how can conversions, modifications and upgrades create value for the owner?

How can conversions, modifica1ons and upgrades create value for the owner? ETH Innova1on Mee1ng, 2 October 2014

Dr Shaun West [email protected]

Value

Conversions, modifica0ons and upgrades are about crea0ng value

Can we iden1fy the opportunity? Can we create a solu1on? Can we deliver the solu1on?

Iden1fy Create Deliver

Service Innova1on | Dr Shaun West

But first why conversions, modifica0ons and upgrades?

• Wide defini1on that does not suggest a solu1on •  Focuses on owner/operator processes • Allows the solu1on to deliver value

Upgrades can be subop0mal…

Remember Vista?


Addressing outcomes, how do Caterpillar consider this?

What is tradi1onally delivered… sell equipment, parts and technical services hours

What(our(customers(really(want…(What(we(tradi@onally(do(for(customers…( What customers really want… is to achieve the outcomes and improve the bo>om line results

Outcomes -‐  BeUer efficiency -‐  Improved revenues -‐  Reduced costs -‐  Mi1ga1on of risk -‐  Improved safety -‐  …

This is system thinking

Service Innova1on | Dr Shaun West Source: Cameron Ferguson, Caterpillar

The customer value proposi0on as a useful framework


Have we become complacent with iden1fying customer value?

Top line

Compliance

BoUom line

• More availability ! + revenue • Higher reliability ! + revenue • Reduced maintenance ! + revenue

Where are the value pools commonly found in power plants?

• Environmental ! fines and reputa1on • Health and safety ! fines and reputa1on

• Increased availability ! costs • Increased efficiency ! costs • Reduced maintenance ! costs


How does the owner and/or operator value each topic? Is there a payback rule? CAPEX vs OPEX?

Owner/operator – why, who and what do they buy?

What are the triggers?

Changes in regula1on Changes in markets Problem plant area Technology Life extension

Who are the buyers?

Opera1onal site? Performance engineer? HQ project (as per new units)

What do they buy?

Full value when the system is addressed Need short payback Plant life extension

The results of CMUs are outcomes!


The life-‐cycle of the equipment helps you to iden0fy poten0al owner/operator needs

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CAPEX" OPEX"fixed"costs" OPEX""inspec>ons" Reliability" Usage"


The life-‐cycle of the equipment helps you to iden0fy poten0al owner/operator needs


How much of the spend can be captured? What outcomes are needed at each stage?

What can be learnt from the life-‐cycle

How the owner/operator is using their plant Total owner spend

Timing of owner spend OEM share of spend

Impact of availability

Total market value

When to inject new technology


The life cycle is key to helping the owner/operator make the right decision

CASE 1

STRUKTON RAIL


Experiences in Holland and Australia

-‐  Expecta1ons set by the context of the home market -‐  Dutch rail has driven cost out

… so what happened in Australia?


Rail is a bo>leneck for the mine

•  12 train movements per day •  Each iron ore train moves 1M AUD •  The rail system limits the number of movements


The customer is willing to pay (well) for increased rail capacity

The value proposi0on was very different to the cost-‐driven home market

•  Maximise revenue poten1al

•  Minimise unplanned maintenance •  Undertake preventa1ve maintenance

•  Increase rail capacity


Model (simply) the mine owner’s willingness to pay

Assump0ons •  350 opera1onal days •  1M AUD value of one train load •  750k AUD extrac1on cost per train load •  250k AUD charge margin per add train •  Can increase capacity by 1 train/day Outcome •  350x250k = 87.5M AUD/yr

Willingness to pay •  43M AUD (50/50 value share) •  87M AUD on 1 yr payback Check: reasonable for the effort?


CASE 2

VANDERLANDE


Systems thinking

•  Few airport operators •  OEM is a system integrator

… what advantages does a system integrator have?


Lack of know how prevents operators from being efficient

•  Vanderlande design, install, commission operate, maintain, support systems •  Some owners operate only one airport •  Value proposi1on for each market segment

Vanderlande Services solutions

Solutions to assure your assets

deliver value & support your

8

organisations’ objectives during the

entire life cycle


By undertaking system O&M they understand the owner’s pain beUer

The customer needs a system that delivers bags quickly

•  Maximise passenger throughput •  Minimised investment

•  Improve thoughput when busy •  Limited spares/easier maintenance

•  Selec1ve de-‐boUlenecking •  Coordinated maintenance •  Limited spares stock

•  Advice on where to dock planes


Model (simply) the owner’s value crea0on

Assump0ons •  1M USD cost of new system •  2 A380s together create delays •  100k USD to modify capacity •  200 flights per year •  5 USD tariff per passenger

Outcome •  100k /(400x200)=1.25c/person

Willingness to pay •  1M USD for new system (8.3USD/person) •  5 USD per passenger •  Suggest 2 USD per passenger as the target

Check: reasonable for the effort?


CASE 3

ALSTOM AND THE 13MXL


Why move to the MXL upgrade

•  Alstom holds LTSAs on 90% of the fleet •  It is able to drive the upgrade to all owners … what can Alstom do that other OEMs cannot do?


Two very different power markets served by one standard product

•  GT13E2 is a standard product •  Owners operate in very different markets


Some owners drive costs – Some owners want more

What is achieved when cost is driven out?

•  Lower cost of maintenance •  Higher availability

•  Frequent maintenance •  Reduce the maintenance requirements

•  Reduce firing temperature


What is achieved when cost is driven out?

Assump0ons •  24k hour inspec1ons ! 48k •  50% less majors •  1.5M USD investment •  3.0M USD per inspec1on

Outcome •  1.5M USD saving over 48k OH •  Plus +7 days availability/year

Willingness to pay •  1.5M USD with one unit •  NPV for both approx equal •  Improvement >2x with 2 units Check: is there owner value?


What can be achieved when owners want more

•  Increased capacity •  Improved efficiency

•  Limited capacity of the unit •  Dropping in merit order

•  Increase capacity •  Increase efficiency

•  Increase firing temperature


Increasing unit capacity and efficiency

Assump0ons •  700USD/kW cost new plant •  25USD clean spark spread •  6,000h genera1on per year •  20MW addi1onal capacity

Outcome •  3.5M USD pa gross margin •  Plus lower fuel consump1on

Willingness to pay •  10.5M USD new unit cost •  7M USD 50/50 share 4 years •  3.5M USD 1 year margin Check: reasonable for the effort?


LESSONS LEARNT


Lessons learnt from the case studies

Understand owner’s opera1ons

Understand what the owner values

Find a solu1on to their pains and gains

Understand the value crea1on and find a way to deliver more

Measure the value you have delivered



Lessons from the cases that are oVen forgo>en in daily business

Iden1fy value

Create value

Deliver value

Find out what the customer values (based on job to be done)

Design a solu1on to maximise the gains and minimise the pains

Discuss and measure the pains and gains with the ‘right’ people

(Figure based on Anderson, 2009)

Any ques1ons?

Dr Shaun West [email protected]


how can conversions, modifications and upgrades create value for the owner?

Education

revenue reducedmaintenance

costs reducedmaintenance

revenue environmental

revenue higherreliability

costs increasedefficiency

value support

reducedcosts mi1ga1onofrisk