Do you know of organisations that have large facilities that are lying idle or working at a fraction of their capacity? Strange as this may sound, this is not very uncommon. Take a look at the Return on Assets metric of organisations across sectors (you need to be careful as to how you read these numbers – for instance, you will even find that some industries have negative returns on assets, which, prima facie, may seem to mean bad investments, but the picture could be distorted by business cycle effects leading to operating losses, etc.). A brand new press shop we know of, with modern equipment, went through two changes of ownership over a few years, before becoming a productive asset.
Seeing the potential of the assets in hand, positioning them aptly, engaging with potential customers – there is work to be done! Sometimes the potential customers are internal too. We can all keep pining for the best facilities needed to do the work that we do. However, it usually won’t make financial sense to keep replacing equipment rapidly. Typically, on an average, the phones in your books should last three years, laptops four, cars ten, and typical capital equipment in plants thirty. Never mind that people in other organisations are seeming to be using ultra-modern, gleaming gadgets that they and others are drooling over.
There is a famous story of a vendor of Toyota who had the privilege of visiting a Toyota facility. He was expecting to see ultra-modern machines. He came out and reported that even his own plant had more advanced equipment than what Toyota was using. It takes time to understand a piece of equipment thoroughly. It requires specific skill to draw value from it and make it perform well, consistently. This is what good teams are able to do with the tools and equipment they have. They look after them well and they use them well.
Of course, this is not to campaign for sticking irrationally with the old. Sometimes early replacements make sense, e.g., it has been reported that new passenger jets have been able to reduce operating costs to the extent that it makes sense for airlines to replace even not-so-aging fleets. Also, the quest to make assets productive cannot be reason to change the business portfolio – better to dispose off assets that are no longer relevant to the business.
Learning to work the tools
Similarly, all around us, we can see the power of digital technologies. They ought to be adopted – thoughtfully, though. Another Toyota story: they adopted CAE technology for their vehicle and plant design work long after such technologies were put to use by US auto makers. Once they decided to adopt, they did their detailed, time-consuming analyses of the available products. Sometimes, even after adopting a given solution, they worked with the software vendor (e.g., they worked with PTC for more than a year) to improve their product before deploying it.
When we interview people in a function to learn about their capabilities, we ask what they do to maintain their equipment and extend their lives, whether they keep an eye out for new tools, technologies and methods, whether they shortlist a few of them periodically for evaluation, and how they deal with the challenge of introducing new tools and methods.
It takes time to understand a piece of equipment thoroughly. It requires specific skill to draw value from it and make it perform well, consistently.
These questions can be asked even to functions such as HR. For instance, many of them today are sitting on ‘analytics engines’ – literally sitting on them.
Related Readings :
CAVASINO A, MILANO G. Does Asset Utilization Matter, CFO, Budgeting ( 2014 )
HARTMAN J. Parallel Replacement Analysis Under Variable Asset Utilization And Stochastic Demand : The Two Asset Case, Lehigh University.
NAIR S, HOPP W. A Model For Equipment Replacement Due To Technological Obsolescence, European Journal Of Operational Research ( 1992 )
