There was a time when many companies tolerated equipment failures as inevitable or as just another cost of doing business. But some of the most recognizable names in global industry have learned that equipment failure is not inevitable, that predicting and eliminating equipment failure is possible with a comprehensive Operations Management initiative. With the ability to forecast and manage the performance of every asset in every part of every operation, companies are improving reliability, safety and compliance—and saving millions.
The size of the prize is enormous for asset-intensive industries. Consider the balance sheet of a typical manufacturing company (see figure), and compare the cash assets against the plant assets. The value of the plant assets ($25.7 billion) is roughly 14 times larger than the cash assets of $1.8 billion.
The chief executive officer of one major U.S. operation stated that his company "must focus on increasing returns on our assets… a 1 percent improvement in the mechanical availability would yield [about $140 million] operating income improvement…." ARC Advisory Group Inc. (www.arcweb.com), Dedham, Mass., also has documented the huge returns possible through increasing asset performance: "Billions of dollars are invested in plants worldwide… acquiring, maintaining, and disposing of these assets is a very serious business." All worlds come together at the asset. However, at least until recently, the prevailing view is that assets are depreciable sunk costs. But they're not—they're competitive differentiators, and can contribute to profit margin.
Manufacturers have been seeking the means to continue on their journey of improving operational performance and shareholder value, and understanding and investing in capabilities to optimize asset performance. Companies that have embarked on this journey are now at a turning point. They've seen the early benefits from investing in Operations Management capabilities and now are looking for advancement in their use of technology for leveraging operational and financial metrics to optimize performance across the enterprise.
According to a study by the Aberdeen Group Inc. (www.aberdeen.com), Boston, the two top market pressures driving manufacturers to continue seeking a means of improving asset performance are the need to improve Return on Assets (ROA) and to comply with customer demands for higher quality and shorter lead times.
That these two pressures were cited with almost the same frequency suggests that manufacturers are caught in a balancing act. They are attempting to negotiate the controlled cost of capital and value to shareholders with the need to provide customer value. Optimizing asset performance is the key to controlling costs (ensuring return to shareholders) and maintaining product quality (providing value to the customer). Managing conflicting goals and objectives across the maintenance and production teams offers the opportunity to enhance the economic value of their investments. The real challenge is not only to select those indicators that satisfy budgetary goals, but also to build the activities needed to meet the levels of asset performance required to meet strategic goals.
Even more importantly, the metrics must be built into a performance management system that allows individuals and groups to understand how their behaviors and activities are fulfilling the overall corporate goals and objectives. A recent research study from MESA (www.mesa.org) provides compelling insights in this area, providing detailed analysis on the correlation between manufacturing key performance indicators and business performance.
John Dyck, [email protected], is Chairman of MESA International (www.mesa.org), an association of suppliers and users of manufacturing operations management systems.
ARC Advisory Group Inc.
Aberdeen Group Inc.