I/EC SPECIAL FEATURE Engineering Evaluation — How the New Tool Works
Engineering Evaluation — Tool for Research Management J. F. ADAMS, R. O . NELLUMS, and R. E. H O W A R D Monsanto Chemical Co., St. Louis, Mo.
THE objective of a research organization is the creation of new products for the company it serves. A continual flow of new developments from the research d e p a r t m e n t of any chemical company is essential if the company is to flourish, as it is a peculiarity of the chemical industry that the obsolescence rate for products is very high. T h e r e is 40 A
no standing still in this respect— to stand still is to move backward, with a n a t t e n d a n t decline in sales a n d profits to the point where the very existence of the c o m p a n y is imperiled. Various devices at the disposal of the m a n a g e m e n t of a research a n d development organization can be utilized to ensure m a x i m u m return
INDUSTRIAL AND ENGINEERING CHEMISTRY
from dollars spent for research. O n e such tool is market research, which confirms the need for a certain type of product. Another tool is the j o b system, u n d e r which each research project is assigned a separate j o b number, with a specific a m o u n t of money appropriated for each project. A third tool is the periodic progress report on active
research projects. These progress reports keep all levels of research m a n a g e m e n t informed about the status of each j o b . This article describes another tool which the Research D e p a r t m e n t of Monsanto's Organic Chemicals Division uses—the engineering evaluation. This provides economic guidance to research m a n a g e m e n t a n d makes it possible to channel research effort into programs that a p p e a r to have the greatest potential for earnings. Such coldly objective studies, when used intelligently, not only provide a quantitative basis for decisions relative to investment of research but perform the secondary but salutary effect of keeping the eyes of all research personnel focused firmly " o n the ball." T h e " b a l l " in this case is the creation of new earnings potential. A continuing infusion of engineering evaluations of an economic n a t u r e into the main stream of research activities cannot help but call attention to the hard fact that research developments must ultimately result in the creation of additional earning power for the c o m p a n y footing the research bill. Admittedly, research is a risky business and there is no certainty of success, regardless of how much time and effort are expended. But preliminary engineering evaluations m a d e near the c o m m e n c e m e n t of a process development program can, in some cases, prevent aimless wandering down blind alleys. Such evaluations, in which are composited the best available d a t a , "imagineering," and engineering j u d g m e n t , can often indicate whether a proposition appears attractive, marginal, or definitely unattractive. If a proposition is adjudged to be definitely attractive in such a preliminary study, research m a n a g e m e n t can proceed with the necessary program with more assurance t h a n otherwise. If marginal, the project is ordinarily not ruled out, but is approached with caution a n d probably re-evaluated at frequent intervals. If a project can be proved to be definitely unattractive at an early stage for clear-cut reasons, it can be d r o p p e d promptly and research effort devoted to other more profitable matters. O t h e r benefits result, too. A careful preliminary engineering study frequently produces valuable sug-
gestions or new ideas relating to the proposed process a n d may pinpoint the performance that must be attained to make a process economically feasible. Such a study in effect establishes a definite performance goal for the process development teams who may be subsequently assigned to the problem. I n some instances, a detailed evaluation provides the basis for a choice a m o n g several alternative processing methods. Frequently the route of choice is not too obvious. H e r e is the way the engineering evaluation function operates in M o n santo's O r g a n i c Division Research and Development D e p a r t m e n t . This function has been set u p within the chemical engineering section of the d e p a r t m e n t to make preliminaryengineering evaluations on a formal basis. Administratively the responsibilities of the function are defined so that there is no encroachment upon the activities of divisional and plant engineering departments which are vested by c o m p a n y policy with responsibility for preparation of a p propriation grade estimates. I t is clearly set forth that preliminary engineering evaluations m a d e within research are to be used only for the guidance of research and development activities—not as a basis for the investment of capital. Actually there is little opportunity here for conflicting responsibility, as research engineering evaluations
are usually m a d e at a m u c h earlier stage in a development than it would ordinarily be possible to consider a detailed plant design. T h e preparation of preliminary engineering evaluations has been well covered in the literature [Dybdal, E. C , Chem. Eng. Progr. 46, February (1950) ]. T h e operation of the function and the problems encountered in our efforts to achieve both rapidity and reasonable validity in our estimates will, however, be covered briefly. Requests for evaluations actually originate informally. T h e interested research group leader or development project specialist fills in a simple printed form which is designed to obtain a clear definition of the problem. T h e request is then assigned a priority rating and is acted upon in order of urgency rather than in order or receipt. As quickly as possible persons requesting the evaluations receive a formal evaluation issued in report form, somewhat similar to other reports issued within the O r g a n i c Research D e p a r t m e n t . Distribution is somewhat different, however, in that copies are distributed to members of research m a n a g e ment, to selected sales, engineering, and market research personnel, and in some instances to interested individuals in other divisions. A complete library file is also maintained. Because some of the people receiving these evaluation reports are
St. Louis Research Department CHEMICAL ENGINEERING SECTION REQUEST FOR EVALUATION STUDY
Date:
Subject:
Date required:
Requested by: Personnel having first-hand knowledge of problem (for consultation): End use for compound: Monsanto References:
Description of Problem and Evaluation Study Required (use back side of form i more space is required):
(Note: If a cost estimate is required, please indicate on the back side of this "orm the quantities for which the estimate should be made, plus any other special assumptions which should be incorporated.)
Request form for engineering evaluations VOL. 4 9 , N O . S
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Grade No. Meaning 0
Evaluation based literature d a t a .
solely
on
1
Evaluation based on laboratory data.
2
Evaluation based on d a t a from successful pilot plant demonstration of process.
3
Evaluation based on performance d a t a from successful operation in plant-scale equipment.
Classification scheme for economic evaluations
not intimately connected with the projects discussed, a scheme of classification is used which indicates to the reader the origin of the basic d a t a u p o n which the evaluation has been based. I have not seen a similar system mentioned in the literature. Each preliminary engineering evaluation of a n economic n a t u r e is assigned a grade n u m b e r which appears as an integral part of the report title. These grade numbers are helpful to market development personnel in their use of the d a t a presented, particularly because in some instances the results of these evaluations are used in setting development prices a n d in predicting ultimate selling prices. I n the work of this evaluation function considerable emphasis is placed upon speed. Speed is essential in preparing these preliminary evaluations, because research m a n agement must decide quickly in m a n y instances whether or not to embark upon a particular program. U r g e n t requests from good customers frequently create such situations. And a corollary advantage of speed is economy. Because of the relatively low order of precision obtainable in these preliminary studies, the expenditure of a large a m o u n t of time c a n n o t be justified in m a n y instances. T h e steady increase in the scope of research activities within the division has resulted in a need for more a n d more evaluations, so that speed is essential to avoid serious delays to projects. Heavy reliance is placed on empirical estimating methods to achieve speed. M a n y of the standard empirical methods—for example, the 42 A
"six-tenths r u l e " — a r e particularly well suited to this type of estimating, in which a high degree of accuracy is not desired or even possible because of the paucity of basic information. T h e use of dictating machines considerably lightens the burden of report preparation. Recently a n u m b e r of the repetitive calculations have been p r o g r a m m e d for execution o n a n IBM-702 digital computer. Techniques have been developed to the point where fairly comprehensive evaluation studies can be prepared in 2 to 3 days. It is seldom that as m u c h as a week is spent on a single study. T h e ability to carry out these studies a n d to develop d a t a and recommendations upon relatively short notice has added considerably to their general value. In general, evaluations of the cost estimate variety comprise the bulk of our work, the others representing special studies about which it is difficult to speak in general terms. In preparing evaluations of the cost estimate variety, a standardized procedure is usually followed. First, the problem is defined in terms of a n u m b e r of specific cases. A variable number of parameters may be employed, depending upon the nature of the problem. While ordinarily 6 to 10 cases m a y serve to cover the usual parameters of production brackets, variously priced major raw materials, etc., in some cases as m a n y as 70 to 100 different cases are dealt with to secure an adequate coverage of the problem. T h e n u m b e r of cases to be considered increases very rapidly as the n u m b e r of parameters increases. O n c e the problem has been defined in terms of a n u m b e r of specific cases a n d the necessary material balances and flowsheets have been prepared, materials costs for each basic case are calculated. T h e n separate conversion costs are also calculated. Conversion costs include all elements of manufacturing cost, other t h a n the raw material costs, which are incurred a t the plant level. O n c e raw material a n d conversion costs are calculated, fixed capital for each of the situations u n d e r consideration is estimated. Fixed capital is calculated for any new installations t h a t might be required, a n d back-up capital is included for any M o n s a n t o - m a d e
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intermediates which m a y be used a n d which will be transferred to the project at a price which does not include return on investment. From these d a t a selling prices for the c o m p o u n d in question are calculated for a wide range of returns on total fixed a n d working capital. Selling prices are adjudged to be more significant t h a n the bare manufacturing cost, because selling price takes the required capital investment into account. Since return on investment is our principal criterion of the worth of a project, the presentation of d a t a in the form of selling prices required to yield certain predetermined levels of return, rather than in terms of predicted manufacturing costs, places emphasis on both cost and return. Manufacturing costs are tabulated also, but they are given much less prominence in reporting than the calculated selling prices. Returning to the procedures used for estimating the various items needed to calculate required selling prices, the estimation of raw materials costs is usually straightforward, although special problems may arise. O n e of the more difficult problems is the prediction of raw materials costs for large annual volumes, when one or more of the principal r a w materials is not well established commercially. If no evaluations on captive manufacture in large volume are available, one is forced either to make such a study or to work through purchasing departments with outside suppliers in obtaining such price information. Estimation of the other element of total manufacturing cost, t h e cost of conversion, is relatively easy for small production rates. However, in most preliminary engineering evaluations it is customary to estimate manufacturing costs over a range of production brackets extending from very small a n n u a l rates to the largest conceivable commercial volume, in some cases u p to 10,000,000 pounds per year or greater. For rapid estimation of conversion costs at these larger a n n u a l volumes it is assumed that conversion costs per pound vary as a power function of the a n n u a l production rates. An unpublished study m a d e within Monsanto some years ago indicates that conversion costs within a given plant vary exponentially with the rate of operation of the plant,
I/EC SPECIAL FEATURE Table I.
Typical Computer Output Data for Economic Evaluations (AH figures in dollars)
028 Oil Case SP-0% SP-10% SP-15% SP-20% SP-40% E-10% E-15% E-20% E-40% AOWC-10%" AOWC-20% SAREWC-10% SAREWC-20% INWC-10% INWC-20%
22
0.28 0.37 0.42 0.47 0.69 45,600 68,600 91,700 193,100 25,500 32,400 11,000 14,100 30,000 30,000 FC 386,300 WC-10% 66,000 WC-20% 76,500 TFWC-10% 452,900 TFWC-20% 462,800 ° AO, all other; IN, inventory.
but we have not as yet collected sufficient d a t a to cover the varia tion in conversion costs in new plants of varying sizes, where plant capacity is the only variable. W e hope in time to develop such cor relations, as this seems to be a neg lected area of cost estimation. While considerable attention has been given in the literature to cor relations involving total plant costs for plants of varying capacities, there have been no attempts to correlate conversion costs in such plants in a similar m a n n e r . Fixed capital estimates are m a d e in the conventional fashion. Com pany records, of course, are a prime source of cost data. Heavy reli ance is placed on use of literature d a t a a n d appropriate corrective in dices for arriving at the cost of items for which we have no firsthand d a t a . Total plant costs for plants of varying capacities are estimated as exponential functions of the es timated costs for a single basic case, which is developed and esti mated as carefully as can be quicklydone. With estimated values of m a n u facturing costs and associated fixed capital in h a n d , selling prices for the desired rates of return on total fixed and working capital are cal culated by formula. O n c e selling prices have been calculated, the various elements of working capital which are estimated as percentages of sales income can then be cal culated, as well as a n n u a l earnings
23
24
0.20 0.28 0.32 0.36 0.55 117,200 172,600 227,900 490,700 58,000 74,500 25,200 32,400 72,000 72,000 983,000 155,200 178,900 1,138,200 1,161,900
0.16 0.23 0.27 0.31 0.46 310,300 494,700 679,100 1,370,600 158,700 213,900 69,000 93,000 242,000 242,000 2,800,000 469,700 548,000 3,269,700 3,348,900
at any desired percentage level of return. Because these calculations can be come tedious and time-consuming, particularly when a large n u m b e r of cases are u n d e r study, the calcula tion of selling prices, earnings, and the various elements of working capital is carried out using an IBM-702 digital computer. T h e use of a computer in this work has proved a time saver a n d has permitted far more extensive coverage of problems than was formerly possible. In fact, computer calculation has been so helpful that we are at present thinking of an additional program to provide the input d a t a for the present program. An added advantage of computer computation is that the results are obtained printed in a form ready for reproduction and in sertion in the final report. T a b l e I shows typical o u t p u t d a t a that might be obtained in the processing of d a t a from an engineering evalua tion study. While the numbers are not taken from a real problem, they show what a typical computer solu tion looks like. T h e problem is identified by a unique n u m b e r at the u p p e r left corner. T h e other numbers in the same horizontal line identify the various cases included in the study. T h e SP figures indicate the selling prices required in each situation to yield the indicated percentage re turns on total fixed plus working capital. S P - 0 % , for instance, is the breakeven selling price—the selling
price which will return only the bare manufacturing cost plus divisional selling, research, administrative, and engineering expenses, but no profit. T h e Ε figures show the a n n u a l earnings at the indicated rate of return after taxes on total fixed and working capital. Immediately below are tabulated the various elements of capital a n d a summation of total capital, iden tified as T F W C . T w o values of T F W C (total fixed plus working capital) are presented in each case, because in preliminary evaluations most elements of working capital are estimated as percentages of sales, and hence T F W C is a func tion of the selling price. T F W C 1 0 % , for example, is the dollar value of the total capital corresponding to a selling price yielding a 1 0 % return after taxes. W e d o not harbor the illusion that the preliminary engineering evaluation is a panacea for the many difficulties inherent in providing for over-all m a n a g e m e n t of a research program. Engineering evaluations m a d e at a very early stage of labora tory development cannot be too com prehensive and their results should not be regarded as absolutely con clusive, except in very clear-cut cases. T h e lack of comprehensive ness is d u e to the fact that they must be based in m a n y cases. upon verymeager data. And the lack of a b solute definitiveness is due both to the fact that incomplete d a t a are used as a basis and to the possibility that subsequent research study may circumvent some of the situations which may make a project look un attractive when evaluated initially. T h e usefulness of the preliminary evaluation lies in the fact that it can point out which projects might prove to be marginal or actually unprofitable. It would constitute a flagrant misuse of the preliminary evaluation study, in my opinion, to use such an evaluation as the basis for p r e m a t u r e a b a n d o n m e n t of a project which might ultimately de velop into a profitable enterprise. It would be just as unwise, on the other h a n d , to ignore the danger signal which an unfavorable prelimi nary evaluation report represents. Chemical Processes Symposium, Division of Industrial and Engineering Chemistry, 130th Meeting, ACS, Atlantic City, N. J., September 1956. VOL. 4 9 , NO. 5
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