This document discusses key concepts for how to optimize business performance and value through process control, modeling, and risk management. It argues that rigorous mathematical modeling is needed to properly measure the financial value and risk impacts of process optimization, dynamic performance, and intermediate stream pricing. The document proposes that the CLIFFTENT method, which assigns a financial "value proposition" to each process variable, can provide this rigorous modeling approach to help companies better set limits, measure performance, price intermediate streams, and make outsourcing decisions.
'Achieving Supply Chain Excellence in the Fast Moving Consumer Goods Industry'
By Thomas Müller-Kirschbaum
LogiChem 2011 will be the event's tenth anniversary and an opportunity for the most senior chemical supply chain & global logistics directors from the European chemicals community to come together once again share experiences, make new contacts and benchmark the latest chemical supply chain initiatives.
Not only will LogiChem 2011 be a chance for the chemical industry to reminisce about the last ten years but an opportunity to shape the next decade. To celebrate a decade of LogiChem, there will be an exciting three day programme filled with networking opportunities in our new location, Antwerp.
'Achieving Supply Chain Excellence in the Fast Moving Consumer Goods Industry'
By Thomas Müller-Kirschbaum
LogiChem 2011 will be the event's tenth anniversary and an opportunity for the most senior chemical supply chain & global logistics directors from the European chemicals community to come together once again share experiences, make new contacts and benchmark the latest chemical supply chain initiatives.
Not only will LogiChem 2011 be a chance for the chemical industry to reminisce about the last ten years but an opportunity to shape the next decade. To celebrate a decade of LogiChem, there will be an exciting three day programme filled with networking opportunities in our new location, Antwerp.
Training Slides of Supplier Assessment and Performance Measurement, discussing the importance of Suppliers.
For further information regarding the course, please contact:
info@asia-masters.com
www.asia-masters.com
Supply chain performance reporting and metrics -logistics digest 091112Thomas Tanel
Many managers see supply chain performance reporting and metrics as a huge time drain that results in a series of uncomfortable conversations and confrontations they would rather not endure. You cannot manage what you cannot measure, and your supply chain is one of the most important functions to manage. The good news is that you’re Logistics and Supply Chain Management people
are probably already doing a lot of measuring. The bad news is that they might not be measuring the right things. To measure your supply chain effectively, you must identify metrics that are appropriate for your organization and that will improve business performance.
Cpk indispensable index or misleading measure? by PQ SystemsBlackberry&Cross
Capability analysis is a set of calculations used to assess whether a system is able to meet a set of requirements. Customers, engineers, or managers usually set the requirements, which can be specifications, goals, aims, or standards.
The primary reason for doing a capability analysis is to answer the question: Can we meet customer requirements? To be more specific: Can our system produce consistently within tolerances required by the customer now and in the future?
Capability analysis involves two entities: 1) the producer and 2) the consumer. The consumer sets the requirements and the producer must be able to meet the requirements.
Read More.
PQ Systems is a partner of Blackberry&Cross, since 2006.
Visit: http://www.BBCross.com
• Make Versus Buy
• Benefit of Outsourcing
• Source of Supplier Information
• Strategis Selection
• Supplier Relationship Management (SRM)
• Industry Example
Training Slides of Supplier Assessment and Performance Measurement, discussing the importance of Suppliers.
For further information regarding the course, please contact:
info@asia-masters.com
www.asia-masters.com
Supply chain performance reporting and metrics -logistics digest 091112Thomas Tanel
Many managers see supply chain performance reporting and metrics as a huge time drain that results in a series of uncomfortable conversations and confrontations they would rather not endure. You cannot manage what you cannot measure, and your supply chain is one of the most important functions to manage. The good news is that you’re Logistics and Supply Chain Management people
are probably already doing a lot of measuring. The bad news is that they might not be measuring the right things. To measure your supply chain effectively, you must identify metrics that are appropriate for your organization and that will improve business performance.
Cpk indispensable index or misleading measure? by PQ SystemsBlackberry&Cross
Capability analysis is a set of calculations used to assess whether a system is able to meet a set of requirements. Customers, engineers, or managers usually set the requirements, which can be specifications, goals, aims, or standards.
The primary reason for doing a capability analysis is to answer the question: Can we meet customer requirements? To be more specific: Can our system produce consistently within tolerances required by the customer now and in the future?
Capability analysis involves two entities: 1) the producer and 2) the consumer. The consumer sets the requirements and the producer must be able to meet the requirements.
Read More.
PQ Systems is a partner of Blackberry&Cross, since 2006.
Visit: http://www.BBCross.com
• Make Versus Buy
• Benefit of Outsourcing
• Source of Supplier Information
• Strategis Selection
• Supplier Relationship Management (SRM)
• Industry Example
Service Contract Analytics - Leverage analytics to improve revenue and profit...Genpact Ltd
Helping CFOs and Service leaders of Industrial OEMs improve revenue and profitability of after market service contracts, through application of analytics on prospect management, Terms & Conditions compliance, and contract margin review.
For many organisations there is an ever-increasing need to reduce cost.
Still, it’s as important as ever not to overreact. Failure to understand the impact of choices made now will squander an opportunity to add real value. It will also risk inflicting lasting damage that will make recovery needlessly difficult, and all amid a crisis of unknown duration.
This e-book from Hudson&Hayes provides a pragmatic approach to optimising operational costs in times of radical change and uncertainty. Amid the unusual conditions created by COVID-19, this approach is especially valuable.
For further information, please visit https://www.hudsonandhayes.co.uk/pragmaticcostreduction
Cost management and performance measurements for petroleum upstream industr p...Hamdy Rashed
Cost management and Balanced Scorecard is not appropriate only for manufacturing and commercial industry; cost management is applied in upstream industry such as Petroleum exploration, development and production cost. Many Petroleum Companies don’t pay more attention to cost control or balanced scorecard and especially during exploration phase or small companies except if Companies face financial dilemma, declining production or if they see they cannot meet their planned schedule of Capital program that lead them to not meet their obligation, commitments and required return, therefore, they start considering cost reduction or control. This paper provide management accountant, cost controller, financial controller, financial manager, internal auditor and cost recovery auditor with brief of cost control, how cost is analyzed and managed and performance is measured in Petroleum upstream industry.
Value Study: Investing in ETRM / CTRM in Turbulent TimesCTRM Center
The only constant is change echoes an astute observation by the Greek philosopher, Heraclitus, some 2,500 years ago. Those of us who are engaged in the world of commodities are continually reminded of the accuracy of his observation, particularly recently, as commodity prices collapsed led by crude oil. In fact, our industry is continually impacted by changes in the regulatory environment, supply/demand balance, global economic environment, technology developments, political intervention and more.
Recently, BP noted in its annual Energy Outlook1, “Today’s turbulence is a return to business-as-usual. Continuous change is the norm in our industry. The energy mix changes. The balance of demand shifts. New sources of energy emerge, such as shale gas, tight oil, ultra-deepwater oil or renewables. Economies expand and contract. Energy production and consumption are affected by disruptions, from wars to extreme weather. New policies are created to address climate change or bolster energy security.“
The environment of physical energy and non-energy commodity trading and marketing has grown increasingly complex, marked by globalization bringing about rapid changes in supply and demand patterns, increased regulatory scrutiny and evolving trading and reporting rules, volatility along the entirety of the physical supply chain, and increasing uncertainty as to future price movements. In order to react to these changes quickly and appropriately, participants in these markets must increasingly rely on a sophisticated infrastructure of software and technologies to ensure a complete view of their trading positions and external market conditions that can quickly and severely impact their values. The core component of these now requisite trading and marketing technologies are energy and commodity trading and risk management (CTRM) systems. As market complexity has increased and multi-commodity trading has become more common, CTRM solutions have had to become more sophisticated and provide a greater depth of capability in order to capture and value the unique characteristics of the multitude of physical commodities being transacted along the physical supply chain, from source to market. Given the capabilities of these CTRM systems, they do represent a significant investment for any trading or marketing organization, generally trailing only the large scale ERP solutions, like SAP, in terms of costs to purchase and implement. Allegro Development, one of the world’s largest CTRM solutions providers, engaged Commodity Technology Advisory to conduct a survey of a number of their clients to determine their views as to the value of their investment and the operational and financial impacts of deploying Allegro’s CTRM solution. This report summarizes the results of that survey and discusses the key considerations for any company seeking to develop their own assessment of the value of their CTRM technology investment via a Return on Investment (ROI) calculation.
Instructions· This is a group assignment with only 4 .docxnormanibarber20063
Instructions:
· This is a group assignment with only 4 members. As discussed and explained in the class, this assignment is a Case study.
· The students should read and analyze the Case study and submit their report.
· The report should contain the following:
The Assignment should cover the following points:
1. Brief Overview (Describe the Company and issues discussed)
2. Situation Analysis (SWOT)
3. Key Issues (Symptoms/Problems)
4. Alternatives (A set of strategic alternatives that have a potential to solve the problem)
5. Evaluation of Alternatives (How well does the alternative address the issue stated? / List the pros and cons of each alternative)
6. Recommendation
7. Implementation Plan (Steps to follow constrained by budget and timeline/Short term and long term plan/Always look for appendices)
8. Risk and Mitigation (List all the challenges that would prevent the company from successfully implementing the proposed solution/List risk mitigation strategies for every challenge)
Rubric for Report: 20 marks
Category
Failed
0-1
Partially
2
Mostly
3
Absolutely
4
Key Issue(s)
Did not identify Key Issues
Partially identified Key Issues
Mostly identified Key Issues
Absolutely identified Key Issues
Relevant Factors
Did not analyze Relevant Factors
Partially analyzed Relevant Factors
Mostly analyzed Relevant Factors
Absolutely analyzed Relevant Factors
Alternatives (Identify)
Did not develop realistic Alternatives
Partially developed realistic Alternatives
Mostly developed realistic Alternatives
Absolutely developed realistic Alternatives
Alternatives (Evaluate)
Did not evaluate Alternatives
Partially evaluated Alternatives
Mostly evaluated Alternatives
Absolutely evaluated Alternatives
Recommendation
Did not select a Recommendation to address key issues
Partially selected a Recommendation to address key issues
Mostly selected a Recommendation to address key issues
Absolutely selected a Recommendation to address key issues
Date of Submission: WEEK 6
BEST WISHES
Activity-Based Costing: A Tool for Manufacturing
Excellence
ABC is a strategic weaoon in the Quest for comoetitive oosition.
By Peter B.B. Turney, Ph.D.
This article exammes rne role of
actiVity-based costing in the
achievement of manufacturing ex-
cellence. It describes manufacturing
excellence and the product cost in-
formation requirements of managers
who seek to achieve it. It shows
how conventional product costing
fails to meet these needs, and dem-
onstrates how activity-based cost-
ing corrects these deficiencies. It
explains how managers in manufac-
turing companies can use activity-
based costing for strategic, product
design, and continuous improve-
ment purposes. Finally, the article
lays to rest fears that activity-based
costing may be too costly and com-
plex to be compatible with manu-
facturing excellence.
A chieving and sustaining a com-petitive advantage via manufac-
turing excellence requires attention
to all .
Survey costing is a complex process which balances an organization’s financial objectives against the expenses associated with achieving or maintaining the scientific standards which govern validity and reliability, or quality, of the final product. Achieving optimum balance between budgetary and scientific goals requires that researchers first understand how survey components are related to costs and how changing each influences both data quality and budgetary outcomes.
Chapter 10Cost Estimation and Cost- Volume-Profit Relati.docxketurahhazelhurst
Chapter 10
Cost Estimation and Cost-
Volume-Profit Relationships
Learning Objectives
• Understand the significance of cost behavior to decision making and control.
• Identify the interacting elements of cost-volume-profit analysis.
• Explain the break-even formula and its underlying assumptions.
• Calculate the effect on profits of changes in selling prices, variable costs, or fixed costs.
• Calculate operating leverage, determine its effects on changes in profit, and under-
stand how margin of safety relates to operating leverage.
• Find break-even points and volumes that attain desired profit levels when multiple
products are sold in combination.
• Obtain cost functions by account analysis and the high-low method.
James Forte/National Geographic/Getty Images
eps81189_10_c10.indd 207 12/20/13 9:45 AM
CHAPTER 10Introduction
Chapter Outline
Introduction
10.1 Significance of Cost Behavior to Decision Making and Control
Decision Making
Planning and Control
Trends in Fixed Costs
10.2 Cost-Volume-Profit (CVP) Analysis
Basics of CVP Analysis
A Desired Pretax Profit
A Desired Aftertax Profit
10.3 Graphical Analysis
The Break-Even Chart
Curvature of Revenue and Cost Lines
The Profit-Volume Graph
10.4 Analysis of Changes in CVP Variables
Sales Volume
Variable Costs
Price Policy
Fixed Costs
Ethical Considerations When Changing CVP Variables
10.5 Measures of Relationship Between Operating Levels and Break-Even Points
Operating Leverage
Margin of Safety
10.6 The Sales Mix
10.7 Cost Estimation
Account Analysis
High-Low Method
Ethical Considerations in Estimating Costs
Other Issues for Cost Estimation
Introduction
Managers need to understand cost behavior and cost estimation to be in a better posi-tion to plan, make decisions, and control costs. As we discussed in Chapter 9, cost
behavior describes the relationship between costs and an activity as the level of activ-
ity increases or decreases. Determining cost behavior is important to management’s
eps81189_10_c10.indd 208 12/20/13 9:45 AM
CHAPTER 10Section 10.1 Significance of Cost Behavior to Decision Making and Control
understanding of overhead costs, marketing costs, and general and administrative
expenses, as well as for proper implementation of budgets and budgetary controls. With
knowledge of cost behavior, managers can also estimate how costs are affected as future
activity levels change, which can lead to better decisions. In addition, knowledge of cost
behavior can assist managers in analyzing the interactions among revenues, costs, and
volume for profit-planning purposes. These interactions are covered later in this chapter.
10.1 Significance of Cost Behavior to Decision Making and Control
To understand more fully the significance of a manager’s analysis of cost behavior, we look at three areas: decision making, planning and control, and trends in fixed costs.
Decision Making
Cost behav ...
IJRET : International Journal of Research in Engineering and Technology is an international peer reviewed, online journal published by eSAT Publishing House for the enhancement of research in various disciplines of Engineering and Technology. The aim and scope of the journal is to provide an academic medium and an important reference for the advancement and dissemination of research results that support high-level learning, teaching and research in the fields of Engineering and Technology. We bring together Scientists, Academician, Field Engineers, Scholars and Students of related fields of Engineering and Technology
Who we are and what we can do for your company.
We believe that prosperity must include company and workers.
We face every challenge with the right thinking and tool: Lean Six Sigma, simulation, design of experiments, change management, training.
Activity Based Profitability ManagementMiguel Garcia
Activity Based Profitability Management (ABPM) and Activity Based Budgeting (ABB) offers organizations a complete tool to gain a competitive advantage and provides crucial information to support the process of making strategic and operational decisions in the current business environment. It might seem that having this type of information for the management of profits, costs and budgets is not necessary to implement Digital Transformation solutions because the implementation of new technologies does not require an evaluation of this type, and it is assumed that it must be implemented independently of what it implies and at any cost, but this is an error because it will always require business processes, products or services, customers or users, service channels, etc. that must be evaluated from the financial and business process point of view, implemented, measured and improved within a competitive and market environment. In this sense, the profitablitiy, cost and budget information provided by the approach of ABPM and ABB will lead to better business decisions that significantly increase the performance and profits of the companies.
LearningObjectivesAfter studying Chapter 12, you will be .docxcroysierkathey
LearningObjectives
After studying Chapter 12, you will be able to:
Explain relationships among the costs of quality categories.
Understand the concepts of target costing and kaizen costing.
Distinguish between value-added and nonvalue-added activities.
Describe various types of non�inancial performance measures.
Identify non�inancial performance measures for multinational companies.
Comprehend the elements of a balanced scorecard.
Describe benchmarking techniques to improve productivity and quality.
12 Costs of Quality and Other Cost ManagementIssues
jacoblund/iStock/Thinkstock
Explain strategies to enhance productivity such as downsizing and business process
reengineering.
TQMandtheNeedtoMeasureQualityCosts
Pete Moss, considered the ace troubleshooter for DeKalb Fertilizer Company, was sent to its Georgia regional
of�ice by “Big Dan” DeLion, president of DeKalb, about 15 months ago. What he found was “big trouble.” The
region was losing about $400,000 per month—mostly from waste, low productivity, and customer warranty
claims. Revenues were declining, and too many customers were unhappy. This was Spring 2018, long after
Total Quality Management (TQM) was a cliché and a norm in most �irms. Yes, DeKalb had a TQM program that
“Big Dan” had announced in late 2019. Signs had been posted about quality being “No. 1.” A consulting �irm
had conducted seminars for workers, statistical control charts were maintained, and managers had
increased inspections. Faster response to warranty claims had been implemented through a costly system to
guarantee a 24-hour response to any customer problem.
Yet, productivity declined, scrap was up, and warranty costs soared. Workers saw the TQM program as a
management project. Managers blamed much of the problem on the lack of union cooperation and of
employee concern. No speci�ic quality goals were set. Everyone lacked a sense of urgency. Pete’s arrival
brought a sudden change: meetings with line workers quickly pointed to key production problems, warranty
claims were grouped to identify failure causes, landscape designers and on-site supervisors were brought
together to analyze failures, and certain changes were made “overnight.” A goal of cutting scrap by 50% in
three months was set.
At every step, the same question came up: “What’s this costing us?” Pete, knowing that this question was key
at other plants, sought out Rose Bush, the plant cost accountant. Rose was in the middle of an ABC study and
had begun to de�ine new activity centers and cost drivers. While not an easy task, Rose was able to modify
her system rather quickly to identify quality costs: which, where, and how much. Pete and Rose became allies,
promoting each other’s views to managers and employees alike. Within two months, Rose gave Pete a 2019
costs of quality analysis. These costs totaled a surprising 15% of revenues. Of this, little was spent on
prevention, about 30% was spent on appraisal, nearly 45% went to �ixing internal fai ...
1. CLIFFTENT Inc.: Process Control, Optimization, Scheduling, Performance
Dr. Pierre R. Latour, PE Consulting Chemical Engineer
CIM BUSINESS POSITION PAPER 04 Feb 2001
1. BUSINESS TYPE. Products/tools/services vs. Solutions
Examples. Grocery store vs. restaurant. Lumberyard vs. homebuilder vs. realtor.
Brain surgery tools – scalpel, suture, scissors, knife, saw vs. brain surgery.
Conclusion. Select & know customer. Sell products to VARs and solutions to
solution seekers. Avoid selling products to solution seekers and solutions to VAR.
Avoid big commercial disconnects.
2. OFFER. Products best sold on features and price. Low cost competitive bid to
Specs/requirements. Solutions best sold on performance, value, and uniqueness.
Examples. Never obtain anniversary - dining experience, college education,
automobile or surgeon by low cost competitive bid to specs.
Conclusion. Sell products on cost plus required profit; sell solutions based on
value. Technology solutions should be licensed on agreed % of value added,
benefit or profit. The solution supplier should offer an expected profit stream to
customer for duration of use.
3. VALUE. Study perception of value and methods for its creation and maintenance.
People appreciate/treasure/value what they had and lost. Examples. Tire. Pinky.
Drug/cigarette, lost daughter, refinery SDM.
Conclusion. Dale Carnegie teaches “Create and Eager Want”. Denial of a habit
creates eager want. Wealth is created - value is added - at the interface between
two people or corporations, depending on how they act, treat each other.
4. RISK. Mitigate risk with science, experience, know-how, history, modeling,
experiments, education, and technology. Knowledge is the mirror image of risk.
What appears risky to the uninitiated is routine to the knowledgeable.
Conclusion. Risk should be aligned with knowledge. Experienced supplier should
assume commercial risk commensurate with his knowledge if potential reward is
commensurate; inexperienced customer should assume his commensurate risk and
reward.
5. MEASURE PERFORMANCE. People are inspired when sports and business are
conducted competitively with clear rules and an agreed method of scoring –
measuring & valuing behavior and results.
Examples. Football 6 points, baseball foul and “a run”, Olympics long jump,
elections, stock market. Measure of business success is money. It is steady stock
value growth related to steady profit growth. This is true worldwide, for a long
time. Consensus is growing.
Conclusion. Spectators, investors, stakeholders, partners insist on agreed rules,
scoring, performance measures, profit growth goals.
810 HERDSMAN DR, HOUSTON, TEXAS USA 77079-4203; Tel & Fax: 281-679-6709; SR2@msn.com
2. CLIFFTENT Inc.: Process Control, Optimization, Scheduling, Performance
Dr. Pierre R. Latour, PE Consulting Chemical Engineer
6. FINANCIAL VALUE OF DYNAMIC PERFORMANCE. Many agree that
smoothness, steadiness, low volatility, low variance or predictability of response
variables of interest to people is good, valuable, worthwhile. But we quantify it on
an incomplete ad hoc basis. Traditionally, reduced variance is deemed to have no
quantifiable tangible benefit (it is intangible) but it is a necessary requisite for
moving the average closer to its more profitable limit, generating an ad hoc
steady-state benefit. Such linear thinking leads to claims for reduced energy
consumption, higher yields, higher capacity, lower costs, which invariably do not
occur in isolation under proper scrutiny. There is no rigorous mathematical
modeling procedure for measuring financial value from improved dynamic
performance of systems (until CLIFFTENT (1, 2)).
Examples. There is no rigorous method for determining value of process control,
improved quality control (Deming, Juran), optimization, scheduling, integration,
IT, CIM, GE six sigma quality initiatives (3).
Conclusion. Before CIM solutions can be licensed based on performance, the
proper method for measuring financial value of improved dynamic systems
performance must be developed, agreed to and used.
7. SET LIMITS RIGHT. Setting limits, specs, targets and tolerances for products,
processes and operations of all kinds is done on an incomplete ad hoc basis by
teams attempting to optimize tradeoffs with risk management. There is no
rigorous mathematical modeling procedure for measuring the financial
consequences of inexact limit setting (until CLIFFTENT). The tradeoffs
naturally connect dissimilar phenomena at the connection of the plant with its
surroundings, where it creates wealth.
Examples. Setting auto speed target in neighborhood of limit, product quality
targets within specs, sulfur blend operation targets for LSFO, sulfur and O2
content in US RFG, equipment pressure/temperature/velocity limits, FCC slide
valve DP, compressor RPM at surge, coker drum outage, oil refinery planning LP
constraints, crude unit naphtha - kerosene cut point in Japan, crude oil charge rate.
Conclusion. There is more profit potential from setting planning LP, process
optimizer and operator limits optimally than from rigorous modeling of interior
plant relationships. The latter allow selection of the proper constraint corner while
the former position the corner in the profit space.
810 HERDSMAN DR, HOUSTON, TEXAS USA 77079-4203; Tel & Fax: 281-679-6709; SR2@msn.com
3. CLIFFTENT Inc.: Process Control, Optimization, Scheduling, Performance
Dr. Pierre R. Latour, PE Consulting Chemical Engineer
8. CV VALUE PROPOSITION. Controlled Variables and Key Performance
Indicators are physically measured or derived dependent response variables that
represent important characteristics of the plant and business. We wish to control
them or call them “key” because they influence value. The CLIFFTENT
function was specifically defined as the value proposition assigned to each CV
and KPI. It is the unit profit rate as a function of the CV/KPI average or mean,
assuming perfect steady state control, i.e. zero variance. This function always
represents a tradeoff (otherwise the best CV is +- infinity), with a tent shape
peaking at a limit and declining to left and right with different slopes. It may have
a discontinuous cliff penalty at the limit and nonlinear curvature downwards in
either direction. It may have slope breakpoints as different phenomena come into
play. Slopes change as economic factors change.
Examples. Inventory, staff size, production rate, product quality, process yield,
utilities consumption, operating conditions, auto speed, product selling price,
maintenance frequency.
Conclusion. Just as every restaurant menu provides price as a function of meal
content as basis for decision, just as every grocery store provides value
information as function of product amount and quality as a basis of decision, so
should every candidate CV/KPI be assigned a CLIFFTENT of its financial
consequences.
9. RISK MANAGEMENT. Statistical frequency distribution functions are a useful
method for quantifying the nature of uncertainty forecasts. Analysis of historical
distributions of event results is a proven method for estimating future
distributions in order to better manage risks. Arbitrary frequency distribution
functions are one of the two basic inputs to the CLIFFTENT analysis of
performance. Valuable CIM systems for control and management inevitably
reduce variability and uncertainty of dependent CV’s & KPI’s.
Examples. Dynamic process control and CIM are basic technologies for risk
management.
Conclusion. Deploying CLIFFTENT allows process control, IT and CIM to
directly provide measurable risk management profits.
10. BUSINESS MODELING. Process models from chemistry, physics and
engineering should be connected to the plant value chain money model. The
organization, business and process models should be properly interfaced with
models of their surroundings: maintenance, customers. suppliers, environment,
investors, neighbors and governments. The connections to surroundings are
critical to measure the value added as perceived by all stakeholders. That is where
the wealth will be created. There is no rigorous mathematical modeling procedure
for financially interfacing process and business models to their surroundings
(until CLIFFTENT).
810 HERDSMAN DR, HOUSTON, TEXAS USA 77079-4203; Tel & Fax: 281-679-6709; SR2@msn.com
4. CLIFFTENT Inc.: Process Control, Optimization, Scheduling, Performance
Dr. Pierre R. Latour, PE Consulting Chemical Engineer
Conclusion. Widespread use of CLIFFTENT to model the profit potential and
achievement created at commercial interfaces is critical to performance
measurement of systems.
11. INTERMEDIATE STREAM TRANSFER PRICING. The HPI continues to suffer
from lack of a rigorous method for determining intermediate stream volume,
quality and delivery financial values (prices). Further it is not able to analyze
individual process steps for profitability contribution. Utility systems are
considered cost centers rather that the profit centers they actually are. It cannot
value recycle streams well. It cannot make good decisions on make/buy/sell for
these streams. It cannot make sound shutdown/startup/bypass decisions.
Examples. Crude unit profitability, value of olefin plant H2 to refinery, value of
reformate to mogas blending, steam boiler profit contribution, sulfur plant profit,
sour water stripper profit, price of atmospheric emissions.
Conclusion. Optimization theory provides well-known methods for calculating
Intermediate transfer prices from properly stated objective functions. Since the
HPI has been limited to LP for operations planning, it lacks the proper tools for
this important deficiency. Integration of CLIFFTENT and nonlinear plant wide
optimizers will greatly improve the accuracy of intermediate stream values.
12. OUTSOURCING. Since automation technology and business for CIM has
matured to a distinct business since the 1960’s that is fundamentally different
from manufacturing fuels and chemicals, there is a strong profit opportunity for
opcos and competent CIM solution providers to establish enduring outsourcing
partnerships.
Examples. Much maintenance and upgrading of hardware and software can be
done by a mix of supplier onsite staff and internet/intranet connections between
opco and supplier computers. CIM professionals’ careers often thrive better in
technology suppliers working for many opco plants rather than being limited to
one plant or one opco.
13. COMMERCIAL SOLUTIONS PRACTICE. HPI operating companies should
encourage their CIM solution providers to adopt a business mission to “Identify,
Capture & Sustain significant economic benefits for both by profitably deploying
current and future technology”. The marketing strategy paradigm shifts from
selling product features (with its associated sales staffs and advertising) to
promoting financial performance (4). The objective becomes to maximize the
expected value of profit NPV(30 yr, 10%) and profit rate annual growth for the
opco. The proper (= optimum) % split of benefit or profit (= benefit - cost)
between opco and such a supplier exists to maximize this goal. Shared risk –
shared reward (SR2) technology licensing provided profit sharing with
established SR2 business partnership teams to integrate business and
technology; incentives and performance. Profit growth opportunities for opco and
supplier are greatly increased with this SR2 method of technology licensing.
810 HERDSMAN DR, HOUSTON, TEXAS USA 77079-4203; Tel & Fax: 281-679-6709; SR2@msn.com
5. CLIFFTENT Inc.: Process Control, Optimization, Scheduling, Performance
Dr. Pierre R. Latour, PE Consulting Chemical Engineer
Example. If the supplier demands an excessive %, the opco expected value is not
optimized. If the opco demands an excessive %, particularly when the supplier
assumes his proper risk, the probability of sustained successful performance
decreases dramatically as the supplier financial strength deteriorates and the opco
expected value is also not optimized. In fact high CIM profits are commonly put
at great risk this way. Operating companies can guard against technology solution
providers running away and highly profitable systems falling into disuse if they
enter proper SR2 (shared risk – shared reward) licensing arrangements with
supplier partners for sustained mutual success, so both sides win. They must
understand the source of profits; the process/business performance improvement
created together, not from each other alone. But they can never achieve win – win
if they do not play the right game, with agreed rules and scorekeeping and the
optimum % split of the profits. Greeks developed the principles of SR2 for
commerce in 420 BC. Governments have employed income taxes worldwide to
take their “piece of the action”. Risk takers who add value deserve no less. Opco
and supplier can retain the right to terminate relationship (= divorce) in order to
inspire each to satisfy the other regularly, competitively.
Conclusion. Dr Pierre R Latour, Consulting Chemical Engineer at CLIFFTENT
Inc. can advise opcos and solution suppliers on how to measure the financial
value of CIM, how to establish SR2 license agreements and how to properly set
the % split to maximize opco expected value profit growth (4) so both sides have
fair high rewards.
14. POTENTIAL. Dr. Latour’s studies indicate the benefit of properly deployed CIM
solutions for refining crude oil to fuels worldwide exceeds 1 $/bbl crude (5, 6).
When extended to basic petrochemicals and gas processing it exceeds 2 $/bbl
crude. At 80 kkbpd crude refined world wide in 2000, this represents 80 - 160
kk$/da x 350 operating day/cal year = 28 - 56 billion $/yr. Dr Latour believes the
cost to capture by SR2 arrangements is 20 - 30% of the benefit, leaving 70 -
80% as before tax profit to be shared between solution providers and their
selected opco clients. That profit is 2 $ x 0.7 - 0.8 = 1.4 - 1.6 $/bbl crude x 80
kk$/day x 350 day/yr = 40 - 45 billion $/year. Current product oriented
commercial CIM practice may generate only 10% of that. The incentive to change
to performance-based SR2 solutions licensing using the rigorous CLIFFTENT
financial merit method is profound.
15. GALILEO ANALOGY. Latour feels his CIM business position is like Galileo’s
position that the Sun does not circle the Earth. The business community prefers to
sell CIM solutions and products with the faith theory that “technology is good”.
Nevertheless, Latour maintains measuring performance value and rewarding
performance and properly aligned risk, SR2, remain essential to lasting success.
810 HERDSMAN DR, HOUSTON, TEXAS USA 77079-4203; Tel & Fax: 281-679-6709; SR2@msn.com
6. CLIFFTENT Inc.: Process Control, Optimization, Scheduling, Performance
Dr. Pierre R. Latour, PE Consulting Chemical Engineer
References.
1. Latour, P.R., “Process control: CLIFFTENT shows it’s more profitable than expected”, Hydrocarbon Processing,
V75, n12, December 1996, pp. 75-80.
2. Latour, P.R., “CLIFFTENT: Determining Full Financial Benefit from Improved Dynamic Performance”, Paper
C01, Third International Conference on Foundations of Computer-Aided Process Operations, Snowbird, Utah, July 5 –
10, 1998. Proceedings published in AIChE Symposium Series No. 320, V94, 1998, p 297 – 302.
3. Clifford, Lee, “Why You Can Safely Ignore Six Sigma” FORTUNE, 22 Jan 2001, p. 140.
4. Latour, P.R., H P InControl Guest Columnist, Hydrocarbon Processing, “Does the HPI do its CIM business right?”
V76, n7, July 1997, pp. 15-16 and “Optimize the $19-billion CIMfuels profit split”, V77, n6, June 1998, pp. 17-18.
5. Latour, P.R., “CIMFUELS”, bi-monthly contributing editorial, FUEL Reformulation, September 1995 - Feb 98.
6. Latour, P.R., "Benefits of Modern Refinery Information Systems for Manufacturing Cleaner Fuels", API
Reformulated Fuels Conference, American Energy Week 1995, George R. Brown Convention Center, Houston, TX,
January 31, 1995.
810 HERDSMAN DR, HOUSTON, TEXAS USA 77079-4203; Tel & Fax: 281-679-6709; SR2@msn.com