Fluor Corporation: Using System Dynamics to Manage Projects and Changes
The Problem
As a global leader in the $600 billion engineering/procurement/construction industry, Fluor manages projects for clients in nearly every market and geography. Every project has unique challenges, and most require some degree of change from original plans to accommodate revised client needs, schedule requirements, regulations, and technologies. Fluor analyzed hundreds of billions of dollars worth of projects and the changes (scope changes, design changes, and schedule changes) that were made to them. The company determined that changes can account for 20% of revenues or more—in an industry with typical operating margins at 3–6% of revenues. Leadership concluded that how they dealt with project changes would define success with clients, in the market, and for shareholders.
The Analytics Solution
Fluor turned to analytics to decrease the impact of these changes on the bottom line. Starting in 2006, the company implemented a system dynamics model-based system to actively analyze the performance of large projects. The model is tailored to simulate each engineering/construction project, to forecast its cost and schedule performance, to quantify in advance the impacts of changes, and to test in advance different impact-avoidance measures. To do so, the model had to be rapidly customizable and able to accurately simulate a diverse range of projects and changes. Since 2006, the company has deployed the model on well over 100 projects throughout the entire company and trained hundreds of managers worldwide.
Several elements of business analytics came together to make the system successful including (1) a system dynamics model that describes the cause–effect relationships that drive project costs, schedules, staffing, work progress, productivity, rework, and their determinants and (2) survey data from managers with over 40,000 person-years of industry experience. Using this data with the system, the company can now, with a high degree of accuracy, rapidly tailor the model to each subject project. The system uses hill-climbing algorithms to calibrate the model parameters so that it can accurately simulate the project plan.
By pulling together all of these analytical elements with company-wide training, Fluor provides each project’s management team and client with advanced analyses that (1) forecast the anticipated impact of changes, (2) identify timing and causes of the impacts, and (3) quantify benefits that will be achieved by different management actions. This information allows project teams and clients to make more informed decisions and reduce costs.
The Value
The tool is used at different stages throughout projects. Before one North American project started, a client considered executing a design effort before preliminary engineering was complete; analyses showed a savings of $34 million by working to a different design schedule, which was adopted. During one European project, the client took Fluor analyses to its corporate management to re-plan the entire construction schedule, saving $23 million.
Fluor estimates that the cost reductions on over 100 projects amount to over $770 million. In addition to those cost savings, Fluor recognized over $70 million in added revenue from change impacts that would not otherwise have been foreseen. The total quantified benefit over the first five years, therefore, is at least $840 million, and the usage and benefits continue to grow throughout the company.
