Despite a general slowdown in the U.S. economy, demand for cement remains steady, driven in large part by strong performance in building and highway construction. At the same time, cement producers are under increasing pressure to control costs. Challenges such as finding new sources of limestone, minimizing waste, managing carbon dioxide effluent, and complying with environmental regulations will reduce profits. In addition, the rising cost of fuel and energy is always a concern. As such, while increasing production and operating efficiency have been — and continue to be — key business drivers for the industry, reducing operating costs is increasingly important.

Contributing to the strategic challenge is the cyclical and seasonal nature of the industry itself. Accurate sales forecasts are difficult. Fluctuating interest rates affect local real estate markets and availability of public funds for construction. Weather also is a factor, as are unexpected operational problems, labor disputes, changes in environmental regulations, and availability of financing.

With such an array of business issues to balance, just settling on strategic priorities can be challenging. How does a cement plant keep costs in control without jeopardizing throughput or worker safety? Which cost center do you tackle first? Crushing? Grinding? Clinker production? Finish mills? Shipping?

If you knew the contribution of each process to your bottom-line, identifying strategic targets would be much easier. Unfortunately, most costing systems in operation today don't provide enough detail on operating costs at the area and unit level.

This article will describe an approach that will enable a company to analyze the contribution of each operating unit to the bottom-line and improve that contribution continuously. It is a manageable, common sense approach that when followed, enables a company to improve the contribution of process units and process areas in the plant to the bottom line of the company. The process involves measuring the business impact of the area designated for improvement to establish a benchmark for improvement, analyzing operations to identify avenues for improvement, and improving operations using advanced management or automation techniques. As clinker production is typically among the largest cost centers in a cement plant, this area will be used to demonstrate this approach to improving plant performance.

Strategy into action

To improve the contribution of the kiln to the company's bottom-line [RB3], one needs an economic baseline measure of its current contribution to the bottom line. Because traditional cost accounting systems do not provide enough granularity to give this benchmark and typically allocate a lot of production costs, you will need to map a quantified path from the top-line profit margin improvement strategy to the kiln.

Figure 1 depicts profit margin as the difference between revenue and cost. To increase the profit margin, one must increase revenue, reduce costs, or both. If demand is strong, production and operations might focus on increasing revenue by boosting production volume as any product made can be sold on the market at a good price.

In a market where demand is flat and competitive presence is significant, low-cost production manufacturing strategy could be adopted by the business. Other strategies also could be applicable depending on the company make-up, industry conditions, and competitive environment (amont other factors). Whichever path is chosen, you will present trade offs. In the cement industry, where both demand and cost pressure remain steady, profit improvement strategies depend heavily on each company's unique situation, including core competencies and local conditions.

While companies tend to be clear on the competitive strategies at the higher levels, the execution path is often fuzzy or even unknown. Figure 2 depicts management theorist Thomas Vollmann's perception of how strategy should be distributed across the organization. Each strategy is supported by an integrated set of sub-strategies, activities, and success measures, which decomposes from the boardroom to the plant floor. In most companies, however, the further one gets from the board room where the strategy is set, the less clarity (and alignment… there may or may not be clarity with the strategy, but alignment is critical) there is about the strategy itself and the related activities and measures.

Taking the right measures

While pure and total alignment may not be achieved easily, much can be gained by aligning one operating unit at a time. Discussions with key management and operating personnel will help determine where to start. Here are some factors to consider when looking for areas that would have significant profit improvement potential:

• Resource consumption — the largest cost centers have the greatest potential for savings.

• Volume of activity — high volume and high cost consumption typically go hand in hand, but this is not always the case.

• Variability — making the process less variable can improve costs (i.e. less electricity in the finish mill is used if the clinker is less variable and more uniformly sized) and in general can make available for sale a higher quality product that sells for more than lower quality product.

• Complexity — the more complex the operation, the greater the potential for improvement, since simple operations are more likely to be optimized already.

Applying these principles to the cement production, would suggest that the kiln is a process unit with high potential economic impact. The cost of kiln operation would decompose as follows:

Cement Cost = crushing $ + grinding $ + clinker $ + finishing $ + shipping $ (with clinker $ = pre-calcination $ + kiln $ + cooling $; kiln $ = (KWH)*$ + (Coal feed)*$ + Raw Materials)

While these equations appear simple on the surface, the fact is that most companies cannot complete them until after the cement has been produced. Cost of electricity for kiln operation, for example, is typically calculated by allocating aggregated costs to operations based on a wide variety of algorithms, none of which is typically related to actual operating activity. This will help determine profitability at the end of the quarter, but does little if anything to help manage operations in ways that could increase that profit.

Rather than allocating costs, a true assignment of cost to the operating unit is necessary in order to have an understanding of the kiln's economic performance relative to production costs. To do this you need a way to capture data about the operations, analyze it in the context of business priorities, and present the analysisto managers and operators in time to make a difference. This is becoming easier to do every day as plant information systems, supply chain management, and ERP systems become increasingly integrated.

Invensys, for example, has patented technology that can be applied to collect real-time process data at the sensor level and stores it in a relational database for use in real-time econometric models, which it calls Dynamic Performance Measures (DPMs). These DPMs measure the performance levels that the top-level profitability improvement strategy. Once defined, these metrics describe performance levels necessary to implement economic improvement strategies. The first step is to establish a performance benchmark by monitoring performance against the metrics for several weeks (or suitable time frame).

Analyzing performance

Once an operating baseline is in place, operators and managers can receive representations of the performance through on-screen dashboards, as shown in Figure 3. With dashboards in place at appropriate levels of the plant, managers and operators have a way of seeing how well they are performing relative to these economic measures which are aligned to the plant manufacturing strategy. These economic measures also provide a way of seeing the business impact of changes they make at the process level.

Further considering the kiln example, if an objective of increasing profitability by 2% is established, analysis of business and process people might conclude that it might require a 5% cost reduction, which can be achieved by 0.4% reduction in fossil fuel consumption and reducing energy costs by 5%. This would define the performance improvement target. The next step would be to define the improvement tools that can be deployed to get there.

Improving performance

Just the monitoring process alone can result in significant performance improvement. By enabling operators to monitor economic performance measures in real-time they can see how their actions affect those measurement and thus, the bottom line. Since the kiln is a complex operating unit, it will likely present opportunity for even greater gains through implementing advanced automation or management solutions.

Figure 4 shows how an operational objective of reducing electrical energy costs 3% to 5%, is supported by activities to improve fuel efficiency 3% to 7%, which are realized through the implementation of advanced process control (APC) and model-based predictive control (MPC) applications.

The APC applications, such as heat balance and feed control, bring about a steady state of operations by fine-tuning the existing loops, balancing heat, digitally managing blends, monitoring emissions, and intelligent feed control.

MPC applications use mathematical models and rules-based algorithms to optimize the process toward business objectives. This reduces the standard deviation of variables-under-control significantly, releasing latent potential in the process and increasing profitability or process output. These schemes also deliver other benefits that increase system availability, such as reduced equipment fouling and aging.

In addition to implemented integrated APC and MPC in the kiln area, a number of actions can speed execution of strategy, including the following improvements:

• Improved training for workers;

• Electronic work instructions;

• Implementation of Six Sigma, or Kaizen team improvement strategies; and

• Advanced supply chain management software.

Optimizing the enterprise

The example above focused just on the cost-driven strategy for the kiln area, so the econometrics were primarily cost focused. If the manufacturing strategy were to increase production, we might have an entirely different set of metrics.

Likewise, comparable metrics could be created for any of the cement plant operating units or areas. Managers and operators usually will have a good idea of where the greatest potential for gains lies.

Process improvement consultants can be brought in from the outside and deployed to investigate the process and identify areas for performance improvement. They should be driven by improving the process in order to improve economic performance as driven by plant manufacturing strategy and proper economic performance metrics. Once identified, the procedure discussed here will give plant operators a good basis for determining what to change and how to sustain and manage the improvement process.

One need not limit the procedure to the production line either. Comparable performance metrics could be identified for the supply chain. The plant could have an objective to reduce raw material costs by some percentage of previous year's costs. This could be accomplished through automation-enabled strategies souceing. Or, to reduce inventory levels, an advanced planning and scheduling scheme or solution could be employed.

This is but the beginning of an ongoing process, during which a company continually refines and improves operations based on the real-time feedback the company gets. Likewise, we see it extending throughout the company, measuring performance of the operation, implementing improvements, and making the weakest operation the strongest. Each will have a clearer picture of their cost structure and revenue contribution, and a greater ability to impact profitability.

This article was adapted from materials provided by Fayyaz Hussain, business performance consultant, Invensys Process Systems, Foxboro Mass.; web: www.invensysips.com).

FIGURE 4: Improvement Path for Reducing Cost of Electrical Energy 3% to 5% Target Measures 3% to 7% increase in fuel efficiency

Improvement Objective: Reduce variability in process (Delta)

• Action 1: Implement APC
• Action 2: Implement MPC