S2:E23 The Value of Cost Benefit Analysis with Shadrach Stephens and Rob Kalwarowsky

Shadrach Stephens is the Global Improvement Leader and Reliability Director at DOW! And, Rob Kalwarowsky is the Asset Management Specialist at Enbridge and Founder of Rob’s Reliability Project! 

Summary

In this week's episode of Masterminds in Maintenance, we are excited to have Shadrach Stephens and Rob Kalwarowsky on the show! Shadrach, Rob, and Ryan dive deep into the topic of Cost Benefit Analysis (CBA), discussing its ethicality and value during uncertain times. Listen today!

[Embedded content: https://anchor.fm/upkeep/embed/episodes/S2E23-The-Value-of-Cost-Benefit-Analysis-with-Shadrach-Stephens-and-Rob-Kalwarowsky-enssgq]

Episode Show Notes

• Lesson in Cost Benefit Analysis

• How to showcase the benefit of maintenance costs

• How to weigh the cost benefit of uncertain projects

Podcast Platforms

• Anchor FM

• Apple Podcasts

• Spotify

• YouTube

Transcript 

0:00:04.8 Ryan Chan: Welcome to Masterminds in Maintenance, a podcast for those with new ideas in maintenance. I'm your host Ryan. I'm the CEO and founder of UpKeep. Each week I'll be meeting with a guest or guests who's had an idea for how to shake things up in the maintenance and reliability industry. Sometimes the idea failed, sometimes it made their business more successful, and other times their idea revolutionized an entire industry. Today, I'm super excited. We've got two guests here on the show, Shadrach Stephens and Rob Kalwarowsky. Shadrach is the Global Improvement Leader and Reliability Director at Dow. And also the founder of Re.engineer, a community of professionals that collaborate, share and leverage value-added solutions and innovations. Rob is an Asset Management Specialist at Enbridge and the founder of Rob's Reliability Project. And also, I know your new business as well, which I'm sure we'll get into you as well, that's the Leadership Launchpad podcast as well as the Dismantling The High Performance Narrative podcast. So if you haven't already checked that out, follow Rob. Welcome. The way that we always kick things off is sharing a little bit more about yourself, your background, and how you were introduced into this field of maintenance and reliability.

0:01:12.4 Shadrach Stephens: By discipline, I am an electrical engineer with 17 years of experience within the industry, all of which has been in maintenance and reliability. I currently support environmental assets across Dow globally, and so I'm a Double E that works for a chemistry company that drives reliability improvements for environmental technology. So I think that in and of itself is a very diversity and inclusion moment. I'll say I was introduced into engineering and then maybe reliability through my dad. He also worked for Dow Chemical for about 30 years as a process control technician, and for fun, you can imagine this, he would bring home Ladder Logic diagrams for PLCs. He would pay me five bucks if I could find the errors in the code, really to help his design more reliable. And so I've worked for a lot of different companies in the maintenance space, but I think Dow was where I was really formally trained on reliability.

0:02:13.9 Rob Kalwarowsky: I worked in reliability for the last 10 years now, as you mentioned. Right now, I work as an asset manager for Enbridge, managing their large mechanical assets, basically valves and actuators across the pipeline. I guess what's new for me is the new show Dismantling The High Performance Narrative. The first episode came out literally two days ago. We were talking about what it means to be a high performer, and something that I'm super passionate about is mental illness. So we're trying to de-stigmatize that because it's a huge problem in heavy industry, especially for maintenance people and especially for men. So I worked about a year as an economist, and a lot of my day job in a lot of my career has been spent doing cost-benefit analysis. So that's why we're here.

0:03:00.3 RC: For all of our listeners here, this episode really came together when this question got asked around cost-benefit analysis in the maintenance reliability space. This was asked in our Slack community, and so if you haven't already, please join our Slack community. But for today's episode, we really want to dig a little bit deeper into this topic and have this discussion around it. So what does it mean to put together a cost-benefit analysis in maintenance reliability? And do you see enough teams doing this? And where and when is this most important? 

0:03:31.2 RK: I think every business does cost-benefit analysis regardless of what they do, whether that's an infrastructure project trying to justify getting some predictive maintenance tool. The sophistication of what cost-benefit analysis looks at will vary on who's doing it and what they're trying to look at. You have to understand what your costs are to make a decision on what your benefits are. And if your costs outweigh your benefits, typically, people don't make investments.

0:04:01.5 SS: So we all work for organizations that measure performance with some level of respect to the bottom line, and I think most of the time those measurements are directly related to profitability, revenue, profit, EBIT. But I think in order for us to really achieve profitability targets, we have to make investments. We have to hire more staff. We gotta drive productivity, so there's a lot of opportunities for us to help meet the company's goals. And almost in all cases, there's not an unlimited budget.

0:04:35.1 RC: We all know what the cost is to run a maintenance team, but oftentimes, we get asked the question, "Well, how can I showcase the benefit? How can I showcase the value?" Because oftentimes in maintenance reliability, the benefit is in disaster prevention.

0:04:53.4 RK: Typically we're using stuff like expected value or risk, which is probability times the consequence or the value of this project. That's how you're gonna evaluate these scenarios, and like the example I always use is like, let's say Ryan you and I are gambling against each other and we're playing this game where we're flipping a coin, right? And we're gonna flip a coin, and if it's tails you win five bucks, and if it's heads, I win $10. I'm gonna wanna play this game because I win in expectation, right? Basically, I'm winning $2.50 per flip. You're just taking a concept like expected value and applying it as a cash flow into the future. Who's gonna know that you avoided a failure next year if it never happened? That's the part that trips people up.

0:05:49.3 RC: Exactly.

0:05:50.2 SS: Make sure that you have a solid relationship with the finance focal point within your business group, because they can help translate what that expected value is and what that cost of potential and reliability we'll do to translate into actual maybe EBIT numbers. Let's say you increase reliability by X% on an asset. However, if the asset part of the business condition is not sold out, are you actually generating any value to the bottom line versus an asset that sold out? And so your facility may get compared different... Or ranked differently, just because of those business conditions, but someone within that financial organization could help you talk through that so that you can still be a good salesman to be able to get your idea supported.

0:06:40.6 RK: There's a few things you're gonna wanna get from your finance department, one of those is opportunity cost, which is what you're talking about, that is the production or the value of an hour down time on this equipment. The other thing that you're gonna need is the discount rate, net present value and DCF are very similar. Typically, when you're looking at discounted cash flows, you're only analyzing what money goes in and what money goes out, so there's not really a place for things like risk or things like future lost production or net present value, you can absolutely throw those things in, you'll wanna go to your accounting department for what your discount rate is and not really your discount rate, typically, it's something in the neighborhood of eight to 10%. Let's say I give you $108 next year, what's that equivalent to worth now? And usually when we're talking about a discount rate of 8%, we would say $100 now is worth $108 next year. You can see if you get way out into the future, where Shadrach is showing us 10, 11, 12 years, 20 years, it stops really making much of a difference to the value right now, and so that's where it kind of front-loads a lot of the costs or the value of your project.

0:08:02.7 SS: There's a part of my role that I have to evaluate on an annual basis all of the capital request and I'm getting 50, 60 requests a year. And so to level set against what the return on investment is on CBA is we've developed an internal tool, similar to what Rob is talking about. So let's say we have a project where a reliability engineer says they have been working with production, and there's an opportunity for us to reduce some of our raw material calls, in this particular plant, we purchase compressed air from a supplier. And so they propose a project that says if we go and install these new air compressors, we can reduce this cost from the supplier, and it's gonna cost us a million dollars to purchase the equipment, the labor. So the benefit of it is about $1.2 million per year.

0:08:57.8 SS: And so you would say just at face value, "Hey, if I invest a million dollars, I get back $1.2 million annually. That's a great project. We should be doing it right away." But like Rob mentioned, there's a lot of factors that you have to look into. What's the expectancy of the life of the equipment? And in our case here, there's gonna be incurred operating costs, so today, we're not spending anything against energy because we are purchasing air directly from the supplier, so we have to consider what the additional energy cost is. So we have a tool that we built to factor in all of those elements with those inputs, and we look at the value weighted over time. So in typical cases, we say an asset, it depends on the type of asset.

0:09:45.7 SS: It could be anywhere from five to 10 to 20 years life expectancy in our depreciation schedule, but in this case, we chose to use 10 years, and if we make this investment, that NPV or that present value is gonna be 3.8, no $3.8 million for us across the 10 years span. Typically, we like to look for projects that are in the DCF range of around 10-20% interest, there's gonna be some cases where you get some projects like this one was... I think it is a slam dunk, it's a project that we should really consider and doing it, if we can afford the capital to do so, but I wanted to share this example because there are a lot of considerations that have to go into how you evaluate whether that project is gonna be supported.

0:10:32.8 RC: Can we talk about cost-benefit analysis? It's really objective, and I think people love it for that reason, it's very objective, it's like, "Are we gonna make more money or are we gonna lose money?" But even in this chat, Hank actually mentioned this, how do you evaluate things like environmental impact? How do you evaluate things like safety, where do those come into play within this cost-benefit analysis? 

0:11:00.0 RK: There's called social benefits like... Honestly, that's most of my day job. So I have a portfolio of valves that don't help us produce any oil, don't help us ship oil, don't help us do anything other than if we have a leak, they minimize the environmental impact. And so from a purely financial perspective, you would never install these valves, you would never do anything with them, but from a purely... From a value-based or a risk reduction-based perspective, you want them because then you don't have a BP oil disaster, typically like how we evaluate those from a purely economics point of view, is a revealed preference survey and you can Google what those are, but that's how we get a value for someone's life, super difficult and kind of uncomfortable to talk about, but that's how they do it in economics.

0:11:55.8 SS: If you don't already do that, then you will get the regulatory agencies to do it for you. And so there's loss prevention principles at the companies and most companies have these that say, "These are the standards or the guidelines that we will adhere to." And if those... If there's opportunities that go outside of those limits, then almost all the times those projects won't be supported.

0:12:18.9 RC: How do you deal with projects that get thrown on to your desk that are highly uncertain, that have a lot of risk in them? 

0:12:27.4 SS: I think what is important is that you have some kind of the process that level sets everyone one's input, because I'll get those requests that I think are great projects, but how does it really compare to projects that have a higher probability of failure. So I'll give you this quick example I made this one up, so. In this one, the piping system is experiencing some severe corrosion, and if we have a catastrophic failure, it's ultimately gonna lead to somehow plant down time against production, so the team wants to install some new technology to extend the life. It's gonna cost about half a million dollars to do it. The benefits are, we can potentially avoid two million dollars of production losses, and then to Rob's point he talked about this, understanding what your unit margins are to help you calculate what the potential benefit is key, and then also in this case, we're spending about $100000 a year in repair costs, and so Rob mentioned that too, there's an equation right there that I use, so in my organization, every facility that submit maintenance projects, they follow the same guidelines, so that way I have a consistent way that I'm measuring what the potential opportunity will be if I make that investment and I factor in probability of failure the severity.

0:13:48.8 SS: So how high is the severity if that incident does occur, does the system need to be out of service in this particular project, if there is not an opportunity for the production plant to come down in a year, there's no need for me to fund the project because there's no window for me to install this new technology, and then we look at potential lawsuits versus true historical lawsuits if you throw that all into this equations, we get a NPV, of 5.8 and so that... In this particular case, this would rank pretty high as a project opportunity that I would evaluate probably doing to help avoid those issues, you really need to create a system of the assets you support to be able to manage how to evaluate successful projects.

0:14:37.2 RK: I like to set a minimum maximum and median value for every input variable in my model, so if you're super advanced... When I was doing it for... For an economics firm, we would put a distribution around every input and then you could simulate the range of outcomes which would come out as an S curve, so you would have literally the ultimate best case scenario, which would almost never happen, you would have ultimate... The worst case scenario, which would never... Pretty much never happen, and then you would have the median outcomes, which are most likely to happen, it helps people understand the range of outcomes that you're worried about.

0:15:22.7 RC: I'm sure we've all seen these projects where we say, You know, hey, we're gonna invest half a million, we're gonna get $5.8 million in return over this, but then you do this project, you make the investment, but then we kind of forget to track and manage it over time and really ask ourselves, Is it really what we thought would happen? Do you have any tips, advice, recommendations for teams to be able to submit these recommendations and also track progress.

0:15:54.2 RK: Everybody likes to report cost-benefit analysis with two decimal places, and they give you one number and it creates this very false sense of accuracy. You have to educate your audience about this, it's... We're forecasting into the future. Yes, we're using statistical data that we had in the past, you have to just qualify with your audience like this is the true sense of accuracy, and we're plus or minus a million bucks or we are plus or minus 10 million bucks or we are plus or minus 1000 bucks, you have to really help people because you're right, it's when they're gonna come back at you next year and go, We spent 2 million where is, the benefit... You gotta answer that question.

0:16:41.4 RC: What's the average threshold at which a capital project would be deemed acceptable at Dow or Enbridge. Is there a threshold same for payback periods as well? 

0:16:50.3 SS: It's always good to have options just in case your first option does not get supported but in this case, let's say we have three options here, we purchase air from a supplier, we can either re-negotiate the contract with the supplier and get some cost-benefit and then spend zero dollars in capital, we'll still get some $670000 in NPV over 10 years, or we install one compressor with no redundancy, no back-up, and so when we come down for maintenance, we need to have still some reliable source of air. So we still gotta have a relationship with the supplier or we install the two compressors... What was in the original project? Which option would you choose? I would say if you were working at DOW, most likely we would go with the third option, the amount of cash is generated for the investment, but you want to drive competitiveness, you wanna earn the most against the investment. So the third option would, but in most times, more time than not the third option would be the right one. Now, let's say you're in the tough, economic climate where capital is hard to come by, you may not have a million dollars to invest, right? So you may evaluate the other two options, so I think to answer the question What we're looking for is probably when we do the analysis, which option or which project is gonna give us the most, NPV.

0:18:19.4 RK: Most of our businesses are capital constrained, so we set some capital budget, whether that's 10 million, 50 million 100 mil whatever it is. And we have more projects to go around, than we have capital to go around, and so the answer to this is, it depends on what year and what projects are submitted, and then you're picking the best projects to fit that it's just an optimization, you're just picking the best projects to fit that bucket of capital that you have.

0:18:52.7 RC: What's something that you wish more people knew about in the maintenance reliability industry? 

0:18:56.4 SS: I wish more people knew about what we are doing with the maintenance community. When you have more collaborators throughout whatever challenge you're trying to face, you're always gonna get the best solution, and I think maintenance folks that work in maintenance reliability they have just as a foundation, we're working with vendors and suppliers with equipment, we're naturally collaborating all of the time. I think what I would recommend is that you start going outside of the spectrum of your workplace and collaborate across industries and across companies.

0:19:28.0 RK: For me, what I want people to really look at is take a long look at leadership at your company and really focus on treating people like people, seeing them for the human beings that they are, and really focus on them first. We always forget that it's our maintenance people, our operators, these are the people who actually make the company run, and as much as we can do these cost-benefit analysis and say, If we install two compressors, we're gonna make $3800, someone actually has to go out and do it and they gotta do a good job, and then the people who are operating it have to operate it well, and so leadership for me, and getting away from these fear-based cultures and more into these high-trust, low fear environments, that's where you're gonna get high performing teams, and you can get better results for your projects than you're getting right now.

0:20:29.0 RC: Shadrach and Rob, can you share with all of our listeners the different ways that they can connect with you and follow you on your journey? 

0:20:35.8 SS: You can either connect with me through LinkedIn at Shadrach Stephens or you can find us at reengineer.co, where we're doing mentorship through partnering with UpKeep and the maintenance community on these webinars, and then also just providing lot of professional development resources for young professionals and also students.

0:20:55.4 RK: And yeah, check out reengineer, it's really good and definitely focus on getting those dollars in your plan [chuckle] You can follow me, Rob Kalwarowsky on LinkedIn. If you're looking for any help on cost-benefit analysis on leadership at your site, you can hire me through UpKeep connect, I'm listed on there, or you can go and reach out to me separately at robsreliability.com, you just fill out in the Contact Us page and I'll get back to you and definitely subscribe to Dismantling The High Performance Narrative, that's the new podcast, we'll be challenging what it means to be a high performer and talking about mental health, and so there's some really good conversations that we're having there, so I hope we can break that stigma.

0:21:43.2 RC: Awesome, thank you again, Shadrach and Rob for joining us and thank you to all of our live listeners and the listeners that are gonna listen to it on our podcast as well. Thank you for tuning in to today's Masterminds in Maintenance. My name is Ryan, I'm the CEO and founder of UpKeep. You can connect with me on LinkedIn, shoot me an email directly at [email protected], you can also find me, Rob, Shadrach, all in the maintenance community on Slack, the largest online community of maintenance and reliability professionals in the world. We host weekly conversations, contests, all centered around maintenance and all that good stuff. I hope to connect with everyone real real soon, until next time, thanks again, Shadrach and thank you to Rob.

0:22:20.7 RK: Thank you.

0:22:21.4 SS: Alright, thanks guys. See you.

Be a part of the world's first Slack Group solely dedicated to those in the maintenance and reliability industry! 

Connect and network with over 1,000+ professionals working across 22 different time zones, attend and receive recordings of free webinars and workshops, ask questions and engage in live discussions with industry experts, and so much more!

Sign up now and meet with maintenance and reliability professionals today!

Join the Masterminds in Maintenance Podcast!