What to do about the industrial capacity utilisation decline.
A recent McKinsey research report reveals that industrial capacity utilisation in the United States has decreased from around 83% in the mid-90s to about 73% in 2004. This 12% decrease in utilisation means that many factories are forced to stand idle or run slow for extended periods. In South Africa the strong currency over the past few years has likewise forced manufacturers to reduce their asset utilisation rate. According to the laws of supply and demand, supply has to reduce when demand suffers.
Does this mean that the need for improved performance from physical assets has lessened? Surely, with so much idle time, an occasional breakdown does not present a serious problem? To the contrary, the low utilisation rate has increased the need for streamlined production processes. Companies have to improve all aspects of their operational execution in order to compensate for reduced production and remain competitive.
Manufacturers now find themselves in a position where demand has dropped to levels where they could dispose of certain assets if the remaining ones operated more efficiently. Such tactics might be required to alleviate the financial pressures faced by manufacturers. Even if assets are not disposed of, the overhead associated with their operation could still be cut back by for instance reducing the number of shifts they are operated. The more you can produce in any one shift, the more shifts you can eliminate altogether.
Keep available capacity, if possible
But the biggest benefit from improved asset performance does not come from the ability to cut back operations. Manufacturers need to keep in mind that the current situation is temporary, and they need to position themselves so that production can be ramped up when demand rebounds. This means avoiding layoffs and capacity reduction where possible.
Already conditions are changing. For the past six months South Africa has been maintaining an inflation rate hovering between 3% and 4%. At the same time inflation within our main trading regions was between 1% and 2%. This means that there was only about a 2% differential. Theoretically, inflation and currency value should always cancel out within a free market environment. This 2% inflation differential should have been matched by a 2% currency devaluation, but the Rand has dropped by almost 20% against the dollar during the first half of 2005. This means that local manufacturers became 18% more competitive during the first half of the year, and it looks as if the Rand's devaluing trend will continue for a while, while inflation is expected to remain within the 3-6% target band for at least the next year.
With competitiveness returning, the ultimate value of asset management lies in the costs savings to be had through improved manufacturing and maintenance efficiencies. By considering the lifecycle cost of assets across the different lifecycle stages of acquisition, operation, care and disposal, while also considering operational aspects such as reliability and capacity, the overall benefit derived from the assets can be maximised. The problem is that these efficiencies play out over the long run, with the full benefits only visible after years of sustained asset management excellence. It is like the oil tanker that takes hours to get up to speed, but once it is going and the momentum is inherent to the system the benefits will be visible well into the future even if the engines are to be turned off. In today's short-term perspective culture this might be frowned upon by some investors, but perhaps those are precisely the investors you do not want to be holding your stock.
For more information contact Louis Volschenk, Pragma, 021 943 3900, LouisV@pragma.co.za, www.pragma.co.za
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