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

Advancing Asset Management 4

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

Advancing Asset Management 6

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

Advancing Asset Management 7

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)

Advancing Asset Management 8

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.

Advancing Asset Management 9

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

Advancing Asset Management 10

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!

Advancing Asset Management 11

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

Advancing Asset Management 12

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)

Advancing Asset Management 13

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

Advancing Asset Management 14

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

Advancing Asset Management 15

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

Advancing Asset Management 17

Setting up the basic analysis: lowest annual life cycle cost

Advancing Asset Management 18

Setting up the basic analysis: lowest annual life cycle cost

Advancing Asset Management 19

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

Advancing Asset Management 20

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

Advancing Asset Management 22

TeamPlan main screen

Advancing Asset Management 23

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

Advancing Asset Management 24

Creating management strategies

Advancing Asset Management 25

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

Advancing Asset Management 26

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)

`

Advancing Asset Management 27

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)

`

Advancing Asset Management 28

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)

Advancing Asset Management 29

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

)

Advancing Asset Management 31

Reporting and scenarios

Advancing Asset Management 32

Drilling into assets

Advancing Asset Management 33

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?