Planning for profit and sustainability

| Published on October 1, 2010

The best opportunities to invest capital in long-term assets may exist at the low point of the economic cycle.

By Iain McBride

We have all heard the story about the CEO who delivered record returns over his four-year term. He handed the business to a new CEO, who gradually realized there was no investment in resources, plant, and equipment. The operation required significant capital to overhaul, resulting in the business losing its competitive edge.

It is evident in many quarry operations that there is insufficient expenditure on capital works programs to improve efficiency and effectiveness of the business. All too often, capital is only approved to upgrade a dilapidated plant for a new sales opportunity.

Figure 1. The product life cycle comprises the capital acquisition and installation.

An effective capital investment plan involves carefully planned timing of maintenance to plant and equipment, which ideally should take place when there is less demand on production. The objective is to maximize profit generation in the good times while developing a sustainable, low-cost base to remain competitive in leaner times. Quarries have this opportunity as their resource bases often have a 20- to 40-year sustainability.

 

Planning cycles

Figure 2. A flow chart used by mining organizations to map out planning for small to medium projects.

All projects have a life cycle where plant or equipment has a finite life from the time it is put into service until it is discarded. Once an opportunity is identified, a project plan is instigated, and, once executed, it follows on into the operation and maintenance through to final disposal. As seen in Figure 1, the product life cycle is made up of a sub-set that is the project life cycle. This is the capital acquisition and installation.


Project cycle

Within the product cycle is the project cycle. The key is to plan and adopt technological advancements and follow a good project cycle regime. Figure 2 is a flow chart used by large mining organizations to map out their planning process for small to medium projects. First, identify the objectives with the key stakeholders. Then, develop a business case through conceptual studies. If the plan achieves its goals, it should be progressed to a feasibility study. Throughout this process, all key stakeholders should be engaged, leading to delivery of a quality functional solution.


Cost commitment

Figure 3 shows a life-cycle cost commitment. The process in the initial planning up to the installation and commissioning of the equipment is where the greatest potential lies to influence the total cost and the greatest returns over the project life. As a typical number for large rotating machinery, initial capital cost for the acquisition, and installation is estimated to be 25 percent of the total cost, but this depends on choices made in the acquisition process. The life-cycle cost includes acquisition, installation, operation, maintenance, conversion, and/or decommissioning.


Total life-cycle costs

A pitfall of any acquisition is the total cost of ownership. The initial cost can be smaller than the total outlay and is very dependent on those initial planning stages where the project planning and feasibility is correctly assessed.

Life-cycle cost analysis was developed by the U.S. military in the 1970s and 1980s and has been adopted by Australian petrochemical industries and large industrial and mining companies in the last 10 years. The focus of the life-cycle cost analysis not only covers the labor, parts and spares, and energy inputs, but also the absence of equipment due to failures, maintenance, etc., which can be looked at as the reliability factor.

Figure 3. A typical life-cycle cost commitment.

For large projects, like the acquisition of a gas module for an offshore platform, the analysis is complex and calculated through software designed for these industries. However, for quarrying projects, only careful analysis of the fundamental factors in the initial planning stages is normally required. The technology available today can fine-tune a processing plant to give a high degree of efficiency in the output and quality of the product. Improvements can also increase the availability of the processing plant and total throughput. However, new technology needs to be engineered into the operation to gain the highest benefit from the improvement.


Operational costs

The following characteristics correlate to the improvement of profit in the business:

• Corrective and preventive maintenance, labor, and spare parts;

• Energy consumption;

• Insurance costs;

• Deferred production;

• Hazard and liability costs;

• Warranty costs; and

• Loss of image and prestige.

Quality improvement can be difficult to substantiate, but in this current economic climate, retaining or gaining a customer through quality improvement is beneficial to the bottom line. In many operations, the product’s fixed cost component is a high proportion of the total cost so small efficiency and throughput improvements have large influence on the production cost.

There are many examples of new technology that have increased the efficiency of a process plant’s operation, such as automatic adjustment in cone crushers, high frequency screens for dewatering, extendable arm stacker conveyors, fluid classifiers, high-efficiency slurry pumps, etc. The installation of this equipment needs to be undertaken with a firm understanding of its potential impact on the process mass balance, electrical capacity, and other services.

It is also important to look at existing plants and audit the system for bottlenecks, inefficiencies, and problem areas. In older plants, the system’s original design is not consistent with the current running conditions and modifications that reduce the plant’s capacity to meet its optimum performance. Small changes can make differences to the bottom line, as seen in the following example.


Cost-to-profit example

A plant running at 100 tons per hour for 50 hours per week and 70-percent availability produces 3,500 tons per week. It produces a product that sells for $12 per ton and has $6-per-ton fixed costs and $4-per-ton variable costs resulting in a profit of $2 per ton. If there were improvements to give a marginal increase of 3 percent to the availability and a throughput of 5 percent and, to simplify the example, assume that improvements were made to the power efficiency to keep the fixed costs the same at higher tonnage, the plant would now run at 105 tons per hour for the same amount at 50 hours per week, 73-percent availability, and produce 3,832.5 tons per week.

The fixed cost is still $21,000, but the variable cost — because of the increase in throughput — is now $15,330. With the increased throughput, there is an increased profit of 26 percent and a gain in the stock. This is a large gain for a small change. Similar gains can be achieved through other small changes through an audit that determines the root cause of plant down time and engineering/equipment changes that eliminate the bottleneck.

 

Planning is the key

Planning and feasibility through execution of an acquisition for a capital project is essential to the life-cycle cost. The future profit of the project is defined in these initial stages. Once the scope of the project opportunity is defined, project commitments can be agreed upon to achieve performance, time, and cost goals. Planning of such goals is needed to achieve these commitments. To ensure the concepts and techniques meet the project standards, an experienced management team is required to customize the plan. AM

Iain McBride is a consultant for MSP Engineering in Perth, Australia. He currently works as a project manager and senior mechanical engineer for EPCM and GMP projects. This article originally appeared in Quarry and is reprinted with permission.

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