IE Business School Designing Evolutionary Control Systems for PM

STX Brazil: Developing an Evolutionary Control System

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Raphael Ani | Kundan Bhaduri | Daniel Bobu | Jason Conner | Rodrigo Ferraz Kimberly Gilsdorf | Kyle Grant–Anderson | Maggie Georgieva | Pedro Oliveira

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STX Brazil’s CEO, CFO, and COO, sat together preparing the approach on how to tackle

the most complex project their shipyard had ever taken on. At the beginning of 2006, the decision was already made to accept an offer from Technip, a DOF subsidiary, to build three different ships with price tag of approximately $220 million each. The management of STX Brazil realized the importance of taking on a project of this magnitude given the opportunity to grow the business and secure client retention, taking into consideration the new partnership between DOF and Technip, a new client to the shipyard. It was now the responsibility of the COO to analyze the details of the project and develop a plan to successfully deliver the three ships on time and within the resources of STX Brazil. He contemplated the challenges given the project’s sheer complexity and STX Brazil’s limited experience with such an endeavor. He also wanted to involve both the CEO and CFO in any solution as this project represented a major opportunity of growth and development for the shipyard, but also, a major going concern risk should something go wrong with a project of this size and complexity.

STX Brazil just successfully completed the delivery of three AHTS (Anchor/Handling/

Tug/Supply) sister vessels, valued at $80 million each, to NorSkan, another subsidiary of DOF, which prompted them to make the new order for Technip. The COO was faced with the situation of how he can use the results of the recently delivered vessels to turn this new project into a successful venture for STX Brazil. The success of the new project hinges on two elements: their ability to continuously satisfy the client’s expectations to ensure a long-term relationship, and to build on their internal control systems to have the right tools in place to meet future challenges.

THE ECONOMY AND WORKING CONDITIONS OF BRAZIL

In 2006, the economic conditions in Brazil were positive with stable inflation, steady unemployment at 10%, and rising average worker income.1 It was considered one of the strongest economies of South America and was showing signs of a strong emerging market. The four main pillars of Brazil’s economy rested in agricultural, mining, manufacturing (including shipbuilding) and service sectors. Foreign direct investments were trickling in creating an opportunity for many industries to flourish throughout the country. In fact, Brazil was second only to China for receiving such investments totaling close to $15.6 billion.2

Productivity in Brazil was relatively low compared to developed countries, but high

compared to other emerging markets. This lower productivity was partly due to the below-average quality of manpower within Brazil because of a lack of specialized training programs within the education system.3 Nevertheless, Brazilian workers were considered flexible, creative, hard workers who valued informal meetings and tended to work well in groups. Unions

The current union structure in Brazil was first introduced by the Getùlio Vargas regime in 1930.4 Working conditions for many industries that flourished within Brazil were not favorable for employees resulting in the rise of unionized labor. One of the key leaders of the

1 http://www.portaldoinvestidor.gov.br/Investor/Investor/BrazilianEconomy/tabid/217/Default.aspx 2 http://www.iea.org/weo/docs/weo2006/brazil.pdf 3 Bonelli, Regis. “Productivity in Developing Countries: Case Study Brazil”. Endorsed by UNIDO. 4 http://www.nationsencyclopedia.com/Americas/Brazil-LABOR.html

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labor movement who worked tirelessly to ensure that unions were allowed to protect employee rights was Luiz Inacio Lula da Silva. Lula moved on to hold a number of political positions; most notably he became President of Brazil by 2003, position he still held in 2006. Under his control he maintained the fight to allow unions to play a significant role. During his presidency, various unions represented many important industries and one of the strongest at the time was the Rio de Janeiro Shipbuilding Union.

SHIPPING INDUSTRY IN BRAZIL5

The shipbuilding industry of Brazil was the second largest in the world before the huge crisis of the 1980s. Just before the crisis, during the 1970s, Brazilian shipyards employed 40,000 direct and 100,000 indirect workers, and claimed the second largest backlog due to contracts with Petrobras, Vale de Rio Doce, Lloyd Brasileiro and others. However, the economic crisis of the mid-1980s in Brazil forced the shipyards to seek financial support from foreign banks and investors. A senior Brazilian shipbuilding official recalled:

“The government needed dollars and forced the shipbuilders to take foreign loans

and, in order to build, obtain parallel loans to reinforce the treasury. Then, during these hard times, it did not put the tax money into the Merchant Marine Fund as it was supposed to. All this contributed to the ultimate collapse.”6

The number of people employed in the Brazilian shipbuilding sector increased by

approximately 300% during the 1990s, a positive sign towards the revival of the industry. By 2006, Brazil had become self-sufficient on oil and gas production for the first time, which also contributed to such growth. Two additional reasons that contributed to this growth were (i) the government subsidy programs through BNDES (Brazilian Development Bank7) that secured promises from Petrobras and Transpetro to use local industry, decreased interest rates on loans to finance shipbuilding activities, and extended their maturity, and (ii) permitting foreign direct investment in Brazilian shipyards (See Exhibit 1 for growth of the shipbuilding industry graph).

By 2006, shipbuilding was becoming one of Brazil’s most important industries in

creating jobs and increasing the country’s competitiveness on a global scale. Total sales during 2006 were expected to reach $2.5 billion with over 36,000 employed in the industry.8

Brazil at the time had over 100 shipyards, out of which 40% are located in Rio de Janeiro with the remaining 60% in the Amazonas, Santa Catarina, Caera, Para, and Sao Paulo areas. Petrobras had 13 new oil platforms in the pipeline, six of which were under construction and seven were under bidding (or would be called for bids). The estimated

5 The information in this section is drawn from “Fast Pack, Brazilian Shipbuilding Industry” (http://www.swedishtrade.se/PageFiles/137145/Fact%20Pack%20-%20Shipbuilding%20sector%20in%20Brazil%20.pdf), “Shipbuilding Industry, Investment Opportunities in Uruguay” (http://www.pacpymes.gub.uy/c/document_library/get_file?p_l_id=6383&folderId=178707&name=DLFE-7601.pdf), “Brazilian 6 Shipbuilding in Rejuvenation?” (http://www.google.com/url?sa=t&source=web&cd=1&ved=0CCYQFjAA&url=http%3A%2F%2Fwww.worldyards.com%2Fmember%2Fnews%2Fwyrepdown.php%3FFileName%3DBrazilian%2520Shipbuilding%2520Snapshot.pdf&ei=b-qaTvKEFoKX8gPhxrH4CQ&usg=AFQjCNE7kWJytwA6hea9XtiLuUE7zD3t3g&sig2=bzEbT1nsggKxGdoAJnqPVA) 7 http://ec.europa.eu/enterprise/sectors/maritime/files/fn97616_ecorys_final_report_on_shipbuilding_competitiveness_en.pdf 8 Sinaval, “Industria Naval No Brazil”. 2007.

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investment for those seven platforms was about $5.2 billion. The growth potential for the Brazilian shipbuilding industry was enormous. STX BRAZIL Background

In 1996, four Brazilian entrepreneurs created the Promar shipyard, located in Niteroi, Rio de Janeiro, Brazil, seizing the opportunity to supply the demand for ship repairs. During the first two years, the shipyard was focused on maintenance of Anchor/Handling/Tug/ Supply (AHTS) and Platform Supply Vessels (PSV), mainly for local shipping companies.

By 1997, in order to boost the shipbuilding industry, the Brazilian government issued a

regulation that restrained foreign ships to a maximum of one year of work along the Brazilian coast. By that time, the Brazilian Oil and Gas industry was increasing its proven oil reserves and production. In addition, Petrobras was investing on exploration of new oil fields, which required new ships and platforms.

The first order for Promar came in 1998, from Companhia Brasileira de Offshore (CBO), an 80 meter long PSV. After this order, two others PSVs were delivered through 2000. At this point, the shipyard was producing at full capacity with these new projects.

In 2001 a Norwegian group, Aker Yards, the largest European shipbuilder, acquired 50% of Promar’s shares. The partnership brought a new client, DOF, which would become Aker Promar’s most loyal client along the years. In the beginning of 2005, Aker Yards secured the remaining shares and assumed full control of the shipyard. However, by the end of 2005, STX Group acquired 39.2% of Aker Yards shares on Oslo Stock Exchange (Oslo Børs), and in January 2006 secured the remaining shares and became the company’s sole shareholder.

The STX Group at the time was a very complex conglomerate encompassing a diverse

group of industries with a true global reach. It was a South Korean holding company with five distinct subsidiaries: STX Offshore and Shipbuilding, STX Engine, STX Heavy Industries, STX Pan Ocean, and STX Energy. The newly acquired shipyard in Brazil, STX Brazil, was owned and operated by STX Europe, which was part of the STX Offshore and Shipbuilding subsidiary. STX Brazil specialized in building offshore vessels and developed state-of-the-art concepts, technology, processes and products for customers around the world. Organizational Structure

The Executive Committee, responsible for leading the company was chaired by the CEO, and also includes the CFO and COO. The full organization was structured on a functional basis comprised of an Engineering, Procurement, Production, Finance, Marketing, and Human Resources departments (see Exhibit 2 for the company’s organization chart). The STX Brazil shipbuilding process involves the four main departments of Engineering, Procurement, Production and Financial. Marketing and Human Resources serve more as support functions to projects, as they were not directly involved.

The Departments

Each of these departments had a Director, which controls the flow of information from its department to the Executive Committee. The organizational design of STX Brazil, in terms of project management, resembled a matrix-style organization, where continuous interactions

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between all departments occurred. It was functionally divided into business groups, each of which shared a particular set of responsibilities. The central piece in this chain of command and liaison was the STX Brazil project manager who had contact with the finance specialists, procurement specialists, engineers and foremen. The shipyard had a team structure for every different project that they were working on and each individual participated in a multi-directional dissemination of information throughout their teams and departments. Further, each team at STX Brazil was cross-functional in nature to give each employee better visibility of stepping in someone else’s shoes. Engineering: This department of white-collar workers represented the company’s skill-labored employees that were the most educated and highest paid employees in the organization. The central design team within the global STX GROUP was located at Alesund, Norway and they did the beginning phases of the ship design process.9 Once the design was finished it was sent to the engineering team in the STX Shipyard in Brazil. This team was responsible for translating the designs into intelligible and detailed ship specifications that could be understood and applied by the production department in delineating the production plans. This translation meant not only preparing those documents in Portuguese, but also simplifying the complexity of the whole design into a number of smaller parts/blocks apart from devising the most efficient solutions to meet all specifications’ requirements. Therefore, it was the engineering department that manages the design and operational complexity risks.

Considering that the engineering process was not one of pure standard delivery of mass production solutions, this process entailed very complex activities. The complexity of the design needed to be reduced in order to allow for lean production plans. Additionally, in the case of projects relating to wholly new ships produced in their shipyard, the challenge was much higher. The ability of the engineering department to translate the innovative ship design into a language the production department understands, was a key factor in reducing the potential for delays throughout the whole process.

Finally, it was extremely important to have fluid communication between the engineering and production departments. The unexpected was surely bound to happen, and the faster they were at devising solutions together, the lower the risk of delays or quality issues. Procurement: This department managed the purchasing of goods and services necessary to complete the project. Their focus was to minimize cost and at the same time try to meet the project’s requirements in terms of quality and quantity of service/materials, time and location of rendering/delivering. Any failure on each of these variables could imply stoppages on the production process and its re-planning, leading to unrecoverable delays or significant extra-hours from the labor force.

The supply risk entails not only these four variables (quality, quantity, time, and location), but also the price. The main supply was steel plates, a commodity with a highly volatile price. The procurement department was responsible for hedging this commodity risk and guaranteeing the prices that were foreseen in the bidding process. Should it fail to do so, and taking into consideration the significant price changes occurred in recent years (the

9 http://www.stxosv.com/products/Pages/Ship-design.aspx.

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nickel price – the main driver of the steel price – more than quadrupled during this century – See Exhibit 3), the project could easily result in a loss. Production: The production department was mainly composed of blue-collar workers and was the biggest department in terms of work force. The foreman and his team worked together with the Planning Coordinator and the Engineering department to devise the production plans. Afterwards, they were responsible to put these plans into practice managing the whole production process, from the steel plates cutting, building and assembling of the blocks, to the actual launch and final ship outfitting.

One of the major challenges was working with the unions, which were strong in this industry. The labor contracts were usually negotiated between the management of STX Brazil and the unions, and they typically include very strict rules about compensation, promotion, over-time and dismissal of workers. STX Brazil realized the importance of retaining employees; therefore, they strove to maintain a healthy relationship with the unions to prevent any difficulties that would cause delays in the process.

Even though most of the workers were skilled at some tasks in the building process, when a completely new project was taken, it presented a major challenge in breaking the rigidness of their working habits and previous know-how and adapt to new methods and new desired outcomes.

Because the production department was at the center of the whole shipbuilding process, it had the responsibility to interact directly with all departments. The fact was that any problems that arose in any other department would surely come up in production as symptoms that something was wrong. The capacity to detect these problems or issues before they affect production seemed to be a major challenge. Finance: This department had a dual objective in terms of project management. On one hand, it managed all the project’s cash flows, including financing from Federal Government and Financial Institutions, payments’ schedules to suppliers, receipts’ schedules from the client, according to the projects’ milestones included in those schedules, hedging interest rate and foreign exchange risks, and settling the payroll. On the other hand, it was also responsible for the performance metrics of the project, preparing regular progress reports to management, and dealing with the accounting requirements. Project Management Structure

The project management team was lead by the project manager, but it included a representative from each department, which not only brought the departments’ expertise to each project, but also made the bridge between what the project needed and what the department could provide.

The project manager’s role was to closely supervise the ship’s construction, manage

the customer’s supervision of the project, lead the project team and get them aligned with the project’s KPI’s, and transform each coordinator in an efficient communication tool between the project and their department, without compromising their day to day duties at the project. The project manager was the only one authorized to exchange information with the client.

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The usual project management organization could be depicted as follows:

The department director selected each representative to the project management

team. To give an example of the coordinators’ responsibility, the procurement coordinator could request reports and updates to his/her department to be used in its project activities. Because these requests had priority over the day-to-day activity of that department, this practice many times creates conflicts. The exception to this flow of information came from the project managers. In fact, the project managers were not part of any department. They formed a group of their own which also includes the planning coordinators.

The quality control coordinator was included in the Production department, and was

mainly responsible for the interaction with the quality and risk control external agency (see below). PROJECT MANAGEMENT PROCESS The Ship Building Process

Offshore-Specialized vessels were built at STX Brazil through a very complex manufacturing process. The process encompassed six phases involving a work force of up to 1,500 individuals (see Exhibit 4 for a visual map of the different phases and its ownership throughout the shipbuilding process). The process can be better understood by analyzing the phases and its ownership per each relevant (semi) output along the process:

Steel Components: Once the Engineering Department finished the project details, including all specifications on the ship, the procurement department then starts procuring all the necessary material and equipment. They had a defined time line of materials and equipment supply so that the shipbuilding process didn’t stop due to lack of materials. The supply risk was managed in two ways: first, validated at least two suppliers for the supply of any part in order to have a backup plan; second, established clear supply deadlines with suppliers, including monetary penalties for delays in the contracts, and set the deadlines with a safety

Steel Components

Ship Blocks Ship

Strucuture Ship

Completion

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margin regarding their actual inclusion in the production process. Parts and materials received ahead of time are stored in the company’s storage facilities. The next phase was the customization of the steel parts, which was done at the Steel Process Unit according to the specifications of each required part. Ship Blocks: In order to reduce the throughput time in building the ship, its production process was designed in a way that several different blocks were being processed at the same time. Therefore, the company was able to have several assembly lines working in parallel and significantly speed up the production process. The block assembly was also performed at the Steel Process Unit. During this phase, there was a new entity involved in the process. DNV10, an external agency dedicated to independent quality control, was responsible for controlling the quality of the semi-finished products and also cooperating in risk management, both on safety issues and in project management. This entity accompanied the production process from this phase until its conclusion. At this point, the blocks were moved to the pipe shop where the pipe assembly was finalized. The full ship blocks structure was concluded and the keel laying takes place (putting together the hull of the ship). Ship Structure: This phase took place on a per ship block basis as well. It was here where the blocks were painted and the larger equipment was installed. This equipment had to be installed before the actual positioning at the dock and erection over the hull, because there was impossible to accomplish this after the fact given its size. The next part of this phase was when the ship blocks were moved into the dock and each module was erected over the ship’s hull (which the assembly began simultaneously at the dock), hence began to look like an actual ship. It was here all the pieces started to come together (see Exhibit 5 for an image of this process). Once this was completed, the ship made its first voyage into the water.11 Ship Completion: The final phase comprised of the installation of the remaining equipment (mostly, the electrical components). Once the ship went through the final outfitting, the ship went through an extensive series of tests to guarantee its performance according to project specifications.

There were three main milestones in the ship building process: keel laying, launch, and delivery. Depending on the ship, the time span between each of these milestones differed in length of time. (See Exhibit 6 for a visual representation of the different stages in the shipbuilding activity.) The Control System

The control system for project management at STX Brazil was comprised of two layers, one visible and objectively defined, and another less visible and related with the way different people were put together and to whom they reported to. Both control systems had the ultimate purpose of keeping each project on-track, on time, and within budget. The Visible Side: STX Brazil had a set of control activities defined to establish a proper control mentality around the project’s development and across every individual involved in the project. They were meant to make everyone feel liable for their mistakes and to create

10 DNV is a multinational company, headquartered in Oslo, Norway, and is a leading provider or services for managing risk. Their activities involve assessing, evaluating and managing the risks involved in high-profile projects. For more information visit http://www.dnv.com/. 11 Usually the launch of a ship is celebrated throughout the whole shipyard for its symbolism, by being regarded as the climax of the ship building process. Check http://www.youtube.com/watch?v=Ie3hnMxQJP8&feature=related.

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communication channels to foresee potential problems that could arise in the future, thus promoting each individual’s involvement and commitment for the success of the project.

In terms of the decision-making process, the project management team made decisions as a group as they all had to be taken by full consensus. Moreover, even though the project manager was the only one on the team with direct communication to the Executive Committee, he did not carry more decisive power over the rest of the team. Additionally, the upward communication was also driven through each department, by reaching the department directors, which also had direct access to the Executive Committee.

Each department coordinator had to prepare summary reports of their activity in the project, which were submitted to its department, to the project manager, and to the financial and planning coordinators. Additionally, the finance department prepared several performance metrics reports intended to provide a visualization tool, accessible to everyone involved in the project management and to top management, for discussion and analysis purposes. This analysis and discussion took place in several instances including project management formal meetings and Executive Committee formal meetings, apart from many other informal meetings taking place.

Project management formal meetings took place on a weekly basis and include all the project’s coordinators. The project management meeting agenda involved: i) tracking the project’s performance in terms of schedule, quality and cost; ii) performing a status check on the issues that had recently been solved or which solutions were currently underway; iii) discussing solutions to problems or issues occurred in the meantime; iv) conducting a forward-looking discussion on potential problems or issues that may arise in the future, where the individual contributions of each participant are valued.

An Executive Committee meeting for project control took place on a monthly basis and brought together all project managers and department directors. Each project manager delivered a set of reports summarizing the projects status and progress, and the project team’s assessment of all the risks found so far that could, in any way, constrain its progress and results. When the project manager presented these reports, participants were allowed to question the assumptions of each report and make comments to spark discussions.

A myriad of reports were created for various stages of a project (see Exhibit 7 for examples of these reports). One of the most important reports was the “Risk register”. The owner of this report was the project manager, and was a result of the project management meetings. It represented the team’s assessment of risk (probability and cost potential), the action plans to mitigate them, and the continuous follow up on every meeting. The Invisible Side: The creation of the project team was a control in itself that top management created to guarantee an intra-control mechanism, where the competing departments have a dual incentive to perform their best in addition to check that others do the same. This team design also created a double flow of information to the Executive Committee: through the project manager as well as through the department coordinators and ultimately their directors. The Executive Committee believes that this parallel flow of information was extremely important to guarantee that their meetings for projects’ control included a healthy level of discussion on details and perceptions about the process. The potential for conflict was viewed as a critical factor to foster the discussion over the formal

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transparency. This was also designed to reach a stage of simulation of reviewing what was actually happening in the shipyard and the authentic interactions and conflicts that were occurring.

Finally, the project management team offices overlooked the shipyard and therefore,

were visually connected to the physical building of the ships. The Stakeholders

From the point of view of the project management team, there were many stakeholders that interact with the team and had interests in its decisions and formed a part of its overall success. These included the following: Shareholders: The interest of the shareholders was that each project maximizes their return. This was viewed from an individual project perspective, but also in terms of achieving long-term valuable relationships with the external stakeholders and internal buy-in to the company’s mission. Executive Committee: The Executive Committee was ultimately responsible for every success and failure in the company. Their interests were mainly aligned with those of the shareholders, however, as remuneration was usually set on certain specific KPI’s, the misalignment between those KPI’s and the shareholders interests, may cause some agency issues. In fact, this misalignment was the norm and reducing it, was the goal of any remuneration committee. The most common KPI was enterprise value, which corresponds to the potential value to be created by its activities, which was very subjective and prone to misconceptions and misperceptions. Departments: Each department was interested in being a factor of success and not being associated with failures. This might lead to some level of conflict between them. Unions/workers: Even though the interests of the Unions might not represent the interests of the majority of the workers of the Company (it was usually the case), they have an agenda that usually includes salary compensation, career progression, working hours, training, and working conditions. The shipyards in Brazil are strongly supported by the Federal Government, and this gives the workers and their Unions a strong negotiation power within the Company.12 Customer: Most of the customer interests are set in the conditions and requirements of the project. In the case of shipbuilding, the price was fixed so the risk was totally on the shipyards side. However, during the project, due to changing circumstances, and because the projects usually last for periods of over a year, it was quite normal for the client to request changes to design, either for including extras or reducing them, aiming to have extra capacity or reducing price, respectively. The customer always has an office on the shipyard from where he can accompany all the works. However, he was only supposed to interact directly with the Project Manager.

12 Shipbuilding in Brazil has become a symbol of progress and employment. It has strong political ties. Check http://www.youtube.com/watch?NR=1&v=VtfraVF2QeQ for a speech of President Lula da Silva on a shipyard (in Portuguese!).

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Suppliers: Suppliers are interested in satisfying the shipyards requests in the most profitable way, and building long-term relationships. Regulatory Agencies/Government Authorities: Regulatory agencies should be independent from the Government, but it’s not the case in Brazil (and anywhere else for what it matters). Their purpose was to provide a public sense of control on the activity of the shipyards. However, their activities in the past have been more towards defending the interests of the national shipyard industry. It was in this point that their interests are clearly aligned with the Governments’, of which the most important interest was to create wealth for the general population by promoting employment. The shipyards lobby with these entities to get special favors (such as public funding/finance for projects) in exchange for the creation of jobs. What Could Go Wrong?

Given the array of conflicting interests from all the stakeholders and considering the complexity and constant innovation in shipbuilding, the number of things that could go wrong in a shipbuilding project was simply overwhelming. The Basic Criteria For Success

There was some commonality of interests between all the stakeholders involved that was key for the reasoning behind any conflict resolution in a way that can be understood as what the shipyard stands for. As a basic understanding, this seems plausible.

However, if examined in depth in to what these concepts meant, the apparent

commonality of interests becomes much more chaotic. It seemed clear that each stakeholder’s interests were conflicting between themselves, and additionally, the self-appraised rationality behind their actions, taking into consideration the considerable level of uncertainty in this kind of projects, crumbled. The complexity of these interactions, together with general uncertainty of assumptions and outcomes, were an overwhelming challenge.

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THE AHTS $80 MILLION PROJECT The Client

NorSkan Offshore was a specialist firm specializing in the Brazilian oil and gas exploration business. It had many innovative service offerings for niche services that include custom drilling and oil exploration project support for the main players in the Brazilian market.

The company was a subsidiary of DOF ASA, a Norwegian offshore support group

founded in 1981, and listed on the Oslo stock exchange. NorSkans’s operations in Brazil began in the year 2000, due to the bright outlook forecasted for the Brazilian Offshore Oil & Gas industry. Since then, NorSkan had rapidly expanded its operations to at the time, owning and operating a fleet comprised of thirty-six supply, support and construction vessels, including new-builds.

The NorSkan vessels were chartered on long-term contracts to the main oil & gas exploration and production companies in Brazil, as well as operating as subcontractor in the area of subsea services. The vessels were able to complete a range of services for rigs, platforms and Floating Production Storage Offloading (FPSOs), or Floating Production Systems (FPSs), as well as other oil and gas infrastructure. The vessels transport materials and supplies; as well as crew to the rigs, platforms and FPSOs; positioning; towing; mooring; and support services related to the construction, installation, maintenance and repairs of rigs, platforms and FPSOs. The AHTS Project – details

NorSkan outsourced the end-to-end construction of three vessels under a new project titled AHTS to STX Brazil in 2004. Each ship would be identical in shape, design, and engineering, and would be sold at a fixed price of approximately $80 million each. Each of these ships was 80 meters long, weighed 2,600 tons and had an 18-month development cycle. There was widespread consensus within NorSkan on the selection of STX Brazil for the design and development of the new project. In the words of the Norskan CEO:

“As we are investing more and more in Brazil, we expect and trust that the shipyard will keep up with our expectations, so far they did.”

The purchase order for these three ships was the largest and most complex that STX

Brazil had ever received. Therefore, they drew special attention of the management and project engineering teams.

The complexity of the project led management to forecast economies of learning

throughout the construction of the three ships. In fact, the shipbuilding industry was characterized by increasing profit margins as the number of ships built per project increase. It was commonly accepted that a shipyard needed to build at least three ships of an identical nature to break even, and at least six ships to reach normal shipbuilding margins. For this project, management was estimating 2%, 5%, and 7% margins for each of the three ships to be built, which are lower than the normal margin realized by the shipyard in a commonly produced vessel. Nonetheless, and considering the interesting prospects for further vessels’ orders down the road, management believed this project to be a necessary step towards that goal.

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After the early joy of victory subsided, STX Brazil soon figured that implementing the

engineering plan for all three ships was easier said than done. Although the customer initially intended to order all three ships in identical design and measurements, it soon turned out that owing to the difference in utility of the ships and adequacy to changing circumstances in the economic environment and the customers’ stakeholders (e.g. Petrobras), their designs needed some customization. In addition, since each ship now had a different project time line, and in reaction to different problems and issues that constantly surfaced, the actual production process differed considerably between them. All of this resulted in temporary delays that had to be compensated with overtime, and additional production planning challenges, since the project plan was no longer synchronous and tightly aligned as initially projected.

But these challenges ended up provoking more problems than estimated. These issues

at the AHTS project brought forward the friction that existed between the Engineering and Production teams. The delays and production planning revisions exacerbated the potential negative impact of that friction, by creating delays on the engineering side (the revision of detailed part specifications was taking longer than expected), and idle time and inefficiencies on the production (the revised production plans were not received in due time that allowed for an efficient planning of resources allocation). Some of the friction seemed to derive from a clash of social classes: the engineering staff was white-collar and highly educated, while the production department had unskilled/semi-skilled blue-collar workers that depended largely on the engineering division to make sense of the maps and blueprints that arrived from the client in Europe. The antagonism between both sides made everything worse.

The Project Manager was also concerned about the sheer complexity of the project, and the engineering division was finding it tough to deal with a complete new ship concept and to keep pace with the consistently changing requirements. As a result these delays also percolated down to production. In the words of the Project Manager:

“We have underestimated the engineering department’s capacity! Now, production is suffering!”

Finally, the political dynamics of the organization and the department conflict gave rise

to an unhealthy lack of trust amongst the two teams. On conditions of anonymity, one of the engineers from the team commented:

“There are regular misunderstanding between engineering department and the production one, mostly regarding planning and the real status of the project.”

Tools Used

STX Brazil developed in-house tools that aided periodic review and helped track the known and unknown elements of the project. However, those tracking tools were of no use to the limitations the whole project was facing with. The production and engineering departments were clearly with their backs turned to each other, and it seemed that the company had no tools or means to reverse that situation. The actual control tools were treated as a bureaucracy procedure, and did not serve its purpose in any way. (Refer to Exhibit 7 for reports).

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The Outcome

As result of the project, the project margins did not meet expectations: the three ships’ margins stood at -2%, 0% and 5%, respectively.

The project manager quickly realized he had severe issues on his hands and

communicated them in an extraordinary Executive Committee meeting. He emphasized three main symptoms which the roots had to be sorted out: i) motivational issues in the engineering and production departments, ii) there were delays in the engineering department and abnormal low productivity in the production department, and iii) instead of working together to devise solutions, both of those departments were further falling apart from each other.

However, the acknowledgement of these problems, and the personal sacrifice of the

project manager’s, supported by a strong stand from the Executive Committee backing him up, made it possible to make substantial improvements throughout the project that became evident in the last ship’s production. Additionally, since they went through the development iteration of the ship three times, after each increment of the project cycle, the project managers, the engineering and production teams knew beforehand some of the issues they would have to deal with, and provided for solutions to anticipate them, which in the end reduced the impact of the problems that had arisen. THE $220 MILLION PROJECT The project consisted of three OSCV ships (Offshore Supply Construction Vessels) which are mostly used to supply offshore platforms during its construction phase and are involved in deep sea construction works. The new order of three ships was considered to be the biggest challenge the shipyard ever faced in its history. The total value of each ship (approximately $220 million) almost surpassed the total value of the previous three ships’ order, and its complexity seemed to be correlated with the increase in value. Not only was this ship much bigger in size (approximately 120 meters long and with a deadweight tonnage of 5,100 tons – refer to Exhibit 8 for a picture of a similar ship), but also, and mostly, it was much more complex in all the additional equipment that it included. This new ship was designed to offer a much bigger range of possibilities to supply and serve the offshore platforms, and because of that, the level and complexity of the equipment to be installed was much higher. The initial assessment of the project’s risks emphasized the following: i) because the shipyard was not experienced in dealing with this level of equipment in a ship, the engineering and production departments will have to work closely together to constantly devise and adapt the production plans to difficulties found in installing the equipment (mainly related with the sequence of equipment installation and ship block building); ii) the complexity of the equipment was in itself a challenge to the equipment handling team, as most of the equipment in this new ship was completely new to them. NEXT STEPS

As the CEO, CFO and COO worked together, they thought about their meeting with the Project Manager of the AHTS project for Norskan. The building of the three ships was the most complex project to-date and presented some major challenges to the company. In addition, this project was not sufficient to achieve considerable gains of learning by itself, similarly to the previous project. However, they believed there should be a way to make the

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learning curve for shipbuilding a continuous between projects, and that the teams involved should endow themselves with the learning opportunities from the previous project and be able to build the first ship at a much higher profit margin. Anyhow, even though the conflicts between the engineering and production departments seemed to be settled, it was clear to them that it was just temporary. The emergence of new challenges, expected to be even bigger in this new project, would certainly make their mutual issues come up and disrupt the course of production.

The challenge that the COO faced was to understand the process and control for the previous three $80 million ships and implement control system improvements to assure that better results were achieved for the new project of three ships, while keeping all stakeholders’ interests in mind. The COO had two questions in mind to ask the Project Manager that he hoped would help devise an action plan to sort out these issues:

What are the key issues to address?

What changes can they do to the control system in order to achieve higher shareholder return in this new project?

But he also remembered what the CFO had told him about how to address all these

issues: “It’s all about asking the right questions!”

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Exhibit 1 – Growth of the shipbuilding industry in Brazil

Exhibit 2 – STX Brazil Organizational Chart

Exhibit 3 – Historical steel prices (US$/ton)

Source: London Metal Exchange (lme.com)

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Exhibit 4 – Map of different phases of the shipbuilding process

Source: STX Brazil

Exhibit 5 – Erection of modules over the ship’s hull

Source: STX Brazil

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Exhibit 6 – The main milestones in shipbuilding

Source: STX Brazil

Exhibit 7 – Various important reports used Report: Cost control – budget, year to date and forecast

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Report: Progress control – milestones status

Report: Labor control – man-hours budgeted, year to date and forecast

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Report: Risk control

Exhibit 8 – Similar ship to the $220 million ships project