Asset Management Control for Thales Naval Services
Master Thesis Klaas Doets
Rijksuniversiteit Groningen
Asset Management Control for Thales Naval Services
Rijksuniversiteit Groningen Faculty of Economics and Business
Master of Science in Business Administration Organizational and Management Control
Supervisor: Drs. A. Smeenge Co-assessor: Dr. M.P. van der Steen
Author: Klaas Doets
Address: Wemenstraat 35A
7551 EV Hengelo
Student number: 1654764
Email: k.doets@student.rug.nl
Date: 28 November 2008
Preface
This master thesis is the last part of my Master Business Administration program, specialization Organizational and Management Control at the University of Groningen. It is the end of my academic period, which can be described as one with ups and downs, but where the overall feeling is really positive towards this period.
First of all, I want to thank my supervisors of the University of Groningen. In the first place, Drs. A. Smeenge. He stimulated me to improve the quality of my thesis with his critical notes on previous versions of this thesis. Secondly, I appreciated the feedback that dr. M.P. van der Steen provided as the second evaluator.
Furthermore, I want to thank Frank Koudijs, business development manager at Thales NS, for his valuable support and instructions as internal supervisor during my research. I also want to thank Michel Kuijer, external consultant of Copernicos Group, for his cooperation and feedback during this research. Finally, I would like to thank my family and friends, who gave me the necessary motivation and support to accomplish this thesis.
The above-mentioned persons drive me the determination to complete this thesis. I hope that I do not disappoint them with this final version of my master thesis.
Klaas Doets
Hengelo, November 2008
Executive Summary
Thales Naval Services (NS) supports the customer in the period from the design until the end of the lifetime of a Thales product. Thales NS recognises a trend of increasing customer requests for long-term service agreements (LTSA). Therefore they want to know how to adapt their organization and what resources are needed for long-term service agreements. They started a pilot study to explore what the concept of Asset Management Control can contribute to the Thales NS LTSA organization.
Asset Management Control (AMC) is a relative new concept and there is not much research available or experience gained with it. AMC is one of the first management approaches that manages and controls over the whole life cycle. This method is designed and developed for analysing the performance and costs of highly expensive capital assets.
Stavenuiter (2002) has shown in his literature study that there are many methods and techniques, which contribute to AMC. The combined theories of Blanchard (1992) and Fayol (1949) provide an overview of different management processes. The theoretical framework in this thesis is built on other theories than the known theories from Stavenuiter (2002). The focus is only on the theories that cover the following management processes: controlling and accounting.
In the AMC pilot study the asset Squire is the central object. The AMC approach will be executed with the aid of AMC tools. These tools will be evaluated with experiences from the program Squire. Each individual tool is explained for what is done to understand the tooling, in which way this went, what the different experiences are and which conclusions are drawn. Unfortunately the AMC tools are not direct fit solutions for Thales NS. They just offer basis functions and have to be tuned to the specific Thales NS situation.
Compared to the ideal AMC approach the present organization needs various improvements. The most important conclusions are:
1. It is really important to have a structure in the organization. A new approach like AMC cannot be implemented when it is unknown in which context it will be used.
2. At this moment the organization of Thales NS is strongly project arranged. For an execution of LTSA, with the help of AMC, an asset related organization is
mandatory.
3. The essence of intensive relations with AMC has its origin in managing risks and managing mutual trust for the long term.
These conclusions are leading to the following recommendations:
1. The internal organization has to be further explored. Thales NS needs a context analysis about what is required to implement AMC.
2. To understand what the AMC method can mean in the future for Thales NS, it is important to learn from situations in practice.
Table of Content
Introduction... 1
Chapter 1. Thales Nederland B.V. ... 2
1.1 History... 2
1.2 Thales Group ... 2
1.3 Products... 3
1.4 Business Units ... 4
1.5 Customers... 5
Chapter 2. Research Plan ... 6
2.1 Problem description ... 6
2.2 Problem statement ... 6
2.3 Research Questions... 7
2.4 Methodology ... 7
2.5 Conceptual Model ... 8
Chapter 3. Theoretical review... 9
3.1 What is Asset Management Control?... 9
3.2 On what theories is AMC based?... 11
3.3 What are the advantages/disadvantages of AMC? ... 16
3.4 What are possible alternatives for AMC? ... 18
3.4.1 Through Life Management ... 18
3.4.2 Total Life Cycle Systems Management ... 19
3.4.3 Product Lifecycle Management ... 20
3.4.4.Differences and similarities with AMC ... 21
Chapter 4. Practical review ... 23
4.1 How is the present Thales NS long-term service organization arranged?... 23
4.2 How will AMC function in practice for Thales assets? ... 24
4.2.1 PRIMA Quick Scan... 25
4.2.2 Lifecycle Management Model ... 27
4.2.3 Performance Killers en Cost Drivers... 29
4.2.4 Cockpit (System Effectiveness en System Costs) ... 31
4.2.5 System Portal ... 33
4.3 What are the advantages and disadvantages by implementing AMC? ... 34
4.4 What are the consequences for the organization by implementing AMC? ... 34
4.4.1 Consequences concerning processes... 34
4.4.2 Consequences concerning products ... 35
4.4.3 Consequences concerning resources ... 35
4.4.4 Consequences concerning ICT infrastructure... 36
4.5 How feasible is the introduction of AMC?... 36
Chapter 5. Conclusions... 38
5.1 The present status of Thales NS towards the AMC ideal approach ... 38
5.2 The usefulness and relevance of the AMC approach and tooling ... 38
5.3 General conclusions... 39
Chapter 6. Recommendations ... 41
References ... 42
Introduction
Increasing complexity, cost and size of capital assets, in combination with a shorter economic lifetime are developments in the present business environment. These factors are stimulating the need for management tools capable of analysing the performance and costs of a capital asset over the whole life cycle. Stavenuiter (2002) states that Asset Management Control is one of the first management approaches that can manages and controls over the whole life cycle.
Thales Naval Services recognises a trend of increasing customer request for long- term service agreements. Thales NS wants to develop a more structured long-term service organization. The present Thales NS organization is probably not mature enough and not well prepared for more and bigger LTSA. Perhaps this structure in the organization could be reached with the AMC approach.
Unfortunately AMC is a relative new concept, so there is not much research available or experience with it. The theoretical part of AMC consists of many methods and techniques. Every method covers a different part of the AMC domain defined by Blanchard (1992) and Fayol (1949). With a literature study it is possible to define the AMC approach more in the Thales NS organization. Furthermore the AMC concept will be concretized with different AMC tools. Experiences with these tools can contribute to the research question of this Thesis:
What can the concept Asset Management Control contributes to the development of an optimal Thales Naval Services long-term service agreements organization?
The structure of this Thesis will be as follows. In the first chapter information will be provided regarding Thales Naval Services. Their place within Thales worldwide and more specific Thales Netherlands will be discussed. Also a short overview of their activities, products and customers will be given. Chapter 2 follows with a problem description and statement. Also the research questions, used methodology and developed conceptual framework will be written down. Chapter 3 consists of the theoretical part of AMC. The most relevant methods and techniques will be discussed and a new theoretical framework will be developed. Also possible alternatives of AMC will be shown in this chapter. In chapter 4 a description of the different AMC tools and their relevance for Thales NS will be analyzed. After the analysis in chapter 3 and 4 conclusions will be drawn in chapter 5. The recommendations of this research will be presented in chapter 6.
Chapter 1. Thales Nederland B.V.
This part of the report gives some general information about Thales Nederland BV.
First, the history of Thales NL is addressed, followed by a short description of the Thales group. In the next part a description of the organization of Thales NL is given and also for the business unit were this Master Thesis is carried out.
1.1 History
Thales Nederland was founded in 1922 as Hazemeijers Fabriek van Signaal apparaten. The core business is the development of naval systems. After the Second World War the company was named N.V. Hollandsche Signaalapparaten, Signaal or HSA.
In 1956, Philips purchased the majority of Signaal shares and started transferring all radar activities to Signaal. They started manufacturing radar systems and their market expanded rapidly. Although the company was very successful with her core business, Philips decided in 1990 to sell their shares. All the shares were sold to Thomson-CSF, a French electronics and defence contractor. Hollandsche Signaalapparaten became Thomson-CSF Signaal. In 2000 Thomson-CSF was renamed to Thales and Thomson-CSF Signaal became Thales Nederland BV.
1.2 Thales Group
The Thales Group is an international electronics and system group. They have three market-driven core businesses: Aerospace, Defence and Security. The Thales group employs 68.000 people in 50 countries and generated revenues of EUR 12.3 billion in 2007.
Thales Nederland is a smaller member of the Thales group, employing about 2000 people in Naval Systems, Air Systems, Communications and Security Services.
Furthermore Thales Nederland has sites in Hengelo, Eindhoven and Huizen.
The Master Thesis is carried out at Thales Hengelo, which is specialised in Naval technology. Thales Nederland is divided into four divisions to organize their core activities. Those divisions are: Naval, Air systems, Land & Joint and D3S. Each division incorporates several Business Units, see figure 1.1 for an overview.
Thales NL
Human Resources Legal
Finance R & D
Operations Communications
Marketing & Sales
NAVAL: AIR SYSTEMS:
LAND &
JOINT: D3S:
BU Above Water BU Naval Radar BU Land Systems BU Rail Sign.
BU Naval Services BU Ground Radar BU Communications BU Transport BU Industr. Services BU Radar BU Gnd Surv. Radar
BU Optronics
BU Cryogenics
Figure 1.1 – Overview Thales Nederland
1.3 Products
Thales designs and builds all kinds of products to detect objects in the air, at sea or at land. Thales NL Hengelo is specialised in the above water systems. Examples of the products designed and made by Thales are presented in figure 1.2.
The products of Thales NL are characterised by a very high complexity and uniqueness. Every product is designed to meet the specifications that a customer demands. This means a wide variety of different products of the same type. The series in which they are built are usually very small. It is possible that a defence organization orders a series of products when they are building a new range of vessels and that even within this series there are differences. This can be due to obsolescence, system updates or other necessary alterations in the design. So every product is unique
These products can be divided into four different categories. Naval Surveillance, Naval Fire Control, Ground Based Systems and Coastal Surveillance. Within these product categories a classification is made by range, which can be short, medium and long. This classification is also presented in figure 1.2.
Thales NL is continuously improving their products to satisfy their customers. This leads to new product development and updates of existing products. 18 % of the revenues of Thales are invested in Research & Development.
To support the systems Thales NS delivers logistics products and services in line with the usage and upkeep requirements of the customer. Examples are spare parts, tools and test equipment, operator and maintainer publications and training, upgrades and modifications, technical assistance and repair and overhaul.
Figure 1.2 – Overview products of Thales
1.4 Business Units
The subjects discussed in this paper are related to the Business Units Industrial Services and Naval Services from the Naval Division.
Business Unit Industrial Services
The first key activity of the BU Industrial Services is fulfilment of offset obligations of foreign companies to the Netherlands Ministry of Defence and Ministry of Economic Affairs. When the Dutch MoD buys a defence system from outside the Netherlands, this has to be compensated with industrial work in the Netherlands. Typical examples are the Joint Strike Fighter and F16. The JSF is bought in the US, but the Dutch government demanded certain workload to be carried out in the Netherlands. Thales is one of the Dutch companies that obtains work from this project.
Industrial Services also wants to cooperate with other Dutch defence organizations.
The MoD wants to give Dutch defence companies the possibility to participate in different projects and keep innovating. More Thales specific, Industrial Services tries to be an attractive business partner with other companies in developing defence products and support.
Business Unit Naval Services
Key activity of BU Naval Services is to support the customer in the period from the design until the end of the lifetime of a Thales product. This support consists of multiple services to provide the customer as much product support as possible.
To anticipate well on questions of customers, a market-oriented approach and good cooperation with other Thales business units is essential. Area Sales Managers, Business Development Managers, Contract Managers and Project & Program Managers obtain and handle orders and anticipate proactively on questions of customers. They will be supported by the Contract Administration back-office. The department Material Handling takes care of the transaction of incoming and outgoing products.
The main task of Naval Services is to keep the customer satisfied with their Thales systems. Thales NS delivers products and services to support the maintenance of Thales systems. Services are of growing importance for customers when purchasing a capital asset.
BU Naval Services has changed its service strategy to providing long-term service agreements for existing and new products. With these agreements they commit customers to their services for a number of years.
1.5 Customers
Thales Nederland has more than 85 customers divided over 50 countries. Most of these customers are defence organizations and shipyards. Many of them are related to governmental defence projects. The biggest part of the business is in the Business to Government market.
Thales has an international Marketing & Sales organization. To have better contact with customers and provide better service, Thales has local offices in for example:
Germany, France, UK, Canada, South Korea, Turkey, Venezuela and Indonesia.
Chapter 2. Research Plan
This chapter explains the design of the research. Paragraph 2.1 starts to describe and analyse the problem of the organization. Then a problem statement is developed, related to the problem analysis. This problem statement will be divided in a few research questions. Paragraph 2.4 will discuss the used methodology and finally a conceptual model is developed to describe the relations between the different elements of the thesis.
2.1 Problem description
Thales Naval Services recognises a trend of increasing customer request for long- term service agreements (LTSA). Thales NS wants to anticipate well on these developments and create less risk with long-term service agreements. They want to know how to adapt their organization and what resources are needed for long-term service agreements. These long-term service agreements are mostly organized as Contractor Logistics Support or CLS.
The present Thales NS organization for long-term service agreements is probably not mature enough and not well prepared for more and bigger LTSA. In that case the organization needs improvements in the following areas:
- Market / Customers
- Suppliers / Subcontractors - Engineering / Design groups - Service organization
Asset management control (AMC) is a definition used in the fields of finance, estate management and logistics. Originally AMC is meant to measure the cost- effectiveness of a capital asset (Stavenuiter, 2002). Thales NS wants to develop a more structured organization, which could possibly be reached from the “asset owner” perspective that AMC offers. By improving the LTSA organization and processes, Thales NS also tries to get a better understanding of the effectiveness of LTSA currently in place.
AMC is a relative new concept and it consists of many methods and techniques.
Each of these methods and techniques cover a part of the asset management domain. Together they form the concept of AMC and provide the theoretical basis behind the concept. Because asset management control is a new concept, there is not much research available or experience with it.
2.2 Problem statement
The objective of this thesis is to provide knowledge and give an advice about what AMC can contribute to the development of an optimal Thales Naval Services LTSA organization. This leads to the following main question: What can the concept Asset Management Control contributes to the development of an optimal Thales Naval Services long-term service agreements organization?
The problem statement covers economical and organizational/social aspects with regard to the logistic processes involved. The research approach uses the AMC concept to improve cost-effectiveness and to reduce risks of LTSA for Thales NS and it will be tested in a pilot study.
2.3 Research Questions
To give a clear answer on the problem statement there have be different sub questions identified. These questions will be split up in theoretical and practical questions.
Theoretical questions
3.1 What is Asset Management Control?
3.2 On what theories is AMC based?
3.3 What are the advantages/disadvantages of using AMC?
3.4 What are possible alternatives for AMC?
Practical questions
4.1 How functions the present Thales NS LTSA model?
4.2 How will AMC function in practice for Thales assets?
4.3 What are the advantages and disadvantages of implementing AMC?
4.4 What are the consequences for the organization by implementing AMC?
4.5 How feasible is introducing AMC?
2.4 Methodology
In order to be able to provide answers to the main question and sub questions, data have to be collected. This paragraph will describe which research methods are used in this research.
In the world of research a distinction is made between practical and scientific research. Although both can be academic in terms of process, the end product is fundamentally different. Pure scientific research results in general knowledge, practical research results in a contribution of knowledge, insights, methods and concepts that are useful for specific management problems (De Leeuw, 2003).
The kind of research in this Thesis is an explorative research. Little is known about the concept of AMC related to long-term service agreements. This means there is an open mind towards possibly relevant aspects or causal relationships regarding this concept. This research has also interpretative characteristics. The aim of interpretative research is to gain insight into specific situations in actual practice. This approach is based on the researcher’s awareness, that people have their own perceptions of reality. Also knowledge cannot be separated from the person who observes and interprets.
This research uses different research methods, like: observations, personal interviews and desk research. Observation is used to describe the processes and to analyze how the present organization is arranged. A personal interview is a two-way conversation initiated by an interviewer to obtain specific information from a participant. By desk research different sources are used, consisting of scientific research and branch specific information.
2.5 Conceptual Model
After identifying the problem statement of this research it is necessary to answer the question how the problem statement can be solved. A research model is developed.
This research model is a schematic description of the objective and the main steps of the research (Verschuren en Doorewaard, 2005). A research model is also important to identify the theoretical background of the research. Figure 2.1 shows this research model.
The model consists of four parts, distinguished by the characters A to D. Part A can be divided in two approaches, a theoretical research and a practical research. Part B consists of two research objects. These will be applied in the research vision. In this case this research has to result in different insights in AMC and the contribution of AMC for Thales NS LTSA. The next step is that the description of the research objects in part B will be analysed in Part C. Both parts contribute to the development of the research vision, by using research objects. These analyses have to lead to part D. This is also the objective of this research, a well-considered advice as a solution to the problem.
There is a dotted line added to the model. This is a direct relation to the research in part A and the research objects in part B. Between the theoretical research and the practical research is a confrontation that leads to research objects. The analysis of both objects should be the basis for the advice.
Theoretical Research
Different insights in AMC
Analysis
Research
Vision
Advice
Practical Research
Contribution AMC for Thales NS LTSA
Analysis
A B C D
Figure 2.1 – Conceptual model
Chapter 3. Theoretical review
A literature review helps to discover what other authors already wrote about a certain subject. Knowledge of the researcher will increase, and it helps with clarifying
research questions.
3.1 What is Asset Management Control?
The increasing complexity, cost and size of capital assets, in combination with a shorter economic lifetime are developments in the present business environment.
These factors are stimulating the need for management tools capable of analysing the system effectiveness and life cycle costs. Asset Management Control is a relative new concept that tries to deal with these developments.
AMC is one of the first management approaches that manages and controls over the whole life cycle (specify, design, produce, maintain and dispose). The emphasis is on the so-called total life cycle costs of a capital asset. Reducing these life cycle costs with a few percent are relevant savings, especially in the case of expensive assets.
Purchases of expensive systems are often based on tenders. It is most likely that, under constant quality boundaries, the cheapest supplier gets the order. However, the purchasing process of an expensive system should not only consider the costs of acquisition but also the costs of maintenance, spare parts and other resources (figure 3.1).
Figure 3.1 - The Iceberg – metaphor (Stavenuiter, 2002)
Manufacturers used to underestimate the cost under the water. A large part of potential customers will only look at the quality and the acquisition price, because those are clear. All other costs are going to be made in the future and these costs could also really differ (figure 3.2).
Figure 3.2 – Example of life cycle cost element contributions (Stavenuiter, 2002)
Within AMC the assets’ life cycle is roughly divided into four phases as can be seen in figure 3.3. It starts with the design phase in which the operational need is specified. Then follows the acquisition phase, also known as the building phase. This phase starts with the conceptual design and ends with the production and construction. The next phase is the operational phase. In this phase the system is in operational use and has to perform. The fourth phase is the selling phase. In this last phase the system can no longer economically fulfil the operational need of the owner.
In each of these phases it is important that the asset meets the operational needs of the customer in the most effective way.
Figure 3.3 – Life cycle phases of an asset
The AMC approach aims to stimulate all logistic actors to fulfil their part in the most cost-effective way. This will be reached by showing the intended result and the impact of their contribution to the whole system. With the AMC approach the relation between operational needs, imposed by the customer and costs can be clearly indicated and controlled. For organizations working with capital-intensive material, the objective will be to reduce cost and to improve the performance.
The AMC approach focuses of the principles of the asset owner. Thales NS learns how to function from the perspective of the customer. In this way Thales NS could be
more proactive to the customer. Also one of the pillars of AMC is a more intense performance based relationship between the most important stakeholders of an asset. This relationship will be concretized with a Life Cycle Management team (LCM-team) and is a consultative body between the most important stakeholders.
This relationship must be build up by mutual trust.
The AMC approach is designed and developed for huge, capital assets. It will be used on the level of whole systems and is less suitable for components of systems.
By using the AMC approach it is important that all stakeholders have the intention to build up a relationship for the long term. For certain investments in the present organization it is required that within the LCM-team the long term is the central thought.
3.2 On what theories is AMC based?
Stavenuiter (2002) has made clear in his literature study that there are many methods and techniques, which could contribute to AMC. It is too complex to use all these methods and techniques in the concept AMC. The methods, shown in figure 3.4, are selected as the most relevant theories in relation to asset management control (Stavenuiter, 2002).
As we concluded in figure 3.3 there are four life cycle phases. Blanchard (1992) has developed these four in six life cycle phases, namely: conceptual design, preliminary design, detail design, production/construction, utilization/maintenance and phase out.
The life cycle starts with an operational need and ends with selling or scrapping the asset.
Fayol (1949) looks at the output of an organization. He specifies the processes, which have to be fulfilled in order to achieve the required output. He distincts the following processes: goal setting, policy determination, planning, organizing, directing, controlling and accounting.
The combined theories of Blanchard (1992) and Fayol (1949) provide an overview, which can be covered by the relevant studied methods and techniques of AMC (Stavenuiter, 2002). Figure 3.4 presents this model. In this figure almost every management process is covered in every life cycle phase by relevant theories. In this research the focus is on the theories that cover the following management processes: controlling and accounting.
Figure 3.4 – Illustration of management support methods for AMC (Stavenuiter, 2002)
The most relevant studied theories related to these processes are Total Quality Management, Activity Based Costing and Design to Cost. This chapter will explain these theories in relation to this research. This research shows also more relevant alternatives for the concept of AMC. At the end of this part a new illustration of relevant management support methods of AMC has been developed.
Total Quality Management
According to figure 3.4 Total Quality Management (TQM) covers a great part of the Asset Management domain. TQM is both a philosophy and a set of guiding principles as foundation for a continuously improving organization. It has been recognized as a competitive advantage for a firm’s success since the 1980s (Kuei et al., 2001). The TQM method can be useful over the asset life cycle.
Total Quality Management is the organization wide management of quality.
Management consists of planning, organizing, directing, control, and assurance.
Total quality is called ‘total’ because it focusses on: quality of return to satisfy the needs of the shareholders and quality of products. At its core, TQM is a management approach to long-term success through customer satisfaction. In a TQM effort, all members of an organization participate in improving processes, products, services and the culture in which they work.
However, some researchers have warned that TQM is a necessary condition for top- level competition, but no longer a sufficient one (Mani et al, 2003). Another research even proposed that TQM sometimes leads to ineffectiveness of a business (Choi &
Eboch, 1998). So there are different opinions in the usefullness of TQM.
Nevertheless, little of the literature has mentioned TQM’s influence on the causal
linkages between manufacturing objective and organizational performance. The paper of Lin & Chang (2006) tries to explain how various manufacturing objectives perform to improve organizational performance under TQM practice.
There are a few important outcomes in this paper. High TQM practice firms are shown to perform better with the overall outcome in manufacturing objectives attainment and organizational performance improvement. The relevance of TQM as an important business management strategy of a firm will be recognized in this paper. Firms that do not implement TQM in their organization can become globally non-competitive rather rapidly.
Another interesting result is that for high TQM practice firms, flexibility and delivery time enhance organizational performance most significantly. Firms with low TQM practice perform best on the manufacturing objective: services. Related to the recognised trend of increasing customer request for long-term service agreements it is doubtful how important TQM for service organizations is.
Total Performance Scorecard
Since the early 1980s, world-class companies have seen an increased interest in the implementation of management philosophies such as TQM. The overall objectives of these philosophies are similar, although their focuses differ. An improved approach for creating a learning organization is now developed in which personal and organizational performance reinforce each other on a sustainable basis. Total Performance Scorecard (TPS) refers to the maximum personal development of all corporate associates and the optimal use of their capabilities for the realization of the highest organizational performance (Rumpersad, 2005).
Traditional business management concepts are insufficiently committed to learning and rarely take the specific personal ambitions of employees into account. An important difference is that TPS is an integrated management concept that regards personal ambition as the starting point. TPS integrates concepts such as TQM, the Balanced ScoreCard (BSC) and performance management into one overall framework. In Figure 3.5 these different theories are visualised in the Asset Management Control domain.
Figure 3.5 – Different theories in the Asset Management Control domain (Stavenuiter, 2002)
The TPS concept starts with formulating the personal ambition of individuals and then balancing this with the shared ambition of the organization. This benefits the durability of improvement and change actions that are subsequently implemented.
After all, real organization improvement and change are only achieved if people
change and improve inwardly. If personal ambition is the starting point, people will cooperate with more commitment and loyalty, which should lead to motivation, inspiration and enthusiasm. This concept is designed to maximize the individual organizational improvements as well as the balance between long-and short-term success and financial and non-financial results.
According to Engel (2005) three elements play a role in continuously improving the organization: organizational culture, involvement and wide support. TPS stresses the importance of and need for developing an organizational structure that combines the goals of the individual with those of the company. It is a process, which results in a corporate culture that is both individually and organizationally driven. This personal attention should lead to the involvement of personnel. An important conclusion from this context is that people and environment need to fit. Then it is possible to involve as many employees as possible to create a support base that is overall accepted.
This should eventually lead to the third element, wide support.
Fact is that organizations know that it is necessary to implement changes leading to greater efficency and cost management. These developments demonstrated that no organisation is excluded from the need to continuously to improve. A variety of process management tools are available to support TQM efforts in quality and or productivity. Activity based costing is an example of these tools.
Activity Based Costing
Traditionally cost accountants had arbitrarily added a broad percentage of expenses onto the direct costs to allow for the indirect costs. However as the percentages of indirect or overhead costs had risen, this technique became increasingly inaccurate.
The reason of this is that the indirect costs were not caused equally by all the products. This means that there is a danger of one product subsidizing another.
Activity-Based Costing (ABC) is a costing model that identifies activities in an organization and assigns the cost of each activity resource to products and services (Griful-Miquela, 2001). This model generates the actual cost of products and services for the purpose of elimination of unprofitable products and services and lowering prices of overpriced ones. In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. It is generally used as a tool for understanding product and customer cost and profitability. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement initiatives.
Activity based costing has grown in importance in recent decades, because:
manufacturing overhead costs have increased significantly. Also the manufacturing overhead costs no longer correlate with the productive machine hours or direct labour hours. Another reason is the diversity of products and the diversity in customers' demands have grown. Furthermore, there are some products produced in large batches, while others are produced in small batches.
According to Baker (2001) there are in today’s environment three concerns that are related to the success of effective management control: cost, customers and competition. Because of ABC systems, cost management and cost control are better
accomplished today than ever before. Concerns for customers are also very well addressed because of TQM that has become prevalent and necessary in the majority of management systems. However, while many companies have implemented ABC and TQM, some of these companies are unconscious of competition. This is not to say that management is ignoring competition. In the opinion of Baker (2001) a company needs competitive target costing to have an effective management control system. Furthermore it is also the missing element in cost management.
Target Costing
In competitive target costing, product cost is equal to some predefined price less some predefined profit. However, to address competition and external standards, companies must strive to reduce costs to the level of competitive target costs. They must do so within the ABC framework and without sacrificing the demands of TQM.
Target costing is also known as a continuous development approach to management. Thus the determination of competitive targets cost and cost improvement strategies is more a process than a one-time calculation.
Life Cycle Cost Analysis
Target costing is often viewed as the philosophy that shows management that most costs are determined early in the life cycle of the product. An important technique that is associated with competitive target costing is life cycle cost analysis (LCCA). Life cycle costing is derived from the life cycle of a product. Asset managers should also note the variations in cost structures that exist among product life cycle stages.
According to Baker (2001) in the introduction phase, cost structures are poorly defined. With a good LCCA there could be huge cost reductions in the total life cycle.
In figure 3.6 the last described theories are visualized and what part of the Asset Management domain they cover.
Figure 3.6 - Different theories in the Asset Management Control domain (Stavenuiter, 2002)
Design to Cost
A last unknown concept that is important in the concept of AMC is Design to cost (DTC). Design to cost is a management strategy to achieve an affordable product.
The objective of DTC is to optimize the cost effectiveness by reflecting life cycle cost considerations at every stage of the design process (Crow, 2000). This is almost the same as Target Costing. However, with Target Costing the three concerns related to
the success of an effective management control system are covered. Related to this information Target Costing is a better alternative than DTC.
All these theories combined give a new framework of relevant management support methods. Hereby this research is limited to the management processes: controlling and accounting in the Asset Management Control domain. The framework is
illustrated in figure 3.7.
Figure 3.7 - new framework of relevant management support methods
3.3 What are the advantages/disadvantages of AMC?
Asset Management Control is a management approach to manage and control over the total life cycle. The price of a huge capital asset (e.g. a ship) is known, but what is the cost of this asset during its life cycle? Also important to know is how to improve performances and/or reduces cost and which system cost effectiveness is really needed? The concept AMC tries to provide an answer to all of these questions.
The emphasis on the provision of total customer solutions is of significant importance to the service and support activities. Although high quality, reliable products are still essential to the overall offering, there is a need to integrate products and services in order to provide through-life total solutions. Services such as maintenance, repairs and overhauls (MRO) are traditional services that have been provided by naval manufacturers for many years. This is viewed as being a reactive strategy where the manufacturer has no real incentive to understand the customer’s operational needs and requirements.
In the future, probably new types of agreements for MRO will become more common.
These should include fixed price repairs, spares inclusive and availability contracts.
AMC offers an approach what gives an organization a structure for these new types of agreements. Unfortunately these value-added services often depend heavily on
Conceptual Design
Preliminary Design
Detailed Design
Utilization/
Maintenance Phase Out Production/
Construction
LIFE CYCLE PHASES
Goal Setting
Policy Determination Planning
Organizing
Directing
Controlling
Accounting
MANAGEMENT PROCESS
Conceptual Design
Preliminary Design
Detailed Design
Utilization/
Maintenance Phase Out Production/
Construction
LIFE CYCLE PHASES
Goal Setting
Policy Determination Planning
Organizing
Directing
Controlling
Accounting
MANAGEMENT PROCESS
Total Performance
Scorecard
Activity Based Costing Life cycle Cost
Analysis
Target Costing
ABC TPS
TC LCCA
the provision of data by the customer. This can often be difficult to obtain, especially with respect to military equipment.
The cooperation between defence organizations and the industry has been motivated by better control and increased performance. The defence organizations have a positive attitude towards the cooperation with the industry. It is calculated that problems in the implementation of AMC should exist. A system of penalties and rewards has been included in contracts, depending on supplied performance.
Nevertheless, the most important condition for good cooperation is mutual trust and the willingness to share information.
The management control system is formed by a Life Cycle Management-team (LCM- team), which consists of experts and managers. Team members can change during the life cycle of an asset. In the conceptual design phase the project managers and design engineers are part of the team. In the operational phase different operators and maintainers are active. In general the LCM-team is a formation that consists of representatives from design, operations and maintenance.
From an organizational point of view LCM-teams can be seen as project teams. For this reason a matrix organization is proposed (Blanchard, 1992). The matrix organization structure aims to combine the advantages of the pure functional organization and the pure project organization. When an organization reorganizes from a functional or a project organization it is a big switch to a matrix organization.
This change means huge efforts in terms of financial and organizational resources by changing the structure of the organization.
Stavenuiter (2002) determined in his book ten improvement factors for organizations.
By implementing AMC these factors should contribute to an improved organization:
1. Well-specified objectives, the asset management objectives must be defined and specified in significant figures.
2. Transparent system breakdown structure, the technical system breakdown structure should be able to decompose the system in such a way that all system component contributions are traceable and comprehensible.
3. Transparent process structure, this should represent the logistic processes related to all life cycle phases in a transparent way for all actors.
4. System effectiveness measurers, a well-defined system effectiveness indicator must be either defined or developed to provide reliable estimation of the system performance in relation to the operational requirements.
5. Cost measures, a well-defined cost measuring method must be adopted or developed. This should provide a clear overview of actual costs in relation to the estimated costs.
6. Key performance indicators, realistic performance indicators must be adopted or developed to verify that cost effective management control will be achieved.
7. System knowledge, in order to achieve professional Systems Engineers over the life cycle of an asset
8. Logistic knowledge, provide a logistic training course in order to achieve professional actors at all logistic levels and phases
9. Management control knowledge, a management training course needs to be provided to achieve system managers capable of organizing, planning and motivating logistic actors in a productive way.
10. Information & communication Technology (ICT), the communication between all logistics actors must be unambiguous, effective and efficient.
The AMC concept is developed for an asset owner. The different tools are supporting the point of view of the customer/user and are not directly beneficial for the industry.
For the industry it is really important to determine their setting/position in the context of AMC. Depending on this setting they can determine the relevance of the method and different tools of AMC. Important to conclude is that for every asset the role of the industry can differ.
3.4 What are possible alternatives for AMC?
Asset Management Control is a relatively new concept in the Dutch defence environment. However in the worldwide defence industry there are more similar concepts. Through Life Management (TLM) used in the UK and Total Life Cycle Systems Management (TLCSM) from the US are more mature concepts than AMC is now. Another common used philosophy in many other industries is Product Lifecycle Management (PLM). These concepts and philosophies have been summarized in the following paragraphs.
3.4.1 Through Life Management
Through Life Management involves the management of all aspects of a capability throughout its life cycle. The concept came out of the Smart Acquisition reforms that resulted from the Strategic Defence Review in 1998 and is aimed at more effective management of defence capabilities (tlmsolutions.co.uk).
The TLM philosophy is adopted by the UK Ministry of Defense and started with the implementation of the objectives of SMART Acquisition. The SMART (Specific, Measurable, Achievable, Relevant, Time bound) Acquisition objectives aimed at faster, cheaper and better acquisition and support of equipment. To achieve these objectives it is important that there is an integrated through life approach to managing projects.
Decisions regarding costs are made in the early stages of the acquisition cycle.
However, most of the whole life cost is actually spent when the equipment is In- Service, as shown on Figure 3.8. TLM enables the decisions made early in the process to take account of whole life costs.
TLM is not only relevant to the defence industry. It is a generic philosophy that involves taking a complete and coherent approach to managing the cost-effective delivery of outputs. This means involving all stakeholders in the management process. TLM also makes up-to-date and relevant management information available. Any kind of business or organisation with complex products in any market sector could benefit from a Through Life Management approach.
Figure 3.8 – TLM – UK MoD
According to Ward and Graves (2005) there are three primary reasons for the adoption of TLM. These are: customer demand, increased revenues and increased competitiveness. The customer’s focus has changed from the acquisition of products to the acquisition of through-life capability. On the military side (the environment where Thales operates) support contracts are increasingly being linked to equipment availability targets. The driver is to transfer risk to the manufacturer or support provider and reduce total costs of ownership.
Traditionally, manufacturers in the naval industry concentrated heavily on the design and manufacture of equipment, with after sales activities being viewed as “necessary evil” suggested by Lele (1997). Over the past ten years, naval manufacturers began to recognise the financial opportunities provided by support and sales activities.
Unfortunately manufacturing and service support were effectively considered separate businesses, with no real integration between the two. This resulted in a win/loss scenario with the manufacturer gaining significantly, but the customer not receiving a comprehensive service over the life of the equipment. Through-life Management attempts to provide integrated customer solutions.
In addition to protecting future revenues, naval manufacturers have expressed a desire to maintain competitive advantage. They want to reach it by protecting their intellectual property rights and their reputation in the market (Ward and Graves, 2005). In this kind of industry there are more and more companies who introduce total support methods. This makes a comprehensive solution really important for their competitiveness.
3.4.2 Total Life Cycle Systems Management
The basic principles of Total Life Cycle Systems Management (TLCSM) emphasize an early focus on sustainment within the system life cycle. TLCSM is the implementation, management, and oversight of all activities associated with the acquisition, development, production, fielding, sustainment, and disposal of a weapon system across its life cycle (TLCSM – US DOD).
The National Defense Strategy, the Quadrennial Review, have made it clear that there must be weapon systems that have reduced cycle times, and also are affordable. Meeting these objectives requires early and proactive actions during the
acquisition process to address those key logistics criteria. TLCSM provides assistance in that process.
The TLCSM approach requires a few important concepts. First is to base major decisions on system-wide analyses on system performance and affordability. Also there should be a single point of accountability for accomplishing program objectives, the Program Manager or Life Cycle Manager. Also long term support has to be a key element of performance. Another important factor is to continue review of sustainment strategies.
Program Managers will develop and execute sustainment strategies based upon warfighter performance requirements. In their opinion it is fundamental to take a total life cycle or total systems approach. TLCSM should be for them, the planning and management of the entire acquisition life of a weapon system. Because of TLCSM, the Program Manager should consider nearly all systems development decisions in context of the effect that the decision will have on the long term operation effectiveness of the system. TLCSM considerations should contain the decision making of all acquisition functions and communities, during all acquisition phases.
Performance Based Logistics is an important concept within TLCSM. It is the purchase of support as an integrated, affordable, performance package designed to optimize system readiness and meet performance goals (Vitasek, 2006). It is especially developed for a weapon system with long-term support arrangements and also clear lines of authority. One of the most significant aspects of PBL is the concept of a negotiated agreement between the major stakeholders. It should formally contain the performance and support expectations and matching resources to achieve the desired PBL outcomes.
Important to notice is that each PBL arrangement is unique and will vary from other PBL arrangements. A PBL arrangement may take many forms. There is no one-size- fits-all approach to PBL. Fundamental to the development and execution of a PBL strategy is the ability to understand and communicate to the stakeholders to support PBL solutions.
3.4.3 Product Lifecycle Management
Product lifecycle management (PLM) is the process of managing the entire lifecycle of a product from its conception, through design and manufacture, to service and disposal. Figure 3.9 divides a product life cycle into several stages characterized by the revenue generated by the product. It is one of the four cornerstones of a corporation's information technology structure. All companies need to manage communications and information with their customers (Customer Relationship Management), their suppliers (Supply Chain Management), their resources within the enterprise (Enterprise Resource Planning) and their planning (Systems Development Life Cycle). In addition, manufacturing engineering companies must also develop, describe, manage and communicate information about their products. (PLM- kennisbank.nl)
