Asset Management Services

Asset Management Services A RONA Case Study

Abstract This case study describes the positive impact of Rockwell Automation Asset Management Services on our customers’ Return on Net Assets (RONA). Using Rockwell Automation Asset Management Services, a customer may decrease expenses and net assets, thus increasing the calculated RONA.

The first section of this case study outlines how Rockwell Automation understands the business and maintenance requirements of our customers. The next section defines RONA and demonstrates how each of the variables can affect the final value. The final section describes several Rockwell Automation programs and how they positively impact RONA. Given the nature of a case study, the examples presented all have real-life applicability and are based on historical norms. Understanding a Customer’s Requirements Most companies that produce and market a product have two main requirements: maximizing uptime and minimizing assets. In addition, any systems employed in meeting these requirements must be easy to implement and financially justifiable.

Maximizing Uptime Our customers are in the business of making product. When the customer isn’t making product, the customer isn’t making money. In order to be profitable, the customer needs to keep its systems running as efficiently as possible. A customer that has invested heavily in Rockwell Automation products, and has automated many of its processes in order to maximize production is maximizing the profitability of the company. If the automation system doesn’t work properly, the profitability declines. For this reason, Rockwell Automation and our customers share the same goal of keeping the automation system running smoothly and effectively so that our customers can be as competitive as possible. Having the right part on-hand when a machine needs repair minimizes downtime as well as the Mean-Time-To-Repair (MTTR). The less time a process is down, whether for scheduled or emergency maintenance or during start-up, the more profitable it can be. Reducing Assets Keeping a customer’s assets low is a financially driven initiative. For the corporate office and for shareholders, large amounts of assets tie up cash, increase the expense of carrying the inventory, and reduce overall profitability Ease of Implementation Ease of implementation is an important consideration for any manufacturer. Can any new system or process be put to use quickly and with minimal effort? Will the system be less complex than the current system? Will the number of transactions and vendors and the amount of paperwork decrease? Only systems that are easy to implement should be considered to satisfy these concerns.

Inventory, as it relates to spare parts for the automation system, is usually considered a capitalized asset. It is purchased for its potential to create income. Keeping a well-stocked inventory of spare parts is an important part of the automation system, and while inventory itself is usually considered an asset, money spent maintaining that inventory can be a large expense.

Financial Justification Any new program that a customer implements needs to be financially sound. A financial analysis for RA’s Asset Management Services is provided in this paper. For each area of the customer’s company, the customer’s requirements--from maximizing uptime to financial justification--have different forms. Plant PersonnelProduction - Uptime Operations - Uptime/Asset reduction Operations - Asset reduction Engineering - Proper spares Maintenance - Reliable spares Purchasing - Asset reduction CorporateProduction - Uptime/Quality Operations - Asset reduction Engineering - Reduce assets on major projects

Return on Net Assets (RONA) Definition Return on Net Assets (RONA) is simply a calculation of how well a company converts assets to sales, and therefore, income.

Sales - Expenses Net Profit RONA = ------------------------ = ------------------------ Net Assets Net Assets Inventory, as it relates to spare parts for the automation system, is usually considered a capitalized asset. It is purchased for its potential to create income. Keeping a well-stocked inventory of spare parts is an important part of the automation system, and while inventory itself is usually considered an asset, money spent maintaining that inventory can be a large expense. Expenses are costs associated with keeping the business operational. They are different from assets in that they are short-term costs for goods or services that will be used in the

Financial Item Percentage of Annual Inventory Cost

Carrying cost of $500,000 inventory

Space Utilities Property taxes Equipment People Fringe Benefits

7.20%

$36,000

Spoilage and Obsolescence 3.60% $18,000 Computer Systems and Accounting Efforts to Monitor Inventories

2.40%

$12,000

Insurance 0.12% $600 Opportunity Cost of Money 12.00% $60,000

Total Cost: 25.32% $126,600

near future. For example, $6000 spent on maintenance fees is an expense. However, $6000 spent on spare parts intended to last more than a year is considered an asset. If a customer wishes to increase its RONA, they must do one of the following:

• increase sales

• decrease expenses

• reduce assets Using RA’s Asset Management Services, a customer can reduce the carrying cost (expenses) of maintaining an inventory of spare parts. Rockwell Automation estimates that inventory carrying costs can total up to 25% of the inventory cost over one year. Based on Rockwell Automation’s experience and estimations, the following allocations of inventory costs have been determined and are detailed in the table below.

Benefit 1: Having the correct inventory on-site, or readily available at a Rockwell Automation Hub or distributor, a customer can significantly reduce downtime and increase profitability. If the right part has not been secured using the Parts Management Agreement program, it may take up to 24 hours to deliver it from another location, if it is available. A Parts Management Agreement ensures availability of the part. Benefit 2: By not actually purchasing the inventory until it’s needed, a customer can eliminate the excess inventory from its books and increase RONA by reducing its assets. Benefit 3: By taking advantage of parts management program, our customer can increase RONA by reducing or eliminating many of the expenses associated with maintaining inventory. In the example above, an inventory of $500,000 costs $10,417 per month and over $126,600 per year to maintain properly. Benefit 4: Because the parts management program is a contractual agreement, it is very easy to implement. The initial contract requires minimal paperwork for the customer. Benefit 5: Through additional Asset Management Services, our customer will further ease implementation of its maintenance by reducing the number of vendors that it works with. Standardizing on Rockwell Automation for both spare parts and services can significantly reduce the number of transactions required for repairs and maintenance. Asset Management Services Impact on RONA Asset Management Services offered by Rockwell Automation can help a customer increase RONA by reducing expenses and assets simultaneously. This is achieved by eliminating the asset of spare parts inventory, reducing carrying costs (expenses) associated with maintaining an inventory of spare parts, such as space, utilities, accounting and insurance, and increasing the availability of critical parts to maximize uptime. Asset Management Services programs by Rockwell Automation have several distinct levels of value:

LEVEL 1 Installed Base Evaluation With a comprehensive Installed Base Evaluation, Rockwell Automation will conduct a complete review of a customer’s installed base and inventory of automation equipment. With this information, Rockwell Automation can look at each panel--with its wiring and communication system, ambient environmental conditions and past maintenance histories--and compare it with the company’s understanding of the plant and its unique requirements. Using this information and the Installed Base Evaluator software, Rockwell Automation develops a statistically based recommended list of spares. This information is provided to the customer in a detailed report. Benefit 1: An IBE can identify many critical needs, such as where current inventory levels are not correct, and where a customer runs the risk of unnecessary downtime in order to procure the right part. Based on past IBEs, Rockwell Automation estimates that about 15% of a typical inventory is insufficient, meaning the stored part is not the correct part or isn’t in inventory at all. Benefit 2: An IBE can identify where a customer has excessive spares. Based on past IBEs, Rockwell Automation estimates that many companies have as much as 60% more spare parts than necessary for profitable operation. For example, a $500,000 inventory might contain $300,000 worth of extra spares which are not necessary to support the existing automation system. LEVEL 2: Inventory Asset Reduction Using the results of the IBE, Rockwell Automation can provide several different degrees of service by establishing and maintaining a tailored inventory located at the Rockwell Automation Hub, at a local distributor, or at the customer’s site. With each option, Rockwell Automation owns and manages the inventory, yet the customer is assured of having the correct parts available to them. By keeping the inventory on the customer’s site, spares are most readily available.

LEVEL 3: Annual Warranty As an extension of the standard warranty offered with Rockwell Automation equipment, and as a supplement to the inventory asset reduction programs, annual warranty agreements help to manage and control unexpected part repair expenses. Benefit 1: Using an annual warranty agreement, repair expenses become fixed expenses, with minimal paperwork, thereby allowing for more accurate budget forecasting and planning. LEVEL 4: Rockwell Automation Asset Management (RAAMP) Contract As a response to customer requirements, Rockwell Automation offers a tailored RAAMP agreement. Rockwell Automation will be the sole supplier of all electronic remanufacturing and repair services for the industrial electronic equipment. In addition, Rockwell Automation will provide an Asset Management Professional (AMP) to assist with the project management and implementation. Finally, Rockwell Automation will provide the RAAMP/ES software package that will allow the Asset Management Professional to track and administer electrical and mechanical asset inventory activity and transactions.

SCOPE OF SERVICES Based on the specific needs and priorities of the customer, the RAAMP program can be configured to include the following service modules: • Data Administration • Inventory Tracking • Warranty Tracking • Bar Coded Assets • Optimized Repairs • Dynamic Installed Base Evaluation Support • Remanufacturing and Repair Services

Service modules shall be pre-defined prior to RAAMP implementation by customer and Rockwell Automation. They shall be based on the immediate needs of the customer, their level of business impact to the facility and the Asset Management Professional’s role and workload requirements. Once selected modules are implemented and are being managed properly by both parties, additional modules may be incorporated into the overall RAAMP scope of services. Overall, through the RAAMP program a customer can positively impact their RONA measurement.

Publication GMSA10-WP001A-EN-P– May 2009 Copyright © 2009 Rockwell Automation, Inc. All Rights Reserved. Printed in USA.