The benefits of strategic asset management

Stanton McGroarty, SAMI Corporation
Tags: maintenance and reliability

After decades of lean manufacturing, JIT, outsourcing, Total Quality Management and Six Sigma, where does a manufacturing executive turn for the next big competitive improvement?

The answer has been hidden in overhead accounts and factory corners since the beginning of mass production. The tools to manage it effectively have been emerging steadily in recent years, and today the science of asset management is accessible to any organization willing to undertake fundamental change in the way they manage production assets. The rewards can be astounding.

In most manufacturing or distribution operations, maintenance department costs are 5 to 15 percent of operating costs. Most accounting systems require that several accounts be combined to identify the total cost of maintenance operations, but the information is there, and it is just the beginning of the asset management story.

The financial impact of asset management, good or bad, touches all parts of the organization:

  • Lean manufacturing cannot function with less than 99 percent overall equipment reliability. In a JIT system of five steps, the reliability of each station must exceed 99.8 percent for the system to deliver 99 percent uptime. In this environment, running equipment until it breaks down is simply not an option.
  • In today’s era of paper-thin manufacturing margins and ever-shrinking customer lead times, it is unrealistic to even think of carrying finished inventory to cover unreliable equipment.
  • For the same reason, nobody can afford to carry duplicate production assets to cover unreliability.
  • The time and cost to repair an equipment breakdown are three to five times what it takes to make a planned repair of the same equipment, prior to failure.
  • Safety and quality costs associated with equipment failure add up to a very convincing case for 99.8 percent equipment reliability as a corporate asset healthcare strategy.

“All right,” you say, “that’s a great set of generalizations, but how do I determine the financial potential of asset management in my operation?”

Fair question. The complete answer requires a thorough assessment of your business, but some important clues are readily available from a short self-assessment. These clues point only to the actual cost of maintenance, but that is an important beginning:

Total Cost of Maintenance (TCM): The accounting department should be able to put this together pretty fast. It is a departmental cost, not the “cost of unreliability” (COUR) index that we use elsewhere. The total is a surprise to most executives. TCM includes the following:

  • Total labor, benefits and overtime cost of maintenance technicians and support personnel.
  • Total labor, benefits and overtime cost of production and other personnel that help maintenance during repair operations.
  • Total cost of maintenance materials, including express freight, short lead time premiums, etc.
  • Total cost of maintenance supplies and the maintenance portion of production supplies.

TCM does not include general overhead that is applied to maintenance today, unless trimming the maintenance department would reduce this cost as well. (Usually it won’t.)

Benchmarking this cost depends on industry, company size and several other factors, but the figure itself is usually an eye-opener.

Breakdown Maintenance Percentage (BM%): As we said above, the cost of repairing an equipment breakdown is three to five times the cost of the same repair done in a planned manner, prior to failure. A world-class asset management program typically holds breakdown maintenance under 5 percent of all maintenance man hours. Once asset management is in place, TCM is often reduced to half what it was under a mostly breakdown approach. The computation is straightforward. For a period of six months to two years, determine the following:

  • The number of maintenance and support man hours that were spent on breakdown work.
  • The number of maintenance and support man hours spent on scheduled planned maintenance (PM) work.

BM% is Breakdown Hours / (Breakdown Hours + PM Hours).

World class is under 5 percent. Anything over 25 percent indicates a serious competitive liability.

Cost Savings for World-Class Asset Management: The Total Cost of Maintenance (TCM) is your baseline cost today. We can approximate the cost of a world-class asset management system as follows:

  • Determine the total cost per maintenance hour (including material) by dividing total maintenance cost by total maintenance man hours.
  • Determine the number of maintenance man hours for a world-class system by dividing your breakdown work hours (above) by four and adding the result to the number of PM hours (above).
  • Then, multiply this number of hours by your current cost per maintenance hour to develop an approximation of the cost of a world-class system.
  • The difference between this cost and your current TCM is a first approximation of the maintenance departmental cost savings available from installation of an up-to-date asset management system.

Most executives are amazed by the results of this self-assessment. The way most accounting systems disguise overhead cost prevents this analysis being done from normal monthly or annual cost reports. But, this isn’t the last insight from self-assessment.

As we noted above, TCM is only a part of the story. Equipment unreliability is a key cause of lost production capacity. The value of this missed opportunity varies widely with the specifics of each business, but it typically ranges from three to 100 times the maintenance departmental savings from world-class asset management.

In today’s lean manufacturing world, many organizations can sell everything they can make. In these cases, uptime improvement may automatically convert to additional business, or to a reduction in outsourcing. It can also postpone the need for massive investments in production capacity. Any one of these can dwarf the cost of an asset management program. Indeed, some manufacturing companies can double their profits by getting control of asset management.

After a more complete assessment of current operations, companies such as SAMI can provide the specific impact of these factors on your business’ bottom line.

Following the assessment, SAMI uses a proven, five-stage process to help your organization install asset management. Each stage brings with it a wave of cost and revenue improvements that more than funds the process. Most clients experience exciting financial results from Stage 1.

Asset Management in Five Steps

1. Planned maintenance – Getting control of maintenance operations

2. Proactive maintenance – Getting control of equipment

3. Organizational excellence – Integrating Maintenance and Production

4. Engineered Reliability – Designing equipment and systems for reliability

5. Operational excellence – Building upon asset management to create a decisive competitive advantage

To learn more about this process, visit www.samicorp.com.

 


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