In This Corner: Revenue versus expense in STO battleWritten by Terry Wireman, C.P.M.M. Friday, 09 October 2009
Properly balancing shutdown, turnaround and outage (STO) strategies requires a company to have a complete view of its entire asset base. This means being able to balance the demands for production, maintenance and engineering changes from the asset base. By examining the complete lifecycle of the asset, you can determine the true impact that properly managed STOs can have on the total cost for the asset.
The asset lifecycle can be broken down into seven major categories, including:
• Asset investment decision;
• Asset design specification;
• Make or build and/or supplier selection for the asset;
• Asset construction/installation project;
• Operational phase of the asset;
• Maintenance phase of the asset; and
• Decommissioning of the asset.
Beginning with phase three of the asset's life, the maintenance and engineering groups may become involved in construction of the asset, or will at least be consulted in the supplier selection for the asset. From this point onward, organizations that are typically involved in STOs will deal with properly maintaining the asset-whether in major repair outages, routine monthly, weekly or even shift outages. When you consider that the personnel who are involved in STOs can dramatically impact the majority of the cost of the asset lifecycle-do companies understand that being more effective and efficient during their STOs can dramatically increase profitability?
Controlling expenses will increase profits. Boosting capacity will have even a greater impact on profitability, however, since it generates improved revenue. Considering the expense side, during an STO, the available resources in the form of maintenance labour and maintenance materials are utilized. In addition, contractors provide additional services, including labour and material. Effective and efficient use of these resources can control or even reduce expenses.
Looking at the revenue side, if equipment is properly overhauled, restoring it to an acceptable baseline-the reliability and efficiency of the asset is increased. If, through good planning and scheduling, the STO meets or even beats the schedule, there's increased availability. This translates into additional capacity.
In its simplest form, return on assets (ROA) is a company's profit divided by the valuation of the assets required to produce a profit. The larger the ROA number, the more efficient and effective an organization is at utilizing its assets. Conversely, the smaller the ROA-the more inefficient and ineffective a company is in managing its assets. Since STOs involve both the profit and asset valuation side of the ROA equation, it would be beneficial to clearly highlight the impact that STOs have on the bottom line.
We can begin considering the expense side, by reviewing a quotation from the book: "The Balanced Scorecard," written by Kaplan and Norton on pages 55 through 61. When considering the financial perspective of the balanced scorecard, the authors urged organizations not to try to reduce spending, but increase their efficiency and effectiveness. This was especially applied to asset utilization, which must meet objectives, such as return on capital employed. This is the same as ROA mentioned previously.
Start with expenses
Unfortunately, this hasn't been the case in most maintenance and engineering departments. A recent report has shown that many organizations have gone beyond lean and are now anaemic. In fact, the same report showed that 17 percent of all companies weren't keeping their assets in compliance with regulatory agencies. This is due to the fact that most organizations are focused on costs and not revenue. As we review the two approaches, the following utility case-study application highlights why this cost focus is the wrong approach. We will begin by examining STO expenses.
There are two main areas of STO expenses: labour and materials. The labour for an STO can either be internal or external. The materials can also be from internal procurement or supplied by a contractor area. In either case, the inefficiencies have a similar impact. In terms of an STO, consider how often employee or contractor personnel are observed losing productivity for the following reasons:
• Waiting for job instructions;
• Seeking supervisors for additional directions or clarifications;
• Examining the job site due to unclear instructions;
• Multiple trips to stores or receiving to procure spare parts;
• Not having the right tools or equipment;
• Waiting for approval on a change of job scope; and
• Too many technicians sent to the job.
In organizations with poor planning and scheduling tools, the hands-on productivity for the workforce during an STO can be as low as 20 percent. The labour utilization (for the utility application during its STOs across portfolios) was found to be about 30 percent. The case-study example showed that if the utility improved its labour productivity to 50 percent through the use of better planning and scheduling tools and processes-the potential savings would be US$8.1 million annually.
The second area to consider involves spare parts or materials. There are many material-related delays and these incur excess costs, including:
• Productivity loss for technicians waiting on materials;
• Technicians travel time to obtain materials;
• Time for the technicians to transport materials to the job site, identify untagged materials, find substitute materials, locate parts and remote/alternative locations, obtain approval for purchase orders and process a purchase order;
• Cost of processing the purchase order, returning unused materials to stores or to the vendor and expediting unplanned materials; and
• Lost productivity due to other crafts having material problems; wrong materials, planned, ordered or delivered; and missing materials.
During STOs, the same utility detailed its spare parts and material usage. It found that spare parts, materials and related procurement cost an average of $57 million annually. The projected improvements in its STO processes showed a savings of $9.5 million.
Count the savings
After examining costs and potential cost reductions, it was determined that by improving planning and scheduling techniques and tools-the utility could reduce annual costs by $17.8 million. While this seems to be a significant cost savings, the real benefits were discovered through a review of asset utilization. Across its portfolio, the utility's revenue loss during STOs totalled $119 million. The managers involved felt that with better planning and scheduling tools and processes-they could reduce the STO time by 10 percent, saving approximately $11.8 million.
In addition to just the STO improvements, the managers also saw the potential associated with reducing their forced outages, some of which were caused by errors committed during the STO. After reviewing the number of forced outages they incurred during the year, the losses were shown to be approximately $95 million. After reviewing the causes of forced outages, it was felt that a 20-percent reduction was achievable. This reduction would produce additional capacity valued at $19 million.
One last area that was examined involved asset efficiency. This is beyond availability, but looks at the efficiency of the unit, which is expressed by most utilities as heat rate. After reviewing efficiency losses, a five-percent increase across the portfolio was projected by the utility to be achievable at an additional capacity worth $24 million.
Now let's compare the financial difference between cost and revenue. If the utility was focused on costs, between its labour and material cost reductions, a cost savings of $17.8 million could be achieved. If the utility focused on revenue increases, between shortening STO durations, reducing forced outages and improving generating unit efficiencies-increased revenue would total $54.8 million.
So if the utility placed more emphasis on where the greatest benefits were going to be achieved-it's clear that increasing revenue would generate more profit than reducing costs. In reality, improved planning and scheduling tools and processes will help an organization reduce costs, while the same improvements will also help increase revenue. The increased revenue isn't automatic, as you also require a dedicated focus on monitoring STO and forced outrage durations and efficiency improvements.
With their STOs, a lack of clear understanding of company financials is a problem that most organizations face. For example, how many outage planners have a clear understanding of what a minute of downtime on a particular unit is worth? Or do they just focus on how to reduce the headcount on an STO? Or can they balance the labour and material expense versus the value of the capacity, which is lost by extending the outage?
Also, in terms of the decision cycle, do individuals (who determine STO annual budgets) look at the cost versus revenue calculations when setting the duration and number of STOs? If they only look at reducing STO costs each year (without considering the impact on the revenue-generating capability of the assets) they may have reduced costs to a point that their assets can no longer keep the company profitable.
Published in Features