"(Equipment) Asset Management - What are

the Real Requirements?"

Presented by

John S. Mitchell
Vice President Maintenance Engineering and Consulting
ABB Industrial Products, Inc.

And

Jon Carlson
Reliability Center Manger
Koch Industries

Key objectives of this session:

ΠDefinition of asset management
ΠLatest concepts and best practices being utilized by industry leaders working
to maximize effectiveness of production assets
ΠThe business case and justification for asset management
ΠA generic asset management process that fuses the best concepts of TPM,
RCM, CBM, Six Sigma and other advanced practices
ΠA summary of "world class" key performance indicators

John S. Mitchell
Vice President Maintenance Engineering and Consulting
ABB Industrial Products, Inc.
31882 Paseo Alto Plano
San Juan Capistrano, CA 92675
Phone: 949-496-0823
Fax: 949-496-0873
E-mail: jsmitchell@worldnet.att.net

Mitchell is current President of MIMOSA, the Machinery Information Management

Open Systems Alliance. He is also founder, President and Chief Executive
Officer of Palomar Technology International, Inc. and manager of the Bruel &
Kjaer Condition Monitoring Systems Division I Naerum Denmark. He has more
than 30 years of experience including maintenance engineer, engineering
supervisor and consultant engaged in developing, advocating and implementing
technical, business and operating strategies for managing the lifetime of
industrial equipment. The first edition of his book, An Introduction to Machinery
Monitoring and Analysis, was a bestseller for more than 10 years. An expanded
second edition was published in November 1993. He has recently completed a
third book detailing the process and best practices for equipment management
that will be published in June 2000. For the last three years, Mitchell has written
a quarterly "Viewpoint" article for Maintenance Technology. He has delivered
numerous papers and presentations and conducts training courses detailing the
technology, financial and business benefits of Equipment Management, Profit
Centered Maintenance, condition assessment and Condition-Based Maintenance
to audiences throughout the world. He is a member of ASME (current chair of
the Plant Engineering and Maintenance Division), SMRP, ISA and the Vibration
Institute. He is a graduate of the U.S. Naval Academy and holds a patent for
fixtures used in optical alignment.

ABB Industrial Products, Inc. is the US division of ABB Service, a subsidiary of

the Global Fortune 100 company ABB (Asea Brown Boveri). ABB Service
provides Full Service industrial asset management, including total ownership of
the maintenance function, reliability improvement, and maintenance and spare
parts management. ABB Service has more than 160 Full Service contracts in
place worldwide in nearly every industry group and a presence in more than 50
countries.

Jon Carlson
Reliability Center Manger
Koch Industries
PO Box 64596
St. Paul, MN 55164
Phone: 651-437-0833
Fax: 651-437-0940
E-mail: gilles.michaud@alcan.com

Carlson has a Bachelor of Science degree in Mechanical Engineering and a

Master of Science degree in Manufacturing Systems Engineering both from the
University of Wisconsin, Madison. In pursuit of his Masters degree, he studied
model based predictive monitoring and diagnosis of machine tool spindles under
a research grant from General Motors. He started with Koch Industries in 1991
as a Rotating Equipment Reliability Engineering at its St. Paul, Minnesota
Refinery specializing in critical machinery condition assessment. Since his initial
role at Koch, he has held numerous reliability positions at both the plant and
corporate levels. Most recently, he has led the implementation of a large-scale
reliability improvement initiative at Koch’s two refineries in St. Paul, Minnesota
and Corpus Christi, Texas. This improvement initiative included organizational
restructuring, work process reengineering and information technology tool
development. He holds the position of Vice President, User Affairs for the
Machinery Information Management Open Systems Alliance (MIMOSA) and is a
Maintenance Committee member for the National Petrochemical and Refiners
Association.

Koch Industries is a privately held company that employs more than 11,500
employees worldwide. Its businesses include petroleum, chemicals, gas liquids,
ranching, mineral services, chemical technology, and financial services. The
Koch Petroleum Group (KPG) manages the petroleum value chain, from crude oil
supply and trading through refining and wholesale product marketing and trading
of light and heavy products, including asphalt. KPG has an integrated refining
system that includes refineries in Minnesota (Pine Bend Refinery), Texas
(Corpus Christi Refinery), a condensate splitter in Rotterdam, The Netherlands,
and a broad system of pipelines and terminals.
 (TXLSPHQW $VVHW0DQDJHPHQW²:KDWDUHWKH5HDO5HTXLUHPHQWV"
by: John S. Mitchell, ABB Service
Jon Carlson, Koch Industries
Abstract:
Enterprises in every industry are under
exceptional pressure deliver more, faster at
reduced operating margin, cost and capital.
To succeed in the rapid shift to minimum
lead, “demand pull” operation, an available,
reliable and stable manufacturing process is
imperative. Many are proposing Asset
Management as the solution. But what is
Asset Management?
The controls community asserts that
managing process and manufacturing assets
is a logical extension that belongs in their
domain. The maintenance management
community makes many of the same
arguments from a different perspective. The
manufacturing execution and enterprise
information communities have still a
different outlook. Multiple approaches to the
challenge of Asset Management, combined
with numerous loosely connected practices,
has led to the appearance of a very
inconsistent and fragmented concept to gain
a single, essential objective.
During 1999 a project was undertaken to
identify the latest concepts and best
practices being utilized by leaders in a wide
range of industries who are actively working
to maximize the effectiveness of production
and manufacturing assets. Not surprisingly
there were far more similarities among the
leaders than differences. It is safe to state
that there is general agreement on the
concept, process and practices in use by
industry leaders to maximize asset
effectiveness. It is equally safe to state that
to gain real success, Asset Management
must build from market, business and
equipment requirements toward specific
John Mitchell, Jon Carlson – Page 1
domains such as controls and maintenance
management and not the reverse.
This paper highlights the latest concepts,
objectives and results gained from leaders
actively driving to maximize equipment
reliability and effectiveness. Specific topics
include the process, benchmarking, fusion of
practices, metrics, necessity of financial
results and use of information technology as
well as leading ideas in areas ranging from
team organizations and results based
compensation to outsourcing.
Asset Management – Maximizing
Production Equipment Effectiveness:
The term Asset Management is being
applied with increasing frequency in the
process, production and manufacturing
industries. But exactly what is Asset
Management? More important, how can
Asset Management contribute to corporate
profit and shareholder value?
In terms of maintenance and reliability,
Asset Management is a comprehensive
process to maximize the lifetime value
delivered by equipment used for production
and manufacturing. Asset Management is an
essential part of production and
manufacturing effectiveness. It prioritizes
and directs efforts toward increased
availability, yield, quality and capital
effectiveness and results in reduced costs.
Although they use many different names,
leading enterprises are implementing
common Asset Management principles in
the drive to improve profitability. Asset
Management is not an option. Asset
Management is a necessity for global
competitiveness.
Asset Management begins with the premise
that asset and capital based metrics are the
best overall measurements of a Organizational issues such as a functional or
manufacturing enterprise’s ability to assess
performance toward creating shareholder
value. Asset and capital based metrics drive
optimizing activities toward increased return
gained by improving production
effectiveness and capital utilization and
reducing costs. Commonly used measures
include Return on Net Assets (RONA),
Return on Capital Employed (ROCE),
Return on Equity (ROE), and Economic
Value Added (EVA®).
Used correctly, Asset Management is the
driving force that assures investments in
human, process and technological resources
are all applied for greatest corporate return.
Asset Management begins at design and
includes procurement, installation, operation
and maintenance. Equipment availability
and reliability, operating efficiency and
spare parts management are all included
under the umbrella of Asset Management.
Each stage of life is optimized for greatest
total return. Purchasing least cost may be
unwise if operating inefficiency, low
availability and maintenance costs quickly
dissipate the temporary advantages. Koch
has implemented an interesting new
approach to business aimed at organizations
who typically select low initial cost and
greater lifetime costs over higher initial cost,
increased quality and lower lifetime costs.
Success requires great foresight, properly
aligned incentives and results based rewards
(As an example, how often is a project
engineer or contractor rewarded for anything
but compliance with cost and project
schedule objectives?).
Asset Management demands business driven
continuous improvement where detractors
from objective performance (defects) are
John Mitchell, Jon Carlson – Page 2
progressively eliminated in order of impact
on safety and financial objectives.
multi-skilled team work force, in-house or
outsourcing, personnel qualification and
training are likewise a part of Asset
Management.
Asset Management requires unification of
objectives and efforts. Few people in an
organization can relate a condition
monitoring program to a warehouse stores
and spares program yet the two are
interdependent and aimed at reducing
operating risk. Operating with minimal
spares requires sufficient warning of need to
permit delivery with normal lead-time. The
necessity to special order and expedite
spares destroys the gains that reduced stock
levels were instituted to gain. Thus,
condition monitoring and reduced stock
levels interact within an overall equipment
strategy to mitigate risk (likelihood x
consequence). Despite the close relationship,
these two programs are often executed in a
fragmented fashion by different groups in
different parts of the organization without
vision or coordination to achieve an optimal
result.
How all this fits together in a unified,
comprehensive process, as well as views and
direction of leading companies are
addressed in the following sections.
History:
Illustrated in Figure 1. Asset Management
represents the third stage in the evolutionary
progression of the manufacturing enterprise.
The first stage, cost containment, was
typical of process and manufacturing
enterprises through the mid 70’s. Cost
containment is characterized by adherence
to budgeted targets and some, but not much,
pressure to reduce expenditures.

Cost Containment Cost Reduction
ΠCost Center ΠReduced margins
Œ Budget Conformance • operating
• redundancy
• capital
ΠCurrent to Objective -- GAP
• benchmarking: %/RAV,
• $/EDC, EFOR
• goals
Figure 1 Progression From Cost Containment to Asset Management
Requirements for change were stated very
succinctly by an engineer working in the
automobile industry:
“When I started work, all US automobile
manufacturers had basically the same
cost structure. There was no real
incentive to reduce costs and therefore,
no one did! Then the Japanese arrived
with a superior product and everything
had to change.”
The change and solutions were primarily
focused on the manufacturing process,
quality improvement and cost reduction. Do
more with less, increase yield, reduce
process variation and work in process
(WIP). Statistical Quality Control (SQC),
Just In Time (JIT), Design for
Manufacturing (DFM) and reengineering are
some of the well-known process changes. If
there was a common shortcoming in all of
these initiatives, it was failure to address the
entire manufacturing process. For example,
a production interruption caused by an
unexpected equipment failure creates havoc
in a Just-In-Time environment. This is the
hidden secret among many if not most of the
optimizing solutions directed at just one part
John Mitchell, Jon Carlson – Page 3
Asset
Management
ΠProfit Center
ΠOpportunity driven
ΠBusiness Model
ΠReturn on Assets
• RONA, ROCE
• EVA
of the production process. The issue goes
well beyond cost. Predictable capacity to
meet production commitments on schedule,
cost and quality is essential!
Asset Management represents a holistic
approach to production and manufacturing
processes. A realization that the entire chain
from order entry through production and
delivery, including logistics and
organization and continuing to warranty and
after sales support, is totally interdependent
and must be optimized as a whole. Make a
change at one point and results will likely
appear at several others – not necessarily in
the right direction. For example, arbitrarily
reducing costs and/or eliminating
redundancy often result in decreased
production availability, yield and/or quality.
Six Sigma and specifically Cost OF Poor
Quality (COPQ) goes a long way toward
quantifying real costs.
Asset Management recognizes that all
equipment requires a minimum sustaining
cost. Spending less than the minimum
sustaining cost consumes the asset, figure 2.
The familiar “pay me now or more later.”
 Cost reductions below a level
required for sustainable
operation consumes the asset,
and will eventually necessitate
major refurbishment or
Goal of Equipment Life
replacement
Cost Management

Minimum Sustainable Cost

Consuming Assets
(Decapitalizing) Age,
Age,intensity
intensityand
andtempo
tempo
ofofoperations
operationswill
willshift
shift
minimum
minimumsustainable
sustainablecost
cost

Lifetime

Figure 2 Principles of Asset Management Demand Expenditures Above The Minimum

Sustainable Cost

In figure 2, the intensity of operations may
establish expectations that exceed the
inherent capabilities of the asset. In these
circumstances, maintenance activities by
themselves (no matter how extensive) can
not produce the desired results. Upgrading
the asset is the only way to meet
expectations. Failure to recognize the
“realm” where maintenance will be effective
and where it can not meet expectations
creates an environment for excessive
(costly) PM’s with little improvement in
asset availability. Establishing best estimates
of equipment, reliability and safety
performance based on the equipment’s
inherent capability creates a forum for
discussion and an environment for
responsible operation.
Asset Management is proactive. This
requires initial and periodic investment to
assure maximizing lifetime value. The
driving factor is greatest return rather than
least cost.
Benefits:
A number of large functional groups exist
within a manufacturing enterprise to correct
failures. Maintenance, planning and
scheduling, spare parts, including
purchasing and warehousing, with attendant
costs, all exist to some degree because of
failures. Failures initiate a cash flow out of
the company and are largely responsible for
non-compliance with safety, environmental,
quality and production commitments.
Eliminating failures is key to success.
The proceeding neatly summarizes the
benefits of Asset Management. Failure
producing defects are identified and
eliminated with economic oriented
prioritization driven by return to the
enterprise.

John Mitchell, Jon Carlson – Page 4

 Proactive reliability improvement program
increases production, reduces maintenance
costs

Production

Maintenance Costs

Reliability

Figure 3 Results of a Proactive Reliability Improvement Program

Although it may appear contradictory, at
least one formal study and numerous
observations all demonstrate that investment
to gain a process and culture oriented toward
proactive defect elimination has a far larger
overall return in terms of mission
compliance, effectiveness and cost than cost
reduction alone. Investing in proactive
reliability improvements has been shown to
improve production availability while
simultaneously reducing costs far more than
sole focus on cost reduction, figure 3.
Definable benefits of Asset Management
include:
q increased production availability,
capacity, yield, productivity and
quality
q improved safety and environmental
performance
q increased stability (reduced
variation) for Lean Manufacturing
q optimized Operation and
Maintenance (O&M) costs
q greater capital efficiency
Asset Management as a Layered Process:
Within the concept of Asset Management,
all activities and metrics must align and
contribute to the whole. For example,
investment to improve Mean Time Between
Failure (MTBF) on specific equipment must
demonstrate a positive contribution to the
enterprise metrics (RONA, ROCE, ROE,
etc.). This simple sounding assertion is
vastly complicated by mission, market and
product margin considerations, system
redundancy, alternate sources of supply and
factors such as capacity, quality, safety and
environmental constraints. This crucial
aspect of Asset Management is addressed in
detail in a later section.
Asset Management Applied to Production
Equipment:
In terms of production, Asset Management
matches capacity/mission availability and
quality to requirements. When production is
sold out, investments to assure capacity gain
provides returns in many areas including
production output (yield), reduced variation
and possibly quality. When there is excess
capacity, investment justification might be

John Mitchell, Jon Carlson – Page 5

based on quality, the cost of waste resulting
from an unexpected interruption in
production and/or operating efficiency.
Operating efficiency is included within
Asset Management. Excessive consumption
of electric power resulting in operation off
Best Efficiency Point (BEP), steam and air
leaks, faulty steam traps, deteriorated or
missing insulation are a number of areas
where good practices may have a solid
return on investment. As an illustration, one
company lost 40,000 pounds/hr. of steam
whenever it rained due to faulty insulation.
Another facility operated one air compressor
continuously just to make up for leaks. This
type of carelessness costs money and erodes
profits.
The key here is defining the asset’s function
and understanding how does it fail to
perform that function. Traditional
definitions of failure (typically maintenance
centric) fall short. A much broader
(production) definition is required. The
process of Reliability Centered Maintenance
(RCM) provides an excellent framework.
For many facilities the boundaries of
acceptable operations are becoming smaller
due to safety and environmental factors. For
example, gas and liquid leaks that might
have been tolerated in the past often result in
expensive fines today. A liquid spill that
might have been allowed to dissipate into
the ground may require total excavation of
all the affected soil and disposal at a
contaminated waste facility. Within the
hydrocarbon processing industry, gas was
flared when a vital compressor failed.
Today, flaring gas may precipitate an
John Mitchell, Jon Carlson – Page 6
environmental violation that in turn forces a
very expensive production shutdown.
The consequences of failure have changed.
Has the asset management strategy remained
unchanged since originally implemented?
Expectations for the asset may have
increased significantly causing the existing
strategy to be inappropriate/ineffective. An
optimal design/procurement maintenance
decision made a few years ago may prove
totally inadequate in light of current safety,
environmental and/or production
requirements. The asset management
strategy must be constantly reviewed and
improved to meet current and anticipated
conditions.
All these issues and many more must be
considered during the development of an
Asset Management strategy. What are
requirements and benefits of increased
reliability? What are the penalties of defects
that slow or interrupt production or degrade
quality? The answers are highly specific and
likely vary with business conditions and
other factors. The secret to success is a site
and mission specific Asset Management
strategy capable of identifying opportunities
and problems in time to make the best
decisions.
What Are The Leaders Doing? -- The
Generic Asset Management Process:
Although few leading enterprises may call
their efforts Asset Management, all are
pursuing courses that have numerous
common elements. Figure 4 illustrates the
process.
 Improve
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RESULTS WHAT
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Figure 4 The Asset Management Process

First and most important, enterprises that are directly to objectives for corporate profit and
leading the charge toward Asset shareholder value. Specifics will be detailed
Management have interest, involvement and in a later section.
drive from a CEO who recognizes the In terms of cost, the GAP may total tens, or
opportunity and competitive necessity for even hundreds, of millions of dollars
maximizing effectiveness and the depending on the size of the enterprise.
advantages of value over least cost. Leaders involve people at the working level
Successful Asset Management is initiated to utilize institutional knowledge, gain
top down in an organization. In most cases ownership and commitment. People who
the people involved with developing the work with directly with manufacturing and
Asset Management strategy and process production processes know where the
either report directly to the CEO or to opportunities are located and have the
someone who does. knowledge to develop the most practical and
Opportunities for improvement are effective action plans. With inspiration,
developed with a GAP analysis – “where we understanding and access to the proper tools,
are” compared to “where we must be.” In the effort quickly gains critical mass.
some cases the “where we must be” is Leaders also recognize that ambitious
defined by industry benchmarks. In others objectives require time for implementation.
“where we must be” may be internally One company set 1,000 days, another five
generated stretch goals such as: improved years, to reach objectives. Intermediate
production output and quality or reduction in goals are established and utilized to measure
cost/unit, forced outage rate, safety and progress to final objectives. Those charged
environmental incidents. All must connect with implementation (the line organization)

John Mitchell, Jon Carlson – Page 7

must have a sense of unease for the present
state (need for change), total understanding
of the vision, full commitment and urgency
for the plan to close the gaps.
Leaders formulate Key Performance
Indicators (KPI’s), to measure performance.
Leading Indicators are formulated to convey
short-term progress to objectives. Leading
Indicators and KPI’s are connected all the
way to enterprise metrics. Specific examples
will be detailed in a later section.
Leaders anticipate employee concerns
regarding job security by determining
projected manning levels and composition
over the planned time to reach objectives.
One organization found that a combination
of anticipated retirements plus historical
attrition actually required some hiring.
As a final comment in this overview, many
industry leaders recognize the necessity of
merit compensation that shares the gains
made in enterprise effectiveness with
employees. Employees immediately
understand that increased effectiveness
gained by reducing failures and unnecessary
work will likely reduce employment and the
size of their paycheck if they are one of the
“lucky” survivors. For this reason initiatives
to streamline work processes and reduce
overtime won’t gain much support from
workers who have become dependent on
overtime to meet payments on boy (or girl)
toys. One organization planned
compensation so that decreased overtime
was matched by merit increases based on
compliance to objectives that included
reducing overtime. Many employees
actually earned more by working less. They
were happy and their families were happy,
all adding to enthusiasm and commitment.
Many organizations are implementing
results based compensation combining a mix
of corporate and individual objectives. Some
have implemented systems whereby as
John Mitchell, Jon Carlson – Page 8
much as 20% of working level
compensation is results based.
Details of Asset Management:
As stated in the previous section, Asset
Management requires a high, CEO, level
visible commitment to permanent,
sustainable improvement and a three to five
year time horizon to meet objectives. Four
elements, commitment, communication,
involvement and patience are inseparable
and mandatory to successfully make the
major changes in culture, organization and
practice necessary to gain full benefit from
Asset Management.
There must be an organizational
commitment to excellence that all involved
see as permanent. People are very skeptical
of change; especially “program-of-the-
month” changes that may affect job security.
A champion or champions must be
appointed to spearhead the effort. The Asset
Management champion(s) must be
enthusiastic, totally committed to success
(passionately consumed by success might be
a better description), highly knowledgeable
and experienced in some area relevant to
Asset Management. He or she must be
credible within the entire organization and
possess the leadership skills and persuasive
ability to sell concepts and requirements to
skeptical, recalcitrant people at all levels in
the organization. Requirements for
enthusiasm, commitment and credibility do
not require much amplification. People with
these characteristics stand out in any
organization.
Experience with mechanical equipment or
process control systems, preferably in a
maintenance organization, is essential.
Individuals who have performed well in
these positions will have gained the
overview necessary for Asset Management
and will have the required familiarity with
the people and processes involved as well as
opportunities for improvement. In addition,
these individuals will be familiar with the
processes and tools necessary to identify
defects and devise corrective solutions, e.g.
Root Cause Failure Analysis (RCFA).
Koch has found that people with a
production background tend to grasp
reliability concepts more quickly. Their
understanding of 2nd and 3rd order effects of
failure “pulls” on their day without the
“hindrance” of maintenance execution puts
them in a better position to impact change.
Finally, but by no means least, perseverance
and the ability to convince others who may
be skeptical and even resistant to change is
imperative. In this vital area, the champion
must have an acute sense of final objectives,
how and where change can be introduced to
assure progress and continuing support. It is
very important to recognize that introducing
change of the magnitude of Asset
Management too rapidly may lose some
support.
As stated earlier, it is imperative that
reliability improvement objectives tie
directly to enterprise objectives for
increasing profitability and shareholder
value. In addition, the relationship must be
thoroughly understood. For example, in a
sold out business, increasing production by
increasing availability, rate and/or quality
may have greater value than reducing costs.
Where production is not sold out, increasing
efficiency by reducing costs is usually a
primary consideration. In many cases it may
be a combination of the two. Whatever the
case, the specific relationships between
business and Asset Management objectives
must be understood and agreed upon by all
concerned. Organizations have commented
that they focused on quality only to find that
availability was the real problem.
As general objectives are mapped out, the
Asset Management steering process must
involve more people. In virtually every
enterprise the institutional knowledge exists
to identify assets that constantly cause
problems, those that sometimes cause
problems, and those that never cause
problems as well as the most effective and
practical corrective action. This analysis
must be modified a bit by the identification
and classification of assets in the second and
third categories with potential problems so
severe e.g., safety and environmental, that
they must be shifted to the first group.
With this division completed, attention must
turn to identifying problems with greatest
impact on objectives, e.g., those that reduce
production availability/quality or those that
consume most costs. Institutional knowledge
should exist to make a reasonable
classification. Leaders perform Pareto
analyses to locate and identify the cause and
costs of lost production and quality (COPQ).
Assessing total operating risk (likelihood of
a failure x the total consequence of the
failure) is imperative. If available and
accurate, a Computerized Maintenance
Management System (CMMS) can provide
invaluable costing information.
With this broad view of opportunities for
improvement, the Champion’s Team can
devise a detailed strategy and action plan. It
is a good idea to formulate initiatives for
increased production and/or quality and cost
reductions in increments that are no more
than 5% of total objectives. There are two
primary advantages to this approach. First,
dividing often-ambitious objectives into
small increments vastly increases the
probability that the overall objective will be
met. Small misses in a few areas do not
materially affect the whole and may well be
matched by better than expected results in
other areas. There is also the question of
executive credibility. A series of small
improvements that add up to the objective is
far more credible than one or a few “all the
eggs in a single basket” large improvement.

John Mitchell, Jon Carlson – Page 9


Maintenance Eliminated
Percentage
Reactive Maintenance
Preventive Maintenance
Condition-Based Maintenance
Current
Figure 5 Industry Leaders Typically Want to Reduce the Total Amount of Maintenance and
Shift to Condition Based
At this point the champion’s team must be
absolutely convinced that the enterprise and
mid level objectives can be met and have
total commitment to making it happen.
From here, activities necessary to meet
objectives must be prioritized and assembled
into an action plan. Root Cause Failure
Analysis (RCFA) is a very useful and
disciplined process to identify action
requirements.
Asset Management is proactive. This
requires initial and periodic investment to
assure maximizing lifetime value. The
driving factor is greatest return rather than
least cost.
Asset Management is proactive. This
requires initial and periodic investment to
assure maximizing lifetime value. The
driving factor is greatest return rather than
least cost.
Reducing reactive and unnecessary time
based or Preventive Maintenance (PM) is
John Mitchell, Jon Carlson – Page 10
A survey(1) disclosed the following objectives:
ΠReduce total maintenance by 50%
ΠShift the proportion of maintenance:
Current Objective
Reactive 50% 15%
Preventive 35% 30%
Condition Based 15% 55%
(1) Thomas Marketing Information Center, Dec. 1997
Objective
the second category of maintenance
optimization, figure 5. Reports abound of
reducing maintenance costs by a third or
more by shifting from scheduled to
Condition Based Maintenance (CBM/PdM),
eliminating unnecessary PM, and, where
possible, extending the intervals of
necessary PM. One company reported they
were able to extend many supplier specified
maintenance intervals by a factor of four
without any adverse effect.
As an important observation, it must be
noted that lengthening PM schedules and
replacement of PM by CBM may be resisted
by many who are directly involved. The real
issue is not fear of failure but rather the
likely impact on employment and
compensation. As stated earlier, to get
everyone behind changes in this and other
comparable areas, it is necessary to devise a
compensation plan based on results and
compliance to objectives rather than time
and task.
Improving spare parts management is the
third area of maintenance optimization. For
the reasons mentioned earlier; reducing non-
performing capital assets and also
decreasing the cost for warehousing, stocked
spares must be reduced in both quantity and
number. Leading enterprises are employing
multiple strategies to reduce stocked spare
parts while simultaneously assuring
availability in the event of need. A simple
delay in restoring production due to the
unavailability of a spare part will cancel all
the capital advantages of reduced stocking.
Outsourcing spare parts to suppliers willing
to provide consignment inventory or
guaranteed delivery is one strategy being
used as a means to reduce assets (capital).
Many of these same organizations are
applying an inventory turn metric as a
measure (KPI) of storehouse effectiveness.
As rapidly moving standard spares, such as
bearings and seals and consumables are
shifted to supplier owned consignment
stock, the proportion of slow moving spares
remaining in the operating/producer
organization’s warehouse increases. Most
spares in this category are long lead items
such as rotating elements and parts for large
critical valves. Since these spares are by
nature slow moving, inventory turns will
decline toward fewer turns. This creates
pressure to scrap highly valuable capital
spares that may require deliveries of six
Centralized
Advantages
q Better focus on enterprise objectives
and requirements
q Better control of personnel and quality
q More efficient use of warehouse and
tools
De-Centralized
q Responsive to individual requirements
q Strong Ownership
John Mitchell, Jon Carlson – Page 11
months or more in the event of failure.
Strong awareness of what is happening is
required to resist financially driven
pressures to scrap slow moving, specialized
spare parts. Scrapping slow moving spare
parts must be accomplished with extreme
caution. Finding that a recently scrapped
spare part has a 24-week lead-time to
delivery can cause major heartburn
following a failure!
Treated separately, all three areas of
optimization will yield results. However,
optimal results will only be achieved when
these programs are linked to a risk-based
overall equipment strategy.
Organization:
Many in the business of selling advice will
advocate shifting a centralized to a
decentralized equipment management
(maintenance) organization and vice versa.
When questioned, the answer is likely to be
that change is good for an organization
when it shakes-up traditional practices. But
there may be a larger truth hidden in the
either/or between centralized and de-
centralized organizations. Perhaps a hybrid
containing the best characteristics of each is
optimal.
Some advantages and disadvantages of both
centralized and decentralized organizations
are:
Disadvantages
q Less responsive to individual
requirements
q Less ownership
q Difficult to maintain consistent
proficiency in specialized areas
q Sub Optimum use of warehouse and
tools
A hybrid organization utilizes the best of
both. Routine maintenance is accomplished
at the team level (autonomous maintenance).
This gains ownership and fast response to
problems. Specialists working from a central
facility perform specialized tasks requiring
specific skills such as work on high voltage
electrical equipment, pump bearing and seal
replacement.
A major pump repair serves to illustrate how
the hybrid organization works. When the
unit team determines major work is required
they are responsible for removal, including
tag-out and all safety precautions. The pump
is delivered to the central repair organization
with a work order indicating priority
(required completion date), description of
the problem(s) and estimate of the work
required.
The actual work is accomplished in the
central facility. Some organizations utilize
employees, some utilize contractors; most
employ a mix of the two depending on the
specific task. When the work is complete,
the pump is delivered back to the unit team
for reinstallation.
Requirements for specialists to perform
specific tasks on reinstallation must be
considered and decided upon. For example,
one facility allows a unit team to tag-out and
remove most motors for repair but a
qualified electrician must reconnect the
motor following repairs. Another facility
authorizes the unit team to reinstall a pump
but requires specialists to be present for
coupling alignment. The key to a successful
hybrid organization is a task division that
John Mitchell, Jon Carlson – Page 12
best utilizes the advantages of each
structure.
Conclusions:
Leaders across a wide group of industries
are developing a process to maximize the
effectiveness of manufacturing and
production assets. Some call the process
Asset Management. Regardless of the
name, the process has many more
similarities than differences. Asset
Management prioritizes and directs efforts
toward increased availability, yield, quality
and capital effectiveness and results in
reduced costs. Asset Management is the
driving force that assures investments in
human, process and technological resources
are all applied for greatest corporate return.
Equipment availability and reliability,
operating efficiency and spare parts
management are all included under the
umbrella of Asset Management. Each stage
of life is optimized for greatest return. Asset
Management demands business driven
continuous improvement where detractors
from objective performance (defects) are
progressively eliminated in order of impact
on safety and financial objectives.
Organizational issues such as a functional or
multi-skilled team work force, in-house or
outsourcing, personnel qualification and
training are likewise a part of Asset
Management.
A final and most important point: Asset
Management strategies must be reviewed
and change as expectations for the asset
change.
Acknowledgements:
This paper is based on a series of interviews conducted during mid 1999 with the companies
listed below. Thanks to CSi for sponsoring the interviews. To the individuals interviewed thanks
for sharing your experience, expertise, insight, and successes. Your enthusiasm, consistency of
purpose and successes is most impressive.

Allied Signal DuPont NOVA Chemicals

AMOCO DuPont, Tyvex Pacific Gas & Electric
Champion International Ford Production Systems Rhom & Haas
Commonwealth Edison Koch Industries Saturn Corporation
Dofasco KoSa Southern Company Generation
Duke Energy Systems Navistar Tennessee Eastman

John Mitchell, Jon Carlson – Page 13

(Equipment) Asset Management –
What are the Real Requirements?
by:
John S. Mitchell
Vice President Maintenance Engineering
ABB Service, Inc.
Jon Carlson
Reliability Center Manager
Koch Industries

Eighth Annual Conference

Society of Maintenance and Reliability Professionals
October 1 - 4, 2000
Asset Management -- Key Points
K Latestobjectives, concepts and results
K Process
l benchmarking
l metrics
l financial results
K Fusion of practices
K Metrics
K Organizations
l hybrid team
l results based compensation
 Demands
K Reduce cost
l asset/operational effectiveness
K Increase revenue
l availability, asset utilization
l yield
l quality
K Minimize capital
l new construction
l spare parts
 Asset Management
A strategic and fully integrated,
comprehensive process to gain
greatest lifetime utilization,
effectiveness and value from
production and operating equipment.
 Business Conditions drive
the change process
K Output,
quality and production
(conversion) costs are key factors
l market conditions determine priority
K Opportunities
l spot market
K Improved efficiency
l often large return
K Become profit rather than cost centered
l optimizing lifecycle costs doesn’t necessarily mean
minimizing
The case for improved reliability!
 Evolution to Asset Management

Asset
Cost Containment Cost Reduction
Management

§ Cost Center § Reduced margins § Profit Center

§ Budget Conformance • operating § Opportunity driven
• redundancy § Business Model
• capital § Return on Assets
§ Current to Objective -- GAP • RONA, ROCE
• benchmarking: %/RAV, • EVA
• $/EDC, EFOR
• goals
 Asset Management
K Isprofit oriented
K Reliability for reliability’s sake is not
Asset Management
l reliability is a means to an end not an end in itself
 Improve
Improvemission/business
mission/businesseffectiveness,
financial
effectiveness,
financial results; RONA,ROCE
results; RONA, ROCE
The process
WHY Drive
Driveand
andcommitment
commitmentfrom
fromthe
thetop,
top,
clear, ambitious objectives
clear, ambitious objectives
Initiate
Initiatecontinuous
continuousimprovement,
improvement,
institutionalize
institutionalizesuccess
success
Construct
Constructstrategy,
strategy,
financial model,
financial model,
business
businessplan
plan
RESULTS WHAT
Measure
Measureand
and
reward results
reward results
Appoint
Appointstrong,
strong,working
workinglevel
level
leadership, formulate opportunity
leadership, formulate opportunity
based
basedtactical
tacticalaction
actionplan,
plan,
reorganize for effectiveness,
reorganize for effectiveness,
Train
Trainfor
forsuccess, select
success, selecttechnology
technologyandandpractice
practice
gain ownership
gain ownership
and
andsupport
support
DO WHERE

Begin Equipment
Equipmentand andimprovement
Beginwith
withradical
radicalchange,
change, initiatives
improvement
construct
construct open informationsystem,
open information system, initiatives prioritizedby
prioritized by
implement plan, potential return
potential return
implement plan,
 Elements of a World Class Asset
Management process
Risk
RiskBased
Based
Reliability
Reliabilitybased
based
life extension
life extension
Proactive
Proactive

Production
ProductionEffectiveness
Effectiveness
Avoid OEE,
Avoid OEE, SixSigma
Six Sigma
Condition
ConditionBased
Based

Improve
Improve/ /Refine
Refine TPM
TPM
Time
TimeBased
Based
Preventive
Preventive
Plan RCM
RCM

Activities Reactive / Crisis Processes

Maintenance Types
 Product:
K Predictable Capacity

K Increased Effectiveness

K Reduced Costs
 Predictable Capacity

The
The ability
ability to
to deliver
deliver aa product
product at
at some
some
future
future date
date with
with assurance
assurance ofof meeting
meeting
objectives/commitments
objectives/commitments for for cost,
cost,
quality
quality and
and schedule
schedule
 Lifetime Sustainable Costs
Cost reductions below a level
required for sustainable
operation consumes the asset,
and will eventually necessitate
major refurbishment or
Goal of Equipment Life
replacement
Management
Cost

Minimum Sustainable Cost

Consuming Assets
(Decapitalizing) Age,
Age,intensity
intensityand
andtempo
tempo
ofofoperations will shift
operations will shift
minimum
minimumsustainable
sustainablecost
cost

Lifetime
 Layered maintenance
Asset
AssetManagement
Management

Reliability
ReliabilityImprovement
Improvement Unplanned,
Unplanned,
Planned
PlannedMaintenance
Maintenance
Life
LifeExtension
Extension Reactive,
Reactive,Maintenance
Maintenance

Proactive
Proactive Condition
ConditionBased
Based Time
TimeBased
Based Corrective
Corrective
Preventive
 Allocation of Maintenance
by Type A survey(1) disclosed the following objectives:
§ Reduce total maintenance by 50%
§ Shift the proportion of maintenance:
Current Objective
Reactive 50% 15%
Maintenance Eliminated Preventive 35% 30%
Condition Based 15% 55%
(1) Thomas Marketing Information Center, Dec. 1997

Reactive Maintenance
Percentage

Preventive Maintenance

Condition-Based Maintenance

Current Objective
 Optimum Reliability
Total Cost of
Reliability

Optimum
Effectiveness
Total Costs

Cost to Improve
Reliability

Cost of Unreliable
Manufacturing

Reliability
Benefits of a Proactive Reliability
Improvement Program

Proactive reliability improvement program

increases production, reduces maintenance
costs

Production

Maintenance Costs

Reliability
Law of Equipment Management
K Identifying opportunities and eliminating
defects is the only way to reduce cost --
permanently!
 Expected Results:
K Improved production and asset
effectiveness
l majority of potential value gained from increased
availability, first-run quality and yield (OEE, Six
Sigma)
K Improved safety and environmental
performance
K Reduced Operation & Maintenance costs
l reach and maintain lowest sustainable cost
K Increased process stability
K Greater capital effectiveness
 Causes of Maintenance

Construction – 5%
Management – 7% Non Preventable – 31%

Operations – 32%
Design and Engineering – 17%
Maintenance Errors – 8%
 Key Point:
K Begin with radical change

“Continuous
“Continuousimprovement
improvementisisexactly
exactlythe
theright
rightidea
idea......
ififyou
youare arealready
alreadythetheworld
worldleader
leaderin ineverything
everythingyouyoudo. do.
ItItisisaaterrible
terribleidea
idea...
...ififyou
youare
arelagging.
lagging.
ItItisisprobably
probablyaadisastrous
disastrousidea
ideaififyou
youare
arefar
farbehind
behind
the
theworld
worldstandard.
standard.
IIbelieve
believewe wehave
havemade
madeaamajor
majormistake
mistakeininour
ouradvocacy
advocacy
of
ofcontinuous
continuousimprovement…
improvement…
We
Weneed
needrapid,
rapid,quantum-leap
quantum-leapimprovement.”
improvement.”
Paul
PaulO’Neil,
O’Neil,Chairman
Chairmanof ofAlcoa
Alcoa
 Requirements
K Executive commitment and drive
K Clearly defined business objectives,
justification and strategy
K Strong leadership, commitment and
ownership throughout all levels of the
organization
K Wide ranging process and organizational
change
K Reliability orientation and culture
K Shift to optimum maintenance
l PM to CBM
K Continuous improvement
 PM Cost Benefit

When evaluated on a benefit/cost

basis, approximately 50% of PM
tasks have essentially no value
Benefit / Cost

25% 50% 75%

PM Maintenance Tasks
Asset Management
Process “Best
“BestPractice”
Practice”
Objectives
Current
CurrentConditions
Conditions
Objectives
Asset
AssetEffectiveness
Effectiveness
Assessment
Assessment Gap,
Gap,Opportunities
Opportunities
for Improvement
for Improvement
Business
BusinessCritical
Critical
Operating Objectives
Operating Objectives
Benchmarking Prioritize
Prioritizeby
byImpact
Impact
on Objectives
on Objectives
Business
Business
Plan
Plan Continuous
Continuous
Form
FormStrategies,
Strategies,
Develop Improvement
DevelopMetrics
Metrics Improvement

People Formulate
People FormulateTactical
Tactical
Action Plans
Action Plans
Processes
Processes
Gain
GainApproval,
Approval,
Obtain
ObtainResources
Resources
Systems
Systems
Measure
MeasureResults,
Results,
Implement
Implement
Technology Metrics
Metrics
Technology
 Metrics
K Connected to corporate objectives
K Layered
K Unifyefforts
K Gain consistency of purpose
l consignment parts vs. storehouse turns
l planned vs. reactive work
K Assure resources are applied for greatest
return
l you can’t achieve what you don’t measure!
 CORPORATE
CORPORATE
RONA,
Metrics
RONA,ROCE
ROCE

INDUSTRY
INDUSTRYPERFORMANCE
PERFORMANCE
Cost
Cost as a PercentageofofRAV,
as a Percentage RAV,EDC,
EDC,
EFOR, Manufacturing Cost/Unit
EFOR, Manufacturing Cost/Unit

OPERATING
OPERATINGEFFECTIVENESS
EFFECTIVENESS
OEE,
OEE, Asset Utilization,RTY,
Asset Utilization, RTY,COPQ
COPQ

RELIABILITY
RELIABILITYMANAGEMENT
MANAGEMENT
MTBF,
MTBF, MTBR,MTTR
MTBR, MTTR

WORK
WORKPROCESS
PROCESSEFFICIENCY
EFFICIENCY
Planned
Planned to Total Work,Overtime
to Total Work, Overtime
as
as a Percentage of Total Hours,etc.
a Percentage of Total Hours, etc.

PROGRAM
PROGRAMEFFECTIVENESS
EFFECTIVENESS
Faults
Faults DetectedPrior
Detected PriortotoFailure,
Failure,
Avoided Cost
Avoided Cost
Lifetime Costs as a Function
of Vibration Level

Vibration Level
There is an optimum vibration level at
which maintenance costs reach an
Costs/Vibration Level

effective, sustainable minimum

Maintenance Costs
 Spares Effectiveness

Cost

Outsourcing spare parts with

guaranteed delivery reduces
cost and risk of unavailability

No spares,
high risk, low
cost

Risk
Optimum

Number of Stocked Spares

Producer Value Model
EVA,
Business Process FCF,
=
RONA,
ROCE
Sales
Process

Production Process Raw

Materials

Value

Production Support

Cost
February 2000
Producer Value Model
Cost of Capital = EVA
Income Statement
Revenue from Manufacturing Sales and After Tax Capital Expenditures
Taxes = plus changes in = FCF
Finished Goods Costs Administrative Operating Profit working capital
_..
Price of Net Assets RONA,
Finished Goods (Capital) =
ROCE
Overall Equipment Effectiveness (OEE)

Conversion Cost Quality Production Rate Availability

(objective) (actual) (actual) (actual)
Production _.. Raw
Yield Materials
Conversion Cost Quality Production Rate Availability
(actual) (objective) (objective) (objective)

Market Conditions
Value

Operating & Maintenance, O & M

Administrative Safety, Operations Utilities; Waste Disposal

Maintenance
Environmental electric, water
PM, CBM, parts, labor efficiency

Cost
March 2000
 Process requirements
K Reliability Centered Maintenance (RCM)
l Failure Modes, Effects and Criticality Analysis
(FMECA)
K Proactive Maintenance
K Condition Based Maintenance (CBM)
K Time Based Maintenance (PM)
K Total Productive Maintenance (TPM)
K Six Sigma
K Failure analysis methodology
l Root Cause Failure Analysis (RCFA)
 Can you
effectively detect
symptoms of a gradual
NO The RCM Process
loss of function?

YES

Is an Can you
on-condition task NO repair and restore NO
technically feasible performance and will this
and worth doing? reduce failure rate?

YES YES
Perform the Is a
on-condition task scheduled Can you
at less than restoration (PM) task NO replace the item
the warning interval technically feasible and will this reduce
and worth doing? failure rate?

YES YES

Perform the Is a
scheduled restoration scheduled
discard (replacement) NO Run-to-failure
task at less than
task technically feasible Action depends
the age limit
and worth doing? on consequences

YES

Accomplish the
scheduled replacement
task at intervals less than
the age limit
 Information requirements
K Condition measurements
l vibration
l fluid properties
l operating performance
l thermal gradient
l electrical characteristics
l ultrasonic
K Equipment information
l manufacturers specifications and drawings
l operating and repair history
l parts lists
 Executive Dashboard
Corporate
CorporateMetrics
Metrics
RONA/ROCE
RONA/ROCE

Plant/Business Unit
RONA/ROCE
RONA/ROCE

OEE
OEE Cost
Cost
Effectiveness
by
KPI’s Availability
Availability Yield
Yield Quality
Quality Cost/RAV
Cost/RAV Cost/Unit
Cost/Unit Production
Unit/Line

MTBF
MTBF Efficiency
Efficiency Equipment

Pareto to identify distribution

Work
WorkEffectiveness
Effectiveness
MTBF affects availability
and cost
 Summary
K Asset Management
l predictable capacity
l highest effectiveness / availability
l least sustainable cost
l improved capital effectiveness
K Requires
l commitment and ownership
l financial orientation
l defined process
l eliminate defects
l integrated information
 The End
Thank You