Physical Asset Management

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1 Nicholas A. J. Hastings Physical Asset Management 4y Springer

2 Table of Figures Outline of this Book xxiii xxix 1 Introduction to Asset Management Background What is an Asset? - An Accountant's View What Is Asset Management? Definition Alternative Definitions of Asset Management Why Do We Need Asset Management? Asset Management Basic Questions The Asset Life Cycle Business Organization and Asset Management Asset Management a Matrix Activity Business Planning and Asset Management The Asset Death Spiral Exercises Holiday Resort Exercise II Pacific Earth Moving Part 1 II 1.10 ATop Level Decision 12 2 The Asset Management Function The Asset Management Function Structure Asset Management Groups Example Asset Knowledge Asset Management Activities Asset Management Policy Asset Management Strategy Capital Items In-Service Support Business Strategy and Asset Strategy Personnel Roles in Asset Management Competencies 23 ix

3 x Contents Personnel Development Exercise Pacific Earth Moving Part Asset Management - Who Needs It? 25 3 From Concept to Project Approval Project Initiation Types of Project Business Development Planning Major Projects Minor Projects Developmental Flexibility Capability Capability Requirements Planning Development Planning Teams Needs Analysis Un-augmented Capability Analysis Remaining Life and Retirement Schedule Capability Gap Capability Requirements Statement Creating the Development Plan Pre-feasibility Analysis Feasibility Analysis Development Plan Development Plan Detailed Topics Considerations in Development Planning Stakeholders Existing Processes and the Status Quo Lead Time In Service Date Date of Decision.' Operational Concept Function and Performance Specifications Level of Service Financial Analysis Acquisition Strategy Project Maturity Implementation Portfolio Capacity Planning Exercise - Generators Gap Analysis Pre-Feasibility Planning and Options Bottling Plant Exercise A Business Imperative 49 4 Developing a Business Case Business Case Introduction 52

4 4.2 Development Plan Business Case Outline Smaller Project Business Case Outline The Final Decision to Proceed Approved Development Plan Wine Selection Example Experience required 57 Implementing Development Plans Project Team and Activities Team Functions Project Management Activities Project Milestones Evaluation of Suppliers Equipment Selection and Trials Through Life Support Financial and Contract Process Project Maturity Status Assigning Responsibilities Project Management Reports Topics Financial Overview Report Project Progress Monitoring Delays and Overruns Scope Creep Project Progress Reports Project Portfolio Management Commissioning and Introduction into Service Operational Readiness, Training < Change Management Exercise Pacific Earth Moving Part An Acquisition Decision 72 Management of In-Service Assets Deployed Assets In-Service Support Aims In-Service Support Activities Organization for In-Service Support Engineering and Technical Services Configuration Management The Need for Configuration Management Configuration Description Configuration Management Process 79

5 6.6.4 Configuration Change Control Change Management Roll Over 81 Asset Continuity Planning Introduction Planning Example Pre-Plan Gap Analysis Planning Process Capability Continuity Planning Vehicle Fleet Capacity Exercise 88 Capital Planning and Budget Capital Planning Considerations What is a Budget? Types of Budget Budget Structure Devolution of Authority Planning Process Planning Periods Source and Application of Funds Capital Requirement Plans for Asset Types Capital Rationing Capital Rationing Example - Postal Vans Replacement Prioritization Condition/Criticality Plot Financial Return and Risk in Project Ranking The Capital Budget Managing the Capital Project Portfolio Capital Budget for Current Year Long River Ferry Company Exercise Are Your Assets Liabilities? 101 Discounted Cash Flow and Asset Decisions Introduction Discounted Cash Flow Interest Rate Debt and Equity Discounted Cash Flow Terminology Future Value Present Value Discount Factor Net Present Value Cash Flow Diagram Equivalent Annual Cost Annuity Factor 109

6 xiii Capital Recovery Factor EAC Example Equivalent Unit Cost (EUC) Repair/Replace Decision for Ore Loading Vehicles Ill Situation -. Ill Factors Involved in the Repair/Replace Decision Ill New Ore Loader Costs Cash Flow Diagram Excel Function NPV Excel Function PMT Payment or Cost at End Life Cycle Cash Flow Old Ore Loader Costs The Excel Function PV Inflation Adjusting Historical Costs Real Rate of Interest Adjusting Future Costs Discounted Cash Flow Revision Question Standby Generator Exercise Solar or Diesel Power Exercise Profit, Depreciation and Tax Introduction Profit and Company Tax Capital Transactions Depreciation Acquisition Cost Book Value (or Written Down Value, WDV) Effective Life Straight Line Depreciation Declining Balance Depreciation Cash Flow after Tax Tax Credits Tax on Resale After Tax Cash Flow Diagram Ore Loader Decision Analysis with Tax New LoaderOption Old Loader Option Impact of Downtime Physical or Service Losses Cost of Failure Loader Policy Decision Loan Repayment Asset Valuation Asset Value Index 137

7 xiv Contents 11 Asset Investment Criteria Net Present Value Payback Period Payback Period Example - Materials Handling System Internal Rate of Return (IRR) Excel Function IRR IRR Example - Communications System Minimum Acceptable Rate of Return (MARR) Profitability Index Project Financial Measures Comparison and Selection of Projects Planning Horizon Leasing Fixed Costs, Variable Costs and Breakeven Analysis Financial Analysis of a Turbo-Generator Project - Exercise Cost-Benefit Analysis Introduction and Reference Non-Financial Benefits Cost Benefit Analysis A Basic Example Needs and Wants User Pays Principle Measures of Benefit Cost Benefit Analysis Steps Planning Balance Sheet Regional Health Clinics Exercise Cost Benefit Spider Diagram Risk Analysis and Risk Management Introduction Definitions Management of Risk Legislative Approach Types of Risk Sovereign Risk Solution Risk Technical Development Risk Performance Risk Commercial or Financial Risk Administrative Risk Safety and Environmental Supplier Risk Resources Hazard Analysis Consequences Risk Matrix 164

8 xv 13.9 Contingency Allowance Retirement of Risk Mitigating Risk Design for Safe Operation Facility Siting and Layout Fitness for Service Assessment Safety Practices Tags Permits Danger Signs Contingency Planning Quantitative Risk Analysis Other Methods Layer of Protection Analysis Safety Integrity Level Event Trees Project Risk Examples Water Supply System Example Hazard Analysis Risk Treatment Monitoring and Audit Logistic Support Introduction Value Engineering Reliability Centered Procurement Equipment Commonality Asset Appraisal and Acceptance Test and Evaluation Preferred Suppliers.., Logistic Support Analysis (LSA) Logistic Support Basic Data Logistic Support Detailed Factors Level of Repair Analysis Integrated Logistic Support (ILS) Configuration Management Plan Logistic Support Plan Through Life Support Through Life Support Contract Logistic Support Example Supplier Viewpoint Cunning at the Castle Exercises Logistic Support Analysis - Tooth Brush Racing Cycle Team Level of Repair Analysis Revision Questions 195

9 xvi Contents 15 Life Cycle Costing Aim of Life Cycle Costing Life Cycle Asset Management Plan Input to Project Budget Life Cycle Costing Elements Life Cycle Costing Example Economic Life Concept Economic Life Example Undiscounted Case Discounted Case Economic Life with Discounting and Tax Equipment Replacement Decisions Replacement Planning Reasons for Equipment Replacement Technical Assessment Data Analysis Cost Analysis for Replacement Like-with-Like Replacement Equivalent Annual Cost of the Challenger Steadily Increasing Cost Case Savings Unevenly Changing Cost Case Formulas Spend Limits Spend-Limit Example Risk with Ageing Equipment Risk-Cost Exercises Water Pump Replacement Exercise Transformer Replacement Exercise Spend-Limit Exercise Outsourcing Introduction Non-Core Activities Minor Player Peak Load Resources The Owner/Operator Model What NOT to Outsource Benefits of Outsourcing Costs of Outsourcing s Formalization Intangible Effects Other Potential Negatives Types of Contract 228

10 xvii 17.8 Contract Features Outsourcing Risk Avoidance Audit Outsourcing Result Contractor Viewpoint Build Own Operate Transfer (BOOT) Public Private Partnerships (PPP) Know Your Assets Awareness of Key Assets Block Diagrams Information Required Per Block Criticality Expert Teams Bottlenecks Backlogs Plant Criticality Exercise Asset Management Information Systems Information System Role and Applications Base Data and the Need for Coding Functional Locations Mobile Plant Coding Location Code Structure Activity and Trade Codes Resourcing and Managing the System Data Administration Users Features Implementing Changes., Reports and their Uses ' Exercises Asset Data Setup Exercise Pacific Earth Moving Part 4 CMMS Maintenance Organization and Budget Introduction Total Productive Maintenance or Asset Basic Care Workplace Tidiness and Organization Maintain Standards Training Machine Knowledge Basic Maintenance Assign Housekeeping and Basic Maintenance Tasks Routine Maintenance by Technicians Accredit Workers 260

11 xviii Contents 20.4 Performance Recording Performance, Quality and Reliability Improvement Asset Basic Care/TPM - Management Support Asset Basic Care/TPM Summary Asset Basic Care /TPM Benefits Maintenance Organization Maintenance Layout Maintenance Work Management Maintenance Budgeting The Business Plan Creating the Budget Using the History Walking Around Sources of Maintenance Work Forecast Demand Direct Labour Estimates - Routine Non-Routine and Breakdown Labour Estimate Specific Items Indirect Labour Overheads The Maintenance Iceberg Arrive at the Resource Requirement Correct the Imbalances Costing Survey and Quote Budget Cost Control Budget Reports Activity Based Costing Revision Questions : Exercises, Maintenance Budgeting Exercise Pacific Earth Moving Part 5, Maintenance Reliability, Availability, Maintainability Specification and Testing Reliability Design for Reliability Reliability Management Operator Records and Incident Reports Failure Reporting and Corrective Action System (FRACAS)." Pareto Analysis Failure Mode and Effects Analysis (FMEA or FMECA) Root Cause Analysis (RCA) Condition Monitoring Failure Patterns and Causes 284

12 xix 21.4 Availability System Availability Cost of Downtime Availability When Needed Availability Related to Total Time Maintenance Effectiveness Maintenance Load Maintenance Regime Maintainability Design for Maintainability Maintainability Measure Exercises Pacific Earth Moving Part 6. Reliability and Availability Cost of Downtime Availability Related to Total Time Desert Song Inventory Introduction Initial Spares Purchase Cataloguing Aims of Inventory Management Inventory Management Basics Stock Keeping Units or SKUs Spare Parts Basics Procedure When Item Is Needed Stock Control Terminology Dependent Demand Independent Demand Items Fast Moving Items MIN and MAX...' Target Level Forecasting Reorder Risks Safety Stock Lead Time Reorder Rules Fast Moving Other Factors Consignment Cannibalization Returned Stores Storekeeper Personnel Overstocking Repair Pools and Rotables Repair Parts Item Criticality 309

13 xx Contents Slow Moving Items Insurance Spares Performance Indicators Service Level Days Supply Value Turns ABC Analysis Inventory Improvement Actions Accounting for Inventory Inventory in the Balance Sheet Inventory in the Profit and Loss Account Overstocking and Write Downs So How Did We Win? But Problems Remain Key Performance Indicators Functional Performance Indicators Railway System Indicators Water Supply System Indicators Electricity Transmission or Distribution Trucks Overall Equipment Effectiveness Maintenance Related Performance Indicators PAS-55 Asset Management Specification Introduction and References Outline PAS-55 Asset Management Manual Guidelines Outline Content of PAS Clauses Functional Gap Analysis 332 Appendix A - Tables 343 Appendix B - Solutions to Exercises 345 B.I Holiday Resort Exercise B.2 Pacific Earth Moving Part 1: B.3 Pacific Earth Moving Part 2: B.4 Capacity Planning Exercise Generators B.5 Bottling Plant Exercise B.6 Pacific Earth Moving Part 3: B.7 Vehicle Fleet Capacity Exercise B.8 Long River Ferry Company Exercise B.9 Standby Generator Exercise B.10 Solar or Diesel Power Exercise B.I 1 Financial Analysis of Turbo-Generator Exercise B.I2 Regional Health Clinics Exercise

14 xxi B.I3 Logistic Support Analysis Exercise - Tooth Brush B.14 Cycle Team Logistic Support Exercise B.I5 Level of Repair Analysis Exercise B.16 Water Pump Exercise B.I7 Transformer Replacement Exercise B.18 Spend Limit Exercise B.I9 Plant Criticality Exercise B.20 Asset Data Setup Exercise B.21 Pacific Earth Moving Part 4 CMMS B.22 Maintenance Budgeting Exercise B.23 Pacific Earth Moving Part 5. Maintenance B.24 Pacific Earth Moving Part 6. RAM B.25 Cost of Downtime B.25.1 Availability Related to Total Time Bibliography 361 Index 365

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