One Gulf Coast refinery projected savings of $2 million/year by cutting down on unscheduled equipment shutdowns and slowdowns. A European chemical company reckoned $1-million/year savings in maintenance costs at each of seven plants.
Reduced off-specification material can decrease reprocessing costs and, in selected cases, even allow lower average staffing levels. It also can cut waiting-time penalties from delays in loading ships, etc.
Abnormal event prevention deserves some special comments. Reducing health, safety and environmental concerns is at the top of every plant manager’s agenda. Better automation is often a key to decreasing these types of risks. If your proposed investment will result in safer operation or lowered emissions, definitely mention that in the justification description even if no quantitative economic value can be attached to these improvements.
Also factor in the possibility of an increased average selling price for products. Automation can contribute to this goal by boosting the yield of more-valuable products. This reduces the amount of lower-valued byproducts and thus raises average revenue per unit feed. Better control also can curb production of off-specification material, which usually must be sold at a discount. Occasionally, an increase in product quality due to improved control will actually permit selling the existing product(s) at a higher price. For instance, a Gulf Coast chemical plant estimated over $3 million/year in incremental revenue due to higher-value products.
Automation projects also can lead to increased production. For instance, better control can allow a process to operate closer to production limits at constant product quality. Greater output also can result from reduced unscheduled downtime for equipment due to better reliability, shorter batch cycle time, lower grade-transition time, less product reblending, and decreases in scheduled shutdown duration and frequency. The shutdown frequency can be cut, for example, by lengthening furnace run-time between required decoking or by not cleaning a heat exchanger prematurely.
However, when considering the benefits of potential production increases, the key question is whether the additional product(s) can be sold. More output only provides financial value for production-limited plants, i.e., those manufacturing products for which the market can absorb the increases. Otherwise, no benefits can be claimed for the improvements.
To estimate the potential magnitude of the overall savings, examine normal expenditures and look for specific quantifiable areas in which savings are possible. Often historical data will provide a basis for this analysis. External consultants with experience in this area also can help insure that potential savings are not overlooked and are properly documented.
Next, you must estimate the necessary investment. When performing such an analysis, it is important to consider the full life-cycle costs, not simply the initial purchase price, of new equipment and software systems. Many studies have shown that more than two-thirds of their life-cycle costs occur after installation.
In assessing initial costs, make sure to include:
â€¢ hardware purchases;
â€¢ installation costs;
â€¢ required infrastructure upgrades such as networks, etc.;
â€¢ software licenses;
â€¢ application-specific services like design, configuration, custom coding, database population, system installation, integration and commissioning;
â€¢ training for both system support staff and end users; and
â€¢ project expenses such as for management and purchasing.
Then, estimate ongoing maintenance and support costs by considering aspects such as:
â€¢ hardware support agreements;
â€¢ hardware upgrades;
â€¢ software support agreements;
â€¢ internal support costs;
â€¢ necessary ongoing infrastructure upgrades;
â€¢ new release migration costs;
â€¢ continuing training of system support staff; and
â€¢ ongoing user training
Don’t forget the last item. Indeed, be sure to budget for ongoing training. The best long-term job security today is maintaining your and your staff’s skill levels and keeping expertise current. It is easy to fall into the trap of being so busy with day-to-day problems that you lose sight of the longer-term requirements.
We now have benefits and costs. How are these converted into a proper overall project financial analysis? How can we demonstrate that the proposed investment will increase the long-term corporate ROIC more than other potential investments?
Specific investment-evaluation protocols vary from company to company and you need to follow your company’s guidelines. However, all center on comparing the net present value of the incremental after-tax benefits generated to the net present value of the required investment. If the value is greater than the investment, the project is considered for funding. Net present value implies discounting a sequence of net cash flows (receipts less expenditures) back to the current time. There are many subtleties, though.
Initially, it might seem that the proper discount rate need simply be a little higher than the average corporate ROIC. After all, if the investment value were positive, then the ROIC would be increased and the investment justified. However, the correct selection of the discount rate is more complicated. Three interrelated factors must be considered. The first is how much the corporation must pay to get additional funds used for investments. This cost is significant and differs for each company. It is based on the relative use of debt and equity and therefore is called the weighted average cost of capital. Investments obviously must produce a return that exceeds this cost; so, the discount factor needs to be at least this amount.