Choose Reliability Or Cost Control

2015

Choose Reliability Or Cost Control

EP Editorial Staff | October 12, 2015

The concepts of reliability and cost control cannot co-exist in the same organization.

By Jeff R. Dudley, Solomon Associates

In a memorable 1858 speech, Abraham Lincoln stated, “A house divided against itself cannot stand.” Incongruous as it may seem, that quote has a modern reference to reliability and the internal battle being waged in many forward-thinking organizations. Do we choose a reliability culture and long-term growth or do we attempt to generate short-term profits by adopting a culture of cost control? An organization can’t choose both. The two concepts are in total opposition.

Reliability is a topic of discussion in many industries today, and countless plants have created their own reliability strategies. Before implementing such a strategy, however, an organization must be clear about its definition of reliability and the level of reliability at which it believes it is operating. This gives the organization a foundation from which to measure its progress.

Most organizations are, in fact, reliable to some degree or they wouldn’t be in business. But many are not as reliable as they could be. Two factors play a role in this situation: One is the organization’s definition of reliability and the other is the culture to which it subscribes.

In many instances, organizations define reliability solely on how assets operate—a focus that allows only incremental reliability improvements. Others use an expanded definition of reliability such as “constantly and consistently meets commitments,” which captures more of an “enterprise” view. In the expanded definition, reliability becomes a measure of how people behave and the impact those behaviors have on asset and work-process performance. But even in this broader view, it is an organization’s culture that will ultimately determine if an increased level of reliability is achieved.

Creating a reliability culture

What does a broadly focused reliability culture look like? For one thing, it’s focused on minimizing the impact of unplanned events. The number and severity of unplanned events have a direct impact on reliability. In a broadly focused reliability culture, every individual is aware that identifying unplanned events at an early stage and minimizing their impact is his or her responsibility. Everyone knows he or she is accountable for doing something to forestall or contain an unplanned event, after which they need to ensure that the situation is brought back to normal.

This requires that individuals take appropriate actions while weighing the risks and resource requirements involved. From this perspective, it’s easy to see how a cost-control culture would have a negative impact. When curbs are applied to spending, they’re also often applied to risk taking and resource allocation. As a result, it is more difficult to minimize the impact of unplanned events. In reliability cultures, individuals are typically empowered to take action. It is expected of them and they are held accountable for it. In cost-control cultures, individuals are restrained from taking action, and will often believe that this is someone else’s decision to make.

Consider the following two asset-intensive Fortune 100 corporations. Both have enterprise-wide views of reliability, but that’s where their similarities end. They are attempting to deliver their results with completely different cultures. One is focused on reliability, individual leadership, and growth, while the other is focused solely on short-term profits. What the companies deliver to stockholders is dramatically different.

The company with the cost-control culture had a stock price of about $35 US in 2008. It has now grown to $45 US, an appreciation of about 30% over seven years—a shallow, straight-line improvement. In contrast, the reliability-focused company had a stock price of about $10 US in 2008. Its stock price is now also $45 US, a 400% appreciation. Both companies have been subjected to the same economic shifts, but responded to them very differently. One attempts to create short-term profits and appears to have an ever-changing strategy, while the other has stuck to a focus on reliability and has seen significant growth.

Cost control is not the answer

Cost control can become a blinding paradox. The need for short-term profits becomes an addiction, and makes it hard to see past the end of the quarter. The belief in cost control can be so ingrained that it is seen as a source of profitability. In the short term, this can be true: Cost is the only active lever that can be used to take profits. However, taking profits has long-term risks. In fact, reliability is the only way to achieve long-term and sustained profitability—making profits, not taking them—and to arrive at a level of spending that drives profitability.

As shown in this graph and explained on the following page, the most reliably performing organizations (indicated by the green bar) are not the ones with the lowest maintenance costs (indicated by the orange bar). In fact, some low-maintenance-cost organizations are actually more unreliable than they should be. Solomon’s research found only organizations that developed a reliability culture and achieved high reliability have been able to maintain spending at a lower level. Not many organizations are patient enough to make that journey. Source: Solomon Associates.

The most reliably performing organizations (indicated by the green bar in Fig. 1) are not the ones with the lowest maintenance costs (indicated by the orange bar in Fig. 1). In fact, some low-maintenance-cost organizations are less reliable than they should be. Solomon’s Reliability and Maintenance (RAM) Efficiency Index is a measure of reliability and the cost to deliver that reliability, measured as reliability-driven cost, or RDC. What we know from the data is that only organizations with a reliability culture and that have achieved high reliability have also been able to maintain spending at a lower level (see Fig. 1). Those that depend on cost cutting to deliver short-term profit (taking profits) face low reliability, including missed sales, unexpected downtime, and disappointed customers.

A culture of reliability is impossible to create if maintenance cost controls are continuously implemented. Constant cost control cancels reliability. As shown here, Solomon’s research found that the lowest-spending performers were second-quartile (Q2) RAM EI performers. Alternatively, through patient development of a culture of reliability, costs will achieve the lowest sustainable level to deliver the desired reliability.
Source: Solomon Associates.

A reliability culture is impossible to create if controls are continuously applied to maintenance costs. Constant cost control cancels reliability. (See Fig. 2, which shows that the lowest spending performers are second-quartile [Q2] RAM Efficiency [EI] performers.) Alternatively, through patient development of such a culture, costs will achieve the lowest sustainable level to deliver the desired reliability.

Why reliability?

Reliability is not what is done but how everything is done. The activities performed in an organization are the what. How they are done determines whether the organization is successful or not. Every activity and behavior can be done either reliably or unreliably. Choosing the latter will ultimately cost more and require more time. Activities that are done reliably will deliver consistently in three important areas:

Increased customer loyalty. If you are consistently reliable, customers will begin to depend on you for what they need. The organization that consistently meets its commitments creates customer trust and loyalty.

Improved employee satisfaction. Employees perform better when they can accomplish what they’ve planned. Unplanned events can disrupt such plans. Because reliability keeps unplanned events to a minimum, it helps make the work and personal life of the employee more predictable. This predictability leads to employee satisfaction and allows employees to accomplish more.

Long-term maximum profitability. Short-term profitability is typically followed by periods of lower profits, drastic actions, or restructuring. Long-term maximum profitability is achieved when the enterprise is run at high reliability rates and at the lowest possible cost while still achieving that reliability.

The timeframe

How long it takes to develop a reliability culture depends on the starting point. If you begin with a strong cost-focused culture and employees with minimal empowerment, the journey will take longer than if you have a reliability-focused culture and proactive personnel allowed to make some of their own decisions. This is where the strength and patience to stick with a reliability culture become so important.

Years of work devoted to creating a reliability culture could still fold to the pressures and stress of cost cutting. The enticement to take profits, i.e., sacrificing long-term reliability, rather than make profits, i.e., sustaining long-term reliability, is often so strong that it becomes the chosen path. Once that choice is made, the reliability culture dies and the cost-control culture comes to life.

Profits may grow in the short term, but at what cost? The ability to increase customer loyalty, employee satisfaction, and long-term profitability has now taken a back seat and will not be easily recovered.

Top-performing companies don’t allow their “houses” to be divided over reliability and cost-control—and for good reason. Once the majority of employees in an organization are on board and a reliability culture begins to grow, positive results build exponentially across the business. MT

Jeff Dudley is a senior consultant with Dallas-based HSB Solomon Associates LLC (SolomonOnline.com), a leading performance-improvement company serving the energy industry. Dudley has spent more than 30 years in the maintenance and reliability arena. Contact him at Jeff.Dudley@SolomonOnline.com.