Crunching the numbers

Maintenance should not be looked at as an expense but as an investment. It contributes to a company's economic health, profitability, reliability, safety, and long-term performance. As with all investments, management must objectively examine work in relation to its cost, return, and benefit. Once company decision makers set cost and performance objectives, KPIs (key performance indicators) can use these goals as benchmarks to evaluate progress and alter the course as needed. This article will explore how financial KPIs, in addition to performance reports, can be used to measure and understand maintenance's contribution and capabilities, leading to better performance, increased efficiency and more profits.

BENCHMARKING AND KPIS

Benchmarking is a process for determining a measure and means for optimal performance. This point of reference could be within the parent company, a competitor(s), or perhaps a completely different industry altogether. This information is then utilized to identify gaps in the organization's work and/or production processes. The exact point in which a company will fix its targets depends largely on their current status, which should be determined as a baseline to measure progress against.

KPIs are used to provide a dynamic narrative of the performance and financial health of a site. Each group or department on a site will have specific performance measures by which to compare themselves. Usually, maintenance is measured against unplanned downtime, PM performance, labor and material costs. However, companies are doing themselves a disservice if they do not move beyond the basic metrics. Compiling more abstract and advanced KPIs will reveal greater insight into a company's practices. Factoring the cost of maintenance vis-a-vis its contribution to a facility's profitability and reliability can reveal a lot about a company's financial status. The contribution from maintenance work should be examined to determine if a site is getting its money's worth.

REPLACEMENT ASSET VALUE

To accurately employ some of the KPIs highlighted in this article, a site needs to first determine its Replacement Asset Value (RAV). A low RAV indicates a maintenance program is effective. The ease of which a site can obtain these figures will also be a gauge for how well employees are tracking costs. Collecting all relevant data in programs such as CMMS, EAM, and/or ERP will help identify where money is spent. To find the RAV, the site must first determine the as-constructed asset value for each piece of equipment, with the help of the company accounting department, and then calculate inflated value of the as-built cost over the intervening years since construction.

Assets are inseparable from the manufacturing processes and operations. Without them, a manufacturer has no means to produce their product and generate revenue. The Society for Maintenance and Reliability Professionals (SMRP) suggests using the RAV as the denominator in a number of calculations to normalize cost performance of various-sized facilities within a given industry. These calculations are used to determine the performance of the maintenance and reliability function relative to other facilities in the same or similar industry.

The RAV may also be referred to as the Estimated Replacement Value (ERV)-the dollar value/cost that would be required to replace the production capability of the present assets in the plant. This includes process equipment as well as utilities, support and related assets. If the buildings and grounds are normally considered maintenance expenditure, their replacement value should be calculated in this equation. That's not to say the ERV would include the insured value or depreciated value of the assets or real estate, but rather only the improvements thereof.

There are various methods to determine a facility's RAV. The CEO and president of Maintenance and Reliability Best Practices LLC, Ricky Smith, describes one straightforward technique as the following:

• Add up all maintenance-related costs performed on a specific asset or site over the course of a year.
• Then, multiply that number by 100.
• Finally, divide the product from the steps one and two by the total cost to replace said asset(s).

RAV = Total Maintenance Cost X 100 ÷ Cost to Replace Asset(s)

Once the RAV is determined, it can help calculate additional KPIs relating to maintenance.

TOTAL MAINTENANCE COST

Total maintenance cost is defined as the annual expenditures for maintenance labor, including work performed by operators such as total productive maintenance (TPM), materials, contractors, services, and resources. It includes all daily maintenance expenses and that of outages, shutdowns, or turnarounds, as well as capital expenditures directly related to end-of-life machinery replacement.

The total maintenance cost can be displayed as a percentage of the Replacement Asset Value (RAV) as long as the costs under scrutiny are for the same assets included in the RAV. This indicator compares the amount of money spent on an annual basis to upkeep a site's assets, divided by the RAV of the assets being looked after, and expressed as a percentage. This metric can then be used to compare the site's maintenance expenditures to that of benchmarks and other plants of varying size and value. Again, the lower the percentage, the more effective the maintenance strategy.

The following is an example of this equation: Consider a site's the Total Maintenance Cost is $3,000,000 annually while the RAV for the assets are $100,000,000.

• Total Maintenance Cost As a Percent of RAV = ($3,000,000 × 100) ÷ $100,000,000
• Total Maintenance Cost As a Percent of RAV = 3%

A facility cannot rely on this metric alone and, as a lower maintenance cost does not automatically translate to best in class, but generally, an RAV of less than 3% indicates best practice. Although it may vary by industry, the top quartile range is 0.7% to 3.6%.

MAINTENANCE COST PER UNIT

Calculating the maintenance cost per unit can offer another insightful performance indicator. To find this value, the total maintenance cost is divided by the number of units produced in a given measurement period, usually on a monthly basis. Although calculating the total maintenance cost is pretty straightforward, computing the cost per unit is not always so simple, especially in manufacturing situations. Manufacturing costs per unit should often consider both the variable costs (expenses that vary with the number of units made, such as that of a barrel of crude oil) and fixed costs (expenses that don't vary with the number of units made).

The following calculates the maintenance cost per unit using both variable and fixed expenditures:

Cost Per Unit = Variable Costs + (Fixed Costs ÷ Units Sold)

The same KPI measurement without including the variable costs can be calculated as in the example below. If the total maintenance cost for the year was $2,585,000, and the total output from the site in that same year was 12,227,500 pounds/gallons/barrels.

Maintenance Unit Cost = $2,585,000 ÷ 12,227,500 pounds/ gallons/barrels

Maintenance Unit Cost = $0.21 per pounds/gallons/barrels

There are no set targets or best in class for this particular metric, but sites can still use this information to help manage their maintenance process. This provides the opportunity to be better equipped to identify issues and implement corrective action to reduce the cost per unit.

MAINTENANCE MARGINS

A KPI for finding maintenance margins is expertly explained by David Berger in his paper, Top 10 World-Class Maintenance Measures. This performance indicator measures the margin cost contribution of maintenance, relative to sales. Monthly maintenance costs are typically spread throughout operating expenses and profits in product sold. Berger says this is an inappropriate way to measure KPIs in production maintenance. Ideally, maintenance cost should be a separate, quantified operating expense line item with a per margin breakdown, which details and compares maintenance costs with company sales and finished product.

The maintenance should be calculated on an annual basis or more frequently. Graphing this KPI on a monthly basis provides a dynamic picture of how maintenance is affecting profitability on an ongoing basis. The calculation for the maintenance margin would be:

Maintenance Margin = Total maintenance costs/mo. ÷ Company sales/mo. X 100

According to Berger, 9% marks the best in class benchmark for maintenance margin petroleum operations.

CONCLUSION

As this article demonstrates, there are numerous financial metrics that can be employed vis-à-vis the maintenance strategy to provide site management with benchmarks to track the value for dollars spent. Knowing the shortfalls and gaps enables management to design remedies and solutions. Effective maintenance metrics require finding the right combination of performance indicators to align to the strategic and financial objectives of the business.

Whatever metrics are used, it is important everyone involved in capturing, reporting, reviewing, and making decisions thoroughly understand each KPI. This includes knowing what the measurements mean to the business, what the metric is made up of (i.e. how it is calculated and what the base numbers represent), and in what way the metrics are used to compare against benchmarks and agreed-upon targets. These targets can be "best in class" or "best demonstrated performance"-based on trends over time to identify sustainable improvement. One thing's for sure: they must be established in advance and understood by all parties. That will talk time, training and effective communications but the results are definitely worth the investment.

ABOUT THE AUTHOR

Michael R. Johnston, CRMP, is a senior consultant at T.A. Cook Consultants Inc., with more than 30 years of professional consulting experience across North America and the UK. He is an expert in delivering maintenance excellence solutions to clients in asset-heavy industries. Following a number of engineering roles at HBS Reliability Technologies/ABB as senior continuous improvement analyst, Johnston joined T.A. Cook in 2009. Currently, he provides strategic turnaround, maintenance work process, and uptime improvement advice to businesses in the oil and gas, petrochemical, and chemical industries in North America.