Managers cannot make business decisions based on emotion. They should make them based on the validity of a business case and return on investment.
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of madness.” So Charles Dickens wrote almost 165 years ago. The same could easily apply to the current situation.
The last two years have been difficult. The COVID-19 pandemic has forced organizations to rethink their business and operations and find ways to adapt to the changing environment. You could say it was the worst of times and the age of madness, but there are signs that the world is returning to some form of normalcy, the new normal. Could this be a sign of the best of times and the age of wisdom?
Maintenance and engineering managers continue to try to do more with less, but must still meet their organization’s goals, objectives, and expectations. How do managers do more with less? The answer is to build a compelling business case for planned purchases and projects. If done correctly, this process can help managers create a path from worst to best.
When I was plant manager, my maintenance manager told me that we needed to hire two technicians. I refused his request. Why? Because he came to me with an emotional request. As leaders of organizations, managers cannot make business decisions based on emotion. They must make important decisions based on the validity of a business case and return on investment (ROI).
I want to focus on two areas. The first is the business case and return on human resource investment. The second is the business case and return on investment of tangible and non-tangible assets.
Let’s start with the business case for adding headcount. This decision only makes sense if it increases the value of the organization and compensates for the additional financial burden. The average maintenance technician spends 18% of the working day looking for parts and tools and 24-25% walking to and from the job site.
All of this worthless activity translates to an average technician utilization of 17-24%. How can managers improve this usage count and make a business case to show the return on investment?
A major reason for this low productivity is the lack of maintenance planning and scheduling. Managers have options in this scenario. One is to promote from within. The argument for promoting from within and moving a seasoned technician to a planner position is that the move takes a skilled person out of the tools. While this is a valid argument, history shows that the improved utilization of other technicians more than makes up for the loss.
Instead of each technician planning their own work, have one of the best workers develop quality work plans so that other technicians can complete their tasks with the same level of quality. Creating a combined weekly schedule of preventive and corrective activities keeps staff fully engaged and improves utilization.
For example, a manager has a staff of 20 technicians with an average fully loaded hourly rate of $50 and a utilization rate of 25%. Staff perform an average of 800 hours of maintenance activity per week. If they are running at 25% utilization, that means they are only working 200 hours out of the required 800 hours. Studies have shown that using a scheduler to develop quality work plans and an executable schedule can increase utilization by approximately 50%.
Promoting one of the 20 technicians to planner will improve utilization by 25% to 37.5%. It will also add 100 hours to the work week, or 5,200 hours over the year, improving utilization by $260,000.
This is the business case. The return on investment is improved utilization. In addition, the department did not hire anyone, thus avoiding payroll increases.
The move still leaves the department below the required 800 hours, but the manager can consider other strategies to improve, such as optimizing preventive maintenance (PM), setting up and implementing materials, implementing reliability-focused maintenance, performing failure modes and effects analyses, and using technology to improve equipment.
Tangible and intangible fixed assets
The definition of an asset is any item or entity that has potential or actual value to an organization and technology. It is essential that organizations understand where their money is being spent.
For example, ultrasound, thermography, vibration analysis, motor circuit analysis technologies are all tangible assets. Computerized maintenance management systems (CMMS), HVAC fault detection and diagnosis (FDD), and process and usability improvements are considered intangible assets. Managers tend to have difficulty identifying, calculating and expressing cost avoidance and reductions to upper management.
Let’s start with tangible assets. To calculate ROI with the highest degree of accuracy, managers need to consider total returns and total costs. For an apples-to-apples comparison between competing investments, managers should consider the annualized return on investment. When calculating costs, be sure to calculate life-cycle costs, which include all costs associated with design, procurement, storage, installation, start-up, operation, maintenance, dismantling and removal.
Consider thermography technology. Since heat is often an early symptom of equipment damage or malfunction, monitoring asset temperature levels should be an essential part of any PM program. Infrared technology simplifies the task of quickly spotting unusual conditions that require further evaluation. Technicians can use thermography to identify hot spots in electronic equipment, locate overloaded circuit breakers in electrical panels, and identify roof leaks.
For example, one manager convinced senior management to purchase two 500 MHz four-channel infrared (IR) oscilloscopes for $15,000. The organization operates a facility with a roof area of 360,000 square feet. The roof is over 22 years old and has several leaks. Cost estimates to replace the roof were $3 million.
An initial IR inspection identified 1,208 square feet of roof needing replacement at a total cost of $20,705. The following year, another IR inspection revealed that 1,399 square feet of roof needed to be replaced at a cost of $18,217.
The department has started an IR roof inspection program and inspects the roof annually. The investigation identified less than 200 square feet of roof needing replacement in any of the next four years. As a result, the total cost of repairing and maintaining the roof for the six years was less than $60,000.
If the facility had been privately owned, the interest on the original $3 million roof replacement cost at 5% would have been $150,000 for the first year alone. By discounting interest on $3 million over the five-year period, the simple cost avoidance resulting from the IR investigation and repair compared to the original replacement cost – $3 million to $60,000 – would amounts to $2,940,000. This figure does not include interest on the $3 million, which would result in cost avoidance of $500,000 to $800,000, depending on the interest paid on the loan.
Intangible returns can also prove advantageous. Whether a manager is considering installing new applications or wants to purchase or upgrade a CMMS, calculating ROI can help make a more informed decision, which can provide both immediate and long-term benefits.
Investing in technology can increase employee productivity and utilization and automate processes, as well as minimize early equipment failures. But without proper training and understanding, technology will only accelerate technician errors. Again, managers must establish the business case, including the return on investment.
Managers must consider a range of issues when looking to add technology to the organization, including: acquisition and implementation costs; the impact of the application on the installation, training costs, reengineering processes, short and long term goals and objectives, and the impact on the culture of the organization.
Managers can use two popular ROI calculations. The first is net present value, which is the return a project will make at a specified discount rate. Ideally, this yield should be a high or positive value. The second is the internal rate of return, which is the annual percentage return on investment.
Consider the example of a large campus that was overspending on energy costs for heating and cooling. The manager made a business case for investing in HVAC FDD. Initially, faults were identified in several large air handling units. A failure can degrade system efficiency by approximately 20%, requiring the unit to run longer to meet space cooling load demands.
The manager established the baseline of current monthly average costs for a comparison between before and after the implementation of FDD. The initial monthly cost reduction estimate was approximately $18,000. After installing the HVAC FDD system, it was discovered that there was an imbalance in the airflow.
Correcting the operation of the circulation pump in an air handler heat recovery loop, the actual cost avoided averaged $20,160 per month, a reduction of 12%. This was an annual cost avoidance of $241,920. The industry average for energy cost savings was 8-15%. Initial FDD HVAC systems range from $500 to $1,000 per unit.
Whatever a manager calculates as financial return, reduction, or avoidance, they should have someone in the finance department review the calculations to validate the numbers, because the leadership of the first department will ask to confirm that the numbers are finance. If finance says they’ve already worked out the numbers and agree, the manager might have won the battle and the war.
Managers who use the wisdom and understanding to identify facility improvements for tangible or intangible assets, develop a business case, and demonstrate the financial return on investment to senior management can make the best of it.
Andrew Gager is CEO of AMG International Consulting. He is a professional consultant and facilitator with over 20 years of partnering with organizations in achieving strategic goals and objectives.