The Digital Revolution. Industry 4.0. The Industrial Internet of Things. The 4th Industrial Revolution. Call it what you will but today’s fast-accelerating technological evolution has forever changed the business of manufacturing.
In any digital transformation, investment in safety systems is essential. However, the justification for a safety system upgrade is seldom a single factor. Many considerations combine to ultimately build a successful case for modernization. I once presented a manager with two choices: Upgrade the legacy safety system or wait until something happens and go out of business. I know that sounds a bit extreme, but it’s not always possible to restart operations after an outage!
This post will look at the critical “funding approach” step. To build an effective business justification and win that all-important approval to successfully secure money and resources for your new safety model, start here.
It’s about the ROI
Traditionally, finance departments considered manufacturing sites purely as financial assets made up of an initial investment plus ongoing fixed and variable costs. The after-tax profit and cash flow generated by the investment must justify these costs and yield an acceptable return to meet corporate targets.
In today’s dynamic economic climate, finance teams require all capital improvement proposals to demonstrate a clear a Return on Investment (ROI). That’s why it’s now more important than ever to focus on the financial justification and the benefits gained rather than just “updating to the most current platform.” The goal of justifying the upgrade is not to compare the new system versus the legacy system, but to fully and specifically connect project investments to their associated gains.
Two Funding Approaches
When considering funding requests for safety system upgrades, the first step in the justification process is to determine what funding to initially request.
Typically, there are two options for consideration: 1) request funding for the full project, or 2) request funding for a Front-End Loading (FEL) study to progressively better define the scope, budget, schedule, resources, risks and other project details. Requesting FEL funding is often a better approach, as it requires substantially less initial funds so is often easier to gain approval. Also, a good FEL study details the scope, areas of risk or uncertainty, and generates a tighter estimate with lower variability (less unexpected surprises).
Front-End Loading is often broken down into multiple phases, with each one providing greater accuracy and tighter commercial estimates as more details are developed, and risks understood:
- FEL-1 – Conceptual phase
- Determine the economic viability of the conceptual project before committing to the expense of more definitive engineering and study expenses
- Identify and explore options
- Establish if there is enough incentive to progress to the next stage by examining the results
- FEL-2 – Feasibility Phase
- Undertake a process hazard analysis (PHA) at this stage to identify any new potential risks and risk reduction measures required
- Determine the best technical and economic schemes, identify choices and options to further explore or exclude
- Gain stakeholder buy-in
- Consider that many projects die at this phase because of the cost and scheduling issues
- FEL-3 Definition Phase
- Achieve the best practical level of definition, overall risk and high quality commercial estimate. At this stage, it is normal to present to management to get financial approval (final sanction) to proceed to the detailed design and engineering stage.
Note that Front-end Loading is not free; investment is still required. The trade-off comes when the subsequent full migration project funding is requested. There is a much higher degree of certainty increasing the confidence of the stakeholders, decision makers and budget approvers. Even if the safety system upgrade budget is not immediately approved, the FEL documentation is often applicable in the future when the project does move ahead.
As the level of REL tasks increases the:
- project cost performance from authorization decreases by as much as 20%,
- variance between project schedule performance versus authorization decreases by as much as 39%,
- plant design capacity attained and facility utilization improved by as much as 15%,
- project scope changes after authorization tend to decrease, and
- likelihood that a project met or exceeded its financial goals increased
From experience, when a full budget is requested without having completed an FEL, the budget is more at risk and typically not more detailed than a ± 30% estimate. Even if this approach is used, it is prudent to include a detailed FEL as part of the overall scope, and build this into the schedule as a check point.
Regardless of which approach to funding you chose, a critical success factor is to define and agree what success looks like. This should be tied to business objectives and translated into measurable success indicator objectives. This is a great way to begin engaging colleagues, peers, key stakeholders etc. to gain buy-in.
In my next blog I take a closer look at Step 2 – Win hearts and minds to build consensus.
Miss the first blog in this series? Click below to read now.