In this paper we will discuss and explore the "Business Case for Reliability" from several different angles:
1. What is ROI? 2. What are the elements of a successful TEAM initiative? 3. What are the typical costs associated with each element? 4. Where are these costs offset with savings? 5. What areas can expect to see the most significant savings? 6. What types of saving are likely in each area? 7. What is the "typical" Rate of Return (ROR) 8. What elements control ROR? 9. Where do you start?
Readers should leave this paper with a fundamental understanding of whether a Reliability initiative makes sense for their business, what elements are essential for their success, what they can control, and how to start. A mature initiative may gain insight into why they are or are not seeing a ROI in their facilities.
The definition of insanity was once shared with me as "continuing to do the same thing and expecting a different result". As I travel North America viewing from the outside the practices being employed at our automotive plants, paper mills, steel mills, food processing plants, chemical processing plants, utility generation facilities, etc., I cannot help but wonder if this isn't exactly what I am seeing play it's way through our manufacturing and maintenance organizations.
In 1988, a benchmark study showed that no less than 55% of maintenance being performed in our plants on average is reactive in nature, 30 % preventive, 10% predictive and 5% proactive. In 1992 CSI published a study that showed across all industries approximately 50% was reactive, 25 % preventative, 15% predictive, and 10% proactive.
A 1997 benchmark study showed once again that reactive was in excess of 50%, Preventive between 25-30%, and Predictive and Proactive represented less than 25% combined.
In it's most recent winter newsletter, an SMRP survey showed 55% reactive, 31% Preventative, 12% Predictive and 2% as Other.
Along with each of these surveys, ideal percentages have been disclosed that represent best practice or top quartile plants. These ideal percentages show less than 10% Reactive, 25-35% Preventive, 45-55% Predictive and the balance Proactive.
Many facilities have invested millions and millions of dollars into a reliability initiative, but they are doing almost exactly the same type of work. I will agree that these are not the same plants, but conclusions can be drawn from any statistical sampling of plants.
Have these Plants had a ROI for their reliability initiative or have they had spot savings that keep the program going?
The purpose of this paper is not to support or refute the use of "avoided costs", but if avoided costs do not eventually transfer to bottom line savings or additional product out the door, are we any better off than what we were? There is no question that a TEAM initiative can have a tremendous return if implemented properly, but what if it isn't? Is it possible for a TEAM initiative to have a negative ROI, even though it has generated several finds? In order to answer these questions, we must first discuss:
What is ROI?
What is ROI? ROI stands for Return on Investment. Simply put, ROI is the ratio of what savings/additional revenue streams were realized because of the initiative divided by what was invested in that initiative over the same time period. If done correctly, a reasonable best case and a reasonable worst case ROI will be constructed to justify the initiative. The calculation will factor in inflation and it will be constructed over an anticipated life of the initiative (7 years is typical calculation period). It basically boils down to a Net Present Value (NPV) calculation from your days in Engineering Economics.
In a 1997 benchmark survey Top Quartile Paper Mills claimed an average ROI of 19:1, while Chemical Processing came in at 16:1, and Steel at 18:1 for their maintenance and reliability initiatives.
The purpose of doing a best and a worst case is that the worst case begins to explain that the initiative is at least a viable investment, the best case shows the potential if all the benefits are reaped. Is it possible for a plant to show a negative ROI? The answer is absolutely YES.
We will hold the explanation for after the discussions of the successful elements, costs and benefits.
ELEMENTS OF TEAM: There are many required elements in a complete TEAM initiative. (See Attachment I for TEAM MAP) Every one of these elements must be deployed and functioning well at the facility to reap a significant ROI. Each of these elements can be grouped into what we call the Diamond Approach to ReliabilityTM.
The 4 quadrants of the diamond are:
1. Work Control Tools (efficiency) such as CMMS, Parts Lists, and Planning and Scheduling
2. Work Performance Tools (effectiveness) such as PM, PdM, Precision Skills and RCFA.
3. Integration Tools - such as integration of islands, cost optimization and standardizing on best practices.
4. Sustainability Tools - such as knowledge transfer, communications, and metrics.
The paper will focus on example costs and benefits from each of the four quadrants. However, these are just examples of factors that should go into a complete business case.
Work Control Tools consist of all the administrative tools that are designed to control maintenance work and enhance worker productivity. Elements under Work Control Tools include;
· Planning and Scheduling
· Workflow Analysis
· Information Systems
The benefits of a well designed and deployed set of Work Control Tools are optimized worker productivity, relieving skilled people from mundane and time-wasting activities, and freeing them up for more value-added technical activities on equipment. In other words, increased wrench-time frees up resources to work on Work Performance Initiatives.
Case in Point from Doc Palmer's book, Maintenance Planning and Scheduling:
Three Persons without "Planning" => 3 X 35% = 105%
Two Persons with "Planning" =>1X0% + 2 X 55% = 110%
Break Even is 3 Persons
55%/35% = 1.57 (57% Improvement)
One planner can plan for 20 to 30 persons
30 persons X 1.57 = 47 persons (17 extra persons)
17 person X $34/hr X 2080 hr/yr => $1,202,240 per year
Properly implemented Planning and Scheduling increases worker productivity, which frees them up to work on other, more value-added activities.
Another example of how developing and deploying Work Control Tools can lead to real bottom line savings can be seen in the area of MRO/Stores optimization.
· It will cost an organization approximately $3-5 per SKU to reclassify their stores records, so that they can be easily identified and so that redundancy and spoilage can be removed from the system.
· A small storeroom will have approximately 5,000 SKU's to be reclassified and will be valued at approximately $1,000,000.
· This reclassification work can be done at a cost of $15,000 - $25,000. This work will result in average Inventory reduction of 20-30% or a one time savings of $200,000-$300,000.
· Not to mention that since inventory has an annual carrying cost of 25-35%, if maintained, this one time reduction will result in annual carrying cost reductions of $50,000 - $105,000.
Another area of savings in this equation is that a well managed/defined inventory can result in a minimum 1 hour per day increase in craft productivity. Clearly just creating the parts descriptions doesn't get you this, you also have to invest additional funds in developing parts lists or bills of materials (BOMs) as well as training on how to effectively search for parts.
· On average 5,000 SKU's in inventory can support approximately 2,650 Assets, based on an estimated duplication factor, BOMs can be developed for approximately $85,000-$90,000.
· Assuming that this $1,000,000 worth of inventory is supporting 25 crafts, 1 hour a day at $34 per hour = $195,500 annually or could free up 2.76 people to do other work!
Work Performance Tools focus on the utilization of predictive technologies as well as reliability analysis tools and methodologies. It is the next higher level within the evolutionary process to reliability improvement. With improved worker productivity resulting from improved Work Control Tools, skilled people will be more available to perform value-added, technical activities that directly impact equipment reliability and health. Each technology and/or process has its own merit and values including optimizing up-time, cost effectiveness, and detailed understanding of the particular asset. Elements under Performance Tools include;
Let's focus on Pm and PdM. The purpose of this paper is not to debate the merits of in-house versus contract, because the business case surrounding it should be evaluated on a case-by-case basis. Let's focus on the cost of delivering the service. In some instances, in-house may prove to be more cost effective, but one must consider the total cost of delivering the required quality of service.
Vibration - depending on the type of vibration program that you have in your facility - simple PdM route based vs. vibration control and elimination, the cost of your program should average between $3.50 - $7.00 per bearing to deliver. Best practice plants across a wide variety of industries have 60-80% of their possible bearings on routes.
IR Thermography - average cost for the delivery of a qualified, multi-disciplined IR program will range from $800 - $1,200 per day. IR should not be limited to an annual high voltage inspection. Best practice plants tend to do a twice per year high voltage survey, an annual low voltage/local disconnect survey, quarterly supplemental mechanical inspections, quarterly refractory studies, and annual building roof/building envelope inspections. These programs also emphasize the importance of "post maintenance acceptance testing and new project acceptance testing".
Tribology and Lubricant Management - a best practice Tribology / Lubricant Management program goes well beyond oil analysis and the oil analysis needs to go well beyond what "standard-free oil analysis" supplies. A best practice program will include:
· Lube Specification
· Receipt Verification
· Storage and dispersement
· Proper Grease Technique
· Oil Analysis - Profiling ($29-$75 per sample)
· Implementation & Follow-up
· Lube Disposal
PM Development - the cost to develop a PM depends greatly on what methodology is used to generate it. A basic PM program that relies predominantly on the OEM's recommendations and a cursory review of performance history is approximately $300 per Job Plan. A fully engineered PM that gets its roots from a form of FMEA, will cost approximately $1,500 per Job Plan. An important note is that many of the PMs developed using the Basic methodology may later be found to be inappropriate and/or non value-added.
After all is said and done, a best practice plant can expect to spend approximately 3-5% of their total maintenance dollars on PdM inspections (which generate an additional 40-50% workflow) and approximately 12-15% on PM inspections (which will generate 8-20% additional workflow).
The 1997 Benchmark study that showed the various ROI's for Paper, Chemical Processing, and Steel, also showed: · PdM and PdM resulting corrective work ranged from 48-60% of the total workflow in Top Quartile Plants to approximately 30% at average plants.
· Those same facilities' maintenance cost to insured replacement asset value ranged from 3.1% to 3.6%
· As compared to an average of 5.5% to 7.2% for those same industries at the time.
But yet the workflow percentages remain virtually unchanged since 1988 -- are our practices insane?
Integration - focuses on the balanced application of reliability initiatives. It also provides the opportunity to perform informed maintenance tasks based on better understanding of asset operational characteristics. The objective is to have reliability improvement become a total comprehensive initiative which takes into consideration the interdependencies associated with the Work Control and Performance Tools facets. Integration provides the path leading towards breakthrough improvements in reliability. Elements of this facet include;
· Consolidation of Islands
· Effectiveness Improvement
· Streamlining Processes
· Cost Optimization
· Best Practices
Over 50% of the Reliability Initiatives that are not reaping the anticipated ROI due to lack of Integration. Their organization views this as a maintenance initiative, their IT department views the implementation of a CMMS system as a IT initiative, or the CMMS implementation is viewed as an accounting or purchasing initiative. Production has a leasing mentality when it comes to the ownership of their equipment and does not even give Maintenance access to critical manufacturing information or historical process data. If this describes your plant, history would tell us to take the worst case ROI and put a negative sign in front of it and take the best case and divide it by 4. Integration is difficult to put a dollar figure on, but lack of integration has consistently and historically cost greatly.
Sustainability - zero's in on the key elements of what it takes to actually gain true long term profitability. Sustainability provides the opportunity to reap the financial gains by having the reliability improvement initiative become ingrained into the organization's culture. Reliability needs to be as much of the culture of the plant as the safety program is. Safety programs consistently get better and stronger over time, because they are part of the culture. If the reliability improvement initiative is viewed as a project that is now complete and has allowed the organization to reach steady-state, failure is certain. In order for changes to be effective, particular attention needs to be given to the elements that increase the probability of permanence. A reliability improvement initiative will not be effective when it is considered to be a "flavor of the month" project. Many companies invest in maintenance and reliability improvement initiatives only to find six months later that the same conditions which originally motivated the improvement initiative have returned. It is imperative to deploy a set of tools that measure compliance with new business practices and procedures. The old adage "What Gets Measured, Gets Done" is never more apropos than in the area of changing the habits of an organization, particularly an organization responsible for operating and maintaining millions of dollars of capital assets needed to profitably produce a company's product. Elements of this facet include;
· Total Organizational Involvement
· Knowledge Transfer
· Metrics ID and Measurement
History tells us that if we do not have a complete measurement system in place, performance will quickly degrade to previous levels. One such measurement is the Asset Health Report. The Asset Health Report is the output of a fully populated Asset Health Matrix. The Asset Health Matrix is the result of fully engineering the plant's PM and PdM program, basing what types of inspections need to be deployed on the failure modes and establishing strong and valid alarm criteria. A fully populated Asset Health Report would look as follows:
Selecting what technologies to apply to what assets is the relatively easy part, determining for each inspection what constitutes:
This is the part that requires significant research into best practices and application of statistical process control.
We have found that Best Practice Plants will have in excess of 85% of their equipment in a Green Condition and less than 1% Red. Note that all three of the Assets in the above Asset Health Report would role up as Red.
How in the world does a plant get to and maintain a facility at 1.5-2.5% maintenance cost as a percentage of insured replacement asset value. The answer can be explained with the results of this survey:
So what happens if you spend 10% this year to improve an Asset's Health from Red to Green, but your facility does not have the standards and practices in place to maintain the Asset at a Green level? You get to spend the money again next year!
Rate of Return (ROR)
The focus up to this point has been to maximize the ROI. For many facilities the ROR or payback period is equally as important. Many manager's ask the questions:
· "When will the bleeding stop?"
· "When will I break even?"
The answer for this, much like the one around ROI, is that it depends. Several factors will impact the ROR:
· Current Cost -what is the current maintenance cost/replacement asset value of your plant. How much low hanging fruit is there at a plant? Clearly it is easier to reduce this rate from 12% to 10% than it is from 4% to 2%
· Current Work Flow Percentage - clearly if you are currently doing a lot of the right things, such as already owning the inspection equipment, less time and money is involved in getting them in place.
· Current Asset Health - does your plant have a history of cheap project delivery and deferred maintenance? If so, more will have to be invested.
· Culture - does your plant culture embrace change or fight change?
· Urgency/Active Participation - positive rewards such as profit sharing or negative consequences such as threat of bankruptcy or plant closure have proven to drive some of the most aggressive implementations.
Summary - In the last 12 years, industry has spent millions and millions of dollars trying to implement various elements of Asset Management. They have done this because of a well-founded belief in a business case and several documented success stories. It is well known that going into the 1990's maintenance costs were believed the largest, most out of control "controllable" cost in a plant. Maintenance represents 9 to 15% of every sales dollar and 8 to 12% of every dollar that goes into the cost of making the product. Yet 12 years later, less than 10% of the organizations that have embarked on a reliability improvement initiative have reached their anticipated returns and less than 20% of implementations are considered successful even by the employees of that facility.
Is there a logical explanation for this or was the anticipated contribution of maintenance too large? Hopefully, after reviewing this document and sitting through the presentation, you will realize that we continue to practice insanity. The numbers have shown us for years that we need to have 45-55% of our work flow come from PdM results, yet the average is still well below 20%. The numbers and success stories have told us for years that if this is a maintenance initiative...it will fail. If it is an IT, purchasing, or accounting initiative, it will fail. As stated earlier, a rule of thumb that seems to hold true is that if only one organization is driving this initiative, take your worst case business case and simply put a minus sign in front of it and take the best case and divide it by four.
The Asset Management initiatives have typically been implemented as "flavor of the month" instead of as an orchestrated and engineered initiative that is being deployed in a way that it becomes ingrained in the culture. We find that often so much attention is paid to the glitzy new elements, that the BASICS of having good work flow models, good measurements, good equipment lists, good parts lists, and good data going into the system are ignored. Hopefully you also take away that the team that is responsible for designing and deploying this initiative must be fully cognizant of how each element relates to the ROI and the ROR. Otherwise it is very possible to implement an Asset Management initiative that has a negative return on investment...look around ... they are not hard to find!
"It's OK to get Excited about Maintenance !"
Article submitted by John Schultz, Allied Service Group, Inc. & Dave Friebel, Management Resources Group, Inc.