Maintenance Costs as a Percent of Asset Replacement Value: A Useful Measure?

Someone recently asked for a benchmark for maintenance costs (MC) as a percent of asset replacement value (ARV) for chemical plants, or MC/ARV%. They also seemed curious about the usefulness of the measure. These questions led to a series of other questions, the result of which is this article. Before addressing these questions, remember these two points:

1. You must understand and apply the processes for achieving benchmark performance for it to be sustainable. You cannot apply the numbers arbitrarily;
2. Do NOT focus on any one benchmark number. All the measures are interrelated and impact each other. As such, if you focus most of your energy on achieving a superior level of performance in one area, you will likely damage those in other areas and damage the overall performance of the business. For example, you could drive down maintenance costs and have an excellent MC/ARV, but that could be at the expense of having more downtime, lost production and lower profits. Or, you could drive down your spare parts inventory levels, only to not have them when needed, delaying maintenance and making it more expensive, and losing production and profits. Aligning all the benchmark measures into a systems-level business perspective is a continuous effort.

Based on an examination of original data of a few benchmark studies (many are a shotgun pattern or scattergram), maintenance costs as a percent of ARV are not a particularly useful stand-alone measure, independent of other measures and considerations. For example, about 2.5 percent for a chemical company would be considered benchmark performance, but there are chemical companies where 4 percent would be an excellent number, primarily because of the highly corrosive and erosive nature of their processes. Yet others, for example with a single stream, far less corrosive process might be able to achieve 2 percent or less. It depends. However, a better use of the measure would be to trend it over time, applying a consistent measurement method, and to use it in conjunction with other measures. In any event, some considerations relative to this measure are provided.

The Measurement Method

The measurement itself is difficult to use if you’re comparing plants within an industry, but among different companies that each use different measurement methods, it’s especially difficult, perhaps meaningless, if you’re trying to compare across industries. For example, how do you measure ARV? Is it the original equipment cost adjusted for inflation? Is it the insured value? Is it an estimate provided by a construction manager for replacing the plant? Is it the fair market value as determined by an independent assessment? Each of these will provide different values for ARV for different plants and for different companies.

Additionally, how do you determine maintenance costs? What do you include? For example, one plant or company might have maintenance build small projects that are expensed immediately, whereas in other operations, these same activities might be considered capital projects, which would be depreciated over an extended time. Would you include maintenance staff benefits or would that be lumped into general and administrative expenses? Would you include contractors and part-time staff (generally yes if they are doing maintenance work)? Are maintenance overhead and administrative staff included? Are central support functions included, such as repair shops, condition monitoring, lubrication shop, custodial functions, and equipment/vessel cleaning crews? Would capital and insurance spares be included and, if so, how would those be expensed or amortized? There are likely other questions that would arise in determining maintenance costs and these might vary across plants, companies and industries.

Other Considerations

The current state of the assets must also be considered. For example, management may have decided to “milk” the assets over previous years, driving maintenance costs down and, therefore, the ratio down, making it appear that an excellent job is being done. This may be done only to have the assets failing more often over time, reducing production, incurring more transient losses, driving up overall costs, perhaps even inducing customers to go to another vendor, and leaving the assets in a much depleted condition. Unfortunately, this situation is not uncommon. Of course, this would require any new management to spend substantially more money to restore the assets to provide for better operating performance and prevent “looking bad” compared to the previous management. Moreover, the nature of the process must be considered, as previously noted. More harsh environments will necessarily require higher maintenance costs.

Demand and market conditions also must be considered, since the greater the demand, the greater demand put upon the equipment and processes, resulting in potentially greater costs for maintenance.

Consideration also must be given to the local costs of labor and parts for a given location. For example, if you have a chemical plant in Indonesia, where labor costs are significantly less than Texas, then accounting for that difference would be necessary. You would also likely spend more money there for spares and specialized contractor services, given a more remote location and associated shipping, travel and service costs. Plus, you may need to carry more spare parts than normal, likewise because of being in a remote location.

Within a company with multiple plants, you would need to consider a given plant’s process technology, as well as its ease of operations and maintenance. For example, there are chemical companies with multiple plants making the same or similar products, but each one has different processes that have evolved over the years. Some processes are more efficient, some much older and less efficient, and some easier to operate and maintain. Take, for example, a plant with two lines that are “identical,” but because of the learning that occurred in building and operating Line 1, when Line 2 was built, it was much easier to operate and maintain, mostly because of simple changes suggested by the technicians during the design and construction phase based on what they had learned on Line 1.

These are just a few examples of things to consider. No doubt you can think of more.

Comparison Across Industries

Comparing across industries is not recommended. It’s difficult enough to compare within a large company and/or industry, let alone across industries. For example, food manufacturing companies tend to have lower capital costs and higher relative maintenance costs per unit of capital compared to, for example, chemical companies. Think about having to compare oil and gas to airlines, the thought being that airlines have very high reliability and, therefore, it might be that oil and gas would benefit from considering their operation. That may be true, but for this measure, it would not be wise to compare them. Airlines spend about 12+ percent of asset replacement value annually on maintenance, something unlikely in most production industries, except perhaps mining, or unless they are really bad. Most likely for aircraft maintenance, they also:

1. Spend a considerable amount of time applying reliability-centered maintenance (RCM) principles and equipment histories to design out unreliability in components;
2. Conduct processes for design and fabrication of the various components under a much stricter regimen for quality control than most routine industrial components;
3. Require more rigorous training of their technicians;
4. Have maintenance requirements that are typically mandatory for the aircraft itself, not optional, and consequences of not performing required maintenance can be severe;
5. Consider redundancy a key element of their high reliability, where it is quite common in the design.

While there are similarities across many industries, the details of the design, operations, maintenance, capital cost, and regulatory environment, among other factors, make useful comparisons difficult.

Integration With Other Measures

The best use of MC/ARV% is in having a consistent measurement system and in trending the value year-over-year, taking a strategic perspective, in light of the aforementioned considerations, and focusing on integrating it for managing the business overall. To that end, other benchmark measures must also be taken into account, including overall equipment effectiveness (OEE), reactive maintenance levels, work management, planning and scheduling, levels of workforce engagement, etc.

For example, a personally preferred definition of reliability in a production operation is the ability of a production system to produce the maximum in quality product on time, in full, at the lowest sustainable cost. It doesn’t mean you produce because you can, but rather you’re capable of meeting maximum demand at any time.

The best measure of reliability in this light is OEE. If OEE is high, your capability is commensurately higher and your gross profits are higher, even if you’re spending more on maintenance. If your reactive maintenance is high, you’re likely going to have a high maintenance cost and a higher MC/ARV%, and coincidentally, a lower OEE and more injuries. If your work management is poor, then your planning and scheduling compliance is poor and your costs will be higher and, if your workforce is poorly engaged, poorly trained and has low morale, you’re likely going to have poorer performance. Again, the key is to get your processes right, engaging a highly skilled workforce in eliminating the defects that create the costs and losses.

While the examples provided may or may not apply to your operation, you are encouraged to select the key measures which, when considered in the aggregate, will provide a systems-level perspective for making the right decisions for the overall success of your business.