valve -et mkeimintg for proveyent of capral pro,,n-s

VALVE -Et MKEIMINTG FOR El V PROVEYENT OF CAPrAL PRO,,n -S

Prepared by

GERH MOUS JOH•NNES VAN ZYL

Supervisor

PROF. L PRETORDUS

A dissertation submitted in partial fulfillment of the requirements for the degree of

MAGISTER PH1LOSPHIAE ON ENGINEERONG MANAGEMENT

FACULTY OF ENGINEERING

RAND AFRIKAANS UNIVERSITY

May 1999

VA LUE ENGINEERING

Management Summary

To achieve growth, most corporations invest a large portion of their turnover in

new business ventures or in expanding current operations. These initiatives

imply capital and thus a return is essential in order to ensure survival.

Research indicates that capital projects seldom realize their full potential. The

value that is released by a project is often unacceptably lower than the value that

was initially forecast and for which the board granted approval. Furthermore, a

number of projects achieved radical improvement within a relatively short

period of time, when they embarked on an initiative focusing on improving the

project. This indicates that, due to the relatively low cost and the rather large

prize at stake, it is imperative to investigate and actively seek improvement

potential.

Value Engineering proves to be a methodology capable of unleashing these

otherwise hidden opportunities. Three basic steps describe the value engineering

process:

analysis to understand the project;

design to find the optimum or a better solution; and

the implementation thereof.

Before a team can embark on an improvement initiative an initiation study will

determine the target, required focus of the exercise and set up an enabled team.

This study also describes the integration of value engineering with the existing

processes using a case study. In order for value engineering to work, skilled

members are required, the initiative has to be timed and complement the existing

processes.

VALUE ENGINEERING

Bestuursopso II ming

Die meeste maatskappye investeer groot gedeeltes van hul omset ten einde groei

te bewerkstellig. Maatskappye se oorlewing is afhanklik van goeie opbrengste

op hierdie beleggings as gevolg van die relatief groot investerings.

Navorsing het getoon dat die voile potensiaal van die moontlike waarde wat deur

hierdie beleggings ontsluit kan word, dikwels nie realiseer nie. Na-

implementeringstudies toon dat die uiteindelike waarde wat deur 'n projek

realiseer word dikwels teleurstellend is in vergelyking met dit wat voorspel is en

wat deur die mad goedgekeur is. Verder het 'n aantal gevallestudies getoon dat

projekte radikale verbetering bewerkstellig het deur 'n gefokusde oefening voor

inbedryfstelling te loods.

Waarde-ingenieurwese word deur hierdie verhandeling voorgestel as 'n

moontlike tegniek om hierdie verbeteringsgeleenthede te ontsluit. Drie basiese

stappe beskryf die proses:

analises ten einde die besigheid en sy dinamika te verstaan;

ontwerp ten einde 'n beter oplossing te vind; en

die implementering van hierdie verbeterings.

Voordat 'n span kan afskop met 'n verbeteringsoefening moet 'n inisiasie-studie

geloods word om die geskikte verbeteringsdoelwit en fokus van die studie te

bepaal. Verder word spanne saamgestel, opgelei en belyn in hierdie fase.

Die integrasie van waarde-ingenieurswese met bestaande prosesse en

organisasies word ook bespreek aan die hand van 'n gevallestudie. Die

tydsberekening en vestiging van kundigheid word bespreek.

VALUE ENGINEE ING

Acknowledgements

I would like to thank the following:

My Creator for making everything possible;

my wife Madelein for her support;

my father Johannes for teaching me the basics of businesses;

Prof. Leon Pretoruis for his guidance;

Dr. Mellet Moll for his encouragement and mentorship;

Ernst Venter for his trust and sponsorship;

Danie Mouton, Petrus de Jager, Marita Welgemoed for their stimulation and inputs;

Bain Barnard for his assistance in finalising the manuscript;

Matie Von Wielligh, Vlam Oosthuizen and their teams for trusting us to interfere in their

projects; and

lastly an idiosyncratic thanks to Microsoft for shift-F7 and F7.

- iv -

VALUE ENGINEERING

TABLE OF CONTENTS

1 PART ONE - INTRODUCTION

1.1 OBJECTIVE 1

1.2 RESEARCH APPROACH 2

1.3 THE DILEMMAS OF CAPITAL PROJECTS 4

1.3.1 Under performance of projects 5

1.3.2 Indications of hidden value 6

1.3.3 Why project teams tend not to create maximum value 10 1.4 CLOSURE 14

2 PART TWO — FUNDAMENTALS 16

2.1 OBJECTIVE 16 2.2 CAPITAL PROJECTS 17

2.2.1 Systems engineering 18

2.2.2 Feasibility study 21 2.3 VALUE ENGINEERING 27

2.3.1 Definition of value 27

2.3.2 Definition of value improvement 29

2.3.3 Definition of value engineering 32

2.3.4 Value engineering fundamentals 34 2.4 CONCLUSION 40

3 PART THREE — MASTER PLAN 41

3.1 OBJECTIVE 41

3.2 BASIC PRINCIPLES 42

3.2.1 Scope of the initiation phase 43

3.2.2 Net potential benefit 44

3.2.3 Value creation target 45 3.3 INITIATION PROCESS 48

3.3.1 Business case review 49

3.3.2 Case for change 54

3.3.3 Target setting 60

3.3.4 Plan to capture value 62 3.4 CONCLUSION 65

4 PART FOUR — INTEGRATION 66

4.1 OBJECTIVE 66 4.2 INTEGRATION 67

4.2.1 Do it right the first time 68 4.3 TIMING OF THE INTERVENTION 68

4.3.1 Team's ability to improve 69

4.3.2 Willingness to change 69

4.3.3 Total cost of intervention 70

4.3.4 Logical intervention points 72 4.4 INTEGRATION WITH PROJECT MANAGEMENT 74

4.4.1 Integration of the intervention 74

4.4.2 Integration of 'do it right the first time' 75 4.5 ORGANISING FOR VALUE ENGINEERING 75

4.5.1 Training of value engineers 76 4.6 CONCLUSION 79

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VALUE ENGINEERING

5 PART FIVE — CLOSURE 80

5.1 OBJECTIVE 80 5.2 OVERVIEW 81 5.3 CONTRIBUTION 81 5.4 FUTURE RESEARCH 82

6 REFERENCES 84

LIST OF FIGURES AND TABLES PART ONE

Figure 1-1: Organization of the research 2 Figure 1-2: Styles of thinking [10] 3 Figure 1-3: Illustration of project team's focus vs. performance 6 Figure 1-4: Iscor Heavy Minerals improvement 7 Figure 1-5: Kamoto improvement 8 Figure 1-6: McKinsey case studies 9 Figure 1-7: Degrees of freedom 11 Figure 1-8: Build on an unrefined case 11 Figure 1-9: Lack of integration 12 Figure 1-10: Distinguish between functionality and cost. 13 Figure 1-11: Multiple outcomes 14 Figure 1-12: Value and measurement not aligned 14

Table 1-1: Performance of capital projects [9] 5 Table 1-2: Items indicating hidden opportunity. [31] 9

LIST OF FIGURES AND TABLES PART TWO

Figure 2-1: Part two, Fundamentals 16 Figure 2-2: Process to establish capital projects [29] 19 Figure 2-3: Iterations of feasibility study 20 Figure 2-4: Future cash flows of the business [13] 24 Figure 2-5: Definition of value 28 Figure 2-6: Value as a distribution of possible outcomes 29 Figure 2-7: Focuses for value improvement 30 Figure 2-8: Improve the outcome 31 Figure 2-9: Value engineering and capital projects 33 Figure 2-10: Value engineering fundamentals 34 Figure 2-11: Operational value drivers 37 Figure 2-12: Value engineering master plan 39

Table 2-1: Accuracy and cost of study 20 Table 2-2: Guideline for bankable document 22

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VALUE ENGINEERING

LIST OF FIGURES AND TABLES PART THREE

Figure 3-1: Part three, Master plan 41

Figure 3-2: Decision point 43

Figure 3-3: Initiation phase scope 44

Figure 3-4: Potential benefit vs. cost to capture benefit 45

Figure 3-5: Price cost squeeze 46

Figure 3-6: Cost curve change over time 46

Figure 3-7: Staircase to insanely great 47

Figure 3-8: Inputs, activities and outputs 48

Figure 3-9: Initiation process 49 Figure 3-10: Process to establish capital projects [29] 50

Figure 3-11: Review project initiation 51 Figure 3-12: Review economic evaluation 51

Figure 3-13: Review business engineering 52

Figure 3-14: Review process engineering 53

Figure 3-15: Review detail engineering 53

Figure 3-16: Review planning 54

Figure 3-17: Initiation process 55

Figure 3-18: Cost of intervention drivers 60

Figure 3-19: Target setting 61

Figure 3-20: Initiation process 62 Figure 3-21: Intervention organisation 63 Figure 3-22: Value engineering master plan 64

LIST OF FIGURES AND TABLES PART FOUR

Figure 4-1: Part Four, Integration 66 Figure 4-2: Project team capability 70 Figure 4-3: Cost of intervention drivers 71 Figure 4-4: Cost of intervention 71 Figure 4-5: Process maturity levels [26] 73 Figure 4-6: Logical points for a value engineering intervention 73 Figure 4-7: Project Management steps. 74 Figure 4-8: Value Engineering initiation study organisation 75 Figure 4-9: Value Engineering Intervention organisation 76 Figure 4-10: Project team adjusted for value engineering 76 Figure 4-11: Skill transfer to project teams 77 Figure 4-12: Certification system 78

Table 4-1: Training program 78

LIST OF FIGURES AND TABLES PART FIVE

Figure 5- 1: Part Five, Closure 80

Figure 5-2: Value drivers 83 Figure 5-3: Methodologies and business drivers 83

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VALUE ENGINEERING

UST OF ACRONYMS

Capex Capital expenditure

BFS Bankable Feasibility Study

FAST Function Analysis System Technique

IHM Iscor Heavy Minerals

IRR Internal Rate of Return

MIRR Modified Internal Rate of Return

NPV Net Present Value

Opex Operating expenditure

PI Profitability Index

PMBOK Project Management Body of Knowledge PPI Producer Price Index SAMI Systematic Analysis Methods and Innovations SAVE Society of American Value Engineers VE Value Engineering

WACC Weighted Average Cost of Capital

WBS Work Breakdown Structure

I Part One - llntroducUon

"Fools you are to say you learn by experience. I prefer to profit by others'

mistakes and avoid the price of my own."

Otto van Bismark-Sch6nhausen

1.1 Objective

The "objective of this dissertation is to introduce the reader to the application of

value engineering principles on capital projects.

This dissertation indicates that problems exist with the creation of businesses by

means of capital projects and that value engineering or any other method capable

of successfully improving capital projects is required. It is therefor indicated that

capital projects cannot afford not to investigate or consider an improvement

initiative.

The theory or fundamentals to rectify the problems are discussed. The reader is

introduced to a typical process used to improve the value of a capital project by

means of value engineering. Since a methodology is of no value until it is

actually used, the establishment of value engineering within a corporation, using

Iscor Mining as a case study, is discussed.

The intention with this dissertation is not to replace current project management

processes or to be a complete methodology on how to manage and create capital

projects. It merely identifies an issue and proposes a process as an addition to

current processes rectifying this lack-of-value' issue.

- 1 -

Why ? What ? How ?

When/ Who ? Final remarks

required byqtrowitur

FUNDAMENTALS what is value ?

what is improvement ? what is aloe engineering?

MASTER PLAN Understating the business Case for change

Target Analysis. design, implementation

Part Fcur-

INTEGRATION integrating value engineering with the Incur process ito tinting organisation & respon.vibilities

PART ONE - INTRODUCTION

The organisation of this research is illustrated in Figure 1-1.

Part one illustrates the dilemmas of capital projects and proposes value

engineering as a possible solution;

part two describes value engineering, discussing the fundamentals;

part three describes the Value engineering process that is followed;

part four discusses the integration of value engineering within an organisation

using Iscor Mining as a case study; and

part five contains final remarks.

Figure 1-1: Organization of the research

1.2 Research approach

Different sources of knowledge range from untested opinion (opposite can be

possible) to highly systematic and proven styles of thinking (true in all cases).

Leibniz describes that knowledge can be based on two kinds of truths. Truth can

be based on reason or it can be based on facts [4 1].

- 2 -

Based on sufficient reasoning

Based on the principle of contradiction

Rationalism based on reason

Idealism Faith/ opinion

Based on case study

Empiricism Fact/ truth

Statistical analysis

Existentialism based on axioms

PART ONE - INTRO UCTION

Cooper classifies the styles of thinking using the two axes to describe the above

mentioned dimensions of research (see Figure 1-2), on what it is based and how

true it is [10].

The horizontal axis ranges from a highly idealistic interpretation on the one end

to empiricism on the other. The vertical axis ranges from rationalism on the one

end to existentialism on the other.

Figure 1-2: Styles of thinking [10]

The need for this research manifests itself in the successes of two re-engineering

projects [17,18]. The possibility of improvement opportunities and the need to

define a repeatable process, able to capture these hidden opportunities, became

evident. The need is therefor based on case studies, the bottom left group of

thinking styles (Figure 1-2).

This research was done by integrating the following three sources:

o Experience gained in re-engineering two Iscor projects (Iscor Heavy Minerals

and Kamoto);

o a methodology developed and used by a consulting group (McKinsey &

Company, Inc); and lastly

- 3 -


relevant literature was drawn on to understand and complete this

methodology.

The integration of the three above-mentioned sources implies that the top left

(Figure 1-2) style of thinking was used. For this group it can be said that the

research is valid because it works and it will be regarded as truth until proven

otherwise [39].

1.3 The dilemmas of capital projects

It is often found that 'good' projects or business ventures do not result in good

businesses. Research has shown that in more than 50% of projects that were

completed within budget, time and specification, the end result was an under

performing business. It almost seems as if the ultimate purpose of the venture

was lost somewhere along the line [8].

Examples of this phenomenon are available both within Iscor and outside. In

Iscor the net value of two large projects was dramatically increased by redesigns

with a strong focus on improving value for the shareholders. Impressive results

were obtained: the projects' net value was increased by 60%` in one case and by

more than 100% in the other [17,18]. Outside of Iscor, five case studies (in

different industries) done by a consulting firm McKinsey & Company, Inc

indicated improvements of between 35% and 80% on the value of the projects

that were considered ready for implementation when it was decided to rethink

the whole project [7].

This illustrates that:

Although emphasis is placed on projects and the management thereof,

`good' projects do not necessarily result in good businesses; and

there is a possibility that projects are generally implemented with

uncaptured improvement opportunities.

- 4 -

PA T ONE - INTm ODUCTION

The possible reasons behind these dilemmas are discussed in this dissertation.

1.3.1 Under performance of projects

A large number of capital projects do not realise their promised potential. Table

1-1 shows that relatively few projects (18%) were not completed within budget

and 55% were implemented late. In a business sense 73% of the resulting

businesses under perform in production and in 86% of the cases the ventures'

market assumptions failed to realise.

Table 1-1: Performance of capital projects [9]

4- c.)„ ,P3ieFfig140-itik PROJECT EXECUTION Project cost 18% 18% 64% Completion time 55% 36% 9%

BUSINESS OPERATION Production & operating performance 73% 9% 18% Market projections 86% 14% 0%

This could indicate (as illustrated in Figure 1-3) that the areas of focus of the r

teams are generally in the wrong order and that cost, time, operations and then

market is the sequence of priority for the teams. The relatively low number of

under performance on cost could for example indicate that the team focuses on

cost and the high number of under performances on market projections indicate

that the teams are not focussing on this driver.

Although this could be in line with the value drivers of the business venture, the

energy and focus was still not on value or on creating an excellent business.

- 5 -

Number of under performances / area O

O O

Indication of project team's focus/ area

O

O O

Cost

Time Production

Market

Rel

ativ

e fo

cus o

f tea

m

aoue

uuop

ad lo

pun

jo i

z

ART ONE - INTRODUCTION

Figure 1-3: Illustration ofproject team's focus vs. performance

1.3.2 'Indications of hidden value

The aim of this paragraph is to indicate that, as a general rule, room for

improvement does exist. Success stories within Iscor and the experience of

McKinsey indicate improvements of not less than 35% [8,17,18].

Value engineering professionals have generated a list of items that indicate when

a project contains hidden value. A discussion of this list on the basis of some

large projects is presented.

A Iscor Heavy Minerals

Iscor Heavy Minerals is a R1,8 billion capital project comprising the mining of

Iscor's heavy mineral deposits and the beneficiation of these valuable minerals.

On completion this business will be capable of producing annually [17]:

250 000 ton Titania Slag;

145 000 ton Pig Iron;

45 000 ton Zircon;

20 000 ton Rutile; and

5 000 ton Leucoxene.

Ilmenite is a composite of titanium and iron and will be smelted to produce a

high-grade titania slag and high purity iron. Titania slag is used to produce a

- 6 -

Iscor Heavy Minerals

Base case Improvement Gap Target

90 499 158

251

c 600 0 400

200 c4

0

o Iscor Heavy Minerals improved their project NPV with R 158 m

PART ONE - INTRO UCTION

white pigment for the paint, plastic and paper industries and the pig iron is

preferentially used in the high quality metal casting industry. Rutile and

leucoxene are used to produce welding rods and pigment. Zircon is used mainly

in the ceramics and refractory industries [17].

The net present value of this project was calculated to be R 251 million, before a

project team commenced an improvement initiative. The project value was

improved to R409 million over a period of less than 12 months.

Figure 1-4: Iscor Heavy Minerals improvement

B Kamoto

Kamoto, the property of Gecamines, is a copper and cobalt mine in the southern

part of the Democratic Republic of Congo. After a cave-in in the early 1990's,

the mine is currently barely operating. Iscor did a feasibility study on the

prospect of rehabilitating the Kamoto mine and mining it in partnership with

Gecamines. A total of approximately US $100 million may be invested to

increase the current unsustainable production of 0.3 million ton per annum to a

sustainable 2 million ton per annum. [18].

The value for Iscor of this joint venture was calculated to be approximately

R36 million net present value with a high risk rating. A project team improved

this project over a period of less than six months to a net present value of

- 7 -

Kamoto

400

300

1 200 5 c4 100

0 Base case Improvement Gap Target

Kamoto is on the road to improve their project NPV with R324 m while lowering the risk and capital exposure

PA - T ONE - INTRODUCTION

R266 million. The risk rating and the peak funding requirements were also

improved during this exercise.

Figure 1-5: Kamoto improvement

McKinsey & Company, Inc experience

Five case studies done by McKinsey in different industries indicate radical

improvements of between 35 and 80% on projects "ready" for implementation.

The capital savings are in the order of 20 to 45 % and the contribution made by

revenue improvement and reduction of operating cost was between 20 and 35%

[7].

Figure 1-6 illustrates results of these case studies, the first column is the industry

the project operated within, followed by the initial capital that was required and

lastly the improvement that realised after a reengineering exercise.

- 8 -

30%, 20% 1 50 % chemicals (xl)

telecommunications (xl)

mining (x2)

building materials (xl)

35 %

(canx • opex = %NPV)

I S 600 m

S 300 m 15% , 20%

Industry Capital Improvement realized

80 % 45% , 35%

50% 30% 20%

S 1 500 m

S 1 400 m

PART ONE - INT ODUCTION

Figure 1-6: McKinsey case studies

Hidden value indicators

Table 1-2 shows a list, published by SAMI, which serves as an indicator of

where hidden improvement opportunities are likely to exist [31]. If these are

present in the project a value engineering exercise is likely to be a successful and

worthwhile exercise. This unedited list will indicate to the reader that there are

actually very few projects which will not benefit from a value engineering

exercise. The initiation phase of the Value Engineering exercise will discuss

techniques to estimate and assess the value enhancement potential in more

detail.

Table 1-2: Items indicating hidden opportunity [31]

1 Involves large expenditures or resources (staff or equipment).

2 Costs exceed budgeted amount.

3 Great complexity is noted in plans. (Often the more complex the plan, the more opportunity to improve value and performance.)

4 Potentially involves major resource impacts (staff or equipment).

5 Activity cycle is highly compressed.

6 Involves critical, exotic, hard-to-get or expensive resources (materials or staff) and / or requires sole-sourcing to obtain them.

7 Activity uses non-standard components such as specialized software, fasteners, unique sizes, computer equipment or other resources

8 Plans include use of specialized components that have comparable counterparts available off-the-shelf

9 Activities involve advancement in the state-of-the-art.

10 Involves status enhancement, new records (e.g., largest database, first time used), embellishment, special interest requirements, high viability, extensive political objectives,

- 9 -

PART ONE - INT 0 ,10) UCTION

or strong controversy

11 Highly skilled labor or time-consuming tasks are involved.

12 Items with poor service or cost history, or having high maintenance and staff operations, are proposed or used.

13 Plans have been in use or "on-the-shelf' for more than five years. (These activities, especially if they receive little or no changes in that period, are prone to losing touch with the present situation and overall mission objectives.)

14 Solutions are included in activity to solve problems or improve conditions unrelated to immediate cost. Examples are: reliability, aesthetics, noise, safety, risk protection, simplification, maintainability, standardization, time, quality, resource use (e. g., energy, limited staff or equipment), environmental factors, performance, or past history avoidance

15 Components or functions are identified in a Value Methodology FAST diagram as being a potential value mismatch.

16 Similar components or functions are being commonly submitted and accepted as Value Engineering Change Proposals.

17 Activity has repetitious components. Repetitious examples include: several organization units being formed and / or destroyed or awarding multiple contracts.

18 Activity has fallen behind the specified schedule. Such a condition often generates poor value situations in the effort to get the activity back on schedule.

19 Activities have been going on for a long period of time without extensive review or modification.

20 Issues involved are highly charged with diverse interests present. Such situations often have highly favored solutions, that may have been the best option once, but continue to be favored long after the value has declined below optimum.

21 Conditions have changed in the base assumptions used to make previous selections such that they are more costly, difficult to implement, and otherwise reduced in value.

1.3.3 Why project teams tend not to create maximum value

There are many possible reasons for the misalignment between intellectual effort

and value creation potential. This paragraph discusses the possible reasons why

value is not optimised, under the following headings:

Degrees of freedom;

building on assumptions;

lack of integration;

group think;

design for multiple outcome; and

measurements.

A Degrees of, reedom

As a project progresses towards completion, the knowledge and insight about the

project and the relevant environment increases. Ironically, but unavoidably, the

- 10 -

PART ONE - I TRODUCTION

openness to change decreases as designs are finalised. (see Figure 1-7) This

implies that the biggest decisions are made at a time when knowledge of the

project is at a minimum. The normal way of doing things thus often results in

these decisions staying unchanged and being implemented unchallenged [6].

Figure 1-7• Degrees of freedom

B wilding on assumptions

Going into the next level of detail without refining and optimising the previous

level means that the whole business could be designed around inaccurate

assumptions. If an assumption has been around for long enough and the next

layers have been built on it, those involved become unable to distinguish

between assumptions and facts. Designs must, as far as possible, be built on

facts obtained from analysis [6].

Figure 1-8: Build on an unrefined case

Exploration and business development

Financial analysts

Design engineers

Project engineers

Operational management

Feasibility Study

P T ONE MT 0 UCTION

Lack of integration

A project goes through a number of phases before it is finally operated as a

business. The teams involved often differ between these phases as illustrated in

Figure 1-9. Although a team normally succeeds in documenting all its findings

and designs, the fundamental reasons behind the decisions are often lost. During

one phase a team can find for example that a bridge over a river is required and

documents the specifications of this requirement. During the subsequent phases

it is possible that the need for the bridge no longer exists but the new team does

not understand the initial reasons behind the bridge and an unnecessary bridge

may be built.

A lack of tight integration between the different phases of the design process

implies that value-leaks occur in every hand-over.

Figure 1-9: Lack of integration

D Group-think

Whenever a group of people has been working together for a period of time they

tend to start thinking more and more in a similar manner about issues. The

- 12 -

Original business case

Function Value =

Cost

= Volkswagen

R 50 000

Outcome as specified by permanent project team

Function Value =

Cost

Porsche

R100 000


adjusting power of disagreeing is to a certain extent lost as permanent project

team members tend to group-think.

A requirement for a function can for example evolve from an initial low

important need to occasionally travel from point A to B to a very specific need

for a Porsche at the end. (see Figure 1-10)

The team becomes unable to distinguish between functionality and cost, which

leads to a dilution of value.

Figure 1-10: Distinguish between functionality and cost.

E Designing for multiple outcomes

One official view of the environment, where the project and future business must

exist, is often defined. The designs are focussed on this one official view of the

future. As no provision is made in the design for worse or better than expected

outcomes, future value is lost as the project is unable to capture the benefit of

optimistic scenarios or survive in pessimistic scenarios.

The future must be seen as a number of possible outcomes as illustrated in

Figure 1-11. Designs will recognise the possibility of outcomes less or more

favourable.

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PossimistIc business clatt$ (Ca*:

.Voad)

Optithigtic business data (14ighroad)

Value

Schedule Budget Specification

"Tell me how you measure me and I will tell you how I perform."

PART ONE - INT 0 UCTION

Figure 1-11: Multiple outcomes

F Measurement

The measurement of a project team's performance is often not aligned with the

real value of the final business as illustrated in Figure 1-12.

Figure 1- 12: Value and measurement not aligned

1.4 Closure

Part one indicates that there is a possibility that hidden opportunities within

capital projects exist and that capital projects often do not realise its full

potential. The possible reasons behind this dilemma have been discussed.

Part two discusses the creation of businesses by means of capital projects, and

the measuring and definitions of value. This forms the fundamentals of the

research. The fundamentals are required in order to address the described

dilemma.

- 14 -

PART ONE - INT ODUCTION

The potential of the hidden value has to be assessed in order to make an

informed decision regarding an initiative to capture this value. Part three

discusses a process to assess this hidden value.

-15-

MASTER PLAN Understanding the business

Case for change

Target Analysis. design. implementation

INTEGRATION integrating value engineering

with the Incur process Ito

tinting organisation &

responsibilities

CLOSURE what was the value of the

research ?

INTRODUCTION why value engineering is

required by growing

Companies ?

2 Part Two — Fundament as

"As a multiple of laws often only hampers justice, so a state is best governed when, with

few laws, these are rigidly administrated; in like manner, instead of the great number of

precepts of which logic is composed "

Rene Descartes

2.1 Objective

Part Two introduces the underlying fundamentals of value engineering as basis

for the case study in part four. It also provides a relevant literature overview of

value and systems engineering.

Figure 2-1: Part two, Fundamentals

- 16 -

PART TWO - FU MENIALS

In order to address the described dilemmas with capital projects it is necessary to

firstly understand capital projects. The generic process to establish a business

through capital projects is briefly discussed. These capital projects are discussed

in terms of:

The establishing methodology used (systems engineering); and

feasibility studies to assess the technical and economical workability of the

project.

Since value engineering is proposed as a possible solution to the dilemmas, the

fundamentals of value engineering are discussed in terms of the following:

Definition of value;

definition of value improvement;

definition of value engineering; and

the value engineering fundamentals.

2.2 Capital projects

Different industries use different processes for executing capital projects, but

apart from differences in terminology, all are conceptually similar. The process

starts with need identification, followed by different stages of design. It goes on

to operation and ends with the phase-out of the system [27,29].

This part briefly discusses the process for capital projects using systems

engineering as the underlying theory.

- 17 -

Exonoinie/ value evaluation

S optimization

PART TWO - FUNDAMENTALS

Figure 2-2: Process to establish capital projects [29]

The three iterations of the business-, process- and detail- engineering are called:

Potential study;

pre feasibility; and

feasibility study.

The only difference between these phases (illustrated in Figure 2-3) is the degree

of accuracy and the amount of money and time spent to complete the phase. The

output of the final phase, (feasibility study) is defined to the extent that a board

of directors representing investors or a commercial bank would consider the

project to be feasible and would be willing to supply the required funds.

- 19 -


2.2.1 Systems engineering

"There is so much talk about the system. And so little understanding"

Robert M. Pirsig

Systems engineering is defined by Nicholas as "the science of designing

complex systems in their totality to ensure that the component subsystems

making up the system are designed, fitted together, checked and operated in the

most efficient way" [27].

In the context of value engineering it can be added that the ultimate and only

purpose of the system is to create value.

The process used by Iscor as set out in this dissertation, is illustrated in Figure 2-

2 [28]. After a potential business has been identified and initiated, a three phased

approach is used: business engineering; process engineering; and then detail

engineering. This process evaluates and optimises each step. Usually multiple

iterations of these phases are needed before approval can be obtained and the

construction project can begin. The economic evaluation forms the centre of the

process and directs and governs the system design towards its ultimate goal to

create value.

- 18 -

PART TWO - F NDAMENTALS

Figure 2-3: Iterations offeasibility study

The degree of accuracy prescribed by Iscor Mining and an indication of the

possible cost of the study are illustrated in Table 2-1.

Table 2-1: Accuracy and cost of study

Potential 60 — 75 % 0.1 — 0.3 %

Pre-feasibility 75 — 90 % 0.2 — 0.8 %

Feasibility 90 % 0.5 — 1.5 %

This paragraph described the essence of the process used by Iscor to establish a

business by means of capital projects that is of importance for this dissertation. It

is important since value engineering is an addition to this process. This process

is sufficiently documented and is used on every capital project within Iscor [2,3,

29]. Since the value of the project is addressed by value engineering, the next

paragraph addresses feasibility studies and the measuring of value in more

detail.

- 20 -


2.2.2 Feasibility study

"Look beneath the surface: never let a thing's intrinsic qualities or worth

escape you.

Marcus Aurelius, Meditations

In order to answer the ultimate question of whether a project is feasible and

therefor whether it is going to create or destroy value, only the following two

questions have to be answered.

o Is it going to work as one foresees?

o Is it worth doing in terms of value?

This part briefly discusses answering the two questions at hand. Emphasis is

placed on the 'worth doing' question since it is felt that this issue is the most

relevant and the most neglected question. Although the answering of these

questions is addressed separately in this document, it must be seen as an

integrated process.

A Technical feasibility

To answer the question on whether a business is going to work as one foresees,

the technical feasibility of the business is assessed. The output of this study is

defined and proves the business to a level of detail and certainty where a typical

bank or investor would be willing to fund it.

This study defines the raw materials (the geology in the case of mining), the

market and the whole value chain with supporting processes to link the market

with the raw materials. Table 2-2 illustrates the typical chapters of a bankable

study as required by Iscor Mining.

-21-

ART TWO - FUNDAMENTALS

Table 2-2: Guideline for bankable document

1 Executive Summary 2 Introduction 3 Markets 4 Geology And Resources 5 Mining Rights And Permissions 6 Mining 7 Processing 8 Infrastructure Operational Concept 9 Integrated Environmental Management 10 Management And Human Resources 11 Implementation 12 Economic Evaluation 13 Ownership And Company Structure 14 Financing 15 Risk 16 Conclusions/Recommendations 17 Role Of Consultants / In-House Specialists 18 Appendices

The output of this phase is a bankable document describing and proving the

viability of the business to an acceptable level of accuracy. This study forms the

starting point from where an improvement initiative has to be launched. Value

Engineering has to improve on the design described during this study. Other

corporations could use other or similar approaches, but in the end a documented

design has to exist to be improved. The objective with this dissertation is to

focus on the improvement and not on the process used to design this business.

Economic feasibility

The economical evaluation of a capital project is used to consider the trade-offs

between cash out-flows in the form of capital and future cash in-flows in the

form of profit [6]. Economic analysis is a field of its own. This paragraph is an

introduction to the concepts with the aim to give a relevant overview to value

engineering on capital projects and is not a detailed discussion.

The reason for evaluating a project economically, is twofold:

o to answer the question of whether a business is worth having; and

o to compare and choose between different projects.

- 22 -

PART TWO - F NDAMENTALS

The result of the economic analysis is also useful as a base and metric for

improvements, hence the relevance for this dissertation.

In the United States top management is' expected and pressured by the board to

maximise shareholder value. In Europe weightings is given to a variety of

stakeholders for whom value must be maximised. These stakeholders include

customers, suppliers, workers, government, debt providers, and the society [11].

Whether the goal with a business should be to maximise value for the

shareholder and what claim other stakeholders should have on value, is an often-

debated issue. According to McKinsey & Company, Inc the shareholders will

maximise the value for the stakeholders in an attempt to maximise their own

value [11].

To regard the economic analysis described in this paragraph as the only metric

for the value and value improvement initiatives, implies that the underlying goal

is to maximise shareholder value.

Economic value as used in this dissertation is describe by Equation 2-1:

Equation 2-1: Value

Value = present value of the discounted, forecast future cash flow

To expand on this economic description of value the following are briefly

described in this paragraph:

The forecast of cash flows in real or nominal terms and different currencies;

(Value = present value of the discounted, forecast future cash flow)

the discounting of cash flows; and

(Value = present value of the discounted , forecast future cash flow)

the possible outputs.

(Value = present value of the discounted, forecast future cash flow)

-23-

Discount rate

Value

Tons

Pd"

—0.1 Revenue

T

-

Al lowance

IL Payable

. . —01 Work ing cap ital

Supporting

L process costs

Primary process coca

—

-

r; Expenditure

—41 Operating cost

—t1 Capital expenditure

--Pi Replacements

—Si Rebuilds

Forecasted cash flow streams over the expected life of the business


Forecast cash flows

The different cash flows of the business have to be forecasted over the expected

life of the business as illustrated in an example in Figure 2-4. These cash flows

and the relationships between them form the core of economic analysis.

Historical data, benchmarking information, design criteria and other techniques

are used to forecast the different cash streams [20].

If these forecasts are expressed in terms of the worth of money of a specific year

it is called real terms. This cash flow stream takes the possible cyclical nature

of the price or cost into account but not escalations due to inflation [32].

Figure 2-4: Future cash flows of the business [13]

By adjusting this real cash flow by the appropriated inflation figure, it is

changed to nominal terms. The PPI (Producer Price Index) is normally used as

an estimate of the appropriate inflation.

Nominal cash flows are therefor described by Equation 2-2:

-24-

PART TWO -FUN AMENTALS

Equation 2-2: Cash flow in nominal terms

cash flow in nominal terms = cash flow in real terms * PP. Ifactor

Forecasted cash flow is often in different currencies. Exchange rates are used to

convert these different currencies to a common currency. The money stream has

to be adjusted with the appropriate inflation of that country before it is converted

to the new currency.

Converting cash flow to a common currency is illustrated in Equation 2-3.

Equation 2-3: Cash flow per currency

cash flow in currency A = cash flow in currency * exchange rate AVB

ii Discounted future cash flows

Economic analysis makes the trade-off between cash out-flows (investment) and

cash in-flows (profit in the form of revenue). In comparing cash flows occurring

at different times and over different periods, the interest paid on loans have to be

taken into account. This is called the cost of capital.

The cost of capital is calculated as a weighted-average cost of the different

source pools of capital of the larger company.

Cost of capital (WACC, weighted average cost of capital) is therefor described

by the following equation:

Equation 2-4: Cost of capital

cost of capital = (cost of debt capital * % of debt capital) + (cost of -owners

equity * % of owners equity)

The cost of capital is used to calculate the discount rate. The discount rate is

similar to the cost of capital but takes company risk and share volatility into

-25-


account. The discount rate is used to express future cash flow streams in one

comparable value, called the net present value of the stream.

Discount rate is therefor described by the Equation 2-5.

Equation 2-5: Discount rate

discount rate = cost of capital + a percentage calculated using share volatility

and country profile

Net present value is then described by Equation 2-6.

Equation 2-6: Net present value

net present value = net future cash flows discounted at the appropriated

discount rate

iii Output of the feasibility study

Economic analysis consists of the gathering of data and making of forecasts.

These forecasts have to be checked, formally approved and placed under change

control procedure to ensure reliability and stability of the final answer.

The financial feasibility of a project can be expressed in various ways. Each one

of these indicators has some advantages and disadvantages. Normally the

different indicators will jointly be interpreted to make a decision. These

indicators are:

Net Present Value (NPV);

Payback Period;

Internal Rate of Return (IRR);

Profitability Index (PI); and

Modified Internal Rate of Return (MIRR).

-26-

P 1 T TWO - FUNDAMENTALS

Anyone of these indicators can be used to measure and manage the improvement

of the project. Net Present Value is, however, an excellent measurement for the

purpose of value engineering as expressed in the two studies described in

paragraph 1.3.2 [17,18].

2.3 Value Engineering

Value Engineering is proposed as a possible solution for the dilemmas described

in Part One of this dissertation. The fundamentals of value engineering have to

be applied on the capital projects described in the previous paragraph of this

dissertation. The fundamentals are discussed in terms of:

A definition for value;

discussion on improvement;

definition for value engineering; and

the success factors for a value engineering exercise.

2.3.1 Definition of value

To consider something to be valuable or of value implies that it is worth

something, desirable, and of some utility [14]. In the business sense value would

have a different meaning for the different stakeholders, but value as defined by

value engineering implies economic value for the shareholders.

Value for the purpose of value engineering is expressed as the desired function

divided by the cost to achieve this function. This equation is shown in Figure 2-

5 [1,38].

-27-

T Function

Output required to satisfy a customer requirement

Vahie = Cost

Capital and operating cost needed to achieve function


Figure 2-5: Definition of value

The economic value of a project is calculated and expressed as discussed in

paragraph 2.2.2B. Net present value will be used in this document as an

indicator of the value of the project.

The value of a project is however not an exact figure, it is rather a distribution of

a number of possible outcomes.

A probability exists that a value of less than the estimated value will realise. This

represents the downside and can be indicated by the project exposure to risk. On

the upside there is also a probability that a value better than the estimate realises.

This is true regardless of the detail and caution involved during the feasibility

study.

In view of the value one must therefor move from a point estimate to an

expected value. The official value of the project is then only a point on the line

with a number of possible outcomes. The total picture as indicated in Figure 2-6

must be considered as the actual value in improving the value.

- 28 -

Realistic biiiittela:d ata (Base case)

?Ian "Br

pytitaistic,..buSitiess data (Hig164irii)

Pi 44 "c"

0

P T TWO - FUN AMENTALS

Figure 2-6: Value as a distribution of possible outcomes

Value

2.3.2 Definition of value improvement

Improving value implies that the project becomes more valuable as defined in

paragraph 2.2.2B. This is not always a cost cutting exercise. The net effects of

all the changes are calculated and trade-offs are made between the positives

(cash in-flow) and the negatives (cash out-flows).

The application of the value equation to describe improvement is illustrated in

Figure 2-7. Different situations would require different focuses for improving

the value.

- 29 -

Type A Type B Type E Type D Type E function up for function up for function up and cost down for the cost down and higher cost the same cost cost down same function function down

Pf

Function Value —

Cost

bb

Strategic importance

Performance


Figure 2-7: Focuses for value improvement

However, since the value is not an exact figure but only an estimate of a number

of possible outcomes (discussed in paragraph 2.3.1), there is another dimension

of improvement to be considered.

Taking this dimension into account improvement can be achieved not only by

changing the mean of the distribution, but also by changing the shape or

skewness of the distribution [30]. From these four basic ways of improving the

expected outcome of the project can be defined. These are graphically illustrated

in Figure 2-8 as:

Pure improvement;

risk management;

budget cut; and

increased certainty.

If the value is improved without changing the shape of the probability

distribution the distribution, as a whole will have to be moved. This implies that

risks are not specifically addressed and that probability of capturing the benefit

of an upswing stays unchanged.

- 30 -


The second improvement implies that the expected outcome stays unchanged,

but that the probability of the downside is improved. The risk of the project is

lowered. This makes the project more desirable and value is therefor improved.

A drive to cut a project budget can result in an increase in risk and a loss of the

ability exploit the possible benefit of an upswing. This is however regarded as

the third type of improvement as long as the negative effect is understood.

The fourth type of improvement is where changes improve the probability that

the project will realize the promised results, without actually changing these

results.

Figure 2-8: Improve the outcome

Pure improvement distribution as a

is when whole move

the value to the right

Risk management lowers the exposure to risk

A All

•

I,

-

A higher value with a higher risk and less optimistic possibilities is typically a budget cut.

A higher certainty to achieve the planned results

-31-

PART TWO - FUN AMENTALS

2.3.3 Definition of value engineering

A History of Value Engineering

Value Engineering had its origin during World War II, at General Electric, when

innovation was required because of material shortages. Some critical materials

were difficult to obtain and a great number of substitutions had to be made.

Harry Erlicker, a vice-president of General Electric, made the observation that

many times these changes resulted in lower costs and improved products. This

encouraged him to seek an approach to intentionally improve a product's value.

He assigned Lawrence D. Miles, a staff engineer, the task of finding a more

effective way to improve a product's value [24].

In 1947, Lawrence Miles and his team developed a step-by-step system, called

Value Analysis, to analyse a product's cost and function and to hunt out

unnecessary costs. As a result of substantial investment the new methodology,

Value Analysis, was developed, tested, and proven highly effective. However, it

wasn't until 1952 that value analysis began its growth throughout industry [24].

Value Engineering is therefor not something new, it comprises no complex or

new techniques it is merely an effective utilisation of common theories

unleashing and organising the mind's power in creativity.

Value engineering for capital projects

This document describes the application of the value engineering methodology

to the development of capital projects, including expansion of existing

businesses (brownfields) and new ventures (greenfields). Value engineering

principles and processes can, however, also be applied for the optimization of

existing businesses. The fundamentals and techniques are similar as illustrated

in Figure 2-9.

- 32 -

Value engineering

Using value engineering to radically improve designed projects

Using value engineering to optimize current operations

Using value engineering to design optimal capital project


Figure 2-9: Value engineering and capital projects

During the life cycle of a project this method is applied in two ways:

Doing it right the first time:

Applying value engineering principles and techniques as an integral part of

designing a business. This implies that the 'optimal' business is designed from

the start.

Formal redesign:

Doing a formal redesign and value optimization exercise at some point during

the project life cycle.

Both applications are needed, but the better the first one is applied the less

reason for the second.

-33-

Collaboration V Commitment Creativity

Value focus Targets

Process Techniques Tools

Value engineering applied successfully to improve capital projects


2.3.4 Value engineering fundamentals

"I have long believed in the principle that you should endeavour to keep things

simple in business. To me simplicity makes profits and complexity reduces

them."

Patrick Meaney

This paragraph discusses the factors required to make a value engineering

initiative successful.

This paragraph describes the three fundamentals of value engineering (illustrated

in Figure 2-10) in terms of:

The culture required for success;

the strategy that must be followed; and

the structure required for value engineering.

Figure 2-10: Value engineering fundamentals

- 34 -


Culture

"People are able to do what needs to be done."

Jay Hall

The success of the exercise depends on the team's ability and willingness to

improve the project. Jay Hall defines competence as a sustained capacity for

meeting demands in a committed and creative way [16]. This model is used to

describe the required culture for a successful value engineering exercise.

The three dimensions discussed are:

Collaboration;

commitment; and

creativity.

Collaboration

Jay Hall defines collaboration as a genuine working together towards a shared

goal [16]. Collaboration is required to release the commitment and creativity into

the improvement initiative on the project.

Collaboration is required for success. For value engineering this implies:

Management support exists;

the team working as one towards the focused goal; and

a willingness and a belief in the ability to achieve the set targets among team

members.

ii Commitment

The extent to which the team members are committed to achieve the

improvement will have an influence on the outcome.

Commitment towards the goal is required; for value engineering it implies:

-35-

PART TWO - FUND MENTALS

Energy and a drive to achieve improvement within a time limit exists; ("lets

do it now")

the culture is to evaluate and test assumptions; ("don't assume, evaluate")

and

it is not easily accepted that something can't be done or that something is the

best option; ("rigorous evaluation")

iii Creativity

"The uncreative mind can spot wrong answers, but it takes a creative mind to

spot wrong questions."

Anthony Jay, Management and Machiavelli

In our mind we are all caught in paradigms which define boundaries for our

minds. Our brain doesn't allow us to' break and think outside these boundaries.

Even if the situation changes the mind often doesn't allow us to see the available

alternatives and the old familiar solutions will be used [12].

Although improvement can be achieved within paradigms, real improvement

often requires the breaking of paradigms. To achieve success, it is required to

think and look for solutions outside the boundaries of the mind. Creativity is

used to stimulate the breaking of paradigms and therefor the finding of better

solutions outside the obvious. The quality and value of improvement ideas is

directly proportional to the degree of creativity among those involved [38].

Creativity and breaking of paradigms should be embedded in the culture and

should be regarded as the right thing to do among the value engineering team

members. The following techniques can be used to assist the finding of creative

solutions [12,34]:

Involvement of outsiders;

brainstorming, lateral thinking; and

six thinking hats techniques.

-36-


B Strategy The strategy of the value engineering exercise is defined in terms of:

The required focus on value; and

the required target for the exercise.

Value focus The project team has to focus on optimizing the value of the project, all actions

are directed to contribute to this goal. This goal becomes not only the most

important, but also the only goal.

Using the equation in Figure 2-11 the focus areas for value improvement can be

grouped into the following groupings [26,22]:

optimize function (quality, speed and flexibility);

hunt out lazy capital;

manage risk don't kill it with capital; and

minimize waste.

Figure 2-11: Operational value drivers

FUNCTIONAL PERFORMANCE

VALUE COST

F(QUALITY; VOLUME; FLEXIBILITY)

F(EXPENDITURE; RISK; WASTE)

ii Set target

It is required that a target to aim for exists. In the design stage of a business this

is achieved by adapting a design to cost philosophy. For a value improvement

exercise a target based on facts have to be determined and formally approved [3].

- 37 -

PA T TWO - FUNDAMENTALS

The second important requirement is that this target has to be stretching and

difficult to achieve. A target where the team knows beforehand how they are

going to achieve would not result in the required frame of mind [15].

Structure The previous paragraphs discussed the need for a specific value focus, creativity

and energy. All these are of no value if it is not converted into improvement. To

convert this into actual improvement a structured process is required. Tools and

techniques to support this process are discussed.

Value Engineering process

According to Moll, the four generic engineering phases that can be distinguished

are [25]:

Analysis;

design;

implementation; and

operation.

Applying these generic engineering phases the master plan for a value

engineering exercise consists of three basis steps:

getting the facts or analysis;

finding the best solution or design; and

including the change in the plans or implementation.

Multiple cycles of these three steps are repeated on all the design levels. An

integral part of the value engineering process should be the tracking and

communication of progress against the set targets. The study is preceded by an

initiation phase which determines the project's 'need to change', and 'ability to

change' and fixes the targets. (see Figure 2-12)

- 38 -

Multiple cycles until

target is achieved (Business, process and engineering level)

• T change our business >

V ANALYSIS gelling the facts

DESIGN find the optimum

TRACKING

INITIATION preparing for value engineering

PART TWO - FUN MENT LS

Figure 2-12: Value engineering master plan

ii Tools and techniques for value engineering

As one can expect from a structured process tools, standard forms and

techniques are required in executing the process.

The following techniques are of importance: (see Appendix A)

Function Analysis System Technique (FAST );

Numeric Evaluation;

Redundancy Analysis; and

Cost to Function Analysis.

(the following literature has more detail on these techniques: Stringer [33] )

The following tools support the process [36]: (see Appendix B)

Idea Management tools; and

Idea Evaluation Supporting tools.

The following standards can be used [36]:

Value Engineering declaration (VE1);

Value Engineering idea capturing form (VE2); and

Value Engineering idea scoping form (VE3).

-39-


2.4 Conclusion

Part one indicated that there is a possibility that hidden opportunities within

capital projects exist and that capital projects often do not realise its full

potential.

Part two briefly discusses the creation of a business by means of a capital project

within Iscor. The system approach and feasibility studies were addressed. This

is of importance for this dissertation as this is the carrier of the dilemmas

discussed in Part one.

Value Engineering is proposed as a possible solution to the dilemmas. The

definition of value, improvement and value engineering have been discussed.

The three dimensions essential to ensure successful improvement; culture,

strategy and structure have been discussed.

Part three will describe the process to initiate and conduct a value engineering

initiative on a capital project.

- 40 -

Part two

FUNDAMENTALS what is value 1

what is improvement ?

what is value engineering ?

INTEGRATION integrating value engineering

with the Ism. process Ito

tinting organisation &

re.sponsibilities

Why ?

INTRODUCTION Irby value engineering Is

required by growing

Companies ?

What ? How ?

;;;; the MY


3 Part Three — Master Man

"We shall not cease from exploration

And the end of all our exploration

Will be to arrive where we started

And know the place for the first time"

TS Eliot, Four Quartets

3.1 Objective

Part three introduces the reader to the master plan for a value engineering

exercise on a capital project. The objective with a master plan is to provide a

methodology that can be used to unleash the hidden value discussed in Part one.

(see Figure 3-1)

Figure 3-1: Part three, Master plan

- 41 -

PART THREE — MASTER PLAN

The master plan for value engineering consists of the following four steps (see

Figure 2-12):

Initiation study

analysis;

design; and

implementation.

The initiation phase of a value engineering exercise is done to scope the value

improvement opportunities and to decide on the best option to capture this value.

The initiation phase determines the necessity for a value engineering exercise as

well as plan and prepare for the exercise if it is required. This dissertation

focuses on the fundamentals and the process to initiate a value engineering

exercise. All the preparation and planning that have to precede the actual

exercise are discussed.

Analysis, design and implementation are the steps following the initiation phase.

Analysis is done to completely understand the business and to serve as a lead to

improve this value of the project. One can only improve what one fully

understands. The objective with the design phase is to find the optimum design

for the business and to achieve the targets set during the initiation. The objective

with the implementation phase is to ensure that the improvement becomes part

of the new design. These three steps are only briefly discussed as they are

considered as detail outside the scope of this dissertation.

3.2 asic Principles

The initiation phase leads to a point where a decision on the value enhancement

of the project can be made. (see illustration Figure 3-2) To make an informed

decision the following questions have to be answered during the initiation phase:

Is there a need to change? (need to change);

Can the project be improved? (potential to change);

To what extent should the project be improved? (improvement target);

- 42 -

Process redesign

Detail engineering redesign

Process redesign

b001:03 1 Pere.r . .r*: 00i0.:-

i-.::Pitiii.4.64if40Pir**iii3

44 IA, 4001 4W4'. N.V3( ',

si. udy

Need to change Ability to change Target

Organization Plan

PART T TREE — MASTER PLAN

Who should be involved? (organisation);

How should the project be improved? (plan); and

What should the timing be? (when to start, when to stop).

The principles of the initiation is discussed in terms of:

Scope of the initiation study;

net potential benefit; and

the definition of a 'good' enough project.

Figure 3-2: Decision point

3.2.1 Scope of the initiation phase

Capital projects are often seen as the provision of plant or technical equipment

that can be improved by value engineering. A request to conduct a value

engineering exercise on an already defined scoped is often received, only to find

that it is of limited value, because of the limited scope [6]. Although it is possible

that the improvement potential is within the scope of the technical equipment, it

is important to fundamentally understand the role and dynamics within the

bigger picture of the business and its environment.

- 43 -

The TOTAL value chain of the The full life cycle will be taken into Findings will be estimates and

project will be analysed: account should be regarded as the tip of

the iceberg

Raw materials • All project costs

Primary processes • CAPEX Risks

Market • OPEX Improvement opportunities

Extemal influences • Equity Potential value

PART THREE — fi ASTER PL A!

It is possible that the outcome of the initiation phase could be a recommendation

that the improvement exercise should focus on a specific process within the

value chain. The scope of the initiation phase, however, has to be the complete

value chain from the raw materials to the client and may even include an

understanding of the client's value chain. (see Figure 3-3, Value chain)

Since a project should be designed and optimised for its total anticipated

existence, the initiation phase of the value engineering exercise should consider

the full life cycle of the project within the scope (see Figure 3-3, total life cycle)

[27].

The broad scope of the initiation phase could lead to the studies never being

completed within an acceptable time limit. It is therefor important not to address

the different aspects in too much detail, but rather to scope and assess all aspects

within the limited available time. The output should be regarded as estimates

and not as exact answers. (see Figure 3-3, estimate)

Figure 3-3: Initiation phase scope

3.2.2 Net potential benefit

Value engineering studies cost money and sometimes imply delays in the

project. A full value engineering exercise might well be an overkill for a small

project or a project with little improvement potential. The value adding potential

- 44 -

PA T THREE — MASTER PLAN

has to be weighed against the cost of the exercise and the effect of the delay on

the project, as illustrated in Figure 3-4.

Figure 3-4: Potential benefit vs. cost to capture benefit

3.2.3 Value creation target

The drive with capital projects should be firstly to create value for the

stakeholders. As shown in this paragraph this drive for value should aim to

create exceptionally high value, not just to be adequate. This is not simply a

matter of high standards for the cyclical-commodity industries, it is a matter of

survival. As said by Jeremy Carter of McKinsey Incorporated: "Projects must

aim to be insanely great." Therefor anything less is not good enough [7].

A Adequate value creation target

Businesses within an industry improve their operations and in doing so decrease

their production cost over time. The price of commodities decreases in real

terms with time as indicated in Figure 3-5. This price decrease puts profit and

production costs under pressure [9]. A large capital project often takes up to three

years from commencement to become operational. Should the project`initially

aim to be in the middle of the production cost curve it is probable that, by the

time it starts production, it would be on the high cost end of the curve. If a

- 45 -

Time

Pri

ce, c

ost

rea

l te

rms

(Ran

d/ t

on)

price

A

Acceptable profit 1 Marginal

profits

cost

More playerS',,enter

market .

Cumulative production

Pro

duct

ion

cost

Player A Player B Player C E

Demand decrease

Cost curve at

the time of

initiation

Cost curve at

commissioning

PART TH EE — MASTER PL N

decrease in demand occurs or should some other low cost player enter the same

industry, the new venture could enter the market as a loser. (See Figure 3-6)

Figure 3-5: Price cost squeeze

Figure 3-6: Cost curve change over time

Adequate target Being 'insanely great' is not achieved just by complying to the standards

prescribed by the firm's growth strategies. It is attained by aiming for something

that is at that stage not obviously achievable or known to be achievable [15].

r

-46-

Yes

INSANELY > GREAT

Yes

Invest your money within a bank

Yes

Buy their shares

V V Find another Revisit the project project

Yes

Can you provide the needed growth within the cash flow remedies?

1No

Are you doing it better than the but competitors?

0

Did you cash in on all the floating ideas?

0

If destiny turns its back on you, would you survive?

0

7

P RT THREE — BASTE PLAN

Project teams often aim for easily achievable goals, thus resulting in

underperformance as indicated in part one.

As shown in Figure 3-7, being insanely great implies that the following hurdles

have been crossed:

The venture complies with the growth strategy of the firm within the specific

constraints existing at that point.

Should the venture not compare favourably with its competitors, it would

probably be better to buy their shares. The share price of a firm is often

undervalued.

The worst case scenario should still imply a small profit for the venture.

Before and during implementation a number of improvement ideas exist in

the minds of the team and other stakeholders. It's not normal for these ideas

to surface or receive the necessary attention, but to cross this hurdle all these

ideas have to be considered.

Figure 3-7: Staircase to insanely great

- 47 -

Need to change

Potential to change

Targets

Cost of delay of project

Fast track projects that

should not be delayed

Proposal for capturing full

value

INPUTS ACTIVITIES OUTPUTS

Financial model

Bankable feasibility to date

Market studies

Undocumented knowledge

Other

hiierviews ,end ,wo Fzy sessions

'StIlf12■ daiumentadon

hat-ifsceOario

112ncrarmantpu a

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available dais

P RT Tr aREE — MASTER PLAN

3.3 Initiation process

This paragraph describes the process to be followed during the initiation phase

of the value engineering exercise. The process described in this dissertation is

the result of reasoning using the experience gained on the two capital projects as

described in Part 1.

This phase utilises existing information about the project obtained from

documentation, interviews and work sessions to decide on the best option for a

value engineering exercise. The inputs, activities and outputs are illustrated in

Figure 3-8.

Figure 3-8: Inputs, activities and outputs

The process used during this phase is illustrated in Figure 3-9. It consists of the

following steps, which will be discussed in more detail:

Business case review (understanding the project);

determine case for change (should we improve);

setting targets(where to); and

planning to capture the value (how).

-48-

Understanding the business/ project

Business level

Process level

Value matrix

Value improvement Target

Proposal to capturing the potential

Case for Value engineering

Potential to change ?

Need to change ?

Cost of delay ?

PART THREE — M STIED PL N

Figure 3-9: Initiation process

3.3.1 Business ease review

The purpose of the business case review is to form a common understanding of

the project as a logical first step of the initiation phase [40]. This review can be

conducted in a work session or extracted from the available documentation, all

depending on the nature of the project and the teams involved.

The approach to be followed is based on the process of establishing capital

projects illustrated in Figure 3-10 [37].

- 49 -

Economic/ value evaluation optimization

conStIWOo.2:


Figure 3-10: Process to establish capital projects [29]

A Review project initiation

The initiation phase of a business case review is aimed at understanding the

fundamental aims of the project. The process consists of a review of the

business case and the objectives and plan of the project. Figure 3-11 illustrates

the activities per process step and the resulting outputs.

- 50 -

Define case for Define project Review macro business change objectives project or action planning

- Define overall project objective

- Define sub- objectives

- Define goal decomposition

- Project objectives - Macro WBS and schedules

ACTIVITIES - Understand current reality

- Understand future intent

- Understand business strategy to move from reality to intent

OUTPUTS - Strategic intent

Identify financial parameters

Identify drivers

Review assumptions

ACTIVITIES - Review NPV and - Draw NPV and - Identify risks for uncon- IRR IRR trees trolable variables

- Link financial - Identify controllable - Derive assumptions for parameters to and uncontrollable uncontrollable variables project objectives variables - Set improvement targets

- Set improvement - Rate variables iro for controllable variables targets where risk and impact on where required required NPV/IRR

- Identify drivers where sensitivity is greatest

OUTPUTS - Improvement - Value tree - List of assumptions

targets - List of key risk areas

PART THREE— HASTE PLAN -

Figure 3-11: Review project initiation

B Review economic evaluation

The economic evaluation phase of a business case review is aimed at assessing

the feasibility of a project. The financial parameters are reviewed, the factors or

drivers are determined and assumptions and sensitivities are reviewed.

Figure 3-12 illustrates the activities per process step and the resulting outputs.

Figure 3-12: Review economic evaluation

- 51 -

PA TTI , EE — 11/1ASTE PLAN

Review business engineering

The business design phase of a business case review is aimed at reviewing the

strategy of the business that flows from the project. (Figure 3-13 illustrates the

activities per process step and the resulting outputs.)

Figure 3-13: Review business engineering

Analyse the business

Develop strategies environment

ACTIVITIES - Analyse the external environment of the business

- Analyse the competitive environment of the business (market, product competitors etc)

- Develop overall strategy - Develop functional

strategies (marketing, operations, logistics etc)

OUTPUTS - Business scenarios - List of value adding ideas and

strategies - Ranking of ideas and strategies

Review process engineering

The process design phase of a business case review is aimed at designing a value

chain for the proposed business, breaking it down into processes and

understanding the work that needs to be done in each process. (Figure 3-14

illustrates the activities per process step and the resulting outputs.)

- 52 -

Assign technical task teams to processes

Review technical requirements

- Identify outstanding issues per high level process

- Generate ideas for outstanding issues

- Assign responsibilities with the groups

- Current work status assessment - WBS to get to BFS stage - Incorporation of value adding ideas

to WBS

ACTIVITIES - Assign specialist groups to high level processes

- Set technical targets

OUTPUTS - Technical task teams


Figure 3-14: Review process engineering

Identify

Decompose value

Identify individual

value chain chain into

requirements for processes each process

ACTIVITIES - Model the Macro flow of activities in the business:

- Identify the processes of the business

- Break these processes down into activities where required

- Use each process as a basis to identify requirements

OUTPUTS - Value chain - Key performance

areas

- Process model - Critical performance - indicators

- Identified technical requirements

- Identified commercial requirements - Value adding ideas

E Review detail engineering

The engineering design phase of a business case review is aimed at reviewing

the technical requirements of a project. (Figure 3-15 illustrates the activities per

process step and the resulting outputs.)

Figure 3-15: Review detail engineering

-53-

Develop Assign Assign action responsibilities target plan f dates

- WBS - Resource plans OUTPUTS

- Assign time schedule to WBS

- Compile plans for study items

- Compile scoping document/proposal

- Final scoping document

ACTIVITIES - Develop all WBS - Identify skill requirements

- Identify external roles to be contracted in for specific study areas


Review planning The planning phase of a business case review is aimed at reviewing action plans

and the progress to date for the rest of the project. (Figure 3-16 illustrates the

activities per process step and the resulting outputs.)

Figure 3-16: Review planning

3.3.2 Case for change

Paragraph 3.3.1 discusses the business case review as the first step of the

initiation phase. This step is done to define a common understanding of the

business. The next step discussed in this paragraph is to determine the case for

change. (see Figure 3-9)

The purpose of the 'case for change' step is to assess whether the project is

required to improve and whether any improvement potential exists. This is

compared to the expected cost of the value engineering exercise.

- 54 -

Case for Vat*, e=1911w

Prxel-A. ;< i.rzp

tot*ofooptri,

Understanding the business/ project

Business level

Process level

Value matrix


Value improvement Target

P RT THREE — MASTER PLAN


This step utilises the output of the business case review and financial analysis. It

can also be facilitated in a work session. It is discussed in terms of:

Need to change;

potential to change; and

Cost of value engineering.

A Need to change

The purpose of assessing the 'need to change' is to determine, quantify and

describe why the project needs to improve. Paragraph 3.2.3 indicates when a

project should be regarded as good enough and absolutely no need for change

exists.

This paragraph focuses on the project risk and the quantification of the threats to

the project. Two related techniques, that can be used jointly or separately, are

described to quickly assess the need to change:

Expected risk analysis [4]; and

controllable vs. uncontrollable value drivers [37].

- 55 -


Expected risk analysis To make a quick assessment of the risk, the expected risk of the project is

calculated. More advanced techniques like Monte Carlo analysis can be used

when time and cost allow it. [23]

For a more detailed discussion on risk management the reader is referred to

Bosman [5].

The expected value of a risk is calculated using Equation 3-1.

Equation 3-1: Expected risk

expected risk = impact of the risk when realised x the probability of being

realised.

The following three steps are used before the expected risk is calculated:

Step 1: Identify risks

The risks are grouped under the following headings:

Project risk;

implementation risk;

raw materials related risks (geology in the case of mining);

operational risks;

market and financial related risks.

Using groupings such as discussed above, risks can be identified by interviews

and work sessions.

Stcp2: Estimate impact

The effect of the risk is estimated and the negative value on the business, as

measured by Net Present Value, is calculated using the financial model.

- 56 -


The potential impact of a specific risk on, for example throughput per houi; can

be estimated in a work session or interviews. This impact is converted to Net

Present Value using the financial model.

Step 3: Estimate probability

The probability of the risk realising is estimated and expressed as a percentage.

This is done in a work session or interviews by estimating, for example, the

frequency of the occurrence.

ii Controllable and uncontrollable value drivers

By dividing the value drivers identified during the business case review (see

paragraph 3.3.1B) into controllable and uncontrollable drivers, an estimate can

be made of the potential drop in value that is not under control of the project.

This is a technique indicating and quantifying the possible downside of the

project.

B Ability to change

The 'ability to change' is calculated to assess and quantify the project's potential

to improve. This is done to compare it to the cost of a value engineering

exercise before deciding to continue with such an exercise.

One subjective and two quantitative techniques are discussed:

Subjective technique;

scoping; and

benchmarking.

Subjective technique

The subjective technique assesses the existence of indicators normally associated

with projects having improvement potential.

Historical information indicates improvements of between 10% and 80%. This

improvement is achieved on (see Part 1) [8,17,18,31,34,35]:

- 57 -


Business level, 60% of the improvement;

process level, 30% of the improvement; and

detail engineering level, the remaining 10% of the improvement.

The following indicators should show where the potential of the project at hand

is on the above continuum of percentages [34].

Complexity

The more complex the project the more improvement potential exists.

Complexity often implies that the team had to focus on the complexity and was

unable to optimise each step as they proceeded. The following are possible

indicators:

Great complexity in the plans, processes and volume balances;

complex relations between the business drivers; and

complex relations between the business drivers and the market requirements.

Age of the assumptions

The age and extent to which the designs are based on assumptions that have

been around long enough to have become unchangeable rules. Indicators are:

The different levels of designs are based on information that have not

changed in more than five years;

conditions have changed in the base assumptions;

activities have been going on for a long period of time without extensive

review or modification.

Measuring of value

If 'measuring value' does not form an integral part of the approach to the project,

this implies that decisions are not based on value. This suggests that value is not

optimised. The extent to which the project members understand the role of their

sub-system and its contribution to value indicates the importance of value in the

design process.

- 58 -


Creativity

The extent to which creativity was allowed in the design process of the different

levels of the business can suggest that improvement opportunities exist. The

following three levels of the use of creativity can be defined:

Creative ideas were not allowed;

creative ideas were allowed, but not seriously investigated;

creative ideas were evaluated economically and not just technically.

Changes in budget or schedule

An increase in budget price or schedule often implies that the original

assumption of where the optimum is, is no longer correct. The team's

knowledge about the project increased to a new level, creating uncaptured

potential.

ii Scoping

This technique is used to estimate the value adding potential of the five to ten

best improvement ideas identified during the business case review [37]. It is

important to focus this estimate on the value and not on the technical feasibility.

The possible advantages are estimated and the financial model, that was used to

determine the value of the project, is used to calculate the value of the

improvement idea.

iii Benchmarking

The third technique is benchmarking with associated industries. If another

business is doing it better, room for improvement exists and should be found.

Cost of value engineering

The cost of value engineering has to be estimated and weighed against the

potential improvement.

- 59 -

PART T EE — MASTE PLAN

The total cost of an intervention consists of the following:

(Figure 3-18)

The 'value engineering' cost or cost of executing the intervention process

and finding improvements;

the opportunity losses caused by a possible delay in the project; and

the cost of necessary rework, including possible contractual implications

resulting from changes.

The index of potential can be calculated using Equation 3-2.

Equation 3-2: Index of potential [34]

Index of potential = estimated improvement / estimated total cost

An index of potential less than ten indicates a possible cut-off point for not

continuing with the improvement exercise [34]. Consideration of all the factors,

especially the availability of resources, should however precede this decision.

Figure 3-18: Cost of intervention drivers

Cost to find improvement

Total cost of intervention

d Opportunity losses resulting from a possible delay

Rework resulting from changes

Cost resulting from contractual changes

3.3.3 Target setting

The improvement target for a value engineering exercise is set by interpreting

the results of the following: (See Figure 3-19)

Compliance with the requirements of the investor or mother company;

- 60 -

PA T THREE : — MASTER PLAN

the risk or worst scenario for the industry;

comparison with the best in the industry; and

value engineering experience.

Figure 3-19: Target setting

What the investor wants needed growth cash flow remedies

Project risks scenario planning risk analysis

Known potential benchmarking floating ideas

Value Engineering history 10- 80% improvement 15 - 45% on capital

A Investor requirements

A comparison of the results of the economic analysis and the fit of the project

within the growth strategy of the investor, gives an indication of whether the

investor would require improvement. It is important to take cash flow

constraints and competing projects into account.

B Project risks

The project should at least survive on a downswing or when a worst-case

scenario realizes. This is the second indication of what the improvement target

should be.

Known potential

`Known' potential can be identified by benchmarking within the industry and by

the interpretation of the improvement potential identified during the business

case review.

- 61 -


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Value engineering history Value engineering case studies indicate improvements of between 10% and 80%

on the net present value of the project. This benchmark is the last indicator used

to decide on a target. (see paragraph 3.3.2)

3.3.4 Plan to capture value

Paragraph 3.3.1 discussed an approach to get an understanding of the business

by means of a business case review [37]. An approach to determine and quantify

the case for change was discussed in paragraph 3.3.2. This is of value as it

normally improves the collaboration and commitment of the team. Once an

understanding of the business and the case for change have been completed, an

improvement target can be set as discussed in paragraph 3.3.3.

As illustrated in Figure 3-20 a plan to capture the potential value and achieve the

set targets has to be defined.


This paragraph discusses a plan in terms of:

o The organisation; and

o the value engineering process.

- 62 -

Demand and direction

Manage improvement

Steering committee

Improvement project manager

(

Certified Value Engineer

Value engineering process support

Unit leaders (value engineer facilitators)

Tracking & scorekeeping

Facilitate & evaluate Track & communicate progress improvement in unit against target

P • T THREE — MASTER PLAN

A Organisation ■

A team dedicated to improving the value is required. The typical organisation

and responsibilities of this team is illustrated in Figure 3-21.

This team would report to a high level steering committee, that gives direction to

the team. A value engineering specialist gives support on the process and value

engineering methodology if required. Progress against the target is tracked and

communicated. A broad spectrum of people outside this organisation and

possibly outside the company may be involved in the study.

Provision must be made to prepare and brief the steering committee members on

their role in the exercise and to give the required training to the project team

members.

Figure 3-21: Intervention organisation

Value engineering process

After the initiation phase the remaining steps in the value engineering master

plan are: (see Figure 3-22)

Analysis;

design; and

implementation.

- 63 -

Multiple cycles until target is achieved (Business. process and engineering level)

INITIATION preparingfor value engineering

PART THREE— MASTER PLAN

Figure 3-22: Value engineering master plan

Analysis

Function analysis is the identification and description of functions followed by a

number of possible manipulations or techniques. This is done to obtain a clear

understanding of the business and its functions. Typical techniques are: (see

Appendix A)

Function identification;

Function Analysis System Technique;

Numerical method;

o Redundancy analysis; and

Cost to function analysis.

For a more detailed discussion on analysis the reader is referred to Stringer [33].

ii Design

Design is the combination of creativity, insight obtained during the analysis

phase and knowledge about the project in order to achieve improvement.

The last step in the design phase is the evaluation of the idea. (see Appendix B)

For a more detailed discussion on design the reader is referred to Utah

Department of Transport [34].

- 64 -


iii Implementation An idea with value adding potential is of no value to the project unless it is

formally approved and becomes part of the new plan and budget.

Implementation ensures that the improvement becomes part of the new design

following the required change control procedures.

iv Cycle and schedule Improvement can be achieved on business, process or engineering level as

defined during the business case review (see paragraph 3.3.1). The value on the

different levels is captured in different cycles each focusing on a specific level.

The target and the findings made during the initiation phase will determine the

relative emphasis on the following three cycle groupings:

Business level cycle;

process level cycle; and

detail engineering cycle.

3.4 Conclusion

Part two introduced value engineering as a proven technique and a possible

solution to the dilemmas described in Part one.

Part three introduced the reader to the master plan or methodology to be

followed. It focused on the process required for initiating a value engineering

study.

Part four will discuss the introduction of value engineering, using current Iscor

processes as a case study.

- 65 -

Part one


required by growing

Companies ?

Part two

FUNDAMENTALS what it value ? what it improvement ? what it value engineering ?

MASTER PLAN Under.standing the business COSL fill change Target Analysis, design, implementation

Part three

Why ? What ? How ?

When/ Who ?

, GRAT1ON atitig vIdtte . enAjne riug .

iltatx, rn A

Final remarks

4 Part For e hltegraUon

"The old concepts and formulas are no longer adequate to express our modern outlook

The old bottles will no longer hold the new wine. The spiritual temple (management) of

the future, while it will be built largely of old well proven materials, will require new

ampler foundations in the light of the immense extensions of our intellectual horizons."

General JC Smuts, 1925, Holism and evaluation

4.1 Objective

Part Four discusses the integration of value engineering with the current

processes Iscor uses to establish a business. (see Figure 4-1) This is discussed to

serve as a case study for this research.

Figure 4-1: Part Four, Integration

The principles and methodology of Value Engineering are essential for creating

value and should be made compulsory on all capital projects. Due to the success

of value engineering the United States Congress passed a law in February 1996

- 66 -

PA T FOUR— INTEG ATION

that requires the "establishment of effective programs to apply the practice of

Value Engineering" [35]. Value Engineering will return our focus to creating

value by changing our views and decision making. This methodology should be

integrated in project management and become part of the current process of

establishing a business [19,21].

In order to introduce value engineering on projects, we must know when in the

project life cycle to do it (when), where and how to fit value engineering within

the project management processes (how) and what skills are required (who).

Integration is therefor discussed in terms of:

Timing;

integration with project management; and

organisation and establishment of skills.

4.2 Integration

Value engineering can be applied as an integral part of the design process ("Do it

right the first time") or as a focused intervention during the life of the project

("Value Engineering Intervention") as mentioned in part two of this document.

It is to be expected that as Value Engineering becomes established, the effect of

interventions will gradually become less and less dramatic until it vanishes

completely. This will happen because project teams will start to introduce value

engineering principles in their designs and will design optimal businesses from

the start. This is the ultimate goal of value engineering, but until this is

accomplished, the intervention must serve as an indispensable tool for a

company.

The intervention of a project also serves as a valuable tool for establishing these

principles in a company. Team members who experienced a successful

- 67 -

P RT FOUR — INTEGRATION

intervention process will tend to use the methods and principles intuitively on

their next assignment [17,18].

4.2.1 Do it right the first time

To establish a culture where projects are designed optimally from the start, value

has to become a way of life and the only goal. The following steps will

contribute towards this goal if they are made part of the normal way of doing

projects:

Establish a value culture and make the team aware of value as part of the

team's briefing;

measure and communicate value, value drivers, and any change in value

during the project;

design value by designing a function to a cost target; and

optimise all steps by way of mini-interventions directly after logical steps

(let's improve what we just did ); examples of logical steps are business

process, detailed engineering, conceptual design and other smaller steps.

4.3 Timi g of the intervention

For an intervention to be successful, timing is of the utmost importance. There

is no easy answer to the question of 'When is the best time for an intervention?'

It is however true that the success of an intervention depends on the timing and

on the stage where it is inserted within the current process.

This paragraph discusses timing and also aims to give the reader an insight into

the factors involved in making a project specific decision on when to intervene.

The ideal time for an intervention would be when:

The teams have obtained insight into and knowledge of the project, its

surroundings, and its value, (ability);

the stakeholders' willingness to change is not frustratingly low (willingness);

and

the cost of changing is lower than the benefit of the intervention.

- 68 -

PART FOUR — INTEGRATION

The benefit expected from an intervention can be described by the following

Equation 4-1, which is used to describe the advantages and disadvantages of

conducting an intervention at a specific time [31].

Equation 4-1: Intervention benefit

intervention benefit = f(ability, willingness) — cost of change

4.3.11 Team's ability to improve

A team's ability to improve can be related to the members' knowledge about the

project. It is therefor a fact that for a fixed team the ability to improve will

increase with time, being at an all time low at the beginning of the project.

As shown in Figure 4-2 knowledge of the project increases over time as the

project progresses towards completion. This implies, as illustrated by Equation

4-2, that this factor favours the study to be later in the project.

Equation 4-2: Intervention benefit: Ability


4.3.2 Willingness to change

The willingness to change determines the team members' ability to perceive

improvements. (see Equation 4-3) A team that is completely satisfied with its

project will only see improvement opportunities with great difficulty. This can

be managed, but managing it becomes much more difficult after board approval

of the project. This factor is graphically presented in Figure 4-2, that shows

willingness to change decreasing as designs are finalised, with a radical decrease

once board approval has been obtained.

This factor favours the study to be earlier in the project.

- 69 -

> ) Feasibility Implementation Operation

phase Project Potential study

initiation phase

Pre-feasibility phase

Capability indicators

Willingness

Suitable for

interventions

Board

approval

Ability

Project steps


Equation 4-3: Intervention benefit: Willingness

intervention benefit =f(ability, willingness) — cost of change

Figure 4-2: Project team capability

4.3.3 Total cost of intervention

The total cost of a value engineering intervention is the next factor influencing

the timing of the exercise (see Equation 4-4). It comprises the following as

illustrated in Figure 4-3. (refer to paragraph 3.3.2C)

The 'value engineering' cost or cost of executing the intervention process

and finding improvements;

the opportunity cost of a possible delay in the project; and

the cost of necessary rework, including possible contractual implications

resulting from changes.

Equation 4-4: Intervention benefit: Cost of change


- 70 -

<1

Cost to find improvement

Opportunity cost due to delay

Feasibility phase

Pre-feasibility phase

Project Potential study initiation phase

)

Implementation Operation

Rework cost

Project steps

Suitable for

interventions

Cost of intervention

PART FOUR — I TEGRATION

Figure 4-3: Cost of intervention drivers

Cost to fmd improvement

Total cost of intervention

Opportunity losses resulting from a possible delay

Rework resulting from changes

Cost resulting from contractual changes

All three these costs increase as the project progresses towards completion as

illustrated in Figure 4-4. From this it is clear the cost factor favour the timing of

the value engineering exercise to be as early in the project life cycle as possible.

Figure 4-4: Cost of intervention

- 71 -

PART FOUR — INTEG ATION

Cost is often confused with the 'willingness to change' when teams use rework

and cost of delay to justify unwillingness on their side. Before the start of project

execution the cost of change is normally orders of magnitudes smaller than the

benefits to be obtained. A Colorado based company, SAMI, reported a return on

investment for value engineering exercises exceeding $1000 for every dollar

invested [31] .

In almost every case in which value engineering is applied, the money saved will

be many times the cost of a value engineering study. "A general rule of thumb

states that expected savings should exceed the expected study and

implementation costs by a factor of ten." [34]

Cost can be quantified and compared to the possible improvements once it is

identified and evaluated. Cost should therefor never be used as a reason not to do

an intervention; it should rather be used to decide whether an idea is feasible and

whether it should be implemented. It is never too late to consider improvement,

although the earlier it is done the cheaper it will be (and the greater the degree of

freedom is).

4.3.4 Logical intervention points

According to Figure 4-5 (adapted from Moll [26]) it is logical that improvement

can occur only after something has been defined and is understood (managed).

In essence this means that something to improve, or a base from where to

improve, exists. The team members should at least understand the dynamics of

the venture and the environment in which it functions.

- 72 -

TIRE

CHAOTIC

L

IMPROVED 4

L

OPTIMISED

DEFINED

MANAGED

Project steps

Project

Potential study Pre-feasibility Feasibility Implementation Operation initiation phase phase phase

Logical points

ART FOUR — INTEGRATION

Figure 4-5: Process maturity levels [26]

Taking all factors into account, logical points of intervention exist as indicated in

Figure 4-6. During the life of the project one or more of these interventions can

be formally conducted.

Logical point 1: as final step of the initiation.

Logical point 2: as final step of the potential phase.

Logical point 3: as final step of the pre-feasibility phase.

Logical point 4: as final step of the feasibility phase.

At the logical point 4, the need for a value engineering intervention (value

engineering initiation study) has to be assessed before the project is presented to

the board for approval.

Figure 4-6: Logical points for a value engineering intervention

- 73 -


4.4 Integration with project management

This paragraph discusses the integration of value engineering with the project

management philosophy used by Iscor. [28] This philosophy comprises four

basic steps as illustrated in Figure 4-7.

Figure 4-7• Project Management steps.

Project Project Project initiation planning execution

Project closing

In theory these project management steps are applied during each of the phases

illustrated in Figure 4-6 (for example after a business is initiated)

A project is initiated and approval to conduct a potential study is obtained;

this potential study is planned in detail;

the project is executed according to the plan; and

finally the project is closed with a possible proposal to proceed with the next

step. In this case a pre-feasibility study could again be initiated.

Hence, these four steps will be followed to complete a:

potential study;

pre-feasibility study;

feasibility study; and

implementation of the business.

4.4.1 Integration of the intervention

Applying the rules discussed in paragraph 4.3.4 (Logical intervention points)

value engineering intervention has to be introduced as part of the project closing,

as the final step of each phase: potential, pre-feasibility and feasibility study. In

practice this would mean that a value engineering initiation study (discussed in

part three) has to become part of the project management closing procedure. (the

- 74 -

PART FOUR — INTEG ATION

fourth step of the process illustrated in Figure 4-7) Depending on the outcome

of this study appropriate re-engineering would then follow.

4.4.2 ffntegration of 'do it right the first time'

As discussed earlier, value engineering should also become an integral part of

the design process. In practice this implies that 'establishing of a value culture'

has to become part of the project initiation step and that 'measuring of value' has

to become part of a supporting process for the planning and execution of project

management steps. (paragraph 4.2.1, Do it right the first time)

4.5 Organising for Value Engineering

The organisation and the required training for value engineering are discussed in

this paragraph.

The staffing of the project should be done to have somebody to:

take responsibility for the required functions; (ownership)

ensure a value focus (value champion); and

ensure, where appropriate, that the required process is followed (value

engineering methodology champion).

The organisation requirements for: The value engineering initiation study is

illustrated in Figure 4-8; the intervention exercise is illustrated in Figure 4-9; and

conducting a project with value engineering principles is illustrated in Figure 4-

10.

Figure 4-8: Value Engineering initiation study organisation

Management team

(

Project team


- 75 -

Steering committee

Demand and direction

Manage improvement

• Value engineering process support

Unit leaders (value engineer facilitators)

Tracking & scorekeeping

Facilitate & evaluate Track & communicate progress improvement in unit against target

Improvement project manager

(


1

Project manager

Project Steering committee

Unit leaders

Value guardian


Figure 4-9: Value Engineering Intervention organisation

Figure 4-10: Project team adjusted for value engineering

4.5.1 Training of value engineers

Capturing the maximum value for Iscor on the various growth projects, requires

skilled personnel. These skilled people should combine insight with knowledge

of the theory, for which this document can form the basis. These skills are only

complete and useful once they are honed by practice.

Paragraph 4.5.1 discusses the establishment of these skills within Iscor in terms

of

The phased approach to transfer of skills;

certification of the acquired and developed skills; and

a training program.

- 76 -

Project team members role in

The role of value engineering value engineering

consultants

Phase I

Establish and train a core team

Deploy on available projects

Phase 2

Transfer skills to project

teams

Formal training of project

members

Phase 3

Maintain a core team (value

engineering center of excellence)

A T FOUR — ONTEG ATION

A Transfer of skills

A phased approach is proposed to firstly establish these skills in a core team and

secondly to transfer these skills with training and experience on projects until

team members are capable of running improvement initiatives with limited help.

(see Figure 4-11)

The phased approach is based on the principle that a core team is trained and

deployed with the following three goals in mind:

Capture value on the growth projects;

add value to the current value engineering methodology; and

transfer the skills to the wider Iscor.

The last phase would require a small team to form and maintain a centre of

excellence for value engineering.

Figure 4-11: Skill transfer to project teams

B Certification

To measure and manage the skill base, a certification system is to be used. The

team members will be certified according to their value engineering capabilities

as illustrated in Figure 4-12. Formal value engineering training, applicable

practical exposure and certain key people management skills will be required for

certification.

- 77 -

Capable of maintaining the methodology and coaching/training of certified value engineers....

Setup and manage an improvement project...

value engineer consultant

certified value engineer

value engineer facilitator

Facilitate on an improvement project....

PA F T FOUR — INTEGRATION

Figure 4-12: Certification system

Training A training program should consist of theoretical training and the practical

application thereof. Since the success of an exercise is based on team work and

human behavior the personality characteristics of the value engineer is of great

importance.

Table 4-1 illustrates a typical training program for the three levels of

certification.

Table 4-1: Training program

4.10e o7gifieerino:

,..'09iligl*t

Cety I v .ext ip t.

alue', steer oijicator

opna retliodatoik: X X X

' ''P'. aAge;113.4401en X X X X X

lilydel*Oiri,C,'

.,, a0.eiat: in . ici:e.IS , •

X X

'f4eklitafjont, X X X Projcdt management X X

Ot,1001Y

@

IFI4pilifliW 't4100; engindeijng...e*roise

X X X

6Ortifild

aitiiiiiti4 o ' stu- -7

X X

Sc4ieekefetiiri -gi& reporting . '. '

X X X

Interpretaiiod5of ; #4.atici0 iiO4:4 .

X X

,Perscitialitjt . , Ocii4i..0010040., ,

Team 1)140 ::‘ X X X Coach X Driver 1 X X . c*Itived iitiei riiund X X X

70:011$00:00: X X X

- 78 -

ART FOUL — INTEGRATION

4.6 Conclusion

Where Part two and Part three have focused on introducing and explaining value

engineering as a possible solution to the dilemmas described in Part one, Part

four has described when and how to institute the principles in a corporation such

as Iscor, Mining.

- 79 -

Part one


required by growing

Companies ?

Part two

FUNDAMENTALS what is value 7

what is improvement ? what is value engineering ?

art three

MASTER PLAN Understanding the business Case for change

Target Analysis, design. implementation //

Part Four

INTEGRATION integrating value engineering with the Imp process lie !bran organisation responsibilities

Why ?

What ? How ?


5-- Part Rive e aosure

" We look at it and we do not see it"

Lao-tzu, 6th century B.0

5.1 Objective

As a closure to this dissertation, Part Five provides a summary of the most

significant conclusions.

Figure 5- 1: Part Five, Closure

The closure is discussed in terms of:

An overview of the dissertation;

the contribution of the dissertation; and

possible future research.

- 80 -

PART FIVE— CLOSURE

5.2 Overview

Case studies indicated that projects seldom realize their full potential and that

projects often under perform in terms of value. Two case studies within Iscor

and [17,18] five case studies from McKinsey [7] indicate that the potential exists

to improve.

Value Engineering proves to be a suitable vehicle capable of capturing otherwise

hidden opportunities. Value Engineering can be introduced as an intervention

on the 'standard' capital project, radically improving the already designed

project or becoming an integral part of the process with the aim to design it

optimally from the start. In theory the more the latter is used the less the first

will be required.

Value Engineering consists of three steps: analysis, design and implementation.

The initiation phase sets the stage for these steps by defining a case for change,

sets a target and obtains a clear understanding of the project.

Due to the potential value of a value engineering exercise, it should be

introduced on all capital projects. The timing and place where it is introduced

within the current capital project processes are of importance.

5.3 Contribution

This dissertation has firstly illustrated the dilemmas with capital projects based

on the case studies and proposed value engineering as a possible solution.

Economic evaluation has been proposed as a means of measuring improvement.

The fundamentals and factors required for success have been defined based on

experience and theory. Lastly, the implementation of this process within a

corporation, using Iscor as an example, has been discussed.

- 81 -

PART FIVE — CLOSURE

5.4 Future research

According to Moll [26] function and cost as illustrated in Figure 5-2 can define

the value of a project or business. The value drivers can therefor be described as:

Volume;

quality;

flexibility;

expenditure;

waste; and

risk.

A number of theories and methodologies that address different aspects of these

value drivers exist, as illustrated in Figure 5-3 [22]. Consultants and managers

often choose one or two from this list and use it as a technique to solve all

problems.

Research to understand the different methodologies and when it should be used

or could be combined to address the specific needs of a business or project,

could be of value.

- 82 -

FUNCTIONAL PERFORMANCE

VALUE COST

F(QUALITY; VOLUME; FLEXIBILITY)

F(EXPENDITURE; RISK; WASTE)

QUALITY VOLUME FLEXIBILITY

EXPENDITURE RISK WASTE

P T FIVE — CLOSURE

Figure 5-2: Value drivers

Figure 5-3: Methodologies and business drivers

Quality Volume IFIertImfity •••.1NArperbliture Vaste

Tralue, EngineeriUg Ousiness P.rocess Re- engineering

x

;Iiheory . of constraints

x x

-Risk , management •

x

dotal Quality Management .;

x

Just in time , x x x

Lean production

x x

- 83 -

REFERENCES

References

1 ARHUR E, 1986, Value Engineering, Systematic Approach, William L. Kelley, Washington

2 BLANCHARD BS, 1991, System Engineering Management, John Wiley & Sons Inc.

3 BLANCHARD BS, 1992, Logistics Engineering and Management, Prentice-Hall.

4 BOSMAN S, KRUGER PS, Markovian Modeling in business risk analysis, South African journal of industrial engineering Vol 1, November 1998

5 BOSMAN S, 1998, A framework for managing risk in a changing business, Unpublished Ph.D.- thesis, University of Pretoria, South Africa.

6 ISCOR MINING, Business Engineering Experience, Consulting Services, Old Mutual Building, Hendrik Verwoerd drive, Centurion

7 CARTER J, VAN DIJK M, GIBSON K, Capital investments: How not to build the Titanic, McKinsey Quarterly Volume 4 September 1996

8 CARTER J, 1996 November, Presentation on Clean Sheet Capital Redesign, Unpublished

9 Continuous Improvement documentation, 1998 February, Performance of capital projects, Kloofsigpark, Centurion

10 COOPER DR, SCHINDER PS, 1998, Business research methods, McGraw-hill

11 COPELAND T, 1996, Valuation — Measuring and managing the Value of Companies, McKinsey & Company Inc. John Wiley & Sons.

12 DE BONO E, 1990, Lateral Thinking, Penguin books

13 ELS FC, 1999, Business Analysis documentation, Consulting Services, Old Mutual Building, Hendrik Verwoerd drive, Centurion

14 FOWLER FG, 1978, Pocket Oxford Dictionary, Sixth edition. Oxford University Press.

-84-

REFE ENCES

15 GOSS T, PASCALE R, 1993, The reinvention roller-coaster. Risking the present for a powerful future, Harvard Business Review November -November — December 1993

16 HALL J, 1996, The Competence Connection, The Woodlands, Texas

17 Iscor Heavy Minerals project documentation, Old Mutual Building, Hendrik Verwoerd drive, Centurion.

18 Kamoto project documentation, Old Mutual Building, Hendrik Verwoerd drive, Centurion.

19 KINNAN M, MARTIN JS, But we already do it, and other misunderstandings, Save International Conference Proceeding, May 1997

20 MAKRIDAKIS S. 1983. Forecasting, methods and applications/ 2" d ed, John Wiley & Sons Inc.

21 MARTIN JS, What's the difference?, Save International Conference Proceeding, May 1997

22 MELNYK SA, 1996. Operational management: A value driven approach, D. Irwin.

23 MILLER I, FREUND JE, 1985, Probability and statistics for Engineers, Prentice-Hall

24 MILES FOUNDATION, www. miles foundation. corn

25 MOLL CM, KRUGER PS, Using the business engineering approach in the development of a strategic management process for a large corporation: A Case Study, South African journal of industrial engineering Vol. 1, November 1998

26 MOLL CM, 1998, An Engineering approach to Business Transformation. Unpublished Ph.D.-thesis. University of Pretoria

27 NICHOLAS JM, 1990, Managing Business & Engineering Projects, Prentice-Hall

28 PMBOK, 1998, Project Management Body of Knowledge, Consulting Services, Old Mutual Building, Hendrik Verwoerd drive, Centurion

29 ISCOR MINING, Project management Consulting Services, Old Mutual Building, Hendrik Verwoerd drive, Centurion

30 RONALD EW, 1982, Introduction to statistics, Prentice-Hall

- 85 -

REFERENCES

31 SAMI, Introduction to value engineering, www. value -engineering. corn

32 STEPHEN J, KIRK AJ, 1995, Life Cycle Costing for Design Professionals, McGraw-Hill

33 STRINGER RA, Fundamentals workshop, VM Services (Pty) Ltd,4 Portman Place, Bryanston.

34 UDOT, Utah department of transport, www.utah.corn "-N

35 UNITED STATES LAW, General Federal Law requiring VE Applications, Public Law 104-106, National Defense Authorization Act For Fiscal Year 1996, Sec 36, Value Engineering, United Sates of America

36 VAN ZYL, 1999, Value Engineering Kamoto, Old Mutual Building, Hendrik Verwoerd drive, Centurion.

37 VENTER E, MOLL CM, 1997 December, Business case review, Hope Downs, Old Mutual Building, Hendrik Verwoerd drive, Centurion.

38 WILLIAM LK, 1986, You and Value Whatnot, William L. Kelley, Washington

39 YIN RK, 1989, Case Study Research, SAGE Publications Inc., London

40 FUREY TR, A Six-step Guide to Process Reengineering, Planning Review March April 1993

41 MAGEE B, 1998, The story of Philosophy, Dorling Kindersley Limited, London

7

- 86 -

APPENDDX A

Function analysis

111 Introduction

Functional analysis is discussed as a technique for understanding the core reasons for

procedures or components, finding better alternatives and improving fitness for purpose

in doing so.

An item or service is purchased because it will provide a certain function at an acceptable

cost. If it does not perform the intended function, it is of no use. Value can therefore not

be improved by reducing the cost of such an item. On the other hand, functions beyond

those that are needed are of little or no value to the user. Function analyses are used to

determine the functions that are required and helps to improve the required functionality

and to reduce the cost and unwanted functions [33].

It indicates possible low value areas for possible focus and helps to understand the

dynamics and purpose of items.

Function analysis is the identification and describing of functions followed by a number

of possible manipulations of these functions in order to achieve the required answer.

This appendix describes function analysis in terms of: (see Figure 1) [33,34,38]

Function identification;

FAST technique;

numerical method;

redundancy analysis; and

cost to function analysis.

- A 1 -

Function identification

FAST technique

Numeral [method

Redundancy

Lanalysis

relation & sequence

order of importance

redundant functions

Cost to function function value analysis

APPENIDOX A

Figure 1: Function analysis process

A.2 Identify fui ctions

The definition of functions should answer the two questions: "What does it do?" and

"On what is it doing it?" [34]

The description of a function should be clear and simple. Normally only two words, a

verb and a noun should be used to describe the function. The verb describes the action

that is required. (the verb could be: generate, support, control, restrain, pump, transmit

etc) The noun describes what is acted upon. (the noun could be: ore, waste, electricity,

temperature, force etc) This simple description of the functions is required to ensure

consistency and to avoid the combination of different functions. The real function should

be described and care must be taken not to describe the solution. The function of the bell

of an alarm could for example be to notify somebody and not to make a noise [33].

Functions can be defined on different levels. The function of an alarm can be to notify in

the case of an intrusion, while the lower level functions of the same alarm are to detect an

intruder and to make a noise. The higher level function of the alarm is then to protect

property. The rule of function analysis is to start at the highest function and the work

down to the lower functions [33].

Once the functions are defined they can be classified according to the following:

o Work or sell functions; and

o Basic or secondary functions.

- A 2 -

APPENDOX A

- 1) Distinguish between work and sell functions: [24]

a) Work functions:

relate to use value

example: The ability of a car to transport something from A to B.

b) Sell functions:

relate to aesthetic or esteem value

example: The four-wheel drive function of a city vehicle or the metallic paint that is

used.

2) Classify functions as either basic or secondary: [38]

a) Basic function: (what should it do?)

That which is essential to the performance of a work or sell function;

The function describing the primary utilitarian characteristics of a product or service

to fulfil a user requirement.

Example: Using a hammer to drive nails into a piece of wood.

b) Secondary function: (what else can it do?)

The manner in which the basic function was implemented;

A function indicating quality, dependability, performance, convenience,

attractiveness, and general satisfaction beyond that needed to satisfy minimum user

needs.

Example: Using a hammer to fix an engine of a car or to pull a nail from a piece of

wood.

Figure 2: Function definition

Describtion Function Classification cost Verb Noun basic second function total

body part 1 funs 1 x 0.1 func 2 x 0.2

x 1 1.3 body part 2 func 3 x

iunc 3 x

- A 3 -

APPENDIX A

A.3 Develop a FAST diagram

A technique called Function Analysis System Technique (FAST) was developed in 1964

to analyze and understand functions in dept. [3 1]

A FAST diagram can be compiled from documentation, but best results and

understanding are achieved when it is drawn up during a work session.

Determining what the team regards as the most general function starts the process. To

extend the diagram to the left the question 'Why?' is asked, the answer obtained is the

higher level function. Similarly the question 'How?' is asked to extend the diagram to

the right and obtain the lower level function. (See Figure 3)

"When we ask 'How' we are looking for solutions and moving to lower levels of

opportunity. When we ask 'Why' we are looking for reasons and moving to higher levels

of opportunity" Bytheway [31].

Figure 3: Directions in a FAST model

A.3.1 Nu

ericali method! 1:1

This technique was developed by Arthur E. Mudge to manage divergence in opinions

and is used to ensure focus on the important function [O.

- A 4 -

A

B

C

D

A is more important than

B and the difference

is major

, .11 D

Key 1 = minor difference 2 = medium difference 3 = major difference

Total

Total

Total

Total A

B

C

D

C

APPEND DC A

This method compares each function to all of the other functions determining the ranking

according to importance in doing so.

The following four steps explain this procedure: (see Figure 4)

Step 1: List functions in a matrix (eight to sixteen appear to be optimum)

Step 2: Compare importance and assign a weight according to the key to indicate the

magnitude of the difference.

Step 3: Add the score for each of the functions.

Figure 4: Numeral evaluation matrix

The findings of this technique are used to indicate order of importance for possible focus

points and to help differentiate between basic and secondary functions. The findings of

this technique can be graphically presented as indicated in Figure 5.

- A 5 -

APPERIMIX A

Figure 5: Presenting numeric evaluation

A.3.2 Redundancy analysis

This technique was developed by Frank Knox in 1965 to determine areas in which

redundant or duplicate functions occur, with the aim to reduce cost for the same

functionality and quality. [24]

After the functions has been identified and classified the following three steps are

followed:

Step 1: List the verbs and nouns onto a worksheet without duplication;

Step 2: List all the body parts onto worksheet using a unique reference index for each

part;

Step 3: Determine the areas of function duplication, by noting intersections with a high

level of symbol occurrence;

Step 4: Take a creative look at how to reduce the duplication.

-A6-

verb

noun cost 1 5 6

Function description verb + noun

a ,b

d Body parts

1

e f

g

APPENDDC A

Figure 6: Redundancy analysis

A.3.3 Cost to function analysis

The cost to function analysis is done to identify the high cost functions with the basic or

priority of the functions. [33]

After the function has been identified and classified the following 4 steps are followed:

Step 1: Determine cost of components (full life cycle cost);

Step 2: Allocate cost to functions;

Step 3: Determine total cost per function (all components);

Step 4: Investigate/interpret the relationships between cost and function;

- A 7 -

APPENDM

Idea Eva l uation

B.1 Introduction

Ideas are evaluated to answer the following two questions:

'Is it going to work technically ?'; and

'Is it worth doing?'

A highly motivated team having Ownership of the targets will evaluate the idea

rigorously, not accepting too easily that it is technical not feasible. This is very

important, since the truly great ideas often have a number of roadblocks where the

solution is not obvious. The truly motivated team will focus on the possible benefit of

the idea, using the size of the benefit in overcoming the roadblocks. It is therefore

advisable to calculate the possible benefits before the technical aspects are addressed. [15

& 16] The logic of this approach is that, should an idea be worth ten million rand, it

would be possible to overcome many technical problems that would have been insoluble

for an idea for which the benefit would be less than one million rand.

There is however one disadvantage of a highly motivated team that has to be guarded

against. Group-think and over-motivation could result in unfeasible ideas being found

feasible. It is therefore important that ideas are critically reviewed by a capable person,

possibly outside the group. The certified value engineer has a major role to play in this

aspect. [38]

The following aspects have to be addressed during the evaluation: [36]

a) Value:

calculate change in capital;

calculate change in operating cost;

calculate change in working capital;

calculate change in tax; and

calculate change in net value.

- B 1 -

APPENDIEX

b) Technical:

determine the reasons for the previous design;

what is the new design; and

what is the difference in technical terms;

c) Risk:

the risks of the old design; and

the risks of the new design.

d) Schedule:

how is it affecting the schedule;

Communication and a formal acceptance of the idea are required. The last step before the

improvement can be claimed is therefore the formal sign-off by the steering committee of

the improvement initiative and all the managers that were involved.

This appendix discuss idea evaluation by means of providing: [36]

An example of the typical idea evaluation form that can be used to communicate the

results and obtain approval; (paragraph B.2)

A typical spreadsheet that can be used to evaluate the positives and negatives of an

idea; (paragraph B.3) and

A spreadsheet used to estimate the net present value of cash stream without a detailed

model. (paragraph B.4)

-B2-

au-A-.424A-C714:4,6

APPENDEX

B.2 Idea capturing form, Example

Project name enptulliting from

VE 1 Rev. 0

Unit Idea No. Idea owner Plant 01 Name

SUMMARY OF IDEA (ATTACH SUPPORTING DOCUMENTATION) TITLE: EXPERT SYSTEM ON FLOTATION CIRCUIT AND CORRESPONDING CHANGES IN GRADE AND RECOVERY

CURRENT SITUATION: Regrind mill, secondary mills and extra flotation cells installed, but the expert system does not cover the flotation circuit. This leads to inefficient operation, which means that optimal grades and recoveries cannot be achieved.

REASON FOR CHANGE: With better control in the flotation circuit, recoveries will be increased. This allows an optimal recovery-grade ratio to be achieved, which will have a positive effect on the NPV of the expansion project.

NEW SOLUTION: By installing an expert system on the flotation circuit, the required level of control will be achieved.

BENEFITS: The optimal grade and recoveries will be achieved. This will result in more metal tonnes being produced with the same volume of ore. Producing a Zn grade of 55.5% reduces the risk of not achieving a Zn grade of 57%.

CAPEX (NPV): 8459,000 extra capital expense (R500,000 + 5.5% tax in 98/99 values to be installed in 99/2000)

OPEX (NPV): R7.423M extra operational expenses (including working capital and royalties) due to higher metal tonnes.

REVENUE (NPV): 818.042 million

TAX IMPLICATION (NPV): R5.984M extra tax due to higher revenue

RESULTING VALUE OF IDEA (NPV): R4.175 million RISK ASSESSMENT AND CONCERNS Rating Ili M L Previously proposed Zn grade of 57% seems hard to achieve. This idea lowers that risk considerably. Recovery of 87% is at low risk and seems very achievable

Low Low

SYNDICATION COMMENTS ADVICE: GO/STUDY/NO Manager Plant Unit leader: Plant Project leader VE financial modeller Mine Manager

PROJECT TEAM APPROVE REJECT

STEERING COMMITTEE APPROVE REJECT

- B 3 -

Revenue

Expenditure

Penalties 0

Treatment charges -25,808

Transport -6,624

Revenue tonnes 43,849

Ore deposit 0

Ore extraction 0

Feed grade 0

Volume 0

Higher recoveries 43,849

Revenue Price/grade

Operating cost

-32,432

Overheads -opex 0

Royalties -opex -358

Mine -opex 0

Plant -opex 0

Working capital -441

Expert system -460

0

-4601

0

1741

50000

40000

30000

20000

10000 -

Higher Treatment Transport Royalties - Working recoveries charges opex capital

Expert Extra tax Benefit system

Extra tax -5,984

APPENDRX

B.3 Idea impact analysis, Example

VE2 Idea 01 Idea value impact analysis Susifiess driver tqPv moo

Net value implication

Capital

Tax -5,984

-B4-

Net cash flow o 1

Real discount rate

10% Effective tax rate

0% 0% 0% 0% 0%

0% 0%

0%

APPENDIX

.4 Net Present Value Estimator

Present

1997198 1998/99 1999/00 2000/01 2001/02 2002/03 2003104 2004/05 value

1

2

3

4

5

8

7

8 Revenue

folia7"- „ Operating contribution :apical, • .• • Tax

Enter numbers as real numbers Enter savings as negative values Enter incremental costs as positive values

- B 5 -

valve -et mkeimintg for proveyent of capral pro,,n-s

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