EPC reborn focus on flow
Economic Times January 2, 2014
The last few quarters have been tough for most Engineering Procurement and Construction (EPC) companies. Advances from new projects are going down, while collections from running projects have been poor. The net effect – increased borrowings with associated interest costs which are denting the profitability of companies. On the face of it, it looks like a macro-economic crisis that is outside the control of companies.
However, analysis of operating level performance of EPC companies shows a high correlation between an ‘internally controlled’ variable – the project execution lead-time (and delays) with margin erosions and working capital requirements. When site closures are grossly delayed, the direct cash outflow in terms of missing material and site expenses balloons up, and the last part of the receivables linked to site handover gets delayed.
Regardless of external conditions, EPC companies stand to gain in margin control and receivables management if they improve the rate of project closure or, in other words, improve the flow of projects in execution.
Obstacles to Improving Flow
Improving flow is not about special expediting efforts on a specific project. It involves acquiring capability to reduce lead-times of all projects as a process. When the delays are caused by customer scope changes, hold-ups in approvals and clearances from external agencies, reducing lead-times seems impossible. However, hidden behind visible external delays are those caused by internal factors.
Management by Turnover: The Biggest Waste
Most EPC companies are obsessed with meeting turnover targets in each period (month, quarter). When different items of a single project have varying billing values, and there is pressure to show turnover in the short period, the focus of procurement and design is invariably on billing of high value items, even though those items may not be needed immediately. The priority bias often leads to situations where a site has lot of material for the future but is waiting for matching parts to work uninterrupted in the present.
When site execution is interrupted due to missing designs or material, execution contractors do not assign adequate manpower per site. At same time, site managers are forced to open multiple work fronts to ensure good utilization, and to prevent direct resources from leaving the site. The net impact is slow progress and interruptions on almost every open site module.
When projects approach closure and handover, the managerial bandwidth required is very high as there are many issues to be resolved. At the same time, bulk of the turnover of the project is usually already booked. Consequently, the focus of management in a ‘turnoverobsessed’ company shifts to improving billing from other projects even as the sites that are in the final handover stage continue to stay open. Soon, the last 20 percent receivables start to pile up. In most projects, this 20 percent is the gross contribution. After a few years, when companies try to close old projects, official handovers become difficult and write-offs become the only way to exit projects.
Design Delays: The Vicious Loop
Expediting requests from many open sites for missing design and corrections create frequent interruptions in design of other projects, which add to the design lead-time of every project.
Interruptions in design tasks emerge not just from sites, but are also caused by delays in vendor inputs arising from conflict of day-to-day priorities between purchase (order placement) and design departments. Pending information inputs from customers adds to the delays. Hence, design departments are frequently switching either within the modules of a project or across different projects. This adds to the lead-time, and forces the department to release drawings with assumptions. These drawings ‘flow back’ for corrections, adding to the interruptions. Delays in design and release in parts, coupled with ‘turnoverbased’ prioritising of items lead to desynchronization of items arriving at site.
The Hindsight Bias ‘Solution’
When delays are detected late but the associated co-ordination lapses are resolved almost overnight, one tends to conclude, albeit in hindsight, that detailed planning and scheduling of tasks with improved accountability for task milestones across departments will solve coordination problems.
However, when an EPC project requires management of high volume of unique procured items and drawings, and each item or drawing requires coordination efforts across multiple departments, and there are many projects in the system, making detailed plans at item level, to drive coordination, is laborious. Such plans are also hypersensitive to slightest uncertainty. At the same time, when resources are shared across projects, delays in tasks of one project can create a multiplier effect of delays across other project tasks. Hence, all such plans go haywire within few weeks of execution.
The Way Out
Experienced EPC managers acknowledge that the fastest execution happens when work goes on uninterrupted. However, they are forced to concede to interruptions. Major sources of interruptions are: (1) Priority conflicts, (2) Flow back of work from downstream departments and (3) Need to wait for information or approvals. These cannot be reduced by scheduling but only by instituting flow control rules
Flow Control rule 1: Gating and Control of Work in Progress (WIP) Levels
Scheduling milestone dates for different agencies cannot help reduce interruptions delays in an environment of uncertainties. They only add up to priority conflicts at the operating level, and amplify interruptions. Interruptions can be reduced dramatically by having a process that forces work front closures across coordinating departments. Limiting the number of open independent design modules (WIP level), will bring focus on closures. A new design module of any project should not be worked upon unless an existing module in the allowed WIP limits, meets the closure criterion. This would prevent interruptions and reduce lead-time of every design module.
The closure criteria should also be used as a ‘no-start’ gating rule for subsequent phase of site execution.
The WIP control along with ‘no-start’ gating rule forces synchronisation of design department priorities with that of purchase department. These rules enable timely equipment and scope finalisation for purchase order placement, which in turn helps in receiving the initial equipment vendor inputs, well within time, as required to complete engineering. At the same time, a strict closure criterion reduces ‘flow backs’. When designs are waiting in queue for entering the ‘WIP zone’,one gets more time to arrange for required information from customers.
While WIP rules in design/engineering enable alignment of vendor designs with overall engineering, it is also crucial to align equipment supply as per the site erection sequence. When equipment manufacturing priority considerations are related to the billing rate of manufacturer, there is a high chance of receiving parts out of sequence. The way to prevent this is to align manufacturing clearances based on site sequence requirements.
Flow Control rule 2: A common and stable project system
Without a detailed item-level scheduling, the uncertain environment of EPC projects requires a common and stable priority system for execution of any task for all departments. Managers should have a common understanding of what is truly urgent and what is not.
The implementation of strict flow control rules of gating and WIP controls ensures most tasks are executed close to their ‘touch time’. In this new environment, the tasks can be planned in a fraction of their typical lead-time, and a common time buffer pool can be created for the project. This time can be shared by all departments. The rate of usage of buffers along with progress of project can also be used to set a common, objective priority system.
Flow Control rule 3: Predefined rhythm of flow management
Since tasks are planned close to their touch times, they are exposed to delays due to uncertainty. Such ‘delays’ should not be attributed to failure of individuals doing the tasks. This implies that management intervention cannot be postponed to a task level deadline. The way out is to set up default ‘rhythm’ of reviewing tasks and projects. At the supervisor level, task management should be done daily to ensure maximum touch time in a day for the task in progress. At higher levels, the ‘rhythm’ of review can be set at weekly or fortnightly frequencies.
Review can also be restricted to critical areas of the project as defined for the level of management. This form of predefined proactive intervention rather than reactive intervention close to deadlines ensures that issues are identified and tackled early.
The rules of flow management ensure rapid cross-agency information coordination for design integration and coordinated material supply for integration at sites, resulting in overall lead- time reduction in complex project environment of EPC companies.
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