What Is Asset Utilization And How To Calculate It?
Acquisition of physical assets can be extremely expensive, especially in the industrial sector. Given the high level of capital expenditure involved, firms need to ensure their optimal use to generate maximum return on assets. In other words, they want to improve asset utilization.
Here, optimal use means striking a balance and avoiding the extremes. An asset sitting idle will still incur maintenance costs. Overutilization is also not desirable, as it can lead to excess production, overflowing inventory, and excessive maintenance and operating costs.
In this article, we explore the definition, significance, and ways to measure and improve asset utilization.
What is asset utilization?
In business, asset utilization is a ratio that measures how efficient an organization is in using the assets at its disposal to make money and turn a profit. In a manufacturing facility, it would measure how well you are using your installed production capacity.
For any installed asset, you have to take into account two different factors – its potential utilization and actual utilization. For starters, remember that there is a hard limit to the number of hours you can work any machine for a year – it is 8760 hours (calendar time).
With multiple shifts in a day, you may be able to extract something close to that figure with an asset – say a CNC machine. Consider this as the potential utilization. But in reality, many factors come into play, preventing your firm from using any asset up to its maximum potential.
It could be:
changeover and operator breaks
scheduled downtime for maintenance and repairs
unexpected asset breakdowns
many other routines and random incidents
Asset utilization allows us to factor everything and measure the actual use of total assets. It is a key metric that can reveal a lot about the efficiency of your business.
Higher asset utilization usually translates into increased overall efficiency and profit margin. Also, it helps manufacturers reach production efficiency.
Why use the asset utilization ratio?
Asset utilization is important to accurately gauge business performance. In the absence of optimal use of the company’s assets, firms risk significant operational losses. The asset utilization metric gives the clearest indication of this vital statistic.
In this regard, it is a cut above OEE for several reasons. Overall equipment effectiveness only focuses on the production process – but low asset utilization can be caused by other factors. For instance, low sales can lead to inventory pile-up and force the firm to reduce production.
As a result, it is best to combine both these metrics – measure OEE and use it in the calculation of asset utilization to get the big picture. Ideal asset utilization should stay above 70%. Anything lower, and the impact on unit cost is too high and can make a business uncompetitive in the market.
The key metrics involved in the calculation of asset utilization
A plethora of diverse factors can affect the overall asset utilization in an organization. The calculation of asset utilization ratio involves four main metrics, as well as several situational ones. The main factors are discussed below.
1) Product yield
Production processes can’t deliver 100% flawless output all the time. Some units in a batch may suffer from defects, rendering them unfit for sale. Product yield is the ratio of good units available in a batch compared to the planned production of units.
The formula for calculating product yield is a bit complicated and involves the following variables:
2) Overall equipment effectiveness (OEE)
When it comes to plant productivity, OEE is widely considered the gold standard measurement. It looks at the total production time and paints a picture of actual productivity. OEE is a compound metric, calculated by multiplying the three major OEE factors:
A score of 100% in OEE means that an asset is delivering 100% results in three areas:
Quality (no defective units)
Performance (speed of production)
Availability (no downtime or pauses in production)
A low OEE could be a sign of poor maintenance, inefficient production, or an overall lack of adequate planning. In manufacturing, it is a key metric for measuring productivity and preventing wastage/losses.
3) Unplanned downtime
Unplanned downtime happens when an asset is forced to be shut down due to malfunctions or breakdowns and the resulting emergency maintenance. It may also occur due to a shortage of parts or stockouts. To find unplanned downtime, use the following variables:
More often than not, high levels of unplanned downtime are a sign of inadequate or faulty maintenance strategies. It can be used to identify troubles related to training, inventory management, and tooling maintenance.
4) Maintenance spend
As assets get older, they contribute more to the overall production cost of a good. Maintenance spend is a metric that reveals this aspect, using the following variables:
As an asset reaches the end of its lifecycle, it requires more frequent and costly maintenance. A higher ratio of maintenance cost points to an inefficient or outdated asset. It may be used as a sign that a piece of equipment needs to be phased out and replaced.
Steps for calculating asset utilization
Measuring asset utilization is fairly straightforward, as far as the steps involved are concerned. We start at the maximum possible utilization and subtract the “times” when the assets weren’t utilized – for whatever reason.
The main challenge is obtaining accurate data for the calculation. A modern CMMS system can go a long way in making the process easier. When used properly, CMMS can automatically track planned and unplanned downtime for specific assets or facilities.
To calculate actual asset utilization, follow the steps outlined below.
STEP #1: Determine annual planned downtime
Find the annual figure for planned maintenance downtime for all production-related assets. Calculate the total average across all assets to figure out the actual maintenance downtime for a plant/facility.
STEP #2: Add lost operations time
Find the total number of operational hours lost each year due to holidays, maintenance, and other downtimes. In general for asset utilization, 24/7/365 is considered the default time denominator (unless there is a leap year). If certain assets do not operate 24/7/365, include the inactive hours here under lost operations time as well.
STEP #3: Include production hours lost due to low sales/backlog
Calculate the hours lost due to forced underutilization of assets. Factors to consider include lower sales, loss of market share to competitors, seasonal variations in demand, downtime caused by trials, innovations, or changes in plans/schedules driven by business decisions.
STEP #4: Calculate the total losses related to a strategic plan
Add all the results from steps 1 – 3 to get the total losses to asset utilization that cannot be attributed to operations/production processes. Keep in mind that only top-level management has the power to make meaningful changes or corrective measures in these factors.
STEP #5: Account for unscheduled downtime
This is the first factor that is usually within your control. Things to consider include unexpected asset breakdowns. Step 5 is where we effectively start with OEE measurement.
STEP #6: Look at quality losses
Calculate the product yield (units lost during production to various factors) and convert those defective units into equivalent production time. Do remember that these hours are not “directly” lost.
STEP #7: Include production rate losses
When assets are operated at below their rated capacity, that should be logged in terms of potential loss in operating time. This step is identical to the previous one for quality losses. If an engraving machine is rated for 10,000 units per hour, but only operates at 5000 units, the 50% output reduction would be converted to a 50% reduction in operating time.
STEP #8: Calculate actual asset utilization
To arrive at the final figure, log all the losses gathered so far in sequential order and subtract them from 8,760 hours – the total in a year (24/7/365). The number of hours you get from this calculation is your actual asset utilization.
The most effective ways to improve asset utilization
Once you gain insights into the actual state of asset utilization in your organization/individual facilities, you can consider remedial action. The benefit of this sequential approach is that you can easily spot the areas that need improvement, even before you get to the actual utilization number.
If the utilization figures are too low, there are several possible solutions, based on your most problematic areas:
Improve maintenance scheduling by using a customized CMMS solution.
Efficiency is more important than ever in the modern business environment. Firms that waste precious assets will have a harder time competing against leaner, more efficient rivals.
As a true measure of efficiency in production and maintenance, asset utilization assumes greater significance in this context. Harness it to find problem areas, improve asset management practices, and increase your competitiveness in the market.
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