fundamentals of asset management
TRANSCRIPT
Fundamentals of Asset Management
Background: Optimized Investment Decision MakingA Hands-On Approach
Advancing Asset Management 2
Investment Decision-Making
Root Cause;RCM; PdM;
ORDM
Confidence LevelRating; Strategic
Validation;ORDM
View 6: AM plan 10-step process
DevelopAsset
Registry
AssessCondition,
Failure Modes
DetermineResidual
Life
DetermineLive Cycle &Replacement
Costs
Set TargetLevels of
Service (LOS)
DetermineBusiness Risk(“Criticality”)
OptimizeO&M
Investment
OptimizeCapital
Investment
DetermineFundingStrategy
Build AMPlan
Advancing Asset Management 3
Three fundamental management decisions
1. What are my work crews doing, where are they doing it—and why?
2. What CIP projects should be done—and when?3. When should I repair, when should I rehab, when
should I replace?
These decisions typically account for over 80% of a utility’s annual expenditures
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Asset decision framework
Big pictureWhole portfolio perspective• Trends• Macro forcesPolicy frameworkBudget arena
Micro viewEvent basedSpecific asset focusCase-by-case decision points
Repair? Refurbish? Replace? Augment?
Advancing Asset Management
Option 3 Replace
Option 2 RefurbishOption 1 Repair
Preventive Maintenance
Maintenance/repair
Rehabilitation
Replace
Managing the “asset consumption” process
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There exists for every asset, a theoretical “best”investment
Opt
ion
1
Opt
ion
2
Opt
ion
3
Opt
ion
4
Opt
ion
5
2002
Tod
ay
2005
2015
2025
2030
2035
Treatment options M M RH RP RPDirect Cost 270 72 360 610 630
Indirect Cost 0 10 20 40 130Benefit 200 75 480 780 320
Option Ranking 4 3 1 2 5
Decay Curve
Catastrophic Failure
100% Level of Service
Minimum Level of Service
Benefit/Cost Ratio 0.7 0.9 1.3 1.2 0.42
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Bringing it all together
Repair-refurbish-replace decision1. Fix when broken (run to failure)2. End of prescriptive life
12 years old3,000 run-time hours35,000 miles
3. Rule of thumb3 breaks per mile or in 24 hoursPoor condition (and worst first)FCI > 6% (Facility condition index—O&M as a percentage of replacement cost)
4. Optimized renewal decision making (ORDM)
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What is optimized decision making?
Systematic search for lowest-cost renewal investmentBased on interaction of• Cost trends (direct O&M, indirect)• Condition trends (decay/survivor curve)• Risk-consequence trendsThree major approaches• Valued expert judgment• Lowest projected average life-cycle cost per year of
residual life; • Operational costs• Risk-weighted, full economic costs
• Intervention factors; condition, performance, reliability, Business Risk Exposure, etc.
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Three levels of ORDM
Level 1 Decision tables/trees• Structured, often substantially qualitative, value
judgment-based• Event-focused, scenario-basedLevel 2 Lowest average PV life cycle cost scenario analysis• Specific decision event-focused• Spreadsheet-driven• Can be used to refine decision tables/treesLevel 3 Integrated intervention and full economic life cycle cost optimization• Sophisticated modeling• Objective function-driven• Both portfolio- and event-driven
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So, what to we mean by…
Minimum life cycle cost strategiesFundamental asset management options available to the management team are
Do nothing (zero-based strategy)Status quoOperate differentlyMaintain differently—run to failure, preventive-based, predictive-based (condition, usage)RepairRefurbish/rehabilitateReplaceDecommissionNon asset-based
Which strategy for each asset?Combinations over life cycle
It’s all investment!
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What do we mean by “alternative treatment options”?
Maintainand Repair
Option 1
Option 2
Refurbish
Option 1
Option 2
Replace
Option 1
Option 2
Option 3
Non-assetOptions
Option 1
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Maintenance/repair 0ption 1...N
Capital
Maintenance
Total
Yr 1 Yr 2 Yr 4 Yr 5
Say, a 5-year solution
Operations
Yr3
NPV Total
CostsMaintenance/repair 0ption 1...N
Capital
Maintenance
Total
Yr 1 Yr 2
Operations
Yr3
NPV Total
Costs
Maintenance/repair 0ption 1...N
Capital
Maintenance
Total
Yr 1 Yr 2 Yr 4 Yr 5
Say, a 20-year solution
Operations
Yr3
NPV Total
Costs
Our “decision rule”
Maintenance/repair 0ption 1...N
Capital
Maintenance
Total
Yr 1 Yr 2
Operations
Yr3
NPV Total
Costs
Maintenance/repair 0ption 1...N
Capital
Maintenance
Total
Yr 1 Yr 2 Yr 4 Yr 5
Say, a 40-year solution
Operations
Yr3
NPV Total
Costs
Estimated total costs for the effective life of the solution (capital, operations, & maintenance)
Look for “alternative treatment” with lowest average annual (present value) cost (average annual cost = total annual cost/year)
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ORDM decision rules
Which strategies?Lowest average annual cost (PV) is used to determine
which strategies to useWhen to change strategies?• Lowest marginal cost is used to determine when to
transition to the next strategy, or• When intervention point is triggered by interaction of
trend lines
PV is present value
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ORDM future costs
Age of Assets
Future total maintenance costs
Unplanned maintenance
High
Low
IncreasingDecreasing
Planned maintenanceTota
l M
ainte
nan
ce C
ost
s
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ORDM—where do the savings come from?
Age of Assets
High
Low
IncreasingDecreasing
Tota
l M
ainte
nan
ce C
ost
s Future total maintenance and operations before renewal
Potential savings
Future total maintenance and operations after renewal
Estimated future unplanned costs
Estimated future planned maintenance cost
Renewal work completed
Advancing Asset Management 16
ORDM—timing the renewal
Time
High
Low
Mai
nte
nan
ce C
ost
sOptimizing the savings
Trial: Several renewal dates
1
+5
2
+10
3
+12
4
+14
5
+16LTD
ORDM is optimized renewal decision-making, LTD is life to date
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Setting up the basic analysis: lowest annual life cycle cost
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Setting up the basic analysis: lowest annual life cycle cost
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Adding uncertainty: a decision tree approach —Tom’s pump
A Chance Point
Replace
Min Failure: (50%) ($70,000)
Max Failure: (90%) ($70,000)
Repair
Min Failure: (500%) ($6,000)
Max Failure: (800%) ($6,000)
An optionProbability of
Outcome Cost of Outcome
Min Failure: (150%) ($17,000)
Max Failure: (300%) ($17,000)
RefurbishPump Options
(Assume 40 year life)
An outcome
A Decision Point
$78,000/2$39,000
$76,500/2$38,250
$98,000/2$49,000
WeightedAverage
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Adding non-financial decision elements: weighted decision tables
Repair Refurbish
Odor 1 7 7 9 9
Performance
Availability 1 8 8 7 7
Criteria Weight A*Weight
A
3
1
1
1
2
10
10
8
30
8
7
7
14
7
7
7
81
B*Weight
B
Life cycle cost 8
8
8
9
10
Safety
24
8
8
9
20
Environmental impact
Noise
Level of service
Reliability
Total 85
* Scored 1 (low) to 10 (high)
Advancing Asset Management 21
Facility condition indices
FacilityConditionIndex (FCI)
=
Cost of deferred maintenance/renewal
Current replacement cost of asset
= X %
> 10%5 - 10%< 5%
PoorFairGood
Typically applied to buildings and related facilities
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TeamPlan main screen
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Management strategy groups
Grouping of assets with similar renewal and behavioral patternsPurpose• Allocate defaults to assets (missing data)• Assign asset lives and decay curves• Calculate current replacement costs• Calculate business risk
• Consequence of failure• Probability of failure
• Determine appropriate investment interventionExample
Gravity pipes, RCP, built <1950, high H2S
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Creating management strategies
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0
5
10
15
20
25
30
35
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055
Year
Ris
k / C
ondi
tion
Scal
e
0
20
40
60
80
100
120
140
160
Cos
t ($)
- C
umul
ated
Cos
t X10
0
ConPoFCoFRiskMin RiskMin ConMn$Op$Cum$
TeamPlan decision logic
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Advanced level ORDM example: asset operationsOperate?Average operations costs?Which curve?Curve shape factor?
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
012345678910
Condition Rating
Uni
t Mai
nt./O
p. %
of R
V
Increase(10)Increase(9)Increase(8)Increase(7)Increase(6)Increase(5)Increase(4)Increase(3)Increase(2)Increase(1.8)Increase(1.3)Increase(1.0)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
012345678910
Condition Rating
Uni
t Mai
nten
ance
% o
f RV
Bathtub (10)Bathtub (9)Bathtub (8)Bathtub (7)Bathtub (6)Bathtub (5)Bathtub (4)Bathtub (3)Bathtub (2)Bathtub (1.5)Bathtub (1)
`
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Advanced level ORDM example: asset maintenanceMaintain?• Managed (CMMS)?• Non-managed (CMMS)?• Run to failure (CMMS)?Average maintenance costs?• Use CMMS as baseWhich curve?Curve shape factor?
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
012345678910
Condition Rating
Uni
t Mai
nt./O
p. %
of R
V
Increase(10)Increase(9)Increase(8)Increase(7)Increase(6)Increase(5)Increase(4)Increase(3)Increase(2)Increase(1.8)Increase(1.3)Increase(1.0)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
012345678910
Condition Rating
Uni
t Mai
nten
ance
% o
f RV
Bathtub (10)Bathtub (9)Bathtub (8)Bathtub (7)Bathtub (6)Bathtub (5)Bathtub (4)Bathtub (3)Bathtub (2)Bathtub (1.5)Bathtub (1)
`
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Advanced level ORDM example: asset rehabilitationRehabilitate?• Non-managed (CMMS)?• Run to failure (CMMS)?Effective life?
% maximum potential lifeInstallation factor?Cost curve?Cost shape factor?Condition curve shape factor?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
012345678910
Condition Rating
% o
f Rep
lace
men
t Cos
t
Late Increase (4)Late Increase (3)Late Increase (2)Late Increase (1.5)Late Increase (1)LinearEarly Increase (0.6)Early Increase (0.4)Early Increase (0.25)Early Increase (0.1)
0
1
2
3
4
5
6
7
8
9
10
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
% of Effective Life
Con
ditio
n R
atin
g
Late Decay (4)Late Decay (3)Late Decay (2)Late Decay (1.5)Late Decay (1)Linear (0.74)Early Decay (0.6)Early Decay (0.4)Early Decay (0.25)Early Decay (0.1)
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Advanced level ORDM example: asset replacementIs asset type valued by size?
What is the default size and unit code of the asset?
Should asset type strategy vary by size?
Does the length and depth of the asset type effect value?
What is the maximum potential of this asset type?
What is the unit cost of the asset (per unit)?
What is the installation/difficulty factor?
Which curve represents the decay curve of the asset type?
0
1
2
3
4
5
6
7
8
9
10
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
% of Effective Life
Con
ditio
n R
atin
g
Late Decay (4)Late Decay (3)Late Decay (2)Late Decay (1.5)Late Decay (1)Linear (0.74)Early Decay (0.6)Early Decay (0.4)Early Decay (0.25)Early Decay (0.1)
Advancing Asset Management 30
Random life statistical model
Assets are allocated a random life centered around the allocated average lifeUtilizes the normal distribution bell-curveReflects real life asset failure uncertainty
Asset Life (Years)
Ave
rage
ass
et li
fe
Dis
tribu
tion
of A
sset
Liv
es
-30%
(Dis
tribu
tion
fact
or)
+ 30
% (D
istri
butio
n fa
ctor
)
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Reporting and scenarios
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Drilling into assets
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Asset renewal decision model
0
20
40
60
80
100
120
2000 2010 2020 2030 2040 2050 2060
Year
Ris
k / C
ondi
tion
Scal
e
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
Cos
t ($)
ConPoFCoFRiskMin RiskMin ConMn$Op$Cum$
Advancing Asset Management 34
Overall projected (optimized) expenditures
0
100
200
300
400
500
600
2006
2009
2012
2015
2018
2021
2024
2027
2030
2033
2036
2039
2042
2045
2048
2051
2054
2057
2060
2063
2066
2069
2072
2075
2078
2081
2084
2087
2090
2093
2096
2099
2102
2105
Year
Expe
nditu
re -
$M (C
urre
nt D
olla
rs)
0
2,000
4,000
6,000
8,000
10,000
12,000
Ass
et V
alue
s - $
M
CIP Existing - Current ProgramCIP New - Future GrowthCIP New - Future Levels of ServiceCIP - Future Rehab and Replace (New Levels of Service / Growth)CIP - Future Rehab and Replace (Plants)CIP - Future Rehab and Replace (Collections)Operations (Operations)Operations (Maintenance)Operations (Overhead)Book ValueReplace ValueAverage Expenditure
Advancing Asset Management 35
Key points from this session
Key Points:Follow a logical best practice process –Optimized Decision Making or Life Cycle Costing Analysis.Get the best information and data you have, consider all feasible alternatives, and generate your best strategy.Consider non-asset solutions!
Associated Techniques:Optimized renewal decision-makingLife-cycle costing (including projections)Decision-tree analysisWeighted decision tables
How do I optimize O&M and capital investment?