What if we calculated maintenance's contribution to profitability on a per-part basis?

Editor In Chief Paul Studebaker asks, "what if we calculated maintenance's contribution to profitability on a per-part basis?"

In the good old days, a factory could set up and crank out the same product day after day until the tooling wore out or a machine broke. We’d build to stock, fill the warehouses, sell what we made, and let the high quality and low cost of our fine goods make them must-haves in every household.

Now, they say, to be competitive, we have to cut inventories and be agile -- build to order, make what we sell, get lean, perfect rapid changeovers and manufacture in cells to minimize work in process (WIP).

The problem is WIP and direct manufacturing costs aren’t the whole picture. They’re just the easy parts for bean-counters to measure and track, so they get all the attention while other, often much greater, costs get lost in the big bucket called overhead.

First, no matter how agile you are, lean inventories and just-in-time manufacturing put a premium on equipment availability and add setup and support costs -- costs that often seem invisible to blind followers of the latest best-selling management book. When zero inventories and efficient cells are performing well, “lean” takes all the credit, but the slightest glitch, like damaging a machine during setup, creates an emergency and too often, maintenance takes the fall.

What about the costs of wear and tear? In a former life, I worked as a process engineer in a magnet factory where we used vacuum furnaces to sinter powdered-metal compacts into solid parts. After much heat-treatment, cutting, grinding and coating, these parts became the high-flux-density marvels behind today’s world of compact disk drives, servomotors, actuators and more.

The various grades of material required different batch load sizes, labor, furnace hours, etc., and we included all those parameters in the cost structure. But some grades required very high temperatures that wreaked havoc on the alumina insulation and molybdenum elements and heat shields, and we did not account for that. All maintenance went into overhead that was charged equally to all products.

Then there are utilities. Sintering different magnet grades took varying amounts of electricity and argon gas but, like compressed air, it all went into overhead.

As a result, our costing structure didn't know what was really going on. The easy products carried much of the overhead for the high-maintenance products. Our prices on high-maintenance products barely covered our true costs, but attracted lots of low-profit orders while the prices on the easier grades drove business elsewhere.

No wonder that plant’s been moved to Beijing.

I recently met with a fellow whose job it is to introduce a German-developed manufacturing execution system (MES) to the United States. The package manages maintenance and collects shop-floor data, but it also tracks materials, production labor, production lots, warehouse information -- you name it. The fellow, Michael Walker of Freudenberg IT, mentioned that it could, for example, track a production tool and allow the company to allocate the costs of storage and retrieval, setups, wear and tear, and refurbishment to specific orders.

But Walker didn’t say it that way. His words were, it would allow their “contributions to profits” to be accurately reflected.

It’s not a new idea. It’s called activity-based accounting (ABC) and was one of the big buzzes of the 1980s. We wanted to use it in the magnet factory, but management decided it was too difficult to get the accurate data needed to support real ABC, and went back to the old overhead allocation system.

I wonder how things would be different if the true costs of maintenance were accurately ascribed to production orders. What if maintenance’s contribution to profitability on a per-part basis could get the same attention as raw materials and production labor?
So I asked Walker, could this software be used to calculate the maintenance contributions involved with making a particular production order?

“Sure,” he said.

 Imagine that.
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