Turning Corporate Asset Management into Real Earnings per Share

Transcription

1 Turning Corporate Asset Management into Real Earnings per Share Robert S. DiStefano Chairman & CEO Management Resources Group, Inc North American Plant-to-Enterprise Conference September 21-23, Orlando, FL

2 The following Strategic Initiatives of MESA International are associated with this presentation: Lean Manufacturing Quality & Regulatory Compliance Real-Time Enterprise Asset Perfermance Management (APM)

3 Objective Provide you with a framework to position your reliability initiatives into your company s strategic evaluation portfolio

4 Basic Beliefs in our Community Maintenance & Reliability Best Practices facilitate substantial business benefits in industrial companies Estimated at $2 to $3 Trillion Annually Worldwide Consensus is building that an enterprise-level, standardized approach will leverage the investment and drive more consistency and bigger benefits fleet-wide Feeling that industrial companies executives get it, is tempered by the fact that most companies are still struggling to accomplish consistent, best practices across the fleet Why?

5 Common Definition Corporate Asset Management (CAM) means attacking the opportunities at the corporate, strategic, or enterprise level (EAM) Corporate Asset Management driven by three threads Supply Chain Management Work Management / Reliability Marketing of Asset Throughput Corporate Asset Management supported by standardized data architecture Items Assets Performance Measurements / Management Reporting

6 Situation Corporate Asset Management (CAM) hot topic CxO suite Continued focus on corporate driven performance improvement programs Increased role of shared services and centralized sourcing Continued demands from The Street on earnings improvement CAM programs are expensive and risky Significant resources required (time, staff and money) Significant cultural change required Significant technology shifts required Significant implementation cycle shades line-of-sight of program returns It is not the Reliability people who are educating the decision makers

7 Situation Corporate Asset Management (CAM) requires multiple experts, including engineering services Big 4 can optimize supply chain management But can t typically connect specific inventory to asset BOMs System Implementers can design to-be processes But can t typically design below sub-process level Niche firms can fully support marketing strategy improvement for throughput But typically are not the primary management consultant on the ground System Implementers can convert data But offer limited enhancement to data quality No one is positioned to fully address all three legs of the stool alone

8 Situation CxO level doesn t understand Reliability vocabulary OEE doesn t mean anything.commercial availability does RAV is not taught in B-School.ROA is Maintenance and Reliability is done by engineering types.earnings per share is managed by corporate Minimal line of sight between Reliability and Corporate Goals and Objectives The right technical answer isn't always the right business answer Paradigm shift: Sustainability isn t always desired (think serial asset acquirer/divestures)! Paradigm shift: Engineering view must become Economic view Drive down from a business problem to a technical solution Everything discussed must relate to creation of shareholder value Paradigm shifts are required by the Reliability community. If we continue to talk as engineers, only engineers will listen!

9 Implications Corporate decision makers have not been educated properly and can t buy CAM Risk associated with CAM is perceived as too much to mitigate if tackled all at once Pragmatic approach must be developed The CxO is not sure how to approach CAM

10 Opportunity Before we introduce CAM as the solution, how is the company performing relative to its peer group? Food & Beverage Sample 2005 ROA (%) Company ACompany BCompany DCompany E Company G Company H Avg = 5.6% Median = 4.9%

11 Opportunity Example of Company G performance improvement 2005 financial information Revenue = $16,029,000,000 Costs = $15,310,000,000 Net Income = $719,000,000 Shares Outstanding = 790,000,000 EPS = $ Plants in Fleet Current Asset average = $5,839,500,000 Total Asset average = $14,589,500,000 ROA = 4.93% versus industry average 5.56% (delta = 0.63%) If ROA was brought up to industry average (assumes no change in total assets) Net Income could be $811MM (increase of $92MM) EPS (at constant P/E) could become $1.03 (increase of 13%) Even a small improvement in ROA drives significant business benefits

12 Opportunity Business advisors start with business questions What are the stated goals around ROA or EPS? What are the barriers to achieve? Is asset inefficiency a result of un-optimized inventory? Is asset inefficiency a result of over capacity or market share deterioration? Is asset inefficiency a result of..unplanned outages? CxO s buy for political, professional or personal reasons Technical Solutions are Table Stakes They need to know how the technical solution fulfills their business need not why it solves a technical problem We are business advisors not engineering advisors we just happen to bring solutions that target a specific set of barriers

13 Opportunity What does managerial reporting look like to answer the questions on the previous page? Does the CxO have access to an executive portal? How frequent and timely is information updated and disseminated? Is unplanned outage within line-of-site? Are there industry benchmarks, trends, goals and stretch goals around inventory levels? Maintenance costs? Are all operational metrics and reports funneled to the engineering types only? Do you really know? Industry analysts and numerous studies indicate lack of data is the biggest underlying business problem today!

14 Recommendation Use ROA as the proxy definition of Shareholder Value and demonstrate how CAM impacts ROA Net Income (earnings) Revenue Costs Shareholder Value = f(roa) Current Assets Total Assets Fixed Assets

15 Challenges to CAM Recommendation Transformational change required Standardized and unified technology platform Standardized processes Increased and fungible skill sets Risk perceived as high Financial (budget, returns, etc..) Implementation (duration, design, etc.) Need for multiple market intermediaries Management consultants / system implementers Capital market / marketing consultants Reliability consultants Few companies find CAM palatable Need for a Pragmatic Approach Bite-size pieces each of which must show a return

16 Pragmatic Approach It all starts with data Items Reduction of duplicate part numbers Standardization of items to leverage strategic/centralized sourcing Equipment Accurate identification/location of fixed assets Using our example company, improving data and leveraging legacy platforms Potential reduction in inventory $34MM Potential increase in productivity $7.2MM ROA improvement to 4.99% (from 4.93%) Illustrative Only Foundational Data

17 Recommendation Use ROA as the proxy definition of Shareholder Value and demonstrate how CAM impacts ROA Revenue 4.99% 4.93% Shareholder Value = f(roa) Net Income (earnings) Total Assets Costs Current Assets Fixed Assets

18 Pragmatic Approach Next address current assets at enterprise Supply Chain optimization Process / execution efficiency Standardize processes with input from all plants Migrate to single scalable technology platform Using our example company, improving data and leveraging legacy platforms Potential SCM cost reduction of $17MM Cumulative ROA improvement to 5.11% Illustrative Only Enterprise Supply Chain Foundational Data

19 Recommendation Use ROA as the proxy definition of Shareholder Value and demonstrate how CAM impacts ROA Net Income (earnings) Revenue 5.11% 4.93% Shareholder Value = f(roa) Costs Current Assets Total Assets Fixed Assets

20 Pragmatic Approach Next address the fixed asset/revenue drivers at plant level Develop optimal maintenance and reliability program MEL creation Criticality ranking Reliability (RCM, FMEA, PdM, PM, etc..) Implementation plan and control Standardize processes with input from all plants Migrate to single scalable technology platform Using our example company, improving data and leveraging legacy platforms Potential net income improvement of $7MM Cumulative ROA improvement to 5.15% Illustrative Only Plant 1 Plant n Enterprise Supply Chain Foundational Data

21 Recommendation Use ROA as the proxy definition of Shareholder Value and demonstrate how CAM impacts ROA Net Income (earnings) Revenue 5.15% 4.93% Shareholder Value = f(roa) Total Assets Costs Current Assets Fixed Assets

22 Pragmatic Approach Leverage plant results for portfolio benefit Corporate directed Potentially funded from all plants, then share results? Potentially corporate funded? Create a pull from other plant managers People are key to success Readiness / change management Skills assessment Reward system and accountability alignment Using our example company, improving data and leveraging legacy platforms Potential net income improvement of $32.7MM Cumulative ROA improvement to 5.38% Illustrative Only CAM Plant 1 Plant n Enterprise Supply Chain Foundational Data

23 Recommendation Use ROA as the proxy definition of Shareholder Value and demonstrate how CAM impacts ROA (Average = 5.56%) 5.38% Net Income (earnings) Revenue Costs 4.93% Shareholder Value = f(roa) Total Assets Current Assets Fixed Assets

24 Summary Impact of Example Illustrative Only 2005 Reported Example Potential Delta Revenue $ 16,029 $ 16,122 $ 93 Total Costs $ 15,310 $ 15,339 $ 29 Net Income $ 719 $ 783 $ 64 Shares (Basic) 790,000, ,000,000 EPS $ 0.91 $ 0.99 $ % (+59-29) Stock Price (est based on constant P/E) 8.9% Total Assets $ 14,589.5 $ 14,555.5 (34.0) ROA 4.93% 5.38% 9.1% All dollars are in $Millions except EPS

25 Conclusion Start with business issues and never leave them behind Continue to show business improvement using palatable size projects Change the vocabulary of our people Change our paradigms.stop trying to change the decision maker s

26 Thank you!