PositionPaper4Feb01

CLIFFTENT Inc.: Process Control, Optimization, Scheduling, Performance

Dr. Pierre R. Latour, PE Consulting Chemical Engineer CIM BUSINESS POSITION PAPER 04 Feb 2001

1. BUSINESS TYPE. Products/tools/services vs. Solutions Examples. Grocery store vs. restaurant. Lumberyard vs. homebuilder vs. realtor. Brain surgery tools – scalpel, suture, scissors, knife, saw vs. brain surgery. Conclusion. Select & know customer. Sell products to VARs and solutions to solution seekers. Avoid selling products to solution seekers and solutions to VAR. Avoid big commercial disconnects.

2. OFFER. Products best sold on features and price. Low cost competitive bid to Specs/requirements. Solutions best sold on performance, value, and uniqueness.

Examples. Never obtain anniversary - dining experience, college education, automobile or surgeon by low cost competitive bid to specs. Conclusion. Sell products on cost plus required profit; sell solutions based on value. Technology solutions should be licensed on agreed % of value added, benefit or profit. The solution supplier should offer an expected profit stream to customer for duration of use.

3. VALUE. Study perception of value and methods for its creation and maintenance. People appreciate/treasure/value what they had and lost. Examples. Tire. Pinky. Drug/cigarette, lost daughter, refinery SDM. Conclusion. Dale Carnegie teaches “Create and Eager Want”. Denial of a habit creates eager want. Wealth is created - value is added - at the interface between two people or corporations, depending on how they act, treat each other.

4. RISK. Mitigate risk with science, experience, know-how, history, modeling,

experiments, education, and technology. Knowledge is the mirror image of risk. What appears risky to the uninitiated is routine to the knowledgeable. Conclusion. Risk should be aligned with knowledge. Experienced supplier should assume commercial risk commensurate with his knowledge if potential reward is commensurate; inexperienced customer should assume his commensurate risk and reward.

5. MEASURE PERFORMANCE. People are inspired when sports and business are

conducted competitively with clear rules and an agreed method of scoring – measuring & valuing behavior and results. Examples. Football 6 points, baseball foul and “a run”, Olympics long jump, elections, stock market. Measure of business success is money. It is steady stock value growth related to steady profit growth. This is true worldwide, for a long time. Consensus is growing. Conclusion. Spectators, investors, stakeholders, partners insist on agreed rules, scoring, performance measures, profit growth goals.

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CLIFFTENT Inc.: Process Control, Optimization, Scheduling, Performance Dr. Pierre R. Latour, PE Consulting Chemical Engineer

6. FINANCIAL VALUE OF DYNAMIC PERFORMANCE. Many agree that smoothness, steadiness, low volatility, low variance or predictability of response variables of interest to people is good, valuable, worthwhile. But we quantify it on an incomplete ad hoc basis. Traditionally, reduced variance is deemed to have no quantifiable tangible benefit (it is intangible) but it is a necessary requisite for moving the average closer to its more profitable limit, generating an ad hoc steady-state benefit. Such linear thinking leads to claims for reduced energy consumption, higher yields, higher capacity, lower costs, which invariably do not occur in isolation under proper scrutiny. There is no rigorous mathematical modeling procedure for measuring financial value from improved dynamic performance of systems (until CLIFFTENT (1, 2)). Examples. There is no rigorous method for determining value of process control, improved quality control (Deming, Juran), optimization, scheduling, integration, IT, CIM, GE six sigma quality initiatives (3). Conclusion. Before CIM solutions can be licensed based on performance, the proper method for measuring financial value of improved dynamic systems performance must be developed, agreed to and used.

7. SET LIMITS RIGHT. Setting limits, specs, targets and tolerances for products,

processes and operations of all kinds is done on an incomplete ad hoc basis by teams attempting to optimize tradeoffs with risk management. There is no rigorous mathematical modeling procedure for measuring the financial consequences of inexact limit setting (until CLIFFTENT). The tradeoffs naturally connect dissimilar phenomena at the connection of the plant with its surroundings, where it creates wealth. Examples. Setting auto speed target in neighborhood of limit, product quality targets within specs, sulfur blend operation targets for LSFO, sulfur and O2 content in US RFG, equipment pressure/temperature/velocity limits, FCC slide valve DP, compressor RPM at surge, coker drum outage, oil refinery planning LP constraints, crude unit naphtha - kerosene cut point in Japan, crude oil charge rate. Conclusion. There is more profit potential from setting planning LP, process optimizer and operator limits optimally than from rigorous modeling of interior plant relationships. The latter allow selection of the proper constraint corner while the former position the corner in the profit space.



8. CV VALUE PROPOSITION. Controlled Variables and Key Performance

Indicators are physically measured or derived dependent response variables that represent important characteristics of the plant and business. We wish to control them or call them “key” because they influence value. The CLIFFTENT function was specifically defined as the value proposition assigned to each CV and KPI. It is the unit profit rate as a function of the CV/KPI average or mean, assuming perfect steady state control, i.e. zero variance. This function always represents a tradeoff (otherwise the best CV is +- infinity), with a tent shape peaking at a limit and declining to left and right with different slopes. It may have a discontinuous cliff penalty at the limit and nonlinear curvature downwards in either direction. It may have slope breakpoints as different phenomena come into play. Slopes change as economic factors change. Examples. Inventory, staff size, production rate, product quality, process yield, utilities consumption, operating conditions, auto speed, product selling price, maintenance frequency. Conclusion. Just as every restaurant menu provides price as a function of meal content as basis for decision, just as every grocery store provides value information as function of product amount and quality as a basis of decision, so should every candidate CV/KPI be assigned a CLIFFTENT of its financial consequences.

9. RISK MANAGEMENT. Statistical frequency distribution functions are a useful method for quantifying the nature of uncertainty forecasts. Analysis of historical distributions of event results is a proven method for estimating future distributions in order to better manage risks. Arbitrary frequency distribution functions are one of the two basic inputs to the CLIFFTENT analysis of performance. Valuable CIM systems for control and management inevitably reduce variability and uncertainty of dependent CV’s & KPI’s. Examples. Dynamic process control and CIM are basic technologies for risk management. Conclusion. Deploying CLIFFTENT allows process control, IT and CIM to directly provide measurable risk management profits.

10. BUSINESS MODELING. Process models from chemistry, physics and engineering should be connected to the plant value chain money model. The organization, business and process models should be properly interfaced with models of their surroundings: maintenance, customers. suppliers, environment, investors, neighbors and governments. The connections to surroundings are critical to measure the value added as perceived by all stakeholders. That is where the wealth will be created. There is no rigorous mathematical modeling procedure for financially interfacing process and business models to their surroundings (until CLIFFTENT).


CLIFFTENT Inc.: Process Control, Optimization, Scheduling, Performance Dr. Pierre R. Latour, PE Consulting Chemical Engineer Conclusion. Widespread use of CLIFFTENT to model the profit potential and achievement created at commercial interfaces is critical to performance measurement of systems.

11. INTERMEDIATE STREAM TRANSFER PRICING. The HPI continues to suffer from lack of a rigorous method for determining intermediate stream volume, quality and delivery financial values (prices). Further it is not able to analyze individual process steps for profitability contribution. Utility systems are considered cost centers rather that the profit centers they actually are. It cannot value recycle streams well. It cannot make good decisions on make/buy/sell for these streams. It cannot make sound shutdown/startup/bypass decisions.

Examples. Crude unit profitability, value of olefin plant H2 to refinery, value of reformate to mogas blending, steam boiler profit contribution, sulfur plant profit, sour water stripper profit, price of atmospheric emissions.

Conclusion. Optimization theory provides well-known methods for calculating Intermediate transfer prices from properly stated objective functions. Since the HPI has been limited to LP for operations planning, it lacks the proper tools for this important deficiency. Integration of CLIFFTENT and nonlinear plant wide optimizers will greatly improve the accuracy of intermediate stream values.

12. OUTSOURCING. Since automation technology and business for CIM has matured to a distinct business since the 1960’s that is fundamentally different from manufacturing fuels and chemicals, there is a strong profit opportunity for opcos and competent CIM solution providers to establish enduring outsourcing partnerships. Examples. Much maintenance and upgrading of hardware and software can be done by a mix of supplier onsite staff and internet/intranet connections between opco and supplier computers. CIM professionals’ careers often thrive better in technology suppliers working for many opco plants rather than being limited to one plant or one opco.

13. COMMERCIAL SOLUTIONS PRACTICE. HPI operating companies should

encourage their CIM solution providers to adopt a business mission to “Identify, Capture & Sustain significant economic benefits for both by profitably deploying current and future technology”. The marketing strategy paradigm shifts from selling product features (with its associated sales staffs and advertising) to promoting financial performance (4). The objective becomes to maximize the expected value of profit NPV(30 yr, 10%) and profit rate annual growth for the opco. The proper (= optimum) % split of benefit or profit (= benefit - cost) between opco and such a supplier exists to maximize this goal. Shared risk – shared reward (SR2) technology licensing provided profit sharing with established SR2 business partnership teams to integrate business and technology; incentives and performance. Profit growth opportunities for opco and supplier are greatly increased with this SR2 method of technology licensing.



Example. If the supplier demands an excessive %, the opco expected value is not optimized. If the opco demands an excessive %, particularly when the supplier assumes his proper risk, the probability of sustained successful performance decreases dramatically as the supplier financial strength deteriorates and the opco expected value is also not optimized. In fact high CIM profits are commonly put at great risk this way. Operating companies can guard against technology solution providers running away and highly profitable systems falling into disuse if they enter proper SR2 (shared risk – shared reward) licensing arrangements with supplier partners for sustained mutual success, so both sides win. They must understand the source of profits; the process/business performance improvement created together, not from each other alone. But they can never achieve win – win if they do not play the right game, with agreed rules and scorekeeping and the optimum % split of the profits. Greeks developed the principles of SR2 for commerce in 420 BC. Governments have employed income taxes worldwide to take their “piece of the action”. Risk takers who add value deserve no less. Opco and supplier can retain the right to terminate relationship (= divorce) in order to inspire each to satisfy the other regularly, competitively. Conclusion. Dr Pierre R Latour, Consulting Chemical Engineer at CLIFFTENT Inc. can advise opcos and solution suppliers on how to measure the financial value of CIM, how to establish SR2 license agreements and how to properly set the % split to maximize opco expected value profit growth (4) so both sides have fair high rewards.

14. POTENTIAL. Dr. Latour’s studies indicate the benefit of properly deployed CIM solutions for refining crude oil to fuels worldwide exceeds 1 $/bbl crude (5, 6). When extended to basic petrochemicals and gas processing it exceeds 2 $/bbl crude. At 80 kkbpd crude refined world wide in 2000, this represents 80 - 160 kk$/da x 350 operating day/cal year = 28 - 56 billion $/yr. Dr Latour believes the cost to capture by SR2 arrangements is 20 - 30% of the benefit, leaving 70 - 80% as before tax profit to be shared between solution providers and their selected opco clients. That profit is 2 $ x 0.7 - 0.8 = 1.4 - 1.6 $/bbl crude x 80 kk$/day x 350 day/yr = 40 - 45 billion $/year. Current product oriented commercial CIM practice may generate only 10% of that. The incentive to change to performance-based SR2 solutions licensing using the rigorous CLIFFTENT financial merit method is profound.

15. GALILEO ANALOGY. Latour feels his CIM business position is like Galileo’s

position that the Sun does not circle the Earth. The business community prefers to sell CIM solutions and products with the faith theory that “technology is good”. Nevertheless, Latour maintains measuring performance value and rewarding performance and properly aligned risk, SR2, remain essential to lasting success.


CLIFFTENT Inc.: Process Control, Optimization, Scheduling, Performance Dr. Pierre R. Latour, PE Consulting Chemical Engineer References. 1. Latour, P.R., “Process control: CLIFFTENT shows it’s more profitable than expected”, Hydrocarbon Processing, V75, n12, December 1996, pp. 75-80. 2. Latour, P.R., “CLIFFTENT: Determining Full Financial Benefit from Improved Dynamic Performance”, Paper C01, Third International Conference on Foundations of Computer-Aided Process Operations, Snowbird, Utah, July 5 – 10, 1998. Proceedings published in AIChE Symposium Series No. 320, V94, 1998, p 297 – 302. 3. Clifford, Lee, “Why You Can Safely Ignore Six Sigma” FORTUNE, 22 Jan 2001, p. 140. 4. Latour, P.R., H P InControl Guest Columnist, Hydrocarbon Processing, “Does the HPI do its CIM business right?” V76, n7, July 1997, pp. 15-16 and “Optimize the $19-billion CIMfuels profit split”, V77, n6, June 1998, pp. 17-18. 5. Latour, P.R., “CIMFUELS”, bi-monthly contributing editorial, FUEL Reformulation, September 1995 - Feb 98. 6. Latour, P.R., "Benefits of Modern Refinery Information Systems for Manufacturing Cleaner Fuels", API Reformulated Fuels Conference, American Energy Week 1995, George R. Brown Convention Center, Houston, TX, January 31, 1995.


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