Spreadsheet Evaluation Method Helps Determine Capital Project Effectiveness

Though the scope of a capital project is defined to a major extent in the conceptual or preliminary engineering phase, the portion of approved capital allocated to perform this work is relatively small when compared with overall project cost. However, the engineering estimates and calculations made during these early phases can have a great impact on the success of the project.

In the early phases of a project, all options must be thoroughly and accurately investigated to ensure their capital effectiveness. If this portion of the project has incomplete data or is based on inaccurate project estimates, the estimated ROI will be significantly altered. To provide more accurate estimates, alternative methods have been developed for arranging, analyzing, and optimizing project data in the early stages.

IMPORTANCE OF ACCURATE ESTIMATES. In a typical capital project implementation, the project is divided into several phases. These phases include conceptual and preliminary engineering, detailed engineering or design, procurement, construction, and startup. Short-term projects are usually maintenance related and based on small incremental production advantages, while long-term capital projects are based on market analysis, long-term profitability forecasts, production costs, and market competitiveness.

Figure 1 shows the relationship between the different phases of a project and their ability to influence the final cost over the life of the project. As depicted, the earlier stages of the project have the highest ability to influence the overall project costs.

Inaccurate and incomplete capital estimates in a project's conceptual and preliminary engineering stage result in higher overall capital costs, extended downtime, and inefficient project schedules. On the other hand, overestimating the required capital risks lowers the attractiveness of the project as a capital investment. For capital effectiveness in projects, determining the following criteria is essential:

The scope development and background information used for project estimates should be as accurate as possible.

During the earlier phases of the project, constructibility issues should be considered for any major changes, including addition or replacement of equipment.

Overall outage time should be estimated, and the upgrades should be carefully planned to take advantage of regular maintenance outages, as well as to coordinate with other minor upgrades. This minimizes the overall shutdown outage time for the upgrade.

To facilitate the flow of information during the conceptual/study phase and to achieve the above objectives, a new engineering approach involving data collection and spreadsheet analysis has been developed.

DATA ARRANGEMENT. To evaluate the current operation of different equipment, a performance survey is required. This survey collects information on the operational requirements, design capacities, and average and maximum operational capacities of the equipment.

The survey should include information on electrical distribution systems, water usage, equipment capacities, and utilities such as steam capacities. Operational information such as minimum and maximum production of different grades, equipment performance, known operational bottlenecks, and steam and water usage are also collected. In addition, the survey should collect information on direct and indirect labor, material costs, and utility costs.

After collecting the survey information, the next step is to group the collected data in a usable form for performance evaluation and corporate planning. Figure 2 lists the data in a spreadsheet program for a mill producing different grades. In addition to the survey data, information related to production variation and grade changes are included as input variables for the program.

This information includes variations in the raw material furnish speed, trimmed width, basis weight, chemical consumption, and so forth. After the data is grouped, a flowsheet or block diagram is developed for the mill area to reflect the process equipment arrangement. Then, an overall material balance calculation is performed for the different unit operations based on the diagram.

Operational data such as stock consistencies, reject rates, retention in forming, and sheet dryness are specified as required. The spreadsheet program may cover different areas of the mill, starting from the winder and finishing back at the pulp mill and chemical recovery areas.

In addition, the program can be tailored to meet the required level of detail for capacity evaluations on different equipment or process areas. Equipment design information is stored in another spreadsheet as input data. Spreadsheet program logic is developed to compare the design information to the instantaneous operational capacity requirement at any given production speed. Based on this comparison, the program will highlight the equipment to upgrade, forming a preliminary equipment list for capital projects.

To find the major equipment's operational limits for different grades, the spreadsheet analysis can be repeated several times by changing the machine speed and also the grade specific information. For example, a particular speed increase on a lightweight linerboard grade may be hydraulically limited by a fan pump or a headbox, while, on the same machine, a heavier grade may instead be dryer limited. The mill must then decide which grade is more important in terms of market demand, production volume, profitability, etc., so that the list of equipment to upgrade can be finalized.

CAPITAL SPENDING OPTIMIZATION. Based on the various speeds and upgrade requirements indicated by the spreadsheet program for the different grades, an equipment list is developed. This list includes equipment upgrades necessary for increased production on any particular grade, as well as new equipment based on the combined limitations identified as necessary to achieve the desired grade-specific production levels.

The forecasted grade distribution-after the upgrade-is used to determine the average and maximum production possible after the upgrade. Then, the forecasted increase in production and the associated profitability data is used to determine the feasibility of the upgrade. If the ROI calculated at this point is lower than desired, the analysis can be repeated with a different speed increase and production level targets.

Figure 3 shows the equipment limitations as a function of machine speed. The target production and the machine speed can be visualized as a function of capital requirement. The machine speed can be chosen based on the major equipment upgrades needed and on the estimates for capital effectiveness interpreted as capital dollars/year/ton of incremental production.

If more than one particular grade is produced on the machine, similar charts should be established for all the major paper grades so that combined equipment limitations are identified. Based on the equipment upgrades and the grade mix for the future operations, the net incremental tonnage produced in the machine will be calculated using the incremental speeds projected for the different grades.

The advantages of using the proposed spreadsheet analysis and capital spending optimization methods include the following:

Establishing a reliable basis for the facility upgrade

Identifying major milestones for the project in terms of capital requirements, outage time requirements, layout issues, and construction costs

Developing an effective spreadsheet tool to evaluate alternate designs and production levels.

GRADE STRUCTURE, PROFITABILITY. For evaluation of different grade structures, the input data for the different grades-such as speed, basis weight, chemicals, refining, and drying rates-are defined in the spreadsheet program. The program computes the impact of different grades and their production levels on direct and indirect costs. In addition, the program calculates the profitability for different grades based on the average selling prices listed and the direct and indirect costs. To forecast the profitability of different grades based on the calculated changes in direct and indirect costs, a spreadsheet macro using input data for the different grade structures can be created.

The advantages of this grade structure and profitability analysis are as follows:

Compares the profitability of different grades and their corresponding limiting machine speeds with the upgrade requirements for achieving those speeds.

Helps choose a specific upgrade plan by comparing the relative profitability of grades.

Quantifies the production increase and, therefore, the profitability of various paper grades using information from the analysis of equipment upgrade requirements. This allows the mill to focus on the long-term capital requirements and to eliminate particular grades in order to produce new, more profitable grades.

Identifies operational inefficiencies in one facility as compared with another by comparing the grade profitability between the different facilities.

CONSTRUCTIBILITY ISSUES. One factor often unaddressed early in a project is the project's constructibility. In paper machine rebuilds involving major equipment upgrades, machine outage time is a major contributor to overall costs. Items to be upgraded during pre-shutdown and shutdown should be clearly identified to minimize the overall machine downtime. In addition, options for having the outages in phases or for combining the upgrades and different phases of the project should be investigated to minimize outage time. Estimations of steam, power, and water requirements and effluent treatment plant capacities should also be made during the conceptual phase of the project.

When choosing a particular machine speed for upgrades, constructibility issues such as relocations, material take-off, etc., should be given early consideration. Break points in the targeted speed must also be identified in terms of equipment upgrades. For example, while higher electrical load resulting from paper machine speed increases might be accommodated by an existing transformer's capacity, a speed increase beyond that point might require a new transformer, switchgear, and MCC room.

BALA PANCHAPAKESAN,Ph. D., is pulp and paper technology manager at Jacobs Engineering Group, Inc., Cary, N.C.