Capital Asset Management and Optimization Program
  • Enhance the balance sheet
  • Improve operating results
  • Increase return on investment
  • Reduce capital expenditures

These are some of the benefits available with a Capital Asset Management and Optimization Program.

Industry is continuously evolving in its endeavor to become world class and to compete in a world market. Companies have downsized, right sized, scrubbed the operating cost, redefined strategy, redesigned products, reengineered manufacturing and business processes, out-sourced business functions, consolidated operating facilities and shifted manufacturing off-shore to enhance competitiveness and operating results. Now that all or some portion of the company landscape has been changed, capital asset optimization analysis coupled with the implementation of an effective capital asset management system is in order. As a minimum, the same scrutiny applied to cost elements and functions of the business need to be applied to the capital assets.

Now more than ever before, capital assets should be scrutinized and systems should be established which ensure management that assets are monitored and managed from the acquisition to the disposition. As the strategy, products, processes and size of the organization evolves, so to does the need for assets. Capital assets (i.e., property, plant and equipment) constitute one of the largest investment categories on the balance sheet.
[Chart 1]
Analysis of over 20,000 manufacturing company balance sheets, Chart 1, shows that 29% of the total assets on the balance sheet represents fixed assets. This investment represents the net book value of the capital assets. However, there may be assets on the books which no longer exist (phantom assets) or assets on hand with zero book value. Phantom assets, those which have been consumed, lost or destroyed but still have a book value, are increasing operating cost.
 [Figure 2]
Additionally, there is a cost related to the retention of Zero book value assets.
Investment in property plant and equipment (PP&E) consumes a major portion of an organization’s financial resources. Analysis of capital distribution of the same 20,000 companies, Figure 2, shows that PP&E is far and away the largest consumer of an organization’s total capital employed. A capital asset management and optimization program may have a significant effect on the balance sheet, return on assets and investment and the availability of working capital.In addition to the effects on the balance sheet and consumption of capital, PP&E has a measurable effect on the organization’s operating cost and results of operations.
 
Operating cost associated with PP&E include maintenance, property taxes, insurance, facilities, and utilities. These cost increase as the asset base increases. Therefore, prolonged retention of idle, redundant and obsolete assets will result in unnecessary operating cost which continuously erode operating profits. Inaccuracies in the asset records also results in unnecessary operating cost. Phantom assets increase cost a result of excess depreciation and the assessment of both property tax and insurance premiums on assets which no longer exist. 

The idle, redundant, and obsolete assets retained by the organization, which have remaining book value, result in increased property tax and insurance assessments even though the asset is no longer useful to the organization. Idle, redundant and obsolete assets retained by the organization, with or without remaining book value, unnecessarily increase facilities, maintenance and utilities.
 
Some companies have taken retention of idle, redundant and obsolete assets to the point that entire warehouses are rented or purchased for asset storage. Others, relocate to larger facilities on the basis that they need more space to accommodate operations when in reality they needed to dispose of the idle, redundant and obsolete assets. Elimination of idle, redundant and obsolete assets will result in a reduction to operating cost and an increase in results of operations.

Asset Optimization Program
The objective of the asset optimization program is to identify idle, redundant and obsolete assets for disposition, eliminate phantom assets and ensure that the asset base is consistent with the future requirements of the organization. The asset optimization program is a detailed analysis of the organization’s existing asset base, short term asset acquisition plans, asset records and the strategy and operating activities of the organization.
 
Analysis of the existing asset base includes a detailed evaluation of asset utilization and comparison of cost of ownership to contribution to current or future activities.To the extent that existing assets are under utilized, the cost of ownership exceeds benefit derived from the asset or the asset does not satisfy current or future capabilities requirements the asset should be placed on a disposition candidate list. Analysis of asset records is to determine the extent to which phantom assets may exist and should be written off when identified to eliminate the possibility of improper tax or insurance assessments. The short term asset acquisition plan should be compared to the disposition candidate list to ensure that no assets are released for disposition for which there is a current demand.
 
Comparison of the existing assets to the organization’s strategy and operational activities is necessary to ensure that only assets which satisfy current and future needs are retained and to determine if under utilized or idle assets will become mission critical to the organization in the near future.After the disposition candidate list has been compared to the planned short term asset acquisition plans internally, it should be compared to the short and long term requirements of affiliate organizations (sister divisions) within the corporate organization. In those instances where one company has a disposition asset which satisfies the short or long term asset requirements of an affiliate company tremendous savings may be realized. After the disposition candidate list has been compared to the asset requirements of affiliate organizations, the items on the disposition candidate list should be released for disposition (i.e., sale, scrap or trade-in).
Experience shows that the results of an asset optimization program may have a profound effect on an organization. Write off of phantom assets, frequently exceeds expectations, the disposition candidate list is generally larger than expected and the substitution of existing assets for planned short term acquisitions is greater than expected and proceeds from disposition of assets are generally greater than expected. Additionally, management has a new found confidence that the asset base has been reduced to the maximum extent practical, that the cost of carrying the assets is as low as possible and the asset information is current and reliable.
Capital Asset Management Program
The objective of the capital asset management program is to maintain a consolidated asset management data base and a standardized assets management process. The asset management data base incorporates all of the relevant asset information including location, assigned responsibility, utilization, maintenance, calibration and cost of ownership into a single system. The best starting point for an asset data base is at the completion of an capital asset optimization program. The asset data base will provide management with a perpetual inventory of assets as their utilization is monitored and maintenance and calibration is performed, information necessary to ensure that assets are leveraged to the maximum extent practical and confidence that assets identified for disposition when they no longer contribute to the organization’s strategy, become obsolete or when the cost of ownership exceeds the derived benefits.
 
The asset management process defines policies and procedures for asset management and reporting from the point of asset requisition to the disposition process and establishes the roles, responsibilities of the personnel assigned to use, safeguard and maintain the assets. The asset management and reporting process ensures that pertinent and accurate asset information is available to management in a timely manner to support critical business decisions. A well defined process will enable management to consider the state of the assets in the strategic planning process. Strategic plans which fail to recognize the need for new assets or the obsolescence which results from a new strategy may have a profound effect on an organization.

A fully integrated and informed asset acquisition process may result in tremendous savings to the organization. Significant savings may be had if the acquisition process includes identification of existing assets which may be re-deployed in lieu of a new acquisition, identification of existing assets which may be sold or traded-in in conjunction with the acquisition or if assets available from affiliate organizations may be acquired at less than market cost in lieu of a new acquisition. Full integration of acquisition plans and the existing asset base will ensure management that all assets continue to be fully deployed and that assets made idle or redundant as a result of the an acquisition are disposed of in a timely manner or retained for a business purpose.

Effective asset management is a continuous process. It requires constant monitoring of asset locations, utilization, maintenance or calibration and inventorying. A fully integrated asset management program assigns these responsibilities and ensures management that the assets are properly safeguarded. By implementing this type of a program, the asset inventory becomes perpetual, to some extent, in that the reporting of utilization, maintenance and calibration constitutes a physical count for inventory purposes.
 
Periodic reporting of asset utilization enables management to quickly identify the need for changes in the asset base. Excessively under or over utilized assets may be indicators that an asset should be disposed or additional assets are required.
The asset disposition process is as important as the acquisition process. Assets represent both capital and capability to the organization. Untimely disposition of an asset may have a dramatic impact on current operations or capabilities critical to the organization’s strategy. Poorly planned asset disposition may result in the loss of proceeds from the sale of assets or the loss of trade-in opportunities related the acquisition of new assets. The integration of asset information and reporting should eliminate the potential for untimely disposition or loss of trade-in opportunity. However, procedures for the sale, affiliate transfer or scrap of assets should be established and strictly enforced.
[Figure 3]
CAMOP Net Results
The continuous asset management process and the information generated by the asset management database provides management with information critical to the day-to-day needs of the organization, ensures management that the capital investment is reasonable and necessary given the current operations and strategic objectives of the organization, that the cost of operations are based on sound business decisions, and that the proceeds form the disposition of assets are maximized to the maximum extent practical. With a structured capital asset management program, the capital asset base is now being managed and controlled as effectively as all other disciplines throughout the organization.

The capital asset optimization program and capital asset management programs may be implemented independently or in tandem. The result of the capital asset optimization program, i.e., reliable asset data base, may be short lived without the benefits of the capital asset management program. Joint implementation of the two programs will provide management with the tools that ensure the reliability of the asset data base on an ongoing basis. If you took the test in Figure 3 and responded no or unknown to any of the questions, you should consider an optimization program, a management program or both.

The CAMC Solution
CAMC has developed a Capital Asset Management and Optimization Program (CAMOP) which establishes a reliable asset data base and provides management with the tools necessary to integrate asset management, minimize fixed capital investment, reduce capital requirements and improve results of operations. The CAMC  CAMOP project is customized to meet the special needs of the organization. The end result is a capital asset management process which satisfies the special requirements of the organization and provides the most efficient and cost effective asset management system possible. The CAMOP project consists of an asset management diagnostic and up to eight phases. The specific phases required during the project are subject to the results of the diagnostic analysis and management judgment. In each phase, CAMC will work in conjunction with company personnel to ensure company ownership of the new process and completeness of each phase. The CAMOP phases include:
  • Development of the optimization program guidelines
  • Management Requirements Definition
  • Asset Management Process Analysis and Reengineering
  • Automated Data System Development
  • Capital Asset Management Training and Implementation

1. Optimization Program Guidelines
The optimization guidelines includes analysis of existing records and asset management practices to identify the potential for phantom assets in the records, errors in the asset records, the potential for idle, redundant or obsolete assets. Based on the results of the analysis, prioritized optimization plans and testing procedures will be developed for implementation. The optimization plans will be executed in order of the largest anticipated returns. In the unlikely event that returns are inadequate to support the effort, optimization plan may be modified to enhance returns or abandoned. The record testing will be implemented to validate the accuracy of the records or identify the extent to which record deficiencies exist. Additional record validation and correction activities will be developed as a result of the record testing procedures. A record accuracy objective of 95% to 97%, subject to management discretion will be pursued.
 
2. Management Requirements Definition
Management requirements definition includes both management and first line personnel information requirements. The requirements definition will establish and define the company’s asset management policies and the information requirements necessary for the execution of the policies. The requirements definition document will serve as the straw man structure of the system and the asset management policy to which all personnel will be indoctrinated.
 
3. Process Analysis and Reengineering
Detailed analysis of the existing asset management process serves two purposes. First, by reviewing existing processes, we ensure that all important features and information requirements of the existing system are incorporated into the requirements document. Second, we ensure that the scope and extent of the changes to the existing system are minimized to the maximum extent practical. Our philosophy is - if it works incorporate it in the new system. Incorporating existing processes into to the new system to the maximum extent possible minimizes the amount of change and simplifies the implementation of the new processes.

Reengineering consists of developing the operating procedures, work instructions and data requirements that integrate management requirements and the features of the existing processes that will not be modified during the process. During this phase, the new processes, procedures and data systems are planned in cooperation with company personnel. By working with company personnel during the reengineering phase, they become familiar with the proposed system and the changes and accept ownership of the new CAMOP. The results of this phase will be a CAOP manual which contains the policies, procedures and work instructions.

4. Data System Development
Based on the information obtained in the diagnostic, the results of the reengineering process and input from the business applications managers within the company, We work with the effected functional representatives and business applications personnel to develop integrated data bases and automated system features which satisfy the reengineering requirements and business application integration objectives defined by the business applications personnel. In addition to capital asset management capabilities, Price Waterhouse has extensive experience with advanced business applications (i.e., Oracle, SAP, BaaN, PeopleSoft, etc.).

Capital Asset Management Training and Implementation
All personnel involved in or effected by the CAMOP will be trained on the corporate policies and the contents of the CAMOP manual. Training should be performed jointly by CAMC and/or company personnel. Upon completion of the CAMOP training all personnel executed the policies and procedures as directed in the CAMOP manual. Price Waterhouse is available to assist and advise personnel during the implementation or may perform post implementation compliance testing to ensure management that the new CAMOP is being used effectively.

If you answered no or unknown to any of the questions in Figure 3, are uncertain about any of the concepts or benefits of capital asset management and optimization programs or you would like more information on the CAMC  CAMOP, please contact Phillip R. Johnson in our Los Angeles County Office at (818) 434-2168.