Total Cost Assessment and TCAce2

Sydney, Australia24 February 2005

Gregory A. NorrisSylvatica / Harvard School of Public Health

TCA Project CollaboratorsAIChE Center for Waste Reduction TechnologiesArthur D. LittleBristol Myers SquibbDowEastman ChemicalEastman KodakGeorgia PacificMonsantoOwens CorningRhom & HaasSmith Kline BeechamUS Department of Energy

Collaborator Motivation

“The full monetary costs and benefits of EH&S issues

historically have not been presentedin an economic format to business leadership

for decision making.”

- Duane Koch, Dow Chemical

Approach to Non-Conventional Costs: Match Company Conventional Approach

Follow & Adapt to General and Company-Specific Accounting Conventions

Investment costsDepreciation, salvage valuesImpacts before- or after-taxDiscountingTime Horizon

Total Cost Assessment Method

Corporate Cost

Analysis System Results:

per year or per unit of production

LCA Results:

per functional

unit

Scenario Builder for Accidents/Liabilities,

Possibilities, “Intangible”Outcomes, etc.

Integrate Functional Unit & Annual / Production

Perspectives

Modeling, M/C Analysis

Results Reporting & Cause/Factor Exploration

Approach to Uncertainty

Take blinders off; acknowledgeAsk subject experts what they knowBrainstormModel systematically Test for possible importanceRefine if necessary

The Core: Scenario Analysis

Option A Option B

Probability

Years

Scenario A1

Cost A1a

Probability

Cost in Year of Occurrence

Cost 1yr laterCost 2yr later

Alternatives ScenariosHow could decision or course of action impact timing, likelihood, or relevance of

Future environmental regulationsAccidents, spills, equipment failuresNon-compliance incidentsWorker health/safety incidentsInterruption of supply for major inputsSignificant and long-term shifts of costsShifts in market shareActions/pressure from one or more stakeholders

Scenarios Costs

For each possible event with altered timing, likelihood, or relevance:

What are the possible cost impacts?Direct costs / impactsLong-term / “secondary” impacts

– Customer loyalty– Employee attraction/retention/morale/productivity– Brand value– “License to operate” (local, state, federal)

Timing, duration, magnitudes

Monte Carlo AnalysisPr(A)

APr(B)

B

Pr(A*B)

A*B

Structured sampling for A and B;

compute A*B each iteration;

create distribution for A*B

Outcomes that interest Decision Makers

Most likely outcome ModeCentral, mid-ranked outcome MedianHow good/bad can it get? Min/MaxWhat range are we prettycertain it will fall within? PcntilesWhat is the likelihood ofa major impact? CDF

Optional Spreadsheet Tracking/ Optional Spreadsheet Tracking/ Recording of Inputs and ResultsRecording of Inputs and Results

Mechanics: “Workshop” Approach

Workshops configured for 1-2 days -Key business and project people needed for data/analysis have only limited time

Disciplined process with total focus on TCA -due to limited time

Scenarios used to clearly document key issues, data, judgements and decisions

Dow Application Examples

Report that use of method has lead to decisions with “estimated benefits in the hundreds of millions of dollars”

15+ business examplesEvaluate 2005 EH&S Objectives established in 1995“TBCA” = Total Business Cost Analysis

Completed Eight TBCA Workshops for Dow EH&S 2005 Goals

Emissions - Priority and ChemicalWaste - TTU’s and KilnsWaste - LandfillsWastewater ( BOD and Hydraulic)EnergyLoss of Primary Containment + Process Safety Personal Injury - Illness/Motor VehicleTransportation

Business Application Examples

EDC/Vinyl Expansion AlternativesChlor-Alkali Cell Technology EvaluationPolycarbonate Technology RouteNew Sustainable Product (Agrifiber)Water Systems OptimizationCompliance IssuesIntegrated Health

SummaryTotal Cost Assessment Method:

Multi-national companies incorporating non-conventional cost risks into structuredfinancial evaluations of:

Environmental, Health & Safety decisionsCapital InvestmentsCorporate Strategy

Applications: Impacting decisions with benefits estimated ~ $100M’s