Study on Construction Supply Chain Cost Management Based on Lean

Thinking
Yan CHEN 1, Zhan-gong XU2
1
2

School of Management, Qingdao Technological University, Qingdao City, P. R. China

School of Management, Qingdao Technological University, Qingdao City, P. R. China
(chenyan0714@126.com)
construction subcontractor. During the outsourcing
process, the issue of cost is not carefully considered. The
decisions on the multiplying percentages and profit
margins are made quite casually, entirely dependent on
past experience.
After reviewing some relevant literature, we conclude
that major problems of our CSC cost management are as
follows:
(1) Most enterprises in our CSC have quite weak
sense and limited understanding of supply chain cost
management;
(2) The accountability mechanism as well as
monitoring & evaluating mechanism of cost management
is unsound in our construction sector;
(3) The scope of current cost management can not
cover the necessary areas across the entire supply chain;
(4) The methods and measures of cost management
are out-dated;
(5) Each party in our CSC including general
contractor, subcontractor, supplier, just conducts
individual and fragmented cost management inside its own
enterprise. Due to this mode, every organization has to
spend much time and personnel on cost data collection and
cost control monitoring. This kind of fragmented cost
management not only results in more wastes, but also in
the increases of inventory cost and transaction cost among
CSC parties.
The above discussed problems have now greatly
impeded the construction of competitive advantages in our
CSC. This paper attempts to explore new thinking and
methods of CSC cost management by applying the
principles and techniques of lean thinking, aiming at
providing rational and practical solutions to solve the
major problems of our CSC cost management.

Abstract - Currently, cost management is playing an

import role in building the overall competence of
construction supply chain (CSC). In order to solve the major
problems of cost management in our CSC, we propose that
lean thinking be applied to CSC cost management so as to
improve cost competence of our CSC by eliminating all
forms of non-value added activities and wastes across the
entire supply chain. This paper first analyzes the major
problems of our CSC cost management. Then it introduces
the idea and characteristics of lean CSC cost management.
Finally, it elaborates four main aspects of implementing lean
CSC cost management, including lean procurement cost
management, lean design cost management, lean
construction cost management and lean service cost
management.
Keywords - lean thinking, lean CSC cost management,
lean procurement cost management, lean design cost
managemnt, lean construction cost management

I. INTRODUCTION
With the gradually strengthened economic
globalization and the increasingly fierce competition, our
construction enterprise is now facing unprecedented
market pressure. In order to ensure its survival and
sustainable development, construction enterprise in our
country has to closely cooperate with other parties in CSC
to form collaborative advantages and also has to rely on
the overall competence of CSC including high customer
service level and low total cost. Nowadays, traditional
cost management ideas and methods in our CSC have
proved to be inadaptable to the new the supply chain
management environment and caused pretty high level of
the total CSC cost. Therefore, it is urgent that new
thinking as well as new methods of CSC cost management
be applied to improve the effectiveness of our CSC cost
management.

III. IDEA AND CHARACTERISTICS OF LEAN

CONSTUCTION SUPPLY CHAIN COST
MANAGEMENT

II. MAJOR PROBLEMS OF OUR CONSTRUCTION

SUPPLY CHAIN COST MANAGEMENT

A. Idea of Lean Construction Supply Chain Cost

Management

Currently, many construction companies in our CSC

do not pay enough attention to cost management.
Frequently, the general contractor often multiplies the bid
price by a certain percentage and contracts it to its project
department. Then project department multiplies the above
value by another certain percentage and outsources it to

Lean thinking is summarized from Toyota Production

System. It was Toyota who first adopted it in car
manufacturing process and obtained great cost reduction.
Almost in the same time, Jennings Construction Company
in Australia also adopted lean thinking in its business

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978-1-61284-449-7/11/$26.00 2011 IEEE



operation. Since then, Jennings has quickly transformed

from a small-sized company to the largest construction
enterprise in Australia. Many scholars attribute Jennings
fast development to its application of Lean thinking. The
essence of lean thinking is to eliminate all forms of wastes
and non-value added activities, that is to say, using less
investment, less manpower, less equipment, less time and
less space to create as much value as possible and in the
meanwhile to be closer to the user to provide what they
really want.
The idea of Lean CSC cost management is to use the
principles and techniques of lean thinking to improve the
effectiveness of CSC cost management, pursuing the
maximum of customer satisfaction as well as the
minimum of CSC cost. In specific, by continuously
eliminating non-value added activities and getting rid of
wastes in each stage across the entire CSC, lean CSC cost
management can help achieve multiple objectives of CSC
including reducing total supply chain cost, improving the
effectiveness of the entire supply chain and best satisfying
more special, personalized and diversified customer
requirements, which all contribute to the enhancement of
the over competence of CSC.

3) Full participation
Lean CSC cost management emphasizes that each
employee is the subject of the cost formation. Therefore, it
requires that every employee in each CSC member
enterprise build strong sense of cost and have full
understanding of lean CSC cost management. By applying
job transition, one employee can deal with multiple work
processes so that traditional fixed job position system can
be discarded and the reduction of labor waste can be
achieved. Enterprises in CSC should educate staff on the
idea of lean cost management and organize job transition
training, authorize staff relevant cost decision-making
rights, provide them opportunities to continuously
improve their work cost and appropriately evaluate their
performance on cost reduction and quality assurance.
4) Increased supply chain visibility with the aid of
modern technologies and methods
Lean CSC cost management concentrates on quick
information transition and high degree information sharing
to increase the visibility across the CSC so that many
uncertainties of interface among all CSC parties can be get
rid of and therefore much logistics cost of CSC can be
reduced. Many IT-based communication methods such as
EDI-based/ or Internet/Intranet-based information
platforms can be used to facilitate information exchange.
In additional, there are other visible tools including wall
charts, posters, brochures, physical models and Video, etc.
to achieve full exchange of information among all CSC
parties.
5) Design of stringent and robust organization
system
The organizing principle of Lean CSC cost
management can be summarized as active participants,
which means that all the participants are encouraged to
play their initiatives to improve the cost and eliminate all
wastes during their workflows. Under lean CSC cost
management, robust multi-functional teams are designed
to take place of pyramid-like hierarchical organization
system. These teams have clearly defined cost rights as
well as cost responsibilities. The cost decision-making
power and authority of the team correspond to its assumed
responsibilities. Although managers authorize necessary
resources to teams for their cost decision-making and
production activities, they will not intervene in the
processes of team decision-making and production. Teams
are totally responsible for continuously improving those
partial costs of the value chain where they are located.

B. Characteristics of Lean Construction Supply Chain

Cost Management
1) Integrated and overall understanding of
Construction Supply Chain cost management
Lean CSC cost management differentiates traditional
CSC cost management from the point that it is an
integrated and overall thinking of cost management. It
requires that all CSC parties form the brand-new thinking
of cost management whose essence is to penetrate all the
cost reduction-related work into the entire process of
construction product lifecycle. Lean CSC cost
management has shifted its focus on separate and
fragmented cost management inside each CSC party to the
integrated and overall cost management across the entire
supply chain. Each CSC member enterprise needs to share
with other CSC parties about important SC cost
information such as production cost, inventory cost, etc.,
which will help achieve better group decision-making on
procurement, inventory and transportation, etc. so as to
reduce the total CSC cost.
2) Sound
accountability
mechanism
and
monitoring& evaluating mechanism
Lean CSC cost management focuses on the
establishment of sound accountability mechanism and
monitoring & evaluating mechanism. The focal company
of CSC (mainly the general contractor) divides the entire
CSC into different cost management accountability
centers in accordance with the principles of
decentralization, organizes cost accountability accounting,
sets up reasonable target settlement prices across the entire
CSC, and establishes effective accountability evaluating
mechanism. Based on this, inside each CSC party, target
cost task is assigned to teams and it is required that team
members work collaboratively to bear this cost together.

IV. IMPLEMENTATION OF LEAN

CONSTRUCTION SUPPLY CHAIN COST
MANAGEMENT
Although it has the same pursuits of cost reduction
and profit increase as traditional cost management, the
underlying philosophy and methods of Lean CSC cost
management are fundamentally new and different. Lean
CSC cost management believes: Cost= Price Profit,
which means that cost is determined by target price.



A. lean procurement cost management

Therefore profit is generally ensured and increased by cost

reduction. However, under the philosophy of traditional
cost management thinking, price is determined by the cost
because of the formula: Price = Cost + Profit. And
frequently construction enterprises raise prices to ensure
their profits. Moreoversince profit is fixed or even
increased under traditional cost management model, sales
price has to increase as cost increases and consequently
cost increase is actually borne by the user. This situation
can only exist under the sellers market circumstance. In
contrast, under lean CSC cost management model, the
total project price is determined by the user, i.e. the owner.
Therefore, because the contract price becomes fixed or
sometimes has to be reduced, construction enterprise has
no choice but to cut down cost to ensure profit or increase
profit.
Lean CSC cost management is a sort of cost
management
thinking
that
is
essentially
customer-value-added oriented, aiming at raising customer
satisfaction, improving market share as well as obtaining
maximum profit. It requires that cost reduction related
activities with full-staff participation be implemented
throughout the entire process of construction product
lifecycle. It has shifted from fragmented cost management
inside each CSC party to the integral cost management
throughout the entire CSC, from traditional cost control
measure to integrated cost management system whose
objectives are to achieve quality is good, the cost is low,
the variety is many, and time is fast. Specifically
speaking, it involves four key aspects including lean
procurement cost management, lean design cost
management,
lean
production/construction
cost
management, and lean service cost management (see
Figure 1). In the following part, we will discuss each
aspect in detail.
Internet/EDI-based
Network

Generally procurement cost of materials and

equipments accounts for over 60% of the total cost of
construction project. Procurement cost management is
now often cited as an important lever for increasing profit.
Lean procurement cost management shifts from
procurement for inventory to procurement for order,
which means procurement activities should be initiated
and carried out at the right time and place, in the right
quantity and quality as the user requires. Furthermore,
procurement
resource
management
should
be
implemented, which includes scientific evaluation and
selection of suppliers and good supplier relationship
management. It requires that construction enterprises build
cooperative and mutually beneficiary relationship with key
suppliers of materials and equipments. By means of this
relationship, quality assurance of material and equipment
is mainly borne by suppliers and JIT procurement can be
implemented so that the level of materials inventory as
well as in-process inventory can be greatly cut down at the
construction site. In order to facilitate JIT procurement,
multi-functional team composed of professional personnel
from different departments including procurement, quality
control and technology departments, should be established
to real-timely monitor the inventory level of materials, set
appropriate procurement lot sizes, publish material
requirements on time and send precise procurement orders,
scientifically evaluate suppliers and select reliable
suppliers to build strategic partnership and educate them
with JIT procurement. The role of this team is to ensure
the accuracy of materials supply on specification, quantity,
quality and delivery time.
B. Lean design cost management
Some construction breakdowns such as disruptions,
delays and rework, etc. can be attributed to design errors.
Lean design cost management means that during the
design stage, by sharing real-time and precise information
about customer requirement with other CSC parties,
accurate forecasting and analysis on customer needs can
be made. And after the feasibility study considering
customer needs, the designer can formulate more scientific
and rational design plan so that the losses caused by the
design errors can be avoided. Furthermore, with the aid of
concurrent engineering, the design stage can be seamlessly
lined to the construction stage. By means of the
collaboration between the two stages, the design
modifications and the corresponding construction
adjustments can be implemented at the same time, which
will result in the savings of both schedule time and the
cost.

Information

Owner
Lean Service Cost
Management

Designer
Lean Design Cost
Management

General Contractor

Subcontractor
Lean
Construction
Management

Cost

Supplier
Lean Procurement Cost
Management

Fig. 1.

C.

Lean construction cost management

Lean construction cost management takes advantages

of Last Planner System to make construction operation
plan, which can make the workload of each construction

Lean CSC cost management model



worker within his capacity and become more reasonable.

This workload arrangement can also help accurately
determine the duration and progress of the project and
fully prepare for JIT construction. During the construction
stage, JIT construction should be implemented to cut
down the losses caused by inappropriate amounts of
materials inventory. Construction workers should follow
the standard operation procedures and modular
construction methods to conduct their work , which not
only helps ensure the safety of construction operations and
avoid the accidents occurred during construction, but also
enables to prevent the occurrence of rework due to
operational errors of construction workers. In addition,
construction workers should comply with 6S management
to keep the site clean. After the completion of each
process, the site should be cleaned and sorted. Monitors
should checked and keep records accordingly in order to
help construction workers develop good practice of
turning the remaining materials back to the original
storage location after the completion of their work to
facilitate inventory management and checking. By means
of this practice, the losses caused by the remaining
material can be reduced.

This paper is financially supported by Qingdao

Technological University Bilingual Teaching Sample
Course Project (SY2008-04) named International
Logistics and Freight Forwarder. We sincerely thank
Qingdao Technological University for its kind
sponsorship.

REFERENCES
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D. Lean service cost management

Lean service cost management emphasizes that all
the service among CSC parties must be customer-oriented
and each CSC party should take user demands into full
account, reduce unnecessary service disputes and improve
service efficiency. The ultimate purpose of lean service
cost management is to continuously pursue zero defects,
zero waste and quick response.

V. CONCLUSION
In brief, Lean CSC cost management is to implement
the philosophy and techniques of lean thinking to CSC
cost management to improve the cost competence of our
CSC. It is a brand-new cost management concept which is
fully customer-value-added oriented and attempts to
achieve the maximum of customer value as well as the
minimum cost of the entire CSC. It discards traditional
individual and fragmented cost management of each CSC
party. With the guidance of lean thinking, integral and
collaborative cost management should be implemented on
the basis of high degree information sharing and full trust
and cooperation among all CSC parties. All the cost
reduction-related activities are planned, managed and
coordinated across the entire supply chain and penetrated
into all the stages of CSC including design, procurement,
construction and service.

AKNOWLEDGEMENT