In Pursuit of the Perfect Plant: A Business and Technical Guide Chapter 6, Strategy, Coordination, and Plannin...
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Supply chain strategy and planning execution can be a challenge in process industries. In this excerpt, discover how to manage information in a process plant and what KPIs are important for analyzing process-type data.
In Pursuit of the Perfect Plant: A Business and Technical Guide, Ch. 6
Table of contents:
An intro to strategy, coordination and planning
Sales and operations planning for manufacturing
Manufacturing plant information management
Information integration in manufacturing: Process control and planning software
Manufacturing supply chain strategy: KPI and execution in process industries
Manufacturing operations management and planning based on strategic models
Strategy and Execution in Process Industries
"It's worth spending some time discussing how strategy and planning are executed in process industries," Moulton said. "They tend to be much more unpredictable than discrete industries, whose raw materials are essentially components made by other manufacturers. In discrete industries, your primary concern lies in making sure that your supply chain provides you with the material you need at the rate you need it. Your variability changes with the supply. In process industries, on the other hand, uncertainty arises in both the quantity and quality of your supply, since you usually need it in several varieties.
"Take the example of a large refiner. Typically, it works with 15 to 20 different crudes per month, none of whose supply levels are consistent. You can't just say, 'We'll do what we did last month,' because each month is different. Success depends upon the individual process operation. With a refinery, you can ramp production down so that it won't exceed any maximums on furnace temperatures or run too close to safety limits. Doing this, though, lowers profitability. That's why the most profitable plants run their equipment to the limits."
"They have to drive everything like a sports car in commercials," Bala said. "You know, with a professional driver on a closed course. To negotiate traffic like most people, wasting fuel switching lanes, accelerating, and braking, is to lose the race."
"And to run at peak performance," said Moulton, "all your instrumentation has to be very accurate. The feedback loop has to be tight, too, otherwise, you're always in danger of an accident or seriously underperforming. But sophisticated technology isn't the only factor for success. You need an expert driver, as well. In our case, that driver is the collective group consciousness that acts in a prudently aggressive way based on information derived from its technology.
"For instance, Chevron closed the loop for their gasoline refineries by examining the octane levels of each batch's finished product. They controlled the levels throughout the batch with a real-time process control system that feeds into their planning model and allows them to calculate 'biases,' or the deviation from the model, very quickly. The model is flexible enough to adjust for each successive batch.
"Planning in a process-type plant requires a model that consumes raw data. It must also understand transformations at the chemical or mixture level well enough to predict and evaluate what emerges from the process. On top of that, you need a way to close the loop so that the economic models are reconciled with it."
"This is very different," Mulcahy said, "from the discrete industries. They reconcile a bunch of separate parts with the final product through the funnel of an economic model that says, 'If I reduce the number of times I bolt the wheel on this car from eight to six, I can save X amount of dollars.'"
"It's not as simple to use the supply-chain model for an industry that relies on commodities," said Moulton. "Their typical economics are expressed by the corporate management as, 'Our optimum is to run this raw material and produce these products. And with that we're going to make a certain gross margin, and, after expenses, a certain cash margin.' Maybe the supply guys on the raw materials side say, 'We can't do that. It'll cost us $0.50 a barrel or a penny a gallon.' Oftentimes, corporate looks at those two optimums and says, 'Which is the sum of the two? If you're going to lose $0.50, but I'm going to make a buck, then let manufacturing do it. The supply or distribution guys will just have to suck it up.'
"This scenario occurs at many oil companies in a centralized planning and economics group, with relatively senior people, who are often called supply chain pilots. They look at those economics continuously to ensure that the different parts of the chain are using the same information."
Strategy KPIs and Responsible Parties
"So how does all of this play out in terms of the KPIs?" Mulcahy asked. "I look at it from the perspective of the EVP of manufacturing," Moulton said, "His first responsibility is to operational safety. Environmentally safe storage is second. Reliability is third. Then comes profitability, and then product quality.
"As for KPIs," Moulton said, and began to write on the whiteboard, "the most important one in the context of coordinating strategy in the plant is return on capital employed, or ROCE. It's calculated like this."
ROCE = Pretax operating profit/Capital employed = EBIT/Total assets - Current liabilities
"Other than ROCE, there's your gross margin—that's revenues minus raw materials. Gross margin is a big one in refi neries. Because of the way crude oils vary, there is a 10:1 ratio between the impact of cutting raw material costs versus other cost-cutting moves. This is why raw material inputs are analyzed by whole teams of people. Watching the commodities markets, for instance, is huge in this area. Analysts will reach conclusions like, 'We'll buy the crude at $1.00 a barrel less than we paid last quarter, and although we can produce $0.25 less of a certain quality gasoline, which will incur $0.25 more operating cost, we should still do so—at the end of the day, we save $0.50 per barrel.'"
"And how frequently does that happen?" Bonhoffer asked.
"Depending on the supply chain," Moulton said, "and how your raw material is delivered, it can happen as frequently as every two to four weeks. If the refi nery's information is up-to-the-minute, and it has multiple manufacturing and distribution channels through which to redirect the raw materials, it can optimize hour by hour. The very best companies are constantly evaluating gross versus net margin. Most, however, don't have the ability to access real-time data."
"Are there any other KPIs we need to know about?" Mulcahy asked.
"Beyond gross margin and ROCE," Moulton said, "it's tough to generalize across all process industries. There is, however, one more capability to consider regarding general profi tability, and that's 'percent of optimum captured.' It describes the variance between your real numbers and idealized goals."
"And your ideal," Bonhoffer said, "is to have all raw materials on hand while running at full capacity with no outages or safety concerns. That way, you can know the exact amount and quality of product you will produce."
"Once you've established that ideal," Moulton said, "you can weigh it against your actual constraints, such as a major supplier's lack of a certain variety of crude or the cost of maintaining or replacing a piece of aging equipment."
"A minute ago," Bala said, "you noted that the EVP of manufacturing's first concern was to operational safety. What are the KPIs there?"
"There are both leading and lagging safety KPIs," Moulton said. "The lagging statistics concern the frequency and severity of accidents. Frequency is measured by number of incidences of each cut or bruise, for instance, and severity covers whether someone got a bandage or an amputation. These are reported to OSHA at the end of each month.
"A leading KPI is behavioral safety, which pertains to monitoring processes as a means of identifying unsafe practices. The goal is greater accident prevention. It takes a bit more manpower, but it beats a poor safety record and OSHA citations. The plant assigns people to report the number of safe and unsafe acts they find. When they locate breaches in protocol, the details are entered in a safety log and the offenders are brought in for training."
"What about the manufacturing EVPs themselves?" Bonhoffer asked. "They give all the orders, but how are they evaluated?"
"Over the year," Moulton said, "they are judged mainly on deltas, which are changes in statistics or ratios. These include improvement of profitability, accident rates, environmental footprint, and the like."
'Rolling Down' and 'Rolling Up': The Tug-of-War between Corporate and Operations
"KPIs," Moulton said, "create serious tension between corporate and operations. Obviously, a lot rides on the two finding peaceful solutions to their differences. For example, each side has its own idea of planned versus unplanned maintenance. If a top manager says something like, 'You can expect some shutdowns, but the rest is totally unpredictable,' there is a problem. He should tell you that the plant tracks the usage, historic maintenance schedules, and breakdowns and slowdowns of each piece of equipment. More, he should know how those histories dictate what the plant as a whole expects from its equipment. There should be precise, data-based predictions about the overall health of operations for the coming months, and everyone from the plant to the top of corporate should clearly understand them."
"No doubt the goal is to keep production steady," Bonhoffer said, "in spite of any planned or unplanned maintenance activities."
"Many factors determine whether that happens," Moulton said. "Other important KPIs include financials, human resources, and transportation. Do you have enough maintenance technicians to sufficiently handle a breakdown? If not, do you have sufficient financial resources to hire more people? If maintenance interrupts production, can you adjust transportation or inventory to accommodate the ensuing production changes? Maintenance issues influence every level of the company. The relevant negotiations are far from trivial."
"What kind of information does the plant manager need to provide the EVP?" asked Mulcahy.
"The EVP," Moulton said, "requests information from the plant manager through a 'roll-down.' The plant manager 'rolls up' by writing a monthly report that covers each of the company's major KPIs.
"Roll-downs also go from the plant manager to his employees on the floor," Moulton said. "The technical, operations, maintenance, and health and environmental safety managers all send him roll-ups that include the relevant KPIs."
"Am I correct to assume," Bonhoffer asked, "that both absolute and trend numbers are used in these reports?"
"You are," Moulton said. "After all, one month does not make a year."
"What about future directions?" Bala asked. "With all of the instrumentation and integration that we're encouraging, the EVP of manufacturing could be sitting in his office and watching KPIs without having to wait for the roll-up. Is it possible that this becomes a daily or real-time event?"
"No one has been able to make an economic justification for real-time KPI reporting yet," Moulton said. "But that time will probably come, because there are situations where a quick decision can save costly waste. These situations can often test a plant's organizational mettle by showing how significant the human factor really is."
Read other excerpts and download more sample chapters from our manufacturing ERP bookshelf
Seven supply chain issues for process manufacturing companies
Dig Deeper on Supply chain planning and execution