Capital project value improvement in the 21st century: Trillions of
dollars in the offing PART II
Continuous optimization
Many people perform
project-value analyses only at the investment-decision stage of a project.
Seasoned PVI practitioners, though, know that the PVI process must be engaged
in continuously, throughout the project lifecycle. In fact, significant
benefits can be accomplished early in the project lifecycle, when key
trade-offs are often evaluated and technical design can be changed relatively
easily without adversely impacting schedule.
A continuous, rigorous
PVI implementation even at later stages of the project lifecycle can unlock
project savings well after traditional approaches would have ceased to
look—even benefiting future projects.
For example, projects
in remote, labor-constrained areas often face fabrication and logistics
challenges that were not well understood or anticipated during design. One
operator gained a 15 percent improvement on fabrication costs by implementing
modularization and logistical optimization improvements into the design just
prior to fabrication. By modularizing pipe racks, process modules and stair
towers, and taking advantage of lowest cost package sizing and routing to
minimize transport costs, the team was able to reduce costs while mitigating
the risks of working in a remote location.
In the above example,
the fabrication and transport ideas generated by the project team were
communicated to the design team for incorporation into future designs and
specifications.
But wholesale
implementation can prove difficult. Project owners must take an active role in
this effort, as they are best positioned to maintain continuity between
solutions and the core issues at hand. Leadership can begin with small projects
to acclimate staff to PVI principles and practices. Once a project team
experiences actual value on smaller projects, increase project size until all
projects in that business unit fall under PVI requirements. After leadership
establishes PVI for a portfolio of projects in one business unit, they can then
apply it to all business units within the company.
Management systems
Agile cross-disciplinary ways of working
PVI practices are most
effective when the innovative agile approach underpins its cross-disciplinary
collaboration. “Agile” has made its way through the industry and is a familiar
buzzword—however, while many people know the term, it is not well understood.
The agile approach posits that requirements and solutions evolve through the
collaborative effort of dynamic, self-organizing, cross-functional teams and
their customers. It stresses adaptive, iterative, and evolutionary development
along with continuous improvement that encourages rapid and flexible response
to change. This provides a perfect platform for PVI to break existing silos and
harness the best thinking across the board.
For example, one North
American unconventional oil operator faced an unexpected drop in commodity
prices that challenged the economic viability of several projects. Applying an
agile approach, the operator hosted cross-functional ideation workshops and
solicited input throughout the value chain. This was significant in the
organization because, for the first time, key suppliers and stakeholders from
outside the organization were included in the design process. The effort
reduced installed costs for equipment by 40 percent and for facilities by 60
percent. The operator achieved these reductions largely by eliminating overly
robust requirements that had been specified by designers working in silos
without a clear understanding of the broader requirements.
Learning repository
As an organization
adopts a PVI culture, it should immediately begin to document and catalogue
proven ideas, as well as those that failed. This process formalizes
institutional knowledge so that it will endure beyond current circumstances and
staff. A major infrastructure firm embraced this concept and leveraged their
database of ideas to obtain a 12 percent cost savings on a 500-kilometer road
project through simple enhancements in pavement design. The creation of this
database was a concerted effort to leverage internal and external experts in
the industry to generate ideas, evaluating impact potential and focusing on the
highest rated ideas to implement rigorously.
Codifying the
knowledge-gathering process and assigning ownership to an individual can also
provide functional and effective returns across business lines. We routinely
utilize PVI examples collected from hundreds of projects in dozens of
industries to improve and streamline processes from the study/funding stage to
final delivery.
Robust financial modeling
Last but not least, all
ideas uncovered in the PVI process must go through robust financial modeling.
Capital project leaders too often make trade-off decisions based on simplistic
calculations that lack rigor and result in crude assumptions. Worldclass
capital organizations consistently test various optimization options including
Monte Carlo modeling, a technique used across sectors to measure and forecast
risk or uncertainty. By modeling a range of potential project outcomes, such as
changes in delivery timelines or commodity prices, Monte Carlo modeling can
provide a superior understanding of real world outcome distributions and enable
more educated decisions.
Technical systems
Design standardization
Design standardization
provides one of the greatest savings opportunities in capital projects.
McKinsey research finds that a five-to-tenfold increase in construction productivity
would be possible if construction were to move to a manufacturing-like system
of mass production, with a greater degree of standardization and
modularization. Such approaches are becoming more common, but are not yet the
norm.2
Capital project designs
are often bespoke, which may seemingly preclude the potential productivity
gains of repeated manufacture and construction. But projects, particularly
major projects, consist of many separate elements and packages—each of which
can provide great opportunity for design standardization. Applying PVI,
particularly in the planning and delivery phases, can prove most useful in
identifying these opportunities.
In addition to savings,
project owners who incorporate standard designs often benefit from reduced
contractor pricing, as contractors can establish facilities tailored to
providing standard products. One upstream petroleum major realized a
seven-month improvement in time-to-market by abandoning its legacy of tendering
projects that required unique execution approaches (bidding, fabrication, and
construction) for each project in favor of a standardized and modularized
design. This move to standardization was made possible through detailed
interviews and problem solving with contractors, partners, suppliers and owners
to identify optimal solutions.
Ultimately, every facet
of a project should be examined through the PVI lens to see if it must be
bespoke or if it can be standardized.
The Minimal Technical Solution
The Minimal Technical
Solution (MTS) methodology serves as a framework to illustrate a project’s
baseline needs, a starting point for design optimization. Once those needs are
defined, the MTS helps users determine necessary add-ons to optimize design,
eliminate any content that does not increase a project’s cash flow, and improve
understanding of the relevant tradeoffs. Analyzed from the macro-level
(production system) to the micro-level (single piece of equipment), this
framework examines the project’s design requirements at the functional design
stage before detailed engineering and procurement has begun.
MTS is not simply a
cost-cutting exercise that slashes budgets to infeasible levels. Rather, by
identifying an intermediate solution that meets mandatory requirements, it sets
a starting point for subsequent iteration toward an optimal solution. MTS
ensures that capex will not exceed expectations, that design is not
over-engineered, and that potential options offer the best NPV. For example, a
major downstream petroleum company saw a capex reduction of five to seven
percent and an NPV improvement of 30–40 percent through the implementation of
MTS in their plant expansion program. The organization defined functional
requirements throughout the process flow, identifying the difference between
the baseline concept for each dimension and its MTS in order to isolate the
largest opportunities.
Design to Value
Each technical solution
proposed in the PVI process—from minimizing technical requirements to
standardizing components—must be validated with the project business case on an
ongoing basis, through a process known as Design to Value (DtV). Each iteration
of the design is modeled on an NPV basis to assure that all decisions maximize
the project’s financial return. In this way, design decisions are tested,
improved, and finally validated with respect to the financial value generated
for the project. This continuous interaction between technical and financial
considerations throughout the process assures that the project business case is
clearly understood throughout the organization.
Capitalizing on the opportunity
A monumental
opportunity exists for project owners who embrace PVI. This is particularly
important when weighed against the vagaries of unpredictable commodity prices,
a fluctuating labor pool, and a shortage of design-and-construction
professionals. Going forward, project owners must ensure project success by
adopting PVI, rather than chasing more projects. But they shouldn’t stop there.
For various reasons,
industry leaders failed to sustain or institutionalize PVI best practices in
the past. That should not happen again. Meaningful steps must be taken to
integrate and systematize PVI into the culture of the industry. In addition,
leaders must also take great care to ensure that these practices remain
flexible and adaptive, and are periodically tested and reexamined to avoid
calcification and rigidity. Done right, PVI implementation can mean trillions
of dollars captured that would have been lost to inefficiency and profligate
practices.
By Jeff Billows, Kevin Kroll, Piotr Pikul,
and Charlene
Pretorius
https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/capital-project-value-improvement-in-the-21st-century-trillions-of-dollars-in-the-offing?cid=other-eml-alt-mip-mck-oth-1808&hlkid=04343a7d0aa44d92ae4934d9954eb7eb&hctky=1627601&hdpid=4efbfdc4-f88f-4238-8f9a-5a8a560b5192
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