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1 August 2005

Making the business case for MRO

By Steve Stall

Limited resources, lack of understanding of maintenance strategies are barriers to asset management.

The changing market forces manufacturers to lean initiatives and more efficient processes. Increase margin and stock value or get out.

Managers at all levels must consider every possible resource to maximize operational efficiency and minimize effort so they can concentrate on core competencies.

Increasingly, one of the most common targets of these cost-savings initiatives is a company's maintenance, repair, and operations (MRO) practice.

MRO managers have come to realize success isn't necessarily production goals alone. They must now consider every purchase and maintenance decision has a direct impact on their company's profit margin, as well as their own department's measurement of success.

For today's maintenance managers, the directive is clear: Find ways to optimize and streamline.

This is a tough situation for MRO departments. According to a recent survey, limited resources and management's lack of understanding of maintenance strategies are two of the most often sited barriers keeping organizations from implementing a more comprehensive asset management program.

Additionally, the survey illustrated there is no universal methodology to measure the performance of MRO activities.

Let's look at the different techniques available to improve MRO activities and how to communicate to management the strategic benefits and investment justification and develop a methodology for calculating and reporting return on investment.

Download music faster

When you live in an age of company downsizing, justifying major expenses to the keeper of the checkbook is a fact of life. Whether you're buying a new computer or expanding an MRO program, a compelling argument needs to be made before the writing the check.

Building a solid expense justification recently hit home when my teenage son lobbied for a new computer. While his older PC was getting the job done, he was vying for a newer Pentium 4 model. He justified the expense by saying it would help improve his schoolwork and keep his computer skills up-to-date.

As the checkbook holder, I was skeptical of his reasoning and had difficulty realizing whether his request was need-based just something he wanted. As a parent who didn't just fall off the proverbial turnip truck, I had the sneaking suspicion the true reason for his request was to have a machine that could download music faster and play more advanced multi-media computer games.

At age 13, my son lacks the business savvy to effectively make a case for the return on investment (ROI) that might potentially arise by a new computer. He may have received a better response from management—Dad, in this case—if he had provided tangible examples of how he could improve his academic performance with a new PC. He also might have improved his chances of success by citing instances where his current PC had inhibited his capabilities, such as repeated loss of schoolwork due to computer crashes or inability to download research data due to slow processor speed. Additionally, he probably should have helped me, as management, fully understand how the computer would achieve the organization's (family's) greater goals. For instance, would a new computer help him earn a college scholarship? Alternatively, could it give him extra time to participate in other activities?

For many MRO managers, the situation with my son parallels scenarios repeated in manufacturing organizations around the globe: The MRO department struggles to communicate the benefits of its needs in terms management understands. In addition to knowing what the drives market demand for a company's products (customer needs and wants), making a business case for MRO initiatives requires mutual understanding and communication, strategic planning, and performance measurement to show ROI.

Achieving mutual understanding

In the manufacturing environment, limited resources and management's limited understanding of maintenance strategies are the reasons MRO managers most often cite for not implementing new MRO initiatives and programs. The fact is management holds the checkbook. Moreover, if they don't understand the impact MRO can have on an organization, it is difficult to justify the additional expense. Resolution to this situation is possible taking management's perspective and adopting the following simple rules:

Eliminate the "us" versus "them" mentality.

To achieve maximum success within any organization, all departments must act as one, in unity, on their business objectives. The mindset of "MRO versus management" must drop off the radar because it undermines the success of the whole organization. Both groups should unite behind achieving the goals of the company as a whole.

Speak front-office language.

Naturally, each group has its own lingo and communicates and pursues business objectives from different perspectives. In many cases, distinct differences in manufacturing terminology and front-office language leads to misinterpretations and a general lack of understanding between both groups.

The situation can get worse when maintenance managers focus too much on the technical aspects of a project. For example, when management asks for rationale supporting the need for a software package, MRO managers have a tendency to elaborate on the features of the software, such as trending and communication capabilities, rather than the fact that the software will help identify equipment degradation and prevent unplanned production shutdowns.

Remember it is not a "management only" problem.

Obviously, mutual understanding is a two-way street, and just as managers often don't completely understand MRO's view, the MRO staff often doesn't fully understand management's perspective. It is up to the MRO department to overcome this communication gap. One way to do this is to educate management on the value of MRO, which involves helping them understand metrics such as ROI, overall equipment effectiveness (OEE), return on net assets (RONA), and uptime. Then, as MRO functions integrate with company profits and corresponding metrics, management can increasingly see the MRO department as an important "contributor to success" rather than simply providing a "support role."

Communicate needs, not wants.

I've heard MRO managers say many times that management thinks maintenance just wants "another toy" when they make a request for additional technology. This illustrates the importance of fully developing your business case and having supporting documentation before you set foot in the front office. Effectively articulate, in management terms, what you hope to accomplish with your MRO initiatives and how these relate to the underlying business goals. For example, how does your need to improve machinery diagnostics relate to the overall organizational goal? When making your case, it is vital to stay objective, keep emotions out of the discussion, stick to the facts of the opportunity and the required investments, and understand the business trends that drive the need and project ROI on savings.

As you provide specifics on the activities and tools, continue to relate the anticipated results back to the business drivers as they pertain to management goals and customer demands. For example, how does condition-based monitoring help deliver the highest-quality products (management's goal) at the lowest price (customer's demand)? It's important to position the condition-based monitoring program as a method to improve equipment uptime and reduce expenses related to lost production and scrap, thereby improving the price per product ratio and directly linking business initiatives to management goals.

MRO value proposition

The value an MRO department provides to the overall organization relates back to key business objectives and can differ widely from company to company. If you're working to create measurable value for your department, remember it will be unique because it must develop by basing on your individual company's situation.

Many companies operate their business and hinge success on a simple principle: Deliver high quality products at affordable prices. To meet this goal, every facet and supporting element of a company's manufacturing process needs to be as lean as possible.

With a maintenance approach that focuses on reducing expenses, improving production uptime and optimizing manufacturing processes, manufactures can parlay this strategy into more affordable products, higher profits, and a distinct competitive advantage.

In other organizations, the value brought by an MRO department is measurable by how it influences the company's core competency. The equation is simple: If machines are not available, the company cannot produce products, and profit opportunities are gone.

In this scenario, the entire manufacturing organization takes equal responsibility for uptime, quality, and profitability. The goal is to make a certain number of pieces per day based on market demand and do whatever it takes to get it done.

In this situation, the MRO department's priority does not rely on equipment maintenance—a necessary function of the manufacturing process—but rather on supporting the production output goals.

Bottom line: If you are unable to make a direct link between your company's goals and your MRO department's goals, then your MRO goals need realigning.

On intuition or experience

Once a company's MRO value has aligned with the organization's business goals, the next step is to develop a strategic plan that identifies exactly how the proposed initiatives will support the business.

An effective MRO strategy outlines what you want to achieve as well as how to best implement that strategy, which tools to use, and which technologies will best serve. The two most common difficulties encountered by MRO managers in this stage are:

1. Identifying something they want and then not effectively aligning it with the organization needs.
2. Relying on intuition or experience instead of facts when developing strategy or requesting a budget allocation.

To avoid such pitfalls, your first step should be to conduct a broad-base assessment of the maintenance and engineering processes, as well as any activities that support the manufacturing process.

This will also identify any factors that inhibit equipment or operator performance. It is often the case that the root cause of a performance issue hides behind the manifested process problems and how those problem insinuate themselves into the process itself.

The assessment process identifies performance issues, establishes baseline metrics, and outlines recommended corrective actions that MRO initiatives like increased machine availability, reliability, and safety can bring about.

This methodology also provides the metrics needed to illustrate the value of MRO to management. Machinery condition and plant baseline evaluations examine equipment and machine components, which are critical for maintaining asset availability.

Examination of the environmental conditions and the maintenance history of each piece of equipment help predict how long each component should last, given its performance history and current working conditions.

By conducting reliability measurements, organizations can recognize common machine failures and empower managers to determine if a specific failure came about because of equipment design, human error, or faulty components.

Evaluating the installed base of equipment and associated spare parts also can provide statistically calculated spare part recommendations to better match storeroom inventories to production needs.

By tracking new and repairable spare-part orders and analyzing part-usage levels, the installed base evaluation allows managers to determine lifetime ratios of machines and machine components and optimize spare parts inventories and overall MRO spending.

It also enables managers to better utilize warranty programs, particularly when a pattern of failures occurs.

Metrics for ROI

Developing a set of methodologies for measuring and communicating the ROI is the final step in any well-built MRO program and will further support your case for new initiatives.

Know what your weaknesses are and what will need to be overhauled first. Moreover, determine what you need to fix and how much it will cost. Be sure to communicate how you plan to show results.

It is also important to know who sets the expectations for ROI. Is it management? Or do customers set the course? ROI can provide the closing rationale management needs to support your efforts and provide the financial resources you need.

You may want to find a common ground both management and MRO can use for evaluating project success by considering the metrics used to measure performance.

For example, while management and MRO may measure equipment availability, inventory turns, uptime, and meeting production goals, management alone may focus on production per unit of maintenance and RONA.

On the other hand, plant floor metrics that typically measure performance most likely will include schedule compliance, maintenance cost reductions, budget compliance, mean time between repair (MTBR), and mean time to repair (MTTR).

To show success, agree with management upfront on how you are going to measure performance.

Justify strategy

As manufacturers continue to align MRO activities with company goals and profitability, the value of MRO initiatives will increase, as will the role of MRO managers.

More than ever, MRO managers must be able to effectively communicate the value their department brings to the organization, and ultimately the customer, and why investment in MRO initiatives makes solid financial sense.

MRO managers can learn to bridge the communication gap and be an effective translator between the front office and the plant floor. In the end, it is about tying MRO activities to the organization's business goals and performance measures.

So what happened to my son's bid for a new PC? After relentless badgering to purchase a new computer, my son and I sat down to discuss all of the reasons why I could support his proposition and the obvious reasons why I was suspicious of his true motivations. After clearing the air, we agreed on the true need for a new computer and laid out specific goals and objectives for putting it to good use.

Justifying the need in a professional environment, RONA is one method MRO managers can use to tie cost savings and expense reductions directly back to a financial investment to show bottom-line profit.

RONA is a calculation of how well a company converts its assets to sales and, therefore, income. RONA = Sales – Expenses/Net Assets = Net Profit/Net Assets.

Inventory, as it relates to spare parts for the automation system, is usually a capitalized asset. It exists for its potential to create income. Keeping a well-stocked inventory of spare parts is an important part of the automation system. In addition, while inventory itself is usually an asset, money spent maintaining that inventory can be a significant expense.

Expenses are costs associated with keeping the business operational. They are different from assets in that they are short-term costs for goods or services for near future use. For example, $6,000 spent on maintenance fees is an expense. However, $6,000 spent on spare parts intended to last more than a year is an asset.

If a company wishes to increase RONA, it must increase sales, reduce assets, or decrease expenses. Generally, inventory expenses (carrying costs) can add up to 25% of the inventory cost over one year.

Here is an illustration of the allocations of inventory costs:

Companies can reduce expenses and assets simultaneously by eliminating spare-parts inventory, reducing expenses associated with maintaining an inventory of spare parts (such as space, utilities, accounting and insurance), and increasing the availability of critical parts to maximize uptime.

Moreover, companies can significantly reduce downtime and increase profitability just by having the right amount and correct inventory on-site, or readily available. By not purchasing spare parts until needed, a company can eliminate excess inventory from its books and increase RONA by reducing assets.

Behind the byline

Steve Stall (sjstall@ra.rockwell.com) is business manager for plant services at Rockwell Automation in Milwaukee.