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In the previous three columns, I described the secrets to success in determining a small but powerful set of measures that trade off in facilitating the management of assets, people and MRO supply chain. I also explained the perils of having too few or too many measures, as well as the importance of how the measures interact or trade off. This column finishes the discussion about key measures with a focus on financial and overall measures for managing your maintenance department.
Key financial and overall metrics
My small but powerful set of financial and overall measures is described below, along with an indication of how the measures interact and trade off. Be aware that there is a lot of discrepancy about how these measures are defined and used within a given company, let alone across industry. So whatever measures you settle on, ensure their meaning is understood consistently across your enterprise.
To be maximized
Start with the obvious: profitability. In North America, profit is the primary company motivator. Thus, there’s a shareholder expectation to turn a profit from capital invested or dollars spent on assets. This reflects two key, high-level measures; namely, return on capital employed (ROCE) and return on assets (ROA). The relationship between profitability and assets is actually quite simple, as demonstrated by the equations below.
Profitability = profit/net assets
= profit/sale x sales/net asset
= profit margin x capital turnover
This shows increased profitability comes from either getting more profit out of a sale or generating more sales out of your assets. In turn, better asset management will yield improved profitability. Therefore, one of the key objectives of the maintenance function in a profit-motivated enterprise is to ensure the throughput of sales is maximized. This means maximizing asset availability, utilization, performance, reliability and quality of output. It also means minimizing expenditure on assets: labor, material, energy, contracts and other costs associated with managing the assets.
The second maximization candidate is overall maintenance effectiveness. To maximize the effectiveness of the maintenance department, it must first work with operations to translate overall business strategy into a meaningful maintenance strategy. The maintenance strategy guides maintenance in determining:
- Long-term goals and objectives.
- Performance measures and targets that define “effectiveness” and indicate whether you met your objectives.
- An action plan describing how to get there.
What will your priorities be during the next three to five years? An airline might want to ensure public safety as a priority despite heavy pressure to cut maintenance costs. A thermal power plant might be interested in maximizing asset availability as demand increases in a given geography. A mail-sorting facility might be interested in improving asset reliability as equipment ages. A mining operation might demand greater employee safety after a series of maintenance-related accidents.
Overall maintenance effectiveness comes from doing the right things, as opposed to efficiency, which is doing things right. With the maintenance strategy determined, it’s easier to categorize actions taken as either value-added or non-value-added with respect to stated goals and objectives. Many companies employ a balanced scorecard approach to determine performance measures for individuals and the maintenance department as a whole. A balanced scorecard provides targets that reflect the strategy and expected results of value-added actions.
Some of the more sophisticated CMMS packages track balanced scorecard measures and targets at each level of the hierarchy, from the overall business to the maintenance department, including goals and objectives served by meeting targets. This allows users to see the results of, say, increased asset availability at the maintenance department level or ROCE at the overall business level. Additionally, many CMMS packages have analysis tools that help identify high-risk or problem areas that can affect the maintenance strategy, as well as tools that facilitate root cause analysis.
Another item to be maximized is overall maintenance efficiency. Once effectiveness is defined through your maintenance strategy performance measures and targets, the next step is determining how to deliver on the strategy in the most efficient manner. For example, this might entail finding the optimal mix of failure-based, condition-based and use-based maintenance that results in minimized maintenance costs and maximized asset performance.
Also, maximize customer satisfaction. It’s one of the most important gauges of effectiveness, albeit not the only one. If the customer is happy, then we’re making progress on doing the right things, at least through the eyes of the customer. Although the customer might not necessarily interact directly with the maintenance department, there may be an implied relationship. For example, asset availability might affect customer lead times, which in turn may affect customer satisfaction.
Some companies refer to operations as an internal customer to the maintenance department. Using this definition, additional measures that might affect internal customer satisfaction are maintenance response time, mean-time-to-repair, work backlog and other traditional metrics.
You also must maximize performance to plan. Once a maintenance strategy is in place to define maintenance effectiveness, and after maintenance policies are defined for delivering the strategy efficiently, the CMMS can be used to develop a plan and budget. For example, suppose you’ve determined the optimal mix of failure-based, use-based and condition-based maintenance for a given production line. The CMMS can then translate it into a plan covering defined routes, inspection frequencies, failure modes, triggers, business rules, PM routines, standard hours and risk tolerances. Performance to plan is an overall measure of how well you stick to the plan and budget, consisting of PM compliance, percent past-due inspections, percent breakdown of planned versus unplanned maintenance, budget versus actual expenditure for labor, material and contract costs.
The sixth candidate for maximization is regulatory compliance. There has been a steady increase in regulatory requirements that affect the maintenance department, including OSHA regulations, the Sarbanes-Oxley Act and industry-specific regulations such as the FDA's 21 CFR Part 11 requirements. Thus, senior management and the regulatory bodies are keenly interested in ensuring regulatory compliance. Most CMMS vendors are fully aware of regulatory requirements for a given industry, and have built this capability, including appropriate metrics, into their packages.
The final element to maximize is your safety track record. Sadly, one of the most effective means of motivating a company to become safety conscious is by using financial measures. Today, a poor safety track record leads to high insurance costs and productivity losses. Thus, safety measures such as lost-time accidents are as critical as a financial metric, and as a barometer for other measures such as employee satisfaction and training effectiveness.
To be minimized
Your main concern should be maintenance cost per unit of production. The key role of maintenance is to manage assets better, but not at any cost. The maintenance department must employ planning, analysis and tracking tools, such as those available through your CMMS, to ensure that the maintenance cost per unit of production is minimized. There is, therefore, a substantial incentive for maintenance to reduce labor, material, equipment and other maintenance costs. There is also an incentive to increase the units of production, where possible. For example, increasing the volume of production output through reduced downtime decreases the ratio of maintenance cost per unit of production.
E-mail Contributing Editor David Berger at [email protected].