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Chemical industry: Competing with the "China price"

Feb. 18, 2005
Chinese producers are consistently offering materials that are cheaper than most American and European producers. This influx of lower cost supplies is threatening the welfare of some domestic plants. How are these American plants dealing with the issue? Voice your opinion on how you'd deal with it with our online poll inside the story.

(Editor's Note: There are two figures that accompany this article that can be downloaded in PDF format via the "Download Now" button at the bottom of this page.)

The climate of the U.S. chemical industry is now improving, but several black clouds remain on the horizon. A major one is the likely need to compete with the “China price.” This is the price at which Chinese producers can supply materials. It usually is significantly below the current manufacturing cost of most American or European plants.

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With stiff foreign competition and declining margins, some poorly performing U.S. manufacturers are, or soon will be, nearing a crisis situation. Many of them, seeking to be “lean” rather than efficient, have already slashed costs and weakened their manufacturing organizations. They might now feel that they have no alternative but to follow the herd, closing domestic facilities and transferring manufacturing capacity to the Third World.

This might be the only sensible survival route for some domestic companies faced with prohibitively high labor or raw-materials costs. However, a majority of American chemical producers can become much more competitive simply by applying a range of commonly available techniques to improve manufacturing efficiency. Such methods already are successfully being used at dozens, if not hundreds, of plants across the country.

As proof of their power, consider the success of the domestic semiconductor industry in fighting, if not slaying, the Asian dragon during the last 20 years. One of its underlying defenses was to strive for continuous improvement via techniques such as Six Sigma, and by fostering employee-wide participation in these efforts.

Operational effectiveness
To understand the potential for improvement, it first is necessary to measure current performance. While it has some limitations, a good metric is overall equipment effectiveness (OEE), which can be used for an individual piece of equipment, a process, an entire plant or even an organization.

OEE (%) = Process Reliability (%) × Current Operating Rate (%) × Quality RFT (%)
Process Reliability = Time Available for Production ÷ Total Time Available × 100;
Operating Rate = Actual Operating Rate ÷ “Best Ever Demonstrated Rate” or Maximum Design Rate × 100; and 
Quality RFT = Salable First-Quality Product ÷  Best Demonstrated or Maximum Design × 100.

Many American and European plants operate in a “reactive mode” with an OEE of around 65%. This contrasts with two or three leading companies at 85% and world-class performance, which is an OEE of about 90%. Sites often can improve OEE by at least 20% over two to three years, which translates to 30% or more salable product for only the additional cost of raw materials and power. Why aren’t more plants operating at these higher efficiencies?

Simply stated, reaching world-class efficiency poses serious difficulties and mandates radical changes. It demands a sustained and integrated approach, incorporating the best technology, design and maintenance practices, along with improved operational discipline and employee empowerment. It requires a commitment to a program of systematic, continuous improvement and problem-solving. And it takes time -- typically three to five years.

Ten key points
Companies compromise efficient operation by failing to understand these crucial concepts:

1. Typical plants are full of defects that must be addressed while they are still small.
2. It is necessary to transform the organization into one that is focused on combating problems, not just dealing with them — i.e., one that strives for continuous improvement.
3. Even within the same organization, different plants might exist in one of four different, stable operating states (as discussed below).
4. Plant-based individuals will find it almost impossible to boost OEE (moving up the scale) without significant external assistance.
5. Improvement will require changing from a “command and control” style of management to one that offers employee empowerment, financial or other incentives, changed work practices and equal effort by individuals at all levels of the organization.
6. Process equipment does not fail according to the “bathtub curve” (Figure 1).
7. The necessary techniques must be implemented on a routine, scheduled basis, not just occasionally.
8. The maintenance program should be based on the actual condition of equipment and the consequences of failure, not on time or history.
9. Planning and scheduling of all activities results in efficiency gains.
10. It is necessary to document the “best practices” that are developed so they are institutionalized.

Given that for this type of efficiency-improvement project little can be done to upgrade fundamental design or chemistry, it usually makes the most sense to begin by concurrently working to boost two key and inextricably linked factors -- equipment reliability and operational discipline. They share several common elements that are described below.
Benchmarking a plant against those that are world-class establishes the “as is” performance, which is then compared with the “to be” or desired performance, allowing progress to be measured. For simplicity, it makes sense to consider the four possible, stable operating states from reactive to world class, as defined in the “Manufacturing Game,” by Ledet Enterprises (Figure 2). Four key indicators are used to describe these states:

• process reliability percentage;
• current operating rate as a percentage of design or “best-ever demonstrated rate;”
• percentage of salable first-quality product (i.e., right-first-time material); and
• plant repair cost as a percentage of plant replacement value (PRV).

Let’s look at how the program can be implemented at a typical plant now operating in the reactive mode, that is, with an OEE of 65% or less.

Essential steps and decisions
Carefully choose an approach that matches the individual plant’s technical and managerial capabilities. Realistically consider current strengths and weaknesses and the nature of the workforce. For instance, culture change and broad employee participation might take more time to develop at a plant with union workers. Likewise, if an organization has technical shortcomings but needs immediate results, avoid techniques like reliability centered maintenance (RCM) or failure mode, effects and criticality analysis (FMECA) that require major technical input and can take years to implement. Then, perform the following to help sell the proposal to senior management.

• Calculate the financial cost of the lack of manufacturing efficiency and develop a realistic timetable to get to where is needed to survive. Multiply the value of current production by the difference in OEE after the expected improvement has been made.
• Place a complete financial value on the solution to each individual problem (operating rate, reliability and quality, as well as safety, environmental, etc.) and work on those with the greatest financial impact first.
• Write a “reliability strategy” for each manufacturing unit and follow it.
• Concentrate most on the short-term, but don’t ignore the medium- and long-term. Short-range initiatives should include root-cause analysis (RCA), integrated condition monitoring (ICM) and maintenance work planning and scheduling that should produce early and significant wins. Medium range, work on improving operational discipline and introducing operator asset care (which involves having operators visually inspect equipment regularly). Medium- and long-range, you could consider projects such as the installation of a well-documented mechanical integrity program, RCM or FMECA, and Six Sigma.
• Become familiar with standard change-management techniques. This will clarify the amount of time and effort needed to achieve the goal, as well as the size and complexity of the project ahead. It will help all parties concerned establish reasonable expectations.
• Set up cross-functional teams under a leader or champion charged with implementing each of the improvement processes or techniques.

Sources of defects
Based on our experience and research by a number of organizations, but distilled by Dupont and Ledet Enterprises, defects or problems in most chemical plants stem from five main sources. Typical levels for each source are:

1. maintenance practices, 18%;
2. maintenance materials, 7%;
3. raw materials, 5%;
4. design, 25%; and
5. operational discipline, 45%.

Depending upon the depth of the crisis, the sorting can involve a grading process based on payback time. Major problems are investigated by RCA teams, mid-size problems are allocated to individual experts creating medium-size RCAs, while the smaller problems are handled by self-directed “action teams” of hourly workers.

Formalize and improve communications by holding a 10-min. to 15-min. daily meeting about an hour after normal starting time. Discuss scheduled maintenance and project activities, and production plans for the day, along with current quality-control data.

To increase meeting efficiency, have the required data updated early in the day and posted on electronic bulletin boards on the plant intranet for review by all parties before convening. At the meeting, limit the discussion to that day’s report and immediate decision-making. Subgroups should get together after the main meeting for detailed discussions.

In addition, hold formal monthly reviews to go over the issues that caused losses and prevented the attainment of operational excellence.

Midway into the program, write best practices to capture the new and improved methods, techniques, policies and strategies. They will form the basis for institutionalizing the changes. The system thus created will provide executive management with a means of directing and changing the organization. 

To sustain system discipline while passing ownership and responsibility for maintaining world-class operations to the local management team, periodic progress auditing is needed. This involves an appropriately trained, plant-based audit group conducting formal progress reviews every six months and issuing a follow-up list of the defects found and actions needed. These early audits are in addition to twice-yearly measurement of performance against the benchmarks.

The detailed plan of attack
Take the following steps to address the five major sources of defects.

Maintenance planning and scheduling. Establish detailed, daily work plans and schedules with operations. The primary purpose is to both increase the productivity of the maintenance group and reduce the time the unit is offline during repairs or modifications. Every job of four hours or more should have a detailed job plan to ensure that staff, tools, parts and permits are ready when needed. Publish a daily work schedule, detailing individuals’ names, tasks and estimated duration at least 48 hours beforehand. Also, prepare a series of “opportunistic maintenance plans” to fully exploit any possibilities for doing work on other equipment when the unit is down for another reason. A productivity improvement of 50% and a 20%-or-better reduction in downtime is typically achieved by eliminating delays of all types. Because each craftsman is able to do twice as much work after eliminating delays, this allows time for often-needed additional skills training.

Also, set up an ICM program. This is critical for changing from time-based to condition/risk-based maintenance. ICM involves routine scheduled inspections using a broad range of techniques, e.g., to check vibration, motor current draw, emissions, material thickness and machinery alignment. In addition, a program of operator asset care involving multiple visual inspections is needed to provide the reliability engineer with comprehensive information on the condition of all major equipment. This information is then used to estimate the remaining life of critical equipment.

Maintenance-materials quality assurance. Impose new levels of quality assurance on suppliers through tightly drawn specifications. Also, have plant personnel verify the quality of materials on-site using techniques such as those described above.

Raw materials and utilities. Again, use a two-pronged approach involving tighter specification and better inspection, along with demands for RCA each time an incident occurs, and offering technical help to the suppliers.

Design. Design defects come in three basic categories:

1. major conceptual ones that this program cannot address;
2. those created by obsolescence; and
3. those that onsite individuals can tackle.

Typically, as problem-solving teams develop, the 80/20 rule starts to apply; that is, 80% of the problems get solved for 20% of the cost.

Operational discipline. While it is responsible for the largest number of defects and problems (45%), operational discipline is usually the last area addressed by engineers and managers who were once engineers. Is this because it requires people skills as opposed to pure engineering?

Most plants suffer process upsets on an irregular, but persistent, basis (Figure 3). These often go unreported unless they cause major equipment damage or product loss. However, each one in some way reduces the life of the unit. Based on published research and our experience, such upsets are most likely due to some lack of operational discipline, i.e., a failure to stay inside the operating envelope or to accurately follow procedures. They do not represent an intentional act or some malevolent behavior, but instead stem from errors caused by the use of deficient operating procedures, poor training, conflicting priorities, inadequate labeling of equipment and instruments, or lack of effective administrative controls.

A crucial move
Launch a program to develop simplified standard operating procedures with individually assigned checklists to be used during starts/stops and emergencies. This effort is front-loaded and should involve an improved method for compiling clear instructions on how to operate and troubleshoot the plant under all conditions. (Because of its simplified architecture and easy references, the “T” bar or two-column procedure format with simple markers to indicate critical steps, the consequences of deviation, etc., often works well.) Procedure writing is an activity that should be well engineered and involve cross-functional teams. The documents should identify the consequences of deviation and the corrective action, and should be easy to read.

The effort needed to achieve the maximum operating rate and product quality while maintaining, if not improving, safety and boosting reliability, of course, goes well beyond better procedures. It also should focus on early detection of impending “upset steps” and rehearsed responses for each individual on the operating team. Comprehensive training and routine drills are essential. The safest plants have regular safety drills. Why not have drills for predictable emergency operating conditions that can lead to product loss?
Insist upon a “process deviation report” every time a deviation occurs. They should be discussed at the next morning meeting, with a monthly review assessing failure patterns and actions needed to prevent a recurrence.

Time and cost
Each of the techniques and processes described requires an initial team of three to six people for a few hours each week. Most teams exist for only six months; teams focused on solving specific problems are created and retired continually. The only external resource is a project facilitator/consultant. That person works on an almost full-time basis for the first six months; afterward, the time gradually reduces, commonly by 50% each six months.

Typically, plants show a financial return on investment of 50:1 during the transition from “reactive” to “improved precision” and 30:1 from there upward. The improvement processes can take from three to five years depending upon the plant’s initial condition, the innate abilities of the group, the amount of money invested, and the level of understanding and commitment of senior management.

If the “China price” currently threatens your facility, survival might well depend upon achieving improved precision, if not world-class, performance. However, even without such pressures, programs to boost OEE make strong financial sense.

Bernie Price is CEO for Polaris Veritas Inc., a Houston consulting group, and has extensive experience in efficiency improvement of plants. E-mail him at [email protected].

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