CALCULATING MAINTENANCE /

RELIABILITY INITIATIVE

RETURN ON INVESTMENT (ROI)

SOURCED FROM "RULES OF THUMB FOR

MAINTENANCE AND RELIABILITY ENGINEERS" BY
RICKY SMITH AND KIETH MOBLEY

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CALCULATING MAINTENANCE ROI

Before any reliability project or initiative can begin a business case must be
established with the financial benefit or risk determined. In this chapter we will deal
more with financial risk rather than with the business risk as it pertains to safety or
environmental issues.

In order to determine the ROI (return on investment) it is important to first establish

the objective for the reliability initiative. The initiative’s objective should have a
financial value assigned. An example may be:

Reliability Objective: Increase reliability of production assets on a specified

production line by 8% with a financial value of $8million the first year.

Developing the initiative’s objective and assigning value to the objective is important
in order to receive management’s approval. The objective above could be broken
down further into more defined measurements to include:
Increase number of units produced in year 1, year 2, year 3 etc.
Reduction in unit cost per unit in year 1, year 2, etc.
Increase in quality yield by % in year 1, year 2, etc.
Reduction in maintenance cost by 10% in year 2, 20% in year 3, and 30% in year 3
based on current maintenance material, labor, and contractor cost

Leadership ROI Team

The first step in this process is to develop a team of professionals who would jointly
develop the business case which includes the ROI. This team must consist of the plant,
or corporate financial person, production leadership, maintenance and engineering
leadership, and plant or executive management. Many times any one of these
personnel will try to not participate in this process, however, if they do not participate,
the chance of the initiative being approved is very low. I always ask managers how
much their time is valued. In most reliability initiatives the value is so high they have no

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option but to participate.

Case Study

An example of this value would be a true situation where I will change the names to
protect the company’s true identity.
Company name: XYZ Company
Situation: Demand for this plant’s product was expected to double in the next one
year - two years.
Company was adding additional production lines in the plant in order to keep
up with production demands.
According to production management no additional capacity of current assets
was available.
Equipment reliability was concern because downtime was seen as high (no real
numbers available)
Skill level of maintenance personnel was seen as a problem because of
reliability issues so a “pay for skills” program was implemented and was seen to
have little effect on the reliability issues.
A new maintenance manager was appointed from engineering.
The Team:
A team was developed by the plant manager to determine a solution to the
reliability problem with real concern that the new production lines will have
similar production issues if equipment reliability is not improved.
Team consisted of the plant manager, production and maintenance manager,
engineering manager, plant comptroller, outside consultant.
Findings: After an evaluation of the situation the following information was found
to be valid and agreed upon by the management team.
Asset reliability problems consisted of only 3% of total downtime
Maintenance department had PM program developed based on
manufacturer’s recommendations and were very vague
Maintenance department had no repair procedures developed

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CALCULATING MAINTENANCE ROI

Change over standards were set too high resulting in a total downtime of 40%
Change over standards were developed based on plant startup 6 years
prior with no further evaluation for improvement
Quality losses were exceeding 9% of production rate due to lack of good
production operating procedures
Operating procedures were developed after the plant initially started up
and were never updated
Little if any data tracking system could be found o The computerized
maintenance software system was used very little
The production software system was used very well however the data
being reported was not valid
Return in Investment (ROI) results:
Plant was operating at 57% of true capacity rate
Change over standard was set to high (4 hour change over went to 45
minutes)
Change over between shifts was costing an average of 15 minutes between
shift times two shifts a day
Industry known product quality benchmarks were found to be 3% where this
plant’s quality losses were at 9% resulting in a delta of 6%
78% of quality losses were caused by operator error on each production
line
The other losses were a result of many factors
Final numbers:
Plant capacity increased to 94% within 6 months (sold to corporate as two year
project)
“Under commit, over deliver”
Resulting in an increase net profit = $12 million
Capital expenditure was halted resulting in a savings of $4 million
Quality increase to 4% in one year
Resulting in an increase in net profit by $800,000

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CALCULATING MAINTENANCE ROI

Maintenance cost increased in the first year by 10%

Maintenance cost decreased over the next two years by 34% ($420,000)
Total cost of the project (2 years) o Production consulting services = $400,000
Maintenance consulting services = $800,000
Skills Training = $150,000
Other cost (training for managers, visits to other plants, etc) = $120,000
TOTAL COST:
(year 1) = $1.1 million
(year 2) = $250,000
INCREASE IN REVENUE
(year 1) = $13 million
(year 2) = $4,220,000

In Conclusion

In the final analysis the plant spent $1,350,000 in order to return $17,220,00. If you
notice the cost was front end loaded. Corporate was told the expected return was
$3,200,000 and not $17,220,000. The cost was stated as estimated. The plant team
“under committed but over delivered”. This was one of many situations which actually
happened.

Lessons Learned

1. Develop a leadership team to identify ROI

2. Have the number one financial person on the team to provide hard validation of
cost and ROI
3. Determine where all of the losses may be occurring and focus on the losses worth
going after. Some losses will always occur but must be determined and accepted
as part of management’s operating strategy.
Reliability
Schedule downtime

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Weekly, monthly, yearly schedules based on time and not asset health
Unscheduled downtime
Rework
In-effective PM program (apply RCM Methodology such as FMEA, RCM,
etc)
Total functional failure
Maintenance cost (this will reduce as a result of an increase in reliability and
reduction in production reactivity)
Maintenance overtime
Maintenance labor (never layoff, loose through attrition)
Maintenance material purchased
Maintenance storeroom value
Maintenance material overnight delivery cost
Maintenance contractor cost
Maintenance capital (replacing equipment because it was not maintained
appropriately)
Production – if the equipment is not operating to the functional requirements
then it is producing a loss.
Product changeovers
Startups
Breaks, lunches
1. Product quality
2. Operator error
3. Partial and total functional failure
4. Determine the objective of the project or initiative and quantify it
5. Under commit, over deliver every time

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Questions? or like to join me for this great workshop?

[email protected]

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