MAintenAnce And Asset MAnAgeMent

Asset management in the Industrial Sector

Background and Conceptual Approach
Productivity of capital could be increased, which results in more sustainable production. Demands for higher turnover of capital, better return on assets and improved sustainability of asset solutions in the rapidly changing business environment have led to very sophisticated decision making situations where a lack of effective and proper decision making tools is evident.

K a r i Ko m o n e n vtt (technical research centre of Finland) kari.komonen@vtt.fi Finland

n the capital intensive industries today, physical assets in production equipment dominate the balance sheet and cause large overhead costs. At the same time, the turbulence of the business environment increases pressure to develop more agile production systems. As the result, companies have begun to recognize the untapped strategic potential of their physical assets as far as the competitiveness, flexibility, productivity and strategic risks of the enterprises are concerned. Today, when in many countries and companies the level of investments has decreased at the lower level than depreciations, the importance of asset management of existing plants has become an issue in focus. Economic analyses are increasingly important in asset management. Market dynamics, technological options, life cycle cost and profit objectives and life cycle cost structure have a significant influence on the plant asset strategy and strategic choices. Within the asset management framework a challenge is how to sustain or improve the life cycle profits of the original investment and at the same time to improve the sustainability of asset solutions. There are many ways to define what asset management is. However, EFNMS (European Federation of national Maintenance Societies) experts were keen to a very simple

and clear definition: The optimal life cycle management of physical assets to sustainably achieve the stated business objectives (EFNMS 2009 A). In the last definition there are two important aspects of asset management present: life cycle management and business objectives. Of course, behind life cycle management and business objectives there are many influencing factors, which need closer analysis.

Asset management in the Industrial Sector: Background

Why do we need asset management? There are some very good reasons to develop asset management in its all aspects. In addition to the above mentioned changes in the market behaviour and technological development, there are many other driving forces: it aims at more economically effi-

cient and effective use of capital: turnover of capital it aims at more profitable business: return on assets it aims at more useable and maintainable installed base it aims at more sustainable use of capital because of the above reasons it aims at long term life-cycle long decisions it gives direction to maintenance strategies and operations it aims at integrated investment and maintenance planning it facilitates influence of maintenance function on asset development (design and engineering) it offers integrated approach for production function (assets, operation and maintenance)

Investment
Asset Management of plants in operation: the focus is on upkeep of plants productivity and profit making capability and improvements in changing business environment

Use of investment
Changing demand Changing competitive environment Modified product Economic obsolescence

Concept design

Design of process and equipment

Manufacturing

Installation and commencing

Operation and maintenance

Disposal

Asset management of new installations focuses on the optimisation of the life cycle profits of the equipment (LCPmodels)

Changing operational requirements Wear and aging Technical obsolescence Environmental obsolescence

Figure 1. Two guiding factors of asset management (Komonen 2009).

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Figure 2. EFNMS conceptual model of asset management.

it gives maintenance improved position among company functions. Investment planning and decision making is an essential part of asset management. Investments deploy scarce resources and should therefore be considered carefully. Although business oriented asset management sounds at first glance working against sustainable production methods, it actually supports sustainable development strongly, because asset management strives at economic use of scarce resources taking into account market dynamics. There are at least two standpoints to create investment policies and to carry out investment oriented asset management. The one is reactions to the changes in the business and technological environment and the other is to make investment decision based on life-cycle profit (LCP) or life-cycle cost (LCC) calculations. Especially in the case of replacement and development investments to the old production line, LCP- or LCC-approach would often be a powerful tool to make effective decisions. A LCC/LCP analysis can be applied to the evaluation and optimization of the life cycle costs and profits of the investments taking into account specified performance, safety, reliability, maintainability and environmental requirements. Other reasons for performing LCP-analyses can be, for example, to identify cost effective improvements and cost drivers (i.e. cost factors that have largescale impacts on the investment profitability), or to choose between different suppliers and products. However, as soon as the installation of the equipment has been carried out the business environment begins to change, figure 1 . Changes may occur in all the exogenous or internal factors which the investment calculations have been based on (Komonen et al. 2005). The essential question is how to sustain or improve the life cycle profits of the original investment. This is the core issue of the management of the existing physical assets. Even in the cases of replacement or development investments to the old operating plant or production line LCP or LCCapproaches combined with some other economic indicators could give the better indication of the profitability of an investment than many of the traditionally used indicators.

EFNmS Conceptual model

Asset management emphasizes integrated approach in decision making. It integrates asset development, operating of asset and up keeping of assets. An important part of asset development is determination of capacity needs and capacity creation which means investment planning and investments. Operating of assets means production and especially the part of production that influences assets and their prevailing production capability. The last dimension, upkeep stands for the maintenance function. Asset development contains e.g. determination of business requirements, which should be attained by well planned investments. These requirements for engineering assets could be e.g.

expected life cycle capacity capability (e.g. quality) flexibility (volume flexibility, product flexibility) efficiency performance rate (e.g. operating rate, OEE, maintenance costs) Asset development contains also determination of asset options to be used, design and construction of production equipment in compliance with life-cycle, capacity, capability, flexibility, efficiency and performance rate requirements (maintainability and reliability included). Operating of asset may have significant effect on production assets e.g. allocation of orders on various plants or production lines break downs because of misuse of assets OEE oriented activities immediate production actions such as process control and machine operations; operation can also include adjustments or replacements of consumables, etc in addition to the operation of assets, the operating personnels duties include tasks related to integrated operation and maintenance such as sanitation, cleaning, lubrication, settings, minor repairs of production machinery as well as machine-specific condition monitoring and followup of production capability. The system of the maintenance function consists of following separate sub-processes determination of requirements determination of maintenance objectives maintenance planning resources management and development management of maintenance processes execution follow-up and continuous improvement. All these three dimensions influence each other and should therefore be handled in an integrated way as illustrated in Figure 2 . These three dimensions are supported by actively employed systems, well planned processes, appropriate competences and supportive culture.
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450 400 350

All the above mentioned dimensions interact with each other. For example, operating and maintenance of assets has a significant influence on asset development. Exogenous influencing factors such as market development, technological development, financing of assets and stakeholder requirements affect asset management activities (planning, decisions and implementation). Actually, market and technology development are key factors when determining the critical success factors of the business in question and requirements on assets. Financing and stakeholders give boundaries to asset management activities (EFNMS 2009 B).

the Effect of Conceptual model on management

The very obvious consequence of applying the conceptual model presented above is that the company management should follow the development of a combined performance indicator, where the components are unavailability costs, replacement and maintenance investment costs and maintenance costs. If the total costs are increasing the management of the plant in question should be worried. In the opposite case the development of the modes of operations has turned to be positive. Nowadays, many companies dont use this kind of aggregate performance indicators. One reason for this is that it is not easy to determine unavailability costs, because it maybe difficult to determine whether down time has caused real production losses.

Asset management Framework

In order to develop methods to manage the above mentioned issues such as dynamic life cycle management, optimal capacity 18
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development, OEE development etc. the general asset management framework is needed. The framework is based on the business objectives of the firm and on analysing and modelling various businesses and business environments from the standpoint of the production assets taking into account technological characteristics, economic structure and uncertainty in the industrial sector in question. Corporate asset management requires systematic decision making at all the levels of the organisation. The proposed asset management decision making framework is schematically presented in figure 4 (Komonen et al. 2006). The corporate asset strategy reflects corporate visions, values and mission, and the business objectives defined by the stakeholders and it incorporates the information from the strategic analyses and scenarios. If the firm has several production facilities or plants decision making related to the local asset needs to be in line with the corporate asset strategy and take into account the plant level objectives and constraints. At this stage, the technical and economic analyses and risk analyses create important input for the decision making. The plant or production asset strategy is allocated to the production systems and equipment and it forms a basis for the decision making at the shop-floor level. The system and equipment level decision making is often regarded as asset management, but this standpoint is too limited to cover the identified needs of the industry. Using the definition introduced in the beginning and the proposed asset management framework, the concept should cover the strategic and economic decision making and guide to the optimal use of the corporate

300

Costs

250 200 150 100 50 0 1 2 3 4 5 6 7 8 9 10

Year
Unavailability costs Replacement and maintenance-investments Maintenance costs Total

Figure 3. An aggregate performance indicator to measure the

success of asset management (Komonen 2009).

assets to meet the business objectives.

Plant Level Strategic Analyses

Plant Business Environment: The analyses of the business environment reveal the phases of products life cycles, uncertainty and volatility of industry structure and nature of competition, e.g. in terms of the sources of differentiation. The market analyses comprise the basis for the internal plant analyses. The life cycle phase of the industry and the products in question may have a significance impact on the flex-

ibility requirements of the production system. The uncertainty and volatility of demand have a parallel effect on the flexibility requirements. Plant characteristics: The economic structure of the plant defines the significance of the production assets in relation to the other variables. The life-cycle cost structure of the plant determines profit potential related to various cost factors. The corporate asset strategy determines the role of the plant in the corporate production system. The task of the plant could be the production of basic components,

Asset Management decision making Framework

Scenarios, Strategic analyses

Corporate Vision, Values and Mission

Corporate Asset Strategy decisions

allocation information

Business objectives &constraints

Strategic analysis, Technical and economic analyses, risk analyses

Plant/Production Asset Strategy decisions

allocation information

Plant/Production level objectives&constraints

Technical and economic analyses, risk analyses

System/Equipment Asset Strategy decisions

System/Equipment level objectives&constraints

Optimal use of corporate assets to meet the business objectives

Figure 4. Schematic presentation of the asset management

decision making framework.

e rat g y rpo trate Co t S se As

PLANT Plant's Role in Corporate Asset Strategy and Production System Economic Structure of Plant (incl. LCP) Competitive Position Product Porfolio

Plant Business Objectives and economic constraints

ROA, profit, LCP, growth, quality etc.

C A ss o r p o r et S ate trat eg y
PLANT'S BUSINESS ENVIRONMENT Products Life Cycle Phases Uncertainty in and Volatility of Demand and Supply Competitive environment

Strategic analyses

Plant asset strategy

Instruments Strategic choices for asset mgt Process development Determination replacements, of optimal improvements performance & expansions

TECHNOLOGY (original investment) Flexibility of Production System Structure of Production system Effectiveness of Production Dependability Traits of Plant Optimal performance
Optimal Capacity Optimal Operating Rate Optimal Maintenance Costs

quires e.g. investments, improvements, development of maintenance processes, and therefore costs money. The highest values of performance indicators are not necessarily optimal, because the costs of these actions may be too high. The asset strategy, strategic choices and set optimal performance objectives give a basis for investment and improvement decisions. The four performance factors introduced above are not independent, but must be levelled as a whole (Komonen et .al 2006).

Summary
The objective of this paper was (1) to present reasons behind the demand for asset management and especially for strategic asset management, (2) to introduce an integrated conceptual asset management model of EFNMS (supported by some other approaches), (3) to suggest new performance indicators to support the new conceptual approach in asset management research and decision making in practice and (4) finally, to introduce general approaches to strategic engineering asset management. Although, EFNMS approaches have been created lately, the basic ideas and decision making tools and approaches in the introduced frameworks have been tested in large international corporations and with empirical data. However, there is an obvious need for additional research in the area of business models. Asset management until now has often been technological in nature. From now on one of the main focuses should be in the area of management science. References 1. eFnMs 2009 A. A definition of Asset Management. Minutes of the meeting. european Federation of national Maintenance societies. trondheim. norway 2. eFnMs 2009 b. A system of Asset Management. Minutes of the meeting, eFnMs Asset Management committee. trondheim. norway 3. Komonen, K. 2009. Asset management: capacity, operation and and maintenance. promaint. volume 6. 2009. helsinki Finland, in Finnish 4. Komonen, K., Kortelainen, h. & rikkonen, M. Asset management framework to improve longer term return on investments in the capital intensive industries. WceAM 2006, Australia.
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Asset management instruments, e.g. LCP -based investment models Novel production control tools Capacity management tools Dependability management Outsourcing solutions Real options

Optimal OEE

Figure 5. Schematic presentation of the plant level asset management decision making
framework (Komonen et al. 2006).

large scale production of one end product or small scale production of several products on the basis of customer order. The analyses of the competitive position determine the portfolio of competitive advantages in relation to production assets. The technology of the original investment: The flexibility of the production system has an effect on capability to meet the volatility of the markets. The structure of the production system has a strong impact on the optimal activity level. The inherent effectiveness of the production system may give competitive advantage and with other traits influence the plant asset strategy. At the same time, the markets needs or plants role in the overall production system determine the optimal position in the effectiveness-flexibility co-ordinate, and how well the used technologies match with the requirements. The dependability characteristics of the plant differ from one technology to the other and have an impact on the optimal performance values. As depicted earlier, technological characteristics have an essential impact on the effective asset strategies. Specially, the inherent flexibility of production system, economic and technical inertia, as well as the relative length of the economic and technical useful life of the equipment affects significantly the competitiveness of the plant.

Strategic analyses, strategic choices: Plants internal strategic traits (role in corporate production system, competitive position, product portfolio and economic structure) and development in the market determine critical success factors from the production assets point of view. The technology used gives constraints and potential to the plants ability to meet the requirements of the market. Based on the strategic analyses and identified critical success factors requirements for the production assets can be identified. The determination of the asset strategy and strategic choices result from the requirements set by the plants business environment, companys internal traits, used technology and asset management options (instruments) available. The asset management options may include e.g. outsourcing, investments or better capacity management. Optimal performance and development actions. As soon as the plants asset strategy and strategic choices have been decided, optimal performance objectives for capacity, operating rate, OEE and maintenance activities can be determined. The structure of the production system and other technological factors influence greatly the aspired performance level. Empirical experiences and studies support the existence of this influence. The increase of capacity, operating rate or OEE re-

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