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Using Benchmarks in Gap-based Business Planning

Issue 4 and Volume 3.

By John H. Sequeira, Ph.D., and Ian Falk, ScottMadden, and Carla Carmichael, Ontario Power Generation

Ontario Power Generation (OPG) operates three nuclear generating stations (Pickering A, Pickering B and Darlington) consisting of 10 active reactors with a combined capacity of 6,600 MW. Two additional reactors are in the process of safe storage. In recent years, OPG has been under increasing scrutiny from the Ontario Energy Board (OEB) to demonstrate that its operating costs are in line with those of other nuclear stations in Canada and the United States. In 2008 the OEB requested that OPG benchmark its operational and financial performance against Candu nuclear plants worldwide as well as against top quartile private and publicly owned nuclear electricity generators in North America.

To address the OEB’s decision and to update its ongoing benchmarking baseline, OPG management in 2009 retained ScottMadden Inc. to compare the company’s nuclear financial and non-financial performance to industry peers and to assist the company in implementing a gap-based approach to business planning. The objective was to establish the basis for the company’s 2010–2014 Nuclear Business Plan.

Project Approach

The project team’s approach to gap-based business planning was implemented in seven steps as listed below and illustrated in Figure 1.

 

1. Benchmark Performance—Compare the company to industry peers to determine relative standing on key operational and financial performance indicators
2. Set Strategic Direction—Use the benchmarks to help set fair and balanced performance targets and identify improvement initiatives that will move the company toward a desired level of performance compared to industry peers
3. Develop Business Plans—Prepare business unit plans that incorporate the improvement initiatives designed to ensure that the desired performance targets are achieved
4. Build Supporting Plans—Prepare implementation plans for the various improvement initiatives that will help drive the desired changes
5. Execute Improvements—Implement the improvement initiatives that will drive improved performance
6. Report Progress—Design and implement a reporting process that will effectively track the implementation of improvement initiatives and the delivery of performance improvement
7. Manage Delivery—Design and implement a process to ensure that those responsible for implementing improvement initiatives are held accountable for their successful execution and for the delivery of the associated business benefits.

Performance benchmarking was performed from March through May 2009 and consisted of a comparative analysis designed to establish current performance gaps at each OPG nuclear station against relevant top-performing peers. The purpose was to enhance understanding of “how much to improve.” From May through September 2009 the benchmark comparisons were used to (a) identify where cost and operational improvements were warranted and (b) to formulate targets and action plans for achieving these improvements. OPG is currently in the process of building supporting plans and executing the desired improvements.

Benchmarking Performance: Effective comparison of performance requires both the selection of appropriate performance indicators and the selection of appropriate peer groups for comparison. In this case the project team identified 19 key performance measures and five separate peer groups as shown in Figure 2. A decision was made to use benchmarks available from recognized industry organizations (for example, WANO, INPO EUCG and CEA). The benchmark results indicated that the company’s nuclear stations were operating at top quartile levels on approximately half of the metrics and below this level for the remaining metrics. Management defined a “performance gap” to be any negative difference between current performance and industry top quartile performance.

Set Strategic Direction: Prior to the current planning cycle, OPG traditionally established future operational and financial targets using a “bottom-up” process whereby each business unit submitted individual plans which were subsequently consolidated into a company-wide plan. This approach was replaced by a “top-down” process whereby OPG nuclear management set specific performance targets based upon where the company “needed to be” to close its known performance gaps. The individual business units then identified specific improvement plans aligned with management’s expectations.

Financial targets were set for each of the company’s nine business units and for each of the five years in the business plan horizon. Operational targets were set for the last year of the planning horizon (that is, 2014) and the business units “filled in” the remaining year commitments based upon the nature of their improvement initiatives.

Develop Business Plans: With the planning targets as guidance, the company adopted a “two-prong” approach to identifying actions plans capable of closing the documented performance gaps. First, each of the company’s nuclear stations worked to identify improvement initiatives specific to their site. Second, 16 functional teams worked in parallel to identify “fleet-wide” initiatives that would contribute to closing the performance gaps. Each improvement initiative was tied to specific quantitative improvements in one or more performance metric.

Primary responsibility for the delivery of business results rests with the leadership team at each nuclear station. Secondary responsibility for the delivery of “fleet-wide” improvements rests with the 16 functional teams. This approach is illustrated in Figure 3. The functional teams identified a total of 150 improvement initiatives which were subsequently consolidated, prioritized and pared down to 33 key improvement initiatives that were then scheduled over the five years of the business plan. The contributions of these initiatives were overlaid onto those of the nuclear sites to determine whether the combined impact was sufficient to close each of the performance gaps. The consolidated results were built into the final company-wide business plan.

The OPG Nuclear business planning group monitored the process and iteratively tracked the contribution of both the site and functional improvement initiatives to closing both the operational and financial targets. The process continued until management was satisfied that the site and functional improvement initiatives would yield sufficient improvement. The final consolidated business plan was approved by the OPG board of directors in late 2009.

Improvement Planning and Execution: In early 2010 OPG Nuclear established the Nuclear Fleet Improvement (NFI) group to manage delivery of the key cross-functional initiatives and provide reporting oversight with respect to the remaining 33 functional initiatives. Site improvement teams are also moving forward with the planning and execution of their internal initiatives. The status of fleet-wide initiatives is reported monthly by the Director, NFI to the nuclear executive committee.

LESSONS LEARNED

While the process outlined above may appear relatively straightforward in hindsight, it represented a significant departure from past planning practices for OPG. The key changes were not only process changes but also cultural changes that will take some time to fully absorb and institutionalize. The key changes were:

1. The replacement of the “bottom-up” planning process with a directed “top-down” planning process. Substituting the new question “Where do we need to go?” for the old question of “Where can we go?” proved to be a cultural change within the organization at multiple levels.
2. The development of “fleet-wide” improvement initiatives in addition to station-specific initiatives was also a significant departure from past planning practices. The institution of “200 percent accountability” (site and fleet) is a relatively new concept which offers significant improvement potential.
3. The quantitative linkage of each improvement initiative to the closure of one, or more, performance gaps was also a significant change. In the past, improvement initiatives were identified but not specifically tied to their quantitative impact on targeted metrics. Committing to specific improvement contributions will drive a greater level of accountability for results.
4. Finally, in the past improvement initiatives were listed in the business plan but not necessarily assigned to specific individuals. Under the new planning process each improvement initiative was assigned to a specific individual who will report to the OPG Nuclear executive team regarding progress achieved and results delivered. Achievement of designated targets is linked to individual and corporate incentive programs. This additional degree of accountability resulted in a more robust vetting of the business plan during the current planning cycle and should drive additional accountability during implementation.

Authors: John H. Sequeira, Ph.D., is a partner at the consulting firm of ScottMadden Inc. and has been involved in improving business operations at leading nuclear plants in North American for over 20 years. Dr. Sequeira earned his B.S. degree from the University of Santa Clara, his M.P.A from the Daniels School of Business at the University of Denver and his Ph.D. in Economics from the University of Denver. He is a Certified Management Consultant and a member of the American Nuclear Society.

Carla Carmichael is director of Business Planning, Nuclear at Ontario Power Generation. She has been involved in business planning and performance monitoring in previous roles outside of the nuclear industry. She is a member of the Canadian Institute of Chartered Accountants and earned her BA from the University of Toronto and her MBA from the Schulich School of Business.

Ian Falk is a director in the Nuclear Generation Practice at the consulting firm of ScottMadden Inc. He has led business planning engagements for several of the largest nuclear generation fleet operators in North America. Mr Falk earned his B.A. from Washington and Lee University and his MBA from the Kenan-Flagler Business School at the University of North Carolina in Chapel Hill.

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