Capital-intensive businesses spend a substantial portion of their budget on critical assets, whether that be the purchasing of equipment or the required maintenance to keep the machinery operating at optimal capacity. It is for this reason that an asset management strategy is critical, and if done correctly, has the added benefit of delivering improved performance and return on investment (ROI).
There are four critical areas that every asset management plan must cover:
- maintenance; and
Plan before you buy
Lifecycle planning is an essential consideration that should be explored long before any acquisition occurs. Its purpose is to consider potential threats and opportunities that may exist beyond the initial acquisition stage, as well as ensuring an organisation is compliant with data security, environmental and industry-specific regulations.
In this phase, a business should conduct detailed scoping of the organisational need to be satisfied by the proposed asset acquisition and compare this with the associated lifecycle cost of the asset. This exercise will reveal whether the asset truly adds value and achieves the desired outcomes.
Risk analysis is also critical. What is the likelihood the asset will meet expectations in terms of output, safety, useful lifespan and cost effectiveness? At this stage of the planning process it is important to examine different suppliers to see how they compare. What are the advantages and disadvantages of competing suppliers, delivery methods, installation options and financing strategies? How do each of these factors influence the risk we are taking in bringing a new asset into the business and what impact will they have on ROI?
The latter (finance options) is particularly important given the impact the outright purchase can have on an organisation’s liquidity.
Managing the asset
When an asset is in operation, it presents an opportunity to drive ROI, provided that asset is actively managed on an ongoing basis. The feedback loop plays a critical role here. The feedback loop is based around ongoing analysis of the outputs and outcomes generated by the asset.
The results generated from the operation of the asset form the basis for further improvement, but so too does changing organisational objectives and the changing context in which it operates. For example, volatile economic or financial conditions can change the degree of risk an organisation is willing to take on for improved short-term performance.
Rigorous and regular appraisal of functional capabilities, as well as an asset’s ability to meet objectives, is crucial if an organisation is to develop an appropriate asset maintenance schedule.
It is also key to determining when the costs associated with the utilisation of outdated technology, become too expensive to ignore. Depending on how the asset was originally financed, an organisation may be able to return the asset and upgrade to the latest technology. However, if the equipment was purchased outright, it will be important to keep track of the asset’s depreciated value to determine the optimum time to repair, upgrade or replace the asset.
According to the International Infrastructure Management Manual, the cost of asset disposal can be as high as five per cent of the full asset lifecycle cost. Given the financial impact, and also bearing in mind the environmental and reputational consequences, it is clear that an asset management strategy is essential to maximising the value and efficiency of asset decommissioning and disposal.
There are a range of options available at this stage of the lifecycle and appropriate planning upfront should provide a useful guide on the organisation’s preferred option regarding retirement, replacement, renewal or redeployment.
A sound asset management strategy can make a big difference for any organisation, particularly with regard to performance, productivity and ROI. It will also help an organisation to navigate the regulatory landscape, and serve as evidence to auditors and regulators of a dedication to compliance and adherence with regulations and safety standards.