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2 Companies That are Proving Good Asset Management Impacts Financial Results

growth-1152553_640In many asset intensive companies around the world, corporate executives are more focused on achieving financial results than the technical aspects of running a company.

They know they have highly talented, technical people who will worry about the ‘nuts and bolts’ of the asset management world.

What they often don’t understand is the impact that asset management practices have on the financial performance of the company, and the potential that improvement in these areas can have on the bottom line.

 

In my 40 plus years in the asset management world, I’ve worked hard to elevate the importance of asset management and help corporate executives understand why they should be concerned and interested in these traditionally technical aspects of running an industrial company.

Here are two case studies I presented at Mainstream Conference 2017 which highlight the role of asset management in improving business performance. These two companies have presented their case studies at public conferences before and are being shared with permission here.  They both very successfully transformed the way they managed their assets and their improved financial results speak for themselves. 

The following two case studies look at a pharmaceutical company and a steel company. And while you may think these might not apply to your industry, let me tell you that I’ve worked in 17 industries around the world and I’ve found surprisingly minimal differences in  equipment. Approximately 80% of the maintainable components in any industrial plant is common. We all have the same kind of equipment; it’s organised differently for different missions, but equipment is equipment, and maintenance is maintenance.

Case Study 1: Eli Lily

Eli Lily and Company is a pharmaceutical company privately owned by the Lily family in Indiana, USA. Back in the 1990s they produced the drug Prozac – a widely-used, so-called blockbuster drug generating billions of dollars in revenue for the company each year.  That drug was nearing the end of its patent. In the pharma industry, when a product comes off patent, generic manufacturers are able to make it very inexpensively compared to the major pharmaceutical companies, because they don’t have the burden of research and development and sales and marketing expenses that the large companies had.  In essence, Eli Lily’s cost structure (and the cost structure of any major pharmaceutical company) was unable to compete with that impending competition from generic manufacturers.

The Lily family went to the management team at their largest plant and revealed that if they didn’t get the cost structure of the plant onto the same level as their competitors, they risked going out of business within two years.

What they did

The company did some benchmarking. They visited a chemical company called Rohm and Haas, which in the 1980s had done some great work in operational excellence, to find out what had made them so successful. After some in-depth research and self-analysis, Eli Lily discovered that they were performing too much time-based preventive maintenance, meaning that every piece of equipment in the plant was the subject of a series of preventive maintenance activities that were performed at a set frequency – monthly, quarterly or annually.

They then did a criticality analysis to rank the importance of their equipment, and starting with their most important equipment, used some formal reliability failure analysis tools to understand how these machines behaved and how they could fail. They made a startling discovery: the vast majority of the preventive maintenance procedures that had been done for decades didn’t have any direct relation or impact  on the failure modes that they had recently discovered were critical to reliable operation.  So they went about a PM optimisation process which eliminated over 60% of the existing PMs.

In addition, they began to regularly measure the condition of their equipment, looking for preventive maintenance trigger points.  They used vibration analysis on rotating equipment, infrared thermography on electrical distribution equipment and oil analysis, three basic predictive maintenance tools, primarily first on their critical equipment, and then eventually throughout most of the assets in the fleet.

Results

Despite deep resistance from many operations people, who were concerned the elimination of these PMs would put the equipment at risk, the end results were remarkable, and even the most strenuous objectors became advocates of the new thinking.

Over only two years, the initiatives resulted in a 60% decrease in reactive maintenance, a 40% reduction in the maintenance cost, and a 12% increase in the ability of the equipment to make more products. These changes had a significant, multimillion-dollar impact on the business on an annual basis, and rendered the plant much more competitive with generic manufacturers.  

  • Reactive maintenance: reduced from 71% to 7%
  • Overtime: reduced from 22% – 5%
  • Reassigned 9 planners, 7 PdM Techs and 8 Reliability Engineers from existing ranks
  • Availability: 12% increase
  • Healthy assets: increased from 35% – 85%
  • Production deviations: 1/10th of previous levels
  • Maintenance budget: reduced by 40%
  • Inventory reduced by 33%
  • Insurance premiums reduced by 30%

When the management team was told that they could expect this kind of reduction in cost, which would improve profit of course, they didn’t believe it at first. But they took bold action and it turned out to be a very successful story. The company survived and thrives today, and they come out in public to attribute their success in large part to their maintenance and reliability philosophy.

 

Case Study 2: Dofasco Steel

In the mid-1990s Dofasco Steel was the largest steel mill in the Western hemisphere, employing thousands of workers and over 2,400 hourly maintenance workers alone. At the time the Chinese were giving the US steel companies a big run for their money: 11 US steel companies had gone bankrupt in the preceding decade, and Dofasco was concerned it was headed the same way.

What they did

Like the first case study, Dofasco did some benchmarking and they discovered much the same: there was a misalignment between the existing preventive maintenance activities and what they had learned about the way those machines behaved and failed. Like most others, they were struggling in a reactive maintenance mode, caught up in trying to get the traditional, frequency-based PMs done, and very often not getting them done on schedule. And reliability was not great.  So they implemented predictive maintenance technology, initially on the critical equipment and eventually on most equipment.  In a 5 year period they too saw remarkable results.

Results

After a five-year improvement journey, these were some of the unbelievable results they achieved:

  • Reactive maintenance: reduced from 70% to 20%
  • Availability: increased from 78% to 91%
  • Product quality (Yield): increased from 76% to 91%
  • Inventory reduction: $40,000,000
  • Maintenance contractors: 50% reduction
  • Most Profitable Steel Producer 1999
  • Ranked as #1 Steel Maker in the World by Dow Jones in 1999

 

Common Denominators

These two case studies are early adopters – they started waking more and more people up to the fact that asset management can have a real impact on corporate financial results. But despite their unenviable circumstances at the time, these two companies arguably had some components in common that made their initiatives so successful:

  1. An enormous dissatisfaction with the status quo

First of all, there was a “burning platform” issue. It was entirely unacceptable to do nothing, and that compelled these companies to take extraordinary and often difficult action.  It was a major transformational change that was not easy and not painless.  Many employees in the company saw the benefits and adjusted, and some were forced to come along.  The luxury of time to allow gradual coaxing and education and slowly bringing people along was not an option.  So the rapid transformation was extraordinary.  It usually takes longer to effect such dramatic change.

  1. Both were privately-owned companies

These were not publicly traded companies. This is an important differentiator and it worked to their advantage because they weren’t being scrutinised by stock analysts and shareholders who were looking for short-term, quarterly returns. Too often I see analysts fail to ask any questions about the physical asset management practices of the company, which I think is a big mistake. They are focused on shareholder value but they’re not asking questions about how companies are maintaining their assets. In my view, there is no greater indicator of an industrial company’s ability to perform financially and reliably in the future than its physical asset management practices.  The bold and courageous change may not have been possible if the company was being run with quarterly financial results at the pinnacle of the strategic goals.  A longer term focus allowed them to take action that deteriorated the finances – temporarily – in the interest of resetting the entire strategy of running the company.

  1. Both Companies had sustained executive leadership and courage

Another common denominator was the courageous, sustained leadership from the executive management level of the companies. The top executives considered the management of the assets to be strategic to the business which was critical to its transformation.  There are many ingredients to success in this kind of transformation, but I have seen NO success stories that didn’t have sustained and courageous leadership.

Looking Forward

There was a time, (for most of my career to be honest) when maintenance, or more broadly, asset management, was seen as a necessary expense and not a profit contributor. I think these two case studies, along with a handful of others in the same era, started a shift in thinking and strategy. The recent publication of the ISO 55000standard (covering Asset Management as a strategic process – much like ISO 9000 transformed the world of quality) is helping industry reach a tipping point – it elevated asset management to a level of importance that the executives couldn’t ignore. The need for it to be standardised meant that it started to be seen as an important strategic aspect of corporate management.

So today, it is much easier for somebody to bring a business case argument involving the maintenance and asset management to the executive management level because there’s much more awareness about this “technical” thing called asset management.  Today, in my view, no senior executive of an industrial company can ignore this critical aspect of producing good corporate results.

For more reading on why I believe asset management is a moral imperative for corporate executives, read this blog post.  You can also download my full presentation with audio from Mainstream Conference 2017: “How to Move the Right Reliability and Asset Management Levers to Significantly Enhance Shareholder Value.”

 

About the Author

robert-distefano-mainstream-conferenceBob DiStefano is widely regarded as one of the world’s foremost Asset Management thought leaders. He was formerly the VP and General Manager of Emerson Reliability Consulting. He has authored countless articles on reliability and asset management and a text book on Asset Data Integrity. Bob was the top rated speaker at Mainstream North America. Later this year, he has the honour of delivering the keynote at the American Society of Maintenance & Reliability Professionals (SMRP) Conference.