by Roy Whitt, Vice-President of Value Realization, Meridium, Inc.
Historically, refined product margins for the U.S. have been experiencing zero or near zero margins about every five years over the past 22 years - with 2008 representing the most recent downturn. Unfortunately, in most instances, the industry response to these downturns has been almost as predictable as the downturns themselves - reduce costs with little or no data to measure the associated risk of these decisions - so it's no surprise that the decisions made often weren't the best ones. (Download The Perils of Cost Cutting.)
Serving in plant management at Ashland Inc. during two downturns in the 1990's, like most of my industry counterparts, I received the directive to reduce costs with very little objective data on which to base my decisions. While generally there is plentiful and accurate data surrounding company financials on which to base cost-cutting decisions, data surrounding physical assets and the impact of altered expenditures on their maintenance and operation is typically lacking. Recent catastrophic events in the US refining industry are dramatic examples of the need for adopting a "smart-cuts" versus "cut-costs" philosophy towards meeting economic challenges.
For instance, one of the primary findings of the Baker Report on the 2005 explosion at BP's Texas City refinery was the intense focus on cost-cutting. (Download How Companies are Complying with the Baker Report.) Total maintenance spending dropped 41 percent from 1992 to 1999 while total capital spending was cut 84 percent from 1992 to 2000 and managers were challenged to reduce costs an additional 25 percent after the company's merger with Amoco in 1998. Draw your own conclusions - mine is that a better way of managing costs based on risk is needed.
To be successful, asset-intensive manufacturing businesses need to achieve profit levels that will satisfy their primary stakeholders. No one will argue with the need to reduce costs when demand declines and cash flow is a problem. The challenge is how to achieve this objective while maintaining operational and safety performance standards that are not driven by the old attitude of "we'll survive" but rather a new attitude of "we'll thrive."
Smart Cuts vs. Cut Costs Approach
Perhaps the most important aspect of managing assets is the management of their associated risk. Understanding the relationship between cost-cutting and risk is critical in times of economic uncertainty where too often the speed at which cost-cutting measures are implemented is the measure of success rather than the achievement of the goal of increased profitability and safety.
So how can plant managers know the potential impact of budget cuts and their associated risk in the complexity of a process unit? One innovative technique for accomplishing this is to (1) measure current risk, (2) make strategy modifications, and (3) determine the resulting impact these changes have on mitigating risk. This approach helps companies identify the impact of proposed cost-cutting measures on production, compliance, safety and environmental risk and make smart cuts. (Register for the February 4 "Smart Cuts" webinar here.)
When executed within the boundaries of a well-conceived asset performance management program, smart cuts will more likely result in improved reliability, enhanced process safety and an improved risk profile than a "cost-cutting only" approach. Rather than making arbitrary or random cuts that might negatively impact asset performance, management should ensure that a holistic program is in place for managing physical assets and then identify cost reduction within the context of the program.
Back in the 1990s when I received those memos with the subject line "Cut Costs by 10% and Do It Fast," we simply didn't have a lot of good options for knowing the impact on plant equipment and systems. Now, a combination of software, best practices and subject matter expertise can help organizations make data-driven, fact-based decisions resulting in simultaneous short and long term benefits. Hurried cost-cutting without a clear understanding of the associated risk might still win your company the blue ribbon for quickest reaction time, but not one for long-term profitability.
Attending the NPRA Annual Meeting? Plan to attend Improve Asset Risk and Process Safety by Roy Whitt, Tuesday, March 24th, 3:30pm, Safety and Asset Integrity Track.
