The Cost and Impact of Earliness and Delays in Materials and Parts Delivery

Abstract

The aim of this project is to explore, in a qualitative sense, the practice of earliness and delays in materials and parts delivery during the delivery of a capital project.

We hypothesize that this current practice exists because available tools are limited: project managers have limited knowledge of trade-offs and limited incentives to effectively trade-off cost and project performance, despite the fact that even project managers believe current practices are likely to negatively impact project performance.

The output of this project will be the development of models to explain why current practice is not optimal, as well as the formation of tools that will support optimal decision-making in this setting.

Introduction

The majority of investment made by an owner operator during the delivery of a capital project is allocated across a complex network of product suppliers and service providers. Currently, owner operators and their EPC’s have looked to minimize the risk of schedule delays resulting from not having the necessary materials and parts. They usually try to do this by ensuring an effective flow of assembly work, either onsite or offsite of installation onsite, by mandating that parts and materials be delivered far in advance of when they are needed, and often before the project starts.

This is in contrast to many other industries, such as automotive, retail, and technology, where the timing of orders and deliveries is more closely coordinated with actual needs.

Research Methodology

The research methodology is based on a three-phase process consisting of:

Phase 1 – Capture current state thinking and practice

By identifying and interviewing industry professionals representing capital projects, procurement and other relevant functions, we will be able to capture current thought and practice, the goal of which is to generate ideas and provide background information. In this preliminary work, we will address a series of questions (detailed in the attached appendix), first over email, and then through interviews.

Phase 2 – Analysis and reporting on findings from Phase 1 data capture

The information collected in Phase 1 will contribute to a larger research project once the cost of this practice is quantified. Simultaneously, we will complete a literature review of project supply chains (including the small amount written on mega-project supply chains). We will summarize our results from interviews and literature surveys in a follow-up white paper.

Phase 3 – Development of models for understanding and tools for decision making

Our ultimate goal is to build models that quantify the cost and likelihood of delays, as well as the cost of insisting on early and complete deliveries.

Appendix

Research Participant Questionnaire

The Cost and Impact of Earliness and Delays in Materials and Parts Delivery

The following list of questions will serve as the basis for discussion. Questions are divided into three categories. The first category is related to the efficiency and reliability of the tools that are used to manage projects, the second category is about the impact of those tools and the resulting decisions on suppliers, and the last category concerns the ways decisions get made.

Balancing Efficiency and Reliability

1. Do you consider cost of project acceleration as well as cost of delay?
2. What tools and techniques do you utilize for analyzing the impacts of delay on overall project performance?
3. How reliable are those tools and techniques? Can you describe projects where these tools and techniques have improved project reliability?
4. Does excessive storing, staging, and moving increase the likelihood of defective or unsuitable components? By how much? What does this practice cost? What is the impact of this on project performance?
5. How do inventory costs increase when the required laydown space increases?
6. What are the costs and other potential problems and negative impacts of mandating that parts and materials are all delivered far ahead of when they are needed, or even before the project starts?
7. What extra steps are necessary to preserve parts and components during long storage? What do these steps cost?
8. How does this impact financial measures? Quality? Rework?
9. Given that the goal is to ensure (with very high probability) that parts and material availability does not delay work, is this practice the best way to ensure this end result? Is it possible that current practices lead to more delays than alternative practices? Put another way, if we graph system costs versus likelihood that material and part availability lead to delays, one would assume that if the system is run as efficiently as possible, the likelihood of delays increases with decreasing system costs. Is it true that capital projects operate on or near this so-called “efficient frontier”?
10. What are the costs and other potential problems associated with part and material delays? How much flexibility is there typically built into the system to absorb these delays? Is the cost of delays more or less linear with the delay time, or is the relationship more complex?
11. What likelihood of delay is acceptable? For instance, is a 1% chance of delay acceptable for a 20% decrease in costs? Is this a tradeoff that the industry considers?

Impact on Suppliers

12. How are suppliers impacted by mandates that parts and materials be delivered far in advance of when they are needed, and often before the project starts? How does this impact quality of parts? Amount of required rework?
13. What challenges have suppliers communicated to you?
14. What do suppliers do to guard against changing delivery dates? How does this impact their costs, as well as the prices they charge?
15. How would not mandating this early delivery of parts and materials, and instead extending these delivery deadlines, affect the suppliers’ delay? Quality? Reliability?
16. How do engineering changes affect suppliers? How often does this happen?
17. Have you ever mapped the value stream between your firm and your suppliers? What have you observed?

Decision-Making

18. How do you or your firm divide a project into components or subprojects?
19. Which decisions are made by managers overseeing the entire project, and which are made by the managers of the subprojects?
20. How do higher-level managers overseeing the entire project communicate with subprojects managers, and how is feedback transferred?
21. What overall project management strategies are communicated to subproject managers?
22. How do procurement/supply chain decisions get made? How do the various levels of project management affect those decisions?
23. How are procurement/supply chain delivery time due dates set? Who sets them?
24. Who decides on shipping times/lead times/etc. for subprojects? Who is responsible for delay and cost overrun on subprojects? Who balances this tradeoff between subprojects?
25. If certain materials and parts are requested farther in advanced than others, what governs these decisions? Are the service levels (i.e., the ability to deliver within agreed lead time) of each supplier being measured and incorporated into how far in advance it is required? Or is it more so based on the criticality of the materials and parts?