Asset
life cycle management is an asset management strategy designed to manage the
cradle-to-grave life cycle of key assets, considering all classes, stakeholders
and life cycle stages, in order to reap the maximum value throughout the lifetime
of the assets. Developing and employing an active asset life cycle management
strategy is a crucial step in achieving operational excellence for asset-intensive
industries. This emphasis is echoed by leading analyst groups such as ARC Advisory
Group: “Optimizing asset utilization can cut costs and increase profitability
in tough economic times.”[1]

Effective asset management requires full consideration of managing assets in
the context of the life cycle of the asset: plan, design, build, operate, maintain
and dispose. Throughout the life cycle, critical information is captured regarding
the asset, its characteristics, its costs, its use, its health, its relationship
to other assets and the strategies to employ in conjunction with it (see Figure
1).

The ability to drive value from an asset management strategy requires a consistent
model and intricate coordination between work management, supply chain management
and a common asset information model. In light of the highly collaborative nature
of the processes involved within the asset life cycle, these three areas are
tightly linked, as data flows are highly interdependent and interactive among
the three. So, the marriage of the work management and supply chain management
information and work flows is central to managing the holistic asset life cycle
process (see Figure 2).

Looking at Supply Chain

Given the essential role that the supply chain performs in effective asset
management, it is not surprising that Gartner’s most recent Magic Quadrant report
defines criteria for quality asset management as laden with numerous supply
chain requirements. In fact, more than half of the requirements identified are
clearly related to supply chain functionality, including:

  • Detailed asset registry, combined with detailed parts and support descriptions;
  • Complex inventory relationships for indirect goods (blue-collar maintenance,
    repair and operations) that are associated with forecasts of planned and unplanned
    work on installed assets;
  • Supply chain capability for indirect goods, with demand planning linked
    to maintenance and repair schedules;
  • Probability-based “just in case” rather than “just in time” inventory and

    • procurement;

  • Supporting complex logistics for inbound material to remote locations;
  • Serial number tracking and tracing for equipment and parts;
  • Financial support via detailed cost analysis; and
  • Extensive warranty tracking to component levels.[2]

It logically follows that asset life cycle management, with conjoined work
management and supply chain management systems, are key capabilities for industries
where asset uptime is a critical factor in keeping the business running. The
organization must capture data for modeling and forecasting repairs, replacements,
failure rates and critical components, while operating in an environment of
unknown timing and unanticipated conditions – all without losing sight of the
goal of minimizing costs. Consequently, the entire life cycle of the physical
asset requires continuous capture, exchange and analysis of both supply chain
and work management information throughout each life cycle stage and the associated
iterations during the asset’s useful life.

In
analyzing work management routines in most businesses, it is clear that most
work (and hence asset life cycle management) requires a part, as well as manpower.
The financial impact of this is highlighted when you realize that in the maintenance,
repair and operations environment, spare parts generally constitute about 80
percent of the purchasing department’s transaction volume. The connection is
further emphasized by the fact that a primary reason for delay in completion
of work assignments is the lack of appropriate parts.

Therefore, understanding that inventory can be the single largest budget item
within a maintenance, repair and operations environment, industry leaders recognize
that maintaining appropriate and optimum inventory levels is imperative. Consequently,
well-developed planning and maintenance techniques such as condition-based maintenance,
predictive maintenance, reliability-centered maintenance, critical parts analysis
and service networks are now being called upon to play important roles in better
managing this asset-intensive environment. Each is dependent on the fusion of
information from the supply chain and work management. Without the interaction
of information from these two systems, management must base their maintenance
decisions on little more than guesswork and speculation.

“Clumsy parts and labor management raises total cost of asset ownership. Power
turbine users spend up to $3 on maintenance costs for every dollar invested
up front. The culprits? Poor MRO [maintenance, repair and operations] inventory
management practices like duplicate parts ordering – and inefficient workforce
management that results in dispatching the wrong technicians with inadequate
skills…

“Operating assets are the backbone of firms’ business functions. Yet
firms’ reliance on ad hoc processes and siloed apps prevent them from extracting
the most value out of their assets.”[3]
– Navi Radjou with Laurie M. Orlov and Liz Herbert; Forrester

Keeping work management, inventory and purchasing seamlessly connected provides
a smooth flow from work activities to material requests to job fulfillment –
and throughout the maintenance arena. A tightly integrated process streamlines
“real world” events such as those being rescheduled or canceled, the need for
more materials or fewer materials actually used. It gives the full cost picture
of the work to the work order planner, along with real-time data on whether
the material has been reserved for the job, and if it is not available, when
it will be received from the supplier or other site. Accomplishing these tasks
or work flow – while functioning outside a fused work management / supply chain
environment – is cumbersome, less functional and ultimately more expensive (see
Figure 3).

Transacting
business in a world where each element brings its own information model poses
problems to the asset-intensive organization. Since “work leads to demand” in
the maintenance, repair and operations environment, an important link is missing.
The “just in time” supply chain mentality predominates – similar to the traditional
manufacturing or retail paradigms – rather than the “just in case” philosophy
that must also be brought into the equation for consideration within the life
cycle of the asset (for items such as critical spare parts). A model without
the binding between supply chain and work management functioning would be ill-suited
for the maintenance, repair and operations environment because it was designed
and built for a different type of business operation.

ERP or EAM Models

It might appear that supply chain functionality (including purchasing, inventory
and contract management) could be provided either by financial ERP systems (like
Peoplesoft, SAP or Oracle) which specialize in discrete manufacturing activities,
or enterprise asset management (EAM) systems, which are oriented to asset life
cycle management activities. This assumes that supply chain models are interchangeable
– “parts are parts.” And although the similar nomenclature (i.e., both worlds
using the “supply chain management” terminology) might indicate otherwise, there
is a distinct “best fit” for each of these types of systems, depending on the
utilization being targeted.

In the maintenance, repair and operations world, the majority of work is unique
and the materials that are eventually used vary, so it is not as easy to predict
the material usage as it is with production work orders. Parts are issued and
charged against budget in the maintenance, repair and operations environment
based on usage. Although a maintenance work order may have a bill of materials,
the work order is only charged with the parts that were actually used. The rest
of the material quantities are released back to inventory and must subsequently
be accounted for.

Estimating
and costing of work plays a significant role in whether a maintenance work order
is approved, and based on estimated lead time for materials and resources or
budget, a job’s schedule may move on the calendar. However, the concepts of
service labor, service parts and contractor management are unknown features
within a production work order. The production work order typically only considers
the inventoried raw materials and production equipment needs – insufficient
information in the maintenance, repair and operations context.

So, from the perspective of the financial system, the assumption would be made
that supply chain management is more of a corporate function and should stay
with the financials, because financial management is generally a corporate function.
In this vein, supply chain management is viewed as fairly synonymous with the
purchasing function. However, as we’ve seen, in an asset-intensive environment,
many of the financial transactions are coming from work management, and supply
chain needs are being driven from maintenance work orders. Thus the operational
accounting requirements of an assetintensive organization are fully contained
within a well-formed EAM solution, combining both work management and supply
chain management (see Figure 4). The subsequent integration to a financial system
is considerably more straightforward and less intrusive into an organization’s
operational performance.

Conclusion

Asset life cycle management needs to encompass work management as a companion
and collaborative system to the supply chain system. This combination ensures
having the right part, at the right place, at the right time, thereby reducing
quantities on hand, which in turn leads to reduced inventory overhead, reduced
warehouse space and better financial control. Solutions should be selected based
on distinct capabilities that match the environment and the required information
flows for effective decision making.

Endnotes

  1. Optimizing Global Asset Management – ARC Advisory Group, Inc., ARCWire Industry
    News, March 1, 2002.
  2. Magic Quadrant for Enterprise Asset Management, 1H06, Gartner, March 29,
    2006, Kristian Steenstrup, Billy Maynard.
  3. How Firms Can Get Value From Physical Assets, Forrester Brief Series: July
    28, 2003, Navi Radjou with Laurie M. Orlov and Liz Herbert.