The last great opportunity
for enhancing corporate
financial performance on a
large scale. by
James W. Davis, PE, Vice
President,
Strategic Asset Management
Inc.,
Voice: 610-861-7472
E-mail:
jdavis@samicorp.com
In the last few years many
companies have begun to
realize the importance of
Strategic Asset Management
(SAM) as an enterprise
strategy that, properly
implemented, will improve
financial performance.
Typical results of an
effective Strategic Plan
for Asset Management
include a 20% - 50%
reduction in maintenance
cost accompanied by a 15%
- 20% increase in real
capacity, with no capital
investment in production
equipment. The tangible
results include a
significant increase in
profitability accompanied
by a dramatic reduction in
unit cost.
In her paper “Improving
Profitability Through
Reliability” Dr. Carol
Vesier states, “The
goal of all public
companies is to enrich
their investors. A
requirement to increasing
shareholder wealth is
profitability.
Profitability is the
return on an investment.
Measurements of return
include cash flow and net
income while measurements
of investment include
operating assets, total
assets and equity. All
strategies to improve
profitability can be
classified as employing
one or more of three
fundamental mechanisms of
which improving
reliability is one. As
discussed below, each of
these mechanisms has a
different risk-reward
relationship.
·
Eliminate waste
·
Change the rules of the
game.
·
Improve reliability
Research has shown that
increasing asset
productivity and reducing
costs are powerful
contributors to improving
profitability. Successful
strategies that allow
harnessing two of the most
powerful contributors to
profitability will have
more impact than those
based on weaker
contributors to
profitability.
Manufacturing reliability
improvements offer a
unique opportunity to
simultaneously increase
asset productivity and
reduce costs. Because of
this ability, reliability
strategies offer an
excellent opportunity to
increase profitability.
Most companies should
include a global
reliability strategy
amongst their
profitability strategies.”
During the days of the
Dotcom Craze, Boston
Consulting Group conducted
a study titled “Asset
Productivity: The Next
Wave”. In the study
Nichol and Amouyal stated,
“In order to compete
for funds, companies must
offer investor returns
that are competitive with
other opportunities.
Alternative investments
such as dot-com and others
with non-traditional
business models have
raised the bar.”
While being a Dotcom no
longer guarantees a wild
ride in the stock market,
the basic statement
remains true today – in
order to compete, your
company must offer
investor returns that
exceed averages for your
industry.
The researchers believed
that shareholder return is
a result of three factors:
·
Asset Growth: Compounded
Asset Growth Rate
·
Cash Flow Margin: Ratio of
Cash Flow to Sales
·
Asset Productivity: Ratio
of Sales to Asset
The study results identify
asset productivity as the
most powerful mechanism
for increasing Shareholder
return. It states the
following, “Companies
have exhausted methods of
traditional cost cutting.
They have experienced the
downside of rapid growth
and have neglected the
balance sheet. Fundamental
changes in industry
structure such as
deregulation, outsourcing,
and IT innovations have
taken their toll.
The only remaining
opportunity is to increase
Asset Productivity.”
Fixed Asset Productivity =
Sales Volume x Selling
Price
Net Fixed Assets
Sales Volume= Max Daily
Rate x Utilization x 365
days
The author believes that
the most effective way to
increase Fixed Asset
Productivity is to
maximize asset utilization
by increasing the
Reliability of the Assets
and associated Business
Processes. In a rather
heated debate my former
boss (then President and
COO of HSB Reliability
Technologies) angrily said
to me, “The problem with
you engineers is that you
think everything is about
process!” Everything
is about processes and the
people that implement them
and the culture in which
they work.
Developing and
implementing a Strategic
Plan for Asset Management
requires significant
effort and knowledge. Most
companies have difficulty
finding a sufficient
supply of these valuable
commodities to implement
SAM internally. Many
companies also struggle
with figuring out how to
get started and what
direction to proceed.
A Roadmap is needed!
Why Consider SAM?
In the past, Reliability
Improvement Initiatives
have been restricted to
site level programs that
achieve impressive results
at individual
manufacturing sites.
These benefits often are
lost due to management
changes, failure to
establish a “Reliability
Culture”, and lack of
Senior Management
support. The ability to
duplicate results across
multiple sites is
restricted due to cultural
differences, lack of
consistent business
processes, and plain old
territorial jealousies.
Strategic Asset Management
(SAM) programs are
designed to overcome these
deficiencies and achieve
significant and
sustainable improvement in
corporate business
processes and financial
performance.
The benefits of a
successful Asset
Management Strategy
include:
1.
Accurate analysis of
equipment maintenance,
repair, and replacement
records.
2.
Increased availability of
production systems and
equipment.
3.
Fewer failures of
production systems and
equipment, resulting in
fewer unplanned outages.
4.
Improved product quality
associated with a
reduction in costs related
to losing or reprocessing
product.
5.
Lower costs for system and
equipment maintenance,
spare parts inventory, and
capital replacement.
6.
Enhanced morale among
management and the hourly
workforce as they learn to
enjoy a proactive
environment instead of
surviving in chaos.
7.
Additional real capacity
as operating units are
able to operate at higher
levels for sustained
periods without excessive
equipment failure.
8.
Higher profits from the
compounded effect of
reduced conversion costs
and increased production
levels.
Case Studies
The following companies
have developed and
implemented a Strategic
Plan for Asset Management
at the corporate or
business unit level to
improve their Asset
Utilization and achieve
impressive financial
performance improvement.
The names of the companies
are removed to protect
confidentiality, but more
information and specific
contacts in each company
are available if you wish
to contact the author.
Global Oil & Gas Producer
This company produces
nearly 700,000 equivalent
barrels per day of crude
oil and associated gasses
from its Gulf of Mexico
base where it operates
approximately a dozen
offshore platforms as well
as several onshore
processing facilities.
Working with our firm,
they have established an
objective of consistency &
economy across these
operations, which include
deepwater platforms, shelf
platforms, and onshore
processing facilities.
Senior management realized
that they needed to
eliminate unnecessary
equipment downtime in
order to increase
production volumes to an
acceptable level. Health,
Safety and Environmental (HSE)
and Asset Integrity
concerns are key issues
for the management team,
but they lacked alignment
on the best way to address
them.
The existing operations
had no common processes
for maintenance and
reliability management
being applied in their
diverse and distributed
asset base. The
geography ranges from
Colorado to Michigan and
about 150 miles into the
Gulf of Mexico. The
dispersed sites have
levels of staffing that
vary from 3 to 250
persons. They had
experienced numerous
failed attempts at
maintenance improvement
and were experiencing
assessment fatigue, having
been “Maintenance
Assessed” seven times in
past five years.
Figure 1 - The Asset
Healthcare Triangle
Management decided to
embark on a Strategic Plan
that initially focused on
Stage 1 of the SAMI Asset
Healthcare Triangle. We
collaborated in a
multi-week Strategic
Planning exercise to:
·
Develop and validate the
future operating vision.
·
Assess and document the
current status.
·
Define and validate the
gaps between the two
scenarios (current and
future).
·
Identify and validate
Strategies & Projects to
close gaps.
·
Integrate other operations
initiatives into a single
implementation plan.
·
Create a detailed
implementation plan with
resources, durations and
costs.
·
Document, by asset,
expected benefits and
costs.
·
Gain Leadership commitment
to proceed
Strategic Initiatives for
Maintenance and
Reliability were defined
and a clear value
proposition supporting the
investment was presented.
The executive management
team and the line
leadership were aligned
and focused on the
required path forward.
The key stakeholders had a
keen sense of ownership
for implementing the
Strategic Plan. A
governance structure was
established to steer the
implementation.
The initiative then moved
into the implementation
phase. The Strategic
Planning Team designed
Asset Healthcare work
process details, including
operations and materials
management interfaces.
They worked together to
develop more detailed
implementation plans based
on design specifics.
The Team engaged the
operations management in
owning their site
implementations. (e.g.,
financial improvements and
project progress owned by
line organization, not the
project team).
An “Owners Group” was
developed to manage and
review implementation
activities and progress.
They commenced with the
training of resources and
kick off of the
implementation. Processes
were put in place to
implement results tracking
and adjustment of
resources and the project
approach as necessary
The results through the
end of calendar 2003 are
exceeding the projections
and the potential upside
forecasted in the business
case.
Annualized operating
expenses have been reduced
by $21 M. The production
capacity increases are
even more outstanding. An
additional production
volume of 13.2 M
equivalent barrels per
year has been produced at
no incremental costs.
This represents in excess
of $300 M in additional
revenue at current market
prices. In addition to
these results, the project
is being achieved ahead of
schedule representing a
cost reduction to the
client, as units test high
for sustainability of the
new processes earlier than
originally forecasted.
Global Life Sciences
Company
The author was the Project
Executive on the
Reliability 2000+
initiative between 1995
and 1999 for a Global Life
Sciences Company. The
initiative was focused on
reducing maintenance costs
and improving the
reliability of
manufacturing and
packaging facilities in
North America.
This Global Company is
involved in Research,
Manufacturing and
Marketing of Life Sciences
Products. Annual sales
exceed $32 billion with
approximately 60,000
employees globally. They
produce a broad range
(over 3000 products) of
Prescription Drugs,
Vaccines and Antibiotics.
Their Manufacturing
Division has over 12,000
employees worldwide.
Manufacturing technologies
include: Bulk Chemical
Manufacturing,
Fermentation, Tablet
Formulation and Packaging,
and Sterile Operations.
Between 1994 and 2000,
this Company gradually
developed and implemented
the initiative that came
to be known as Reliability
2000+. The Vice President
of North American
Manufacturing was the
Executive Champion for the
effort. Under his
direction, they
established a corporate
level leader for the
program, acquired a
corporate Maintenance
Management System and
engaged the consulting
services of my company to
assist in creating the
program. We assembled a
multi-functional team of
the “Right People” and
proceeded to develop the
Reliability 200+
Initiative. Together we
set out to identify and
implement “best practices”
at their major
manufacturing sites.
The program was very
successful, resulting in
cost reduction of
$42.4 million per year
based only on reduction of
maintenance costs without
considering additional
capacity utilization.
Perhaps the greatest
achievement of the
initiative was the
implementation of a new
Reliability Design
processes that enabled
them to bring the first
AIDS Bulk Pro-Tease
Inhibitor to full
production reliably and
safely, faster than ever
before. This produced
millions of dollars in
additional revenue and
provided early treatment
for thousands of
critically ill people.
SAM Concepts
The “Asset Management
Business Process" cuts
across all enterprise
functions: operations,
engineering, management,
production, purchasing,
and maintenance. This
implies that each of these
organizations has an
opportunity to contribute
to enhanced equipment
reliability and to benefit
from the results. The
members of these
organizations will have
roles to play in the core
business processes that
are integrated into the
Strategic Plan.
The Strategic Plan
documents the current
status, provides a future
operations vision and
identifies of a set of
detailed strategies and
projects for achieving the
future vision.
It establishes effective
leading and lagging
performance indicators and
goals that clearly reflect
the adoption of new
behaviors and trend the
achievement of stated
objectives that results
from these changes. The
Strategic Planning process
aligns Senior Management
as to strategy,
objectives, performance
indicators, and the means
by which we will achieve
success.
The SAM Model
In a recently published
paper titled “The
Future of Asset
Management” Brad
Peterson, Founder and
President of SAMI, stated,
“This article explores
a broader vision for asset
management than has been
previously articulated and
brands this vision
Strategic Asset Management
(SAM). Based on successful
experience with our
clients, SAM is an
integrated set of
processes that
systematically derive the
highest value from plant
assets, through a
consistent philosophy,
plans and objectives, and
cooperative involvement by
everyone in the plant.
SAM represents a higher
level of performance than
is currently practiced or
even recognized by the
manufacturing community
today.”
“Any useful model to
guide action will have
several characteristics:
·
Simplicity:
All of the greatest ideas
are simple in concept. If
not kept simple, they are
not fully understood or
remembered, and fail as
guiding principles.
·
Intuitive:
Readers should be able to
understand the underlying
principles without
guidance.
·
Utility:
The model should work
consistently in
application.
·
Completeness:
All necessary elements of
success should be
contained.
Our experience with the
SAM model indicates these
criteria are met.
However, you as the reader
will need to make your own
judgments.”
We will explore the SAM
Model and its applications
in detail in a subsequent
paper.
Business Processes of SAM
In order to have effective
business processes,
“The Six Sigma Way” by
Peter Pande tells us that
we need to understand the
components or
characteristics required
for defining a business
process.
These consist of:
·
A work flow diagram that
models the process and
identifies roles for each
step in the process, and
identifies interfaces to
other processes
·
Definitions of the roles
and terms used in the
process model
·
Measures or performance
indicators to measure the
process
·
Definition of the inputs /
suppliers and
·
Clear specification of
output and service
requirements
There are nine “Core” or
high level Business
Processes that are
addressed in SAM.
Strategic Management
Strategic Management
processes define the way
in which we establish and
communicate the future of
the company involving
stakeholders at all levels
within the organization.
Information Management
Information Management
incorporates all of the
processes and tools that
are used to store and
retrieve information that
is used to support
decision making based on
hard data.
Organization Management
Organization Management
involves establishing the
Asset Management process
management organization
and defining the roles of
personnel involved in
working with the
reliability and
maintenance business
processes in all
organizations. It defines
our Managing System
business processes.
Capacity Management
Capacity Management
processes address the
methods by which we
acquire or dispose
capacity and manage
capital investment. It
includes all of the
aspects of incorporating
reliability,
maintainability, and
operability into the
design and installation of
new systems and equipment
or modifications to
existing.
Production Management
Production Management
includes all of the
processes necessary for
establishing and
maintaining proper process
controls as well as those
required for day to day
management of the
production process. This
process includes critical
equipment operating
procedures, quality
management, environmental
compliance, and more.
Resource Management
Resource Management
includes all of the
planning and supervision
activities that go in to
allocating manpower,
materials, tools and
contractors to the
accomplishment of the day
to day function of the
manufacturing site..
Logistics Management
Logistics Management
includes all of the
planning and day to day
management processes the
manufacturing reliability
mission and objectives.
Storehouse management,
procurement of supplies
and parts, and vendor
management are all
elements of Logistics
Management.
Reliability Management
Reliability Management
involves the work
processes and activities
that focus on ensuring and
enhancing reliability of
the plant’s production
assets, the manufacturing
equipment. It includes
proactive activities like
preventive and predictive
maintenance and analysis
activities and record
keeping.
Change Management
Change Management includes
all of the work processes
and activities required
for communicating the SAM
objectives to the
workforce, to motivate
them to take ownership of
the SAM, to achieve
success, and to maintain
state of the art work
processes.
We will address these
Business Processes and
their relationship to the
SAM Model in a subsequent
paper.
The SAM Organization
The SAM Organization is a
multi-functional team of
individuals responsible
for creating, implementing
and maintaining the
Strategic Plan for Asset
Management. We call it a
“SAM Organization” because
it exists in parallel with
the normal company
hierarchical
organization. It is
designed to support rapid
development,
implementation and
maintenance of critical
business processes in
order to achieve
performance improvement
and financial benefits as
quickly as possible.
The SAM Organization is
process-oriented rather
than function-oriented.
Members will have roles to
play in support of the
core business processes
and the detailed business
processes that are
integrated into the SAM.
Key roles include:
·
The SAM Executive Champion
and Steering Team, who
provide overall guidance
and support to the
initiative supported by a
team of Senior Management
individuals that sets the
vision and objectives for
the SAM Program and
provides guidance to the
Strategic Planning (SP)
Team.
·
The SAM Program Director,
who has management
responsibility for the
design, planning, and
implementation of the
SAM. He is the only
“full-time employee” in
the SAM Organization.
·
The SP Team, a work group
responsible for developing
the Strategic Plan and
participatging in the
redesign of existing
processes and the
development of new
processes.
·
The SAM Site Champions,
volunteers who are
involved with the site and
committed to
implementation of the
Strategic Plan for Asset
Management.
Members of each
organization must discard
their traditional thinking
about individual
departmental goals in
favor of the overall plant
performance and
higher-level strategic
objectives.
Key Performance Indicators
(KPI”s)
Effective measurement of
the results is a critical
success factor for SAM.
Performance indicators
will be identified at each
phase of the
implementation
Sample Leading Indicators:
|
Indicator |
Measurement |
Best in Class |
SAMI Experience |
|
PM hours worked as
a percentage of
available hours |
PM Hours /
Available Hours |
> 30% |
35% |
|
Inventory
Stock-outs |
Items issued on
demand / Items
requested |
< 3% |
3% |
|
PM Compliance |
PM’s scheduled by
week / PM’s completed
by week |
> 90% |
90% |
|
PM Effectiveness |
Defects found by
PM’s / PM’s issued by
week |
4 : 1 |
4 : 1 |
Sample Lagging Indicators:
|
Indicator |
Measurement |
Best in Class |
SAMI
Experience |
|
Maintenance Cost /
RAV |
Annual Cost /
Replacement Value |
1.4% |
|
