International Multi-Company Collaborative Engineering:A Study of Japanese Engineering and Construction Firms

Masatoshi KanoRam Duvvuru Sriram

Amar Gupta

WP #3778 August 1994PROFIT #94-17

Productivity From Information Technology"PROFIT" Research InitiativeSloan School of Management

Massachusetts Institute of TechnologyCambridge, MA 02139 USA

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Copyright Massachusetts Institute of Technology 1994. The research describedherein has been supported (in whole or in part) by the Productivity From InformationTechnology (PROFIT) Research Initiative at MIT. This copy is for the exclusive use ofPROFIT sponsor firms.

Productivity From Information Technology(PROFIT)

The Productivity From Information Technology (PROFIT) Initiative was establishedon October 23, 1992 by MIT President Charles Vest and Provost Mark Wrighton "tostudy the use of information technology in both the private and public sectors andto enhance productivity in areas ranging from finance to transportation, and frommanufacturing to telecommunications." At the time of its inception, PROFIT tookover the Composite Information Systems Laboratory and Handwritten CharacterRecognition Laboratory. These two laboratories are now involved in research re-lated to context mediation and imaging respectively.

VERESEARCH,fiaELABORATORY

ELECTRONICSCENTER FOR \_CNA I

i COORDNATIO ]> LABORATORYCOORDINANTION S SCIENCES . RSAC)

Room E53-3 10, MITTCambridge, MA 02ATIO142-1247R Ioom E3-31 O, MIT

International Multi-Company Collaborative Engineering:A Study of Japanese Engineering and Construction Firms'

Masatoshi Kano, 2 Ram Duvvuru Sriram,3 and Amar Gupta4

ABSTRACT-- Concurrent/collaborative engineering (CE) often requires the collaborative

participation of several companies. Management of such multi-company collaboration in

engineering becomes more difficult when companies from different countries are involved,

as is the trend in the Japanese engineering and construction industry (E&C). This paper

focuses on the conditions required for successful management of such CE. The authors

first propose a conceptual time- and cost-based model of multi-company CE work as a

framework. Then using this framework, current practices of Japanese E&C firms are

analyzed. Major findings are that (1) international multi-company CE should be designed

with careful consideration, not only to task spilt and allocation but also to inter-firm task

dependencies; and (2) Japanese E&C firms need to alter their inter-firm coordination

scheme significantly in order to derive full benefits in the global marketplace.

1. INTRODUCTION

1-1 Motivation

In plant engineering and construction (E&C) projects, tasks are divided into

several sub-tasks such as plant design, component design, and construction. The sub-

'Support of Masatoshi Kano for this study was provided by the JGC Corporation. Funding for the DICEproject was provided by the MIT Intelligent Engineering Systems Laboratory affiliates program andNational Science Foundation PYI Award No. DDM-8957464, with matching grants from NT Data,and Digital Equipment Corporation.

2JGC Corporation, 1-14-1 Bessho, Minami-ku, Yokohama, 232 Japan

3Principal Research Scientist, Intelligent Engineering Systems Lab., 1-253, Massachusetts Institute ofTechnology, Cambridge, MA 02139

4Senior Research Scientist, Sloan School of Management, E53-3 11, Massachusetts Institute ofTechnology, Cambridge, MA 02139

tasks are shared among joint venture partners, equipment manufacturers, and

subcontractors. This multi-company task-sharing scheme for Japanese E&C firms has

become increasingly internationalized during the last decade under fierce market

competition for lower costs. Because engineering activities require close coordination and

collaboration, especially under strong market demand for shorter project periods, efficient

organization and management of international multi-company collaborative engineering

work is critical to such E&C firms.

For faster and better-quality product development, concurrent/collaborative

engineering (CE) has become a major focus of engineering management. Information

technology (IT) is considered a key tool which enables effective CE. Responding to this

situation, the second author and his group, in 1986, initiated research on a computer-based

architecture program called DICE, an acronym for Distributed and Integrated

Environment for Computer-aided Engineering [1,2]. In addressing coordination and

communication problems in engineering, key research issues of CE and IT application

identified and addressed in the DICE project are as follows: (i) Framework for dealing

with problem-solving architectures, (ii) Representation issues for the development of

product models needed for communicating information across disciplines, (iii)

Organizational issues to be addressed in organizing engineering activities for effective use

of computer-aided tools, (iv) Negotiation/constraint management techniques for conflict

detection and resolution between various agents, (v) Transaction management issues

relating to interaction between the agents and the central communication medium, such as

long-duration transactions and concurrency control, (vi) Design methods to support

various kinds of design activities of individual agents, such as hierarchical refinement and

constraint propagation, (vii) Visualization techniques including user interfaces and

physical modeling systems, (viii) Design rationale records of the justifications generated

2

during design and other engineering activities, (ix) Interfaces between agents to support

information transfer between various agents, and (x) Communication protocols to

facilitate the movement of objects between applications. Within this broad perspective of

CE and IT application, this paper concentrates on organizational issues (item (iii) above)

in international multi-company settings.

Organizational issues of engineering projects across country and company borders

have been examined by several researchers. For example, the organization for large-scale

development projects has been studied by Sayles and Chandler [3], the organization of

multi-national companies by Ghoshal & Westney [4] and Egelhoff [5], information

technology in multi-national companies by Roche [6], international operations by Hollier,

et al. [7] and organization and supports of design projects by Eppinger, et al. [8]

However, no study has yet addressed how best to organize and manage international

multi-company CE projects.

1-2 Objectives and Organization of the Paper

This paper addresses four basic questions:

1) Is a cross-national distribution of engineering tasks advantageous to E&C firms?

2) How should engineering work be split?

3) How should tasks be allocated?

4) What aspects make such collaborative work efficient and effective, thus feasible?

3

To answer these questions, the motivating factors for and issues in international

multi-company CE of Japanese E&C firms are discussed (Section 2), and a conceptual

workload model is presented (Section 3). Using this framework, the current engineering

processes, intra- and inter-firm engineering coordination work, and information systems of

Japanese E&C firms are analyzed (Section 4) to identify the issues in splitting and

allocating the engineering tasks. The paper concludes with suggested measures and a

future scenario for making international multi-company CE efficient and effective.

2. BACKGROUND

2-1 Drivers of International Multi-Company CE

E&C firms rely exclusively on awarded contracts, and are highly prone to

fluctuations in workload. (See Fig. 1.) Because of difficulties in recruiting and laying off a

competitive workforce that can respond to the changes in workload, Japanese E&C firms

have focused instead on: (1) geographical market expansion, (2) product family expansion,

(3) arranging finance for clients, and (4) outsourcing work, including engineering and

design. The last option constitutes a major reason for E&C firms to practice multi-

company CE.

4

Fi2ure I WORLD MARKET FOR PETROCHEMICAL PLANTS IN THE 80S

M EUROPE· NORTH AMERICA· SOUTH & CENTRAL AMERICAO AFRICA* MIDDLE EASTX ASIA

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

YEAR

(Source: Engineering News Record [9])

Japanese E&C firms typically own neither manufacturing facilities nor assembly

factories; they purchase equipment and construction material from outside suppliers.

Because equipment manufacturers (vendors) possess rapidly evolving equipment

design/manufacturing technology and often share the engineering work of customizing

their equipment for a particular project, E&C firms are motivated to enter into multi-

company CE relationships with vendors.

On the other hand, the appreciation of the Japanese Yen initiated by G5's Plaza

Agreement of 1985 boosted Japan's engineering fees to the world's highest level in a short

period (see Table 1). Also during the 1980s, worldwide investment in the oil refining and

petrochemical industries became sluggish (Fig. 1), leading to fierce competition among

E&C firms worldwide.

5

z-J-J0Z-iWp4*

County Fee (h)Japan 120Germany 110US 91UK 55Netherlands 55Taiwan 36Ireland 32Korea 27PR China 27Poland 14Philippines 9

(Source: The Engineering Business [ 10])

Both these developments prompted Japanese E&C firms to increase their purchase of

equipment and material from abroad, and to shift part of the work to developing countries

using quality but less expensive engineers. The JGC Corporation, for example, established

a new engineering subsidiary, Technoserve International Co., Inc., in The Philippines

during 1989, and Toyo Engineering Corporation set up Techno Management Co. in

Korea, in 1988. In other words, the new and turbulent global market has served to

catalyze internationalization of CE among E&C firms.

In addition, in order to foster industrialization at home, the public policy of

developing countries often mandates foreign firms to work with local firms in plant

construction projects. Such industrialization policy serves as yet one more motivator for

international multi-company CE.

6

ENGINEERING FEETable I

2-2 Issues in International Multi-Company CE of Japanese E&C Firms

After a shortened project period became critical for E&C firms, a task overlapping

technique, or CE, was adapted to reduce the engineering period. Unlike sequential task

execution which provides a complete set of information at the end of each task, a task

overlapping technique requires bilateral or multi-lateral flow of information on an evolving

basis, enabling a downstream task to start earlier, even when its upstream task is still

underway [11]. Such flow and coordination of information becomes difficult and costly in

an international scenario because of the greater distances involved. The difficulties in

coordination across both company and country borders have occasionally resulted in

design changes and rework at the construction site as well. Although engineering

accounts for only nine to fifteen percent of total project costs [12], engineering work

determines most of the overall project costs. So, each factor that impacts engineering

quality, engineering time, or costs is critical to the overall competitiveness of E&C firms.

3. CONCEPTUAL WORKLOAD MODEL

What is unique about international multi-company CE? The answer possibly lies in

distances between companies. Although telecommunication and transportation

technologies have altered traditional views about physical distance, there still exist

distances in (i) cultures, (ii) time zones and seasons, (iii) meteorological conditions, (iv)

technological expertise, and (v) communication/coordination modes, or methods and tools

for communication. While these differences can provide new perspectives and approaches

to an engineering problem and can lead engineers to more effective solutions, they

nevertheless make communication and coordination difficult.

7

3-1 Engineering and Coordination Workload Model

In order to analyze the difficulties in communication and coordination encountered

in international multi-company CE, we must review the characteristics of coordination.

When engineering work is broken down into tasks that involve several engineering

disciplines, three kinds of interdependencies among different tasks emerge [13]: (i) pooled,

where the activities share or produce common resources but are otherwise independent;

(ii) sequential, where the initiation of some activities depends on the prior completion of

others; and (iii) reciprocal, where each activity requires input from the others.

Coordination offers a means to manage these task interdependencies, so the

overhead involved in coordination between companies is determined primarily by the

method used to divide the engineering work and to allocate the decomposed tasks among

companies. That is, overhead is determined by the number of inter-firm task dependencies

of the companies, and the level of difficulty in communication encountered when

managing the task dependencies across company-borders. The number of inter-firm task

dependencies can be approximated by the number of firms involved. Communication

difficulties generally arise from encoding and decoding information (code in Miller's

terminology [22]) exchanged by engineers of the task-dependent companies. Difficulties

in encoding and decoding are determined by the communication tools available and by

differences in language, culture and technological standards. The more limited the tools or

the greater the differences, the more difficult the encoding and decoding operations

become. In short, communication difficulties can be represented by distance that denotes,

in this paper, differences in culture, language, and technologies, rather than for physical

distance.

8

Thus, the coordination workload in multi-company CE can be modeled as a

function of the number of firms involved and the distances between task-dependent

companies. On the other hand, the effort involved in performing sub-divided engineering

tasks is considered to be constant, because engineering tasks are based on scientific and

technological knowledge and skills, and are relatively immune to differences in language,

culture, and geography.

Based on these assumptions, the total workload F is deemed to comprise of a

constant engineering workload K and a variable coordination workloadf as follows.

F(n,d) = K + f(n,d) (3-1-1)

where n is the number of firms, and d is the distance between the task-dependent firms.

The functionf(n,d) is considered to increase in value as either n or d increases.

3-2 Productivity and its Effects on Multi-Company CE

If multi-company CE merely adds extra coordination workload, as in Eq. 3-1-1,

why does one bother with multi-company collaboration? The key reason is that we can

reduce total engineering time and costs despite an increase in total workload. To relate

workload to engineering time and costs, let us consider the company's engineering

productivity p, which is defined as a ratio of the total workload F(n,d) to required person-

hour; the person-hour is the product of the average number of engineers m and the total

engineering time t in hours. Formally, p is given by:

F(n,d)P nm xt (3-2-1)M X

9

In multi-company CE, the productivity of i-th firm is given as:

F(n,d)Pi = m i x t i

(3-2-2)

where F(n,d) = E F (n,d). By using a unit engineering fee per engineers' person-hour c,

and productivity pi of i-th firm for the workload F, the total engineering cost C becomes:

(3-2-3)

Total engineering period T is:

1mi

T= (n,d) xi Pi

T = max( (n,d)i P,

- if all the firms' tasks are sequential, or (3-2-4a)

1) if all the firms' tasks are in parallel. 5(3-2-4b)

mi

F (n,d)Equations 3-2-3 through 3-2-4b highlight the importance of the term , which

denotes the number of person-hours, in reducing engineering time and costs.

3-3 Task-Resource Fit and Coordination Fit: Strategic Dimensions

F(n,d)We will elaborate on the person-hour in this section. Person-hour can be

re-written by using Eq. 3-1-1.

re-written by using Eq. 3-1-1.

5In case that firms have mixed task connections (both sequential and parallel), Twill have a valuebetween Ts given by Eqs. 3-2-4a and 3-2-4b, depending on the scheme of the task connections.

10

Cl~(n~d)X Cii Pi

F(n,d) K i f(n,d)- -- + (3-3-1)

Pi Pi Pi

where K = E Ki and ftn,d)= Z f(n,d).i i

The first term of the right-hand side of Eq. 3-3-1 denotes the engineering person-

hours, and the second term the coordination person-hours. As engineering person-hours

represent the level of skillfulness of engineers of a company with regard to engineering

tasks assigned to them, we call it as task-resource fit. Similarly, the coordination person-

hour represents how smoothly task-dependencies are processed by a company, or the

skillfulness used in performing coordination work, so we call it as coordination fit. Hence,

the total cost C can be stated as follows:

C= xc + f(nXd)C . (3-3-2)Pi Pi

First, we check the effect of task-resource fit Assuming that two companiesPi

have the same engineering project, the same task breakdown, and can perform all broken-

down tasks on an interchangeable basis, multi-company collaboration always gives better

fit to the overall workload. Suppose that Company A and Company B have four

disciplines (civil, machine, piping, and electrical engineering), and for each discipline, j, a

project has engineering workload Ki, (30,15,35, and 20, respectively). If each company, i,

has a set of productivity pi and the unit engineering fee c for each disciplinej as is shown

in Fig. 2, the cost of the project is calculated as shown in the parentheses in Fig. 2. For

machinery design, Company B has a cheaper unit engineering fee and involves less cost.

11

For piping design, Company A has better productivity with the same unit engineering fee,

thus provides less cost. For civil design, Company B has a more expensive unit

engineering fee but has much better productivity, resulting in less cost. For electrical

design Company B has less productivity but much less unit engineering fee, yielding less

cost. When two companies split the project tasks and work together (bottom one in the

figure), the overall engineering cost becomes lower because we can find better

productivity pij or lower unit engineering fee cj while total engineering workload K

(= E Ki ) remains the same value.

Fiure 2 BENEFITS OF MULTI-COMPANY COLLABORATION

CIVIL MACH. PIPING ELEC.

K 1=30 K2=15 K3=35 K4=20

COMPANY A(TOTAL=230)

COMPANY B(TOTAL=212)

COLLABORATION(TOTAL=200)

Note: ( ) cost

12

l. : P 83.-'.:,..-190 .7.-(30) ( 42 (50<,s °--K Be'tt

, i u}<A.:\ s Its}, o62 dt

In this way, frther task decomposition and involvement of more companies, or a bigger n,

will yield a better chance of reducing the overall engineering cost through (i) task-resource

fit or (ii) involvement of cheaper unit engineering fee through multi-company

collaboration. Similarly, greater cost reductions are likely when companies with greater d

are involved, because of growing science and technology parity across borders and

complementarity of national systems in science and technology [14]. (See Fig. 3.) Better

engineering productivity, p, and cheaper engineering fee, c, constitute two motivations for

multi-company collaboration to enhance overall engineering cost competitiveness.

Figure 3 ENGINEERING COST CURVE

ENGGCOST

Note: The horizontal axis is number of firms n or distance d.

On the other hand, as coordination workload fi(n,d) increases with number of

firms n or distance d, the overall coordination cost also increases with n or d even with

better coordination productivity or lower unit coordination fee. (See Fig. 4.)

13

-EN

j L

Fi2ure 4 COORDINATION COST CURVE

COORD.COST

Note: The horizontal axis is number of firms n or distance d.

There are, however, possible options to suppress the increase in coordination cost through

f (n,d) f (n,d)better coordination fit . Let us check two factors of coordination fit

P Pi

coordination workload fi(n,d) and coordination productivity pi.6 The coordination

workload is determined by inter-firm task dependencies related to engineering work

process, or task sequence, and the method of splitting the tasks for each company. The

examples of Figure 5 illustrate how task sequence and the method of splitting impact inter-

firm task dependencies.

6Coordination productivity Pci is actually different from engineering productivity pi. This paper uses thenotion of Pi in the sense of Pci for coordination, for simplicity's sake.

14

Mftkm.

Figure 5 INTER-FIRM TASK DEPENDENCIESSE UENTIAL

COMPANY A - COMPANY B

REIPC2 L 3 ID 4 5IL(0) ( _

RECIPROCAL (UNIDIRECTIONAL)

COMPANYB ..

%: M- . . , V·-

.,..:-+ ~ ~ ~ ~~~ ._

RECIPROCAL WITH SYNCHRONIZATION (UNIDIRECTIONAL),Lo;; ,COMPANY B

':'- ·r; - sV.X.

COMPANY A

- I I

(1)

N~~~'i4i... i i

15

yf _'

\> ':i

.

t! UI i

Note: ( )= number of inter-firm task dependencies, j = number of iteration cycles

·. 44_1 1~~~

t. -1-~·:: · 'Z'·p-:·.-~ji·:,~·. , - (1)~~~·

I 1

Let us measure inter-firm task dependencies by the number of inputs required for each

company to perform its tasks. A simple sequential task transfer from Company A to

Company B (top one in the figure) gives one inter-firm task dependency for Company B,

while Company A will also get one inter-firm task dependency if task sequence transfers

back to Company A on a reciprocal basis (second from the top). If Company A has an

independent task to be done in parallel with tasks of Company B, and Company A also

needs to consolidate the design results from both task sequences, each Company gets one

inter-firm task dependency (second from the bottom). If Company A's and Company B's

tasks need an iterative process between them, both companies get j inter-firm task

dependencies, wherej represents the number of required iteration cycles (bottom one).

As we can see from these examples, inter-firm task dependencies can be reduced

by: (i) avoiding inter-firm task split across the iteration process [8], (ii) avoiding task

transfer reciprocity, or (iii) minimizing the number of firms to be involved. These are

important rules for limiting the increase in coordination workload under multi-company

collaboration.

Now let us examine coordination productivity, which is the company's proficiency

in handling required coordination work. One way to improve it is to identify the inter-firm

differences that cause encoding and decoding difficulties, and to devise countermeasures

to improve encoding and decoding productivity by: (i) wide exchange of engineers, or (ii)

transferring liaison engineers to other firms as technological gatekeepers [15].

To summarize, better coordination fit can be attained through three steps: (i)

splitting and sharing engineering tasks so that the inter-firm task dependencies are

minimized, (ii) identifying the difficulties in task coordination that collaborating companies

have between them, and (iii) devising strategies for overcoming these difficulties.

16

3-4 Tradeoff between Engineering Cost and Coordination Cost

From the discussions thus far, when total cost for a project is considered under

multi-company collaboration, a tradeoff exists between reduced engineering cost and

increased coordination cost. In other words, an increase in the number of firms or

distance among firms is advantageous so long as marginal coordination cost is less than

marginal engineering cost. (See Fig. 6.) Taking the number of firms and their distances as

variables, the point where the marginal coordination cost is equal to marginal engineering

cost represents the ideal operating situation characterized by the lowest total cost (Point

A-a in the figure).

Figure 6 TRADEOFF BETWEEN ENGINEERING COST ANDCOORDINATION COST

r(n,a)r(n,d) = Vn '+ d2n: number of firmsd: distance between firms

17

TOTAL COST

-...... ENGINEERING COST

.................. COORDINATION COST

I

Exactly the same argument holds in case of engineering time T. If the number of

firms or the distance increases, engineering time decreases through better task-resource fit

and higher probability of finding companies with a greater number of available engineers.

The tradeoff between engineering time and coordination time can determine the optimal

number of firms and the distance.

In Figure 6, when coordination cost and marginal coordination cost are reduced,

the minimum total cost will decrease by more than the amount of coordination cost

reduction. This is achieved through engineering cost reduction enabled by the increase in

number of firms or their distance (Point B in Fig. 7). We term this effect as leverage by

task-resource fit. Similarly, when engineering cost and marginal engineering cost are

reduced, the minimum cost will decrease by more than the amount of engineering cost

reduction through coordination cost reduction enabled by a decrease in number of firms or

their distance (Point C in Fig. 8), and this effect is termed as leverage by coordination fit.

The conceptual model described here suggests two strategic dimensions to

improve performance through multi-company CE: (i) manage improvement of

coordination productivity among collaborating companies, if the leverage by task-resource

fit through increase in ii and d is great, or if the marginal coordination cost curve is steeper

than the marginal engineering cost curve (from Point A to Point B in Fig. 7); and (ii)

manage improvement of engineering productivity of collaborating companies, if the

leverage by coordination fit through reducing n and d is great, or if the marginal

engineering cost curve is steeper than the marginal coordination curve (from Point A to

Point C in Fig. 8). (See Fig. 9.)

18

COORDINATION IMPROVEMENT

I

A B r(n,d)

TOTAL COST

-*-.-----*--- ENGINEERING COST

.................. COORDINATION COST

COORDINATION TOTAL COSTIMPROVEMENT IMPROVEMENT

I- --- ----- -------

r(n,d) = n:+ dn: number of firmsd: distance between firms

Figure 8 TOTAL COST REDUCTION BYENGINEERING PRODUCTIVITY IMPROVEMENT

C A r(n,d)

n: number of finns

d: distance between finns

19

$ IIi

4-

$TOTAL COST

............. ENGINEERING COST

................ COORDINATION COST

PRODUCTIVITY TOTAL COSTV IMPROVEMENT IMPROVEMENT

Figure 7 TOTAL COST REDUCTION BY

\

STRATEGIC FRAMEWORK FOR MULTI-COMPANY CE

LEVERAGE BYCOORDINATION

FIT(C)

IMPROVEENGINEERINGPRODUCTIVITY

4. CURRENT PRACTICES OF JAPANESE E&CFIRMS

4-1 Engineering Process

The engineering process of E&C firms can be divided into three main phases: (i)

the basic engineering phase; (ii) the detailed engineering phase; and (iii) the

vendor's/subcontractor's engineering phase. In the basic engineering phase, process

engineers specializing in a certain product group that requires product-specific expertise

design the overall system to client specifications. In the detailed engineering phase, the

engineering work is decomposed into several tasks to design different types of sub-

systems and components, e.g., steel structure, building, piping, compressor systems, boiler

20

1

IMPROVECOORD.PROD'TY

LEVERAGE BYTASK-RESOURCE

FIT

4

CURRENTPOSITION

(A)

- -l ...Figure 9

systems, control systems, and substation. While project engineers provide coordination

support, each component is engineered by component engineers grouped into functional

departments mainly by categories of engineering disciplines or manufacturing industries.

The component engineers maintain technological expertise about components by

specialization, creating smoother interfaces with vendors and subcontractors for effective

engineering coordination. The component design is transferred to vendors, with each

functional department retaining responsibilities for supervising the vendor's design of the

components in both performance and ease of site installation and maintenance.

Document Approval Procedure

Although this sequential engineering process appears to be simple, the actual task-

connection is often not straightforward. Engineering tasks subcontracted to vendors or

subcontractors are generally subject to a reciprocal and iterative approval procedure based

on documents which enable the E&C firm to keep track of the responsibilities of each

company. Moreover, regardless of inter-firm task dependencies, vendors and

subcontractors are often subcontracted directly by the E&C firm so that the E&C firm can

easily take control of the whole engineering process. In this way, even a simple task

sequence flows through a complex, reciprocal and iterative path (see the Current Practice

in Fig. 10), although the tasks need to be connected directly from engineering

subcontractors to vendors or construction subcontractors (see the Ideal Task-Flow in Fig.

10).

One way to simplify the path, for example, is to subcontract tasks directly from

project engineers to final vendors by improving the engineering capabilities of project

engineers and vendors so that component engineering departments and engineering

21

subcontractors can be eliminated from the path (Possibility (1) in Fig. 10). A second

method of simplification would be to establish an IT-based coordination platform among

companies based on a long-term close relationship. This will enable once-through

engineering processes through preliminary checks and earlier comments (Possibility (2) in

Fig. 10). The engineering process may remain sequential with these options, however the

authors believe that this is the first step toward designing an effective CE framework in a

multi-company and multi-country situation.

22

Figure 10 INTER-FIRM ENGINEERING TASK-FLOW

IDEAL TASK-FLOW

CURRENT PRACTICE

- -- ENGO SUB

F O R i ..

FOR

POSSIBILITY (1)

x~~~~~~~~~

...... ""..--.'.- y i Vans .;'. : - ; ' :!;'"*:, ', '. ,,,. ..;s;o ; > .. ;.!:,ib:.. '. aVENDOR . .. ,* s<w, . vZ, , ,,<A_ T~v ·-

* -f-. .:· ,· i - . --- o-w

POSSIBILITY (2)

23

-

Rationale for Current Engineering Practice

The surge in new technology and the advent of a global economy motivate E&C

firms to assign work to companies with the lowest quotations in the free market, even

with no previous work relationship and on an individual project basis. Because the

subcontractors' capabilities is not clear under such short-term company relationship, a

typical E&C firm i likely to exercise greater control through centralized subcontracting

and strict document approval procedures. So, a short-term company relationship based on

free market competition creates extra coordination workload through an iterative process,

and reciprocal task dependencies among collaborating firms. Although the competitive

market remains attractive to reduce costs of E&C firms, it may be appropriate for these

firms to evaluate the free market's efficiency, especially in terms of coordination cost.

One explanation for the emergence of multi-national companies (MNCs) is that

MNCs internalize international economic transaction costs previously curried out on the

open market, and can make a profit through doing them more efficiently than the global

market [16,17,18,19]. If this transaction-cost theory is correct, long-term partnership

among companies may be more efficient than a one-time relation. This is because a long-

term partnership will eliminate work relating to each subcontract and allow closer relations

between engineering subcontractors and construction subcontractors/vendors, which will

then enable them to streamline the task-flow between companies with less E&C firm

intervention.

To attain efficiency even in a one-time inter-firm relationship, a global

infrastructure is needed to support frequent exchange of the unstructured information

required for engineering processes, especially in CE. While the current infrastructure is

24

sufficient for international transfer of funds, goods, people, and structured data, the

problem of insufficient market infrastructure for CE cannot be mitigated by frequent face-

to-face coordination in an international setting. To overcome this shortcoming, we

recommend that companies establish long-term strategic alliances to substitute market-

based relations, and establish IT-based infrastructure to support smoother exchange of

unstructured information for engineering.

Adherence to the document approval procedure and E&C firm-centered

subcontracting imply that E&C firms are extending their Japan-based organization and

operation to the global marketplace only by internationalizing their peripherals. While

their project management activities have become international, the corporate management

structure of E&C firms remains domestic. To manage effective international operations

especially in engineering work, Japanese E&C firms need to depart from the old paradigm

of home-country-centered corporate management, to a new paradigm of international

alliance-based corporate management (see Section 4-4).

4-2 Engineering Coordination -- Project Engineer

In an E&C firm, project engineers play the pivotal role of intra- and inter-firm

engineering coordination with responsibility for resolving inter-disciplinary engineering

conflicts from various viewpoints of project management. At one specific E&C firm,

project engineers accounted for 36 % of the total engineering resources (see Fig. 11); 37

% of the time of these project engineers was devoted to engineering work (see Fig. 12), of

which three-quarters was spent on engineering coordination alone.

25

Fi2ure 11 HUMAN RESOURCE ALLOCATION IN A JAPANESE E&C FIRM

(Percentages are based on the number of employees)

R&D & DATA PROCESSINGENGINEERS BASIC ENGINEERING

9% 13%

PROJECT36%

DETAIL ENGINEERING25%

PROCUREMENT &OPERATION & SAFETY INSPECTIONE CONSTRUCTION INSPECTION- GINEERS ENGINEERS 6%

.Y70 8%

(Adapted from Outline ofJGC [20])

In other words, project engineers spend nearly one-third of their total time in engineering

coordination. From Fig. 11 and 12, roughly 12% of an E&C firm's total human resource

is devoted to engineering coordination by project engineers, while 38% is allocated to

basic and detailed engineering; i.e., engineering coordination consumes about one-quarter

of the total engineering and coordination person-hours.

26

Figure 12 PROJECT ENGINEER'S WORK

(Percentages are based on used time.)

PROCUREMENT CONSTRUCTION5% 5%

OJECT MANAGEMENT37%

BASIC & DETAILFMUrIM:FRIM(G

PROPOSAL PREPARATION16%

The intra- and inter-firm coordination work of project engineers has been handled

mostly through meetings held at the E&C firm, and by telephone (see Fig. 13). Letters

and facsimiles are as popular as such meetings and telephone calls for international

projects, while business trips or meetings at another firm's office are much more common

for domestic projects. The physical inter-firm distance involved in international projects

makes personal meetings less effective in terms of both time and cost, and one relies

instead on written communications, including drawings, which can reduce chances of

miscommunication across country borders and have the added advantage of leaving a

record for future reference. In any case, inter-firm engineering coordination by data

communication remains negligibly small.

27

Figure 13 COMMUNICATION MODES OF PROJECT ENGINEERS

100%

80%

60%

40%

20%

0%

OBUSINESS TRIP=LETTER & FAXmMEETING & TELEPHONE

INTL PJ DOMESTIC PJ

(Vertical axis is based on used time.)

If the current human resource allocations for project engineering and the project

engineer's workload are appropriate for E&C firms, overall productivity of E&C firms

cannot be effectively improved without first improving the productivity of the engineering

and coordination work handled by project engineers. Their communication modes,

especially, of letters and facsimiles, which require more time and effort for encoding and

decoding than face-to-face communication, need improvement.

4-3 Information Systems

We now examine the state of computer-aided engineering (CAE) systems currently

employed by Japanese E&C firms. A survey was conducted by Nippon Kikai Kogyo

Rengo Kai (Japan Machinery Federation) and Engineering Shinko Kyokai (Engineering

Advancement Association of Japan). Of 27 Japanese E&C firms that replied to a survey,

28

90 % use CAE systems for basic and detailed engineering work, 50% intend to improve

engineering quality and productivity by introducing CAE systems, and 30% intend to

reduce project periods and costs [21]. As shown in Figure 14, the two major problems

with current systems are as follows: (i) historical data of completed projects was not yet

installed in the CAE database, making it unusable for ongoing projects, and (ii) data was

incompatible with other CAE systems. The first problem originated tfrom relatively recent

installation of CAE systems and fast evolving CAE technology. The second is of a

different origin: the CAE systems in an E&C firm have been developed department by

department, and each department uses a unique CAE platform best suited to its particular

engineering tasks; e.g., a piping design CAE for a piping engineering department. Data

incompatibility and poor hardware inter-connectivity among different CAE platforms have

resulted in inefficient repetition of data output and input via paper at each CAE platform

associated with extra checking for input error. This problem is true also for inter-firm

CAE data transfer. About 60% of CAE data communication is done by paper and 20% by

diskettes for both domestic and international projects [21].

29

Figure 14 PROBLEMS OF CURRENT CAE SYSTEMS

IN THE JAPANESE E&C INDUSTRY

NO

TIN

DIF

CAD SYSTEM

IE FOR INPUT

FICULT INPUT

LIMITED USAGE FOR 3D MODEL

USER UNFRIENDLINESS

HARDWARE INCOMPATIBILITY

DATA ACCESSIBILITY

DUPLICATED INPUTLIMITED USE OF STANDARD

DATA

INFLEXIBILITY

TIME FOR 3D INPUT

DATA INCOMPATIBILITYCOMPLETED JOB DATA

NOT ON CAE

0 2 4 6 8 10 12 14 16

Notes: The number shown in the legend box denotes respondent's first, second,third, and other minor choice. The horizontal axis represents number ofcompanies who replied.

(Source: [21])

In order to derive higher benefits, an engineering database (EDB) needs to be

established, as highlighted in Figure 15. An EDB is the design database originating from

process engineers and transferred to and evolved by component engineers; it is considered

to be a new engineering framework to replace the current engineering document, such as

plot plan and P&ID. It eliminates the need for data input and output repetition among

different computer systems, including the CAE systems of each engineering department.

30

OOTHERS03U2X1

Figure 15 ISSUES TO GET MOST OUT OF A CAE SYSTEM IN

THE JAPANESE E&C INDUSTRY

ORGANIZATIONAL CHANGEHARDWARE/SOFTWARE

COMPATIBILITYMANAGEMENT COMMITMENT

FUNCTIONALITY

HARDWARE/SOFTWARE COSTINTEGRATION OF Al, NEURO-

COMPUTER, & FUZZYEWS PROMOTION

PROMOTION OFCOMPUTER NETWORK

DATA INTEGRATION

TRAININGENGG PROCESSREENGINEERING

HISTORICAL DATA STORAGEAND QUERY TECHNOLOGY

USER FRIENDLY INTERFACE

ESTABLISHMENT OF EDB

0E2

0 2 4 6 8 10 12 14 16 18

Notes: The number shown in the legend box denotes respondents' first, second,third, and other minor choice. The horizontal axis represents number ofcompanies who replied. EWS and EDB are the abbreviations forengineering work station and engineering database, respectively.

(Source: [21])

4-4 Future Scenarios: Toward a Global Matrix Operation of a Multi-CompanyAlliance

From the above analyses, a future scenario of international multi-company CE can

be constructed. First, we review the service location in current E&C projects. The left

half of Table 2 shows the current service location of Japanese E&C firms. Almost every

service, except for a part of detailed engineering, construction, and operation &

maintenance (O&M), is located in Japan where Japanese E&C firms have a major

technology base. From a business viewpoint, services will need to be located near clients

or near the local market, while the best technology remains at its centers of excellence

around the world; in other words, the technological base of Japanese E&C firms needs a

31

drastically enhanced global perspective regarding service locations, as depicted in the right

half of Table 2.

Table 2 E&C FIRMS' SERVICE LOCATION. NOW AND FUTURE

NOW FUTURE

SERVICES

MARKET TECHNOLOGY MARKET TECHNOLOGY

SALES

BASIC ENGG a (v') v

DETAILED ENGG , ()

PROCUREMENT ' ()

CONSTRUCTION o /

O&M V

R&D , (')

Notes: Columns denote locations: market means client's country or region, whiletechnology means countries or regions where technological expertiselocates. denotes the applicable location(s) of the service in each row.(/) indicates locations where a part of each service exists or will exist.

To attain this goal, E&C firms are looking at establishing two organizational

hierarchies, one for geographic markets and another for globally distributed technologies.

This means that each client's country or region needs a local company having functions at

least of sales, construction, and O&M services, seeking for the best local task-resource fit

and coordination fit, and possibly organized around the organization operating in each

32

regional market today. However, basic engineering, detailed engineering, procurement,

and R&D services which require both state-of-the-art technology and local knowledge of

the client's country, such as codes and regulations, need to be organized both domestically

and globally. This can be approached using a global engineering coordination platform,

possibly through strategic alliance of leading E&C firms worldwide, seeking for the best

global task-resource fit and coordination fit. These two organizational hierarchies then

need structural coordination, most probably through a matrix (see Fig. 16).

Figure 16 GLOBAL MATRIX COORDINATION STRUCTURE

SERVICES..

[COUNTRY A I SALES

COUNTRY B SALES

COUNTRY C I SALES

I REGION D SALES

! REGION E SALES

BASICENGG

DETAIL.ENGG

PROC

CONST.I 0 & M

CONST. & M

CONST. & M

CONST. &M

CONST. O & M_o~tl

ALLY

Allen's framework of the rationale for matrix organizations [15] supports the

scenario above. According to Allen, a functional organization is more appropriate if

technology factors are critical in a business, while a project task-force organization is

more appropriate if market factors are critical. Where both technology and market factors

are critical in a business, a matrix organization is appropriate, as in the case of Japanese

E&C firms today (see the left half of Fig. 17). As both technology and market factors are

now globalizing (see the right half of Fig. 17), a new coordination platform possibly

33

MARKET

R& D

II

>j F~--MRrI

I

i _ ----- i 1 i_ I

through global alliance and matrix coordination will be required to bind these dispersed

functions of CE.

Figure 17 GLOPALIZING TECHNOLOGY AND MARKET FACTORS

TECHNOLOGYGEOGRAPHICAL DISPERSION

'II I s

. COORDINATION PLATFORM

a I IIA t IB I IC~~~~~"'-I r~~~~~~~~~

E&CFIRM

TECHNOLOGY

I 11 III I IV

1t 2 3 14

a Ib C-.

A B C I

E&CALLY

MARKET

MATRIX ORGANIZATION(PRESENT)

GEOGRAPHICAL DISPERSIONMARKET

GLOBAL MATRIX ORGANIZATION(FUTURE)

I, II, III, IV: TECHNOLOGICAL INNOVATION1, 2, 3, 4: FUNCTIONAL TEAMa, b, c : PROJECT TEAMA, B, C : MARKET SEGMENT

34

5 CONCLUSIONS

5-1 Key Issues

The proposed engineering and coordination workload model illustrates how E&C

firms can benefit from international multi-company CE. Through collaboration with

companies having complementary technological specialties or engineering skills, E&C

firms can reduce engineering cost as described in Section 3-3. Increase in the number of

companies or distance involved in CE increases coordination cost while reducing

engineering cost. The coordination cost is determined by two factors: coordination

workload and coordination productivity. Coordination workload depends heavily on the

way of splitting and allocating engineering tasks, which determines inter-firm task

dependencies, and coordination productivity depends on communication tools and

previous work experience between the collaborating firms. After seeking the optimum

combination of collaborating firms which yields the lowest total cost, there are two

possibilities for further cost reduction: improvement of engineering productivity and

improvement of coordination productivity.

Japanese E&C firms encounter coordination workload and productivity problems

based on their reliance on document-based approval procedures, E&C firm-centered

subcontracting, use of traditional coordination/communication methods, and inefficient

physical and logical connectivity between different CAE platforms. The current problems

can be traced to: (i) inefficient market-based short-term company relationships under

insufficient market infrastructure; and (ii) home-country-centered corporate management

style of Japanese E&C firms which prevents them from realizing the full potential of

international multi-company CE. A scenario for a future international multi-company CE

was formulated in this paper.

35

5-2 Suggestions for Future Research

Because of the many attributes involved, the measurement of the workload and the

distance conceptualized by the model described in Section 3 is difficult; as such, the

discussion in this paper has been largely qualitative. Future research on metrics for

workload and distance will enable more quantitative analyses of engineering cost and

coordination cost curves.

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[2] A. Wong, and D. Sriram, "SHARED: An Information Model for Cooperative ProductDevelopment," Research in Engineering Design, Fall, 1993

[3] L.R. Sayles, and M.K. Chandler, Managing Large System: Organizations for theFuture, Harper & Row, New York, NY, 1971

[4] S. Ghoshal, and D.E. Westney, Organization Theory and the MultinationalCorporation, St. Martin's Press, New York, NY, 1993

[5] W.G. Egelhoff, Organizing the Multinational Enterprise: An Information-ProcessingPerspective, Ballinger Publishing Company, Cambridge, MA, 1988

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[8] S.E. Eppinger, D.E. Whitney, R.P. Smith, and D.A. Gebara, "Organizing the tasks inComplex Design Projects," appeared in Design Theory and Methodology -- DTM '90,edited by J. Rinderle, and Carnegie Mellon, The American Society of MechanicalEngineers, New York, NY, pp.39-46, 1990

[9] Engineering News Record (ENR), "Top 250 International Contractors", July 1981 toJuly 1991

36

[10] The Engineering Business, "Special Report: Nippon no Plant Yushutsu noKyosoryoku wo Kenshosuru (Examining Competitiveness of Japan's Plant ExportIndustry)," The Engineering Business, Engineering Journal Co., Tokyo, Japan,Vol. 13, No. 18, pp.4-19, October, 1993

[11] K.B. Clark, and T. Fujimoto, Product Development Performance, Harvard BusinessSchool Press, Boston, MA, 1991

[12] International Trade Center, The Export Marketing of Technical ConstructingServices form Developing Countries, 1986

[13] J.D. Thompson, Organizations in Action, McGrow-Hill Book Company, New York,NY, 1967

[14] D.E. Westney, "The Globalization of Technology and The Internationalization ofR&D," The MIT Japan Program, MITJP 91-05, Massachusetts Institute ofTechnology, Cambridge, MA, 1991

[15] T.J. Allen, Managing the Flow of Technology, The MIT Press, Cambridge, MA,1977

[16] J.K. Hennart, A Theory of Multinational Enterprise, University of Michigan Press,Ann Arbor, MI, 1985

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[20] Outline of JGC, JGC Corporation, Yokohama, Japan, 1993

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37

LIST OF FIGURES

Figure 1 WORLD MARKET FOR PETROCHEMICAL PLANTS IN THE 80S

Figure 2 BENEFITS OF MULTI-COMPANY COLLABORATION

Figure 3 ENGINEERING COST CURVE

Figure 4 COORDINATION COST CURVE

Figure 5 INTER-FIRM TASK DEPENDENCIES

Figure 6 TRADEOFF BETWEEN ENGINEERING COST AND

COORDINATION COST

Figure 7 TOTAL COST REDUCTION BY COORDINATION IMPROVEMENT

Figure 8 TOTAL COST REDUCTION BY ENGINEERING PRODUCTIVITY

IMPROVEMENT

Figure 9 STRATEGIC FRAMEWORK FOR MULTI-COMPANY CE

Figure 10 INTER-FIRM ENGINEERING TASK-FLOW

Figure 11 HUMAN RESOURCE ALLOCATION IN A JAPANESE E&C FIRM

Figure 12 PROJECT ENGINEER'S WORK

Figure 13 COMMUNICATION MODES OF PROJECT ENGINEERS

Figure 14 PROBLEMS OF CURRENT CAE SYSTEMS IN THE JAPANESE E&C

INDUSTRY

Figure 15 ISSUES TO GET MOST OUT OF A CAE SYSTEM IN THE

JAPANESE E&C INDUSTRY

Figure 16 GLOBAL MATRIX COORDINATION STRUCTURE

Figure 17 GLOBALIZING TECHNOLOGY AND MARKET FACTORS

38'""~"�-"11�1�'�"---��1---^--1111�1-1- .1_-_ �-���� ��-���

ENGINEERING FEE

E&C FIRMS' SERVICE LOCATION, NOW AND FUTURE

39

LIST OF TABLES

Table 1

Table 2

"""""""""" ----- ---- ---------- --------