Asset Utilization - Principles of Management

Almost all organizations have significant physical assets. For a retailer these include its stores, distribution warehouses, and delivery trucks; for a hospital they include the hospital building itself; for an automobile manufacturer they include its assembly plants and the equipment therein; a bank’s assets include the space devoted to branches; restaurant assets include the space devoted to customer seating and the kitchen equipment; and an airline’s assets include aircraft.

Assets do not come free—a business needs capital to own or lease them. Assetutilization refers to the extent to which assets are “working,” generating income for the organization. If operating managers can find ways to utilize their physical assets more intensively, they can increase the productivity of the firm’s capital, thus lowering the cost structure of the organization and boosting its profitability.

Consider a restaurant: One task for the restaurant owner is to utilize her tables as intensively as possible to generate more sales for every dollar of capital invested in the restaurant. A key to utilizing these assets is to turn the tables over morefrequently. If the tables are just used once a night, sales willbe much lower than if tables are turned over two or threetimes a night. How can the restaurant owner maximize tableturnover?

First, it is important for the restaurant owner to optimize capacity, balancing seating capacity with expected demand.If the restaurant is too big for the local market, asset utilizationand capital productivity will be low, and costs will behigh. Assuming that capacity is optimized, asset utilizationcan be further enhanced by the efficient operation of the restaurant(which in this case means quick customer service andcleaning of tables).

By reducing the time people spend attheir tables and the time tables wait to be cleaned ( turnaroundtime ), quick service and cleaning allow the tables to be usedmore often. Another important method is scheduling whenpeople are seated, primarily through a good reservation systemthat coordinates reservations with how long it takes customersto eat a meal, so that new customers are scheduled toarrive just as a table is being cleared.

Some busy restaurantsin New York have taken scheduling further by telling customersthat they have only a certain amount of time at the table (perhaps two hours). By efficientlyscheduling the serving of meals, clearing of tables, and reservations, some fashionablerestaurants in New York can use their tables three times a night, dramatically increasing theirasset utilization and capital productivity.

Another example of asset utilization can be seen in the airline industry. The key to asset utilization in the airline industry is to have aircraft fly as often as possible (they don’t generate money when they are on the ground) and as full as possible. Again, the issue is one of optimizing capacity and scheduling, coupled with efficient operations on the ground to turn around flights as quickly as possible.

Airlines try to match their capacity on a route (say Denver to Seattle) with demand. They also schedule flights to match demand and try to minimize the time a plane has to spend on the ground not just through scheduling but also by training ground crews to turn around planes as quickly as possible, thereby reducing the amount of time the assets are not working. At Southwest airlines, for example, ground crews can turn around an airplane in just 15 minutes, which keeps Southwest’s planes in the air more often.

As suggested by these examples, asset utilization is often influenced by three closely related variables: optimizing capacity, scheduling, and quick turnaround to intensify utilization of the asset. These three variables are not independent of each other. Efficient scheduling can reduce the amount of capacity a business needs, as can quick turnaround time.

Managers must predict and manage demand as well as possible, invest in the appropriate level of capacity for expected demand, and try to reduce the amount of capacity needed by efficient scheduling and minimizing turnaround time. Operations managers use complex algorithms to predict demand flows and optimize scheduling. In a manufacturing setting, flexible technologies are used to create quick turnaround (by reducing setup times for a machine).

Changing prices to make sure capacity is fully utilized is also often an option. Businesses that take orders electronically have a particularly good view of real-time order flows and can use real-time pricing algorithms to set the best prices to match demand and supply. Airlines are infamous for adjusting prices, often by the minute, to try to fully utilize their capacity. Railroads too now use dynamic pricing algorithms to make sure their rolling stock is fully utilized.

Dell Computer uses dynamic pricing to optimize capacity utilization in its assembly operations. Dell will alter the prices for specific models and components (sometimes daily) to keep its factories humming at optimal capacity and to better manage inventory.

Asset Utilization


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