Defining performance targets through interpretation of standard comparative performance information
Du Pont, Abe James
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Setting performance targets for a business is a strategically important function. These targets focus the efforts of teams and team members, and as such define the direction of development of the business's competencies and thus its competitiveness. In the highly competitive world of commodities, it is imperative that resources be focused optimally. This implies that the focus be placed on those few aspects that if achieved, it would yield maximum benefit. The objective of this report is to, for the Natref refinery: • Define and prioritise those business aspects that should be focused on over the next three years so as to maximise profit and long-term competitiveness, • Define target performance levels for the respective aspects, and • Define interim targets that could be applied in yearly performance incentive schemes. The aspects of importance for Natref have been defined through an analysis of the South African liquid fuel industry, its profit profile and the implications for Natref specifically. Benchmarking was primarily based on the 2002 refinery performance survey, as executed by Solomon Associates. Optimal profit performance is subject to the combination of optimal integration, and optimal relative performance of the contributing functional roles. Over-emphasis of one role relative to another inevitably results in lower than achievable long-term profitability. Benchmarking the relative performance of refineries is complicated by the extensive differences between refineries and their respective business situations. As a result, technical aspects can be consistently compared through a process of normalisation and peer groups. However, no fundamentally sound method could be found to compare the overall performance of refineries in different business situations. Return-on-investment and refining margin were evaluated, but found unsuitable for this purpose. As a compromise, the Profit Index as developed by Natref, is proposed for evaluating integrated refinery performance. In addition, a new parameter, the Profit Potential Index, aimed at measuring growth of relevant value-adding capability, is proposed. Evaluation of and performance targets for total cash cost, fixed cost, and variable cost, round of evaluation of integrated performance. Total production cost, including fixed and variable cost, has to improve by approximately 10% to be competitive with the Asia-Pacific peer group and other South African refineries. It is proposed to achieve a 10% composite cost reduction over the next three years. The targeted improvement in energy consumption, if achieved, could represent the full 10% reduction in operating cost. It was found that Natrefs performance in terms of energy efficiency was of the poorest of all the refineries included in the 2002 benchmarking survey. Given the increasing cost of energy, it is considered critical to improve energy efficiency. The proposed three-year performance target of 92 Ell, if achieved, will result in matching the average energy performance of the Asia-Pacific peer group, but will still fall short of the energy efficiency of the best performers in the group. Refinery availability is of strategic importance in the current industry situation where Natref production is cut back due .to over-capacity and tactics. It is thus recommended that performance in terms of availability be targeted to be first quartile, whereas third quartile performance was achieved in the 2002 benchmarking survey. The overall availability performance is required to increase to 96. 7%. The following practices are recommended for implementation in addition to the performance targets set: Operating cost is strongly influenced by the R/$ exchange rate. Systems are required to proactively identify the impact of this exchange rate. In contrast with previous practice of always operating Natref at full capacity, Natrefs production rate is subject to market share, product demand and price competitiveness since termination of the Main Supply Agreement. Sasol' s overall unbalanced product slate results in Sasol being long in petrol production capacity and short in diesel production capacity. Sasol is thus obliged to sell part of its petrol production at discount prices, which motivates other producer-distributors to maximise their production of diesel and to minimise petrol production. Marginal sales are in competition with the marginal cost of production with other South African refineries for inland sales, and with that of Asia-Pacific peer group refineries for export markets. More emphasis is thus required on knowledge of marginal production cost, and on minimising marginal production cost than was before. It is concluded that producer-distributors utilise the imbalance in product supply capacity stemming from Synfuels' product slate to negotiate price discounts. It would thus be in the interest of the producer-distributors to increase their production capacity according to demand growth so as to maintain the petrol over-supply situation and thus reduced purchase prices. The optimisation model for the refinery forms the backbone towards determining not only the marginal cost of production, but also for optimisation of business decisions, crude purchasing, profit apportionment between the Shareholders, and for determining the Profit Index and the Profit Potential Index. As such it is recommended that the accuracy of this model be targeted at 15USc/bbl. Finally, crude oil cost represents approximately 90% of the overall production cost. Yet the refinery has only indirect input on crude slate optimisation, i.e. via the accuracy and number of crudes represented in the refinery model. It is recommended that this input be expanded.