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.
INTRODUCTION
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:
- Accurate analysis of equipment maintenance, repair, and replacement records.
- Increased availability of production systems and equipment.
- Fewer failures of production systems and equipment, resulting in fewer unplanned outages.
- Improved product quality associated with a reduction in costs related to losing or reprocessing product.
- Lower costs for system and equipment maintenance, spare parts inventory, and capital replacement.
- Enhanced morale among management and the hourly workforce as they learn to enjoy a proactive environment instead of surviving in chaos.
- Additional real capacity as operating units are able to operate at higher levels for sustained periods without excessive equipment failure.
- 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.
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% | 2.0% |
Overtime | Maintenance overtime / Maintenance total time | < 5% | 4% |
OEE | Availability x Quality x rate of production | 90% | Varies by industry |
MRO Inventory Turns | Annual issue value / Average annual inventory valuation | > 3 turns per year | 3 turns per year |
Key Performance Indicators (KPI's) are established to track or trend all critical aspects of an organization's business processes. Accurate KPI's provide a firm base for making decisions that will increase the organization's efficiency, effectiveness, and success. Two integrated levels of KPI's are used in implementing SAM:
The KPI's are a key element in the Change Management Process, and are the primary method for tracking progress in the implementation of the new business processes. The value of KPI's can be enhanced through benchmarking internally, among your sites, as well as externally within and outside your industry, and using the comparisons to establish stretch goals.
IMPLEMENTING SAM
The author recommends a two-step approach to a Strategic Plan for Asset Management; Strategic Planning and Implementation.
Developing and implementing SAM requires significant effort and knowledge. Most companies have difficulty finding a sufficient supply of these valuable commodities to implement a SAM Program internally while continuing to perform their rather demanding daily functions. Many companies also struggle with figuring out how to get started and in what direction to proceed. The ability to create and implement SAM and realize the associated benefits is dependent on success in three areas:
1. Development of three to five year operational strategy that clearly identifies the current status, future vision, gaps and strategies for closing the gaps, project plans to execute the strategies, and a compelling business case.
2. Design of the business processes, management systems, and performance indicators that, when implemented, will accomplish the business case.
3. Integration of the Asset Management Strategy with existing business processes and systems and establishing a new culture that will sustain the changes into the future.
The Strategic Planning (SP) Phase
In the SP Phase, you should assess your corporate reliability performance and identify opportunities for improvement. The results of the assessment are used to establish the roles and responsibilities of personnel and the key performance indicators that will drive the reliability improvement initiatives. Your reliability processes are documented and perfected using models that can be implemented and enhanced with effective software tools. Information about your existing software solutions is
incorporated into the overall strategy.
Current State vs. Future State
The assessment defines the current state and establishes a baseline for improvements. We then work to establish an "Operational Vision" of the future state, the three to five year objective of our initiative.
Gaps and Strategies to Close the Gaps
The difference between the current and future state is defined as the "Gap". The SP Team begins to develop strategies designed to close the gaps.
Projects to Implement the Strategies
Once all of the Strategies have been defined, the Team begins to develop Projects that will execute the Strategies.
Challenge Sessions
Challenge sessions are conducted between the SP Team and the Executive Steering Team. These Change Management Tools serve to create ownership of the Strategy among the SP Team members and assure alignment of the Senior Management.
The Business Case
A key activity completed during the SP Phase is determination of potential financial benefits resulting from SAM implementation. Primary benefits come from improved efficiencies and increased capacity utilization.
The Business Case shows how the financial benefits will be realized over time, assuming the SAM implementation follows the methodology outlined in the Strategy Document and the established targets are achieved. It demonstrates the yearly impact as well as the cumulative effect of Maintenance Cost Reductions and Productivity Improvements. It also provides a means for comparing the cost of the implementation to the benefits derived, thus determining the return on the SAM investment.
The SAM Implementation
Implementation should begin with a Design Workshop of several weeks' duration designed to get the SAM Design Team onboard and up to date. It focuses on defining the detailed project plan and establishing the SAM Organization. Activities conducted during this workshop include:
· Completion and documentation of an integrated Project Plan with resources, cost estimates, milestones, etc.
· Confirmation of the Business Case and creation of a SAM Scorecard.
· Creation of detailed business process models and KPI's for Phase 1 Implementation.
· Identification of the reliability management information requirements for each reliability role.
· Change management and training plans to support implementation.
Implementation is best achieved using an Iterative Implementation Methodology designed to mitigate project risk and deliver results every six months to one year. During each of these implementation phases, the SAM Team will define, pilot, and roll-out new business processes including performance indicators, definitions of terms, and identifications of roles required for each.
This Iterative Implementation ensures quick and productive development of a comprehensive, working Strategic Plan for Asset Management, and mitigates the risk that is often associated with "flash-cut" implementations. These distinct phases allow us to focus on the vital processes at each stage, keeping the project streamlined while presenting specific milestones. Formal Monthly Scorecards provide concrete progress reports, allowing you the benefits of ownership early on. The achievement of measurable results with each iteration reinforces the cultural change and supports buy-in at all levels in the organization. Leading Indicators are implemented with each of the business processes to trend the implementation and measure progress. Your Strategic Plan for Asset Management is developed, tested, and implemented on-site in an iterative approach that achieves real, practical results.
The key to a successful SAM implementation is the creation of a detailed Asset Management Implementation Plan combined with an effective change management plan that supports that strategy. Experience has taught us that a proven step-by-step technique starts with the company's strategy and objectives, uses comprehensive tools such as business process models and key performance indicators, and follows an iterative development and implementation methodology to ensure maximum return on investment.
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IN CLOSING
Executive management in pace setter companies has begun to realize the benefits of implementing SAM across the full spectrum of their enterprise. Millions of dollars in savings combined with increased profitability are available to pacesetter companies who are capable of designing and implementing an effective SAM strategy.
It is not enough to define the functions that need change. A useful SAM initiative must also define the roles and responsibilities of those who are to implement it. It must be designed to change the organizational culture to a "Reliability Culture" where everyone involved assumes ownership of the assets and focuses on improving financial performance by making reliable production a primary target.
The critical success factors for such an effort include:
· Highly visible top-down management commitment to the initiatives. People must perceive active leadership versus authoritative management during the course of implementation and in the future culture.
· The "Right People" on the bus to develop the Strategy and implement sustainable change to a new culture.
· A measurement system (KPI's) and committed goals to track the progress. This weaves accountability into the initiatives and provides a tangible picture of the organization's efforts.
· Internal and external benchmarking of the organization's products, services, and processes. This information inevitably leads to a "significant emotional event" as the organization can truly understand its relative position.
· Stretch goal setting (10x, 100x, etc.). Such goals focus people on changing the process by which the work gets done rather than "tweaking" the existing process. This leads to "leap-frog" rates of improvement.
· Provision of education and development plans to all levels of the organization. Without the necessary mind-tools, people cannot make breakthrough improvement happen.
· Communicating success stories that demonstrate how the tools of improvement can be applied and the results that can be achieved.
Beginning without full commitment to these principles will rarely achieve success. This is not a journey to be undertaken by the faint of heart..........commitment to change and strong leadership are required. Engagement of a qualified outside agency as a catalyst and facilitator for sustainable change is most often needed.
Title | Author | Copyright | Publisher |
The Future of Asset Management | S Bradley Peterson | 2003 | Strategic Asset Management, Inc. |
Asset Productivity: The Next Wave | Ron Nichol, Phillipe Amouyal | 1998 | The Boston Consulting Group |
Maintenance Engineering Handbook | Lindley Higgins | 1994 | McGraw-Hill |
Improving Profitability Through Reliability | Carol Vesier, PhD | 2001 | RonaMax |
The Six Sigma Way | Peter Pande et al | 2000 | McGraw-Hill |
Uptime: Strategies for Excellence | John Dixon Campbell | 1995 | Productivity Press |
Please visit SAMI online for more information here: www.samicorp.com
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