Value Optimization in a World of
Choices
Presenters:
Timothy J. Havranek, MBA, PMP
Leigh A. Hostetter, BA
Copyright 2006, Triangle Economic Research, LLC
DTC Process
Framing Meeting
Optimization
Problem
Optimal
Decision
Modeling
Introduction
• Client for original model was a chemical
manufacturing company
• This company has developed a number of value
improvement processes (VIPs)
– Applied to all new projects
– Exist for the each phase
– Latter phase VIPs are focused on fine tuning the design
• Model developed to facilitate the Design to
Capacity (DTC) VIP.
DTC Purpose
• Maximize capital efficiency
• Prevent over design that can occur due to:
– Allowances for uncertainty (safety factors)
– Equipment and materials come in incremental step
sizes
– Lack of design definition
– Uncertain market demand
DTC Approach
• Uses a facilitated framing meeting to:
– Challenge the design team
– Identify design components that add excess capacity and cost
– Develop a list of viable alternatives
• Alternatives are evaluated in terms of:
– Capital and operating costs
– Useful equipment life
– Manufacturing capacity
• Recognizes that costs and equipment life are uncertain
Framing Meeting Steps
• Identify Major Equipment Alternatives
• Provide Equipment Capacities
• Develop Cost Range Estimates
• Identify Alternative Constraints
Major Equipment Requirements
• Under the control of the design team
• Two or more viable alternatives exist
• Equipment could have impact on
system capacity
Concerns with Standard DTC Process
• Assumes that stated design capacity is the
optimum capacity
• Does not include an evaluation of uncertain
demand
• Seeks value improvement without
addressing “Over the Wall” effect
Today’s Presentation
• We present the results of a model:
– Based on real project
– Altered for purposes of demonstration and
confidentiality
– Evaluates the effect of uncertain demand
Optimization and Inputs
Optimization:
Present Value of Total Cost
Present Value of Revenue
Net Present Value of Profit
System Capacity
Capacity Metric - Minimizing Excess Capacity
Model Inputs:
Product Price
Demand
Capital Costs
Installation Costs
Operating Costs
Equipment Capacity
Equipment Life
Framing Meeting Alternatives
Alternative Name
Alternative
Number
Primary Cooling System
Acid Tower
Bottoms Cooler
Product Heat
Exchanger
Water Wash Tower
1
Existing Unit
New Shell & Tube
Heat Exchanger
Existing Fin-Fan
Exchanger
Monel Clad Tower
2
New Unit
Refurbished Fin-Fan
Heat Exchanger
3
New Unit with Booster
Pump
4
Refurbished Unit
New Shell & Tube Carbon Steel Extra
Exchanger
Corrosion Allowance
*Failure of existing unit for the primary cooling system reverts to a refurbished unit
**Failure of existing fin fan exchanger for the product heat exchanger reverts to a refurbished fin fan exchanger
Model Inputs
bbl/day
Design Capacity
2,700
Model Assumptions
number
number
percent
Working
Working
Nominal
Gallons in
Days Per Weeks Per
Discount
BBL
Week
Year
Rate
55
5
44
12%
number
Primary Cooling System
bbl/day
percent
years
Inflation
Rate
Economic
Horizon
3.5%
20
Capital Cost
thousands of dollars
Most
Max
Distribution
Likely
Capacity
Min
Existing Unit
2,481
$200
$250
$350
New Unit
3,800
$1,700
$3,500
New Unit with Booster Pump
4,000
$2,500
Refurbished Unit
2,630
$750
Installation Cost
thousands of dollars
Min
Most Likely
Max
Distribution
$258
$0
$0
$0
$0
$5,000
$3,450
$1,000
$1,500
$2,000
$1,500
$4,000
$6,500
$4,167
$1,000
$1,500
$2,000
$1,500
$1,500
$3,000
$1,625
$1,000
$1,500
$2,000
$1,500
Base Product Demand (bbl/day)
Most
Min
Max
Distribution
Likely
2,400
2,700
3,000
2,700
Base Product Price (per gallon)
Min
Most Likely
Max
Distribution
$0.35
$0.45
$0.55
$0.45
Input Distributions
Distribution for Capital Cost of Existing Primary Cooling System Unit
5.0%
180
200
220
95.0%
240
260
280
Thousands of Dollars
300
320
340
360
Modeling Elements
Alternative
1
2
3
4
Primary
Cooling
System
0
1
0
0
Alternative
1
2
3
4
Final
Acid
Tower
Bottoms
Cooler
1
0
0
0
Product
Heat
Exchanger
Water
Wash
Tower
1
0
0
0
1
0
0
0
Capital Costs
Acid
Primary
Product
Tower
Cooling
Heat
Bottoms
System
Exchanger
Cooler
$1,075
$0
$3,450
$3,450
$1,075
$0
Capital Coats After Replacement
Water
Wash
Tower
$425
$425
Alternative
1
2
3
4
Final
Primary
Cooling
System
Acid Tower Product
Bottoms
Heat
Cooler
Exchanger
Water
Wash
Tower
$1,075
$1,570
$425
$1,075
$1,570
$425
$3,450
$3,450
(2x2)
Product Price 2010
Product Demand 2010
Product Price 2010
1
0.75
Product Demand 2010
0.75
1
Optimization for Lowest Total Cost
(Present Value)
Equipment
Alternative
Primary Cooling
System
New Shell & Tube Heat Existing FinExchanger
Fan Exchanger
1
2
Acid Tower Bottoms Product Heat Water Wash
Cooler
Exchanger
Tower
Monel Clad
Tower
New Unit
3
4
System Capacity (bbl/day)
2,600
Capacity Metric
2,100
Restricting Equipment
Restricting Alternative
Initial Capital Costs
Product Heat Exchanger
Existing Fin-Fan Exchanger
$4.95
Initial Installation Costs
$1.71
PV of Operating & Replacement Costs
$12.90
PV of Total Costs
$19.57
PV of Revenue
$104.28
NPV of Profit
$84.71
Optimization for Specified Design Capacity
Equipment
Alternative
Primary Cooling
System
Acid Tower Bottoms Product Heat Water Wash
Cooler
Exchanger
Tower
Existing FinFan Exchanger
1
Refurbished Fin-Fan
Heat Exchanger
2
Carbon Steel
Extra Corrosion
Allowance
3
4
Refurbished Unit
System Capacity (bbl/day)
Capacity Metric
2,600
130
Restricting Equipment
Restricting Alternative
Initial Capital Costs
Product Heat Exchanger
Existing Fin-Fan Exchanger
$3.32
Initial Installation Costs
$1.66
PV of Operating & Replacement Costs
$44.84
PV of Total Costs
$49.82
PV of Revenue
$104.51
NPV of Profit
$54.69
Optimization for Minimum Excess Capacity, Maximum PV
of Revenue and Maximum NPV of Profit
Equipment
Alternative
Primary Cooling
System
New Shell & Tube Heat
Exchanger
1
2
Acid Tower Bottoms Product Heat Water Wash
Cooler
Exchanger
Tower
New Unit
Monel Clad
Tower
New Shell &
Tube
Exchanger
3
4
System Capacity (bbl/day)
Capacity Metric
3,500
300
Restricting Equipment
Restricting Alternative
Initial Capital Costs
Acid Tower Bottoms Cooler
New Shell & Tube Heat Exchanger
$6.03
Initial Installation Costs
$1.84
PV of Operating & Replacement Costs
$12.36
PV of Total Costs
$20.23
PV of Revenue
$117.85
NPV of Profit
$97.62
Optimization Comparisons
Optimization Number
Optimization 1
Optimization 2
Optimization 3
NPV of Total Costs
System Capacity (bbl/day)
Capacity Metric, NPV of Revenue,
NPV of Profit
Minimum Value
Exact Value
Minimum Value, Maximum Value,
Maximum Value
New Unit
Refurbished Unit
New Unit
New Shell & Tube Heat
Exchanger
Refurbished Fin-Fan Heat
Exchanger
New Shell & Tube Heat Exchanger
Existing Fin-Fan Exchanger
Existing Fin-Fan Exchanger
New Shell & Tube Exchanger
Monel Clad Tower
Carbon Steel Extra
Corrosion Allowance
Monel Clad Tower
System Capacity (bbl/day)
2,600
2,600
3,500
Capacity Metric
2,100
130
300
Restricting Equipment
Product Heat Exchanger
Product Heat Exchanger
Acid Tower Bottoms Cooler
Restricting Alternative
Existing Fin-Fan Exchanger
Existing Fin-Fan Exchanger
New Shell & Tube Heat Exchanger
Initial Capital Costs
$4.95
$3.32
$6.03
Initial Installation Costs
$1.71
$1.66
$1.84
PV of Operating & Replacement Costs
$12.90
$44.84
$12.36
PV of Total Costs
$19.57
$49.82
$20.23
PV of Revenue
$104.28
$104.51
$117.85
NPV of Profit
$84.71
$54.69
$97.62
Variable Optimized
Optimization Criteria
Primary Cooling System
Acid Tower Bottoms Cooler
Product Heat Exchanger
Water Wash Tower
Net Present Value Statistics
NPV of Profit
Lowest NPV of Total
Cost
Specified System
Capacity
Lowest Excess
Capacity, Max Revenue
and Profit
Mean
$84
$54
$97
Standard Deviation
$3
$3
$7
5th Percentile
$79
$50
$85
25th Percentile
$82
$52
$92
50th Percentile
$84
$54
$97
75th Percentile
$86
$56
$101
95th Percentile
$88
$58
$108
Statistic
NPV Risk Profiles
Distribution for NPV of Profit
100%
Probability
80%
60%
40%
20%
0%
40
60
80
100
Millions of Dollars
Lowest Total Cost
Specified Design Capacity
Min Excess Capacity, Max Revenue & Profit
120
NPV Histograms
Distribution for NPV of Profit
16%
Specified System Capacity
14%
Low est Total Costs
Probability
12%
10%
8%
Low est Excess Capacity
Metric, Max Revenue & Profit
6%
4%
2%
0%
40
60
80
Millions of Dollars
100
120
Comparison of Cumulative Profit over Time
Curves
Cumulative Profit
Optimization #2
Optimization #1
Optimization #3
240
Millions of Dollars
190
140
90
40
-10
2007
2010
2013
2016
2019
2022
2025
2008
2011
2014
2017
Year
2020
2023
2026
2009
2012
2015
2018
2021
2024
Summary
• RISKOptimizer can be used to improve the value of value
improvement processes:
– Improves decision making under uncertainty
– Encourages synergetic analysis rather than a fall back to business
axioms
– Helps achieve a shared understanding of business alternatives
• @RISK can be used for detailed evaluation of alternatives
identified by RISKOptimizer
• The effects of uncertain demand and product price must
accounted for when attempting to design for maximum
capital efficiency