The types and particularities of current investments and the differences between capital projects and operational improvement projects are presented. From the recognition of these differences, practices are proposed for the efficient management of the portfolio of current projects in companies.

1. 1
Operational Improvements Management
Tito Cardoso | Associate Director
Berkeley Research Group
tcardoso@thinkbrg.com
D +55 11 3728.9227
M +55 11 94456.1821
thinkbrg.com
"We are starting a new planning cycle where the keyword is optimization. Investments are mostly suspended ... The
focus is to do more with less ... improve productivity now!! ".
Statements of similar objectives can be read and heard in the most diverse economic segments in Brazil and in the
world. It really is the way. All operations present opportunities to do more with less and, even if the moment to
realize these productivity improvements is always and continuously, the present economic moment is of special
significance the austerity of the declaration of this objective.
Initiatives to optimize and increase productivity, even if they are not capital investments, are projects: they are
unique initiatives, have definite goals - tangible or not - these gains are usually expected within a deadline, and to
achieve the gain in the long term, it is needs to define a scope and responsible. Despite what you might at first
imagine, optimization and productivity projects involve costs. At a minimum, expenses with owner team salary and
displacement of employees involved in the design and implementation of improvements, and where modernization
of processes usually involves current investments to purchase SW/HW or components and eventually installation
services.
Therefore, improvement projects have costs - either expenditures or current investments and these must be
recognized and controlled within the same austerity of the discourse that proposes the goals of gains so that these
gains are real and can be realized.
Current projects, although generally "cheap" and short-cycle (a few weeks or months of implementation), due to
their large amount, represent, on the whole, large sums similar to capital investments in their best years!
Companies have different degrees of awareness of these facts. Some shout slogans and start a kind of contest among
employees behind good ideas, believing that actions do not cost anything, so what comes is a good profit. At the
other end, some companies prepare better, even structuring "project offices" (PMO) with resources dedicated to
improvement projects. In some cases, the methods applied by these units replicate, in a simplified way, practices
used in larger projects. In other cases, it is also observed predominance in the performance management profile in
the people in these units.
Next, using an example in improving logistics operations, we will note some important differences between
improvement projects and capital projects and requirements for improvement projects to achieve their maximum
value.

2. 2
1- Management of the Improvement´s Portfolio in Logistics Operations
In most logistic modes, fuel is the largest variable cost component [NOTE 1]
.
To illustrate our case, let us suppose the operation of a not-too-large general cargo rail corridor equipped with
diesel-electric locomotives of various models and ages, with an annual consumption of 7 million liters of Diesel Oil.
The cost with fuel can represent 60% of the operational cost and several projects have been proposed to reduce it.
These projects are proposed by different areas, such as Maintenance (For example, Replacement of the Diesel
injector nozzles of the locomotives for another more efficient model), Fuel Supply to the Operation (Example: Use of
Paraffinized Diesel), Permanent Way Engineering (Example: spring keys installation), Yard Operations Management
(Example: Reallocation of the X and Y Fleets exclusively for maneuvers), among others.
The number of projects can be quite high. In our case, suppose that 40 improvement projects were proposed, as
shown in the following table.
Table 1- Portfolio of projects for fuel-saving cost reduction
Projeto
Redução de
consumo
proj 1 0,75%
proj 2 3,55%
proj 3 2,20%
proj 4 1,40%
proj 5 1,55%
proj 6 0,95%
proj 7 3,10%
proj 8 0,50%
proj 9 0,75%
proj 10 3,60%
proj 11 0,45%
proj 12 2,10%
proj 13 2,90%
proj 14 2,15%
proj 15 0,30%
proj 16 3,50%
proj 17 2,25%
proj 18 0,40%
proj 19 1,35%
proj 20 1,25%
proj 21 0,45%
proj 22 1,25%
proj 23 1,15%
proj 24 1,55%
proj 25 2,80%
proj 26 0,60%
proj 27 2,30%
proj 28 0,90%
proj 29 2,25%
proj 30 2,95%
proj 31 2,55%
proj 32 2,70%
proj 33 0,75%
proj 34 2,15%
proj 35 2,20%
proj 36 0,35%
proj 37 1,00%
proj 38 0,60%
proj 39 3,75%
Projeto
Redução de
consumo
proj 1 0,75%
proj 2 3,55%
proj 3 2,20%
proj 4 1,40%
proj 5 1,55%
proj 6 0,95%
proj 7 3,10%
proj 8 0,50%
proj 9 0,75%
proj 10 3,60%
proj 11 0,45%
proj 12 2,10%
proj 13 2,90%
proj 14 2,15%
proj 15 0,30%
proj 16 3,50%
proj 17 2,25%
proj 18 0,40%
proj 19 1,35%
proj 20 1,25%
proj 21 0,45%
proj 22 1,25%
proj 23 1,15%
proj 24 1,55%
proj 25 2,80%
proj 26 0,60%
proj 27 2,30%
proj 28 0,90%
proj 29 2,25%
proj 30 2,95%
proj 31 2,55%
proj 32 2,70%
proj 33 0,75%
proj 34 2,15%
proj 35 2,20%
proj 36 0,35%
proj 37 1,00%
proj 38 0,60%
proj 39 3,75%
proj 40 0,05%
On average, the projects show gains in consumption of 1.68%, the highest gain being 3.75% and the lowest being
0.05% (a project that presents other gains, besides the gain in the reduction of consumption), the sum of the
Projected gains in projects is 67.3%. So, the expected reduction in annual consumption is 5 million liters, at $ 1.10 /
liter, corresponding to USD 5.5 MM / yr, which is the value of the portfolio gain from the improvement projects,
right?
Not really. Here begins the difference between capital projects and improvement projects. In capital projects, each
project results in an expansion of the business and, therefore, each one has its own added value to the value of the
others in the portfolio. Improvement projects show gains on the existing business, therefore, when implementing
the project number 2, their gain is based on the already reduced consumption base of the gain in project number 1
1
Some examples of exceptions in cargo logistics are the modal pipeline and handling operations at port terminals, where electric
power is an important variable cost component (belt conveyors, pump station, etc.).

3. 3
and so on. Total portfolio gains totaled 49.4%, corresponding to 3.7 million liters / year or 4.0 million USD / year. Still,
an excellent portfolio.
Figure 1- Graph of the gains with fuel-saving of the project portfolio in Table 1.
The total portfolio gain does not change according to the sequence of the projects, but the individual economic value
of an improvement project will depend on how it is positioned following the portfolio of projects, even if its relative
gain does not change. This is why it is not possible to calculate NPV, IRR, ROI, payback and other indicators of
economic viability of improvement projects without considering their positioning in the context of the project
portfolio.
Therefore, after receiving the project proposals, a different process is required: the analysis and optimization of the
value of the portfolio.
Knowing that the first projects to be implemented will obtain the greatest economic value, we can prioritize the
projects with the highest relative gain. Thus, while following Table 1 we will need to implement projects 1 to 30 to
obtain 80% of the portfolio gain, USD 3.26 MM, we can achieve the same economic value only by implementing the
19 projects with the highest relative gain.
Figure 2- Graph of the gains with reduction of consumption of the portfolio of projects prioritizing those of greater individual relative gain.

4. 4
The selection prioritization criteria seems logical, but corporate goals are often more complex. It may be that the
company wants to reduce its variable costs with fuel but wants to do this with the least expense and / or current
investments possible. In this case, a criterion of maximizing the Gain / (Expense + Current Investment) indicator can
generate a very different prioritization in the portfolio.
Another quite different situation occurs if the company is under cash flow constraint for this and next year.
Maximizing the Gain / Present Value of the Disbursement can generate another very different prioritization because
a project with a larger total expenditure may have a lower disbursement in the first months than another with a
lower total expense.
Clearly establishing the objectives and carrying out the analysis of the economic value in the portfolio as a whole will
allow to select and prioritize the projects forming a portfolio optimized for the objectives of the company.
As a result, the optimized portfolios of improvement projects will differ between companies or between units of the
same company, not only because the earning potential of the same project will be different, but also because the
objectives are different.
In 2001, I created a process and method called " Projects Selection by objectives", applied to current investments
that did exactly this analysis.
2- Synergies and Interferences Analysis
The correct definition of the improvement projects´ portfolio does not depend only on the correct strategic
positioning and correct analysis of the economic value. They also require complete technical understanding of the
scope. This understanding will allow to identify when projects proposed by different areas have the same systems
focus and mutually reinforce each other so that they must be evaluated together and when two projects are
mutually exclusive, or if one is implanted or the other implanted.
In the same case of fuel-saving projects, consider the example of the projects "Moving from Governor to Electronic
Governor on Fleet X Locomotives" and "Electronic Injection on Fleet X Locomotives", it is easy to see that projects
are mutually exclusive, but Situations not so directly related are more common. For example, consider the projects
"Dynamic Brake Energy Recovery and Storage System" and "Auxiliary Generating Unit" projects, both have good
potential for economy and act quite differently, however, it is possible that both systems use the same space on
locomotives. Here we have a case of projects that are not at first mutually exclusive but have some level of physical
interference. Most likely, the projects have been proposed by different areas and one does not know the detailed
scope of the other. It is up to the PMO to identify this situation and to collaborate in the planning of both projects,
together with the teams and suppliers, in order to ensure that both can be implemented without mutual
interference.
So, the technical mastery of the scopes is also fundamental to the optimized definition of the portfolio of
improvement projects.
3- Effectiveness and Efficiency of the Project execution. Value Contingency
IT professionals have a "joke" about "why the world could be done in just 7 days? Because there were no legacy
systems." This anecdote (regardless of its comic merit) illustrates the fact that deploying improvement projects on
systems that are in operation presents unique difficulties. From the change of established procedures, sometimes
quite a long time, through competition for physical space and "windows" in the production / transportation program.
A number of other factors create uncertainties in the execution of improvement projects, for example, they may
involve well-specialized suppliers, but with less physical capacity or because small projects may be a lower priority

5. 5
supply from a larger, more general supplier. It may also occur that the implementation is all carried out by the
internal team and the daily demands interfere with the progress of the project. In other situations, people who come
up with good ideas do not necessarily have experience in implementing them, but are responsible for the project.
Many of these factors are unique only to improvement projects that, if they occur, will delay, cost more, or may not
achieve the proposed gains.
Here we have another requirement: Control the execution of the improvement projects so that the expected
profits of the company are achieved.
Also, at the portfolio level, it is necessary to carry out the risk analysis (see in reference [2] the method that I created
for improvement projects and a real case of application) to determine what are the possibilities that the selected
projects achieve the total target portfolio gain after the implementation, in our case, the total reduction of USD 3.26
MM in fuel cost.
The analysis of risks on the projects initially selected will allow to define a Value Contingency for the Portfolio. This
concept is not usual - and it has nothing to do with the contingency definition of disbursements to implement each
project. Refers to the complementary selection of projects in the portfolio so that the portfolio maintains its
probability of generating the proposed value (the economic gain) even considering the greater or lesser possibility
that some projects in the selected portfolio do not realize all the proposed individual gain.
The importance of this is evident: the company's goal is to realize the gain, not to implant projects. The gain of the
portfolio must be guaranteed and the value contingency, recognizing the technical uncertainties of the projects,
protects the company's objective.
Conclusions
In this work, through a case of projects to reduce the cost with fuel in railways, we could observe:
 Improvements and optimizations in operational processes are projects, usually involving expenses and
current investments,
 The economic value of an improvement project depends on its positioning in the project portfolio,
 The definition of the optimized portfolio of improvement projects depends both on the precise definition of
the company's objectives and on the joint evaluation of all the projects,
 The portfolio management of improvement projects involves, among others, the:
o Portfolio Entry
o Portfolio Selection and Prioritization
o Synergies and interference analysis
o Planning and Control of Execution
o Risk analysis and value contingency
 Since projects are proposed by several areas and effective portfolio management requires an overview of the
projects, this work is best performed if assigned to a PMO - if 1 person or a team, whether primary or
outsourced, whether together or separately of capital projects, in each company there will be a better
definition depending on the need and objectives,
 In order to fully perform the processes described, the PMO must present technical, economic, strategic and
management analysis capabilities.

6. 6
 If properly trained, Project Improvement Management is a powerful enterprise tool to achieve productivity
and optimization goals at the lowest possible cost.
Referências
[1] Cardoso, Tito L. M., "O preço da commodity está no fundo? É a hora para desenvolver seu projeto". Artigo
Berkeley Research Group.
[2] Cardoso, Tito L. M., “Análise de riscos da aplicação de novas tecnologias”, 68º Congresso ABM
Internacional, 2013, disponível on-line: https://pt.slideshare.net/TitoLivioCardoso1/analise-de-riscos-da-
aplicao-de-novas-tecnologias
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