Decision Making for CAPEX and OPEX. IPR Methodology

Organizations pursuing growth face significant cost obstacles (CAPEX & OPEX) due to inflation in goods prices, supply shortages, and political, economic, and social uncertainty. Leaders can use strategic cost optimization resources to make decisions about their CAPEX & OPEX budgets while investing for growth, digitalization, sustainable development, and sustainability.

Organizations are reintroducing costs in pursuit of growth opportunities as the global economy recovers from lockdowns related to health issues, the economy, war, and social impact.

However, goods scarcity and inflation have added a considerable hurdle to CAPEX & OPEX cost optimization. Costs that were once taken for granted (e.g., labor costs, operations, raw materials, materials, freight, and components) have risen far above pre-pandemic levels as demand recovers without a corresponding rebound in supply.

While margin management actions (e.g., price changes) can provide some relief from rising costs, executive leaders are challenged to ensure that inflationary headwinds do not diminish profitability. In this environment, executive leaders must take action to optimize CAPEX & OPEX costs without compromising growth.
After conducting studies in different industrial sectors, we have concluded that new business models focused on creating value solutions, supported by the health index, must be restructured. These represent a novel way to capture and quantify the results of maintenance operations, field inspections, and on-site and laboratory tests into an objective and quantitative picture. This provides the overall health of assets to seek the Risk Priority Index (CAPEX & OPEX).

At PMM Innovation Group, we developed the IPR (Risk Priority Index) to help organizations predict when assets would need replacement and, from there, what the CAPEX & OPEX budget should be for the next two, five, or ten years. More recently, its use has expanded to include more strategic plans, such as the long-term Strategic Asset Management plan recommended by the new ISO 55001 Asset Management standard.
Ultimately, organizations should use asset condition to make data-driven repair and replacement decisions that are based on facts, not on who complains the loudest or has the executive’s ear.

Where does asset health indexing fit in?
Asset condition value losses are part of the Strategic Asset Management Plan (SAMP) and the continuous asset performance management process. It starts with your corporate business strategy and corporate policy for managing your assets, and it considers projected future demand (e.g., reducing carbon footprint, ensuring high reliability, and considering factors such as population growth or a decrease in demand due to the use of digital technologies).

Health indices evaluate the current capacity and health of your asset base, providing an indicator for decision-making regarding CAPEX and OPEX investment bases and alternatives (Figure 1).
Figure 1. IPR – Key elements for operational excellence, Amendola.L, Depool.T, 2017
Based on our industrial application, asset managers could optimize budgets and save money, but if the quality of the capital asset is declining due to insufficient investment, there is a greater risk of failure. By using a more sophisticated measure of asset health (Health and Impact) related to condition, asset managers can have defined criteria based on real facts to demonstrate to company executives the correct levels for capital and operational budgets.
Risk Priority Index (IPR) becomes a powerful tool for managing assets, identifying investment needs, and prioritizing investments in CAPEX & OPEX programs. When developed, health indices provide an accurate indication of the likelihood of asset failures and associated risks.

PMM CIEx Innovation University (www.pmmciex.com) & Maintenance Intelligence, using the IPR (Risk Priority Index) methodology, designed software (https://decision-apm.com) that incorporates health and impact for calculating the health index to predict the future condition of assets based on the IPR.

This methodology can be used to assess future risks associated with an asset or to select optimal maintenance levels that would provide the right balance between risk and investment and operating costs.
The methodology shows the sequence in which asset needs are prioritized based on their IPR. Once this hierarchy is established and based on budget program criteria (budget constraints and/or commitments to other projects), the different needs are filtered or structured, for example, over a period of X years. The next step is to organize initiatives based on asset groups or location, or by leveraging economies of scale to achieve greater productivity, and then to implement the investment alternative.

Methodology for evaluating the IPR (Risk Probability Index)

What is the objective of the Methodology? The objective is to prioritize the CAPEX/OPEX plan through a systematic method and clear criteria, considering asset health and impact criteria.

The decision to implement and automate asset health indices can have a significant positive impact on asset reliability, enable you to develop a better multi-year strategic overall asset management plan, and establish CAPEX and OPEX budgets based on delivering value at an acceptable level of risk without degrading the overall health of your asset base.

The Decision-APM software (https://decision-apm.com) incorporates health and impact for calculating the health index with the aim of predicting the future condition of assets based on the IPR (Risk Priority Index).

By generating asset health indices in a much more timely and automated manner, you will have better visibility into the overall health of your assets. Health indexing is bridging the gap between short-term corrective work, driven by condition-based maintenance, and longer-term capital planning, which used to be driven by one-off periodic studies (or last year’s budget and available capital). With asset health indexing, the foundation is laid for fact-based decisions to find the right balance between ongoing maintenance, capital replacement, and overall risk mitigation.

It’s useful for more than just an annual budget

By establishing the trend of health indices over time and correlating them with failure rates and maintenance costs, management can use the health index to help decide if a major renewal program is more effective than asset replacement. Asset health indices change how maintenance programs are executed.
An engineer responsible for a major program needs to know if taking a system out of service will create a situation where the maximum load will land on a system in poor condition and prevent the poor system from becoming a single point of failure.

There is a limit to how far we can take health indices into regular maintenance. The data sources for both are often similar, but for day-to-day asset performance management, we need to monitor and model asset condition, understand condition degradation, and trigger corrective work that needs to be done in days or weeks. Meanwhile, a health index is a number used for medium and long-term planning in business financial and technical decision-making.

Condition indicators must react to near real-time data, while health indices are generally only generated monthly, quarterly, or annually. This longer-term assessment and planning requires a CAPEX & OPEX decision model (IPR) as shown.

BENEFITS OF DECISION – APM (IPR)

• • Provides instant information to finance, operations, engineering, and maintenance departments to make the best joint decision.

• • Identify ROI (Return on Investment).

• • Identify changes in maintenance costs.

• • Understand the asset lifecycle.

• • Identify unnecessary preventive maintenance.

• • Identifies asset availability to meet production or operational objectives.

• • Adoption of reliability and asset lifecycle strategies.

• • Selection of Investment Alternatives.