Up Time Magazine- August/September 2008

The Scenario A company, let’s call it “ABC” Company, is growing and currently sold out in one of its major businesses. Market demand is expected to increase substantially in the coming 5 years. Current production capacity is limited and not expected to be able to meet the increasing demand within the next 12-24 months. The long range capacity and demand profile is outlined in Figure 1. “ABC” Company Current Capacity Utilization = 69% 434 al capacity. This effort thus far has indicated that $300M is within a +20% band, depending on: a) whether the plant is new, and closer to some of its developing markets, 2) added to existing operations, but farther from those same markets, 3) whether they pick up more advanced process and control technology in the new plant. Option Two - now being considered - is to acquire some of its competitors’ assets. The company has recently been advised that one of its competitors is in financial difficulty and in need of cash, and thus may be willing to be acquired or to have some of its assets acquired. The company also believes that some additional capital will be required to convert some of the technology in their assets into the processes more compatible with the company’s. A “due diligence” review will be necessary to better evaluate this option, including the current state of their assets and their historical performance. If they proceed with this, it is expected to cost ~$1-2M. Option Three - not seriously considered, until now - the company had recently had a review done at its Turkey Creek plant, one of its five plants, and it was concluded that the Turkey Creek plant was currently only operating at 56% of its maximum capacity, and that it could, with minimal additional capital or operating expense (e.g., $1-5M), perform in a sustained manner at >80% on an annualized basis of that maximum demonstrated production capacity. Members of the management team, who comprise former plant operating managers and/or capital project managers, are skeptical of this option. They don’t believe that the plant is performing at 33% less than its inherent capability; or alternatively that they have invested 33% more capital than necessary to produce at current levels. Very intrigued by the possibility of higher capacity, especially if it turns out to be true, not just at the one plant reviewed, but at the other plants as well, they could get all the additional capacity they need for the next 3-5 years without having to invest some $300M in new capital equipment. The initial assessment of the Turkey Creek plant, including the development of an action plan for achieving 80% annualized production rates, cost some $150,000. In spite of their skepticism, they have decided to proceed with having the other four plants reviewed as well. Option one is in process and is adequately described above for purposes of this paper. Options two and three are discussed in additional detail below. 500 450 400 350 Rated Design Capacity - 370 308 235 236 252 272 354 M Tons 300 250 200 150 100 50 0 220 227 2004A 2005A 2006A 2007A 2008 2009 2010 2011 2012 Turkey Creek Big Bend Marsh Point Red River Eagle Cliff 90% - Forecast Annual Growth Figure 1 - Production Capacity for ABC Company The Options The company is reviewing its options for supporting this anticipated growth in its markets. These are summarized as follows: Option One - currently in progress - is to invest considerable additional capital into building new capacity. The current estimated investment required to build a new plant or expand existing operations has been determined to be approximately $300M. The company is proceeding with conceptual design work and planning, using a budget of ~$1.5M to improve its understanding of the business requirements and capital budget estimates for the addition- Editor’s note: This paper is based on the experience of the authors and is an amalgam of that experience. Therefore, the information below bears no particular correlation, real or imagined, to any company, but rather, a ﬁctitious company will be used to illustrate certain principles based on the composite experience of the authors working with many different companies. www.uptimemagazine.com 9 http://www.uptimemagazine.com

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Up Time Magazine- August/September 2008 Contents Upfront Upclose Information Technology Lubrication Infrared Maintenance Management Motor Testing Precision Maintenance Reliability Ultrasound Vibration Upgrade

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