chemical suppliers manage portfolios of small - and medium-sized projects

Increasing strictness in the management of smaller chemical projects helps to capture significant undeveloped value.

Capital account is an important contributor to the growth of chemical suppliers: take a look at the six new ethylene cracking furnaces currently under construction along the Gulf coast of the United States. Such a large project has been highly concerned by senior management. But they account for just over half of the chemical industry's $400 billion a year in capital spending. There is another kind of capital expenditure that many chemical enterprises are difficult to manage: moderate expenditure for maintaining and maintaining existing assets and small and medium-sized growth projects. Chemical suppliers have the opportunity to gain significant added value and improve the reliability and safety of assets by better managing the portfolio of small and medium-sized projects.

Projects worth US $50 million or less (usually less than US $10 million) account for a large part of the chemical supplier's expenditure. By volume, these projects usually account for 80% of all capital projects and 50% of the value of capital expenditure. Based on our experience, improving the selection and management of these projects can lead to 15% to 30% savings, which can be reoriented to more value creation projects. The return on investment of such projects is much higher than that of many large projects: for example, activities to eliminate bottlenecks can get high returns because they sell to familiar markets and customers who already know they want more products. If done properly, such actions can also increase the total return on investment capital (ROIC) by as much as four percentage points - an important consideration given that ROIC performance has always been a major driver of chemical companies' valuations.

When it comes to their approach to managing small capital projects, most of the chemical supplier executives we talked to described a well-defined and effective process: selecting projects according to business logic, designing projects with the best scope, executing them within a strict time line, and maintaining full cooperation with suppliers. In fact, we have observed that in many cases, these companies do have a robust stage gate governance framework and clear requirements, which will lead to good design and implementation of capital projects.

However, the reality is often quite different. Over and over again, we see business cases that overestimate returns and underestimate risks, and we see projects moving forward through phase gate processes that do not follow or apply significant gaps. Despite a sound documentation process, project sponsors are usually overburdened by a large number of projects and do not have enough time and, in some cases, technical capability to actually test a proposed small and medium capital project.

As a result, many of these projects are poorly formed at the front end. They will eventually be demoted by the final approval and funding, and the increased review will usually send the team back to the drawing board. This approach not only wastes time and money, but also increases the risk of approving defective solutions. First class chemical suppliers are overcoming these problems by developing small and medium capital management projects and teams based on six building blocks: making capital strategy and allocation consistent with enterprise strategy, optimizing investment portfolio, simplifying project concept and design, achieving lean project management, using effective purchasing and supplier management processes, and promoting sustainable development of research institutes.