BRUSSELS, Aug 1, 2014 (PPI Magazine) - For decades the pulp and paper industry has contracted outside resources to design, build, and maintain manufacturing facilities. When it comes to maintenance and reliability of manufacturing assets, it is almost inconceivable that the industry could continue its business without access to these important resources. In short, contracted services are critical to short and long term infrastructure integrity and profitability. That being said, we must ask ourselves: How well do pulp and paper mills manage these important relationships and capture their essential contributions for strategic gain? Are the contracted resources true partnerships? Are they strong, reliable, and cost effective?
Consulting in the North American pulp and paper industry since early 1975, I have seen many approaches to managing outside resources, working with single-mill companies as well as those who count their mills in the dozens. Across the industry, managing contractors has always come down to four objectives: maintenance of infrastructure, improved manufacturing productivity and quality, and increased profitability. How mills attempt to realize those strategic goals varies widely across the industry. The simple fact is outside contractors are only as effective as a mill's purpose for hiring them and its strategy for managing the projected work.
A mill manager in the southeastern US shared the following thoughts on contractor management. When the mill makes a request for bids, the low bidder typically gets the work. The majority of the bids are "lump sum" because they are the "easiest to manage." The contractor selected is often a known quantity-"somebody we have contracted with for years" and "who is familiar with the mill". The mill rarely reviews costs or performance against plan after the work is completed, being satisfied simply that the work is done. This approach to managing outside resources has led to a certain complacency and absence of effective oversight of the contractor's activities. Contractors receive little follow up, are viewed as a simpler way to get work done, and are almost never interviewed to review performance or learn evolving best practices.
Fig. 1 - Kamyr job plan
To modernize their aged practices and expand limiting views of outside resources, pulp and paper mills require strategic management plans that include long-term outage objectives, financial management guidelines, and contractor relationship development. This article is a blueprint to develop and implement such a plan, but first, here is an example illustrating the effect of unmanaged contractor resources.
In 2005 during a maintenance improvement project at a west coast mill, we were asked to reduce the cost of maintenance and increase the reliability of the mill assets. To begin, a planning strategy was created; improved scheduling processes implemented; foremen were coached on the job; and improved inter- and intradepartmental cooperation established (Pulp & Paper, Nov. 2007; Maintenance renaissance: Bringing reliability to production). The project proceeded as planned and projected results began to materialize with one exception, costs were not falling as quickly as predicted. Further investigation uncovered a surge in expenditures on outside maintenance resources. The number was large, and growing out of control. The cause? Improved processes, particularly planning and scheduling, allowed for more work to be completed, which led to the hiring of more contractors to fill the increased capacity to do maintenance. A strategic planning initiative was implemented, including financial checks and balances, to manage the situation and significantly reduced the contractor expenditures by creating efficiencies.
The first step we took was to stop the "free" spending. The second step was to determine how to regain control of the outside resources employed by the mill. Both steps were taken with a sense of urgency and determination. Costs were quickly brought under control and significantly reduced. Our approach to assisting clients with performance issues changed; the impact of contractor management strategies became a more important element in our improvement process design strategy. This was especially true with regard to the annual outages that almost every one of our clients performed in their manufacturing facilities. The benefits we sought to provide were:
- Reduced/eliminated causes of equipment failures
- Reduced maintenance costs
- Reduced product loss or production downtime due to equipment failure, repair or deterioration
- Ensure equipment operates to design specifications
- Maximize the life of equipment
- Improve equipment reliability
In many mills the same approach to contractor management and spending numbers can be found. However, unmanaged contractor activities impact reliability and expense. When the numbers in the example where examined, corporate leadership and mill personnel were embarrassed and angry. They questioned how it could be? Why didn't we see this? And how did it could get so out of control?
Know the results you want
Fig. 2 - Emlex schedule
Fig. 3 - Kiln work step job plan
The biggest factor affecting the success of an outside contractor is the planning and preparation made by the mill prior to engaging the resource. The mill must be able to describe the results it is seeking from the contractor. The description must be as precise as possible, the more precise the greater opportunity for success. In those unusual situations where the mill does not possess the skills to develop the scope and content of the work, help can often be found elsewhere in the corporation or from trusted resources outside the company.
Failure to thoroughly understand what you are requesting of the contractor makes it impossible to negotiate a fair and reasonable cost for the work and develop the performance parameters that will be used to measure contractor performance.
A detailed work identification and planning process also allows mills to move from "lump sum" and "not to exceed" contracts to more precise and manageable time and material contracts. It strengthens the negotiating position of your purchasing personnel and allows for the contractor to bill only for the work and materials you are requesting them to provide. For example, a contractor may insist that a particular job would require 200 man hours and that is what they are going to invoice you for. However, if the purchasing person has a detailed step plan developed by one of your maintenance planners or engineers stating the work should require only 120 man hours, a discussion must ensue. The discussion is not about who is right or wrong. Rather it promotes opportunities for learning, enables mill personnel and contractors to focus on results rather than activities, allows for a clearer understanding of the work to be performed by the contractor, and strengthens the mill-contractor partnership. To illustrate what we mean by step plan, see Fig. 1.
Another real example for your consideration: Major mechanical work was required on two lime kilns during an eight-day annual outage at a South Carolina mill. The contractor bid the job with a lump sum proposal of $1 million and was awarded the contract. Upon review of the bid with maintenance and purchasing personnel, it was concluded that the work would be more efficiently done on a time and materials contract. The final cost of the work was roughly half of the initial bid, a cost reduction of approximately $500,000. The effort required to secure this reduction was surprisingly little. It did however require the mill to modify its approach to this long time contractor and ask different questions than they had asked in the past. The highlighted copy on page 2 illustrates a wide variance in the man hours required to perform the five jobs listed, but only a small variance in the fees being charged. In fact, four of the jobs have identical quotes.
In another situation at an Arkansas mill, a package of larger jobs was placed for bids, the winning bid was a $906,000 lump sum proposal. The planner who was to oversee the work felt uncomfortable with some of the details of the proposal. In partnership primarily with maintenance foremen and craftsmen, it was determined that there was far too many man hours in the proposal for the scope of work. A new time and material contract was developed and the reduction in this example was approximately $400,000.
The opportunities are not always hidden in the $1,000,000 proposals; they appear in every size of contractor proposal presented. With an outage approaching an Arkansas mill was planning some metal work around one of the paper machine. It wanted to replace three 25-ft steel beams, and because of the corrosive environment the beams were to be placed in, mill personnel determined they should be coated for protection. The mill has a national account with the contractor, who theoretically is providing the best value, the bid for the job was $10,000. The mill purchased the steel and coating materials and had it delivered to a location less than a mile from the front gate of the mill where the work would be completed.
It seems like a fairly simple job, until you look a little closer at the numbers. This contractor's stated rate for a "painter" who can also do surface prep if necessary is $19.95/hour. Deducting 30% for equipment rental, the contract contained $7,000 for the actual labor. That equates to roughly 30 12-hour shifts to prep and coat three 25-ft beams, or 120 man hours for each beam. Because it lacked a robust contract review process, the mill grossly overpaid to have three beams coated.
Although most mills possess similar policies and procedures, very few apply them uniformly across manufacturing systems. As a result they lose opportunities to reduce contractor costs. Everyone knows it; few talk about it. Everyone can recall instances of receiving contractor invoices, scratching their heads and wondering: "Why did that cost so much?"
Contractors are, in general, businessmen and women who want to provide good services at a reasonable price; they want to deliver good value, and develop productive relationships with their mill customers. They cannot do that in a vacuum. Mill leadership must participate in robust interactions with contractors that promote diligent and precise examinations of every significant job that mills expect contractors to tackle. Without the mill's active participation, we will continue to scratch our heads and wonder why contractor job costs are so high. This is true in day to day work with contracted resources and especially critical in major outage and capital project efforts.
Developing an effective planning process will transform how a mill approaches its engagement and management of outside resources. A transformation from outdated approaches will save mills money, improve infrastructure maintenance, and improve productivity and reliability.
This blueprint is more than "doable." It is not a matter of awaiting new technology or changed labor union rules; it is a matter of the will of management to apply the process and expect improved results.
It is time for the pulp and paper industry to strategically develop transformational processes and cultures that better utilize and manage outside resources with an eye toward improved maintenance reliability and planning, and a more productive and profitable future.
Plan vs plan
The planning process is a fundamental ingredient in the successful contract management formula. However, as we all have observed, there are numerous opinions about what a "good" plan actually contains. Two examples illustrate the point. The first is taken from a recent North Carolina mill annual outage. The contractor submitted a "plan" for the $500,000 plus kiln work with the document, Fig. 2. You can draw your own conclusions as to the acceptability of the submitted plan.
The second example represents what I believe to be a more precise instrument that breaks down the work into more manageable and measurable activities. It identifies who is doing what, when, and for how much money. Safety is better served, productivity is easier to promote and measure, and the quality of work is simpler to assess, Fig. 3
Terry Whalen is the founder and president of Team Development Group (TDG, Florida, firstname.lastname@example.org.
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