How reliability simulators can deliver a massive increase in profitability

In tough economic times, businesses often take short-cuts with asset

management in a bid to remain profitable. Yet as this whitepaper clearly

demonstrates, a long-term, reliability-driven approach delivers much

greater gains for the business.

Towards besT pracTice asseT managemenT:

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As economic conditions toughen, managers face the challenge of improving the bottom line performance of their business, fast. Yet in doing so, they risk bypassing the fundamental practices needed to sustain a reliability-driven approach to asset management.

Too often, asset managers take a short-term view of asset management, whereby they take shortcuts or easy options to cut costs or postpone shutdowns, to boost asset utilisation rates and keep their plant up and running. In some of these instances, they achieve increased profitability or efficiency and so they think, job well done.

But is it job done best?

These asset managers think that getting back to basics, or making prudent cuts to maintenance spending, will be enough to boost the bottom line. Yet these practices are not sustainable, and generally dont support continuous improvement.

So how do you boost business profitability over the long-term, without compromising the effectiveness of your assets? How do you make the switch from reactive to proactive maintenance?

This whitepaper demonstrates how asset management requires a long-term view incorporating planned maintenance and the effective (not just the efficient) management of assets to deliver quantifiable results.

InTroducTIon

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Towards best-practice asset management

AcMEMAnufAcTurInGThis whitepaper uses a fictional manufacturing plant, AcME, to demonstrate the effectiveness (or lack of) for the various practices that asset managers can use to boost profitability.

AcME operates 24/7, and produces 400,000 units of widgets per year. right now, it has a very disorganised and ad-hoc approach to asset management; and has a maintenance practice of keeping machines running at all costs in other words, there is no planned downtime for scheduled maintenance.

With this approach, AcME gets a return on capital employed (rocE) of just 2.5%. Theyd be better off putting their money in a high-interest bank account.

WHAT IS rocE?return on capital employed is a figure indicating the efficiency and profitability of the companys capital investments. The higher rocE is, the better off your business will be.

Basically, rocE is calculated by dividing your profit by the cost of assets or capital.

But to make this calculation, you need to take a few steps back. To work out your profit, you need to know how much revenue youve brought in compared to how much you would if your plant worked at full capacity.

Lets look at the AcME example to see how we get to rocE of 2.5%.

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calculaTe asseT uTilisaTion (au)au = availability X performance rate X Quality rate X demand

availability = 80% (100% 10% from unplanned downtime due to machine breakdowns 10% due to starting up machines)

performance rate = 100% (no losses due to yield)

Quality rate = 81% (due to off-spec production)

demand = 100% (due to full market demand)

au = 80% x 1 x 81% x 1 = 65%

calculaTe revenuerevenue = Max Production capacity (400,000) x Au (65%) x $5 sales price per unit = $1,300,000

calculaTe profiTprofit = revenue ($1,300,000) Expenses ($1,250,000) = $50,000

calculaTe reTurn on capiTal employedreturn on capital employed = Profit ($50,000) / cost of capital Employed ($2,000,000) = 2.5%

STEP 1

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Towards best-practice asset management

Throughout the rest of this whitepaper, we will use the AcME example to illustrate how various strategies can boost rocE and deliver financial benefits to the organisation.

base casePrice/unit $5

Max Prod capacity 400,000

Asset utilisation 65%

revenue $1,300,000Expenses* $1,250,000

profit $50,000capital Invested $2,000,000

r.o.c.e. 2.5%

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There are two common shortcuts taken in asset management, which many managers wrongly assume will deliver strong results for their business. The truth is that, while shortcuts may deliver an immediate result, they are not the optimal solution.

firstly, why does the need for these shortcuts arise? Essentially, they stem from the competing goals of the management team to boost production and profits, while keeping the plant up and running via improved asset utilisation rates.

These competing goals create vicious circles, whereby the production team is under so much pressure to produce goods that they dont factor in the time to run planned maintenance. The plant only allows downtime when there is no choice when the machine is broken. This puts more stress and pressure on plant equipment, which in turn places more pressure on maintenance crews.

In a bid to overcome these issues, many managers implement one of two solutions getting back to basics or reducing maintenance spend.

This section examines these shortcuts, using the AcME example to demonstrate why they are not always the best option.

SHorTcuT 1getting back to basics

A back to basics approach is about following good work practices and fixing broken machines in the shortest possible time. It often involves spending more on spare parts and various tools now, in a bid to reduce the time spent on unplanned maintenance and repairs down the track.

You would think that a reduction in unplanned maintenance equates to an increase in production capacity and profits. Yet, as the AcME calculations demonstrate, the boost in profits is offset by the increased spending on spare parts and tools and only delivers a minimal increase in overall returns.

This is because the focus here is on fixing faults, rather than eliminating faults. Getting back to basics is a reactive approach to maintenance; whereas best-practice plants operate using a proactive approach.

SHorTcuTS In ASSET MAnAGEMEnT

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Towards best-practice asset management

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base case back To basics

Price/unit $5 $5

Max Prod capacity 400,000 400,000Asset utilisation 65% 67%

revenue $1,300,000 $1,340,000Expenses* $1,250,000 $1,275,000

profit $50,000 $65,000capital Invested $2,000,000 $2,000,000

r.o.c.e. 2.5% 3.3%

AcMEMAnufAcTurInGThe AcME asset manager decides to spend $25,000 on spare parts and tools, so that they can better respond when faults occur. Their objective here is to keep the machines running at all costs.

This investment helps to reduce unplanned maintenance by 30% although it only improves asset utilisation by 2%. Given that they have spent more on spare parts and tools, and the assets are still not being used anywhere near maximum capacity, the return on capital employed only goes up to 3.3% (from 2.5%)

rocE cALcuLATIonasseT uTilisaTion (au) = availability X performance rate X Quality rate X demand

availabiliTy = 83% (100% 7% from unplanned downtime due to machine breakdowns 10% due to starting up machines)

performance raTe = 100% (no losses due to yield)

QualiTy raTe = 81% (due to off-spec production)

demand = 100% (due to full market demand)

au = 83% x 1 x 81% x 1 = 67%

revenue = Max Production capacity (400,000) x Au (67%) x $5 sales price per unit = $1,340,000

profiT = revenue ($1,340,000) Expenses ($1,275,000) = $65,000

reTurn on capiTal employed = Profit ($65,000) / cost of capital Employed ($2,000,000) = 3.3%

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Towards best-practice asset management

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base case back To basics cuT The budgeT 10%Price/unit $5 $5 $5Max Prod capacity 400,000 400,000 400,000Asset utilisation 65% 67% 65%revenue $1,300,000 $1,340,000 $1,300,000Expenses* $1,250,000 $1,275,000 $1,187,000profit $50,000 $65,000 $112,500capital Invested $2,000,000 $2,000,000 $2,000,000r.o.c.e. 2.5% 3.3% 5.6%

SHorTcuT 2:cut spending in maintenance

Typically, maintenance expenses make up half of a plants operational expenses. It may be tempting for asset managers to think, Lets trim our maintenance budget to boost overall profits. After all, its easy to cut maintenance spending when you dont see an immediate adverse impact.

Yet this short-term move has costly long-term implications. cutting out planned maintenance which is the most efficient type of maintenance will most likely increase the rate of failure and downtime, which in turn decreases your rate of asset utilisation.

remember, the cost of reactive maintenance is much higher than the cost of doing planned maintenance. By cutting your maintenance budget, you run the risk of increasing the overall cost of maintenance in the long run.

AcMEMAnufAcTurInGThe management team decides to slash spending on maintenance. The asset utilisation rate remains at 65% (for now were not looking at the likely cost of increased downtime down the track); yet by reducing their maintenance budget theyre saving $62,500 in their production expenses. This saving helps deliver a return on capital employed of 5.6%.

rocE cALcuLATIonasseT uTilisaTion (au) = availability X performance rate X Quality rate X demand

availabiliTy = 80% (100% 10% from unplanned downtime due to machine breakdowns 10% due to starting up machines)

performance raTe = 100% (no losses due to yield)

QualiTy raTe = 81% (due to off-spec production)

demand = 100% (due to full market demand)

au = 80% x 1 x 81% x 1