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II. STRATEGIC ASSET MANAGEMENT PROCESS - CHAPTER 5 - STRATEGIC ASSET PERFORMANCE MEASUREMENT
5.2 Asset Performance Measurement
Asset performance measurement refers to the process of measuring and reporting the non-monetary performance of the enterprises strategic asset portfolio including its use of non-monetary resources. The output of the process is performance data for assessing the asset portfolios performance relative to established business objectives and requirements (Section 3.1). The inputs to the process include the basis against which asset portfolio performance is assessed (quantified requirements per Section 3.1 and the investment decision basis per Section 3.3) and performance and resource data from ongoing asset operation during the asset life cycle.
Together with asset cost accounting measures (Section 5.1), performance measures are the basis for asset performance assessment. The asset performance measurement and assessment processes are part of a continuous effort to evaluate and improve investment decisions so that the enterprises business objectives are more successfully achieved. Performance assessment methods such as benchmarking and investment analysis are covered in Section 6.1. The TCM process map does not explicitly include the performance measurement process (e.g., industrial engineering, etc.); it only addresses the strategic asset management interface with these processes.
In terms of information technology (IT), the distinction between cost accounting and performance measurement is increasingly less distinct as materials or enterprise resource planning (MRP and ERP) and business intelligence (BI) data mining systems increasingly encompass the measurement of all resource and calculating performance data (scores, ratios, indices, etc.) for both asset management and project control.
.1 Requirements and the Investment Decision Basis Establish What to Measure
As discussed in Section 3.1, requirements are a condition or capability that a problem solution must have to address their perceived problem or opportunity. The first characteristic of a good requirement is that it defines what the asset will do. The next is that it be quantified to serve as a basis of performance measurement. For example, performance against a requirement such as "must have good reliability" cannot be measured; a statement such as "must have less than 1 percent downtime" is better. In this example, the enterprise would measure percentage downtime for this asset.
As further discussed in Sections 2.3 and 3.3, the most important business requirement for most enterprises, and the basis for their asset investment decisions where applicable, is a measure of economic return on investment (ROI); ROI is a single measure that expresses in monetary terms the value of the investment over its life cycle to the enterprise. Allowing for the time value of money, return on investment improves with greater income and less costs. In decision and investment analysis, income and costs may include non-monetary benefit and cost factors expressed in monetary terms. For example, if a reliability or quality requirement for the asset investment was "must have less than 1 percent downtime," the downtime would be measured and the cost or detrimental effects of more or less downtime would need to be monetized in investment analysis as a measure of lost revenue and increased indirect cost per unit of production.
Investment alternative solution planning and decisions are based on requirements, but also on various performance assumptions and constraints. A common example is resource assumptions and constraints. These may relate to assumed attributes or performance of a supply chain, or availability of key personal with special skills, and so on. The use and performance of these resources would need to be measured if they were part of the basis of the investment decision.
The number of requirements established, and hence measures to capture, can be quite large. Therefore, most enterprises focus on only a few high level key performance indicators (KPIs) that are the measures believed to most directly correlate with successful achievement of the executive teams strategic business objectives. Gradually and later more KPIs can be cascaded down into the core business processes, but it is still a good practice to restrict the number of KPIs for each employee team to the vital few (recommended at about three) rather than the trivial many for which measures become outside the teams influence and control. KPIs can be established at the enterprise level as a strategy for the overall portfolio of asset investments, or for individual asset investments at the time the investment decision is made. An important KPI is usually return on investment, so priority should be placed on measures that drive ROI.
If a process requirement is that activity-based costing/management (ABC/M) methods be used (see Section 5.1), costs are accounted for and will be assessed by the work activities that belong to the business processes, and are then subsequently causally traced to the intermediate outputs, products, channels, and customers (i.e., cost objects) that consume the work. Therefore, the performance of work activities, both employees and equipment, must be measured (or reasonably estimated) as well as the quantity of the activity driver (e.g., the number of purchase orders to calculate "the unit cost per purchase order"). For example, if an ABC/M cost assignment network traces resource expenses to activities using the time that people spend performing a certain activity, that time or percentage of their week must be measured (or estimated) as well as the quantity of the activity driver that traces the activity cost into its cost object. The measure is generally a proxy (i.e., an activity measurement factor) that is assumed to represent the performance of the activity.
5.2.2 Process Map for Strategic Asset Performance Measurement
Figure 5.2-1 Strategic Asset Performance Measurement
The following sections briefly describe the steps in the asset performance measurement process.
.1 Planning for Asset Performance Measurement
The process for performance measurement starts with planning for the measurements. As an integrated process, initial planning starts with development of the requirements (Section 3.1) and continues through development of the investment decision basis or business case (Section 3.3). As was discussed, requirements must be quantified and measurable. Because the measurements are done to support the assessment methods that will be used, planning for measurement and assessment must be done together as well.
One aspect of planning includes assigning specific roles and responsibilities for measuring the performance of each asset investment. Much of the measurement work is the responsibility of ongoing operations and functional management (or equivalent) and may require little planning. The role of cost engineers may be limited to helping plan the measurement process, communicate requirements, and review measures to ensure they meet the needs of performance assessment.
Another aspect to plan is the interface (i.e., data transfer) between transactional systems (e.g., ERP systems, etc.) where base metrics reside and the business intelligence (BI) data mining systems used to store data from disparate data sources into common database platforms for performance assessment. Business intelligence systems provide not only a common database for all measures, but the capability to analyze and assess these measures against established performance criteria (e.g., balanced scorecards, "KPI dashboards," etc.), as well as predict and forecast. Enterprise performance management (EPM) systems operate on and draw data from enterprise information platforms (EIP).
Planning ensures that the measures captured in and reported by various systems are either consistent with the assessment tools (e.g., ABC/M, Quality Function Deployment, etc.), or that processes and procedures are in place to obtain measures and/or translate them to the assessment basis. This may involve manual measurement (e.g., audits or inspections), translation, and entry of data. In addition, the interaction/interface of owner, supplier, and contractor reporting systems, if any, must be considered and addressed in performance measurement plans.
After performance measurement has been planned, measurement processes or systems are initiated for each resource type for which consumption or status is to be measured and each asset activity factor or function that will be measured. The performance measurement plan will establish who may enter, change, delete, view, or otherwise use data and information in or from each system.
.2 Measuring Performance
It is difficult to summarize the possible measures that may be captured regarding an assets performance. Some are measured on a continuous basis in ERP systems, process control systems, and business intelligence (BI) systems. Others may be obtained on an as needed or spot basis through audits, inspections, special studies, or surveys (for more qualitative measures). In general, however, there are three main types of measures obtained as described in the paragraphs that follow.
Functional Performance and Utility
Functional requirements and functionality measures capture what an asset does and how it does it. These measures may include such performance attributes as production rates, operability (e.g., percentage downtime), maintainability, usability, and so on. They may also include quality control attributes such as reliability, defect rates, and so on. Another common functionality measure is cycle time (i.e., economic costs are in large part driven by timing). These are generally highly objective, physical measures.
Utility measures capture user or customer perceptions of how well the asset meets their wants and needs. These should be quantified as requirements, but measurements may indicate that the requirements elicitation and analysis process (see Section 3.1) missed the mark. These measures often reflect "soft" or experiential requirements and the measurements tend to be more subjective in nature. Methods such as surveys may be used to capture performance information.
Measure Activity Factors
As discussed in Section 184.108.40.206, if ABC/M methods are used, cost assignment network tracing ties expenses to activities whose performance must be measured; and then into output costs, product costs, and so on (i.e., cost objects). Resource measurements, as discussed below, are often used as proxies for activity (i.e., activity factors).
The purpose of investment decision making is to make good decisions as to how to invest or allocate the enterprises resources. The use of resources in or by an asset must be measured as applicable, including labor, materials, and so on. ERP systems are one source for this measurement as well as work order systems in project-oriented environments. Emphasis will often be focused on scarce or otherwise critical resources.
.3 Review Performance Measures
The asset management function (e.g., strategic or capital planning, etc.) regularly checks that the basis of performance measurement is appropriate and in alignment with the asset management plans and the investment decision and performance assessment basis. Measures are also reviewed to ensure timeliness and accuracy. Most measurements are not made directly by those responsible for the performance assessment. Much of the data will be obtained from ERP systems. However, those with performance assessment responsibility should spot check the work progress and performance measurements to some extent (i.e., audits, inspections, questioning operations management, etc.) to ensure that the data being received and reviewed are reliable, appropriate, and understood.
.4 Report Performance Measures
After review, measurement information is reported to the performance assessment process (Section 3.1). Also, measurement data are used in the evaluation of changes in the change management process (Section 3.2). Performance information may also be used in the cost accounting process (Section 6.1) to identify when cost accounts should be initiated or closed.
Finally, historical performance information is captured (see Section 3.3). The information is used to help improve measurement tools such as software, forms, checklist, procedures, and so on. Measurement data, including experiences and lessons learned about past measurement practices, are used for planning future asset investments.
5.2.3 Inputs to Strategic Asset Performance Measurement
.1 Requirements. Quantified requirements define some performance measures (Section 3.1) as well as methods to be used for the process.
.2 Basis for Measurement. Planning assumptions and constraints incorporated in the basis of the investment decision (Section 3.3) define some performance measurements.
.3 Asset/Activity Performance. Measurements of asset performance are obtained from operating or project processes.
.4 Changes. Changes to the baseline requirements and asset plans are identified in the change management process (see Section 6.2). Requirement changes may result in changes to performance measurement.
.5 Historical Information. Successful past performance measurement approaches are commonly used as future planning references. Historical performance data are also captured.
5.2.4 Outputs from Strategic Asset Performance Measurement
.1 Basis for Measurement. Measurement planning may identify improvements to investment decision making (Section 3.3).
.2 Asset Cost Accounting Plans. Performance measurement planning may identify improvements in plans for cost accounting (Section 5.1)
.3 Corrections to Measurement Basis. Review of performance measurements may identify corrections that need to be made in the measurement process (e.g., timeliness, quality of measures, etc.).
.4 Measurement Information for Cost Accounting. Measures of asset/activity performance are reported to the cost accounting process (Section 5.1) to support the initiation and closing of accounts. Also, the tracking of resource expenditures identifies cost obligations (i.e., commitments).
.5 Measurement Information for Performance Assessment. Measurement information supports performance assessment (Section 6.1).
.6 Status Information for Change Management. Measurement data are used in the evaluation of requirements and planning changes (Section 6.2). In order to evaluate the effect of a change, it is necessary to know how the asset is functioning, etc.
.7 Historical Project Information. The performance measurement approaches used are captured in a database (Section 6.3) for use as future planning references. Measurement data are captured as well.
5.2.5 Key Concepts for Strategic Asset Performance Measurement
The following concepts and terminology described in this and other chapters are particularly important to understanding the strategic asset performance measurement process of TCM:
.1 Requirements. (Sections 220.127.116.11 and 3.1).
.2 Return on Investment (ROI) (Section 18.104.22.168 and Section 3.3).
.3 Benefits and Costs (Section 22.214.171.124 and Section 3.3).
.4 Investment Decision Basis/Business Case. (Section 3.3).
.5 Asset Cost Accounting. (Section 5.1).
.6 Enterprise Resource Planning (ERP). (Section 5.2.1).
.7 Business Intelligence (BI). (Section 5.2.1).
.8 Enterprise Performance Management (EPM). (Section 126.96.36.199).
.9 Key Performance Indicators (KPIs). (See Section 188.8.131.52).
Further Readings and Sources
The strategic asset performance measurement process is generally covered in business and strategic management texts, including those that cover decision making, ERP systems, ABC/M methods, business intelligence, and so on. The following references provide basic information and will lead to more detailed treatments.
Cokins, Gary. Activity Based Cost Management: An Executive Guide. New York: John Wiley & Sons, 2001.
Cokins, Gary. Performance Management (Finding the Missing Pieces to Close the Intelligence Gap). New York: John Wiley & Sons, 2004.
Klammer, Thomas P. Managing Strategic and Capital Investment Decisions. Burr Ridge, IL: Irwin Professional Publishing, 1993.
Ostrenga, M., M. Harwood, R. McIlhatten, and T. Ozan, Editors. Ernst & Youngs Guide to Total Cost Management. New York: John Wiley & Sons, 1992.
Player, Steve and David E. Keys. Activity-Based Management. New York: MasterMedia Limited, 1995.
Schuyler, John R. Risk and Decision Analysis in Projects, 2nd ed. Upper Darby, PA: Project Management Institute, 2001.
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