Most of the Maintenance benchmarking report maintenance cost as percentage of ARV. The issue here is how to calculate ARV. In Financial point of view, they report asset value with depreciation. They never calculate for maintenance. Some matenance professional advise to report with "fair value" by IFRS. Request anyone to advise.
My understanding is that there are 3 ways Net Asset Value (NAV) or Asset Replacement Value (ARV) is reported:
1) The asset value shown on the company general ledger (with or without depreciation)
2) The current cost of replacing those assets
3) The insured value for the assets
I warn you that even within the same company there are many ways to calculate this metric so beware. Even highly trained accounting professionals have trouble with this metric.
Another business level metric that is easier to come by is Maintenance Cost as a percentage of sales or revenue. Revenue is a known number on a daily basis and is easy to calculate.
Point for discussion - what will you do if you finally find an acceptable way to determine the ARV and you find maintenance cost is higher that your competitor? or higher than management would like?
The brilliant minds in management will dictate a cost reduction program (what else can they do if they do not know how to lead change?)
Cost is not a cause - it is a result.
COST IS AN OUTCOME AND IS THE DIRECT RESULT OF THE PROCESS.
If you wish to change cost - change the process.
In fact the most important costs are the ones we cannot measure (Deming is often misquoted as saying "we cannot manage what we cannot measure" - he never said that and he definitely did not believe that.)
What is the cost of deferring maintenance from this quarter till next?
What is the cost of dealing with the lowest bid supplier?
What is the cost of short term thinking?
What are the results of the training program?
These are examples of important elements that must be managed but we cannot measure them.
Focus on better process and measure the results not the causes.
FOOD FOR THOUGHT
OK, Terry, what do you mean we cannot measure them? Each of them are cause and effect issues which can be measured the further you step back from the system.
Howard W Penrose, Ph.D., CMRP
Vice President Operations Dreisilker Electric Motors, Inc. and Editor-in-Chief IEEE DEIS Web
Author: Axiom Business Book Award Winning "Physical Asset Management for the Executive (Caution: Don't Read this on an Airplane)" and; ForeWord Book of the Year Finalist "Electrical Motor Diagnostics: 2nd Edition"
Thank you, Terrence.
Thank you Howard.
Now, I get what I want.
How about using the Nelson-Farax index? Will it give a standard value for ARV across the board?
Isn't the Maint cost over ARV % one of the SMRP recommended KPIs?
Terrence, Howard and Josh ahve all provided you valuable advice. Picking up Terrence's point, let me add a few thoughts.
Terrence said COST IS AN OUTCOME AND IS THE DIRECT RESULT OF THE PROCESS.
In my view, two factors affect costs.The first is Reliability; the higher the reliability the lower the cost. It is easier to improve reliability than many of us believe; work on people's knowledge, skills and motivation and your reliability will go up.
The second is Productivity. The solution is not to beat the drum faster, but to improve your
Planning, Scheduling and Work Preparation. Eliminating delays is the key to productivity.
Back to ARV; as long as you use the same method to compute it, year on year, you will always make improvements on cost as % of ARV, as long as you improve your reliability and productivity. I suggest you work on the reliability improvements first; once you get that going well, start on your productivity effort. You cannot fail to make rapid improvements.
Lead Author, Case Studies in Maintenance and Reliability: A Wealth of Best Practices, 2012, Industrial Press.NY ISBN-13: 978-0831102210
Author, Effective Maintenance Management: Risk and Reliability Strategies for Optimizing Performance, Second Edition, 2011, Industrial Press NY ISBN-13: 978-0-8311-3444-0
I have been faced with the RAV conundrum at many locations. Some very static, one that replaced as much as 20% of it's assets every year (extrmely dynamic!. FYI - I have not had much success usign construction cost index data. It doens't go back far enough for many sites. A method that I have found to be pretty accurate and straight forward (if tedious):
1) Obtain the original capitalized costs of your plant assests from the accounting dept. Since they do depreciation, they somewhere have the original cost and the year it was capitalized.
Be careful of assets transferred in from other sites. The finance folks often put them on the books as the transfer cost, not the new cost.
2)FM (Factory Mutual) has cost indexes for various industries and types of assets that go back many many years. You may have to subscribe to a service to get it, but generally your corporate folks who deal with insurance and risk managment can get a lead on this.
3) Identify and segregate anything removed from service, abandoned, etc, or otherwise not a part of your maintenance expenditures. Also segregate land purchases since that is generally not included in RAV.
4) Break you assets into groups by year capitalized and by asset type. The asset types can be simple: by your industry segment, or it cna be as complex as you need it to be and the FM categories (about 20 of them as I recall) allow them to be. All you want is a lump sum for each category your choose for each year.
5) Using the factors from the FM tables multiply each capital group in each year by it's respective factor for the year in question to determine it's present replacment value. A spread sheet helps and allows you to update it annually.
6) Add up all of the replacement values for the groups within each year and then the year groups.
When you see the FM tables all of this explanation becomes very clear. This can take a few hours to a few days if the site is old and the records are bad. The important issue here is that if you are using the information to benchmark:
1) External benchmarking has to be taken with a grain of salt or more, since not everyone uses the same method for RAV or for calculating what is included in maintenance or stores or whatever you are trying to index to RAV
2) Internal benchamarking within a company is simpler since if all sites use the same methods for calculating the RAV they will have the same baises if any. Since the purpose behind any data like this is to:
a) Identify the best in class in order to learn from them.
b) Set improvement goals
c) Track your own improvement.
I have found that it is a good thing going forward to make an arrangement with the finance people and shift the responsibility for tracking RAV going forward to that group. It is financial data used to drive key business decisions, set goals, and make performance improvements - right. If you take the time to educate them (and your plant manager) most of them are glad to take on being a valued part of the team. After all they now have some new information to track, analyze,and report. And that's what they get off on doing isn't it?
Now that you have the number and have looked at $maint/RAV, stores inventory / RAV, and all of those other great metrics (and educated the finance folks abotu them too), now you can start making rational cases for budgeting for maintenance and spare parts when capital expansions occur, and you can show historical data that is valid, and make valid forecasts based on where you are and where you plan to be. (You will use this data to set rational improvment goals - right?) Hoepfully your data for the numerator of your various indexes are accurate going back a few years so that you can look at your improvment trends and see the effects of good or bad decisons made in the past.It's a great educational tool if used right.
Life Cycle Engineering
Samuel S McNair Jr, PE CMRP
Life Cycle Engineering
The SMRP Best Practices Committee has developed a guideline for calculating Replacement Asset Value for use in comaritive benchmarking. A copy of the guideline is attached.
Management Resources Group, Inc.
SMRP_Metric_Guideline_1_RAV_060908_PUB.pdf (163 Kb, 112 downloads)
I think the answer is time. Some costs can be predicted: energy comsuption by a process/equipment; materials with a estimated % for scrap, direct labor, services, etc.
Others can not, but can be measure after the event is done. For example, an inexpert supplier may prove the lowest bidder for a project but required double efforts of the Maintenance or Project Engineer in terms of supervision, meetings, delays, etc.
Darth Eugene Vader
Howard - sorry it took so long to reply here.
I am also sorry but I have to challenge the idea that one can absolutely measure everything in business.
Take training as an example. A manager or owner will never know the exact return on training investment - he will only be able to have faith in what he see as the results and hope that the training was part of the reason.
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