The financial asset management industry represents one of the most dynamic parts of the global financial services sector.
Funds under institutional management are considerable and growing rapidly. A recent Fortune 500 report showed that three of the largest 12 companies and 12 of the largest 100 listed companies in the US provide primarily financial asset management services. In South Africa names such as Investec, Allan Gray, Sanlam and Old Mutual are some of the best known brands in the market. Undoubtedly this is a highly regarded and hugely important industry.
When we shift the focus from financial assets to fixed assets, however, the picture changes drastically. Formal focus on financial asset management is always prioritised as the driver behind business success. As such, full attention when planning business strategy tends to be given to this area of the business.
Yet the global investment in capital assets is staggering. Manufacturers in the consumer goods, petrochemicals, chemicals, metals and paper, utilities and facilities industries have hundreds of billions of rand invested in 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 savings from the effective management of capital assets is immense, and these savings go straight to the bottom line," says Adriaan Scheeres, CEO of asset performance management specialist Pragma Holdings. "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 lifecycle, which starts with acquisition, 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 selection. 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 they could have tax implications when governments are forced to account for their national contributions to greenhouse gases and other pollutants. Factors such as timing, price and product support should also be considered.
Asset disposal can be costly and should again consider environmental factors. There might be legislative requirements that mandate certain parts of the asset be recycled. Those containing hazardous substances should be dealt with appropriately. Some assets fetch handsome prices on the second-hand market, or might be more valuable when disassembled and sold in parts.
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 its eventual disposal cost. On top of this it should turn a profit for the asset owner. Achieving this requires an optimum maintenance mix of preventive maintenance, condition-based maintenance and run-to-failure tactics that will optimise the cost/risk tradeoff. These maintenance tasks should not only be executed efficiently but effectively.
Another factor that can weigh on maintenance cost is inappropriate spares levels that either tie up capital that eventually ends up as redundant stock, or causes the organisation to run huge risks due to the unavailability of spares.
During operation, meticulous measurement of performance is required so benchmarks can be set and the root causes of performance failure identified. In the continuous manufacturing environment this means knowing when production lines are operating below capacity and why. It also means knowing the percentage of product being produced within the required quality standards. The de facto standard for performance measurement within the continuous manufacturing environment is overall equipment effectiveness (OEE), calculated by measuring availability, production rate and quality rate. 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.
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. For example, a plant might find that it can eliminate one shift by working more efficiently on the other two, or the amount of overtime required might be reduced. Another benefit is waste reduction. When continuous processes break down, waste results. Work in process might become unusable while poor quality at start-up can create scrap. Equipment that is operating properly reduces the percentage of 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.
Scheeres says 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," says Scheeres.
To achieve these goals, organisations require the expertise of capital asset management specialists. Very few organisations and individuals are sufficiently competent to manage their own financial asset portfolios. Yet many large capital asset owners insist on 'going it alone' and managing the maintenance of assets themselves.
But the nature of capital asset holdings in most organisations has become so complex that the in-house approach simply does not suffice. These organisations often end up jumping at the latest maintenance acronym - RCM, TPM, FMECA - much as an indiscriminate investor might jump at some hyped share without considering the fundamentals.
"The wily investor has learned that the secret to investment success is a carefully balanced portfolio of quality shares rather than betting the business on the flavour of the month," says Scheeres.
About Pragma
Pragma is a leading South African leading supplier of world-class asset performance management solutions to a myriad local and international organisations. The company has used its domain knowledge to produce globally competitive applications in this space through a strong focus on helping companies to maximise the value of their assets. Pragma's innovative solutions are designed to deliver internationally accredited asset management practices and high-performance asset management teams to improve asset performance at optimum lifecycle cost.
Pragma's customers come from the manufacturing, mining, facilities, utilities, telecommunications, transport and local government sectors. The company's growth internationally is increasing, with a strong presence in Europe and resellers in the US, Canada, Australia and the Middle East.
For more information contact Scheeres Louis Volschenk, Pragma Holdings, 021 943 3900, [email protected]
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