Maintenance and ROFA

The investment a company makes in its assets is often measured against the profits the company generates. This measure is called return on fixed assets (ROFA). It is often used in strategic planning when a company picks what facility to occupy or the plant in which to produce a product.

Asset management focuses on achieving the lowest total life-cycle cost to produce a product or provide a service. The goal is to have a higher ROFA than the competition in order to be the low-cost producer of a product or service. A company in this position attracts customers and ensures greater market share. Also, a higher ROFA attracts investors, ensuring a sound financial base on which to build further business.

All departments or functions within a company have the responsibility of measuring and controlling their costs, since they ultimately will impact the ROFA calculation. Only when everyone works together can the maximum ROFA be achieved. For our purposes, the maintenance function is the focus of this discussion.

How does maintenance management impact the ROFA calculation? Two indicators in particular show the impact:

Maintenance costs as a percentage of total process, production, or manufacturing costs. Maintenance costs are an accurate measure for manufacturing costs. They should be used as a total calculation, not a per-production-unit calculation. Maintenance will be a percentage of the cost to produce, but is generally fixed. This stability makes the indicator more accurate for the financial measure of maintenance, because it makes trending maintenance costs easier. If the maintenance cost percentage fluctuates, then the efficiency and effectiveness of maintenance should be examined to find the cause of the change.

Maintenance cost per square foot maintained. This indicator compares the maintenance costs to the total amount of floor space in a facility. It is an accurate measure for facilities because the cost is also usually stable. This indicator is also easy to use to trend any increases over time. If the percentage of maintenance costs fluctuates, then the efficiency and effectiveness of maintenance should be examined to find the cause of the change.

These two indicators show that traditional maintenance labor and material costs will have an impact on ROFA. However, ensuring the equipment or assets are available and operating efficiently also has an impact. The total impact of the maintenance function on ROFA is illustrated in Figure 2-1.

Overall, the goal for any company is to increase profitability. This is true whether the company is public with shareholders, or is privately owned. The maintenance or asset management function can increase profits in two main ways: decreasing expenses and increasing capacity.

Estimates suggest that 1/3 of all maintenance expenditures are wasted through inefficient and ineffective utilization of the maintenance resources. Maintenance costs consist of two main divisions: labor and materials. If a maintenance labor budget for a company is $3M annually, and 1/3 of it is wasted, then $1M could be saved over time. This savings would not necessarily be in headcount reduction. It may be by reducing overtime, reducing the use of outside contractors, or performing deferred maintenance without additional expenditures.

If the maintenance labor budget is $3M annually, then studies show that the materials budget will be a similar amount. If the materials budget can also be reduced by 1/3, then the total savings for improving maintenance efficiency and effectiveness could approach $2M per year. This savings is actually expense dollars that would not be required. Expenses dollars not used translate to profit dollars.

Be aware that when improving a reactive maintenance organization, these savings are not immediate. Time is needed to realize the total savings. Improvement of a reactive maintenance organization to a proactive, best practice organization can take from three to five years. The transition is not technically difficult; however, time is required to change the corporate culture, from one of negativity towards the maintenance function to one of treating it as a core business process.

The pure maintenance contribution to profitability is dwarfed when compared to the savings realized by increasing the capacity (availability) and efficiency of the assets being maintained. For example, equipment downtime may average 10 to 20% in some companies, or even more. Equipment that is down when it is supposed to be operating restricts the amount of product that is deliverable to the market. Some companies have gone as far as to purchase backup or redundant equipment to compensate for equipment downtime. Such purchases have a negative impact on their return on net assets indicator, lowering their investment ratings in the financial community.

Even in markets that have a volume cap, downtime increases costs, preventing a company from achieving the financial results desired, whether it is to increase profit margins or to be the low cost supplier. Yet some organizations refuse to calculate a cost of downtime and some have even said that there is no cost to downtime. They fail to consider the following factors:

• Utility costs

• Cost of idle production/operations personnel

• Cost of late delivery

• Overtime costs to make up lost production to meet schedules

The true cost of downtime is the lost sales for product not made on time. A company needs to have a clear understanding of this cost to make good decisions concerning its assets and how they are operated.

Suppose a company discovers a considerable amount of unplanned downtime for the previous year, only part of which can be corrected by improving maintenance. Some other causes for equipment downtime could be related to raw materials, production scheduling, quality control, and operator error. However, if the maintenance portion of the downtime was valued at $38M and a 50% reduction could be achieved by improving maintenance, the savings could be $19M. Even if only 10% of this amount was spent improving maintenance, the total savings would still be more than $17M.

In addition to pure downtime is the cost of lost efficiency. One company examined the efficiency of its gas compressors on an off-shore operation.

It found that, due to age and internal wear, the compressors were operating at only 61% efficiency. This loss cost approximately $5.4M annually. The overhaul would cost $450K, including labor, materials, and downtime production losses. The decision was made to overhaul the compressors serially, in order to avoid total shutdown. The compressor overhaul was paid back in 28.1 days after restart. Furthermore, the $5.4M in increased production was realized in the next 12 months.

Many Japanese studies (related to TPM) have shown that efficiency losses are always greater than pure downtime losses. This fact becomes more alarming when we consider that most efficiency losses are never measured and reported. In turn, many chronic problems are never solved until a breakdown occurs. Some chronic problems that have a dramatic impact on equipment efficiencies are never even discovered. Only when accurate maintenance records are kept are these problems discovered. Only then, utilizing the maintenance data combined with the financial data, can the root cause of the efficiency problem be solved.

If asset management is a focus for an organization, then the maintenance function can contribute to overall plant profitability. While cooperation and the focus of all departments and functions within an organization are needed to be successful, the maintenance department can have a dramatic, positive impact on ROFA.

Because maintenance is typically viewed as an expense, any maintenance savings can be viewed as directly contributing to profits. By achieving maximum availability and efficiency from plant assets, a plant or facilities manager ensures that a company does not need to invest in excess assets to produce its products or provide its services. Eliminating investment in unnecessary assets contributes to overall improvement to the ROFA for any company.

Because maintenance management is a core business process, it is a process than could benefit from benchmarking. The next question then asks what type of benchmarking should be utilized to gain the maximum benefits.