Maintenance Cost and Estimated Replacement Value
Torbjörn Idhammar, President & CEO IDCON INC
Yesterday you were a happy camper. Today you are told your Maintenance Cost (MC) as a percent of your Estimated Replacement Value (ERV) is 4.9%. According to Consulting, Inc. and your corporate management 4.9% is way too high. Good performers are under 3%, some operations are even under 2%. So, the question is what are you going to do about it Mr. Maintenance Manager?
The Number
Before we discuss what we should do about this situation, let’s discuss the number. An educated guess is that the number has emerged from financial consulting firms trying to benchmark maintenance management. Many use a MC/ERV of 2-3 percent as a benchmark for best performers. Is it reasonable to use the number as a benchmark? My opinion is that in theory it can be, but I have rarely seen it used to help and organization assess or improve maintenance. Let me explain some of the deficiencies in applying the number.
The target number (2-3%) is often applied to all industry with the assumption that all industry maintenance cost should be the same if the estimated replacement value is the same. This is not a reasonable assumption. A computer chip manufacturer may buy a piece of equipment for $5,000,000 to produce wafers while a cement operation buy three 400 ton load capacity trucks for the same cost and same ERV. Does that mean that the maintenance cost is the same for the wafer making machine and the three trucks, I highly doubt it, but that is the underlying assumption for use of the number.
The maintenance cost compared to the equipment value is different depending on industry. For example, a mining operation has a much higher MC/ ERV than a fixed plant operation. A Mining corporation that is considered an industry leader recently surveyed the MC/ERV number in 11 mine locations. The MC/ERV ranged from 18% – 36%. Equipment in some industries wears more. A Gould 3196 pump servicing water supply has a higher MC/ERV than a slurry pump servicing oil sand. The slurry pump convolute often grind down in less than a year due to the extremely sharp sand grains while the water pump may last for years.
The Maintenance Cost is measured different from areas, locations, and corporation. Some capitalize large maintenance jobs, some don’t. You may say there are rules in place for capitalizations. Area A has a $100,000 job they want to put on the maintenance budget. They simply bring out my magic wand, now there are 3 jobs for $33,333 each! And so it goes on, with different rules for different companies, different definition of maintenance, and different people. Maintenance cost can easily vary 40-50%.
A reliable ERV is equally difficult to establish. To make an attempt for getting it as close to right as possible, you need to go back to the original investment of the mill. Then, you have to decide what index to use for estimating current replacement value. After that, you need to cluster all investments and divestments, for example, in a three-year time period. When all this is done, you can calculate ERV. This number is far from an exact number regardless of how you calculate it.
What Do you Do?
Regardless of what anyone thinks about the number you will most likely have to live with it at your location. What are you going to do about the maintenance cost (you probably can change the ERV unless you use dynamite on equipment and it is not recommended)?
Poor options
If you must change maintenance cost short term you are out of any good options. Maintenance can be deferred for about 12-18 months. My recommendations is that you make sure you become a hero and is promoted out of the plant before the 12 months are up, because the deferred maintenance will catch up around that time.
You can cut maintenance staff, which also works as an automatic system for deferring maintenance. Often, the logic is that maintenance people only work 2—3 hours per day, so let’s cut 30% of the crew. The problem is that when the cut is done the remaining maintenance people now only work 1 ½ to 2 hour per day.
A good option
Sit down with your lead team and ask “what drives cost (maintenance and operational) down long term?” IDCON has done this with many corporations and with honest discussions we always come to the same conclusions. Improving the following will reduce cost and increase production volume long term: Planning, scheduling, preventive maintenance, condition monitoring, spare parts management, and root cause problem elimination.
If our American industry would get this message, we would make a lot of money with no capital investment. I’d have to find another job.
Torbjörn Idhammar
Torbjörn Idhammar is the president and CEO of IDCON INC., a Reliability and Maintenance Management Consulting Firm. Tor’s responsibilities include training IDCON consultants, product development, sales, and marketing. He gives advice to IDCON’s multi-site and international clients to ensure outcomes and deliverables are met.
Related Articles
When manufacturing organizations look to asset reliability to improve their facilities, there is often one main driver behind this decision: financial performance. There are many reasons to employ reliability practices including improved safety and production, but many companies focus on reliability initiatives because they touch so many aspects of the business and yield strong financial results. This article provides a guide to the processes, mindsets, and organizational characteristics necessary to achieve optimum financial results through reliability initiatives.
When manufacturing organizations look to asset reliability to improve their facilities, there is often one main driver behind this decision: financial performance. There are many reasons to employ reliability practices including improved safety and production, but many companies focus on reliability initiatives because they touch so many aspects of the business and yield strong financial results. This article provides a guide to the processes, mindsets, and organizational characteristics necessary to achieve optimum financial results through reliability initiatives.
See More
Proactive organizations recognize that one of the critical success factors in achieving a best practices reliability program is developing a sound maintenance, repair and operations (MRO) spare parts program. That notion is quickly followed by the realization that there are potentially hundreds of improvement opportunities that typically could be associated with a materials management effort. As such, it becomes overwhelming to determine where to start.
Proactive organizations recognize that one of the critical success factors in achieving a best practices reliability program is developing a sound maintenance, repair and operations (MRO) spare parts program. That notion is quickly followed by the realization that there are potentially hundreds of improvement opportunities that typically could be associated with a materials management effort. As such, it becomes overwhelming to determine where to start.
See More
So, if you’ve had this discussion, which you will have at some point in your career, and if you haven’t heard it a hundred times already, you need to reduce maintenance costs. Have this discussion – how do we do this? What happens in most places is that maintenance cost X this year, last year it was X minus 5%. Why do we do that? Well, this year we have this big rebuilding of boilers…
So, if you’ve had this discussion, which you will have at some point in your career, and if you haven’t heard it a hundred times already, you need to reduce maintenance costs. Have this discussion – how do we do this? What happens in most places is that maintenance cost X this year, last year it was X minus 5%. Why do we do that? Well, this year we have this big rebuilding of boilers…
See More
Managing your inventory levels correctly can mean the difference between machinery that has broken down and is slowing down the assembly line or a smoothly running machine that is boosting productivity. In today’s competitive industry, no company can afford downtimes and delays in production due to missing parts. With increased competition, companies depend on their supply chain to be leaner, healthier and faster than the competition. The thing to remember about inventory control is that it’s about striking a balance between too much stock and too little. If you have too many tools and spare parts on hand, you’re wasting company funds that could be better utilized elsewhere.
Managing your inventory levels correctly can mean the difference between machinery that has broken down and is slowing down the assembly line or a smoothly running machine that is boosting productivity. In today’s competitive industry, no company can afford downtimes and delays in production due to missing parts. With increased competition, companies depend on their supply chain to be leaner, healthier and faster than the competition. The thing to remember about inventory control is that it’s about striking a balance between too much stock and too little. If you have too many tools and spare parts on hand, you’re wasting company funds that could be better utilized elsewhere.
See More
The cost of unreliability is a big picture view of system failure costs, described in annual terms, for a manufacturing plant as if the key elements were reduced to a series block diagram for simplicity. It looks at the production system and reduces the complexity to a simple series system where failure of a single item/equipment/system/processing-complex causes the loss of productive output along with the total cost incurred for the failure.
The cost of unreliability is a big picture view of system failure costs, described in annual terms, for a manufacturing plant as if the key elements were reduced to a series block diagram for simplicity. It looks at the production system and reduces the complexity to a simple series system where failure of a single item/equipment/system/processing-complex causes the loss of productive output along with the total cost incurred for the failure.
See More
Making money, not tons, has become the mantra of the pulp and paper industry in recent years. Consolidation moves in the sector have resulted in more effective management of inventories and supply, but the cyclical tendencies of the business remain. On top of that, the market is now a global one rather than being split up into regions. Managers today have to live up to the challenge of reducing costs to remain competitive in this global market. Mills face the real possibility of closure if manufacturing costs are no longer competitive in the global market economy. Future success will be achieved only by driving down costs and improving operating efficiencies.
Making money, not tons, has become the mantra of the pulp and paper industry in recent years. Consolidation moves in the sector have resulted in more effective management of inventories and supply, but the cyclical tendencies of the business remain. On top of that, the market is now a global one rather than being split up into regions. Managers today have to live up to the challenge of reducing costs to remain competitive in this global market. Mills face the real possibility of closure if manufacturing costs are no longer competitive in the global market economy. Future success will be achieved only by driving down costs and improving operating efficiencies.
See More
