Maintenance Tip: Calculating return on investment

Source: PlantServices.com

By Ricky Smith CMRP

Jan 05, 2007

Before any reliability project or initiative can begin a business case must be established with the financial benefit or risk determined. In any business case the return on investment must be established with management and finance working as a team. This team must also determine at what point the savings will exceed the cost. This intersection of cost versus savings is so important in order to receive executive sponsorship and engagement.

In order to determine the ROI (return on investment) it is important to first establish the objective for the reliability initiative. The initiative’s objective should have a quantitative value assigned. An example may be:

Reliability Objective: Increase reliability of production assets on a specified production line by 8% with a financial value of $12 million the first year.

Developing the initiative’s objective and assigning value to the objective is important in order to receive management’s approval. The objective could be broken down further into more defined measurements to include:

  • Increase number of units produced in year 1, year 2, year 3 etc.
  • Reduction in unit cost per unit in year 1, year 2, etc.
  • Increase in quality yield by % in year 1, year 2, etc.
  • Reduction in maintenance cost by 10% in year 2, 20% in year 3, and 30% in year 3 based on current maintenance material, labor, and contractor cost

For the full story on the development of a “return on investment” send an email to ricky-smith@comcast.net

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