At the enterprise level, asset management is often reactive – or even inactive. Most enterprises let individual divisions make their own asset plans and purchases, summarizing their overall costs on reports after the fact.
“A lot of capital expenditures for physical assets happen in a one-off mode, where a team knows they need something, they put together a business case and they buy it,” said Grant Thornton Principal in Advisory Business Consulting for Asset-intensive Industries Robert Hersh
. “They don’t look at – nor do they have the tools to determine – how that expenditure affects their margin flow or their financial statements.”
Hersh said that financial leaders often feel like this approach is detached from the enterprise strategy. One CFO told Hersh “I think they’re doing the right thing from the operation side, but they don’t have visibility or understanding for the financial side. So, their spending tends to be over-engineered rather than timed correctly.” And that spending can account for a big chunk of capital.
Can an enterprise achieve focused high-level clarity to help manage asset spending while also driving process efficiencies? With the right approach and tools, organizations can better administrate their asset costs, reduce critical failures, plan long-term expenditures and find hidden efficiencies. “A lot of companies have enterprise asset management systems, but they’re not getting everything out of them – they’re not having these higher-level discussions about assets,” said Infor Senior Vice President and General Manager of Global Solutions Heather Preu.
“Management is measured by operations and financial metrics that are not connected as well as they could be – and there is a way to fix that,” Hersh said. “Now, it’s time to move some of the asset planning from the shop floor to the C-suite – from the basement to the boardroom.”
Ask the right questions, track the right details
“Everything we do around assets should tie back to the balance sheet, the income statement or the statement of cash flow,” Hersh said.
That means organizations need to coordinate asset expenditures with their overall strategy. For instance, if a manufacturer is planning to purchase 5-axis milling machines, the manufacturer needs to consider which purchase will help it to adapt to strategies and markets over time. “There’s a time element, a value element and a portfolio element that are generally left off the table given the way organizations allocate and spend capital, and monitor assets,” Hersh said. For asset expenditures, organizations need to consider:
- What margin does this buy, in the short term and long term?
- How does this fit into the portfolio of productive assets we already own?
In the milling machine example, Hersh said a manufacturer might ask: “How do we transform our portfolio of milling machines, and its production capacity, over time to support new product lines?”
- Does this help make our portfolio more efficient?
- How can we get more out of the value streams or assets we will have after this purchase?
- If we postpone or accelerate this purchase or replacement, can we achieve a strategic or financial efficiency?
Some of these questions may be familiar to an organization’s current purchasing review. But, many organizations don’t have the data to answer them definitively. “What organizations don’t have right now is a tool set to really figure out how they allocate capital and how they track that capital once it’s deployed,” Hersh said. Plus, many organizations don’t consider their portfolio of assets, or they don’t have data across their portfolio, when evaluating expenditures.
The biggest issue might be that organizations don’t scrutinize asset expenditures below a certain cost threshold – which means that they don’t ask the right questions or track the right data for most of their assets. “Above a certain capital spend threshold, they require a detailed business case, usually some net present value analysis – but below that, it’s basically managed like an operating expense, so it doesn’t get the same scrutiny and it’s not optimized over time,” Hersh said.
Yet, smaller expenditures may actually have room for optimization and streamlining that could lead to exponential savings over time. Meanwhile, high-level expenditures often don’t yield much return from close examination, because they are business critical. “Sometimes, the high-level expenditures get all of the scrutiny when, in the end, you don’t have a choice – you’ve got to go buy the thing,” Hersh said.
For an organization to gain more clarity about its asset portfolio while still driving efficient processes, it needs tools to comprehensively track and efficiently analyze asset data. Many organizations have a mix of enterprise resource planning (ERP), enterprise asset management (EAM) and other systems that collect asset data, but they don’t combine and analyze the data at an enterprise portfolio level.
“You need to ingest all of those systems into a data lake, then run analytics and algorithms to generate unique insights that inform your decisions, both at a point in time as well as over time,” Hersh said. By generating a data-driven view of an asset portfolio, an organization can make more strategic purchasing decisions – and also drive ongoing efficiencies across its portfolio.
Tune efficiencies and improve performance
“What you’re going after is a portfolio view, a time-based view and an overall lifecycle view of your assets. Those three views are very important as they relate to the three financial statements – the balance sheet, the income statement and the statement of cash flow,” Hersh said.
Those three views require a lot of data – data that comes from your actual system rather than from manufacturer specifications or initial measurements. “How does that asset really perform in the production line, given the stresses and volume it endures over time?” Hersh asked.
“By looking at data on utilization, spare parts, warranty, tax stream, margin and more – usually data from a lot of disparate sources – you can reveal insights that inform strategic efficiencies and performance over time,” Hersh said. With that data, organizations can consider how to refocus their capital spending, whether to invest more in maintenance to extend an asset’s lifecycle and even whether to let some assets run to failure. “If you can do modeling to see how even your smaller expenditures might have an exponential effect on one of your three financial statements, that’s powerful,” Hersh said. “This really is showing them how to do something meaningful with their data, and how it can really impact the bottom line,” Preu said.
The efficiency and performance analysis must stay connected to driving a financial impact. “Right up front, identify where the money is, how to go after it and how to really capture that in actionable steps that you can take,” Hersh said. “We want to find hard value, hard cash, hard benefit. The whole process is driven by that goal, and whatever money you find can be used to fund a next step of the progression,” Hersh said.
Use a limited, not limiting, approach
As you improve asset expenditure planning and management across your enterprise, a phased approach can help you keep improvements aligned with financial returns.
This is where cloud-based solutions can help you scale, and integrate existing investments. “Start with a small project on a cloud platform that lets you ramp up usage and users over time,” Hersh said. This limited approach lets you:
- reduce your up-front investment to a level that’s aligned with the likely short-term benefits.
- select the best team within your organization to pilot and succeed with the project before you commit to rolling out and supporting the process across the broader organization.
- work out bugs in your processes, data and other integrated solutions on a smaller scale.
- maintain focus on driving real impact on your balance sheet, income statement or statement of cash flow.
“We often see organizations undertake big multi-year EAM engagements and, by the end, everybody’s honestly lost sight of the original objective. But, with a phased approach, you can have better focus, a shorter time to go-live and a more successful implementation overall,” Preu said.
The trick is to make sure that your initial implementation doesn’t limit your overall implementation. Even though the initial implementation has a limited impact, you need to discuss the overall goal of enterprise-level planning at the C-suite level and get buy-in on the approach before you begin. Make sure that the initial phase is aligned so that its success and validation will help justify approval for further phases, and that you address high-level concerns up front. “I think the biggest downfall for projects that don’t deliver results is that they didn’t have buy-in from the top down,” Preu said. “If you don’t have the right champions in place, you’ll have a lack of support and drive on the project.”
Also, if an initial project is designed to be asset-specific or contained in a single facility, it can be hard to argue that its success justifies investment for a broader application. Processes and solutions that need to be reconsidered, reauthorized or redesigned for other divisions or locations will erode the value of your enterprise approach.
While a phased approach can be the best first step, remember that your ultimate goal is to consolidate and analyze data about your enterprise’s complete portfolio of assets and their lifecycles over time – because that is how you inform the high-level decisions that drive your enterprise financial statements.
Grant Thornton Principal
Advisory Business Consulting for Asset-intensive Industries
+1 617 848 5060
Grant Thornton Senior Manager
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