November 1, 2008
Investing in new technology can add value to your production operation.
by Bernard A. Benson
The purpose of business is to create value for the owners. That’s a pretty simple concept but sometimes it is forgotten. Not only must manufacturers bring new technologies to the aggregates and asphalt industries that bring value to their customers, but producers also have to provide similar value to their own customers.
A basic question a customer may ask is whether he or she can expect a positive return on the investment (ROI). In other words, will the company’s profitability increase by more than the cost of purchasing and implementing the new technology? How long will it take to recoup the investment?
Good estimates of ROI are far easier to come by than one would think. One way to estimate ROI is to draw upon experiences of other companies that have implemented new technologies. Some companies are rightfully careful about their experiences using new technologies with close competitors, but many are not. Talk to industry peers who use the same or similar technology and ask them about their ROI experience. Vendors should be able to put you in touch with other companies that are willing to help you understand the benefits of new systems and methods. Ask them how much of an increase in production and loadout throughput they experienced as a result of implementing new technology.
It is important to differentiate between investments in machinery or systems that are necessary to keep the business running versus those investments that are designed to bring increased value to the business. Replacing an old front loader, for instance, while necessary to the plant’s production process, is not likely to produce significant new, incremental revenue. The technologies and systems addressed here are those that contribute to new revenues and create new value for the company. So the first way of thinking about increased value is as a significant net increase in revenues.
There also is a second type of value that involves benefits that your customers enjoy by doing business with you. If you can add value to your customers’ business, they will be more likely to buy from you and be willing to pay a premium price for your products. Producers maximize their profits by bringing the most value to the customer while at the same time minimizing their costs to produce and deliver the products. This is sometimes referred to as a value chain or value model.
The value model
By using a value model, a company can more clearly see where it should be focusing investments. Value model recognizes three basic ways that value is created and maximized. Three concentric rings represent three sources of value: product value, delivery and service value, and enhanced value. The size of the circles represents the opportunity potential. There are ever-increasing opportunities for growing value as one moves from the center of the circle, product value, to the outer ring, enhanced value.
Improving production value
In the center of the value model is the value potential of the product itself. All value starts and is built on the product. Rock that is buried in the earth has little inherent value. But value is created when a producer mines that rock, then crushes, screens, washes, and offers it for sale. The producer has turned something of little value in its native state into something of significant value to the customers. Value is created by transforming raw materials into a product that customers are willing to pay to receive.
Product value can be increased in several ways, beginning by increasing plant throughput. The more tonnage that can be produced, the more potential there is for value creation.
The first automation systems used at production sites aimed at increasing the speed at which material could be produced and delivered into a waiting truck. There are a number of ways that new generation production systems improve upon those earlier systems. While computers have been used to manage and control production for a number of years, the continual increase in processing power has opened the door to new ways to improve production efficiency and increase value. For instance, new systems combine faster computers with more sophisticated algorithms to control material handling. With these new systems, dropping materials into an asphalt batch plant bin requires fewer jogs of the material control gates. Fewer jogs mean faster drops and faster batch times. The faster a batch of asphalt can be produced, the more loads that can be created, and the better the plant throughput that can be achieved. A side benefit is that the measurements are more accurate and that leads to more consistent product mixes.
Similar advances have been seen in truck loadout, both from batch plants and silos. More accurate and fine-tuned in-air measurements result in more accurate and faster loadouts with fewer gate jogs, increasing plant throughput while reducing wear and tear on the gates and other mechanisms.
The systems themselves have also become easier to run with less operator intervention, resulting in faster loadouts and better throughput. There are several ways that this is accomplished, but the most dramatic improvements come from the use of site automation systems, not just plant automation.
Another way to improve production efficiency is through better production management. New systems give the producer better visibility into the day’s production requirements. The improved logistics capabilities mean a closer match of raw materials to product specs, a reduction in the use of more expensive materials when lower cost materials will do, and higher product profit margins.
Technology can improve the use of materials. In asphalt production, there is often more than one mix design that will meet the specifications of a given order. The cost of manufacturing varies according to these mix designs because each design consists of a different blend of materials with different and, often, changing costs. So producers are faced with the task of determining which mix design is lowest in cost while still meeting the job specifications. To complicate matters, the producer fulfills multiple job orders throughout a given day, and each job may require a different mix design. The challenge is to find the optimal production schedule that will fulfill loadout while minimizing the cost of materials used.
For instance, let’s say an asphalt plant loads most jobs from a single silo. What is the optimal mix design that should be batched to the silo, and what jobs should be fulfilled by batch? Since this is a complex problem, producers often either play it safe and fill the silo with a higher cost mix than is actually necessary or fill the silo with a lower cost mix and rely on the batch plant for a greater number of higher spec jobs. In the first case, the producer is losing profit, while in the second case, by running more trucks through the batch plant than is necessary, the producer loses efficiency and reduces throughput.
The complex computations that are needed to solve this problem are relatively simple for computers. These new systems give the producer the tools needed to optimize the product design and production schedule, bringing value to the business by minimizing production costs and adding to the company’s profit margin.
Increasing delivery and service value
While production improvements are always welcome, one cannot take advantage of them if there are logistical bottlenecks that prevent trucks from getting into the yard and back out as quickly as possible. Advanced site automation technologies address these issues, among others, and deliver two major benefits. First, they improve the throughput at the site. This alone may justify the investment in these technologies since it means that producers may see an increased return on their fixed capital investments.
Second, they bring improved services to the customers. Producers have found that customers are willing to pay more for their product when they receive other valuable services.
New truck management systems are good examples of technologies that increase both delivery and service value. Trucking is a huge cost both in time and money, and improved truck management can net large returns. More producers are now using some form of truck identification system to reduce the in-yard times of trucks. Identifying the truck when it enters the yard allows the producer to more quickly fulfill the truck’s order. Some systems use RFID tags installed in the trucks to identify the trucks, while others use truck ID cards or driver entry of a code into a kiosk keypad to identify the truck. Regardless of identification method, the systems work the same way. When an ID is entered, the system matches the truck to an entry in its database and determines what materials the truck is there to pick up. In the case of an asphalt batch plant, the system and the operator might begin preparing the material before the truck pulls under the bin. And in the case of silo loadout, the system can quickly and efficiently use automated electronic signage to direct the truck to the correct silo. No matter how it is accomplished, the result is much faster truck turn around.
Kiosks, whether using RFID or keypads, can dramatically reduce in-yard time. The term kiosk is used to describe a number of different types of remote data entry or printout locations. It may be as simple as a card swipe terminal at the entrance to a site. Or it may be more sophisticated like the kiosk technology that gives the driver the option of selecting or changing products, customers, and job identification, all without scale house intervention.
Other uses of kiosks include remote ticket printing. Using these systems, trucks are on the scale for less time because, once the weight is captured, the truck can move off the scale to the printing kiosk. The driver retrieves the ticket without leaving the truck.
The new systems provide unprecedented flexibility to the operator. Remote devices such as printers, kiosks, and interactive electronic signage are highly cost effective, and installation designs can be customized to needs of the site.
As wireless technology improves, more low-cost options are being offered to site operators. Wireless loader notification systems for use in aggregate loadout are growing in popularity. Paired with a self-service kiosk, the concept is remarkably simple, but provides significant payback in reduced truck in-yard time. Envision a truck entering the yard to pick up a load of #2 crushed rock. The truck is identified as it comes into the yard, either by a manual entry into a kiosk or by RFID, which doesn’t require the truck to stop. The site’s computer system knows that the truck is to be loaded with #2 crushed rock. The truck is directed to the materials pile using electronic signage while the loader operator is notified that he has to meet a truck at the correct materials pile. By the time the truck arrives, the order has been wirelessly transmitted to a display on the front loader. The operator knows exactly what and how much material is to be loaded on the tuck. There is no need for the drivers to get out of the truck to speak to the loader operator.
The outside ring of the value model is the area of enhanced value, offers significant opportunity for value improvement, but is the last to be addressed by new technology. It also is the last area to see improvement because systems that address the enhanced value creation opportunity need to be built on a foundation created by other site automation technology.
Enhanced value is created by helping customers maximize their profitability and increasing the customers’ perceptions of the value of the products. It is a marvelously cost effective way to increase value because it doesn’t involve costly manufacturing solutions. Instead, incremental value comes from providing services that make the customer’s business more competitive and, as a result, justifies higher prices for the producer’s materials. Any time you can add value to a customer’s business, you are adding value to your business.
The use of technology to improve in-yard time provides value to the operator by increasing the maximum potential throughput of the site. Reduced truck turn-around time also creates value for the customer. Consider a customer’s company that owns its own fleet of 20 trucks. The speed at which a truck can get into a yard, get loaded with the correct amount of the correct material, and be back out on the road ultimately affects profits. One way to look at this is simply by the cost of the truck and driver. Let’s say that the trucking costs $90 per hour. By shaving just 6 minutes off the in-yard time, a very realistic goal, the hauler saves $90 in just 10 loads. Multiply that by all the loads that run through the yard in a day and meaningful savings may be achieved. Faster turnaround might mean that the hauler can do with one less truck. Either way, savings can be passed on to the customer, either through lower cost on delivered materials or direct savings if the customer owns or hires the trucking. The producer’s systems have saved the customer money and, by extension, added value to the customer’s business. This is enhanced value. And this is what helps producers get and keep customers and justify premium prices.
Central dispatching systems are changing the aggregate and asphalt worlds. Let’s say a customer calls in and orders 40 loads of aggregate to be delivered to his job site the next day beginning at 8 a.m. and ending no later than 3 p.m. With a dispatch system, the producer can accept the order and manage the logistics of finding haulers and assigning trucks to loads. The producer can charge the customer a premium for handling the logistics of shipping. Customers are happy to be relieved of the costs of managing shipping logistics. Customers find value in “one-stop shopping” where the producer arranges the delivery, and, even with slightly higher pricing, their projects are more profitable.
Other features that enhance value are technologies that help the customers of the producer better manage their business. Take, for instance, systems that provide the producer’s customers with visibility into the location and activity of their truck fleets. GPS tracking systems communicate with the company’s computer system, mapping all the trucks’ locations, speed, and direction. Whether the producer or the customer owns the fleet, the process is the same. The investment can be cost-justified in a remarkably short time.
As one moves from the center of the value model to the outside ring, one moves from a commodity-focused (price) value to true value-added services to the customers. With a commodity-focus, customers see no difference between producers other than price. On the other hand, when a producer creates value-added services, he distinguishes himself from other price-focused producers. Customers gravitate towards those producers who deliver more than the product.
The most successful producers are those who have invested in improvements in the outer two value rings because that’s where the most opportunity and upside is found.
These systems provide value-added services that the customer is willing to pay a premium to receive. Carefully selected and well-implemented new technologies can bring significant returns to the bulk materials producer. By thinking in terms of added-value, and systematically identifying opportunities to improve site efficiency, today’s producers have an unprecedented ability to maximize their own and their customer’s return on investment.
Bernard A. Benson is chairman of Livermore, Calif.-based BMG Seltec. He can be reached at 925-373-3200, or visit the company’s Web site at www.bmgseltec.com.