What Is Asset Management
EP Editorial Staff | May 2, 1998
While driving through northern Arizona, I noticed a prominent sign in front of a real estate office: “Specialists in Asset Management.” Many people are using the term asset management to describe a maintenance process. Several suppliers are promoting products and services for asset management. Very possibly a product or system with asset management in its name has been proposed or even demonstrated as the solution to your challenges. But just what is asset management?
For the answer let’s return to the real estate office. In their case asset management clearly is not connected to equipment maintenance–they don’t have any. In their world, asset management is achieving greatest return from a property (land or house). Return is measured in only one way–money.
The conclusion is clear: asset management is directed to gaining greatest monetary return from some type of asset. In addition to real estate, the term asset management can be and is applied to stocks, savings accounts, and even things like hotel rooms and hospital beds. In the latter two areas, asset management means maintaining a high level of occupancy to maximize the return on investment. Return is measured strictly in financial terms.
In the maintenance field we hear similar sounding terms: asset utilization and asset effectiveness. Both are essentially defined as availability times production output. Returning to the motel analogy, I suggest that asset utilization is keeping the rooms filled. But that objective can be accomplished in several ways, low pricing for example. Rooms are full, but you are not making money. Asset management is thus the Jerry McGuire version of asset utilization: “Show me the money!”
By now I hope you are convinced that financial return is the distinguishing element of asset management. Compared to other like-sounding terms, asset management demands that resources and efforts be directed toward maximizing the financial return on the assets, whatever they might be. With this definition, the realtor, motel manager, and maintenance mechanic are all working toward the same goal: ending the day with more money than they started with.
If we are in agreement so far, let’s next try to identify the essential elements of a system or process to accomplish asset management.
An asset management product or system must have an integral financial model of your specific business conditions that provides an objective means to identify and evaluate opportunities, prioritize and manage resources, and measure results. The model must be able to tell you the return from any given investment on an overall and individual basis under various assumptions. The ability to play “what if” is essential. And in a complex process or manufacturing environment this may not be an easy task. Market conditions, variation of product margins, value of reliability and availability, impact of safety and environmental violations, and the effect of reduced efficiency are just a few of the many factors that must be accommodated in the financial model required for asset management.
The motel owner has it easy. Multiply average occupancy by the room rate and subtract operating expenses, including the share to your friendly state and national governments. You’d better have enough left over to pay off the mortgage and end up with a return on funds invested that is higher than you can obtain at your neighborhood bank. Otherwise why be in business in the first place?
The preceding discussion is a greatly simplified description of the method used to calculate economic value added (EVA). In my opinion EVA will become the favored method of scoring asset management.
As a final question, can the principles of asset management be applied throughout an enterprise? The answer must be yes. Everyone must be aware of and focused on his or her role in maximizing monetary value. Asset management must demonstrate that saving money today by purchasing inferior equipment or components and accepting substandard practices will likely have a very poor return when analyzed objectively over any reasonable period of time. Thus, the top to bottom financial analysis tools that must be included in asset management and asset management systems will go a long way toward eliminating the ill-advised decisions that are so ruinous to effective maintenance and assuring all within an enterprise are pulling toward a common goal. MT