When we ask what are the biggest headaches currently in running the plant, the list of issues expands: raw material cost hikes; poor base oil quality and/or availability; disruptions due to weather, earthquake or man-made catastrophes; late production changes due to wrong or nonexistent short-term sales forecasts; and health, safety, environment issues. Unreasonable local government or trade unions also make the list, as do ineffective use of equipment or people; snafus with quality control, slops, flushings and losses; inappropriate clumping together of deliveries and dispatches; slow changeover times; lack of experienced people who know what to do when things go wrong; energy inefficiency, etc., etc.

Meanwhile, the competitors keep getting more competitive. So running a lubes and/or greases blending plant is no picnic.

Companies can get to grips with all this with PIMS help by benchmarking their lubricant and grease manufacturing plants against regional quartiles, local best competitors, and anonymous best look-alike plants. (Best look-alikes have a similar mission in terms of scale, complexity, labor cost environment, and any other location-specific factors beyond the managements control). Since 1993, the PIMS database and analysis framework have evolved to enable decisions to be based on evidence rather than wishful thinking.

Defining success

When benchmarking, some companies have a policy to aim for best quartile performance. But this immediately raises difficult questions:

What metric should be used to measure success – best quartile on what? Just operating cost? What about losses? Inventory levels? Depreciation? Allocated headquarters costs? On-time dispatch? Health, safety and environmental performance?

What comparison set to use? (Best quartile in this country? in this region? in the world?) Should you include or exclude specialty industrial lube plants?

Since labor represents the biggest cost, and pay rates are location dependent, should pay rates be equalized, since a plant cannot change its location?

Since complexity is the biggest driver of plant cost, after people costs, and generally intrinsic to a plants mission, how to correct for differences in that? Plants with higher complexity generally have not only higher cost but also better margins in the marketplace.

Scale of operation is also a key cost driver. Should the benchmark correct for that? What about product mix, service levels, quality standards, automation, etc.?

To illuminate the way forward, we have searched the PIMS 2004-2010 database for plants that are consistently and unequivocally world champions – best quartile in several ways – to see how they differ from the rest. The total data set comprises 199 lube plants and 50 grease plants from 34 companies across six continents (see map, page 42).

First we omitted plants which did not produce a full range of small packs plus large packs plus bulk, and plants which did not produce a mix of several different types of lubricants or greases (e.g. marine-only lube plants). We also omitted plants with an unstable track record over time or difficult data issues.

Then, separately for lubricants and greases, and also keeping the warehouse separate, we came up with an Overall Efficiency Index appropriately weighting the ratio of actual to par (or expected) performance along five dimensions: operating cash cost, depreciation, losses, inventory days and allocated costs. We only kept plants with operating efficiency better than the global average.

The par is the expected level given a plants scale, complexity, labor cost environment, fixed assets, automation and annual average temperature (based on a multiple regression analysis). This means we only allowed plants generally better than par. Also, to ensure we only included plants with good productivity by global standards, we only kept plants with volume per head at or better than quartile one globally.

To ensure we had plants that were cost leaders in their region, we only kept plants with cost per ton (including warehouse) at or below quartile one for the region.

The result of this winnowing was 17 world champion lube blending plants and four grease plants. We then added one further plant to each set, namely the lowest-cost plant in our database. For both lubes and greases, these lowest-cost operations had failed on the productivity test, due to having above-global-first-quartile headcount per barrel in low-labor-cost countries in Africa and Asia. We felt their inclusion reduced pro-Western bias, and that people would be upset if a world champion set excluded the lowest-cost plant!

We then further split the lube blending plant sample into those producing more than and less than 600,000 barrels (85,000 metric tons) per year.

The geographical spread of our selected plants was wide, as seen in the table on page 44. Some of the world champion lubricant blending plants produced greases but were not champions at that, and vice versa. We only retained the world champion operations in such cases.

What do world champions look like?

They are somewhat bigger than the rest in terms of volumes produced, despite already being split into large and small. For small lube blending plants and grease plants, this economy of scale feeds through into bigger batch sizes.

This is not the case for large plants: There seems to be a point above which going for ever bigger batches does not help in terms of inventory management and efficient equipment utilization. The ceiling on efficient batch size is lowest on small-pack filling.

Champion large lube blending plants are often next to a base oil refinery, receiving most of their base oil by pipe, and getting economies of scale on bulk filling by sharing facilities with base oil. This is not the case with small lube or grease champions, who have the same delivery mix – ship, barge, rail and road – as the rest of the data-base participants.

Do champions have shiny new equipment? In general, no. They have well used and well bedded down equipment (the exception being greases, where champions do have newer kit). Brand-new plants in our database tend to have quite poor results in their first few years as they gradually go through the learning curve and slowly build volume up to the designed capacity.

Most plants – champions and non-champions alike – have capital expenditure greater than depreciation. The difference is that champions put the new kit to work faster and more effectively. Small champion plants do have modestly more automation than the rest, but there is no significant difference for large champion plants.

What about complexity? This is the biggest surprise. Small lube champions are less complex, but large blending (and grease) champions are MORE complex, in terms of number of grades, number of SKUs, number of different raw materials, etc., even when correcting for the larger scale.

Across the database as a whole, complexity is strongly positively correlated with cost, so whats going on? It appears that champion plants are just much better at managing complexity. They have more flexibility, quicker setup times and faster running speeds. Since our data do not include margins, we can only speculate, but it would appear that champions have higher margins in addition to lower costs.

How do world champion plants perform?

Champions have a cost advantage in every operating area.

For a champion large lube blending plant, the prize on average is nearly $9 million in terms of lower annual costs than the rest of the pack. General and administrative costs are the biggest difference. Then warehouse, large packs, bulk handling, material receipt and blending.

For small lube champions the average prize is $3.5 million versus the pack, despite 5 percent higher average personnel costs per head. Again, general and administrative costs are the top contributor. Then blending, losses, allocated HQ costs, laboratory, large packs and warehouse.

For grease champions the cost advantage is a more modest $400,000, but this is in the face of 40 percent higher personnel costs per head.

Champions have six fewer days in inventory for raw materials and 11 fewer days for finished goods. They have 2 percent better on-time-in-full dispatch levels, fewer blend corrections and reject blends, and better health/safety/environment results (despite not being selected on that basis).

A lot of the performance differences are due to productivity and efficiency: Champions use on average 28 percent fewer person-hours and 14 percent less energy per barrel of lubes. They spend 8 percent less on maintenance, but they outsource a lot less maintenance and do more in house.

So the evidence is that champions get to the top – and stay on top – mainly by being better managed. They continuously but modestly invest to increase flexibility. They set a limited number of realistic improvement goals and remorselessly achieve them.

So as not to be caught by surprise, champions closely monitor changes in relevant marketplaces for finished products and raw materials. They take responsibility for solving problems rather than handing them off to others. They develop their people to know the why and the what to do in case things go wrong.

Its not magic; its professionalism, and it is a road open to all, even the most cash-strapped, volume-deficient, complexity-ridden, ill-equipped plants.