Cost and estimated replacement value

Tor Idhammar, IDCON INC

Yesterday, you were a happy camper. Today, you are told that your maintenance cost (MC) as a percent of your estimated replacement value (ERV) is 4.9 percent. According to Consulting Inc. and your corporate management, 4.9 percent is way too high. Good performers are under 3 percent; some operations are even under 2 percent. So, the question is, what are you going to do about it, Mr. Maintenance Manager?

Before we discuss what we should do, let us discuss the number. An educated guess is that it has emerged from financial consulting firms trying to benchmark maintenance management. Many use a MC/ERV of 2 to 3 percent as a benchmark for best performers. Is it reasonable to use that as a benchmark? My opinion is that, in theory, it can be, but I have rarely seen it used to help an organization assess or improve maintenance. Let me explain some of the deficiencies.

The target number (2 to 3 percent) 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 isn't a reasonable assumption. A computer chip maker may buy a piece of equipment for $5 million to produce wafers, while a cement operation buys three 400-ton-load-capacity trucks for the same cost and same ERV. Does that mean the maintenance cost is the same for the wafer-making machine and the trucks? I doubt it, but that's 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 company that's considered an industry leader recently surveyed the MC/ERV number in 11 of its mine locations. The MC/ERV ranged from 18 to 36 percent. 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 grinds 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 differently for areas, locations and corporations. 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 that it wants to put on the maintenance budget. It brings out the magic wand, and now there are three jobs for $33,333 each! And so it goes, with different rules for different companies, maintenance definitions, accounting practices and people. Maintenance cost can easily vary 40 to 50 percent.

A reliable ERV is equally difficult to establish. To get it as close to right as possible, you need to go back to the original investment of the plant. Then, you must 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 of this is done, you can calculate ERV. This number is far from an exact number.

Regardless of what anyone thinks about the number, you'll most likely have to live with it at your location. What are you going to do about the maintenance cost? You probably can't change the ERV unless you use explosives on equipment, and that isn't recommended.

If you must change maintenance cost short term, you're out of good options. Maintenance can be deferred for 12 to 18 months. My recommendation is to make sure you become a hero and get promoted out of the plant before the 12 months are up, because the deferred maintenance will catch up around that time.

You can cut staff, which also works as a system for deferring maintenance. Often, the logic is that maintenance people only work two to three hours per day, so let us cut 30 percent of the crew. The problem is that when the cut is complete, the remaining maintenance people still only work two to three hours per day, perhaps less because morale is down.

Want a good option? Sit down with your lead team and ask "what drives cost down long term?" IDCON has done this with many firms, 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 industry got this message, it could make a lot of money with no capital investment. I'd have to find another job.

Torbjörn (Tor) Idhammar is partner and vice president of management consultant firm IDCON Inc. IDCON specializes in reliability and maintenance management. He is responsible for all IDCON projects and consultants, including training and implementation support for reliability management assessments, preventive maintenance, operator-based reliability, planning and scheduling, materials management, and root cause problem elimination. He is the author of "Condition Monitoring Standards" (volumes 1 through 3). Contact Tor at 800-849-2041 or e-mail info@idcon.com. Also, visit www.idcon.com.

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