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Asset Management Council Meeting, 8 November, 2007, Melbourne

A Systematic Methodology for Holistic Risk Assessment in

Asset Management

John MoManufacturing and Materials Engineering

RMIT UniversityPh: 03 9925 6279 or

Em: [email protected]


Outline of Presentation• Risks in asset management• The change process and holistic

approach• Analytic Hierarchy Process• Internal quantifiable factors• External non-quantifiable factors• A worked example


Risk Issues in Asset Management

• Long service life• Changes in external factors, e.g. climate

change, market, supply and distribution networks

• Changes internal factors, e.g. production, loss time, organisations


AS 4360

Frame-work

Assess Risk

Establish The Context

Identify Risks

Analyse Risk

Evaluate Risk

Treat Risk

Mon

itor a

nd R

evie

w

Com

mun

icat

e an

d C

onsu

lt


Commercial off the shelf tools• The COTS tools partially address the risk management

issues & challenges in asset management • No COTS tools completely meet the baseline requirements• Critical limitations of COTS tools for asset management

applications:– Knowledge management: inability to capture and reuse organisation

knowledge in order to formulate better mitigation plans – Risk propagation analysis: fails to consider the propagation of risks

based on their interdependencies– Quantitative risk analysis: highly dependent on user judgements

resulting in inconstant risk analysis– Treating incomplete information: inability to compute risk likelihood

using incomplete information


Difficulties in Asset Management Decisions

• Many factors are non-quantifiable• Major decisions such as replacement,

upgrade, overhaul should be based on optimising business performance

• Effective decision making needs a single value indicator that combines other indicators in a logical way


The Change Process

CURRENT FACILITYAS-IS

FUTURE FACILITYTO-BE

InformationSystem

TransitionPlans

ManufacturingEquipment Transition

Plans

Human andOrganisationTransition

Plans


Holistic Approach• All factors considered• Multi-criteria, capable of handling large number

of factors• Deal with both quantitative and qualitative data• Systematic, unbiased methodology• Analytic hierarchy process (AHP) has been used

in many areas in business enterprises for priority setting, resource allocation, decision making

• The process is to be supported by quantitative means wherever it is possible


Analytic Hierarchy ProcessCollect

the facts

Define the hierarchy

Establish criteria

Pairwise comparison

Normalise to Vector of priorities

Compute overall vector of

priorities


Level II

Asset performance

indicator

AHP Structure for Asset Management Decisions

Level I

System reliability

Production capacity

Customer satisfaction

Frequency of power failures

Enterprise activity under existing asset

conditions

Enterprise activity under

new asset conditions

Level III

(Large no. of factors)


Pairwise Comparison• For each factor, compare two states to

determine the relative importance• Internal factors are often quantifiable. For

quantifiable factors, use available numerical values– Actual production data– Historical failure rates– Test results– Sales or marketing data


Pairwise Comparison of Data

Reliability Old asset New asset

Vector of priority

Old asset 1

New asset 1

1


Remote Process Monitoring


Capturing Process Performance


New Equipment Operation Data from Vendor


Reliability Data Comparison


Old asset 1 6132/7800

New asset 7800/6132 1

Available time for old asset per year = 6132 hrsAnticipated available time for new asset per year = 7800 hrs

Invert from cell (1,2)


Vector of Priority

• To address inconsistency in dimensions, units of measurement, importance or criticality

• Computed by normalising the factors for both old and new asset conditions


Normalise Data


Old asset 1 0.786

New asset 1.272 1

2.272 1.786 1


Compute Vector of Priority

Reliability Old asset New asset Vector of priority

Old asset 1 0.786 0.44

New asset 1.272 1 0.56

2.272 1.786 1

2.272___(2.272+1.786)

1.786___(2.272+1.786)


CAPEX (Negative Factor)

CAPEX Old asset New asset Vector of priority

Old asset 1 10/1 0.91

New asset 1/10 1 0.09

1.1 11 1

CAPEX for old asset = $0.1MAnticipated CAPEX for new asset = $1.0M


External factors• External factors are often non-quantifiable.

They are often uncontrollable. • For non-quantifiable factors, use expert

judgement:– Customer satisfaction– Competition– Market share

RMIT UniversityAsset Management Council Meeting, 8 November, 2007, Melbourne

Define the scale of comparison• Extremely preferred/favourable• Very strong to extremely• Very strongly preferred/favourable• Strongly to very strongly• Strongly preferred/favourable• Moderately to strongly• Moderately preferred/favourable• Equally to moderately• Equally preferred/favourable

987654321


Pairwise Comparison of Customer Satisfaction

Customer satisfaction

Old asset New asset Vector of priorities

Old asset 1 1/3 0.25

New asset 3 1 0.75

Total 4 1.333 1

Customer preference:Old asset is moderately preferred than new asset


Pairwise Comparison of Insurance Premium

Insurance premium

Old asset New asset Vector of priorities

Old asset 1 1 0.5

New asset 1 1 0.5

Total 2 2 1

No perceived change of insurance premium


Vector of Priority for

Each Factor

Governing factors Old PL New PLOperating cost 0.3737 0.6263

Insurance cost 0.5000 0.5000

Capacity 0.4098 0.5902

Reliability 04401 0.5599

Payback period 0.7500 0.2500

Staff morale 0.6000 0.4000

Capital expenditure 0.9091 0.0909

No. of workers 0.2273 0.7727

Customer satisfaction 0.2500 0.7500

Area occupied 0.5882 0.0317

Expected reject/ rework 0.3571 0.6429

Competitive advantage 0.3333 0.6667

Change over time 0.4118 0.5882


Weighting of Governing Factors

• To distinguish the importance of some factors as compared to another in the context of the business (asset to be managed)

• Pairwise comparison and then normalised in much the same way


Pairwise Comparison for FactorsGoverning Governing factorsfactors

Op. Op. costcost

Insur.Insur. CapaCapacitycity

ReliaReliabilitybility

PaybPaybackack

MoralMoralee

CAPECAPEXX

WorkWorkersers

Cust. Cust. sat.sat.

Area Area RejecRejectt

Cmp. Cmp. adv.adv.

C/OC/O

Operating Operating costcost 1.001.00 7.007.00 3.003.00 5.005.00 3.003.00 9.009.00 1.001.00 5.005.00 0.200.20 9.009.00 1.001.00 5.005.00 6.006.00

Insurance Insurance costcost 0.140.14 1.001.00 0.200.20 0.140.14 0.330.33 0.330.33 0.140.14 1.001.00 0.110.11 3.003.00 0.200.20 3.003.00 0.200.20

CapacityCapacity 0.330.33 5.005.00 1.001.00 5.005.00 3.003.00 5.005.00 3.003.00 3.003.00 0.140.14 7.007.00 1.001.00 3.003.00 3.003.00

ReliabilityReliability 0.200.20 7.007.00 0.200.20 1.001.00 5.005.00 5.005.00 0.200.20 1.001.00 0.110.11 5.005.00 0.140.14 5.005.00 3.003.00

Payback Payback periodperiod 0.330.33 3.003.00 0.330.33 0.200.20 1.001.00 3.003.00 0.200.20 5.005.00 0.140.14 7.007.00 0.200.20 3.003.00 5.005.00

Staff moraleStaff morale 0.110.11 3.003.00 0.200.20 0.200.20 0.330.33 1.001.00 0.140.14 3.003.00 0.140.14 5.005.00 0.140.14 5.005.00 0.330.33

CAPEXCAPEX 1.001.00 7.007.00 0.330.33 5.005.00 5.005.00 7.007.00 1.001.00 5.005.00 0.330.33 9.009.00 3.003.00 3.003.00 7.007.00

No. of No. of workersworkers 0.200.20 1.001.00 0.330.33 1.001.00 0.200.20 0.330.33 0.200.20 1.001.00 0.140.14 5.005.00 0.200.20 2.002.00 0.200.20

Customer sat.Customer sat. 5.005.00 9.009.00 7.007.00 9.009.00 7.007.00 7.007.00 3.003.00 7.007.00 1.001.00 9.009.00 5.005.00 9.009.00 9.009.00

Area Area occupiedoccupied 0.110.11 0.330.33 0.140.14 0.200.20 0.140.14 0.200.20 0.110.11 0.200.20 0.110.11 1.001.00 0.200.20 0.330.33 0.330.33

Reject/ Reject/ reworkrework 1.001.00 5.005.00 1.001.00 7.007.00 5.005.00 7.007.00 0.330.33 5.005.00 0.200.20 5.005.00 1.001.00 5.005.00 7.007.00

Competitive Competitive adv.adv. 0.200.20 0.330.33 0.330.33 0.200.20 0.330.33 0.200.20 0.330.33 0.500.50 0.110.11 3.003.00 0.200.20 1.001.00 0.330.33

Change over Change over timetime 0.170.17 5.005.00 0.330.33 0.330.33 0.200.20 3.003.00 0.140.14 5.005.00 0.110.11 3.003.00 0.140.14 3.003.00 1.001.00


Vector of Priority for

Factors (Normalised)

Governing factors VP

Operating cost 0.1245Insurance cost 0.0210Capacity 0.0989Reliability 0.0618Payback period 0.0539Staff morale 0.0347CAPEX 0.1266No. of workers 0.0256Customer complains 0.2735Area occupied 0.0109Expected reject/ rework 0.1095Competitive advantage 0.0187Change over time 0.0405


Overall Vector of Priority

Governing factors Old PL New PLOperating cost 0.0465 0.0780Insurance cost 0.0105 0.0105Capacity 0.0405 0.0584Reliability 0.0272 0.0346Payback period 0.0404 0.0135Staff morale 0.0208 0.0139Capital expenditure 0.1151 0.0115No. of workers 0.0058 0.0198Customer satisfaction 0.0684 0.2052Area occupied 0.0064 0.0045Reject/ rework 0.0391 0.0704Competitive advantage 0.0062 0.0125Change over time 0.0167 0.0238

TOTAL 0.4437 0.5563

Benefit indicator:

%4.254437.0

4437.05563.0


Sensitivity AnalysisOld/New VP

1/5 0.26991/2 0.25401/1 0.23822/1 0.22285/1 0.2075


Summary• Many other factors are also governing the operation of the

asset• Some of these factors are non-quantifiable• Major decisions such as replacement, upgrade, system

overhaul are risk sensitive• The existing and new asset conditions can be analysed as

a transition from AS-IS state to TO-BE state by Analytic Hierarchy Process

• AHP can take both quantitative and non-quantifiable factors together in an equitable way

• Internal factors are mostly quantitative factors• External factors are generally non-quantifiable factors.

They are analysed by expert judgement• This holistic risk approach can convert all factors into a

single indicator value assisting decision making on asset management


A Word of Caution• Like any risk analysis, there is always a

factor of uncertainty• The indicator should be used as a

reference for decision making, rather than dictating the outcome of the decision

• More expert involvement will give a fairer judgement on non-quantifiable factors


Thank youQuestions?

Professor John MoDiscipline Head, Manufacturing and Materials EngineeringRMIT UniversityBuilding 251, Bundoora East Campus, Bundoora, VIC 3083Contact: 03 9925 6279 or [email protected]

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