21st Century Maintenance Organization Part I: The Asset Management Model

01 February 2003 John Moubray, Aladon LLC
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Comparing physical asset management to financial asset management and human asset (resources) management, the other two members of the triumvirate that supports the enterprise value chain.

When talking to maintenance managers from organizations spanning all major industry sectors in more than 40 countries around the world, it is apparent that there is a great deal of uncertainty about the precise role of the maintenance function. Should it be centralized or decentralized? To what extent (if at all) should maintenance be outsourced? What is the ideal maintenance strategy? Above all, what exactly is—or should be—the role of the maintenance manager?

Underlying this uncertainty is a widespread feeling that the maintenance department as a whole lacks the organizational clout to do whatever needs to be done to achieve real world-class equipment performance. To understand why this may be so, it is useful to compare and contrast current approaches to the management of financial and human assets with the management of physical assets.

What follows reflects the opinions of the author, which are based on more than 30 years of experience in the field of physical asset management. It should be noted that I have not encountered any organization designed exactly along the lines suggested here, but I  also have not encountered any physical asset management department that enjoys the same level of respect and influence as the finance department among the top executives of any organization. What follows might be a way to remedy this situation.

A wide variety of issues affect the current state—and status—of the maintenance function in industry around the world. Some of these are organizational and others are technical.

Traditional maintenance organizations
 In some organizations, one finds highly centralized departments responsible for all aspects of physical asset management. The responsibilities of these centralized departments include specifying, acquiring, installing, and commissioning new plant equipment; formulating maintenance policies; specifying, installing, and operating maintenance planning and control systems; managing spare parts stocks; executing maintenance tasks; and, in some cases, looking after site services (water, steam, air, power distribution, etc.). These departments tend to be large, with dozens and sometimes hundreds of employees reporting ultimately to one department head.

In other cases, especially in North America, engineering is separated from maintenance. The former is responsible for the specification, acquisition, and deployment of new plant efforts (nearly always capital projects), while the latter looks after all aspects of maintenance after the plant has been commissioned.

The business unit concept
The previous two models tend to dominate maintenance organization design. About 15 years ago a major trend started to emerge in the structure of business undertakings. This was the growth of the business unit concept. In essence, this concept entails subdividing larger undertakings into business units, usually centered around specific products or services. When these units are formed, the maintenance department is often broken up at the same time and most, if not all, of its personnel allocated to the business units.

Automation
Over the same period, we have seen a leap in automation. The number of operators has shrunk by an order of magnitude as machines have taken over duties that used to be performed by humans. In the case of some systems, pumping stations for example, there are no operators on site. These systems are driven by computer programs, with occasional additional guidance provided by people in distant control rooms.

Maintenance cost reduction
Nearly all maintenance departments face intense pressure to reduce direct maintenance expenditures. Some of this pressure arises from a need to remain competitive in the market, from competition within the organization for financial resources, or both. However, much of the emphasis on cost reduction seems to arise from a vague belief on the part of senior executives that if it was possible to reduce expenditures on operations people by (say) 40 percent, then it should be possible to reduce maintenance costs by a similar amount. This belief loses sight of the fact that one of the main factors that has enabled organizations to achieve increases in productivity has been increased mechanization and automation—in other words, replacing people with machines. However, these machines need maintenance. Under these circumstances, huge reductions in direct operating costs should, if anything, be accompanied by an increase in direct maintenance expenditure, because too little expenditure on maintenance reduces equipment reliability and hence productivity.

The problem of under funding is made worse by the fact that most maintenance managers are unable to specify with adequate precision two important baseline factors:

  • The safe minimum that must be spent on maintenance (especially proactive maintenance)
  • What consequences the organization faces if it does not spend it.

This occurs despite the fact that tools which enable managers to specify both with great precision have been available for over a decade.

(All this having been said, there is no doubt that it is often possible to reduce maintenance costs to some extent by making more effective use of maintenance resources. However, the real scope for such reductions while still delivering a safe and effective maintenance service is much more limited than is generally believed.)

Maintenance technology
One final major area of change has been the technology of maintenance itself. The comfortable certainties of 30 years ago about asset care, which tended to be based on fixed-interval overhauls and component replacements, have been found in many cases to be a waste of time and often actively counterproductive. These needless overhauls cost a fortune in terms of both maintenance expenditure and equipment downtime—and hence lost production—while contributing little or nothing in terms of improved equipment reliability.

Many organizations have become aware of the invalidity of fixed interval overhauls, and have reacted with a massive swing toward predictive or condition-based maintenance. In some cases, this swing shows signs of going too far, and is in danger of reaching the point where predictive technologies are being employed either at the expense of arguably even more important tasks such as failure-finding, or where they are simply another expensive waste of time.

The consequences of the status quo
The issues discussed have produced the following results:

  • Where engineering is separated from maintenance, there is a tendency for the former to acquire assets with little thought given to their long-term maintenance requirements. This lack of foresight means that the maintenance function has to spend vast amounts of time and money dealing with reliability problems that should have been anticipated and eliminated on the drawing board. It is also a simple fact that in organizational terms, two smaller departments that operate independently are usually much less influential than one larger, more focused department.
  • The fragmentation of the maintenance department and its dispersal into various business units has reduced its overall influence within the organization. Where this has occurred, the only maintenance management units (if any) that tend to survive on a centralized basis are a small group in charge of an often not-very-highly-regarded CMMS, and perhaps a few specialists in advanced condition monitoring techniques.
  • The growth in automation has meant that, at the human-machine interface, the role of operators has mainly become a matter of gauging, measuring, and monitoring, then reacting to abnormal conditions (most of which could be classified as failures), rather than operating the plant. Many of these activities could in fact be classified as maintenance rather than operations, which means that the distinction between operators and maintainers is steadily disappearing. In some industries, this distinction is being blurred even further by a drive to allocate more and more conventional maintenance tasks to operators. For instance, this is a cornerstone of the TPM philosophy, as well as being a frequent outcome of processes like RCM. So even where centralized maintenance departments still exist, operations people are taking over more and more responsibility for the execution of maintenance tasks.
  • Excessive reduction in maintenance expenditure means that there is not enough money to carry out the minimum maintenance needed to ensure that the physical assets continue to function reliably and safely, and also that there is not enough to do an adequate job of establishing appropriate maintenance policies to begin with. Continued starvation of resources means that this situation gets steadily worse.
  • An awareness that many fixed-interval overhauls do nothing to improve equipment reliability led many operations people to form the opinion that the whole idea of  preventive maintenance is a complete waste of time. Sadly, some of them also began to form an equally low opinion of the maintenance people who were promoting these expensive and often useless ideas. This did nothing for the stature of the maintenance function. (There is also a danger that excessive, inappropriate use of predictive maintenance could further erode the credibility of the whole idea of proactive maintenance.)
  • The loss of stature of the maintenance department has further eroded its ability to influence the rest of the organization. In many undertakings, the point has been reached where the maintenance function has completely lost control of its own destiny. In the opinion of the author, the loss of faith in the ability of internal maintenance departments to deliver a service that is considered to be satisfactory by its main customers—the operations people—is a major reason why maintenance so often seems to be the first candidate for outsourcing. There seems to be a belief (often unstated and usually incorrect) that if our own people can't get it right, then perhaps someone else can.

All these developments have contributed to feelings of confusion and occasional demoralization in the world of maintenance. (This does not mean that all maintenance departments and their managers have reached this state. However, nearly all are suffering from some of these problems to some extent.)

The following discussion explores ways out of this maze. It does so by comparing and contrasting typical physical asset management organizations with the design of the two other major asset management support functions—those associated with the management of financial assets and of human resources. These comparisons are used to draw conclusions about how not only maintenance but the world of physical asset management as a whole could be restructured in such a way that it becomes recognized as a vital contributor to the long-term health of the organizations that it serves, and its practitioners acknowledged accordingly.

In order to place the major asset management support functions in context, we first consider the value chain.

The value chain
The function of all organized forms of human endeavour is to take a primary input, add value to it, and dispose of the output. In manufacturing, the primary inputs are raw materials; value is added by converting these materials into something else, and disposal entails selling them to customers. In mining, the input consists of ore, value is added by extracting and refining the minerals in the ore, and the minerals are disposed of by selling them to manufacturers. This logic also applies to services. For instance, in hospitals the primary input is sick people to whom value is added by curing their illnesses, and the expected output  is healthy people.

Nearly all value chains, especially those associated with for-profit businesses, consist of three main organizational elements. At one end, one finds the raw materials procurement function. In the middle is the operations department, which is responsible for operating the value-adding processes. At the other end is the marketing and sales function, which has to locate potential customers and persuade them to acquire the output of the value-adding process.

These three principal organizational functions are supplemented by major support functions associated with the management of assets.

All value chains need three types of assets to function: financial assets, human assets or human resources, and physical assets. All three categories must be managed appropriately to ensure that they support the value-adding process efficiently and effectively. The detailed processes and procedures are very different for each of the three categories. However, they have seven basic elements in common: functional specifications, design specifications, acquisition and deployment, maintenance, disposal, compliance, and scorekeeping. See accompanying section Three Asset Management Types, Seven Elements in Common.

Financial asset management
One very important thing that the finance department does not do is decide what is to be sold or acquired (except for goods and services needed for its own use). Those decisions are made by people in charge of the different parts of the value chain. The finance department merely ensures that the organization has the financial wherewithal to allow the value-adding process to continue to function in accordance with the mission established by its principal stakeholders.

The finance department is very much a support function. It sets the policies and procedures that are to be followed with respect to finance by the people involved in the value chain, ensures that they follow those procedures, disposes of surplus funds, and keeps the financial score. It also arranges for the acquisition of additional financial assets when required.

This department usually consists of a small number of qualified specialists ranging from clerks and bookkeepers to highly qualified accountants. However, despite its small size, the finance department is immensely powerful. The overall head of this function nearly always reports directly to the chief executive, and is usually known as chief financial officer (CFO), vice-president–finance, or financial director. This officer nearly always has a seat on the main board of directors.

Human asset management
One very important thing the human resources department does not do is tell other employees what to do on a day-to-day basis (except for those employed by the department itself). Those instructions are given by the managers of the different elements of the value chain. The human resources department helps to ensure that the organization has the people needed to allow the value-adding process to continue to function in accordance with the mission established by its main stakeholders.

The human resources department is also very much a support function. Like the finance department, it sets the policies and procedures that are to be followed with respect to employees by managers of the value chain, ensures that they follow those procedures, and keeps the human score. It also assists with the acquisition and deployment of additional human resources when required. It usually consists of a small number of qualified specialists.

Like its financial counterpart, the HR department is also becoming increasingly powerful. In more and more cases, the overall head of this function reports directly to the chief executive, and is usually known as vice-president–human resources or personnel director.

Physical asset management
These tasks are once again very much support functions. They entail setting procedures to be followed with respect to physical assets by managers of the value chain, ensuring that the procedures are followed, and keeping score. They include the acquisition and deployment of additional physical assets when required. Given the striking similarities between these tasks and those of the other two main value chain support functions, one would think that the physical asset management organization would be similarly small, focused and tightly organized, and equally influential.

In reality, this is seldom, if ever, the case. As mentioned previously, the physical asset management function is usually much larger than the other two, much more diffuse, much less focused, and not nearly as influential. All of which means that it is also much less effective.

In the opinion of the author, the single most important reason for the differences in organization, influence, and effectiveness between the physical asset management function and the other two is that more often than not, it is responsible for executing maintenance tasks in addition to deciding what tasks should be done. This adds an enormous—in fact, a crippling—additional day-to-day management burden compared to the other two support functions.

The second part of this article in a future issue will examine the implications of this situation and suggest a way out. MT

John Moubray is president of Aladon, LLC, a reliability-centered maintenance consultancy.

THREE ASSET MANAGEMENT TYPES, SEVEN ELEMENTS IN COMMON

Financial

Human

Physical

1. Functional specifications: Decide what each asset must do to make the value-adding process function as a whole

Deciding what finance must do entails deciding what funds are needed to set up and operate the value chain. This requirement is usually expressed in the form of financial models that forecast cash flows and capital requirements on the basis of detailed budgets. It is usually also the responsibility of the finance department to develop the processes used to establish these budgets.

What people must be able to contribute to the value-adding process—what they must be able to do—is defined by preparing job specifications. The role of the HR department is to develop procedures for preparing these specifications, and help other managers to apply them correctly.

In the case of physical assets—plant, equipment, buildings and, to some extent, inventories—the first step is yet again to specify what their users want them to do in the context of the requirements of the value-adding process as a whole. A key role of the physical asset department is to help users prepare accurate functional specifications.

2. Design specifications: Decide what the asset must be in order to meet functional specifications

When setting up the organization, deciding what the finance must be entails deciding what combinations of debt and equity (or grants) are needed to start up the value-adding process. Thereafter, it entails establishing whether projected revenues are sufficient to sustain the process, or whether these need to be supplemented by further combinations of debt, equity, and/or grants.

Decide what people must be entails deciding what combination of skills, qualifications, and experience prospective employees must have in order to be able to do what is required.

The next step is to decide what the assets must be in order to fulfill the functional requirements (the design stage). The physical asset department usually either prepares these designs itself or, more often, arranges for outside specialists to do so.

3. Acquisition and deployment: Acquire and deploy the assets

Acquiring financial assets entails persuading someone either to invest in the undertaking or to lend what is needed to get started. In the case of established business undertakings, the principal source of funds is revenue from sales, supplemented by the disposal of assets that are no longer needed. If additional funds (debt, equity, or grants) are needed, the finance department usually plays a key role in acquiring these funds.

The human resource acquisition process involves hiring, promoting, or transferring people. Ideally these should be people who are already able and willing to do exactly what is required. However, the exact blend of required skills and motivation seldom exists in the job market. As a result, it is usually necessary to put people through a training program. This training is reinforced where necessary by clearly defined procedures.

The physical asset department plays a central role in acquiring, installing, and commissioning new physical assets. In the case of large capital projects, this nearly always entails soliciting and adjudicating competitive tenders.

4. Maintenance: Sustain—and where necessary replenish—the assets in such a way that they continue to make the required contribution to the value-adding process

Sustaining financial resources is largely a matter of preserving their value. This is done by:
" Guarding against theft, inflation, and currency variations. This in turn entails installing procedures for ensuring that amounts actually spent coincide both with what is actually delivered and with the amounts allocated. It also entails recording all financial transactions and ensuring that the books balance at the end of each accounting period.
" Ensuring that debtors and creditors are managed appropriately (in other words, that debts are collected and creditors paid in accordance with organizational norms).
" Keeping the cost of financial transactions to a minimum.
In addition, the finance department is responsible for keeping the financial asset register up to date and recording the depreciation of these assets.

Sustaining human resources requires a blend of employment conditions, leadership, and ongoing training which ensures that the people continue to be able and willing to do what is required for as long as they are physically capable of doing it. The role of the HR department is to assist with the development of training programs, and in some cases to conduct the courses, especially where these deal directly with human resource management issues such as leadership. Additional functions of the HR department in this area include:
" Ensuring that reward systems are reasonably consistent and fair across the organization
" Developing and helping other managers to apply human performance evaluation systems
" Developing and enforcing disciplinary procedures
The HR department also is responsible for compiling the human resource register and for keeping it up to date.

Sustaining physical assets is a matter of operating and maintaining them correctly. Determining what tasks must be done to sustain these assets correctly is a two-stage process.
1. The physical asset department needs to work with the users of the assets to determine what tasks need to be done (identify the right job). This entails developing and applying procedures for identifying what tasks must be done to anticipate, prevent, detect, and, where necessary, rectify failures, and for deciding what spares should be held in stock, and (perhaps) for actually managing them.
2. Procedures need to be put in place to ensure that these tasks are done at the right time in the right way by the right people (do the job right). These in turn include (but are not necessarily limited to) the following:

  • standard operating procedures
  • systems required to plan and schedule maintenance tasks, together with procedures to ensure they are done as planned.

If the execution of tasks is to be outsourced, it should be the responsibility of the physical asset department to establish the scope of and negotiate contracts.

5. Disposal: Dispose of the assets when they can no longer fulfill the required functions or when they are no longer needed

Disposing of financial resources entails paying the suppliers of goods, services, and labor (including employees), and where relevant, deciding what to do with surpluses that emerge in the form of profit. This includes the development of the procedures used to allocate funds for acquiring goods and services (purchase requisitions and purchase orders) and issuing the checks that actually pay for goods, services, and labor.

Disposing of human resources entails either redeploying or retiring them when the demands of their jobs exceed their physical capabilities, or redeploying or retrenching them if the nature of what they need to do changes—or if the people themselves change—in such a way that they are no longer the right people to do it. The role of the HR department is to develop and enforce procedures for ensuring that this is done as fairly and equitably as possible.

Physical assets are disposed of when they are no longer able to do what is required. (More often than not, this occurs because what the assets need to do changes rather than because the assets wear out.) Disposing of plant, equipment, and buildings is usually a matter of selling them to less demanding users or scrapping them. However, in some sectors—notably nuclear undertakings—disposing of obsolete plant and equipment can be the most costly challenge in the entire value chain.

6. Compliance: Monitor and ensure compliance with laws and regulations governing the use of the assets

In the case of financial assets, compliance means ensuring that the organization fulfils its statutory and regulatory financial obligations, such as the payment of taxes and adherence to accounting codes of practice.

In many industries, conditions of employment are codified in the form of government regulations (governing such issues as mini-mum wages and working hours). These regulations often are supplemented by union agreements, and HR professionals tend to play a leading role in the development of such agreements. The HR department also monitors laws and regulations governing employment (such as minimum wages, working hours, and so on), and ensures that the organization complies.

The physical asset department should ensure that the organization is aware of and complies with laws and regulations governing the operation and maintenance of its assets.

7. Scorekeeping: Identify key performance indicators that show how well the assets are making their required contribution to the value-adding process

Financial scorekeeping consists of two principal elements:
" Reconciling actual revenues and expenditures with budgets, and preparing variance reports
" Preparing consolidated financial reports—balance sheets, profit and loss statements, and cash flow statements.

Human resource scorekeeping entails tracking key performance indicators such as staff turnover rates, lost time injury rates, absenteeism, and so on.

It is the responsibility of the physical asset department to track key performance indicators such as plant availability and reliability indices, schedule completion rates, outstanding workloads (backlogs), and so on.

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