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Delivering Performance Improvement

Enterprisewide Cost Optimisation. Delivering Performance Improvement. December 5, 2001. Table of Contents. Part 1 - Overview Executive Summary Our Understanding of Your Requirements and Project Scope Part 2 – Approach and Project Structure Our Approach

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Delivering Performance Improvement

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  1. Enterprisewide Cost Optimisation Delivering Performance Improvement December 5, 2001

  2. Table of Contents • Part 1 - Overview • Executive Summary • Our Understanding of Your Requirements and Project Scope • Part 2 – Approach and Project Structure • Our Approach • Project Management and Team Structure • Part 3 – Work Plan, Costing and Financial Proposal • Part 4 - PwC Experience and Qualifications • Why PwC? • PwC Related Experience • PwC Team Bio’s • Appendices • Responses to Suncor Questions • Detailed Methodology and Deliverables • Team Roles & Responsibilities • Developing Opportunities, Alternative Service Delivery, Benchmarks & Best Practices

  3. Executive Summary • Suncor has requested assistance to identify and achieve base cost improvement opportunities and/or improved asset performance opportunities, resulting in a $1/bbl reduction in cash operating cost, equivalent to $100 million per year on a current cash cost structure of $1 billion. • Our proposal defines how PwC will enable Suncor to achieve these cost reduction goals. It details our proven approach and supporting methodology for Enterprise Wide Cost Reduction. PwC’s approach enables sustainable cost reduction and will position Suncor for future growth. We participate with the client throughout the cost reduction life cycle, from identifying hard cost reduction opportunities to engaging key stakeholder support and sponsorship. • Our approach is divided into three phases. The scope of this proposal focuses specifically on the first 2 phases: Assessment, “Size the Prize”, and Designing the Transformation, “Get the Money”. Phase 3, Delivery, “Keep the Money”, will be scoped and defined as part of Phase 2. Work in Phases 1 and 2 is designed to ensure sustained achievement of the targeted cost reduction in Phase 3. Phase 1 is estimated to span a 5 to 7 week period starting early in January. Phase 2 is estimated to span a 12 to16 week period, commencing immediately after the completion of Phase 1. • We are pricing the entire engagement at a rate structure that reflects our valued relationship with Suncor. Our estimated fees are $CD 715,000 for Phase 1 and $CD 1,633,000 for Phase 2. We commit to working with you to identify potential savings AND to support your activities to realise them. For Phase 2, we propose to tie our fees, in part, to the success of the project. We will hold back 25% of our Phase 2 billings pending achievement of mutually agreed targets. Based on your assessment of these targets we would bill the holdback of 25% and, if these targets are exceeded, we would be able to bill up to an additional 25%.

  4. Part 1 1(b) Our Understanding of your Requirements & Project Scope

  5. Improve Processes Reduce Costs Aligned with O/S Growth Strategy Optimise Assets Sustainable through: • Actual implementation • Embedded in performance measures Leverage Technology Function 1 Function 2 Function 3 Project Scope: Oil Sands Requirements • The objective of this project is to identify opportunities for sustainably reducing cash operating costs by $1/bbl on a cost base of $1.0 billion in annual expenditures, for target savings of $100 million per year. • The principle focus will be on: • evaluating operating & maintenance processes • optimizing asset utilization • leveraging information technology • The operating focus is on mining, extraction and upgrading operations as well as the operation of support services – finance, IT, HR, and procurement and inventory management. • Typical Cost Reduction Initiatives • Reducing SG&A • Implement Shared Services/Outsource • Optimizing Supply Chain and Networks • Implement Strategic Sourcing and Procurement • Optimize Technology Costs • Reducing Input Costs • Streamlining Processes

  6. Our Understanding of the Numbers • Review of per bbl cash operating costs and daily production volume from the past 8 years, indicates that no significant economies of scale will be achieved solely from increases in production. How will we attain our target cash operating costs per bbl?

  7. Our Understanding of Supporting IT Requirements • Oil Sands has grown rapidly over the past several years, and this rapid growth is expected to continue into the foreseeable future. • Issues • As a result of the growth, and in order to fulfill • business process requirements, Oil Sands has • customized their existing • information systems, resulting in: • Interface complexity; • Potential systems gridlock; • Weak information & knowledge management; and • Potential scalability problems for additional business processes as new operating units come on stream (i.e., Firebag, etc.). • This situation will become more complicated as the anticipated growth in Oil Sands continues. In this project, PwC Consulting will evaluate the role that IT systems will need to play in realizing the opportunities identified and evaluated. We believe that with the existing legacy systems in place, the Oil Sands group needs to make process improvements first, including eliminating some processes if possible. That will directly affect the scope of IT support requirements going forward. At the same time, the team will concurrently assess the support that IT systems will have to provide in the future with a view to reducing support costs if appropriate. Once the key cost reduction decisions are made which might impact system design, our IT team can assess the high level system options facing Oil Sands and integrate the systems transformation into the overall performance improvement plan.

  8. Our Understanding of Change Management Issues • The Environment Influences the Change Program • Long-term growth and continuous change is the norm for Oil Sands • There is a close knit community in Ft McMurray • There is a unionized work force • There are skills shortages and looming demographic challenges • The community is important to Suncor and; Suncor is important to the community There are Opportunities & Needs • Leverage the closeness of the community by considering new services to develop (e.g. Alternative Sourcing) • Look for community-based solutions to business issues • Continue to develop robust change capability • Where practical and appropriate, involve line staff in identifying, assessing and implementing solutions • Communicate frequently and openly with staff

  9. Part 2 2(a) Approach

  10. The Objective to Deliver a Step Change in Performance Requires an Approach Which: • Challenges the ‘status quo’ • Solicits employee input in a constructive and non-threatening manner • Provides unbiased input based on extensive industry experience • Focuses on the 20% of the initiatives that will deliver 80% of the value on a sustainable basis • Provides a structured approach to: • Identifying cost reduction and productivity enhancement opportunities • Quantifying financial impacts • Assessing implementation impacts and sequence • Facilitating implementation • Validating opportunities • Measuring progress and impact • Initiating appropriate corrective action • Engaging affected stakeholders • Considers both radical (top-down) and continuous improvement/process re-design (bottom-up) opportunities • Considers existing initiatives as well as new initiatives • “Sizes the prize” AND defines the ease of implementation to ensure appropriate prioritization • Engages the organization, at each level, appropriately • Takes a structured approach to eliminate, re-engineer, simplify or automate processes – in that order! • Turns opportunities into practical projects that reflect: • Business priorities • A business case justification • Integrates with existing management budgeting and planning processes • Ensures Oil Sands can assimilate the required changes

  11. High Current cost / service performance curve Eliminate or Re-engineer cost/service performance curve, resource re-deployment Cost Better service, same cost Better service, better cost Same service, lower cost Low Low Service/Quality/Cycle Time Standards High Performance Improvement is More Than Cost Reduction Alone • Cost reduction needs to be balanced with achievement of appropriate service, quality and cycle time standards, and particularly safety and environmental protection. • With this in mind, PwC Consulting approaches cost reduction from a standpoint of priorities: • Can we ELIMINATE processes? • Can we Re-Engineer processes, for example either internally or would it be better to outsource or co-source a service or process? • Can resources be more effectively re-deployed in value-adding processes? • For those that remain, can we simplify the process, or do we need to automate the process? • Ultimately, the value of this approach lies in creating operational flexibility and options to align both cost and service to the needs of the business – today and in the future.

  12. The Project Scope is Comprehensive Manage Oil Sands Business • The scope of this project includes Oil Sands management, support functions – IT, finance, HR, procurement and inventory management (warehousing), administration and facilities management as well as the core processes of operations and maintenance management of the mining, extraction and upgrading processes themselves. Suncor not only requires substantial cost reduction expertise but also people who have significant, relevant industry and operational experience. Reserves Extraction Mining Upgrading Design & Construct Utilities (power, steam & water) Functions Operations Management Maintenance Management Procurement and Inventory Management Financial Management HR Management IT Management “No Sacred Cows” Administration & Logistics Management (Security, Camps & Catering, employee transportation, etc.)

  13. Gross Gross Margin Margin Utilization Utilization EBIT EBIT Variable Variable Costs Costs Return on Fixed Return on Fixed Gross Investment Costs Gross Investment Costs (ROGI) (ROGI) Fixed Fixed Capital Capital Invested Invested Capital Capital Working Working Capital Capital We Take a Structured Approach to EBITDA Improvement • Examples of Issues to Examine in Upgrading • Hydrocarbon Management • Yield accounting • Physical loss management • Performance Control & Monitoring • Catalyst and yields • Process unit modeling • Hydrogen system management • Energy • Planning & Scheduling • Crude scheduling and process unit target-setting • Blending operations / sweet-sour crude optimization • Inventory Management • Planning models • Utilization • Routine maintenance planning • Turnaround maintenance planning • Mechanical availability • Unit run-lengths

  14. A Comprehensive Review is Required to Achieve $1 Per Barrel Cost Savings ILLUSTRATIVE Improvement Opportunities Impact On Results Improvement Target, $/B + 0.30 - 0.10 + 0.40 - 0.20 + 0.60 - 0.40 + 1.00 • Improve unit yields • Improve quality management and consistency • Reduce material losses • Use more marginal capacity • Manage bitumen content of oil sands • Improve energy efficiency • Improve purchasing of catalyst and chemicals • Reorganize operations to improve productivity • Improve maintenance planning; reduce dead inventory • Outsource non-core support services • Increase quality-tracking automation (lab+on-stream analyzers) + Product Value Feedstock Cost Gross Margin Variable Cost Variable margin Fixed Costs Net Margin - = - = - =

  15. Building commitment Dealing with resistance Sponsorship Performance Improvement Dealing with people consequences Stakeholder management Implementing new organization Communication Integrated Change Management is a Critical Success Factor • In advocating two concurrent opportunity streams: one developed as “outside” the current business model; and the second, reflecting “in-the-box” opportunities, PwC Consulting recognizes that it is important to build commitment not only to existing cost reduction initiatives (such as strategic sourcing for the Procurement Group) but also new opportunities that might be identified. • At the same time, some of the “out-of-the-box” opportunities may be extremely sensitive, for example the prospect of outsourcing or co-sourcing a service needs to be managed in a sensitive and practical way. • If such an opportunity does not make the Phase 1 “short-list” for opportunities that require a business case, then no case for action needs to be developed and presented to employees. • Change management is a critical issue and while the Consultant’s total involvement over time diminishes in relation to Oil Sands’ staff, the change management element will have to be actively managed throughout the term of the project.

  16. Critical SuccessFactors What to do What not to do Critical Success Factors – our experience tells us that…

  17. Part 4 4(a) Why PwC?

  18. Statement of Qualifications – Cost Savings Examples

  19. Statement of Qualifications – Cost Savings Examples

  20. Statement of Qualifications – Cost Savings Examples

  21. Statement of Qualifications – Cost Savings Examples

  22. Statement of Qualifications – Cost Savings Examples

  23. Statement of Qualifications – Cost Savings Examples Richard Oishi

  24. Statement of Qualifications – References • Mr. Bruce Farmer President and Chief Executive OfficerKennecott Utah Copper Corp(801) 252-3001 • Mr. Tom MyattTeam Leader, IMPACTKennecott Energy (307) 685-4626 • Mr. Marv Kaiser CFO and VP FinanceThe Doe Run Company(314) 453-7130 • Mr. Bryon Petti Manager, Operations Shell Canada Products Ltd. (403) 691-3785 • Mr. Michael SmithVP Org Effectiveness Molson Breweries(416) 966-6159 • Mr. Russ HallbauerGeneral Manager, Coal OperationsTeck Cominco Limited(604) 640-5272 • Mr George Halatsis Chief Financial Officer Inco Ltd.(Note: Please call Graeme Bate (403) 509-7358 to obtain telephone number. Mr. Halatsis was CFO of CP Rail, for the above reference.) • Reference for Ikon is available from Mr. Richard Oishi (312) 298-2000

  25. Enterprise Wide Cost Reduction – Global Experience Client Cause for Change Scope Results • Competitive/economic pressure • Desire to leverage global scale • Worldwide overhead and manufacturing support processes • Analyzed operations across 15 Business Units in 10 countries • Annual savings of $300MM • Improved shareholder value • Created global process models • Reduced overhead costs and aligned with Business Unit needs • Centralized/outsourced of shared services • Shareholder value and investor pressure • Transform business model from decentralized to centralized • North American SG&A and Business Unit distribution and warehousing operations • Annual savings of $100MM • Restructured organization • Redesigned sales and operations • Established shared services for common support functions • Deregulation in Telecomm industry • Decentralized organizational structure • High cost provider • Pressure from Wall St. for cost improvement • U.S. Operations excluding R&D • Analyzed Business and Consumer Services, Broadband and Wireless divisions • Annual savings of over $1B • Leveraged local networks for access charge savings • Changed strategic sourcing and spending policy • Integrated decentralized BU functions with web-based tools • Restructured SG&A functions and reengineered processes to save over $100MM annually • Integrated Corporate Center functions of R&H and Morton International to save $45MM • US and Europe SG&A functions • Corporate and all HQ functions • Industry (Specialty Chemicals) earnings pressures • Industry consolidation • Acquisition growth strategy • Shareholder value • Shrinking margins • Industry consolidation • Need capital for investment • Customer satisfaction • Shareholder value • Global Card Operations • Service delivery functions • Credit control • Telephone service operations • Real estate • $1 billion cost reduction • Improved customer satisfaction • Rationalized operating real estate • Eliminated non value add transactions

  26. Cost Reduction Opportunities Ten Approaches used in the Industry Alternative Service Delivery Benchmarks & Best Practices Refinery Framework – with Solomon

  27. Developing Cost Reduction Opportunities – Ten Approaches For Creating Options Low Risk Short Term Preempt or eliminate non - value - added • activities Outsource or insource processes • Leverage suppliers or customers • Minimize hand - offs • Convert serial processing to parallel • processing Restructure the organization • Change the physical layout • Automate the manual process • Improve effectiveness of existing • technology Utilize alternative technologies • High Risk Long Term Screening and sorting opportunities must address business risks and length of time to achieve benefits

  28. Alternative Service Delivery – Changes the Current Business Model • Examples: • Outsourcing/co-sourcing services • Eliminate services • Value Management – buy results not inputs (e.g. buy truck capacity and uptime) PwC Consulting Process: • Segregate unique processes (unique to your company) from generic processes • For generic processes – is there a competitive marketplace for services? • What competitive advantages does the third party provide (lower unit costs through improved economy of scale/scope, capital, management talent, services, quality standards) • Would the relationship be managed as an open book/closed book contract? • What risk/reward relationship is practical/doable? Is it a gain sharing contract? • What track record has the third party got with its customers? How long, what contract renewal history? Financial strength? Conduct as Joint Venture due diligence, not sourcing a service. • Ensure you have agreement to replace third party, or can repatriate assets and labour force if necessary • Service Level Agreements specify services, improvements, targets, remedies, notifications etc. • Ensure appropriate chemistry and values fit between the third party delivery management and your company’s management team • Don’t use to solve industrial relations problems • Don’t use to solve an intractable management problem

  29. Overall Self Assessment Initial Evaluation of Site Asset Management Best Practices 1. Maintenance Strategy 100% 10. Maintenance Process Reengineering 2. Organization / Human Resources 80% 60% 40% 3. Employee Empowerment 9. Materials Management 20% 0% 4. Maintenance Tactics 8. Planning and Scheduling 5. Reliability Analysis 7. Information Technology 6. Performance Measures / Benchmarking PwC Benchmark Database Average Top Quartile

  30. Example of Some Maintenance Measures & Benchmarks Measure Operation X Benchmark* Maint overtime/total maint labour 6 - 16% (depending on area) < 5% Overall schedule compliance Not measured > 90% Compliance to PM/PdM schedule 60 to 97% (depending on area) > 95% Work order backlog 2 to 10 man-wks (depending on area) 2 to 4 man-weeks Stockouts Not measured < 3% (PM/PdM + Planned Work)/Total Mtce hours < 34% < 34% > 80% * Generally accepted industry benchmarks

  31. A Cost Reduction of $4.7 to $8.3 Million is Possible from Improved Planning * Based on PwC’s experience

  32. Arrive to start load 320,000 No of events 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 Minutes Haul truck cycle - the wait time at the shovel is excessive Examples of Mine Operations Benchmarks • Average wait time at shovel • 6.2 minutes • Std deviation • 7.2 minutes • Leading practice average is • 2 minutes (at budgeted shovel utilization) • Specifically: • <5% have zero wait • 15% wait 1 min or less • 25% wait > 10 min • 10% wait > 14 min Dispatch data was analyzed over a fixed period of time

  33. Framework for Refining: Analysis of Operating Factors Gross Margin • Crude/Feedstocks Optimization • Product Slate Optimization • Material losses / downgrades / rerun • Mechanical Reliability • Scheduling & Logistics • Marginal Economics • Energy Intensity • Catalyst/Chemicals • Hydrogen • Maintenance Labor • Operating Labor • Maintenance Materials • Support Processes • Outsource and “sell” non-core operations (e.g. hydrogen plant, water treatment) • In-plant inventory optimization • Receivables Management Utilization EBIT Primary Focus of this study Variable Costs Return on Gross Investment (ROGI) Fixed Costs Fixed Capital Invested Capital Working Capital

  34. A Comprehensive Review will be Required to Achieve $1 per barrel ILLUSTRATIVE Improvement Opportunities Impact On Results Improvement Target, $/B + 0.30 - 0.10 + 0.40 - 0.20 + 0.60 - 0.40 + 1.00 • Improve unit yields • Improve quality management and consistency • Reduce material losses • Use more marginal capacity • Increase bitumen content of oil sands • Improve energy efficiency • Improve purchasing of catalyst and chemicals • Reorganize operations to improve productivity • Improve maintenance planning; reduce dead inventory • Outsource non-core support services • Increase quality-tracking automation (lab+on-stream analyzers) + Product Value Feedstock Cost Gross Margin Variable Cost Variable margin Fixed Costs Net Margin - = - = - =

  35. An Activity-Based (ABC) Analysis is Required to Uncover Inefficiencies... The Traditional View ILLUSTRATIVE Activity-Based View Typical cost profile for a large, complex refiner

  36. … and plan the operations better in the future Move from managing resources to managing activities Activity-Based View The Traditional View Payroll-Normal 30 20 50 Payroll-Overtime 12 8 20 Equip./Mat’ls 3 7 10 Contractors 4 1 5 Total 49 36 85 Preparation 5 3 8 Repair 6 15 21 Testing 14 15 29 Return to Service 24 3 27 Total 49 36 85 Unit Turnaround: Resources Unit Turnaround : Activities Oper. Maint. Total Oper. Maint. Total . . . lacks relevant information about the work being performed and why it is being performed. . . . is actionable, easily understood and can be related to resources and products.

  37. 1.70 1.65 1.60 1.55 1.50 Fixed Operating Costs, $/B 1.45 2.7 1.40 2.6 1.35 2.5 1.30 1.25 2.4 Cash Operating Costs, $/B 1.20 1994 1996 1998 2.3 1.2 2.2 1.1 2.1 1.0 2.0 1994 1996 1998 Variable Operating Costs, $/B 0.9 0.8 0.7 0.6 1994 1996 1998 Refiners progress on reducing costs... Fixed Operating Costs Cash Operating Costs Study Group Pacesetter Variable Operating Costs Source: Client analysis of Solomon Benchmarks

  38. 97.0 96.5 96.0 Mechanical Availability, % 95.5 95.0 94.5 94.0 1994 1996 1998 95.0 90.0 85.0 Energy Intensity Index 80.0 75.0 70.0 1994 1996 1998 …and efficiencies have improved as well Mechanical Availability Refinery Personnel 5.5 Study Group 5.0 4.5 FTE Personnel per M BPD 4.0 Pacesetter Energy Intensity 3.5 3.0 1994 1996 1998 Source: Client analysis of Solomon Benchmarks

  39. Cost Minimization is Not the Answer:Increasing Value in Refining Operations Requires Cost Optimization Gross Margin Crude Costs • Increased deterioration in yields / efficiencies • Increased unit breakdowns / outages • Decrease turnaround costs • Decrease routine maintenance costs Net Margin Gross Product Value Variable Costs Fixed Costs Utilization Routine Maintenance HSE Performance MAINTENANCE Systemic Analysis and Modeling can help find optimum cost levels • Increased quality excursions (off-spec) • Increased unit instability; lowered throughputs • Increased risk of HSE incidents • Decrease staffing / payroll costs Cash Profit Optimal target range OPERATIONS Cost of Activity

  40. Benchmarking is a good starting point, but insight is required to drive improvements • On Pacesetter refineries: “Somehow, this group appears to employ a superior combination of facilities, raw materials, products, and operating expenses relative to most other refineries.” • “The Pacesettersdo not have the best energy efficiency, the lowest manpower, the lowest maintenance costs, or the highest yield as final goals.” They encourage their people to... [achieve] optimum utilization of all resources to generate the best profitability available to the plant.” • “The Pacesetters appear to be constantly reviewing their competitive status, questioning their own practices, and transforming themselves.” From Solomon Fuels Study; Pacesetter defined as refinery consistently performing at 1st Quartile level, based on ROI

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