The case study is designed to illustrate the stage gate approach to project sanction and the importance of identifying value in the process. Situation Company Z is an established company producing edible oils, related products and derivatives to the UK markets. Its customers are predominantly major industrial concerns who use the companys products in their processes.

Company Z has no consumer products and virtually all of its products are distributed by road tankers. The company has been in existence for over 75 years and has had a number of owners over the last 20 years. It is currently owned by a European based conglomerate with interests in the food, flavorings and pharmaceuticals intermediates market. The group has ambitious growth targets but is cash constrained as a result of its aggressive acquisitions strategy and is currently facing demands for investment from several of its subsidiaries.

Company Z s production site has grown over the years and includes both new state of the art computer-controlled facilities and less sophisticated facilities, some dating back more than 50 years. Of particular concern is the product storage and distribution facility. The majority of this is over 40 years old and has grown in an unstructured manner over the years. The unit comprises a large number of relatively small tanks of a range of sizes, standards and specifications. The majority of customers are large industrial concerns who impose their own specifications on the products.

This means that Company Z produce a large range of individual grades, many of which are quite similar in nature but need different additives or subtle changes in the manufacturing process. The combination of the number of grades and the range of storage tank sizes means that production planning is very complex, both for the main production plant and for the storage and distribution facility itself.

This complexity is compounded by customers needs to change their orders to suit the demands of their own production processes. The marketing department is becoming increasingly concerned that the company is losing key contracts as a result of failing customer audits, with the storage and distribution facility being quoted as the prime cause of concern. It is also known that new regulations will be implemented on food hygiene in a couple of years which will accelerate this process. There are concerns about the viability of the site without major investment, but it is felt that it will be difficult to meet the company s investment criteria on this project. Potential project Concept review an initial suggestion to replace the storage facility was tabled at a meeting of the site development steering committee.

In the initial discussion it became clear that it would be prohibitively expensive to simply replicate the existing design to modern standards and both the production and planning departments were desperate for a different approach that would simplify their work. It was also recommended that the project design should build on recent experience at some of the continental sites of the European organization and it was agreed to contact group-level engineers to review their experience and incorporate key learning points from these projects. Both operations and the instrumentation/control teams recommended that attention should be given to automation and distributed control functions, to ensure that the staffing of the eventual plant was in line with the companys cost objectives. The quality control representative suggested that the new plant should incorporate both sophisticated online analysis and provide for a high standard laboratory to match the objectives of meeting customer expectations on both quality and visual amenity. Finally, the human resources representative highlighted the need to comply with recent changes in working hour regulations and meet the company standards on ergonomics

As the meeting closed, the Engineering Manager was concerned that he had both a hard job in meeting the investment criteria, and meeting the needs of a range of internal parties all requesting features that would increase the cost. Based on these discussions, the Engineering Manager felt that the overall project would cost in excess of 40 million and suspected that it would be difficult to justify expenditure in excess of 25 million. He also recognized that if the investment could not be justified, the prospects for the site were poor. In discussion with the Site Manager, he agreed to spend 10,000 on a preliminary investigation of the project. He recognized that a key part of this study would be a discussion with functional experts and his colleagues at sites in Europe where improvement projects had recently been completed.

His aim was to produce an initial estimate and project program. He was aware of force field analysis and recognized the need to maximize the benefits, so he decided to contact the Group Marketing Director to get her views (Figure 1). Figure 1 Lewis Force Field model Initial investigation as the next meeting of the steering committee was only a month away and the Engineering Manager wanted to submit a proposal to authorize a feasibility review, he needed to move quickly. Discussions with his opposite numbers at the European sites led him to base the initial scheme on the approach used at the site, in Italy, which was most similar to that in the UK.

The Italian plant had been installed some 5 years before and at the time had set new standards for the group. This approach also had the advantages that it could be installed simply and effectively on the UK site and required only minor modifications to the production process. Scaling and updating the costs from this project and making adjustments for the country suggested that the project was likely to cost around 30 million. The timescale for the plant was felt to be around 18 months and the business view was that this would safeguard most of the key accounts. At this stage, the benefits of the project were considered to be:

Retention of existing key contracts.

Increased marketing potential resulting in a higher probability of winning bids in the future. Cash flows were calculated for both scenarios, investment and no investment, and the internal rate of return (IRR) was evaluated on the differential cash flow. This showed that the project would generate a return of around 7% per annum which fell somewhat short of the investment hurdle of 12% (Figure 2). Nevertheless, the Engineering Manager felt he had no option but to suggest that a feasibility study should be authorized to see if the gap could be closed. He felt that 75,000 would be appropriate to move the project definition to the next stage. The site steering committee was concerned that as the expected return was so low there seemed to be an insurmountable gap to be closed, but recognized that the project was crucial to the prospects of the site. So, they decided to authorize the next stage and set up a sub-committee to provide additional support. Feasibility review a week later, the Engineering Manager attended the group engineering review at the companys headquarters in Munich. He discussed the possible project with his colleagues and was intrigued by a project that had recently been completed in Denmark.

This plant processed related products to those on the UK site but used a radically different approach. He recognized that using a similar scheme would put the costs of the project up, but would enable it to deliver some substantial benefits to the main operating plant. The company had an objective of increasing production but the site was struggling to meet even its current targets and there was no consensus on how to achieve the increased targets. Whilst in Munich, he managed to have a discussion with the Group Marketing Director. She was very supportive of the initiative and suggested that in the event that the UK plant was to close, the group would lose sales of products from other group companies. She agreed to get her team to review the situation and to discuss it with the UK Marketing Director. Working with a local engineering contractor a revised estimate for the project was completed in 4 weeks and as expected, the costs had escalated, due to both the new engineering solution and the features added by the functional groups. The revised cost of the scheme was put at 40 million.

The program had extended by about 3 months but it was felt that there was scope for reducing this. Simultaneously, the marketing and operational reviews had reported back, with the result that there were significant additions to the benefits. These were seen to be: Customer retention as previously identified.

Increased marketing potential as previously identified.

Additional credit for support of group products.

Operational improvements due to a decrease in the number of product campaigns and an increase in the average duration.

The ability to produce small quantities of material for trial or bespoke applications without disrupting the main production process. The result of the feasibility review was that the cost of the project had escalated to 40 million but the IRR increased to 12%, exactly matching the companys investment hurdle (Figure 3).

This information was used to compile a proposal to the board of the UK Company to authorize 250,000 to allow preliminary design to be completed. This would form the basis of an application for sanction to the group board. The Engineering Manager was conscious that the project was still looking marginal, but he had had positive feedback from some key people at group level and was confident that the UK board would support his proposal. The proposal was accepted but the board insisted on a tight program for the preliminary design and requested some additional work to reduce a number of perceived risks. They also reduced the budget for the work by 20% to reflect the shorter time period. Preliminary design phase this phase was conducted using a combination of the local engineering team and the engineering contractor who was involved in the earlier phase. Both the Italian and Danish sites were visited and the most appropriate process agreed with the companys technical experts.

This was checked for feasibility and reviewed from safety, operations and construction perspectives. This allowed a final scheme to be developed and detailed to the extent that the project risk issues could be resolved and a higher degree of certainty applied to the cost estimates. The costs moved in both directions. They went up because it was recognized that by adding some additional equipment (to reprocess finished material that failed some quality assurance trials) it was possible to reduce the need to reintroduce this material into the main process. This had significant advantages in reducing variability on the plant which had previously been identified as a major cause of both product variability and throughput. It was also recognized that many of the failed batches could be easily modified to match other product grades. Shortly after this, it was accepted that a modification of this approach could be used to handle the material produced during the transition between production campaigns on the main plant. The combined effect of this was to deliver major contributions towards the key production objectives of throughput, quality and product variability. The project costs were reduced by the use of a value engineering approach. This had two keys elements, firstly, the requirements of functional groups. Production and support groups were critically reviewed to ensure that the proposed solutions were appropriate. Secondly, reviews were held to find alternative, more creative solutions to several key engineering problems. The net effect of this was to reduce the cost without eliminating any essential features of the project. Having had bad experience of projects where costs were reduced drastically to meet project investment criteria, the Engineering Manager was keen to avoid this approach. Consequently, there was no across the board cost cutting, but only a nominal contingency budget was allowed. It was also decided that if the project were approved, the value management approach would be adopted throughout. The final budget amounted to some 37 million. The project program was confirmed and the final revised benefits were stated as:

Increased marketing potential.

Additional credit for support of group products.

Operational improvements due to a decrease in the number of product campaigns and an increase in the average duration.

Additional production benefits due to improved handling of off-specification and inter-campaign material. Further benefit was also realized with improved reliability and reduced variability of production.

The ability to produce small quantities of material for trial or bespoke applications, without disrupting the main production process.

On this basis, the project had an IRR of 15% coupled with a robust implementation plan and properly assessed risks. The project was put forward with confidence to the main board who had been sounded out on its acceptability (see Figure 4). Figure 4 Sanction Application The project was approved with minor modifications. Conclusions The project went ahead and met its functional, cost and program objectives within close limits. There were relatively few major changes during the implementation phase. The project was considered a success by all concerned having met both its project and strategic objectives. The production site continues to thrive and has been expanded to manufacture additional products.

Lessons learnt:

It is as important to maximize the benefits of any proposed project as to minimize the costs.

Bear in mind that your project may contribute to more corporate, site or functional objectives than the ones it is designed to achieve.

Sometimes adding to the scope will allow additional objectives to be met and increase the attractiveness of the project.

A value engineering/management approach can be helpful in providing lower cost solutions without removing functionality.

Beware of adding features which ought to be separate projects justified in their own right, or which logically form part of other projects.

It is important to prepare the ground for your proposal by lobbying and networking with key people in the organization. They may also give you different perspectives on the project and its justification.

Questions:

1- Develop a business case using Project management tool kit- the template attached.

2- List the benefits criteria identified within the business case

3- Establish a Benefits scorecard using 4 areas of concern:

• financial perspective
• Customer Perspective (Customer satisfaction)
• Internal Business processes (Process improvement-quality management- Cost management)
• Learning and Growth