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Teachable Moments I

’ve spent countless column inches decrying accountants who advocate volume and fixed cost

absorption as the keys to profitabil- ity. Just as bad are CFOs fixated on management by the numbers. CEOs would do well to steer clear of those who insist their equation or spread- sheet fully illuminates the correct path forward, much less the “one true path” to profitability. But finance shouldn’t be con- demned altogether, because such things are only to be absolutely shunned in theory. In practice, finan- cial tools can sometimes be helpful in achieving specific goals. For example, I’ve recently trotted out an old chestnut—return on assets—to help train a new maintenance manager and enlighten his boss. History provided the first teachable

moment. In its early days, maintenance was mainly about reacting to break- downs. Later, its focus shifted from putting out fires to preventing them from happening in the first place. As this era of preventive maintenance arose, my mentor, Joel, coined a new mission state- ment of sorts: maintenance must never be the reason operations fails to execute the production schedule. And that’s where my client and most of our industry’s maintenance programs remain today—commit- ted to supporting the success of their internal and external customers by focusing on breakdown prevention. But metalcasters can and should expect more from their maintenance programs. Tis fact is ripe with teach- able moments and is also where return on assets comes into play. Return on assets (RoA) is a

measure of overall business perfor- mance that’s calculated as the ratio of net profits to total assets. Te purest connection between maintenance management and improving RoA is to be found in Total Productive Maintenance (TPM), which is the latest and most powerful incarnation of this ages-old discipline. TPM’s es- sential goal is to maximize equipment

42 | MODERN CASTING December 2015

sure path to weaker business perfor- mance; that instead of avoiding risk, he is actually putting the sustainabil- ity of his company’s superior profit performance at higher risk. From the RoA perspective, most of his top 20 “investments” are non-productive, and when they come into use the impact will be to increase total balance sheet assets, increase P&L costs and leave capacity and revenues largely un- changed. In such circumstances, RoA and other business performance indi- cators will surely highlight diminished profitability and signal that earning superior profits will be more difficult going forward. In a very real way, this client is

utilization (aka uptime) and thereby boost asset utilization, which is a use- ful, tactical- and operations-oriented surrogate for RoA. In other words, TPM can—through equipment and asset utilization—have a direct impact all the way to RoA and the profit and loss statement’s (P&L) bottom line. Tis is possible because TPM goes be- yond breakdown prevention to address all barriers to 100% uptime, including constrained line speeds, production scheduling, pattern changes, planned downtime and other causes of idling. Te new maintenance manager’s

boss, at least at this stage, doesn’t need to be convinced of TPM’s merits. Instead, I am lining up an RoA-related teachable moment of another sort for him, one that will hopefully shift his perspective on investing the company’s significant profits and growing cash reserves. You see, he is very risk averse and, as important, he has learned per- fectly well the virtue of finite capacity and knows to avoid equipment-driven (as opposed to TPM-driven) capacity expansion. As a result, his investment priorities include new offices, updated equipment (minimal new capacity), additional support staff and largely cosmetic facility upgrades. A breakthrough is needed for him to learn that such an approach is a

generating more profit dollars than they know what to do with. While our protagonist is correct to avoid spend- ing that cash on additional equipment- driven capacity, the path he seems to be on would actually increase the risks associated with sustaining the very engine of superior profitability that created the happy situation he finds himself in today. A better move would be to stick the money under his mat- tress, but developing a complementary business would be better yet. Pursuing such a strategy would

minimize risk and, as important, pro- vide an opportunity to maximize RoA. Specifically, investment risk would be minimized by maintaining the core business’s strong financial fundamen- tals and, also, by creating economies of scale and fully leveraging the company’s technical strengths, young and tal- ented management team, and existing customer base. At the same time, the chances of converting those investments into substantial profit increases would be maximized through the acquisition of fully productive assets. While RoA can’t be the final word here, using it to create a teachable moment will hope- fully nudge this future CEO in a differ- ent investment direction.

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