Monthly Archives: May 2013

Cost Escalation in Alberta Oilsands

A great deal of engineering work is outsourced from Alberta oil sands projects but some oil companies feel they are not receiving value for money because of unpredictable performance and cost reimbursable billing practices.

Oilsands Cost Performance

At the moment the oil companies are assuming most of the risk in project and service delivery impacting their profitability. Rapid growth in Alberta has favoured the service sellers who pass most of the risk back to the buyers. Recent observations regarding massive cost escalation in the Alberta energy industry were made by oil sands leaders from Canadian Oil Sands, CNOOC, Sunshine Oil Sands, and Surmont Energy. Much has been done to coordinate major construction project start dates to smoothen peak demands so simply attributing high costs to the boom-bust cycle is no longer a strong argument.

Is the market shifting more in favour of buyers of engineering services? Demand side constraints from global demand, transportation constraints, and engineering labour shortages are moderating growth. The price split is continuing to place pressure on oil producer bottom lines. Eventually new capacity construction will decline and the industry emphasis will move to focus on maintenance which has much lower labour requirements. A tipping point may be approaching where the buyers of engineering services will expect more predictable performance, shared risk, and eventually firm fixed price service offerings from engineering suppliers.  These changes will bring about increased competition and greater attention to cost performance. Alberta’s engineering suppliers need to get control of their operational engineering costs and schedule performance in both design and maintenance processes. Engineering suppliers will need to find ways to remain competitive when this shift occurs.

Other Industry Experience

As the oil sands industry matures and construction pace becomes steady state industry participants should look to other industries to understand how they managed cost control and increased competition. The automotive and aerospace industries are both good case examples.

In the late 80s Canada’s automotive industry along with the US automotive industry experienced a major disruption from the entry of Japanese car makers into the North American market.  Increased competition placed significant pressure on automobile quality, cost and reliability standards. All North American automotive manufacturers and their supply chains were forced to redesign, retool, and radically improve their cost and quality delivery performance to compete and survive.  Some didn’t and further industry shake-outs continue as recently occurred after the financial crisis in 2008. Automotive engineering teams adopted new management practices such as Lean, Toyota Production System, and Total Quality Management with a focus on core process improvement.

A similar situation unfolded in Canada’s aerospace industry, ranking between fourth and sixth in the world in the 90s global manufacturing competition increased from new entrants
such as Embraer in Brazil as well as high competitive pressure on aircraft Maintenance
Repair & Overhaul (MRO) services created by low cost airlines, recessions, and military budget pressures.  The world leader in aerospace, the US also experienced similar competitive pressures from consolidation and the emergence of Airbus who was able to compete with Boeing head-to-head.  Aerospace engineering service suppliers of both design and repair services were also forced to adopt lean engineering practices to offer competitive and predictable services for aircraft manufacturers and MRO providers to remain profitable.  In both cases, engineering service suppliers adopted lean engineering successfully improving their delivery performance which enabled them to move to more predictable billing to meet their customer expectations and to compete internationally. Aircraft engineering services also provides a good example where strict cost and schedule performance must be met with no compromise on stringent air safety, regulatory, and reliability standards.

The impact of these massive changes were not felt in Alberta during the 80s-90s so the lessons of these competitive disruption experiences are being brought to Alberta by people who have relocated. Alberta did suffer from the NEP but the impact was due to very different reasons. To say the day will never come that the Alberta oilsands industry will not mature and competitive dynamics will not change is simply naïve so engineering service suppliers need to prepare.

Lean Engineering Process Improvement

How can Alberta Engineering Services Suppliers apply the experience from other industries to become more predictable, deliver better value, and reduce delivery risk for their customers? Proven lean engineering process improvements can deliver engineering productivity gains with cost and lead time reductions of 25% or more as demonstrated in the automotive and aerospace industries. Lean engineering process improvements could dramatically improve supplier profitability, competitiveness, and customer satisfaction in the Alberta oilsands. Lean engineering also offers the added benefit of solving engineering capacity shortfalls driven by the engineering talent shortages.

There are two varieties of lean engineering: lean engineering and engineering for lean. Engineering for lean involves designing for lean manufacturing applying principles such as design for manufacturability, design for assembly, mistake proofing, etc. Lean engineering involves streamlining engineering processes and removing waste in engineering processes to reduce delivery time, reduce engineering costs, and improve quality. Both are critical but engineering service suppliers need to have a program for lean engineering if they want to become more predictable, deliver better value, and reduce delivery risks for their customers.

Productivity Alberta is making a strong contribution to lean manufacturing awareness and training in the Alberta oilsands and construction supply chains. The reality is that lean requires a long term commitment and can take a few years to demonstrate sizeable improvements. Alberta engineering services suppliers need to be ready and ahead of the game as the shift takes place. North American automotive and aerospace suppliers waited until the crisis occurred before taking action and paid a heavy price. Adopting a new management paradigm on the back foot is not a path to success and many firms failed, were consolidated, or died slow deaths who could not change.

Can Alberta engineering service suppliers afford to wait for a crisis similar to what Canada’s automotive and aerospace industries? I would be interested to hear views on this issue.

Innovation Skills Profile 2.0 Released

The Conference Board of Canada’s Centre For Business Innovation has released Innovation Skills Profile 2.0 (ISP 2.0) that define an individual’s skills, attitudes, and behaviours that contribute to an organization’s innovation performance.

The innovation skills profile is available in a condensed form to make it easy to build into performance management systems, have discussions with employees, employees to self assess, and clarify expectations if as a business you want to adopt innovation as a strategy.

Skills are organized under four main categories:

  • Creativity, Problem Solving, and Continuous Improvement Skills;
  • Risk Assessment and Risk-Taking Skills;
  • Relationship Building and Communication Skills; and
  • Implementation Skills.

Subheadings also group skills by how individuals should ‘act and contribute’ and ‘manage and support others’.

Overall a great tool to clarify employee expectations if a business has adopted innovation as a strategy and is intended to complement broader innovation initiatives focusing on innovation supportive cultures, structure, processes, and leadership.

Managing Complexity Through System Engineering

In an increasingly complex world the relevance of systems engineering to the broader profession of engineering is growing.

Importance of Systems Engineering Today

Ensuring the safety of the public is becoming more difficult as we put more trust in devices we use in our daily lives that are integrated with smart technologies and automation. Complex systems can have failure modes that are difficult to fully identify and understand during design and complex systems can be used in ways not envisioned when a solution is first conceived.

Systems engineering provides a structured approach to address safety concerns and protect the public when designing complex systems. The UK Royal Academy of Engineering drew attention to the growing importance of system engineering to society and solving today’s difficult problems in report entitled Creating Systems That Work: Principles of Engineering Systems for the 21st Century. Systems engineering is a poorly understood discipline in most industries and few engineers are skilled in its application beyond aerospace, defence, nuclear, and transportation. 

What is Systems Engineering

Systems engineering is an interdisciplinary field integrating the contribution of diverse technical disciplines that collaborate to realize a successful system . ‘Integration‘ is the key element. The RAE capture the essence of system engineering well in that:

engineering uses technology to build the systems that meet our needs – energy, transport, food, health, entertainment and the rest. Those systems must work: do what they should and not do what they should not, do it on time and within budget, do it safely and reliably. These do not happen by chance; they happen by design.” RAE, 2007

The RAE report also captures well why it is not obvious that systems engineering is key success factor in many complex solutions because:

customers rarely want a system. What they want is a capability to fulfil effectively a business objective. The system…is usually only part of the means to deliver the capability…Engineers are responsible for identifying with the customer the capability that is really needed and expressing it as a system that can be built and is affordable.” RAE, 2007

The 30 page RAE report gives an appreciation for the principles underlying systems engineering and the growing importance of systems engineering today.

Origins of Systems Engineering

British UGM-27 Polaris missile on display at I...

British UGM-27 Polaris missile on display at Imperial War Museum London (Photo credit: Wikipedia)

Systems engineering methods emerged following the second world war as the complexity of programs and technology increased rapidly.  Systems engineering developed in conjunction with project management and risk management but is often not as well publicized. Notable systems engineering examples include the Polaris missile system, nuclear submarines, Apollo, and early jet airliners.

Although systems engineering was first applied to military systems development this was soon followed by transportation systems, major construction and infrastructure programs. Engineers who have worked in these industries have typically been exposed to systems engineering approaches and methods more so than other industries.

Today the International Council on Systems Engineering (INCOSE) is a not-for-profit organization that develops and disseminated practices that realize successful systems.

Systems Engineering Process

The fundamental concept underlying systems engineering is that to manage complexity a system can be broken down into smaller parts, building blocks, or modules so that it can be more easily defined, understood, and designed. This is referred to as ‘chunking’ or ‘divide and conquer’.  Once defined and understood at the building block level the smaller parts are then integrated together in a disciplined way to construct the system. 

The ‘V-Diagram’ illustrates this core systems engineering process. The left side of V-Diagram illustrates the ‘chunking’ stages and the right side the ‘integration’ stages. All systems engineering methods support the implementation of the steps illustrated in the V-Diagram.

V Diagram

RAE, 2007

Systems Safety Assurance

Complex systems safety assurance best practice has evolved in parallel with systems engineering. Systems safety emerged as a sub-discipline of systems engineering as designers pushed the envelope of complex system design with numerous resulting tragic accidents. System safety requirements for military system were specified by MIL-STD-882 which mandated a comprehensive risk assessment and management approach. Numerous versions of these same principles have evolved since that time in the commercial aviation, nuclear, and transportation industries and countries. A thorough review of systems safety assurance can be found in Nancy Leveson’s book Engineering a Safer World: Systems Thinking Applied to Safety.

Serious consideration should be given to applying systems engineering when the scope of a system extends beyond the expertise of one or several engineering disciplines or the consequences of system failure on public safety can’t be fully predicted and controlled during design.

Canada’s Oil Sands Innovation Alliance

Today I had the pleasure of attending a presentation by Dr Emilson Silva from the Alberta School of Business on Canada’s Oil Sands Innovation Alliance (COSIA) as part of the Eric Geddes breakfast series.

COSIA was created in 2012 to bring the benefits of collaboration between oil sands producers and other parties to solving Canada’s Oil Sands environmental challenges. Although relatively new COSIA is quite unique in how alliance members have agreed to share intellectual property and knowledge previously developed from over $700M R&D prior individual investments and to collaborate on R&D moving forward in four key oil sands environmental areas: water, tailings, land, and green house gases. Dr Silva is researching the economic rationale underlying COSIA and how Canada, oil producers, regulators, NGOs, and the environment will win in the long run.

From the perspective of innovation, COSIA is a great example of how collaboration can be leveraged for solving large and difficult problems, and in this case, those charged with highly emotive aspects, through a scientific/engineering approach. Although the activities of COSIA may not be widely known it is worth visiting the COSIA website to appreciate the scope and novelty in their program going forward.

SME Innovation Benchmarking

SMEs interested in benchmarking their innovation performance should evaluate the IMP3rove Assessment methodology. The IMP3rove methodology is particularly useful if SMEs want to adopt innovation as a strategy but don’t have a structured framework to decide where to make investments when resources are tightly constrained.

IMP3rove Innovation Model

The IMP3rove Assessment methodology uses an innovation model based on the A.T. Kearney ‘House of Innovation’ as illustrated below.

ATKearney House of Innovation
A.T.Kearney ‘House of Innovation’

IMP3rove Innovation Benchmark

Interested SMEs can either perform an un-assisted or assisted innovation assessment. The un-assisted assessment uses an on-line tool. An assisted assessment is supported by a certified consultant who can provide a validated assessment report and improvement opportunities to deliver results. The assessment is benchmarked against a growing database of SMEs in a variety of industry sectors.

Benefits of IMP3rove

A key benefit of this approach is the direct applicability of the IMP3rove assessment results to SMEs because it is targeting SMEs and quite a few SMEs have participated in this survey already. In the absence of a mature innovation management approach innovation benchmarking can be susceptible to unrealistic or ideal models of innovation that will just leave SME management frustrated.  A minor down side of IMP3rove is that it is tied to one form of innovation model where others exist such as Scott Anthony’s Growth Factory innovation model but this model is optimized for large corporations who have the budget for big innovation investments.

SME innovation is relevant today because of slow economic growth and high unemployment in developed countries.  SMEs drive growth and job creation more than large corporations. SMEs should therefore evaluate if IMP3rove meets their needs if they adopt innovation as a strategy.

Solving Engineering Capacity Problems

Firms never have enough engineering capacity to meet their needs. Down-sizing, hiring freezes, narrow specialist expertise, labour shortages, and increasingly demographics are significant constraints on engineering capacity. Engineering work is also constrained to highly qualified staff with unique knowledge, experience, and competencies.   Yet the demands on engineering are continually growing, changing, and becoming increasingly complex.  Capacity shortfalls impact customer satisfaction, company reputation, and goal accomplishment potentially leading to negative fall-out and financial consequences.

If they can’t recruit, managers typically respond to capacity problems with three solutions: working overtime, prioritizing, and outsourcing. These solutions have their limitations.  Lean engineering is a fourth solution that managers can use to expand their capacity by providing a systematic approach to make more efficient use of their existing talent.  Engineering specialists can benefit from lean engineering because it allows them to do more of what they want to do – engineering – which in the long run fuels their career development. Significant results on the order of 5-10% improvements in efficiency can be achieved in the first year of applying lean engineering which for a 100 person engineering organization means freeing up 5-10 scarce resources to meet business needs. Committing to a lean engineering program in the long run can deliver an important competitive advantage to the business and support increased growth but it will take some effort.

Limitations of Overtime, Prioritization, & Outsourcing

What are the limitations of overtime, prioritization, and outsourcing?

Overtime enables short-term capacity surges but can hurt productivity in the medium term from the effects of fatigue and reduced morale. Unfortunately many firms have come to rely on almost continual overtime since the financial crisis.  Overtime can hit overheads hard if not chargeable. If it is chargeable excessive billing can signal inefficiency directly to customers leading to cost overruns that impact the reputation of the firm. Overtime should be held in reserve to mitigate the risk of sudden surprises due to the uncertainty inherent in most engineering and new product development work.

Prioritization allows high priority committed work to be completed but delaying lower priority committed work hurts customer satisfaction that can result in lost revenue in the longer term when customers decide to go elsewhere. Depending on where high, medium, or low priority lines are drawn delaying too much work volume can have a significant impact on the business. Priority decisions should be applied where slack exists between multiple projects off the critical path on any project.

Outsourcing can be effective but can be difficult to manage. Engineering service supplier work needs to be tightly aligned with internal engineering processes, structured to meet project needs, requires extra management overhead, and can be very costly if requirements change often or are not correctly defined up-front.  Outsourcing can lead to hollowing out of a firms core competencies and can create future competitors.  Outsourcing can be effective in the long run but requires extensive investment in the relationship and setting up an effective work allocation/performance management system. Outsourcing engineering work is usually most effective for algorithmic tasks that can be more easily defined, packaged, and monitored with clear end deliverables.

These three solutions help solve capacity problems but are often not enough and can be overused so managers need to look at finding efficiencies.  Unfortunately the process of finding efficiencies often involves an ad hoc approach with mixed, un-repeatable, or un-scalable results.  Managers need a systematic approach to engineering delivery efficiency which is why managers need to take a serious look at lean engineering.

Lean Engineering

Lean engineering is about doing more with less.  Lean engineering is the application of Lean Thinking to engineering and new product development work.  Lean was popularized by James Womack and Daniel Jones in the early 90s with their book on Lean Thinking based on the Toyota Production System. Although lean is best know in the context of lean manufacturing, lean engineering methods have evolved as a systematic approach to gain efficiencies in engineering while taking into account the unique influences of uncertainty, complexity, variety, and creativity in engineering and new product development work. Direct application of lean manufacturing methods to engineering does not work because of these subtle differences from production work that is algorithmic, predictable, and repetitive. In fact drawing parallels with how lean is applied in manufacturing to engineering work in my experience leads to disappointment. Instead lean engineering needs to be understood by starting from the same basic principles of lean but then adopting an information based perspective.

Lean is based on the central principle of delivering only what the customer (internal and external) needs and eliminating all forms of waste.  Quoting Womack & Jones lean ‘is the process of reducing effort, time, space, cost, and mistakes while producing more nearly what the customer wants’ when the customer needs it.  Lean thinking is ‘a way to specify value, line up value creating actions in the best sequence, conduct activities without interruption whenever someone requests them, perform more and more efficiently’. Value creating actions are visualized as continuous work processes or value streams. While lean manufacturing focusses on the flow of physical items through a production environment, lean engineering diverges from the physical model because ‘work items‘ flowing through engineering and absorbing value derived from an engineer’s time are information based.  Engineering work items are primarily virtual in the digital age thus difficult to see in the typical engineering work environment. In fact lean engineering is really about how most knowledge based professions will need to compete in the information age going forward. Software professions are already do this with Agile scrum lean methods.

Lean engineering seeks to improve how engineering value is specified, how value creating actions are lined up in the best sequence, how to conduct engineering activities without delay whenever someone requests them, and perform engineering activities more efficiently. Lean engineering involves a change in mindset. Lean engineering requires managers and staff to ‘question the status quo’ and their prevailing assumptions in how engineering work should be performed to free up capacity in the firm. In this respect lean engineering does involve the complexities of change but the results in terms of capacity efficiencies are compelling.

Waste in Engineering Burns Capacity

Waste in engineering effort is anything that does not contribute to what the customer needs or delays when the customer’s need is satisfied. Not surprisingly examples of waste in engineering include waiting for data, unnecessary tasks, multitasking, hand overs, reinventing, engineering IS tool incompatibilities, over-engineering, rework, distractions – the list is very long.

Waste in engineering can take many forms but the impact is the same – waste burns engineering capacity unnecessarily.  So the underlying logic of lean engineering is that by eliminating waste the capacity of existing engineering talent can be freed up to meet the business needs including making more time for business success enablers such as talent career development and innovation to create new value for the business.

Lean Engineering Methods

There are two varieties of lean methods prevalent in engineering worth noting: lean engineering; and engineering for lean. Making this distinction is important because they represent two very different forms of value capture. The focus of lean engineering is the fast and efficient delivery of engineering work (thus freeing up engineering capacity) while the focus of engineering for lean is to enable lean manufacturing.   Both are important but engineering for lean often gets more attention across the business because 80-90% of a product’s costs are ‘baked in’ during design which greatly restricts buyers and production leaders from achieving cost savings. Lean engineering should be of interest to delivery managers (ie. project managers, project engineers, functional managers, depending on organization structure of the firm) who need engineering capacity to meet their commitments.

Lean engineering methods emerged in the 1990s from global competitive pressures first in the automotive industry followed very quickly by the aerospace industry.   Diffusion of automotive/aerospace lean engineering experience to other industries has been slow – awareness and lack of competitive intensity being leading reasons. Experience from the automotive and aerospace industries has demonstrated that firms can successfully implement lean engineering through value stream mapping, waste identification, process measurement, and some form of local continuous improvement methodology (usually based on DMAIC) to establish repeatable engineering processes and basic process standardization.  Firms should begin standardizing  algorithmic engineering processes first – such as detail drawing production, release, and the change process – then move can to processes involving more creative work when algorithmic processes demonstrate results.

The  basic framework then provides the opportunity for intermediate methods such as engineering work batch sizing, capacity or WIP constraints, sequence, cadence, and synchronization. These methods allow for flow to be managed between multiple engineering processes.  In the longer term more advanced lean engineering methods such as fast feedback, iteration, rapid prototyping, and simulation allow process standardization for those involving higher uncertainties where outcome is less certain – for example fuzzy front end processes supporting new products, new methods, and concept development.    Agile scrum and the Lean Start-up movement are examples of more advanced lean engineering methods being applied in extreme uncertainty situations.

Key Success Factors

In my experience successful implementation of lean engineering requires time, patience, and a methodical application of a series of solutions starting from the most basic to more advanced. Strong evidence suggests that best in class performers have committed to lean engineering for longer than five years.  In my experience improvements came steadily from the application of lean engineering over several years.   Lean engineering is a long-term investment – lean engineering is a journey.  Certainly as competitive intensity increases in an industry, like it did in automotive and aerospace, surviving firms need continuous improvement to stay in the game.

Lean engineering also requires nurturing a culture of lean within engineering and across the business.   Lean requires the application of a DMAIC methodology for continuous improvement.   Lean requires a performance measurement system for appropriate feedback and monitoring.  Lean engineering also needs to be integrated with the firm’s business processes: project management, cost accounting, and resource allocation systems.  This is achievable with the use of visual workflow methods that complement the existing systems without the need for costly investments in additional software.

Lean engineering is a solution for capacity problems that results in faster, more efficient, streamlined delivery with reduced rework. Unfortunately many firms wait until too late to begin the lean journey then don’t have enough time to respond to increased competition, increased demand, or labour shortage.  Please contact me at for help deciding if lean engineering is right for your firm or to successfully implement lean engineering methods, cultural change, and ensure results are sustainable in the long run.