Production Assets Provide Business Value

Overview

Manufacturers and other industrial enterprises strive to gain maximum business value from all their production assets.  Here, automation assets and other operational technologies (OT) can play a major role. 

While not always obvious, most production facilities are designed with hidden or contingent processing capabilities.  Chances are that from the moment it is commissioned, there are opportunities to improve on the way the OT drives production.  Equally likely is that corporate management has little visibility into these potential performance improvements.  That’s because if there is visibility, it is often expressed in failure rates, quality gaps in product production, or other non-financial measures.

In today’s highly competitive global manufacturing environment, it is essential that all opportunities to invest capital be considered on equal basis.  This includes the potential value vs. potential risk of the respective opportunities.  These opportunities must be expressed in terms of business value such as return on assets (ROA), net present value (NPV), and other measures that align with the corporate governance process, so they can be evaluated equally with other opportunities for capital expenditures.

Are You Achieving the Maximum Business Value from Your Production Assets ?

Today, your plants may be operating well.  You are producing product and your customers are satisfied.  But there are almost always further opportunities for business improvement.

When a production process is designed, there are often hidden or contingent processing capabilities.  When these capabilities are unleashed, they can improve productivity, product quality, and environmental performance, while lowering risk.

All industrial companies constantly strive to improve their business performance in the face of continuously changing challenges and priorities.  One of the best ways to do so is to achieve maximum asset capability throughout the asset lifecycle.

So what does “maximum asset capability” mean?  For a defined production unit or a logical aggregation of units in a process cell, the maximum production output has been demonstrated for a sustained period, typically 30 days.  This is to be distinguished from “maximum design capability,” or the theoretical production output as calculated by engineering design principles.  Output must be produced within the quality specification, under normal operating conditions, and in compliance with all health, safety, and environment (HSE) regulations. 

How Does All This Relate to Your Corporate Governance Process? 

As a manufacturing enterprise, operations management is responsible for the performance of your plant or plants.  The goal of operations management is to maximize the ROA for all production assets. 

Investment capital allocation is part of the governance process.  This process should include an analysis of the current performance of production assets to use as a baseline to perform a gap analysis to expose the potential additional ROA that a plant’s assets could provide.

To determine where to best allocate the limited investment capital available, operations management also needs to know what solutions are available and how much it would cost to achieve the desired performance using these solutions.  Sometimes the solution just involves changes in how your operational technologies (OT) are applied, rather than wholesale changes to the production assets.  It is definitely worth knowing what you may be missing in terms of additional business value.

Unfortunately, many manufacturers and other industrial enterprises have not assessed their plants’ potential to uncover unrealized ROA.  ARC Advisory Group believes that that this should be an essential part of the on-going governance process.   Manufacturers need to understand what their current OT assets are doing for them, and have a plan for managing and improving these.

When Is the Best Time to Select New Operational Technology?

All too often, an impending crisis drives the need for a company to initiate a technology selection process.  This may result from a supplier removing a product from the market; forcing the end user to buy a different model or even turn to a new supplier.  The crisis may also involve sudden urgency to replace an obsolete system; a decision that had been postponed until there is no other option except an often-massive replacement project.

Due to the possible threat of an impending shutdown, these decisions must often be made quickly, without adequate time to consider how well the replacement choice meets all current and future projected needs and how to smoothly perform the changeover process to the new technology.

ARC always encourages our technology user clients to think in strategic, rather than tactical terms.  When it comes to replacing operational technologies, it’s best to have an ongoing strategic plan in place for a variety of scenarios.  In this manner, companies can turn a potential crisis situation into a strategic business opportunity.    

This strategic plan for operational technology should align with the company’s business strategy.  ARC recommends that the multi-disciplinary team of stakeholders tasked with creating the OT strategic plan should first look at the “current situation,” followed by a determination of the “desired situation.”  Then, a list of criteria must be defined to identify the characteristics and capabilities that would be required to help the company close the gap between the current and desired situation.  This requires an “OT strategy,” that might involve more than one possible scenario. 

Developing a strategic plan for operational technology is not a one-time project.  Each time a company does this, it will surely uncover some new opportunities because the exercise will include the observations and insights of a new mix of internal stakeholders, plus the observations and insights of a new mix of OT suppliers and the new technology capabilities they bring to the table.

Since both technologies and supplier capabilities change over time, it is important to also include an “improve” step in your strategic plan.  Make this part of a continuous improvement program and revisit the OT strategic plan at least every couple of years.

Recommendations

The potential investment opportunities available to today’s industrial enterprises far exceed the available capital. A company’s governance process must decide between the diverse opportunities on which to spend that often-limited capital.  To maximize the business value achieved by these investments, and OT investments in particular, they must be made based on the business return as expressed in business terms such as ROA and NPV, as well as in terms of business risk vs. business reward.

Based on ARC research and analysis, we recommend the following actions for owner-operators and operational technology users:

• Understand your corporate business objectives and align OT strategies with these.
• Assess the performance of your plant (or plants) to find the gaps and missing potential value.  Express these opportunities and gaps in business value terms, rather than technical terms such as failure rates, transition times, or other non-financial measures.  This is a team effort.

• Develop a strategic plan to improve performance – beginning with the highest value/lowest risk opportunities identified by the assessment.

Perhaps most important is to make sure that the C-Suite agrees with what you and your team are doing.  Ultimately, your team’s findings should be considered along with other CapEx opportunities to maximize asset capabilities throughout the enterprise. 

A session at ARC’s upcoming Industry Forum in Orlando, Florida will focus on this important topic.  Join us and learn what your peers are doing to drive maximum asset capability in their plants.

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Keywords: Operational Technology, Automation, Governance, Return on Assets (ROA), ARC Advisory Group.