) to get possession of: obtain by particular care and effort, (2) bring about’;
Supply: ‘(1) to provide for, (2) to make available for use, (3) the act or process of filling a want or need’.
Documentation of one of history’s first uses of logistics management as a strategic
driving force is given by Engels (1978) in his description of Alexander the Great and
how Alexander planned and conducted his warfare, in the time period 340-323 B.C.
Even earlier than Alexander the Great Sun Tzu a Chinese General, 500 B.C., wrote a
collection of essays named ‘The Art of War’
23
. ‘The Art of War’ has come to be
recognised as the oldest military treatise outlining warfare strategy, and does also
contain aspects of logistics and logistics management. Creveld (1977) gives another
reference to logistics role in warfare, in a later, but longer historical time-perspective.
As part of later military warfare, Pagonis (1992) gives us insight into the role of
logistics and logistics management in the Gulf War often referred to as the largest
logistics operation in history taking the time-frame into account.
22
As defined in the Encyclopædia Britannica.
23
See e.g. http://pubweb.ucdavis.edu/Documents/ROTC/suntzu/szbook1.htm.
4 Logistics and supply chain management.
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55
Commercial use of many of the concepts and methodologies developed within military
applications of logistics goes often under the name of logistics engineering. Logistics
engineering takes a maintenance or operability focus in its approach to logistics. A
definition of logistics engineering is given by the Society of Logistics Engineers, SOLE
(www.sole.org);
‘[Logistics engineering is] the area of support management used throughout the life of the product or
system to efficiently utilise resources assuring the adequate consideration of logistics elements during all
phases of the life cycle so that timely influence on the system assures an effective approach to resources
expenditure’ (www.sole.org).
The other main branch within logistics is named ‘business logistics’. Business logistics
focuses more broadly on the whole supply chain from the initial source to the final
consumer and the elements that have to be managed to secure a correct flow along these
chains to meet service and cost requirements. One definition of business logistics is
given by the Council of Logistics Management, CLM (www.clm1.org);
‘Logistics is that part of the supply chain process that plans, implements, and controls the efficient,
effective flow and storage of goods, services, and related information from the point-of-origin to the
point-of-consumption in order to meet customer requirements’ (www.clm1.org).
The mission of logistics is on the upper-most level service and total-cost (Bowersox et
al. 1997, pp.8-13).
24
The service element is related to availability, operational
performance, and reliability. All three aimed at the ability of getting an object into a
place where it is needed, when it is needed, given that internal and/or external elements
may impact the supply chain and disturb or threaten its ability to meet its service
requirements. The total cost element is related to all costs accrued up through the supply
chain, from ‘point of origin to final point of consumption’. That means the costs
necessary to bring the object from its raw material bases through its development stages
and finally into the ‘hands of the customer’ or ready for final ‘consumption’. The total
cost aspect focuses specifically on elements that may be improved through a holistic
approach to the supply chains. Finally there must be a balance between service and total
costs, given the needs and requirements to be fulfilled.
‘The challenge is to balance service expectations and cost expenditures in a manner that achieves
business objectives’ (Bowersox et al. 1997, p.9).
The contribution and recognition of the importance of managing the external supply
chain has been known and acknowledged all since the days of Alexander the Great
(Engels 1978). As a management topic logistics got foothold after the Second World
War. The period up to the 1970’s was characterised by logistics functions, e.g. physical
distribution, warehousing, and purchasing. Then in the 1970’s and 1980’s the focus
became optimisation of the balance of customer service and operations cost, often
addressed as materials management. The focus was still on internal functions that was
‘optimised’ within their boundaries, e.g. through the use of quantitative calculations for
predicting optimum stock levels. The next logistical period that emerges in the 1980’s
commenced with the focus towards internal integration between company internal
24
‘[T]he logistics of an enterprise is an integrated effort aimed at helping create customer value at the
lowest total cost’ (Bowersox et al. 1997, p.8).
4 Logistics and supply chain management.
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56
functions, as well as the move to integrate, or synchronise, inbound activities with
outbound activities. In this period the integrated logistics concept emerges, which
integrates internal activities from the supplier interface to the customer interface around
the two flows of material and information
25
. The information flow is the holder/carrier
of requirements and demand, originating in the customer interface, to pull the value-
added materials flow from the supplier interface, through the organisation and up to the
customer interface. The 1980’s were as such characterised by internal integration,
integrating internal functions related to the logistics flow, as well as the integration of
the flows of material and information as two mutually dependent flows.
Then in the 1990’s the focus on integration continued, but now the focus was broader,
taking external elements into account, extending the holistic focus to embody both
customers and suppliers as part of the managerial context. The flow aspects was also
extended as in addition to the flows of material and information, the flows of services
and funds became important elements of the logistical flow.
Table 4.1 outlines the developments of logistics management up till now, as well as
suggests a scenario for further development of the logistics management domain.
Table 4.1. Development of logistics’ concepts.
26
Stage 1 2 3 4 5
Timeframe To 1960s 1970s-1980s 1980s-1990s 1990s-2000 2000 -
Concept Warehousing
and
Transportation
Total Cost
Management
Integrated
Logistics
Management
Supply Chain
Management/
Demand Chain
Management
Context
dependency
Management
focus
Operations
performance
Optimising
operations
cost &
customer
service
Tactics/
Strategies
Logistics
planning
Supply Chain
Visions,
Objectives &
Goals
Supply Chain
Context
Mastering
flexibility and
uncertainty
Interconnectedn
ess &
Dependency
Competitive
aspect
Internal
competitiveness
Supply chain
competitiveness
Supply network
competitiveness.
Organisation
al design
Decentralised
functions
Centralised
functions
Integration of
logistics
functions
around logistical
flows
Partnering,
“Virtual”
organisation,
Market co-
evolution
Co-opetition
e-linkages in the
network
25
See e.g. the article ‘Materials logistics management’ by Bowersox et al. in Christopher (1992), pp.38-
48.
26
This table is a revised and extended version of Ross 1998, p.78.
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flows Outsourcing
Insourcing
Logistical
flows
Material Material
(Information)
Material
Information
Material
Information
Services
Funds
Information
Funds
Services
Material
The specifics of this development is further outlined below where the developments
from logistics functions, through logistics engineering, logistics management,
integrated logistics, supply chain management and integrated supply chain
management, up to demand chain management and extended or virtual enterprises are
described.
4.2.1 Logistics functions
To bring goods from the ‘point of origin’ to the ‘point of consumption’ there is a need
for transportation. The demand for goods from one ‘point of origin’ may be
geographically distributed over a wide area. To cover the demand that arises in one area
within the timeframe available before the demand disappears, the transportation time
from the ‘point of origin’ to the ‘point of consumption’ has to be less than the
timeframe of the demand. If the transportation time is longer than this, then a new ‘point
of origin’ has to be located closer to the potential demand area, so that the transportation
time becomes shorter than the timeframe of the demand. This new ‘point of origin’ may
be a warehouse located to be better able to service the customers, i.e. cover the demand.
Thereby a chain of transportation and warehousing is established between the initial
‘point of origin’ for the goods and the final ‘point of consumption’. This may be
referred to as a physical distribution chain and the management of it may be referred to
as it is done in the definition of physical distribution management given by the
American Marketing Association in 1948:
‘The movement and handling of goods from the point of production to the point of consumption or use’
(Robeson 1994, p.4).
Already in this early phase the ‘work of logistics’, as described by Bowersox (1997),
are seen to emerge. The ‘work of logistics’ are defined as the five elements of (1)
network design, (2) information, (3) transportation, (4) inventory, and (5) warehousing,
material handling, and packaging.
Except from physical distribution the work of logistics comprises the management of
materials that are needed to produce or construct the goods. This is often referred to as
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materials management
27
. Now we see two ‘schools’ of logistics emerge. First the intra-
organisational focus, focused at the flow of information and goods related to the
manufacturing of goods, often termed material and production planning and control or
materials management. Secondly, the flow of information and goods between
organisations, or inter-organisational, i.e. inbound and outbound transportation focusing
on the transportation aspects, or physical distribution management. Table 4.2 gives an
overview of how the logistical functions may be grouped into materials management
and physical distribution management, and finally into logistics management.
Table 4.2. From logistics functions to logistics management (from Ross 1998, p.26).
Purchasing Receiving Manu-
facturing
Ware-
housing
Trans-
portation
Demand
forecasting
1
Inventory
mgmt.
Material
handling
Value
added
processing
Finished
goods
inventory
Supply
channel
mgmt.
Order
processing/
services
2 Materials Management Physical Distribution Management
3 Logistics management
Before we move on to the ‘all-embracing’ logistics management, we shall look into
logistics engineering.
4.2.2 Logistics Engineering
As described in the historical retrospect of the reliance on logistics, its origins may be
found within the military context, and later came to be developed and known as
logistics engineering. A well-known textbook within the area of logistics engineering is
‘Logistics Engineering and Management’ written by Benjamin Blanchard (1992).
‘Logistics engineering is defined by the Society of Logistics Engineers, SOLE, as ‘the art of science and
management, engineering, and technical activities concerned with requirements, design, and supplying
and maintaining resources to support objectives, plans, and operations’ (Blanchard 1992, p.4).
Logistics engineering is different from the business or industrial logistics approach in
that it focuses on continued operations of a piece of equipment or a system and how this
is prepared for in the design process of the system. As such logistics engineering is
more concerned with analysis of the system (facilities) capabilities per se, and not so
much the analysis of the supply chains – from point-of-origin to point-of-consumption –
bringing forward the necessary support. There is also a focus today within e.g. the
27
Materials management may also refer to the wider domain of logistics management as presented later.
This view is especially distinctive in the school of thoughts that emerged in the Nordic countries, see e.g.
Persson et al. 1993.
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defence organisations to use and rely more on commercial items, more or less freely
available in the marketplace, and less on specifically designed items only to be used in
defence equipment or facilities. The background for this being the cost position of using
a specific, proprietary supply chain for defence material, versus a supply chain based on
open-market goods and services. This may also be seen in what is emphasised in what
Blanchard (1992) refers to as the ‘language of logistics’
28
. As the ‘language of logistics’
comprise a large number of elements a dedicated, proprietary supply chain will need its
own resources for all elements, in stead of having the opportunity to base and rely on
resources shared with a number of other application areas. This may improve on both
cost and service factors. The downside may be increased vulnerability for the supply
chain as part of defence operations, but that is part of the analysis to address and
evaluate.
The system or facilities is the point-of-consumption or ‘consumer’ in the logistics
engineering approach. The demand side of logistics engineering is to a large extent
given in the design process of the facilities, and one may also say that the demand side
(the demand for support to make the facilities operate and do their mission) is the core
focus of logistics engineering. Of the two logistical mission elements, service and total
cost, logistics engineering focus on both taking the given service level required by the
mission of the system or facilities as a basis requirement. The service level shall secure
the uptime of the system or facilities. The required service-level is given and logistics
engineering must focus on how to make the logistics support cost-effective. The
emphasis on maintaining continuous operations and the required service of the support
‘structure’ is by Blanchard’s (1992) referred to as ‘measures [or factors] of logistics’
where also the order of the factors should be noted
29
. First one should be able to rely on
it (reliability), then be able to fix it and continue operations (maintainability). Total cost
in the logistics engineering approach is seen in the life-cycle perspective while business
logistics sees it in a supply chain perspective throughout the actors in the supply chain.
Balancing investments, i.e. design of facilities, against operational cost is therefore at
the core of logistics engineering.
4.2.3 Logistics management/ Integrated logistics
The mission of logistics management is related to two elements. First is the service
element that addresses the alignment of demand and supply, i.e., to have supply
available to fulfil a given demand within a pre-defined time. The other is cost, i.e., the
28
Blanchard (1992) names the following twenty areas to be part of the ‘language’ of logistics: (1) systems
engineering, (2) concurrent engineering, (3) logistics support, (4) integrated logistics support, (5) logistics
engineering, (6) logistics support analysis, (7) reliability, (8) maintainability, (9) maintenance, (10)
maintenance level, (11) maintenance concept, (12) maintenance plan, (13) total productive maintenance,
(14) supportability, (15) human factors, (16) producibility, (17) total quality management, (18) system
effectiveness, (19) life-cycle cost, and (20) cost effectiveness.
29
Blanchard (1992, pp.26-93) give the following list of measures or factors of logistics: (1) reliability, (2)
maintainability, (3) supply support, (4) test and support equipment, (5) organisational, (6) facility, (7)
transportation and handling, (8) software, (9) availability, (10) economic, and (11) effectiveness factors.
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total cost position of obtaining the alignment of demand and supply throughout the
whole supply chain. Thus, supply chain management is concerned with matching
demand and supply in the most cost-effective way, taking a holistic view of the supply
chain from ’point-of-origin’ to ’point-of-consumption’.
Logistics management is based on the interdependent logistical flows of material and
information. The duality of the material and information flows is in the logistical theory
known as the integrated logistics concept
30
. Among the information and material flows
the information flow is the driver and the one to focus on if one is to improve the supply
chain dramatically. It is often said that ‘the flow of material can not be better then the
flow of information’. This may be true, but the flow of materials is though the one
needed to understand to start creating knowledge. The flow of information may be a
supply chain in itself, e.g. in the supply chains of the financial services where the ‘flow
of material’ or the products, which are financial derivatives, are in themselves
information or virtual/intangible objects.
31
As was shown in Table 4.2 above, logistics management comprises materials
management and physical distribution management. Thereby logistics management
connects the inbound side with the outbound side of the company, and integration is a
key subject in logistics management and integrated logistics. The core of the integration
is to align the inbound side of the company with the outbound side as cost-effective as
possible to meet service requirements. The means to obtain this is intra-organisational
integration along the logistical flows, i.e. the flows of material and information, and
integration of the logistical flows themselves. Integrated logistics is then a concept by
itself, as it presents the core of the logistical thought in aligning both resources and
flows towards the mission of serving a stated need with a given level of service in a cost
effective way.
As the use of information technology and broad world wide networks increases, there
becomes a need to make the information flow more ‘transparent’ so that it is easier for
the actors along the supply chain to make use of information to enhance the physical
supply chain. Transparency of information has raised the possibilities and challenges
within logistics management to a new level. The emergence of ‘e-‘type of solutions is
an example of this.
4.2.4 Supply chain management / Integrated SCM
Supply chain management extends logistics management to comprise external
integration of logistics oriented processes among several individual companies and
organisations that as a whole make up the total supply chain from point of origin to
30
See e.g. Bowersox et al. 1996, pp.33-40.
31
Financial systems are referred to by Meister (1991) as an example of idealised logistics systems.
‘Financial institutions may seem like odd man out in this company [distribution systems], but systems
such as banks and the stock market essentially store and distribute wealth in various forms’ (Meister
1991, p.105).
4 Logistics and supply chain management.
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61
point of consumption. As such supply chain management takes logistical management
and integrated logistics into the inter-organisational context.
‘To be fully effective in today’s competitive environment, firms must expand their integrated behaviour
to incorporate customers and suppliers. This extension, through external integration, is referred to as
supply chain management’ (Bowersox 1997, p.34)
32
.
The term supply chain management has been used at least since 1982, when Oliver and
Webber published their article “Supply chain management: logistics catches up with
strategy” (Christopher 1992). The terms used are both supply chain management and
integrated supply chain management, but they are both inter-organisational concepts
that comprise the same elements. Some authors use supply chain management, while
others use integrated in addition to emphasise the focus on integration.
With supply chain management, i.e. an inter-organisational context, a new competitive
entity is born. The supply chain has been raised as the competitive business entity to
address, where it is the combined resources and competence of the supply chain that
brings competitiveness, not the single firm or business unit.
‘Integrated supply chain management implements a co-ordinated total supply or value chain from
determination of external customer needs through product/service development, manufacturing/operations
and internal/external distribution, including first, second and third tiers customers/suppliers. The objective
is to provide the highest customer service and satisfaction levels and make the most effective use of the
competencies of all organisations in the supply chain. The supply chain, versus the single business unit, is
positioned as the competitive unit.’ (Frayer et al. CLM 1997, pp.346-7).
Copper et al. (1997) and Lambert et al. (1998) published in two articles the idea of
supply chain management extending beyond logistics, and draws the integration aspect
further into that supply chain management is about integration of business processes;
‘Based on the review of literature and management practice, it is clear that there is a need for some level
of co-ordination of activities and processes within and between organisations in the supply chain that
extends beyond logistics. … The integration of business processes is what we call supply chain
management’ (Copper et al. 1997, pp.1-2).
Though, there may be a danger in presenting supply chain management as the
integration of business processes view in that what originated from logistics
management may be led to comprise all aspects of inter-organisational management.
That may contribute to undermine the specific contribution of logistical concepts and
logistics and supply chain management as a domain of knowledge.
The definitions of logistics has though been influenced by the ongoing development in
supply chain management definitions and practice. The Council of Logistics
Management, CLM, changed their definition of logistics management to apply to the
developments of SCM;
32
‘From the perspective of the total supply chain, efficiency is improved by eliminating duplication and
waste. However, cross-organisational co-ordination requires joint planning and relationship management’
(Bowersox 1997, p.26).
4 Logistics and supply chain management.
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Table 4.3. The development in CLM’s definition of logistics management.
Year Definition (see www.clm1.org)
1986 ‘Logistics is the process of planning, implementing and controlling the efficient, cost-effective
flow and storage of raw materials, in-process inventory, finished goods, and related
information flow from point-of-origin to point-of- consumption for the purpose of conforming to
customer requirements’
1998 ‘Logistics is that part of the supply chain process that plans, implements, and controls the
efficient, effective flow and storage of goods, services, and related information from the point-
of-origin to the point-of-consumption in order to meet customer requirements’
The change in CLM’s definition of logistics management shows the transformation of
logistics management from being its own entity, to becoming part of a greater set of
business processes in the inter-organisational context.
The commonalties of the supply chain management literature are by Cooper et al.
described to be:
- ‘It evolves through several stages of increasing intra- and inter-organisational integration and co-
ordination; and, in its broadest sense and implementation, it spans the entire chain from initial source
(supplier’s supplier, etc) to ultimate consumer (customer’s customer, etc.).
- It potentially involves many independent organisations. Thus, managing intra- and inter-
organisational relationships is of essential importance.
- It includes the bi-directional flow of products (materials and services) and information, the associated
managerial and operational activities.
- It seeks to fulfil the goals of providing high customer value with an appropriate use of resources, and
to build competitive chain advantages’ (Cooper et al. 1997, p.4).
As a last comment with respect to the correlation among logistics and supply chain
management, the following quote from Ross (1998) may draw it all together;
‘It has already been discussed that integrated logistics management constitutes the tactical side of the
SCM concept. In addition, there can be no denying that in the emergence of modern logistics can be
found the seedbed of SCM. As the role of logistics has expanded from a preoccupation with warehousing
and transportation to today’s concern with integrating the logistics operations of the entire supply
channel, SCM has been instrumental in merging the marketing and manufacturing with the distribution
functions to provide the enterprise with new sources of competitive strength. In addition, the application
of SCM can be seen in the integration of logistics activities among supply chain partners in the pursuit of
shorter cycle times and reduced channel costs’ (Ross 1998, p.24).
4.2.5 Demand chain management
Within logistics there is a demand side and a supply side. Logistics and supply chain
management comprise both sides in their approaches. As the requests for customer
specific products and solutions increases, and with increased complexity in many
products among others in the consumer markets, as well as logistics and supply chain
4 Logistics and supply chain management.
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63
management concepts being applied to new areas, the management of the demand side
has been elevated. Demand chain management, DCM, is a concept that has been taken
into use to address this, but for practical purposes it may be said to be another name for
supply chain management;
‘Is SCM the best term for this integrated management form? SCM was first proposed in 1982. More
recently, the term demand chain has been suggested to provide additional focus on the customer. Since
the end consumer is the focus of the entire supply chain, all members of the chain are suppliers to the end
user. Hence supply chain may still be the appropriate terminology’ (Cooper et al. 1997, p.10).
If demand chain management is just another name for supply chain management it
could have been presented together with supply chain management and integrated
supply chain management. In this overview of the developments in logistics and supply
chain management it is presented on its own. Demand chain management as a concept
have aspects that are important specifically for supply chain management within the
project context.
The concept of demand chain management was first used by a group of researchers and
academics at the International Institute for Management Development, IMD (see
Vollmann et al. 1995). However, the focus on the demand side, e.g. in production
planning and control, is not new which may be seen through the development of the
quantitative planning and control approach to materials requirements e.g. as presented
in Orlicky (1975). As with supply chain management the objective of demand chain
management is to;
‘develop synergy along the whole supply and delivery chain, from your suppliers’ suppliers, to your
customers’ customers in order to satisfy the demand of the end customer’ (Vollmann et al. 1995 p.2).
The contributions of demand chain management is as supply chain management related
to the logistical mission. Although the service element is left out, the element of value
enhancement is kept, as was seen in the commonalities of SCM literature as presented
by Cooper above;
’The DCM synergies are twofold: a reduction of cost and an increased value of the bundle of goods and
services provided’ (op cit.).
Although demand chain management on first sight may be seen to be very closely
related to supply chain management it addresses an aspect that is worth while to
consider. By addressing the demand it gives emphasis to what is the driver of the supply
chains and the process that lies behind developing and fulfilling that demand, and the
impact that the supply chain, i.e., the supply chain actors, has in that process. Especially
for more complex products, where the design and engineering processes of developing
or customising a product to its need (the demand) is important with respect to the value
that the product will have as part of the customer’s business.
‘The application of demand-driven techniques is most appropriate in situations where requirements are
independent. … to provide maximum response to what occurs in the marketplace …’ (Bowersox et al.
1997, pp. 491-492).
Although this quote is related to the consumer market it may still be appropriate to use
it for the project context. It is in this context that the requirements are most independent,
4 Logistics and supply chain management.
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64
i.e. the ‘one-of-a-kind’, ‘unique’ characteristics of the project object and the project-
oriented context.
The design and engineering processes are the demand generating processes in the
project context of the oil and gas industry. The design and engineering processes have
impact on the supply chains both for fabrication and construction, as well as operations.
The focus within demand chain management on the customers demand side help to
integrate supply chain management more with total quality management, in realising the
product that meets the demand, i.e. the customer’s specifications and requirements, this
is e.g. described in Kanji et al. (1998).
The importance of addressing demand as part of the alignment of demand and supply is
found in another recent supply chain management source (Gattorna 1998). They say
that;
‘Most of the material presented in this book is new and previously unpublished. It reflects next-generation
thinking about management of the supply chain for success. And while there will be many differing
perspectives on the issues, some key themes emerge. Most powerful of them all is the message of
alignment [of demand and supply in the supply chain] – a message about the sophisticated integration of
all the attributes so that the supply chain operates as a single, integrated, cost-effective system’.
Demand chain management is also seen to emerge in another, more agile or fast and
flexile oriented perspective
33
. This approach assumes among others that it should be
possible, through smart use of information technology, to anticipate the customer
demand prior to him ordering. I.e., when the demand arises, the goods or service needed
is in place to cover the demand, without the customer ordering it;
‘A first step in releasing the value locked away in inefficient supply chain practices is to pose the problem
in terms of the "demand chain", say Thomas Vollmann and Carlos Cordon. Demand chain thinking starts
from the customer's needs and works backwards, replacing narrow focus on transport costs with
consideration of how to achieve "mass customisation". This entails ever more precise, swift and efficient
delivery of product/service bundles, which in turn places considerable demands on the information
systems along the chain. But given good management of the right systems, suppliers should be able to
anticipate customer companies' needs and deliver what is needed without the need for ordering. Internet
technology -- via which suppliers can hook up to customers' intranets at very little cost -- can play a big
part in this. Such approaches require companies continuously to transform the way they work together.
Information systems are important but are best seen as a fast follower of this strategic process rather
than as a driver’ (Vollmann et al., 1999).
As the quote above mentions, there are new concepts and strategies that lead, with
technology as an enabler and adding value when being used to realise a strategy. This is
followed up by a quote about ‘hyper-competitive’ markets, where the emphasis is put
on the demand chain to be able to become customer-oriented in a fast and flexible
context.
‘Many manufacturing companies are implementing new information systems to improve their supply
chain management. These projects typically cost tens or hundreds of millions of dollars and take four or
five years to complete. This is fine in moderately competitive markets, says Donald Marchand, but in
hypercompetitive markets, where competitive advantage is sustained by continuous short-term changes,
33
See Financial Times series on ‘Mastering information management’, ‘Information in the
demand/supply chain’, Monday February 22
nd
1999.
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the time and expense are likely to be excessive. Such markets require a "demand chain" approach, which
focuses on fast, responsive interactions with the customer; unlike moderate markets, standardisation of
data upstream -- in financial and inventory management systems, say -- is not the main source of
advantage (and may even be a hindrance as the competitive environment evolves)’ (Marchand, 1999).
As discussed above demand chain management may comprise many of the elements of
supply chain management. It should not be a competing approach to supply chain
management, rather a complementary approach. I.e., the context in which each should
be applied should be governing which approach to use. In the discussion of supply chain
management in the project context, the discussion of the context influence on the choice
of a supply chain or a demand chain approach will be further elaborated. The project
context of the oil and gas industry could utilise both approaches in a constructive way.
4.2.6 Extended or virtual enterprises
The supply or demand chain management concepts, and their ‘integrated’ focus, base
much of their perspectives on what may be termed extended or virtual enterprises.
However, there are, or maybe more correctly should be, differences between the use of
the two terms extended enterprise and virtual enterprise. Both are inter-organisational
constructions, comprising the several organisations taking part in, or being the analysis
focus of, the larger supply chain or supplier and producer network. The differences
between the two should be in their duration and focus. As such a virtual enterprise may
be said to be a sub-set of extended enterprises. Let us use one definition of a virtual
enterprise that we feel addresses this point (Goranson 1999, p.65 and p.66);
‘Our virtual enterprises are opportunistic aggregations of smaller units that come together and act as
though they were a larger, long-lived enterprise. The virtual here is meant to convey that many of the
advantages of a larger enterprise are synthesised by its members. In the most interesting case, this
synthesis is temporary, built around a specific opportunity. … A virtual enterprise is a temporary
aggregation of core competencies and associated resources collaborating to address a specific situation,
presumed to be a business opportunity’ (Goranson 1999, pp.65-6).
Another quote reflecting the difference between extended and virtual enterprises is
given by Jagdev et al. (1998);
‘To some extent, it is a question of semantics, and perhaps the degree of integration between the
enterprises and the objectives of the co-operating partners. One could state that, relatively speaking, in a
virtual enterprise the degree of integration is closer and especially its scope of co-operation is wider. The
extended enterprise can be considered as a special case (and a subset) of the virtual enterprise. Virtual
enterprises usually operate in niche markets, are project based and tend to have, relative to extended
enterprises a shorter life span. They form and reform based on market needs’ (Jagdev et al., p.227).
We see that Jagdev et al. take the opposite position from us. They say that the extended
enterprise is a sub-set of the virtual enterprise, as we said the opposite. We still believe
that the virtual enterprise is a sub-set of the extended enterprise. However, as Jagdev et
al. say, this is (to a large extent) semantics.
Further, Goranson defines four types of virtual enterprises that meet his view and
definition of a virtual enterprise. These four types are given in Table 4.4 below.
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Table 4.4. Four types of virtual enterprises, as defined by Goranson (1999).
Type 1; An aggregation formed in response to an opportunity.
Type 2; A relative permanent aggregation of core competencies that largely pre-exists, and which
is seeking an opportunity.
Type 3; A supplier chain which, while using relatively conventional business relationships,
exhibits agility
34
in responding to market needs.
Type 4; A bidding consortium.
As such an extended enterprise could be said to comprise much of what we think of
when talking about the repetitive, long-term supply chains of e.g. a car manufacturer.
On the other side, a virtual enterprise could also e.g. be seen as the extended project
organisation or the project supply chains of a large-scale development project.
4.2.7 Future developments of logistics concepts
As the historical outline of the developments of logistics management and its
derivatives shows, the trend goes from specific functions that has or had to be
performed and was regarded as part of the overriding term logistics. The conceptual
developments have ended with bringing the mission of logistics into the larger inter-
organisational and integrated context of the supply chain, to be able to analyse the
totality and its inter-relationships and cost position.
‘Originally, logistics had a transportation and warehousing focus, which has gradually evolved into a
“customer driven” integrated management system focus’ (Novack et al. 1995, p.27).
The search has gone from the functional view to the view of competitiveness, where one
seek to develop concepts that contributes to make visible the impact that elements and
concepts from logistics may have on business competitiveness. In addition the
organisational scope and context that is necessary to address and enhance the value that
logistics may bring. In summary one may say that the focus is turned towards the
environment and context, that logistics and supply chain management concepts and
methodologies are to be applied to, as well as the core contributing elements of logistics
and supply chain management in the given environment and context.
34
We will return to the term agility below.
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Table 4.5. Future themes for logistics and supply chain management.
Author Emerging important aspects and elements
Novack et al. (1995) Six emerging themes; Leadership and differentiation, marketing, scientific
management, capability to integrate, ownership of responsibility, and value
enhancement focus internally and externally.
CLM (1998) Positioning, integration, agility, and measurement.
Gattorna (1998) Alignment of demand and supply.
Goranson (1999) The Agile Virtual Enterprise. Risk and reward sharing, light contractual
formats.
As stated above the Council of Logistics Management has contributed to bringing
forward much knowledge and theoretical aspect concerning logistics management, and
primarily business logistics. They have also given their contribution to outlining
emerging perspectives and concepts within the logistics management domain (CLM
1995). CLM outlines four perspectives/concepts as important to be able to keep up with
the challenge of continuous change. The four concepts are; (i) positioning, (ii)
integration, (iii) agility, and (iv) measurement.
One may say that what CLM proposes with their four concepts is to make better use of
some core elements to understand and elevate the role and development that logistics
and supply chain management has to focus on in a context where uncertainty and
change are aspects that have to be dealt with specifically and proactively.
Focusing more specifically on alignment of demand and supply is another emerging
aspect (Gattorna 1998), especially driven by the emerging ‘e-‘type solutions, which will
become ‘natural’ business processes. As well as CLM’s four concepts to survive and
thrive in a changing world, the alignment aspect brings with it a need to better
understand the core drivers or fundamentals that lie behind logistics and supply chain
management. I.e., to know what the strategic basis is, as well as knowing which
concepts and approaches to apply when and where, so that all relevant ‘attributes’ are
integrated to make an ‘optimal’ supply chain.
‘And while there will be many differing perspectives on the issues, some key themes emerge. Most
powerful of them all is the message of alignment [of demand and supply in the supply chain] – a message
about the sophisticated integration of all the attributes so that the supply chain operates as a single,
integrated, cost-effective system’ (Gattorna 1998).
More specifically one may say that the future development of logistics concepts will
clarify and make more and better distinct use of the core concepts of logistics and the
supply chain derivatives. That means that the further developments will address core
concepts used in a context specific way. By contextually dependent is to be understood
that the characteristics of the context will guide the development of specific logistics
management derived solutions and ‘concepts’, based on a set of clearer and better
understood core concepts.
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‘A final, and perhaps the most significant, reason for integration is that the complexity of future logistics
will require innovative arrangements. The challenge for the new millennium is to develop new ways of
satisfying logistical requirements, not simply using technology to perform old ways more efficiently‘
(Bowersox 1997, p.695).
As many developments in the future is seen to be more temporary and flexible in
utilising upcoming, and often short term business opportunities this should also be seen
as an upcoming element of logistics management developments. This is presented
through Goranson’s focus on the agile virtual enterprise (Goranson 1999).
The temporary aspects should open up for bringing aspects and elements from the
project context into developing logistics concepts further. Aspects and elements from
the project context and project management could contribute especially with focus on
the ability to integrate organisation and business in the temporary, short-term
perspective. Integrating organisations and people in the short term view may draw on
both the channel oriented thinking of logistics with the objective orientation of the
project context. Integrating business in the short term may draw on developments from
the project context and project management within e.g. contract strategy and contractual
relationships.
4.2.8 Summary of logistics and supply chain management
Above the development of logistics and supply chain management from its functional
origins to its current status as a management concept has been presented. These
developments have brought logistics and supply chain management back to the strategic
importance as Alexander the Great gave it as a ‘winning strategy’ in his warfare.
Supply chain management has originated from developments within logistics
management. From its origin logistics was concerned with the movement and storage of
goods to bring the goods from the place where they originated to the place where they
were ‘consumed’, this is named the logistical material flow. Later the focus of logistics
came to include the flow of information that underlies the flow of materials, i.e. the
logistical information flow.
The mission of logistics management is related to two elements. First is the service
element that addresses the alignment of demand and supply, i.e., to have supply
available to fulfil a given demand within a pre-defined time. The other is the cost
element, i.e., the total cost position of obtaining the alignment of demand and supply
throughout the whole supply chain. Thus, supply chain management is concerned with
matching demand and supply in the most cost-effective way, taking a holistic view of
the supply chain from ’point-of-origin’ to ’point-of-consumption’.
Logistics management is concerned with obtaining the logistical mission based on
integration of logistical material and information flows and organisational functions.
Integration of flows means to see the logistical flows of material and information as
interdependent processes. Organisational integration means to integrate the
organisational functions into processes supporting the logistical flows, of material and
information. The flow of material was the object of managerial attention, and the cost-
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bearing element, but the flow of information comprised the mechanisms used to initiate
and control the flow of material. In logistics management this is all seen within the
boundaries of a given organisation (firm).
With the move towards businesses focusing on core competence and as the value of
externally procured goods and services increased compared to the value created
internally, the need arose to extend the logistics management into the suppliers on the
inbound logistics side. The importance of conforming to the operations and
requirements of the customer established the need to bring the actors on the outbound
logistics supply chain into developing and improving logistics management. Thereby
supply chain management was developed as a concept.
Supply chain management brings logistics management into the inter-organisational
context by addressing the logistical flows and organisational integration in the
perspective of the supply chain, comprising several independent actors (firms). An
important aspect here is that the supply chain is regarded as the competitive unit, i.e.,
each firm is competing as part of a supply chain and the objective is to establish supply
chain relationships and processes that give the actors an asset compared to other supply
chains. In the theory of supply chain management the flow of services and funds
between the supply chain actors are added as the third and fourth logistical flow. As the
flow of funds comprises much of the incentive mechanisms in making the supply chain
operate it should be given special emphasis. Especially in the project context where the
flow of funds is comprised in contract strategies, payment formats and payment
schedules. Risk and reward sharing schemes are also part of the flow of funds, and are
important elements to obtain supply chain management schemes in the project context.
Demand chain management is the latest term that have emerged in the academic world
of logistics and supply chain management. For most practical purposes it may be
regarded as the same as supply chain management, but as described, dependent on the
context in which supply chain management shall be approached it may be useful to give
special emphasis to demand chain management.
Logistics engineering focuses still more on the supply chains role in the life cycle
perspective of an object. With a basis from defence applications that addressed the
necessary logistical resources needed to maintain the combat responsiveness and
availability of military equipment, it gained attention in industrial context where an
object has to be developed taking the resources necessary to support its operation into
account.
Further developments within the domain of logistics and supply chain management has
been suggested should extend along the lines of focusing more directly on the core,
contributing elements of logistics and supply chain management, and how these may be
differentiated in use to apply to the specifics of given environments and contexts. I.e.
contextually dependent logistics and supply chain management.
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4.3 Uncertainty in logistics and supply chain management
Uncertainty in logistics and supply chain management is primarily related to the
processes taking place between the two logistical ‘end-points’, i.e. the ‘point-of-origin’
and the ‘point-of-consumption’, where most of these processes are related to the
alignment of supply and demand. The demand and supply processes will take different
forms and rely on different formats and technologies when being ‘transported’ through
the supply chains, dependent on the range of manufacturing types from one-off to
continuous process. There is a large span in both volume and part variety among the
different ‘manufacturing’ types, as seen from Figure 4.1.
High
volume
continuous
manufacture
Semi
continuous
manufacture Large
batch Small
batch
One-off
manufacture
Part variety
V
o
l
u
m
e
Figure 4.1. Span in parts volume and variety, dependent on type of ‘manufacturing’.
It will be differences in the demand and supply processes dependent on the
manufacturing type. These differences will also differentiate the type of uncertainties
that may affect the logistics and supply chain processes. Uncertainty in the logistics and
supply chain focus of demand/supply alignment, may also be related to the project
context and the ‘what’s’ and ‘how’s’ of the project space. In such a perspective the
uncertainty with respect to demand and supply may be seen as;
- Demand uncertainty - uncertainty with respect to ‘what’.
- Supply uncertainty – uncertainty with respect to ‘how’.
In addition to these, there are the issue of the meeting point between demand and
supply, i.e. the aspect of time – uncertainty with respect to when. Then uncertainty may
relate to what is needed, how to get hold of it, and when it is needed.
4.3.1 Demand
Demand processes vary from re-ordering mechanisms to replenish standard consumer
goods or industrial parts, to interactive processes aimed at specifying what is needed to
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build complex one-of-a-kind products, e.g. project objects in oil and gas development
projects.
Many of the demand triggering mechanisms in e.g. the fast-moving consumer goods,
FMCG, market today are using point-of-sale type of technologies to catch and use
demand information as close to the end-user, or point of consumption, as possible. As
products in the FMCG market are examples of high volume and semi-continuous
manufacturing type of products, they have a short time-scale from indication of need to
delivery or replenishment. The demand processes in consumer goods markets are more
characterised by which amount, where, rather than what, to which specifications that is
more characteristics for determining the demand in the project context.
‘The future it has been suggested, is a combination of the known and the unknowable. The proportion of
the latter tends to rise as the time-scale extends’ (Rosenhead 1989, p.194).
Uncertainty with respect to the demand in the future increases the longer into the future
we see, or the longer time there is from the initial time a demand is set and until
delivery is done. In the continuous and repetitive type of industries pull-oriented
systems, often enabled through electronic re-ordering or replenishment systems have
short response times, and the question is not so much what to replenish, rather how
much and where to. Another situation is that of the one-off type of manufacturing. Such
products are often large, e.g. like offshore oil and gas development projects, and there is
long development and specification processes that underlay the demand definition of
such manufacturing types. There is a long time-span from the initial demand
specification up to the point when the goods or service has been delivered and the
demand is fulfilled. Throughout the time cycle from the initial demand to delivery, there
is possible to alter the initial demand specifications and thereby initiate change
processes, as is familiar in engineering in the development phase of the project life
cycle.
4.3.2 Supply
Supply processes in the high-volume setting of continuous and repetitive types of
manufacturing often make use of already established supply and distribution processes
and services. The question is often how much to replenish, of which products to which
location. For the one-off situation in the project context the ability to supply, within the
time frame available after the demand is specified, is the important issue. In the
development phase of the project context many suppliers have one delivery, and then it
is often of critical importance for the progress of the project object development that
delivery take place as scheduled, otherwise the whole project schedule may be
postponed. This is often part of the project planning and control activities, to monitor
each supplier to see that their progress is so that they will be able to deliver on or before
schedule.
If there are critical items, but of a nature so that there are several suppliers to choose
among and reasonable cost compared to the value of having it on time, e.g. some
welded steel items, then e.g. more orders have been made than actually needed. An
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example is that when twenty items were needed, five items were ordered from each of
five suppliers. That was an excess of five items, but in the end one of the suppliers were
not able to deliver in accordance with the schedule and the added insurance of having
one supplier in excess proved to be a well suited supply insurance.
Below we will address uncertainty in the logistics and supply chain domain through a
three-staged pyramid approach.
4.3.3 Growing opportunities and controlling risks
When describing uncertainty in the project context the difference and importance of the
two sides of uncertainty, opportunity and risk was stressed. Uncertainty comprised both
a wanted side, given by business oriented opportunities, as well as an unwanted side
given by the presence, occurrence and materialisation of risk elements. Also within
supply chains and supply chain management the two-sided uncertainty perspective
could be useful. The two-sided aspects of uncertainty may be related to the logistics and
supply chain context by Copacino’s (1997) ‘customer service pyramid’. In the
‘(customer) service pyramid’ service elements are divided into three categories and
related to the financial and market share impact of each. The first category is reliability,
which constitute the basis, but that by itself will make you lose in the marketplace. The
second category is resilience that enables you to adapt to the situation and be able to
resume the supply chains mission if brought out of ‘balance’. Resilient aspects will
enable a company or supply chain to maintain its financial and market position. The
third and final category is creativity, where you use new and improved ways of
working, and thereby gain on both your financial and market position.
Table 4.6. The relation between uncertainty and the ‘service pyramid’.
The two aspects of uncertainty The elements of the ‘service pyramid’.
Dealing with opportunities Creativity
Resilience Dealing with risks
Reliability
If we relate the elements of the ‘service pyramid’ to the two aspects of uncertainty, we
may say that the reliability and resilience part is related to risk aspects, or dealing with
such, and that creativity is related to the opportunity side, or the ability to dealing with
opportunities. The ‘service pyramid’ thereby becomes an approach to supply chain
management in the uncertainty of the project context. This may be developed further by
rewriting the ‘service pyramid’s’ classification of reliable, resilient and creative supply
chains and transferring them to the project context. Following the outline of the ‘service
pyramid’, the supply chains related to a project may be divided into three groups:
active, reactive, and pro-active supply chains. The difference between these three
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groups may be said to be that the active supply chains are those that are planned and
executed as planned, while the latter two are not executed as planned, but are
proactively planned for uncertainty situations, i.e. to handle risk or opportunity
elements. The reactive supply chains are activated due to an ‘emergency’ situation, as
contingency for unforeseen events. The pro-active supply chains are also activated
based on an emerging need or request, though they are not initiated due to an
‘emergency’-like situation, but because they may improve time, cost or qualitative
aspects of the project’s product, e.g. as part of design changes. Table 4.6 above then
have to be revised as presented in table 4.7.
Table 4.7. Uncertainty elements and the ‘revised’ service pyramid’.
Uncertainty related aspects Elements of the ‘revised service pyramid’
Focusing on opportunity elements Pro-active
Focusing on risk elements Re-active
A certain world, i.e. no uncertainty. Active
Figure 4.2 juxtaposes Copacino’s ‘service pyramid’ and the ‘revised service pyramid’,
aimed at the project context. The active supply chains may then be seen as the reliability
element, i.e., those supply chains that must be a basis to realise the project’s product.
The reactive supply chains may be seen as the resilient element, i.e., the supply chains
that shall get the project back on track if something happens to the active supply chains,
e.g. a supplier that is not able to deliver. The proactive supply chains are then those
supply chains that will be necessary if the project is to be able to pursue better
opportunities during the project’s life. The proactive supply chains are as such the
creativity that shall enable the project, or its product to gain value above what is
planned.
As shown in Figure 4.2 the two lower groups of supply chains may together be termed
as giving ‘operational robustness’, while all three groups of supply chains together may
be termed as giving ‘business robustness’ or ‘project value robustness’. We have then
ended with this three-class separation of supply chains taking the aspects of uncertainty
into account, and how these may be seen to contribute to robustness on two levels.
A question may then be raised whether this is important for logistics and supply chain
management in the project context? Projects are temporary undertakings, with given
time and cost targets, but with an emerging trend to regard value enhancement
throughout the development phase. To become ‘operationally robust’ there is important
that the processes that are about to realise the project’s product are robust, so that
‘nothing’ may prevent the creation from taking place, and the project’s product will be
realised within time and cost targets. Seen from the perspective of ‘business robustness’
the project shall be value generating, so the upside of uncertainty – the value generating
opportunities – must also be secured within the supply chain approach. The “business
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robustness” perspective may also be seen in the life-cycle perspective of the project
object. The opportunity side of uncertainty is often related to elements that bring about
improved operational performance of the project object, but although the creativity of
the supply chains are aimed at the operations phase they often have to be implemented
in the development phase.
Financial and
Market Share Impact
Gain
Maintain
Lose
Creativity
Resilience
Reliability
Customer Service
Pyramid
Proactive
Reactive
Active
Project Supply Chain
Pyramid
O
p
e
r
a
t
i
o
n
a
l
R
o
b
u
s
t
n
e
s
s
B
u
s
i
n
e
s
s
R
o
b
u
s
t
n
e
s
s
Copacino, W.C., 1997. Supply chain Management: The Basics and Beyond. St. Lucie Press, Boca Raton, Florida.
Copacino Asbjørnslett
Figure 4.2. The customer service pyramid
35
.
4.4 Some lessons from manufacturing
Several management concepts have emerged from the manufacturing domain. Among
others the car manufacturing industry has been central in many of these developments.
That many of these have been regarded as important may be seen in Fortune Magazine’s
rating of the businessman of the century (Fortune 1999), where Henry Ford of Ford and
Albert P. Sloan of General Motors were among the four top contenders
36
.
35
Source: Revised from Copacino, C.W. 1997. Supply Chain Management. The Basics and Beyond. St.
Lucie Press, Boca Raton, Florida.
36
Among Henry Ford’s new ideas and concepts was the concept of mass-production and the assembly-
line to the manufacturing of ‘complex’ products, in Ford’s case the automobile, for consumer use. Albert
P. Sloan is said to have ‘invented the art of organising and managing a large corporation’ through a group
model with a corporate office supporting autonomously operating divisions, co-ordinated through a set of
‘standard procedures’.
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Among concepts developed within among others the car manufacturing industry are the
two concepts lean and agile. We may now raise a question regarding why we address
these, and what development projects can learn from manufacturing. A project, through
its life cycle has phases with different characteristics, from the one-of-a-kind situation,
and rather short and temporary timeframe of development, to the repetitive processes
and longer time frame of operations. The two manufacturing concepts lean and agile
represents, in our view, two opposite approaches to manufacturing. Therefore, within
these two concepts we want to address elements and aspects that could have a
contribution to developing logistics and supply chain management in the project
context.
Central to lean management is the elimination of waste. Thereby the focus is set on cost
effectiveness and cost efficiency. This has particular importance in an operations
setting, were a repetitive setting makes up the ground for continuous improvements.
Central to agile management is mastering change and uncertainty. Change and
uncertainty come by because there are business opportunities that we want to follow,
but following these opportunities mean that we have to take the inherent risks into
account. The supply chains and each actors role in them have particular influence on
how agile we are or may be, and how well we are prepared for mastering this situation.
The project-oriented context of the upstream oil & gas industry has been known for,
especially technological, discontinuous improvements, and agile characteristics are
important in such situations, as well as approaching the extended project organisation as
an agile virtual enterprise.
4.4.1 Lean Production
Lean manufacturing or ‘lean thinking’ was brought to the public by the book ‘The
Machine that Changed the World’ (Womack et al. 1990). The book was one of the
deliverables from the International Motor Vehicle Program. The sub-title of this book
has a quite far-reaching hypothesis as it says that;
‘The story of lean production – How Japan’s secret weapon in the global auto wars will revolutionise
western industry’.
Lean production methods as we have been used to know them were pioneered by
Toyota in Japan, often referred to as the Toyota Production System. However, many of
the underlying thoughts that led to lean concepts originated outside of Japan, and were
imported to and refined in Japan under the build-up of the Japanese industry after World
War II. One of these sources of knowledge was the North American movie industry,
that in the 1930’s was configured much as the industries we learn as lean today;
‘The market was dominated by a few large, stable companies. … They were deeply vertically integrated,
… . Competition among them drove them to what we today call lean manufacturing practices; flat
organisations, pre-qualified suppliers, a version of just in time practices’ (Goranson 1999, p.38).
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Some claim that the success of developing lean concepts and organisational principles
in Japan were due to their special way of organising into keiretsu’s
37
, based on their old
feudal system, but in a ‘democratic’ form and focused on the market pull of business
(Goranson 1999, p.38-9). The extended keiretsu ‘organisation’ could make it easier to
obtain the necessary integration between inter-organisational entities that is necessary to
‘drive out’ as much waste as possible, in the search for cost efficiency;
‘Japanese manufacturers were able to excel because their monolithic, vertically-integrated keiretsu were
able to gather and lock in the majority of suppliers and dictate integration standards to the remainder. It is
a crude way to integrate an enterprise; it trades agility for integration’ (Goranson 1999, p.56).
The thoughts and concepts proposed by lean manufacturing have found foothold in
western industry and are becoming more important as industries mature, margins are set
under pressure, with an increasing pressure for cost effectiveness and efficiency, as
sources of value enhancement. This is reflected in the five lean principles (Hines et al.
2000, p.4);
1. ‘Specify what does and does not create value from the customer’s perspective and not from the
perspective of individual firms.
2. Identify all the steps necessary to design, order and produce the product across the whole value
stream to highlight non value adding waste.
3. Make those actions that create value flow without interruption, detours, backflows, waiting or scrap.
4. Only make what is pulled by the customer.
5. Strive for perfection by continually removing successive layers of waste, as they are uncovered’.
As can be seen from the lean principles, the aim is value enhancement based on cost
effectiveness and efficiency, i.e. using costs effectively and efficiently to enhance value
as perceived by the customer. This should be obtained through waste reductions refined
through continuous improvements. As with the developments within logistics
management lean thinking starts within the confines of the single company, but then
extends into the inter-organisational arena of customers and suppliers, just as logistics
management extends to supply chain management. The term used in lean thinking is not
the supply chain, but the ‘value stream’
38
that is found within the supply chain;
‘In order to go lean, you need to understand customers and what they value. To get your company
focused on these needs you must define the value streams inside your company and, later, the value
streams in your wider supply chain as well’ (Hines et al. 2000, p.4).
What is not perceived to bring value is perceived to be waste. Lean thinking make use
of the seven wastes as defined within the Toyota Production System; (i) overproduction,
(ii) defects, (iii) unnecessary inventory, (iv) inappropriate processing, (v) excessive
transportation, (vi) waiting, and (vii) unnecessary motion. Both value creation and
37
Keiretsu: A network of businesses that own stakes in one another as a means of mutual security,
especially in Japan, and usually including large manufacturers and their suppliers of raw materials and
components. (www.dictionary.com).
38
The term ‘value stream’ is linked to the supply chain and supply chain management in Hines et al.
(2000:2).
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waste is generated through activities performed within a company. Lean thinking
focuses on three types of activities within a company or between companies in a supply
chain; (i) value adding, (ii) non value adding, and (iii) necessary non value adding
activities. Value adding activities are those activities that are perceived by the customer
to give value enhancement to a product or service. Non-value adding activities are
activities that do not enhance the value in a product or service, and are regarded by the
customer as not necessary. Necessary non value adding activities are activities that are
necessary as support for the value adding activities, as the current supply process is
constructed. Hines et al. (2000, p.10) gives some experience based proportions of these
three types of activities to be found within a company.
Table 4.8. Three types of activity with experience based proportions.
Environment
Activity types
Physical product
environment
(e.g. manufacturing)
Information
environment
(e.g. office,
distribution, or retail)
Value adding activity 5% 1%
Non value adding activity 60% 49%
Necessary non value adding activity 35% 50%
An interesting thought had been to estimate how such proportions would be throughout
the different phases of a project’s lifecycle.
0%
20%
40%
60%
80%
100%
I
n
i
t
i
a
t
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o
n
P
l
a
n
n
i
n
g
E
x
e
c
u
t
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O
p
e
r
a
t
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s
A
c
t
i
v
i
t
y
p
r
o
p
o
r
t
i
o
n
s
Necessary non value
adding activity
Non value adding activity
Value adding activity
Figure 4.3. Indicative proportions among lean thinking activity types throughout
project phases.
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Figure 4.3 above show some indicative proportions among the lean thinking activity
types. The proportions are based on the results presented by Hines et al., comparing the
operations phase with the proportions from the manufacturing domain. The figure
reflects that the value adding activities decreases from the initiation phase throughout to
the operations phase. Though, the value adding activities have a rather large proportion
in the early project phases as compared to the situation in the ‘static’ manufacturing
domain. The project is in its early phases very much influenced by the ‘customer’, and
as such value as perceived by the customer is engineered into the project object. It
should also be noted that the ‘necessary non value adding activities’ have a rather large
proportion, though decreasing, in the project phases leading up to operations. This may
be said to be so because in the project front end there are a large number of ‘creative’
and value searching processes going on, needed to support the value adding activities.
The activities related to bringing the value-contributing actors in to organise the larger
project organisation, or project supply chain, may also be regarded as part of the
‘necessary non value adding activities’. Finally one may say that the non-value adding
activities get a larger share of the total number of activities performed as the project
matures into the operations phase. This should not be so as the operations phase is a
context characterised by repetitiveness and has the ability for continuous improvements;
‘Removing wasted time and effort represents the biggest opportunity for performance improvement.
Creating flow and pull starts with radically reorganising individual process steps, but the gains become
truly significant as all the steps link together. As this happens more and more layers become visible and
the process continues towards the theoretical end point of perfection, where every asset and every action
adds value for the end customer. In this way, lean thinking represents a path of sustained performance
improvement – and not a one off programme’ (www.cf.ac.uk/carbs/lerc/about/ leanthink.html).
The outline of lean thinking presented above shows that repetitiveness as the basis for
underlying continuous improvements is central. Authors and researchers working within
the lean thinking concept says that it may be applied to different industries and contexts.
E.g. Womack et al. (1996) uses lean thinking towards the construction industry, but
ends up with trying to make the construction industry into a repetitive context, with the
manufacturing context as its ideal. Though, they address one point that is worth
mentioning;
‘While a few buyers enjoy the complexities of today’s construction industry, including the ability to
change their minds about the details of their building during the six months to a year of typical contract-
to-close cycles, most buyers would like to get exactly the building they need as quickly as possible at the
lowest price’ (Womack et al. 1996, p.291-2).
They here see value creation as minimising cost (or price) and short delivery time from
the demand is defined. For the project context in general, the definition of value is hard
and is often harder when it has to be converted to a specific demand that shall create and
deliver the value. A central aspect of the demand process, and its search for ‘value’ is
shown above with the point about the lead time of the ‘contract-to-close’ cycle and the
customer’s ability to influence the demand process throughout this cycle. For the project
context though, the central aspects of ‘business opportunity’, ‘temporarily’,
‘uniqueness’ and ‘one-of-a-kind’ could stress or stretch the lean concept. Another
concept form the manufacturing domain is based on agility and is termed agile
manufacturing. The relationships and differences between lean and agile have been
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debated among researchers and practitioners, and we will revert to that after our outline
and discussion of agility below.
4.4.2 Agility and Agile Manufacturing
Agility or the quality of being agile is often regarded as a quality or characteristic of a
person or an animal;
Agile: Having the faculty of quick motion in the limbs; apt or ready to move.
Agility: The quality of being agile (Webster's Revised Unabridged Dictionary (1913), web1913).
As agile and agility often is referred to as aspects characterising a person or an animal,
it may both be with respect to physical, as well as mental capabilities. Within the project
context it is approached with respect to organisational and inter-organisational aspects.
Agility is in itself not a step on the development ‘ladder’ of the domain of logistical and
supply chain management, though it has great influence on and similarities with
developments within the domain, and is therefore presented here.
Agility and agile manufacturing came to be known after the publication in 1991 of the
U.S. report 21
st
Century Manufacturing Enterprise Strategy: An Industry-Led View. The
report was one of the deliverables from an industry-led U.S. Presidential Commission
established to address how to make U.S. industry regain its global competitiveness. As a
result of the report the Agility Forum was established with an aim to;
‘Facilitate the return of the U.S. industry to global competitiveness through the adoption of the “agile”
organisational paradigm’ (Preiss, 1995).
As an organisational paradigm agility is related to the inter-organisational context, and
is related to the product’s lifecycle from design through to final disposal;
‘Agility is an umbrella term. It extends over a broad spectrum of correlated developments that together
define a comprehensive change in the prevailing system of competition. …At the level of design, agile
competition is characterised by a holistic methodology that integrates supplier relations, production
processes, business processes, customer relations, and the products use and eventual disposal’ (Goldman
et al. 1995, p.xvi).
This approach to agility within the design element makes it applicable to the
development phase of, and a life cycle approach to the project context, as it takes a
holistic approach both to the supply chain and the life cycle. In an alliance contract,
both related to the development and operations phase, both the alliance and agile
organisational paradigm have as a core the holistic perspective on competition that
involves all actors in a common competitive unit. This is similar to the supply chain as
the competitive entity. As in an alliance contract, based on risk- and gain-sharing
mechanisms, the first principal element of agility is related to ‘enriching customers’.
Participants gain a ‘reward’ for delivering value to customers, where in the project
context the ‘customer’ may be seen as the owner of the oil and gas resources – the basic
business opportunity. Agility has further relations to the project context in that it is
based on organisations coming together and creating an inter-organisational
construction, or a virtual enterprise, adapted to exploit a temporary business opportunity
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(an entrepreneurial approach), i.e. new, emerging business opportunities implies the
establishment of a new, temporary inter-organisational entity that will pursue and
exploit the opportunity;
‘Agile involves the ability to optimise resources within, and to get external resources integrated into, your
enterprise to be able to respond to an unanticipated spectrum of product needs [the opportunity]’
(Goranson 1999, p.90).
As agile manufacturing is based on temporary inter-organisational constructions, in a
setting characterised by change and uncertainty, where the organisational construction
will change over time, dependent on business opportunities, an important ability is the
ability to get new actors into the temporary ‘virtual enterprise’, make use of their
value contribution, and then end the specific relationship for the specific situation;
‘The important differentiator is the ability to develop new relationships with suppliers and customers’
(Preiss 1995-A, p.9).
Just like a project organisation the agile virtual enterprise has the up-front
understanding of ‘working relationships coming to an end’. Maybe not directly with a
planned end date as a project, but the awareness and preparedness that closing a
relationship is a natural end;
‘A virtual enterprise is an agile virtual enterprise if it is formed with the intent of dissolving or quickly
and cheaply reconfiguring in direct response to a change in the opportunity’ (Goranson 1999, p.68).
We see here that the emphasis is on the ability to develop new relationships, i.e. the
ability to initiate and operate in a project context. The project context is also
characterised by uncertainty, which leads to changes, due both to materialisation of
risks and opportunities. Mastering of change and uncertainty is the second principal
element of agility, and by some regarded as the original idea of agility.
‘[T]he original idea of agility: The ability to engineer your enterprise to respond well to unexpected
change, to even leverage that ability as a competitive strategy. Engineering is a key term here, since it
implies formal management principles rather than vague concepts’ (Goranson 1999, p.xiii).
Change and uncertainty has to be both acknowledged and dealt with. In the oil and gas
industry exploitation of given oil and gas resources is the business opportunity, and
several organisations have to come together and blend their competence to develop and
operate a project object that can exploit the oil and gas resources profitably. In agility
terms it relates to the third principal element of agility – ‘co-operating to enhance
competitiveness’. The inter-organisational project organisation is ‘constructed’ to
leverage the competence of each individual organisation, and as such becomes a
‘knowledge driven enterprise’, which is the fourth principal dimension of agility. The
third and fourth dimension of agility brings us back to the virtual enterprise;
‘A virtual enterprise is a temporary aggregation of core competencies and associated resources
collaborating to address a specific situation, presumed to be a business opportunity’ (Goranson 1999,
p.66).
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Table 4.9. The four principal elements of agility (Preiss, 1995).
Enriching customers –
Products vs. Solutions
In an agile world, customers pay either a fee for skills, materials and
a modest profit for products, or they pay a percentage of the
perceived value for solutions. Companies adopt a value-based
strategy to configure products and services into solutions which
enrich their customers.
Mastering change and
uncertainty – Entrepreneurial
organisation
Agile competition is based on the ability to thrive on change and
uncertainty. Companies use an entrepreneurial organisational
strategy, which can respond more quickly than a hierarchical
structure to changing conditions.
Co-operating to enhance
competitiveness – Virtual
organisation
In an agile organisation, co-operation enhances competitive
capability. Companies use the virtual company model inside and
outside to share responsibility and enhance co-operation
opportunistically across organisational lines.
Knowledge-Driven Enterprise:
Leveraging the impact of
people and information
In an agile environment, organisations sell skills, knowledge and
information over time. Companies make investments to increase the
strategic impact of their people and information on their bottom line.
As many of the developments within logistics and supply chain management, agility is
based on information technology as an enabler. The management of information
therefore becomes an important asset, and may be regarded as objects to be developed,
stored and put into use. In relation to the manufacturing context where work-in-process,
WIP, is used to secure and improve the material flow, the information counterpart is
information-in-process, IIP;
‘For an agile system WIP (work-in-process) is not required, but IIP (information-in-process) is required
everywhere. … An agile system is coupled by information (IIP), not by material WIP’ (Preiss 1995-A,
pp.11-12).
When information-in-process is used in the flow of information as work-in-process in
the material flow, it may improve the organisation’s ability to respond. A relation to the
material flow may be the bottleneck principle
39
, where WIP should be stored before
bottlenecks to keep them working, and thereby not influenced by distortions elsewhere
in the system that would have a negative impact on the systems time response or
throughput. In the agile domain, IIP may be used to make the system time responsive.
‘In agile, or dynamic, coupled systems, the capability for time response is a critical competitive factor’
(Preiss 1995-A, p.13).
As a relation to the material flow, information could be stored at locations in the supply
chain, where it made best use to facilitate timely response, when response where
wanted, i.e. to best align supply and demand. Preiss (1995-A) addresses this in relation
to the scheduling problem in the inter-organisational supply chain;
39
See e.g. Goldratt and Cox (1984), Goldratt (1990-A) and Goldratt (1990-B)
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‘The scheduling problem in a total value-adding chain includes two interesting decisions. The first is; up
to which point in the chain to bring catalogue products and at which point to invoke customised work.
The second is; if a time-dependent response is required, where to locate inventory and surge machine
capacity and how the payment for these should be equitably shared among all the companies in the value
adding chain’.
With respect to the inter-organisational project supply chains there will be points in the
chains that could be referred to as project de-coupling points, i.e. points above which
the ‘product’ is specific and ‘unique’, and below which standard components are
brought forward. Preiss (op cit.) does also refer to another important aspect in such agile
virtual enterprises related to distribution of costs and financial gains between the actors
involved. This is what we know from the project context as ‘risk/reward’ sharing
schemes.
Agility is also found in the domain of logistics and supply chain management. The
Council of Logistics Management, CLM, defined agility as one of four core logistics
competencies to substantiate ‘world class logistics’. The other three competencies were
positioning, integration and measurement, though agility was regarded as the ‘essential
end state’ of logistics performance;
‘Thus, it is safe to conclude that agility is the essential end state of world class logistics performance. …
Agility is the competency that sustains world class performance over time [author: i.e. the ability to
change to pursue new, temporary business opportunities]. It is extremely important to stress the inter-
connectiveness between agility, positioning and integration’ (CLM 1995, p.185).
CLM uses three terms to describe agile capabilities; relevancy, accommodation and
flexibility. These are other terms than is used in the manufacturing context to describe
agility. The terms as defined and used by CLM, and their respective logistical drivers
are presented in Table 4.10.
Table 4.10. Three agile capabilities, (CLM) and their relation to the project context.
Capability Relevancy:
The ability to maintain focus
on the changing need of
customers.
Accommodation:
The ability to respond to
unique customer requests.
Flexibility:
The ability to adapt to
unexpected circumstances.
Drivers Customer cocooning
Dominant logistics franchise
End-casting
Order-to-delivery alignment
Synchronisation
Cross-shipment
Routinization
Postponement
Time
Form
Relation to the
project context
The demand processes and
proactive demand chain
management.
The ability to align the
demand and supply chains
The ability to deal with
changes due to emerging
opportunities and risk.
Service
pyramid
Resilience and reliability. Creativity. Resilience and creativity.
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The agile capability flexibility is related to mastering the change and uncertainty
element of agility.
‘Flexibility concerns a firm’s [author: maybe more importantly a supply chain’s] capability to encounter,
resolve and, when appropriate, exploit the unexpected emergency or opportunity that confronts logistical
operations’ (CLM 1995, p.187).
Above we have presented some aspects of agility that we mean have relevance for the
project context, and logistics and supply chain management within that context.
Especially for the development phase we mean that agility is important as a concept,
and we will revert to that when developing the project supply chain management
concept in chapter six. Now we would like to address some of the differences between
the two concepts discussed above, lean and agile.
4.4.3 Lean versus agile
As part of developments within the manufacturing domain, agility follows the trend
from mass production and lean manufacturing. Mass production was suitable in a
competitive and market situation where there was a demand for common, standardised
products. Special requests where few and could be covered by small craft shops. Each
actor could in this setting act as one independent actor. Lean systems came into order in
the mass production setting when outsourcing, and thereby a larger dependency on
external organisations to produce standardised products came into place. Lean systems
have to be cost-effective and not least cost-efficient. Still, in lean systems the demand
(business opportunity) is more or less given in a longer-term setting, and the system
may opt for continuous improvements. In the lean system the actors are linked and act
as one competitive unit, as e.g. in the supply chain management context. In the agile
setting the business opportunity is shorter-term, temporary with not the same possibility
and rationale for continuous development, it should be ‘right the first time’. Cost
effectiveness and efficiency is still important, but has to be obtained through
discontinuous improvements. The senior vice president of procurement in a larger EPC
contractor said it like this;
‘Developments and improvements must be made between projects. We have to go through discontinuous
improvements both with respect to technologies applied, products developed, and work processes. …
This includes establishing new relationships and developing old ones, and it all must be right the first
time out [i.e. when a new project (business opportunity) shall be executed]’.
The actors are also in the agile setting linked together, but in a dynamic context they
have to be able to re-configure themselves to meet new demands, which may involve
taking new actors into the competitive unit, as described above from the project context.
Table 4.11 outline some differences between mass, lean and agile systems, and may be
used to outline the contributions for supply chain management in the project-oriented
context.
The characteristics of the agile context given above are to a large extent applicable to
the project context and specifically for supply chain management within the project-
oriented context. Work processes as outlined above have to be formed and managed as
relationships among several organisations. Developing inter-organisational relationships
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needs time and needs managerial attention. A main difference between lean and agile is
found with respect to how such relationships are regarded;
Table 4.11. Mass, lean, and agile work processes (based on Preiss 1995-A, p.15).
Type of system Mass Lean Agile
Characteristic Uncoupled, static Coupled, static Coupled, dynamic
Internal
differentiating
attribute
Every station a
statistically random
constraint
One permanent constraint Never any constraining
resource
Operational
management goal
Utilisation factor of each
individual resource
Utilisation of the whole
plant = utilisation of the
constraining resource
Able to exploit change as
opportunities.
Material inventory
location
Everywhere To serve the constraint None – all make to
customer-individualised
order
Information
inventory distribution
Local Across processes Wide variety of
unpredictable subjects in
the Information in Process
(IIP)
Knowledge required Local Only of given processes Entrepreneurial turning of
information into profitable
knowledge
Executive
management goal
Utilisation of each
individual resource
Utilisation factor for plant
seen as a whole
Be a permanent part of the
customers’ customer
satisfaction process
Interactions with
customers’ and
suppliers’ processes
None – connection is via
product only
Processes linked in static
business relationships
Processes linked in easily
changeable relationships
‘Agility has been expressed as having four underlying principles; (i) delivering value to customers, (ii)
being ready for change, (iii) valuing human knowledge and skills, and (iv) forming virtual partnerships.
Of these, the first three can be found within the operating philosophies of companies generally thought to
be “lean” … The fourth principle is different. In fact, agile and lean take quite different attitudes towards
partnerships, and here is where an important research and practical challenge may lie. Companies like
Toyota stress how long it takes to develop effective partnerships for procurement of complex automobile
assemblies. Relationships of 20+ years are typical. In the world of agility, where such partnerships are
predicted to be of dramatically shorter duration, extra attention will have to be paid to launching and
maintaining supplier relationships’ (Whitney et al. 1995, pp.2-3).
Table 4.12 below gives a summary of remarks given by Goranson (1999) on how they
see the differences between lean and agile (the remarks is drawn from several, different
pages in their book).
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Table 4.12. Differences between lean and agile as seen by Goranson (1999).
Lean Agile
Lean is a state Agility is strategic, system-wide set of capabilities
Lean means integration Agility means loose couplings
Lean optimises processes Agility optimises the ability to adapt processes to
new conditions
Lean focuses on profitability today Agility focuses on profitability tomorrow
Lean is static Agility is dynamic
Lean means just-in-time-manufacturing Agility means just-in-time-organisation
Lean means flat organisations Agility means virtual organisations
Lean means a decreased supplier base Agility means a larger set of potential suppliers in
a loosely coupled network
Finally we would like to summarise the differences between lean and agile as we see
them in Table 4.13.
Table 4.13. Some differences between lean and agile.
Lean Agile
Going concern, long term view Temporary, shorter term view
Improving business Realising business – business opportunities
Continuous improvements Discontinuous improvements
Developing supplier relationships Launching and maintaining supplier relationships
‘Reactive’ – develops, then improve Proactive – develop/improve concurrently
Extended enterprise Virtual enterprise
Improving over time First time capability
Cost efficient Cost effective
Then, after we now have outlined elements related to the development of logistics and
supply chain management, and related issues, we will now look into how this has been
addressed in theory related to the project context.
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4.5 Logistics and Supply chain management in the project context
There are supply chains in many environments and supply chain management is
conducted within several contexts. Supply chains may be found in the financial
marketplace, where financial information is moving the goods, i.e. financial objects or
derivatives. Supply chain management may also be applicable public services, e.g. in
healthcare. The patients may be perceived as the ‘material’, information regarding the
criticality of a patient’s illness may state the ‘delivery’ time and the demand for support.
Services may be perceived as the personnel attending the patients (i.e. physicians,
nurses, etc.), and funds, e.g. through public funding, membership or insurance, may
decide where, when or whether you are treated.
Logistics and supply chain management are though most known from the industrial
context where it varies from highly repetitive, high-volume supply chains found in the
consumer goods markets, to the one-of-a-kind project context of engineering,
constructing and operating large-scale, complex objects (i.e. industrial plants, offshore
installations, etc.). In the supply chains of the development phase in the project context,
engineers try to establish the demand in developing an object that is suitable to fit a
purpose in a ‘best possible way’.
In the project context large amounts of information, people, equipment and materials, as
well as several fabrication and construction sites are part of the supply chains that
realises the project’s product. They are themselves actors in the supply chain and part of
the logistics processes. Logistics and supply chain management is not an explicit project
process in itself or part of project management as it is published today, e.g. in the
Project Management Institute’s knowledge area. This is so although several experienced
professionals and authors within the project management domain have pointed to its
importance, and that it should be given due attention in accordance with its importance
for project realisation, both with respect to schedule and cost impacts.
40
Project management has as a domain of knowledge developed, often based on using
concepts and methodologies from other domain of managerial knowledge. Hetland
(1999) says it like this;
‘On good and bad we may say that project management is a subject that draws extensively on other
subjects. The development of project management over time will therefore be extensively influenced by
development in other subjects. The choice of other subjects is although not given once and for all. What is
perceived as currently relevant is evaluated by active project management environments’.
An example that is relevant in this context is the focus that CRINE Network give supply
chain management as a competitiveness factor for the British oil and gas industry.
Below an outline is given of earlier approaches to logistics and supply chain
management in the project-oriented context, before a basis for supply chain
management in the project context is outlined.
40
Both Kerridge (1987) and Harrison (1992) points to the impact that materials management may have on
schedule and cost in realisation of the projects product. Harrison (1992) points further to the mismatch
between its importance and the attention it is given within project management.
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4.5.1 Earlier approaches
Logistics and supply chain management related to the project-oriented context has been
addressed by several authors approaching the topic from different angles, and with
different objectives. Logistics and supply chain management in the oil & gas industry
(Silver 1986, 1988, CRINE 1998 & 1999, Burton et al. 1999), materials management in
construction projects (Kerridge 1987, O’Brien 1995, Stukhart 1995, CII 1988),
materials management as part of project management (Harrison 1992, Lock 1994,
Rolstadås 1997), within the landbased construction industry (Byggforskningsrådet
1991, SBI 1995, Pahkala et al. 1997), partnering and alliances in the oil and gas
industry (Schultzel et al. 1996, Vollmann et al. 1995), benchmarking of oil & gas
procurement functions (CAPS 1997), partnering and total quality management
(Oberlender 1993, Kanji et al. 1998), and project-oriented supply chain management
(Asbjørnslett 1998).
Issues related to logistics and supply chain management has been addressed within the
oil and gas industry for some year. Silver (1986 & 1988) address materials management
(as he calls it), or logistics or supply chain management as it would have been called
using current terminology, to the different phases of large-scale construction projects.
Through several case studies and question based interviews he finds out how materials
management is perceived and its different aspects dealt with, within the organisations,
owners and contractors, involved in such large-scale construction projects. Based on his
findings Silver outlines some concerns, suggestions for improvement, and potential
research topics. All in all Silver touches into several aspects that make logistics
management within the project context different from the continuous supply,
manufacturing and distribution context. Among the aspects that Silver raises we find
uncertainty and the design change process, responsibility along the supply chain,
degree of reactive versus proactive attitude towards logistics and supply chain
management, early involvement of logistics functions and suppliers, and the long-term
perspective of supply chain relationships versus the one-of-a-kind context of projects.
Though Silver touches into many interesting aspects and elements, he raises more
questions than attempts to address approaches to manage the consequences involved in
the questions raised. Silvers research report and article is the first one that publishes a
search into the relationship between logistics management and the project context.
A new initiative within the area of supply chain management in the oil and gas industry
was presented in a newsletter from CRINE Network (CRINE 1998), they state that
supply chain management developments within the British oil and gas industry is their
primary focus element for a year to come. The aims they outline are related to
awareness, assessment, and implementation (CRINE 1998, p.3).
‘The focus of CRINE’s effort is specifically to bring about: ‘(i) Broad awareness of the potential
contribution of SCM to increased effectiveness and efficiency; (ii) Focused awareness for selected
companies; (iii) An assessment of where the industry stands yielding identified and prioritised
opportunities; (iv) The identification of projects to address these main opportunities; (v) The delivery of
means and training for the industry to apply SCM techniques.’
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In sum the aim is ‘to have a programme that gets companies beyond awareness and into
improvement for their own activities, both internally and with their contractors and
suppliers.’ (CRINE 1998, p.3). A first deliverable from this initiative was a booklet
titled; ‘How Supply Chain Management Works’ (DTI 1998) that outlines how supply
chain management is approached in different types of industries, and what is
characteristic of and the main focus to achieve through supply chain management
approaches in these industries. CRINE Network further published the results of a study
about the contemporary practice of supply chain management in the British oil and gas
industry (CRINE 1999-A) and a supply chain improvement methodology (CRINE
1999-B). All of CRINE Network’s publications are good in bringing understanding of
what supply chain management is about, as well as building awareness around current
aspects and challenges as perceived by the industry. Their methodology brings a good
balance between the context (the demand and supply market and its actors and
stakeholders) and approaches to gain knowledge about your own supply chain and your
part in the bigger project-oriented supply chains. All in all CRINE Network manages to
raise important issues of supply chain management to give raised awareness as well as
means to approach it, to build competitive advantage for the British oil and gas industry.
A later article (Burton et al. 1999) approaches supply chain management or strategic
supply initiatives in the oil and gas industry and the relation these have on business
success and shareholder returns. Burton addresses several aspects and elements that are
regarded as strategically important by the industry actors. He then compares the
applicability of these elements as strategic drivers with the level of implementation that
these elements have reached in the companies studied. They show that there is a
discrepancy between what is perceived to be of strategic applicability and what is being
implemented, together with what is perceived to be the greatest barriers to achieving the
intended strategic supply initiatives. The article gives a good impression of what is
perceived by the industry to be of value to pursue, but also the current status and what is
keeping the industry from reaching the potential benefits inherent in a strategic
approach to procurement and supply chain management.
If we move to the functional area of materials management in construction projects we
find that this is an area that has been addressed thoroughly from several sources.
Kerridge (1987-I & -II) outlines in two journal articles a guideline perspective to
materials management within the context of large-scale construction projects. The
articles are planning and control oriented and relate to the project control domain, and
are limited to functional relationships internally in the executing company (the
contractor) of engineering, procurement, and construction contracts. As such the
emphasis is on internal dependency and integration,
41
and not on external integration
and supply chain management aspects.
During the four years 1985 through 1988 the Construction Industry Institute, CII, an
interest organisation of the North-American construction industry, conducting their
work based on industrial and academic participants, undertook a research programme
into materials management in the construction industry. The research was published in
several publications, where the two most comprehensive are CII (1988) and Stukhart
41
The term ‘internal integration’ is not used in the articles.
4 Logistics and supply chain management.
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89
(1995). Stukhart was the lead researcher, and involved in all CII-internal publications
from the research. The publications give a deep and thorough presentation of the
functional elements within the subject. On the other hand the publications do not take
the supply chain management perspective nor do they address the specific
characteristics related to the project context.
Within project management literature the area of logistics management have achieved
some attention, though from different aspects and with differing thoroughness. Harrison
(1992) points to the importance of the subject and that it receives far less attention than
it should be given due to its importance. Besides pointing to the ‘fact’ that logistics
management is important and outlining the interfaces between a materials management
system and other project management systems, Harrison does not give any approaches
to enhance the subject as part of project management. Lock (1994) look into some
functional elements of materials management – none of which addresses the project’s
dependence on its supply chains. The focus is introvert, which may be correct if one at
the same time relate the internal aspects and functions to the whole of the inter-
organisational supply chains bringing forward the project’s physical resources.
Rolstadås (1997) addresses procurement, contract administration, and materials
management, but as the rest of the project management literature Rolstadås present an
introvert and classic project control focus. The focus is on the internal functional
process and on the formal process between owner (buyer) and contractor (seller) and the
different contractual forms that may be built between the two. Supply chain related
aspects is nor a subject in Rolstadås’ book.
Within the construction industry in the Nordic countries some research has been
undertaken related to logistics management in construction projects. In Sweden
Byggforskningsrådet (1991) published the results of a research effort aimed at testing
how manufacturing based approaches to and methods of logistics management (material
flow) could be transformed to suit the needs of the construction industry. The rationale
for the research was the improvements obtained within the manufacturing industry and
the possibility of obtaining the same standards within the construction industry. The
publication of the research points to the elements of integrated logistics and the need to
manage down through the different actors of the supply chain.
42
The research report
does both in approach as well as in its outline reflect that an effort is made to adjust
concepts and methods from industrial logistics management to the material flows of the
construction industry. This may also be expected as the research and report was outlined
by a logistics specialist from the car manufacturing industry.
A later Danish report SBI (1995) takes a broader view of logistics management within
the construction industry. It does not take a certain approach to it as
Byggforskningsrådet (1991) did, but in stead tries to define what logistics management
is about and which experiences has been drawn from logistics management efforts
within the construction industry. The objective is to inspire to a continuing effort to seek
improvements through logistics management in the construction industry. The report
focuses on establishing a common understanding of what logistics management is all
42
The term ‘supply chain’ is not used directly in the report, but the organisational construction they
describe is an inter-organisational supply chain.
4 Logistics and supply chain management.
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90
about, and how (on an overall level) it may be used to enhance the construction
industry. Logistics and logistics management is presented as a holistic perspective on
the material flows of the project. It is also interesting to see that they focus on the
impact and importance that the supply chains have on the realisation process of the
project’s product, and that they see the project’s product as the ‘consumer’ in the supply
chain process.
43
The report does also point to the importance of the relationships
between the actors in the supply chain to obtain good logistics management, or supply
chain management that may be a more correct term in this respect. They also address
that the total cost aspects of logistics management is related to finding and eliminating
non-value adding cost elements down through the supply chain, in stead of chasing best
prices in an adversarial buyer-seller relationship. All in all a report that both comprises
good logistics management as well as relating it to the specific characteristics of the
project context and the construction process.
Through a case-study based research O’Brien (1995) addresses the relationships in the
trade-off between transportation, inventory and production costs in the supply chains for
a small construction project. Among other aspects he raises the importance of
uncertainty in timing on supply-chain costs and performance, and the impact this has on
a project specific analysis versus a manufacturing analysis in a continuous
manufacturing context. Thereby O’Brien raises the difference and difficulties that lies in
using lean manufacturing oriented concepts like just in time, in a non-repetitive context
like the one found in project context.
The term ‘construction logistics chain’ is introduced by Pahkala et al. (1997) as
partnering in a supplier network, consisting of contractors, sub-contractors and
suppliers. The focus is partnering within the supplier and contractor network as an
aspect brought forward with the total-quality movement of the eighties. Although the
article does not directly state logistics management or supply chain management
specifically the context of their research are construction logistics, and they bring
forward the basis for externally integrated logistics management within the construction
industry, i.e. construction supply chain management.
Vollmann et al. (1995) introduces the concept ‘demand chain management’ to focus
specifically on buyer-supplier relationships. They relate the concept demand chain
management to an offshore oil and gas development project that was executed as an
alliance between the operator, contractor and a few suppliers. As they use the concept
demand chain management they relate it to the design, planning and development
processes that were undertaken by the alliance partners in developing the project object
and the supply chain to realise it that in a best possible way met the operators demand.
As such they compare the alliance with a demand chain approach to the project, which
resulted in improved cost and schedule parameters, compared to a comparative project
undertaken with ‘arm-length’ relationships with the suppliers. Partnering as it is used in
this article is often termed horizontal partnering to reflect the horizontal partnership
43
They do not say specifically the project’s product is the consumer, but they say that the materials
brought forward through the supply chains are ‘consumed’ when installed into the project’s product at the
construction site.
4 Logistics and supply chain management.
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91
among the top-level tiers of the supply chain, a partnership aimed at the demand
processes, more than the supply processes.
Another aspect to partnering is presented by Schultzel et al. (1996). Here it is supplier
partnering seen from an EPC
44
contractor’s point of view, i.e. partnering down into the
contractor’s supply chain. It is an approach that focus on total installed costs, and how
these may be reduced through multi-project acquisition agreements that brings
repetitiveness into the supply chain relationships of the contractor. Again a lean
manufacturing oriented approach. It also shows the contractor’s reliance on its lower-
tier supply chain actors in becoming a competitive supply chain to realise solutions for
the contractor’s customers;
‘In summary, the program to reduce TIC [total installed cost] and schedule by quantity buying of
common commodities through establishing strategic multi project aquisition agreements (MPAA’s) has
demonstrated that it can be extremely successful. The partnering agreements have all of the necessary
elements – vision, mission, trust, open communication, mutual benefit, and continuous improvement –
that one would find between two parties, and in this case it was the vendors who became part of an
alliance that would help Bechtel with its clients’ (Schultzel 1996, p. 137).
This type of partnering is often termed vertical partnering as it goes down into the
supply chain, focusing more on the supply side than on the demand side.
As with all managerial aspects there is a question to quantify and show results of
improvements made. Benchmarking is a technique used extensively in different
industries to compare one’s results with the best or average in the industry. CAPS (1997
I & II) show results of a benchmarking effort undertaken in the oil and gas as well as
the construction industry. The benchmarking parameters are related to purchasing
activities and costs.
Total quality management equalling supply chain management in the project context
may sound like odd man out. Kanji et al. (1998) presents an approach where supply
chain management is presented as a ‘facilitator’ of achieving the goals of partnering,
and at the same time be focused on the aims of total quality management. This approach
is quite interesting as it brings with it the merging of ideas and the focus that has to be
obtained in a partnering construction. Especially in the development phase of a project
object to develop an object that fulfils the functional specifications and requirements of
the owner, and at the same time does it based on the principles of total quality
management to make an object without ‘extra fat’. The last is an important requirement
in the partnering and alliance concept, as the incentive mechanisms are often based on
some sort of risk-/reward-sharing mechanism between the owner and the other actors in
the alliance (partners).
An early version of the concept presented in this thesis, project supply chain
management, was presented at a doctorate workshop arranged by the European
Logistics Association, ELA, June 10-12, 1998 (Asbjørnslett 1998-A). A presentation
(Asbjørnslett 1998-B) based on this article and further developments in the author’s
work was given after invitation at the 15
th
German Logistics Congress, October 22
nd
44
EPC = Engineering, Procurement and Construction, i.e. a contractor able to and committed to perform
both engineering, procurement and construction of a project object for a client.
4 Logistics and supply chain management.
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1998. This was done before CRINE Network presented their supply chain management
initiative in the September 1998 issue of the CRINE Network newsletter.
4.5.2 Has project management and supply chain management been
integrated?
The forefront of logistics management is contextually related to the inter-organisational
aspects of supply chain management. There is still some ambiguity with respect to the
extent of the number of integrating processes between the actors of the supply chain, i.e.
which has their core within logistics management and which has not. Though, the
supply chain has become the new unit of competitive analysis, i.e. companies are not
competing against each other, but supply chains are.
The basic elements of logistics management are found within the integrated logistics
concept, with its focus on both flows of information and physical goods, supporting the
logistical mission elements service and total cost positioning. Although several concepts
may be used to support or illuminate the key perspectives and concepts of logistics
management, one should distinguish between the core logistical contribution and the
contribution or support that may be found in other perspectives. Finally agility is found
as a new and emerging concept within logistics management. With agility logistics is
approaching the project-oriented context, with its unique and temporary characteristics.
As agility is focusing on the ability to be fast and flexible, i.e. the ability to adapt to new
possibilities and supply chain structures, it is bringing logistics closer to the project
context with the project’s need to establish and operate temporary supply chains.
Logistics and supply chain management within the project-oriented context has
emerged both from the logistics domain and from the project management domain.
There has though not been much integrative effort undertaken to combine the two.
Much is based on functional elements of logistics and materials management, much
related to the project planning and control perspective. Authors and lecturers address its
importance, but does not outline the concept with its full implications, and give a rather
introvert view of the topic. Finally, examples of good efforts to bring logistics and
supply chain management into industries within the project context are found with
examples from the construction industry in the Nordic countries, and the British oil and
gas industry.
What is still missing is an outline of what are the main characteristics and drivers of
logistics and supply chain management in the project-oriented context. Especially, how
does the project-oriented context set different conditions for supply chain management,
as opposed to the repetitive context of the consumer and capital goods industries, e.g.
the context of the car manufacturing industry.
4.5.3 Project Supply Chain Management
In Part III of this thesis the concept project supply chain management, PSCM is
outlined. PSCM may be regarded as part of the systemic constructivistic project
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93
management approach. Hetland (2000) regards the systemic constructivistic project
management approach like (translated from Norwegian);
‘The main point is partly that we (1) see the world through individual “glasses” and partly that we (2) are
free to choose which “glasses” we want to use to perceive the world. The latter open for that we may
create “project constructs” in such a way that they fit our way of working, i.e. we choose to delimit actor
structures and work processes in such a way that the project’s value added becomes as large as possible’.
The systemic constructivistic project management approach means that the supply chain
management approach is intentionally chosen to approach the project context and
project management, because of a belief that this approach may enhance the value of
project management. The project becomes an intentional construction regarded as the
business opportunity, and the supply chain approach becomes an intentional
construction regarding the supply chain as the competitive entity, to increase the
project’s competitiveness.
The definition of project supply chain management as it is defined in this thesis is;
Project supply chain management seeks value
enhancement in projects through logistics’ focus on
demand and supply alignment. This is met through the
characteristics of logistics throughout the project life
cycle with an agile approach to demand chain
management in the development phase and a lean
approach to supply chain management in the operations
phase. Thereby meeting the need for value enhancement
through engineering and the supply chains contribution in
developing demand for the project object, and creating
value through cost efficiency in the operations supply
chains.
5 The Project Supply Chain Challenge
5. The Project Supply Chain Challenge
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94
5.1 Introduction
The aim of this chapter is to outline the challenge of the oil and gas supply chain. First
we shortly discuss the business context, a driver for change in project strategy,
execution and organisation, both from the macro perspective, the inter-organisational
industry perspective, and the micro perspective of the firm. Secondly we outline and
seek references to the challenge of the oil and gas supply chain, as we see it. Then we
shortly outline and discuss the oil and gas supply chain stakeholders and actors. Finally
we relate the challenge of the oil and gas supply chain to aspects presented in chapter
three and four.
5.2 The Business Context
Projects of the type focused in this thesis are realised because they constitute a business
opportunity. The project or the business opportunity is influenced by and realised within
a business context. Related to the project supply chain context, one may say that the
competitiveness of the business context is made up of three levels;
1. Competitiveness in the macro perspective
2. Competitiveness in the inter-organisational perspective
3. Competitiveness in the micro perspective
These contextual levels increase the complexity of project management, and in addition
there is an increasing rate of change that has to be taken into account;
‘Nothing ever remains stationary. The context in which projects are being formed and managed is
constantly changing, and indeed in the 1990s it is changing at a rate not experienced in over 40 years. The
political situation of the 1990s is dramatically new and fluid. Business and finance have to operate in
conditions of unprecedented uncertainty. Social pressures are mounting sharply. A number of
environmental issues have become very serious. Technology continues to develop rapidly. And the
practice of management is changing’ (Morris 1994, p.273).
5.2.1 Competitiveness in the macro perspective
The oil and gas industry is an industry in which the competitiveness to a large extent is
dependent upon the CAPEX and OPEX needed to become able to exploit the
hydrocarbon resources. The up-front capital disbursements, both needed in exploration
and in CAPEX, are high, and as such the industry is very capital intensive and funds
often need to be obtained from several sources. The CAPEX level are again to a large
extent dependent on the geographical location of the hydrocarbon resources, e.g.
whether they are located below the seabed in the Gulf of Mexico, the North Sea, under
5 The Project Supply Chain Challenge
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95
the Siberian permafrost in Russia, or below the desert in the Middle East. I.e., whether
the hydrocarbon resources are located offshore, in shallow or deep waters, or onshore,
in difficult or simple terrain and climate. The consequence of this is that industry
competitiveness is dependent upon the area in which the industry is to operate. That will
often impact the industry’s approach to projects dependent on geographic region and
terrain. A quote by a General Manager for the British branch of an international
engineering contractor may be used to support this;
‘To be able to compete for projects in the North Sea area, we have to present and work under novel
approaches to project strategy and management. When competing for projects in areas that are more
competitive, e.g. in the Middle East, we can use ‘old’ approaches’ (R.L., Epci Advisory Council meeting,
London, 23 April, 1999).
This was as well the background for the CRINE and NORSOK initiatives to develop the
competitiveness of the British and Norwegian Continental Shelves.
‘Early in the 1990’s it became evident that the cost position that was established in the oil and gas
industry was too high to ensure that the fields on the Norwegian Continental Shelf would be competitive
against oil and gas developments in other regions’ (Kaasen 1999, p.19).
Among the initiatives raised through CRINE and NORSOK were changes in the inter-
organisational working relationships among the actors of the oil and gas project supply
chain.
5.2.2 Competitiveness in the inter-organisational perspective
Large-scale projects of the type found in the oil and gas industry are inter-organisational
endeavours. What is needed is competitiveness in the inter-organisational domain, as
e.g. CRINE Network and the NORSOK Collaboration Panel has addressed through
CRINE Network’s supply chain management initiative (CRINE 1998 & 1999) and the
NORSOK Collaboration Panel’s acknowledgement of the ‘[inter-organisational]
procurement processes as the most important processes among operator, contractors and
suppliers’ (NORSOK 1998).
The underlying aspect of supply chain management is that the supply chain is the
competitive entity. This is due to the fact that the share of value contribution from
contractors and suppliers to an end product is increasing, and that there are many
sources of synergies to exploit for both development and operations through the
interfaces of the supply chain. In the development phase of the project context the
supply chain is focused towards a temporary setting where there is a large degree of
uncertainty and high complexity both with respect to the scope and technical issues of
the project object, as well as in the organisational domain. However, there is and will be
a continuous search for enhanced ‘value added’, both through cost reductions and
improved income, e.g. through technology development;
‘[R]equiring competitors to intensify their efforts at cost leadership, while also seeking to boost revenues
through the deployment of innovative technologies and processes. Many look to market innovations,
while others seek to unlock “supply chain” value through innovative relationships with suppliers’ (Burton
et al. 1999, p.54).
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96
The key is to bring new concepts and approaches to the project context, and to enable
the industries and actors operating in project contexts to make use of approaches applied
successfully for increased competitiveness in other industries. As said above, the British
CRINE Network addressed supply chain management in the oil and gas industry
through their initiative, and thereby opened up to further explore the possibilities and
new approaches needed for this. The Norwegian NORSOK Collaboration panel on the
other hand, just stated that this was important, maybe even the most important inter-
organisational issue for competitiveness, though they did not address it further. The
question then is how the characteristics of logistics and supply chain management
processes change to be suitable for the purposes of the competitiveness of the oil and
gas industry?
5.2.3 Competitiveness in the micro perspective
Though the supply chain is regarded as the competitive entity, the supply chain is an
inter-organisational construction of individual firms. As such each firm must be
competitive by itself, as well as have ‘equal’ competitive opportunity to become part of
the supply chain, and be competitive as part of a supply chain. Competitiveness in the
micro perspective then become competitiveness of each actor in being attractive as a
supply chain actor, both able to quickly adapt to a supply chain context and uphold its
attractiveness and contribution as a supply chain actor.
Though, there are differences between the different types of actors in a project supply
chain. Most of the differences are related to differences in what is the core business of
each related to a project, i.e. the difference to whether the development or operations
phase is their core business. These differences are acknowledged, and have to be dealt
with. Especially this is related to the relationship between the Operator and the
contractor, which have the following (simplified) differences in profit schemes of a
project;
Operator’s profit = Life-cycle Income – CAPEX – OPEX
Contractor’s profit = Contract Price – Contractor’s Cost
Some requirements that address how actors should position themselves and behave to
optimise a project supply chain, and to be an attractive supply chain member is given in
Appendix B.
5.3 The Oil and Gas Supply Chain
5.3.1 General
Figure 5.1. below illustrate the supply chains of the oil and gas project, or more
correctly the relationship between the project value chain, the services and goods
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97
supply chains of the development phase, and the operations, maintenance and
modifications supply chains of the operations phase.
Develop
& Plan
R & D
FEED &
Sales
Receive,
Schedule
& plan
Buy/make/
assemble
Pack &
transport
Complete
GOODS;
Suppliers’ part of PSC
Receive
Schedule &
Plan Project
Engineer
& Design
Acquire
Goods &
Services
Execute Complete
Develop
& Plan
Acquire/
maintain
Assets
Sales &
Marketing
SERVICES;
Contractors’
part of PSC
Plan &
Design
Complete Operate Maintain
Sales &
Abandon
PROJECT VALUE CHAIN
Specify
Demand
Plan &
Schedule
Supply Use (Return) OPERATIONS
Piping &
Equipment
Spec.s
RCM or
Time-based
Maintenance
Plan
Supply &
Supply
Start-up Return MAINTENANCE
Given
Infra-
structure
Plan &
Design
Complete MODIFICATIONS
Shutdown
&
Maintain
Develop
& Plan
R & D
FEED &
Sales
Receive,
Schedule
& plan
Buy/make/
assemble
Pack &
transport
Complete
Develop
& Plan
R & D
FEED &
Sales
Receive,
Schedule
& plan
Buy/make/
assemble
Pack &
transport
Complete
GOODS;
Suppliers’ part of PSC
Receive
Schedule &
Plan Project
Engineer
& Design
Acquire
Goods &
Services
Execute Complete
Develop
& Plan
Acquire/
maintain
Assets
Sales &
Marketing
Receive
Schedule &
Plan Project
Engineer
& Design
Acquire
Goods &
Services
Execute Complete
Develop
& Plan
Acquire/
maintain
Assets
Sales &
Marketing
SERVICES;
Contractors’
part of PSC
Plan &
Design
Complete Operate Maintain
Sales &
Abandon
PROJECT VALUE CHAIN
Specify
Demand
Plan &
Schedule
Supply Use (Return) OPERATIONS
Piping &
Equipment
Spec.s
RCM or
Time-based
Maintenance
Plan
Supply &
Supply
Start-up Return MAINTENANCE
Given
Infra-
structure
Plan &
Design
Complete MODIFICATIONS
Shutdown
&
Maintain
Figure 5.1. The oil and gas supply chain.
The project value chain is in the development phase (‘Plan & Design’ and ‘Complete’)
supported by the contractors’ part of the project supply chain, PSC, through engineering
(demand development) and construction ‘services’ (supply consumption). Then both
indirectly through the contractors’ service chain, and directly through e.g. the operator’s
frame contracts and agreements, the suppliers supply ‘goods’, equipment and bulk, to
meet the engineered demand at the construction site. In the operations phase we may
say that three different supply chains are involved. The first is the operations supply
chain, bringing in all supply needed for drilling, process plant operations, and catering,
both rental equipment, bulk chemicals, and other consumables. The other is the
maintenance supply chain, involved both in unplanned and planned maintenance. The
planned is shown in figure 5.x. The last supply chain is the modifications
demand/supply chain. This is to a large extent a development demand/supply chain,
though with the extra factor of having to take the opportunities and limitations of the
existing infrastructure into account. One may say that the modification demand/supply
chain covers the remaining openness of the project (refer to the project atlas in chapter
three).
Then what is the focus of the oil and gas supply chain throughout the project lifecycle?
Figure 5.2 below is revised from IPA (1995), with some comments to its message.
5 The Project Supply Chain Challenge
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98
Business &
Project
Development
Project
Planning
Project
Definition
Engineering
Procurement
Construction
Commissioni
ng &
Startup
Operation &
Maintenance
Front End Loading
B = Business T = Technical O = Operations P = Project Team C = Contractor
Lead
role
Moderate role
or co-lead
Minor
role
B
T
B
P C O
O
B C
T
O
C P O
B
C
B B
In the ’old’ execution
model, this was the
operator’s role as ’builder’.
The contrators’ role in
operations could be
larger, dependent on
operations strategy
The project is initiated as a business
opportunity, but the direct role of ’business’
thereafter diminishes. We believe that for the
operations phase, business play a greater role,
especially if each object is managed as an own
business unit. This may impact lean operation
strategies.
T
’Technical’ should have role also
in operations, w,r,t, modifications
for further value enhancement
(link to ’Business’)
’Technical’ and
’Operations’ having
equal role in front
end. Balancing out
Contractor time
effectiveness and
Operator’s lean
operation
requirements?
Business &
Project
Development
Project
Planning
Project
Definition
Engineering
Procurement
Construction
Commissioni
ng &
Startup
Operation &
Maintenance
Front End Loading
B = Business T = Technical O = Operations P = Project Team C = Contractor
Lead
role
Moderate role
or co-lead
Minor
role
B
T
B
P C O
O
B C
T
O
C P O
B
C
B B
Business &
Project
Development
Project
Planning
Project
Definition
Engineering
Procurement
Construction
Commissioni
ng &
Startup
Operation &
Maintenance
Business &
Project
Development
Project
Planning
Project
Definition
Engineering
Procurement
Construction
Commissioni
ng &
Startup
Operation &
Maintenance
Front End Loading
B = Business T = Technical O = Operations P = Project Team C = Contractor B = Business T = Technical O = Operations P = Project Team C = Contractor
Lead
role
Moderate role
or co-lead
Minor
role
Lead
role
Lead
role
Moderate role
or co-lead
Moderate role
or co-lead
Minor
role
Minor
role
B
T
B
P C O
O
B C
T
O
C P O
B
C
B B
B
T
B
P C O
O
B C
T
O
C P O
B
C
B B
In the ’old’ execution
model, this was the
operator’s role as ’builder’.
The contrators’ role in
operations could be
larger, dependent on
operations strategy
The project is initiated as a business
opportunity, but the direct role of ’business’
thereafter diminishes. We believe that for the
operations phase, business play a greater role,
especially if each object is managed as an own
business unit. This may impact lean operation
strategies.
T
’Technical’ should have role also
in operations, w,r,t, modifications
for further value enhancement
(link to ’Business’)
’Technical’ and
’Operations’ having
equal role in front
end. Balancing out
Contractor time
effectiveness and
Operator’s lean
operation
requirements?
Figure 5.2. Focus of the oil and gas supply chain throughout the lifecycle (based on
figure by IPA, 1995).
The message of figure 5.2 is the changing focus on different roles throughout the
project’s lifecycle. ‘Business’ is the main focus in the front end of the project, to be
realised through value enhancing solutions for ‘technical’ and ‘operations’. However,
‘business’ has a role all through the project lifecycle, though diminishing relative to
other roles. A question is though whether ‘business’ should have been given a larger
role in the operations phase, as each installation often is managed as unique business
units, thereby they may have an impact on synergy potentials for lean operations among
several installations. The major role of the contractor(s) is found in the EPC part,
though this role was the Operator’s role, as the ‘builder’, in previous execution models
(not integrated EPC type models). Also in operations, the role of contractors could have
been elevated, as many operations models use an outsourcing approach with a set of
contractors with specific responsibility for different parts of the operation. Finally,
‘technical’ could or should have a stronger role in operations, as ‘technical’ linked with
‘business’ are the basis for further value enhancements, e.g. extending the plateau
production of an installation, realised through modifications projects.
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5.3.2 The roles of inter-organisational PSC actors
In table 5.1 below we have described the actors of the inter-organisational project
supply chain, as we see their role and objective as part of the project demand/supply
chain.
Table 5.1. Roles of the inter-organisational PSC actors.
Phase Actors Roles Objective
License owners Owner and sponsor. Ensure that the project
meets the profit required.
Operator Project manager and value enhancement
responsible.
Strategic and tactical demand/supply chain
manager.
As license owner.
Develop own operator
competence.
Project success.
Contractors
(1
st
tier suppliers)
Solution providers.
Tactical and operative demand/supply chain
manager.
Project object(s)
delivered and accepted,
giving a profit.
Project success.
Sub-contractors
(2
nd
tier suppliers)
System and technology suppliers.
Demand and supply chain contributors.
Development,
acknowledgement of
solution and competence.
Commercial, increased
business in industry.
D
e
v
e
l
o
p
m
e
n
t
Suppliers
(3
rd
tier suppliers)
Component suppliers.
Minor role in demand chain, major impact on
supply chain.
Commercial.
Increased business with
operator.
License owners Owner and stakeholder. Ensure that the project
meets the profit required.
Operator “Operator”, i.e. operations value enhancement
responsible.
Actor may change from development.
Meeting production
targets and targets for
installation up-time.
Cost effectiveness.
HES focus.
O
p
e
r
a
t
i
o
n
s
Contractors Responsible for functional progress, e.g.
length of drilled hole per day.
Commercial.
Meet incentives and
measures in own
contracts.
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Suppliers Rental equipment and consumables. Commercial.
Logistics service
providers
Transport from suppliers to supply base.
Supply base services and warehousing.
Offshore transport.
Commercial.
Increased business, scope
of work and number of
installations covered.
Solutions developer.
Development
The license partners are the owners of the petroleum field to be developed and
exploited. As owners the license partners have several roles;
‘Generally, owners have three roles. The first is to ensure that the project is conceived and realised meets
its objectives. This is the sponsor’s role: that of ensuring that the plant makes the profit required or the
weapons system performs properly, or that the aid or welfare programme delivers real benefit. The second
is the task of ensuring that once handed over to operations, the product will perform optimally. This is the
operator’s role: it covers a variety of factors, by far the most critical of which are technical efficiency,
safety and environmental performance. The third is that of the builder, or project manager: ensuring that
the project is realised effectively and efficiently. It seems to me that in principle these duties should be
performed entirely by the owner, subject only to the extent to which he does not – or should not – have
the resources or skills, outlook or experience to perform them adequately’ (Morris 1994, p.252).
Another issue that is related to the role clarification and influence between owners and
the Operator, is the issue of split operatorship between the development and operations
phase. If one owner company act as Operator during the development phase, and
another owner company take over as Operator after operations has commenced, this
may have a rather big impact on an approach to the project supply chain construct. E.g.
if the operator for development takes a lean approach to the development, making the
project object fit with the other installations in his portfolio, then that may become or
bring a ‘richer’ set of supply chains to the company taking over as operator in the
operations phase.
To be competitive the supply chain actors must posses different strengths. In the upper-
level project supply chain relationship between the Operator and contractor
organisations, the following differences in strengths has been outlined;
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Table 5.2. Strengths of owner organisation versus contractor organisation (IPA 1995).
Owner organisation Contractor (1
st
tier supplier) organisation
Identification of customer needs
Feasibility/economic analysis R&D capability
for project basic data and piloting issues
Knowledge of plant conditions and needs
Process expertise, maintenance know-how
and operability information
Equipment specifications and vendor
inspections
Detailed knowledge of vendor standards and
capabilities
Advanced project scheduling and tracking
systems
Contracting and procurement planning
Extensive experience with construction
management
As Table 5.2 shows, the main strengths of the owner organisation, i.e. the Operator, is
seen to be that of ‘sponsor’ and ‘operator’. The ‘sponsor’ role of the owner organisation
is primarily a part of the front-end phase of the project, while the ‘operator’ role is part
of operating the project object. The main strengths of the contractor organisation are
regarded to be related to an owner’s ‘builder’ role. The contractor is seen as project
manager, or maybe more precisely project planner and controller. As Morris (1994)
stated above the role of the ‘builder’ is a role that the owner should hold himself.
The contractor(s) are brought into the project supply chain to support the Operator with
the ‘builder’ role. The contractor could also take part in and support the Operator in
fulfilling his role as project sponsor, i.e. in ensuring that most value enhancement is
taken out of the project. The difference between the contractor’s support to the Operator
in these two roles give room for some reflection. What is the role of the contractor? Is it
to be a supplier of capacity, i.e. people with a competence to ‘help’ the Operator’s
‘builder’ role, or as a supplier of capability, i.e. helping the Operator making the most
out of the business opportunity?
In an EPC or EPCI project the contractor may be regarded as the demand and supply
chain co-ordinator, establishing and co-ordinating the development supply chains on
behalf of the operator. Or as a contractor’s procurement executive stated;
‘The contractor is the hub in a network, which mission is to specify the elements and parts of the whole
[the demand and demand chain process], as well as obtain and compound the elements and parts into a
whole [the supply and supply chain processes]’.
The contractor use sub-contractors that are providers and fabricators of e.g. systems.
These sub-contractors have in many cases taken over parts of the contractor’s scope of
work, often through that the contractor have transferred engineering capabilities and
software to sub-contractors with which the contractor has long term agreements.
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Thereby the sub-contractors take active part not only in the contractor’s supply chain, as
well as the contractor’s demand chain.
Several of the sub-contractors focus on standardisation of their products and systems,
and simplification of their deliverables so that they can improve their time
competitiveness, i.e. become ‘quick response’ suppliers. Quick response strategies may
enhance the sub-contractor’s position in the supply chain, both schedule and cost
position. The sub-contractors’ position then become much like suppliers of systems or
modules e.g. in the car manufacturing industry. They have to provide their share of new
technology and value enhancement as part of the demand chain, and then they have to
be good at their supply side so that they are able to meet new delivery schemes in trying
to reduce the length of the development schedule. The sub-contractor role fit as such
into a development towards more segmentation of the project objects.
At the end of the demand/supply chains we find the part suppliers. They take part in
both the demand chain and the supply chain. They do also often have a role both in
development as well as in operations. There are two main categories of goods that the
suppliers provide, equipment and bulk. Below in table 5.3 an engineering and
construction contractor’s supplier strategy with respect to supply category is listed. We
see that there are three categories of supplies, critical, standardised and other, which are
separated based on criticality both for the;
demand chain – ‘critical’ impacting the execution model and value through
technology, and ‘standardised’ impacting technology.
supply chain – ‘critical’ with respect to securing availability, ‘standardised’ based
on lead time, and ‘other’ based on the supply chain cost position.
Table 5.3. A Contractor’s supplier strategy with respect to type of supplies (LL
990614).
Type of supplies # of suppliers
per product
Focus Drivers
Critical 1 Product development,
standardisation,
communication, cost
efficiency programmes
Major impact on design,
interface documentation from
suppliers crucial for
finalisation of design, high
cost, complex manufacture
and/or technology,
availability in market
Standardised 2 – 3 Standardisation and use of
suppliers product range.
Challenging from a technical
point of view, long delivery or
high cost.
Other Many Selection based on
commercials
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Operations
In the operations phase, the license owners continue their role as owner and sponsor of
the project, with the objective of ensuring that the project delivers its required profit.
This is from a cost efficiency (lean) perspective an interesting constellation, as the
license owners may be operators for other fields in a region, so that a driving
mechanism for utilising synergies through collaboration among several installations and
operators, is directly linked to the sponsor role of the license owners.
The Operator will either continue to be the same as the owner-company having the
operator role through the development phase, or it could be changed so that another
owner-company take over the role in the operation phase, e.g. when the installation has
come in stable production. This may be a challenge for the project supply chain, as it is
one operator that will have to operate supply chains partly established by another
operator. The development operator could e.g. choose project supply chains based on
long-term synergies across installations were he himself is operator. Then for the
owner-company taking over in the operations phase, the supply chains established to
give the development operator synergies could result in the opposite for the operations
operator.
Contractors in the operations phase are responsible both for completing the
development of the project (not the project object), e.g. drilling, and as part of long-term
operations, e.g. maintenance contractors.
Suppliers could be linked to the contractors, e.g. for supply of rental equipment to be
used by the contractor on the installation offshore. Or they may be part of the Operator’s
supply chain, e.g. through long-term contracts and agreements, and often supplying to
several installations that the Operator operates.
The logistics service providers make up the link between the suppliers and the offshore
installations. They are more becoming integrated logistics service companies that
provide full scale of logistics or supply chain services, including transport from
suppliers to the offshore supply base, base services, and offshore transport. The logistics
service providers may either operate the services fully on behalf of an operator, or offer
part services to the operators. The logistics service providers are following the general
trend in the logistics service industry in developing and offering complete services.
They are also in a good position to develop solutions that extract synergies across
several operators.
5.3.3 The roles of intra-organisational PSC actors
The role and objectives of some key actors and stakeholders in the internal project
organisation are listed in figure 5.x.
Table 5.4. Roles of the intra-organisational PSC actors.
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Phase Actors Roles Objective
Management Demand and supply context
regulators.
Deliver a project object according
to expectations.
Meeting the financial basis on
which the project was sanctioned.
Engineering Demand generators – ‘point of
origin’.
Demand chain managers of the
project supply chain.
Designing an object based on
available options to best meet the
business requirements of the
owners.
Procurement Demand fulfillers – tactical and
operational supply and demand
alignment.
Making best possible use of long
term supply chain relationships,
and the market to cover
engineering’s requirements
Construction Supply consumers – ‘point of
consumption’.
Realising the project object
according to schedule.
D
e
v
e
l
o
p
m
e
n
t
Project control Demand/supply co-ordination –
Value enhancement through time-
and cost-wise control of the project
demand and supply chains.
Giving a best possible status and
future estimate, cost and
schedule-wise, to help guide
decisions and actions in E, P, and
C.
Offshore
operations
Planning and optimisation of
production.
Plan and initiate supply requirements.
Meet or exceed production rate
and up-time of facilities.
Onshore
support
Order and administer the commercial
side of supplies.
Improve effectiveness, contracts
and terms, and efficiency, internal
process, of administrative supply
process.
O
p
e
r
a
t
i
o
n
s
Supply
organisation
The demand/supply chain coordinator
and single point of contact.
Establish and commit demand and
supply side, periodically.
Optimise supply operations long
and short term to meet offshore
requirements.
Development
For the development phase there is five actors or functions that have a central role in the
project demand/supply chain, i.e. management, engineering, procurement, construction
and project control.
Management is set to manage the project under the context given by the company
strategy, project strategy, and the broader project context. The strategies that are part of
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the managerial context are further specified into aims, means and measures relevant to
the project construct, and as a managerial tool to manage the project forward. The term
‘budget’ is a good example of how management is given focus and set to ‘operate’. Is
the budget a cost or value measure, to be kept within, met exactly, or tried to challenge?
If the budget is a maximum cost level, not to be exceeded in any circumstances, then
that will influence how the project supply chain actors have to approach the project.
Risk reduction and cost minimising is the name of the game, i.e. the project has to be
‘closed’. On the other side, if the budget is a type of ‘value’ measure, then it may be
something that should at least be met, but preferably exceeded. This will challenge the
demand side of the project supply side, setting the frame to work within towards new
opportunities and seeking value, taking both life cycle income and cost profiles into
account, i.e. the project should work at least initially in the ‘open’ part of the project
atlas. However, management will often (always?) move towards securing some
‘expected’ results or measures related to the project objectives.
The second function is engineering. Engineering has an important, and maybe the most
important role, seen from the demand side of logistics in large-scale development and
construction projects. Earlier, the engineer got an assignment, with a given
specification, and designed out of own experience and competence, with rather large
degrees of freedom. Today, the engineer must to a larger extent take given terms, e.g.
frame agreements, into account, leading to a more predefined and ’lean’ approach. The
engineer’s role in this new situation becomes important to develop and improve the
processes of realising a qualitative product based on the engineers understanding of the
demand and the options available in the ‘lean’ supply chain.
Within such a framework the engineer may be viewed as both an artist as well as a
craftsman. As an artist the engineer want to have a large action or freedom space with
respect to the design that he creates. He will also retain the option to change or alter his
design as he develops his understanding, or as new information (or new technology)
become available. The artist is mostly represented in the early conceptual development
phase of the project object. The solution created by the artist, although rough, will
establish a basis for the demand that will ultimately trigger the supply chains. With a
lean approach to a project’s supply chain the engineer’s freedom space in developing
his solution is limited.
As a craftsman the engineer use his functional knowledge and competence in
developing, or bringing together the details of the conceptual solution developed by the
artist. In doing this he has to apply to the rules and specifications given for his function.
In designing the details of the object/product he is guided by a set of choices with
respect to equipment and materials to be used, as outlined e.g. through frame contracts
and agreements. The aim of frame contracts or agreements may be regarded as moving
the ‘openness’ of the artist’s role through to meet the cost-effective and cost-efficient
needs of operations of the project object, often based on utilising synergies across a
portfolio of project object’s to be operated, thereby ‘closing’ the degrees of freedom
available for the engineer to use.
As such the engineering role is twofold. First it is developing the demand, i.e. the
functionally oriented engineer, often seen as the optimal technological solution to the
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problem. Then there is to define the specifications needed from the product that shall
fulfil that demand, i.e. the product-oriented engineer. One approach to balancing the
technological development role versus the commercial, or business oriented demand
fulfilment role of the engineer is presented in Figure 5.3.
problem. Then there is to define the specifications needed from the product that shall
fulfil that demand, i.e. the product-oriented engineer. One approach to balancing the
technological development role versus the commercial, or business oriented demand
fulfilment role of the engineer is presented in Figure 5.3.
After the demand has been defined and specified by engineering, procurement comes
into the picture to close the commercial commitments and delivery schedules with
suppliers, and thereby activating and committing the supply chain downwards, as well
as upwards (towards the engineers) committing the demand chain. The roles and
functions between procurement and engineering may be regarded as in Table 5.5 below.
After the demand has been defined and specified by engineering, procurement comes
into the picture to close the commercial commitments and delivery schedules with
suppliers, and thereby activating and committing the supply chain downwards, as well
as upwards (towards the engineers) committing the demand chain. The roles and
functions between procurement and engineering may be regarded as in Table 5.5 below.
E1: Engineering 1 - “R&D”
E2: Engineering 2 - Making use of available technology
P&L: Procurement & Logistics
Logistics Technology
Supply Demand
Market
Suppliers
Technological
Developments
P&L E2 E1
Figure 5.3. The engineer’s role in a project’s demand and supply processes. Figure 5.3. The engineer’s role in a project’s demand and supply processes.
Table 5.5. Roles and competence distribution among engineering and procurement. Table 5.5. Roles and competence distribution among engineering and procurement.
Engineering Procurement
Demand oriented.
Technical competence.
Product-market competence.
Supply oriented.
Relational and commercial competence.
Market-availability competence.
Procurement is in relatively continuous contact with the suppliers in the market. Then
when a demand is specified from engineering, a matching supply process is activated
and directed through procurement to the suppliers in the market. Finally delivery is
brought back to the engineering domain, now in the fabrication or construction context.
However, procurement is related to logistics, but there is a difference between the
procurement role and the role of logistics in the supply process. A commissioning
executive for a major field development project on the Norwegian Continental Shelf
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gave his comments with respect to procurement’s contemporary ‘standing’ related to a
project’s needs;
‘Procurement is not flexible enough to cover the dynamic needs of the project;
- Procurement: Static, manages based on rules and principles.
- Projects: Dynamic, strategic guidelines, with dynamic execution.
Projects runs fast, and they don’t stop when started, the project just look for solutions.’
The difference between the perceived static position of procurement versus the dynamic
needs of the project bring with it a need to develop dynamic supply chain relationships.
Dynamic will in this context mean the ability to balance and search for good
demand/supply alignment together with the engineers and the supply market. As such
the ongoing dialogue within the triangle between engineering, procurement and
suppliers is in the longer-term view aimed at influencing suppliers in the market to
develop new technology, concepts and solutions. Or, how engineering may be
integrated with the suppliers so that new developments ‘continuously’ become available
for the product-oriented engineer to be applied in the demand/supply process – when
needed in a dynamic or agile manner. This outlines the role for the ‘logistics’
professional on the project team. There is then a need to broaden the procurement
competence to further incorporate logistics and supply chain management competence,
or as a logistics responsible in a project team said;
‘Procurement is all routines, rules, systems, and commercial and contractual aspects – i.e. focus on
“local” price, not “global flow”. Logistics is experience based, to secure “global flow and
commissioning”, comprising everything not covered in “local” focuses. Logistics is co-ordinating
procurements between demand, availability and “transport”’.
The fourth project internal function is construction. Construction may be regarded as the
consumer or customer of the demand generated by engineering. In construction all
material, pre-fabricated items and equipment are brought together into the whole and
final project object. As such construction involves a vast number of resources, and
‘consumes’ vast resources such as man-hours, fabrication and construction drawings,
materials and equipment. Thornton et al. (1996) address assembly, which may be
regarded as construction in this project context, as the organisational point that is the
‘proof of the pudding’ with respect to seeing whether the demand and supply chains
perform as expected;
‘In virtually every site in our project, the people pushing most strongly for new design, procurement and
production methods are those responsible for performing assembly’ (Thornton et al. 1996).
At the assembly point, or for the project context the fabrication and ultimately the
construction point(s), all pieces come together and weaknesses in the demand and
supply processes and chains will be revealed, as items may be wrong, e.g. changes has
happened that has not been communicated to all relevant actors in the supply chain,
does not fit, or are not available when needed. The assembly/fabrication/construction
point may as such be regarded as the ‘point of consumption’ in the demand/supply chain
perspective.
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As such the consequences are that construction may both be impacted by, as well as
may impact the supply chains. The supply chains delivery service to construction in
accordance with schedule and construction programs are important for schedule
adherence and progress for the project in meeting milestones. Good delivery service is
also important with respect to construction costs, as the construction-staff will not be
able to perform their work if materials and equipment is not available when promised
and needed. This means increased costs without increase in progress, giving rise to
contractual issues regarding responsibility and payment for lost construction man-hours.
As such construction is dependent on timely and secure deliveries to make construction
cost- and time-efficient, meaning that the logistics service aspect is important for
construction.
Then again construction may be the ‘source’ of or detect necessary changes, and thereby
impact the demand/supply chain(s). E.g. if construction detects a design ‘error’ making
something ‘impossible’ to construct, or place into the bigger construction, then changes
have to be made that may affect several tiers down into the supply chain. These changes
have to be effected rapidly, not to delay the construction or even the total project
schedule un-necessary. As such a change will have effect as the domino principle down
through the supply chain.
The last function described here is project planning and control. The project planning
and control functions are mainly related to structuring, sequencing and estimating the
scope of work, time schedule and cost budgets, as well as the important function of
measuring and controlling the progress in scope of work versus the progress in
accumulated cost and schedule. As such one may say that project planning and control
is related to structuring, quantifying and updating the coordinating structures and
quantities of the project as it moves from the ‘open’ to the ‘closed’ mode, and as it
moves from planning to and through execution.
Project planning and control comprises two central functions with the role to co-
ordinate the different elements and interrelationships of the holistic perspective of the
project, i.e. the planner and the cost engineer. As the ‘single point of contact’ for the
project’s planning and control information the planner and cost engineer have a central
and co-ordinating role in and for the project demand/supply chains. As the planner and
cost engineer have a comprehensive overview of the parts and relationships of and
among the project’s parts and actors, and are strictly dependent on complete and regular
data and information about status and progress, they need extensive communication
with the project supply chain actors, both internally and externally in the extended
project organisation. Through their role as a point for collecting data, the planner and
cost engineer analyse and present information that are valuable and necessary for all
actors in the project supply chains. The planning and control information is important
for the project as a whole and for each of the project supply chain actors, as it is the
medium that relates local aspects and status to the overall aspects and status, thereby
communicating consequences that could have commercial effect for both the project
and project supply chain actors, hopefully in due time so that corrective action could be
taken if necessary.
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Operations
The intra-organisational operations of the project object comprises the operations
organisation that take over the project object after it is developed and commissioned. To
make the picture simple let us focus on three different parts that are relevant for
logistics and supply chain management in the operations of the project object. These
three parts are; (i) the offshore operations organisation, (ii) the onshore support
organisation, and (iii) the operations logistics support organisation.
The offshore operations is the direct operations organisation located on and operating
the offshore installation, i.e. the project object. The onshore support organisation and
the offshore operations organisation is often termed the project’s ‘operations
organisation’
45
, but here we have chosen to separate the offshore and onshore part, as
they have different roles as part of the operations supply chain and logistics
management. The third and last, the logistics support organisation, may be regarded as
the hub in the operations supply chain and logistics management, namely the ‘base’
operations. The ‘oil bases’ as they are often termed are partly operated by the operators
themselves, or by third party logistics providers which the operator have outsourced
base and logistics services partly or fully to.
The demand generator in the operations phase is the offshore operations organisation.
The demand information goes through the onshore support organisation, the operations
logistics support organisation, or directly to the supplier. The flow of goods then goes
from the supplier, transported via the supply bases and the logistics support
organisation, out to the offshore installation by supply vessel or helicopter. For some
goods a return process is also included, e.g. for rental equipment, as the goods are
returned to the supplier after being used offshore.
Though, the operations organisation, or the operations experience of the operator do
also take directly part in the project object development. Then their role is to bring
operational experience with respect to choices of equipment and solutions, so that use
and operations of equipment and systems functions well in the offshore operations
environment, as well for later maintenance and modifications. Thereby one may say that
the offshore operations organisation directly influences the demand management in the
project development phase.
‘Operations influence the choice of components directly in the contractors purchasing organisation, and
may thereby influence the use of the frame agreements’ (JMP, 990124).
However, the main importance of the different parts of the operations organisations is in
the operations phase. The onshore support organisation is the administrative and
commercial management centre for the operations phase of the project. In the supply
chain their role is in managing the contractual terms and conditions, as well as other
both tactical and operational procurement issues. E.g. much of the offshore procurement
demand is led through procurement in the onshore support organisation, then further
down the supply chain to the supplier.
45
In Norwegian; Prosjektets ‘driftsorganisasjon’.
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The logistics support organisation is an important part in the operations supply chain as
it is the link in the logistics chain between the offshore installation and the onshore
suppliers. The supply chain management role is often divided between the onshore
support organisation and the logistics support organisation at the bases. The onshore
support organisation is often tied to the information based demand side of the offshore
supply operation, while the logistics support organisation is tied to both the flow of
information and goods in the offshore supply chain, from the offshore demand to the
supplier and out to offshore delivery of the goods.
5.4 External Bodies – Law and legislation
External to the project and the internal and external actors of the project supply chain
there are national, multi- and inter-national ‘bodies’ that may have influence on the
project supply chain. These bodies may influence the ability to construct and develop
project supply construction, e.g. laws and regulations to secure that competitiveness is
upheld, i.e. to prevent cartels, monopolies etc., in industries and markets. Here we will
just show a couple of examples on the influence such may have on project supply chain
constructions.
‘It is obviously easier to build an alliance on the back of an existing relationship, or to roll over from one
contract to the next, and a longer-term relationship can save time in setting up new projects. However,
there are some issues which cannot be ignored here. The European Union Procurement Directives impose
strict requirements on procurement by Government or public authorities and on procurement by “utilities”
companies (including oil companies operating under Government franchises). On the face of it, these
directives may make it difficult – if not impossible – to restrict bid lists to a select few, or to select
suppliers on a basis other than the lowest price, or the most “economically advantageous” bid. Similar
regulations may apply in other countries. World Bank procurement procedures are widely applied by state
enterprises in the Third World, even where no World Bank money is involved. Partnering arrangements
have been criticised for becoming too cosy and being insulated from the pressure of competitive pricing.
In the longer term, if owners and suppliers pair off this will reduce market capacity and competitiveness’
(Pritchard 1994).
If we e.g. go to the Norwegian petroleum industry, some Norwegian petroleum
companies come under the definition of “utility” company, i.e. it is a company
controlled by the Norwegian Government, and EU’s Procurement Directive has to be
adhered to;
‘The European Union’s Purchasing Directive are based on paragraph eighty in their Treaty of Rome,
which states that along a supply or procurement chain there shall be competitive selection in at least one
link’ (Instefjord, 30.06.99).
An example of a supply or procurement chain where the initial link was established in
accordance with the competitiveness rules of the Treaty of Rome for thereafter to make
use of that and thereby have more degrees of freedom in selecting actors for and
constructing the project supply chain;
‘All procurement in this development project is contractually executed through the Contractor. The
Contractor was chosen after competitive bidding in accordance with the European Union’s purchasing
directives, and therefore we are free to select sub-contractors and suppliers without taking EU’s
purchasing directives into account’.
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From the industries side the European Union’s purchasing directives may be met
through conscious distribution and use of roles between the Operator and the
Contractor. From the other side, the European Union may give their opinion about the
petroleum industry’s use of the market for procurements;
‘EU’s purchasing directives point out that the petroleum industry must be better at:
- specifying and use what is available in the marketplace today,
- not specifying what is ‘just not’ in the market place – that should be developed continuously and
brought to the market place to be used in future projects’ (OA, 990614).
This is important seen from the view of up-keeping competitiveness in the market-
place, as one in specifying product details, especially that needs to be developed may
favour specific suppliers or lock out others that have ‘similar’ products.
Another dimension to the level of competitiveness in the marketplace, is the ability to
develop project supply chain constructions that are competitive, as well as keeping the
construction within legally defined constraints. As well as EU’s Procurement Directive
that shall secure to up-keep competitiveness in market-places, there are directives and
rules that define how a company are defined, or more precisely in which category a
company is to be placed e.g. for taxation purposes. A question may be asked whether a
change in organisational structure and formal business relationship does change how a
company are ‘defined’ by legal interpretation of terms. An example may be taken from
the offshore petroleum field Yme
46
. In Yme two oilfield services companies have
incentive contracts related to the production capacity of the Yme project object. The
question then is whether the two service companies are service companies as defined by
legal terms, or whether they are to be regarded as a production company. The core of
this question is the difference in taxation between service companies and production
companies. A production company is due to pay a production tax of 78%, which is
considerably higher than the normal business tax level of a service company. To keep
this type of incentive contractual arrangement under surveillance, bureaucrats monitor
the incentive arrangement to see whether the contractual arrangement make the service
companies legally regarded as production companies. This is an example of the
influence that ‘governing bodies’ have on the ability to create competitive project
supply chain arrangements based on the core competencies and capabilities of each
actor in the supply chain.
5.5 The challenge of the oil and gas project supply chain
One may say that value enhancement in oil and gas projects are ‘engineered’ into the
project, either through project processes or through novel technology. The demand
definition and specification process in project development is directly related to the
value positioning of the project. This demand process is both established through and
will commit the supply chain when the defined demand shall be supplied. This is
46
Based on a discussion with Mr. Odd Instefjord, June 2000.
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established through the contract execution model
47
. During the last decade there has
been changes in the contract execution models from the operator being the hub and
using function specific contractors for specific functions and parts of the project scope
of work. The operator did also have closer contact with a broader set of technology
providing suppliers, and an extensive technology development dialogue was present
among the operator’s engineering functions and the same of contractors’ and suppliers’.
Then in the late nineteen eighties this was believed to be a costly set-up. This was to a
large extent the same as the situation found in the defence industry.
During the cold war the defence budgets were more or less ‘limitless’. Cost should not
be an issue that could give the opponents an edge in the weapon technological advances,
and thereby lead to disturb the power-balance in an unwanted direction. As in the oil
and gas industry this gave rise to an entire culture where engineering and demand
definition meant technological development, which again meant new, specific supply
chains to cover the demand both in manufacturing and support. After the cold war the
defence budgets has been exposed to dramatic cuts and costs both in development and
support has become an issue;
‘The United States still desires to maintain a technological edge over potential enemies, but cost is now as
important as performance. Therefore, the pressures to use unproven, high-risk, and potentially expensive
advances in weapons are reduced. Whereas the unknowns associated with designing cutting edge
technologies are lowered, other factors increase the difficulties of decision-making by the IPPD
[Integrated Product and Process Development] team. The long duration of the Cold War gave rise to an
entire culture; one that saw generations of military leaders and weapons designers matured in an
atmosphere where the issue of cost was secondary to performance. No longer!’ (Usher et al. 1998, p.286).
This may also be used to reflect the current situation in the offshore petroleum industry.
With the focus on being competitive and profitable, and thereby able to meet very low
oil prices, the focus on development and operations has become a cost-conscious one.
This is a situation that leads to new challenges for the engineering community of the
offshore petroleum engineers. The mental adjustments necessary for engineering may in
many respects be found to be that of the defence industry community. Although the cost
issue has gained a strong foothold, the question in the end is project value. And value
in a project is dependent in income, costs, and time. Technological choices, as well as
models for project development and execution may influence all these three.
5.5.1 Cost and income – Value of technology
Then, how does the above relate to the challenges of the oil and gas supply chain? Let
us refer to two, possibly counter argumentative, quotes by the British Department of
Trade and Industry;
47
The TIKO-II (Kinn et al., 1998) report written jointly by a group of representatives from the operator
Statoil and the contractor Kværner, gives a thorough analysis of the challenges and problems of contract
execution models for Norwegain offshore development projects, and the related elements in the
relationship between the operator and the main contractor.
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’Over the last four years, with a fairly stable, relatively low oil price, there has been a drive to reduce
costs in the partly-depleted North Sea oil province. The multinational oil companies operating on the UK
Continental Shelf (Operators) are changing the pattern of business relationships within the industry
network. Instead of dealing directly with a large number of subcontractors as they previously did when
the main concern was to get the oil flowing, regardless of cost, most are progressively moving to a “lean
supply” approach. In its most extreme form, this means drawing up a single contract with a prime
contractor or “alliance” group of contractors, which takes responsibility for constructing and managing a
major production facility. Prime contractors in their turn have publicly announced that they are seeking to
reduce the number of subcontractors and to develop long term relationships with a smaller number of
favoured partners and most have taken steps to implement this policy’ (DTI, 1997).
‘In the face of reducing margins and increasingly difficult and expensive exploration and production
challenges, reduction of activity is a real possibility unless there is a constant stream of innovative
ideas and technologies feeding through from indigenous supply firms, particularly those in the small to
medium-sized (SME) bracket, to enable continuous cost reductions’ (DTI, 1998).
So the challenge of the oil and gas industry was to increase the competitiveness of the
North Sea oil province, especially to meet lower oil prices. The answer was a ‘lean
supply’ approach towards the oil and gas supply chain, both for development and
operations. But, at the same time it is estimated that innovation and technology
development will stand for approximately 50% of the future value enhancement
48
in the
oil and gas industry. In this situation, the oil and gas industry has tried to copy lean
practices, e.g. as found in the automotive industry
49
. As the oil and gas industry of the
North Sea area are becoming mature, they are focusing more on cost efficiency, than on
cost effectiveness and value enhancements through e.g. a rich set of suppliers with
technology development capabilities.
‘A substantial group of indigenous technology-based oil-related companies has been formed since the
discovery of oil on the UK continental shelf. … These SMEs have been contributing to the flow of new
technology, and this was originally promoted by their close relationships with the Operators, and end-
users. The close relationship which previously existed between the Operators and the technology-based
oil-related companies permitted close integration of their operations and R&D. However, this has been
substantially lost now that most Operators tend to confine their direct interactions to the large integrated
service contractors and have, indeed, closed many of the functional departments which used to interact
with suppliers. Now most responsibility for managing innovations lies with the contractors, with whom
many SME’s have not had dealings in the past. The continued growth of the smaller, innovative
companies in a highly competitive global market is dependent on maintaining their technological
competitiveness, but the perception is that changing contracting practice is threatening this’ (DTI
1997).
So, due to the need for improved competitiveness, the answer was ‘lean supply’, which
is a good strategy in a repetitive context were it is about refinement of already
established processes. In the project atlas presented in chapter three we called this a
closed state. The cost of such a strategy could be that the many SME’s
50
that provided
48
Presentation given by INTSOK.
49
The automotive industry does also have a challenge in getting more innovations and technological
development through the supply chain from 2
nd
tier suppliers, i.e. suppliers below the system suppliers
developing and delivering systems to the automotive assembler. See e.g. DTI 1998 for a discussion of
this.
50
SME, small and medium-sized enterprise.
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the necessary innovations and technology developments are lost from the marketplace,
with the effect that new innovations could be reduced, with the ultimate consequence
that fewer new projects would come on stream due to not having access to technology
that could make the projects cost effective.
Below we have taken a set of quotes from a ‘discussion’ by the British Department of
Trade and Industry (DTI, 1998), outlining the development of the lean supply concept
in the oil and gas industry versus the degree of innovations and technology
development, and shortened them into the following list;
The initiative Win 90s established lean supply practices; operators moving to closer relationships
with one or two main contractor(s) to exploit interface synergies.
The main contractor began to form the whole interface between the operator and the rest of the
supply chain.
Operators’ downsizes their technical departments, reducing their ability to undertake research and
development and their ability to evaluate new technologies.
A view is that operators have lost their ability to evaluate new technologies. Taken over by main
contractors.
Whereas SMEs could approach engineering departments in operators and find ‘product champions’
they now have to identify project teams, which may consist of operator and contractor engineers, and
who are essentially mobile.
Win 90s continued by CRINE.
Industrial stakeholders agree that these various changes in supply methods are having, or may have
an adverse effect on innovation.
There is a shared perception that the largest percentage of new technologies have come from SMEs.
Cost cutting initiatives often embodied in alliancing agreements, usually transfer increased risks onto
the contractor, making the contractors highly reluctant to take on any new ideas since innovation
means greater risks, and they therefore tend to stick with tried and tested technology.
Contractors may not be accessing best technologies when these are available in the market place, due
to preferring to source tried and tested technology rather than risk using an innovation despite it
having the potential to reduce costs for the operator; and demanding excessively large cost reductions
before considering an idea.
In order to cut costs operators and contractors have to seek innovation from SMEs.
It seems clear that also contractors will pass down the responsibility for technology identification and
development to SMEs.
Pre-CRINE and pre-NORSOK, technology development happened to a large extent
through a broad base of SME’s working tightly to the technological problem core. This
could be regarded as a ‘rich’, not ‘lean’ approach. Some say that even in the post-
NORSOK period, the improvements in cost and execution time were due to
technological developments.
‘Although the actual performance [‘NORSOK-performance’] represents a considerable achievement
compared with traditional budgets and development schedules, it is more likely that these achievements
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are caused by more cost effective technical concepts than by the use of the NORSOK … contract
execution principles’ (Kinn et al. 1998, p.1).
The ‘lean supply’ approach may be very well suited for the repetitive context of the
operations phase, when the supply chains are established and the demand is prescribed
for a longer term, but it may be a wrong concept to pursue for the one of a kind, new
technology dependent context of the project development phase. When the context is
such that new technology is needed to make smaller reservoirs financially exploitable,
the question may more be about the ability to in an engineered way being able to
manage the search or development of new technology and/or processes that may make
a new project feasible or enhances the value of the project.
5.5.2 Time – Value of the execution process
What was said above about the main contractor filling the ‘whole’ interface between the
operator and the rest of the supply chain is a modifiable truth. The operators’ does also
have their long-term frame agreements and frame contracts with their own suppliers,
which the operator often demand that the main contractor use in a specific project. This
may again be the basis for discussions between the operator and the contractor,
regarding whose supply chain to use, the operator’s or the contractor’s to get the most
time-effective execution.
When the development phase with its demand and supply chain processes is completed,
the operator will therefore in the operations phase be making use of operations supply
chains established partly by the operator and partly by the contractor. Use of frame
agreements for long-term demand and supply chain relationships as sources of
effectiveness and efficiency both for the development phase as well as the operations
phase of the project life-cycle, become central in the relationship and distribution of
roles between the Operator and contractor as project supply chain actors. A central
question is whether it is the Operator’s or the contractors frame agreements and
contracts that are to be used, and why. A contractor procurement executive said it like
this;
‘Our [the contractor’s] claim is that we as contractor develop concepts, products and solutions together
with our sub-contractors and suppliers, and that it therefore is necessary that it is us [the contractor] that
possess the long-term, development oriented agreements and contacts with these. The petroleum
companies counter-argument is that they need the long term agreements and contract due to the need for
simplification and efficiency in operations’.
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Table 5.6. Who’s supply chain to use in development.
Operator’s supply chain Contractor’s supply chain
Could effect in leaner operations (not necessarily
if change in operatorship)
Potential for supply synergies across operator’s
installations.
Higher execution time risk.
Improving network relations in the industry
(indirectly improving contractor’s agile
capabilities).
Shorter execution time, due to using ‘pre-defined’
and established demand/supply chains, with a
potential for continuous development.
Less execution risk.
Strengthening contractor’s lean execution model.
As such the main question for whose frame agreements to use is whether one is aiming
for effectiveness and value enhancement through the operator’s frame agreements,
which should result in shorter development execution time, or aiming for value
enhancement through efficiency in the operations phase. Another dimension used by the
Operator is that they want to exploit and enhance the effect of operational synergies
between several licences. The background for the use of frame agreements is the aspect
of development of competitive products and solutions, as well as the efficiency element
of reuse.
Seen from the contractor’s point of view this is much about whether the contractor has
to establish new relationships when executing a project based on the operator’s supply
chain, or whether the contractor may use its own supply chain relationships;
‘There has also been a change in when developments should take place in the industry. The old approach
was that developments should take place within the projects. This takes more time in the projects, as well
as it brings more uncertainty into the project. The new approach is that developments should take place
outside of and between projects. This approach differentiates more clearly between product development
and product execution’ (meeting with a contractor representative, 990614).
Then we are into the effect that time has on the value enhancement through project
execution. As was stated in chapter one describing the main changes resulting from the
NORSOK process, the overlap between the project phases is increased, contracts are
placed early, and work is commenced based on preliminary technical information, in
order to reduce the project execution time. The importance of reducing the project
execution time is due to the value position of the project for the project owners. The net
present value of the project is improved by reduced execution time, due to earlier
income from operations, and shorter time between the large cost spending of the
execution phase and start of operations and income. This positive effect is to some
degree counteracted by increased costs, when the execution time becomes too short and
the quality costs start to raise due to more concurrent activity than what the project
organisation is able to manage. The question therefore is what is the most optimal
execution time?
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Figure 5.4 shows the declining life cycle income, LCI, as a function of the execution
time. The CAPEX cost curve, here given without risk measures, is also shown, with the
minimum point of the curve showing the optimal execution time from a CAPEX cost
point of view. By bringing the CAPEX costs curve and the LCI income curve together,
this gives us the net present value curve of the project, with its highest point marking
the optimal execution time from a net present value point of view. A natural question to
ask is whether it is the same life cycle income curve or CAPEX curve that applies for
both ‘execution times’, or whether it is possible to ‘lift’ the LCI curve with a longer
execution time due to improved time for design optimisation or use of new technology,
or lower the CAPEX curve?
Project
execution
time =
Time from
investment
to income
Income curve;
Present value of
project life cycle income (LCI)
Result-curve;
Net present value
of the field development
CAPEX (budget);
Built into the CAPEX
is an efficiency cost,
which is at a minimum
with a certain
execution time
0
Cost
Income
Optimum execution time from
net present value point of view
Optimum execution time from
Executin efficiency point of view
?
The optimum execution time:
A compromise between different needs.
Where in the range should it be?
Project
execution
time =
Time from
investment
to income
Income curve;
Present value of
project life cycle income (LCI)
Result-curve;
Net present value
of the field development
CAPEX (budget);
Built into the CAPEX
is an efficiency cost,
which is at a minimum
with a certain
execution time
0
Cost
Income
Optimum execution time from
net present value point of view
Optimum execution time from
Executin efficiency point of view
?
The optimum execution time:
A compromise between different needs.
Where in the range should it be?
Project
execution
time =
Time from
investment
to income
Income curve;
Present value of
project life cycle income (LCI)
Result-curve;
Net present value
of the field development
CAPEX (budget);
Built into the CAPEX
is an efficiency cost,
which is at a minimum
with a certain
execution time
0
Cost
Income
Optimum execution time from
net present value point of view
Optimum execution time from
Executin efficiency point of view
?
The optimum execution time:
A compromise between different needs.
Where in the range should it be?
Figure 5.4. The optimum execution time (Based on figure in TIKO-II, 1998).
This opens up for alternatives, and alternative supply chains. Being able to establish
new supply chains if new opportunities or risks are uncovered through uncertainty
management of the project, then being able to undertake evaluations that could answer
whether the value position of the project would be enhanced, i.e. pre-evaluating the
changed cost position and changes in execution time if going for alternative
technologies and/or processes.
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5.6 Summarizing the challenge
The challenge of the oil and gas supply chain in the North Sea region, as presented
above, is two-fold. First it is the ability to be able to support and take advantage of
innovations and technological development that may keep up the competitiveness of the
oil and gas region. The other is related to finding the most ‘optimal’ execution time,
taking the option of alternative routes into account. Both are aimed at macro
competitiveness, through inter-organisational capabilities and capacities, where the
project specific supply chain has to be competitive, both in enabling use of innovative
technologies, and without compromising on the execution time. And this should be
made manageable in a planned and controlled way.
Table 5.7. Summarizing the challenges of the oil and gas [project] supply chain in the
North Sea region.
Challenge Description
Innovations and technology
development
[Cost and income impact on value]
Being able to develop relationships in the industry
demand/supply chains that enables and sustains the
initiation and use of innovations and technology
development.
Project development execution time
[Time impact on value]
Being able to establish extended project organisations that
are able to execute the project development in a ‘correct’
scheduled time, and in a controlled manner.
In chapter one we presented the developments of project execution and management
through four stages in the North Sea oil and gas industry. There we saw that improved
project planning and control, through CTR-catalogues, ‘Front End Loading’, and
incentives for the contractor to control his own costs were means applied in ‘stage two’
to meet the recommendations from ‘stage one’; detailed definitions and tight change
control. Then in ‘stage three’ new project and contract execution models were
introduced, with a lean supply approach to the supply chain. Together with bringing the
supply chain earlier into the project, to take part in project definition and project object
specification, together with committing the supply chain earlier, in a still open project
context, through placing contracts with larger contractor risks on a less defined basis
(more degrees of freedom, both on the contractor and operator side), resulted in an
‘open’ situation to be developed based on a lean supply chain.
In other words, we may say that in stage two the focus was on closing the project
through strict project planning and control means, especially before committing the
supply chain, but having a multitude of potential supply chains (and thereby
technology) to develop from. Then in stage three we may say that the project is opened
up, especially to the contribution of the supply chain and even when committing the
supply chain, but the portfolio of supply chains to develop from is reduced due to lean
supply developments. This benefited the execution time, but at the sacrifice of the
(potential) opportunity value of alternative technology. In summary we may say that;
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Stage 2; Approach a closed project, with a rich (open) supply chain.
Stage 3; Approach an open project, with a lean (closed) supply chain.
The consequence may be that when opening up the demand processes, concurrently
with applying lean supply, as in stage three, one may see that technology development
in is danger of being lost, with its potential value enhancement contribution. At the
same time the concurrent execution process, with a lean supply chain seeks to manage
the time element of the value enhancement process in a controlled manner. However, if
project value enhancement from both technology (cost and income), as well as time
shall become an opportunity, then one may seek to combine the approaches of stage two
and three in one way or another. Combining the steps from stage two and three could
e.g. for stage four mean to;
Stage 4: Approach
51
an open project, with a rich (open) supply chain.
Approach a closed project with a lean (closed) supply chain.
This means that new project planning and control concepts and means should be
established that enables to up-keep and manage the option of a rich and open supply
chain for an open project setting, though still keeping manageable control of the time
processes of the project development and execution.
So then what we have defined for the three stages could be shown as in figure 5.5.
Closed Open
Stage 2;
-Close!
-’Rich supply’
Stage 3;
-Open!
-Lean supply
Closed Open
Stage 3;
-Open!
-Lean supply
Stage 4;
-Open to closed!
-’Rich’ to lean
Lean
supply,
...
... for
an open
situation
Lean
supply,
...
... for
an open
situation
Rich
supply,
...
... for a
closed
situation
Lean supply,
for a closed
situation
’Rich’ supply,
for an open
situation
Closed Open
Stage 2;
-Close!
-’Rich supply’
Stage 3;
-Open!
-Lean supply
Closed Open
Stage 3;
-Open!
-Lean supply
Stage 4;
-Open to closed!
-’Rich’ to lean
Closed Open
Stage 2;
-Close!
-’Rich supply’
Stage 3;
-Open!
-Lean supply
Closed Open
Stage 2;
-Close!
-’Rich supply’
Stage 3;
-Open!
-Lean supply
Closed Open
Stage 3;
-Open!
-Lean supply
Stage 4;
-Open to closed!
-’Rich’ to lean
Closed Open
Stage 3;
-Open!
-Lean supply
Stage 4;
-Open to closed!
-’Rich’ to lean
Lean
supply,
...
... for
an open
situation
Lean
supply,
...
... for
an open
situation
Rich
supply,
...
... for a
closed
situation
Lean supply,
for a closed
situation
’Rich’ supply,
for an open
situation
Figure 5.5. The three stages and their use of rich or lean supply chain concepts, to
approach closed or open projects.
To use some terms that we defined in chapter four, we may say that the ‘rich’ or open
supply chain approach may be supported by the concept of agility and lessons from
51
Here we have used the term ‘approach’, but what should be more appropriate is to say ‘optimise’ in the
sense that one will seek the solutions that give the most project value to the project owner, but were the
supply chain also make a reasonable profit taking their risk exposure into account.
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agile manufacturing. This has direct relations to the project development phase as
described above. However, the project operations phase is both a closed project state, as
well as have a ‘closed’, repetitive supply chain, i.e. a context suitable for lean supply
chain approaches.
If we now summarise what we have said regarding the three stages of developments of
project execution and management in the North Sea, then it may be presented as in table
5.8. below.
Table 5.8. The three stages and their use of rich or lean supply chain concepts, to
approach closed or open projects.
Stage Project Supply chain Operations Supply chain
Stage 2
52
Closed “Agile” Closed “Agile”
Stage 3 Open Lean Closed Lean
Stage 4 – Alt 1 Open Agile Closed Lean
Stage 4 – Alt 2 Closed Lean Closed Lean
Taking the conclusion from table 5.8 with us, we will now move to the third part of this
thesis. The development of the project supply chain management concept, PSCM.
The development of the PSCM concept and the related methodological guidelines seek
to meet the challenges of the project context or state, in both the development and
operation phase, with appropriate logistics approaches to the corresponding supply
chains.
52
We have for the operations phase of stage two said that it is following an agile approach. This is not the
fully correct use of terms. What we mean by using that term is that at that point in time there were still not
that much focus on utilising synergies for supply across several offshore installations. This means that
each offshore installation was still being supplied from its own supply ‘warehouses’, with its own
material. This is a ‘rich’ (cost un-efficient) rather than an agile approach.
6 Project Supply Chain Management – The Concept
6. Project Supply Chain Management – The Concept
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121
6.1 Introduction
This chapter outlines and discusses the concept of project supply chain management,
PSCM. PSCM may be regarded as an artificial construction as defined by Simon
(1990);
‘The thesis is that certain phenomena are “artificial” in a very specific sense: they are as they are only
because of a system being moulded, by goals or purposes, to the environment in which it lives. If natural
phenomena have an air of “necessity” about them in their subservience to natural law, artificial
phenomena have an air of “contingency” in their malleability by environment. … artificiality is
interesting principally when it concerns complex systems that live in complex environments. The topics
of artificiality and complexity are inextricably interwoven. … Fulfilment of purpose or adaptation to a
goal involves a relation among three terms: the purpose or goal, the character of the artefact, and the
environment in which the artefact performs’ (Simon 1990, pp. ix-xi, 8).
As stated by a Norwegian Public Study [NOU 1988] there is a need for system
knowledge when new facts or trends are emerging;
‘New facts need system knowledge … Shortly said: the basic theoretical foundations of learning is vital
both for the interpretation of new information and as a guide to direct the search for new facts. The better
the theories are, the longer they last. And it is those concepts, models and theories that one is familiar
with that decides what one may conceive of the unknown. The production of new knowledge makes it
more necessary than ever to know such fundaments of understanding. The large flow of explorations and
findings necessitates fundamental knowledge – systems for interpretation and action – now more than
ever. Without systems knowledge the explosion of knowledge will lead to greater confusion and
perplexity. The flood of impressions becomes fuzziness if the frames of reference that can give them
meaning, are missing’ (NOU 1988, p.9).
With respect to supply chain management in the project context of the oil and gas
industry, it is being perceived as a new, emerging competitive aspect of the oil and gas
industry, e.g. as addressed through CRINE Network’s supply chain management
initiative. To be able to ‘navigate’ in this new world of words, concepts, models and
theories, there should be outlined how logistics and supply chain management is
different from and focus as compared to other industries. The concept of project supply
chain management, PSCM, is set to outline that.
Before we start looking into PSCM as a concept, a short introduction to some terms is
needed. First the term concept, which may be defined as;
‘Concept: a word or phrase used in propositions to describe real world relationships; concepts are
neither true nor false, only more or less useful’
53
.
53
‘Concept: a word or phrase used in propositions to describe real world relationships; concepts are
neither true nor false, only more or less useful; the cognitive meaning of a term and the smallest unit of
(conscious) thought processes; concepts are neither true nor false but more or less applicable (a) to
recognise an object as an instance of the concept, (b) to produce or to understand sentences in which the
concept is expressed and (c) to develop constructs or cognitive systems using the concept in question’
(Web Dictionary of Cybernetics and Systems, http://pespmc1.vub.ac.be/ASC/Concept.html).
6 Project Supply Chain Management – The Concept
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122
The main idea behind developing the PSCM concept has been to outline a concept that
is ‘neither true nor false, only more or less useful’ to understand ‘the character of the
artefact’ as Simon says above, and that thereby could act as a ‘fundament for
understanding’ and a ‘system for interpretation’ as the needs stated by NOU. Then
PSCM may be the frames that could guide logistics and supply chain management in
this project context. The concept should again be based on some principles;
‘Principle: a basic generalisation that is accepted as true and that can be used as a basis for reasoning or
conduct’
54
To develop knowledge takes time and a concept built on a set of principles could be
useful in that process;
‘As with almost all innovations, implementation precedes understanding. The aircraft industry, to cite
one example, was decades old before a theoretical basis for designing aircraft began to develop, and
decades more passed before theoretical models were mature enough to allow new designs to be deducted
from them. Agility is happening. This book is an attempt to understand what is happening and to capture
that understanding in a first-generation model’ (Goldman et al. 1995, p.xvii).
As with the aircraft industry and the concept of agility, supply chain management in the
project context of the oil and gas industry is ‘happening’, i.e. the awareness of its
impact is becoming more clear. The project supply chain management concept, PSCM,
is an attempt to try to capture the characteristics of that through a conceptual
development.
6.2 Principles and Characteristics of Project Supply Chain Management
Now we will start with stating the principles that PSCM is built on, and then describe
the characteristics of PSCM. First the characteristics will be outlined and described per
se, before the characteristics is ‘summarised’ in two ‘statements’ one for the
development phase and the operations phase of the project respectively.
6.2.1 The Principles of PSCM
The principles of project supply chain management is outlined to be the basis for
developing the key describing characteristics of logistics and supply chain management
within the project context. The underlying assumptions for the principles is the notion
of the project as a business opportunity, with the project supply chains as a competitive
entity that may enhance the value of the project, i.e. the business opportunity. Value
enhancement through the project supply chain may then be explained through a logistics
and supply chain management approach. As such the principles of project supply chain
management are the same as the three underlying assumptions of this thesis;
- The project as the business opportunity.
54
From Webster Unabridged Dictionary/WordNet, http://work.ucsd.edu:5141/cgi-bin/http_webster/ .
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- The supply chain as the competitive entity.
- Competitiveness through logistics and supply chain management, focused on
alignment of supply and demand in the project context.
We then have a set of principles that build up the foundation from both the project as
well as the logistics and supply chain side. Within the project context addressed here,
the project is a business opportunity that has to attract investors able and willing to
invest the necessary financial means to realise the project. The supply chain is as
described in the previous chapter the extended entity that make the owners of the project
able to realise the scope of work and technological content of the project. The last
principle is the principle that takes the contribution from logistics into account.
Logistics is ultimately about aligning the supply with the demand in a best possible
way, and in the project context that has to be done throughout the life-cycle of the
project and the project object. Aligning demand and supply in this project context is
driven by engineering processes, within an open context in the development phase,
meaning that uncertainty is an important aspect to take into account. In the operations
phase the project is in a closed state, and the processes and uncertainty changes
character. This necessitates that the characteristics of PSCM change from the
development phase to the operations phase. Together with the characteristics of PSCM
(described below) these principles will be the basis for the PSCM concept.
6.2.2 The Characteristics of PSCM
As a business opportunity and a value generating ‘entity’, the project could be separated
into a development phase and an operations phase. These two phases have distinctly
different characteristics, which should be reflected in the characteristics of a logistics
and supply chain management approach to this context, i.e. the characteristics of PSCM.
As described earlier, a key describing characteristic of the inbound supply chains of car
manufacturers is robustness (Schneider et al., 1994). Their processes have a high degree
of repetitiveness and delivery frequency, with tight interrelationships and connection
within the inter-organisational supply and system manufacturing network. Further the
automotive supply network is characterised by lean use of resources so that if one
supply chain stopped, the whole supply network would stop within a short period of
time. The supply chains therefore have to be robust.
The project context focused on here is primarily characterised by being a unique
business opportunity, with two distinct phases that again are unique with respect to the
characteristics that describe their supply chains and processes. In table 6.1 below we
present the characteristics of project supply chain management, as we propose them,
related to five different aspects describing the project supply chains.
The first characteristic is the project life cycle, stating the importance of being aware of
the differences in characteristics between the two distinct phases, development and
operations. The second characteristic is the supply chain focus, driven by the targeted,
one-of-a-kind demand/supply in the development phase, versus the repetitive
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demand/supply in the operations phase. Then the third characteristic is the logistics
drivers, or whether the main driver of the supply chains should be demand or supply in
the development versus the operations phase respectively. Then come the organisational
processes, characterised by agile characteristics in the development phase and lean
characteristics in the operations phase. The final characteristic is then related to the
service quality, an important logistics mission, focusing on resilience in the
development phase and robustness in the operations phase. Each of the PSCM
characteristics is described more thoroughly below.
Table 6.1. The characteristics of project supply chain management.
Aspect Characteristics
1. The project life cycle Development Operations
2. The supply chain focus One-of-a-kind Repetitive
3. Logistics drivers Demand chain management Supply chain management
4. Organisational processes Agile Lean
5. Service quality Resilient Robust
The project life cycle
The project life cycle is characterised by the two distinctly different phases development
and operations. The development phase is focused on developing a business opportunity
and the project object enabling the owner to exploit the business opportunity. The focus
is on developing the business opportunity in a context that is influenced by a high
degree of uncertainty, where value enhancement has to be developed through combined
knowledge, competence and cost effectiveness in the extended, or ‘virtual’ organisation
that comprise all the actors taking part in the development (demand) and supply
operations. The operations phase on the other hand have to generate the income that the
project object is set to do, and do that in the most cost efficient way. The uncertainty is
reduced to an operation risk management aspect. While the development phase is
temporary and working under limited time, the operation context is repetitive, with
ample time for refinement.
The origin of the project is when knowledge about a business opportunity starts to
emerge. In the context of development projects in the oil and gas industry that is when
geological data is collected, refined, analysed and interpreted. The first time period of
the project is known as the project’s front-end, or ‘project development’ as we said in
chapter three. This is the time period from the point in time when the first data is found
‘describing’ whether hydrocarbon reserves are present below the seabed, and a business
opportunity starts to emerge, up to the point in time when the project has been defined
and acknowledged as a project and ‘big spending’ starts. ‘Big spending’ may be
regarded as the point in time of placing and committing to contracts with contractors,
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sub-contractors and suppliers, i.e. the start of the major capital expenditures of the
project object development phase.
The development phase of the project is characterised by bringing it from an open state,
towards closing several degrees of uncertainty, both risks and opportunities. The high
degree of uncertainty that characterises this phase is related both to opportunities for
value generation that the project owner want to take advantage of, and at the same time
risks that should be hedged against. The development phase ends when the project
object is commissioned, set into operation and reviewed for a period to see that it is able
to deliver as specified.
In the commissioning phase, when the development phase ends and operations
commence, a rather radical change occurs in the logistics and supply chain management
setting for the project object. At this point in time the project object has been developed
and all needs generated by the technical and support processes are defined, and the
project object shall be operated for a longer period of years to exploit the reserves in the
reservoir and produce the oil and gas resources and generate value for the project
owners. The objective has changed from being cost-effective in using costs for life cycle
value enhancement in the development phase, to becoming cost-efficient with respect to
operations and value seeking in enhancing the options available to enhance the
production.
The supply chain focus
A logistics and supply chain management concept aimed at this project context has to
focus in on the specifics of each of the two phases, i.e. the ‘unique, one-of-a-kind’
project object to be developed in the development phase, and the repetitiveness in the
operations of the project object.
In a logistics and supply chain perspective the project object development means first
and foremost the development, i.e. engineering, fabrication, construction and
commissioning of a ‘one-of-a-kind’ project object. The processes involved in the
development phase are directly influenced by the development setting, i.e. developing
and constructing a unique object. The setting is moving from an ‘open’ area with rather
wide degrees of freedom available, through specifying, committing and thereby
‘closing’ the project, in creating a specific object with all its detail, to exploit the
business opportunity in an ‘optimal’ way.
The project object development is characterised by a large scope of engineering. The
project object to be developed is unique, and therefore the engineering is targeted at
specifying specific materials and equipment to be used. At the same time one may say
that engineering comprises the value enhancement processes that shall make use of the
opportunities inherent in the uncertainty of the ‘what’s’ and ‘how’s’ of the object
development processes. The engineering processes therefore have to balance the search
for value enhancement through making use of new, state-of-the-art technology and
solutions, against the time frame available to establish specific needs, that again can be
committed to deliverables from actors further down in the supply chain. This is a
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demand specification process, which we prefer to use the term demand chain
management for.
In the operations phase, the supply chain focus is characterised by repetitiveness. The
logistical drivers are repetitive, driven by technical processes and predefined operations
schedules. This accounts for ‘more of the same’, where reliable replenishment when
needed is in focus. Replenishment from a supply base and through a supply system that
is characterised by efficiency, both with respect to cost and time, and reliability. This is
a process where supply is in focus, and we prefer to use the term supply chain
management for. The repetitiveness of operations establishes the ground for fine tuning
and through that making the organisational processes lean. And as for the supply chains
of the car manufacturing suppliers, lean supply chains need to focus on the robustness
of their service quality. These are the characteristics that characterise the operations
phase and that will be further described below.
Logistics drivers
In chapter four, in the outline of the developments in logistics and supply chain
management theory, we stated that there were maybe only a conceptual difference
between supply chain management and demand chain management. Though, we stated
also that there could be reasons to separate the usage of the two terms when addressing
logistics and supply chain management in the project context. Here we emphasise the
term demand chain management in the development phase, and the term supply chain
management in the operations phase. The reason for this dual use of terms and their
differences are outlined and discussed below.
Demand chain management in the development phase
The objective of the development phase is to develop a project object that in a best
possible way creates value for the owners in a life cycle perspective. This means that the
capital expenditure laid out during the development phase should be kept low, but at the
same time should give value enhancement in the life-cycle, i.e. it should be cost-
effective. As inn all supply chains there is an initial demand that triggers the supply
processes, whether there is a pull (given demand) or push (estimated demand)
orientation. The demand in the development phase is defined, and redefined through
change processes, and set by engineers, through the engineering processes in conceptual
and detail engineering. The demand may further be changed during the fabrication and
construction activities, to suit exact fabrication or construction needs that have not been
adequately covered in detail engineering.
Horizontal alliances between the operator and one or more contractors have been used
to support the demand chain management objective and function as described here.
These are often referred to as alliance contracts. In such horizontal alliances it is the two
upper-most tiers of organisations in the project supply chain that are the anchorage point
of the demand chain management processes. The operator and the contractor(s) may be
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regarded as a ‘horizontal alliance’ construction in establishing and defining the
demand
55
.
Operator
Contractors
Sub-contractors
Suppliers
‘Horizontal alliance’
‘Vertical alliances’
w/ different origins
Demand
S
u
p
p
l
y
S
u
p
p
l
y
S
u
p
p
l
y
S
u
p
p
l
y
Figure 6.1. Organisational demand and supply alignment in the development phase.
Figure 6.1 illustrates how a horizontal alliance may be seen as the cornerstone of a
demand chain management approach. The operator and the contractor(s) constitute the
main node in the demand chain, in managing and being the ultimate generator and
customer of the outcome of the demand processes. Each of the actors have again
relationships with suppliers of both short and long term duration. In the process of
engineering value into and specifying the project object and establishing the demand,
each actor draws on his set of supplier relationships. As such these suppliers not only
take part in supplying, when a demand is specified, but also in specifying the demand,
as they support their higher tier customers with knowledge and competence in finding
e.g. the most optimal and value enhancing technology, given the time available within
the schedule. One may then say that the extended project organisation, as a demand
chain, comprises the horizontal alliance of the operator and contractor(s), and their
vertical supplier alliances or relationships, of which the ones are used that contribute
most to the value enhancement of the project through the project object development.
Though there is a primary focus on demand chain management in the development
phase, the supply chains does also play an important part. Although the demand
processes establishes the potential for value enhancement and cost effectiveness, the
supply chains and the supply processes are necessary to realise the development, i.e.
supply the demanded (engineering specified) material and equipment, fabricate and
construct. In figure 6.2 below we see that the demand chain originates in the horizontal
alliance (whether formal or informal) between the operator and the contractor(s). From
55
See e.g. the description of the Cleeton Compression Project in Harrison et al. 1996, and the reference
to British Petroleum in Vollmann et al. 1995.
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the top-level demand stipulation the demand processes moves downwards to sub-
contractors and suppliers, and ultimately to sub-suppliers. The demand processes are
commitment intensive in that the operator and contractor specifies the initial demand,
that again may be adjusted (due to changes) through product-oriented processes with
sub-contractors, suppliers or sub-suppliers, for at the end to be committed through
contractual bindings.
Operator &
Contractors
Sub-
contractors/
Suppliers
Sub-
suppliers
Demand chain:
Downwards.
Engineering and design
Demand is specified
Procurement
Commitments made
Ordering mechanisms activated
Costs accrue
Supply chain:
Upwards
Equipment and material
Fabricate and construct
Capacities and capabilities
Documentation
Figure 6.2. Alignment of demand and supply in the development phase.
Supply chain management in the operations phase
When the project object is developed and operations commence, the setting becomes
repetitive with respect to the logistics operations and supply chain management. The
demand processes goes from being defined by engineering in the development phase, to
becoming defined by technical processes and work plans, i.e. the demand is more or less
given, except for contingencies and incidents that ‘disturb’ what is planned. The focus is
oriented towards the supply as compared to the development phase’s demand focus. The
focus is therefore towards the supply chains, and project value shall be enhanced
through cost efficiency and reliable logistics support for the operations.
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Offshore
installation
Operators
onshore
organisation &
supply base s
Suppliers &
Logistics service
providers
Operations demand chain:
Planned or unplanned
Critical or non-critical
Need date
Operations supply chain:
Responsiveness
Lead time
Capacities
Documentation
Figure 6.3. Alignment of demand and supply in the operations phase.
An example of a supply chain from supplier to an offshore oil & gas platform is shown
below. The chain shows goods ordered from the platform, via procurement in the
operator’s onshore operations organisation, and supplied from the supplier, through
using a logistics service provider to the offshore supply base, and then offshore
transport to the platform via a supply ship.
Demand/
request
Order to
supplier
Packing
and shipping
goods
Transport
to supply
base
Supply
base
operations
Offshore
transport
Installation
receipt
Retour
to supplier
Installation Operators
onshore
organisation
Supplier Logistics
service
provider
Operator’s
supply base
Supply
ship or
helicopter
Installation E.g. leased
equipment
returned to
supplier
after use.
Figure 6.4. An example of an offshore supply process and supply chain.
Organisational processes
The objective of logistics management is to align supply with demand in a cost and time
effective way. What becomes an additional point in the project context is that the
demand/supply processes in the development phase play an essential part in the value
enhancement of the project value through the engineering of the project object. In
seeking the most value, i.e. engineering value into the project object, the processes have
to be adaptable to accommodate the opportunities that arise throughout the development
of the project object. Therefore the logistics alignment of demand and supply in the
development phase should be characterised by agility.
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When the project object is fully developed and set into operations, further value
enhancement could be achieved through seeking cost efficiency in the supply system.
Therefore the logistics alignment of demand and supply in the operations phase should
be characterised by being lean, removing waste from the supply chains through the
supply system, though keeping it reliable.
Agile (development phase)
Value enhancement in the oil and gas industry is to a large extent dependent on
technological progress and innovations. It has been estimated that approximately fifty
percent of future improvements in cost position and competitiveness will come from
improvements in technology. As such there will be an important aspect of supply chain
management to address the technological development capacity both within and outside
an inter-organisational supply chain construction, e.g. the portfolio of long-term frame
agreements;
‘From the 1990s on, everyone working on the design and definition of projects should be aware of the
need for and benefit of forecasting likely technological change over the following five to ten years. Very
simply, if managed technology forecasting is not performed then future competitiveness will be
diminished’ (Morris 1994, p.297).
These technological changes has to be accounted for through the engineering processes
in developing the project object, and thereby engineering value into the project, i.e. the
engineering processes have to account and employ opportunities that emerges due to
technological developments. This will often require changes, which requires that the
extended or virtual project organisation is able to meet these. This is the core of agility
and the agile virtual enterprise;
‘The agile virtual enterprise is one that simply responds well (at low time and cost) to unexpected change’
(Goranson 1999, p.67).
However, changes are a costly process, and as CAPEX costs should be kept as low as
possible, one should approach building agility into the parts of the organisation where
changes are likely to occur, in stead of trying to hedge all risks (i.e. risks of not being
able to pursue a wanted opportunity), so that resources are not wasted;
‘Agility is insurance, and investment decisions need to be made accordingly. … The ability to
accommodate change that is unimportant or unlikely to occur represents the wasting of resources’
(Goranson 1999, p.77).
In terms of being able to exploit technological opportunities, without wasting resources
necessitates blending technology development and organisational agility as part of
project management;
‘Future products are managed as portfolios according to their degree of technological uncertainty and the
organisational relationships needed to bring them ‘to market’. The organisational and control attributes of
project management have a major role in accomplishing this successfully’ (Morris 1994, p.297).
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If organisational agility is left out, this necessitates managing development within the
project demand/supply chain between projects, so that new technology and processes
are ready to be used for new, upcoming projects, but that is a lean approach;
‘There has also been a change in when developments should take place in the oil and gas industry. The
old approach was that developments should take place within the projects. This takes more time in the
projects, as well as it brings more uncertainty into the project. The new approach is that developments
should take place outside of and between projects. This approach differentiates more clearly between
product development versus the fabrication of a product’ (A Norsok representative, June 1999).
As the quote above states, a lean approach seeks to reduce risk. An agile approach does
also try to reduce risk, but does it in another way. The agile risk reducing approach is
aimed at trying to use resources to hedge the possibility to capture the opportunities
where they are most likely to emerge, i.e. reducing the risk to miss opportunities, but in
a cost-effective way.
As such agility needs to be ‘engineered’ into the project organisation, to make it work
as an agile virtual enterprise. The result of agility will be that the virtual enterprise are
able to proactively manage ‘moving targets’, as new opportunities arise where the
organisation must decide whether to follow the opportunity or leave it due to either cost
or time constraints. As it often is a time pressure for developing the project object, the
old or ‘classic’ model acting much like a ‘relay race’ has been left for more concurrent
processes, where much work is done in parallel. This puts even greater stress on the
agile ability of the project organisation, as the available time to cost effectively follow
opportunities become reduced. The difference between the classical model and a
generic, concurrent model, with an increased need for interrelationships is shown in
figure 6.5 below.
Classic model:
“Relay race”
Development Operations
Generic model:
Must see both
forward, as well
as sideways to see
interdisciplinary
relations
Decisions made on lack of “perfect information”,
and searching for better opoprtunities;
=> Proactive management
=> Managing moving targets
=> Calculating value versus organisational cost
and time of change (agile quality)
From ...
… to
Figure 6.5. Enhance the agility in project development.
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In addition to the generic, functional model above, highlighting internal agility, there is
a need for the extended project organisation to be agile in itself;
‘Overall, there are these four contexts of agility: (1) The sum of internal agility of each of the
components. (2) The (probably quite different) agility of the Virtual Enterprise as a whole. (3) The ability
of each component to quickly/cheaply aggregate. (4) The ability of each component to quickly/cheaply
change the aggregation boundary. … This is to say that the agility of the virtual enterprise comes from the
ability of each component to be added, or subtracted, and to fluidly change its relationship with the
partners, plus the skill of the virtual enterprise organizer’ (Goranson 1999, p.70).
As an agile virtual enterprise, the extended project organisation needs to be able to
reconfigure itself, amongst other establishing new supply chains through bringing new
partners and suppliers in as needed when new opportunities emerges. The question then
is how this could be made practical?
Lean (operations phase)
Central in lean concepts stands waste reductions through continuous improvements. A
necessary basis for this is that there is a repetitive context, so that there is at least a
minimum of continuity for improvements to be carried out within. In chapter four we
outlined three different types of activities that lean thinking focuses on; value adding
activities, non-value adding activities, and necessary non-value adding activities. As we
also pointed out in chapter four, these activities should be approached and focused in
the whole supply chain, not only per actor in the chain. The chain focus is easier when
the chain, or more appropriate the network of chains, is stable over time.
The operations phase of the project life cycle has the necessary continuity and
repetitiveness for lean thinking to be applied. It does also have supply chains that are
stable over time, i.e. both the production processes to be supported and supplied and the
supply network can for this purpose be regarded as constant over time. There are also
both value adding, as well as necessary non-value adding activities, and naturally non-
value adding activities, or waste in the total supply chain network and the inherent
processes. As such the operations context and its supply chains are so that ‘lean
thinking’ may be a natural approach for value enhancement.
Lean thinking is focused around the five lean principles value, the value stream, flow,
pull, and perfection (Womack et al. 1996). These principles may be regarded as a serial
development from initially starting with defining value as perceived by the customer of
the product and/or service that is delivered, then mapping the chain of actors and
functions that take part in delivering the product or service. Then the chain should be
‘re-engineered’ to establish a ‘flow’ bringing the product or service through to the final
customer, ‘pulled’ by the customer so that it only ‘flows’ when the customer wants
something. That means a tightly coordinated chain that works as one entity. This
requires transparency into the elements and processes of the chain, so that the actors
involved could improve the chain as one entity. This leads to the final principle of lean
thinking, the continuous improvements.
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If we see this in the operations phase of the project context, this means that the operator
should define what type of value that the supply chains delivers to the operations of the
project object, then map all the supply chains delivering specific products or services to
get a ‘transparent’ mapping of the chain as a basis for co-operative improvement work
among the actors in the supply chains. Then the demand and supply processes of the
supply chains should be re-engineered to get efficient and effective pull-based flow
from the initial supplier to the final customer, i.e. the project object in this case.
However, the operations phase is more or less similar for several offshore installations,
i.e. project object for different projects, as well as for several operators. This means that
the potential for waste reductions is not only along the whole supply chain, and in
treating it as one entity, but also synergies across several installations and operators
should be aimed for. For the oil and gas industry and the offshore installations, the
supplier base may be varying a bit, but still it is the same type of products being
supplied from the same type of suppliers, through more or less identical supply
schemes, so that the potential for cross-installation and –operator synergies should be
apparent. This type of synergies seeking to develop lean solutions not only for a single
installation (project object), but for several installations e.g. in a geographic area, may
be regarded as what we referred to as competitiveness in the macro perspective in
chapter five.
Examples of lean thinking along these lines may be found among others in Ernst et al.
(1997) in their description of potential types of alliances in upstream oil and gas
industry. Among the types of alliances they propose are ‘consolidation joint ventures’,
‘enhanced supplier relationships and outsourcing alliances’, and ‘advantaged networks
of producers and suppliers’ that cover elements of lean thinking and the utilisation of
synergies for improved value/cost ratio in the upstream oil and gas industry. Further the
CRINE Network in the UK has proposed similar initiatives among others in their ‘Pan
Industry Initiatives’ as part of their supply chain management initiative (CRINE 1999-
A).
Service quality
The service quality of supply chain management is one of the key aspects of logistics.
The term ‘service quality’ itself, may not be the best to use in this respect, but it is a
term that help to address what is sought to point out. Bowersox et al. (1997) say that
basic logistics service is measured in terms of availability, operational performance, and
service reliability, defined as in table 6.2.
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Table 6.2. Logistics service measures.
Measure Description
Availability Having inventory to consistently meet customer material or product requirements
(demand).
Operational
performance
Deals with the elapsed time from order receipt to delivery, and is further defined
through; Speed and consistency – first consistency of service, then improving
delivery speed; Flexibility – able to accommodate unusual and unexpected customer
requests; and finally malfunction and recovery – required time to recover when a
malfunction occur in the supply chain, affecting the delivery.
Service
reliability
Logistics quality and the ability to accurately measure inventory availability and
operational performance.
We have used two terms here, resilience for the development phase and robustness for
the operations phase. In relation to Bowersox’s definitions they are first and foremost
related to service reliability, but with some differences regarding the operational
performance measures, and ultimately aimed at availability. As will be explained below,
resilience is used to reflect the ability to adapt, while robustness is used to reflect the
ability to withstand. Resilience and robustness has as such quite similar objectives in
their core, though they have at least a theoretical difference in their approach and
meaning that is useful for pointing out the differences in the characteristics of project
supply chain management in the development phase versus the operations phase, and
the related agile and lean organisational processes.
Resilience (development phase)
The reason for choosing resilience as the describing characteristic for service quality in
the development phase, is the terms focus on the ability to be able to come ‘back on
track’ after a ‘disturbance’. Changes may e.g. be perceived as ‘disturbance’ for demand
and supply chain management during the engineering development processes.
‘[T]he true vulnerability of technological and social systems cannot always be predicted. Since this has
been demonstrated repeatedly, it becomes obvious that resilience, that is the ability to accommodate
change without catastrophic failure, must be given greater cognisance in decision-making. … Resilience,
for better or for worse, leads to greater permanence in a world of flux’ (Foster 1993, p.36).
As the quote above from Foster shows, there is a direct relation between resilience and
agility, which may be seen as an other reason for choosing to focus on resilence as a
service quality characteristic;
‘An agile response might be required concerning a negative change as well as to address a positive
opportunity. For example, a positive opportunity would be a newly identified customer niche, or a
leveragable technology. A negative change may be a new restrictive law, a raw material that disappears,
or a customer who has been enticed away’ (Goranson 1999, p.68).
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With an agile approach to engineering and value enhancement in the development
phase, the exploitation of opportunities inherent in the open setting and the involved
uncertainty, there is a large chance that the means sought does not lead to the desired
end. That means that if one seeks to exploit novel technology and solutions, one cannot
predict that they will give the desired outcome, or an outcome at all. But if one follows
such a path one has to activate a supply chain to research and develop the needed or
wanted technology. However, if one sees that it does not lead to the desired end, the
established supply chain has to be ‘terminated’, and another solution chosen and the
corresponding supply chain activated. This means that the approach to service quality
has to be resilient, so that one is aware that a solution may not lead to the desired end,
and therefore the corresponding supply chain has to be ‘terminated’, but due to a
resilient approach this is accounted for and a ‘procedure’ for an alternative solution and
activation of the corresponding supply chain is in place. This is shown in figure 6.6.
TIME
Solutions and technology concepts are chosen … and ‘re-chosen’
… but the initial solution , and/or supply chain
does not reach the desired end, ...
With a new supply chain activated,
to realise the new solution.
Figure 6.6. Resilience as the ability to convert to a new solution and corresponding
supply chain (read text in figure from bottom upwards).
Reference to this type of reasoning may also be found in Goransson (1999);
‘Our case study addressed lowering the cost of getting it right the second (or third) time, by relaxing the
period of time that design decisions need to be frozen. Typically, in the defense environment, all major
design decisions are made in the very early phases, because of the perceived need to lock in suppliers
(and their processes). It’s the way the system works. We change that.’ (Goranson 1999, p.187).
Goransson (op cit.) seeks to play time against cost, through relaxing the time constraint.
As Figure 6.7 below shows cost commitments, and thereby e.g. technology
commitments, are delayed in time, which may be possible if one have business and
work processes in the project extended enterprise that fit the requirements needed to be
able to bring forward a necessary end within an ultimate time frame.
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Time
C
o
m
m
i
t
m
e
n
t
o
f
C
o
s
t
Delaying cost commitments in time,
i.e. larger freedom in seeking and
evaluating opportunities.
Figure 6.7. An agile supply chain allows design changes to be made later (based on
Goranson 1999, p.187).
Robust (operations phase)
The reason for choosing robustness as the describing characteristic for service quality in
the operations phase is that the supply chains shall not be the cause for interruption or
stop in production by the project object. I.e. value of break in production is so high that
one should seek to eliminate all possible causes for that. Therefore we use the rather
strong term robustness, as they did for the supply chains of the car manufacturing
industry.
The project object that ‘produces’ the hydrocarbon resources have given delivery
service targets. This service target is 98% up-time
56
of the facilities, i.e. the facilities
should be able keep up production for 98% of the planned production time, i.e. except
for planned shutdowns. Such a service measure may be weakened if the supply chains
that shall supply the facilities with needed supplies break down for any reason.
As there is limited storage space on the offshore infrastructure itself, there is a need to
store needed goods at different locations onshore and that requires good and robust
supply chains from suppliers all the way to the offshore infrastructure.
6.2.3 PSCM characteristics in summary
The characteristics of project supply chain management may be summarised into one
‘statement’ for each of the two main phases of the project, development and operations;
- Agile and resilient demand chain management in the development phase.
- Lean and robust supply chain management in the operations phase.
56
Ref. O. Instefjord, Statoil.
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Development phase; Agile and resilient demand chain management
To summarise the project supply chain management characteristics for the development
phase the terms demand, agile, and resilient are the three that should be given attention.
For both the development phase and the operations phase the chain perspective should
be taken as the basis for value creation and value enhancement. However, the
development phase is a phase were the project and the project object is to be developed,
i.e. the aim is to define and specify the demand that in sum through the fabrication and
construction activities will become the project object. Therefore we have chosen to
emphasise demand chain management specifically for the development phase. We have
used the term agile to point to the importance of seeking and evaluating opportunities
that could bring value enhancement to the project. The engineering processes are
concurrent and they have an underlying mission to engineer project value into the
project object within the time and cost frames set. The context is defined by a high
degree of uncertainty so that opportunities as well as risks will emerge, necessitating an
agile approach either explicitly or implicitly. The term resilient is used to reflect the
uncertainty in the development phase, and some of it will mature, so that the
demand/supply chains has to be able to ‘come back again’, i.e. be resilient, to aim for
the final objective.
Before we move to the operations phase let us use one quote to point to the difference
between the development versus the operations context;
‘
industry manner. These people who worry more about managing a supply chain rather than supporting a
more profitable virtual enterprise with the same players’ (Goranson 1999, p.29).
The context of the development phase is that of the virtual enterprise aimed at meeting
and generating a project object that could realise a business opportunity, i.e. demand
ultimately set by the context that the business opportunity is to be realised within is in
focus. This as opposed to the operations phase where it is ‘only’ about ‘managing a
supply chain’, though that is in itself very important, given the mission and objective of
the operations phase and the supply chains part of it.
Operations phase; Lean and robust supply chain management
As for the development phase, the operations phase does also have three terms that we
would like to summarise the attention around. The terms supply, lean, and robust is
what we mean should characterise the operations phase of the project life cycle. The
operations context is one of repetitiveness, keeping focus on the details so that the
whole ‘machinery’ goes like ‘clockwork’. This is the ultimate basis for lean thinking
where not only the potential for waste reduction could be discovered through
incremental rounds of continuous improvement, but also making the whole supply
operations more robust through revealing elements that could be a risk factor. We have
used the term supply specifically for the operations phase because it is a repetitive
supply operation. The demand is already defined and the supply chains should be robust
so that they do not contribute to disturbing the production. The term robust is used
specifically to indicate that although the supply chains should be lean, that should never
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compromise their service quality, because a stop in the revenue generation of the
production by the project object in most cases far outweighs the incremental supply
cost. I.e. the service quality in operation should strive for a 100% service degree.
6.3 PSCM – Concept and Definition
The characteristics of project supply chain management outlined above show that we
have a project supply chain that is built up of one branch for the project object
development and another branch for the project object operations. Seen as one, these
two project supply chain branches constitute the entity that shall make the project as a
business opportunity competitive.
6.3.1 Project Supply Chain Management – The Concept
Project supply chain management is a concept, i.e. ‘a word or phrase used in
propositions to describe real world relationships’, being ‘neither true nor false, only
more or less useful’. The basis for the project supply chain management concept has
been laid in the previous parts and chapters of this thesis. Table 6.3 lists the “building
blocks” for the PSCM concept as it has been developed this far.
Table 6.3. The building blocks of the PSCM concept.
“Building block” Contribution
Ch.3 Projects and Project
Management
A value enhancement focus for a business opportunity.
The ‘openness’ of project development – uncertainty and degrees of
freedom with respect to what’s and how’s; The basis of agility.
The project lifecycle – starting with the front end, ending with the end of
operations; Taking the whole life of the business opportunity into account.
Strategies and routes are different; Being aware of the underlying
characteristics and choices.
Ch. 4 Logistics and
Supply Chain
Management
Alignment of supply and demand in an inter-organisational chain
perspective – demand and supply chain management.
Lean – Adding value through removing waste (cost efficient).
Agile – Adding value through pursuing opportunities (cost effective).
Ch.5 The Project Supply
Chain Challenge
The business context – competitiveness as the underlying driver.
The challenges of the oil and gas supply chain – value enhancement
through technology and execution models, measured in cost, income and
time.
Ch. 6.2.1 The Principles
of PSCM
The project as the business opportunity.
The supply chain as the competitive entity.
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Alignment of supply and demand for competitiveness.
Ch.6.2.2/3 The
Characteristics of PSCM
Agile and resilient demand chain management in the development phase.
Lean and robust supply chain management in the operations phase.
The building blocks of the PSCM concept start with discussions of projects and project
management outlined in chapter three. Projects are ‘open’, they have inherent
uncertainty and complexity, as well as degrees of freedom, both in scope and the
organisational construction developed to undertake it. The uncertainty is reflected with
respect to what to do and how to do it, and that has to be defined and decided on in the
project front end, to have the right basis and approach for managing it through the
execution part of the development phase. The supply chain actors are important in this,
and has to be brought into the extended project organisation, or the project supply chain
at an appropriate point in time. Therefore, projects of the type addressed here are not
‘rushed into’, i.e. they comprise a front end in their lifecycle that shall both secure the
business basis for realising the project, as well as preparing for both the execution part
of developments, and the operations and continuous development of the project object
and the project. We questioned whether a value enhancement approach to project
management was in place, and which perspectives that are necessary for such a
perspective to gain foothold. How a value enhancement perspective is approached is
dependent on the level of ambition, or needed ambition e.g. due to competitive
pressures, among the project’s owners and stakeholders. This again have to be reflected
in the project strategy, and will have an impact on the approach to and the construction,
selection of actors to and development of the project supply chain, through the
contracting, procurement and operations strategy. When these strategies is laid, this
again will have impact on the routes that is to be followed through the project execution
phase.
The development of logistics has brought the logistics concepts to the inter-
organisational domain, with the demand/supply chains as the competitive entity. There
is a distinction in the use of the terms supply chain versus demand chain that should be
clear as they have their distinct roles in value enhancement processes. The logistics
objective is alignment of supply and demand through the inter-organisational demand
and supply chains. The project inherent uncertainty with respect to ‘what’s’ and ‘how’s’
will influence the logistics uncertainty in that the demand processes is influenced by the
degree of uncertainty in what’s and uncertainty in the supply processes is influenced by
the degree of uncertainty in how’s. We also found the concepts agile and lean from the
manufacturing domain. These concepts created a background for two different
‘manufacturing’ contexts. The first, agile, aimed at the context of temporary business
opportunities that need several companies connecting together to be able to exploit the
temporary business opportunity. The other one, lean is aimed at continuous
improvements in an inter-organisational setting of repetitive operations. The agile
concept with strong similarities to a project’s development phase, and the lean concept
with strong similarities to a project’s operations phase.
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In the project business context we saw that competitiveness is driven by macro forces,
demanding competitiveness to be developed through demand/supply chain
constructions that compete against other demand/supply chains. Each company have to
take their role and contribution as a chain actor into account in developing their own
competitive strengths and capabilities related to organisational issues.
Drawing all this together we came up with the principles of project supply chain
management. The project as the business opportunity, with a value enhancement focus
and approach, playing with the uncertainties of the project in a proactive management
approach that seeks to develop the opportunities and control the risks. The project
supply chains constitute the competitive entity that shall undertake the project,
throughout its lifecycle, and it is through the project supply chains that one are able to
enhance the value of the project. The project supply chain play on utilising the logistics
supply and demand alignment objective in searching for value in and through the
project object.
The characteristics of project supply chain management have their root in agile demand
chain management in the development phase and lean supply chain management in the
operations phase. As such the concept of project supply chain management take the
openness and uncertainty of the project development context, with respect to ‘what’s’
and ‘how’s’, through to dealing with uncertainty in the logistics perspective related to
demand and supply aspects, i.e. we have a situation in need of agile qualities. Bringing
the project’s openness towards a closed state through the development phase, to the
operations phase that are ‘closed’, but with defined degrees of freedom to exploit further
opportunities (through modifications), developed through lean approaches to value
enhancement. This again has to be seen in the project chain construct, as it is the project
chain that is the developing, executing and operating entity of the project and the project
object. We then have the project supply chain management concept as given in Table
6.4;
Table 6.4. The PSCM concept.
Principles Characteristics
The project as the business
opportunity
Development Operations
The supply chain as the
competitive entity
One-of-a-kind Repetitive
Demand chain management Supply Chain Management
Agile Lean
Competitiveness through
logistics and supply chain
management, focused on
alignment of supply and demand
in the project context
Resilient Robust
We then have a logistics and supply chain management concept that ‘obey’ the logistics
objectives of supply/demand alignment. That takes account of the specialities of the
project context’s development and operations phases, and is aimed at value
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enhancement for the project as a business opportunity realised through the project
supply chain as a competitive entity throughout the lifecycle of the project. That is the
concept of project supply chain management.
6.3.2 Project Supply Chain Management – A Definition
To make up a new concept a definition is often needed to communicate with
stakeholders within the different domains, both theoretically and practically.
The definition of project supply chain management as it is defined in this thesis is;
Project supply chain management seeks value
enhancement in projects through logistics’ focus on
demand and supply alignment. This is met through the
characteristics of logistics throughout the project life
cycle with an agile approach to demand chain
management in the development phase and a lean
approach to supply chain management in the operations
phase. Thereby meeting the need for value enhancement
through engineering and the supply chains contribution in
developing demand for the project object, and creating
value through cost efficiency in the operations supply
chains.
Why then may we say that PSCM is an important new approach? Logistics and supply
chain management is already taking place in the oil and gas industry. As the quote from
Goldman (1995) in the introduction to this chapter stated; ‘As with almost all
innovations, implementation precedes understanding’. To answer the question we
therefore have to go back to what was stated in the Norwegian Public Study (NOU
1988) also referred to in the introduction; ‘New facts need system knowledge. … Shortly
said: the basic theoretical foundations of learning is vital both for the interpretation of
new information and as a guide to direct the search for new facts’. Project supply chain
management is happening today. However, to further develop supply chain
management in the project context of the oil and gas industry, there is a need to lay out
what should be the core guidelines for this development, where to seek new knowledge
for improving. This is what the development of the PSCM concept is one contribution
to.
Above we have outlined project supply chain management as a concept that meets the
characteristics that logistics and supply chain management sets in aligning supply with
demand in the project context of developing and operating a project object, to enhance
the value of the project as a business opportunity. Project supply chain management is
as a concept not viable unless it is supported by structures that may help to put it into
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practical use. The next chapter aim to do that, in outlining methodological guidelines
along the line of the PSCM concept.
7 Methodological Guideline for PSCM Analysis
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7.1 Introduction
What is the intention with methodological guidelines for supply chains? It shall be a
guide to address the questions that is important with respect to the context and the
characteristics of the supply chains that are approached, as well as the mission of those
supply chains. When approaching project-oriented supply chains one have to take both
the specific context of the project as well as the supply chain approach into account.
Methodological guidelines for analysis of supply chains are as such both of general
character, to be applied in a variety of contexts, as well as of specific character,
developed and aimed for use within a specific context.
This chapter outlines a methodological guideline for project supply chain management,
PSCM. The emphasis is put on describing elements and aspects that should be part of
PSCM for the development and the operations phase. The description does not aim to be
exhaustive or complete, but aim to address a set of elements and aspects that we regard
to be important following the concept presented in this thesis. Methodological
developments within project management and logistics and supply chain management
has also been commented upon by authors representing management professionals and
academics.
’The methodology used is actually much more important than which technique is used. Methodology is
defined as ‘the system of methods and principles used in a particular discipline’ and methodical is defined
as ‘characterised by method and orderliness: systematic’. Both are required in the planning and control of
projects, and they are independent of the techniques used. Methodology is concerned with how you go
about planning and controlling a project in a systematic manner, that is, the process rather than the
ingredients’ (Harrison 1992, p.105).
Commenting on the future research topics and areas within supply chain management,
Lambert et al. states the following;
‘A top priority should be research to develop a normative model that can guide managers in the effort to
develop and manage their supply chains’ (Lambert et al. 1998, p.14).
The methodological guideline developed here is an attempt to ‘guide managers in the
effort to develop and manage their supply chains’ in the project context. Then, how
shall methodology and guideline be understood in this chapter? Methodology and
guideline shall be seen in relation to the two definitions below;
‘A methodology is a kind of "coaching" -- not a formula for producing a result, but a set of practices that
can lead to appropriate questioning and to appropriate change’
57
.
‘Guideline; a rule or principle that provides guidance to appropriate behaviour’.
57
Web Dictionary of Cybernetics and Systems, http://pespmc1.vub.ac.be/ASC/Methodology.html
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Methodological guidelines should as such meet the aim of the future research proposals
set out by Lambert et al. to ‘guide managers in the effort to develop and manage their
supply chains’, in this case in the project context.
Given that a project’s supply network is not fully developed the methodological
guidelines should help to build an understanding of important aspects to address up-
front. The methodological guidelines should as well be of help in the process of
developing and analysing the supply network and processes that will be activated when
the development and operations phases of the project starts. As such the methodological
guidelines for PSCM analysis should be regarded as a central part of ‘front end
loading’
58
of a project. The methodology should take the life cycle approach to the
project, comprising demand/supply chains for the development and operations phase.
The approach should be characterised by a pre rather than a post analysis.
In itself a supply chain analysis may bring forward new knowledge, or present
knowledge in a new way for actors involved in the supply chain. In another research
project (Schneider et al. 1994) they refer to the benefits that were achieved through
applying a supply chain analysis methodology within the network of part suppliers for
car manufacturing, as well as for after-sale support of the cars manufactured;
‘Application of the supply chain methodology has provided the following results to user companies:
- The identification of a mismatch of strategy between the chain players.
- The recognition that measures of performance in the chain conflicted with satisfaction of end
customers.
- Appreciation of the lack of knowledge of chain players about activities occurring elsewhere in the
chain that could have yielded business benefits.
- Better understanding of customer requirements further upstream in the supply chain.
- Recognition that certain replenishment policies caused distortion of true requirements.
- The appreciation that, in some cases, different routes were required for materials, order information,
technical support and end customer feedback’ (Schneider et al. 1994, p.151).
To explore what stakeholders from the industry itself felt about the need for a
methodology for approaching the supply chains of the project in development and
operations, the project director of a development project stated his wishes with respect
to a ‘model’ related to PSCM as;
- ‘A simple model or concept for demand/supply chain management in a project.
- To be applied in the front-end of the project.
- A ‘tool’ that shows the whole value or demand/supply chain in one, that gives a ‘total overview’.
- A structural approach: Understand and present the whole structure, given inherent uncertainty.
58
‘Front end loading’ is a concept that comprises the activities to secure that all elements necessary to
explore up-front of a project is necessarily researched and defined to secure a good project development
basis.
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- Focus to understand the totality, not advanced details.
- A proactive approach – where are the critical elements or areas?
- I.e., a project management tool with a demand/supply chain approach, that is not too advanced, but
that address overview, understanding, and guidance.’
Based on these remarks and discussions with a logistics advisor in a petroleum
company, we decided that the following list of items should be addressed as part of
developing knowledge that could be useful for supply chain management in the project
context;
1. An ‘ideology’, for SCM in the project context, should be established as a basis.
2. The ideology should derive five core aspects that specifically characterises SCM in the project
context, or PSCM, i.e. the five most descriptive factors for PSCM.
3. Which demands do these five characteristics describe for methodological guidelines for analysis of
PSCM?
4. Should the methodology be applicable for all types of supply chains, i.e. development and
construction (substructure/hull, topside), sub-sea, modifications, drilling, and operations?
5. Supply chains versus project phases – the methodology must cover and determine supply chain
management activities in each project phase.
6. How to use the methodological guidelines to make PSCM activities become part of the project
processes at the correct time?
The two first points were addressed through the PSCM principles, characteristics and
concept outlined in chapter six. Then, the third point is addressed in the development of
the methodological guidelines. Point number four has been discussed throughout this
thesis and comply with the concept and principles of PSCM, in focusing on the project
as a business opportunity comprising both development and operations, but without
giving to much emphasis on specific areas as e.g. type of construction, sub-sea or
drilling. The fifth and sixth point is then discussed in sub-chapter 7.2. However, the
guideline is developed to follow the lifecycle of a project, though the methodology will
not go more specifically into the project phases than the split between development and
operations.
7.2 Methodological Guidelines for PSCM Analysis
The PSCM methodological guidelines are intended for project-specific use. This means
that e.g. compared to CRINE Network’s SCM methodology, this one is not meant for
general supply chain improvements per se, but meant as part of ‘front-end loading’ of a
project. Compared to CRINE’s methodology we may say that CRINE has a general
supply chain improvement focus, and that this PSCM methodology should have a
project management emphasis, but from the side of logistics and the supply chain.
This PSCM methodological guideline is built up of nine basic steps, as illustrated in
figure 7.1. Figure 7.1 shows the process flow, as well as the impact from one step on
other steps of the guideline.
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1. Establish project vision
and definition
5. Develop project
supply chain strategy
8. Preparation for and start-up
of the operations supply-chain
2. Clarify project development
and operations alternatives
4. Analyse the
demand/supply networks
9. Re-configure and improve
the operations supply chain
7. Activate and execute
the project development
supply chain
6. Select project development
and operations alternative
Project related
Project supply chain related
Order of methodology
Impacts
Selection point
3. Analyse the market
1. Establish project vision
and definition
5. Develop project
supply chain strategy
8. Preparation for and start-up
of the operations supply-chain
2. Clarify project development
and operations alternatives
4. Analyse the
demand/supply networks
9. Re-configure and improve
the operations supply chain
7. Activate and execute
the project development
supply chain
6. Select project development
and operations alternative
Project related
Project supply chain related
Order of methodology
Impacts
Selection point
Project related
Project supply chain related
Order of methodology
Impacts
Selection point
3. Analyse the market
Figure 7.1. The outline of the PSCM methodological guideline.
Each of the nine steps of the methodological guideline is described further below.
However, before we start a comment should be given to the process of the guideline
itself. The methodological guideline consists of steps that are both related to the project
itself, as well as specifically to the project supply chain. Step number one, two and six
are related to the project itself, in developing the project strategy and vision, and
evaluating and selecting the project development and operations alternative. Step three
and four are then related to general analysis of the market, as well as analysis of the
demand and supply chain constructions necessary or available for the different project
development and operations concepts. Step five is development of the supply chain
strategy. However, step five should be seen as done in parallel and as part of the
definition and selection of the project development and operations concept. As such
steps two, three and four, should be done iteratively with step five. That means that the
project vision and definition, the analysis of the project development and operations
alternatives, together with the analysis of the market, and the demand/supply chain
constructions, should be the basis for an iterative evaluation and selection of project
supply chain strategy. The results of step three, four and five, together with step one and
two are the basis for selecting the project development and operations concept in step
six. Then, in step seven the project supply chain is activated as part of the extended
project organisation. It is here necessary with a comment to the supply chain’s
involvement in the process prior to step seven. Often several ‘supply chains’ are
involved in the development and analysis of alternative project development and
operations concept. This may be seen as part of step two, where the ‘supply chains’
related to the different concepts take part in developing and analysing the concepts
together with the project owner(s). Then in parallel to the different (and alternative)
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supply chains taking part in developing alternative project development and operations
alternatives, the project owner(s) and/or operator internally analyse the market and the
demand/supply networks related to the alternative concepts. Then in step six, one of the
project development and operations concepts are chosen. Then with the project supply
chain strategy developed concurrently, the demand/supply chain related to the chosen
development and operation concept are selected and activated, and made able to start
executing the project development. With the project object development taking place,
one has to start preparing the operations of the project object. That is the objective of
step eight and nine. Step eight prepares and establishes the operations supply chain,
while step nine cover the continuous improvement and re-configuration of the
operations supply chain. The shut-down and removal of the installation is not covered.
1 Establish project vision and definition
Up front of the project it is important to establish a ‘problem statement’ for the project,
to be used as a unifying element for the project supply chain. The ‘vision’ should be a
guide for the project development and as such be in accordance with the project
strategy.
2 Clarify project development and operations alternatives
The project could be developed and operated based on a portfolio of different
technological and organisational concepts. It is therefore important to establish an
overview of those alternatives, so that comparative analyses may be done among them
for later selection of the best alternative for the project.
3 Analyse the market
This is a collection of activities that should take place project independently, as a
normal part of supply chain evaluation and improvements.
4 Analyse the demand/supply networks
The demand and supply chains for the different alternatives in step two has to be
mapped and analysed to be able to evaluate their comparative advantages.
5 Develop project supply chain strategy
Here the supply chain strategy for the development and the operations phase of the
project should be established and documented. An agile and resilient demand chain
strategy for the development phase, and a lean and robust supply chain strategy for the
operations phase, that supports and leverages the chosen development and operations
concept.
6 Select alternative for project development and operation
This is a selection point, where the outcome is a selected concept for development and
operations of the project and the project object.
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7 Activate and execute the project supply chain
This is where the project supply chain is selected, then activate and execute the
development of the project object. The focus is now on the logistics and materials
management involved in development and execution.
8 Preparation for and start-up of operations supply chain
Up-front of commissioning and start-up of operations the operations supply chains must
be developed and activated. This must take both the requirements of the project object,
as well as the opportunities for use of existing infrastructure and supply chains, and
collaboration with other offshore installations.
9 Re-configure and improve operations supply chain
The project object offshore is seldom operating as the only installation being supplied.
There is most often a portfolio of installations and the supply need of this portfolio of
installations will change over time. To get the best cost/service position for the supply
chain, it therefore has to be re-configured according to changes in the supply
requirements.
Throughout the methodology the project atlas is used as a common denominator for
bridging the steps of the methodology. Through the project atlas we show for each step
which elements within the project atlas that is in focus, and how the project supply
chain link to this.
7.2.1 Establish project vision and definition
The first stage in a project is to establish and define the business opportunity as a
project, a unique business opportunity, in need of inter-organisational capacities and
capabilities to be able to realise it. This could be regarded as a definition of a ‘problem
statement’, i.e. the project to be solved. The project is a business opportunity for both
the owner(s) as well as the companies in the project supply chain, and the problem
statement will as such have implications for both those two groups of stakeholders.
Closed Open
What?
How?
i
ii
iii
Closed Open
What?
How?
Closed Open
What?
How?
Closed Open
What?
How?
i
ii
iii
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.2. The starting point of the business opportunity.
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In the project atlas, the “project”
59
owner are in the ’open’ end, able to choose whether
to go for the potential business opportunity, and develop it into a project, or not, i.e
invest his financial means in another opportunity. If the owner chooses to start
developing the business opportunity further he may choose among several alternative
routes. He may either (i) seek a radical change, e.g. utilising new, innovative technology
not used before, (ii) go for a continuous development approach, e.g. well known
technology, but a novel approach to project execution processes, or (iii) seek to ‘copy’
both the technology and project execution processes of an earlier, successful project.
Whatever the owner chooses, if he want to develop the opportunity into a project he
needs to establish and communicate the vision of the business case, as well as develop
and define the business case.
Project vision and concept
The project vision may be regarded as the problem statement of the business case that
the project owner(s) have developed for the potential business opportunity. The vision
should communicate; What is the business case, and what is needed from those involved
in developing it for it to become a business opportunity?
An ‘instrument’ that originated in and is used with success in the movie industry is the
‘High Concept’. The ‘High Concept’ was developed with the purpose of being the
bearer and communicator of the ‘vision’ of a movie as a tool for aligning and focusing
the supply chain around the movie’s objective and ‘message’ to the customers.
‘A high concept film is one that is based on a succinct and detailed description of the product, including
all features of the product that would be valued by the customer’ (Goranson 1999, p.40).
The method/technique of the ‘high concept’ was developed in the movie industry after
the movie enterprises in the United States were broken up due to antitrust concerns in
the late 1930’s. The ‘High Concept’ evolved to understand and deal with the customer
after the prior connection was broken, due to the break-up of the vertical integration in
the movie enterprises that included the theatres and the customer contact
60
. When the
period with the vertically integrated movie enterprises ended, a system known as the
‘packet unit system’ developed. This system was based on establishing a unique
collection of companies to produce each movie. It may be regarded much like a project,
with a prime contractor (the production company) that identifies the market need,
establishes the plan and intellectual property that states that need, arranges financing
etc, and then the necessary production assets are owned by many small companies that
are assembled to produce a film. The ‘high concept’ is then;
59
”Project” is put in brackets as the potential business opportunity it is still not defined as a project.
60
The movie industry in the United States of the nineteen thirties was configured much like the present
car and aerospace industries. The market was dominated by a few large stable companies, deeply
vertically integrated, including control of distribution through ownership of the theatres. Due to intense
competition among the movie enterprises, they developed and applied what today is known as lean
principles and practices; flat organisations, pre-qualified suppliers, and versions of just-in-time practices
(Goranson 1999).
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‘… so named because it ties all elements across these media [theatre, TV, video, domestic and foreign
distribution] and all elements within the product (story, stars, and such) into one clear statement of
philosophy and style. … The underlying assumption is that the customer can be tersely, understandably,
and logically characterised; that is modelled. That understanding, however broad and involved, has a
simple core, which by itself covers all the important elements of the project. … The notion of High
Concept is thoroughly studied in film schools, and consistently practiced by producers, who are
organisers of the virtual enterprise. It is also considered difficult to master’ (Goranson 1999, p.40).
The methods and techniques concerning the ‘High Concept’ are something that could be
beneficial as a source of new knowledge for the traditional project industries, and
especially for seeking to find something that may be used to focus and align, on a high
level, the project demand and supply chain.
Some important aspects to remember about the use of High Concept like approaches in
establishing a vision (derived from Goranson 1999);
Success on a film, including keeping costs low, depends heavily on everyone having the same idea of
style and purpose of the product.
A way to build and establish a clear definition of the business opportunity, where the strategy
anticipates to address the business opportunity, and the ersatz corporate culture of the virtual
enterprise [or the extended project organisation/supply chain].
A way of modelling the customer’s need/desires; managing constraints, and coordinating a coherent,
understandable approach.
A description of a strategy to reach customers in terms of understandable to the customers, which the
producers use to form a profitable link with the customers.
A High Concept description should be succinct.
A High Concept description almost always builds in prior experience.
Familiarity with the precedents is culturally necessary for membership in the community.
High Concept is composed by agents.
Agents are evaluated based on their experience with and understanding of elements in the High
Concept.
Trust is relative and High Concept gives a calibrating foreground against which trusted agents can be
evaluated.
Goranson (1999, pp.43-44) summarises his discussion about the ‘High Concept’ to
develop agile virtual enterprises, AVE’s, or agile supply chains, into three AVE
principles;
You must have a robust system of agents that autonomously act to configure and optimise their
system, not because you so direct them, but because they are acting in their own best interest.
You must have a way of providing a common goal to the diverse agents so that their efforts optimally
converge on what you want, and what the customer needs. So far, we’ve been calling that High
Concept, but a better term is feature-based modelling.
You must have a way for all the components of the enterprise to be rewarded and punished by
contracts, but you cannot rely on predefined, static business boundaries, nor expensive, static, old-
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style contracts. You need to be able to have fuzzy business boundaries, even perhaps having the
original corporate identities essentially vanish for the project. (Goranson 1999, p.44).
These lead to the principles underlying an agile virtual enterprise, of which the ‘High
Concept’ is one of the principles.
Table 7.1. The principles of an agile virtual enterprise (Goranson 1999).
Agents to certify and indemnify Lightweight contracts
A coordinating mechanism
(High Concept)
Trust
Now we have presented a concept that have a high level bearing in establishing a good
basis for an extended project organisation, that is focused towards developing a project
aimed at the project as a business case for the owner, and to focus and lock-in the
project demand and supply chains accordingly. Then, based on this high-level vision,
we have to define the project more formally.
Project definition
Following up on the approach to establishing a vision for the project along the lines of
the High Concept presented above, a more formal definition of the objectives of the
project is in place. The ACTIVE initiative, Achieving Competitiveness Through
Innovation and Value Enhancement, in the British construction industry, states that
project definition is;
‘Project definition: The need to articulate, test and communicate the commercial, technical and regulatory
objectives of a project. … A project will only meet the owner’s business requirements and deliver cost
effective solutions if the objectives, scope and the basis for performing the work are explicitly defined
with a clear success criteria articulated. It is important that this process should be completed before the
execution phase of the project’ (ACTIVE 1998, VEP 1.2).
ACTIVE further states the following essential activities that need to be undertaken to
during project definition;
‘Establish and define the project’s objectives, based upon the business case made for the project by
the project owner, rigorously test project assumptions and review their options.
Clearly define the boundaries of the project.
Develop and test the scope of the project in sufficient detail to assess technical and commercial
feasibility.
Develop and define the strategy for executing the project.’ (ACTIVE 1998, VEP 1.2)
In more detail that cover the whole project team and project supply chain, i.e:
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‘In order to ensure that the subsequent project definition and development of an execution strategy are
focused on meeting the requirements of a project in full, a detailed statement which clearly explains the
key business drivers, project objectives and potential constraints and variables is required for
communication throughout the project team. The key success factors of the project owner should be
stated openly to all participants. The key measures of success must be clear prior to the start of any
design, procurement, construction or other activity. Typical project parameters which must be clearly
understood before definition proceeds include:
The key programme requirements including key events, milestones and any interdependencies
Key supply chain relationship requirements
Constraints on cost
Broad scope of project in terms of functionality and operability, defining inclusions and exclusions
External factors which may impact on the project
Key technologies which will be employed
Product quality output targets
Design standards
Safety, health and environmental requirements
Availability and reliability requirements for plant operating at design capacity
Without definition or appreciation of these parameters at the outset of the work, difficulties and
inefficiencies will be encountered during project execution in relation to developing procurement
strategies, resource plans, mobilisation plans, arrangements with vendors and subcontractors, and other
activities which can directly influence the outcome of the project (ACTIVE 1998, VEP 1.2).
‘For supply chain partners working with the project owner, a statement of the boundaries for the project is
essential for the accurate determination of scopes of work, budgets, programmes, liabilities, and
recognition of interdependencies’ (ACTIVE 1998, VEP 1.2).
One may ask whether the notion building a business case vision like a High Concept for
a project is just of theoretical interest, or whether one may find examples that show that
such constructions, or similar, are used. In the Cleeton project British Petroleum gave a
set of key success criteria as the vision or guideline for the project supply chains to
develop the business opportunity towards;
‘In essence all that was said was that BP would like to have Front End Engineering and Design for a
compressor platform and these are the Key Success Factors we wish you to address; Safety, Capital
Expenditure, First Gas Date, Availability, Constructability (later incorporated within Capital
Expenditures), Fitness for Purpose (life cycle based assessment), Operations Interface (making most
effective use of the existing operations team), and External Opportunities (flexibility to incorporate the
addition of new gas reception options). … [BP requested] just to demonstrate how these factors would be
met, what rates would be charged, and, importantly, who would be performing the work. … In best
practice terms these Key Success Factors clearly defined the objectives of the project’ (Harrison et al
1996, pp.1-2).
BP’s key success criteria, may not directly be seen as a High Concept like vision, but
follows many of the same underlying drivers of the High Concept, as well as meet e.g.
the requirements set by ACTIVE for good definition of the project.
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One may also say that the drive that came with the CRINE and NORSOK initiatives
acted as a top-level ‘High Concept’. The vision was aimed at the industry as a whole,
leaving more or less a ‘mass suggestive’ effect. As such that ‘High Concept’ worked
well, with respect to uniting the whole industry.
Further readings;
Goranson (1999); Chapters 1-5, 7.
Vollmann et al. (1995). Article.
Harrison et al (1996). Article.
Active (1998). Section 3, AP1, VEP 1.2, and 1.3.
EPCI (1999). Presentation; ‘Front End Opportunities’.
7.2.2 Clarify project development and operations alternatives.
The basis for developing the project is the project vision and definition. These are the
frames and references that shall guide the project owner(s)’s internal team, as well as
the supply chain that take place in developing the alternative project development and
operations concepts. In the project atlas one is now in the position of how the open
business opportunity shall be realised, and brought into a closed operation position. The
question is how to best close the open opportunity, enhancing most value out of the
opportunity, at the same time remaining openness and flexibility to deal with the
inherent uncertainty of the development process.
Closed Open
What?
How?
i
ii
iii
Closed Open
What?
How?
i
ii
iii
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.3. Alternative routes and states in project development and operations.
Harrison (1995) presents a decision making process consisting of six steps, where steps
two and three are related to searching for and comparing and evaluating alternatives;
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2. Searching for alternatives. In the decision making process, search involves scanning the internal
and external environments of the organisation for information. Relevant information is
formulated into alternatives that seem likely to fulfil the objectives.
3. Comparing and evaluating alternatives. Alternatives represent various courses of action that
singly or in combination help attain the objectives. By formal and informal means alternatives
are compared based on the certainty or uncertainty of cause-and-effect relationships and the
preferences of the decision maker for various probabilistic outcomes’ (Harrison 1995, pp. 37-8).
Closed
i
ii
iii Closed
i
ii
iii
Status Quo Status Quo
Figure 7.4. Different positions for the operations alternatives.
In the project atlas above, we have one end point for the project development in the
operations phase (closed segment). This may not be the case, as each alternative
(‘route’) may end up in different positions with respect to remaining openness in
operations, e.g. additional infrastructure (deck space available, weight resources) to take
later extensions and/or modifications of the project object into account, and/or
additional processing capacity to cover ‘adding on’ e.g. new sub-sea developments. In
figure 7.4. we have shown this by letting the alternatives i, ii and iii end up in different
‘positions’.
Comparative value analysis of alternatives
The main criteria for evaluation of a set of development and operation alternatives in
these types of projects is the commercial value enhancement the project owners obtain
by the different alternatives, corrected for the inherent risk profile of each alternative.
The net present value, NPV, criterion is a measure for this. Another criteria are the
social economics measures that the national government is seeking through the project.
We will leave the latter out of the discussion, except for commenting that it is a part of
the evaluation of the project’s plan for development and operations, PDO, when handed
over to the government by the project owners.
ACTIVE (1998) has defined the value analysis process to consist of two stages, value
planning and value engineering;
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‘The value analysis process comprises two broad stages. The first stage, known as value planning, seeks
to verify the critical performance objectives that must be met and then identify conceptual options that
best meet them. Once a broad option has been selected, value engineering then aims to optimise capital
efficiency by seeking design solutions which maximise benefit (both in financial and non-financial terms)
while minimising through-life costs. Value engineering is more technical and takes place during design
development when sufficient information is available to compare different solutions to the project's
functional objectives’ (ACTIVE 1998, VEP 1.2).
The purpose and benefit of the value analysis process is by ACTIVE said to be;
‘Value analysis is a value enhancing process for analysing systems, equipment, facilities, services and
supplies with the aim of achieving the essential functions of a facility at the lowest life cycle or through-
life cost. While cost reduction is the primary goal, the functions of the facility must meet the required
performance and standards of quality and safety. The value analysis process is used to identify alternative
design solutions or strategies using numerical models to compare through-life costs and benefits, and to
assess the optimum level of capital efficiency. In this way, informed and objective decisions may be made
regarding alternative development options and the provision of facilities which maximise value. It must
be recognised that the potential for improving long term value reduces as the project proceeds through its
life cycle and hence the value analysis technique is most effective when applied during the definition
stage of projects. Nevertheless there is benefit to be gained by applying the process at other stages of the
project life cycle’ (ACTIVE 1998, VEP 1.2).
ACTIVE states the following as essential activities of the value analysis;
‘Establish performance requirements and project objectives
These should include financial and non-financial parameters, for example costs and revenue data,
schedule and resource constraints, and targets for reliability, availability, safety and environmental
performance of the facility.
Identify the options and assess life cycle costs
Determine which options are likely to achieve the project's goals and measure their relative value by
assessing benefits and technical performance against whole life costs and risks. Select the options which
present the optimum value.
Seek continuous improvement
As the project progresses, effort should be made to improve the selected options by continuously
comparing functional requirements against objectives’ (ACTIVE 1998, VEP 1.2).
For our approach, we may say that there is a three stage value analysis and evaluation
process;
1. Static net present value, as presented in ACTIVE’s approach.
2. Value of flexibility – seeking the options and analyse how their use may be
optimised actively throughout the project development phase.
3. Flexible or agile demand chain management – which is the result when this
process is brought into the scope of work development.
Initially, some form of a static net present value analysis is made for each alternative for
development and operation of the project and the project object. This could e.g. result in
a comparison as given in table 7.2.
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Table 7.2. Representation of static net present value measure per alternative.
Alt. 1 Alt. 2 Alt. 3 …
Project income PI1 PI2 PI3 Risk impact
adjusted
Project costs LCC1 LCC2 LCC3
Time impact
adjustments
Static NPV measure NPV 1 NPV 2 NPV 3 …
The cost side of the project value equation is made up of costs covering the whole life
cycle of the project. As rough overview of such costs are given in table 7.3.
Table 7.3. Important elements for life cycle costing.
Main group of costs Cost elements
Investment costs Design and engineering
CAPEX
Spare parts
Documentation
Logistics and transport
Stock-keeping at suppliers
Installation and commissioning Carry-over work
Operations and maintenance Preventive and corrective maintenance
Consumables (incl. spares)
Immediate maintenance / shut-down of operations
Repairs
Warehousing, logistics, transport
Other costs Cost of capital, financing
Abandonment costs
Environmental costs
Taxes, legal duties
Risk premiums
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The value of flexibility is an important aspect in value analyses of the alternative
development and operations alternatives. Trigeorgis (1997) presents the real options
concept and methods used as a tool in resource allocation, i.e. which possibilities shall a
company pursue given one or several possible routes. Route is used as a term to show
that the real options concept enables active management. Trigeorgis says that;
‘[This] calls for an expanded or strategic investment criterion, reflecting both value components: the
traditional (or static) NPV of direct cash flows and the option value of operating flexibility and strategic
interaction’ (Trigeorgis 1997, p.4).
What is interesting here is operating flexibility as a strategic aspect, and how strategic
operating flexibility should be planned and prepared for in advance of development and
operations, and allocating and committing demand/supply chains to the project. It is
important to remember that it must be thought of in advance, and that this strategic
operating flexibility has a cost, i.e. an option price.
‘Many of these real options occur naturally; others may be planned or built in at some extra cost from the
outset (e.g., to expand capacity, or build growth opportunities, to default when investment is staged
sequentially, or to switch between alternative inputs or outputs)’ (op cit., p.4).
Trigeorgis lists a series of real options that could be used in a project development
analysis. The different options are options to defer, time-to-build options, options to
alter, options to abandon, option to switch, growth options, as well as multiple
interaction options of the ones mentioned. Below follows a description of how each of
the types of real options may be defined and understood as options to be used when
approaching the topic of project demand chain management. The options are listed as
they are presented in Trigeorgis (1997, pp.2-3).
An option to defer gives the holder the possibility to wait a certain time period before
making a decision, e.g., to choose between two emerging technologies.
Time-to-build options, or staged investments, may in this regard be seen as a series of
deliveries. The buyer has an option to abandon his interest in the development if he
means that it is not leading to the results he planned with, and may do so at predefined
milestones, i.e., maturity dates. This is an option to be used to be able to choose
between two or more emerging technologies.
Options to alter operating scale may be perceived as an option to buy more or less per
time period of, e.g., bulk materials, or may be used to alter the rate of production of an
equipment item so that it may be delivered earlier or later. This is as such an option to
make use of changes in the market, as well as gain flexibility in speeding up, or
postponing the project schedule. This option could be used for purchasing bulk
materials or pre-fabricated elements.
Option to abandon should in this respect be seen as flexibility to move away from a
given technology, when this is not leading to the wanted or promised goal, or it is
inferior to another available technology, e.g. in relation to one of the options above. It
could also be used for purchasing bulk materials (to secure the availability when
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needed), e.g. together with a futures contract to secure the possibility to sell the bulk
material that is not needed.
Option to switch is the possibility to move from one type of technology to another
technology, i.e. switch from one supplier of technology to another. This may be seen as
one of the options above, but undertaken after the main project has started, i.e. the
option is used during the construction of the project’s product.
Growth options may be seen as a pre-investment (the prerequisite) undertaken to secure
the ability, at a later point in time to be able to pursue a given possibility for ‘growth’.
With regard to project procurement this option could also be seen in relation to growth
in the scope of work or changes under construction of the project’s product. Growth
may not be due to added possibilities, but changes in the project may, or should, be due
to new and better possibilities. The growth option used for changes may as such be seen
as an option to switch.
Multiple interacting options where several of the above-mentioned options are used
together to make up a targeted, made-to-purpose option to enhance and secure
managerial flexibility. These purpose-made options may be constructed out of several
‘tools’ as long as they give added flexibility, and may be viewed and valued as options
related to procurement that give access to the underlying assets cash flow.
Scope of work development
Development of the project scope of work, SoW, is the main demand chain
management activity in the project. This is a ‘chain’ activity as it is based on interaction
between the operator, his direct supply chain relations, and contractor(s) and his (their)
supply chain relations. This is a process that should be given sufficient attention, and
where a question raised is better than a question not raised;
‘The most successful projects are those where the team has applied a rigorous process for reviewing
assumptions and assertions in the scoping exercise. Contractors and suppliers working in the project team
are sometimes reluctant to do this on the mistaken assumption that the 'client is always right' but much
value can be added at this stage by a questioning approach by the team. A good supplier at this stage
can often persuade the buyer to check within their own organisation on whether the proposed scoping
assumptions are secure. It has been traditional in the industry for operating companies to define
requirements for scope of supply in great detail, leaving little room for suppliers to develop ways of
meeting requirements more cost effectively. Functional specifications, where the buyer defines
functionality requirements but leaves the vendor to define how that functionality is achieved, has been
used to great effect within the offshore industry's CRINE initiative as a way of simplifying the
procurement process, encouraging innovation by suppliers and reducing overall costs. Where possible, it
is recommended that this functional approach should be adopted’ (ACTIVE 1998, VEP 1.2).
The scope of work development is started in the project front end, where the focus is on
balancing opportunities and risks. This was a topic in a workshop arranged by Epci, the
European Institute of Advanced Project and Contract Management. The summary of
that workshop is given in Appendix D. In summary the conclusions of the workshop is
given below;
‘The project front end is;
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balancing opportunities and risk;,exploring and acting on potentials, clarifying contextual
differences and implications, understand – focus – check.
getting the project beyond sanction points and up to “big spend; financial justification, technical
development (opportunity realisation), supply chain involvement.
enhancing the ability to master speed and flexibility in project execution; mental conflicts, classic to
generic model, decision making under uncertainty, and
enhancing the ability to reach or exceed an expected result; proactive front end planning, build on
experience, seek and understand current challenges, align challenges and means’.
Front end loading is an approach, or a collection of methods that may apply to secure
and improve the scope of work development process. Value improving practices are a
group of methods within front end loading, that may have a considerable contribution to
the value improvement of the project. Figure 7.5 show ten value improving practices
and their value impact in the project development life-cycle.
A question is then who should be responsible for controlling the front end loading of a
project, the operator or the contractor(s)? Table 7.4 show some results of a study
between projects where the operator or the contractor has been responsible for front-end
loading. The conclusion form the study is that the operator should control front end
loading, as that resulted in reduced cost growth, reduced cycle time, and improved
attainment.
R&D Front End Loading Detail Design Construction Start-up
Authorization
Technology selection
Process simplification (value analysis)
Classes of plant quality
Waste minimisation
Process reliability modelling
Minimum STDs & specs
Predicitive maintenance
Design-to-capacity
Value engineering
Constructability review timeframe
Time
Value
improvement
potential
R&D Front End Loading Detail Design Construction Start-up
Authorization
Technology selection
Process simplification (value analysis)
Classes of plant quality
Waste minimisation
Process reliability modelling
Minimum STDs & specs
Predicitive maintenance
Design-to-capacity
Value engineering
Constructability review timeframe
Time
Value
improvement
potential
Figure 7.5. Value improving practices (IPA, 1995).
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Table 7.4. Operator should control front end loading (IPA 1995).
Outcomes Contractor FEL projects Operator FEL projects
Cost growth from authorisation 60% 15%
Cycle time (FEL through start-up) 70 months 54 months
Time for start-up 11 months 7 months
Attainment in the second six months after
mechanical completion
41 percent of design 73 percent of design
However, although the operator should control front-end loading, the operator does
have an important responsibility in being clear in their definitions and requirements of
scope of work and interfaces with the project supply chain. This is important for the
demand and supply chain to be able to work and deliver within the functional
requirements given, and to meet the financial basis on which the project was sanctioned.
The basis for this is established through the project vision and definition, e.g. as
described above;
Companies must clearly define the scope of the goods and services to be procured as well as the
responsibilities of the contracting parties, including defining interfaces. Scoping will focus on defining
functional requirements, thereby encouraging innovative ways of meeting the performance criteria.
Successful contracts clearly define the roles and responsibilities of all the parties to the contract. Clarity
of the scope of supply (and also defining that which is not to be supplied) is crucial to effective
performance by suppliers. Problems with scoping often have their root cause in inadequate definition
within client organisations. Sometimes this is because the overall objectives for the project have not been
properly thought through and articulated by the client resulting in scope growth as the contract proceeds’
(ACTIVE VEP 3.1.8).
Dealing with innovations and technology development.
As was commented as a challenge in chapter five, the use of technology may prove to
be value enhancing for the project, though it may be a risky endeavour to go for
unproven technology, in stead of technology proven either within your organisation or
outside within the same industry. However, searching for new technology is in the long-
term perspective a necessity, and the use of it have to be part of the project decision
process or development concept.
Technology selection may be defined as (IPA 1995);
‘A formal, systematic process to search for process technology outside your site that may be superior to
that currently anticipated for your site.’
Although applying new technology is concerned with a considerable portion of
uncertainty, both with respect to ability to make it work and regarding the impact on the
project schedule if it does not work and alternatives have to be used, one should
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remember that the opportunity side of new technology is the driver for using new
technology. An illustration of the opportunity side is shown in table 7.5 below.
Table 7.5. Why is technology selection important? (IPA 1995).
Position of firm in its industry. Percent of current sales from products
introduced in the last five years.
Most successful in industry 49%
In top third of industry 34%
In middle third of industry 27%
In bottom third of industry 11%
However, technology selection and implementation has to be conducted wisely. As
table 7.6 shows, new technology could have a negative impact both on cost growth, the
start up time of the installation (thereby affecting the project schedule), as well as the
production regularity after production commences.
Table 7.6. Results of using conventional versus new technology (IPA 1995).
Conventional technology New technology
Cost growth 15% 33%
Start-up time 2 months 15 months
Production (6-12 months) 88% 53%
To be able to meet the challenges that new technology presents IPA (1995) proposes the
following list:
‘Identify technological advance correctly.
Good engineering will not overcome poor basic data.
Don’t short-cut piloting for processes were recycle streams or solids handling issues are involved.
FEL for new technology projects will take longer.
Start-up planning should begin during FEL.
Team continuity is essential‘ (IPA 1995).
Also the ACTIVE initiative for the British construction industry has addressed the
aspect of innovations and use of new technology in project development, and how the
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project supply chain may contribute in that respect. Their guidelines for ‘harnessing
innovations in the supply chain’ are;
‘Since most suppliers and contractors work across a number of operating companies, the supply chain
provides a rich, and often untapped, source of experience and knowledge which can be harnessed in
improving project performance. Whether this experience is available through improved products and
equipment or in the methods and processes of project delivery, early involvement of the supply chain at
the conceptual and definition stages of projects can often bring considerable benefit.
Unfortunately, many traditional working practices within the industry make it difficult to involve the
supply chain early in the project process. Operating companies have been reluctant to involve suppliers
and contractors at this early stage, fearing loss of confidentiality and prejudicing subsequent fixed price
tendering. Suppliers, on the other hand, are wary of putting forward innovative ideas through fear of lack
of protection of intellectual property and the concern that ideas generated at the pre-contract stage will not
be rewarded.
Much, however, can be done by adopting a different approach to supply chain relationships and many
traditional contractual practices can and must be challenged. Alliance and partnering arrangements make
it much easier to encourage the sharing of ideas between parties without loss of commercial protection.
Much more has yet to be done to define commercial arrangements which positively encourage an early
contribution from the supply chain. The increasing use of integrated project teams does much to foster the
introduction of new ideas to facilitate the achievement of project objectives. Within such teams, new
ideas need to be encouraged and properly rewarded while confidentiality and intellectual property rights
are upheld.
To encourage innovation, consideration should be given to different contractual arrangements, for
example:
At an early stage in the project, select a contractor or supplier on the basis of a paid study which
culminates in a priced tender. The vendor with the most innovative and cost effective proposal should
be rewarded with the contract.
Encourage innovation by linking payment of a fixed sum for bid costs against savings produced by
the vendor. The most attractive offer should win the contract but the other vendors could be paid a
proportion of the fixed bid sum in relation to their cost difference from the successful vendor.
At all phases of the supply chain cycle it is important that vendors are given positive incentives to be
creative and innovative in their proposals since there are often risks in innovation which can lead to
caution or conservatism on the part of the vendor.
For the buyer to benefit from an innovative approach there are issues of intellectual property ownership
and value which need to be protected if novel solutions and ideas are to be shared in the supply chain.
Confidentiality agreements are needed on both sides but this can be difficult at the pre-contract stage
where sometimes the novel approach of one bidder is shared, to his disadvantage, with other competitors
in the bid process. This practice, besides being unethical, stifles innovation and leads to
uncompetitiveness. A way of dealing with this is for the parties to define some form of agreement which
will protect the bidders position. For example, vendors might be rewarded for innovation by retaining
ownership of intellectual property in exchange for the buyer's free and unrestricted use of the innovation’
(ACTIVE 1998, VEP 6.2).
Further readings;
Active (1998). Section 3, VEP 1.4, 1.7, 7.4.
CRINE Network (1999); Chapter 7.
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Harrison (1995).
IPA (1995). Presentation.
Lund (1997). Dr.ing. thesis.
Mikulski, 1993.
Stukhart (1995). Chapter 7.3.
Trigeorgis (1997). Chapter 1–5, 7 and 11.
7.2.3 Analyse the market.
Independent of project activities one have to know what the market has to offer, how we
are able to benefit from the market, and how we are able to realise the market’s
offerings? In the project atlas this is about how the market may be of help in realising a
potential business opportunity, i.e. the market’s opportunities to close the space in
between open and closed projects.
Closed Open
What?
How?
i
ii
iii
Closed Open
What?
How?
i
ii
iii
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.6. The opportunities in the market to realise an opportunity.
Many logistics and purchasing factors are project independent, aimed at research and
preparation. Silver (1986) proposes the following list of such factors.
i) ‘General information on commodity lead times and costs (including trends)
ii) Supply sources with associated lead times
iii) Quality and capacity surveys of manufacturing facilities
iv) Development of new sources of supply
v) Information on new equipment and materials’.
In this part we rely mostly on CRINE Network’s supply chain (CRINE 1999-B)
methodology and their section about analysing the market. We have summarised
CRINE’s focus into a matrix, presented in table 7.7.
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Table 7.7. CRINE Network’s SCM methodology – analyse the market.
Understand company’s position Best practice.
Existing dimensions and future trends.
Industry competition – forces driving
competition in the supply market
The provider’s position.
Sources of supply/sourcing options
Provider capability mapping.
Industry mapping
Benchmarking.
CRINE has split the market analysis into two categories, first understanding the
company’s position versus the market, secondly understanding the company’s and the
market actor’s maturity with respect to supply chain management best practices.
In the first category it is first of all necessary to understand the existing market
dimensions of a particular goods or service, as well as future and current trends in the
market, as these may impact such an analysis. Then, understanding industry
competition, CRINE uses Porter (1990) and his five forces that may drive competition
in the supply market, industry competitors, bargaining power of buyers, bargaining
power of providers, potential entrants, and substitutes. Then, it is important to
understand the provider’s position versus company as a business potential. This may be
done through a matrix with the two sides of ‘account attractiveness’ and ‘value of
business’. For the provider the company (buyer) may then in the matrix be classified as
a nuisance, a developing relationship, to be exploited, or as a core customer. Then
blending the provider’s matrix with the role of the goods that company will procure
from the provider, a routine, leverage, bottleneck, or critical product or service, one
may see or estimate the position of each before one come into a specific business
situation. Sources of supply should be evaluated, e.g. through the British based ‘First
Point Assessment’ or the Norwegian based ‘Achilles’. Finally one should map the
provider’s capability versus the ‘ideal’ provider. This is shown in figure 7.7 below.
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Product quality
Delivery lead-times
Reliability
Relationship quality
Responsiveness
Price
Market reputation
Customer service
Ideal provider
Actual provider
Product quality
Delivery lead-times
Reliability
Relationship quality
Responsiveness
Price
Market reputation
Customer service
Product quality
Delivery lead-times
Reliability
Relationship quality
Responsiveness
Price
Market reputation
Customer service
Ideal provider
Actual provider
Ideal provider
Actual provider
Ideal provider
Actual provider
Figure 7.7. Provider capability mapping (CRINE Network (1999)).
In the second category, ‘best practice’, CRINE proposes initially to use industry maps,
which are graphical methods of describing current and future dimensions of competition
in a particular industry, and how a given set of companies are placed in the given
dimensions. One representation is using a spider diagram with a branch for each factor
or dimensions that effect performance. E.g. one may be analysing ‘degree of excellence’
with respect to; services, terms and conditions, availability, marketing channels,
relationship building, assurance testing, international presence, supply guarantee, …
others that could vary due to type of industry. Then finally one should benchmark ones
supply chain management practices against acknowledged best practices. Benchmarking
should be conducted both within ones industry as well as outside. Investigation into the
procurement practices of other companies and industries may be useful in providing
guidance.
Regarding capability mapping and benchmarking of supply chain operations of
providers, CRINE Network’s SCOR’s and CAR’s as presented in Appendix B should
also be noted. These may be used for improving company and provider’s position as
supply chain actors and in supply chain management practices. In addition to the
SCOR’s and CAR’s, Goranson (1999) proposes an analysis for actors to become part of
an agile virtual enterprise that also may support this type of analysis. This is given in
table 7.8.
‘If one is creating an information base on potential partners, it should gather these six types of
information, each with a temporal modifier’ (Goranson 1999, p.69).
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Table 7.8. The capability of an actor in a virtual enterprise (Goranson, 1999).
Characterisation of
what it does
What it adds to the whole
What it makes
Characterisation of
how good it is
Internal agility
Internal performance
(quality, etc.)
Characterisation of
how well it partners
In a static situation – to
respond to initial change
In a dynamic situation – to
respond to continual change
+ Temporal modifier,
i.e. how the baseline
information is compromised, so
that the actor’s agility may be
situation specifically or
temporarily modified.
Further readings;
DTI (1997). Article.
CRINE Network (1999). Chapter 4.
Active (1998). Section 3, VEP 2.1, 6.2.
1
st
Point Assessment.
Achilles.
www.capsresearch.org – Benchmarking of procurement practices. .
7.2.4 Analyse the demand/supply networks
In the project atlas we have now come to analysing the demand and supply chain
constructions that the different development and operations concepts rely on. In figure
7.8 this is presented with a focus on the demand and supply chain constructions moving
from the project from the opens space to the closed space. In addition it should be
mentioned that also the supply chains of the closed space, the operations situation, are
object for such analyses.
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Closed Open
What?
How?
i
ii
iii
Operator
Contractors
Sub-contractors
Suppliers
Closed Open
What?
How?
i
ii
iii
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.8. Analysing the project’s demand and supply chain constructions.
The demand and supply chain constructions covering the development and operations
phases of a project’s lifecycle is a comprehensive network. As an object of analysis the
networks could be approach in several ways, and below we will present an approach
and give reference to some methods that we believe may be constructive to use in such
analyses. The approach covers the five issues of;
Mapping the demand/supply chains.
Relationships in the demand/supply chains.
Agile development.
Lean operations.
Resilient and robust – a vulnerability analysis.
Map the demand/supply chains
Mapping of demand and supply chains are often the starting point of logistics analysis.
It may often seem ‘easy’ and regarded as not useful, because ‘we know the supply chain
in detail’, but do we? However, there are several possible approaches to demand and
supply chain mapping. Here we will give a short introduction to three different
approaches. First a general supply chain reference model (SCOR, 2000), then a
reference model for ‘agile virtual enterprises’ that are based on and follow a life cycle
approach and infrastructure that may be suitable for the project situation (Goransson,
1999), and finally a scheme that give an explanation to several types of value stream
mapping originating from lean thinking (Bicheno, 2000).
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The SCOR model, or the ‘Supply Chain Operations Reference Model’, is a reference
model for supply chain analysis that are developed by the Supply Chain Council, a
professional interest organisation for supply chain management, with several hundred
member companies from different types of industry.
Supplier
Plan
Customer
Customer’s
Customer
Suppliers’
Supplier
Make
Deliver Source Make
Deliver Make Source Deliver Source Deliver
Internal or External Internal or External
Your Company
Source
Return Return Return
Return Return
Return
Return Return
Supplier
Plan Plan
Customer
Customer’s
Customer
Suppliers’
Supplier
Make
Deliver Source Source Make
Deliver Make Source Deliver Source Deliver Deliver
Internal or External Internal or External
Your Company
Source
Return Return Return Return Return Return
Return Return Return Return
Return Return
Return Return Return Return
Figure 7.9. The five SCOR processes (Supply Chain Council 2002, SCOR Ver. 5.0).
The SCOR model focus on the flow of goods through the supply chain, covering e.g.
the supply chain from your supplier’s supplier to your customer’s customer. The focus
is on five processes; plan, source, make, deliver, and return. Five processes that cover a
natural segregation of the work of the supply chain. This is shown in figure 7.9.
Further the SCOR processes differentiate between three types of products; stocked,
make-to-order (MTO) and engineer-to-order (ETO). This is shown in figure 7.10. This
grouping of products is related to where the product order penetrates into the supply
chain, i.e. the order penetration point. As the SCOR model focus on the flow of goods
through the supply chain, the differentiation of the product types is important also with
respect to the treatment of the products through the supply chain. This may best be
explained by an example. Given that a product is ordered as an engineer to order
product, then one may follow how this product is treated down through the tiers of the
demand/supply chain, e.g. to find the point in the chain where the product is treated as
an make-to-order product, i.e. the point in the demand chain where the customer may no
longer specify the product. Such analysis could also be interesting in the project
development demand chain to see where e.g. the core technology of a product enters the
chain, e.g. to give that leg of the chain special attention.
The SCOR processes are further broken down from the segregation given in figure 7.10,
into suggestions for specific processes on a very detailed level. As such the intention
with the SCOR model is to bring the best generic knowledge from the participating
companies into a set of suggestions for generic supply chain processes, that may be used
as a basis for company internal developments of demand and supply chain processes.
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C
u
s
t
o
m
e
r
s
S
u
p
p
l
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r
s
P1 Plan Supply Chain
Plan Plan
P2 Plan Source P3 Plan Make P4 Plan Deliver
Source Make Deliver
S1 Source Stocked Products M1 Make-to-Stock
M2 Make-to-Order
M3 Engineer-to-Order
D1 Deliver Stocked Products
D2 Deliver MTO Products
D3 Deliver ETO Products
S2 Source MTO Products
S3 Source ETO Products
Return Source
P5 Plan Returns
Return Deliver
Enable
SR1- Return Defective Product DR1- Return Defective Product
SR2- Return MRO Product
SR3- Return Excess Product
DR2- Return MRO Product
DR3- Return Excess Product
C
u
s
t
o
m
e
r
s
S
u
p
p
l
i
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r
s
P1 Plan Supply Chain
Plan Plan
P2 Plan Source P3 Plan Make P4 Plan Deliver
Source Make Deliver
S1 Source Stocked Products M1 Make-to-Stock
M2 Make-to-Order
M3 Engineer-to-Order
D1 Deliver Stocked Products
D2 Deliver MTO Products
D3 Deliver ETO Products
S2 Source MTO Products
S3 Source ETO Products
Return Source
P5 Plan Returns
Return Deliver
Enable
SR1- Return Defective Product DR1- Return Defective Product
SR2- Return MRO Product
SR3- Return Excess Product
DR2- Return MRO Product
DR3- Return Excess Product
Figure 7.10. Breakdown of the main SCOR processes (Supply Chain Council 2002,
SCOR Ver. 5.0).
It should also be mentioned that the SCOR reference model does also give suggestions
to key performance indexes, KPI’s, related to the different processes of the model.
These KPI’s may be a good starting point for establishing own KPI’s for ones own
demand/supply chains.
The second reference model that we would like to draw attention to is Goranson’s
(1999) ‘agile virtual enterprise (AVE) reference model’. The structure of the reference
model is given in Appendix F. We will come further back to some specific analysis that
Goranson proposes below, but first we would like to draw attention to the detailed
structure of the AVE reference model. The structure of the model is developed along
two axis, a decision point breakdown, following the life cycle of the enterprise or in our
case a project, and the infrastructure breakdown that cover elements that should be
given attention to secure a good development. The message that we would like to
convey here is that the AVE reference model give a structure that could be used as a
check list for analysis of the demand and supply chains in the project context, especially
as the model is aimed at the virtual enterprise, where the life cycle cover much the same
as the project situation.
Then finally we would like to give an overview of some different types of demand and
supply chain mapping, or value stream mapping as it is named within lean theory. The
overview is based on a list by Bicheno (2000), but similar lists could have been taken
from other authors within the lean manufacturing domain. Based on the listed types of
value stream mapping we have tried to relate each to the project situation. This is
presented in table 7.9 below.
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Table 7.9. Value stream mapping and the project situation (based on Bicheno, 2000).
Overall lead
time
mapping
An overall mapping to see the general lead-time per stage of a demand and supply
chain. E.g. the lead-time for rental equipment could be made up of the following
elements; order planning, order generation, order receipt and entry, prepare and pack
equipment, pre-transport to base, base-handling, supply vessel, use at base, return to
base, and transport back to supplier. This is a longer lead-time than the time from
demand is known until demand Is covered, but e.g. for rental equipment the total lead
time could be interesting as that could have price and contractual implication versus
the supplier.
The lead times could either be presented as a Gantt chart, displaying how each element
in total add up to the total lead-time, or as a Pareto distribution diagram showing the
lead-time elements from the longest to the shortest. The Pareto distribution is important
to use to address the areas where there are most to gain in reducing the lead-time, and
not addressing elements that are un-important lead-time wise.
The lead-time map could be especially important to use for schedule purposes, e.g.
schedule compression or activity interaction, or for improving operations response
times, e.g. for special services.
Order
mapping
Order mapping is done to focus specifically on special customer orders, to be able to
uncover elements in the order’s demand and supply chain that could improve customer
service and/or lead-time. The focus in order mapping is the clerical process, or the full
order management cycle from planning to payment and post-completion services.
There are to approaches to order mapping. The first is to ‘staple yourself to an order’,
where an analyst follow an order through all its stages, and records the time each stage
takes, and if possible the reasons for eventual delays in a stage. The other is ‘tagging’
an order, i.e. make a tag on an order that follow the order an where employees dealing
with the order should record data as they deal with the order. The intention is to collect
a representative sample of data that helps tracking variation in both time and routing of
orders. For the tagging approach, one should also follow it up with physical tracking to
get a better picture of the situation.
Customer
mapping
Customer mapping is the process of identifying your customers, and their influence,
along the demand chain. This mapping give insight into who makes decisions to
activate the demand chain, not only the direct customer, but the ‘ultimate’ customers,
e.g. the operations management of an installation. Customers could for this purpose
e.g. be grouped as ‘buyer’, ‘decider’, ‘user’, or ‘specifier’. Customer mapping could be
useful e.g. as background for establishing supply agreements with customers.
“Learning to
see mapping”
The ‘learning to see map’ draw an illustrative map of both the material flow and the
information flow. Such maps are often used to illustrate the current and future state of a
process. The mapping makes use of simple boxes and illustrative symbols related to the
process, to show the material flow. The information flow may be fitted into the
material flow picture through lines with explaining text, and schedule information may
be shown by using lines with arrows to explain that process. Lead-time information
could also be set into the process picture to clearly show the relation between processes
and time. As this type of mapping is very illustrative, it is often termed as a ‘process
cartoon’.
Process
activity
mapping
The process activity map is the same as the process flow chart. Most importantly,
process activity mapping shall help in identifying opportunities, especially with respect
to improving the ratio among value adding and non-value adding time. The mapping
should be available for operators to use themselves
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should be available for operators to use themselves.
The process chart lists every step that is involved e.g. in the delivery of a service.
Standard symbols are used to indicate ‘operation’, ‘delay’, ‘move’, ‘store, and
‘inspect’. The process chart helps to identify wasteful actions, and documents the
process completely. Such a systematic record should help reveal the possible sources
of quality and productivity problems. The process is first to document the process map.
Documenting the process map should be done based on the current situation and not be
based on ‘old’ process maps, as these may give another picture than the current
situation as working in practice. What should be mapped is the actual, not the ideal
situation. After the process map has been developed, then it should be analysed. The
map could both be used for time (valuable time) analysis, as well as if cost data is
connected to the processes, a cost analysis could also be made.
Product
variety
funnel
The product variety funnel is useful in understanding where variety is added along a
supply chain. This is especially used for retaining flexibility and variety as long as
possible in a production chain, but could also be used in a services or product supply
chain, e.g. in planning warehousing and base services for the offshore petroleum
installations. For production processes variety should be added as late in the process as
possible, as this improves responsiveness and flexibility, and reduces inventory. For
supply services the situation does also have another dimension. In the supply services
context it is also important that variety, e.g. variety for use at several installations of
rental equipment, is kept early in the supply chain, and that the supply and return
processes are effective so that alternative use is not hindered. Equipment and material
stored later in the supply chain, e.g. at a specific base or at the installation should have
variety in use.
Quality filter
mapping
Quality filter mapping aims to pick up the rate and sources of defects along a demand
and supply chain. Defects may impact the customer, but it is also wasting resources.
The defects should be mapped and linked directly to all operations steps where they
occur. The result will as such be a figure showing the supply chain stages along a
horizontal axis and number of defects in equivalent units along the vertical axis. In
particular, such mapping can highlight defects that are passed over long distances
along a supply chain only to be rejected beyond the point where correcting the defect is
not economic.
Demand
amplification
mapping
Demand amplification mapping models the amplification of demand disturbances
along the supply chain. This type of mapping may be more essential for production
oriented supply chains, but could also have benefit for the operations supply context,
especially with respect to seeing how the ultimate demand may be visualised better
along the whole demand and supply chain, and to address what can be done to improve
the demand response along the supply chain.
Push pull
mapping
Push pull mapping identifies the points or buffers at which supply push takes over for
demand pull. Such mapping is useful as the pull point generally should be moved
further back along the supply chain, or one should be conscious with respect to where
the push pull point is placed. A long term strategy should be established to challenge
the push pull points, and long term moving them backwards in the supply chain. The
vision is to synchronise the demand and supply chain through conscious push pull
points.
Physical
structure
mapping
Physical structure mapping helps set the policy for suppliers and customers
rationalisation. Such mapping is a useful basis for periodic changes to the supply
system configuration.
Capacity
mapping
Capacity demand mapping looks at the ratio of capacity demanded to total capacity
available. The idea is to identify the physical bottlenecks and constraints along the
supply chain. Such mapping is relevant for the periodic reconfiguration of the supply
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system scheme, both for optimising the standard supply service and preparing for
special supply services.
Cost time
profile
A cost time profile is a graph showing accumulated cost against accumulated time for a
supply chain. It gives a visual presentation that has a powerful effect in conveying a
message. Could e.g. be effective when analysing the demand and supply chain for
rental equipment, where a rental price often is directly linked to time spent from
delivery to base until return to supplier.
Relationships in the demand/supply chain
We have earlier mentioned the relationships in the project demand and supply chains as
some type of horizontal alliances for the demand setting, and some type of vertical
alliances, through frame agreements and contracts, for the supply setting. Example of
horizontal versus vertical partnering is shown in figure 7.11 below. As part of an
analysis of a project’s demand and supply chain structure it could be wise to see how
the configuration of horizontal and vertical alliance or partnering will be for the
different project development and operations alternatives. E.g. how the use of operator’s
versus the contractor(s)’s frame agreements and contracts. i.e. vertical alliances, impact
the demand and supply chain constructions.
HORIZONTAL PARTNERING VERTICAL PARTNERING
Contractor
Engineering
Contractor
Construction
Client/Owner
Sub-
contractor
Supplier
Contractor
HORIZONTAL PARTNERING VERTICAL PARTNERING
Contractor
Engineering
Contractor
Construction
Client/Owner
Sub-
contractor
Supplier
Contractor
Contractor
Engineering
Contractor
Construction
Client/Owner
Contractor
Engineering
Contractor
Construction
Client/Owner
Sub-
contractor
Supplier
Contractor
Figure 7.11. Horizontal versus vertical partnering.
The relationship between the operator and contractor(s) will not always take form as an
horizontal alliance structure. The choice of formal relationship structure between the
operator and the contractor(s) may be dependent both on the business challenge,
whether that is simple or complex, and the business culture in the market or between the
stakeholders, whether that is characterised by adversarial behaviour or by trust and
mutual respect. A matrix to guide the choice of formal relationship structure between
the operator and the contractor(s) based on position with respect to business challenge
and business culture, is presented in figure 7.12. The matrix is developed by Hetland
(1999).
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RELATIONAL
CONTRACTS
•High definition
•Target Sum bidding
•Proactive behaviour
•Focus on efficiency
AD HOC ALLIANCES
•Goal alignment
•Early involvement
•“Beauty contest”
•High interaction
•Gain-sharing
•Focus on effectiveness
CONVENTIAL
CONTRACTS
•High definition
•Lump sum bidding
•Reactive behaviour
(Claim mentality/
Defence strategies)
Change
Culture
Reduce
Complexity
Simple Complex
BUSINESS CHALLENGE
A
d
v
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r
s
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RELATIONAL
CONTRACTS
•High definition
•Target Sum bidding
•Proactive behaviour
•Focus on efficiency
AD HOC ALLIANCES
•Goal alignment
•Early involvement
•“Beauty contest”
•High interaction
•Gain-sharing
•Focus on effectiveness
CONVENTIAL
CONTRACTS
•High definition
•Lump sum bidding
•Reactive behaviour
(Claim mentality/
Defence strategies)
Change
Culture
Reduce
Complexity
Simple Complex
BUSINESS CHALLENGE
A
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Figure 7.12. Choice of operator contractor relationship based on business challenge and
business culture (Hetland, 1999).
As figure 7.12 shows one moves from conventional contracts where the challenge is
simple and there may be no or (assumed) adversarial relation between the operator and
contractor, to alliance type of contracts when the challenge is complex and the
relationship is characterised by trust and mutual benefit
61
. There is one quadrant of the
matrix that possess a challenge. That is if the challenge is complex and the culture is
adversarial. Then one either must reduce the complexity, e.g. through reducing
contracted scope of work, or change the culture. The first could be an example of
returning to earlier execution models where the operator had a larger scope of work and
interface control, while changing culture could be regarded as what was necessary
through the NORSOK and CRINE initiatives.
Figure 7.12 segregated business culture between ‘adversarial’ and ‘trust’. Maybe a
better distinction is between ‘misaligned’ and ‘aligned’. The interesting question is
whether the contractual relationship between the operator and the contractor is such that
there is a common benefit in achieving the clients objectives. A representation of this is
given in figure 7.13.
61
Maybe mutual benefit could be a stronger and more appropriate incentive than mutual respect.
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“Misaligned” “Aligned”
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The contractual challenge;
How does the contract format help to
align the focus of the client (operator)
and contractor?
Figure 7.13. Aligning client and contractor through the contract (Instefjord, 1999).
A further progress of the topic addressed through the figures 7.12 and 7.13 are given in
Appendix E, which summarises a workshop on contract strategies arranged by the
European institute of advanced project and contract management.
Through their supply chain initiative, CRINE Network established two sets of
requirements for companies to become interesting partners in oil and gas supply chain
constructions. The two sets of requirements are first ‘supply chain optimisation
requirements’, SCOR’s and secondly ‘critical attractiveness requirements’, CAR’s. The
SCOR’s and CAR’s are presented in full in Appendix B.
SCORs are those things that a customer (operator or contrator) should be doing to
ensure they maximise the potential for the supply chain to provide appropriate
technologies for the future at the right time and quality. CARs are those things which
make a supplier or a contractor highly attractive to a customer, i.e. they appropriately
‘magnetise’ the supplier in order to enable him effectively to move closer to the
customer. For more details we refer to Appendix B.
Agile development
Agility is in the literature to a large extent conceptually described, missing out on
methods to analyse the agile capabilities and capacities of virtual enterprises or
demand/supply chains. Goranson (1999) seek to make agility analysable in an
engineering oriented way. To bring the concepts of agility into use, this is needed as the
methods and techniques of project planning and control were developed and applied in
the second phase of the North Sea oil and gas development history as explained in
chapter one.
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The tools used and proposed by Goranson (1999) are based on a breakdown of the
enterprise, e.g. the project organisation, into a set of key processes. To define and focus
on a set of few critical processes that will help to define the enterprise’s agility barriers
and levers, the ‘agile virtual enterprise reference model’ is developed. To help in
analysing the processes a set of metrics is developed based on a theoretical basis of
information theory and communicative acts, and with a simplified approach suitable for
direct calculations.
The tools used and proposed by Goranson (1999) are based on a breakdown of the
enterprise, e.g. the project organisation, into a set of key processes. To define and focus
on a set of few critical processes that will help to define the enterprise’s agility barriers
and levers, the ‘agile virtual enterprise reference model’ is developed. To help in
analysing the processes a set of metrics is developed based on a theoretical basis of
information theory and communicative acts, and with a simplified approach suitable for
direct calculations.
The focus for the reference model and metrics that Goransson (1999) propose is on
analysing processes to evaluate their agility, their ability to adapt. The method is based
on models of ordinary processes within an enterprise or across partners in a
demand/supply chain. The result of the method are numbers or functions which indicate
the time and cost of change. The results could be used to address change in one of two
ways;
The focus for the reference model and metrics that Goransson (1999) propose is on
analysing processes to evaluate their agility, their ability to adapt. The method is based
on models of ordinary processes within an enterprise or across partners in a
demand/supply chain. The result of the method are numbers or functions which indicate
the time and cost of change. The results could be used to address change in one of two
ways;
1. Comparing a pair of processes, resulting in the time and cost of changing from
one to another. This could e.g. be between new, unproved technology and old,
well-known technology, and the degrees of freedom available with respect to
trying the new technology before having to revert to the old if the new is not
delivering results as promised, and the time and cost for such a change
compared to the time available, and the value/cost ratio of the inherent
opportunity of using new technology.
1. Comparing a pair of processes, resulting in the time and cost of changing from
one to another. This could e.g. be between new, unproved technology and old,
well-known technology, and the degrees of freedom available with respect to
trying the new technology before having to revert to the old if the new is not
delivering results as promised, and the time and cost for such a change
compared to the time available, and the value/cost ratio of the inherent
opportunity of using new technology.
2. Evaluating a single process against a threat and/or opportunity, or a spectrum of
threats and/or opportunities to determine how agile the process is. The metrics
can here be used to evaluate the time and cost of adapting from an existing or
potential process design, to a new process that can deal with the threat and/or
opportunity.
2. Evaluating a single process against a threat and/or opportunity, or a spectrum of
threats and/or opportunities to determine how agile the process is. The metrics
can here be used to evaluate the time and cost of adapting from an existing or
potential process design, to a new process that can deal with the threat and/or
opportunity.
Below we will describe and explain the AVE reference model and the metrics used to
calculate the agile ‘position’. The AVE reference model is based on matching the
opportunity with partners able to realise the opportunity, throughout the life-cycle
phases of the opportunity from enterprise formation to enterprise reconfiguration. This
is shown in figure 7.14.
Below we will describe and explain the AVE reference model and the metrics used to
calculate the agile ‘position’. The AVE reference model is based on matching the
opportunity with partners able to realise the opportunity, throughout the life-cycle
phases of the opportunity from enterprise formation to enterprise reconfiguration. This
is shown in figure 7.14.
Enterprise
Formation
Enterprise
Operation
Enterprise
Reconfiguration
Opportunity
Identification
Partner
Identification
Figure 7.14. Major life cycle categories of a virtual enterprise. Figure 7.14. Major life cycle categories of a virtual enterprise.
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The life-cycle elements of the reference model as shown in figure 7.14. above, is in the
reference model termed ‘decision point breakdown’. The decision point breakdown
constitutes the rows in the model. The columns of the reference model is termed
‘infrastructure breakdown’. There are four main infrastructure elements, information,
social/cultural, legal/explicit, and physical. The matrix given by the decision point
breakdown and the infrastructure breakdown (except the information infrastructure) is
presented in table 7.10.
Table 7.10. Major headings of the agile virtual enterprise reference model (for the
structure of the full model, see Appendix F).
Infrastructure Breakdown
Social/Cultural Legal/Explicit Physical
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VE Reconfig/Dissolution
Based on the main structure the reference model is broken further down into twenty-one
decision point (life-cycle) processes and thirty-three infrastructure processes, resulting
in matrix with a total of six hundred and ninety-three cells. The matrix of the full model
is presented in appendix F. The total number of cells in the reference model is due to its
use for reference purposes, established to cover both the whole life-cycle of an AVE, as
well as the infrastructure elements that could be important from an agile analysis point
of view. However, for practical analysis purposes only a smaller number of cells will
most often be necessary to achieve the wanted analysis. Goransson refers to ‘twenty
high value cells’ that based on their research were seen to be important.
To support the ‘engineering of AVE’s’ Goransson has developed a set of metrics’ that
shall help in pre-analysis of the time and cost associated with the potential that a system
has to accommodate future change. The metrics’ are based on the cells of the reference
model, and the communicative acts that take place between the cells in the model. The
communicative acts is based on results from information theory, that calculate the cost
and time of adapting an algorithm to address a new problem, but in this case it is used
on processes that are the tactical means of a strategy. A graphical representation of the
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communicative acts process called a Dooley graph is used to enable a simplified
calculation of the metrics. The Dooley graph is a way of representing the process of a
‘dialogue’ among actors taking place in a cell in the reference model, using the
utterances between each actor. The type of utterances could either be a question or to
inform. The utterances will again be a respond or reply to earlier utterances, or to
resolve or complete earlier utterances. The dialogue will in the Dooley graph be
represented by nodes for each actor’s involvement in an utterance, and directed arrows
between nodes that reflect the direction of the utterance between the actors. Through
this process of utterances between actors in a process the main important elements to be
used in the metrics are the number of nodes, the number of loops between the nodes,
and the type of nodes and loops, i.e. how many loops corresponds to a node and vice
versa. For a thorough explanation of this process, see Goranson (1999) pp. 157-210.
There are five metrics that may be derived by the use of the Dooley graph. Those
metrics are termed distance, time delay, moveability, importance, and frequency. Each
metric is explained in table 7.11 below.
Table 7.11. Summary of the intermediate metrics (Goranson 1999, p.186).
Distance Total number of weighted nodes. This is the simple sum of the number of nodes
raised to the power of its type, i.e. the number of loops of those nodes.
The metric say that the more actors involved, and the more each actor does, the
harder it will be to change the process. The higher the sum of the metric, the
higher the cost or time of changing the process.
Time delay Total number of weighted loops. This is the simple sum of the number of loops
raised to the power of its type.
The metric say that the more tasks a subconversation has to do, i.e. the more
actors involved in the subconversation, the harder it will be to change it. The
higher the sum of the metric, the higher the cost or time of changing the
process.
Moveability Topology match, internal. This measures the structural difference between two
processes, i.e. ratio of nodes in a process that match the nodes of a ‘baseline’
process.
A greater number indicates a greater match, and a lowered time and cost to
adjust.
Importance Nodes compared to the VE’s total. This metric is the ratio of weighted nodes in
a process, compared to the weighted sum of all nodes in the whole AVE, or in
e.g. a part sub-infrastructure, from the reference model, of the AVE.
This gives an indication about whether a given process help to make the total
system of process more agile or not, i.e. whether it help the system agility. a
process may be more agile than another in itself, though may contribute less to
system agility.
The higher the number the higher contribution to the overall system’s agility.
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Frequency Loops compared to the VE’s total. This metric is the ratio of weighted loops in a
process, compared to the weighted sum of all loops in the whole AVE, or in e.g.
a part sub-infrastructure, from the reference model, of the AVE.
The higher the number the higher the cost and time of change.
The aim of using the metrics is, e.g. from a project planning and control point of view,
to develop and build a project demand/supply chain with a specific type and extent
of agility. An example is e.g. that the total development time could be longer than the
rate at which new, important technology evolve. Best practice dictates that you build
and involve your demand/supply chain early, but as the development evolves, the
demand/supply chain should be agile, not artificially limiting the development due to
commitments made too early. The metrics should tell you which processes, among
those available to you, are more agile, and with respect to the project demand/supply
chain, they can tell which supplier’s processes give you the agility needed.
Then, in summary the method proposed by Goransson could be outlined as follows;
Assess the spectrum of opportunities or threats, e.g. based on a context dependent
taxonomy.
Determine an agility strategy or candidate strategies, e.g. based on intelligence
about technology development and/or potential partners.
Brake down the related processes of your enterprise or project demand/supply
chain, e.g. using the AVE reference model as a guideline.
Within the break-down of the processes identify the few key cells that are relevant
to the agility opportunity or threat and your possible options in addressing that
opportunity or threat.
Breakdown of the communicative acts between actors through utterances in the
processes, e.g. through the use of Dooley graphs.
Calculating the metrics.
However, agility has a cost and there is always a limited amount of resources available.
Therefore one has to decide how to use one’s ‘agility budget’, e.g. based on the results
of the metrics. Examples of how to spend the agility budget could be (Goranson 1999,
p.190);
- Increasing you internal ability to support the change, for example, in acquiring specifications
related to [alternative materials] so that you can direct un-knowledgeable suppliers.
- As contract termination fees to discontinued suppliers, so that a simple supplier swap is feasible.
- As fees to keep suppliers hot, in which case you are buying capability that you may never use, like
an alternative to the existing supplier.
- As funding to help suppliers learn/hire consultants or insource skills.
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- As funding for your cost to transfer skills, processes and equipment to a supplier.
Whitney (1995) defined some aspects of agility, which we related to the project context.
These are presented in Appendix A.
Lean operations
Whereas the project development phase should have agile characteristics, the project
operations phase should possess lean characteristics. Here we presents four lists
covering lean principles, characteristics, types of waste (muda), and planning elements,
and their relation to the project operation supply chain. The bullet points of the lists are
taken from Bicheno (2000), but could also have been taken from other sources within
lean literature.
There are five lean principles; customer value, the value stream, flow, pull, and
perfection. Below in table 7.12 we have listed these with an explanation to each
regarding the project operations supply chain.
Table 7.12. The five lean principles and relation to the project operations phase.
Customer
value
Customer value from the operations supply system comes when the customer get
confidence to the supply system, the correct supply system is periodically established
in accordance with the customer’s change in needs, and there is a continuous focus to
improve the cost and service position of the supply system.
The value
stream
The value stream of the operations supply system goes from the demand initiation at
the offshore installation, through to return of e.g. rental equipment to the supplier. This
value stream should be mapped for the major supply categories.
Flow The base is a central point in the value stream where the goods coming in from several
suppliers are stowed onto several supply vessels, and return cargo shall be shipped
back to suppliers. The base is also the point in the value flow where there is a potential
for break in the flow of goods through the supply system. This may be due to break
load units to separate cargo to diverse offshore installations, or just to assure the
content of load units before shipping it offshore.
Pull A good system for pulling, in stead of pushing cargo through the supply system, should
be based on periodic plans and agreements that adjust to the periodic change in needs,
and then spread information about this need across the demand/supply network. Then,
based on these plans and supply agreements …
Perfection Each year the consulting company McKinsey makes a benchmark study of a.o. the
logistics and operations cost per offshore installation and company in the North Sea
basin. This benchmark study establishes a theoretical best position, as well as the best
operator in the basin. In a strive for perfection it is important to remember that e.g. in
logistics it is not possible to always be no.1, as demand and supply configuration per
operator will change periodically e.g. giving some a very cost-effective supply vessel
scheme. What is important for perfection is that one optimises within ones periodic
limitations, and continuously seek for improvements within the supply chains.
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Bicheno (2000) states fourteen lean characteristics; customer, simplicity, visibility,
regularity, synchronisation, pull, waste, process, prevention, time, improvement,
partnership, gemba, and variation. Below in table 7.13 we have listed these with a
comment of each regarding the operation supply chain.
Table 7.13. Lean characteristics and relation to the project operations phase.
Customer The uppermost customer is each license, i.e. each unique ‘profit center’. However,
each company to be served by a supply scheme does also want to optimise the supply
service for all its licenses, as such each company could also be regarded as a customer.
Finally, each installation is the direct customer for the supply service, as it is first and
foremost dependent on the direct supply service, not its related cost position.
Simplicity The services provided through the supply scheme should be simple in the sense that
they are predictable. That could e.g. be achieved through a split between standard and
special services, where the standard services is a group of services covering a given
scope of work and conducted within a specified and fixed schedule. The special
services cover speciality services needed on an ad hoc basis, as well as for unforeseen
or accidental situations.
Visibility Visibility of the supply services could be achieved through setting the supply services
as an agenda issue for the continuous improvement for each license, e.g. through
supply agreements between the license and the supply organisation. Another,
organisational, issue that could improve visibility is to have some sort of ‘supply
operations centre’ for each supply region, a centre acting as a single point of contact
for all supply services. Then again, for the operations centre all parts of the supply
chain should be ‘visible’, e.g. through systems for monitoring status of orders and
tracking movements and localisation of goods.
Regularity The context of the supply services is such that there will be changes both in the scope
and type of services needed, as well as the scope of installations covered, and volumes
for each installation. To make the supply services predictable within this context, the
services have to be predictable within periodic schemes. This means that the scheme of
the standard services has to be adjusted, or optimised, periodically, to fit to the
contextual changes.
Synchroni-
sation
Synchronisation is achieved when there is ‘one-piece’ flow through the supply system.
To achieve this it is important that all goods coming form suppliers into the supply
base is packed into load units that could be directly loaded onto the supply vessel, or
into consolidated load units for one installation. Tagging of goods and content of load
units from the suppliers is important to achieve this, and if there is mistakes in the
tagging that will be a hindrance to synchronisation, as the load units has to be re-
checked at the base. Further the timing of when the goods from the supplier arrive at
the supply base has to be coordinated with the schedule of the supply vessel so that the
base organisation are able to organise and load the goods onto the supply vessels in an
effective and secure way. To achieve the latter the demand ordering process from the
installation itself has to be in accordance with the time needed for preparation and
transport from the supplier to the base.
Pull The periodic optimisation and planning of the supply services will establish the overall
and specific demand of each installation for specific product categories. This will be
used to prepare and plan the scope of the supply system. Then again the specific
demand of the installations will activate a pull based flow of goods from the suppliers
through the supply system to the installation. A reverse pull system should also be in
place to secure that equipment to be used only for a short period of time at the
installation is pulled through the reverse supply system back to the supplier, so that the
use of the equipment will not add more cost than necessary. The latter is the case e.g.
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for rental equipment.
Waste Waste could be related to an inappropriate supply system scheme. This should be
helped through adjusting the supply system scheme periodically to the changes in
demand and supply context. Waste could also mature from a supply system scheme
that covers ‘all in one’. i.e. try to cover all supply needs, both planned and unplanned,
through the same system and administrative approach. By separating the supply
system into two, one standard covering the planned demand, and a system or approach
covering the special demands. The latter do not necessarily need to be a single system,
but another approach in dealing with the specific special situations, either through the
standard system or through other, purpose specific systems.
Waste could also be regarded with respect to the consequences of breakage in the
supply system, e.g. when an installation has to stop production due to not getting
supplies needed. This show that preparing a supply system scheme is a balancing act
between ‘over’- and ‘underproduction’. However, this should be handled effectively
through a good approach to special services taking care of special situations.
See further elements of waste in the ‘muda’ table below.
Process Organising the services along groups of processes that have different characteristics,
e.g. the different product groups as such as consumables, rental equipment, and others.
Another type of processes that should be separated are the difference in processes for
standard and special services. For the latter response time will be an important issue.
Prevention Through a focus on processes and periodic adjustments of the supply services scheme,
one should get a proactive attitude to being in front of problems, through focusing on
the means of solutions, not the specific problem.
Time Being able to reduce the total lead-time in the demand and supply chains should focus
separately on the standard and special services. For the standard services the lead-time
of the total demand and supply processes for the different supply categories should be
in focus. In addition for rental equipment is the return chain back to supplier important.
In addition for special services the response time is important. Being able to establish
and produce a special service based on the portfolio of resources available will for
many situations be time-critical, as well as may need to be produced through different
alternatives.
Improvement ‘Improvements’ should be made periodically through ‘forced’ periodic adjustments
and optimisation of the supply system scheme. These periodic revisions call for
‘innovative’ improvements. The analysis leading up to these periodic revisions should
also comprise analysis for continuous improvements of the supply system. The focus
of the continuous improvements should be made for the different supply processes, but
could well originate from functional areas along these processes. The analysis process
should also seek to track these improvements, to see the impact of them. This lead up
to the fact-based management as described under ‘gemba’ below.
Partnership Each installation and each company has a demand for supply services. In optimising
the supply system scheme one should look for potential synergies in collaborating with
other, both on installation and company level, to optimise the supply system for
common, shared benefit. This may even mean that the management of the supply
system could for given areas, situations, or periods be partly or fully outsourced to
other petroleum companies, or logistics service providers.
Gemba Gemba stands for ‘management based on facts and managerial presence’. With respect
to fact-based management, the cost-position of the North Sea operations, included the
logistics and supply operations, is benchmarked yearly by a consultancy company
(McKinsey). This give high level facts that are acknowledged among the petroleum
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companies to give a comparative status. This benchmark study should again be
supported by internal analysis so that one know the reason for one’s position, and may
predict how this may change, both due to improvements, as well as contextual changes.
Presence need direct involvement in the supply chain, decisions based on first hand
knowledge, often starting by supply chain mapping, ‘see to learn’.
Variation Variations are a normal part of supply services, and should be treated as such. This
means that special services, as commented above, should be planned and prepared for
in advance as standard services are, though with the difference that the execution of
them will not follow fixed schemes. As such the special services could e.g. be planned
for through a vulnerability analysis.
Among the lean characteristics presented above we found waste. Reducing waste, in its
different forms, is one of the main focuses of lean thinking. Below we present six types
of waste as presented in Bicheno (op cit.) and relate each to the operations supply chain.
Table 7.14. Types of waste (muda) in the project operations supply chain.
Over-
production
Overproduction in the operations supply context may mostly be related to making use
of more resources than optimally needed to cover the demand requirements. This could
be related to the demand side, e.g. in the planning process from the customer’s side
increasing the demand estimate to bring some slack into the system. Another may be
that the supply vessel size is not suited to need, e.g. there is lack of suitable vessels in
the market. Also not utilising the potential for supply synergies across installations or
companies, could be a source for overproduction. In addition, external factors may
have an impact on the scope of resources used for the supply operations. On the
Norwegian Continental Shelf each license has in its concession requirements about
how the supply arrangement shall be, including which base to be used and level and
location of onshore support organisation. Such concession based requirements could
add considerably to the ‘overproduction’ in the system.
Waiting Waiting in the operations supply context could both be related to goods waiting in the
system, e.g. rental equipment waiting to be shipped back to the supplier. This could
also be regarded as temporarily unnecessary inventory. Another form of waiting could
be supply vessels waiting for inbound goods. This could happen due to incidents or
accidents earlier in the supply chain, or could be a system failure e.g. due to a
mismatch in aligning lead-times along the supply chain.
Transporting
and
unnecessary
motion
Waste of transporting could e.g. mean non-optimal or not situation adapted supply
vessel routes. That means not adjusting the supply vessel routes, the size or number of
vessels as the supply demand changes. Unnecessary transportation could also mean
supply vessels that have to return back to an installation due to that the installation was
not ready to handle inbound goods when the vessel arrived on its scheduled time.
Inappropriat
e processing
Inappropriate processing could mean re-packing load units at base, instead of packing
directly into customer specific load-units at supplier. This does not mean loading the
supplier load-unit into load unit for supply vessel, e.g. container. Another, more
directly waste of processing resources and time is the need for extra check of content
of load-unit versus tagging at base. This could e.g. be due to suppliers not being correct
in tagging the orders, or putting several orders, for several customers into the same
load-unit, with only one customer specific tag. This could lead to the customer not
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getting the goods needed, thereby initiating a new supply need.
Unnecessary
inventory
Unnecessary inventory could be related to several elements;
e.g. short-term due to early ordering, e.g. due to doubt about the supply chains
ability to supply on time,
keeping additional spares than required e.g. due to doubts about suppliers’
ability to supply when needed,
keeping rental equipment longer than needed, e.g. due to a non-effective or
non-existing return process,
or not having a process to periodically remove items from inventory that are
no longer needed.
Defects Defects in the supply system could e.g. be load-units that are defect when arriving at
the supply base, so that they are not able or allowed to be loaded onto the vessel or
lifted onboard the installation offshore. Missing or to old certificates on the load units
could also be regarded as defects.
Lean thinking does not happen by itself. To start preparing for lean thinking and realise
its potential some elements of planning could be worth while to bring along. Below we
present seven lean planning elements as listed in Bicheno (op cit.) and relate each to the
operations supply chain.
Table 7.15. Lean planning elements and the project operation supply chain.
Scenarios Scenarios are often used to prepare for different possible situation s in the future, and
how one may go about dealing with such situations. For the context of the supply
service scenarios may especially be useful for dealing with a differentiation between
standard versus special services. Planning a standard supply services scheme is rather
straight forward given a static demand for a given period of time. Based on this a
standard supply scenario may be developed that cover the time-phased demand of each
installation, set into a fixed set of supply vessel routes and schedules.
However, the supply situation will both be impacted by events and special situations
that do not fit into the standard supply scheme. The question then becomes whether
one should try to cover all situations through ‘stretching’ the capability and capacity of
the standard supply system scheme, or whether one should separate and deal with
special situations in another, ‘special’ supply system scheme, adopted for different and
specific situations, and planned through scenario developments. Then it will be easier
for all stakeholders of the supply services to see impacts and consequences of
situations that come on top of the value optimisation of the standard supply services. In
addition the special situations will be own ‘objects’ for value optimisation.
Time pacing Time pacing in this respect may be seen as adjusting the supply system scheme to
periodic changes in supply requirements. The supply service scheme cover several
installations, often in different phases of the project operations life-cycle, and thereby
with differing supply demands. As an installation come into a new phase with respect
to supply demand, there may (will) be changes to the optimal configuration of the
supply system scheme, and this should be reflected through periodic re-planning and
re-configuration to optimise the supply system scheme to the new supply demands.
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Periodic shut-downs, maintenance and modification projects including extra supply
needs, will also be a subject for time pacing. Such time pacing should however be
treated through the supply system for special situations.
Value
focused
thinking
Value focused thinking is to a large extent driven by the yearly North Sea Operations
benchmarking studies. In these the operators get a relative measure of their own
position versus other operators, per installation. If one through the planning processes
aims to understand the mechanisms that produce value, and the cost structure and cost
drivers related to this, the benchmarks could be used as a top-level driver for
uncovering value. Examples of value improvements that could be directly related to the
benchmarking exercise is e.g. operator collaboration in supply base services and supply
vessel utilisation. Such collaboration will increase the value/cost ratio of producing the
supply services through leveraging on the potential for synergy through shared
resources that exists in the supply chain cost structure. However, what is important to
remember in value-focused thinking is that one should start improvement work as free
from constraints as possible, e.g. not only see potential in improving already
established partnerships and collaborations, but analyse based on the full set of
opportunities, including ending established collaborations and establishing new ones, if
that enhances value contribution the most.
Policy
deployment
Policy deployment means the few, critical breakthroughs or goals required to be
achieved to meet the overall development plan. The policy deployment should be
customer focused. Two high-level, critical breakthroughs needed for development of
the operations supply chain is first the ability to commit the customer into taking
proactive part in developing, planning, and following up the operations supply chain
schemes. To be able to realise the benefit in ‘optimised’ supply schemes, customer
commitment is an absolute necessity. The other critical breakthrough needed to make
optimal use of resources for supply services adopted to the changes in the demand
situation is collaboration among installations and across operator companies. This
gives a much wider set of opportunities to optimise within, but need to establish a form
of consensus within the business that such is beneficial.
Cross-
functional
management
A good example of cross-functional management within the operations supply chain is
e.g. regional supply chain operations centres that cover all operational demand/supply
activities within one supply region, e.g. related to one supply base. Such operations are
known e.g. from other transport network management contexts, e.g. the air transport
industry. Representatives from all functions are co-located in one room, supported by
technology to give their customers and supply chain stakeholders a single point of
contact.
Target
costing
Target costing in this context could e.g. be related to the costing differentiation
between standard and special supply services. The standard services should have a
cost-minimising aim. The standard supply services scheme should be the services that
aim to meet the estimated and planned supply demand requirements within a given
period of time, and for a given supply scheme configuration. To achieve this it is
important that it is true commitment to the system from each customer, and that the
customers accept and adhere to the level of service that they are given true the standard
system. The target costing of the standard supply system scheme is as such proactively
engineered based on a periodic optimisation of the supply system scheme to fit the
predicted demand.
For the special supply services the customer, and activator, of such need to pay the
additional cost of establishing and operating such services when needed. However, it
should also be some form of incentive for the operational managers of the overall
supply system to make additional use of special supply services when such are
established and if this is cost and service effective.
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In sum the target costing should aim to price standard versus special services so that
there is a true incentive in choosing and following the scheme of the standard services,
as well as a disincentive in breaking the standard scheme, and an incentive to paying an
additional price to get special services when such is required.
To facilitate and support lean thinking in the operations supply chain we have above
listed lean principles, characteristics, types of waste and planning elements, and related
these to the operations supply chain. The literature on lean thinking is rich and
comprehensive, and we suggest the interested reader to look into e.g. Bicheno (2000) as
he presents good lists of references for further reading.
Resilient and robust – A vulnerability analysis
A supply chain must be able to keep up its mission, i.e., it has to be robust with respect
to factors that may ‘disturb’ the supply chain from fulfilling its mission. This is related
to the logistical service element. Another aspect of the logistical service element is the
supply chains ability to retain to do its mission if it has been brought out of ‘balance’,
i.e. the resilient aspect of service. The mission of the supply chain may itself be object
to changes, and then the resilient characteristics or abilities of the supply chain must be
leveraged. This was seen in Copacino’s (1997) approach to differentiate between
reliable, resilient and creative supply chain management elements.
Whether it is the robust or resilient characteristics that are most important or if it is a
combination of the two will be contextually dependent. But as important parts of the
logistical service element, robustness and resilience should be addressed in a supply
chain or SCM analysis methodology. An example of this is presented in the CMSO
methodology (Schneider et al. 1994), which emphasised robust lean supply chains for
the automotive supply industry.
Before we proceed to a methodological approach to a vulnerability analysis, let us
define some related terms.
Table 7.16. Definitions related to resilience and robustness (Asbjørnslett et al., 1999).
Mission The system’s ability to deliver products and services according to demand. In
addition to make contemporary good performance, it is also part of the
system’s mission to prepare for its position in tomorrow’s market. The
mission covers both the systems vulnerability to deliver, as well as the
vulnerability of the larger system due to the performance of the given system.
Resilient A systems ability to absorb change without catastrophic failure, i.e. its ability
to return to a stable state (still persist).
Robust A systems ability to resist shock and return to do its intended mission and gain
the same market position as it had before the shock.
Damage tolerance A measure of a systems robustness w.r.t. a specific damage, i.e. the reduction
in reliability of a system that has a specific damage but has not failed.
Threat A stable, latent, adverse factor that may manifest itself in an accidental event.
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Risk Combination of the frequency, or probability, of occurrence and the
consequences of a specified hazardous event.
A vulnerability analysis is aimed at a system’s ability to up-keep its mission, i.e. the
survivability of the system. This is different from a risk-analysis which focus on the
consequences of human, environmental and property impacts of an accident.
Table 7.17. Differences between a risk and a vulnerability analysis.
Risk analysis Vulnerability analysis
Focus; Human, environmental and property
impacts.
What can go wrong?
How likely is it to happen?
What are the consequences?
Focus; The survivability of the system.
Extended set of threats and consequences.
Are there adequate resources to mitigate and bring
the system back to stability?
When will new stability be reached?
In this respect a vulnerability analysis needs to focus on a greater set of threats than a
risk analysis. The threats could be the direct causes of an accidental event, or they could
be threats to barriers or safety functions that should prevent or reduce the consequence
chain of the accidental event in developing. After the direct chain of consequences
following from the accidental event has stabilised, the risk analysis ends, but then the
vulnerability analysis focus on how one may bring the system back to a position in
which it may up-keep its intended mission. This is presented below.
Accidental
event
Accident
causes
Consequence
chains
= Barrier or Safety function
T
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r
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a
t
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Threats
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event
Accident
causes
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chains
= Barrier or Safety function
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Vulnerability analysis
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Accident
causes
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= Barrier or Safety function
T
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Vulnerability analysis
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Figure 7.15. Difference between a risk analysis and a vulnerability analysis.
For analysis purposes, both robustness and resilience comes within the confines of
vulnerability. The methodology described below outline the main elements of a
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vulnerability analysis that is suitable for analysing systems as found in the supply chain
context
62
.
The vulnerability analysis is based on a taxonomy of factors or threats that may
contribute to the vulnerability of the system. The taxonomy is then used as basis when
approaching the system through an input/output model that view the input and output
from the system as either wanted or unwanted. On the input side there are required input
and hostile input. The required input is what is needed to make the system function, and
the hostile input is one part of what may threaten the system. On the output side the
wanted output is related to the systems products and/or services, i.e. the mission of the
system, and unwanted outputs that may naturally follow from the systems internal
processes or due to internal malfunctions.
The vulnerability analysis is made up of two parts. The first part shall establish an
overview of the potential scenarios, their immediate effects, and resources, systems and
plans for mitigation, restoration, rebuilding etc. The second part is a quantitative
analysis to establish an internal ranking of the scenarios, ranked by how critical they are
(emergency to attend to).
Table 7.18. Vulnerability analysis part 1; Establishing scenarios and their attributes.
Resources/systems/plans
for mitigation, restoration,
rebuilding, etc.
Threat
Scenario
(Emergency)
Likely?
(Yes/No)
Potential
immediate
affects? Internal External Remarks
The sequence of the analysis follows a potential route of an accident
63
. Identify threats,
based on a taxonomy for the specific context in question, and describe scenarios. Rule
out those scenarios which are not likely to occur (yes/no). Identify and describe
potential immediate effects. Establish which internal and external resources, systems
and plans are present to mitigate, restore or rebuild after an accident. The result is a list
of scenarios that give a rough, overall picture of the vulnerability situation of the project
demand/supply chain system.
62
For a more detailed description about the vulnerability analysis methodology see Asbjørnslett et al.
(1999) and Einarsson et al. (1998).
63
The use of the term ‘accident’ shall here be regarded as both a wanted change, e.g. new technology, or
unwanted change, e.g. due to the fall out of an established supply chain.
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Table 7.19. Vulnerability analysis part 2; Quantitive assessment based on scenario
criticality.
Scenario
(Emergency)
Consequence of scenario Resource to
mitigate, rebuild,
restore, etc.
No. Description
Likelihood
of
scenario
Human
impacts
Environmental
impacts
Business
impacts
Property
impacts
Internal External
Total
(4-1) (4-1) (4-1) (4-1) (4-1) (4-1) (4-1)
The second part of the vulnerability analysis establishes a criticality ranking of the
scenarios. Each input is given a weight from four to one (the lower the rank, the better).
The ranking of the scenarios are based on the sum (‘Total’). Selective analysis can be
performed by e.g. adding a factor to selective inputs. Time is an important factor with
respect to all consequences, e.g. for the project context both in the development phase to
secure schedule adherence and in the operations phase to re-establish production. The
result is a list of critical scenarios that may be used ‘backwards’ to guide actions, e.g.
how to reduce the likelihood and consequences of each scenario. With respect to
reduction of likelihood measures to avoid or reduce a threat and measures to reduce the
probability of an accidental event should be addressed. Then, with respect to reduction
of consequences, measures related to design and passive barriers, then operations and
active barriers, and finally measures to mitigate and restore should be addressed.
The result of the analysis should help in a proactive way to address how to deal with
threats, events and consequences before they occur.
A good example of resilience (unplanned?) is the Sleipner substructure accident, were a
new substructure had to be built after the original one sank, to secure the deliverables of
the project object (1
st
mission – project development execution mission), and secure the
committed deliveries of gas by the project object (2
nd
mission – project mission).
Further readings;
Asbjornslett et al. (1999). Article.
Bicheno, 2000.
CLM (1995). Chapter 9.
Cooper (1997). Article.
CRINE Network (1999); Chapter
Goranson (1999); Chapters 7, 9-12, and 14.
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Lambert (1998). Article.
Schneider et al. (1994). Article.
SCOR (2000).
7.2.5 Develop project supply chain strategy
In the project atlas the project supply chain strategy shall guide both the development
phase as well as the operations phase of the project demand/supply chain.
Closed Open
What?
How?
i
ii
iii
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Closed Open
What?
How?
i
ii
iii
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.16. Develop project demand and supply chain strategy.
Here we have deliberately chosen the PSCM strategies, agile and resilient demand chain
management and lean and robust supply chain management, for the development and
operations phase respectively. Alternative strategies could be a lean supply chain
management strategy for the development phase, e.g. as some operators propose with
predefined ‘packages’ of technological solution and project supply chain. For the
operations phase we believe that there will be one variant or another over the strategy
chosen here, i.e. lean and robust supply chain management. The strategic choices will
mostly be related to the operator’s involvement and commitment as supply chain
manager of the operations supply chain, i.e the spectrum of options between being fully
in charge and operating every step of the supply chain himself, or fully outsourcing the
supply chain management activities, thereby creating an outsourced gap between the
suppliers and the operator’s own project object in operation. This is in accordance with
the proposal as set forth in the conclusion of chapter five;
Stage 4: Approach an open project, with a rich (open) supply chain.
Approach a closed project with a lean (closed) supply chain.
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The supply chain strategy is the responsibility and task of the operator, but the rest of
the demand/supply chain should be involved as the strategy should be open, and used as
part of the project vision and definition as laid out in part one above. The strategy is
also to be established concurrently and in interaction with the four parts above.
Further readings;
ACTIVE 1998. VEP 1.7, 3.1, 5.2, 6.1, 6.2, 7.2, 7.4
Burton et al. (1999). Article.
CRINE Network (1999); Chapter 7.
Harrison et al. (1996). Article.
Trigeorgis (1997). Chapter 8–9.
7.2.6 Select project development and operations alternative
In the project atlas we have now come to the point where both the development and
operations strategy is to be committed to through selecting project development and
operation alternative. This is a selection point where each company among the license
owners have their own agenda in optimising the outcome as part of their own portfolio
of stakes in licenses.
‘[A decision] is simply a moment in an ongoing process of evaluating alternatives for meeting an
objective. It is the moment when a decision maker selects the course of action that appears most likely to
result in the attainment of the objective’ (Harrison 1995, p. 27).
Closed Open
What?
How?
i
ii
iii
Closed Open
What?
How?
i
ii
iii
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.17. Select project development and operations concept.
In this decision point there are a set of stakeholder interests that has to meet and be
aligned. Among the directly involved stakeholders are the government of the nation
where the petroleum resources are located, the license owners, the company(ies) that
shall develop and operate the license as Operator(s), and the actors of the demand and
supply chain of the industry.
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The nation’s interest are with respect to the long term development of the continental
shelf and depletion of the hydrocarbon resources, e.g. future opportunities in the field
region, growth national and regional of suppliers, future development of related onshore
industry due to field development (e.g. base and supply activities, or industry using gas
or oil as feed-stock). The nations interest in the development of the license is formalised
in the concession process. The programmed
64
decision process in the oil and gas
context;
1. Concession round – concessions to develop a field are given to licensees and
operator(s) for development and operations is (are) nominated.
2. Development and operations alternatives are researched and decided upon
(supply chain actors may be selected, committed and work commenced pending
on approval of PDO).
3. Plan for development and operations (PDO)
65
are sent to the Governments for
approval.
Especially point two above should be noted with respect to project supply chain
management as this enables the project demand and supply chain to commence the
work, pending on the approval of the concession. However, the risk for sunk cost if the
concession is not approved has to be covered by the project owner(s).
This formal concession process and the underlying interests of the nation, handled by
the Government, has to be acknowledged by the companies in their decision making
process, or as Harrison states;
‘Because organisations exists within the society’s economic system, managers need to be responsive to
the total society’s decisions and the reasons for them’ (Harrison 1995, p.17).
The interest of the licensees’ lies among others in the potential for synergies across own
operator licensees with new field development. The operator(s) have interest in
developing and benefiting from synergies across several of the operator’s own operated
installations. While the demand and supply chain’s involvement and interest lies in
developing own solutions, products and supply chain capabilities and competence.
Further readings;
Harrison (1995).
64
Programmed according to Herbert A. Simon in Harrison (1995, p.17).
65
In Norwegian; Plan for utbygging og drift, PUD.
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7.2.7 Activate and execute the project development supply chain
In the project atlas the focus is now on the execution, or the project planning and control
domain. The focus should as such be on logistics and materials management. This may
typically be presented as a check list set-up, and we will here present two check lists
from one source (Kerridge, 1987), some general considerations from a researcher
(Silver, 1986), and some experiences from an alliance project (Harrison et al., 1996).
Closed Open
What?
How?
i
ii
iii
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Closed Open
What?
How?
i
ii
iii
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.18. Activate and execute the project development supply chain.
Silver (1986) has given the following list of procurement and logistics activities in project
development phases;
‘Feasibility: estimate cost of major items, estimate availability and lead times of critical items.
Bid preparation: Identify long lead items, do logistics study, develop list of vendors for project,
determine an order of magnitude budget.
Planning (owners): Contribute to specifications of requirements, pre-screen contractors, evaluate bids,
take part in negotiations, review material management organization and procedures of selected EPC’s,
develop material management plan for owner procurement/ logistics.
Planning (contractors): Prepare project procurement plan of execution, firm up long lead items, interface
with scheduling, identify oversize equipment.
Detailed design: Have design done as quickly as possible on long lead items, work with engineers in the
timely development of requisitions, review inspection needs with engineering, advise engineering of
weight and size limitations from the standpoint of logistics.
Procurement: Receive requests for quotations, prepare and process purchasing/subcontract requisitions,
receive and evaluate bids, write purchase orders, expedite, inspect, arrange and monitor transportation,
prepare material receiving reports, maintain appropriate documentation, (owner) monitor contractor’s
material management activities.
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Construction: Check when installation of key equipment is possible and how it will be handled,
influence construction schedule when appropriate, receive goods, warehouse and manage inventories on
site.
Commissioning: Dispose of surplus, roll over history of equipment to operations (ability to track back to
vendors and specifications), ensure availability of spare parts, operating and maintenance instructions,
make appropriate back-charges to suppliers for field corrections’ (Silver, 1986).
A more thorough check list for materials management in project execution is given by
Kerridge (1987). Kerridge’s check list is presented in table 7.20 below. For a full and
specific discussion of each bullet point in the check lists see Kerridge (1987).
Table 7.20. Materials management checklist – Materials of construction.
Material cost optimisation
Engineer vs. procure vs. construct
Vendor engineering
Component standardisation/rationalisation
Shop vs. field fabricate
Material responsibility
Material take-off (MTO)
Requisitioning
Purchasing
Expediting
Inspection
Installation
Material control planning
Quantity take-offs (prelim/intermediate)
Material quantity trending
Growth allowance
Construction allowance
Surplus material disposal
Spare parts
Material sourcing
Local vs. world supply
Mill vs. stock supply
Package deals
Sole source negotiations
Blanket orders
Package plant
Modular design
Project financing constraints
Material shipping
Protective packaging
Containerisation
Assembly and marshalling
Material scheduling
Field need date
Critical material items
Early vendor selection
Schedule vs. cost considerations
Early bulk ordering
Subcontracts
Subcontracted engineering
Subcontracted material supply
Combined subcontracts
Field material control
Field warehousing
Field material purchasing
Damaged/missing material replacement
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Kerridge has also established a check or reference list over materials management
responsibilities in the project execution phase. That list is presented in table 7.21 below.
Table 7.21. Material management responsibilities.
Engineering
Material selection and specification
Material quantities by drawing, by line and by item
Material quality control
Technical and drawing review of vendor information
Application of material identification codes
Material cost control with regard to quality and quantity
Material quantities and requisitions to schedule requirements
Procurement
Vendor selection
Issuance of inquires and commercial review of bids
Purchase orders, subcontracts and purchase order changes
Vendor expediting and inspection
Transportation logistics
Specification of packing, tagging and identification requirements
Material cost control with regard to overall cost and unit rates
Delivery of materials to schedule requirements
Construction
Establishing onsite required dates for all materials
Setting erection sequences
Field receipt, inspection and/or rejection
Field warehousing
Field identification coding and tagging
Issuance of material shortage, damage and excess notifications
Purchase of field sourced materials
Installation of materials to specifications and drawings
Installation to schedule requirements
Project controls
Establish scheduled dates for material acquisition cycles
Issue approved budgets for materials – quantities, unit rates, costs
Maintain approved equipment list
Establish material tagging and identification codes
Monitor, track material performance (quantities and costs)
Issue material status/exception reports
Receive, verify invoices vs. purchase orders
Pay approved invoices
In addition to Kerridge’s check list a sum up of purchasing and materials management
from an alliance project should be mentioned (Harrison et al., 1996).
Bulk steel procurement was better carried out by the fabricator, and not by the design office, as the
fabricator is better placed to perform material take-offs, knowing his own approach to nesting and
hence judging cut and waste.
Late arrival of quality vendor documentation (as usual on a project).
Look at the procurement process to take into account data which could be provided at order, data
which is unavailable until the item is built, and that the vendor has also to go through a design,
procure and manufacture cycle.
For significant packages, have much closer peer-to-peer interaction in the early stages of an order,
rather than waiting until drawings appear and it is too late.
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offer appropriate incentive schemes – delaying payment only works if the amount are significant, and
penalties are difficult to enforce, particularly if the item is delivery critical.
Make greater use of long-term call-off supply agreements – especially as individual projects get
smaller and their ability to influence becomes more marginal.
Establishing and maintaining a good relationship between engineering, procurement and the
construction site(s) pays off many-fold (Harrison et al., 1996).
Logistics and materials management in project execution is a comprehensive field,
where both the ‘devil is in the details, but so is also salvation’. In the references under
further readings you will find a comprehensive coverage of the topic, from different
approaches and industries.
Further readings;
ACTIVE 1998. AP7.
Burton et al. 1999.
CAPS 1997, I and II.
CII 1988.
CRINE 1999-B.
Harrison et al. 1996.
IPA 1995.
Kerridge 1987.
O’Brien 1995.
Pahkala, 1997.
SBI, 1995.
Stukhart, 1995.
7.2.8 Preparation for and start-up of operations supply chain.
The main structure of the operations supply chain was established through the
concession for the license that the project was developed to exploit, as well as when the
concept for development and operations were chosen. Spare parts programmes and
related supplier contracts are also part of the scope of work of the development phase.
However, the operations supply chain has to be configured, planned and established
before operations commence.
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The project is now brought into a closed mode and the focus is on the operational
supply chain, from suppliers via pre-transport into the supply base, supply base
operations, offshore transport, and the demand situation at the offshore installation. This
is shown in figure 7.19.
Closed Open
What?
How?
i
ii
iii
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Closed Open
What?
How?
i
ii
iii
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.19. Preparation for and start-up of operations supply chain.
Operations programmes
The demand requirements have already been established for the offshore installation,
through spare parts programmes, number of personnel located offshore. In addition one
now have to plan the operations programme, including drilling programmes. This will
impact the deck space needed for drilling tubes, equipment, and general operations
supplies, as well as bulk products such as concrete, drilling chemicals, etc.
Good planning and communication of the operations programmes are a prerequisite to
be able to establish a cost-effective and robust supply services scheme.
Supply categories, supply volumes and service requirements
The operations supply chain cover several categories of supply. The supply could be
grouped into the following six categories:
Food and consumables.
Operations supplies.
Drilling material.
Drill-tubes.
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General bulk.
Operations chemicals.
Each category will have its specific demand characteristics and supply service
requirements, therefore they should be treated independently for planning purposes, but
collectively for developing the total scope of the supply services infrastructure and
resources. E.g. could the volume demand for supply of food and consumables be treated
as a constant, except for e.g. maintenance periods with increased manning offshore.
Drilling equipment, or more specifically all rental equipment, will also have a return
process, as it is important to bring the rented equipment back onshore after it has been
used offshore to prevent unnecessary costs through increasing the rental period.
Approaching the different service requirements per supply category has many
similarities with the CMSO methodology (Schneider et al. 1994) and could be used
accordingly for the operations supply chain categories.
Establish supply chain
The supply chain infrastructure has partly been established through the concession and
the development and operations concept. The localisation of the supply base(s), and
suppliers for spare parts has been established, as well as drilling and maintenance and
modification contractors would also be committed to. Then one have to establish the
warehousing nodes and transport modes to link the supply chain together.
Storage of spare parts, consumables, equipment and bulk material could be at
warehouses at suppliers site, at base, or offshore. The criticality of the goods and the
lead-time from storage to offshore use, the potential for shared use and synergy will
decide where the different goods should be stored.
For all goods stored before the supply base in the supply chain, pre-transport is needed
to bring the goods from the supplier or external warehouse and to the supply base. In
addition, the same mode of transport or transport system may have to be used for ‘post-
transport’ back to the supplier or external warehouse, e.g. for rental equipment.
The supply base must be equipped to handle the goods needed for the installations it is
set to serve, e.g. storage of drill-tubes, storage tanks for different types of bulk products,
repair shop for small repairs, and if required a sub-sea equipment pool.
To bring the goods from the supply base to the offshore installation in a cost-effective
manner an appropriate supply vessels scheme is needed. First the total demand for
supply vessel capacity, both with regard to deck-space and bulk storage capacity has to
be levelled. This should be done to optimise the number and size of vessels needed to
cover the whole supply operation, both for the specific installation and for other
installations that go in the same supply vessel scheme. When the overall capacity is
established one need to plan the sailing routes and schedules of the supply vessels, so
that it will cover the service requirements of the specific installations, e.g. needed
frequency of vessel calls per week, as well as give the installations a fixed and known
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schedule to plan from. The schedule must also meet specific time related requirements
of the installations, e.g. installations that are closed during night hours for vessel calls.
The vessel capacity levelling and the route planning and fixing of schedules need to be
revised periodically to optimise the supply vessel scheme as requirements changes.
Then the loading of each vessel needs to be planned on a daily basis. This cover both
planning of the deck space and the bulk tanks. Specifically stowage and segregation
plans need to obey the rules for dangerous goods, as well as prepare for safe and easy
un-loading and loading offshore in accordance with the route of installations that are
called.
So in summary for the supply vessel operations, there are three main elements;
Capacity levelling
Route planning and fixing schedules
Deck and bulk planning – stowage and segregation.
Operations supply chain management
Operations supply chain management is an important role for the operator. Much of the
scope of work in the operations supply chain may be outsourced to actors that have
specific functions as their core business, but the management role of the supply chain
should be kept as the operator’s role and responsibility. Below we list and comment
some elements that we mean are relevant for the management role.
Customer supply agreements
The customer, i.e. here the offshore operations organisation, is maybe the one actor and
stakeholder in the operations supply chain that could contribute the most in the
continuous development of the supply chain, and the management of it. To make the
customer a committed part of the supply chain, that understand and take a responsible
role in the continuous development and improvement of the supply chain, supply
agreements should be established between the provider of the supply services and the
customer(s).
Standard and special services
Some of the actors within the operations supply context has said that ‘10% of the
supplies on a daily basis are controlled or controllable, 90% is a “surprise”’ – this put a
considerable amount of stress on the standard supply system, and necessitates that the
situation is turned around so that one get a 90/10 situation in stead of a 10/90 situation.
This should be achieved through better commitment from all actors in and stakeholders
to the supply system, as well as separating clearly between standard supply services to
cover the planned situations and special supply services that cover requirements and
situations that will put to much strain on the standard system. This means that the
standard supply system should cover the 90% controllable situations + 5% of the
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special, uncontrollable situations, and that special supply configurations should cover
the remaining 5% of the special, incontrollable situations so that these does not destroy
the ‘optimal’ standard supply system. Special requirements e.g. due to incidents in the
supply chain, specific one-off demand etc., should not penalise all customers of the
supply system depending on the service level of the standard supply system scheme.
A differentiation between standard and special services may be seen as optimising a
lean basis, with an agile top. Establishing the special services as a specific element, to
be treated separately, but not necessarily executed separately, shall also secure that the
standard operations are kept as an element for optimisation on its own, not to be overly
disturbed by ‘special’ requirements and ad-hoc ‘requests’. This should also contribute to
focusing the customers, i.e. the offshore installations, on utilising the standard system to
its full extent, and thereby improve their own cost position with respect to logistics
services.
Operations supply centre
Each installation could come in contact with the supply chain through several points of
contact. They could either go through the procurement part of the onshore operations
organisation, the base organisation, or directly to the suppliers. These points of contact
with the supply chain could also be reached through various means, e.g. phone, fax, e-
mail, or through information and communication systems. All these contact points and
means make the supply ordering and contact process rather diverse, with many
potentials for mistakes and with the potential for loosing overview of the supply
situation.
Such an operation supply centre should be organised with various functions co-located
to facilitate short communication lines and ‘hands-on’ management from the team
operating the centre. Communication wise, the centre should be supported by
technological means so that all order and supply information is routed through the
centre, and with ‘single points of contact’, e.g. specific phone and fax number, e-mail
and system access so that a ‘one-number’ principle lead directly to the centre, but with
multiple line access to avoid bottlenecks.
Such an organisation would enhance the ‘visibility’ of the supply chain operations. Both
for the customers and suppliers interacting with the demand and supply chain through a
single point of contact, and for the supply services that bring the operational
management of the demand and supply chains into one cross-functional unit. It should
be noted that the intention should not be to have one centre for all supply operations on
the continental shelf, but one centre per supply base.
Further readings:
Bicheno (1999); Chapters ‘Philosophy’, pp.12-29, ‘Planning’, pp.30-40, ‘Analysis
and mapping’, pp.67-109, ‘Improvement’ pp.110-134, and ‘Suppliers and
distribution’, pp.178-183.
CRINE Network (1999-B). Chapters 1-6, and 8.
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Fagerholt et al. (2000); Article.
Schneider et al. (1994). Article.
Statoil Operations Supply Strategy, 2002.
7.2.9 Re-configure and improve operations supply chain
After the project object or installation is set into operations, and operations programmes
develop, the supply requirements will change. So will the supply requirements of other
installations, both of the same operator, as well as for other operators. As the supply
requirements change with time, this has to be paid attention to, to continuously develop
and improve the operations supply chain along lean principles. In the project atlas the
focus is now not only on the operations supply chain of the one installation, but also on
synergies with other installations.
Closed Open
What?
How?
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Closed Open
What?
How?
Operator
Contractors
Sub-contractors
Suppliers
Operator
Contractors
Sub-contractors
Suppliers
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Suppliers Base Installation
Pre-trsp. Offsh-trsp.
Improvement
Status Quo Radical Change
Quo Vadis Improvement
Status Quo Radical Change
Quo Vadis
Figure 7.20. Reconfiguration and continuous improvement of the operations supply
chain as the supply context changes.
A question in this respect is what is changing. There could be:
Changes in supply volumes and requirements, e.g. due to end of drilling
programmes, or changes in production programmes.
Installations in the same supply system configuration close down.
New installations, or modifications, that commence operation.
Changes in the supplier base, old ones are terminated, new ones established.
Changes in supply requirements across supply regions.
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Given such periodic changes, what should be done to adapt to them and to make sure
that one are able to optimise to the changing situation and draw benefit from new
opportunities;
Analysis of the changes in the supply demand requirements. Both for the installation
in focus, but also across installations within the supply region, for existing and
potentially new partners.
Mapping of changes in the demand/supply chains.
Analysis of resource utilisation; suppliers, pre-transport, supply bases, and supply
vessels.
Analysing potential for new synergy driven collaboration across operators.
Address limiting factors.
Demand analysis
Periodic updating of the demand for supply services per installation is the basis for
adjusting and adapting the supply services. The demand analysis is especially important
to set the scheme for and optimise the ‘standard’ supply services.
Supply chain mapping
Above we gave reference to a set of approaches to mapping the demand and supply
chain. Most of these have continuous improvement as their aim, and the project
operations supply chain as it was mapped when it was established may be used as a
baseline. However, as the operations supply chain develop with the progress and
development of the offshore operations and supply requirements, there is needed to do
revised mapping of the operations supply chain.
The mapping should be the basis for the continuous development activities of the
operations supply chain. The continuous development activities comprise improvement
of the supply processes as part of the operations supply chain management activities,
both for standard and ‘special’ services, adapted and improved utilisation of the supply
infrastructure as the supply requirements and cross-installation supply configuration
changes, as well as understanding the potential for and initiating synergies across
installations and operators.
Optimised utilisation of infrastructure and resources
Along with the offshore oil and gas field developments, the infrastructure of the
operations suppliers and the supply bases are being developed. Much of these
developments are due to regional, geographic reasons, to be able to supply and reach the
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offshore installation(s) with a supply vessel from a supply base, within time- and cost-
effective acceptable limits.
The supplier and supply base infrastructure is also part of the concessions of each field
development. This is often the Government’s way of securing regional benefit of
offshore field developments. However, there may be situations where the onshore
supply infrastructure has to be the target for reconfiguration to secure the profitability
and lifespan of the offshore installations. As such the conditions stated in the
concessions may have to be challenged. This is further addressed below.
Collaboration and alliances
Changing supply requirements does often open up for co-operating with new partners to
exploit new potentials of synergy. E.g. new supply requirements could mean that new
supply vessel routes and schedules could be improved through establishing
collaborative sailing schemes with other operators, or others than the operators one are
presently collaborating with. This presumes an understanding among operators that the
basis for collaboration will change, and that periodic analysis and adjustments to the
collaborative configuration have to be made, including termination of old
collaborations.
Limiting factors
In realising the potential for supply synergies across installations and operators, one will
eventually find potential for synergies in the scope of work and structure of the supply
bases. This could e.g. mean that some services could be located at one or a few bases, or
e.g. that the operations of several bases within one region could be gathered at one or a
fewer set of bases, e.g. as the supply volumes are reduced and fewer bases are capable
of covering all supply operations in one region. This could mean substantial
improvement in the supply cost position.
However, the scope of work and supply structure of the supply bases for the Norwegian
Continental Shelf is part of the concession for each installation. This means that e.g. it is
specifically stated in the concession from which base each installation shall be supplied,
and there is also stated what scope of work shall be covered from each base for each
installation, as well as the amount of personnel resources of different categories, e.g.
procurement, that shall serve a specific installation from a specific base. This will
eventually become a limiting factor for realising supply potential as the supply
requirements are reduced.
This means that the concession based requirements for the supply services structure will
eventually become a cost disadvantage for operations of the offshore installations and
should therefore at one time be evaluated against the initial intentions of the concession.
This means that even the concession requirements should be a factor for revision as the
supply situation of the offshore installations change.
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Further readings;
See under 7.2.8 above.
7.3 Summary
Above in the introduction to this chapter we stated that:
‘Methodological guidelines should as such meet the aim of the future research proposals set out by
Lambert et al. to ‘guide managers in the effort to develop and manage their supply chains’, in this case in
the project context. Given that a project’s supply network is not fully developed the methodological
guidelines should help to build an understanding of important aspects to address up-front. The
methodological guidelines should as well be of help in the process of developing and analysing the supply
network and processes that will be activated when the development and operations phases of the project
starts’.
The guidelines given above should help in this. They are not comprehensive in all
aspects, it could also be improved in its form, but should help in understanding the
process as well as address some constructive elements in demand and supply chain
analysis for the project setting. That was also the intention.
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This chapter concludes this thesis by asking whether something new has been brought
forward through this work, assessing how the objectives are met and assessing the
applicability of this work.
8.1 PSCM – ”Old wine in a new bottle”?
Within the wine industry, old grapes have been ’exported’ to new areas, developed and
resulted in good wine. Though the grapes are ‘old’ they still have ’capacity’ to develop
and make good results in a new area, and be acknowledged by the consumers – often
based on a quality to price ratio. In this thesis supply chain management may be
regarded as grapes. The new area, the ‘Promised Land’ for supply chain management to
make a contribution, is the project-oriented context and within project management. As
old grapes in a new area makes a wine that have similarities with wine based on the old
grapes in their area of origin, it still has its own characteristics that make it unique. The
same may be said about project supply chain management in the project context.
There are many similarities between supply chain management in the repetitive,
continuous business and industrial context and in the project-oriented context. Though,
there are certain characteristics that are more important, or should be given more
emphasis in the project-oriented context than in the business or industrial context, and
vice versa. Therefore, project supply chain management may be said to be “new wine in
a new bottle”. On the other side, if the wine is seen as a remedy or cure or to improve
something, project supply chain management may be “old wine in a new bottle”. The
wine, now seen as supply chain management, i.e. the remedy, is old, but it needs a new
bottle, here seen as a format, to fit the remedy to the project-oriented context. In either
way, supply chain management has become a necessity. Organisations focus more on
their core competence and out-source the rest, there is a need or desire to be able to plan
and execute faster, though at the same time relying more on the external supply chain
than before. Thereby the supply chain becomes the competitive unit, not only the
individual company.
However, project supply chain management is only one approach to fit supply chain
management to the project-oriented context in such a way that it leads attention to what
is important in the different phases of the project or the life-cycle of the project object.
As business value for all supply chain actors is the aim, the right analogy to use should
therefore be “new wine based on old grapes in a new area gives value to both customer
and suppliers”. To summarise, ‘old wine in a new bottle’, is not to be regarded as just
brushing up some old ideas, but rather a necessity to bring ideas, concepts and methods
from one domain of knowledge and application to another. That could give results and
benefit both to the ‘adopting’ domain of application, as well as the ‘parent’ domain of
application.
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8.2 Recapturing the objectives
In chapter two the objectives of this thesis was summarised as to;
- ‘Develop principles and concepts of logistics and supply chain management in the project context.
- Demonstrate these principles and concepts through theoretical and empirical examples.
- Apply these principles and concepts, through methodological guidelines for analysis.’
Now it is time to ask whether we have obtained these objectives? The first objective, to
develop, is obtained through the development of the PSCM concept and guidelines. The
second objective, to demonstrate, is done to some extent through the text, but we still
miss a full demonstration through one or more case studies. That is a weakness with this
research. The third objective, to apply, has been covered as it is formulated above,
‘through methodological guidelines for analysis’. However, the PSCM development,
both the concept and the guidelines, should have been applied to a real case, to test and
revise elements of both the concept and the guidelines. We have not been able to do
this, and it must therefore be left for further studies.
We did also formulate three part objectives to support the main objectives;
1. ‘Determine if there exists present work or approaches that are suitable to use with respect to
developing and proposing the use of logistics and supply chain management within the project-
oriented context of the oil & gas industry, through a survey of existing research on project
management and supply chain management.
2. Determine competitive aspects or elements of logistics and supply chain management that are more
important than others to relate to and use within the project context as found in the oil & gas industry.
3. Structure and adapt existing theory as a guidance to practical use – formulate a concept (or ‘frame of
mind’) and develop methodological guidelines for an approach to logistics and supply chain
management within the project context of the oil & gas industry.
Below in Table 8.1 we have summarised how and where these part objectives has been
covered in this thesis.
Table 8.1. The fulfilment of the part objectives set for this thesis.
Part objectives, covered in;
1 This is covered in chapters 3 and 4, specifically in the earlier developments in sub-chapter 4.5.
2 This is covered through the outlining of the oil and gas supply chain challenge in chapter 5,
preceded through the theoretical outlining in chapters 3 and 4.
3 This is covered in the development of the project supply chain management concept in chapter
6, and the methodological guidelines in chapter 7. The methodological guidelines in chapter 7
are sought developed along the life-cycle of a project.
If we return to the aim of this study as set by Arbnor & Bjerke’s (1997) systems
approach and presented in chapter two, we have determined the type of the system, not
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fully described the system in detail, but given a guide in how to approach to see the
system from a logistics point of view.
The basis of this research has been theoretical studies, and empirical input and
reflections about demand and supply chain issues given by several actors related to the
project demand and supply chain in the petroleum industry around the North Sea basin,
as well as open empirical sources of information. The studies of the project-oriented
supply chains and the other sources of empirical material may be regarded as one ‘case’.
This is due to the nature of the research, which are conceptual development as well as
methodological outlining. The ‘case’ as such is not specific projects and supply chains
per se, but the ‘industry’ of the project context, its actors and processes that are involved
in the ‘problem’ and context to be studied. This may be said to be in line with the
research approach as given by Arbnor et al. (1997).
‘Let us only say that it is important to understand historical material from its own contemporary
perspective, which often requires extensive studies of the spirit of the times in the environment of the
system being moulded’ (Arbnor & Bjerke, 1997, p. 241).
8.3 Usefulness of the project supply chain management concept
‘The requirement [for validation in the systems approach] is not so much that definitions must correspond
with existing theory or be operational, as that they are perceived to be important and relevant to the
creator of knowledge as well as to other participants from the real system engaged in the process of
creating knowledge’ (Arbnor & Bjerke, 1997, p.234)
As outlined in chapter two and above, we have not been able to demonstrate or apply
the PSCM development versus one or more real cases. But following Arbnor &
Bjerke’s comment above, we will here relate the PSCM development to some
theoretical and empirical sources that we have had access to. On the theoretical side we
relate the PSCM developments to the earlier approaches to logistics and supply chain
management as given in chapter four, and the areas for further improvements post-
NORSOK as given in chapter two. To discuss the PSCM developments against practical
challenges in the industry we use the results of two industry workshops that we
arranged, given in appendix D and E, and some challenges and recommendations that
we got in interviews with actors and stakeholders in the project demand and supply
chain of the petroleum industry.
8.3.1 The PSCM development versus theory
PSCM versus earlier approaches
Here we will compare the earlier approaches to logistics and supply chain management
in different project contexts, as outlined in chapter four, with the project supply chain
management concept and guidelines, as presented in chapter six and seven.
Silver (1986 & 1988) is the first author we found to address the logistics and supply
chain management challenges of the project context of the petroleum industry. Silver
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raises some questions or challenges related to the subject. Among them he raises the
aspect of uncertainty and the design change process, which is the basis for the agile and
resilient demand chain management perspective of the development phase in the PSCM
concept, supported by the agile development aspect in the PSCM guidelines. It is also
an aim of the PSCM development that it shall contribute to the degree of a more
proactive attitude towards logistics and supply chain management in the project context,
as Silver questions.
The supply chain management initiative of the CRINE Network was established two
years after this research commenced. CRINE Networks treatment of the subject is
comprehensive and interesting, and the PSCM development has many similarities with
their objectives. The contribution that the PSCM development bring along that CRINE
Network does not address is the distinction between the characteristics and approaches
to the two phases, development and operations, of the project life cycle, that should help
in focusing the difference in the challenge. Further, the PSCM guidelines bring in
addition to CRINE Networks methodology, another perspective on the project vision
process, and its relation to the project supply chain, the guidelines to agile development,
as well as the specific guidelines to the operations phase. The resilient versus robust
dimensions of the service aspect is neither addressed by CRINE Network. However,
CRINE Network’s supply chain management initiative comprised a broad industry
initiative, and as such has covered more practical elements that we have been able to in
this study. The CRINE Network initiative has also been established as an independent
entity through the Logic-Oil establishment.
Burton et al. (1999) address the aspect of strategic supply initiatives in the oil and gas
industry, and its relation to financial advantage. This is an element that is not covered
through the PSCM developments. One relation may though be found in the operations
phase, e.g. collaboration between installations and operators for supply vessel services
and supply base services. Operator frame agreements and contracts do also fall within
this category, but has not been treated specifically in the PSCM developments.
The PSCM development does neither address the specific material administration part
of the development phase of the project, as e.g. Kerridge (1987-I & -II), CII (1988) and
Stukhart (1995) does. Especially CII and Stukhart’s contributions are comprehensive in
this field. This field is also partly covered in the textbooks on project management,
planning and control, Harrison (1992), Lock (1994) and Rolstadås (1997), though not to
the same extent as the aforementioned authors. In relation to the text-books on project
management, planning and control, the PSCM development could contribute with a new
perspective on the challenges of management of the project and its demand and supply
chains.
Three more authors, Byggforskningsrådet (1991), SBI (1995), and O’Brien (1995)
address aspects of logistics and supply chain management within the construction
industry. Compared to Byggforskningsrådet’s industrial approach in trying to copy
repetitive industrial logistics processes to the construction project context, the PSCM
development break with that approach in separating between the one-of-a-kind
development phase, from the repetitive operations phase. The total cost aspect as
addressed by SBI, and further specified by O’Brien has not been specifically addressed
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in the PSCM development. However, the PSCM development is founded on the
assumption that the underlying driver for the demand and supply chains contribution to
the project should be value focused, through cost effectiveness in the development
phase, i.e. cost is a generator of future value, not only a cost, and cost efficiency in the
operations phase, i.e. the focus on the lean concept.
Pahkala et al. (1997) and Kanjii et al. (1998) address the total quality management
aspect that underlay the lean development within supply chain management. This is
only partly and indirectly addressed in the PSCM developments, as part of the
guidelines for the operations phase.
Vollmann et al. (1995) introduced the demand chain management concept. This concept
is taken directly into the PSCM development, and used specifically to address the
development phase, as the demand management processes in this phase are regarded as
the key driver for understanding the supply chain management challenge of this phase.
Therefore we have used the term demand chain management specifically. We have also
used horizontal partnering for the type of demand chain partnering between operator
and a set of contractors and main suppliers in an alliance as Vollman et al. uses, as well
as vertical partnering for the supply chain partnering from the contractor and
downwards into the supply chain, as e.g. Schultzel et al. (1996) does in their description
of Bechtel’s multi project supplier agreements.
Vollmann’s use of demand chain management could be furthered by the discussion of
the differences between ‘agile’ and ‘lean’ approaches, and their reliance on the English
and French engineering traditions respectively. From Goransson’s (1999) discussion
of these one could argue that ‘supply chain management’ is a wrong term to use for the
development phase. It could rather act as a ‘contradiction in terms’, as the most
important part of the development phase is to enable value enhancement based on an
agile, extended, or ‘virtual’ enterprise, within a short scope of time available for
developing the project. This is in line with the commercially oriented, solution seeking
English engineering tradition. A good example of this could be British Petroleum’s
Cleeton project (Harrisson et al. 1996), conducted as an alliance, where the prime
objective for creating the alliance was to become able to enhance the value of the
project and make it financially viable. The project, with British petroleum as Operator,
that Vollman et al. comment in their article is developed in the same period and
tradition as the Cleeton project in Harrison et al.
66
Compared to the earlier theoretical approaches the PSCM development has generally
contributed with some new thoughts and perspectives, and specifically with the focus on
the different characteristics of the development versus the operations phase of the
project life-cycle, and some of the related methodological guidelines. There are
however many aspects and areas that not has been covered by the PSCM development,
especially the detailed studies of the material management processes.
66
See Goranson (1999) for a discussion of the origin and differences between the British and French
engineering traditions, and how these influenced the development of the North American engineering
schools and their engineering tradition.
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PSCM versus post-NORSOK recommendations
In chapter one we pointed to some of the main areas for improvement post-NORSOK,
as presented by Kaasen (1999). These were the five areas of attitude and cooperation,
better quality early, decision processes in development projects, support for further
improvements, and level of activity.
For the first, attitude and cooperation, the PSCM concept and guidelines as developed
here have a rather small contribution. There are however a couple of elements that could
be useful. One is the first element of the PSCM guidelines in establishing a project
vision. Establishing a project vision may unite the project supply chain, and especially
regarding collaboration about contractual risk, which need the right attitude among the
project stakeholders about the project’s degree of openness. Another is use of the PSCM
concept to build understanding, and thereby attitude about the challenge of the project
demand and supply chain context and one approach to deal with this.
The second, better quality early, is a challenge for the more concurrent processes of the
contemporary development and execution practice. The PSCM concept may help in this
through the sharper focus on the need for agile capabilities in the demand processes and
resilient capacities in the supply processes of the project development phase. Better
quality early may as an alternative lead to a return to the earlier practices of the relay
type of development and execution processes, were one may get improved control of the
demand when orders are placed and the supply chain involved, but at a cost of longer
duration. The PSCM development regard it as important, as a support to ‘better quality
early’, that one see and acknowledges that in practice it is not possible to control all
uncertainty, i.e. risk and opportunity elements, before committing the supply chain, and
that one has to take account of this and be prepared and able to handle the remaining
uncertainty in an ‘engineering type’ of approach. This is the basis for the agile and
resilient demand chain management aspect of the development phase of the PSCM
concept. This is also the aim of the ‘agile development’ part based on Goransson
(1999), in step four of the PSCM guidelines.
The third, decision processes in development project, was related to the real function of
the plan for development and operations, PDO. When the regulatory framework is such
that one is allowed to make commitments with the project supply chain before PDO
approval, then in practice the PDO is only a formal milestone for the demand and
supply chain management in this project context. The PSCM development has no
impact on this.
For the fourth area, support further improvements, the PSCM development in itself may
contribute with a new way of thinking and bringing other dimensions into the
improvement processes. As such the PSCM development could be one element in
challenging established practice, and supporting further improvements. For the
operations part of the PSCM concept and guidelines, they could directly contribute in
establishing a basic fundament for continuous improvement, especially through step
eight and nine of the PSCM methodological guidelines, but also with the concept’s
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focus on lean and robust operations. The PSCM development could also contribute as
part of competence development in being a framework to analyse previously executed
development projects in, and for projects in operation.
For the fifth area, the level of activity in the industry, the market analysis part of the
PSCM guidelines could be used. An even better source would be CRINE Network’s
methodology on this aspect. They have a good analysis of buyer versus provider
positioning.
To conclude, the PSCM development does not cover all areas for further improvements
post-NORSOK, but contribute with some elements that could give a constructive
contribution, among others, to the ongoing improvement efforts of the competitiveness
of the project context of the petroleum industry. These contributions does both bring
new elements to and build on the earlier approaches presented in theory, as well as may
give a contribution to the areas for further improvement post-NORSOK.
8.3.2 The PSCM development versus the industry’s challenges
As stated above, we had to move away from developing three descriptive case studies.
However, empirical material was collected through interviews, participation in
meetings, as well as through two workshops that we arranged. The two workshops were
related to topics that have impact on supply chain management within the project
context of the petroleum industry. The first workshop was related to the project front
end, the other to contract strategies. Below we will first discuss the PSCM development
in relation to the front-end workshop, then the contract strategies workshop, and finally
in relation to empirical input collected in some interviews.
Both workshops gathered representatives from several petroleum companies and
contractors. The summary presentation of the front-end workshop is given in Appendix
D, while the questionnaire and summary of the contract strategies workshop is given in
Appendix E.
PSCM versus project front end workshop
The objective of the project front-end workshop was to establish recommendations for
improving the awareness of the importance and challenges of the project front-end. The
workshop was based on the assumption that the main objective of the project front-end
is to develop the opportunity that the project shall realise, while concurrently reducing
the inherent risk. Risk come as a result of something. This something is related to
obtaining or reaching an expected end result, where the expected end result is the
developed opportunity. The front-end must therefore balance the development of
opportunities against risk reduction.
The main messages from the participants of the workshop was summarised into the
following:
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1. Balancing opportunities and risks; exploring and acting on potentials, clarifying
contextual differences and implications, and understand-focus-check.
2. Getting the project beyond sanction points and up to “big spend”; financial
justification, technical development (opportunity realisation), and supply chain
involvement.
3. Enhancing the ability to master speed and flexibility in project execution; mental
conflicts, classic to generic model, and decision making under uncertainty.
4. Enhance the ability to reach or exceed an expected result; proactive front end
planning, build on experience, seek and understand current challenges, and align
challenges and means.
Let us now relate these ‘conclusions’ from the workshop participants with the PSCM
development. We refer to Appendix D for more details under each of the four points
above that we bring into this discussion.
Regarding the first point the focus was on being able to act on potentials, when they
were present, i.e. one should have agile capabilities and capacities. Developing
opportunities is also a matter for the supply chain, or more precisely the demand chain
in this phase, in developing the demand for supplies for the project object development.
As such, developing the opportunity and reducing risks is a matter to be managed by the
demand chain construction, involving both operator(s), contractor(s), and even suppliers
of major or critical items. Another element under this point is the need to understand the
project’s position with respect to degree of openness. We have in the PSCM guidelines,
used the project space as help in visualising this. Understanding the project’s degree of
openness, and relating this to the choice of execution model and demand and supply
chain involvement, was also discussed in chapter five under the challenge of the oil and
gas supply chain.
The second point addresses first the element of financial justification, and the stepwise
process through sanction points. In the guidelines we referred to evaluation based on
real option concepts that could fit a stepwise sanction process, and that at the same time
could cover uncertainty, and take elements of flexibility into account. With respect to
the technical side the focus was on how requirements change over time, which need
support of an agile approach to the demand processes. It was also remarked that
technological choices lead to commitment, and that if these are to be changed the supply
chain should be resilient to be able loose up commitments made, and seek and make
required new commitments. This point is only indirectly mentioned in the PSCM
developments. Also in this point the involvement of the supply chain was mentioned as
an important part, i.e. not the operator as one demand actor, but the operator and the
‘supply chain’ actors as a demand chain construction.
The third point, address first the engineering roles of the demand chain management
construction. We discussed this in chapter five, in the roles of the intra-organisational
project supply chain actors. Then the focus was on the transfer from a classic, relay
oriented development process, to a more generic, concurrent process. In a generic,
concurrent process one should prepare for flexibility, being able to manage both
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uncertainties and risks. The workshop participants stressed further that this necessitates
decision-making under uncertainty, making decisions in spite of lack of complete
information. The question then became how one could become confident about such a
context? In the PSCM development we have taken the demand chain focus on this
management setting, as outlined by the workshop participants. We have further pointed
to the need for agile and resilient capabilities, capacities and methods, both directly and
as sources of knowledge about how to cope with the given project context.
The fourth and last point focus on enhancing the ability to reach the expected result, i.e.
being able to take the developments into the execution phase, and being able to manage
the development all the way to and commence operations as planned. The focus is
further on having a proactive attitude towards front end planning. As Silver (1986 &
1988) questioned the reactive versus proactive attitude, the workshop participants
stressed proactive planning, including the project demand and supply chain. Being
proactive includes planning for and managing moving targets, and aligning challenges
and means, as we stated in chapter five, under the challenges of the oil and gas project
supply chain. Our answer in the PSCM developments became, agile and resilient
demand chain management for the project development phase.
A final point or message from the workshop participants was ‘planning for success’.
The message was that one should aim for;
‘a good model of how to “move through” in a rational way, i.e. aligning and balancing based on an
understanding of scope of work and the way of execution’.
The PSCM development follows the messages and meet some of the aspects as laid out
by the workshop participants. The PSCM development, with the concept and guidelines,
may therefore be one contribution to a ‘good model’ for developing the project
together with the demand and supply chain, taking the inherent uncertainty, comprising
both opportunities to be developed and risks to be managed into account. This should in
the development phase be based on a conscious focus of the demand processes and
demand chains, understanding the required agile needs and preparing for agile
capabilities in a proactive way, including the demand chain, and resilient capacity in the
supply chains.
PSCM versus the contract strategies workshop
The objective of the contract strategies workshop was to address and discuss the types
and roles of contract strategies, in relation to the project context and the attitudes of the
participants and stakeholders in the project value chain. As an assumption the workshop
rested on a split between three generic groups of project strategies, namely;
1. Risk reducing strategies.
2. Opportunity seeking strategies.
3. Value enhancing strategies.
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Up-front of the workshop the participants in the workshop got a questionnaire to use as
preparation for the workshop, and to be discussed in the workshop. We will here discuss
the PSCM development in relation to some of the main messages in the feedback that
the workshop participants gave.
The mission of a contract strategy was seen to be a ‘communication tool’ internally and
with the market, to signal the given approach to procurement and demand and supply
chain management. In relation to the project management activities the contract strategy
shall align and co-ordinate the project demand and supply chain with the project
objectives, and supporting the project strategy. As such the contracts strategy shall be a
‘tool’ for establishing and managing the project’s inter-organisational demand and
supply chain. Then how does this fit with the three generic project strategies and the
PSCM development?
Of the three generic project strategies, the PSCM development seeks primarily to
address opportunity seeking strategies. Value enhancing project strategies could both be
risk reducing and opportunity seeking, as to balance out the realisation of the business
opportunity that the project shall undertake and the inherent risks, as stated by the
project front-end workshop. It should be noted that risk reducing project strategies were
the ones felt necessary to use, but that the portfolio of contract strategies should be
elevated. It was also said that the portfolio of different contract strategies should be
elevated carefully. This is due to being sure that the division of risk among the project
demand and supply chain, that a given type of contract strategy lead to, does not bring
any stakeholder into a position not manageable. As the workshop participants stated,
risk drives behaviour. If we relate this to the project strategies then one may say that the
risk reducing strategy is a ‘safe’ choice for minimising and handling risk in the short
term, i.e. for the given project. However, for the longer term, opportunity seeking
project strategies drives further development, which supports long term
competitiveness. As such the opportunity seeking strategies should, balanced against
risk reducing strategies for parts of the project, be elevated with a good division of risk
between the actors. This supports the common objectives between the operator and
contractors, as future projects are their mutual source of future business. Therefore to
meet both short and long-term needs a balanced attitude and ability should be developed
to being able to handle both risk reducing approaches and opportunity seeking
approaches, including the right type of contract strategy.
A risk reducing project strategy could be regarded as a lean approach. If the ‘lean
supply’ philosophy should be carried out as a supply chain strategy for the development
phase, then one may think of two scenarios. The first is the case of copying. A new
project is developed based on copying an existing project and project object. This is a
scenario that is much discussed, as it will always be considerable differences between
two developments, both with respect to supply requirements and process, which make
the ’copy’ into a ‘prototype’ of its own, i.e. the ordinary project situation. The other
scenario is the one where an operator orders a product, i.e. a ‘project object’ from a
fully integrated contractor. Then there are again two possibilities. The operator gives the
contractor full freedom to develop based on the contractors own demand and supply
chains. This may give lean supply execution both cost and time wise, seen from the side
of the development phase. However, this may not bring with it a lean supply set-up for
8 Conclusions
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operations. To overcome the last one the operator often want the contractor to use the
operator’s supply chain, i.e. the operator’s long term contracts and agreements. Then
there is hardly possible for the contractor to achieve its intention of lean supply for the
project object developments, but the operator come closer to achieving lean supply in
the operations phase. Therefore, in sum it is possible to achieve lean supply in the
operations phase, but that must be handled through taking the specifics of novelty and
uncertainty in the project situation into account in the project development phase.
To be able to reuse approaches to project and contract strategies, it was stated that the
principles that underlay almost all projects had to be addressed. Such principles were
seen to be the primary conditions for re-use and continuous development, with
secondary conditions that could be taken further from one project to another, but with
correction for specialities in the new project context. The PSCM development is based
on the opportunity seeking strategy as part of a value seeking project strategy. The
development is based on a set of principles derived from the challenge of the project
demand and supply chain, and the characteristics of the project. Related to contract
strategies, in hindsight we believe that these should have been more strongly focused,
and that this could have been a help to improve the PSCM development, through the use
of a concept that most actors and stakeholders in the project demand and supply chain
are familiar with.
PSCM versus comments from interviews with industrial representatives
Here we will discuss the PSCM development versus a set of interviews we have
conducted with representatives related to the demand and supply chain of the project
context of the petroleum industry. The representatives are from operators, contractors,
and an interest organisation for the industry. The focus of the discussions is how their
comments support the PSCM development.
The first interview we refer to was with a representative from an operator. This is
another representative than the two referred to in the introduction to chapter seven. The
representative’s position was as head of procurement and demand and supply chain
relations development within an operator, i.e. petroleum company. The interview was
based on a discussion of the relations between the operator and the operators project
specific demand and supply chains, and how a PSCM development should focus to
become a basis to address this. The main message from the interview was that the
PSCM development should be based on some underlying principles for demand and
supply chain management in the project context of the petroleum industry. Based on the
principles a concept should be developed that pursue these principles. Then
methodological guidelines should be developed that they do not intent to be specific,
but rather could act as a framework for developing more specific methodologies for
demand and supply chain management in this project context. These recommendations
were also in line with the recommendations from the supervisor of this research. We
have followed these recommendations in the PSCM development, and believe that the
PSCM concept meet these recommendations in a good manner, and that the PSCM
guidelines meet them to some extent. However, especially the guidelines could have
8 Conclusions
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been revised and improved if they could have been applied in a specific setting. If they
had been tested out, i.e. applied, in some specific project settings, than this could have
given important information about their relevance for specific developments, as well as
given a basis for revision of the guidelines. Therefore, the inability to test the guidelines
is a shortcoming of this research.
The second interview we refer to was a set of interviews with a representative from an
interest organisation of the Norwegian petroleum industry. The representative is a
senior representative with long experience from working within a contractor company,
and has followed the developments within project development and execution models
within the industry for many years. The setting of the interviews was around a meeting
he had with representatives from the British CRINE Network. As a basis for the
discussions he referred to what was estimated to have the main contribution for further
improvements in competitiveness for the Norwegian petroleum industry. The main
contributions were estimated to based 50% on technology development, 30% on work
process development, and 20% on change of contextual limitations. Being able to make
use of technology development in project development has a relation to the work
processes, and technology development will impact the demand processes and demand
chain processes. Technology development could either take place between project, i.e.
the contemporary principle, or in a project, either partly or fully, which was the ‘old’
principle. The ‘old’ principle of technology development within the projects, lead to
longer duration of development, as well as brought more risk into the project. However,
what should be remembered is that although the contemporary ‘established’ principle is
that technology development shall take place between projects, in practice this will be
challenged, both from the operator’s and contractor’s side. This lead to a degree of
moving targets, or openness in the project, which change throughout the project
development. A development and execution model that is based on moving targets is
OK as such, but have to be reflected in the decision processes of the development and
execution model. This requires a good communication between operator and
contractor(s) and the rest of the supply chain. The representative gave example from a
contemporary project, under development in 1999, where new demand in a rather large
scale came up after demand decisions and specifications had been made and supply
chains were activated. Then resilient processes had to come into effect, that revised the
demand, closed down the existing supply chain, and established a new supply chain.
These comments are important to remember when addressing the PSCM development,
because although the contemporary principle is to conduct technology development
between projects, in practice this has been hard to achieve. Therefore, in the
development phase of the PSCM concept, we have focused on this through a specific
awareness on the demand chain and the demand processes, the need for agile
capabilities and capacities to meet such moving targets, and the need for resilient
approaches and capacities towards the supply chains, to be able to secure the logistics
service aspects for the project. We believe that we met this representatives comments in
the PSCM development, however there are many aspects that was mentioned that we
have not covered extensively, as e.g. the role of standards where e.g. NORSOK and
CRINE has chosen quite different approaches, or the use of systems to support these
processes, e.g. as the First Point Assessment system used by the British petroleum
industry or the Norwegian Achilles system.
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216
Then we would like to refer to an interview with a senior vice president of procurement
and supply chain management with a major engineering and construction contractor.
This representative supported the view above, with technology development as the main
contribution to future competitiveness for the Norwegian petroleum industry, quote:
‘Price adjustments will not be most important in the future, but the ability to bring
forward new technology that give stepwise improvements in both CAPEX and OPEX’.
He further focused on the demand development and specification process that lay
behind making new technology available to use in a project. The contractor develop
technology and solutions with their supply chain, and when this is brought into a project
there is often a requirement that the operator’s supply chain agreements and contracts
shall be used, leading to changes and often starting a process of moving targets in the
demand development process. This leads to a focus on criticality in the project, with
respect to two elements, new technology and project execution. The criticality will have
a balancing challenge of applying new technology, an opportunity and a source of added
risk, versus the criticality of keeping the project development schedule. If new
technology, leading to a process of moving targets shall not disturb the execution of the
project, then this has to be acknowledged and treated correctly. The development and
execution models should therefore take the practical reality into account, not only the
aim of letting contractors use their own technology, solutions and supply chains, when
this is not possible in practical project development together with the operator. As
above, the PSCM development tries to address this and principally give an outline for
this in the PSCM concept.
An interview with the procurement responsible in a development project confirmed this
focus on moving targets even further. He said that, quote: ‘It seems that engineering
representatives from both the operator, the contractor and even suppliers try to exceed
each other in smartness, even after a contract is placed. This leads to many changes, and
have to be dealt with in an [agile] way to deal with the moving targets in the demand
processes, as well as dealt with in a [resilient] way when consequences have effect
down into the supply chain, and in some cases even necessitates change of supply
chain’. The focus further was that a PSCM development had to take this into account, so
that it could be possible to address this as a basis for dialogue between the engineering
and procurement representatives.
As the messages from the interviews with the representatives from the petroleum
industry above show, we have tried to guide the PSCM development along the
challenges and recommendations given, so that the requirement for validation of the
systems approach according to Arbnor & Bjerke given above are met. The PSCM
development followed the messages that were seen as important and relevant from the
side of the industrial representatives for demand and supply chain management
development in the project context of the petroleum industry. We as creators of
knowledge feel the PSCM development address important and relevant subjects, but
still regret being able to demonstrate and apply the development through real cases.
8 Conclusions
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8.4 Closure
In the early phase of the work with this thesis, a project planning and control executive
from a petroleum company said;
‘Logistics? There is no logistics in a project! Well, we have some barges, so maybe there are some
logistics after all, but that is not much!’.
As part of the developments within the project context of the oil and gas industry as
presented in table one in chapter one, it is our hope that the results from this thesis may
inspire and strengthen the supply chain management developments in the oil and gas
industry. For the development phase, new projects may draw lessons from this work, as
for the operations phase even ongoing projects could have potential for supply chain
improvements.
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230
Appendix A
___________________________________________________________________________________
Appendix A – Findings in agile manufacturing.
Appendix A presents a list of observations of situations, operating patterns and
problems that has been found at an early stage in the U.S. agile manufacturing research
programme (Whitney 1995). This is presented in the table below, together with some
reflections based on the project-oriented context of the oil and gas industry.
MIT’s research findings
(Whitney 1995)
The changing operating
pattern of the web
Pervasiveness of the web
environment
Dispersal of the design and
production
Relation to the project-oriented context
The project development execution process is becoming more
concurrent, thereby getting more agile characteristics, e,g, as seen in
figure 6.5.
How well do you manage your portfolio of suppliers, so that they are
manageable as part of a ‘web’? E.g. operators and contractors use of
frame agreements and frame contracts, to develop long-term
relationships. Through several and different options of
operator/contractor(s) constellations, this make a considerable (agile)
web environment. However, a project specific web will be project
unique.
Ability to bring specific requirements and choices made on a high level
tier in the project supply chain down into lower tiers, and the result back
again in accordance with the requirements. As e.g. in Whitney’s
discussion of assembly as the proactive part to establish better
manufacturing and demand/supply models, due to its position as ‘proof
of pudding’ with respect to seeing whether theory and practice match in
bringing everything together when needed and of correct quality at the
fabrication and construction sites.
Growth of hierarchical
supplier relationships
Do the top-tier actors in the project supply chain, e.g. the operator, want
to control all lower supply chain tiers, or do they only ‘control’ the first
tier below themselves? E.g. through the use of frame contracts and frame
agreements that penetrate several supply chain tiers below themselves, as
well as the option to ‘control’ contractor’s and subcontractors’ choice
and use of suppliers, the operators grow hierarchical supplier
relationships.
Loss, omission, obscurity,
or misinterpretation of
information
E.g. the increased focus on use of standards, e.g. the NORSOK
standards, as well as use of functional specifications could help to ease
this. Further information is an important part of the supply chain, to
secure that all specification and certificates necessary for commissioning
to take place are available together with the supplied goods or
equipment. I.e. the proof of pudding of the information supply chain.
Lack of first time capability In the project context a product or an assembly has to be a ‘first time
performer’, as it is a one-time undertaking. This is central for the project
context, and as such an aspect that separates the project context from the
repetitive manufacturing context. However, the agile manufacturing
approach has the same basis as the project context, as reflected in
Goranson’s (1999) Agile Virtual Enterprise Reference Model.
Lack of visibility into the This is the same for the project context. The consequences may in the
231
Appendix A
___________________________________________________________________________________
cost or performance
consequences of a design or
production choice
project context be seen in the design of incentive schemes that shall try
to capture and distribute risk and profit among the actors. However, this
is an important aspect that is sought to be covered in the selection of
development and operations alternative, based on a type of value
criterion, e.g. NPV.
Local solutions The situation that only present, local connections are dealt with when
problems occur. May lead to reduced ‘lean’ ability in the operations
phase due to local ‘smart’ solutions, e.g. is change of operatorship a
situation that could be an offer for such solutions.
Complexity of the product The ability and difficulty of gathering all the knowledge and
competence, located in the heads of geographically and culturally
dispersed people, to capture the design and construction processes
needed to realise a product, increases with increased product complexity.
The products developed in oil and gas development projects are often
very complex, often separated into programs, projects, sub-projects, and
modules to become manageable throughout the ‘web’.
Long design cycles The problem with long design cycles is that people, and thereby
knowledge and competence, moves around, organisations changes, and
that the project demand/supply chain corresponding to long-lead items
has to be committed early, and much development have to take that into
account.
Inadequacy of current
design methods
The move from the ‘relay race’ of the previous development and
execution models of the North Sea oil and gas industry, to the
concurrent, early demand/supply chain lock-in of the CRINE/NORSOK
models, showed that further improvements have to be made to them.
Need for more attention
early in the process
Lack of adequate cost
models
Cost estimating techniques are well developed in the project context,
however should models that calculate the value, cost and time impact of
changing from one process or technology to another be further
developed. This is important for enabling the use of methods for agile
approaches.
The front-end is the most important phase also of a project. The
uncertainty is then highest (most open project situation), but so are also
the opportunities available for designing value into the project. The
project context do among other apply front end loading, as one
methodology to improve the quality of the front-end processes.
232
Appendix B
___________________________________________________________________________________
Appendix B – CRINE Network’s SCOR’s and CAR’s.
Appendix B presents a set of supply chain optimisation requirements, SCOR’s and
critical attractiveness requirements, CAR’s, for companies to become interesting
partners in oil and gas supply chain constructions. The SCOR’s and CAR’s are
developed through the British Department of Trade and Industry supply chain initiative
(DTI, 1999).
SCORs are those things that a customer (operator or contrator) should be doing to
ensure they maximise the potential for the supply chain to provide appropriate
technologies for the future at the right time and quality.
CARs are those things which make a supplier or a contractor highly attractive to a
customer, i.e. they appropriately ‘magnetise’ the supplier in order to enable him
effectively to move closer to the customer.
233
Appendix B
___________________________________________________________________________________
Supply Chain Optimisation Requirements (SCORs)
SCORs are those things that a customer (operator or contrator) should be doing to
ensure they maximise the potential for the supply chain to provide appropriate
technologies for the future at the right time and quality.
Table. SCORs that operators and contractors should do to optimise the supply chain.
Operator Contractor
Communications
- Give suppliers more opportunity to talk to
them
- Give clear forecasts, 5 year demand horizon
- Explain new organisation structures and who
does what, to suppliers
- Listen to suppliers and contractors (including
constructive criticism)
- Discuss with contractors and suppliers the
role of each party with respect to the supply
chain activities
- Tell suppliers who to talk to within their
organisations about different issues
- Provide feed-back to suppliers on equipment
performance, how they could do better etc
- Keep an open door to suppliers
- Ask operators how they used to manage
supplier relationships and learn from this
- Publish details of procurement mechanisms
- Tell suppliers what is expected of them
- Give suppliers a forum for open discussion
- Listen to and act on constructive criticism
Procurement
- Do not insist on performance bonds from
small suppliers
- Adequately reward contractors for bringing
forward new innovation
- Ensure fair and open gainshare contracts
- Be a good customer (this gives an operator an
edge) – pay on time, be open and easy to do
- Get suppliers involved in FEED and bid
stages
- Do not ask for performance bonds
- Recognise and reward good suppliers
- Look for value rather than the lowest unit
cost
- Keep tender lists down to sensible numbers
- Maintain links with the industry, keep in
touch with the supply chain
- Publish details of projects won and what
technologies are sought
- Provide feed-back to suppliers on equipment
provided and how they can do better
- Improve dissemination within organisations
as to what suppliers can offer and who to
contact
- Adequately motivate contractors to take on
supply management role
- Operate 2-way supplier/customer assessment
234
Appendix B
___________________________________________________________________________________
business with
- Support ‘First Point Assessment’
- Operate 2-way supplier:customer assessment
- Recognise and reward good suppliers
- Mutually set target costs on gainshare
contracts
- Adopt functional specifications
- Adequately reward contractors for costs
incurred entering design competitions
- Use standard CRINE contracts
of companies
- Be aware of supplier difficulties when faced
with larger, fewer contracts
- Insist on a flow-through of good contractual
relations with contractors - Address the lack of trust between contractors
and suppliers (IPR etc)
- Consider framework/partnering arrangements
with suppliers
- Recognise that squeezing suppiers and not
paying on time etc affects the availability of
that supplier service in the future
- Support First Point Assessment
- Be prepared to consider companies and
technologies that do not have track record
- Treat suppliers as you expect to be treated as
operators
- Be a good customer in terms of paying on
time, not insisting on achievable targets
- Appoint account managers (single point of
contact) for suppliers or groups of suppliers
Technical
- Publish details of R&D budgets and
evaluation criteria for investing in suppliers
ideas
- Tell the world what their technology
requirements and priorities are, and how they
might change
- Retain capability to be an informed buyer or
ensure contractors have this capability and an
incentive to act as such
- Encourage a spirit of continuous technical
improvement
- Use functional specifications
- Publish details of what R&D support they are
willing to give
- Source best technology, not just use own sub-
divisions, e.g. access specialisms in the
market
- Publish criteria for considering applying new
technologies/innovations
- Keep abreast of new technologies/technology
suppliers in the market place
- Use functional specifications
- Use standard CRINE contracts
- Support JIPs and other collaborative
initiatives
- Continue to sponsor JIPs
- Increase in-house ability to be an informed
buyer
- Arrange technology forums/brainstorming
sessions to develop step changes open to UK
suppliers only
235
Appendix B
___________________________________________________________________________________
Table. Operator SCOR’s.
Communications Procurement Technical
- Give suppliers more
opportunity to talk to them
- Maintain links with the
industry, keep in touch with
the supply chain
- Give clear forecasts, 5 year
demand horizon
- Explain new organisation
structures and who does
what, to suppliers
- Listen to suppliers and
contractors (including
constructive criticism)
- Provide feed-back to
suppliers on equipment
provided and how they can
do better
- Do not insist on
performance bonds from
small suppliers
- Adequately reward
contractors for bringing
forward new innovation
- Ensure fair and open
gainshare contracts
- Support ‘First Point
Assessment’
- Insist on a flow-through of
good contractual relations
with contractors
- Recognise and reward good
suppliers
- Mutually set target costs on
gainshare contracts
- Be prepared to consider
companies and technologies
that do not have track
record
- Adequately reward
contractors for costs
incurred entering design
competitions
- Publish details of R&D
budgets and evaluation
criteria for investing in
suppliers ideas
- Tell the world what their
technology requirements
and priorities are, and how
they might change
- Retain capability to be an
informed buyer or ensure
contractors have this
capability and an incentive
to act as such
- Encourage a spirit of
continuous technical
improvement
- Use functional
specifications
- Adequately motivate
contractors to take on
supply management role
- Continue to sponsor JIPs
- Be a good customer (this
gives an operator an edge) –
pay on time, be open and
easy to do business with
- Discuss with contractors
and suppliers the role of
each party with respect to
the supply chain activities
- Arrange technology
forums/brainstorming
sessions to develop step
changes open to UK
suppliers only
- Operate 2-way
supplier/customer
assessment
- Adopt functional
specifications
- Use standard CRINE
contracts
236
Appendix B
___________________________________________________________________________________
Table. Contractor SCOR’s.
Communications Procurement Technical
- Publish details of what
R&D support they are
willing to give
- Tell suppliers who to talk to
within their organisations
about different issues
- Get suppliers involved in
FEED and bid stages
- Do not ask for performance
bonds - Support JIPs and other
collaborative initiatives
- Source best technology,
not just use own sub-
divisions, e.g. access
specialisms in the market
- Provide feed-back to
suppliers on equipment
performance, how they
could do better etc
- Keep an open door to
suppliers
- Operate 2-way
supplier/customer assessment
- Recognise and reward good
suppliers
- Look for value rather than the
lowest unit cost
- Publish criteria for
considering applying new
technologies/innovations
- Ask operators how they
used to manage supplier
relationships and learn from
this
- Keep tender lists down to
sensible numbers of
companies
- Be aware of supplier
difficulties when faced with
larger, fewer contracts
- Increase in-house ability
to be an informed buyer - Publish details of projects
won and what technologies
are sought
- Keep abreast of new
technologies/technology
suppliers in the market
place
- Publish details of
procurement mechanisms
- Address the lack of trust
between contractors and
suppliers (IPR etc)
- Tell suppliers what is
expected of them
- Consider
framework/partnering
arrangements with suppliers
- Give suppliers a forum for
open discussion
- Listen to and act on
constructive criticism
- Recognise that squeezing
suppiers and not paying on
time etc affects the availability
of that supplier service in the
future
- Support First Point
Assessment
- Improve dissemination
within organisations as to
what suppliers can offer
and who to contact
- Treat suppliers as you expect
to be treated as operators
- Be a good customer in terms
of paying on time, not insisting
on achievable targets
- Appoint account managers
(single point of contact) for
suppliers or groups of
suppliers
- Use standard CRINE contracts
- Use functional
specifications
237
Appendix B
___________________________________________________________________________________
Critical Attractiveness Requirements (CARs)
CARs are those things which make a supplier or a contractor highly attractive to a
customer, i.e. they appropriately ‘magnetise’ the supplier in order to enable him
effectively to move closer to the customer.
Table. CARs Contractors and Suppliers should have to be attractive to Operators and
Contractors.
Contractors Suppliers
People
- Professionalism and reliability such as to
engender trust
- Culture fit with client
- Open behaviour
- Easy to deal with
- Professionalism, so as to be able to put trust
in company - Adequate resources and back up
- Depth of quality personnel throughout
company
- Good middle management
- Overall quality of personnel
- Leadership qualities
- Good vertical alignment of management
ethics
- ‘Can do’ attitude
- Full time staff rather than large proportion of
agency staff
Marketing
- Keep operators and contractors informed of
new products
- Ability to communicate well
- Taking trouble to find out exactly what client
wants in order to understand his needs - Present ideas in terms of financial benefit to
the customer
- Ability to think like an operator (put oneself
in his shoes) - Ability to communicate well
- Track record of satisfied customers and
market reputation
- High degree of visible strategy and planning
- Awareness of life cycle issues
- Understanding of market place and market
conditions
- Knowledge of operators business
Technical
- Leaders in their industry area - In-house quality of products and services
i hi h lit d t d i
238
Appendix B
___________________________________________________________________________________
ensuring high quality products and services
- Familiarity with operations processes
- Competitive on a world scale
- Quality systems and reliability
- Design for safety
- Track record of successful performance
- Good finishers
- Recognition of own limitations
- High level of technical competence
- Commitment to continuous improvement
- Environmental awareness in design and
operations
- Innovative technology
- Awareness of innovations available in the
market place
Operations
- Value for money
- Willingness to join alliances, develop mutual
relationships
- Track record of successfully maintaining long
term relationships
- Innovative approach to projects, bright ideas
- Positive and focused
- Site safety management
- Trouble shooting and problem solving
- Objectivity
- Alignment with project/client objectives
- Willingness to put reputation at stake
- Support of client
- Willingness to link profit to performance
(take risks)
- Reduced delivery times and delivery on time
- Capacity/plant availability
- Good relationships with the supply sector
- Speed and quality of response to customer
requirements
- Reduced delivery times and accuracy of
deliveries, on equipment and projects
- Post delivery support/spares and service
support
- Anticipating and solving problems
- Good working practices (e.g. safety and
environment)
- Delivering of promises with minimum
involvement of client (i.e. zero expediting,
progress chasing)
- Financial stability
- Flexibility to react quickly to changing
market conditions
- Evaluating and recording performance (and
making visible to customers)
- Track record in delivering to time and cost
239
Appendix B
___________________________________________________________________________________
Table. CARs Technical Suppliers and Commodity SMEs should have to be attractive to
Operators and Contractors.
People
- Multi-tasking personnel
- Cultural fit with customers (sharing same
company values)
- Good management at all levels plus
commercial skills
- Develop good working relationships with
customers
-
Marketing
- Visibility, in general
- Ability to understand customers’ position
- Focused and targeting marketing, rather than
blanket selling
-
Technical
- Track record of innovative products that
work
- Design capability
- In-depth technical knowledge of own sphere,
ability to answer detailed questions
- Understanding of local conditions for a
particular project or development
- Provision of specialised skill sets missing
from contractors and now not normally found
- Wide range of products and willingness to
extend range
Technical Suppliers Only Commodity SMEs Only
- Energy, dynamism, willingness to ‘go the
extra mile’
- Low personnel turnover rate/core of
experienced personnel who understand the
company
- Openness
- Be part of a larger trade association
- Strategic or project/operations critical
products
240
Appendix B
___________________________________________________________________________________
in operators
- Value added products and capability
- Innovative approach to projects and ways of
working
- Good co-ordination, project management
skills (e.g. visible planning systems)
- Alignment and focus on the objectives of the
project
- Willingness to work together to find solutions
to problems
- ‘No job too small’ attitude
- Unit cost
- Stock-holding or evidence of ability to supply
on demand
Operations
- Provision of independent and unbiased advice
- Willingness to join and/or contribute to
operator:contractor alliances
241
Appendix B
___________________________________________________________________________________
Table. Actions for SME’s to develop specific CAR’s
Actions
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Quality/quantity retention of personnel x
Cultural fit with customers x x
Management and commercial skills x x x
Keeping customers aware of new products x x
Presenting financial benefit to customers x x x x
Good communicators x x x x x x
Reputation and visibility x x x
Market/customer understanding x
Competitiveness on a world-wide scale x x x x x x
Targeted marketing x x x x x
Product/service packages x x x x x x x
In-house quality systems x x x x x x
Continuous improvement culture x x x x x x
Strategic or project/operations critical products x x x x x x
Specialist skill-sets x x x x x x
Value added products/capability x x x x x x x x
Participation in operator/contractor alliances x x x
Innovative approaches/ideas x x x x x x
Strong project management skills/system x x
242
Appendix B
___________________________________________________________________________________
Reduced lead times for delivery x x x x
Willingness to work together to solve problems x x x x x
Speed/quality of response to customer requirements x x x x x x x x x
Post delivery support x x x
Performance evaluation x x x x
Reliability x x x x x x
243
Appendix C
___________________________________________________________________________________
Appendix C – CRINE’s supply chain strategy setup.
Appendix C presents a set-up for documentation of supply chain strategy as given in
CRINE Network (1999-B). The set-up consists of five elements to be documented;
- Vision
- Supply Scope
- Provider/Customer Relationship
- Source Selection
- Performance Measurement
VISION – Describe;
The high level objective of your supply chain initiative
The scope of your initiative
The key people and processes that are involved
Cost/benefit statement
SUPPLY SCOPE – Describe;
The good or service you are purchasing
How it is used
The main customer contacts
The expected volume, and the historical expenditure trend
The expected changes in scope (e.g. technology, specifications, demand)
The strategy – local, regional, corporate, global
How long the customer will require the good or service
Lease options (where appropriate)
The current market conditions (e.g. price, elasticity, supply and demand, economic trends, provider
profitability, cost of production)
PROVIDER/CUSTOMER RELATIONSHIP – Describe;
What kind of relationship best suits this good or service
How the identified strategy works towards creating the identified relationship
If there is a commitment to communicate openly with the provider/customer about the plan, and stick to
the plan
244
Appendix C
___________________________________________________________________________________
How long are you committed to the relationship
How the strategy will change if the relationship creates less value than is available in the marketplace
SOURCE SELECTION – Describe;
The right number of providers
Whether the plan rationalises (i.e. “right sizes”, and not necessarily reduces) the provider base to
maximum leverage
How the business will be allocated
How the providers will be selected
How the providers will be evaluated
Whether the good or service be sole, multiple or parallel-sourced
Whether you need back-up providers, and how reliable the supply is
Whether you have explored contract consolidation or outsourcing options
PERFORMANCE MEASUREMENTS – Describe;
Whether you need a measurement or continuous improvement process
If providers should be involved in developing the performance measurement system, and how they should
be involved
The elements (for all involved parties) which should be measured
Whether all stakeholders mutually agree to the measurement elements
Whether the measurements are meaningful/specific
Whether the measurements are realistic to capture
Whether the measurement elements are tied to performance targets
Whether measurement frequency and review method have been established
Whether measurements for market comparisons have been considered
The measurement elements designed for continuous improvement and corrective action
245
Appendix D
___________________________________________________________________________________
Appendix D – Epci Front End Opportunities workshop.
Appendix D is a summary presentation from a workshop arranged by the European
Institute of Advanced Project and Contract Management. The topic of the workshop
was the project front end, and its focus on balancing opportunities and risks. The
workshop was arranged and documented by the author.
Figure App. D-1. Workshop Front End Opportunities, Foil 1 of 7.
246
Appendix D
___________________________________________________________________________________
Figure App. D-1. Workshop Front End Opportunities, Foil 2 of 7.
247
Appendix D
___________________________________________________________________________________
Figure App. D-1. Workshop Front End Opportunities, Foil 3 of 7.
248
Appendix D
___________________________________________________________________________________
Figure App. D-1. Workshop Front End Opportunities, Foil 4 of 7.
249
Appendix D
___________________________________________________________________________________
Figure App. D-1. Workshop Front End Opportunities, Foil 5 of 7.
250
Appendix D
___________________________________________________________________________________
Figure App. D-1. Workshop Front End Opportunities, Foil 6 of 7.
251
Appendix D
___________________________________________________________________________________
Figure App. D-1. Workshop Front End Opportunities, Foil 7 of 7.
252
Appendix E
Appendix E – Epci Contract Strategies workshop.
Appendix E is a summary of a workshop arranged by the European Institute of
Advanced Project and Contract Management. The topic of the workshop was contract
strategies. The appendix show the questionnaire used up-front of the workshop, as well
as the summary of the feed-back from the questionnaire and the workshop. The
questionnaire and the workshop was prepared, arranged and documented by the author.
253
Appendix E
Workshop
CONTRACT STRATEGIES
‘Contracts are used to procure people, plant, equipment, materials and
services. Contracts are therefore fundamental to the management of
almost all engineering projects. The type of contract should be
selected only after consideration of the nature of the parties to the
project, the project objectives and the equitable allocation of duties,
responsibilities and risk. This chapter outlines the main components of
the process used to determine how the project will be procured,
usually referred to as the contract strategy’
(N.J.Smith, 1995, Engineering Project Management, p.188. Blackwell
Science Ltd., Oxford).
Interview guide to background document.
The questions below will be the basis for this interview. The questions are meant to be guiding,
i.e. they shall act as a basis upon which the framework related to contract strategies is to be
discussed in the workshop.
Interviewer from Epci: Mr. Bjorn Egil Asbjornslett,
Telephone: +47 – 51 87 66 92, Fax: +47 – 51 87 17 11
E-mail: [email protected], Internet: http://www.epci.org
1. GENERIC PROJECT STRATEGIES
One may state that there are three generic strategies underlying project development and
execution. These three generic project strategies are:
- Risk reducing strategies
- Opportunity seeking strategies
- Value enhancing strategies
Which type of project strategies do you consider is most used by the company you
represent?
Do you believe it could be of value to try to follow another project strategy than the one
most currently used? If so, where do you see the potential for improvements?
254
Appendix E
What could be potential drawbacks of using another project strategy?
What kind of measures would be necessary to focus on if other project strategies were to be
pursued?
2. CONTRACT STRATEGY MISSION
What is a contract strategy, and company’s preferred contract strategy?
What is the basic mission of the contract strategy?
How is the contract strategy related to project and project management activities?
3. TYPES AND USE OF CONTRACT STRATEGIES
Is there a portfolio of different contract strategies?
When and where are the different contract strategies useful – given project type, project
context, market situation and cultural locations?
Could you give your subjective perception of where different contract strategies would be
placed in relation to the three project strategies listed above?
4. RATIONALE FOR CHOICE
What have been the reasons behind the choice of a given project strategy (or strategies)?
Do you have any examples?
What have been the outcome of the given project strategy (or strategies)? (Your
experiences/perception).
Did it (or they) work out for the assumed reasons or not?
5. THE MATCH BETWEEN THE ELEMENTS
How does the selected contracting strategy match the environment experienced during
execution? I.e. the ‘match’ between the;
Project’s context or external environment, the
Project strategy, and the
Contract strategy?
How does the contracting strategy support the project objectives?
6. SUCCESS FACTORS
What are the ‘factors’ that determine the success of a contract strategy – as seen
both from a client’s and contractor’s point of view?
What are the success factors of the client’s attitude?
What are the success factors of the contractor’s attitude?
255
Appendix E
7. ARE THERE COMMON OBJECTIVES?
Are there common objectives among the actors in the project value chain?
Are there elements or aspects that may be improved in each actor’s approach to contracting
strategies?
How could these be leveraged?
8. RE-USE AND POTENTIAL FOR IMPROVEMENT
Is it possible to ‘copy’ a ‘successful’ contract strategy from one project to the next?
Or is the combination of contract strategy and project context unique so that more basic
aspects have to be addressed? If so, do you have examples of relevant aspects?
Then, how should we proceed to bring more knowledge about this area, to make up
‘guidelines’ for contract strategies in the project context for the future?
9. INCENTIVES
Do you have any experience from the use of incentive-based contracts?
What kind of incentives and/or incentive mechanisms do you believe to be best to support a
win/win situation for both clients and contractors?
Could incentive mechanisms be counter-effective?
Thank you for letting us share your time, knowledge and experience, and for taking part in
preparing this ‘Contract Strategies’ workshop!
September 17
th
1999
The Epci Project Processes Workgroup
256
Appendix E
CONTRACT STRATEGIES
Proceedings,
Epci workshop,
23-24 November 1999
EXECUTIVE SUMMARY
This is the summary of a workshop on ‘contract strategies’ arranged by the European
Institute of Advanced Project and Contract Management, Epci, November 23-24, 1999.
The workshop was based on a set of nine subjects related to contract strategies. A
questionnaire related to these nine aspects was distributed to the workshop participants
and others prior to the workshop. The nine subjects and the questions related to each
subject are presented in Table 1.
Table 1. The nine initial contract strategy subjects.
1. Generic project strategies. 4. Rationale for choice. 7. Common objectives.
2. Contract strategy mission. 5. The match between the elements. 8. Incentives
3. Types of contract strategy. 6. Success factors. 9. Re-use and improvement.
An initial approach taken up-front was that project strategies, or the strategic guidelines
underlying the decision making in the project, might be characterised and divided into
three categories;
1. Risk reducing strategies
2. Opportunity seeking strategies
3. Value enhancing strategies
Dependent on the underlying approach taken to project strategies, whether explicit or
implicit, the contract strategy and other project management activities will be
influenced. Below the input and reflections from the contributors and participants in the
workshop are summarised.
The approach made up by the generic project strategies was regarded as a constructive
approach. Risk reducing strategies were the type mostly used, or felt necessary to use,
but the trend is towards emphasising value enhancement aspects within the project per
se, as well as within and among the actors of the project supply chain. A value
257
Appendix E
enhancement approach necessitates that both risk reducing and opportunity seeking
strategies are pursued in a balanced way dependent on the project context.
Taking new project strategies into use demands that one understands the impact that
change of strategy has in relation to each actor’s commercial aspects, and not to ‘loose
focus on value enhancement and profitability at the same time’.
The mission of the contract strategy is to be the project’s guidance, communication and
alignment tool for establishing and operating the project’s supply chain. As such the
contract strategy is the basis for carrying out the project’s procurement, from the lowest
supplier tier, through all supply chain tiers and actors till the final ‘assembly’ of the
project product. The contract strategy will communicate internally and externally with
the market the approach taken to procurement and supply chain management in the
project. As a guidance to and together with the other project and project management
activities, the contract strategy shall ‘increase the probability of meeting intra- and inter-
organisational project objectives’.
The types and use of the contract strategy reflects the potential to elevate the use of the
portfolio of contract strategies available. Though there is a portfolio of different contract
strategies, they are perceived to be under-utilised to their optimum, which may lead to a
loss of value enhancement and profitability due to a mismatch between strategy and
context. As the contract strategy as a basis will drive different behaviours within the
project supply chain, the possibilities within the portfolio of contract strategies should
be elevated carefully. Especially understanding how the use of the strategy to impact the
division of risk among the actors drives behaviour.
When it comes to the rationale for choice of a strategy it is very much seen as following
and adapting to the choice made by the client. Important in this respect is the client’s
approach to the actors in the project supply chain, and the division of roles, work and
risk among the actors and the client’s ability to manage the project supply chain as an
entity, given the project context. The context of both the project and the supply market
will impact the ability and necessity of managing the project supply chain as an entity.
Especially with respect to the need for speed or the inherent complexity in the project
that will need different governing mechanisms within the project supply chain to elevate
inherent capabilities and value contributions.
Matching the contract strategy with the context and the objectives of the project could
easily become a theoretical exercise. Therefore the contract strategy should match the
project’s context and environment as far as practically feasible with options for
additional flexibility as required. The contract strategy should aim to support and meet
the project objectives through reducing imbalances along the project supply chain,
aligning and committing the supply chain to deliver, to increase the likelihood of project
success.
Then, what are the success factors of clients and contractors attitude in the project
supply chain. The client should be non-adversarial, commercially oriented and fair, and
be the supply chain manager of the project supply chain, i.e. have the ability to manage
contractual interfaces, enable the supply chain to perform through giving it sufficient
freedom to act, though setting guidelines to meet objectives. The contractors’ attitude
258
Appendix E
should be characterised by being non-adversarial and co-operative, pro-active, as well
as integrity to deliver in accordance with promises.
Common objectives between clients and contractors are based in the project as a mutual
source of present and future business. The contract strategy and formats of payment
may help to address and balance sources of risk and profitability, but managing the total
risk that is comprised by and that will influence the success of the total project supply
chain and its actors should be elevated as a common objective. The success lies not with
each actor, but in supply chains competing against other supply chains. Therefore a
supply chain management framework should be developed to suit the project context.
The contract strategy should be regarded as the strategic ‘tool’ to develop and manage
the project supply chain, that through transparency into the project supply chain help to
elevate the understanding of common business objectives, with ‘visible’ incentives and
remuneration linked to ‘visible’ performance.
Incentives used should reflect an understanding of the dependency to the project
context, and dynamic in reflecting changes in the project context that may distort the
function of the incentives. The incentives should be linked to areas where the project
supply chain actors would be in a position to influence, and towards essential business
parameters that are possible to commit to. All in all the incentives should be aimed at
“making the important measurable, and not the measurable important”. Incentives could
also be counter-effective if they are too complex and focused on details, unrealistic and
static, and is felt to address things that doesn’t matter,
The potential for re-use and improvement for contract strategy from one project to the
next lies in addressing the principles that are underlying more or less all developments.
Such principles are both generic as well as company specific, and may be regarded as
the primary conditions to be re-used and improved over time. Around these primary
conditions there are secondary conditions that have to be adjusted to the “specialities”
of the given project context. To better understand these principles an approach would be
through improved understanding of the business processes (work and commercial
processes) within and between the project supply chain actors. Such process analysis
could bring with it increased understanding among the project supply chain actors.
Through elevated understanding the primary and secondary conditions underlying the
development of the contract strategy could be addressed and be used as guidelines for
developing contract strategies in given project contexts.
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6
7
Appendix E
___________________________________________________________________________________
Participants & Contributors
Those that contributed up-front to the workshop with input to the questionnaire and/or
participated in the workshop were:
Name
Company
Mr. Mike Abramczyk ESSO Norge
Mr. Johan Almen Aker Maritime
Mr. Thor Chr. Andvik Statoil
Mr. Bjorn Egil Asbjornslett Epci
Ms. Hege Blom Norsk Hydro
Mr. Chris Bruke Foster Wheeler
Mr. Imre Csoti Raytheon Engineers & Constructors B.V.
Mr. Henk Dolman Raytheon Engineers & Constructors B.V.
Mr. Herman Jan van Driel Raytheon Engineers & Constructors B.V.
Mr. Eric F. Ekern Telenor
Mr. Steinar Fagerland Statoil
Mr. Svein Gjeraker Statoil
Mr. Harald Graff-Andresen Aker Maritime
Aker Maritime
Phillips Petroleum Company
Mr. Ole Hausken Statoil
Dr. Per Willy Hetland Epci / Statoil
Mr. Magne Holta Statoil
Mr. Mark Iden Preussag
Mr. Odd Instefjord Epci / Statoil
Mr. Phillip Jellard BP Amoco
Mr. Magnus Johansen Norsk Hydro
Ms. Kari Gro Johanson Statoil
Mr. Arnt Knudsen
Dr. Bjorn Johs. Kolltveit BI, Norwegian School of Management
Mr. Jan Larsen Phillips Petroleum Company
Dr. Jon Lereim BI, Norwegian School of Management
Mr. Odd Mosbergvik Statoil
Mr. Sverre Myklebust Aker Maritime
Mr. Hogne Pedersen Statoil
Mr. Malcolm J. Sheperd Foster Wheeler
Mr. Knut Skarestad
Ms. Mette Sundholm Statoil
Mr. Oliver N. Utoy Statoil
Mr. Raj Verma Norsk Hydro
Mr. Rolf Vestre Norsk Hydro
268
Appendix F
___________________________________________________________________________________
Appendix F – Agile Virtual Enterprise Reference Model.
Appendix F gives the full structure of the Agile Virtual Enterprise Reference Model
(Goransson, 1999). The full structure of the reference model is not presented as a
matrix in Goransson (1999).
269
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B . b C o m m u n i t y C u l t u r e s
B . c B u s i n e s s C u l t u r e
C . a . a S t r a t e g y D e v e l o p m e n t
C . a . b S u p e r v i s e R i s k / R e w a r d P r o c e s s
C . a . c S u p e r v i s e E n g i n e e r i n g Q u a l i t y
C . a . d W o r k S c h e d u l i n g
C . a . e D e p t h o f C u s t o m e r R e l a t i o n s
C . b . a Q u a l i t y A s s u r a n c e A g r e e m e n t s
C . b . b R i s k / R e w a r d C o n t r a c t s
C . b . c H o w t h e V i r t u a l E n t e r p r i s e i s R e p r e s e n t e d
C . b . d A s s i g n m e n t o f N e w T e c h n o l o g y
C . b . e L a b o u r A g r e e m e n t s
C . c . a P l a n n i n g W o r k B r e a k d o w n A s s i g n m e n t
C . c . b W o r k B r e a k d o w n R e s p o n s i b i l i t i e s
C . c . c M o n i t o r i n g / A d j u s t i n g t h e W B S
C . c . d A r b i t r a t i o n / A d j u d i c a t i o n
C . c . e R o u t i n e E x c e p t i o n H a n d l i n g
D . a . a V E H u m a n C o l l a b o r a t i o n
D . a . b V E P r o d u c t C o l l a b o r a t i o n
D . a . c C u s t o m e r ’ s P i p e l i n e , P r o d u c t
D . b . b H o w R e c o n f i g u r a b l e
D . a . d C u s t o m e r ’ s P i p e l i n e , P e o p l e
D . a . e R a w C o m m o d i t i e s
D . b . a H o w M o d u l a r
D . b . c H o w S c a l a b l e
D . b . d H o w R e l o c a t a b l e
D . b . e H o w S t o r a b l e
D . c . a G e o g r a p h i c a l l y L i m i t e d P r o c e s s e s
D . c . b S c a l e L i m i t e d P r o c e s s e s
D . c . c A t t e n t i o n L i m i t e d P r o c e s s e s
D . c . d T i m e L i m i t e d P r o c e s s e s
D . c . e A c c i d e n t L i m i t e d P r o c e s s e s
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doc_149215016.pdf