The financial asset management industry represents one of the most dynamic parts of the global financial services sector. Funds under institutional management are massive and growing rapidly. A recent Fortune 500 report showed that three of the largest 12, and 12 of the largest 100 listed companies in the US provide primarily financial asset management services.
Locally names like Investec, Alan Gray, Sanlam and Old Mutual are some of the most well known brands in the marketplace. Evidently this is a highly regarded and hugely important industry.
However, when we shift the focus from financial assets to fixed assets, the picture changes drastically. Yet the global investment in capital assets is staggering. Manufacturers in industries such as consumer goods, petrochemicals, chemicals, metals and paper, as well as the utilities and facilities industries, have hundreds of billions of rand invested in thousands of plants around the world. These assets were acquired in order to deliver return on investment, and they require expert management to ensure that their ROI is maximised over the medium- to long-term.
The potential for savings from proper management of capital assets is immense, and these savings go straight to the bottom line. In manufacturing, where profit margins are slim, sales increases of 10 to 20 times these values would be required to achieve the same financial performance improvement. Capital assets require management throughout their lifecycles. The lifecycle starts with design, but most often the users have no direct control over this stage. The cycle then moves to the acquisition stage, goes through the operation stage and ends when the asset is disposed of. The value generated by an asset is the difference between the benefits and costs associated with the asset across all lifecycle stages. Typical benefits include revenue generation, expense reduction, regulatory compliance, more efficient processes and better operation of the assets.
Costs include monetary losses, regulatory violations, customer dissatisfaction, limitations on process performance and limitations on the performance of other assets. Clearly, assigning monetary values to these variables is a difficult task.
Each lifecycle stage requires particular expertise. During the acquisition stage there are many factors that influence the selection of a particular asset. Competing products should be thoroughly evaluated. A robustly designed asset that allows for easy maintenance and cleaning might well justify its higher price tag when considering its lifecycle cost. Pollution generating or energy inefficient assets might have hidden costs in the form of brand value degradation, and could foreseeably have tax implications when governments are forced to account for their national contributions to greenhouse gasses and other pollutants. Factors such as timing, price and product support should of course also be considered.
Asset disposal can be expensive and should again consider environmental factors. There might be legislative requirements that mandates that certain parts of the asset be recycled. Assets containing hazardous substances need to be properly dealt with. Some assets could fetch handsome prices on the second-hand market, or the asset might be more valuable when disassembled and sold off in parts. A case in point is certain telecommunications equipment that contains precious metals that could be very valuable if recovered.
The longest stage of the lifecycle is the operational stage. During this stage the asset should recoup the investment made to acquire it, the cost of operation and maintenance, and the eventual disposal cost. On top of this it should turn a profit for the asset owner. Achieving this requires an optimum maintenance mix consisting of an appropriate combination on preventive maintenance, condition-based maintenance and run to failure tactics that will optimise the cost/risk tradeoff. These maintenance tasks should be executed not only efficiently, but also effectively. Maintenance departments often do their jobs well, but they fail to focus on the right jobs. Others never seem to have the resources to do a job properly, but always find the time to redo it when an emergency occurs. Another factor that can weigh on maintenance cost is inappropriate spares levels that either ties up capital that eventually ends up as redundant stock, or causes the organisation to run huge risks due to the unavailability of spares.
During operations meticulous measurement of performance is required so that benchmarks can be set and the root causes of performance failure be identified. Within the continuous manufacturing environment this means knowing when your production lines are standing or operating below capacity as well as the reasons for this. It also means knowing what percentage of product is being produced within the required quality standards. The de facto standard for performance measurement within the continuous manufacturing environment is Overall Equipment Effectiveness, or OEE. OEEs are calculated by measuring availability, production rate and quality rate. These three percentages are multiplied to produce the OEE measure. While it is theoretically possible to keep track of OEEs manually, the reality is that unless an automated system is employed, the quality of the results are often not worth the effort. This is why an automated system such as PRAGMA`s ON KEY Performance Manager should be considered.
There are also indirect benefits to maintenance optimisation. Increasing the efficiency of a particular asset might create the opportunity to do away with another that becomes redundant. A plant might for instance find that it can eliminate one shift by working more efficiently on the other two, or the amount of overtime required might be reduced. A further benefit is waste reduction.
When continuous processes breaks down, waste is the inevitable result. Work in process might become unusable while poor quality at start up can create scrap. Properly operating equipment also reduces the percentage poor quality product that has to be either reworked or rejected. New capital expenditure can also be delayed by extending the lifecycle of existing equipment. To manage these lifecycle stages effectively, capital intensive organisations require a comprehensive asset management strategy supported by an implementation plan and measurable goals. The strategy should consider all stakeholders including maintenance, operations, sales, suppliers and finances. It is important to view the asset management function holistically within the context of the organisational purpose. This implies consideration of appropriate constraints such as safety, public health, environment and acceptable business practice.
To achieve these goals, organisations require the expertise of capital asset management specialists. Very few organisations and individuals are competent enough to manage their own financial asset portfolios. Yet most large capital asset owners insist on the `going it alone` approach. The reality is that the nature of capital asset holdings within most organisations have become so complex that the in-house approach simply does not suffice.
These organisations often end up jumping at the latest acronym - RCM, TPM, FMECA, much like an indiscriminate investor might jump at some hyped share without considering the fundamentals. He could of course strike it lucky, but then again, he might not. The wily investor has learned that the secret to investment success is a carefully balanced portfolio of good shares rather than betting the farm on the flavour of the month.
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