Quality Drives ROIC Pt. 4

A 4-Part Blog Series

Author: Steve Bogaert & Dan O'Connor | December 19, 2022

We are excited to bring you the final installment of our 4-part series, Quality Drives ROIC. Throughout this series, we discussed the impact quality-driven CapEx solutions have in helping to reduce the risk and uncertainty of capital allocation and expenditure on major projects. 

In Part 1, we identified five critical tenets of project quality and discussed the positive impact that following a quality process has in objectively selecting the best projects for optimizing Return on Invested Capital (ROIC). We also shared why it is valuable to bring in the third-party teammates as early as the identification stage of a CapEx investment. At Middough, we call this the Identify-Assess-Select phase.

In Part 2, we provided insight into how project teams should partner with their clients through quality-driven engagement in what we call the Define phase, and the elements required to be successful as you look to implement.

In Part 3, we talked about the elements needed to help minimize risk and optimize ROIC during execution, the importance of keeping the team together, and the impact of following a quality management system during the Execute phase.

In Part 4, we will cap off the series by discussing the critical elements to help minimize risk and optimize ROIC as projects transition from construction into commercial operation - the Operate phase.

The Operate phase transitions the project from construction into commercial operation. A safe and effective transition is a critical element of project delivery and the beginning of return on invested capital. Efforts must be well-planned when transitioning highly complex installations including one-of-a-kind processes and new facilities into operation and are essential to optimizing asset availability and product quality. Having the experience, quality processes and expertise necessary to safely place assets into service is the final step of project delivery.

The following examples help minimize risk and optimize ROIC during the Operate phase:

  1. Development of the Project Commissioning Plan. The plan should define all static, dynamic and acceptance testing requirements, assign responsibilities (via a Division of Responsibilities Matrix), align stakeholders with expectations, and ensure contract documents are developed to address administrative requirements. Early development of the plan with involvement of end-user stakeholders, and with procurement, has proven to be effective at streamlining the process of bringing new assets online.
  2. A key component of the Project Commissioning Plan is the Detailed Commissioning and Closeout Schedule. The commissioning and turnover period often becomes shortened and having a well-defined schedule that identifies tasks, milestones and durations will drive mitigations such as the need for multi-shift testing or outsourcing of activities.
  3. Pre-Startup Safety Review (PSSR), including system boundary definition leveraging P&IDs, LOTO strategy, temporary power strategy and energization sequence leveraging single lines. A properly executed PSSR minimizes the safety risks associated with brining new assets online.
  4. Operating Procedure Development and Operator Training. Development of operating procedures, especially for chemical or pharmaceutical installations, should not be overlooked. They are often a regulatory requirement, and their development and associated training can turn down a critical path if not well-planned.
  5. Predictive and Preventive Maintenance Systems. To optimize the availability of assets, predictive and preventive maintenance processes must be in place at initial startup. Using data gleaned from maintenance processes to optimize maintenance activities increases up-time and maximizes ROIC.
  6. Process Analytics. The use of analytics to optimize yield and/or throughput promotes process improvement. Critical process parameters must be agreed upon during the design process to support testing method development and data collection activities that provide the data necessary to support of process improvements that drive ROIC.

In Part 1, we discussed the value of including flexibility in thought and design to conceptualize and analyze project options relating to: scope, scale, and implementation timing. During the Operate phase, the value of design flexibility is realized as changes in scope, scale and timing can be implemented quickly while minimizing additional CapEx investments and improving ROIC.

Across industries, digital transformation is occurring at an exponential pace that impacts CapEx investment strategies. The factory of the future – what Deloitte calls, The Smart Factory – leverages the scaled adoption of advanced digital and cognitive technologies such as sensors, wearables, and robotics in helping manufacturers realize unprecedented value across the supply chain. Deloitte defines The Smart Factory to be “a flexible system that can self-optimize performance across a broader network, self-adapt to and learn from new conditions in real time, and autonomously run entire production processes.” Key characteristics of a Smart Factory include the following:

  • Connected processes, materials, and equipment.
  • Optimized for minimal manual intervention and high reliability.
  • Transparent network to enable greater visibility across the facility.
  • Proactive approach for issue identification and troubleshooting.
  • Agile operations to self-configure equipment and material flows with staffing schedule, and product changes.

During the Operate phase, The Smart Factory leverages automation / control solutions and asset integrity monitoring to reduce or postpone CapEx investments and create significant operating cost savings, improved asset efficiency and improved product quality:

In summary, companies (both publicly traded and privately held) can only create value for their organizations by generating a ROIC on capital projects that is greater than their Weighted Average Cost of Capital (WACC). For most companies, the Current Value of Existing Operations is the single largest component of their total Enterprise Value (Market Capitalization plus Debt). The Current Value of Existing Operations is calculated by dividing a company’s operating profit by its WACC.  If operating costs can be reduced permanently, or revenues accelerated on a project, the increase in the company’s Enterprise Value is significant. For example, if operating profit for a project is increased by $1 million and the company’s WACC is 7%, Enterprise Value would increase by $14.3 million (multiplier effect). Finally, through this 4-part series, we have demonstrated how a focus on quality can optimize ROIC at each stage resulting in significant increases in the value of an enterprise.

We hope you will take away some useful information, and we invite your feedback and comments. Please read each part of our 4-part series, Quality Drives ROIC and share your comments on LinkedIn.

Performance You Trust™ 

Middough’s commitment to quality results in trusted performance recognized by our clients. We encourage each Middough team member to assume personal responsibility for continuous improvement and compliance with our quality processes. The return on quality starts with the adoption of our core values, proceeds into the CapEx process during Phase 1, the Identify, Assess, and Select phase; adds definition and feasibility in Phase 2, and continues along the entire path of the project delivery process into our Execute (Phase 3) and Operate (Phase 4) phasesOur MAPP™ (Middough Advanced Project Procedures) quality management system provides the structure and rigor necessary to consistently deliver value and help to reduce the risk and uncertainty of capital allocation and expenditure on major projects. If you want to optimize your capital investment for the highest ROIC, see how we can help.