Posted under Blog by Mike Davey, Content Marketing Specialist
April 9, 2020
Maintenance budgets are an attempt to balance the demands of the assets against the funds available. And curbing maintenance costs relies on far more than simply reducing the budget. The money available for maintenance is never unlimited, while the need for maintenance always increases.
Most of us work for organizations where overall profitability is of very high importance. Profits are simply total revenue minus total expenses. This very simple equation means the choices come down to either increasing revenue or cutting expenses. Maintenance budgets are often a point of consideration for the later.
Profit as such isn’t a concern for the public or non-profit sectors, but that’s not the same as not having any budget concerns. Those who maintain publicly owned infrastructure, for example, have often seen their budgets slashed repeatedly. As a result, key infrastructure is allowed to deteriorate, shortening its useful life, and accelerating refurbishment or replacement. Controlling maintenance costs is always important, regardless of your core business or mission.
There are many ways to reduce maintenance expenses, but they all come down to three main strategies. All three may work in the short-term, but two methods do so by amassing trouble and expense in the long-term.
While this strategy will definitely reduce short term maintenance costs, it is highly impractical to revert to reactionary maintenance in the long term. It’s also sure to eventually reduce your organization’s operational capacity and therefore its long-term profitability. And what do you do with your skilled maintenance labour force in the meantime? Assign to other duties? Furlough?
This strategy can seem very attractive to someone who doesn’t really understand maintenance and just wants the short-term financial gains. They’ll get them, but the overall cost, in the long run, will wipe out those gains and probably cost even more money than it would to have left the maintenance strategy as it had been.
This is a minor increase over the first strategy, as you at least continue performing maintenance. However, that’s about the only positive comment you can make about it. You need to keep looking at other solutions if the most positive thing you can say about a strategy is that it’s not the very worst one available.
The temptation here may be greater than simply calling a halt to all maintenance activities. After all, no one is saying not to maintain your assets, just to stop all process improvement projects and enhancements currently being developed.
There are certainly expenses associated with any maintenance project. However, cancelling them can be compared to dropping out of school to avoid paying another year’s tuition. You’re saving money today at the cost of reducing your future revenue.
This is most often the winning strategy for both reducing and controlling costs. The right maintenance projects can reduce your long-term expenses, while simultaneously improving your capacities. When it’s done right, this strategy is a double win. Maintenance is more effective and efficient, and less costly than it was before.
This can be a winning strategy even if you have no concerns about your budget or the current quality of maintenance work. You’ll be a hero if you can improve on either or both of those items.
Remember, profit is simply revenue minus expenses. Reducing expenses without reducing maintenance quality means more profit, both today and in the long-term.
There are numerous studies showing the value of maintenance improvements to the bottom line and overall health of the business. A quick search will turn up quite a few examples, including “The Role of Maintenance in Improving Companies’ Productivity and Pro?tability,” “Training and its Value in Reducing Maintenance Costs,” and “Cost of Poor Maintenance: A Concept for Maintenance Performance Improvement.”
There are clear benefits to improving maintenance processes, and most of those benefits will accrue to your bottom line in one way or another.
Given the evidence, it may be tempting to save money by executing a new project. However, it needs to be the right project, or you won’t get the maximum benefit. Any successful maintenance project must eliminate inefficiencies, increase work quality, reduce safety risks, and therefore reduce costs.
VIZIYA has a great deal of experience, assisting many different companies across many different industries, to improve their maintenance processes. What we have found is that certain specific enhancements tend to reduce maintenance costs, regardless of the organization or the vertical in which it operates.
Management support may be the most powerful change agent for a maintenance organization. One of the best ways to get management support is with quality data.
Improvements to reporting doesn’t accomplish anything by itself, but it gives your team insight, goals, and the ability to move forward. Succeeding in maintenance is about understanding where you are and what your next steps are to improve. Reporting and analytics put this power in your hands.
The sort of fine-grained data you can get from a quality maintenance reporting solution is invaluable. First, better information usually leads to better decisions. Second, having the data at your fingertips shows you where improvements can have the most impact. Third, it’s a great tool for convincing others. Management may not listen or care if you tell them that the maintenance team is overworked or needs an increased budget. However, they will find it harder to ignore cold, hard numbers.
One of the less obvious advantages of improved reporting is how it can help you to discover best practices within your own organization. Site business processes are often very different, even within the same company. One of the great advantages about analytics and reporting is that it allows you to compare and benchmark them. Not only does this show you which sites are excelling at particular parts of your maintenance mission, it allows you to draft individualized plans to improve the processes at each site.
Reactive work is recognized as being 3 to 5 times more expensive to conduct than properly planned preventive maintenance work.
When maintenance moves from reactive to a planned environment, there is less wasted time and effort looking for the right part, getting instructions, and less confusion around who is doing what and when. Just imagine the craft productivity that could be attained if your technicians go straight to the job and straight to work, rather than spending the first hour or two searching for a plan of action.
If you’re mostly doing corrective maintenance, you likely don’t do much material planning, and as a result, you’re going to carry excess inventory just to avoid stock outs. But stock outs are inevitable since only repair history is guiding material purchases. You may also have to rely on the expedited buying of material which was not planned. This means higher procurement costs for the materials and rapid delivery.
The key to effective maintenance is the right work, at the right time, done at the highest level of quality. Moving from a reliance on reactive and corrective maintenance to a preventative maintenance strategy will benefit your assets and your budget.
If you have made the decision to move from reactive work to preventive maintenance, then you need to determine what needs to be maintained and when.
A reactive vs. preventive scenario:
You’ve got to make a decision, and you’ve got to make it fast. A piece of equipment on the plant floor has just failed, and the only available crew has a full schedule of preventative maintenance work orders. You know the PM work can be pushed back a bit (it’s preventive, after all), so you decide to shift the PM crew to reactive maintenance and get that asset back online.
It sounds like a good plan. The problem is that we didn’t give you all the information. The equipment in need of corrective work is not production critical. Having it offline for a day will only reduce capacity by a minimal amount.
The asset scheduled for PM work, on the other hand, is crucial to continued operations. It’s true that PM work can often be pushed back, but what about the times that it can’t? In short, if the critical asset fails, production is completely halted until you can get it back up and running.
These are extreme cases, but they highlight the need for determining work order prioritization and asset criticality. There are always limits on the resources you have, some equipment will always be more important to production, and some maintenance tasks are more time-sensitive than others.
An asset criticality index gives you the ability to properly prioritize your work orders. For more on how to create one, please see “Creating a Work Priority Index: 4 Essential Steps.” You can go even further with this and start using your criticality index to help manage your backlog, with “Maintenance Backlog: Take Control with a Priority Index.”
Building an effective budget and monitoring it closely is very important. It can also be harder than it sounds. How you build your budget depends on your maintenance strategy & goals, as well as any rules your organization has in place for budgeting.
A maintenance budget should be established to meet the demands of the assets, based upon history, targeted asset life, and production demands. Simply copying last year’s budget and adding a small percentage, as is the case in many companies, won’t meet those goals.
VIZIYA built our WorkAlign Budgeting tool in collaboration with aluminum producing giant Alcoa. You can see an in-depth webcast on how the tool was built and its impacts at “Maintenance Budgeting with Alcoa Inc.” You can also download our white paper, “Why Maintenance Budgets Matter with Alcoa.”
In brief, Alcoa believed that 20 to 40 percent of the maintenance budget was controllable. That doesn’t mean you can cut that percentage from the budget, but it does mean that it can be controlled.
If you’re like most maintenance organizations, about 20 percent of your assets consume about 80 percent of your budget. Start by looking at that equipment, with the aid of your asset criticality index, and build a budget for each piece of critical equipment. This will help you to control your costs by showing where money should be spent, where it shouldn’t, and where it absolutely must be spent to avoid production downtime.
Warranty cost recovery is often overlooked by many maintenance organizations. The dollars recovered can be substantial yet are often left sitting on the table because many maintenance teams lack the systems necessary to assemble, submit, and track warranty claims for a successful recovery.
In VIZIYA’s Warranty Business case paper we point out the requirements and benefits of successfully submitting warranty claims.
The numbers below show what you could expect to recoup if you claimed every warranty to which your organization is entitled.
None of those percentages individually are very large. The overall average rate is only 3.4%. However, let’s plug in some dollar figures and see what happens.
For this exercise, we’ll assume your overall capital equipment budget is $25,000,000. Your actual capital equipment expenditures may be higher or lower than this. Of that, new equipment is around $10 million, and your organization is spending $5 million each on new parts, rebuilt parts, and contract labour.
At $10 million dollars, your expected recovery on new equipment warranty claims is about $300,000. New parts, which cost you $5 million, have the lowest warranty recovery return rate at 1%. Even here, though, you can expect to recoup $50,000 in warranty claims. Rebuilt parts and contract labour could net you another $250,000 each. The grand total, if you’re submitting all eligible warranty claims, comes to $850,000.
This assumes, however, that you are recovering 100% of all submitted claims. Warranty Week reported that the average warranty recovery rate for companies using manual processes is between 10 and 25% of total potential warranty expenses. Manual warranty program administration can result in inefficiency, error, delayed claims, and thus a low rate of recovery. However, according to IDC Manufacturing Insights, instituting an automated warranty management solution has been shown to raise recovery rates to 50% of total recovery opportunity. Companies with very focused and efficient processes may recover even more than 50% of total warranty expenditures. Even at a rate of just 50%, the potential exists to recover $425,000.
Would you turn down an $425,000 increase in your budget? Of course not! Yet that’s exactly what you’re doing when you don’t have a good warranty management system in place.
One approach would be to take just one or two hours per week to focus on identifying warranty work orders for possible warranty claims. Focus first on claiming reimbursement for the largest amounts on your most expensive equipment or parts. You may be surprised just how fast you manage to get the payback on your time.
Warranty claims are a potential goldmine for maintenance departments, but sadly the money is often left sitting on the table. If you’ve been asked to cut 5% from the maintenance budget, there’s a very good chance you could balance that cut through warranty claims alone.
It’s very easy to miss the opportunity for a warranty claim. Say you’re replacing a pump, and you think to yourself, “That pump was only six months old. It shouldn’t have failed like that.” Today, though, you’re concentrating on getting the pump back online. Tomorrow you’ll be concentrating on something else. Before you know it, thinking about making a warranty claim isn’t even a distant memory.
Your organization could certainly use the money (couldn’t we all?). But this lack of action has other long term effects. A year later, when the purchasing department needs to purchase some new pumps, they may go with the same vendor who provided your prematurely failed pump. Why wouldn’t they? After all, you’re not showing any warranty claims!
You can use warranty claims to evaluate your vendors. It might be worth considering competitors if products from your selected vendor keep failing prematurely or more than expected.
Long story short, the money from warranty claims is just lying there, waiting for you to pick it up.
VIZIYA has a product that simplifies the entire process and helps to ensure you don’t miss a single claim. You can learn more about VIZIYA’s WorkAlign Warranty Tracker here.
Planning and scheduling are at the core of maintenance process improvement. Taken together, planning and scheduling recommend what work you do, when it should be done, and what resources should perform the work. It’s hard to think of what could be more important to maintenance.
Picking the right work, at the right time, and having the right people perform it can certainly save maintenance dollars. A big part of these savings come from better labor utilization.
In his “Maintenance Planning and Scheduling Handbook,” Doc Palmer notes the most utilization you will ever get out of a maintenance person is about six to seven hours per eight-hour shift. There are many reasons for this including breaks, meetings, gathering materials, traveling to and from job sites, etc.
Note that the figure quoted above is with planning and scheduling. Without planning and scheduling, the average wrench time at about two to three hours per day, not six or seven. In other words, proper planning and scheduling can cause productivity to rise by 100% or more! A 100% rise in productivity is almost unheard of for any project.
Maintenance planning and scheduling are recognized as industry best practices for many reasons. However, just because your organization is planning and scheduling doesn’t mean best practices are being followed. Like many aspects of maintenance, successful planning and scheduling revolves around the characteristics of the assets under your care. For more on this, please see “Asset Based vs Resource Based Maintenance Scheduling,” and our white paper, “Planning and Scheduling Best Practices.”
A properly executed maintenance project shouldn’t cost money. Rather it should save money and result in a more efficient maintenance process.
The old saying is that it takes money to make money, and it’s true in this case. That’s why one of the earliest steps in any maintenance project is to secure funding.
It is critical to ensure that you have a properly researched and planned business case showing the return on investment model. VIZIYA provides assistance to our customers and prospects who desire to make an investment in critical maintenance process improvements. Please contact us if you’re interested in reducing costs while making your maintenance processes more efficient.