Documented Evidence of Property Management Value, Part 3

Cover Article Value Based Asset Management Documented Evidence of Property Management Value, Part 3 By Robert J. McFarland, CPPM, CF, Hoosiers Chapter Part 3 of this series by Bob McFarland covers database integration including the purchase of a fully integrated database to generate maximum savings from operating a single property management system. Bob includes the asset utilization improvement that continuously contributed cost savings from a reduction of capital required to run the business and a reduction in the cost of ownership eliminated from the reduction in the financial investment. 8 The Property Professional Volume 21, Issue 1

Project Overview In 2002, ITT Communication Systems (ITT CS) implemented a program to change the culture of controlling assets to a proactive program that managed company and customer assets. Implementation required a change in the culture of the control functions and user community. Tools needed to be available to the users to obtain their support and process improvements. Cost benefits were required to change the organizational culture. When the tools were available and cost savings clearly identified, functional organizations and the user community worked in a cooperative team effort to improve overall performance with reduced costs. This program included three major phases with ongoing process improvement objectives so that the implementation would result in maximum use of capital funding, improved customer service and significantly reduced costs. Maximizing Asset Utilization and Driving Costs Down We worked with The Sente Group, Inc. to produce a Blueprint-for-Action and subsequently installed, trained and matured the ITT processes and team that were part of Phase III of the Value Based Asset Management (VBAM) initiative in Ft. Wayne, Indiana. Sente s proprietary processes and tools were used to support this effort and have been used subsequently to sustain it. The contents of this section are representative of a portion of the work they did at ITT. As additional background, The Sente Group, Inc. is a test resource management firm that provides processes, tools, intellectual property and expertise to help companies with large investments in test and test equipment to significantly reduce their total-cost-of-ownership. The Sente Group s solutions are installed alongside many different property management systems, including AssetSmart at some of the top companies in the world. We selected to prioritize test equipment assets first during this phase and expand the process to other asset categories with characteristics that allow shared utilization. Test equipment assets represent over 60% of all CS assets, directly affect productivity, program performance and costs. We established a management and leadership team to ensure we had buy-in for the process and representation of the organizations that were critical to system design and implementation. Finance, Property Management, Engineering and Production were selected for team leadership roles. These organizations were very supportive of the program and were essential in accomplishing our objectives. Chart 1 Chart 2 Chart 3 January/February 2009 www.npma.org 9

We have conducted an evaluation of our current test equipment inventory and created a blueprint for action. The initial review identified critical areas to be worked so that we could improve program performance, reduce capital spending requirements, improve asset utilization, reduce operating costs and provide full visibility of assets for program planning and execution. The analysis identified an aging test equipment inventory that was either obsolete and supported by the Original Equipment Manufacturer (OEM) or obsolete and not supported by the OEM. This puts programs at risk and adds costs to our calibration and maintenance functions. Sente s analysis of spectrum analyzers (a major class of test equipment at CS) indicated the following conditions about the age of our equipment. (Chart 1) The initial evaluation of test equipment indicated that much of our test equipment was functionally obsolete and we needed to implement more intelligent acquisition policies and practices. The result of the spectrum analyzers used at CS clearly indicated that we were working individual issues and not taking into consideration long term requirements, other equipment opportunities, or the planned and actual use we could achieve from more insightful purchase decisions. This part of the evaluation also indicated that we were not standardizing the types of equipment we were purchasing and that also restricted our ability to maximize the use of the equipment and minimize capital investment. Charts 2 and 3 clearly demonstrate the issues uncovered that needed to be addressed as we implemented more proactive approaches to the management of test equipment assets. The initial review and analysis also indicated that we had low levels of test equipment utilization. Utilization was evaluated at all locations and for both the engineering and production test equipment. This was being driven by our lack of equipment standardization and a lack of visibility for all the available assets. The visibility issue had been resolved with the single accountability database created during Phase II of this project. The data also indicated higher levels of utilization in the production environment but further improvement offered additional opportunity for process improvement and cost savings. Chart 4 indicates the results of our analysis of current asset utilization and shows the utilization percentage by location to identify the opportunities for improvement. This analysis indicates that we had a 20% overall utilization rate and only 13% in non-production areas. The equipment obsolescence factors add risk and cost to the operation. Proliferation of non-standard Chart 4 Chart 5 Chart 6 10 The Property Professional Volume 21, Issue 1

equipment limits collaboration, sharing of assets and best practices for testing. A lack of operational metrics prevents fact-based decision making for test equipment resources. Reactive processes create distractions and additional cycle-time, which lead to more reactive processes. Improvement in our utilization rates would have a dramatic improvement on productivity and costs. Incremental improvements have a direct impact on our profitability and improvements are made on a dollar-fordollar basis. The management team elected to use Sente s Quick Start process to achieve immediate improvement in our process and accelerate cost savings. In order to achieve the desired result, we put into place a Test Resource Management (TRM) structure to support the program. This will allow us to manage the three critical components necessary for success. The three critical components of success are: Technology Alignment Capacity Alignment Asset Inventory Management Technology Alignment Technology alignment involves the processes that direct the coherence of the test technology deployed at CS with the demands of the business as it changes. Technology alignment includes team members with expertise in applications, substitution, life cycle management and test equipment standardization. Application expertise is generally performed with the test process engineer when the end user has not established a specific manufacturer or model for the required testing application. The goal of this process is to ensure that test equipment users have the most effective test technology provided to them while minimizing their time spent in research and fit application efforts. Substitution assistance is generally performed by discussion with technical area leaders or by accessing a technical database that consists of standardized test equipment, original equipment manufacturers technical information and equipment functionality. The goal of this process is to make best use of what technology is already available in the CS inventory as well as to begin shifting user practices toward the use of a more standardized inventory. Life cycle management is used to ensure the proper mix of test equipment in the inventory to balance the risk against technical obsolescence. Inputs on endof-life service are provided by the original equipment manufacturers. Managing life cycle allows more proactive technology refresh, upgrading and asset retirement at the optimum net recovery price. Test equipment standardization captures criteria and standards used to Chart 7 Chart 8 Chart 9 12 The Property Professional Volume 21, Issue 1

assess equipment by equipment-type or classification. These criteria and standards represent future needs of the organization from a technology and business point of view. They include present and future technology needs, life cycle trends, serviceability history and inputs from the original equipment manufacturers to craft standardization into the overall technology plan. We planned to improve our technology alignment by maximizing our asset flexibility and eliminating the risk of obsolete test equipment (Chart 5). Improvements would also be made on our equipment standardization to provide a more responsive inventory, ready for users. Chart 6 demonstrates the test equipment profile when we started. Chart 7 represents our inventory position in 2007. Capacity Alignment Capacity alignment processes drive specific assessments of current capacity demand for test technology given the current CS business plans. These processes evaluate the current condition of the inventory and documented requirements to identify and fill any gaps that affect productivity, schedules or costs. The capacity evaluation is critical to the overall process and needs to include evaluation of reactive requests, test equipment utilization analysis and short term needs to ensure that acquisitions provide maximum value to CS. Reactive requests are captured to evaluate end user unplanned demands on the process. This process confirms the request as it relates to appropriate technology, standardized equipment plans and substitution from existing available test assets. The process satisfies the requirements for existing asset inventory when possible or to acquire equipment when necessary to support programs. An evaluation is performed to identify the reasons why the requirement was not in the plan and make all necessary process adjustments necessary to avoid reoccurrence of this condition. Test equipment utilization analysis is conducted to support the team and provide visibility of available inventory. The regular review of equipment utilization includes analysis of use by key classes of test equipment assets, manufacturer/model and organizational demands. This data provides historical grounding on usage to assess availability for disposition and the effects of various strategies being used to maximize asset utilization. Short-term needs data must be captured to properly prepare and refine the upcoming system demands. This information includes equipment requirements, date of Contract Property Seminar Property Management Going Green The 2007 NPMA Large Chapter of the Year invites you to learn about the latest challenges in property management from key leaders in the industry and discover how to turn property management green in your organization. Preliminary Program Green Property Management Technology and Property Management NPMA Updates ASTM Standards FAR and Contract Property Issues EPA Green Team Collaborative Asset Management Natural Capitalism Real World Status of Changes in Property Management Software Systems and Sharing Property Data Audits and Self Assessments Register: http://www.npma.org/ams/seminars www.nova.npma.org January/February 2009 www.npma.org 13

need, duration of need, location of use, and any special project organizational information. The process includes the ultimate agreement on needs translated from test requirements refined to a simple list of equipment that would be suitable and available to the user. Asset Inventory Management is the process for managing test equipment technology as a total portfolio with emphasis given to life cycle management, equipment financing strategies, the execution of intelligent acquisition policies and timely retirement programs. The technology alignment and capacity alignment strategies provide critical support to make this process effective. Inventory Alignment Inventory management determines the method used to acquire, obtain necessary approvals, and negotiate price and benefits using the information from both the technology alignment and capacity alignment processes. By using these processes and establishing standardization objectives, CS can create critical mass and be able to leverage the acquisition of test assets. Disposition management uses input from the capacity alignment and technology alignment processes to analyze and make appropriate retirement actions. This places emphasis on reutilization of assets in order to maximize the company s investment and includes screening other ITT locations for reutilization prior to disposal. When assets can not be reutilized by ITT, appropriate channels for disposition are exercised based on the best value that can be achieved for CS. Rental management is critical to the acquisition process and implementation of an intelligent acquisition process. Test equipment rentals/leases will only be authorized when there is a short-term need and there is a financial advantage over purchasing the equipment. This process tracks all rental/lease agreements for test equipment to ensure that asset location is accurate and agreements are terminated as scheduled so that operating costs are controlled. Supplier alignments are used by the inventory management process to select appropriate suppliers for the requirements of CS. This includes the OEMs, rental companies, recycling partners and third party suppliers of service. This process has matured and a supplier scorecard has been implemented to rate all suppliers equally on predetermined criteria such as: response for information, price, delivery, quality, benefit and innovation. Inputs from technology alignment and capacity alignment analyses allows for more proactive forecasting with suppliers and allows for volume commitments and prices that are negotiated with predictable budgets. Chart 10 Chart 11 Asset inventory accuracy is critical to the process and the automated recording programs previously implemented have provided more frequent and accurate inventory and location information to the team. Analysis is completed for each system transaction to ensure the integrity of manufacturer, model number, options and location to ensure the Test Resource Management (TRM) process can deliver what is required, when it is required, at the lowest possible cost. The plan includes the Fort Wayne, IN and Clifton, NJ operations for both CS and the Space Systems Division (SSD). The initial scope was established for general purpose electronic test equipment in Fort Wayne, CS and to rapidly integrate New Jersey capital and expense requests into the Fort Wayne TRM process. In 2006, SSD joined CS and is now receiving the benefits at Fort Wayne and Clifton. We established a team to coordinate the key components of the plan. The team was constituted with a vision, mission and strategies. The current culture and their roles were defined. They needed to be able to intervene in the current processes to effect change to existing practices and change the culture. Emphasis was placed on customer-performer relationships as well as the required supporting metrics to demonstrate 14 The Property Professional Volume 21, Issue 1

performance. The structure was flexible and allowed both permanent and temporary team structures. The management team would continue to provide guidance as a governance board. They met on a regular basis to set goals, review progress toward established goals, act as a sounding board for strategies to meet goals, address corrective actions and provide continuous improvement objectives to further improve the process. A small working group continues to work as a team and is comprised of functional leaders for Engineering, Operations and Finance to support the Test Resource Management team and the governance board. The TRM team has been led by a team leader and has the support of Operations, Logistics, Test Process Specialist, Inventory Management Leadership, Calibration, Repair and Maintenance functions. The team worked hand-in-hand with each test area to ensure all requirements were being evaluated. The team had integrated two sets of processes. They must support the functional organizations and the planning functions to continue to bring about the desired changes. These changes provide better asset availability, improved productivity and reduced costs. Chart 8 shows the relationship between the processes. This integration of the test enterprise combines the interests of the customers who need test equipment. They are generally the enterprises, systems and programs that generate the requirements for equipment. These requirements take the form of product, plans, schedules and budgets and must look at component requirements and system specifications. The process must also accommodate all the needs of the users or customers of the TRM System because they are responsible for executing the required tests. The TRM function looks at product plans, schedules and budgets to ensure the test assets are available and have the technological capability to support the requirements. Likewise, the process must look at the customer s needs and when they need it. The TRM process is an unbiased organizational process that fully manages the test environment. Team members are assigned to labs and perform key process actions. They know where assets are being used and what tests are being performed. They must support the overall efficiency of the program by assessing 100% of the

inventory utilization levels. Ensure test application data is captured with every request for equipment to ensure appropriate technical capacity is delivered. This is also critical for information for standardization, acquisition and disposition management. They must capture and fulfill equipment requests. They must ensure that unused test equipment is removed from the labs so it can be used for other testing needs. Sente s Test Resource Management process architecture is in Chart 9. Our initial evaluation indicated that the test environment had low asset utilization: 20% Overall 13% Non-Production We had a risk to the company and inefficient execution of programs from obsolete equipment. Our inventory of non-standard test equipment resources limited collaboration, sharing of assets and best practices. Operational metrics were needed to ensure fact-based decisions were made for test equipment acquisition and inventory. Processes were reactive; creating distractions and additional cycle time. These conditions led to more reactive processes from the users. In that environment, we had several challenges that needed to be considered as we developed our plan to move forward. Some of the major challenges were: Chart 12 Chart 14 Chart 13 Chart 15 16 The Property Professional Volume 21, Issue 1

Test technology was shifting with new programs and our product mix. New testing methods needed to be continuously developed and adopted to stay competitive. Current methods and behaviors produced low-test equipment utilization. Old and non-standard equipment was in need of a technology infusion to support objectives. We addressed all of the conditions and challenges to reach our objectives to: Increase Utilization Evolve Test Equipment Technology Meet Financial Goals Earn User s Trust In order to address the challenges, we implemented a proactive approach that changed our current culture through commitment and delivery of results. The strategy we used took into consideration the three critical resources we had to manage: people, money and equipment forming a self-reinforcing and alignment process. We installed processes that increased the utilization of scarce test equipment capacities. EQUIPMENT: Leverage what we had. MONEY: Increasing utilization drives requirements lower PEOPLE: Effective coordination and removal of distractions increases people capacity. We proactively implemented a process to use our capacity to drive additional utilization, cycle time improvements and quality. This allowed us to address each of the critical resources positively. EQUIPMENT: Continue to leverage what we have and what we acquire through Intelligent Acquisition MONEY: Standardize equipment to reduce risk, drive cycle time down and increase utilization which all reduces cost.

PEOPLE: Design and develop standardized tests using standardized equipment to improve the use of available resources, employ best practices and lower cost. We utilized the tools made available through our Phase 1 and Phase 2 streamlining and integration efforts to improve our processes and services to the team and users. TOOLS: Use the integrated TRAX database as a single source for data and information for the users and Test Resource Management team. PROCESSES: We tailored and installed proven process components into our plan. This plan led to a self-reinforcing and a single selfaligning process with continuous improvement objectives. The Test Resource Management process works because: The TRM process has visibility of the current and future testing needs of all CS activity. It is a customer service organization, put in place to drive standardization and cycle time improvements across the entire organization. Provides the focus necessary to implement intelligent acquisition of all assets by having visibility to current and future test capacity requirements. Provides visibility to excess and idle assets no longer needed or ineffective so that retirement actions can be accomplished in a timely manner and improve any recovery of the original investment. Test equipment standardization is accomplished through the knowledge of existing inventories, visibility of future CS requirements and awareness of what is available in the marketplace. All planning needs are captured and acted upon in a systematic manner that ensures program success and customer satisfaction. There are several contributing factors that must be managed simultaneously and when these processes are managed we can drive improved customer service and positively impact our costs at CS. With the TRM process in place we have proven that we can drive improved financial results. When equipment utilization increases, the cost of equipment, service and the costs associated with ownership will be proportionally reduced. We know that when redeployment of assets is increased and standardization is implemented the same costs are reduced as well. Chart 10 depicts the relationship between metrics and financial cost elements that Sente used as part of the total-cost-of-ownership financial analysis which produces the pro forma income statement and balance sheet impacts of a TRM program. We implemented a rapid implementation strategy to achieve cost savings sooner rather than later. This strategy allows the team to accelerate: Increased utilization of our test asset base and frees up capacity for other uses and contingencies Reduced risk of obsolete asset inventory and allows us to plan for reinvesting wisely to build a high capacity equipment portfolio Elimination of distractions and a shift to a proactive partnership with the users and allows them to focus on their primary responsibilities and program performance A shift to fact-based decisions that ensure the long term success of program performance Metrics that are tied to customer (internal and external) requirements for management support And provide a structure for sharing and collaboration between users and groups We have established objectives for the program that will have a significant impact on reducing our costs. All aspects of our business have performance targets aligned with all objectives of the program. Metrics have been established to measure progress and ensure success. A major capacity objective in 2005 was to reach savings of $848,000. We also wanted to improve utilization from 20% in 2005 to 42% by the end of 2007. We have met or exceed these objectives including the related cost savings. Chart 11 shows the savings achieved from the reduction in capital spending from the increased utilization of existing equipment. Capital capacity success is driven by more efficient use of existing test equipment inventory. Most of the costs of ownership savings from the TRM project were achieved through reductions to capital spending requirements. The capacity objective drives 18 The Property Professional Volume 21, Issue 1

Chart 16 significant cost savings to CS. We have achieved additional savings by reducing our cost of ownership. These reductions are the result of having less equipment, less equipment-driven purchase orders, materials to support a larger asset inventory and other reductions associated with the cost of owning assets. Some examples used to calculate the savings are listed below: Reduced capital & expense purchases Reduced depreciation expense Reduced property insurance costs Increase to cash from the sale of excess and idle equipment Reduction to repair and calibration expenses Reduced outsourcing costs for equipment calibration and maintenance Reduction to materials and parts to support test equipment Reduced sales tax Reduced property tax Reduced Purchase Order processing costs Reduced interest expenses Reduced inventory expenses Improved engineering productivity o Distractions removed o More efficient and timely tests from improved technology Reduced calibration and maintenance cycle times Reduced acquisition cost Reduced calibration and maintenance square footage requirements Note: Due to the nature of square footage costs they were not considered as hard cost savings. This will, however, provide more space for revenue generating program functions. We have conservatively calculated the following process improvement contributions to the total cost of ownership savings under the TRM program. The TRM process has made significant cost savings from all aspects of the program. In 2005, the TRM program went into full swing and generated savings of $2,872,179 and added additional savings in 2006 of $1,944,653. The TRM contribution in 2007 was $1,044,678. The program has also generated improvements to the users with improved cycle time providing better use of resources. Charts 12 & 13 are used to track system efficiency and cost savings. They are reviewed and reported each month to the TRM executive committee that continues to provide guidance and direction to TRM and the complete VBAM process. Chart 12 shows evidence of cultural shift toward more sharing. The influence of new assets into the system has diluted utilization trends somewhat but only temporarily. As new models become established, and inventory management strategies are executed, utilization will continue to increase. This allows the company through TRM to leverage existing investments resulting in reduced cash expenditures and an overall reduction to our cost of ownership. Since inception of TRM in the 1st qtr of 2005, equipment utilization has increased from 27.0 % to a current level of 40.9%. Chart 13 shows if there is a proper mix of test equipment in the inventory to balance the risk of technological obsolescence. This process allows us to use a more proactive technology refresh, upgrading, and dispositions of test equipment at the optimum price. Since inception of TRM in the first quarter of 2005, life cycle 4A & 4B (obsolete) models have decreased from 77.0% to its current level of 44.2%. Standardization of equipment increases the potential for sharing equipment and knowledge. Standardization reduces calibration and maintenance costs. At the beginning of 2007 we had 744 different models in stock. Over the year we ve continued to add new models on a continuous basis which clearly demonstrates the cultural shift toward sharing. In spite of the additional models added, we continue to hold the original standardization goal to keep pressure on the system (See Chart 14). The Technology Alignment team has identified standards 20 The Property Professional Volume 21, Issue 1

for six key modalities and is currently working on two additional modalities (DMMs & Function Generators). Goals are reevaluated annually to ensure that they are achievable. Chart 15 measures the time it takes from request to delivery. The reduction in the time engineers and technicians spend looking for items improve their ability to focus on their responsibilities. Tracking location of assets (control) by capturing and fulfilling equipment requests is critical to building customer confidence and use of the system. In 2007 the average performance was 28.6 minutes for 575 items. Continuous Improvement The Value Based Asset Management Team process will have ongoing continuous improvement led by the ITT Value Based Six Sigma (VBSS) teams. Expanding the process outside the test equipment classification will drive other asset classes to be managed in a similar way and provide similar cost benefits to ITT. The implementation of these processes at four major defense systems will help us improve our reutilization between ITT Defense divisions and will also make the Value Based Asset Management (VBAM) toolset available to all participating divisions. This process can be applied to other ITT locations by making the process improvement and by implementing the appropriate data systems. This will provide additional cost savings to ITT and make our company the low cost provider and the contractor of choice. Cost Savings through Year End 2007 The actual cost savings of the complete program are documented in Chart 16 by phase and represent net savings resulting from each phase. The listing of any commercial product in this article does not represent an endorsement of that product. Names are provided for illustrative purposes only. Biography Bob McFarland is a recognized expert in the interpretation and practical application of government property regulations. His experience spans more than 42 years; working for top government contractors as a problem-solver and corporate leader. Bob is employed by ITT Aerospace & Communications as the Manager of Property Administration for Defense Systems Operations. Bob is a Certified Professional Property Manager and an NPMA Consulting Fellow.