Manufacturing Chemicals In The U.S. May Provide Significant Benefits

Proper front-end-planning and project evaluation are crucial for achieving success.

By Brian Gallagher, O’Neal, Inc.

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For years, off-shoring appeared to be an irreversible trend. After all, cost of labor drove many decisions to relocate operations and gave developing countries a significant and seemingly unassailable advantage.

However, several factors now are contributing to the decision to re-shore. As energy concerns escalate, re-shoring offers a way to reduce energy and transportation costs. The value of the U.S. dollar has deflated over the last ten years while the values of other industrialized nations’ currencies have risen. In many cases, the United States is a low-cost location for exporting products to other nations. Moreover, labor cost is in flux: wages are rising in developing countries while the increasing flexibility and productivity of the American worker is boosting U.S. competitiveness. Furthermore, advanced manufacturing techniques, which rely heavily on robotics and automation, make labor costs less of a factor than they once were.

INCENTIVE FOR CHEMICAL MAKERS    
Studies indicate that some industries have more to gain than others when it comes to bringing manufacturing operations back to the U.S. A 2012 PriceWaterhouseCoopers’ report [1] noted that the chemical industry, among several others, stood to benefit the most from “maintaining or expanding facilities in the U.S. given opportunities and cost incentives to re-shore domestically.”

A major reason for this, as cited in the report, is that transportation and energy costs likely will remain high given the current global demand for energy. Domestic production also has added benefits when it comes to considerations such as supply chain, lead times and inventory levels. However, the pivotal factor contributing to re-shoring in the chemical industry, according to the report, is the U.S. shale boom. New technologies for extracting natural gas and the resulting increase in affordable energy have created investment opportunities. Several manufacturers are switching from oil-based to natural-gas-based processes to make key chemicals. Large companies are investing billions to upgrade existing facilities and build new facilities in North America due to the abundance of natural gas here.

Most chemical manufacturers are aware of the advantages of re-shoring, if a 2012 U.S. re-shoring survey conducted by MIT [2] is any indication. MIT’s report on the survey results, published in January 2013, cited the chemical industry as one of the top three industries providing responses, accounting for 8.1% of the total. Many respondents stated that they were “considering” bringing manufacturing back to the U.S. — but only a few (15% of all respondents) had “definitive” plans to do so.

What accounts for the gap between manufacturers who merely are interested in re-shoring and those who actually follow through? A host of factors are responsible — among them is the difficulty of performing a comprehensive cost analysis to assess the overall benefit of re-shoring. Variables ranging from customer location and quality control to emissions regulation guidelines must be considered. There also are many costs associated with physical relocation and manufacturing downtime.

KPMG, an international cooperative of firms that provide audit, tax and advisory services, reported in 2011 that most chemical companies have strong balance sheets (http://goo.gl/9u6cpX). Of the chemical industry executives KPMG surveyed, the majority indicated they planned to increase capital investment in facilities.

COSTS VERSUS BENEFITS
Fortuitously, as more-detailed cost assessments become a pressing concern for chemical manufacturers, front-end loading (FEL) for capital projects is receiving a new level of attention throughout the construction industry. FEL increasingly is becoming part of an overall project analysis for many firms.

Design and construction firms offering FEL services as part of a total project delivery effort can help owners and investors identify risks and assess feasibility early in the project planning stage. This type of evaluation is particularly important because the re-shoring trend isn’t limited to moving facilities back from overseas but also includes capital investment in new manufacturing plants as well as the expansion and modernization of existing U.S. facilities.

FEL provides owners with a formal approach for establishing, evaluating and executing capital projects — such as the construction of a chemical plant — that require long-term investment to develop, build and maintain. This level of FEL can offer insights on where to deploy capital. Specifically, FEL may involve implementing a series of structured processes during the evaluation and preconstruction phase. The goal is to define the project scope, schedule and cost as early as possible to enable the most-efficient use of resources and money. Ultimately, this process helps the owner determine if a project is viable or not, provides a basis for comparing competing projects, and can assist in determining the right location for capital investment.

The Construction Industry Institute (CII) has extensively studied capital project delivery processes and FEL. The mission of CII — a consortium of more than one hundred leading owner, engineering-contractor and supplier firms from both the public and private arenas — is to improve the cost effectiveness and sustainability of the capital facility project life cycle. CII research has shown the critical importance of effective FEL to increase project predictability in terms of cost, schedule and performance metrics. The process conclusively fixes the project scope while capturing design, construction and operating requirements. (For more on CII initiatives, research, etc., go to www.construction-institute.org.)

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