Why Asset Management for Manufacturing?

Industry 4.0

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Manufacturing

Why Asset Management for Manufacturing?

Martin Horvath | Apr 08, 2019

Assets are the basis for any business - no matter if it’s the ax to chop down a tree or a robot that assembles a car. So why isn’t it common practice to manage assets in an efficient way? Probably because a proper asset management requires knowledge and costs money.

In this post, I’ll explain why asset management is important and how a manufacturing business will benefit from a structured approach to asset management.

Is your Asset-Turnover-Ratio above or below 1.0?

At the end of the day, someone needs to justify investments in front of the business. We’re sure about that and so the “why” needs to be expressed in dollars!

A dominant indicator for the success of a business is the “Asset-Turnover-Ratio” that literally expresses the efficiency of usage of assets in a business by taking into account the total value of assets and the total sales generated with them. A ratio of 1.5 indicates that for every dollar the business has in form of assets, it is generating $ 1.50 of sales.

While the value itself cannot be classified as good or bad, because it depends on the industry and other aspects, the comparison with main competitors or the change of that value over time in your own business is meaningful and important! Increasing this KPI just by 0.1 might make a huge difference in the financial reports!

Here are some numbers, taken from our friends at csimarket.com, to help get a feeling about what this indicator looks like across different industries. What’s of interest is not the absolute number, but the differences between industries, sectors and businesses.

Retail

3.53

Transportation

1.31

Energy

0.77

Technology

0.46

Financial

0.26

Utilities

0.31

 

By sector, retail obviously takes the lead with approximately $3.5 in sales for every $1 spent on assets. Unsurprisingly, the more asset-intensive a business is, the more important proper asset management is. Taking a look at the industries unveils that there are also differences within the sectors. Technology retail is lagging behind wholesale retail.

Wholesale

3.53

Technology retail

2.80

Agricultural production

1.76

Misc. financial services

0.01

Commercial Banks

0.04

Water supply

0.17

Electric utilities

0.23

 
And finally taking a look at some well-known companies shows that some obviously work more efficient than others in terms of assets. Best Buy, a technology retailer operating in the United States, Canada and Mexico, outruns the industry average by $0.50.

Sports Field Holdings, Inc.

8.89

China Carbon Graphite Group, Inc.

8.16

Dominos Pizza Inc

2.72

Best Buy Co Inc

3.30

Unites States Steel Corp

2.94

Wallmart Inc.

2.42

Q Biomed Inc

0.00

Harvest Oil & Gas Corp.

0.16

Netflix Inc.

0.19

 

How to calculate the Asset-Turnover-Ratio

The calculation of this key-performance-indicator is easy (just divide the sales by the average value of assets), getting the right numbers for the assets might be difficult. Only a rich enterprise asset management system allows businesses to calculate and observe this performance indicator, because the registries on paper and spreadsheets which we still see in the daily business lead to tremendous efforts when business intelligence/KPIs and later, decision making, comes into play. I’m sure most of the readers are aware of the data silos and millions of outdated Microsoft Excel sheets out there.

The bottom line is that an enterprise asset management system makes it easy to calculate asset-related KPIs and allow optimizations - such as eliminating unused assets - to improve those KPIs and focus on generating more value for the business.

An enterprise asset management system is a key component in every business, but let’s take a closer look into the manufacturing area.

Asset management in the manufacturing

Inventory is one of the most critical aspects of a manufacturing business. And in most cases, the business is running multiple factories which are spread across the globe. While on a global scale, the organization is often lacking centralization, and this leads to the previously mentioned mess of information. When inventory runs out of stock or breaks down, production output is decreased, deliveries are delayed, work is interrupted… in other words – it costs money! The breakdown of a critical machine with the lack of needed spare parts can cause devastating consequences. One customer of ours reported in an analysis phase that unplanned downtime can cost anywhere from $15.000 to $300.000 per hour!

To avoid this, many “home brewed” approaches can be observed: Ghost-machines and shadow inventories, fail-over equipment and more may prevent downtime, but they have a significant impact on the financial figures – like the Asset Turnover Ratio.


What comes next when we’re done with the basics

For those who are convinced that structured asset management will provide their business more value, the challenge of picking the right enterprise asset management tool is the next step,  and sometimes a project on its own. But once the homework is done and the system is up and running, it not only provides the right information, it also provides a single version of the truth, traceability and control. It’s also the time when new ideas and possibilities become clear in terms of optimizations. Predictive maintenance, paperless factories, artificial intelligence, augmented reality, efficiency maps, predictions and simulations.

All those technologies, processes and use cases require a proper foundation – which is enterprise asset management along with other components in the field of finance, human resources, and so on.

 

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