Outsourcing boiler feedwater treatment can aid mill bottom line

For a mill needing to upgrade water treatment, a discounted cash flow analysis of outsourcing vs. capital expenditures is examined
INTENSE GLOBAL COMPETITION IS FORCING paper mills to look critically at all aspects of mill operation in order to reduce costs and become more competitive. Water treatment, specifically, boiler make-up water purification, is a key component in efficiently operating a power plant.
Many companies prefer to devote valuable resources to areas of expertise or core competencies such as making pulp and paper, not to peripheral areas such as water treatment. If a mill needed to upgrade water treatment facilities, it traditionally invested capital in new equipment. However, outsourcing this function is an alternative method. This article outlines a stepby-step process for conducting a comparison of the two options, as well as results from mill experience at St. Laurent Paper Products Corp. in West Point,Va.
FIRST STEP: DETERMINING COSTS. Before a final decision can be made on whether to install new equipment or to hire an outsider to do it and run it for you, the true cost of the options must be determined. This can sometimes be difficult because of shared budget items. Additional costs to consider, but ones that are hard to quantify, are management time and corporate costs for finance, engineering, human resources, etc. In addition, several less tangible items need consideration, such as company strategic direction, philosophy/culture, capital available for investment, extent and timing of the need, and available companies to perform the service.
The financial decision requires a basic understanding of the cash flows of each alternative. The two types of projects may be evaluated and compared differently in each corporation. The decision to outsource a function (such as water treatment) in some cases may not produce net savings, although the Outsourcing Institute reports that, on average, companies save 5% to 9% on outsourced programs or projects. Other factors may enter into the decision, such as corporate strategy, quality control, technology upgrades, internal experience/knowledge of the process, backup systems, and obsolescence.
The financial tool most often used to evaluate capital investments is discounted cash flow or present value. This tool is based on the theory that a dollar today is worth more than a dollar received one year from today. The precise calculations of return on assets and present value are, at best, based on imprecise estimates of obsolescence or deterioration that relate to the equipment's projected useful life. However, comparing the cash flow of options will give information that is useful in making a decision on how to finance a project. To help understand the methods used here for comparing options, this article includes a glossary of common terms used in financial analysis (page 53).
BOILER FEEDWATER SYSTEMS. Problems in boiler feedwater treatment can be due to capacity constraints, age, or high operating costs. Normally, addressing the problem will involve installation of newer technology with reduced operating costs. As noted, the project can either be outsourced to a company whose core competency is handling this feedwater or the mill can invest capital in new equipment.
A study of any problem in the boiler feedwater system will cause all areas of pure water production to come under review. For example, problems in demineralization probably mean that membrane technology will need to be introduced into the system. This technology will extend run lengths on demineralization units, thus saving regenerant costs.The new system will normally save operational costs, but it needs to be financed, which is a cost.
A capital expenditure normally involves financing a sum of money and making payments on it, plus the advantage of depreciation from a tax standpoint. In the case of producing boiler feed water, service contract payments for outsourcing will also be a predictable amount over a period of time.The long-term agreement can also have some flexibility in payment method.The service charge can be a flat, monthly fee, or a charge per unit volume, a charge per regener ation, or a combination of all of these payment methods. Fixed monthly costs allow level budgets that, in turn, could contribute to a level or slightly increasing profit.
The cost of both options should be carefully studied to determine which option efficiently meets the pure water demands of the present and future systems. Elements of cost shown in Table 1 are not all inclusive but should cover the major expenditures related to purchasing capital equipment for a major project. These same costs must be addressed when considering outsourcing.