Analysing the electrical power network construction supply chain

Transcription

1 Analysing the electrical power network construction supply chain Mikko Punakivi Department of Industrial Engineering and Management Helsinki University of Technology Marianna Herold Department of Industrial Engineering and Management Helsinki University of Technology Abstract This study of electric power network construction supply chains was launched by reviewing the operations models of leading companies in Finland. All the members of the electric power network construction supply chain were interviewed. The interviewees included manufacturers, wholesalers, construction companies and power companies. Based on the review, some problem areas in the supply chain operations were identified for further research and development initiatives. According to the expert interviews, developing the current operations models and increasing cost efficiency are the main objectives for the further research and development initiatives. Some means identified for achieving these objectives were optimising the materials management process, eliminating overlapping operations in the supply chain, and improving the material needs estimation by using the power companies yearly budgets. Based on the results of the review further research was undertaken. Two real-world case projects from power companies using different operations models were selected for thorough examination. The differences between the power companies were that the first power company outsources all the construction and materials management activities whereas the second power company performs all activities itself. Based on careful analysis of two fairly similar case projects, substantial differences in operational efficiency were discovered. For example, time lags were notably larger in the case project where the construction and materials management operations were outsourced. This result alone verifies the need for further research in the electric power network construction business. Keywords: electric power network construction, supply chain development, operations benchmarking Introduction During the 1970's and 1980's notable investments in power networks were made in Finland both due to rebuilding needs and a great boom in the construction business. At the moment there are still thousands of different sized electric power network construction projects in Finland yearly. According to industry estimation the next bigger rebuilding phase will start around Thus at the moment, the demand for electric power network construction supply chains typically consists of a great number of fairly small rebuilding, maintenance, and repair projects. According to some estimates the volume of material flow in these projects is only 20% of the volume of bigger projects in the 70's and 80's. This has led to a more challenging situation when considering the supply chain operations models. The small sized electric power network construction projects are geographically dispersed, the volume of deliveries is now smaller than earlier, and the contractors require on site deliveries packed in assembly sets to ease the assembly work. Additionally, in projects where damages caused by storms are repaired, high delivery accuracy and short delivery times are required from the wholesalers and manufacturers. As the wholesalers have increased their delivery capability the power companies and contractors have shut down their own inventories and thus reduced supply chain flexibility. Additionally there has been

2 changes in the roles of various supply chain partners as the industry has moved from local monopolies to a market economy in the mid 1990's. Thus, it may be concluded that the whole business environment has become more dispersed and is still in a state of continuous change. Figure 1 clarifies the structure of the current business environment. Household customers Raw material suppliers Manufacturer Wholesaler Contractor Power company Industrial customer Serviceproviders -Market information -Software and systems Network inspection Figure 1 The supply chain and business environment in the electric power network construction business. At the moment there are 92 power companies in Finland (Lassila, 2002) that in practice take care of the electricity distribution in their own geographical areas and build and maintain the electricity distribution network according to customer needs. They also measure the electricity consumption and invoice the customer's accordingly. The biggest power companies in Finland are Fortum Oyj, Vattenfall Oy, and Helsingin Energia Oy. Additionally, the Kymppivoima group, representing several smaller power companies, can be seen as one of the biggest players in the field. After the market liberalisation the industry has moved from local monopolies to a market economy in the mid 1990's. Since that several power companies have incorporated their construction departments. These contractor and project planning companies that used to be integral part of the power companies are seen as new players in the business. However, there are still only two contractor companies offering nation-wide services. These are Empower Oy ja Eltel Networks Oy. Additionally, there are some 10 to 15 independent contractor companies acting on a local scale and around 70 construction departments of smaller power companies. The materials supply chain of the construction sites is created and developed together by the wholesalers, manufacturers, and the contractors. There are three wholesalers offering electric appliances and materials, SLO Oy, Onninen Oy, and Elektroskandia Oy. All the wholesalers offer nation-wide service networks. The services are typically tailored to the customer needs. The systems have been trimmed and delivery lead-time is typically 24 hours. From the manufacturers point of view the Finnish electric power network construction market is rather small and typically suffers from seasonal changes in volume. The product assortment is rather large and there are some 100 manufacturers producing the appliances and components used in Finland. These manufacturers are naturally located both in Finland and abroad. The main customers for the manufacturers are the wholesalers but direct deliveries are also made occasionally to the contractors and power companies. Due to shortage of demand information and required short delivery times, make-to-order is impossible as a manufacturing strategy. Additionally, the globalisation trend in the production business strengthens the warehousing strategy in material supply. Furthermore, there is typically warehousing on several levels in the Finnish electric power network construction supply chain. Manufacturers, wholesalers and power companies / contractors hold some inventories. However, the power companies aim to only have critical components such as transformers in stock. As can be seen in Figure 1 the service providers offering and maintaining market information, construction standards, and planning tools are the supporting players in the electric power network construction business. Visma Software Oy offers production planning software. Unions such as Sener ( and Adato ( offer market information. However, perhaps the fastest developing service provider is a portal company Headpower ( The portal offers planning tools and information services such as industry safety instructions. It also maintains and provides the component and product standards. Additional service

3 is a 'tender forum' for the contractors and power companies to ease and speed up the process of selecting the contractor. In the electric power network construction business the power companies typically see the network planning department as their core competence and it is thus not outsourced. At the moment the 'hot topic' regarding the supply chain operations is the responsibility for materials procurement. At the moment there are three prevailing operations models: 1. The power company takes care of planning and outsources the realisation of the project to the contractor company. 2. The power company performs all the activities from planning to construction itself. 3. The power company takes care of planning and orders the materials. The outsourced contractor is only responsible for the mounting work. According to the industry experts developing the current operations models and increasing cost efficiency are the main objectives in the near future. Some means for achieving these objectives have already been identified. These are, for example, optimising the materials management process, eliminating overlapping operations in the supply chain, and improving the material needs estimation by utilising the power companies yearly budgets. In this article we focus on identifying the tasks and operations of the various players in the electric power network construction supply chain. Secondly the aim is to find the overlapping operations of different organisations in the supply chain. The final goal is then to identify the operations with the greatest improvement potential. Method The method used in this study includes aspects of the Delphi method (Linstone, 1975), which employs an iterative process of summarising and evaluating the respondents views on a consensus view (McKinnon & Forster, 2000). The Delphi method consists of focus interviews in the first phase, which are then followed by a workshop in the second phase. In this study the traditional Delphi method was extended with a third phase, the case study phase. The three phases of the study are illustrated in Figure 2. Phase I: Interviews Phase II: Workshop Figure 2 The phases of the study. Phase III: Case study In the first phase the interviewed companies included manufacturers, wholesalers, contractors and power companies as well as service providers like software suppliers, information providers, and a contractor union. The study was conducted by interviewing 31 industry experts from 15 companies in Finland. Based on the review some problem areas in the supply chain operations were identified for further research and development initiatives. In the second phase a workshop was organised to evaluate the findings of the first phase and to select the further research area. The experts that were interviewed in the first phase attended the workshop and thus had a possibility to re-emphasise their original responses. Based on the workshop a case study was started. In the case study phase the supply chains of two selected real-world construction projects were analysed carefully by interviewing 21 industry experts to map the operations of the companies in the electric power network construction supply chain from the planning to the completion of the construction project. Essential in the case study phase was to first identify the tasks and operations of the different partners in the supply chain. Secondly the aim was to find the overlapping operations of different organisations in the supply chain. The final goal was then to identify the operations with the greatest improvement potential.

4 This kind of three-phased research process enables better evaluation and analysis of the first phase findings and facilitates identifying development areas and further research topics. Usually case methodology is used to describe and explore new phenomena in order to build a new theory (Eisenhardt, 1989). Additionally, according to Yin (1989), it is a suitable method for investigating complex real-life events. However, the aim of this research was not to build theory, it was merely to describe and explore research and development areas in the electrical power network construction supply chain. Analysis The research focus of this article is on analysing operations in two real-world electric power network construction projects. The objective is to understand the operations, resources, and time needed by the different parties in the supply chain and thus identify the operations with the greatest potential for improvement. In case project 1 the supply chain consisted of a power company, a contractor and a wholesaler. Both the power company and contractor are leading companies in the Finnish market. The planning was performed by the power company. The realisation of the project was outsourced to the contractor and all the materials were delivered by one wholesaler. The project consisted of the renovation of an old 20 kv cable. The site was in a rural area and the length of the cable was 9,5 kilometres. In case project 2 the supply chain in consisted of a power company, a wholesaler, and a materials manufacturer. The power company is a middle-sized company in the Finnish market. All the activities from planning to assembly were performed by the power company. The project consisted of the renovation of the pillars of a 20 kv cable and changing a transformer. The site was also located in a rural area and the length of the cable was 6 kilometres. Table 1 illustrates the distribution of resource-weighted working days in the two case projects. In both cases the table shows the work in percentages of the total work performed in the supply chain. The resource weighted days were obtained by multiplying calendar days with the amount of resources used. Table 1 The distribution of resource-weighted working time (days) in the participating companies. Case 1 Case 2 Power company 17% 11% (planning) 84% (assembly) Contractor 82% - Wholesaler 1% 3% Manufacturer (supplier) - 2% In case 1 the majority (82%) of the resource-weighted days fall on the contractor. The main task of the contractor is mounting. Additional tasks are project realisation planning and materials procurement. The portion of the power company (17%) consists mainly of planning. The wholesaler s portion of the case-project is only 1%, which comprises order management, picking and distribution. The main difference between cases 1 and 2 related to the distribution of the work is that there is no separate contractor in case 2. Another difference is that the portion of the wholesaler is larger proportionately. This is due to the fact that case 2 is shorter. For the same reason terrain planning is a smaller activity in case 2 (see Table 2). Table 2 The distribution of resource-weighted working time (days) in the two projects. Case 1 Case 2 General Planning 1% 2% Project Planning 2% 2% Terrain Planning 12% 6% Order management 3% 5% Project realisation 80% 84% Documentation 2% 1%

5 In project 1 the majority (80%) of the working time is spent on the realisation of the project. In addition to mounting this figure includes picking and distributing the materials (wholesaler) as well as supervision and reception of the work (power company). The second largest portion of the work is terrain planning, which in this project requires substantial work as the power lines cross several landowners properties. The positioning of the power lines has to be agreed on with each landowner separately. Order management (3%) includes the order management functions of the power company, the contractor and the wholesaler. Order management thus encompasses both materials ordering and the bidding process for the whole project. Order management between the wholesaler and materials supplier was considered to fall outside the scope as it could not be allocated to a project of this size logically. General planning and documentation are the shortest tasks in this project. Also in case 2 the majority (84%) of the working hours are spent on realising the project. Again besides mounting, realisation includes the materials picking and distribution functions performed by the wholesaler and materials supplier. The second largest portion of working hours (6%) is spent on terrain planning. What is noteworthy about the order management portion is that it is substantially larger than in case 1 where all the materials came from one wholesaler. As in case 1 the order management functions of material flows between the materials supplier and the wholesaler fall beyond the scope. An additional goal of this study was to determine the actual lead-time of the case projects and possible duplication of effort. The case project lead-times are illustrated in Figure 3, where the actual lead-time is compared to the theoretical lead-time. The theoretical lead-time has been calculated by summing up actual effective working time and leaving time lags out. As in reality for example the wholesaler s functions have been calculated to be simultaneous with the contractors activities. When analysing Figure 3 it is important to keep in mind that the figures in it are cumulative calendar days- they are not resource-weighted working days. Case Project Lead Times general planning project planning terrain planning order handling project realization documentation Days actual lead time case 1 theoretical lead time case 1 actual lead time case 2 theoretical lead time case 2 Figure 3 Case project lead times In case project 1 the difference between theoretical lead-time and actual lead-time is 37 days, proportionally 28% of the project lead-time. The time lag increases in terrain planning, order management and project realisation. The 10-day time lag in terrain planning is caused by e.g. planning smaller projects during the same time and scheduling meetings with landowners. The 16-day time lag in order management is caused by the time it takes to select a contractor with the bidding process. In this case a three-week period was given for making a tender on the project, but only three days of this time was actually used to make the tender. In fact the work was done just before the deadline, which causes a slight time delay in the whole project. The 11-day time lag in project realisation is caused by the delay between the selection of the contractor and starting the actual work.

6 In case 2 the discrepancy between actual and theoretical lead-time is 18 days of which 6 days were holidays making the actual development potential 12 days, proportionally 19,7% of the project leadtime. The difference is caused by time lags between different phases of the project. Between general planning and terrain planning there is a time lag of 4 days. Additionally there is a 8-day time lag between terrain planning and realisation planning. Proportionately the total time lag in case project 2 is eight percent lower than in case 1. Results An important issue to keep in mind when comparing the two cases is that they are not exactly equal. Case project 1 was longer and therefore the mounting took longer. Additionally in case project 1 the contractor was chosen in a bidding process whereas in case project 2 the power company s own contractor-unit took care of the realisation. The power company in case 1 was large and the power company in case 2 was medium-sized. When analysing the operations models we noticed that the lack of bidding process in case project 2 speeds the project s timetable considerably. The bidding process was also partly responsible for the time lag between selecting contractor and starting the project realisation phase. The speed and flexibility of case project 2 are due to being able to schedule all larger projects at the end of the preceding year. Similar faster and more flexible operations could be achieved in case 1 by making skeletal agreements with contractors. The contractor s work could be speed up by utilising the power company s project realisation plans and bills of materials. This however requires an agreement on the responsibilities for the planning work concerning the bill of materials. In other words agreeing on whom is responsible when the bill of materials is lacking components or products. CASE 1 Based on the analyses we feel that the largest potential for development in case 1 lies in the collaboration of the power company and the contractor. Valuable time is lost in the fragmented planning process and the bidding process. The project is also delayed after the contractor is selected as it takes time to start planning the realisation phase and engage in the actual mounting. Duplication of efforts was discovered in the power company s planning and the contractor s realisation planning operations. The contractor feels a need to verify the power company s plans. This duplication could be eliminated with a clearer agreement policy, where the power company would assume all responsibility for the realisation and bill of materials and possible errors therein. For the power company another way to decrease project lead-time would be to buy the whole construction/mounting project as a turnkey solution from the contractor. CASE 2 In case project 2 the largest room for improvement lies in order management policies in materials purchasing and planning. The power company in case 2 uses hand-written faxes for ordering, which slows the process at the wholesaler and increases the risk of errors. When comparing the times spent on purchasing activities in cases 1 and 2 we discovered that when buying from several sources as in case 2 the time spent on purchasing is notably longer. Therefore one way of increasing efficiency in case 2 would be to centralise purchases to one wholesaler. This finding is also supported by the findings of a recent study performed by the Finnish electric power construction union, which analysed the costs of sourcing in the industry (Teittinen and Uusitalo, 2002).

7 Conclusions In this article we analysed two real-world electric power network construction projects from two different sized power companies. These two case projects were managed using different approaches. The first power company took care of the project planning and outsourced all the construction and materials management activities and the second power company performed all the activities itself. The research focus was set on analysing the supply chain operations from planning to assembly and identifying all the operations needed in the case projects. The central goal was to find out the time needed for performing the operations, the time delays, and the overlapping operations in the supply chain. The final goal was to provide means to develop the operations more effective in the future. According to our analyses the greatest development potential was identified in the co-ordination and organising of the tasks between the power companies and the contractor companies. Based on this research we suggest further research focusing on: 1. Identifying and classifying new more flexible operations models for dividing the tasks between the power companies and the contractors. 2. Analysing and developing the material ordering process in the electric power network construction supply chain. It must be kept in mind that these research results were limited to two Finnish cases. To increase understanding of the subject, a broader spectrum of cases would be needed. However, as a conclusion based on this study it may be stated that by analysing and developing the operations models the total cost level in the supply chain can be decreased and, for example, allow the workers on site to concentrate on mounting work instead of material handling. References Eisenhardt, K. (1989), "Building Theories from Case Study Research", Academy of Management Review, Vol.14, No. 4, pp Lassila, A. (2002), "Sähköyhtiöt rypevät tappioissa -Power companies are unprofitable" (in Finnish), news paper article in Helsingin Sanomat, , D4. Linstone H. (1975), The Delphi Method : techniques and applications. Reading (MA) McKinnon A., Forster M. (2000),"European Logistical and Supply Chain Trends : The Results of a Delphi Survey", Logistics Research Network 2000 Conference proceedings, Cardiff Teittinen, H. ja Uusitalo, K. (2002), "Logistiikkatutkimus 2002, Työmaaprojektin koon ja käytettävän jakelurakenteen vaikutukset logistisiin kokonaiskustannuksiin ", (in Finnish) Tutkimusraportti, SSTL & STUL, , Helsinki Yin, R. (1989), Case Study research; Design and Methods, Sage Publications, 1989