Fluor Corp. Competing for INFORMS Edelman Prize

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Ashley Smith
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HANOVER, MD, March 21, 2011 – Fluor Corporation’s analytics team is among six finalists that will compete for the INFORMS 2011 Franz Edelman Award for Achievement in Operations Research and the Management Sciences in Chicago on April 11 at the Marriott Chicago Downtown.

The finalists for the competition, sponsored by the Institute for Operations Research and the Management Sciences (INFORMS®), include:

Fluor Corporation with Kenneth Cooper Associates for “System Dynamics to Manage Projects and Changes.”

As a global leader in the $600 billion engineering/procurement/construction industry, Fluor manages projects for clients in nearly every market and geography. Managing large projects to cost and schedule in this industry is a major challenge. 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.

Five years ago 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.

For decades the industry's practice has been to report change impacts retrospectively and sort out later who will pay for how much (after the impact amounts become painfully evident). In projects with many changes, this led to late surprises in cost and schedule performance. It placed contractors at odds with their clients over cost responsibility, sometimes leading to formal contract disputes and lawsuits. A change in dealing with changes was needed.

Fluor turned to management science. 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. A system dynamics model describes the cause--effect relationships that drive project costs, schedules, staffing, work progress, productivity, rework, and their determinants. Fluor built and used large databases of projects and market characteristics, and conducted a worldwide survey of 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 advance analyses that (a) forecast the anticipated impact of changes, (b) identify timing and causes of the impacts, and (c) 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 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 replan the entire construction schedule, saving $23 million.

All told, 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.

Beyond these quantified impacts, the change in mindset achieved may be even more important to the long-term strategy of the company. The industry’s past change analyses were typically simplistic, retrospective, and too often an exercise in finding blame. The new system not only helps avoid costly disputes; now the approach is routinely active, seeking impact avoidance and savings---a “win--win” for the company and its clients. Moving from a reactive approach to a positive, active one is truly a fundamental change in Fluor’s business of managing projects.

Fluor Corporation is one of the world's largest publicly owned engineering, procurement, construction, maintenance, and project management companies. Fluor is a Fortune 500 company that is ranked Number 1 in Fortune magazine's ''Engineering, Construction'' category of America's largest corporations.

The six 2011c Franz Edelman finalists are:

  1. CSAV
  2. Fluor Corporation
  3. The Industrial and Commercial Bank of China Limited (ICBC)
  4. IHG (InterContinental Hotels Group)
  5. Midwest Independent Transmission System Operator
  6. The State of New York Department of Taxation

 This is the 40th year of the prestigious Franz Edelman competition. The winner will be announced at a special awards banquet on April 11, 2011 during the INFORMS Conference on Business Analytics & Operations Research. The conference takes place at the Marriott Chicago Downtown from April 10-12.

About INFORMS

The Institute for Operations Research and the Management Sciences (INFORMS®) is an international scientific society with 10,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, financial engineering, and telecommunications. INFORMS serves the scientific and professional needs of operations research analysts, experts in analytics, consultants, scientists, students, educators, and managers, as well as their institutions, by publishing a variety of journals that describe the latest research in operations research. INFORMS Online (IOL) is at www.informs.org. Further information about operations research can be found at www.scienceofbetter.org.

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