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Selling Reliability – ROI & ROC

Anyone trying to champion reliability in industry has experienced difficulty with obtaining funding from executive management for reliability improvement, regardless if requested from capital expense (CAPEX) or operating expense (OPEX) accounts. How many times has your team developed an innovative solution to improve reliability, with clearly defined improvements in overall equipment effectiveness (OEE), mean time between failures (MTBF), mean time to repair (MTTR), uptime, and a host of other reliability metrics, but you just can’t get the board’s attention for funding? Why? Clearly, because you’re not speaking their language. Executives speak in terms of margin performance, earnings before interest, taxes, depreciation and amortization (EBITDA), and return on investment (ROI), while you’re talking OEE, MTBF and MTTR. They may as well be speaking German while you’re speaking in Chinese. So, to get your idea across, you must speak in their language: FINANCE.

Senior executives are usually focused on two strategic areas: how to make money and how to stay out of jail. So, when you ask the board to fund a reliability improvement idea, besides knowing how much capital you need, you better know return on capital (ROC) or how soon they get the money back, and the risk, both in terms if they give you the money and if they don't". Depreciation and the cost of capital would probably be good to have, too.

To define ROC or ROI, you must have defined what reliability is worth to the company. If reliability drops from 98 percent to 95 percent, what is it worth? If you can’t answer that basic question, how can you ask for money to improve it? And, it’s not easy. The easy stuff, like maintenance labor, overtime, spare parts, contractors, start-up power, penalties and litigation are relatively easy to get from your enterprise resource planning (ERP) system, but lost sales, backup product, and lost inventory are difficult because they’re in the profit and loss (P&L), the balance sheet that is usually restricted to vice president level or higher and not easily shared. However, without it, you’re dead in the water.

Yes, the P&L information is confidential, but here’s another reason to limit access: Maintenance is the trump card to use in business downturns and aggressive improvements in margin performance. Say you’re a new executive and want to make your mark, or in a business downturn, you must improve margin. You can increase price – difficult; you can renegotiate supplier contracts – difficult; or you can cut payroll – difficult. All are difficult! So, what can you do? Cut maintenance! You stop spending money, it goes directly back to margin, and you look like a genius! And the beauty of cutting maintenance is nothing will happen for years, hopefully after you’re promoted or a headhunter took you for your superior business acumen. It’s like maintaining your car. Stop changing oil and maintaining it. It will probably run for five years, but when it fails, you need a new engine.

So, if you’re allowed to define what each point of reliability is worth in eventual losses for the company, you would never subjectively cut maintenance because it’s NOT A VARIABLE COST like travel. For example, let’s say a $4 billion company opened their P&L and defined reliability’s average impact at $8 million a point. Then, the company goes into an economic downturn and cuts maintenance 50 percent to save margin, but four years later, sees reliability drop from 98 percent to 95 percent, directly impacting margin with a $24 million loss and worse, maintenance costs have to be more than tripled to bring it back since you can’t keep watching reliability spiral down because eventually you’ll wipe out all the margin and, before you know it, you’re in bankruptcy.

This kind of nonsense happens all the time, but if you define what reliability is worth, the poker hand is on the table and the trump card is gone, and no one likes playing poker with all their cards face up. However, as a reliability champion, you now have the information you need to justify investing the company’s money into a reliability improvement project. So, let’s say you ask for a meeting with the board to request $2 million to establish a data lake for an asset performance management (APM) system with advanced analytics and algorithms to improve reliability performance from 96 percent to 99 percent in three years. Likely, your next question will be: What is the value of each point of reliability? If you can answer $5 million per point, for example, you’re home free! Now, you can provide ROC, ROI, simple payback, depreciation, a risk plan, and critically important impact on margin and EBITDA. And for that kind of return, you are almost assured of getting the funding approved, and you did it without mentioning any of the normal reliability vernacular, like OEE, MTTR, or MTBF, because executives don’t understand it anyway. Always remember, executive management’s language is strictly FINANCE.

Note: The author shared this topic in detail at IMC 2021 and you can easily view the presentation on Reliabilityweb.com.

Victor Rioli

CMRP, is an independent consultant and owner of Rioli Reliability LLC. He has more than 40 years in the chemicals (industrial gases) industry, commissioning some of the largest cryogenic distillation plants ever built, and then leading teams in instrumentation, electrical, pipelines, turbo machinery, reliability, process, and plant management. In 1990, he defined, organized and implemented the very first reliability center for the Midwestern United States, centralizing the major maintenance, plant upgrades, turnarounds, predictive technologies, and CMMS (EAM) from one location. He later duplicated the reliability center concept for the rest of the U.S. and Canada. For nearly 20 years, Vic worked as Global Director - Reliability for Praxair Inc., championing reliability around the world. Working in concert with operations and engineering from every business region, he visited nearly 50 countries in six continents, centralizing reliability KPIs, standards, CMMS, predictive technology, outage planning, FMEA strategy, and root cause analysis into a global reliability engine. Later, the focus included IIOT 4.0, advanced analytics, and digital twins. Vic, who earned an engineering degree from Valparaiso Technical Institute, serves on the board of the Association of Asset Management Professionals (AMP), under the umbrella of Reliabilityweb.com, and has presented and held workshops for numerous professional organizations around the world, including IMC, Reliabilityweb.com, SMRP, CGA, Vibration Institute, Bentley, American Petroleum Institute, Rolls-Royce and Sulzer.

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