Financial & Economic Considerations
This topic covers:
The finances, economics, and costs of maintenance are complex.
Three facets relate to the economic and financing of maintenance:
- What makes up the cost of maintenance?
- Relationship between factors
- When should the asset be replaced?
Maintenance Costs takes the form of manpower or materials. This cost is offset by a benefit of enhanced equipment reliability/plant availability. The cost of providing maintenance is:
Total Cost = Direct Costs (labor, materials, overheads) + Indirect Costs (Lost production and environmental damage)
The direct costs of maintenance are normally preventive and corrective maintenance costs.
Despite its significance, cost is normally the last criterion to be considered in determining maintenance policy, since it only becomes relevant after one or more potentially effective tasks or processes have been identified.
The objective of the analysis is to select the least cost alternative satisfying the maintenance objective, with consideration to inaccurate costing of alternatives, dynamic circumstances, and the difficulty in identifying the full range of costs.
This section provides guidelines for the economic evaluation of maintenance priorities, particularly when comparing alternative courses of action.
A five level approach is suggested, in order of increasing sophistication:
- Cumulative cash flow analysis to indicate project margin and cash involvement per period
- Discounted cash flow analysis to indicate net present value of a project
- Qualitative assessment to identify the intangible costs and benefits also expressed in terms of customer satisfaction
- Sensitivity analysis to determine the effect of a change in one or two key variables to the financial outcome indicated in above items 1 and 2
- Risk analysis to determine the effect of changes to all variables on the financial outcome indicated in above items 1 and 2.
Projects requiring substantial expenditures over long periods should be assessed according to all five levels. With the advance in computer technology, the above five level evaluation can be accomplished easily with appropriate software for risk analysis.
The Failure Modes Effects Criticality Analysis (FMECA) process is carried out to provide:
- Systematic and logical evaluation of the maintenance requirements
- Documentation of the process for subsequent reviews
- Defining initial maintenance requirements.
The direct relationship between maintenance requirements, resource costs and work capability makes it essential that maintenance policies be accurately established.
The following considerations are addressed when considering a maintenance concept:
- Plant operational requirement and availability of the workforce
- Design and maintenance philosophies of the manufacturer.
There are four maintenance concepts considered suitable for a particular situation:
Periodic Maintenance
Involves grouping together all of the tasks identified with similar frequency and perform them at the same interval i.e. all one-month tasks should be undertaken at the same time, minimizing operation interference.
Grouping ‘like’ intervals and distributing over a period. For example, if there are 24 tasks with 6 monthly intervals they could be programmed at two a month for 12 months, thus spreading the workload and making maintenance more manageable.
Flexible Maintenance
Required maintenance is individually programmed and controlled so complete maintenance requirement for the plant is performed progressively.
Flexible Servicing
Tasks on each item are individually controlled and can be programmed to coincide with unscheduled work on the item or to take advantage of short periods of downtime. Flexible maintenance is inappropriate for activities requiring significant preparation or access.
Reviewing Maintenance
The process is iterative where activities performed are evaluated to allow adjustment and correction with an aim for improvement. This process is important in maintenance management to ensure the maintenance plan is responding to external influences and the needs of the equipment. It ensures that the maintenance continues to be optimal.
The procedure is to assess what failures have occurred and what should have been prevented, delayed or predicted. Likely events should be processed through the analysis procedure and the maintenance plan amended or updated.
The three common causes resulting in changes to the maintenance plan are:
- Failure was not considered
- Incorrect assessed maintenance
- Inappropriate frequency selection.
Maintenance analysis is performed to identify items of equipment displaying specific or likely modes worthy of scheduled maintenance. Analysis is not intended to identify all possible failures for all equipment. In some cases, it is more cost effective to repair an item or failure. Failure will inevitably occur.
The analysis of maintenance requirements for plant and equipment involves separate but related procedures. These relate to identification and description failure mode and effects maintenance analysis.
The true costs of operating infrastructure is comprised of two major categories:
- A real assessment of the actual allowance should be made for asset depreciation
- A true cost of the real maintenance costs is not based on what is currently happening but the "optimal maintenance" necessary for lowest life cycle costs.
The manner assets are operated is important to the overall operating statement.
Over the life span of a typical asset, maintenance costs will rise with asset age. This is dependent on the objectives of the maintenance program. Throughout the entire life cycle, assets will be affected by:
- New technologies
- Time value of money
- The asset may be superceded.
What is essential however is that the organization develops an income stream that has the ability to match the rate of return necessary to ensure their long term business viability.
This revenue needs to be sufficient to:
- Meet current operating costs
- Meet the "optimal" maintenance
- Make allowance for perceived replacement.
Using Renewal Cost Accounting
This figure will be the same for an old or new system. It will be present day costs. The difference will be new assets won't need the money to be spent initially.
As the maintenance management system is implemented and progresses to the conclusion of the initial planning stage, maintenance practices require examination in order to be optimized. The following can achieve this optimization:
- Monitoring of developing trends
- Monitoring of results of existing practices and accordingly revise
- Utilizing pure research techniques
- Deliberately implementing and monitoring diverse maintenance practices
- Monitoring new trends and existing practice results.
It is essential an organization continue to monitor existing maintenance systems and new technology and equipment systems.
Consisting of, but not limited to, analysis of materials, experiments with protective coatings, detailed analysis of corrosion, etc.
Determination of different breakdown probabilities can be established by adopting different maintenance practices on a series of samples throughout that asset group. The results of these differing practices can be monitored and in time, the "optimal" practice determined.
Activities undertaken can generally be divided into three categories:
- Core Activities (activities that only the organization should do)
- Marginal Activities (those cost-effective to the organization)
- Non-Effective Activities (completed by other organizations at a lower cost).
Outsourced maintenance tasks need a clear scope of work and specified deliverable. A clear and unambiguous scope of work is the most important factor in obtaining competitive bids.
Assets can survive a short period when planned maintenance expenditure is altered, without excessive impact on the life cycle or performance of the asset. An asset's current condition, production requirements and reliability etc., will influence decisions to defer maintenance.
Key budget items fall into one of the following categories:
- Planned Maintenance - Abandonment of all condition monitoring on assets that represent little risk to the organization
- Cyclic Preventive Maintenance - Work units should review cyclic preventive maintenance activities focusing on risks associated with extending, or ceasing the cyclic interval
- Emergency Corrective - Little can be done to reduce this activity. An allowance should be made for this
- Schedulable Corrective Maintenance - Often resource driven not needs driven for effective budgeting.