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The benefits of strategic asset management

The benefits of strategic asset management
Page 1 of 3
The benefits of strategic asset
Stanton M cG roarty, SAM I C orporation
Tags: m aintenance and reliability
After decades of lean m anufacturing, JIT, outsourcing, TotalQ uality M anagem ent and Six Sigm a,
w here does a m anufacturing executive turn for the next big com petitive im provem ent?
The answ er has been hidden in overhead accounts and factory corners since the beginning of
m ass production. The tools to m anage it effectively have been em erging steadily in recent years,
and today the science of asset m anagem ent is accessible to any organization w illing to
undertake fundam entalchange in the w ay they m anage production assets. The rew ards can be
In m ost m anufacturing or distribution operations, m aintenance departm ent costs are 5 to 15
percent of operating costs. M ost accounting system s require that severalaccounts be com bined
to identify the totalcost of m aintenance operations, but the inform ation is there, and it is just
the beginning of the asset m anagem ent story.
The financialim pact of asset m anagem ent, good or bad, touches allparts of the organization:
• Lean m anufacturing cannot function w ith less than 99 percent overallequipm ent reliability.
In a JIT system of five steps, the reliability of each station m ust exceed 99.8 percent for
the system to deliver 99 percent uptim e. In this environm ent, running equipm ent untilit
breaks dow n is sim ply not an option.
• In today’s era of paper-thin m anufacturing m argins and ever-shrinking custom er lead
tim es, it is unrealistic to even think of carrying finished inventory to cover unreliable
equipm ent.
• For the sam e reason, nobody can afford to carry duplicate production assets to cover
• The tim e and cost to repair an equipm ent breakdow n are three to five tim es w hat it takes
to m ake a planned repair of the sam e equipm ent, prior to failure.
• Safety and quality costs associated w ith equipm ent failure add up to a very convincing
case for 99.8 percent equipm ent reliability as a corporate asset healthcare strategy.
“Allright,” you say, “that’s a great set of generalizations, but how do I determ ine the financial
potentialof asset m anagem ent in m y operation?”
Fair question. The com plete answ er requires a thorough assessm ent of your business, but som e
im portant clues are readily available from a short self-assessm ent. These clues point only to the
actualcost of m aintenance, but that is an im portant beginning:
Total Cost of Maintenance (TCM): The accounting departm ent should be able to put this
together pretty fast. It is a departm entalcost, not the “cost of unreliability” (C O U R) index that
w e use elsew here. The totalis a surprise to m ost executives. TCM includes the follow ing:
The benefits of strategic asset management
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• Totallabor, benefits and overtim e cost of m aintenance technicians and support personnel.
• Totallabor, benefits and overtim e cost of production and other personnelthat help
m aintenance during repair operations.
• Totalcost of m aintenance m aterials, including express freight, short lead tim e prem ium s,
• Totalcost of m aintenance supplies and the m aintenance portion of production supplies.
TCM does not include generaloverhead that is applied to m aintenance today, unless trim m ing
the m aintenance departm ent w ould reduce this cost as w ell. (U sually it w on’t.)
Benchm arking this cost depends on industry, com pany size and severalother factors, but the
figure itself is usually an eye-opener.
Breakdown Maintenance Percentage (BM%): As w e said above, the cost of repairing an
equipm ent breakdow n is three to five tim es the cost of the sam e repair done in a planned
m anner, prior to failure. A w orld-class asset m anagem ent program typically holds breakdow n
m aintenance under 5 percent of allm aintenance m an hours. O nce asset m anagem ent is in
place, TCM is often reduced to half w hat it w as under a m ostly breakdow n approach. The
com putation is straightforw ard. For a period of six m onths to tw o years, determ ine the follow ing:
• The num ber of m aintenance and support m an hours that w ere spent on breakdow n w ork.
• The num ber of m aintenance and support m an hours spent on scheduled planned
m aintenance (PM ) w ork.
BM % is Breakdow n H ours / (Breakdow n H ours + PM H ours).
W orld class is under 5 percent. Anything over 25 percent indicates a serious com petitive liability.
Cost Savings for World-Class Asset Management: The TotalCost of M aintenance (TCM ) is
your baseline cost today. W e can approxim ate the cost of a w orld-class asset m anagem ent
system as follow s:
• D eterm ine the totalcost per m aintenance hour (including m aterial) by dividing total
m aintenance cost by totalm aintenance m an hours.
• D eterm ine the num ber of m aintenance m an hours for a w orld-class system by dividing
your breakdow n w ork hours (above) by four and adding the result to the num ber of PM
hours (above).
• Then, m ultiply this num ber of hours by your current cost per m aintenance hour to develop
an approxim ation of the cost of a w orld-class system .
• The difference betw een this cost and your current TC M is a first approxim ation of the
m aintenance departm entalcost savings available from installation of an up-to-date asset
m anagem ent system .
M ost executives are am azed by the results of this self-assessm ent. The w ay m ost accounting
system s disguise overhead cost prevents this analysis being done from norm alm onthly or
annualcost reports. But, this isn’t the last insight from self-assessm ent.
As w e noted above, TC M is only a part of the story. Equipm ent unreliability is a key cause of lost
production capacity. The value of this m issed opportunity varies w idely w ith the specifics of each
business, but it typically ranges from three to 100 tim es the m aintenance departm entalsavings
from w orld-class asset m anagem ent.
The benefits of strategic asset management
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In today’s lean m anufacturing w orld, m any organizations can selleverything they can m ake. In
these cases, uptim e im provem ent m ay autom atically convert to additionalbusiness, or to a
reduction in outsourcing. It can also postpone the need for m assive investm ents in production
capacity. Any one of these can dw arf the cost of an asset m anagem ent program . Indeed, som e
m anufacturing com panies can double their profits by getting controlof asset m anagem ent.
After a m ore com plete assessm ent of current operations, com panies such as SAM I can provide
the specific im pact of these factors on your business’bottom line.
Follow ing the assessm ent, SAM I uses a proven, five-stage process to help your organization
installasset m anagem ent. Each stage brings w ith it a w ave of cost and revenue im provem ents
that m ore than funds the process. M ost clients experience exciting financialresults from Stage 1.
Asset Management in Five Steps
1. Planned m aintenance – G etting controlof m aintenance operations
2. Proactive m aintenance – G etting controlof equipm ent
3. O rganizationalexcellence – Integrating M aintenance and Production
4. Engineered Reliability – D esigning equipm ent and system s for reliability
5. O perationalexcellence – Building upon asset m anagem ent to create a decisive com petitive
To learn m ore about this process, visit w w w .sam .