Putting it all Together: Closing the Gaps

3.3 Selecting and prioritizing EMO projects

At first glance, the projects that offer the highest return on investment may appear to be the ones that should be realized. It is not that simple. Other considerations should be made. Project selection and prioritization is often perceived as a very difficult task. The following is a brief guide, which includes some proven decision-making tools to make the task simple enough for anyone to do. They include:

• Assessing risks;
• Assessing costs;
• Doing the first thing first; and
• Using economic modeling to evaluate project trade-offs.

Initial scrutiny
Technical feasibility
The initial long list of EMO projects should now be scrutinized from several viewpoints. In addition to clearly impractical ideas, which can be rejected out-of-hand, the projects not meeting our criteria (very much of our own making, i.e., foundry-specific) should also be discarded. We will examine all available information, such as:

• Good engineering practice;
• Experience of others, testimonials;
• Supplier information;
• Literature;
• Consultants;
• Technical uncertainties; and
• Performance risks.

Possible synergies
Can the project be integrated advantageously with others to achieve heightened benefits (e.g., an upgrade of induction furnace cooling water together with improved space heating and ventilation)?

If so, try to quantify the benefits of the projects’ interaction and compare these to benefits of the individual projects and their sum. Consider various combinations of projects before settling for an optimum group to implement jointly.*

Business risks
1. Balance perspectives from the point of view of safety, the environment, legal and regulatory factors and business and public image. Quantify the risk by using the formula

R = E × L × C

where R = risk, E = exposure, L = likelihood and C = consequences (the sum of individual consequences in the environment and legal, safety, business impact and public image/company reputation areas.) Use simple criteria to assign value to the measure of risk in each of these categories (e.g., high, medium, low, negligible).

2. Assess if there is a potential for risk exposure in undertaking the project and its abandonment.

3. Determine the tolerable risk level.

4. Include countermeasures in the project design, if possible.

See Appendix 5.6 for further details.

Business plan and priorities
The foundry’s business plan (usually over several time horizons – short-, mid- and long-term) and priority objectives should also be considered.

"The key is not to prioritize what is on your schedule, but to schedule your priorities!" – Steven Covey

Apply the “first things first” rule: put emphasis on a proactive, preventive approach to issues and projects, which will allow departure from the all-too-common fire fighting, crisis management mode of operations. In other words, ask, “Is this the right thing to do?”

Project’s profitability
1. Assess the total capital cost of the project, including, for example:

• Equipment price, modification, installation, certification; and
• Installation space.

2. Estimate the cumulative annual operating savings of the improvement project, such as:

• Power, water, natural gas, compressed air, consumables; and
• Maintenance, spare parts, labour.

Of these, for energy conservation projects, the energy consumption is the most important. Note that compressed air, due to the high cost of energy involved in its generation, is considered separately.

3. Calculate the simple payback on investment and express it in years (months, if less than one year).

Do you calculate the return on capital investment only as a simple payback? That is customary, but often it is better to use net present value, or internal rate of return, which is based on projected, discounted cash flow. This is better because you can include the effect of capital cost allowances (CCAs). The CCAs vary with the type of assets under consideration. For example, the CCA on machinery is 20%; for buildings it is 5%. These calculations will show the rate of return more accurately.

Risk
All projects involve some degree of risk. Organizations face a wide range of risks, e.g.:

• Financial – Accounting and audit, insurability, credit, insolvency;
• Organizational – Corporate image, human relations;
• External – Market, social change, climate change;
• Regulatory – Regulations, governmental policies;
• Legal – Legislation, statutes, torts, contracts; and
• Operational – Production, environment, health and safety, assets.

Business risk is a threat that an event, action or inaction will adversely affect an organization’s ability to achieve its business objective and execute its strategies successfully.

Business risk management is a proactive approach that helps owners and managers to anticipate and respond effectively to risk. Not all business risks can be eliminated.

To assess whether further effort to reduce risk is meaningful, an acceptable risk tolerance level must be established.

Further information on business risk assessment can be obtained from reading the CAN/CSA-Q850-97 Standard, Risk Management Guideline for Decision-Makers. To buy the guideline, load their website at www.csa.ca and then click on Welcome> Standards> Quality/Business Management> Online Store & Catalogue> Risk Management> Q850> CAN/CSA-Q850-97. The tables in Appendix 5.6, which will allow you to rate various risks quickly and simply, are based on this standard.

Costing of a project
Note that for initial screening purposes, “best guess” rough estimates of a project’s capital cost are generally sufficient. We are interested in the order of magnitude at this pre-feasibility level, based on a preliminary concept. Include generous allowance for all cost components that should be considered in the project, such as equipment capital costs, installation costs (mechanical, structural, piping and civil engineering, site preparation, existing equipment modifications/removal, electrical, etc.). Make allowance for indirect costs (such as construction management, contractors’ overhead, owner’s costs, consultants). Include generous contingency leeway at this stage. We understand that at this stage the anticipated accuracy may be off by 50%. Use the results for initial ranking.

While it is difficult to predict the future, energy savings projects must be assessed in the context of the foundry’s future operations; e.g., future increases of production, possible process bottlenecks and anticipated process changes.

As the project selection progresses, the preliminarily selected projects can now be subjected to feasibility estimating, which uses more formal and better researched project pricing. Budgetary quotations may be obtained from vendors at this stage. All of the project component costs, as above, must now be developed in more detail.

When we have narrowed our choices to a particular solution, greater accuracy for a formal project approval process is required. It means that detailed engineering of the project, including drawings, schematic electrical, piping and duct diagrams, issuance of formal requests for proposal to multiple vendors, with all project specifications, etc., must be done. The typical relationships and anticipated accuracy levels are shown in Table 7.

Even now, our task is not quite completed. Before we will be able to arrive at a more accurate cost of the selected project, we must examine the possible trade-offs. We are not living in an ideal word, where all is possible. We must make choices. There are many considerations, each of which has a cost attached to it, and we must find an optimum solution. That optimum solution should then be the subject of project submission approval.

TABLE 7:
Cost estimation accuracy

Economic model for trade-offs
If you deal with a complex project with many variables, you may wish to consider computer modeling (computer simulation). The advantages lie in speedy answers to multiple scenarios. The disadvantages include high cost and skill level required to run a computer-modeling program.

For those disinclined to use computer simulation, another proven, very simple economic modeling tool is available, courtesy of Reinertsen & Associates of Redondo Beach, CA ("Do your product development math," Machine Design, May, 1998). It is based on setting uncomplicated trade-off rules in project development. It recognizes that every project has four key objectives:

• Schedule – target date;
• Project unit cost;
• Project performance; and
• Development costs.

Trade-offs between them should maximize a project’s profitability. The model allows the user to make the right investment decisions.

The target date is the date when the project should be fully on stream. The product unit costs are the implemented costs expressed based on product unit, or one tonne of metal cast, etc. The project performance measures the revenue stream over the project’s lifetime from the saving/improved productivity it will achieve. The development expense is the one-time cost associated with the development of the project.

The next step is to assign a dollar value to 1% change in each of those parameters. This is foundry-specific, something we can set as a rule of thumb very easily. We may now model, for example, a 50% overrun of development (i.e., equipment procurement and installation) expenses, a 10% overrun of production costs, a 10% performance shortfall, and a six-month delay in project commissioning. By applying the dollar values to each of the parameters, we can quickly see what impact each change will have on the anticipated saving (profit).

An application economic model helps decide trade-offs among individual project features or attributes. The various economic drivers – installation cost or down time – can be quantified and estimated, and total ownership cost can be expressed in dollars. This can be used to calculate the trade-off rules. In this case, reducing inspection time has nine times the impact of lowering electricity consumption.

Charts after D. Reinertsen, Machine Design, May 1998

The economic model can also be applied to a trade-off between features of the particular equipment, as the lower right-hand corner table above shows. For it, the total project ownership costs must be estimated (i.e., equipment cost, installation, commissioning; space cost; power, compressed air, consumables; cleaning, maintenance, labour; cost of breakdowns; spare parts, bad product; cost of down time; lost production time and volume; cost of missed sales, etc.). Expressed in dollars, the total ownership costs help in deciding trade-off among different performance/equipment attributes.

Important note
A foundry can use this economic model in evaluating other types of projects as well. For instance, when contemplating new product development and possible trade-offs, substitute appropriate terms, such as market introduction date, product, etc., for the parameters used in the preceding examples.

A few tips on how to implement the economic modeling tool

• Keep the financial model simple – when input data is imprecise, do not fret over accuracy of product unit costs; use cumulative profit before taxes instead – this is something that is generally understood. Focus any extra effort on making the input data as accurate as possible.
• Involve the right people – different team members may have different critical information needed to construct the model; involve the financial controller for analytical as well as political reasons.
• Make the trade-off rules visible – post the key numbers (e.g., what is one hour of down time worth, etc.) so that people see them all the time and will use them routinely. Review those numbers from time to time.
• Use the project economic model for decision making – be consistent in using it systematically.
• Integrate the tactical decision rules into your business process – make the decision rules a part of every project (e.g., any new-product business plan, too!). Start every project with a consistently calculated and reviewed set of tactical decision rules.
• Don’t develop projects (products, etc.) unless you are ready to do the simple math!

*The approach described here is considered proper because it is comprehensive. However, it is recognized that lack of necessary resources may force a foundry to implement a project without expending the time and effort required in comparing it to others. Once a project is seen as meeting the energy-savings requirements, clears all the other investment hurdles described here, there is no reason for delaying it. The advantage of this ad hoc approach is in the rapid implementation of projects, which start to provide ongoing energy savings.