Invensys fellow Dr Peter G. Martin explains the power of real-time process based accounting systems in a modern manufacturing environment.
SAI&C: What does the VP of strategic ventures actually do at IOM?
Martin: That is a very good question. Publicly traded companies like Invensys have real difficulty investing in the future, because when you are publicly traded you are mediated by the stock market and because of this publicly traded companies have to have a short-term focus. But no technology company will survive for very long with only a short-term focus. So we have a group whose job is to figure out what the future is, where we are going and how we are going to get there. My job literally is to create opportunities for clients and for Invensys and then hand those off to main stream Invensys organisations. My job changes about every year as we reinvent ourselves to stay in sync with the pulse of industry.
SAI&C: In that context, what value do modern automation systems really add in manufacturing and how can these be measured in ways that allow CFOs to attribute the benefits directly?
Martin: The important thing to realise is that automation can add a lot of value, but, it does not always do so. If all a company is doing is automating, or re-automating a system, that is not where the value comes from. Value is created by adding new value-generating functionality, not just replacing like for like.
The game in industry changed when the costs of production started to vary on an hourly basis. The monthly accounting systems in place could not provide any information or visibility to these near real-time variations. The real issue now is convergence between the automation and the accounting measures. Most of the measurement systems out there, business and operational, are not set up to work together to reveal the benefits (ROI) that an automation system adds. If real-time accounting systems were in place right to the process unit level, then it would become obvious that an expanded functionality and properly designed automation system can add more value than almost any other investment an industrial organisation can make.
The problem is, financial people are sceptical of the value of automation. This is partly the automation suppliers’ fault. Suppliers and industrial users have been too focused on getting the lifecycle cost of ownership to be low as possible. But, to a CFO, any cost to the business is a negative. Automation costs just look like an extra cost to the business, something the CFO really does not need or want.
What we should be focusing on is the positive profit impact the automation system provides and ways to measure its benefits, in an outcomes based sense. For instance, we need to create financial reports in a way that reveals to the CFO that although the operating cost of the automation may have been say $100 in a month, the benefit in terms of increased production value, reduced energy cost and reduced material costs was say $120. In other words, the focus must not be on the cost of automation, but rather on the positive economic benefit the automation system provides to the business of the plant.
Look at it from the CFO’s point of view. In a month 2000 things may have happened on the plant to drive the production value up or down. Which of those, if any, can be attributed to the automation system? If this cannot be clearly communicated then the automation system is relegated to a cost that provides little or no value.
Actually, accounting measurement issues are even more complex. Typically CFOs are looking at plant wide accounting while the engineers are focused on KPIs that relate to a specific subsection or unit of the plant. There is no mathematical way you can ever reconcile the two. What I mean by that is, if an engineer puts an automation solution on a distillation column to reduce its overall energy consumption, the energy KPI for that column may improve significantly as a result. But the CFO typically will not believe it because the overall energy costs for the plant, which is what the accounting system measures, does not appear to improve in the same way. What I believe we need is a plant-wide system based on accounting measures, not KPIs, which shows the contribution to the production value of each of the different units in the value chain. Get it down to an equation an accountant can validate, then the accountants will start to see the value automation solutions can provide.
The question then is how to make the equations reflect what is truly happening on the plant? The way you do this is by incorporating all the sensory data from the processes: temperatures, pressures, flows, levels, and use this information as source data for the real-time accounting models. This is when you must pull the engineers in to model the equations. These are accounting measures remember, and are not based on physics, chemistry or biology. Given the equations and the engineering knowledge of the plant, engineers can be very successful at building the real-time accounting models right in the control systems. Once that is done, you can combine the results from the different subsections in the plant to get area level measures. Finally, when you combine these you get the overall plant-wide performance. If these are then historised in a process historian we can look at costs per day, per shift, whatever you want, that shows the effect of all the critical production parameters on the overall production value of the plant. This becomes a real-time activity based accounting system.
A sporting analogy would be, a baseball hitting coach who has been trying to improve the offensive performance of the team, but only has monthly team batting averages to go by. It would be near impossible for the coach to know where to invest his energy to improve the team’s performance. But if I give the coach the batting averages for each individual player on a real-time basis, then the necessary information in the necessary time frame is available to make decisions and provide advice that will improve both individual and team performance.
The next question is how do we use this to determine the ROI of each automation investment? On a brownfield project it is relatively easy. Put the real-time accounting measures in place before you implement the automation solution and let then baseline the performance of the unit. Then install the automation solution. The installed accounting measures will automatically measure the benefits directly – even if you are only automating a subsection of the plant at a time.
On a greenfield project it is more difficult because there is no way to build a baseline. But the results from brownfield projects are typically so striking that it is usually not difficult to extrapolate to motivate the greenfield investments.
Here is the most amazing thing we have learned, there is more potential for payback and profitability improvements at the process level than from anywhere else in the plant. In our experience the numbers are through the roof and there is a reason for this. With the market downturns of the last decade and resulting downsizing many plants are in need of plant floor attention and improvements. Small improvements in plant level measurement and controls can directly tie to profitability improvements in short order.
SAI&C: What these ideas of dynamic performance measurement imply, is that in fast changing environments the operator is becoming even more critical to organisational profitability. Could you expand on this?
Martin: The implication is correct. There are primarily three critical dynamic performance measures at plant levels, the production value of the plant, the energy costs and the material costs. Now that we have an accounting system that allows us to measure these in real-time, we can start feeding back to the operators the impact their actions are having on the plant, and we can do this in dollar terms. Instead of presenting the operator with root cause measures (KPIs) we can instead display performance measures (profitability). Most operators understand money very well indeed.
Suppose an experienced operator who has been around forever likes to run things in manual. If suddenly it shows on the dashboard that production value is dropping compared to the previous shift that ran the plant in automatic control, the operator immediately knows that operating in manual is a performance mistake. They will snap the controllers back into automatic hoping to see the performance improve. But if at that point the performance still is not as high as on the previous shift, the operator might realise that the set point of the previous shift was different. At this point the operator can experiment to determine which set point provides the most value to the operation. By enabling this we found it took no time at all before all the operators have all the sections of the plant running fairly optimally across all the shifts. This is how you get best practice through dynamic performance measures. What I believe we will see in the future is a convergence between the operator and the engineer functions to drive even more value.
This gets us to the point where we can consider one of the most important benefits of an automation system solution – the ability to drive continuous improvement. If continuous improvement is achieved based on the dynamic performance measures, then the automation system is actually enabling better and better profitability over time – CFO heaven.
SAI&C: With this in mind, how should automation systems be bought versus how are they currently being sold?
Martin: Typically what happens at the moment is that industrial companies realise the need for an automation system upgrade, prepare a budget and submit a request for capital. When it starts to look like the capital request will be approved then a request for proposal (RFP) is prepared. A common problem though, RFPs are typically based on directly replacing the functionality of the old system on a like for like basis. Unfortunately, replacing old technology with new technology performing the exact same functions seldom results in improved performance. This is a real frustration for automation suppliers who want to add value that could knock performance out of the park – if only the capabilities of the newer technology would be fully utilised.
However, the lack of focus by the project team on value improvement is perfectly understandable. The project teams that create the RFPs know they are only measured on two things: on-time and on-budget delivery of the project. This is the way it has always been. What would be a game changer is if we were to start measuring the project teams differently – on on-time, on-budget delivery, and on the value the project adds to the company’s bottom line. Just as dynamic performance measures can be used to measure and improve the operator contribution to profitability, they could also be used to measure the performance of a project team.
The stumbling block is that the project team’s hands are now tied by budgets once the RFP is let. It is exactly at this point when the vendors would be able to contribute so much more to improve overall ROI, but it might cost a bit above what had been predicted.
So what do we all do? We specify the automation solution exactly to the RFP and the end-user gets an exact replacement system function for function. As I said earlier this adds little or no value.
Many companies that I interact with on a daily basis understand that replacement technology adds little or no value. They justify this approach by believing that once the new system is installed they will utilise the new functionality and get the potential value. What happens in practice though is that when the project team moves on to a new project, there is nobody left in the operation capable of implementing the new functionality and thirty years later when this system is obsolete it somehow never got done.
This is a disaster for our industry and it takes me back to your first question. One of the opportunities my group at Invensys is actively pursuing is going in after automation systems have been installed and are operating, then we work to take advantage of the technology by implementing the latent value adding functionality. The functionality we have talked about can truly be implemented on almost any modern automation platform and can add significant value. I see this as a strategic opportunity for growth into the future. The possibilities are almost unlimited.
For more information contact Jaco Markwat, Invensys Operations Management, +27 (0)11 607 8100, [email protected], www.iom.invensys.co.za
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