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Lite Makes Right

Companies are putting a new twist on a '90s trend as they look to squeeze more life from assets without jettisoning them altogether.

Call it the era of “asset-smart.” Wary of long-term capital investments, many companies have reacted to today’s economic uncertainty with a spin on the “asset-lite” strategy popularized during the 1990s, when companies rushed to lighten their balance sheets by slashing plant-and-equipment outlays, wringing as many sales as possible from existing assets, and spending as little as they could on upkeep.

This time, however, the approach is much more cautious. Finance executives are determined to squeeze the most out of existing facilities, machinery, real estate, and inventory, even if that means spending more on upkeep or, as counterintuitive as it sounds, buying new equipment.

The strategy is driven by the tentativeness of current economic conditions. “You can develop the most sophisticated financial model in the world about what the cost and revenue implications of a decision will be, yet the fuel price you plug in this morning may be all wrong by tonight,” says Peter Ingram, CFO and treasurer of Hawaiian Holdings, the parent company of Hawaiian Airlines.

Facing tepid consumer demand and volatile commodities prices, most companies have put off capital spending and are holding on to their cash (see “Captains of Capex,” September). That may put them at a disadvantage should demand surge, but few are willing to spend now to head off that possibility. Instead, many are working to improve their asset utilization, essentially buying time by “not immediately investing their capital, or investing it in a more targeted fashion,” says David Garfield, managing director at consulting firm Alix Partners.

Asset utilization is typically calculated by dividing revenue by assets — revealing, for example, the volume of sales linked to a given factory and the equipment inside it. Hence the appeal of asset-lite: strip your balance sheet of assets and your asset-utilization ratios improve dramatically. Investors tend to like that, and often fail to look beyond the improved ratios.

Finance executives, however, are now focusing on a second metric related to asset use: the “opportunity gap.” Calculating it requires estimating a company’s maximum theoretical output, the number of widgets it could crank out if its assets were running 24 hours a day, seven days a week, at maximum efficiency.

By subtracting actual output from that theoretical maximum, a CFO can get a sense of how much the firm is falling short of its ideal — and how much of the difference it can make up before resorting to capital outlays. “In the real world you can’t get to that perfect state. But the closer you get, the more efficient you become,” says Garfield. “That’s the opportunity.”

How companies manage assets may depend on how they look at them, and at the world.

Managers must, however, resist the temptation to game the system. Since they know that perfection isn’t achievable, they might, for example, ignore such things as the cost of regularly scheduled maintenance when calculating ideal output.

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