PROCESS ECONOMICS PROGRAM SRI INTERNATIONAL Manlo Park, California 94025 ABSTRACT Process Economics Program Report No. 140 OPERATING COSTS IN THE CHEMICAL INDUSTRY AND THEIR ESTIMATION (April 1981) This report is concerned with various elements of operating costs in the chemical industry other than raw materials and energy. The principal data are specific to U.S. conditions. However, with adjustments, the results are applicable to other countries. SRI has developed new correlations for operating and maintenance labor requirements, plant overhead, and selling, general and administrative, and R&D cost. Other cost elements are reviewed. SRI has developed nonarbitrary methods for allocating utilities credits, and costs of by-products, coproducts, and joint products. We extended the general approach to include the development of a method of calculating transfer prices consistent with management objectives in.establishing profit centers. All of these methods apply to both cost estimation and actual operations. Capital and labor productivity trends in the U.S. chemical industry are evaluated. Labor productivity trends for several other industrial countries are also presented. PEP'79 KEL
Report No. 140 OPERATING COSTS IN THE CHEMICAL INDUSTRY AND THEIR ESTIMATION by KENNETH E. LUNDE April 1981 A private report by the PROCESS ECONOMICS PROGRAM Menlo Park, California 94025
For detailed marketing data and information, the reader is referred to one of the SRI programs specializing in marketing research. The CHEMICAL ECONOMICS HANDBOOK Program covers most major chemicals and chemical products produced in the United States and the WORLD PETROCHEMICALS Program covers major hydrocarbons and their derivatives on a worldwide basis. In addition, the SRI DIRECTORY OF CHEMICAL PRODUCERS services provide detailed lists of chemical producers by company, prod- uct, and plant for the United States and Western Europe. ii
CONTENTS INTRODUCTION.... SUMMARY... Operating Cost Elements... Cost Allocations and Transfer Prices.... Cost Projections.... OPERATING COST ELEMENTS... Operating Labor Requirements.... Control Laboratory.... Maintenance and Operating Supplies Costs.... Property Taxes and Insurance.... Plant Overhead... Working Capital and Inventory... Book Depreciation and Retirement.... Administration, Selling, and Research Costs... COST ALLOCATIONS AND TRANSFER PRICES.... Review of Literature.... Overhead... By-Products... Coproducts.... Joint Products.... Transfer Prices... Utilities Costs and Credits... Proposed Approaches to Cost Allocations... Overhead... By-Product Costs and Credits.... Utilities Credit.... Coproducts.... Joint Products or Multiproducts... Transfer Prices... COST PROJECTIONS.... 1... Review of Literature.... Analysis of Productivity Trends in the Chemical Industry... Contribution of Technology to Productivity in the Chemical Industry.... 1 3 3 6 7 13 13 25 27 39 40 50 53 57 73 73 73 74 76 77 78 83 84 84 85 87 87 95 106 113 113 119 137 iii
CONTENTS 6 COMPARISON OF OPERATING COST ELEMENTS IN THE UNITED STATES WITH THOSE IN SELECTED OTHER INDUSTRIAL COUNTRIES.... 151 Operating and Maintenance Labor... 151 Overhead... 152 Labor Productivity... 154 7 RECOMMENDED METHODS FOR ESTIMATING OPERATING COSTS... 157 Operating Cost Elements.... 157 Operating Labor... 157 Control Laboratory... 159 Maintenance Labor and Materials and Operating Supplies... 159 Plant Overhead... 161 Working Capital and Inventory.... 162 Book Depreciation, Plant Retirements, and Replacement Cost.. 166 Property Taxes and Insurance... 166 Administrative, Selling, and R&D... 167 Wages, Salaries, and Employee Benefits... 169 Cost Allocations... 172 Capital and Labor Cost Projections... 172 Capital Investment and Capital-Related Costs, Chemical Industry Average.... 173 Labor Cost, Chemical Industry Average.... 174 Cost Projections, Industry Subsectors, and Individual Plants... 176 Adjustments for Countries Other Than the United States... 176 CITED REFERENCES........................ 179 iv
ILLUSTRATIONS 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13 3.14 3.15 Operating Labor Requirements, Continuous Processes Reactor and Furnace Basis................... 18 Operating Labor Requirements, Continuous Processes Equipment Item Basis..................... Maintenance Labor...................... Historical Trends in Plant Overhead Nonproduction Employees, Payroll and Number; Percent of Production Employees, Payroll and Number...... Plant Overhead as Related to Plant Size Sic 28, Chemicals and Allied Products............ Plant Overhead as Related to Plant Size Commodity Organic Chemical and Petroleum Refining Industries...................... Plant Overhead as Related to Plant Size Synthetic Fibers and Other Mostly Single-Product Plants.... Plant Overhead as Related to Plant Size Specialty Chemicals..................... Growth in Corporate Staff Employees in Administrative and Auxiliary Units, Percent of Production Workers................. 61 Industry Centralization Number of Manufacturing Establishments per Administrative and Auxiliary Unit..... Central Administrative Offices Sic 28, Chemicals and Allied Products............. Growth in Corporate Payroll Sic 28, Chemicals and Allied Products............. Plant and Corporate Nonproduction Workers Sic 28, Chemicals and Allied Products............. Administration and Selling Costs in 1979........... Comparison of Calculated and Reported Administration and Selling Costs $ Million in 1979...... 19 36 42 43 45 47 48 62 63 64 66 69 71 V
ILLUSTRATIONS 5.1 Factor Productivity Trends in the Chemical Industry..... 116 5.2 Chemicals Production......,............. 121 5.3 Physical Productivity Trends in the Chemical Industry Sic28.................. 123 5.4 Physical Productivity Trends in Plastics and Resin Materials Sic 2821...,............... 125 5.5 Physical Productivity Trends in Basic Organic Chemicals Sic2818...:. 126 5.6 Trends in Plant Capacity, Investment Exponent, and Labor Exponent Sic 28, Chemicals and Allied Products............ 140 5.7 Contribution of Technology Advances to Productivity in the Chemical Industry since 1959............. 145 5.8 Relation Between Published Information and Technical Productivity in the Chemical Industry....... 147 6.1 Comparison of Chemical Industry Labor Productivity Trends in Various Countries............,.,..... 155 Vi
TABLES 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4. 7 5.1 5.2 5.3 6.1 7.1 7.2 7.3 7.4 7.5 Equipment Count.... 21 Inventory Turnover Ratios.... 51 Gluten and Starch Production Base Case... 89 Gluten and Starch Production Case A (Hard Wheat Flour).... 91 Usual Ranges in Cost Element Exponents for Chemical Plants.... 97 Gluten and Starch Production Flour Mix Profit Optimization and Cost Allocation Equations Disaggregated Cost Elements.... 100 Gluten and Starch Production Results of Flour Mix Profit Optimization... 102 Conditions Assumed in VCM and PVC Example.... 109 Transfer Price for Vinyl Chloride Monomer and Returns on Replacement Value... 110 Plant Capacity and Physical Productivity Growth Rates in the Chemical Industry... 128 Comparison of Economic Productivity Growth Rates Sic 28 - Chemicals and Allied Products... 130 Cost Structure of the Chemical Industry in 1975 Sic28.....133 Production Worker Hourly Wages and Benefits in the Chemical Industries of Various Countries Mid-1975, Local Currencies... 153 Approximate Man-Hour Requirements for Loading and Unloading Liquids.... 158 Plant Overhead Payroll Equations... 163 Typical Timing for Elements of Working Capital... 164 Average Administration, Selling, and Research and Development Costs... 167 Wages, Salaries, and Employee Benefits in the Chemical Industry... 170 Vii