Crisis, not aspiration, drives us to action

I often hear reliability professionals comment that senior management just doesn’t get it – they can’t seem to see the benefit of investments in plant reliability management. As a consultant, I’m often retained to help plant engineers and managers enlighten the managers they report to on the merits of a solid reliability strategy. It’s an activity I enjoy a great deal. Unfortunately, I can’t offer a silver bullet or magic words that will make your managers suddenly “get it.” I can, however, offer some insight as to why they don’t seem to get it. The first task in any battle is to know the enemy. Perhaps you can parlay these lessons and thoughts into strategies that work.

There are essentially two things that motivate an organization to achieve excellence in equipment asset reliability management. Either the organization aspires to be the best it can be (proactive) or the organization is forced to act in response to a crisis (reactive). By a wide margin, most organizations that focus effort on maintenance and reliability have done so in response to a crisis. I think there are two significant reasons why this is the case:

• most organizations are forced into focusing on short-term objectives; and,

• as decision-makers, the majority of people are hard-wired to approach propositions like investments in plant reliability reactively.

Let’s begin with the easy one, short-term focus.

Like most of you, I’ve been confused, even miffed, by the fact that CEOs of large manufacturing organizations haven’t made plant reliability management a strategic function. I think every organization should have a senior-level manager, one who truly understands the broad landscape of plant reliability management, dedicated to this critical function. A few companies do, but not nearly enough. Why do these smart people in charge of billions of dollars worth of equipment assets – who presumably learned the same lessons I did in business school about managing an organization and maximizing shareholder value – not see plant reliability as a strategic function.

It seems so obvious. If a company depends upon equipment assets to convert raw materials into finished goods, the functioning of those assets should be a top priority. This is particularly true for companies that function in what I call a “commodity sandwich,” whereby raw material commodities (where price is determined strictly by the market) are converted into finished goods commodities (the price for which the manufacturer has little or no influence). Managers can’t control the markets from which they buy raw materials or sell finished goods. They only control the process itself, which is where the profits must be found (see Figure 1).

Figure 1. Most manufacturing organizations have no control over the price of
raw materials or finished goods. Their profits must be found in the process.

Why then do we design and purchase machines with the objective of achieving functional capability at the minimum price level instead of implementing a well-documented and sensible life-cycle pricing/value-maximization approach to design and procurement?

Why do we lack rigor in deploying optimized operational processes and procedures?

Why have we been slow to truly and wholeheartedly adopt proven proactively focused precision maintenance practices and condition-based maintenance?

Why do we neglect to effectively manage the skills and behaviors of our team members?

Why do we reward unreliability, both formally (overtime pay) and informally (pats on the back) for fixing something at midnight to get us up and running, instead of questioning why it failed?

Why do we reward unreliability by making it easy to get resources to fix problems once a failure has occurred, but consistently reject proposals for proactive initiatives that will reduce the likelihood of their occurrence?

Why? Why? Why?

The list goes on, but the overriding question is: Why do companies wait until the wheels fly off before they get serious about reliability management? There are plenty of possible answers and explanations. I’d like to address the two previously mentioned: focus on the short term and psychological response to risk.

I don’t believe senior-level managers, or anyone else for that matter, intentionally compromise plant reliability. However, as a shareholder in several companies, I, along with all of you that own shares in manufacturing concerns, may be a big part of the problem. The CEO of the organization is ultimately responsible to manage shareholder value. In publicly traded companies, that is the share price on the New York Stock Exchange, NASDAQ or other exchange on which the company’s shares are traded. When you’re publicly traded, your business, and the manner in which you manage, is a matter of public record, which is scrutinized on a daily basis – minute by minute, in some instances.

When done correctly, investments in plant reliability management represent a major change in the way an organization conducts its business. As most who have gone through it will tell you, the culture change required to succeed is monumental, to say the least. The investment is heavily front-end loaded. The organization must spend a great deal of time and money to re-engineer business processes for all associated functional activities, upgrade with technology, educate and train the team … it’s a big deal. Unfortunately, the gains aren’t felt until months or years after deployment. The stock market, however, want returns today. This motivates and often forces management teams to make decisions that look good in the short term but have long-term negative consequences. For instance:

• They buy machines on the cheap even though the life-cycle cost of ownership will be much higher.

• They arbitrarily cut the maintenance budget, which is analogous to moving money from the asset column of the balance sheet to the income statement.

• They operate machines beyond their limits to seize the opportunity today, knowing full well that the piper must be paid later.

Unfortunately, pressure from Wall Street evokes this type of behavior. It seems irrational to us reliability professionals, but most of us haven’t walked a mile in the CEO’s shoes. We can’t understand the kind of pressure he or she must survive.

An interesting contrast is the privately held company. At this year’s Lubrication Excellence/Reliability World conference in San Antonio, we were privileged to receive two excellent keynote addresses – from Ron Christenson, chief technical officer of Cargill Corp., and Vince Adorno, vice president of Alcoa’s Primary Metals division.

With annual sales exceeding $60 billion and more than 100,000 employees, Cargill is the world’s largest privately held company, by a wide margin over No. 2. Ron is an enlightened manager who clearly understands the importance of reliability to Cargill’s strategic vision, competitive position in the markets the company serves, customer satisfaction and corporate culture. Cargill gets it. To what extent do you believe being private enables management to take a longer-term view? I think it’s significant.

Unfortunately, because of the short-term pressure the stock market places on publicly traded companies, few aspire to excellence in plant reliability management. It’s a tough sell to fickle shareholders who don’t care about anything beyond share price growth and dividends today, this week, this month or this quarter. As a result, crisis is more often the impetus. When cornered, managers have little to lose, and they tend to get more aggressive with longer-term initiatives that carry a higher perceived risk, like improving reliability management. When left with a binary choice of getting it right or closing the doors, our survival instincts kick in, which brings us to framing effects, the second factor working against the implementation of reliability initiatives.

In their seminal article in 1979, researchers Khaneman & Tversky proposed a concept called “Prospect Theory,” explaining that the way in which a proposition is presented to an individual, or “framed,” determines how he or she will respond. Conventional utility theory suggests that risk is defined as the magnitude of an event multiplied by the probability of occurrence. No distinction is given to whether the event is a potential gain or potential loss. Khaneman & Tversky empirically compared potential gain propositions to potential loss propositions to see if there is any difference. There is a big difference. Their theory has been verified again and again since their original research, in many different situations.

Let me explain. Imagine a proposition where you are offered a choice between $50, no strings attached, or a 50:50 proposition on the flip of a coin that, if you win, gets you $100, but if you lose, leaves you with nothing. What do you do? From a strict utility perspective, both propositions are equal: ($50 x 100%) = ($100 x 50%). Most folks, according to research, take the sure $50. A bird in the hand is worth two in bush, right? Why take the risk? Khaneman & Tversky found that when the proposition is one of potential gain, people tend to become averse to risk.

However, let’s change the proposition a bit. Suppose you owe me $50 and I ask you to pony up the money or take a double-or-nothing bet on the flip of a coin. Again, from a pure utility perspective, the propositions are equal: ($50 x 100%) = ($100 x 50%). However, a funny thing happens in this situation. People are more inclined to take the risky double-or-nothing proposition when it is framed as a loss. You’re already down $50. Why not go for it, right? Many a gambler has gotten into serious financial trouble trying to “make up” his or her losses. If the wrong people are bankrolling the gambler, the trouble can go beyond financial.

Funny psychology, isn’t it? We’re averse to risk when a proposition is framed as gain, or an opportunity, and we seek risk when the proposition is framed as risk.

Let’s bring this back to plant reliability management. When the organization aspires to achieve excellence in plant reliability management, the proposition is definitely one of gain. According to Khaneman & Tversky and the scores of researchers that have validated their prospect theory, the organization is going to be risk averse. Conversely, when the chips are down and the company is in a crisis mode – get it right or go out of business – managers become much more open to propositions they perceive as risky.

So, how do you put this knowledge to work? For one, understanding why people behave the way they do is helpful in and of itself. But here are some tips to keep in mind:

1. Don’t let small victories get lost in the noise of day-to-day operations. Clearly show and communicate the gains you make from plant reliability management initiatives. Understand how your efforts influence profits and share price, and then tell everyone.

2. Frame projects as losses. Rather than say “this change will add $200,000 per year in additional profit to the organization,” say “we’re presently losing $200,000 per year due to our failure to do this effectively; we can either continue to lose this money, year on year, or take the following actions.”

3. Educate, educate, educate. Borrowing from the utility theory of risk, the potential gain, or avoided loss, is multiplied by the likelihood that the project will work. A manager that is uneducated about plant reliability management is likely to discount the proposed gains/avoided losses because he or she doesn’t understand the project or basic plant reliability management strategies and concepts. Don’t allow lack of subject matter knowledge to compromise your important projects.

The decision to change a company’s culture and its business processes is a significant investment of time and money, one that carries some risk. This risk is difficult to explain for publicly traded companies and difficult to undertake when the organization is not in a crisis. Understand these challenges so you can manage them effectively.

References:

Troyer, D. (2005) “Plant Reliability Management Course Book”, Noria Corporation, Tulsa, OK.

Mitchell, J. (2000) “Operating Equipment Asset Management Handbook”, Clarion Technologies, Houston, TX.

Khaneman, D. and Tversky, A. (1979) “Prospect Theory: An Analysis of Decision-Making Under Risk”, Econometrica, 47, 263-291.