September 1, 2005

The Case for Project Management

Using seat-of-the-pants approaches to managing major capital investments can stymie returns. But as these three case studies illustrate, modern project management methods may significantly boost ROI.

Before you decide to forego investment in business process improvement, chew on this: Due to poor knowledge transfer, 43 North American projects in the mining and metals sector lost more than $20 billion in non-productive capital investments over the last decade, reports Hatch Ltd., a global process and business consultancy based in Mississauga, Ontario, Canada. “Knowledge, Technology and Profit,” a white paper written for Hatch, asserts that more than two-thirds of them “did not have proper phasing and had no continuity in the execution teams from concept to start-up.” In addition, 40% had “serious front-end development issues.”

There’s no question that metals service centers or mills can get by, or even thrive, without formalized project management. The metals industry already employs many ad hoc processes, bits and pieces of the whole project management methodology, mostly evidenced in its IT and construction efforts. However, when there are multi-million dollar investments on the table and the immediate and long-term future of the business is on the line, metals executives with project management experience rely on a structured methodology to deliver results. Chicago Tube & Iron, Earle M. Jorgensen Co. and Alcoa, for example, rely on project management best practices for their capital projects.

Chicago Tube & Iron’s Project “Bueller”
Project: Relocation of corporate headquarters, learning center, Chicago division and engineered products division
Cost: $22 million
Drivers: Warehouse operating efficiency; closer proximity to customers; safety of employees
Financing: Proceeds from the sale of the Chicago campus and internal resources
Business Lines and Markets: Distribution and fabrication of steel products. More than 30,000 line items of inventory, including carbon steel tubing, pipe, stainless and aluminum products, boiler and condenser tubes, tools and fabrications, bar, valves and fittings. Predominantly domestic market, with some products sold in South Korea, the Middle East, New Zealand, Canada, Mexico and Australia.

Founded in 1914, Chicago Tube & Iron Company (CT&I), which consists of 11 subsidiaries and 1.2 million square feet of warehouse, storage and processing space throughout the Midwest, has annual revenues exceeding $200 million and 425 employees, including 150 in its Chicago facilities. Throughout its 90-year history, the privately held company has never had an unprofitable year.

CT&I’s Chicago operations occupy a dozen separate buildings spread across seven city blocks on Chicago’s Southside, and although the company invested significantly in expansions and upgrades over the years, the current facility just wasn’t working anymore. “The competitive nature of our industry mandates maximum efficiency,” says Donald R. McNeeley, the company’s president and COO. “Our multi-block, multi-building configuration was less than optimal.”

After an exhaustive two-year search, McNeeley and his partner, Robert Haigh, elected to invest $22 million in a new state-of-the-art, 25-acre complex in Romeoville, Illinois, 22 miles southwest of the existing facility. The 400,000-square-foot, single-roof complex will be one of the industry’s newest, most efficient distribution and processing facilities when it opens later this year.

Project managers, led by Thomas Moran, CT&I vice president of information technology, were involved before site selection. “I elected to use internal project management, for the simple fact that not only are we constructing a new facility, but we also had to relocate 450 truck loads of inventory from the old facility to the new, without interrupting existing customer service,” McNeeley says. “Internal project managers would be more sensitive to the priority of this need.”

At the basic level, project management means closely monitoring cost, quality and schedule. All activities are delineated along a work breakdown structure, the master schedule. Steering the effort, Moran ensured all the major work packages and contracts were in place, including external architects, engineers and consultants, and local contractor Carlson Brothers.

“McNeeley broke the project into three different functional groups: construction, financing and relocation,” Moran says. “The people leading these efforts sat down and planned the entire project, deciding how the operation had to work, including the overall materials flow. We still meet regularly to discuss progress and keep executives updated. They’ve been hands off, but we have the advantage of their guidance.”

Much of the project management work focused on determining exactly what the company needed today and tomorrow. “In terms of putting together a timetable, there are a myriad of details that need to be signed off on, from where electrical outlets will go to the color of carpeting,” Moran says. “You have a lot of very talented people involved in a large project and they must work together in concert. The project manager directs that, making sure that we think about everything. It’s important that decisions are made at the right time, otherwise we’ll be delayed.”

Moran notes that a simple, seemingly insignificant decision can make all the difference. “For example: You can’t order an elevator without first choosing a door color. Lead times on elevators are long. If we hadn’t picked a door color back in February, we wouldn’t have an elevator ready to install when we needed it in August,” he says. “If you don’t understand the importance of scheduling, you’re going to have problems down the road. There are so many pieces moving around at the same time, that if you don’t organize things properly, you’re going to miss something. With project management, you can have a reasonable assurance that something’s going to be done when you say it will be done.”

In addition to breaking the project into manageable pieces, Moran stresses the importance of communication and documentation to avoid costly changes. “So much work was done ahead of time—defining what needed to be done—that there’s not a lot of decision-making that needs to occur as work progresses,” he says. “We can focus completely on execution.”

Project management also entails checks and balances, a system for change management. For example, CT&I took advantage of a no-cost service offered by the Illinois Small Business Smart Energy Assistance Center, an analysis of the site design to determine possible energy conservation tactics. Moran agreed to consider changes that showed a payback in three years. Based on the suggestions, work crews installed energy-efficient fluorescent lighting fixtures instead of metal halide fixtures. The fixtures had higher up-front costs, but much lower operating costs over time.

Work is two-thirds of the way done, and McNeeley expects CT&I to be completely relocated by Jan. 1, 2006, with more than 90% of the existing workforce also making the move. “Thanks to professional project management, we are on schedule and on budget,” McNeeley says. “As we enter the final stages of this project, I am most proud of our internal team approach for it is this team that will have to live with the results of their efforts. This represents a significant investment, for, after all, as a private company, it is our own money.”

Earle M. Jorgensen’s Schaumburg Renovation 
Project: Business reengineering and technology upgrade
Cost: $40 million over 5 years
Drivers: Performance improvement/growth and expansion
Financing: Internal cash flow and existing capital expense allotments
Business Lines: More than 25,000 different metal products, including carbon steel, stainless and aluminum bar and tubing, specialty plate and brass. Provides value-added metal processing and inventory management services from its distribution network of 37 service and processing centers in the United States and Canada.

Since 1923, Earle M. Jorgensen Co. (EMJ) in Lynwood, California, has supplied metal to manufacturers across North America. In recent years, EMJ management felt that process issues were holding the company back. “As an industry, we don’t put enough emphasis on our process control,” says Kenneth Henry, EMJ executive vice president, stationed at the company’s regional office in Dallas, Texas. “We have detached processes. To operate properly, you have to look at the entire process holistically, and project management enables you to look at how your processes interface. Based on this philosophy, we’ve learned at EMJ that to grow and expand, we had to fix everything through a reengineering of all of our processes.”

To lead the improvement effort, EMJ executives selected a team from across its commercial, administrative and operations units. “We originally defined our goals and our inhibitors that kept us from being successful,” Henry says. “Most of our orders went out on schedule without fail, but we felt we had to improve in the instances where we did fail.” EMJ set ambitious goals: 100% on-time delivery at the lowest total cost.

“I don’t think a project approach to our industry is common,” Henry says. “We never connect the dots: If we have a problem in the saw department, we fix the saw department. We don’t look to implement better operations in the plate department at the same time.”

The team determined that process flow was the overriding problem, predicated by lapses in technology and software. The overall solution, which involves streamlining operations and repositioning equipment in the Schaumburg depot facility into a cell manufacturing system setup, had three stages. In the first phase, dubbed the Center Bay project, the team reengineered the Schaumburg facility with a more efficient materials flow and processes to match that flow. Because the 600,000-square-foot plant operates 24/7, a single scheduling issue could have cascading repercussions with business disruptions.

“We diagrammed the current state of the facility with a basic flow chart,” Henry says. “That’s when we realized that we had trucks traveling 5,000 feet around the building to be loaded. So we drew another chart of how we wanted it to work, and shortened that distance to just 400 feet.” The revised site design includes zone loading with drives on either side of the building as well as a center drive.

The second phase involved technology improvement to support the process redesign. The new materials flow required a loading and shipping manifest, order management system and software that allows easier, paperless organization of orders. “Technology was the tool that delivered us,” Henry says.

In addition, this phase included the installation of a 160,000-square-foot by 60-foot-tall Kasto-Racine automatic-storage-and-retrieval system with customized automatic bundling. This was the largest automated service center system Kasto had ever installed. “Chicago is the inter-company depot, so this made sense,” Henry says. “You certainly don’t want to experiment on the mother ship, but once we saw it could work in Kansas City [where a similar system had been installed 3 years earlier], we felt confident that we could move forward with Schaumburg.”

Phase two concluded in October 2003, and phase three (further expansion) has begun. Improvements implemented in the first two phases alone have doubled output and reduced man hours by 40%. Henry says the only thing he would have changed was to build the facility bigger at the outset.

As a result of the reengineering project, EMJ was ready to profit from the booming market of 2004. Revenues increased 61.5% to $401.7 million, and operating income increased 11.6% to $16.4 million for the third quarter of fiscal 2005, compared to $248.8 million and $14.7 million, respectively, for the same period in fiscal 2004. In addition, EMJ’s tons shipped from inventory increased approximately 14% from the prior year‘s quarter. “We couldn’t achieve the stunning results we achieved without project management,” Henry says.

Alcoa’s Brazilian Extrusion Business
Project: Expanding the cold-drawn rod and bar operations at Alcoa’s Aluminia S.A. (Utinga), Santo Andrè, Brazil, plant
Cost: Incremental investment of more than $5 million meant to double capacity to the plant
Drivers: Upgrade Alcoa’s position globally in cold-finished products and enable the company to expand its worldwide reach
Financing: Internal
Employment: 40 employed during the project, bringing the total plant employment to 430
Trade: Cold-finished/cold-drawn products
Countries Served: Central, South and North America, portions of Europe.

With 131,000 employees in 43 countries, Alcoa is the world’s leading producer of primary aluminum, fabricated aluminum and alumina, serving the aerospace, automotive, packaging, building and construction, commercial transportation, and industrial markets. Alcoa Aluminio in São Luís, Brazil, operates Utinga, a $50-million extrusion facility, one of three Alcoa plants in the region. Built in the 1940s, Utinga is important to both the local economy and Alcoa’s core values.

Alcoa previously supplied cold-finished products to the North American marketplace exclusively with plants in South Korea and Massena, New York. So, when Alcoa leadership determined in June 2004 that additional cold-finished metal capacity was vital to global competitiveness, the natural fit was to expand the Utinga plant’s cold-finished capacity and absorb displaced extrusion production at Alcoa’s other Brazilian operations. “We have a commitment to stakeholders in the community. So rather than expand elsewhere, we committed to putting resources into the existing plant,” says Douglas Dietrich, president, Latin America Extrusions and Global Cold-Finished Products, Alcoa global headquarters, New York.

By upgrading operations and shifting extrusion to other regional plants, Alcoa’s Utinga unit would be able to boost production of cold finished goods from 1,000 tons a year to a projected output of more than 1,000 tons per month by June 2006.

Alcoa prides itself on manufacturing sustainable products and promoting environmental health. Given this organizational mandate, new equipment had to produce high-quality cold-finished products safely, with low nitrogen oxide (NOx) emissions and environmentally sound production and recycling practices. “The upfront incremental cost of this equipment is very small in comparison to the effects and downstream costs of any detriment to the environment and community,” Dietrich says. “It’s a very small investment to take the high road and make sure we’re a safe and clean company. And using the latest technology makes sense now rather than having to install it down the road.”

Alcoa approaches all expansions—the Utinga plant is considered a relatively small effort—through structured project management. “I don’t see how you can run projects without a sound and tested approach,” Dietrich says. “We do have a very rigorous set of processes. The way we analyze and present projects for investment, the people put in place, and the teams created to run them all support our ingrained values.”

Project management at Alcoa is based on the Alcoa Business System (ABS), an offshoot of the Toyota production system, which stresses continuous improvement through a kaizan—which literally means continuous incremental improvement in small steps—and focused teams. Management looks at the current state of operations, a target, or desired, state and assigns a single point of accountability for reaching that target.

“We have an overview of the project called an ‘A3’ because the entire vision should fit on an A3 [11.69 x 16.54-inch] standard piece of paper,” Dietrich says. “We start with individual strategic objectives and cascade down through the business to define all actions and roles.” By mapping each task as the project moves from decision-makers to those doing the work, Alcoa essentially assures its strategy is aligned with its methods and results.

Following this basic structure, the Utinga team was formed from cross-functional leaders within finance, commercial, engineering, production management, and environmental, health and safety areas from Alcoa’s Brazilian, South Korean and New York units. All were familiar with the equipment and products needed for this type of expansion. Communication was difficult, but face-to-face meetings during project planning helped. “We spent a lot of time in team building,” Dietrich says. “You’re never going to avoid phone calls at the start of a project, but our impetus for face time was important to enable joint buy-in across the team.”

Based on a strong plan, the project has proceeded on time and on budget. Although work continues, Utinga already is producing 500 tons of cold-finished metal per month. Drawing and heat treatment equipment were added within the same plant footprint. “We added a roof on a previously open area of the plant, but the expansion has mostly been accomplished through reengineering the existing space,” Dietrich says.

There have been a few timing issues—some highly sophisticated equipment needed to be “debugged” and ingrained within the workflow—but Dietrich says that a structured approach to risk mitigation has helped minimize inconveniences. “Project management helps us solve issues as they arise,” he says. “We’re able to examine issues thoroughly, determine the contributing factors and deal with them effectively. A $250 million project is going to take a somewhat different approach, but overall consistency provides us with an organizational understanding of how projects run and how to ensure they succeed.”