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Engineering in the age of optimization: adapting to the new realities of engineering.

The pulp and paper companies that survived the acquisitions and consolidations of the last decade, particularly in North America, have become highly cost-conscious and investor/profit-motivated. As a whole, they have cut back on all but essential capital expenditures, creating a ripple effect among supplier companies. Among those that are having to cope with those changes are the engineering and construction companies that have been closely aligned with the industry.

Certainly in North America, some significant trends have emerged:

* A move away from new machine construction

* Downsizing or elimination of some traditional engineering firms serving the paper industry

* A move by many paper companies to reduce or eliminate their engineering staffs

* A greater reliance on suppliers to manage the remaining engineering projects

One project manager for a large engineering firm offered the following observations on such recent trends:

"I have been through several downsizings on the mill side and one mill closure. Now on the consulting side, I see the impact of downsizing at the mills in the work we are asked to do.

"We are living in an age of decision-making focusing on short-term gain that is affecting our long-term viability. In 19 years at two mills, I worked for 10 mill managers (average tenure less than 2 years). In this environment, the managers do not make decisions based on long-term investment performance. In an industry where equipment has a 25-plus year life expectancy, we see projects rejected if they don't have a 1-to-2-year pay-back. You don't need engineers, just fixer-uppers. Nor do we see long-term thinking because the decisions are being made by people who will not be on site 5 years from now. All of the trends mentioned are prevalent in our industry (and others) because our focus doesn't go much beyond the next quarterly report."

So what impact have those trends had on the way engineering firms do business?

The move away from new machine construction has greatly reduced the volume of engineering design business, said Don Sorenson, vice president, pulp and paper process technology, for AMEC Simons in Greenville, SC. "The focus is on maximizing output from assets to reach reasonable return on capital employed," he said. Classic free market economics have prevailed in the supplier business. Demand dropped, exerting downward pressure on pricing to the point that some firms exited the business.

"Firms that remain continue to focus on cost, quality of service, and timeliness of response," Sorenson said. "AMEC has addressed the challenge on larger capital projects by developing engineering at lower cost, high performance execution centers. The benefits include greater stability for our staff and the ability to take advantage of currency exchange rates. This has been made possible using web-enabled technology and a standard, disciplined approach to projects. A second strategy is to provide on-site mill engineering support for smaller projects."

The reductions in mill engineering staffs and greater reliance on suppliers to take on mill engineering projects go hand-in-hand, Sorenson observed. "As paper companies reduced staff, of necessity they had to look outside for greater assistance on engineering projects. The business objectives of projects are scrutinized even more carefully. Surprises are not acceptable. Many paper companies have selected an EPC (engineering, procurement and construction) contracting approach to fix the price, delivery and risk management. This has become a significant part of AMEC's forest industry business."

"The trend away from greenfield mill and new machine installations and towards mill optimization and rebuild projects has been evident for some time, especially in North America," said Chris English, manager, pulp and paper, for Sandwell in Vancouver, BC, Canada. "These projects require a different mix of skills and experience on the engineering team. For the last 10 years our firm has targeted hiring to include key staff with mill experience and the right skills for this type of work."

The greater reliance on suppliers to provide detail engineering with their equipment supply is very familiar to firms such as Sandwell that do a significant part of their business outside of North America, English said. "An important role for us is therefore to adapt international best practices into a form that is appropriate for the project at hand."

Although the market for new machines has dried up considerably in North America, "there is still a good bit of new machine activity in Europe (as well as Asia)," said Don Traywick, vice president and general manager, BE&K Bechtel International, in Birmingham, AL. Several companies have installed new LWC machines in Europe, with the possibility of light-weight medium machines for corrugated being built in the near future.

OTHER TRENDS

Additional trends, such as the following, are having a more positive effect on today's engineering projects, Sorenson noted:

* Project scope is being much more tightly defined.

* There is all elevated focus on risk management

* It has become more common to spread risk through collaborative efforts, joint ventures, etc.

* The industry is more progressive in embracing change.

"The focus on the effective use of capital is changing the way projects are defined and implemented for many pulp and paper companies," English said. "A rigorous series of steps leading to project approval requires front end loading of the engineering effort, with up to 40% of the engineering effort spent prior to project approval. The benefits to the industry include early elimination of unattractive projects, reduced project risk, and a greater impact from the dollars spent on engineering."

Traywick pointed out that there are fewer major players serving the industry. "If you look at the top six or seven engineering firms that have traditionally served the industry [only] BE&K and Jacobs consider pulp and paper a core business, but the amount of pulp and paper business considered to the whole is a lot less," he suggested. While other "big players" continue to serve the pulp and paper industry, they've shifted more of their focus to more active industries.

A lot of that is due to available projects and the market, Traywick continued. "There's not the US$ 10 to US$ 15 billion in capital investment that there was five or 10 years ago. Today, we're seeing US$ 3 to US$ 4 billion. And if you look at the capital projects going through, they are very much smaller."

The flip side of that is, all of those companies have done a lot of downsizing. So you have a lot of people out there working as private consultants or they're working in smaller groups. They continue to do onsite work for mills rather than major capital projects for the paper companies.

"The other thing we've seen from our side of the business is the vendor and technology suppliers take on more of the consulting and engineering role that we used to have. They do studies, they do optimizations, they do basic engineering on projects. So some of the work traditionally done by E&C companies is now done by equipment suppliers such as Metso, Andritz Ahlstrom, and others," Traywick said.

"It's been very, very difficult because of the competitive nature of the market, the down-sizing, and the financial health of the paper companies to be able to get a decent fee, a decent mark-up on our people and our services. The companies that have the flexibility and serve other markets are able to put their key people to work in growth markets, such as power, telecommunications, and infrastructure, where there is good growth and good profit potential," Traywick added.

EFFECTS ON MILLS

Of course, mill engineering departments have been affected by the changes, also. Mill engineering has greater responsibility in supporting operations while managing project engineering, Sorenson noted. Likewise, mill engineers have more responsibility, but fewer resources.

Different companies have taken very different approaches to engineering management, English added. "One consistent trend is the desire to achieve better results with the application of current engineering tools and project management techniques, but with fewer resources. My impression is that this is usually being achieved."

English believes "it is essential for the success of a pulp and paper mill to develop a core of skilled engineering and maintenance staff with a long-term relationship with the facility. Besides their daily roles in troubleshooting, reliability, and continuous improvement, these people provide the collective technical memory for the organization."

However, "regardless of cost, it is conceptually impossible for every mill to employ top-quality expertise in every area," English said. "In my view, the best performing mill engineering teams focus on the core areas of the business and supplement their skills by drawing upon industry-leading expertise as needed. Engineering and/or maintenance for non-core areas can be contracted to specialists who have the experience and the focus to do a better job at a lower cost."

One of the advantages to outsourcing service is to match it more closely to need, Sorenson said. "Outsourcing provides the opportunity to convert a fixed cost to a variable cost, improving resource management," he said. "To maintain a knowledge base and continuity, some type of win/win partnering relationship is essential."

The types of projects and tasks mills typically farm out to engineering suppliers these days ranges from simple drafting, data management services to complete outsourcing of all engineering, construction, startup and commissioning services, Sorenson said.

"Over the past 10 years, AMEC Simons in New Zealand has helped key clients reduce their own staff by setting up engineering partnerships or preferred engineering agreements," a relatively new concept to North America, said Tony Johnson, principal, AMEC Simons, New Zealand. Among those clients are Norske Skog Tasman and Carter Holt Harvey Tasman in Kawerau, NZ.

"We apply many innovative engineering solutions these days compared to traditional engineering to reduce the cost of engineering, typically about 10% of a project, and reduce the cost of construction, about 30% of a project," Johnson said. Along with innovative contract engineering and a team approach to projects, the company uses PDMS (plant design management system) programs for advanced 3-D modeling and IDEAS software for modeling and thrashing out solutions at the design stage

"In the forest industry sector, we have over 75% of our business in engineering partnerships," Johnson said. AMEC Simons has, for example, been involved in a partnering agreement with Norske Skog Tasman (NST, formerly Tasman Pulp & Paper) since 1993.

The scope of services supplied to NST include the following:

* Project scope definition

* Strategic planning

* Plant optimization and bench-marking

* Feasibility studies

* Operations and maintenance support

* Shutdown planning and supervision

* Engineering, procurement and construction management services to plant upgrades, minor project and major capital projects.

TIPS FOR SUCCESS

For a continuing engineering and project management services agreement like that between Tasman and AMEC Simons to work, the following are givens, Johnson said:

* The client must accept responsibility for setting the strategic direction of the capital expenditure program, establishing priorities and presenting the facts upon which decision makers will base their investment decisions.

* The objective of the agreement must be to optimize service delivery effectiveness rather than to minimize engineering cost.

* The client must maintain an on-site pool of engineering expertise to set the standards against which technical and engineering decisions can be judged and to provide for succession planning.

* Maintenance support activities, including some CAD capability, project scope definition activities and capital plan administration activities, must be mill-based, though not necessarily mill-staffed.

* The client must maintain a single, integrated project administration system, consistent with its maintenance and accounting administration systems.

* The vendor "partner" organization must be dedicated to serving the client's needs without the distraction of having to survive in the greater market jungle.

* There must be a clear and fair contract between the parties, with risk shared in proportion to each party's ability to control events.

* The contract administrators (ie. project managers) must have the right incentives to work for the complementary interests of the parties and must be empowered to implement the actions they perceive to serve those interests.

On a broader scale, to help engineering projects go smoothly, Sorenson suggested that mills and engineering suppliers clearly define expectations and responsibilities upfront. Make certain that business drivers, such as effective capital deployment and operational excellence, are aligned with expectations, he said.

In Sorenson's view, these are some of the key factors that make or break an engineering project (from developing the contract to managing and completing the job):

* Competent staff

* Defined objectives

* Well-developed scope and schedule

* Good execution and risk management plan

* Work the plan

* Over communicate

* Manage change.

When an outside engineering firm is performing a mill engineering function, it is usually involved in a program made up of a large number of sub-assignments, English observed. It is important for both parties to have a common, clear understanding of the scope, schedule, and probable cost of each sub-assignment as it is initiated. An engineering firm that is qualified to provide this type of service will have techniques available to easily track and report on the multiple sub-assignments as well as the overall program.

The key to success for any project, English said, is still:

* Know what you want to achieve.

* Plan how to achieve it.

* Plan for the success of all parties involved.

* Follow the plan.

From the mill standpoint, the key to a successful project is really an alignment of the business strategy with the technology strategy, Traywick said. "Engineers, being engineers, would like to design and implement the latest and greatest technology," he said. "But meshing that with good returns and good payback, I think, is very critical. And I think that is the key."

Another "essential" is to develop good, sound, complete scopes of work that incorporate all of the plant or mill interface points. "Too many times there's a project in a paper mill that looks good, but you may overlook the impact it has on environmental and energy considerations, what the loading on the recovery boiler might be, on the mill water system, on the mill air system, etc.," Traywick said.

Staffing is yet another concern, especially having the right people in place at the mill in order to manage the project properly. "Don't give us some rookie or someone out of production who's never run a project to this project and expect good results."

Another aspect of any project is scheduling. "We've come full circle on schedules and I think, if anything, we're trying to do projects too fast," Traywick said. The expectations is, "if we did it in 18 months two years ago, then we ought to be able to do it in 16 months now. That's really not the case."

In addition to the downsizing and the impact it's had on engineering and construction companies, it's also had a similar impact on the technology suppliers and responsiveness, Traywick explained. "We used to be able to send a fax and get budget quotes within two days. Now, it may be two weeks or a month. [Equipment suppliers] don't have the staff to support that kind of activity any more either."

Traywick suggested that the true success of a project can only be measured a year or two after start-up. That's the time to ask, "how well did that project perform against the way it was scoped and the benefits and returns that were forecast," he said. "At the end of the day, it's how many tons are you making and how much it costs to do that, so I think those year 2 results are the most critical and they are most often overlooked."

Donald G. Meadows is senior editor of Solutions! Address correspondence to Meadows at dmeadows@tappi.org
COPYRIGHT 2001 Paper Industry Management Association
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Title Annotation:Management Focus
Author:Meadows, Donald G.
Publication:Solutions - for People, Processes and Paper
Date:Sep 1, 2001
Words:2583
Previous Article:Setting the industry's technology agenda: addressing the need for an industry commitment to innovation.
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