Even in a downturn, manufacturing and production sites must spend capital to maintain and enhance the value of their assets. How effective is your site at defining and delivering capital projects? How do you know?
IPA data show that, although significant capital is being spent at the site level, most sites do not use this capital effectively. A typical first-time benchmarking uncovers that the site is wasting 10 percent, if not more, of its capital spend relative to the industry average. In contrast, the Best Site (a real site identified out of all the sites that IPA benchmarked in 2008) spends 13 percent less than industry average. This means that if a typical site spends $100 million to define and execute a certain portfolio of projects each year, the Best Site can deliver that same portfolio of projects for just $87 million.
Most plant managers are measured by operating cost stewardship. However, improving capital effectiveness can directly translate into reductions in operating cost. First, the money that is saved by executing capital projects more effectively can be used to fund additional projects that reduce operating costs, such as energy efficiency projects. Second, many small capital projects are intended to reduce operating costs. When these projects are executed badly, the benefits are reduced, delivered late, and/or not achieved at all. Using Best Practices can not only help ensure that the correct projects are executed, but that those projects achieve the planned functionality.
Why do so many sites in Industry execute small capital projects (defined as projects <$10 million) poorly? This result can be traced back to several common root causes. First, capital spending at the site level is often focused on predictability (not exceeding the estimated cost and schedule), rather than effectiveness (delivering cost and schedule performance that is better than industry average). Many sites will set fat estimates and spend up to the authorized amount because of lack of discipline, undefined scope, and/or a tendency toward “urban renewal” at the site. Second, while many companies have strong gated processes for their large projects, these Best Practices have not yet trickled down to the small projects, or are deemed excessive or inapplicable for small projects. Finally, despite the fact that small projects typically constitute a substantial portion of corporate capital spend, the capital project systems at sites have not been an area of emphasis for many companies. During the market boom from 2003 to 2008, small projects often suffered as the sites became responsible for executing larger and larger projects, without any corresponding increase in resources.
In contrast, the Best Site as well as other successful sites in Industry manage to deliver projects both effectively and predictably. At these sites, leadership is held accountable for setting and meeting aggressive cost and schedule targets through strict adherence to a suite of common Best Practices.
During the economic downturn, small capital project work will continue because of the need to maintain aging assets, make operational improvements, comply with environmental requirements, and make safety improvements. The downturn offers a chance for sites to regroup and develop the ability to execute their small projects more effectively.
IPA’s Site Benchmarking Methodology provides a fast and inexpensive but comprehensive look at a site’s capital project management process. Site benchmarking studies help identify potential capital savings and provide clear recommendations to achieve the savings identified. Site benchmarking provides guidance on the level of processes and Best Practices appropriate for small projects, as well as data to help communicate with management about the need for effective as well as predictable results.
A site benchmarking evaluation involves the analysis of 8 to 12 recently completed or ongoing capital projects managed at the site level. These projects can range from $250,000 to $10 million.
Project outcomes evaluated in a site benchmarking include:
The outcomes analysis provides a holistic picture of how the site is performing relative to Industry and the Best Site, taking into account market drivers, project scopes, and other characteristics.
Project drivers evaluated include:
The drivers analysis identifies the root causes of the site’s performance outcomes. It assesses how consistently and effectively these practices are applied at the site and identifies gaps in practices relative to Industry and the Best Site.
Finally, the benchmarking provides a set of conclusions and actionable recommendations based on the analysis of the above factors. The recommendations will help the site to leverage strengths and improve weak areas to drive better performance in the following year’s portfolio of small projects.
The results of a site benchmarking help both plant management and corporate leaders. For plant managers and plant engineering managers, site benchmarking studies provide:
For corporate leadership and business-line managers, site benchmarking studies provide:
The site benchmarking provides the same high-quality, holistic, and detailed diagnosis of status and areas for improvement that are provided by IPA’s large project system benchmarking evaluation. This is accomplished, however, with the needs and realities of plant-based projects in mind and at a fraction of the cost of the large project evaluations.
Once the site benchmarking diagnoses a site’s weaknesses and gaps, many sites struggle to effectively implement improvements. IPA can prepare and deliver the tools and training necessary to drive improvement on the site’s upcoming small capital projects. This includes, but is not limited to, the following:
Over the past few years, IPA has studied the performance of plant-based projects and has quantified practices that drive improved performance. The site benchmarking study leverages IPA’s extensive proprietary database to evaluate each project individually and prepare site-level findings. The database includes over 5,000 global projects from more than 30 companies. Industries represented include refining; commodity and specialty chemicals; mining, minerals, and metals; consumer products; pipelines and distribution; and pharmaceuticals. Project types include revamps, add-ons, expansions, and greenfield/colocated. About half of the projects include construction during a turnaround.
The database is very recent—over 460 small projects were added in 2008, with a total value of over $1.2 billion. This ever-growing database allows IPA to quantify the impact of key practices on project results, benchmark sites against one another, and conduct research to identify new Best Practices that drive improved performance.