Optimize the investment portfolio
Management teams often lack data or processes to discuss the advantages of one portfolio over another. On the contrary, they may pursue a basket of default projects year after year, or simply cut down on expenses, but they do not actively shape the investment portfolio to optimize it, which can not only maintain operation, but also promote growth. In contrast, the most successful chemical companies determine the optimal project portfolio based on three factors:
Priority. Best practice chemical companies need to evaluate the business case of each project. This helps to improve the transparency of the business issues that projects want to address and helps to determine which projects can be postponed or cancelled. This, in turn, releases money for the most attractive projects. These companies also categorize their projects and ensure that these portfolios are in line with their strategic objectives. Typical categories include “must do” investments that meet regulations, “ongoing” projects that improve production processes and reduce the possibility of disruption, “strategic” projects that open up future growth directions, and “growth” projects that increase profits or revenue. Here, there is a clear business case to show that return on investment helps to prevent projects from being pushed just based on their classification. In all of these categories, committed and ongoing capital expenditures are usually given priority to minimize cost increases.
The trade-off between financial and non-financial indicators. The trade-off is based on financial indicators such as net present value (NPV), internal rate of return and profitability index, as well as non-financial indicators such as carbon dioxide emissions. First class companies apply NPV calculation to all projects, including those without revenue components and those that can reduce the risk of significant impact on the company’s profitability due to production disruption. Applying a series of metrics enables companies to make fine trade-offs in project selection.
Scene modeling. Under a variety of hypothetical strategic objectives or constraints, evaluating the results of a portfolio is a powerful way to show management risk and other factors that should be considered. For example, a chemical company models the net cash flow of an enterprise under different scenarios of final product and raw material prices, and compares the returns of different portfolios; in a bear market, some portfolios dominated by maintenance are actually better than those dominated by pure growth.