In 1980 Philip Crosby introduced a book titled, Quality is Free, the Art of Making Quality Certain. His message was straightforward: if you are consistently and effectively doing all of the basics there is no additional or incremental cost of quality—it is inherent to the organization.
Today, 36 years later, we are fixated on the cost of reliability and how much of an investment must be paid to achieve it. We struggle to build a business case to justify implementation of one or more programs that purport to create reliability. If your organization is already consistently doing everything from strategic planning to maintenance effectively, the cost of reliability is zero—it is already a part of its DNA and there really is no reason to build a business case.
However, if your organization is not one of the fortunate few that are already reliable, then change—perhaps small, perhaps quite large—will be needed and there will be associated costs. This is not a cost of reliability, but rather an investment required to become reliable. If this is the case, then building an accurate business case is essential. But where do you start?
Common sense dictates that you begin by identifying the gaps between a truly reliable organization and your current operation. Benchmarking is one approach that can be used, but it must be used with extreme caution. It is virtually impossible to find a reliable operation that is identical to yours. While it might be in the same industrial classification, differences in size, location, mode of operation and many other factors can badly skew the comparison. Benchmark comparison, done correctly, can be a valuable tool, but should be used only to identify potential opportunities for reliability improvement and not as the basis for a business case.
If benchmarking is not the answer, then how does one build a business case? The most logical approach is to identify the gaps and their forcing functions. Where are your losses, where is your waste, and where are your reliability issues? While this may sound like a simple exercise, it is not. For example, many organizations identify unscheduled physical asset downtime as a major reliability issue and automatically assume this is a maintenance issue. After all, the repair cost shows up as a maintenance cost. However historical data disagrees. Statistically, 17% of unscheduled asset downtime results from deficiencies within the maintenance function. The remaining 83% is driven by deficiencies in other functions within the organization. Therefore, no matter how much you invest in maintenance improvement, the maximum gain is limited to a 17% improvement in unscheduled downtime. The truth is that most of the factors that limit reliability are not maintenance or even physical asset-driven. Inconsistency (the reciprocal of reliability) in the way decisions are made, and how work is planned and executed, is the real reason that many operations are reactive.
If your gap analysis is to have any validity, you must peel back the layers and identify the true forcing functions that are preventing you from being a reliable operation. In most cases, your investigation will uncover the variability or inconsistency in the way work—in all functions of the organization—is identified, planned, scheduled and executed. Several forcing functions contribute, including a lack of visible performance indicators and the absence of standard work in processes, procedures and practices.
Once the gaps and forcing functions have been identified and their impact quantified, one can accurately develop a budget and timeline to implement improvements that will eliminate the gaps and create a reliable organization. If your plant has been reactive, e.g. unreliable, for more than a few years, your budget should include a 12-18% per year increase in current maintenance expenditures for two to three years to restore physical assets to reliable and maintainable state. Typically, physical assets are poorly operated and maintained in a reactive environment. This short-term investment is mandatory to overcome the degradation and gain minimum levels of asset reliability.
Now that the investment to close reliability gaps is known, the final step is to qualify and quantify the tangible benefits that will be generated by gaining reliable operations. Benefits are defined in two classifications, cost avoidance and revenue improvement.
Cost Avoidance
Within this classification are current and known future costs that can be prevented once a reliable state is achieved. For example, unplanned events drive excessive overtime labor cost. These costs can be reduced or eliminated as the organization becomes reliable and unplanned events are reduced. Targets for cost avoidance include:
- Overtime: Controllable overtime throughout the organization is typically used to provide temporary increases in labor-hours to meet unexpected demands. As the organization becomes more reliable, the need for overtime diminishes. Use caution with this variable cost. Many organizations have agreed to certain amounts of overtime as part of their labor agreement. These costs are not controllable and are not avoidable without renegotiating the agreement.
- Materials Usage: In reliable operations, the usage of both production and maintenance materials is minimized simply because there is little, if any, waste. In maintenance, improving the quality of maintenance performed will reduce the need for repair parts and in production the combination of standard work and visual factory will reduce waste and quality losses. Both will reduce materials expenditures year over year.
- Contractor and Temporary Labor Cost: Gains in effective use and work execution efficiency of the organization’s workforce will decrease the need for and reliance on maintenance contractors and temporary production labor. These savings can be significant.
- Labor Cost: Forced headcount reduction should not be considered as a possible cost avoidance opportunity. Most organizations have already reduced their workforce to or below critical levels and further reductions would prohibit a sustainable state of reliability. If this is not the case, the efficiencies gained through better resource utilization may permit the use of attrition as a means to lower labor cost—both direct and indirect. If you elect to use labor cost reductions as a part of your benefits calculation, use extreme caution and communicate the message that attrition and only attrition will drive these reductions.
If your operation is fully utilizing its installed capacity or is in a stagnant market where additional volume is unsaleable, cost avoidance or reduction is the only option. Your business case must identify enough real benefits to offset your investment and provide a reasonable return on investment. Reliance on cost avoidance as the sole source of benefits will limit the investment one can make to become reliable.
Revenue Improvements
Many operations have the opportunity to increase their output, increase revenue and lower their total cost of goods sold by becoming more reliable. For these organizations building a business case is much simpler and quite straightforward. The number of operations that fall into this category is far greater than one would imagine. Potential opportunities can be found in asset utilization and overall equipment effectiveness.
Asset Utilization
There are 8,760 possible production hours in a year, but most plants only plan to operate their plants about 6,000 hours. In part, the planned reduction is based on the perception that outages and planned downtime are needed. In truth, physical assets must be properly maintained and some downtime is needed for these maintenance windows, but not nearly as much as many plants plan. Depending on industry, downtime required for sustaining maintenance ranges from 400 to 800 hours per year. So from an asset reliability standpoint, operations would utilize between 7,960 and 8,360 hours per year for production. The volume and increased revenue gained by increasing operating hours from 6,000 hours to 7,960 would offset a significant investment in reliability. Yes, the investment might also include a new manning plan, increased headcount and other incremental costs, but the benefit would more than offset the costs.
Management decisions on shift structure and scenario are another potential source of improvement. Not only does a 24/7/365 improve asset utilization but it also improves physical asset reliability. These assets are designed to operate, not sit idle. Startups and shutdowns cause more asset failures than any other factor.
Another potential area for improvement is how well production planning and scheduling utilize installed capacity. Look at changeovers, distribution of products and unscheduled time for your production assets. In many instances, significant capacity gains are possible by improving the reliability of the production planning and scheduling process.
Overall Equipment Effectiveness (OEE)
In many operations there are also significant opportunities to increase output and reduce cost of goods sold through improved reliability. OEE should be used to measure the performance of operating or production teams. For business case purposes, look closely at the true reasons for losses in these three controllable areas: uptime, production rate, and quality.
Uptime is a measure of actual operating time, not availability, and while a catastrophic failure reduces uptime, the majority of these losses reside with the operating team or management decisions. The absence of reliable operating practices, and resultant variability in the methods used to operate production assets, creates the majority of uptime losses. These losses are manifested as prolonged setups or changeovers, operator-induced failures on startup, and a myriad of other non-maintenance issues. Inclusion of standard work, visual factory and better training will minimize these losses, reduce costs, and increase output.
Production Rate is a measure of the actual vs. design operating speed or output. This is a major source of lost capacity in most production and manufacturing plants. Simply stated, the operators slow the assets down to ease the pace required to tend it. While there are other reasons that a production asset must operate at reduced speed, arbitrary decisions by the operator or supervisor decisions to operate at reduced speed may represent up to 60% of losses in the category.
Quality Rate: As Crosby stated, quality is free. Avoiding scrap, rework, or down-graded losses provides additional output that is absolutely free. While increases in capacity achieved by improving production rate or uptime incur variable costs (predominately direct materials and energy) that reduce the organization’s contribution to net operating profit, reductions in quality losses drop directly to the bottom line. The primary forcing functions that generate quality losses are the absence of or minimal adherence to standard work. Variability in all functional areas, especially production, maintenance and materials handling, is the primary source.
Increased output, assuming that it can be sold, is the primary benefit of reliability. Not only does it increase revenue and lower total cost of goods sold, it also significantly improves net operating profit.
Fundamentals of Business Case Development
Keep these fundamentals of business case development in mind as you build your business case for reliability:
- The investment must be completely and accurately quantified. Too often the investment is significantly understated—often limited to the cost of a consultant or software program with no thought of the internal, remedial and ancillary costs that will be incurred during implementation.
- Benefits must be real. If the potential benefit does not change the bottom line of your financial statement it is not real. Justifications are frequently made based on improved efficiency—especially wrench time in maintenance—that does not change the incurred labor cost. If the headcount remains the same, no matter how efficient, the cost does not change and there is no benefit. Always remember, you will be expected to deliver on your promises.
- Benefits are not instantaneous. It takes at least a year or more to implement changes such as standard work. As a result, there will be a lag between initial investment and the beginning of payback. Benefits will also be exponential. They will start slowly and compound as the reliability improves. Build your business case to match your organization’s normal financial cycle, typically three to five years. Some organizations even look out to 10 years for justifiable financial investments.
- Couch your business case in terms your organization already uses. Not all organizations use simple return-on-investment as the evaluation tool. Talk to your senior financial team and get their help. At the end of the day, they will decide whether to fund your reliability investment. It’s in your best interest to get them involved early.
Building a business case is really quite simple, but it does require due diligence for both the cost and benefit side of the equation. Account for all of the cost and limit benefits to the real and achievable.
Keith Mobley has earned an international reputation as one of the premier consultants in the fields of organizational performance optimization, reliability engineering and effective change management. He has more than 50 years of direct experience in corporate management, process optimization, and reliability engineering. For the past 25 years, he has helped hundreds of clients worldwide achieve and sustain world-class performance. Keith can be reached at [email protected].
