Episode 1: Asset Management Terms Demystified

Every business wants to maximize working time, reduce costs and risk, and deliver the highest quality products or services. 

To achieve these goals, the assets of the enterprise should be used and managed as efficiently as possible. 

This is a series of articles on Physical Asset Management. In the first part of the series, we will look at the basic concepts in asset management and how to put them into practice. 

Let’s dive in! 

Glossary – Introduction to Asset Management Terms 

There are several key concepts in asset management. Understanding them will help you achieve your business goals.

Asset – the heart of the system

An asset is an object that has potential or actual value for an organization. 

Its main features are: 

  • Asset Value – The value can be tangible or intangible, financial or non-financial. Depending on the circumstances it can be positive or negative at different stages in the life of the asset. 
  • Physical assets usually refer to equipment, inventory, property, machines, infrastructure. They can be owned by the organization, leased, or used on the “as-a-service model”. 
  • Physical assets are the opposite of intangible assets, which are non-physical assets. For example, leasing, brands, digital assets, usage rights, licenses, reputation, and more. 
  • Asset life-cycle – the period from its creation to the end of its life 
  • The life-cycle of an asset does not necessarily coincide with the period during which an organization handles it. It can provide potential or real value to one or more organizations over its lifetime.

The organization may choose to manage its assets as groups or individually. 

Asset Management – Achieving goals through value

The management of physical assets is a coordinated activity aimed at unlocking their full potential. This is achieved by managing and balancing: 

  • Risk 
  • Costs 
  • Benefits 
  • Opportunities 
  • Quality 

Effective asset management makes the company’s goals a reality by leveraging the value of the assets and their capabilities. 

An activity can be classified as: 

  • Management Approach 
  • Action Planning 
  • Implementation of plans 
  • Making decisions 

Assets Classification One-On-One

The topic of asset management can make you feel: 

  1. Astonished 
  2. Horrified 
  3. Confused  

It’s time to unravel the mystery of asset classification. They are usually classified in three ways: 

  1. Convertibility: how easy it is to convert them into money 
  2. Physical existence: tangible or intangible assets 
  3. Usage: The purpose of their business operation   

The main characteristics of asset types are: 

  • Current assets can be easily converted into cash and cash equivalents 
  • Fixed assets aren’t as easy to be converted as current assets are 
  • You can touch, feel, and see tangible assets while intangible assets don’t have a physical existence 
  • Operating assets are required in the daily operation of a business. They are used to generate revenue from a company’s core business activities 
  • Non-operating assets aren’t required for daily business operations but can still generate revenue 

By purpose, the non-financial assets of any enterprise can be classified into two main categories: 

  1. Assets used to perform primary business functions (production machinery, light and heavy industrial equipment, manufacturing facilities, etc.) 
  2. Assets used to support business functions (buildings, vehicles, workplace facilities, IT infrastructure or equipment, etc.) 

According to their function and characteristics, we can divide them in this way: 

The chart shows three broad groups, all of which can be included in the context of Enterprise Asset Management (EAM): 

  • Infrastructure Asset Management (IAM) – Linear Asset Management (L). 
  • Building Asset Management (BAM) – Vertical Asset Management (V). 
  • Portable assets (P) 

Linear Assets (L) 

Linear assets have the sole purpose of moving something from one place to another. For example, transporting people and goods on road networks, rail networks, shipping, and airlines or transmitting services to assist people such as fuel, electricity, and water 

Linear assets have the following general characteristics: 

  • They are partially hidden from view or kept at a safe distance from people (overhead power lines) 
  • They cannot be moved, but they can be extended and enlarged 
  • They are large scale and very expensive to build 
  • They are designed to be very durable. Their components must have a long operating life  

Vertical Assets (V) 

This asset class includes buildings for the occupancy of people and equipment. They have a building shell that includes foundation, floors, walls, roof, windows, and doors. To be safe and comfortable a building requires direct service. 

Vertical assets have the following general characteristics: 

  • Visible above ground, but hidden underground 
  • They cannot be moved, but they can be expanded in size 
  • Moderate to large in scale 
  • Expensive to build 
  • Durable 

Portable Assets (P) 

It will be difficult to list all existing portable assets but we can organize them into four groups: 

  1. Vehicles – Cars, trucks, trains, buses, airplanes, and water vehicles. 
  2. FF&E – tables, chairs, paintings, and works of art 
  3. All kinds of machinery and equipment 
  4. Electronics and IT – devices, servers, computers, peripherals, and many more 

How can you distinguish portable assets? 

Take a small model of a building. Turn it around and shake it. All things that fall on the ground are the portable assets you are looking for. 

The Framework – ISO 55000 Family

Who defines the terms as ‘asset’ and ‘asset management’? The ISO 55000 suite. 

It includes three key chapters – ISO 55000, ISO 55001, ISO 55002. 

The purpose of these documents is to determine the principles by which an organization intends to apply asset management to achieve its organizational goals. 

Back in 2014, these standards have reinforced the importance of asset management. They provide a clear and conventional definition of assets, their business context, and the requirements for establishing an asset management system.

How can ISO 5500, ISO 55001, and ISO 55002 be described? You can think of them as the three elements of asset management. 

ISO 55000 is an overview of the subject of asset management. It defines standard terms and definitions. 

ISO 55001 presents the requirements of an asset management system. This standard describes the four assets management system documents: 

  1. Asset Management Policy 
  2. Asset Management Objectives 
  3. Asset Management Strategy 
  4. Asset Management Plans 

IS0 55002 guides implementing an asset management system 

The three elements interconnected and complement each other. 

NOTE: The International Standard is intended to be used for the management of physical assets. However, it may also apply to other types of assets.

Principles of Asset Management

Let’s make a distinction between principles and values:

“Principles are rules or laws that are permanent, unchanged, and universal in nature. Values are internal and subjective. They may change over time.” 

Asset management is based on a set of principles. They are a compass that you can use to orient if: 

  • you are doubting something 
  • you need to defend a statement 
  • evaluate an opportunity, behavior, or situation 

If any of these principles is missing in asset management, it will result in a decrease in the asset value. 

The principles must influence the organization’s asset management systems and plans. 

The principles of asset management are: 

  1. Output Focus – focus on achieving results. It must follow the organizational objectives. The goals themselves are usually set out in the external agreements the organization is committed to achieving; 
  2. Capabilities – they are a measure of the ability of an entity (department, organization, person, system) to achieve its goals. Capabilities are inherent in both organizations and assets. At the heart of asset management is not the physical asset itself, but the abilities and value it provides; 
  3. Level Assurance – the degree of confidence that the asset will achieve the intended/planned results. “Certainty” and “uncertainty” are associated with risk. Risk is a situation where the probability of a variable (such as a flood) is known, but the probability of an event (whether a fire will occur in a particular property) is not. Risk management is a key role in asset management. It provides a level of assurance that asset systems will provide the necessary measurable and tested capabilities; 
  4. Learning Organization – An organization that expands its knowledge of the environment. It is adaptive. It strives to improve its products and services. By developing their asset management approach, organizations provide clarity in decision making and process execution. They strive for continuous improvement. The focus is on the people and their understanding of the roles in the organization. 

The Fundamentals of Asset Management

Asset management has both principles and fundamentals.

Value

An asset carries potential or already revealed value for an organization. 

We have stated that asset management is not focused on the asset itself, but the value it provides. 

It (the value) may be tangible or intangible, financial or non-financial. The organization and its stakeholders determine its type.

Alignment

Asset management transforms organizational goals into: 

  • technical and financial solutions 
  • plans 
  • activities 

This transformation involves processes and activities for planning and decision-making. They turn organizational goals into asset management plans. 

Leadership

Leadership and workplace culture are critical to realizing value. 

Leadership and commitment from all levels of management representatives are essential for the successful establishment, operation, and improvement of asset management in the organization. 

There should be defined roles for this case. Each role has its responsibilities and authorization. 

Employees should be educated and consulted on asset management to keep up the trends and take care of enterprise development. 

Assurance

The purpose of asset management is to ensure that they /the assets/ fulfill their defined purpose. 

The need for assurance stems from the need for effective management of an organization. Assurance applies to assets, asset management, and an asset management system.

Asset Management Objectives

We already know that:

“Physical Asset Management is a coordinated activity that aims to unleash the assets’ full potential to help businesses reach their objectives.” 

Sounds too easy but the reality is harsh… 

It is difficult to translate business objectives into meaningful asset management goals for different teams operating at different levels of the business. 

Working without these meaningful objectives is like winking at a beautiful woman in the dark. The chances of you getting your hands on the prize tend to zero. 

When the business has clear objectives, it is easy to link them to the various functions within the organization. 

What is the meaning of ‘objective’ in general and in the context of asset management? 

DEFINITION: An objective is a desired and planned result. 

Goals can be divided into 4 levels: 

  1. Strategic 
  2. Operational 
  3. Tactical 
  4. Business 

Different percentages of the staff will be involved at different levels. 

To determine the right asset management goals for your business, you must: 

  • align different types of goals with the right roles in the organization 
  • implement the objectives through specific asset management processes

The Benefits of Strategic Asset Management

There are factors that influence the type of assets an organization requires to achieve its goals: 

  • the nature and purpose of the organization 
  • its operational context 
  • financial constraints and regulatory requirements; 
  • needs and expectations 

They must be taken into account when creating, maintaining, and continuously improving asset management. 

Effective asset management guarantees: 

  • achieving the goals of the organization 
  • maintaining balance 
  • increasing the ROI and reducing costs 
  • improved decision making 
  • higher quality of services and products 
  • emissions, conservation of resources and adaptation to climate change, allows to demonstrate socially responsible and ethical business practices and management; 
  • building a reputation 

Let’s sum it up

We got an idea of the basic concepts in asset management. How can they possibly help us? 

The implementation of an asset management system will not work if the process itself is mediocre at best. 

So, before looking for ways to automate the process, it is crucial to understand and master existing asset management practices also known as “The Fundamentals”. 

The image illustrates the elements of managing asset lifecycle in Enterprise Asset Management.

In the next chapter, we will take a look at one of the Asset Management models – the Concept Model. It represents the strategic level of AM and examines the foundational elements of asset management.

Thank you for joining our course! See you next week!

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