Demonstrate Reliability’s Value to Management
EP Editorial Staff | October 16, 2017
When it comes to plant operations, personnel regularly contend with scores of issues. Through this column, Klaus M. Blache attempts to help them address those concerns by answering common questions. This month’s installment focuses on economic issues associated with reliability programs.
Q: “How do I justify reliability to my leadership to get resource support?”
A: Of all the questions I receive, this one comes up constantly. It’s at the crux of the struggle of countless plant-floor trades, technicians, and engineers. Many managers understand the benefits from a robust reliability and maintenance (R&M) process, but enabling success requires changing business processes. Plant leadership often pushes back because it views maintenance in terms of “fix it fast and at lowest cost.” Note: For clarification, when I refer to reliability, I am referring to all parts of reliability, maintenance, and maintainability, i.e., human performance, precision maintenance, designing-in accessibility, modular replacement, and mistake-proofing. Since leadership only “listens” to and understands dollars, let’s start there.
Return on net assets (RONA) measures a company’s financial performance as related to fixed assets and working capital. Higher RONA means greater profitability.
Return on Net Assets (RONA) = (Net Income / (Fixed Assets + Working Capital)) x 100
Net income is what remains in revenues after all costs and expenses are subtracted. This includes such things as cost of goods sold, operating expenses, taxes, interest, depreciation, and amortization, among others. Net profit and net income (which also deducts preferred stock) are often used interchangeably.
By now, you may be asking why you should pay attention to this financial lingo. Instead, you should be asking, “Why should leadership want to listen to your R&M lingo, i.e., RCM, FMEA, RCA, PdM, CBM, LCAM, and Weibull?” The good news is that your site’s management does these calculations all the time. You only need to ask for the numbers, and, at a minimum, be able to translate value into financial terms that leadership understands.
Let’s assume that all of your process equipment and building(s) are worth $10 million and generate $1 million in profit annually. During a year’s time, the working capital (current financial assets minus liabilities) is $1.5 million.
Return on Net Assets (RONA) = (1,000,000 / (10,000,000 + 1,500,000)) x 100 = 8.7%
At this point, if you don’t yet have one, build a simple activity-based life-cycle-cost (LCC) model that reflects the total cost of ownership (acquisition, operation, maintenance support, spare parts). But make it detailed enough to answer your R&M decision-making needs. This model would track recurring costs due to poor R&M. By getting a little more detailed on net income, you can use price minus costs (material, labor) times throughput to evaluate the incremental benefit of more production, versus cutting maintenance costs. Have financial help for support and further credibility. Many companies already have some form of make-buy decision process that does some or all of this. You may just need to simplify and tweak it for easy use.
If you’re not ready to go into that much detail, perform a simple gap analysis of your current practices versus top-quartile performance. Calculate what 1% of throughput is worth in revenue and profit. Understand the quartile in which you operate relative to reactive maintenance. Chances are that you aren’t in the top quartile (9% reactive maintenance). The data from my 2016 study of 140 companies, representing more than 3,000 facilities, showed facilities that are top quartile in reactive maintenance were also better in maintenance cost/sales and overall equipment effectiveness (OEE) than those in lower quartiles. Use the Improvement Chart on p. 47 to determine your percent-improvement potential.
Let’s go through a simple example. Say your site’s reactive maintenance is 60%, maintenance cost as a percent of sales is 10%, OEE is 71%, and management wants to cut maintenance costs.
Start by explaining that you can’t cost-save your way to higher availability, reliability, and throughput.
Rather than cut maintenance cost, it would make more economical and strategic sense to improve your reactive maintenance to top-quartile levels, reduce maintenance cost/sales (10% x 0.41 = 4.1%) to 5.9%, and increase OEE (71% x 0.11 = 7.8) to 78.8%. Calculate what those benefits are worth to your organization. This doesn’t even get into other related benefits, i.e., helping reduce downtime, minimizing variation of production output, and improving safety.
The first thing is to calculate what a 1% improvement in OEE, maintenance cost/sales, maintenance cost/replacement asset value, and other factors is worth in dollars. Consider Novelis: As their reliability process matured, unscheduled average company downtime improved over 2 % (every 1% improvement is about four days of additional run-time—for every machine across the entire corporation, that is). The takeaway? Know your numbers.
Remember: Everything in your operations is related. For example, if less than 23% of your resources are allocated to finding issues with predictive technologies, you’re not a top-quartile performer. At least another 30% should be targeted for addressing issues that infrared, ultrasound, vibration-analysis, and other predictive tools find. This is what drives continuous improvement.
Be advised that two things frequently come up when discussing reliability-program justification with management: not enough trades/technicians and funding for predictive technologies. Turning to information from a new or recently performed PM Optimization handy (assuring all tasks are value-added) can be an especially helpful first step in dealing with these issues (reallocating people and resources).
Taking a close look at your MRO-parts-management process is next. Every facility I have reviewed has been able to reduce 10% to 40% in inventory. If yours is a medium- to large-sized enterprise, improving inventory turns to more than three from, typically, less than one, or improving inactive inventory from, typically, more than 30% to less than 10%, are each worth more than $1million. Try targeting savings and obtain agreement to keep a percentage to fund your PdM-tool purchases.
Bottom line: Understand the maturity of your R&M/life cycle asset management process, calculate the savings potential, and start with justifying the basics. EP
Based in Knoxville, Klaus M. Blache is director of the Reliability & Maintainability Center at the Univ. of Tennessee, and a research professor in the College of Engineering. Contact him at firstname.lastname@example.org.