Decide to Plan your Capex and Plant Renewal Projects

Capital expenditure budgeting is a slow process with planning and feasibility studies preceding any decision. The low capital efficiency which follows a major Capex decision, amplifies the necessity of ensuring that a return on investment is not only plausible, but conducive to sustainable growth in market share. Hence, any such expenditure commitment brings with it a significant expectation of returns, and the promise of fewer time consuming problems. The reality is that renewal ventures seldom bring with them fewer headaches and rarely deliver to the initial perceived expectations.

The reason for misaligned expectations and poor delivery can vary from as intangible as personality traits of stakeholders and product-market life-cycles, to the physical asset life and capability of the technology. Whichever reason, all related aspects can be addressed while making the decision, prior to making the expensive mistake of applying good capital on a bad idea.

Decision making is the first link in the chain of capital commitment, but also the final point at which the direction of the new project can be determined. At this stage there are few players involved, many options still on the table, and momentum will not run away with the project. This is the ideal time to ensure the following general problem solving questions are answered:

• Where does this need originate from and what is the quantifiable problem?
• Where is the best point to address this need?
• What is the best vehicle to use?
• What is the expected solution output and how does this directly link to the current need?

The need may originate from opinion on shop floor, proven tests, loudest person in the room propagating a belief, a great salesman, benchmarking, or just pure frustration. The magnitude of the problem determines the priority as well as the size of committed capital. A root cause analysis, or six sigma approach of defining the problem will identify the cause of the problem or deviation to ensure the correct focussed measures are taken. Investigation into solving the problem will identify the best solution options and preferred vehicle to apply.

In many cases, the output of these questions leads to alignment on the problem definition, selecting plant renewal as a solution, and the on expected result. At this stage the decision making for plant renewal capital expenditure starts with the evaluation of various scenarios, the analysis of the future performance and eventually the business case and implementation roadmap.

Any such project can thus be well defined resulting from a continuous improvement drive, or just start off with the initial questions above, but should be analysed professionally with technical results to harness confidence in the solution, and also plan for successful commissioning.

Focussing on plant renewal for a manufacturing facility, we follow the LTS Plant Renewal Methodology. This methodology addressed both the technical and human aspects of the decision making process, and consists of two work packages, Scenario Evaluation, Operations Analysis, which culminate in the final phase Business Base and Roadmap.

Scenario Identification focusses on identifying feasible solutions for the areas included. It is possible that the problem definition might change during this phase, or that the focus areas might be adjusted. Whichever way, the output is documented process changes with corresponding infrastructure requirements.

During this phase the human aspects concerning change management is also addressed by focussed workshops with dependant stakeholders. It is crucial that the main company champion be involved in spearheading this process, as this gives authority to the project and project team, shows management commitment and gives the project a personal familiarity to the people attending.

During Scenario Capital Costs investigation of alternative equipment, software, processes, infrastructure and corresponding vendors are identified. The budget costs are gathered from the vendors, together with solution specifications to ascertain capabilities.

The parallel stream to this analyses the operations of the manufacturing facility. This starts with Operations Model identifying the best analysis method for the involved operations and required output. Activity Based Costing models allows unit pricing comparisons for old and new operations. This is combined with process flow redesigns based on certain scenario options, such as outsourcing, sharing of expensive resources to maximise utilisation. In the case that a detailed logistical analysis should be included, an event-based simulation is optional.

Scenario Production Profit calculates the operational savings probable per scenario based on the simulation cost model. At this point the increased throughput capacities, labour, maintenance and quality savings are included. The operational costs are used to calculate the ROI and capital efficiency over the lifecycle of the payback period. At this point is it possible to include lifecycle costs of technology and equipment.

The final hurdle in decision making is the Business Case and Roadmap. This entails evaluation of ROI results from the operational analysis combined with the capital costs positioned on an implementation timeline. As part of this phase, some final scenario changes and re-evaluations are executed and the final business cases are presented for fact based decision making.

For more information on simulations that help your decisions making: professional decision support services

"LTS Consulting was engaged by Transnet Capital Projects to carry out a capacity simulation study on the rail network between Ermelo and Richards Bay.
Transnet Capital Project is satisfied with the quality of the study and would consider using the services of LTS Consulting again if required"

Willen Kuys
Project Director
Transnet Freight Rail