Operational Aspects Of Arabian Construction Company: Supply Chain, Procurement, And Logistics Essay.

Choose an organization of your choice . Understand the organization’s supply chain process, procurement, logistics and their operations to get an insight of the organizational process. Give a brief introduction about the organization, its area of business and then proceed to answer the questions.

Give a brief introduction about your chosen organization, think of the scenario, plan and answer the questions below:

1. How can lean management reduce waste in the organization?  (How can lean management reduce waste in the organization?).

2. Evaluate with reference to your chosen organization the different types of stock. (Evaluate the different types of stock).

3. Based on the nature of business with your chosen organization, describe the impact of   high inventory on the organization’s liquidity Describe the impact of stock levels on firm’s liquidity.).

4. Explain the impact of Land Locked countries on your chosen organization. (Explain the impact of weather and fuel prices on import and export activities for a firm).

• Evaluate ABC analysis and provide details of other inventory control analysis with respect to your chosen organization. ( Evaluate ABC analysis and provide details of other inventory control analysis)

5. Explain the role of Third party logistics firms or freight forwarders in reducing shipping cost. (Explain the role of Third party logistics firms or freight forwarders in reducing shipping cost.). 

6. Analyze the need for NVOCC in the shipment for your chosen organization. (Analyze the need for NVOCC).

7. Describe the impact of Demurrage and Detention in case of your chosen organization and recommend methods   to avoid and or reduce these charges.Describe the Impact of Demurrage and Detention.).

For the chosen organization, understand the customer service management and the customer relationship management perspectives and answer the following AC’s accordingly.

8. How can quality be used to improve relationships with suppliers? (How can quality be used to improve relationships with suppliers.

9. Explain the importance of supplier relationship management and recommend the best relationship for strategic and non – critical vendors  (Explain the importance of supplier relationship management and  recommend the best relationship for strategic and non – critical vendors)

Lean Management and Arabian Construction Company

Construction industry is one of the fastest growing and booming industry all over the world. The industry plays a very significant role in development of all the other industry and contributes towards economic development of countries. International market research firm Deloitte reports that global construction industry is facing several challenges like extremely high material price, talent management issues and mounting overhead costs. The advancement in technology and changing political scenarios are also challenges which are looming over the construction industry (Deloitte.com. 2019). While these factors are challenges which the construction industry is experiencing several emerging positive trends are forecast to have long lasting effect. Use of prefabricated structure, using of green technology in construction, better safety equipment, sustainability, project management solutions and building information modelling are some of the positive trends which are predicted to boost the construction industry (News.jm.com. 2019). Krausmann et al.(2017) mention that construction industry builds assets like road and bridges which in turn form the base of economic development of nations. The revenue generation in the construction industry is dependent on the amount of economic development in nations. This is evident from the fact that most of the multinational construction companies are shifting their operations towards emerging markets of Middle East and South East Asia, the two booming economic regions (Prnewswire.com. 2019). The aim of the paper is to delve into the operational aspect of the construction companies. The company chosen for the study is Arabian Construction Company based Beirut, Lebanon.

Arabian Construction Company is a multinational construction company based in Lebanon and follows a family business owned format. The owners of the company are Merehbi and Mikati families.

The vision of ACC is to emerge as the leader in the construction markets it operates and to be one of the most sought after construction companies by the potential clients namely, governments and leading corporates. ACC seeks to cement its presence on the grounds of reliable execution, cost effectiveness and use of global standard technology.

The core values of ACC rest on six main pillars. They are excellence, teamwork, integrity, commitment, sustainability and accountability.

The main capabilities of ACC are civil construction, construction of different types of buildings including skyscrapers and industrial plant construction which includes oil and gas industry as well. The company also engages in turnkey contracting contracting, value engineering and procurement of industrial equipment. The main markets of ACC are Middle East, Egypy and India.

Different Types of Stock at Arabian Construction Company

Lean management helps organisations to reduce their wastes and associated financial losses. Nikakhtar et al.(2015) point out that lean management results in operations in ways so as to reduce the waste of resources by ensuring optimum amount of resources procured. This is very pertinent for the construction industry because the industry has to acquire raw materials which are expensive and have to be procured from different countries. Thus, it can be pointed out that the large amount of waste of building and construction raw materials actually result in huge financial losses. Tezel, Koskela and Aziz (2018) points out the challenges which adoption of lean management would face in construction industry. The construction materials are very expensive and attract heavy taxes. The equipment and plants used in the construction works have to procured from companies usually based in foreign markets like the United States of America. While speaking about the challenges which lean management application in the construction industry is facing, Sarhan et al.(2017) points out that lean management requires use of advanced software to control the entire process of the project execution. This project management operations in construction works, especially the high-end construction works are dependent on use of project management software which is capable of integrating the different stages of the work along with the manpower and costs related to them. Ansah, Sorooshian and Mustafa (2016) mention that software should be able to present the entire project both in parts and as a whole. This would allow controlling of the project efficiently to ensure that at each stage materials are used optimally. This would ultimately lead to the reduction of wastes of materials. For example, ACC operates in several markets in Asia and Africa which requires the company to bear huge expenditure to procure the materials. This means that means that due to markets spanning from Africa to Asia, lack of control over projects would lead to wastage of materials and result in immense financial losses. ACC can appoint its representatives in each construction site in which the company or its agents are involved to ensure that the sub-contractors optimally utilise the materials in order to ensure low amount wastes from construction works.

Lean management reduces wastes by streamlining the entire operations towards the customer expectations thus ensuring optimum use of the materials and minimum wastage. For example, ACC serves cleints which are either government bodies, international organisations or body corporates. The company using its advanced project management technology breaks down the entire scope of the construction works into a number of component like hiring of sub-contractors and hiring of equipment contractors. The company enters into contracts with all the suppliers which follow the procurement policy of the company. The contracts provide the firm the power to inspect the usage of materials and equipment. ACC in order to maintain stronger vigil on the construction work often builds temporary offices at the sites. The company deploys specialists like engineers who manage each stage of work and ensure that the sub-contractors use the materials optimally and do not result in huge wastage. The representatives of the company maintains communication with the management and the regional offices of ACC to communicate them about the commencement of the work. The representatives of ACC ensure that the materials and equipment are stored in appropriate ways which reduces loss due to spilling and slack material storage system. This way lean management would result in reduction of wastage of materials and ensure optimum utilisation of materials in the construction work.

Impact of High Inventory on Arabian Construction Company's Liquidity

The following are the three types of stock which ACC holds:

The raw material inventory consists of raw materials which acquired forusage in the construction works. As far as ACC is concerned, the raw materials which the firm acquires consists of bricks, sand, construction materials, cement of different kind and rods. The raw materials also consist of different types of chemicals which find use in the construction work.

Work-in-progress:

The second category of materials which construction companies use are work-in-progress materials. They consist of prefabricated structures which are used in the construction work. As far as ACC is concerned, firm constructs structures like buildings and plants. The prefabricated structure which the company uses in the construction work like prefabricated bridges and beams fall into the category of work-in-progress.

High inventory of raw materials, WIP and finished products results in reduction in liquidity. Diamond and Kashyap (2016) defines the term liquidity as the power of firms to sell assets in the market and convert them back into cash. Adrian et al. (2017) defines liquidly as tahe rate by which business organisations can convery their current assets in cash so as to redirect towards procurement of more assets. It is clear from this definitions that liquidity is of utmost importance to companies. It can be pointed out that the construction firms have to invest immense amount of capital to procure and hold stock of raw materials. Masuda (2015) in this respect points out that construction raw materials are extremely bulky and have to be stored in warehouses. This means that companies like ACC have to spend immense amount of capital towards both procurement and holding of raw materials. Moreover, the logistics expenses of transporting the materials are also very high. This means at the initial stage the firm has to spend amount of capital to make materials available at construction sites. Now, if the firm fails to mobilise the raw materials on time towards construction, it has to bear immense amount of recurring expenditure of holding the materials. This results in shortage of liquid cash with the company which reduces its liquidity. This can be explained with the table given showing two situations, the first showing the effect of high liquidity while the second shows that impact of low liquidity. In the first case, the company acquired construction materials worth Lebanese Pound 4000000 and entered into contract with the client for a revenue of 16000000. The costs incurred for holding the materials were warehouse costs and transport. The company even after bearing all the expenses earns a profit of 272 percent. The company in the second situation did not maintain stock successfully. The company suffered increased expenses of warehouse and transport costs. The company in addition incurred losses due to theft, penalty due to quality issues, spillage and loss due to wastage of materials. It is evident that the profit percent fell down to 96 percent. Thus, it can be affirmed from the discussion that liquidity has heavy impact on the financial position of the company.

Impact of Landlocked Countries on Arabian Construction Company

Figure 1. Table showing low liquidty

(Source: Author)

Land locked countries have negative impact on the business organisations, especially on the logistics. The construction companies like ACC have to acquire immense amount of raw materials including chemicals. These companies also have to import equipment and plants which they mobilise in the sites of construction. It must be pointed out that most of the materials are very bulky and its is required to transport them by sea in order to minimise transport costs. However, it can be pointed out that land locked countries do not have sea ports which prevent them important the materials and equipment. This results in high logistics costs as they have to depend on air transport and land transport. This prevents them operating at economic costs, thus eroding their profit margin. This it is evident that landlocked countries have damaging impacts on the business of the companies residing in their geographical territories.

The ABC analysis is the method of stock maintenance in firms to ensure lean management and reduce wastage of stock. The ABC inventory control analysis divides the process into three categories namely, A, B and C. The A category items are the most crucial items having the highest consumption in the construction process. Liu et al. (2016) mention that the category A materials actually constitute a mere 10 to 20 percent of the total stock. Li et al.(2017) strengthen the opinion that being very crucial in the entire process, the first category require stringent storage requirements. The construction companies have to report the availability of the category materials on frequently or even on regular basis. This is because these materials are so critical to the manufacturing process that it cannot without them.

As far as the ACC is concerned, the category A materials consists of important components like bricks, rods and cement of different types without which civil construction works cannot proceed. It can also be pointed out that these materials are subject to theft and corrosion. This requires the construction company to report the stock of these materials regularly to ensure minimum loss due to theft.

The second category or category B of materials consists of items with medium consumption requirements and account to about a quarter of the all the materials used. As far as ACC is concerned, the chemicals used to support the category A materials belong to this category,

The least C category of materials constitute of about half the total volume of materials required. This class materials attract the lowest price of procurement around 10 to 15 percent. The companies like ACC acquire materials like pipes, electrical items and glass, all of which constitute the category C materials.

Role of Third Party Logistics Firms in Reducing Shipping Cost

The other two inventory control methods are FSN analsyis and VED analaysis  The FSAN analsysis divide inventory into three categories namely, fast moving, slow moving and non-moving. The fast moving items are the items which are channelized towards production on regular basis. The slow moving inventory are inventory which are issued less frequently. The third category of raw materials consist of materials which are used extremely rarely.

The VED (vital, essential and desirable) inventory analysis methods consider three categories of raw materials. The vital category of materials are the materials which have to be maintained consistently in stock to ensure commencement of the production activities. It can be pointed out that this category of raw materials correspond to the category materials of the ABC analysis. The second category of materials as per the VED analysis are essential materials which correspond to the category B materials under the ABC analysis. The materials belonging to this category are to be kept in moderate amount.  The least important and the last category of materials consists of the desirable materials. The construction process can proceed without these materials on temporary basis.

Third party logistics firms enable the construction companies to import machinery. Du et al. (2016), point out that construction companies often have to procure both materials and plants to support their high-end civil and industrial construction projects. The third party logistics firms hold and transport these assets to the construction companies, thus reducing the shipping costs. Moreover, since most of the shippers have their own warehouse networks, the companies like ACC does not have to bear the warehousing costs while are the assets are on transit.

The non-vessel operating common carriers (NVOCC) are needed in the shipment of goods.  The careers deliver materials to the companies from both within the country and foreign countries. NVOCC proves very helpful especially for companies like ACC which operates mostly in Middle East which is a landlocked region. Thus, NVOCC enables companies to acquire goods from other countries or regions.

Demurrage and detention in Arabian Construction Company have great impact on the company and its operations. First, demurrage results in detention of assets at the ports which increases the cost the company incurs to acquire them from foreign nations. Secondly, the detention of machinery and construction materials delays the flow of the construction projects. This increases the cost of construction and the clients impose penalty for delay. This further escalates the costs of constructions and erodes the profit margin of ACC.

The Need for NVOCC in Shipment for Arabian Construction Company

Quality can be used to improve relationship between companies and their suppliers. The companies involved in construction have to acquire materials from a large number of suppliers (Wong, San Chan and Wadu, 2016). Derakhshanalavijeh and Teixeira (2017) strengthen the opinion by mentioning that the suppliers have to deliver the materials within a predetermined time period. Moreover, since construction works attract immense precision, the companies have to ensure that the supplies meet their quality parameters. The company can enter into procurement contracts with suppliers in order to ensure strong and transparent relationship between the two parties. ACC can also train the suppliers to enhance their quality of supply.

Efficient supplier management relationship results in building of strong relationship with suppliers. Dave et al.(2016) while pointing out the first importance of supplier relationship management mention that it promotes lean management. Efficient supplier relationship ensure ready availability of materials. Secondly, this availability of materials relieves ACC from maintaining huge stock of raw materials. Thus, on the whole it results in more economic operations. Strong supplier support enables firms like ACC to operate more profitably due ready availability of materials and labour. Thus, they are able to take up projects in multiple markets which in turn boosts their profitability.

ACC should make a strategy to build strong relationship with strategic and non-critical vendors. The recommended strategy should encompass all the markets of ACC. The recommended strategy would be showed on the attached activity plan. The apex management along with the cooperation of the regional offices should carry out market scoping. The market scoping should be divided into four parts. The first part would consist of the Middle East market of ACC including its home country, Lebanon. The second leg of the market scoping would consist of India while the third leg would consist of Egypt. ACC should conduct a market analysis of a new host country where it can expand to get access to their supply chains like China. The regional offices after this would submit reports to the apex management at Lebanon.

The the apex management would embark on the second part of the supply relationship building strategies which is mentioned below.

Conclusion:

Thus, it can be concluded that lean management holds a great promise for the construction industry. The operations of ACC clearly shows that the firm should maintain a strong supplier chain in all its markets to maintain its position. However, it can also be pointed out that it should expand its presence into other Asian nations like China to take advantage of booming construction industries in these markets. The company should empower its subsidiaries to control the suppliers very strictly so as to ensure that they supply high quality inventory. The suppliers should be directed to follow and accept the codes of conduct laid down for the suppliers. The procurement managers should observe their operations of the suppliers and remove suppliers which do not comply with the codes laid down by ACC. They should also enter into procurement contracts with new suppliers to maintain the strength of the supply chain.

Impact of Demurrage and Detention in Arabian Construction Company

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