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Fundamentals of Asset Management
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Fundamentals of Asset Management

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  • 1. Fundamentals of Asset Management Background: Optimized Investment Decision Making A Hands-On Approach
  • 2. View 6: AM plan 10-step process Determine Develop Assess Determine Set Target Live Cycle & Asset Condition, Residual Levels of Replacement Registry Failure Modes Life Service (LOS) Costs Determine Optimize Optimize Determine Build AM Business Risk O&M Capital Funding Plan (“Criticality”) Investment Investment Strategy Confidence Level Root Cause; Rating; Strategic RCM; PdM; Validation; ORDM ORDM Investment Decision-Making Advancing Asset Management 2
  • 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 3
  • 4. Asset decision framework Big picture Micro view Whole portfolio Event based perspective Specific asset focus • Trends Case-by-case decision • Macro forces points Policy framework Budget arena Repair? Refurbish? Replace? Augment? Advancing Asset Management 4
  • 5. Managing the “asset consumption” process Preventive Maintenance Option 3 Replace Maintenance/repair Rehabilitation Option 1 Repair Option 2 Refurbish Replace Advancing Asset Management
  • 6. There exists for every asset, a theoretical “best” investment 100% Level of Service Decay Curve Minimum Level of Service Catastrophic Failure 2005 Option 1 2030 Option 4 2035 Option 5 2015 Option 2 2025 Option 3 200 2 Toda y Treatment options M M RH RP RP Direct Cost 270 72 360 610 630 Indirect Cost 0 10 20 40 130 Benefit 200 75 480 780 320 Benefit/Cost Ratio 0.7 0.9 1.3 1.2 0.42 Option Ranking 4 3 1 2 5 Advancing Asset Management 6
  • 7. Bringing it all together Repair-refurbish-replace decision 1. Fix when broken (run to failure) 2. End of prescriptive life 12 years old 3,000 run-time hours 35,000 miles 3. Rule of thumb 3 breaks per mile or in 24 hours Poor 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 7
  • 8. What is optimized decision making? Systematic search for lowest-cost renewal investment Based on interaction of • Cost trends (direct O&M, indirect) • Condition trends (decay/survivor curve) • Risk-consequence trends Three 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 8
  • 9. Three levels of ORDM Level 1 Decision tables/trees • Structured, often substantially qualitative, value judgment-based • Event-focused, scenario-based Level 2 Lowest average PV life cycle cost scenario analysis • Specific decision event-focused • Spreadsheet-driven • Can be used to refine decision tables/trees Level 3 Integrated intervention and full economic life cycle cost optimization • Sophisticated modeling • Objective function-driven • Both portfolio- and event-driven Advancing Asset Management 9
  • 10. So, what to we mean by… Minimum life cycle cost strategies Fundamental asset management options available to the management team are Do nothing (zero-based strategy) Status quo Operate differently Maintain differently—run to failure, preventive-based, predictive-based (condition, usage) Repair Refurbish/rehabilitate Replace It’s all investment! Decommission Non asset-based Which strategy for each asset? Combinations over life cycle Advancing Asset Management 10
  • 11. What do we mean by “alternative treatment options”? Maintain Refurbish Replace and Repair Option 1 Option 1 Option 1 Option 2 Option 2 Option 2 Option 3 Non-asset Options Option 1 Advancing Asset Management 11
  • 12. Our “decision rule” Maintenance/repair 0ption 1...N Maintenance/repair 0ption 1...N Costs Yr 1 Yr 2 Yr3 Yr 4 Yr 5 Maintenance/repair 0ption 1...N Maintenance/repair 0ption 1...N Costs Yr 1 Yr 2 Yr3 Yr 4 Yr 5 Capital Costs Maintenance/repair 0ption 1...N Yr 1 Yr 2 Yr3 Yr 4 Yr 5 Costs Yr 1 Yr 2 Yr3 Capital Costs Yr 1 Yr 2 Yr3 Operations Capital Capital Operations Capital Maintenance Operations Operations Maintenance Operations Total Maintenance Maintenance Total Maintenance NPV Total Total Total NPV Total Total Say, a Total solution NPV 5-year NPV Total Say, a 20-year solution NPV Total Say, a 40-year solution 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 12
  • 13. ORDM decision rules Which strategies? Lowest average annual cost (PV) is used to determine which strategies to use When 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 13
  • 14. ORDM future costs High Total Maintenance Costs Future total maintenance costs Unplanned maintenance Planned maintenance Low Decreasing Increasing Age of Assets Advancing Asset Management 14
  • 15. ORDM—where do the savings come from? High Future total maintenance and Total Maintenance Costs operations before renewal Future total maintenance and operations after renewal Renewal work completed Potential savings Estimated future unplanned costs Low Estimated future planned maintenance cost Decreasing Increasing Age of Assets Advancing Asset Management 15
  • 16. ORDM—timing the renewal High Maintenance Costs Optimizing the savings Trial: Several renewal dates 5 4 2 3 1 Low LTD +5 +10 +12 +14 +16 Time ORDM is optimized renewal decision-making, LTD is life to date Advancing Asset Management 16
  • 17. Setting up the basic analysis: lowest annual life cycle cost Advancing Asset Management 17
  • 18. Setting up the basic analysis: lowest annual life cycle cost Advancing Asset Management 18
  • 19. Adding uncertainty: a decision tree approach — Tom’s pump Weighted A Chance Point Average Max Failure: (800%) ($6,000) Repair $78,000/2 $39,000 Min Failure: (500%) ($6,000) A Decision Point Max Failure: (300%) ($17,000) Refurbish $76,500/2 Pump Options $38,250 Min Failure: (150%) ($17,000) (Assume 40 year life) Max Failure: (90%) ($70,000) Replace $98,000/2 $49,000 Min Failure: (50%) ($70,000) An option Probability of An outcome Cost of Outcome Outcome Advancing Asset Management 19
  • 20. Adding non-financial decision elements: weighted decision tables Repair Refurbish Weight Weight Criteria Weight A* A B* B Life cycle cost 3 10 30 8 24 Safety 1 8 8 8 8 Environmental impact Noise 1 7 7 8 8 Odor 1 7 7 9 9 Performance Level of service 1 7 7 9 9 Reliability 2 7 14 10 20 Availability 1 8 8 7 7 Total 10 81 85 * Scored 1 (low) to 10 (high) Advancing Asset Management 20
  • 21. Facility condition indices Cost of deferred Facility maintenance/renewal Condition = = X% Index (FCI) Current replacement cost of asset Poor > 10% Fair 5 - 10% Good < 5% Typically applied to buildings and related facilities Advancing Asset Management 21
  • 22. TeamPlan main screen Advancing Asset Management 22
  • 23. Management strategy groups Grouping of assets with similar renewal and behavioral patterns Purpose • Allocate defaults to assets (missing data) • Assign asset lives and decay curves • Calculate current replacement costs • Calculate business risk • Consequence of failure • Probability of failure • Determine appropriate investment intervention Example Gravity pipes, RCP, built <1950, high H2S Advancing Asset Management 23
  • 24. Creating management strategies Advancing Asset Management 24
  • 25. TeamPlan decision logic 35 160 Con PoF CoF 140 30 Risk Min Risk Min Con Mn$ 120 25 Op$ C ost ($) - C um ulated Cost X100 Cum$ R isk / C ondition Scale 100 20 80 15 60 10 40 5 20 0 0 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 Year Advancing Asset Management 25
  • 26. Advanced level ORDM example: asset operations 4.00 Increase(10) Operate? Increase(9) Increase(8) 3.50 Increase(7) Average operations costs? Increase(6) Increase(5) 3.00 Increase(4) Increase(3) Which curve? Increase(2) Increase(1.8) Unit Maint./Op. % of RV 2.50 Increase(1.3) Curve shape factor? Increase(1.0) 2.00 1.50 1.00 0.50 0.00 3.50 10 9 8 7 6 5 4 3 2 1 0 Bathtub (10) Bathtub (9) Condition Rating Bathtub (8) 3.00 Bathtub (7) Bathtub (6) Bathtub (5) Bathtub (4) 2.50 Bathtub (3) Bathtub (2) Unit Maintenance % of RV Bathtub (1.5) 2.00 Bathtub (1) 1.50 ` 1.00 0.50 0.00 10 9 8 7 6 5 4 3 2 1 0 Condition Rating Advancing Asset Management 26
  • 27. Advanced level ORDM example: asset maintenance Maintain? 4.00 Increase(10) Increase(9) Increase(8) 3.50 Increase(7) • Managed (CMMS)? Increase(6) Increase(5) 3.00 Increase(4) • Non-managed (CMMS)? Increase(3) Increase(2) Increase(1.8) Unit Maint./Op. % of RV 2.50 • Run to failure (CMMS)? Increase(1.3) Increase(1.0) 2.00 Average maintenance costs? 1.50 1.00 • Use CMMS as base 0.50 Which curve? 0.00 3.50 Curve shape factor? 10 9 8 Bathtub (10) Bathtub (9) Bathtub (8) 7 6 5 Condition Rating 4 3 2 1 0 3.00 Bathtub (7) Bathtub (6) Bathtub (5) Bathtub (4) 2.50 Bathtub (3) Bathtub (2) Unit Maintenance % of RV Bathtub (1.5) 2.00 Bathtub (1) 1.50 ` 1.00 0.50 0.00 10 9 8 7 6 5 4 3 2 1 0 Condition Rating Advancing Asset Management 27
  • 28. Advanced level ORDM example: asset rehabilitation 100% Rehabilitate? 90% • Non-managed (CMMS)? 80% • Run to failure (CMMS)? 70% % of Replacement Cost 60% Effective life? 50% % maximum potential life 40% Late Increase (4) Late Increase (3) Late Increase (2) Installation factor? 30% Late Increase (1.5) Late Increase (1) Linear Cost curve? 20% Early Increase (0.6) Early Increase (0.4) 10% Early Increase (0.25) Cost shape factor? 0% Early Increase (0.1) 10 9 8 7 6 5 4 3 2 1 0 Condition curve shape 10 Condition Rating Late Decay (4) factor? 9 Late Decay (3) Late Decay (2) Late Decay (1.5) Late Decay (1) 8 Linear (0.74) Early Decay (0.6) 7 Early Decay (0.4) Early Decay (0.25) Early Decay (0.1) 6 Condition Rating 5 4 3 2 1 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of Effective Life Advancing Asset Management 28
  • 29. Advanced level ORDM example: asset replacement Is asset type valued by size? 10 Late Decay (4) What is the default size and unit code of 9 Late Decay (3) Late Decay (2) the asset? Late Decay (1.5) Late Decay (1) 8 Linear (0.74) Should asset type strategy vary by size? 7 Early Decay (0.6) Early Decay (0.4) Early Decay (0.25) Early Decay (0.1) 6 Does the length and depth of the asset Condition Rating type effect value? 5 4 What is the maximum potential of this 3 asset type? 2 What is the unit cost of the asset (per 1 unit)? 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of Effective Life What is the installation/difficulty factor? Which curve represents the decay curve of the asset type? Advancing Asset Management 29
  • 30. Random life statistical model Assets are allocated a random life centered around the allocated average life Utilizes the normal distribution bell-curve Reflects real life asset failure uncertainty Average asset life Distribution of Asset Lives - 30% (Distribution factor) + 30% (Distribution factor) Advancing Asset Management Asset Life (Years) 30
  • 31. Reporting and scenarios Advancing Asset Management 31
  • 32. Drilling into assets Advancing Asset Management 32
  • 33. Asset renewal decision model 120 18000 Con 16000 PoF 100 CoF Risk Min Risk 14000 Min Con Mn$ 80 Op$ 12000 Risk / Condition Scale Cum$ 10000 Cost ($) 60 8000 40 6000 4000 20 2000 0 0 2000 2010 2020 2030 2040 2050 2060 Year Advancing Asset Management 33
  • 34. Overall projected (optimized) expenditures 600 12,000 500 10,000 Expenditure - $M (Current Dollars) 400 8,000 Asset Values - $M 300 6,000 CIP Existing - Current Program 200 CIP New - Future Growth 4,000 CIP New - Future Levels of Service CIP - Future Rehab and Replace (New Levels of Service / Growth) CIP - Future Rehab and Replace (Plants) CIP - Future Rehab and Replace (Collections) Operations (Operations) 100 Operations (Maintenance) 2,000 Operations (Overhead) Book Value Replace Value Average Expenditure 0 0 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 Advancing Asset Management 34
  • 35. Key points from this session How do I optimize O&M and capital investment? Key Points: Associated Techniques: Follow a logical best Optimized renewal practice process – decision-making Optimized Decision Making or Life Cycle Life-cycle costing Costing Analysis. (including projections) Get the best information Decision-tree analysis and data you have, Weighted decision tables consider all feasible alternatives, and generate your best strategy. Consider non-asset solutions! Advancing Asset Management 35

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