Manufacturing Chemicals In The U.S. May Provide Significant Benefits

For years, off-shoring appeared to be an irreversible trend. After all, cost of labor drove many decisions to relocate operations and gave developing countries a significant and seemingly unassailable advantage.

However, several factors now are contributing to the decision to re-shore. As energy concerns escalate, re-shoring offers a way to reduce energy and transportation costs. The value of the U.S. dollar has deflated over the last ten years while the values of other industrialized nations’ currencies have risen. In many cases, the United States is a low-cost location for exporting products to other nations. Moreover, labor cost is in flux: wages are rising in developing countries while the increasing flexibility and productivity of the American worker is boosting U.S. competitiveness. Furthermore, advanced manufacturing techniques, which rely heavily on robotics and automation, make labor costs less of a factor than they once were.

INCENTIVE FOR CHEMICAL MAKERS    
Studies indicate that some industries have more to gain than others when it comes to bringing manufacturing operations back to the U.S. A 2012 PriceWaterhouseCoopers’ report [1] noted that the chemical industry, among several others, stood to benefit the most from “maintaining or expanding facilities in the U.S. given opportunities and cost incentives to re-shore domestically.”

A major reason for this, as cited in the report, is that transportation and energy costs likely will remain high given the current global demand for energy. Domestic production also has added benefits when it comes to considerations such as supply chain, lead times and inventory levels. However, the pivotal factor contributing to re-shoring in the chemical industry, according to the report, is the U.S. shale boom. New technologies for extracting natural gas and the resulting increase in affordable energy have created investment opportunities. Several manufacturers are switching from oil-based to natural-gas-based processes to make key chemicals. Large companies are investing billions to upgrade existing facilities and build new facilities in North America due to the abundance of natural gas here.

Most chemical manufacturers are aware of the advantages of re-shoring, if a 2012 U.S. re-shoring survey conducted by MIT [2] is any indication. MIT’s report on the survey results, published in January 2013, cited the chemical industry as one of the top three industries providing responses, accounting for 8.1% of the total. Many respondents stated that they were “considering” bringing manufacturing back to the U.S. — but only a few (15% of all respondents) had “definitive” plans to do so.

What accounts for the gap between manufacturers who merely are interested in re-shoring and those who actually follow through? A host of factors are responsible — among them is the difficulty of performing a comprehensive cost analysis to assess the overall benefit of re-shoring. Variables ranging from customer location and quality control to emissions regulation guidelines must be considered. There also are many costs associated with physical relocation and manufacturing downtime.

KPMG, an international cooperative of firms that provide audit, tax and advisory services, reported in 2011 that most chemical companies have strong balance sheets (http://goo.gl/9u6cpX). Of the chemical industry executives KPMG surveyed, the majority indicated they planned to increase capital investment in facilities.

COSTS VERSUS BENEFITS
Fortuitously, as more-detailed cost assessments become a pressing concern for chemical manufacturers, front-end loading (FEL) for capital projects is receiving a new level of attention throughout the construction industry. FEL increasingly is becoming part of an overall project analysis for many firms.

Design and construction firms offering FEL services as part of a total project delivery effort can help owners and investors identify risks and assess feasibility early in the project planning stage. This type of evaluation is particularly important because the re-shoring trend isn’t limited to moving facilities back from overseas but also includes capital investment in new manufacturing plants as well as the expansion and modernization of existing U.S. facilities.

FEL provides owners with a formal approach for establishing, evaluating and executing capital projects — such as the construction of a chemical plant — that require long-term investment to develop, build and maintain. This level of FEL can offer insights on where to deploy capital. Specifically, FEL may involve implementing a series of structured processes during the evaluation and preconstruction phase. The goal is to define the project scope, schedule and cost as early as possible to enable the most-efficient use of resources and money. Ultimately, this process helps the owner determine if a project is viable or not, provides a basis for comparing competing projects, and can assist in determining the right location for capital investment.

The Construction Industry Institute (CII) has extensively studied capital project delivery processes and FEL. The mission of CII — a consortium of more than one hundred leading owner, engineering-contractor and supplier firms from both the public and private arenas — is to improve the cost effectiveness and sustainability of the capital facility project life cycle. CII research has shown the critical importance of effective FEL to increase project predictability in terms of cost, schedule and performance metrics. The process conclusively fixes the project scope while capturing design, construction and operating requirements. (For more on CII initiatives, research, etc., go to www.construction-institute.org.)

A CRUCIAL TOOLKIT
CII has developed a scope readiness tool, the Project Definition Rating Index (PDRI), which is a weighted scoring system that evaluates all aspects of a capital project. Developed based on research on more than 25,000 completed capital projects, the PDRI improves the FEL process and aligns team members’ and owner’s expectations.

PDRI documents define the key elements of an industrial facility project and provide a rating system for those elements. The project team assigns a rating to each element on the checklist and totals these to generate a final score. This number indicates, at a glance, the overall risk associated with a project; during the CII validation process, projects scoring less than 200 (out of 1,000 total points) were found to be “significantly more successful than those that scored greater than 200,” according to the organization.

All chemical projects have unique risks that must be addressed and mitigated to ensure the project is the correct one for the company. Setting a good basis for design requires identifying important scope issues; the project execution approach should meet the company’s needs. The PDRI process can help ensure a smooth transition through the design and construction phases and into effective startup and operations.

The PDRI benefits owners, designers and constructors. It provides the project team with significant advantages including: a detailed checklist for work planning, standardization of scope definition terminology, risk assessment facilitation, assistance in monitoring progress, help in communicating requirements among participants, a method for reconciling differences among project participants, a training tool and a basis for benchmarking.

ONE FIRM’S EXPERIENCE
Using the PDRI as a springboard, O’Neal, an integrated design and construction company, has developed a proprietary project delivery approach that is driven by its Capital Appropriation Process (CAP). The CAP is an assessment tool that can effectively determine the cost, scope and schedule of an investment prior to making the decision to re-shore. It provides an owner with a thorough front-end assessment of its proposed project and identifies areas posing a specific risk to success, especially from design and cost standpoints. The pre-planning process greatly impacts the outcome of the project. In addition, once the project is completed, the process can help the owner during plant operations.

The CAP focuses on project development and delivery models with the following characteristics:
• Every potential project is viewed as an opportunity for savings.
• Capital is directed toward the areas that best benefit the organization’s overall goals.
• Stakeholders are included in the FEL process at the appropriate times.
• Each step in the capital process is connected to and builds on the previous step.
• Long-term requirements are considered at the front-end of a project.
• “Gates” or review processes occur throughout FEL. To move forward, projects must meet owner-established criteria set at the beginning of the project.

O’Neal has successfully utilized the CAP and the PDRI for numerous chemical companies and consistently has found that greater FEL efforts lead to improved performance on capital projects in the areas of cost, schedule and operational characteristics.

Our company currently is working with a European-based chemical producer that recently announced a $150-million capital investment for a greenfield plant in the southeastern U.S. The owner evaluated several locations before deciding to invest in the U.S.; the new plant is the first of its kind to be built in the U.S. in 35 years. During project development, O’Neal worked closely with the owner’s team, conducted a PDRI and utilized the CAP to help them define the project’s cost, scope and schedule.

COSTS BEYOND CONSTRUCTION
Even when cost analysis of factors through the plant construction stage shows a benefit to re-shoring, a thorough cost assessment shouldn’t neglect post-move considerations. For example, the U.S. remains at a disadvantage from a tax perspective because it has among the highest statutory tax rates of the industrialized countries. Yet, corporate tax rates must be balanced against the benefits afforded by potential corporate tax reductions, tax credits and research-and-development incentives. In addition, the introduction of the Affordable Care Act likely will increase health care costs for workers. However, worker insurance costs in the U.S. are on par with those in other industrialized nations. Ensuring that intellectual property remains safe is a key factor in site location decisions, too, and the U.S. generally has strong laws and enforcement to protect technologies, business processes and trade secrets.

Furthermore, the decision to deploy capital and re-shore shouldn’t rest upon assumptions, even when it comes to seemingly unquestionable benefits. For instance, capital project planning must factor in actual costs associated with a company’s transportation and supply chain needs.

Manufacturing is making a comeback domestically due to a number of factors, including — significantly for chemical manufacturers — a decrease in energy prices due to the newfound abundance of natural gas. While the U.S. never may reach the manufacturing employment levels of the past, the addition of chemical production capacity and jobs will drive economic growth. Chemical makers evaluating investment options and capital projects should pay careful attention to FEL and project evaluation to ensure effective capital deployment and successful project delivery. As the nation continues to become more competitive, this manufacturing resurgence will result in greater capital investment, job growth, a rise in exports and an increase in gross domestic product. “Made in America” holds a tremendous amount of promise for us all.

BRIAN GALLAGHER is director of marketing for the process chemical business unit of O’Neal, Inc., Greenville, S.C. E-mail him at [email protected].

REFERENCES
1. “A Homecoming for U.S. Manufacturing? Why a Resurgence in U.S. Manufacturing may be the Next Big Bet,” PricewaterhouseCoopers, New York, N.Y., (September 2012), www.pwc.com/en_US/us/industrial-products/publications/assets/pwc-us-manufacturing-resurgence.pdf
2. Simchi-Levi, David, “Re-Shoring: A Turning Point; Findings from the 2012 MIT Forum for Supply Chain Innovation Re-Shoring Study,” MIT Forum for Supply Chain Innovation, Massachusetts Institute of Technology, Cambridge, Mass., 2012, http://web.mit.edu/newsoffice/2013/mit-forum-releases-reshoring-report.html
 
3. Harnick, Paul and Meike, Tom, “Global M&A: Shifting the Global Chemical Industry Balance,” Reaction Magazine, KPMG, Toronto, Ont. (Spring 2011),