Dispelling the myths of real-time costing

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Dispelling the myths of real-time costing

July 25, 2011 - 01:59

NEW YORK, July 25, 2011 (RISI) -Modern paper mills are paragons of interconnected systems, a seemingly perfect marriage between technology, machinery and personnel. In between these systems, a highly trained production staff measures productivity and quality down to the n-th degree. Costs are the resulting concern, often making the difference whether a paper grade is jettisoned or kept to meet market demand.

Production managers pride themselves on knowing how to run a machine to achieve the highest cost efficiency, but too many times decisions come down to gut feelings. There are real-time costing systems available that can provide immediate feedback to operators and production staff, helping managers back up their feelings with tangible data, but it is estimated that as few as 10% of mills in the US use such a system to make critical decisions.

In any manufacturing setting, literally thousands of decisions are made every hour of every day, each with a direct impact on profitability. Implementing a real-time costing system can provide data relating to the production costs of each of these decisions, pointing out not only deficiencies during production but analysis that can be used for planning and forecasting, such as when to schedule machines for cost-optimal block scheduling. The ultimate goal for a real-time costing system is to give production staff the information to produce each new reel at a lower cost than the previous one.

In light of the benefits of real-time costing, why aren't more mills using these types of systems? Why do some mills continue to depend on instinct and post-production data to determine production costs and profitability? As costs have become more prevalent in every grade in paper mills throughout the world, and with margins paper-thin, it may be time to reexamine the debate on real-time costing.

Real-time costing system are designed to give production staff the information to produce each new reel at a lower cost than the previous one

Guessing game

Real-time costing is not an entirely new concept. Introduced to the pulp and paper industry within the last decade, the theory behind real-time costing is that it gathers production, material consumption and quality in real time. These individual data points are presented as immediate feedback on cost, consumption, productivity and quality to production managers and machine operators.

"The most common obstacle to implementing a real-time costing system is a perception that it's very complicated and perhaps a bit bleeding edge," says Fredric Karlsson, president of Enterprise Performance Solutions (EPS), Inc. EPS is one of the first companies to offer a real-time costing solution to the pulp and paper industry. "Once you have it, as our customers tell us, it becomes part of doing business and they say that can't manage without it."

Part of the confusion is how mills measure costs, explains Karlsson. While mills traditionally focus on productivity and quality, costs are usually left on their own analysis. To accurately account for production costs, many mills may not know exact costs until after the close of each month. When production costs are identified, reports seldom break down costs by grade, basis weight and machine. Without directly connecting costs to productivity and quality, production decisions become a guessing game.

"If you increase productivity, your fixed costs will go down, but what happens to quality?" asks Karlsson. "If your quality improves and your productivity and costs suffers, do you know why? You can't just look at one factor and ignore the others."

For example, most machine operators know that increased ash content decreases production costs, but few know exactly how much. Assigning a percentage and a cost to that single decision can be tricky. With real-time costing, operators and managers are given direct feedback, in monetary terms, about how much is saved by a higher ratio of ash, for example. Post-production, real-time costing can be used for benchmarking production shifts as well as increasing the accuracy in target costs and grade recipes.

Questions of measuring costs often end up in the boardroom when decisions are made on whether to continue producing certain grades. Without accurate real-time costing, these decisions are sometimes made without all the information. "Our customers have gained insight into what grades are profitable on what machines and in what volumes," says Karlsson, "and they have been able to optimize their profitability based on that insight."

With real-time costing, Karlsson maintains, it becomes possible to draw a straight line from individual production decisions to costs, along with productivity and quality, to make the right profitability decisions for the entire mill.

Managing costs during a machine failure, treating recycled waste or valuing the amount of broke between one shift to the next are all examples of where real-time costing becomes part of the larger business model

Improving intuition

At some point in every mill, production managers must rely on their experience and intuition. Most managers know that costs decrease when making 100 tons of a certain grade as opposed to 10 tons, but problems arise when trying to find the limits of that efficiency and how to schedule the optimal run for a certain grade. Production managers will use their previous experience or extrapolations from other grades to make the best educated guess, and mills rely on them heavily for those decisions.

There is some criticism of real-time costing that it would do away with this kind of hands-on expertise of the production managers. This concern is exaggerated, observes Karlsson, saying he talks to mill managers all the time that wonder why they don't have a real-time costing system implemented in their mill to help them make exactly those kinds of decisions.

"If we're talking about making a decision based on cost, no one can see everything that goes on," says Karlsson. "There is so much information production managers get out of real-time costing, that it actually helps them get better at making decisions, decisions they could never just lie in bed at home and figure out."

Another perceived concern is that real-time costing is only technically effective if all materials consumptions are automatically tracked and flow meters can be counted on to be accurate. In practice, replies Karlsson, it is sufficient to track only the most important materials, although tracking more variables can also increase the accuracy of the data. For flow meters, any inaccuracies can be corrected during the validation process when implementing a real-time costing system and their accuracy can actually increase through continuous validation during production.

Apart from the production floor, real-time costing can be a valuable tool for senior management. Managing costs during a machine failure, treating recycled waste or valuing the amount of broke between one shift to the next are all examples of where real-time costing becomes part of the larger business model.

In high-cost regions, such as North America and Europe, real-time costing may find its strongest success stories yet. Paper mills in these areas have already invested in the required advanced technologies and trained personnel to make the most of real-time costing. These mills can implement a real-time costing system between four to eight weeks, typically realizing most of its benefits within the first three months.

"You would think that real-time costing would make the most impact at mills that have problems in some shape or form," says Karlsson. "If you look at our customers, it's the opposite. Our customers have probably the most well-managed mills in the industry and they feel real-time costing allows them to be even more efficient."

The best real-time costing systems, asserts Karlsson, empower machine operators to be the first line of defense against inefficiency and costly production practices. For those mils willing to take the next step in this technology, the results translate into improved profitability and increased competiveness in a very tight global market.