Cost Effectiveness Perspective
How can we continue to reduce the unit costs of the asset
management efforts?
Operational Costs
Over
the past twenty years asset management professionals have seen their share of
the operational spending rise, in some cases substantially. This has been due
to a large number of reasons. The impact of regulatory and legislative changes,
the impact of advanced methodologies reducing costs in other areas as well as
rising complexity of machinery are just some of the pressures driving maintenance
costs.
On
the other hand pressure has never been greater to reduce the direct costs of
the maintenance function. As we enter the 21st century the world’s markets are
opening up, exposing industries to direct competition from countries operating
in low-cost environments (due to a lack of regulation, low labor costs and a
range of other factors). Some industry types, such as utilities industries for
example, are still coming to grips with competitive pressures for the first
time after the waves of privatization over the past two decades.
As
a major part of the operational spending of capital-intensive industry, this area
often attracts a lot of attention when profit margins need to be increased or
when overall direct costs need to be reduced. A general reaction, noted by the
author, is to act in three ways potentially-
-
Direct cost savings
through putting off or eliminating maintenance activities
-
Isolated measures and
cost-saving activities
-
Forcing down the
direct costs of maintenance through reduced spending
In
all of these cases the focus is on reducing the direct spending on maintenance.
However the results of these types of initiatives are often either shortlived, or
in worse case scenarios they are counter-productive or even dangerous.
While
reduction in direct maintenance costs are possible, it is in the reduction of
unit maintenance costs where a permanent and lasting solution to maintenance
costs is found. Unit costs are the costs per item produced of the maintenance
function. There are two ways to drive this down, either through increasing the
amount of units produced6, or by reducing the direct costs of the
maintenance function. Changes in thinking such as these require a fundamental
change in the way that maintenance spending is allocated and managed.
For example- A CMMS implementation will result in benefits in
two specific areas. First it allows for the reduction of waste and in providing
the tools for process improvement. Second it provides the ability of data
collection for further improvements in equipment performance and execution
efficiency. If the maintenance regime in place is incorrect, then a CMMS will
enable a company to do incorrect maintenance in a more efficient manner. As a
result any benefits achieved will be
limited.
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Units produced could mean items manufactured, tons produced or refined, units
of energy produced transmitted or distributed, etc.
A
true focus on cost effectiveness needs to be aimed at raising the production levels
with existing assets. Therefore it should provide only the maintenance required
for increasing the reliability of machinery, thus allowing the machinery to be
used to produce more units than before. While there are always areas where
redundancy can be eliminated, this needs to be supported by the creation of the
correct baseline maintenance regimes if the goal is to achieve permanent cost
effectiveness.
This
often involves the elimination of many maintenance tasks, the creation of new
maintenance tasks and the review of operational procedures and techniques to
provide a lowered risk of failure. When using cost effectiveness as a measure,
the focus on direct maintenance costs becomes a secondary, although still
important, concern.
Effective Use of Capital
This
area has varying effects in different industry sectors; however, it is important
to all of them. During the 1990s de-regulation and privatization of industry
swept the world at an astounding pace. Industries such as electricity distribution
and transmission, water purification and treatment, gas distribution, public
rail transport and health were exposed, often for the first time, to the rigors
of competition and the open markets.
As
we enter the 21st century it is becoming widely recognized that many of these
industries contain infrastructure that is, at times, centuries old. As such there
is the perception of an increasingly pressing need to look at asset replacement
and overhaul of existing assets. Similar perceptions exist in other industries such
as manufacturing, mining and oil and gas where the asset base may have aged
considerably, or where technology advances or obsolescence has created a need
to replace or renew equipment. This has given rise to a whole new area of asset
management services, that of decision support, and it is here where asset
management can contribute greatly.
Capital
spending on physical assets is generally considered to be along the lines of
expanding to meet capacity or of asset replacement, modification and overhaul7.
Capital expenditure can also include equipment modifications to meet
productivity, safety or other requirements of the asset base8. As we
have observed, operational maintenance budgets are coming under ever increasing
pressure. However it is the capital expenditure portion of the corporate budget
that is often several times larger than operational spending. As such it is
here where asset management professionals can add substantial value to their
organizations by freeing up capital.
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7
The inclusion of overhauls as a capital item is generally determined by the
size of the overhaul required and of the internal company policies regarding
how capital items are determined.
8
Capital expenditure is also used to fund new assets to cope with expanding
demands. This is not covered in great detail within this book.