Table Of ContentPhysical Asset Management
Nicholas A. J. Hastings
Physical Asset Management
123
Dr. Nicholas A. J. Hastings
Queensland University of Technology
Centre for Integrated Engineering Asset Management (CIEAM)
Gardens Point Campus, Level 7, O Block
Brisbane QLD 4001
Australia
ISBN 978-1-84882-750-9 e-ISBN 978-1-84882-751-6
DOI 10.1007/978-1-84882-751-6
Springer London Dordrecht Heidelberg New York
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About this Book
Physical asset management is the management of fixed or non-current assets such
as equipment, plant, buildings and infrastructure. This book presents a systematic
approach to the management of these assets from concept to disposal. It introduces
the general principles of physical asset management, so as to make these accessible
to a wide audience, and covers all stages of the asset management process, including
initial business appraisal, identification of fixed asset needs, capability gap analysis,
financial evaluation, logistic support analysis, life cycle costing, management of in-
service assets, maintenance strategy, outsourcing, cost-benfit analysis, disposal and
renewal. Industries to which this is applicable include: electricity generation and
supply; oil and gas; water; roads; railways; mining; aviation; shipping; hospitals;
retail centres; manufacturing; distribution; defence facilities and defence materiel;
recreation and sporting facilities and local government.
The book addresses the needs of existing and potential asset managers and pro-
vides an introduction to asset management for professionals in related disciplines,
including finance. It provides both an introduction and a convenient reference work,
covering the main areas of physical asset management.
This book is based on my involvement in asset management in a range of indus-
tries and organizations over a period of many years, in the course of which I have
absorbed material from many sources. Thanks are due to staff members present
and past at the Centre for Integrated Engineering Asset Management, Queensland
University of Technology, Mount Isa Mines, Powerlink, Rio Tinto and the Defence
Materiel Organization. Particular thanks are due to Andrew Jardine, Joesph Mathew,
Melinda Hodkiewicz, Peter Knights, Tony Healy and Brian Jenney. Special thanks
are due to my wife Tina, who developed a wonderful family and garden while I was
stuck in the study or away on site.
There is a substantial amount of organizational documentation in this field, but
relatively few conventional books. I wish particularly to acknowledge the follow-
ing key references. These and others are included in the bibliography.
PAS 55 Asset Management Specification, British Standards Institution 2008;
International Infrastructure Management Manual, www.ingenium.org.nz;
IEC 60300 series of standards;
Benjamin S. Blanchard, books on logistics and related topics;
Defence Capability Development Manual, and DMO Acquisition and Sustainment
Manual, Australian Defence Publishing Service, Canberra;
A.S. Goodman and M. Hastak, Infrastructure Planning Handbook, Mcgraw-Hill
2006.
Melbourne 2009 Nicholas Hastings
v
About the Author
Nicholas Anthony John Hastings is the training
coordinator for the Cooperative Research Cen-
tre in Integrated Engineering Asset Manage-
ment, and an Adjunct Professor at the Queen-
sland University of Technology, Brisbane.
His early career was in the British Army
and he attended the Royal Military Academy
Sandhurst and the University of Cambridge
where he graduated in engineering. He served
in the Royal Electrical and Mechanical Engi-
neers, initially working in maintenance man-
agement, and later in asset management policy.
From 1968 he lectured in Operations Research
at universities in Britain and Australia. He was
Professor of Operations Research at Monash
University, Melbourne, from 1977–93.
In 1994 he took up the Mount Isa Mines Chair in Maintenance Engineering
at Queensland University of Technology, Brisbane, and was involved in work on
projects in mining, electricity transmission and other asset intensive industries. He
is the developer of RelCode software for the analysis of reliability data which is
widely used in industry. In 2006 he was awarded the Medal of the Maintenance
Engineering Society of Australia for contributions to reliability and engineering
asset management.
He is a director of Albany Interactive Pty. Ltd., a consultancy firm in engineering
asset management. He enjoys country walks and watching local sport.
vii
Contents
Chapter Table of Figures ................................................ xxiii
Chapter Outline of this Book ............................................ xxix
Chapter 1 Introduction to Asset Management .............................. 1
1.1 Background ............................................ 2
1.2 What is an Asset? – An Accountant’s View .................... 3
1.3 What Is Asset Management? ............................... 4
1.3.1 Definition ....................................... 4
1.3.2 Alternative Definitions of Asset Management .......... 4
1.3.3 Why Do We Need Asset Management? ............... 5
1.4 Asset Management Basic Questions ......................... 5
1.5 The Asset Life Cycle ..................................... 6
1.6 Business Organization and Asset Management ................. 6
1.6.1 Asset Management a Matrix Activity ................. 7
1.7 Business Planning and Asset Management .................... 9
1.8 The Asset Death Spiral .................................... 10
1.9 Exercises ............................................... 11
1.9.1 Holiday Resort Exercise ........................... 11
1.9.2 Pacific Earth Moving Part 1 ........................ 11
1.10 A Top Level Decision ..................................... 12
Chapter 2 The Asset Management Function ................................ 13
2.1 The Asset Management Function ............................ 14
2.2 Structure ............................................... 14
2.2.1 Asset Management Groups Example ................. 15
2.3 Asset Knowledge ........................................ 16
2.3.1 Asset Management Activities ....................... 17
2.4 Asset Management Policy ................................. 17
2.5 Asset Management Strategy ............................... 19
2.5.1 Capital Items ................................... 20
2.5.2 In-Service Support ............................... 20
2.5.3 Business Strategy and Asset Strategy ................. 21
2.6 Personnel Roles in Asset Management ....................... 22
2.6.1 Competencies ................................... 23
ix
x Contents
2.6.2 Personnel Development ........................... 24
2.7 Exercise ............................................... 25
2.7.1 Pacific Earth Moving Part 2 ........................ 25
2.8 Asset Management – Who Needs It? ......................... 25
Chapter 3 From Concept to Project Approval .............................. 27
3.1 Project Initiation ......................................... 28
3.2 Types of Project ......................................... 29
3.3 Business Development Planning ............................ 29
3.3.1 Major Projects ................................... 29
3.3.2 Minor Projects ................................... 30
3.3.3 Developmental Flexibility .......................... 30
3.4 Capability ............................................. 31
3.5 Capability Requirements Planning ........................... 32
3.5.1 Development Planning Teams ....................... 33
3.5.2 Needs Analysis .................................. 34
3.5.3 Un-augmented Capability Analysis .................. 35
3.5.4 Remaining Life and Retirement Schedule ............. 35
3.5.5 Capability Gap .................................. 37
3.5.6 Capability Requirements Statement .................. 38
3.6 Creating the Development Plan ............................. 38
3.7 Pre-feasibility Analysis ................................... 38
3.7.1 Feasibility Analysis ............................... 39
3.8 Development Plan ....................................... 40
3.9 Development Plan Detailed Topics .......................... 40
3.10 Considerations in Development Planning ..................... 41
3.10.1 Stakeholders .................................... 41
3.10.2 Existing Processes and the Status Quo ................ 42
3.10.3 Lead Time ...................................... 42
3.10.4 In Service Date .................................. 42
3.10.5 Date of Decision ................................. 43
3.10.6 Operational Concept .............................. 43
3.10.7 Function and Performance Specifications .............. 44
3.10.8 Level of Service ................................. 45
3.10.9 Financial Analysis ................................ 45
3.10.10 Acquisition Strategy .............................. 45
3.11 Project Maturity ......................................... 46
3.12 Implementation Portfolio .................................. 47
3.13 Capacity Planning Exercise – Generators ..................... 48
3.13.1 Gap Analysis .................................... 48
3.13.2 Pre-Feasibility Planning and Options ................. 48
3.14 Bottling Plant Exercise .................................... 48
3.15 A Business Imperative .................................... 49
Chapter 4 Developing a Business Case ..................................... 51
4.1 Business Case Introduction ................................ 52
Contents xi
4.2 Development Plan ....................................... 52
4.3 Business Case Outline .................................... 53
4.4 Smaller Project Business Case Outline ....................... 54
4.5 The Final Decision to Proceed .............................. 55
4.6 Approved Development Plan ............................... 55
4.7 Wine Selection Example .................................. 55
4.8 Experience required ...................................... 57
Chapter 5 Implementing Development Plans ............................... 59
5.1 Project Team and Activities ................................ 60
5.1.1 Team Functions .................................. 60
5.1.2 Project Management .............................. 60
5.1.3 Activities ....................................... 61
5.2 Project Milestones ....................................... 61
5.3 Evaluation of Suppliers ................................... 62
5.4 Equipment Selection and Trials ............................. 62
5.5 Through Life Support .................................... 62
5.6 Financial and Contract Process ............................. 62
5.7 Project Maturity Status .................................... 64
5.8 Assigning Responsibilities ................................. 64
5.9 Project Management Reports ............................... 65
5.9.1 Topics ......................................... 65
5.9.2 Financial Overview Report ......................... 65
5.10 Project Progress Monitoring ................................ 66
5.10.1 Delays and Overruns .............................. 66
5.10.2 Scope Creep .................................... 67
5.11 Project Progress Reports .................................. 68
5.12 Project Portfolio Management .............................. 69
5.13 Commissioning and Introduction into Service .................. 70
5.13.1 Operational Readiness ............................. 71
5.13.2 Training ........................................ 71
5.14 Change Management ..................................... 71
5.15 Exercise ............................................... 72
5.15.1 Pacific Earth Moving Part 3 ........................ 72
5.16 An Acquisition Decision .................................. 72
Chapter 6 Management of In-Service Assets ................................ 75
6.1 Deployed Assets ......................................... 75
6.2 In-Service Support Aims .................................. 76
6.3 In-Service Support Activities ............................... 76
6.4 Organization for In-Service Support ......................... 77
6.5 Engineering and Technical Services .......................... 78
6.6 Configuration Management ................................ 78
6.6.1 The Need for Configuration Management ............. 78
6.6.2 Configuration Description .......................... 79
6.6.3 Configuration Management Process ................. 79
xii Contents
6.6.4 Configuration Change Control ...................... 80
6.7 Change Management ..................................... 80
6.8 Roll Over .............................................. 81
Chapter 7 Asset Continuity Planning ..................................... 83
7.1 Introduction ........................................... 84
7.2 Planning Example ...................................... 84
7.2.1 Pre-Plan Gap Analysis ............................ 85
7.2.2 Planning Process ............................... 86
7.3 Capability Continuity Planning ............................ 88
7.4 Vehicle Fleet Capacity Exercise ............................ 88
Chapter 8 Capital Planning and Budget .................................. 89
8.1 Capital Planning Considerations ........................... 90
8.2 What is a Budget? ...................................... 90
8.3 Types of Budget ........................................ 90
8.4 Budget Structure ........................................ 91
8.5 Devolution of Authority .................................. 91
8.6 Planning Process ....................................... 92
8.6.1 Planning Periods ................................ 92
8.6.2 Source and Application of Funds ................... 93
8.7 Capital Requirement Plans for Asset Types ................... 93
8.8 Capital Rationing ....................................... 94
8.8.1 Capital Rationing Example – Postal Vans ............. 94
8.8.2 Replacement Prioritization ........................ 95
8.8.3 Condition/Criticality Plot ......................... 96
8.8.4 Financial Return and Risk in Project Ranking ......... 97
8.9 The Capital Budget ...................................... 98
8.10 Managing the Capital Project Portfolio ...................... 98
8.10.1 Capital Budget for Current Year .................... 99
8.11 Long River Ferry Company Exercise ........................ 99
8.12 Are Your Assets Liabilities? .............................. 101
Chapter 9 Discounted Cash Flow and Asset Decisions ....................... 103
9.1 Introduction ........................................... 104
9.2 Discounted Cash Flow ................................... 105
9.2.1 Interest Rate ................................... 105
9.3 Debt and Equity ........................................ 105
9.4 Discounted Cash Flow Terminology ........................ 106
9.4.1 Future Value ................................... 106
9.4.2 Present Value ................................... 106
9.4.3 Discount Factor ................................. 107
9.4.4 Net Present Value ............................... 107
9.4.5 Cash Flow Diagram .............................. 108
9.5 Equivalent Annual Cost .................................. 108
9.5.1 Annuity Factor ................................. 109
Contents xiii
9.5.2 Capital Recovery Factor .......................... 109
9.5.3 EAC Example .................................. 110
9.6 Equivalent Unit Cost (EUC) .............................. 110
9.7 Repair/ Replace Decision for Ore Loading Vehicles ............ 111
9.7.1 Situation ...................................... 111
9.7.2 Factors Involved in the Repair/Replace Decision ....... 111
9.7.3 New Ore Loader Costs ........................... 112
9.7.4 Cash Flow Diagram .............................. 112
9.7.5 Excel Function NPV ............................. 114
9.7.6 Excel Function PMT ............................. 114
9.7.7 Payment or Cost at End ........................... 115
9.7.8 Life Cycle Cash Flow ............................ 116
9.7.9 Old Ore Loader Costs ............................ 116
9.8 The Excel Function PV .................................. 118
9.9 Inflation .............................................. 119
9.9.1 Adjusting Historical Costs ........................ 119
9.9.2 Real Rate of Interest ............................. 120
9.9.3 Adjusting Future Costs ........................... 120
9.10 Discounted Cash Flow Revision Question .................... 121
9.11 Standby Generator Exercise ............................... 121
9.12 Solar or Diesel Power Exercise ............................ 122
Chapter 10 Profit, Depreciation and Tax ................................... 123
10.1 Introduction ........................................... 124
10.2 Profit and Company Tax .................................. 124
10.3 Capital Transactions ..................................... 125
10.4 Depreciation ........................................... 125
10.4.1 Acquisition Cost ................................ 126
10.4.2 Book Value (or Written Down Value, WDV) .......... 126
10.4.3 Effective Life ................................... 126
10.4.4 Straight Line Depreciation ........................ 127
10.4.5 Declining Balance Depreciation .................... 127
10.5 Cash Flow after Tax ..................................... 128
10.5.1 Tax Credits .................................... 129
10.5.2 Tax on Resale .................................. 129
10.6 After Tax Cash Flow Diagram ............................ 130
10.7 Ore Loader Decision Analysis with Tax ...................... 131
10.7.1 New Loader Option .............................. 131
10.7.2 Old Loader Option .............................. 131
10.8 Impact of Downtime ..................................... 132
10.8.1 Physical or Service Losses ........................ 133
10.8.2 Cost of Failure .................................. 134
10.8.3 Loader Policy Decision ........................... 134
10.9 Loan Repayment ....................................... 135
10.10 Asset Valuation ......................................... 135
10.11 Asset Value Index ....................................... 137
