Asset management (AM) is a recognized value lever for asset intensive organizations. It encompasses a broad vision of possibility and action. Within this new paradigm, AM practitioners need a new toolbox of skills, competencies and tools. This article, written in two parts, opens the lid of this asset manager’s toolbox and takes a look inside.
Some AM Background
AM as a value lever gained impetus with the development of a series of ISO asset management standards in 2014 called ISO55000, ISO55001 and ISO55002. These standards conceptualize and define how organizations should structure and implement a management system for AM, simply called an asset management system (AMS). The ISO55000 series of standards articulate numerous benefits from adopting such an AMS approach. These benefits are substantiated by user experience and empirical evidence.
Two distinct concepts, namely AM and maintenance, are often confused as the same. The blurring of their roles leads to confusion and conceptual frustration. There is a clear difference between their roles. AM encompasses a whole of business approach, incorporating numerous business functions, of which maintenance is one. Maintenance, on the other hand, is a transactional repair/restoration activity intended to optimize and prolong asset/equipment life. Both AM and maintenance are important, but a clear distinction needs to be made in order to understand their relative contribution toward delivering organizational objectives.
Asset owners and managers cannot just be specialists in specific niches within an organization. They need to develop the skills and tools necessary to see the whole picture. Moreover, they must act strategically, be able to define value and articulate it, and understand how to pursue value in complex initiatives, which often lies across departmental and functional boundaries.
AM calls for a new set of thinking and skills aligned to what Michael E. Porter, the eminent Harvard Business School scholar, refers to as creating shared value. Porter argues that creating shared value is the potential new paradigm for sustainable capitalism and presents the case for organizations to create long-term sustainability. He refers to the need to transition from an exploitative to a hared value model. Within this model are three core components; the one that concerns asset managers is the second component, referred to as “redefining productivity in the value chain.” Within asset intensive industries, the role of AM is to: direct the important strategic activities promoting effectiveness throughout the organizational value chain.
Figure 1: Mapping asset management to Porter's value model.
Figure 1 illustrates Porter’s value chain, where the contributions of AM enablers are mapped to the fundamentals in the value model. It clearly illustrates the areas of contribution from an AM approach. Furthermore, it clearly demonstrates the distinction between a whole business AM approach and the narrow, specific activity of maintenance, which serves to support production.
A number of important tools within this new toolbox support asset managers on their AM journey. Figure 2 provides an overview of these various tools that will be explained in the following sections.
Figure 2: Asset manager's toolbox.
Having a Plan: Utilizing an Effective Implementation Model
The ISO55000 series of AM standards provides a complete, albeit complex, picture of what is required from an AMS. However, many users find it too complex and difficult to translate into the nuts and bolts of what needs to be done.
Figure 3: An effective asset management delivery model (see References, #4)
Using an implementation framework, such as the effective asset management delivery model in Figure 3 or “Asset Management – An Anatomy” by the Institute of Asset Management (IAM), will assist in creating a clearer pathway toward execution.
AM predominantly fits into the complicated, complex and chaotic domains (see section on Understanding Complexity in Part 2). Establishing an AMS using a proven delivery model will significantly shorten the development and implementation period, while allowing those organizations with elements of a system in place to clarify their understanding of requirements, gaps and opportunities.
Measurements for Success: Having a Methodology to Measure Value Contribution
According to ISO55000, AM enables an organization to realize value from the ownership of assets through the achievement of organizational objectives. What constitutes value is a weighty topic and varies from organization to organization. Inevitably, within the value argument, there is a financial component. However, in his review of the emerging redefinition of the value chain, Porter states here are many additional elements that contribute to the value paradigm. While the financial component is clearly important, there are many examples where a singular view on short-term financial criteria within the AM arena can lead to value erosion. Clearly, there is a need to redefine the whole financial value evaluation criteria so it provides the appropriate view of whether AM is creating or destroying value.
A number of financial indices measure the erosion or creation of value. However, the one that best reflects the combined efforts of an organization in influencing the creation of long-term financial value is return on invested capital (ROIC).
Practical experience has demonstrated that this is the most appropriate metric because it is a reflection of pure value erosion or creation by a management team over time. An increasingly positive trend is what one is looking for here, as it consolidates all the various efforts of an organization, from both an operational and capital deployment perspective.
Figure 4: Measuring the effectiveness of an asset management program.
The implication is that a good AM program will result in an increasing trend in ROIC, a downward trend will indicate value destruction and a flat trend will indicate a static situation. The ROIC value can be compared to industry and geographical benchmarks to ascertain whether the organization is better or worse than the competition.
Experienced practitioners often find that shop floor actions and plans are often disconnected from the boardroom’s measures or objectives. For example, what is the value of redefining a production planning system or implementing TPM activities and how is that reflected in return on equity (RoE) or ROIC? Coupled to this is the complexity of organizational maturity.
A tool, like the asset management contribution model shown in Figure 5, can help link the shop floor to the boardroom. The tool is populated with organizational maturity derived through an appropriate assessment, key business performance and financial measures. Once populated, it allows an organization to run scenarios to identify where improvement or savings must be made. Incorporating maturity guidelines allows the tool to identify areas where improvement must be made, but issues warnings when the maturity of the organization is too low to perform the initiatives or sustain them.
Change is easy, sustainable change is a different matter. Once the team has identified improvement areas, initiatives identified through analysis and assessment can be tailored, prioritized and implemented. Not quite the mythical business crystal ball, but as close as you can get to it.
The bottom line is the tool allows organizations to clearly align initiatives to measurable value contribution. This is a big-time credibility enhancer and effort saver.
Figure 5: Example of an asset management contribution model.
In Part 1 of the 2-part article we have looked at two key asset management enablers:
- Having a Plan – Utilizing an effective implementation model
- Measurement of Success – having a methodology to measure value contribution
As can be seen, these are strategic enablers that apply across the business, not just in the maintenance department, and as such, contribute to real strategic value.
In Part 2, we will look at:
- Modeling Risk and Opportunity – an effective risk model
- Understanding Complexity – how understanding complexity theory will enhance your chance of success.
- The Maintenance Reliability Toolkit – selecting the right improvement tools
- Integrated Planning – seeing the “big picture”
- Data – realizing the value of analysis
- International Organization for Standardization (ISO). ISO55000:2014 Asset management – Overview, principles and terminology. https://www.iso.org/standard/55088.html
- Porter, Michael E. Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press, 1998.
- Snowden, David J. and Boone, Mary E. “A Leader’s Framework for Decision Making”. Harvard Business Review, November 2007: pp 69–76.
- Fogel, G. and Swart, P. “Does Relying on Criticality Put Your Organization at Risk?” Uptime Magazine, April/May 2018.
- Fogel, G., Stander, J. and Griffin, D. “Creating an Effective Asset Management Delivery Model.” Uptime Magazine, June/July 2017.
- Fogel, G. and Kemp, T. “The Role of Asset Management in a Constrained Economy.” IAM Annual Conference, Edinburgh, Scotland: 2016.
- Fogel, G. and Swanepoel, S. “Chapter 8: Declaring Value from an Asset Management System.” The New Asset Management Handbook. Fort Myers: Reliabilityweb.com, 2014.