June 2017, Vol. 244, No. 6


Reliability Rescue: Converting Compliance into Competitive Advantage

By Drew. D. Troyer, Consultant-Engineering Assets, Tulsa, OK

The oil and gas pipeline industry is increasingly encumbered by regulations with respect to the integrity and care of engineered assets. Constraints, directives and regulations from the Pipeline and Hazardous Materials Safety Administration (PHMSA) division of the Department of Transportation (DOT), the Environmental Protection Agency (EPA) and the American Petroleum Institute (API) are just a few of the regulatory and standards bodies that continue to heap restrictions on the industry.

Additionally, ISO 55000, based largely on the British Standards Institutes PAS 55 standard), addresses engineered asset management (EAM) that will at some point create at least latent risk and liability for firms that fail to comply. In some cases, these regulations are driven by societal pressure. In other instances, they derive from the mismanagement of engineered assets by industry players.

When disaster strikes, resulting in adverse safety or environmental consequences, the “iron law of social responsibility” is invoked and organizations lose the authority to manage engineered assets without regulatory supervision.

To illustrate the importance of EAM, consider the case of British Petroleum (BP). Figure 1 illustrates the relative share price for BP vs. Chevron from 2003-13, according to Yahoo! Finance. There are three super-imposed vertical lines that reflect the dates of the BP Texas City refinery explosion (TC), the BP Prudhoe Bay leak (PB) and the BP Deepwater Horizon disaster (DH) – all caused by mismanagement of engineered assets. The charting is relative for comparative purposes. Prior to the TC disaster, BP and Chevron were tracking very closely in terms of stock price.

After TC, they continued to track and BP got a get-out-of-jail-free card, so to speak. However, after PB, which occurred about a year later, BP’s share value dropped precipitously compared to Chevron. While BP’s stock didn’t fully recover, the two companies’ share price eventually changed with near-mirroring variation. DH, however, was the killer. BP’s stock dropped steeply and didn’t recover, either in terms of magnitude or correlated variation.

In terms of cost, a $1,000 investment in BP stock in 2003 was worth $1,000 in 2013. In 2003 present-value dollars, the value of the investment would have dropped from $1,000 to $558, assuming a 6% cost of capital. That spells bad news for investor relations.



Figure 1: The effects of mismanaging engineered assets.

Is there a silver-lining in all of this regulation? Yes, I believe so. Research suggests that upper-quartile EAM organizations significantly outperform the lower-quartile performers in terms of productive availability, productive yield and cost of asset ownership. Increasing throughput and reducing costs is a great formula for driving up return on net assets (RONA) and share price or owner’s equity.

Moreover, effective management of engineered assets can create a competitive advantage, positioning the firm for mechanical growth through acquisition in down markets when lower-quartile performers can’t survive and are forced into a bargain sale. It turns out the very management strategies that drive up profits also drive environmental and safety risks down, as the incidents that decrease throughput and increase costs are the very same incidents that produce safety and environmental impacts.

So, what’s the secret to uncovering this wealth of opportunity and risk avoidance? That’s the great thing – it’s no secret – it is reliability in engineering and management – the same risk-management framework that is employed in aviation, nuclear power and other reliability-critical industries. While it’s not wise to approach reliability management from a modular perspective, picking and choosing what you want, the framework is extremely scalable. The effort can be calibrated to match the risk and risk-mitigation requirements for your organization.

Reliability 101

The word “reliability” has been around for many years. However, its application to engineering didn’t really begin until the 1950s, when the current framework got its start in military applications. It later evolved and expanded to commercial aviation, nuclear power and other industries. In essence, reliability engineering employs a range of quantitative and qualitative tools as well as techniques to define and manage the risks associated with the dependability of electrical and mechanical components. This also pertains to systems over the lifecycle of the asset, which includes design, manufacture, installation/commission, operate/maintain and dispose/reuse.

Reliability engineers and managers employ a range of different tools and techniques, but the overall process is generally managed using two primary and complementary processes: failure modes and effects analysis (FMEA), and failure reporting and corrective action system (FRACAS), which includes root cause analysis (RCA) as a sub-part. In reality, FMEA and FRACAS are bookends of the same overall process, designed to manage risk and reliability over the lifecycle of the asset.

FMEA, which employs inductive reasoning, is used in the design phase of the asset lifecycle to hypothetically and, where appropriate, systematically test potential failure modes and mechanisms. The goal of FMEA is to manage the process of reliability growth to a level deemed acceptable to the stakeholders’ risk managers.

FRACAS, conversely, employs abductive reasoning and is employed during the operate/maintain phase of the lifecycle. It depends on diligent and systematic field data collection and analysis. It results in in-situ design modifications, changes in the operating context and modifications to the maintenance strategy. Figure 2 provides an overview of the general scope of reliability engineering and management applicable to the oil and gas pipeline operator and owner.


Figure 2: The scope of reliability engineering and management.

Because reliability is managed across the entire lifecycle of the engineered asset and is affected by all functional groups in the organization, it requires a strong cross-functional approach with a clear focus on the mission of the organization. While highly summarized, that defines reliability engineering and management in a nutshell. Reliability engineers serve as the actuaries of the engineering discipline and play a supporting role to design engineers, process engineers and maintenance engineers.

Reliability engineers must be familiar with common failure modes and mechanical, electrical and chemical failure mechanisms as well as the causal forcing functions that lead to failure. And, they need to be able to effectively connect their efforts to your organization’s mission. The Department of Energy (DOE) suggests technical factors account for only 20% of system failures in nuclear power plants. Human factors account for 80% of failures – 56% organizational artifacts and 24% individual artifacts. Those percentages quite accurately describe most industries.

Competitive Advantage

Regulations and other instruments of compliance force owners of engineered assets to do things they wouldn’t normally do – usually to avoid costs. However, if you have to spend the money – do so wisely by implementing the compliance process within a comprehensive and right-sized reliability engineering and management framework.

Doing so will improve safety and environmental performance, improve profitability and protect shareholder value. A study by the Aberdeen Group in Cambridge, MA revealed upper-quartile EAM performers enjoyed a 17% higher production throughput and a 26% lower cost of engineered asset ownership than their lower-quartile counterparts. That translates into big profits. Moreover, upper-quartile EAM performers were much more likely to meet or exceed return-on-asset (ROA) projections, which is popular on Wall Street.

Improved production, reduced costs and predictable ROA should offer enough motivation to pursue a reliability management-based EAM process. And when executed properly, EAM creates a significant competitive advantage. I’ve always been fascinated by the Hayes and Wheelright model of operational excellence. In essence, they postulate that a firm’s operational capabilities affect its ability to create value for shareholders and its relative competitive advantage. The model identifies four stages of operational capability (Figure 3).



Figure 3: The Hayes and Wheelright model of operational excellence adapted to the management of engineered assets.

Internally neutral – The internally neutral firm is primarily focused on itself. From an engineered asset perspective, it tends to be reactive – dealing with problems as they arise – often with little or no warning. This strategy is neutral in terms of value creation and driving competitive advantage. In reality, one could argue this approach has a negative impact on value creation or protection. The BP example provides evidence.

Externally neutral – As a firm matures with respect to operational excellence, it starts looking at what others are doing; they then implement the tactics and strategies that work. Benchmarking against competitors is a common example of externally neutral behavior. By looking outside the firm is moving beyond purely reactive behavior and instead adopting industry best practices.

From an engineered asset management perspective, this often equates to adopting preventive and predictive asset integrity techniques. This is considered strategically neutral because the firm is only keeping up with the industry, at best. The organizations that it is copying have already moved on to other improvements, keeping them in the lead.

Internally supportive – The internally supportive firm is a more advanced player – they are innovating best practice, not copying it. From an engineered asset management perspective, the internally supportive firm focuses on proactive strategies to manage the electrical, mechanical, chemical and human root causes of equipment failure.

This is supportive because it is effective in reducing costs and improving throughput. But it is internal since it is tactical in nature and usually driven by middle management. EAM is not viewed as a strategic intellectual asset, differentiating factor or a mechanism with which to strategically expand the firm. It is often plagued by problems caused by the organization’s functional silos.

Maintenance is onboard, but operations is not supportive, and capex engineering has its own agenda. Still worse, because it’s driven by middle management and not policy, the internally supportive EAM initiative is often inconsistent – with frequent starts and stops.

Externally supportive – This organization is the one that really gets it. Management has figured out that there are few external factors within its control, but internal factors, including the cross-functional, mission-focused management of engineered assets is wholly within its control. In this organization, engineered asset management is driven from the top as a matter of policy. These firms are called externally supportive because the top-tier asset managers have a competitive advantage in the marketplace.

They can outperform competitors by satisfying customers. Moreover, these firms view engineered asset management capabilities as a valuable intangible asset. When the market is in a bust cycle, these organizations are in a position to acquire struggling competitors – often at bargain sale prices – implement an effective system of engineer asset management and create value for the company’s shareholders.

In conclusion, compliance to seemingly ever-increasing regulations may seem taxing. Take a fresh look at your EAM compliance efforts and ask yourself, “Are we viewing compliance as a nuisance cost or an opportunity to reinvent ourselves with respect to our management of engineered assets?” If you’ve got to spend the money, you may as well spend it wisely.

Luckily, the tried-and-true reliability engineering and management framework means that you don’t have to reinvent the wheel.

Author: Drew D. Troyer, a CRE based in Tulsa, OK, is a consultant specializing in management of engineered assets. He has over 25 years serving clients on an array of technical and managerial projects. Troyer is a certified reliability engineer (CRE), a certified maintenance and reliability professional (CMRP) and holds a bachelor’s degree and an MBA. 

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