By Shane Johnson, Preservar CEO
When this time of the year comes around and one starts to put the next annual budget together, we often concentrate on three aspects of operations; our physicals (production, grade, services and other activities), costs, and the required new or sustaining capital.
All of that seems sensible enough. However, the tendency to rely on historical averages or apply a factor of improvement to the past best performing months leads to significant pitfalls. It is the most common issue we see here at Preservar – that these averages and improvement factors turn around to bite our clients.
The 4 Main Reasons Averages Betray Us
These are the four main causes of this dilemma, and are associated with the way one looks at the asset life cycle and performance:
- A narrow focus on the immediate budget cycle (typically an annual plan), with minimal attention paid to the less detailed four-year outlook.
- Over-reliance on past performance metrics and assumptions (such as 85% availability, 70% utilisation, average production rate, average yield etc…) without factoring in variations and shutdowns.
- A failure to consider the asset life cycle, including cost profiles and performance expectations as assets age (particularly after we are out of the honeymoon period).
- Discomfort with less favourable projections which may be unpalatable to business leadership.
This leaves one in a tricky situation when the business’ demands are not aligned with the science, resulting in planning that is more about negotiation and hope than sound analysis.
So, What is The Answer?
Asset life cycles play out over decades, so to accurately anticipate expected performance and business impact, it becomes critical for Asset Management that planning processes also take the 4-year medium term into account. There two main reasons for this:
- Nobody likes surprises! In a world where quarterlies are so heavily scrutinised by analysts, noticeable deviations from guidance are less that desirable. By incorporating detailed Asset Performance expectations for the 4 upcoming years, organisations can prepare for potential cost increases or performance declines well in advance. This proactive strategy allows for timely adjustments and the ability to capitalize on emerging opportunities.
- Averages are overrated! Understanding your current position in the asset life cycle alongside various factors (operating conditions, duty cycles, supply chain health, major interventions, service level agreements, inflationary pressures etc.) provides a more comprehensive view of expected performance. This holistic approach diminishes the relevance of historical averages and enables more informed decision-making if we don’t like the forecasts.
Whilst short-term planning is very important, particularly within the context of work management processes, I strongly encourage operations to also consider the next four years with a scientific approach to Asset Management’s expected performance and the associated business impacts.
The bottom line – start the conversation of what can be expected in upcoming years as soon as you can within leadership. That way we can all avoid the death of averages!