Improve Asset Management: A Driver of Additional Profits

Are you presently experiencing one or more of the following situations?

1. Your global economic earnings are down and shareholder returns lagging your peer group;
2. competitive analysis identified that you have a significant disadvantage in asset productivity; and/o
3.  You have major further capital expenditures are planned.

Does your company need a more effective Asset Management Strategy as an additional way to increase your profits in this ever changing economy?

Recent research completed by our firm suggests that profits and shareholder value can be improved in many companies by increasing the productivity of your fixed asset base

For example, our survey identified that in the capital intensive industries good shareholder returns are strongly linked to capital efficiency.

One of our major conclusions was that “Implementing a more effective Operating Asset Management Strategy can have a significant impact on increasing profits and shareholder value”.

The two goals of this strategy should be:

1.  Implement improvements that generate increased productivity from existing assets with minimal capital investments; and
2. Improve utilization, throughput, and acceptance of any “production equipment” which delivers higher unit margins from existing fixed assets and defers further capital projects until absolutely necessary

As an example, when we apply our Operating Asset Effectiveness Measurement Approach to several capital intensive industries, individual industry performance ranges from 40% to 80%, with best practice performance above 85% demonstrated in all industries surveyed. 

The five most ineffective industries in our survey, ranged from 40% to 50% effective and the average of all industries was below 60% compared to the 85% goal. This demonstrates the potential for significant “bottom line” improvement in asset utilization in many industries.

Operating Asset Effectiveness (OAE) measures the ability to extract the most value from the existing asset base. For example, OAE = amount of sellable product manufactured compared to the theoretical potential). 

In this case, the Operating Asset Effectiveness (OAE) metric is a composite of equipment utilization, process rate, and product quality reflecting the productivity of the fixed asset base. OAE shows the balance between increasing production hours, faster production, and product acceptance.

By improving your OAE, you can increase your operating profit without increasing the capital base.

Best performers know how to measure and sustain asset effectiveness. They use capital as an enabler of, rather than a substitute for, operational excellence.

Many of the companies that were surveyed were rich in engineering skills. But many have historically relied on the infusion of new engineering and construction capital to maintain or improve throughput rather than improving their present assets effectiveness.

All too often, companies have traditionally tried to address both operating cost and capacity issues with capital projects. In many cases, this was done with little proof that the technological solution will work in driving new effectiveness and without understanding the re-training and process fine-tuning requirements.

Today, given the present economic environment, a large number of companies see the opportunities in this new approach to driving greater profits and are now moving toward a more effective asset management focus. 

The first step in developing an effective Asset Management Strategy is for the management to have an Asset Management Mindset. This requires that your team think beyond just managing assets on a capital project basis. Examples of an Asset Management Mindset include: 

1. Periodically evaluating the economic value creation impact on improving your Operating Asset Effectiveness and determining the potential for (1) increase in revenue and profit and (2) ability to maintain or reduce invested capital 
2. Managing existing assets to their fullest capability in order to increase capital productivity; 
3.   Minimizing or delaying additional capital expenditures with your initial focus on driving operational excellence; equipment performance; and improved process capability; and 
4. Rewarding your teams for improved performance and effectiveness of existing assets.

This approach significantly expands on the traditional Asset Management approach prevalent in many companies today which is a Capital Project Mindset. In this mindset, the company instead limits its’ focus on:

1. Acquiring or building the latest technology as the primary way to increase productivity: 
   
2. Sending additional engineering, construction and sustaining capital as needed; and  
3. Rewarding for efficient spend of capital dollars in executing projects.

Excessive reliance on capital investment as a primary driver of productivity may not increase your economic earnings by acquiring these new assets. If fact, in many cases, after the new investment, the results tend to migrate to the historical OAE level as time progresses thereby minimizing any potential expected gains.

The second step is to execute a comprehensive integrated approach to increasing Operating Asset Effectiveness using a proven methodology. 

In our approach, we help our clients improve their Operating Asset Effectiveness by focusing on three goals:

1. Create the appropriate metric for measuring asset productivity;  
2. Develop a framework for enhancing shareholder value; and
3. Implement a methodology for achieving improvements.

Our framework for addressing Operating Asset Effectiveness Methodology seeks improvement in the three primary components — utilization, throughput, and acceptance

Improvements result from a structured methodology based on three key improvement techniques:

1. Operations Improvement - enhancing work and production process effectiveness
2.  Equipment Stabilization - improving maintenance, reliability and equipment condition 
3. Process Capability - improving the basic performance of production processes

Our OAE methodology utilizes these key three improvement techniques to (1) identify sources of loss; (2) focus on determining root causes and (3) implementing sustainable solutions.

We would be happy to answer any questions you have on the specifics of this approach or the benefits that have been achieved through its’ implementation. Please feel free to contact me.