Saying ‘Nuts’ To Maintenance Cuts

To debunk the ‘we can cut maintenance’ myth, you need to use the right language.

By Jane Alexander, Deputy Editor

Despite improved economic conditions and expanded operations across various industry sectors, countless maintenance departments continue to find themselves in the crosshairs of management cost-cutting efforts. While these initiatives (or mere news of proposed ones) typically send personnel into a dither, the use of sound, effectively delivered information from maintenance can reverse, forestall or prevent their implementation. We asked Contributing Editors Bob Williamson and Ken Bannister for some practical advice on how maintenance organizations can say “nuts” to cuts and win.

Williamson and Bannister agree that even in the smartest of plants with the most forward-thinking leaders, the myth that “maintenance” is the first and easiest place to start chopping from an operating budget is a dark cloud that never totally dissipates. Breaking out from under that cloud requires maintenance team members to think clearly and speak fluently in the language that management understands best: financial.

Whether you’re new to the maintenance field or a seasoned plant professional, the following insight can help you build the case that your maintenance organization isn’t a “burden” to ax, but a manufacturing and facility “cost” that provides significant return on investment (ROI). You’ll need to do your homework, though.

Williamson: Focus on semantics

Williamson emphasizes the importance of semantics (the meaning of terms) to the discussion—especially when it comes to understanding the way a plant’s accounting department views maintenance. “As far as accounting functions are concerned,” he says, “a maintenance department really is a cost center.” But that’s not a negative, according to generally accepted accounting principles.

Accounting, in manufacturing operations, Williamson notes, also considers maintenance to be an indirect or “overhead” cost. “In those facilities,” he says, “maintenance personnel, along with their salary burdens and benefits and the repair and maintenance parts and supplies they use are all referred to as overhead.” (See “Typical Overhead Items” sidebar.)

As Williamson has frequently written and discussed, what maintenance as a cost center offers more than any other overhead group is “the assurance that production equipment and facilities are capable of making products that will ultimately generate revenue for the business.” That begs the question: Why would the source of such assurance be considered a financial burden or a cost to be cut?

Unfortunately, Williamson says, in light of the Total Quality movement, Lean, downsizing/rightsizing and other cost-cutting initiatives in industry over the past 20 years, the maintenance function was “falsely labeled” as an overhead cost to be cut by financial experts who didn’t comprehend the fundamental requirement for maintaining equipment and facilities. “That cost label,” he laments, “has stuck like glue.” 

Bannister: Use your data 

Bannister approaches the discussion from an empirical perspective. He encourages maintenance departments to reference the KPI of “maintenance cost as a percentage of total operating costs” when talking with management—and to explain why a high percentage cost of maintenance is not necessarily a bad thing. As an example, he points to the difference between maintenance costs in the mining industry, which, from experience, he has found to be among the highest as a percentage of operating costs (up to 40%), and those in facility maintenance, which are among the lowest as a percentage of operating costs (less than 10%).

According to Bannister, any industry that has copious amounts of abrasive material in contact with process equipment and is operating in remote locations and harsh environments can expect its maintenance percentage costs to be high. “But,” he explains, “if asset availability is high, say above 95%, and the maintenance process is efficient, a high percentage cost of maintenance is an acceptable cost of doing business.”

Bannister would also remind management that there are several ways to reduce inefficiency and maintenance costs without cutting maintenance budgets. These include planning and scheduling of work; condition-based maintenance; performing only PM tasks proven to add value and prevent premature failure (value based PM); and implementing strategies and tactics that deliver “twofers” and “threefers” (like extending equipment life cycles, improving energy efficiency and reducing CO2 emission reduction). “Maintenance processes that reduce costs not under the control of the maintenance department are profit-based finds,” he says, “and should be touted in the same way as a new sale would be.”

Maintenance adds value

While maintenance is NOT considered a “profit center” in accounting practices, it can add value to the bottom line very efficiently (a much higher ROI than a sales-profit margin). One-time savings such as energy improvements in lighting, heating/cooling efficiencies, compressed air and other areas can result in utility-company incentive payments, grants, as well as ongoing lower costs per unit produced. The maintenance department has the unique ability to generate bottom-line hard-dollar improvements (savings) more than any other overhead group.

For example, Williamson cites a previously reported compressed air-leak-elimination project conducted by a maintenance department. In this case, the plant was spending between $250,000 and $500,000 annually to produce compressed air—and compressed air leaks. When maintenance performed a “leak audit” and fixed all leaks in one part of the plant, it cut energy costs by $250,000 per year. Compressor wear was also reduced. Furthermore, one of five compressors could be taken off-line, which allowed rotating maintenance of the other units without curtailment of production, and eliminated the need for a rental compressor during maintenance downtime.

Maintenance had clearly added a significant amount of “profit equivalent” to the bottom line. And because of these compressed air-system improvements, the cost-per-unit-produced was reduced. But as Williamson recalls, if that wasn’t enough, inconsistent airflows and pressures associated with the leak had also affected the performance of the plant’s manufacturing equipment tools: By eliminating leaks, maintenance helped increase production efficiencies and decrease quality-defect rates.

Know what you control 

“Maintenance is an accepted component of the operational process, but asset failure and repair are not,” says Bannister. “To be effective and efficient, the maintenance department must clearly understand what it controls versus what it manages. In other words, it must first deal with maintenance-related failures and restore equipment to as-designed or as-bought condition, then work on things that it does not control but must manage.” This concept, he says, is important to reinforce with management.

Bannister has often written about and discussed the problem maintenance has trying to “sell” itself. As he has described the situation in the past, a $1M dollar contract at an average after-tax 5% profit margin that produces a mere $50,000 profit will be applauded in the sales department (and by management). Yet, a $50,000 efficiency-saving project by maintenance often goes un-applauded, despite the fact that it’s equivalent to a million-dollar sale.

To attract the attention of management that is typically more informed on financial and sales-impact matters than maintenance costs, Bannister offers this last bit of advice: “Maintenance must always determine its after-tax profit figure and apply it to savings as if a sale had taken place.”

Both Williamson and Bannister often refer to maintenance as a “partner” with production operations, equipment engineering (for maintainability design) and procurement (for purchasing/stocking reliable fit for service repair parts). The more effective these partnerships are, they say, the more efficient and cost-effective production operations will be. When maintenance is seen and treated as a cost to be reduced, however, the synergies of those partnerships cease.

It is up to the maintenance department to make sure management fully understands this concept and the true value of the relationships that maintenance has with other plant functions. MT

Typical Overhead Items

On financial statements, each product must include the costs of the following:

1. Direct material costs

2. Direct labor costs

3. Manufacturing (or factory) overhead costs

Costs included in manufacturing overhead typically include, but aren’t limited to:

• Material handlers (forklift operators who move materials and units)
• People who set up the manufacturing equipment to the required specifications
• People who inspect products as they are produced
• People who perform maintenance on the equipment
• People who clean the manufacturing area
• People who perform record keeping for the manufacturing processes
• The factory management team
• Electricity, natural gas, water and sewer for operating the manufacturing facilities and equipment
• Computer and communication systems for the manufacturing function
• Repair parts for the manufacturing equipment and facilities
• Supplies for operating the manufacturing process
• Depreciation on the manufacturing equipment and facilities
• Insurance and property taxes on the manufacturing equipment and facilities
• Safety and environmental costs

Compelling Points In a Nutshell

What Management Needs to Know but May Be Too Afraid to Ask

— Maintenance is a manufacturing and facility cost that generates significant ROI: lower cost per unit produced and lower cost per occupied square foot. Cut maintenance and watch production/operations efficiencies fall, repairs increase, and cost per unit increase to the point that a business is no longer viable.

— Equipment and facilities will always require maintenance due to natural mechanical and chemical deterioration, not to mention abuse from improper operation and PM deferment leading to repairs. Efficient, effective maintenance can reduce the speed and amount of deterioration and prevent untimely failures. No other overhead cost center in manufacturing has this capability, or responsibility.