Therefore Strategic Technology Services

Tuesday, 10 February 2015

The Capacity Crunch … Things we learn from Eskom

Of late, there has been a lot of candle lit dinner table conversation about “capacity management”, largely driven by Eskom’s imposition of load shedding. Eskom's current predicament is very clearly the consequence of them having performed capacity management rather poorly for an extended period of time. Talk has it that we are on the brink of experiencing similar problems with water provision. The sobering thought is that it’s not just governments and parastatals that struggle to manage capacity … the private sector routinely gets it wrong too.

Capacity is typically seen as a strategic enabler. You develop a strategy, the strategy has growth targets and you develop enough capacity to be in a position to support the strategy with a view to realising its growth targets. Sounds simple, doesn’t it?

The reality is that the management of capacity is typically hard work. There are two aspects to the exercise – maintain your existing capacity and develop new capacity.

Maintaining existing capacity

To return to the Eskom example, it is very clear that they have failed spectacularly to maintain their existing fleet of power stations. Lately, the portion of their fleet that is offline due to unscheduled maintenance exceeds the portion that is offline for scheduled maintenance, by a factor or two or three … a sure sign that they are losing the maintenance war. Eskom have recently admitted that they have neglected the performance of routine maintenance since 2010, apparently as a consequence of the 2010 Soccer World Cup. What can we learn from the Eskom debacle regarding the management of existing capacity? Some ideas follow:
  1. The management of existing capacity is a long term commitment. 
  2. You can’t afford to take a breather when it comes to managing existing capacity. There is no such a thing as a “cost holiday”. 
  3. If you have taken a “cost holiday”, my deepest condolences. You will pay for it dearly at a later stage. 
  4. The management of exiting capacity requires discipline, skill and needs to be driven from the top. If you don’t have the appropriate human asset, set about growing it or employing it. 
  5. The management of existing capacity requires financial resource. Cutting back on routine maintenance because you “can’t afford it” is not smart poker, as the good folks at Eskom have found. 
  6. The management of existing capacity requires a continued and disciplined focus on quality and root cause analysis. 
  7. If you have neglected routine maintenance for a long time, it is going to take you a long time to turn the ship around. In short, if it took you five years to break it, you can expect to take five years to fix it. 
  8. Don’t neglect to perform routine maintenance on your existing capacity because you have been seduced by the excitement of new capacity build initiatives. 
  9. If you can’t afford to maintain your existing capacity, you can’t afford to pay big bonuses.

Developing new capacity

Talk has it that Eskom had presented demand projections and plans for the development of new capacity to the Government in good time. Unfortunately, the Government hadn’t settled their policy framework for power, and as a consequence were unable to provide Eskom with the requisite go ahead until it was too late. What can we learn from Eskom’s new capacity build efforts? Some ideas follow:
  1. The delay in initiating the build of new power stations was a consequence of the Government not having strategic clarity on how it wanted to handle power generation going forward. While the Government was squabbling about the “privatise vs continued State monopoly” issue, precious time was being lost. Strategic clarity and Board commitment to the management of capacity is a key success factor … and the Government failed on both counts. 
  2. New capacity development takes time. If poor strategy and / or planning have put you in a position where you need to bring new capacity on-stream in a shorter period of time, you generally land up paying more or compromising on quality. Oddly enough, in the case of Eskom, it looks like they may well land up both paying more AND compromising on quality … which points to poor leadership. The bottom line is that it’s not smart to start late! Check out the “Good, Cheap and Fast” blog article for some background reading on this principle.
  3. New capacity development planning and execution must continually be performed across the short, medium and long term planning horizons. 
  4. Successful capacity development requires the delivery of capacity that is workable, on time and within budget. The Eskom new power plant builds are overrunning, both with respect to cost and time. Further, there has been some question about the quality of the new plants that are being built. It’s perhaps best not to reward performance of this nature with bonuses as it encourages the type of practices that you would rather do without. 
  5. Once again, the development of new capacity requires depth of skill and effective management. If you don’t have the appropriate human asset … set about growing it or employing it. 
  6. It’s not smart to finance the building of new capacity by cutting down maintenance spend on your existing capacity. 
  7. Large projects such as power plant builds tend to be hotbeds for corruption. Professional procurement contextualised by a solid value system is essential, particularly when your shareholder is the taxpayer. For example, clean procurement practices would never have allowed the Chancellor House / Hitachi issue to have arisen. It seems somewhat perverse that the ANC should both be ultimately responsible for the power crisis and be profiting from it.

When it goes wrong

When it comes to capacity, it’s fair to say that it’s easy to sell into surplus capacity, but it’s pretty tough to sell into undeveloped capacity.

Surprisingly, the new democratic dispensation inherited an excess of power capacity when they came into power. They did the right thing … they rolled power out to the previously disenfranchised. In business speak; they sold into the surplus capacity and they did so for in excess of 10 years. The problem arose when they were called upon to lead the development of new capacity. Sadly, capacity development simply wasn’t centre stage on their strategy.

The consequence of the Eskom debacle has been massive for South Africa. Although it’s very difficult to quantify the impact of the power crisis, conservative estimates suggest that GDP growth has been held back by somewhere between 30 and 60 basis points per annum by Eskom’s inability to keep the lights on. South Africa’s GDP would have been somewhere between 2.1% and 4.2% bigger right now if we had not run into a capacity crunch back in 2008. That translates into a lot of lost jobs for people that desperately need them.

What do we learn?

Capacity is the life force behind any organization. It is capacity that allows for the provision of goods and services to market and its often capacity that stands against you meeting your growth targets. In short … it’s the engine room behind what your business does. Take it for granted to your own detriment. Capacity management must be a key accountability of your Operations Team and should be in direct line of sight for your CEO.

Making the wrong capacity decisions for the sake of your next set of results will come back to haunt you in the medium to long terms. It is NOT in the best interests of your shareholders and it’s NOT sustainable. Don’t do it! Trust me … it’s not a good idea.

Your capacity is as strong as its weakest link. You should be continually monitoring for areas where your capacity is failure prone, performing root cause analysis and implementing corrective action. Focus on ensuring that your capacity is as robust and efficient as possible. Performing routine preventative maintenance is a far better option than living in a world where you are continually chasing around after the next “out of the blue” breakdown.

Treat your capacity well … and it will reciprocate. The alternative also applies.

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