6.2 Industrial engineering applications
6.2.6 Productivity management
115 Chapter six: Industrial engineering applications in the construction industry
11. Few large companies, and virtually no small companies have implemented the con- cept of a quality or productivity manager—cost-cutting trends have resulted in such a position being viewed as an unjustifiable luxury.
12. There is little, if any, benchmarking—many manufacturers and service organizations have become preeminent by adopting the best practices of benchmarked organiza- tions. Construction has done very little of this due to distrust, fear of losing competi- tive advantage, but more likely, simply by being anachronistic.
6.2.5.3.1 Quality management systems. The Malcolm Baldrige Quality Award cri- teria provide an excellent framework for a construction organization’s QM system; these criteria embody many of the concepts advocated by the quality pioneers—Deming, Juran, Crosby. Past winners of the Baldrige Award have proven to be been world-class organiza- tions. Industrial engineers can assist construction organizations to improve quality and productivity by applying the Malcolm Baldrige criteria to their business model.
The Baldrige Award Criteria are based on a framework of core values for quality improvement comprised of seven critical areas:
1. Leadership
2. Customer and market focus 3. Strategic quality planning 4. Information and analysis 5. Human resource development 6. Process management
7. Operational results
Other industry-recognized QM systems include the ISO9000: 2000 standards.
6.2.5.3.2 Industry awards. The National Association of Home Builders created a National Housing Quality Program in 1993 to promote quality improvement in that industry.
The National Housing Quality Award was developed based on the Malcolm Baldrige Award.
Therefore, productivity is the combination of effectiveness and efficiency. To increase pro- ductivity, the ratio(s) mentioned in Equation 6.1 must increase. This can be achieved by increasing the output, reducing the input or permitting changes in both such that the rate of increase in output is greater than that for input.
An increase in productivity can be achieved in five ways as follows:
(i) Reduced costs:output at same level input decreasing (ii) Managed growth: output increasing
input increasing (slower) (iii) Reengineering:output increasing
input constant (iv) Paring-down: output down
input down (faster) (v) Effective working:output increasing
input decreasingg 6.2.6.1 Total productivity
Total productivity (TP) is the ratio of output to all inputs. All input resources are factored in this principle. Tracking the productivity changes that occur in different time periods is the most useful application of TP. Sumanth (1984) points to the limitations of partial productivity measures, which are measured by the ratio of output to one class of input such as labor productivity. Such measures if used alone can be misleading, do not have the ability to explain overall cost increases, and tend to shift blame to the wrong areas of management control.
Total productivity may be defined as
TP Total sales or value of work
Labor cost Materia
= (M1)+ l cost Machinery cost Money cost
Mana
(M2)+ (M3)+ (M4)
+ gement cost(M5)+Technology cost(M6) or
TP=
+ + + + +
T s
M M M M M M
( )
1 2 3 4 5 6
(6.2)
Since
P T s M
P P P P P P P
i i
=
= + + + + +
( )
t
1
1/ 1 1/ 2 1 3 1/ 4 1/ 5 1/ 6 (6.3)
117 Chapter six: Industrial engineering applications in the construction industry
The above-mentioned factors are expressed as constant dollars (or other currency) for a reference period. To increase TP, it is necessary to determine which partial productivity factor (Pi) has the greatest short- and long-term potential effect on TP.
As pointed out by Oglesby et al. (1989), traditional construction project management tools do not address productivity; they include schedule slippages and cost overruns.
Forbes and Golomski (2001) observed that the construction industry as a whole measures performance in terms of completion on time, completion within budget, and meeting con- struction codes.
Construction organizations (designers and constructors) would benefit significantly by establishing formal productivity and quality improvement programs that build on the knowledge gained from the measurement approaches that have been discussed above.
Industrial engineers can support such organizations in setting up productivity and quality improvement programs and providing ongoing measurement, which is critical to the process of continuous improvement.
Construction productivity is a major concern, especially when compared to other industries. As reported by the U.S. Department of Commerce, construction productivity has been rising at a much slower rate than other industries; between 1990 and 2000 it rose by approximately 0.8% compared to more than 2% for all U.S. industries. Construction costs have been increasing at the same time. Raw materials such as steel, staples have been rising, especially in the face of escalating global demand. Labor costs are a major compo- nent of most construction projects—in the vicinity of 40%, yet on many construction sites a large percentage of the daily labor hours are unproductive.
Activity sampling studies have shown that the working portion of activities generally occupies 40% to 60%, and by the same token 40% to 60% of labor hours are unproductive.
There are many reasons for lost time—poor communications, waiting on assignments, waiting on resources, double material handling, rework, accidents, late or inaccurate job status reports, lack of supervision, etc. One third of these losses reflect issues that are within management’s control. Construction profitability is directly linked to labor produc- tivity. Industry-wide studies suggest that most construction projects yield net profits of 2 to 3% of the total project cost.
A hypothetical example:
Contract price $10,000,000
Labor cost (40%) $4,000,000 Other costs, overheads, etc. $5,700,000
Net profit $300,000
Assuming a 5% reduction in labor cost due to productivity improvement, savings in labor cost = $4,000,000 × 0.05 = $200,000 revised net profit = $300,000 + $200,000 = $500,000
Hence, a 5% improvement in labor productivity can improve profitability by 66.7%.
Similarly, the value of lost labor hours due to management inefficiencies
= $4,000,000 × 1/3 = $1,333,333
A 50% reduction in management-based losses would save $1,333,333/3 = $666,667 revised net profit = $300,000 + $666,667 = $966,667
A 50% improvement in labor deployment would improve profits by 967 × 100%/300 = 322%
In summary, IEs can have a major impact on construction productivity and profitability by helping management to improve its decision making and the logistics of the labor force.
Further gains can be derived by addressing other construction processes and SCM issues.