How can CMUs create value for the owner - v001

How  can  conversions,  modifications   and  upgrades  create  value  for  the  owner? ETH  Innovation  Meeting,  2  October  2014

Dr Shaun  West [email protected]

Conversions,   modifications   and  upgrades  are   about  creating   value   Can  we  identify  the  opportunity? Can  we  create  a  solution? Can  we  deliver  the  solution?

Identify

Create

Deliver

Value Service  Innovation  |  Dr  Shaun  West

But   first   why   conversions,  modifications  and   upgrades? • Wide  definition  that  does  not  suggest   a   solution • Focuses   on   owner/operator   processes • Allows  the   solution  to  deliver   value

Upgrades can   be   suboptimal…

Remember  Vista?

Service  Innovation  |  Dr  Shaun  West

Addressing  outcomes,   how  do   Caterpillar   consider  this? What  customers  really  want… What  is  traditionally  delivered… What(our(customers(really(want…( What(we(tradi@onally(do(for(customers…( Outcomes -­‐ Better  efficiency -­‐ Improved  r evenues -­‐ Reduced  costs -­‐ Mitigation  of  r isk -­‐ Improved  safety -­‐ …

sell equipment,   parts and   technical  services hours

is  to  achieve  the  outcomes and   improve the  bottom  line results

This  is  system  thinking Service  Innovation  |  Dr  Shaun  West

Source:  Cameron  Ferguson,  Caterpillar

The   customer   value   proposition   as   a  useful  framework

Have  we  become  complacent  with  identifying  customer  value? Service  Innovation  |  Dr  Shaun  West

Where   are  the   value  pools  commonly   found  in   power   plants?

Top  line Compliance  and   risk  management

Bottom  line

• More  availability   à +  revenue • Higher   reliability   à +  revenue • Reduced  maintenance   à +   revenue

• Environmental  à fines  and  reputation • Health   and  safety  à fines   and  reputation

• Increased  availability   à costs • Increased  efficiency   à costs • Reduced  maintenance   à costs

How  does  the  owner  and/or  operator  value  each  topic? Is  there   a  payback  rule? CAPEX  vs OPEX? Service  Innovation  |  Dr  Shaun  West

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

What  are   the   triggers? Changes  in  regulation

Who  are  the  buyers?

Changes  in  markets

Operational  site?

Problem  plant  area Technology

Performance  engineer? HQ  project  (as  per  new  units)

Life  extension

What  do   they  buy? Full  value  when  the   system  is  addressed Need  short  payback Plant  life  extension

The  results  of  CMUs  are  outcomes! Service  Innovation  |  Dr  Shaun  West

The   life-­‐cycle  of   the  equipment   helps   you   to   identify  potential  owner/operator   needs 60"

100" 90"

50"

80" 70"

40"

30"

50" 40"

20"

30" 20"

10"

10" 0"

,3" ,2" ,1"

1"

2"

3"

4"

5"

6"

7"

8"

9" 10" 11" 12" 13" 14" 15" 16" 17" 18" 19" 20" 21" 22" 23" 24" 25" 26" 27" 28" 29" 30"

Years'(note:'1'is'the'start'of'opera4on)' CAPEX"

Service  Innovation  |  Dr  Shaun  West

OPEX"fixed"costs"

OPEX""inspec>ons"

Reliability"

Usage"

0"

Percent'

Cost'

60"

The   life-­‐cycle  of   the  equipment   helps   you   to   identify  potential  owner/operator   needs

How  much  of  the  spend can  be  captured? What  outcomes are  needed   at  each  stage? Service  Innovation  |  Dr  Shaun  West

What   can   be   learnt   from   the  life-­‐cycle How  the  owner/operator  is  using  their  plant

Total  owner  spend

Total  market  value OEM  share  of  spend  

When  to  inject  new  technology

Timing  of  owner  spend

Impact  of  availability

The  life  cycle  is  key  to  helping  the  owner/operator   make  the  right  decision Service  Innovation  |  Dr  Shaun  West

CASE  1

STRUKTON   RAIL  

Service  Innovation  |  Dr  Shaun  West

Experiences  in   Holland   and   Australia -­‐ Expectations   set  by  the  context  of  the  home  market -­‐ Dutch  rail  has  driven   cost  out …  so  what  happened  in  Australia?

Service  Innovation  |  Dr  Shaun  West

Rail  is  a   bottleneck   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 Service  Innovation  |  Dr  Shaun  West

The   value  proposition   was  very  different   to   the   cost-­‐driven   home   market • Maximise  revenue  potential

• Increase  rail  capacity

• Minimise  unplanned   maintenance

• Undertake  preventative  maintenance

Service  Innovation  |  Dr  Shaun  West

Model   (simply)   the  mine  owner’s  willingness  to   pay Assumptions • 350  operational  days • 1M  AUD  value  of  one  train  load • 750k  AUD  extraction  cost  per  train  load • 250k  AUD  charge  margin  per  add  train • Can  increase   capacity  by  1  train/day

Willingness   to  pay • 43M  AUD  (50/50  value  share) • 87M  AUD  on  1  yr payback

Outcome • 350x250k  =  87.5M  AUD/yr Check:  reasonable  for  the  effort?

Service  Innovation  |  Dr  Shaun  West

CASE  2

VANDERLANDE

Service  Innovation  |  Dr  Shaun  West

Systems  thinking • Few  airport  operators   • OEM  is  a  system  integrator …  what  advantages   does  a  system  integrator   have?

Service  Innovation  |  Dr  Shaun  West

Lack  of  know   how  prevents   operators   from   being  efficient • Vanderlande design,  install,  commission  operate,   maintain,  support   systems • Some   owners  operate  only  one   airport Vanderlande Services solutions • Value   proposition  for  each  market  segment

Solutions to ass

deliver value &

organisations’ obj

entire li

8

By  undertaking  system  O&M  they  understand  the  owner’s  pain  better Service  Innovation  |  Dr  Shaun  West

The   customer   needs   a   system  that   delivers  bags  quickly • Maximise  passenger  throughput • Minimised  investment

• Advice  on  where  to  dock  planes

• Improve  thoughput when  busy • Limited  spares/easier  maintenance

• Selective  de-­‐bottlenecking • Coordinated  maintenance • Limited  spares  stock

Service  Innovation  |  Dr  Shaun  West

Model   (simply)   the  owner’s  value  creation Assumptions • 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

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

Outcome • 100k  /(400x200)=1.25c/person Check:  reasonable  for  the  effort?

Service  Innovation  |  Dr  Shaun  West

CASE  3

ALSTOM  AND   THE  13MXL

Service  Innovation  |  Dr  Shaun  West

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?

Service  Innovation  |  Dr  Shaun  West

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 Service  Innovation  |  Dr  Shaun  West

What   is   achieved  when   cost   is  driven   out? • Lower  cost  of  maintenance • Higher  availability

• Reduce  firing  temperature

• Frequent  maintenance

• Reduce  the  maintenance  requirements

Service  Innovation  |  Dr  Shaun  West

What   is   achieved  when   cost   is  driven   out? Assumptions • 24k  hour  inspections  à 48k • 50%  less  majors • 1.5M  USD  investment • 3.0M  USD  per  inspection

Willingness   to  pay • 1.5M  USD  with  one  unit • NPV  for  both  approx equal • Improvement  >2x  with  2  units

Outcome • 1.5M  USD  saving  over  48k  OH • Plus  +7  days  availability/year Check: is  there  owner  value?

Service  Innovation  |  Dr  Shaun  West

What   can   be   achieved  when   owners  want   more • Increased  capacity • Improved  efficiency

• Increase  firing  temperature

• Limited  capacity  of  the  unit • Dropping  in  merit  order

• Increase  capacity • Increase  efficiency

Service  Innovation  |  Dr  Shaun  West

Increasing   unit   capacity   and  efficiency Assumptions • 700USD/kW  cost  new  plant • 25USD  clean  spark  spread • 6,000h  generation  per  year • 20MW  additional  capacity

Willingness   to  pay • 10.5M  USD  new  unit  cost • 7M  USD  50/50  share  4  years • 3.5M  USD  1  year  margin

Outcome • 3.5M  USD  pa  gross  margin • Plus  lower  fuel  consumption Check: reasonable  for  the  effort?

Service  Innovation  |  Dr  Shaun  West

LESSONS  LEARNT

Service  Innovation  |  Dr  Shaun  West

Lessons   learnt   from  the  case   studies

Understand  owner’s  operations Understand  what  the  owner  values Find  a  solution  to  their  pains  and  gains Measure  the  value  you  have  delivered

Service  Innovation  |  Dr  Shaun  West

Understand   the  value   creation  and   find  a  way   to   deliver  more

Lessons   from  the  cases   that   are   often   forgotten   in  daily   business Discuss  and  measure  the  pains  and   gains  with  the  ‘right’  people

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

Identify value

Create value

Deliver value

Design  a  solution  to  maximise  the   gains  and  minimise  the  pains

Service  Innovation  |  Dr  Shaun  West

(Figure  based  on  Anderson,  2009)

Any  questions?

Dr Shaun  West [email protected] Service  Innovation  |  Dr  Shaun  West