On the subject of when assets should be purchased the answer would naturally have an element of company business plan exposure. Capital equipment is usually capital intensive, meaning that it is costly to purchase assets. A cost-benefit analysis is typically needed at a bare minimum to assess if a capital asset and its operation will gain the fiscal benefits being projected. Time is usually a critical component when calculating the lead times needed to secure the necessary project funding and get the equipment built and installed. This coordination requires a solid grasp of market trends and financial projections way out into the future.
We won’t even touch on securing principal supplies, packaging, and other requirements that might come from a new product being run, or an increase in production of current SKUs (Stock Keeping Units). There is so much to factor into an asset purchase that it would not be uncommon for organizations to feel that they don’t have time to spin up a team for every asset purchase being considered. Yet we always have time to overcome the reliability and maintainability issues that are inherent in whatever the folks upstairs come up with. There was an old Fram oil filter commercial in the 1970s that had the famous tagline, “Pay me now or pay me later.”
If we’ve heeded such advice as given over the last few sections, we would now have an asset that is truly performing to the levels we intended. This is an asset that we can and should manage for the continued success of our company. But, how long should we keep this asset?
When the conversation turns to asset life, or even calculating life cycle costs (LCC), the ISO 55000 standard introduces an interesting twist. We learn that an asset’s life does not necessarily end when the machine is no longer of use for our purposes. Instead, the asset can provide value to more than one organization over its (the asset’s) lifetime.
We’ve actually seen this before. Anyone who has ever cared for an automobile at a very high level to protect the trade-in value has an absolute appreciation for the sentiment the ISO standard just referenced. Here is a story demonstrating this point that fits perfectly into the discussion on when to dispose of an asset.
My first assignment in the Air Force after the Aircraft Maintenance Officer Course was to Wurtsmith AFB, MI. I was a flight line maintenance officer (2nd Lieutenant) and I had good friends in the Company Grade Officers Council (Lieutenants to Captains). One of my friends, Terry, was a lieutenant at the base motor pool. The Air Force motor pool was made up mostly of staff cars. This was a time in the military of tight budgets, and as a result, the Air Force had purchased almost exclusively the Dodge K-car platform, and it seemed that the majority of cars were the Reliant K-car.
It’s widely known that cars are individually identified by their VIN (Vehicle Identification Number). These cars were no different. Terry told me that each car cost about $8,600 landed at our base, all decked out with the Air Force required package: AM radio, roll-up windows, manual locks, etc. He told me that each vehicle had in essence a ‘bank account’ that had roughly $10,000 in it, and each time the car was serviced (other than fuel), the labor and material charge was subtracted from that account. Once the car’s balance hits $0 (zero), the car was sold.
I’m not confirming the numbers or Terry’s accounting of these details, but I remember feeling that this was a very good idea. At what point do we decide to stop spending money on an asset and just buy a new asset? Imagine that we are caring for the assets to ensure the highest trade-in value.
I often tell clients that if we don’t have some trigger set in our process to evaluate where we are on spending money towards the upkeep on an asset, we are likely to find ourselves having spent $2.3 million on an asset that costs $300K brand new.
When my son graduated from college he still had the car I bought him while he was in high school. He asked me, “Dad, how do you know when it’s time to stop spending money on an old car, and just buy a new car?” I told him, “When you can afford it.”
I wonder how many companies actually build an asset disposal plan into their life cycle projections, including the funding for such actions. Ramesh Gulati re-prints a value in Maintenance and Reliability Best Practices, of <5%. (p. 177). Disposal costs for an asset with an LCC of $1,000,000 should be less than $50,000, as an example.
A good business plan has an exit strategy. What is your capital asset exit strategy?
It makes sense to start a book on asset management with a short discussion on what makes an asset an asset. I contend that although we call many things ‘assets,’ in practice we don’t treat them like assets. Give some thought to the care and upkeep of your capital equipment and the knowledge and skills of your people. Are you currently providing the necessary attention and direction needed for each, as if the business literally depended upon it? In most cases we are doing what we can, but not executing the care at the highest levels possible.
NOTE TO THE READER: What follows is the start of a compelling business case to adopt a formal asset management plan for your company. I’ve had success with this format in the past and I know it will work in this case as well. Fill in the spaces below using the responses to this chapter’s work. Much of this same material will appear in the back of the book in the closing chapter. It is my hope that the material in the back of the book, once completed, will net a comprehensive and compelling case to encourage your leadership and associates to move forward on this critical journey and provide a blueprint for asset management.
Our Business Case
We often begin our journey in asset management by setting off on the wrong foot. The manifestation of that misstep is not having an acceptable definition for key words and phrases. For the purposes of our discussion on asset management, here are some key words and phrases and the working definitions at this location:
| Maintainability: |
| Reliability: |
| Asset: |
| Asset Management: |
It must be the focus of this organization to recognize that there are many types of assets, including but not limited to:
■ Capital assets
■ Human resource assets
■ Financial assets
■ Property assets
■ Trade secrets or proprietary assets
■ Processes
■ Inventory
■ Accounts receivable
■ The company’s brand
For the extended purpose of asset management, we are going to focus on capital assets, recognizing that the effective deployment and utilization of capital assets make income for the company. Assets, it turns out, are what we manipulate to make income and ultimately a profit. Robert Kiyosaki animated this for us in the following figure.
In each case,
