The second in a series of three papers on using a KPI Model to improve Asset Productivity.
The simplest way is to check the utilization; the number of hours sold ÷ the number of hours available for sale for each significant item of plant.
You can also factor in the revenue dimension by checking the charge out rate for each item. It is always interesting to compare charge rates for similar equipment for different business units. Even though two units are similar market driven charge rates vary, and
It is important to avoid the error of expecting 100% utilization. All plant and equipment has a necessary level of downtime.
An example from my time as a factory manager will illustrate how this works.
In a plastic molding business, power usage is a major cost item, and starting up a molding machine from cold is very expensive. We ran the factory 24 hours/day for 5 days each week to minimize the frequency of starting up from cold. Saturday mornings were used for maintenance and Sunday was downtime. The cost of double time penalties made working on Sundays uneconomic.
This gave us a theoretical maximum utilization of 120 ÷ 168 = 71.4%
The other major source of downtime was die changes. Long runs, or short die change times would increase our utilization.
Our budget target utilization was 67% or 5,870 hours per year for each production unit. It was the most important KPI for the factory, and we watched it like a hawk.
At certain times of the year the level of customer orders forced us to operate for longer hours. We could operate at 75% for a few weeks before deferred maintenance led to breakdowns. We could even push the limit to 80% for a week or two, before we ran into the other limiting factor; our staff started to take sick leave because they were overworked.
We made a lot of money from pushing the limit but it did not last long, before our overall utilization dropped and the excess costs started to bite. The law of diminishing returns always kicked in.
A basic guideline for assessing Asset Turns.
The DuPont formula demonstrates that Asset Turns are an important high level Key Performance Indicator.
Some industries are asset intensive. Examples are power and water utilities, oil refining, mining and manufacturing. They operate on low asset turns and need high profit margins to earn a decent return. Low asset turns are considered to be 1.0x or less. These organizations are highly focused on asset productivity.
At the other end of the scale are small service businesses with minimal assets where asset turns are typical very high; in the range 5-10×.
Leveraging stock turns – a retail example
A small retail business sought advice on how to improve profitability. They had a “point of sale system” that could calculate Stock Turns. A retails business sells for cash so has no debtors. Stock and margins (managed by negotiated buying prices) are the most common management levers.
We arranged a monthly stock take to manage stock shrinkage and used the POS system to calculate stock turns. SKU groups with low stock turns were reviewed, and buying quantities were reduced or the items were dropped. Shelf space and placement were reallocated to items with higher stock turns. Consignment arrangements with suppliers were negotiated for product ranges with low stock turns.
Inside 6 months we saw the business return increase by 30%. Sales increased by managing product range decisions on stock turns.
Customers were happier with the new products introduced and sales rose slightly.
Top Retailers have been using this concept for years.
But you can do it just like Waltons or your preferred supermarket chain.
If you can turn stock into cash fast, you will have very high stock turns. The killer mistake is to buy stuff you cannot sell, then you find you have to sell it off below cost just before your annual stock take.
The other trap is to rely on annual or quarterly stock takes. Monthly stock takes are the only way to manage stock levels and stock turns. Supermarkets do it weekly and have used computerized daily stock replenishment systems for years. They know it pays off.
If you can turn over your stock 10+ times a year, you can make a lot of money from a 4% operating margin.
Balancing service levels with minimum stock levels.
The secret of minimizing stock levels without the risk of reducing service levels is Supply Chain Management.
This requires meticulous optimization at every point in the supply chain to balance up supply lead times, reduce queuing times, reduce inventory vale and above all, forecast demand with great accuracy.
Customers will not tolerate unreliable suppliers, and stock outages are prohibitively expensive.
I recommend setting the service level that customers need and are willing to pay for and working back up the supply chain from there. There is a lot of money to be made from a simple process of managing the interface and aligning the systems at every point in the supply chain.
How can you be confident that your asset productivity program will deliver the results you expect?
Check it using a KPI Model. You can build your own or use the “What if?” model from realkpis.com as a base.
The next paper in this series deals with Strategic Asset Management