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Taking a strategic view of physical assets
Strategic asset management (SAM) maximizes the performance of fixed, physical or capital assets that have a direct and significant impact on achieving corporate objectives. Companies and organizations depend on vital assets to drive their business. Often, however, they see them as individual, stand-alone objects operating in the background. In reality, companies are a collection of strategic assets that exist as a single system. These tightly inter-dependent assets should be managed as a unified enterprise at higher levels in the organization.
To achieve higher corporate performance— whether measured in terms of shareholder value, revenue growth, profitability or customer satisfaction — companies are becoming more sophisticated in their approach to asset management. They are more focused on managing the interdependencies between all of the different types of assets that drive their operations, assets that have previously been viewed as functioning separately and independent from one another. They are also recognizing the need to manage assets from a strategic perspective across the entire organization, rather than purely from a maintenance perspective. Maximizing the value of asset investment is a responsibility that reaches from the shop floor to the executive suite.
Whilst the definition of exactly which assets are considered strategic differs by company and industry; managing critical assets to optimize their value is universally important. Accomplishing this by integrating and synchronizing management practices, both at a strategic and tactical level, across multiple types of assets and across the entire enterprise is the essence of strategic asset management.
Manufacturing companies depend on equipment uptime to meet production goals; for them, plant floor machinery is clearly strategic. Hotels, hospitals and airports require trouble-free facilities to deliver the quality of service their customers and users expect. Public transit and over-the-road transport companies depend on the reliability of their fleets to move people or goods. Meanwhile financial services companies rely heavily on their computer systems to manage transactions and maintain positive customer relationships that drive their business.
On the surface, these companies appear to depend on a narrow set of assets. In reality, companies usually depend on a combination of production assets, facilities and fleets as well as their IT infrastructure for operational and financial success. Manufacturing companies are equally dependent on the integrity of the buildings that house their production equipment as they are on the equipment itself. The reliability of trucks that ship raw materials, work-in-progress or finished goods can be just as strategic. Hotels and hospitals need effective IT assets to handle personal information as much as they need efficiently operated facilities. Trucking companies, marine shipping companies and airlines need as much attention focused on their facilities as on their fleets. Financial services companies must be concerned with their facilities as well as their IT assets.
Asset management requires the attention of the entire enterprise. Companies need to manage all their assets “on the ground” — on the plant floor, in the machine shop, in the IT department, or in the vehicle repair bay. At the same time, companies must be able to manage them from the “corner office” with an integrated, enterprise-wide asset management strategy across plants, departments, divisions and even continents. The practice of strategic asset management offers this integrated approach to asset management. Companies can obtain an enterprise-wide view of asset performance and possess the tools needed to drive maximum return on asset investment.
What is a Strategic Asset?
When we consider strategic asset management we refer to assets that either directly generate revenue or are closely associated with revenue creation. In strategic asset management, this includes fixed, physical and capital assets rather than financial assets or intangible assets such as knowledge capital. The realm of strategic assets includes four broad categories: production assets, facilities, fleet, and IT hardware and software.
Production assets are generally those involved in discrete or process manufacturing. This includes robots on the assembly line at a Volvo plant or the steppers used in chip manufacturing at Intel. However, the definition of production assets is considerably broader. In the utility industry, for example, production assets are turbines and compressors used for power generation; they also include the transmission and distribution assets that deliver output to end-users. In the telecommunications industry, the antennas and microwave towers that are involved in producing and delivering output to customers are also production assets.
This asset category includes types of buildings spanning from corporate headquarters, casinos and museums to stadiums, shipyards and passenger terminals. Maintaining these facilities can involve mechanical, HVAC and electrical systems as well as landscaping and parking lots. In addition, there are a variety of specialized facilities such as clean rooms, surgical theaters, laboratories and satellite ground stations.
Fleet assets are often over-the-road vehicles such as cars and trucks; however, this category also includes airborne fleets, rolling stock and marine assets. Companies may have mission-critical fleet assets around which the core of their business is built; for example, Federal Express depends on both trucks and aircraft. Alternatively, companies may have enterprise fleet assets that are important to the overall function of an operation but don’t directly generate revenue, such as employee shuttle buses, repair trucks or fork lifts.
The operations of most companies today are critically dependent on the organization’s IT infrastructure. On the hardware side this includes servers, desktops, laptops, cell phones, PDAs, hubs/routers and telecom equipment. Software is equally important to day-to-day operations, and ensuring software license compliance is an important part of IT asset management.
The Changing World of Asset Management
It may help to understand the direction in which we are headed by looking at where we have been.
The early days of asset management were centered on the concerns of the shop floor. The first evolutionary phase featured the computerized maintenance management system (CMMS); where the focus was purely that of the shop floor with the spotlight on maintenance management of specific equipment. Stand-alone departmental CMMS solutions met the needs of the one person who was concerned about when it was that the lube oil was last changed on a line-critical piece of manufacturing equipment.
The CMMS market evolved over time to the current phase of Enterprise Asset Management (EAM). Most companies, as well as the software vendors with products in this space, are focused here today.
EAM solutions extend beyond the needs of one department and separate pieces of equipment; they may be integrated to some degree with financial, ERP and other key systems. But EAM solutions do not embrace the breadth of asset types on which a company depends, neither do they provide senior management with the tools they need to take an active and strategic role in managing asset performance.
This takes us to strategic asset management (SAM).
Strategic Asset Management: The Way of the Future
SAM advances the effectiveness of corporate-wide asset management in two important ways. From one perspective, SAM recognizes that companies exist as a system of assets acknowledging that production assets, facilities, fleet and IT are interrelated, and that by functioning effectively together they contribute to the business mission and success of the organization. SAM also enables all members of the organization, from the executive suite to the shop floor, to take an active role in maximizing the lifetime value of asset investment.
1. Production assets, facilities, fleet and IT assets must be managed together
Assets work together. The notion that one asset or set of assets is independent of another is a vestige of the days of CMMS, when asset management focused narrowly on the shop floor. Today we recognize the importance of valuing assets as part of a larger system and synchronizing their management.
The tactics of asset management, including work management, materials and inventory control and maintenance planning must be an organized and coordinated effort that concurrently takes into account the requirements of all assets. First and foremost, asset management activities for one asset or set of assets should not conflict with higher priorities for another. The goal of SAM is to ensure that maintenance plans, use of labor, draw-down of spares and expenditure of budget for one asset support and work in concert with the needs of another.
2. Asset Management through the Enterprise
CMMS and EAM asset management practices traditionally considered people, processes and systems to have limited scope – specialized labor using point software products dedicated to a single category of assets. There are two intrinsic problems with this approach.
First, CMMS and EAM practices create silos of separate functions and departments operating independently; this fails to capture the full opportunity for maximizing asset performance by limiting the ability to manage general skills across the enterprise, not facilitating the sharing of asset information and not building shared maintenance best practices, independent of asset type.
Second, EAM fails to capture the potential that lies with greater attention and focus by higher levels of management. SAM brings the necessary and added dimension of asset management to higher levels of the organization, where there is a more strategic view of the organization as a whole, a longer planning horizon and the ability to make broader prioritization decisions.
At the operational level, typified by the plant manager, who must consider all of the elements that add up to fully functioning plant operation, the focus is generally on throughput, yields, and product quality, and making trade-offs when it comes to allocating a limited budget and deploying limited labor resources.
At the executive officer level, the CFO in particular needs to understand the drivers of financial performance including revenue generation, cost structure and return on assets. This person must make educated allocation decisions among multiple asset investment options. Only with information that includes historical maintenance expenses, projected costs, current asset values and replacement costs can the CFO make knowledgeable investment choices. The CFO is also concerned with ROA as a key financial metric; improving this financial ratio can correlate closely with greater shareholder value and higher stock price. Armed with measurement metrics and key performance indicators such as actual vs. budget maintenance costs, lost-time incident rates and software license utilization rates, the CFO can identify areas for greater scrutiny and delve into underlying drivers in pursuing continuous improvement. Strategic asset management gives senior executives, including the CFO, the information they require for informed decision-making and effective corporate governance.
Driving Corporate Performance with Strategic Asset Management
With pressure mounting to improve financial performance in the face of a difficult economic climate, companies are looking in all directions to increase revenue, reduce costs and mitigate risks. Strategic asset management is a more sophisticated and comprehensive approach to extracting greater lifetime value from asset investment; it is one relatively unexplored avenue that offers an opportunity for significant gains.
Corporations can pay a high price for failing to synchronize asset management among different categories of strategic assets in a way that includes all levels of management within the organization:
- Without a unified solution for managing labor priorities across the enterprise, downtime of the equipment may be unnecessarily, and expensively, extended.
- Conflicting maintenance activities among different assets lower productivity, extend downtime, and drive costs higher.
- Limited labor resources may be assigned work orders for preventive maintenance that could be deferred while emergency maintenance needs for production line equipment go unmet.
- Companies don’t know lifetime repair costs for key assets; as a result, they can’t make comparative, strategic decisions about repair, replace or run-to-failure for different assets that impact budgets for the entire company.
Strategic asset management solves the short-comings of traditional EAM practices and provides value to an enterprise in a variety of dimensions:
- Management can make prioritized investment decisions for allocating limited budget, labor and material based on more complete information with a longer planning horizon, rather than simply tracking historical maintenance events.
- Educated decisions that allocate limited labor resources can be made in a way that flexibly balances both long-term maintenance strategies and immediate repair requirements.
- Repair history and historical maintenance costs can be used to project future budget requirements and determine total cost of ownership for large asset investments.
- Operating management can intelligently match labor skills and expertise to specific requirements of different types of assets.
- With more complete information, companies can achieve a clarity of focus on those key assets that are most directly tied to division or corporate objectives. Concentrated focus on, and investment in, the most critical assets translates into a higher ROA.
- Lifetime cost of ownership information can be used to create strategies that standardize equipment and parts, yielding more efficient maintenance efforts, lower parts inventory and more vendor leverage to negotiate lower acquisition costs.
- Operating management can reconcile relative urgency and priority of asset management needs on a plant-wide, division-wide or perhaps enterprise-wide basis.
Asset-Centric Procurement
Asset-centric procurement (ACP) is an important aspect of a complete strategic asset management solution. Different from acquisition of direct material, ACP is focused on efficient procurement and purchasing of the parts, materials and labor required for maintaining strategic assets. This form of e-procurement is strengthened by its tight connection to demand signals for maintenance, repair and operations (MRO) materials. Specifically, asset information, predictive maintenance strategies and inventory management programs together can drive intelligent and automated procurement.
Conclusions
Asset management has evolved significantly over time as companies have sought new avenues to achieve their business objectives more profitably. Strategic asset management brings companies the ability to synchronize management of production assets, facilities, fleets and IT assets as a single system that drives corporate success. With strategic asset management, companies can manage assets at a tactical level — at the shop floor by direct labor and crafts people — and at a strategic level by the senior management team — up to and including the CFO.
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