Let me begin this month with a “mea culpa.” In last month’s column, I used an example to illustrate a point, and it turns out that example was inaccurate. I said: “It wasn’t until 1791 that Vermont became the last of the 13 original states to ratify the Constitution.” Wrong on two counts: 1) Rhode Island was the last of the 13 original states to ratify; and 2) Vermont was the first new state admitted to the Union, making it the 14th overall. So to my friends and readers in New England, please accept my humble apologies. And to those of you who called the error to my attention, I am forever grateful because it not only shows that you’re paying attention, but now I know who to call if I ever get stuck on a pesky U.S. history question on “Who Wants to Be a Millionaire.”
Fortunately, we don’t need to rely on my American history skills this month, as we have Part Two of an expert series from David Tod Geaslin on avoiding the perils of maintenance budget failures. You’ll recall that in the June 2004 column, we gave time to Geaslin’s excellent teachings on the effects of deferring maintenance; in particular, his game-changing Inverse-Square Rule for Deferred Maintenance. I hope you’ve had a chance to put some of Geaslin’s theories to the test. In Part Two, he addresses the root causes of maintenance budget failures and, not surprisingly, strongly suggests that flawed budgeting techniques are the culprit.
“The Sources of Problem Maintenance are Seldom Found in the Maintenance Department.” - David Tod Geaslin
The sources are usually:
1) An operations plan…
2) A maintenance department manning level…
3) Or a spare parts inventory stocking level…
4) That does not meet the minimum needs of the asset…
5) When the asset needs to be serviced.
When I am asked to assist organizations with maintenance challenges, I find the root cause of the problem is almost always found in the above issues. Maintenance departments are not being allowed to stock an adequate supply of spare parts, hire enough qualified people, or spend maintenance money when the machines demand it. Instead, they are being forced to spend money in specific lumps of time (budgeting), and if those time periods do not meet the minimum needs of the machines, maintenance budgets explode dramatically.
This has come about because existing budgeting techniques work well in every other business discipline except maintenance. If management attempts to impose fiscal discipline on accounts payable (A/P), they cut their budget by 10 percent and watch for ticklers to see if the cut is too deep. In an A/P department, a 10-percent reduction in funding will produce 10-percent fewer checks unless a more efficient way is found to produce at a lower cost. If the ticklers detect that the cuts are too deep, they bump them up a little and that becomes their new budget set point.
This MBA technique works well for budgeting in accounting, marketing, finance, and HR departments because reductions in input will produce approximate reductions in output. Small changes in initial conditions upstream will produce approximately small changes downstream with a small failure potential.
This budgeting technique will not work when managing maintenance because the risk/reward ratios are exponential. The Inverse-Square Rule for Deferred Maintenance teaches that deferring maintenance can produce risk/reward ratios from 15:1 to 40:1 if allowed to become a breakdown event. Early intervention is necessary or expenses will become the square of the root-failure part, or a minimum of 15-times the early intervention cost!
If a $100 electric motor bearing is known to be failing, but repairs are deferred until the rotor drops and hits the stator, the rewind expense will be the square of the bearing (or $10,000). If that bearing could have been replaced for $666 in early intervention costs, the risk/reward ratio for deferring this work order exceeds 15:1 in direct maintenance costs.
If the process is down for 4 hours and the indirect cost is $5,000 profit per hour, the risk/reward ratio escalates to 45:1.
Add in any intangible costs, such as customer dissatisfaction, etc., and there is no telling what the ratio could be!
In almost every case I have examined, the budgeting managers have overridden the maintenance department’s advice and induced my Inverse-Square Rule for Deferred Maintenance. Then, after a delay, their budget exploded. When the resultant fiscal or physical disaster manifested itself, the blame did not reflect on the financial departments. Every time, maintenance got tagged for bad management. These five sources of problem maintenance need to be addressed:
1) The Operations Plan – the penalty for not stopping a process for required maintenance will trigger exponential expenses that will be recorded as a maintenance expense unless Operationally Induced Events (OIEs) are recorded.
2) Inadequate Maintenance Manning Levels – an HR policy that restricts hourly wages for experienced technical workers will manifest itself as substandard maintenance. Rework costs must be connected to compensation policies. (Example: Experienced trade worker can’t earn more than 110 percent of an entry-level engineer.)
3) Spare Parts Inventory Stocking Levels – financial managers seldom accept the advice of maintenance when estimating the cost of not having parts on the shelf. This leads to an inaccurate risk/reward ratio when determining parts inventory levels.
4) The Minimum Needs of the Asset – at budget time, financial managers (who have little or no qualifications to judge) apply significant discounts to the recommended minimum maintenance needs of production assets. The continuous use of arbitrary numbers to attempt to enforce budget discipline on maintenance will result in a 30-percent cost penalty over optimum maintenance costs.
5) When an Asset Needs to be Serviced – absolute budget values in a time period will create the need to defer maintenance. Machines do not consult the calendar or clock when they first warn of needed maintenance. Operations and budgeting plans that depend on machines to function in a degraded status (without losing quality) until a scheduled maintenance time without breaking down are unrealistic and manifest themselves as excessive maintenance costs unless Operationally Induced Events (OIEs) are held responsible.
Deferring is a false economy because it actually costs less to borrow short-term than to defer repairs. The $666 cost to install the $100 bearing in the electric motor could have been financed with a 1-month, 12-percent APR short-term loan for about $7 in interest. In this case, a $10,000 risk could be avoided with a $7 loan.
These examples show that financial departments are using the wrong risk/reward ratios for budgeting maintenance. It is just that simple. By not understanding the non-linear nature of maintenance events, finance managers confidently apply a good budgeting tool to the wrong task (as proved by studies in complexity such as The Chaos Theory).
The good news is that every CEO, CFO, and budget manager I have exposed to the true risk/reward ratios has chosen to change the way they manage maintenance.
In closing, I would like to make one last point: At some stage in my teaching, a budgeting manager will say: “You are asking me to give the maintenance department a golden checkbook!”
My answer has always been: “Yes. If your budgeting technique is creating breakdown maintenance, you can’t spend any more than you are already spending. If you repair your assets when the machine demands it, you can reduce your linear maintenance expenses (refineries, high speed manufacturing, etc.) by 5 percent and non-linear maintenance expenses (office facilities, warehousing, construction equipment, vehicles, etc.) by 30 percent.”
If executive management can revise their risk/reward ratios from 2:1 to a more realistic 40:1 value, production quality will rise because the machines will produce an “in spec” product, and breakdown disruptions and maintenance costs will be lowered dramatically.
It has been my experience that senior management often cuts the budget for those things that they understand least. The thinking, as it applies to maintenance, often goes like this: “If it ain’t broke, don’t fix it.” They are playing a fool’s game when it comes to maintenance. Fixing it before it breaks can avoid burdens on so many levels, from financial, to manpower, operations, lost business due to downtime, customer satisfaction … the list goes on.
From my vantage point, the maintenance and facility managers who can apply Geaslin’s teachings will do their organizations, management teams, and stakeholders a huge service.