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ОглавлениеThe Production and Distribution Process
This book deals with the management of risks through the life cycle of a process plant. We will address the question of why we do maintenance, what tasks we actually need to do, and when we should do them, so as to reduce these risks to a tolerable level and an acceptable cost. We will examine the role of maintenance in obtaining the desired level of system effectiveness, and begin this chapter with a discussion of the production and distribution process. After going through this chapter, the reader should have a better appreciation of the following:
•The production and distribution process and its role in creating value as goods and services;
•Difficulties in measuring efficiency and costs; understanding why distortions occur;
•Determination of value and sources of error in measuring
•Reasons for the rapid growth in both manufacturing and
•Understanding the systems approach; similarities in the manufacturing and service industries;
•Impact of efficiency on the use of resources;
•Maintenance and the efficient use of resources;
•Maintenance—the questions to address.
We need goods and services for our existence and comfort; this is, therefore, the focus of our efforts. We change raw materials into products that are more useful. We make, for example, furniture from wood or process data to obtain useful information. By doing so, we add value to the raw materials, thereby creating products that others need. We can also add value without any physical material being used. Thus, when a nurse takes a patient’s temperature, this information helps in the diagnosis of the illness, or in monitoring the line of treatment.
Another instance of adding value is by bringing a product to the market at the right time. Supermarkets serve their customers by stocking their shelves adequately with food (and other goods). They will not be willing to carry excessive stocks as there will be wastage of perishable goods. Overstocking will also cost the supermarket in terms of working capital, and therefore reduce profit margins. By moving goods to the shelves in time, supermarkets and their customers benefit, so we conclude that their actions have added value. The term distribution describes this process of movement of goods. It adds value by increasing consumer access.
Production processes include the extraction of raw materials by mining, and their conversion into useful products by manufacturing.If the main resource used is physical or intellectual energy,with a minimum of raw materials, we call it a service. The word process describes the flow of work, which enables production of goods or provision of services. In every commercial or industrial venture there is a flow of work, or Business Process. The business can vary widely; from a firm of accountants to a manufacturer of chemicals to a courier service.
In the case of many service industries, the output is information.Lawyers and financial analysts apply their knowledge, intellect, and specialized experience to process data and advise their clients. Management consultants advise businesses, and travel agents provide itinerary information, tickets, and hotel reservations. In all these cases, the output is information that is of value to the customer.
1.1.1 Criteria for assessing efficiency
In any process, we can obtain the end result in one or more ways. When one method needs less energy or raw materials than another, we say it is more efficient. For a given output of a specified quality, the process that needs the least inputs is the most efficient. The process can be efficient in respect of energy usage, materials usage, human effort, or other selected criteria. Potential damage to the environment is a matter of increasing concern, so this is an additional criterion to consider.
If we try to include all these criteria in defining efficiency, we face some practical difficulties. We can measure the cost of inputs such as materials or labor, but measuring environmental cost is not easy. The agency responsible for producing some of the waste products will not always bear the cost of minimizing their effects. In practical terms, efficiency improvements relate to those elements of cost that we can measure and record. It follows that such incomplete records are the basis of some efficiency improvement claims.
1.1.2 Improving efficiency
Businesses try to become more efficient by technological innovation,business process re-engineering, or restructuring. Efficiency improvements that are achieved by reducing energy inputs can impact both the costs and undesirable by-products. In this case, the visible inputs and the undesirable outputs decrease,so the outcome is an overall gain. A similar situation arises when it comes to reducing the input volume of the raw materials or the level of rejections.
When businesses make efficiency improvements through workforce reductions, complex secondary effects can take place. If the economy is buoyant, there may be no adverse effect, as those laid-off are likely to find work elsewhere. When the economy is not healthy, prevailing high unemployment levels will rise further. This could perhaps result in social problems, such as an increase in crime levels. The fact that workforce reductions may sometimes be essential for the survival of the business complicates this further. There may be social legislation in place preventing job losses,and as a result, the firm itself may go out of business.
1.1.3 Cost measurement and pitfalls
There are some difficulties in identifying the true cost of inputs. What is the cost of an uncut piece of diamond or a barrel of crude oil? The cost of mining the product is all that is visible, so this is what we usually understand as the cost of the item. We can add the cost of restoring the mine or reservoir to its original state, after extracting the ores that are of interest, and recalculate the cost of the item. We do not calculate the cost of replenishing the ore itself, which we consider as free.
Let us turn to the way in which errors can occur in recording costs. With direct or activity-based costing, we require the cost of all the inputs. This could be a time-consuming task, and can result in delays in decision making. In order to control costs, we have to make the decisions in time.
Good accounting practice mandates accuracy and, if for this purpose it takes more time, it is a price worth paying. Accounting systems fulfill their role, which is to calculate profits, and determine tax liabilities accurately. However, they take time, making day-to-day management difficult. Overhead accounting systems get around this problem by using a system of allocation of costs. These systems are cheaper and easier to administer.However, any allocation is only valid at the time it is made, and not for all time. The bases of allocation or underlying assumption schange over time, so errors are unavoidable. This distorts the cost picture and incorrect cost allocations are not easy to find or correct.
Subsidies, duty drawbacks, tax rebates, and other incentives introduce other distortions. The effect of these adjustments is to reduce the visible capital and revenue expenditures, making an otherwise inefficient industry viable. From an overall economic and political perspective, this may be acceptable or even desirable. It can help distribute business activity more evenly and relieve overcrowding and strain on public services. However, it can distort the cost picture considerably and prevent the application of market forces.
We have to recognize these sources of errors in measuring costs. In this book we will use the concept of cost as we measure it currently, knowing that there can be some distortions.
1.2.1 Mechanization and productivity
When we carry out some part of the production or distribution process, we are adding value by creating something that people want.We have to measure this value first if we want to maximize it. Let us examine some of the relevant issues.
In the days before the steam engine, we used human or animal power to carry out work. The steam engine brought additional machine power, enabling one person to do the work that previously required several people. As a result each worker’s output rose dramatically. The value of a worker’s contribution, as measured by the number of items or widgets produced per hour, grew significantly. The wages and bonuses of the workers kept pace with these productivity gains.
1.2.2 Value added and its measurement
We use the cost of inputs as a measure of the value added, but this approach has some short comings. Consider ‘wages’ as one example of the inputs. We have to include the wages of the people who produced the widgets, and that of the truck driver who brought them to the shop. Next we include the wages of the attendant who stored them, the salesperson who sold them, and the store manager who supervised all this activity. Some of the inputs can be common to several products, adding further complexity. For example, the store manager’s contribution is common to all the products sold; it is not practical to measure the element of these costs chargeable to the widgets under consideration. We have to distribute the store manager’s wages equitably among the various products, but such a system is not readily available. This example illustrates the difficulty in identifying the contribution of wages to the cost. Similarly, it is difficult to apportion the cost of other inputs such as heating, lighting,or ventilation.
We can also consider ‘value’ from the point of view of the customers. First, observe the competition, and see what they are able to do. If they can produce comparable goods or services at a lower price than we can, customers will switch their loyalty. From their point of view, the value is what they are willing to pay. The question is: how much of their own work are they willing to barter for the work we put into making the widgets? Pure competition will drive producers to find ways to improve their efficiency, and drive prices downward. Thus, another way is to look at the share of the market we are able to corner.Using this approach, one could say that Company A, which commands a larger share of the market than Company B, adds more value. Some lawyers, doctors, and consultants command a high fee rate because the customer perceives their service to be of greater value.
Assigning a value to work is not a simple task of adding up prices or costs. We must recognize that there will be simplifications in any method used, and that we have to make some adjustments to compensate for them. Efficiency improvements justified on cost savings need careful checking—are the underlying assumptions and simplifications acceptable?
1.3 MANUFACTURING AND SERVICE INDUSTRIES
1.3.1 Conversion processes
We have defined manufacturing as the process of converting raw materials into useful products. Conversion processes can take various forms. For example, an automobile manufacturer uses mainly physical processes, while a pharmaceutical manufacturer primarily uses chemical or biological processes. Power generation companies that use fossil fuel use a chemical process of combustion and a physical process of conversion of mechanical energy into electrical energy. Manufacturers add value, using appropriate conversion processes.
1.3.2 Factors influencing the efficiency of industries
Since the invention of the steam engine, the productivity of human labor has increased steadily. Some of the efficiency gains are due to improvements in the production process itself. Inventions, discoveries, and philosophies have helped the process. For example, modern power generation plants use a combined-cycle process. They use gas turbines to drive alternators. The hot exhaust gases from the gas turbines help raise high-pressure steam that provides energy to steam turbines. These drive other alternators to generate additional electrical power. Thus, we can recover a large part of the waste heat, thereby reducing the consumption of fuel.
A very significant improvement in productivity has occurred in the last quarter of the twentieth century due to the widespread use of computers. With the use of computers, the required information is readily available, thereby improving the quality and timeliness of decisions.
1.3.3 Factors affecting demand
The demand for services has grown rapidly since World War II. Due to the rise in living standards of a growing population, the number of people who can afford services has grown dramatically. As a result of the larger demand and the effects of economies of scale, unit prices have kept falling. These effects, in turn, stimulate demand, accounting for rapid growth of the services sector. In the case of the manufacturing sector, however, better, longer lasting goods have reduced demand somewhat.
Demographic shifts have also taken place, and in many countries there is a large aging population. This has increased the demand for health care, creating a wide range of new service industries. Similarly, concern for the environment has led to the creation and rapid growth of the recycling industry.
Some of the characteristics of the manufacturing and service industries are very similar. This is true whether the process is one of production or distribution. We will consider a few examples to illustrate these similarities.
A machinist producing a part on an automatic lathe has to meet certain quality standards, such as dimensional accuracy and surface finish. During the machining operation, the tool tip will lose its sharpness. The machine itself will wear out slightly, and some of its internal components will go out of alignment. The result will be that each new part is slightly different in dimensions and finish from the previous one. The parts are acceptable as long as the dimensions and finish fall within a tolerance band. However, the part produced will eventually fall outside this band. At this point, the process has gone out of control, so we need corrective action. The machinist will have to replace the tool and reset the machine, to bring the process back in control. This is illustrated in Figure 1.1.
In a chemical process plant, we use control systems to adjust the flow, pressure, temperature, or level of the fluids. Consider a level-controller on a vessel. The level is held constant, within a tolerance band, using this controller. Referring to Figure 1.2, the valve will open more if the level reaches the upper control setting, allowing a larger outward flow. It will close to reduce flow, when the liquid reaches the lower control setting. As in the earlier example, here the level-controller helps keep the process in control by adjusting the valve position.
Consider now a supermarket that has a policy of ensuring that customers do not have to wait for more than 5 minutes to reach the check-out counter. Only a few check-out counters will be open during slack periods. Whenever the queues get too long, the manager will open additional check-out counters. This is similar to the control action in the earlier examples.
Companies use internal audits to check that the staff observes the controls set out in their policies and procedures. Let us say that invoice processing periods are being audited. The auditor will look for deviations from norms set for this purpose. If the majority of the invoices take longer to process than expected, the process is not in control. A root cause analysis of the problem will help identify reasons for the delays.
Figure 1.1 Process control chart.
Though these examples are from different fields of activity, they are similar when seen from the systems point of view. In each of these examples, we can define the work flow by a process, which is subject to drift or deviation. If such a drift takes place, we can see it when the measured value falls outside the tolerance band. The process control mechanism then takes over to correct it. Such a model allows us to draw generalized conclusions that we can apply in a variety of situations.
1.5 IMPACT OF EFFICIENCY ON RESOURCES
1.5.1 Efficiency of utilization
Earlier,we looked at some of the factors influencing the efficiency in the manufacturing phase. For this purpose, we define efficiency as the ratio of the outputs to the inputs. We can also examine the way the consumer uses the item. We define efficiency of utilization as the ratio of the age at which we replace an item to its design life under the prevailing operating conditions.
Figure 1.2 Level controller operation.
First, we examine whether we use the item to the end of its economic life. Second, is it able to reach the end of its economic life? In other words, do we operate and maintain it correctly? If not, this can be due to premature replacement of parts. When we carry out maintenance on a fixed time basis, useful life may be left in some of the parts replaced. Alternatively, we may replace parts prematurely because of poor installation, operation, or maintenance. In this case, the part does not have any useful life left at the time of replacement, but this shortening of its life was avoidable.
Manufacturers are concerned with production efficiency because it affects their income and profitability. From their point of view, if the consumer is inefficient in using the products, this is fine, as it improves the demand rate for their products. Poor operation and maintenance increases the consumers’ costs. If these consumers are themselves manufacturers of other products, high operating costs will make their own products less profitable. This book helps the consumer develop strategies to improve the efficiency of utilization.
1.5.2 Efficiency and non-renewable resources
An increase in efficiency, whether it is at the production or at the consumption end, reduces the total inputs and hence the demand for resources. We can ease the pressure on non-renewable resources greatly by doing things efficiently. In this context,the efficiency of both producer and consumer are important.
The first step in improving efficiency is to measure current performance. Qualitative or subjective measurements are perfectly acceptable and appropriate in cases where quantitative methods are impractical.
1.6 MAINTENANCE—THE QUESTIONS TO ADDRESS
We have looked at the holistic aspects of maintenance so far. What do we actually achieve when we carry out maintenance? Capital investments create production capacity. This capacity will decrease with use and time, unless we take the right actions—which we call maintenance.Equipment degrades with use, due to a variety of reasons. It can get internally fouled by particulates or residues from the process or materials of construction.It may deteriorate due to wear, corrosion, erosion, fatigue,or creep. These mechanisms lead to component and equipment failure, resulting in equipment unavailability, and maintenance costs. Unavailability can affect safety or production,so we want to keep that as low as economically possible. Planned downtime has lower consequences than unplanned downtime, so we try to minimize the latter.
What do we mean by the term maintenance? The British Standard BS 4778-3.1:1991 defines it as “...actions intended to retain an item in, or restore it to, a state in which it can perform its intended functions.” In simple terms, we need equipment to do something for us, i.e., to have a function. To retain that function over its life, we have to do maintenance.
Loss of process safety can lead to serious accidents, such as that in the Texas City Refinery in March 2005. An Independent Safety Panel Review headed by (former Secretary of State) James Baker investigated and concluded that “When people lose an appreciation of how their safety systems were intended to work, safety systems and controls can deteriorate, lessons can be forgotten, and hazards and deviations from safe operating procedures can be accepted. Workers and supervisors can increasingly rely on how things were done before, rather than rely on sound engineering principles and other controls. People can forget to be afraid.”1,2.
Maintenance is central to process plant performance, as it affects both profitability and safety. How well we do it depends on our ability to answer the questions, what work to do, when to do it, and the process steps to use. Doing so efficiently means we will do the minimum volume of work at the right time in the right way.
When an item of equipment fails prematurely, we incur additional maintenance costs and a loss of production and/or safety. As a result we cannot utilize the full capability of the equipment. Timely and effective maintenance helps avoid this situation. Good maintenance results in increased production and reduced costs. Correct maintenance increases the life of the plant by preventing premature failures. Such failures lead to inefficiency of utilization and waste of resources. The need to minimize these losses is why we need to maintain equipment. We will examine the purpose and mechanics of maintenance further in Chapter 9. There, we will see that the role of maintenance is to ensure the viability and profitability of the plant. In Chapter 10, we offer guidance on the strategies available to you to find the most applicable and effective tasks and to select from these the ones with the lowest cost. At the end of Chapter 10, you should have a clear idea of what tasks are required and when they should be done in order to manage the risks to viability and profitability of the plant. In Chapter 12, we will discuss how a plant performing poorly can take systematic steps to become a top performer.
We began this chapter by defining the production and distribution processes and then looked at some of the factors that influence efficiency. We use costs to measure performance; low costs imply high efficiency. When measuring costs, we make simplifications,as a result of which we may introduce some distortions.
We discussed how we compute the value of work, using production costs or competitive market prices. We noted that there are some sources of error in arriving at the value of work.
Thereafter, we saw how manufacturing and service industries add value. Manufacturing productivity has grown dramatically, due to cheap and plentiful electro-mechanical power and, more recently,computing power. A beneficial cycle of increased productivity—raising the buying power of consumers—results in increased demand. This has lowered prices further, encouraging rapid growth of manufacturing and services industries.
Manufacturing and service industries similar processes. The systems approach helps us to understand these, and how to control them.We illustrated this similarity with a number of examples.
Thereafter, we examined the impact of efficiency on the use of resources. We noted that cost is a measure of efficiency, but recognize that all costs are not visible; hence distortions can occur. With this understanding, we saw how to use costs to monitor efficiency. A brief discussion of the role played by maintenance in managing safety, availability and costs sets the stage for a more detailed examination later. We will address the questions why, what and when in regard to maintenance as we go through the book.
REFERENCES
1.Original Baker report is at http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/SP/STAGING/local_assets/assets/pdfs/Baker_panel_report.pdf
2.UK HSE report. http://www.hse.gov.uk/leadership/bakerreport.pdf
