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Asset Reliability and Maintenance Management Strategic Levers for Driving Shareholder Value

Asset Reliability and Maintenance Management

Strategic Levers for Driving Shareholder Value

Asset Reliability and Maintenance Management Strategic Levers for Driving Shareholder Value
Complex asset owners, operators and service providers often view asset maintenance as expendable. In reality,

Complex asset owners, operators and service providers often view asset maintenance as expendable. In reality, the opposite is true. Trimming maintenance costs may save money in the short term. But over time, cost cutting can have safety, legal and financial ramifications. Moreover, proper asset management— e.g., increasing equipment availability and reducing parts and labor consumption— can actually reduce costs. Emerging performance-based business models are escalating the criticality of reliable assets in driving new, significant revenue streams.

The bottom line is asset reliability and maintenance should be an essential component of an asset intensive business strategy to achieve high performance.

Accenture has developed an advanced set of tools that can help asset-intensive organizations identify priorities such as asset reliability, work management and capital utilization—all of which have a significant impact on shareholder value.

Shareholder Value Analysis for Reliability and Maintenance

Figure 1. Value Creation Roadmap.

Value Creation Total Return to Shareholders (TRS)
Value Creation
Total Return to
Shareholders
(TRS)

Value of the discounted cash flows to shareholders or Economic Value Added (EVA)

cash flows to shareholders or Economic Value Added (EVA) Spread Growth ROIC Cost of Capital Organic
cash flows to shareholders or Economic Value Added (EVA) Spread Growth ROIC Cost of Capital Organic
cash flows to shareholders or Economic Value Added (EVA) Spread Growth ROIC Cost of Capital Organic
cash flows to shareholders or Economic Value Added (EVA) Spread Growth ROIC Cost of Capital Organic
cash flows to shareholders or Economic Value Added (EVA) Spread Growth ROIC Cost of Capital Organic

Spread

Growth

to shareholders or Economic Value Added (EVA) Spread Growth ROIC Cost of Capital Organic M&A Operating
ROIC
ROIC

Cost of Capital

Value Added (EVA) Spread Growth ROIC Cost of Capital Organic M&A Operating Margins Capital Efficiency Higher

Organic

M&A

Operating

Margins

Capital

Efficiency

Higher asset reliability and better maintenance can improve operating margins— not just by reducing expenses but by increasing revenue. One reason is that higher equipment availability often increases production capacity for a “sold- out operation.” Another (more common) scenario is improving profitability by maximizing the most profitable and productive units.

Despite these benefits, reliability and maintenance are often overlooked levers for improving shareholder value (Figure 1). They are viewed as costs of doing business. Yet

the return on invested capital (ROIC) made possible by these initiatives is frequently reflected in operating margins and capital efficiency. Key ratios that may be positively impacted by effectively managing assets include opex/revenue, net PPE/ revenue and (to a lesser extent) working capital/revenue.

Net PPE/revenue is the most strategic lever associated with improved reliability. By deploying a formal program for asset reliability and maintenance management, high-performance businesses both sustain the productive capacity of their equipment

and extend the equipment’s useful life. Getting longer and more efficient use from your equipment often makes it possible to defer capital costs for replacement.

Improved reliability also affects working capital/ revenue by allowing for reduced spare parts inventories. For goods producers, this may be a relatively small impact compared to production and in-process inventories. However, a focused effort in spare-parts reduction can be a high impact, short-term initiative that can often pay for investment in reliability programs.

Figure 2. Power Generation Company ROIC Tree.

Operating Margin 19.1% 20.9% 19.6% 18.1% 2007 2008 TTM Peer Pre-Tax ROIC 10.8% 6.8% 5.8%
Operating Margin
19.1%
20.9%
19.6%
18.1%
2007
2008
TTM
Peer
Pre-Tax ROIC
10.8%
6.8%
5.8%
5.8%
x
2007
2008
TTM
Peer
Capital Efficiency
0.50
0.36
0.30
0.32
2007
2008
TTM
Peer

The following examples illustrate the benefits from using some of the above measurements to drive operational improvements.

In the first case, a power generation company was behind its peers in opex/revenue, but 70 percent ahead of them in net PPE/revenue (Figure 2). The power company’s analysis showed strong potential returns associated with improving the reliability of its low-cost production units. Although opex/revenue was trending upwards, a more detailed analysis found this to be due to rising fuel costs.

Opex / Revenue

 

68.2%

69.0%

69.4%

66.6%

         

2007

2008

TTM

Peer

Depreciation / Revenue

13.7%

12.6%

12.9%

9.7%

2007

2008

TTM

Peer

Operating Working Capital / Revenue

15.2%

13.6%

18.1%

Working Capital / Revenue 15.2% 1 3 . 6 % 1 8 . 1 % 10.9%

10.9%

Capital / Revenue 15.2% 1 3 . 6 % 1 8 . 1 % 10.9% 2007
Capital / Revenue 15.2% 1 3 . 6 % 1 8 . 1 % 10.9% 2007
Capital / Revenue 15.2% 1 3 . 6 % 1 8 . 1 % 10.9% 2007

2007

2008

TTM

Peer

Net PPE / Revenue

285.2%

246.6% 270.0% 191.1%

2007

2008

TTM

Peer

Net Other Assets / Revenue

-14.3%

-14.1%

-13.6%

-13.0%

 

2007

2008

 

TTM

Peer

Goodwill / Revenue

 
 

50.4%

 

35.4%

 

36.8%

 

26.6%

2007

 

2008

TTM

Peer

Figure 3. Mid-size Oil and Gas Producer ROIC Tree.

Operating Margin

27.1% 19.8% 13.2% 9.3% 2007 2008 TTM Peer Pre-Tax ROIC 25.4% 24.7% 14.7% 7.0% x
27.1%
19.8%
13.2%
9.3%
2007
2008
TTM
Peer
Pre-Tax ROIC
25.4%
24.7%
14.7%
7.0%
x
2007
2008
TTM
Peer
Capital Efficiency
1.29
1.25
0.94
0.76
2007
2008
TTM
Peer

In the second case—a mid-size oil and gas producer—operating expenses were higher than peers while net PPE/revenue was lower (Figure 3). In this case, the benefits of improved reliability would come from reduced maintenance labor and materials costs. In effect, variation in net PPE was a result of capital improvements for a refinery during a planned shutdown. In order to cost- effectively sustain capacity over time, improvements would be required in reliability analysis (do only the right work at the right intervals) and maintenance planning and scheduling (be more efficient when doing the right work).

Understanding the processes that have the greatest impact on shareholder value clarify what capabilities actually require detailed analysis. Accenture has developed a structured approach for identifying improvement opportunities that yield the greatest return on investment, while increasing safety and regulatory adherence.

while increasing safety and regulatory adherence. Opex / Revenue 79.4% 72.8% 71.5% 61.3% 2007 2008 TTM
Opex / Revenue 79.4% 72.8% 71.5% 61.3% 2007 2008 TTM Peer Depreciation / Revenue 15.3%
Opex / Revenue
79.4%
72.8%
71.5%
61.3%
2007
2008
TTM
Peer
Depreciation / Revenue
15.3%
11.6%
11.4%
7.4%
2007
2008
TTM
Peer

Operating Working Capital / Revenue

10.4% 5.6% 2.3% 1.0% 2007 2008 TTM Peer Net PPE / Revenue 128.4% 145.1% 107.5%
10.4%
5.6%
2.3%
1.0%
2007
2008
TTM
Peer
Net PPE / Revenue
128.4% 145.1%
107.5%
78.2%
2007
2008
TTM
Peer
Net Other Assets / Revenue
-4.7%
-3.5%
-6.2%
-7.5%
2007
2008
TTM
Peer
Goodwill / Revenue
4.6%
4.2%
2.6%
2.9%
2007
2008
TTM
Peer

Asset Reliability and Maintenance Management Diagnostic

High-performance businesses often approach maintenance in an organized and proactive manner—using a holistic strategy to help achieve optimum asset reliability and performance. Sustained excellence in reliability is a comparatively small investment that reaps benefits in any business cycle. Four critical success factors are typically involved:

Strong interest and buy-in from executives.

An effective, formalized and proactive strategy.

• Strong workforce morale and skills.

Experience making sustainable improvements.

The process begins with a diagnostic phase focused on formulating an asset reliability and maintenance strategy that aligns with the organization’s business objectives. The key differences between this strategic initiative and other endeavors are the link to shareholder value and a financially optimized decision-making process emphasizing high impact and readily achievable improvement opportunities. A structured, phased approach then is implemented to help ensure sustainable, long-term improvements.

The objectives of this approach are increased safety, increased revenue and quantifiable

savings. Accenture helps companies achieve these objectives by offering customer insight coupled with in-depth problem solving. Deep attention to knowledge and capability transfer is equally key. High impact, high value opportunities identified early in the process help drive initial investment and encourage capability transfer, while support in later phases strengthens internal capabilities as knowledge and expertise are internalized. Our experience has been that, as the cost of capital rises, the importance of effective asset performance increasing important in minimizing operating cost.

Accenture’s Differentiated Approach

Accenture has developed extensive functional depth in operations strategy, talent optimization, organizational performance and supply chain management. These are invaluable for identifying and implementing asset reliability and maintenance management solutions that address clients’ unique business objectives.

We are uniquely positioned to diagnose issues not only compared to industry standards but specific to the organizations business objectives and challenges. Our industry depth and functional breadth provides our clients with a partner to enable strategy through execution and sustained improvement.

Increasing Competitive Advantage through Asset Reliability and Maintenance Management

To increase competitive advantage, a mid-sized integrated oil company initiated a comprehensive maintenance improvement program. A main focus of this effort was on maintenance planning, the company integrated this function through process reengineering, training and system enhancements. The effort yielded significant benefits – reduced

maintenance costs by 30 percent, improved throughput by 5 percent and aligned leadership which had a positive impact on morale and overall operational performance for the company.

About Accenture

Accenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With approximately 177,000 people serving clients in more than 120 countries, the company generated net revenues of US$21.58 billion for the fiscal year ended Aug. 31, 2009. Its home page is www.accenture.com.

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About Accenture Supply Chain Management

The Accenture Supply Chain Management service line works with clients across a broad range of industries to develop and execute operational strategies that enable profitable growth in new and existing markets. Committed to helping clients achieve high performance through supply chain mastery, we combine global industry expertise and skills in supply chain strategy, sourcing and procurement, supply chain planning, manufacturing and design, fulfillment, and service management to help organizations transform their supply chain capabilities.

Contact

For more information on how Accenture can assist your organization with the implementation of an asset reliability and maintenance management program, please contact:

Thomas Schramm – Senior Executive Munich Germany +49 89-93081-68289

Erik Olson – Senior Executive Atlanta, United States +1 678-657-6104

Robert Giacobbe – Senior Executive Atlanta, United States +1 678-657-6282

Patrick Scullin – Senior Executive Austin, United States +1 512-912-6582

We collaborate with clients to implement innovative consulting and outsourcing solutions that align operating models to support business strategies, optimize global operations, enable profitable product launches, and enhance the skills and capabilities of the supply chain workforce. For more information, visit www.accenture.com/supplychain.