Jack Welch once said that the 1980s would be a ‘white-knuckle’ decade of intensifying industrial competition – and that the 1990s would be tougher still.
In many ways, however, the 1990s were just the start of a massive reshaping of the global economy that will continue for the next 10 to 20 years. The driving force behind this process of ever intensifying competition is primarily communications technology, which is giving rise to globalisation and economic liberalisation in those pockets of the globe that just a decade ago were still fairly isolated.
President Mbeki recently stated that globalisation is like the weather in that there is nothing that can be done to stop it. If that is true then Africa is being hit by an economic El-Nino that has triggered a debilitating drought. As trade barriers continue to fall in the wake of this unprecedented restructuring of the world economic system that is supposed to 'level the playing field', it is often the poorer countries that are left wondering why it feels all too much as if they are running uphill to the try line. Due to the increased absence of government protection for local industry, local businesses have no choice but to rethink the way they do business in order to survive in the face of international competition.
Consumers also have become smarter and more demanding, using the Internet to compare prices across the globe before committing to a purchase. Economies of scale have become all but obsolete, killed by the demand for flexibility, customisation and individualisation. This has opened the market to a flood of new players that is not shackled by the large overheads their established competitors have to contend with.
Yet shareholders demand value, so what are businesses to do? The concept of value itself has been a hot topic for many years, precisely because it is not always so easy to define. Net Present Value calculations for future projects imply a required rate of return, which will swing markedly from one region or industry to another to compensate for disparate inflation rates and risks.
DuPont
Many systems have over the years been construed to quantify value. One of the first attempts was in 1919, when the chemical giant, DuPont, developed the now famous DuPont model. This model endures to this day as a simple, yet effective way to visualise the critical building blocks that contribute to return on equity and hence shareholder value.
The DuPont model uses certain inputs such as sales, cost of sales, fixed assets and current assets. At successive stages they are added, subtracted, divided or multiplied until return on equity is reached. The model forms an easy to use and understand framework with which to investigate the root cause of insufficient value creation. The model demonstrates that there are only a few things that can be done to increase ROI: Increase sales - either by increasing the price or by selling more units, or decrease cost of sales, fixed assets and current assets.
Within asset intensive environments such as the manufacturing, mining, utilities and facilities industries the DuPont model finds particular significance.
The driver of sales is production, provided that the market is not saturated. Increasing the selling price is most often not feasible in a tough market. Production requires equipment, whether it be a machine on a factory floor, a crane in the harbour or a bus that transports people. Keeping these assets, or geese that lay the golden eggs, operating at optimal lifecycle cost and availability is the key to increasing this variable. Even in instances where the market cannot absorb more product, increasing the efficiency of a particular asset might create the opportunity to sell another that becomes redundant. A plant might for instance find that it can eliminate one shift by working more effectively on the other two. Keeping your physical asset humming is probably the number one way you can improve the shareholder value created by your enterprise.
Progress hardly ever occurs if meticulous measurement of performance does not take place. Measurement 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.
Overall equipment effectiveness
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 is often not worth the effort. This is why an automated system such as Pragma's On Key Performance Manager should be considered.
Not every aspect can however be automated as certain downtime reasons cannot be measured with sensors. For such instances the system should allow for operator intervention. With Performance Manager such downtime reasons are captured by having the operator select them via a touch screen that provides a list of predefined downtime reasons. Operations cannot resume unless the required information is provided. A time threshold can however be set so that minor stoppages can still occur without reasons having to be provided.
Simply measuring and capturing the information is however not enough. In today's competitive environment where flexibility is non-negotiable, decisions need to be made as the problems occur. There is no time to wait for the weekly or monthly planning meeting where a course of corrective action can be chartered. This is why the information should be available in realtime over the Internet so that access is possible from anywhere in the world with no more than a few seconds delay. Performance Manager allows an executive to observe exactly what is occurring on the floor of a factory on the other side of the globe as it happens.
Operating expenses
The second factor in our DuPont model - operating expenses, can also be significantly influenced by effective asset management. Maintenance cost can constitute as much as 40% of operating expenses. This presents a huge opportunity for improvement. Shaving even a few percent off this amount can have radical consequences for the bottom line. Most industries still find themselves in a reactive mode - fixing equipment once it breaks down. Besides the obvious cost of lost production time, this haphazard approach also ends up pushing up maintenance expenses. What is needed is an orderly maintenance approach that focuses on prevention rather than curing - a structured process for issuing maintenance jobs - both reactive and proactive, that will ensure that the appropriate spares and human resources are available when needed, that accurate records of work conducted are kept and that reasons for equipment failure are noted. Such an approach will in the long haul save you money by saving you time, eliminating 'safety stock' of both spares and human resources and providing you with the information needed to run a finely tuned operation.
A further way in which asset management reduces cost of sales is in waste reduction. When continuous processes break 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 of poor quality product that has to be either reworked or rejected.
Shareholder value
Asset management can also create shareholder value by reducing fixed asset requirements. As noted earlier, the need for certain assets can be eliminated by better utilising others. New capital expenditure can also be delayed by better maintaining existing equipment while spares reduction can further reduce tied up money.
Limitation of inventory
Current assets are also reduced through the limitation of inventory. Excess inventory of work in process is often kept to maintain production when a certain piece of equipment in the production process breaks down. This inventory not only costs money, but also takes up valuable storage space and causes a clustered, less safe working environment. Such practices violate both the Theory Of Constraints and Just In Time manufacturing principles. The more reliable the production process, the less the dependency on such safety inventory.
Asset management
It is evident that asset management impacts on every aspect of the DuPont model. With the level of competition in the marketplace unlikely to abate, asset management improvement represents a rare opportunity to break the stranglehold of escalating competition. Yet this is an often-neglected aspect of corporate management, presumably since top management is so far removed from the shop floor that they do not realise the inherent value of the discipline. Arguably, this is something that is set to change as other sources of competitive advantage continues to deliver ever diminishing results.
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