The Effects of Asset Management Strategies- Who Really Owns Accountability for Overall Risk Management?
Industry supply chains have constantly had to respond to business needs for overall cost reduction. This author can recall numerous supply chain executive surveys dating back to the early part of this decade, all pointing to supply chain cost reduction as one of any top three organizational challenges. While the severity of such pressures tended to vary, the extreme being the global of recession that began in 2008-2009, they have since established numerous structural supply chain changes. These changes included transferring more cost risk into lower tiers of the supply or value-chain as well as the shedding of assets. The consul of CFO’s was to avoid, as much as possible, the ownership of hard assets. A clear byproduct of the implications of shedding assets or outsourcing asset management was who owns overall accountability for risk management.
This relentless pressure to improve return-on-assets has, as this community well knows, led to far different industry supply chain structures. Shedding of capital-intensive manufacturing related assets led to the resurgence of the contract manufacturing model. Today’s dominant contract manufacturers hold production plants in multitudes of countries and regions. In semiconductor related manufacturing, the termed fabless model emerged where many semiconductor suppliers shed their super highly expensive capital intensive chip manufacturing plants into today’s smaller concentration of global fabricators such as TSMC. Fabless semiconductor firms’ in-turn, outsourced chip assembly and test to other lower-cost Asian locations.
Similar asset transfer trends occurred in logistics and transportation. Manufacturers and retailers shed transportation assets to third-party logistics providers (3PL’s), and have since added technology and services augmentation which are the basis of termed fourth-party logistics providers (4PL). Each of these providers themselves discovered enhanced opportunities for profitability growth by transferring transportation assets to mega-carriers or IT infrastructure to leasing or IT hosting firms.
Like any game, the unwritten gaming rules seem to be, hold no assets.
In this specific commentary, we want to focus on a current development capturing the attention of general and business media that being the U.S. railroad industry. By its nature, this industry is completely capital-intensive and ROA driven and must further adhere to continual regulatory standards and practices.
In April of 2011, a Supply Chain Matters commentary focused on how U.S. railroads were attempting to bounce back from years of industry setbacks as well as severe recession across the economy. A previous decade or so of asset transfer and outsourced maintenance strategies had the bulk of railcars, especially those related to the transport of bulk cargo, under the ownership of leasing, financial services or bulk shippers themselves. In essence, the railroads served as service providers to ship customers’ bulk cargo, utilizing primarily non-owned bulk transport railcars. In 2009, railroad shipments had declined by a whopping 64 percent, the worst year since 1988. An estimated 28 percent of rail fleets were parked and idle storage on unused track, some stretching as much as 30 miles in places. The crisis of asset management was acute and leasing companies and railroads jointly bore the brunt of that crisis. Another reality was that a large percentage of the bulk transport railcar fleet remained dated and proper maintenance did not appear to be financially viable in times of severe downturn.
That brings us to today and in particular the current manufacturing and energy boom occurring across the United States. The U.S. economy is rebounding and utilization of bulk transport railcars has now increased significantly to the point of periodic lack of availability. The massive new discoveries of shale oil deposits and the new technologies of fracking have led to today’s oil exploration boom, but with a certain bulk transportation challenge. The existing north to south oil pipeline networks existing across the United States did not account for current booming sources of crude oil production such as the Bakken region in North Dakota. That region alone is producing what is estimated to be 1 million barrels of crude production per day. In December alone, rail transport accounted for nearly three-fourths of crude production stemming from the Bakken region. With the lack of pipeline infrastructure, and with new options for higher profitability depending upon which refinery or which port ultimately receives such crude, energy companies have now re-discovered rail as the preferred shipment mode.
The rest of this story has occupied general and business media headlines, namely a tragic series of tanker car explosions and fires endangering property and human life. There have been revelations that Bakkan crude is far more volatile and unstable than allegedly believed. The railroads have been finger-pointing toward tank car owners for holding liability for such accidents. Two major railroads have filed lawsuits against asset maintenance contractors over who is liable for derailments caused by broken axles. Of further contention is which entity is responsible for proper safety inspections and which is responsible for necessary safety modifications to strengthen railcar axles and to contain a potential tank car explosion from spreading to other cars. Maintenance contractors claim the railroads are far exceeding weight limits and overlooking the hazardous nature of today’s crude oil shipments. Both are balking at who will pay the overall expense, with the implication being which party is accountable for risk?
This entire situation has resulted in an oil safety deal reached in mid-January when federal regulators were forced to step-in and demand railroads and energy companies agree to forms of voluntary changes to improve the safety of tanker rail cars. Railroads must now take more proactive steps to avoid derailments, reduce speeds and reroute tanker laden trains around high risk areas such as major cities. Both parties agreed to come up with recommendations for improved safety of tank car fleets.
One railroad is going a step further. The BNSF railroad is seeking bids for investing in 5000 next-generation tank cars that will meet higher safety and cargo load standards. However, for the current remainder of the rail industry, and perhaps many industry supply chains, is an open question of which party holds ultimate risk when the bulk of assets and asset management services are outsourced. We believe it is a timely and rather important question, one that will occupy the mindshare of CFO’s, insurance providers and industry supply chain leaders in the months to come.
What’s your view? Does outsourcing of assets and asset management include the outsourcing of risk accountability? Is the current trend sustainable?
Prediction Nine of our Supply Chain Matters 2014 Predictions for Global Supply Chains declared that the Internet of Things would gain considerably more momentum in 2014 and beyond. We based that prediction on new investment initiatives from industrial giants such as General Electric to build-out the technology and service technologies to make more machines interact with one another.
Yet another reinforcement of this increased momentum was yesterday’s announcement from product and service lifecycle management software provider PTC indicating that it had acquired ThingWorx, a provider of platform that allows firms to build and run applications that leverage machine to machine information exchange. The acquisition included a sum of $112 million in up-front cash along with a two year earnings agreement that could net ThingWorx an additional $18 million. The transaction has already closed and PTC indicated in its briefing call with analysts that ThingWorx will continue to operate as a separately branded company with its existing senior management team providing both platform technology for customers while affording PTC the opportunity to leverage this technology within the provider’s existing PLM and SLM product suites. ThingWorx’s revenue model is subscription based predicated on the number of connected devices.
ThingWorx was founded in 2009 by three previous senior executives at manufacturing intelligence portal vendor Lighthammer, after that company was acquired by SAP AG. Their goal was build a manufacturing and services focused platform that would leverage concepts of connected intelligence to operational systems, involving people, systems and devices. While PTC executives admit that ThingWorx is not currently profitable, they were willing to pay a considerable premium by investing in a “momentum” company that could provide much broader internal and external opportunities. The company provides opportunities to leverage PTC’s current customer base of asset intensive design and manufacturing firms including its high profile within aerospace and defense focused firms.
PTC will begin selling ThingWorx this quarter and believes the company can add an additional $5m-$7m in incremental boost to PTC’s annual revenues. The company also outlined plans for internally leveraging the platform in development plans over the next three years.
Supply Chain Matters initial reaction is that PTC has made a bold move to lock-up a promising technology platform. Of course, how PTC balances the needs to continue to fund ongoing development and selling efforts by ThingWorx and at the same time insure an open standards based development platform will be interesting to observe in the coming months. The move adds another arrow in PTC’s ongoing efforts to compete with far larger enterprise software vendors. In the longer-term horizon, successful internal integration efforts if timely, could present rather compelling service management options for asset-intensive or service intensive customers.
An Infoys Limited Guest Contribution
The electrical utility industry is characterized by huge and geographically widespread organizational structures. Moreover, the processes followed by industry players across their several business functions are cumbersome and complex. Today’s utilities face numerous challenges like high operational efficiency, stringent safety levels, high reliability and proactive customer service. Also, being asset intensive, emphasis on critically tracking assets availability and performance has become an important priority. With these ever growing demands, the work and asset management in the utility is changing and striving for excellence.
Enterprise packages populated by best-of-breed applications have been supporting utility work and asset management processes effectively for a long time. However, a futuristic outlook and ever growing demands of utilities has forced them to look beyond the boundaries of these work and asset management applications. Greater emphasis is now being given to the functions which are more relevant to business, and address their long standing pain points. A typical example would be managing capital projects, spanning multiple years and sometimes multiple geographies. The inherent nature of such work, the financial reporting involved, budgeting requirements, and statutory & regulatory needs, demand more than what a standard asset management package could offer. Furthermore, smart and efficient data entry for field force, having limited interactions with complex software applications, remains an unattended and sought after area.
Efficient and quick customer service has been a challenge in the light of an aging workforce, leading to less knowledge about customers and their problems. Traditionally work management and customer management has been working independently and in silos. Though, efforts were spent to optimize business processes, the benefits of such optimization programs were limited due to absence of mechanisms to ensure adherence and accountability.
To meet growing gaps, utilities either customize their software packages or bind their systems with external applications using complex integrations, only to realize the associated downstream challenges later.
Infosys with its extensive domain expertise in utilities and client interactions, identified these critical pain areas which utilities are facing and addressed them in the development of the Maximo Utilities Amplifier. This application leverages the inherent capabilities of IBM Maximo and combines utilities best practices. Built on a robust framework of IBM’s Enterprise Asset Management for Utilities, it equips the business users with enhanced functionalities and supporting tools required for managing the ever-growing needs in this area.
The application has been designed to build on the core utility Maximo feature to address extended work management needs. With a modified work order application, the application captures specific capitals works information like Tax, customer and service information, overhead reporting, project and task linkages etc. A dedicated project budgeting application allows work planners and schedulers to define, manage and control project budget and its performance vis-à-vis work execution. Smart reporting identifies critical functions for field crews by consolidating information in a single portal. The application further enables a user friendly and efficient data entry process, channelizing the effort in the right direction and optimizing the work hours. Standardized and repetitive process is automated using workflows, ensuring close process adherence and accountability.
Readers can learn more about this utilities industry application at: http://www.infosys.com/industries/utilities/Documents/IBM-maximo-utilities-amplifier.pdf
Know more about Infosys Supply Chain capabilities at: http://www.infosys.com/supply-chain/pages/index.aspx
About the Authors
Praveen Agrawal –Industry Principal, Consulting & System Integration, Infosys
Praveen is a subject matter expert in Asset Management – especially in Maximo – with knowledge levels spanning across functions and industries. Praveen has global experience of executing various EAM and ERP projects for Energy, Utilities, Manufacturing and telecommunication clients in various capacities. Praveen anchors Maximo Center of Excellence for Infosys which is responsible for developing solutions, tools, accelerates, processes and methods. He also manages IBM relationship for all advanced technologies for Infosys’ Energy, Utility, Communication and Services vertical.
Rejeesh Gopalan –Consultant, Consulting & System Integration, Infosys
Rejeesh Gopalan has worked extensively in package consulting around the Maximo Asset Management Software, with a clear focus on energy companies and utilities. As a Consultant, Rejeesh is responsible for providing leadership in multiple projects based on Maximo Asset Management Software, involving end-to-end implementation, upgrades and application support.
Disclosure: Infosys Limited is one of other named sponsors of the Supply Chain Matters Blog.
Supply Chain Matters had previously made reference to a two part commentary exploring sustainable operations and their relationship with asset management pain points which is being featured on the Infosys Supply Chain Management blog. Part One of this commentary included my recent guest commentary that responded to questions related to the growing interest in sustainability strategies and approaches within asset intensive industries. The questions explored my views of how asset intensive industries are starting to shift focus more toward sustainable operations and green assets, opportunities to tie these needs with asset management approaches and current concepts in smart buildings and IT data centers. The notion comes down to thinking a bit differently, that smarter asset management, real-time monitoring, coupled with sustainability and product objectives opens up new opportunities to compete for business and revenue growth.
In the Part Two commentary of this series, Praveen Agrawal, Enterprise Asset Management Consulting and System Integration lead from Infosys, along with the assistance of Joanna Karlic, a participant in the Infosys Global Internship Program, expand our ongoing dialog for this topic. Their posting reflects on the current focus areas of sustainability in asset intensive industries today, that being namely energy savings in buildings, with some suggested thoughts as to how broader based sustainability goals can be leveraged within focused aspects of Asset Management systems.
Our readers, especially those within asset intensive industries should gain benefit and insights from this series of commentaries and please share your own thoughts as well.
Supply Chain Matters readers are probably aware that this author pens periodic guest blog commentaries on the Infosys Supply Chain Management Blog. The Infosys Asset Management consulting team has noticed that while discussing needs in asset management, clients are expressing new interest in coupling sustainability with asset management needs. Today we initiated a two part commentary to explore sustainable operations and their relationship with asset management pain points. In my initial guest commentary, I respond to a series of questions that were posed related to current sustainability challenges within asset intensive industries. The questions explore my views of how asset intensive industries are starting to shift focus more toward sustainable operations and green assets, opportunities to tie these needs with asset management approaches and current concepts in smart buildings and IT data centers. The notion comes down to thinking a bit differently, that smarter asset management, real-time monitoring, coupled with sustainability and product objectives opens up new opportunities to compete for business and revenue growth.
In the second part of this series, Praveen Agrawal, Enterprise Asset Management Consulting and System Integration lead from Infosys will further list the areas in which asset intensive organizations are going to focus more on sustainability based on the current research which Praveen and his team are undertaking for clients.
Our readers, especially those within asset intensive industries should gain benefit and insights from this series of commentaries and please share your own thoughts as well.
Disclosure: Infosys is one of other named sponsors of the Supply Chain Matters Blog and strives to promote thought leadership and insights for supply chain and asset management.
The latest quarterly earnings reports from the major U.S. railroads again reflect that shipment volumes and profits are on the rise, but behind the scenes, customer service and asset management remain a bit of challenge.
As an example, CSX posted a 13 percent gain in revenues and a 30 percent boost in Q1 profits. CSX noted higher shipments in autos, auto parts and construction materials. Where the railroad once had 700 idle locomotives at the depths of the global recession, that number is down to 290.
Similarly, Union Pacific reported gains amounting to 13 percent in revenues and 24 percent in profits with a corresponding 5 percent gain in freight volumes.
Last week, an article published in the Wall Street Journal (paid subscription required) noted that U.S. auto makers are struggling to get finished automobiles and trucks to their respective dealers because of a shortage of railcars. Chrysler, Ford and General Motors have been storing finished vehicles in temporary storage lots awaiting the scheduling and arrival of railcars for shipment. This shortage of railcars has added days to expected dealer receipts and consequent sales. The article notes that now that U.S. manufacturing volumes are on the rise, the rail carriers do not seem to have enough active rolling stock in circulation to accommodate on-time deliveries. Interesting enough, CSX acknowledged that the shortage of available railcars has had an impact on the carrier ability to transport finished vehicles from production sites to dealer locations.
We recently penned a guest commentary on the Infosys SCM blog noting how the past global recession has brought forward the critical importance of enterprise asset management (EAM) for asset-intensive industries such as railroads or utilities. As an example, U.S. industry shipments of railcars declined by 64% in 2009. According to the Association of American Railroads, 2009 was the worst year for freight rail traffic, reaching its lowest levels since 1988. In that same year, 28 percent of rail fleets were parked in storage, and one estimate noted that there were $43 billion in idle assets representing both leased and owned locomotives and railcars. The BNSF railroad alone had rail cars that sat idle for up to three years on unused track stretching more than 30 miles in some places. It seemed like every available rail spur was utilized as a storage location, a virtual real estate warehouse, as it were. As observers, we speculated on how railroads were able to track and account for all of these scattered idle assets.
Now that manufacturing is surging in the U.S. these same railroads are under pressure to accommodate increased service requirements, but that leads to challenges of locating idle assets, checking and inspecting equipment and sequencing locomotives and railcars into normalized train schedules.
While the financial numbers for U.S. railroads are steadily improving, the operational challenges of customer service as back once again. In the backdrop lies the importance of integrated and timely inventory and scheduling of assets. That may well be the most important lesson for U.S. railroads and other asset-intensive industry.