Solve The Mystery Of Proper Budgeting For Asset Replacement

A sensible approach can reduce the risks of inadequate recapitalization

By Terry D. LaGrange, Eli Lilly & Co.

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Budget reductions often mean that industrial sites must contend with equipment, facilities and infrastructure deteriorating to the point of becoming unusable. While a variety of factors such as poor design, inadequate maintenance, overloading and environmental conditions can contribute to this situation, the culprits almost always include a lack of proper recapitalization.

So, here we’ll look at a method you can use to determine appropriate capital investment.

The key to a good capital investment program is understanding the assets owned and applying basic engineering principles to their evaluation, including condition, performance and expected service life. To do these evaluations, you first must understand recapitalization (or recap). It’s the process of extending the useful life of assets through maintenance/repair and capital investments to keep them in a “qualified state” and “fit for use.” Essentially, it’s part of lifecycle asset management. Note that recapitalization isn’t just for old, obsolete or deteriorating equipment and facilities.

Recapitalization can address:

Performance. The facility or equipment doesn’t reliably meet the needs of the business or is too expensive to maintain.
Functionality. Capabilities or functions no longer satisfy current expectations, e.g., in terms of regulatory compliance, efficiency, capacity or technology.
Productivity. New technology allows for improved economics and provides a positive business case for the capital cost of replacement.
Industry Trends. Existing equipment falls below current expectations, e.g., for good manufacturing practice (GMP).

To sum up, recapitalization projects are those where assets are either upgraded, replaced or retrofitted due to age, obsolescence or other compelling needs. Projects related to safety/environmental compliance, GMP or administrative upgrades, though new, usually are considered part of recapitalization because they keep the site functional. So is a new building constructed to replace an old one. Recapitalization doesn’t include added assets for production/marketing growth. However, replacement of existing assets, even when it results in some increased output, is considered recapitalization.

Projects that update existing assets mostly for growth or productivity are developed and addressed as part of this process but prioritized separately on the basis of return on investment (ROI) or marketing value. This article doesn’t address these growth and productivity projects.

Essential Evaluations

To define and predict the recapitalization, you must continually monitor and analyze the assets’ status. You can accomplish this through computerized maintenance management system (CMMS) data or asset list evaluations.

Assets include facilities, buildings, utilities, infrastructure, automation, information technology/telecommunication and process production equipment.

All sites must perform an annual resource assessment (RA). This involves listing and analyzing key assets. To minimize the effort, the RA only includes those assets of greater value or criticality.

Ultimately, the facility or operations personnel along with maintenance specialists and subject matter experts (SMEs) must evaluate the condition or state of each listed asset based on the four areas of concern: performance, functionality, productivity and industry trends.

The actual asset condition evaluations should consider many factors, including:

1. Reliability — Check the maintenance history of failures, out of tolerance, number of work orders, work-order costs, etc.
2. Age — Compare equipment age to “expected industry standard life” for the asset type, manufacturer and severity of the service, i.e., loading, environment, etc. (We develop an extensive list of typical lifecycles for assets through research with vendors and contractors as well as company history.)
3. Obsolescence — Look at parts or service availability or whether emerging technology or compliance regulations will render the existing asset obsolete.
4. Site initiatives/agenda — Many times, safety, environmental or quality issues will become a site focus and affect the perceived adequacy of an asset.
5. Incidents — Include production lost due to downtime or quality, safety, environmental, audits, findings, etc.

Keep in mind that retrofitting an asset doesn’t mean it will perform optimally for the business needs. For instance, my 1972 Volkswagen was recently overhauled and now is in good shape — but certainly doesn’t match the performance of a new vehicle.

These condition-evaluation techniques ultimately help in the challenging decisions regarding when to upgrade or replace an asset. Waiting too long to recapitalize can pose productivity, quality and compliance risks — but recapitalizing too early ties up funds that could have been spent more appropriately elsewhere.

Categorization

Based on condition evaluations, categorize each asset (larger and critical) as:

• High impact — poor condition (issues need addressing within 0–2 years);

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