The Business Case For Asset Reliability
EP Editorial Staff | March 12, 2015
Build it by understanding how the many benefits of asset reliability affect everything the operation wants to accomplish.
By Al Poling, CMRP
Corporate executives and senior managers have historically held a dim view of the maintenance function. Many believe maintenance would be unnecessary if manufacturing operations were better run. Consequently, it is not uncommon to find a huge schism between the corporate office and manufacturing sites. It would be an epiphany for both to learn that they want the same thing: failure-free operations.
The maintenance/reliability relationship
To achieve failure-free operation, it’s important to understand the following relationship between maintenance and asset reliability: As reliability investment drops, maintenance costs rise. Corporate offices that historically focus solely on profits typically put pressure on their maintenance departments to reduce their costs. On the surface, the logic is sound: Each dollar not spent on maintenance is another dollar of profit. But inevitably, asset reliability is overlooked. Instead of applying valuable resources to failure prevention, they are consumed by corrective maintenance.
The relationship between maintenance and reliability is directional, and applying pressure on maintenance cost will not result in failure-free operation. It will also not improve asset reliability. In fact, if enough pressure is applied, activities that improve reliability, such as preventive and predictive maintenance, will be curtailed. And when these strategies go away, the result is even higher maintenance costs and lower asset reliability.
When the focus is shifted away from maintenance cost and onto asset reliability, the opposite occurs: record reductions in maintenance costs, and a corresponding improvement in reliability. However, it is only through high asset reliability derived from an unwavering commitment to failure-free operation that low maintenance costs can be achieved and sustained.
The benefits derived from high asset reliability go well beyond lower maintenance costs. They impact many key business drivers. To understand these benefits, consider that all for-profit organizations operate under the same fundamental business model. This model can be distilled down to a basic mathematical formula:
Profit = Sales – Cost
As this equation indicates, profits rise with sales. As costs go down, profits also rise. Therefore, an obvious key to maximum profitability is to drive sales up while driving cost down. Asset reliability and corresponding maintenance costs have a profound, yet not well-understood, affect on sales, cost and several other key business factors:
Asset reliability and sales
To understand the effect of asset reliability on sales, it’s important to examine each of the components in the equation in more detail. Sales revenue is driven by two primary levers: unit price (and related margin) and sales volume. The higher the sales price per unit, the higher the margin and the greater the profit. Additionally, the more product sold (sales volume), the higher the sales revenue and the greater the profit. This relationship can be illustrated in a basic mathematical formula:
Sales = Price x Volume
To understand the relationship between asset reliability and sales revenue in this equation, it’s important to examine each component in more detail.
Asset reliability and price
The price of a product is largely set by the market and what it will bear. But the market places a premium on quality, and customers are generally willing to pay more for higher quality. This is where asset reliability comes into play. The highest sustainable product quality possible can only be produced through uninterrupted manufacturing. And as assets become more reliable, manufacturers are able to produce consistently higher quality product. Revered engineer and management consultant W. Edwards Deming recognized this over a half-century ago, though most American manufacturers weren’t listening at the time.
A second price lever is derived by maximizing production volume—again through uninterrupted operation due to highly reliable assets. As the cost per unit (CPU) goes down from reduced maintenance and related costs, the ability to compete on a price basis provides significant advantages. Manufacturers who achieve this benefit can undercut their competitors who are still saddled with high maintenance costs.
Asset reliability and volume
CPU is a product of both cost and volume. We know that maintenance costs drop as asset reliability increases. However, production volume can also increase with highly reliable assets, thereby providing a dual benefit. As with lower costs, higher production volume without capital investment enables manufacturers to further erode the margins of their competitors by lowering prices.
With the added advantage of both lower maintenance costs and higher production volume enabling more competitive pricing, market share goes up. And unless overall product demand increases significantly, when one manufacturer’s market share goes up, a competitor’s must go down.
Asset reliability and cost
Maintenance costs are typically the largest fixed cost in manufacturing, surpassed only by the costs of raw material and energy that vary with production volume. As indicated by the following equation, if maintenance labor, maintenance material and/or maintenance overhead costs go down so does the cost of the product:
Total Maintenance Cost =
Labor + Material + Overhead
To understand how these fundamental maintenance costs can all drop simultaneously, each component needs additional examination.
Asset reliability and maintenance labor cost
As countless studies have confirmed, proactive maintenance is significantly less costly than reactive maintenance. When asset reliability increases, equipment failures go down. With fewer equipment failures, less maintenance labor is required. And not only will straight time labor requirements drop, overtime labor will all but disappear. While the cost per hour of maintenance labor is not affected by high asset reliability, the volume of maintenance labor hours goes down markedly, providing a significant cost benefit.
Asset reliability and maintenance material cost
As with maintenance labor, fewer equipment failures proportionately reduces the need for repair materials. Also, without emergency repairs, the high cost of expedited repair materials evaporates. And storeroom labor and inventory (working capital) can be reduced when unplanned failures no longer occur.
Asset reliability and maintenance overhead cost
There is a direct, corresponding maintenance-overhead benefit derived from less maintenance labor. The most obvious is that fewer maintenance supervisors and planners are required. However, additional specialized resources are typically still required to achieve high reliability.
Reliability professionals are needed to focus on failure avoidance, while the rest of the maintenance organization is focused on corrective maintenance. This group of professionals includes reliability engineers, reliability paraprofessionals (non-degreed personnel who learned through experience) and craft personnel trained in the various predictive technologies. The demand for these specialized resources is at an all-time high, which means salary and wage rates are higher than the market rate for equivalent resources not trained and skilled in asset reliability. Fortunately the reduction in reactive resources far exceeds the cost of these specialized resources, so there is still a net reduction in overhead.
The case is compelling
The benefits of high asset reliability are so compelling, it is mystery why so many manufacturers have yet to embrace it! They include:
- Higher sales price (margin) derived from a higher quality product
- Lower unit cost by distributing costs over a higher volume of product
- Higher production volume from fewer production interruptions (equipment failures)
- Increased capacity without costly capital investment
- Increased market share through more competitive pricing
- Increased market share derived from higher quality product
- Lower maintenance labor requirements due to a reduction in equipment failures
- Lower maintenance material cost due to a reduction in equipment failures
- Lower maintenance overhead as a result of lower maintenance labor requirements
- Ability to expand into new markets when transportation costs can be offset by lower manufacturing costs
- Fewer environmental incidents caused by equipment failure
- Lower regulatory costs due to fewer environmental incidents
- Fewer injuries when fewer workers are exposed to hazards caused by equipment failure
- Reduced maintenance turnaround downtime due to higher equipment reliability
- Avoidance of painful and protracted start-ups by including reliability in the design of new and expanded units
- Avoidance of unnecessary brown-field or green-field expansions
- Reduced or eliminated off-spec product caused by equipment failure and related shutdowns and start-ups
Change is in the air
Although it is hard for some to believe that uninterrupted or failure-free manufacturing is possible, it is being achieved today at many manufacturing sites around the world. Change is in the air. Those who embrace failure-free operation (and therefore invest in asset reliability), consistently achieve high levels of asset reliability with downtime attributed to equipment failure down to 1%. This is less than four days of downtime a year due to equipment failure. This feat would be remarkable even if it was limited to routine maintenance alone, but it also includes annualized downtime for turnarounds.
Top-performing manufacturers have all but eliminated unplanned equipment failures. These same top performers have reduced maintenance costs through increased asset reliability to 1% of plant-replacement value of their manufacturing assets.
Do the math for your operation. What affect would an increase in production without capital investment have on your competitive position? How much would your profitability increase if every dollar derived from reduced maintenance cost due to high asset reliability went to your bottom line?
Manufacturers that maintain a short-term focus on costs and profit fail to recognize the one true path to success. With higher product quality and lower unit cost (which means more competitive pricing), the sales and marketing organization should be able to sell every unit produced! The argument that no sales were lost due to unreliability is a self-fulfilling prophecy. And don’t impose artificial limits on your operation that build in a calculated amount of downtime built-in. The only limits are those that are self-imposed. Take off the blinders and release the full potential of your manufacturing assets. MT
Al Poling has more than 30 years of reliability and maintenance experience in the process industry. A Certified Maintenance and Reliability Professional (CMRP), Poling has served as Technical Director for the Society for Maintenance and Reliability Professionals (SMRP), and most recently served as project manager for Solomon’s International Study of Plant Reliability and Maintenance Effectiveness (RAM Study) where he worked with global clients to improve performance through benchmarking. Contact him at firstname.lastname@example.org.