stand out in Category 1. The proportions of ‘the trustful’ (23.8 % → 34.8 %) and ‘the trailblazers’ (15.9 % → 19.6 %) are both elevated in relation to the survey sample. This observation holds true equally for Category 2, where some of the companies may also have cost management IOMs in use. The issue with Category 2 is, however, the ambiguity of the responses. Overall, ‘the trustful’ and ‘the trailblazers’ are consistently highlighted more on the positive than the negative side, which indicates that the managerial outlook of the companies belonging to these clusters is optimistic.
When the results of the cluster analysis were compared with the responses to the open-ended question, there was a disparity between the rhetoric and the state of affairs. The companies, especially ‘the trustful’ and ‘the trailblazers’ (~ 40 %), were interested in increasing inter-organizational integration through joint cost management. However, this orientation did not emerge from the (qualitative) content analysis, as only a small portion of the surveyed companies (~ 7 %) had cost management IOMs in place.
4.2
Publication 2: ‘towards inter-organizational asset management’Publication 2 – Inter-organisational asset management: linking an operational and a strategic view – had two main objectives; (1) to demonstrate how organizations benefit from the use of asset management IOMs, such as the life-cycle model (LCM) and flexible asset management model (FAM), which require that customers and service providers engage in information exchange, and (2) to conjoin the above-mentioned two levels of
‘inter-organizational asset management’; operational represented by LCM and strategic represented by FAM. The publication was founded on the case study method in which quantification to the otherwise qualitative research approach was achieved by the means of analytical modelling. In order to reach objective (1), two sources of data were employed. Operations and maintenance data was collected directly from the case company (i.e. the customer) to demonstrate how organizations achieve benefits with LCM. The financial statements of the customer and its service provider were also retrieved to exemplify the use of FAM on the level of the dyadic relationship.
The first of the two asset management IOMs is LCM, which is a maintenance management tool for asset-level decision-making, monitoring realized costs and profits from the past and planning the future. In comparison to other similar maintenance management tools, the unique characteristic of LCM comes from its inter-organizational nature, as it incorporates by default the perspectives of the customer, the (maintenance) service provider and the equipment manufacturer. LCM takes advantage of the present value method in which the cash flows consisting of cost and profit items related to the
asset are discounted/appreciated annually to their present-day values. A key figure in LCM for measuring achievable economic benefits is the cumulative net present value (CNPV), which shows the difference between cumulative discounted profits and cumulative discounted costs at each stage of the asset life cycle. Further information, e.g.
the full equation for determining the CNPV, can be found in the publication.
The case company, Company A, is a Finnish manufacturing organization of several distinct bulk products that have a variety of diverse industrial and other professional applications worldwide. The subject of the study was the past and planned future maintenance of Company A’s production asset that plays a key role in the processing of its raw materials. Even though Company A had used external workforce in the past to maintain the above-mentioned production asset in operating condition, they had recently outsourced its entire maintenance to a small, local service provider, Company B. The received operations and maintenance data as the starting point, a scenario was created with LCM. Figure 4.1 illustrates how the CNPV developed in the scenario.
Figure 4.1 Development of CNPV (10 % interest rate in discounting).
As can be seen in the figure, the CNPV is heavily negative throughout the beginning of the asset life cycle, where high cost levels dominate over the smaller profit items. The turning point is the year 2014, which is consequently also the transition year from the realized past to the planned future. After 2014, the CNPV starts to improve gradually, reaching a life-cycle end value around 151 000 €. The positive outcome was naturally
4.2 Publication 2: ‘towards inter-organizational asset management’ 55 expected, as the created scenario emphasized both operational improvements and cost intensifications. The magnitude of the figure was, however, unexpected. Just over seven years, Company A could benefit more than 385 000 € through rather small, gradual changes in asset maintenance. Despite the fact that the scenario was created from the perspective of the customer (i.e. Company A), the service provider (i.e. Company B) could also benefit from the improvements. Collaborative planning reduces the service provider’s costs and increases its profit margin. It is also possible that the customer distributes some of its benefits to the service provider, e.g. a bonus as a sign of goodwill.
The latter of the two asset management IOMs is FAM, which is an alternative way to understand a company’s relative profitability, a typical measure of which is return on investment (ROI), where the earnings of a financial period are proportioned to the capital employed (i.e. equity and liabilities with an interest). Instead of the capital employed, FAM concentrates on organizational assets that are situated on the other side of the balance sheet. The denominator of FAM therefore consists of fixed assets and working capital, which is the difference between current assets (i.e. inventories and accounts receivable) and current liabilities (i.e. accounts payable). Earnings before interest, tax, depreciation and amortization (EBITDA) are situated in the numerator. Because FAM utilizes the cash conversion cycle (CCC) to measure the employment of working capital, both EBITDA and fixed assets (FA) are divided by total sales, resulting in the use of the EBITDA% and FA%. By decreasing FA% and/or CCC, the organization increases its ROI and thus its profitability. Further information, e.g. the full equation for determining the ROI, can be found in the publication.
Encouraged by the positive past experiences from asset maintenance, Company A and Company B have decided to extend their collaboration to flexible asset management to be able to realize additional benefits from the relationship. As the relative profitability of the small Company B has been unbearably low for years, the ownership of its fixed assets and inventories have been transferred to Company A, which is – by far – Company B’s largest customer. By getting rid of overlapping assets, Company A’s balance sheet in terms of fixed assets and inventories has become lighter despite the reorganization efforts.
The companies have also agreed to revise the mutual terms of payment in order to shorten Company B’s CCC substantially. In addition to the non-existing inventories that have already had a positive effect on the CCC, the new payment terms guarantee that Company B acquires all outstanding accounts receivable faster from Company A. The impacts that this kind of flexible asset management scenario has had on the companies and customer-provider relationship are shown in Table 4.4. The values for the EBITDA%, FA% as well as CCC in the baseline situation have been determined as a three-year average from the financial statements of Company A and Company B.
Table 4.4 Comparing the baseline against flexible asset management.
Company A Company B Relationship
Component Baseline Flexible Baseline Flexible Baseline Flexible
EBITDA% 10.0 % 10.0 % 2.1% 2.1% 9.8% 9.8%
FA% 134.1 % 127.5 % 4.1% 0.0 % 131.7% 125.1 %
CCC 59.9 d 58.3 d 70.3 d 19.0 d 130.2 d 77.3 d
ROI 3.4 % 3.5 % 3.6 % 39.6 % 3.0 % 3.5 %
As can be seen in the table, the transfer of fixed assets to Company A’s balance sheet brought the FA% of Company B naturally down to zero. At the same time, the removal of asset overlap decreased the FA% of Company A by almost 7 percentage points.
Because of the size difference between the companies, the relationship-level FA%
follows largely Company A’s figure. The plunge in the relationship-level CCC, on the other hand, originates from Company B. Its CCC benefitted around 31 days from the reorganization of inventories, while another 20 days came from the revised payment terms. As far as the CCC of Company A is concerned, the benefits gained from smaller inventory levels were revoked partly by the expedited cycle time of accounts payable.
By looking at the numbers, the overwhelming winner in the flexible asset management scenario seems to be Company B, the ROI of which has increased by impressive 36 percentage points. Its lighter asset structure equals higher profitability. The overall benefits are, however, significantly more moderate, as the relationship-level ROI has improved only by a half percentage point. A scenario such as this would likely require that Company B will provide certain incentives to Company A. It could e.g. change the pricing of its maintenance services. Cheaper maintenance will benefit Company A directly, thus increasing the EBITDA% that contributes towards higher profitability.
LCM and FAM are two distinct asset management IOMs designed for different managerial purposes; LCM steers operational decisions regarding asset maintenance, and FAM teaches organizations how the balance sheet is treated as a strategic instrument.
They are therefore separate, but also complementary IOMs. As illustrated in Figure 4.2, the link between the two levels of inter-organizational asset management, i.e. operational and strategic, lies in the CNPV and EBITDA%. In other words, better maintenance decision-making will eventually show on the financial statement. If an organization has several production-critical assets, the sum of their CNPVs equals the change in the EBITDA%. This forms the answer to objective (2).