Planes, trains, automobiles, production equipment, and almost every class of asset continues to increase in level of complexity, sophistication, and automation. This has indeed been a steady trend over the past 100 years. We are moving from a very simplistic, labor-oriented, and operations-dominated world to a more complex, capital-intensive environment where there is, or should be, far greater demand for highly skilled maintenance personnel to get the most out of a growing asset base.
But before we enter the golden age of asset management, we need to show top management the money. Old paradigms abound when you speak to senior management, from indifference to ignorance as to just how critical asset management has become in today’s asset-intensive world. Any good senior manager will want to know from a strategic perspective, what spending money on improved asset management will do for the bottom line.
Your best and possibly only shot at persuading top management sometimes requires selling solutions first to operations, engineering, finance, marketing, and any other stakeholder departments both within a given site and at a corporate level. For instance, if operations management can be deeply involved in developing an asset management strategy that benefits both maintenance and operations, you have gained an important ally.
The asset management strategy must provide a long-term game plan complete with measurable goals and objectives, in light of the operations and overall business strategies. Once a strategy is formulated, a budget showing the costs and savings of implementing the improvement plan must be prepared, using the CMMS as the key planning tool. (To present a budget to top management without first selling an asset management strategy, leaves seemingly arbitrary budget cuts as a viable option for top management, especially if it appears to have worked in prior years without short-term consequences.)
Use the CMMS to determine:
- Where to spend more money (e.g., aging equipment that is cheaper to replace than repair)
- Where to cut the budget (e.g., dropping the level of spare parts inventory where turnover is low), and/or
- The consequences of cutting budgets too deeply (e.g., show the correlation between PM spending and equipment availability for a given operation).
In preparing a cost justification you should remember to only promise what you can deliver and only show savings for the amount you need. As well, consider ease of implementation, cash requirements, use of existing resources, and probability of success. Top management will expect these criteria to be addressed in an implementation plan. The plan should also include resource requirements, training needs, and a timeline showing long- to short-range milestones and when the proposed improvements will take place.
Described below are a few examples of where and how to source savings, in order to prepare a business case for your improvement program. Of course, details will depend on what improvements you are recommending. For multi-site environments, savings will be significantly higher and therefore more attractive to top management if the business case covers the entire enterprise. High savings stem from the considerable synergy between departments, and with the corporate level (e.g., shared database, common systems, centralized services such as procurement over the web, internal benchmarking of best practices, “friendly competition” among sites).
Maintenance labor savings
Increased tradesperson utilization – Using work sampling, suppose it is determined that the average utilization of your department of 50 maintainers is 50%. Note that the average in most maintenance organizations is 35-50%, with a potential to increase utilization to 75% or more. If a 10% increase in utilization were achieved, then five person-years would be freed for work on special projects, more emphasis on preventive/predictive maintenance; or if necessary, a layoff of five people saving approximately 5 x $75,000 = $375,000 annually. The 10% improvement in utilization could come from better planning and scheduling, greater emphasis on planned maintenance, and a better matching of the maintenance organizational structure to the work required.
Reduced overtime – One of the most difficult problems to overcome is chronic overtime. Through better planning and scheduling in conjunction with operations, as well as improved matching of work backlog to labor requirements across all shifts, assume a 10% reduction in overtime is achievable. If overtime costs say, $750,000, then expected annual savings would be $75,000.
Maintenance material savings
Reduced inventory levels & material purchases – Suppose the maintenance department holds an average of $10 million in inventory, and $2 million in materials are purchased each year. As a result of better control systems, greater planning of purchases, more effective troubleshooting and repair techniques, etc., a 10% reduction in inventory is achieved. This frees $1 million to invest at say, 10% interest, which translates into $100,000 in savings. A 10% reduction in material purchases would yield a further savings of $200,000.
Reduced downtime – If the total investment in production equipment is $20 million, then an average 1% reduction in downtime means approximately $200,000 worth of equipment is "made available". The additional machine capacity can be used for increased production and therefore increased sales, or for training purposes. If an entire machine is freed, it can be sold or disassembled for spare parts. You cannot sell a fraction of a machine, but you can replace a larger machine with a smaller, less expensive one. Savings stem from greater planning and tighter control systems, closer attention to equipment history trends, and quicker response to breakdowns. These measures will decrease the severity of breakdowns and increase the mean time between failures.
Increased reliability – Equipment may last longer as a result of your improvement program. Thus, a $20 million capital investment would be replaced say, 3 months later, yielding savings of $0.5 million. This assumes the $20 million, which would have been used to replace the equipment, could instead be invested for the three months at say, 10% annual interest. However, additional maintenance expenses would be incurred in order to extend the life of the equipment. This must be estimated based on average maintenance costs and netted against the $0.5 million.
Improved equipment performance – Through similar actions as described above, equipment can be run closer to the factory-stated peak performance. Suppose a machine is designed to run with an output of 100 widgets/hour; however, actual performance has historically been 80 widgets/hour (ignoring downtime). Therefore, a 5% increase in performance results in a rate of output of 84 widgets/hour. Savings are roughly equivalent to a 5% decrease in downtime.
Reduced cost of goods sold – Improvements such as implementing superior PM and predictive maintenance programs, making better equipment replacement decisions, and faster response time may enable production equipment to be maintained in peak condition. This translates into higher, more consistent quality product at greater yields, and less scrap, rework, returns, and waste. For example, suppose the cost of goods sold (COGS) for a given company is $80 million on sales of $100 million. An improvement program results in a 1% reduction in COGS. This would yield a staggering $800,000 in savings, in real dollars or opportunity cost.
Increased operational capacity – Suppose improvements result in more efficient and effective maintenance of equipment, which in turn leads to greater speed and uptime of the equipment, and therefore more units produced. Consider a company that sells 10 million units at $10 each, with a gross margin contribution of $3 per unit. Assume implementation of the improvement program results in a 1 percent increase in product volume. Therefore, the total gross margin contribution added will be 100,000 x $3 = $300,000.