"In an industry that is always subject to ongoing margin pressure, we believe that effective cost management is essential to success over the business cycle. A relentless focus on operating costs must continue in both market peaks and valleys."
Sherman J Glass, Senior Vice President, ExxonMobil Chemical
Hydrocarbon World 2007
While 2009 was an unwelcome challenge for many organizations, the truth is that at any given time, most companies, regardless of industry or size, are universally challenged by a number of factors - increasing or decreasing demand, safety incidents, an aging workforce and infrastructure, economic downturns, new legislation, etc. For some companies, 2009 was a wake-up call of sorts, a time for honest self-assessment. The examples below represent a sampling of companies who made the strategic decision to investigate the effectiveness of their current asset strategies. The results verified that refinement of their current equipment strategies offered significant short and long-term opportunities for fulfillment of a shared key company business driver - the reduction of operating costs.
The vehicle used for identifying strategy improvement opportunities is Meridium's Asset Strategy Value Accelerator - an on-site assessment utilizing software*, best practices, and subject matter expertise. As demonstrated below, the five-day** engagement identifies current asset strategy risks and improvement opportunities, as well as how modifications to current strategies will decrease operating costs. All strategy modifications are based on risk assessment - a method every company CFO can understand and appreciate.
* Assessments are made using Meridium Asset Strategy Management software. Participants are not required to own the software.
** Alignment of client's risk categories, consequences, and failure probabilities of identified assets will be completed prior to the on-site assessment. Customers are provided with a final report providing recommendations, return-on-investment summary, and suggested next steps.
What makes this assessment a standout is its ability to conduct company specific "what-if" equipment strategy scenarios and document the corresponding risk implications. For example, in efforts to lower operating costs, a company may decide to cut back on inspections. But is this the smart choice? What are the corresponding human, environmental or production risks posed by simply cutting back inspections? Although equipment assets within a manufacturing facility can number in the thousands, the assessment is made on a small sample, identified by the client. Yet, as the results demonstrate, when using a risk approach to determine asset strategies, even a small sample size can identify several high-risk financial, compliance, and safety threats to a company's operations.
Example 1
Identified assets for strategy review: several compressors, one pump and two heat exchangers
Identified risks/opportunities:
- Addition of new activities to mitigate identified risks
- Reduction of redundant activities
- Extension of maintenance intervals
Identified potential savings: $180,000 (USD)
Example 2
Identified assets for strategy review: compressor system, storage tanks
Identified risks/opportunities:
- Reduction of tank inspection program activities
- Discovery of hidden failure of tank warning systems mitigating potential energy losses
- Discovery of hidden failures of compressor system exposing the company to potential health, safety, environmental, and financial risks
- Implementation of low-cost operator round activities to provide mitigation and monitoring of key failure modes
Identified potential savings: $1,000,000 plus (USD)
Example 3
Identified assets for strategy review: funnels and conveyer system
Identified risks/opportunities:
- Appropriate strategies did not exist to ensure assets were proactively maintained and monitored to meet company availability goals
- New strategies were identified to specifically address key failure modes impacting asset/system uptime
- New strategies were identified to mitigate financial risk exposure
Identified potential savings: $500,000 (USD)
Example 4
Identified asset for strategy review: compressor system - the most critical asset in the facility
Identified risks/opportunities:
- Bearing failure identified as highest risk
- Modification of existing oil analysis strategy from 3 month interval to 1 month interval
Identified potential savings: $800 (USD) increase in associated annual strategy modification; mitigation of unplanned failure valued at over $2,000,000 (USD)
Cost cutting under any circumstances can be tricky business. As authors of Managing the Unexpected emphasize, well-managed companies remain vigilant, always alert for warning signs, and adjust quickly to changing conditions. A competitive response measures the short and long-term risks to identify the smart cuts. Committing to an asset management system which enables consistent and continuous data-driven, risk-based choices in the management of critical equipment assets isn't a strategy separate from that of the CFO, but rather in support of their overall corporate strategy to sustain effective cost management strategies.
Click here to download The Perils of Cost Cutting by Ron Moore, Managing Partner, The RM Group
Click here to download a copy of the 107th NPRA Annual Meeting executive interview outlining the smart cuts versus cut costs approach to the reduction of operating costs.
Click here to read as Operating Budgets Tighten, Spotlight Turns to Efficiency Improvements.
Click here to register for the Asset Strategy Workshop at 2010 Meridium Conference.
