How to calculate return on investment for equipment maintenance

How to calculate return on investment for equipment maintenance

Setting the return on investment (ROI) for maintenance consists in demonstrating to the organization the value generated by the maintenance activities.

It establishes the justification in allocating resources in the maintenance activities and how those will contribute to the result generation.

The proposed approach serves to highlight a change to the usual understanding that maintenance is a cost center or a necessary evil, to be perceived as a profit center, a positive paradigm change.

This article points out considerations to calculate maintenance ROI. It seeks to list the main cost items and ways to mitigate them, allowing the reader to reflect and adopt what makes sense for his/her own reality.

 

PREDICTIVE MAINTENANCE: THE NEXT STEP TO INCREASE THE PLANT EFFICIENCY

If the industry runs to failure and is still in the marketplace, it has great opportunities to reduce costs and efficiency gains. The informed reader already knows that the best overall maintenance strategy is the one that adopts a mix of maintenance approaches, such as: run to failure (or corrective), preventive and predictive maintenance, taking into consideration the characteristics of its plant machinery.

Considering that maintenance costs can be as high as 30% or more of the total direct production costs, adopting a strategy to reduce or avoid some of these costs is a way to increase the industry competitiveness. In this sense, predictive maintenance for critical machines, becomes the great ally of that industry.

The main items of maintenance costs are:

– Costs with own or outsourced maintenance labor;

– Costs with spare parts;

– Costs generated by the unavailability of machines.


HOW THE MAINTENANCE MANAGER CAN CHANGE THE PERCEPTION OF HIS DEPARTMENT

It is up to this professional to convince the board, peers and subordinates of what to do and why. There is nothing better for this task than to anchor its approach to tangible gains:

1- Quality and safety gains: investment in maintenance translated into greater safety for employees and better product quality, resulting in less rework. More efficient production means lower costs, which will translate into competitive advantage in the medium term;

2- Gains from the increased machine availability:  production will follow according to plan. Better asset use  will increase production capacity, allowing for increased sales. Reduced production stops also mean less frustration and better team morale;

3- Financial gains: reduced spare parts use and higher machine productivity frees labor hours and streamlines production processes. This optimization improves cash flow and contributes to the business profitability.

There are a number of performance indicators in maintenance with varied use purposes, in accordance to the goals to be reached. In this case of maintenance ROI, the KPIs suggested to measure the effectiveness of the actions to generate profits are:

  • Maintenance expenditure in percentage of RAV (Replacement Asset Value);
  • Materials and MRO (Maintenance, Repair and Operation) spare parts inventory expressed in percent of RAV;
  • Maintenance cost per unit produced;
  • The industry energy cost on an annual basis.

These metrics are usually taken on an annual basis and are the ones that most impact the effectiveness of the maintenance investment in the company’s results.

The value of maintenance costs, converted into a percentage of RAV, will demonstrate how long the assets in service could be replaced by new ones. It is an index that serves as a benchmark for diversified industries of various sizes. In the best industries, this indicator is below 3% according to the SMRP – Society for Maintenance and Reliability Professionals.

Example: Total annual maintenance cost of R$ 1,000,000.00 and value for  replacement of machines in use of R$ 20,000,000.00.

RAV = R$ 1,000,000.00 / R$ 20,000,000.00 = 0.05 * 100 = 5%.

The inventory value of materials and MRO spare parts refers to the entire inventory of all manufacturing sites under assessment, including spare parts in consignment and supplier managed inventory, if any.

According to SMRP, in the best industries this indicator falls below 1.5%, ie, the inventory value of materials and parts is less than 1.5% of its Replacement Asset Value (RAV).

The reduction in maintenance cost per unit produced, will improve OEE (Overall  Equipment Efficiency). That is because this indicator will incorporate the impact of machine failures and unavailability in the analysis of maintenance cost effectiveness in relation to the company’s results.


The cost of energy consumption can be reduced from 5% and 10% depending on the maintenance program adopted. The greater the share of preventive and predictive maintenance, the better the energy efficiency of the industry.


MAINTENANCE LABOR WORK PRODUCTIVITY INCREASE

Among the causes of labor productivity loss are: waiting for spare parts; waiting for instructions, for information, for technical drawings; waiting for the machine to be turned off for maintenance; running from one emergency repair to another…

With systematic and structured work, clear and documented processes, trained staff, as well as computerized maintenance management system (CMMS) in place, it gets much easier. In addition, it has been proven that maintenance staff productivity can be improved by using basic maintenance management techniques such as:

– Job or task planning;

– Schedule tasks to designated executors (operators);

– Ensure that necessary spare parts are available where needed;

– Coordinate that needed tools are available where needed;

– Reduce emergency maintenance by replacing it with preventive and predictive maintenance, as much as possible.


SPARE PARTS INVENTORY CAN BE REDUCED WITH PREDICTIVE MAINTENANCE

The amount and variety of spare parts and materials inventory will depend on the process management quality, size of the operation, age of the manufacturing assets, the maintenance strategy adopted, among other factors. With preventive maintenance, one can better plan that inventory.

However, it is with the use of predictive maintenance techniques that it becomes possible to  anticipate component wear and risk of failures. Thus planning the acquisition and replacement of parts, with great return on investment by postponing financial disbursements. In addition, only with predictive techniques (or condition based maintenance) the life cycle of spare parts and components can be extended and unscheduled stops minimized, if not eliminated.


COST OF ENERGY CONSUMPTION AND PRODUCTION WASTE

By adopting an optimal maintenance strategy, combining corrective, preventive and predictive maintenance techniques, it is possible for the industry to reduce its energy costs by up to 10%. This includes mechanical, electrical, steam generating, hydraulic or pneumatic systems.

A proper maintenance process, aiming at the ideal operation condition of the assets, will certainly have an impact on the quality of production output, reducing waste and therefore increasing productivity and profit margins accordingly.

The best managed industries are adopting continuous monitoring of machines to stay competitive in their marketplace. Do not miss out! Get to know the DynaPredict solution!