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A Cost Model of Industrial Maintenance For Profitability Analysis and Benchmarking PDF
A Cost Model of Industrial Maintenance For Profitability Analysis and Benchmarking PDF
Abstract
A hierarchical system of maintenance performance indicators is presented. An empirically tested cost model of
industrial maintenance has been used with data collected from more than 400 companies operating in various industries.
This has revealed clear causalities between certain variables and key "gures. On the basis of the above results
a benchmarking tool has been created. This gives a fairer benchmarking value for a production unit. This cost model also
provides valuable information for management in the process industry when evaluating the competitiveness of both old
and future plants. 2002 Elsevier Science B.V. All rights reserved.
Keywords: Industrial maintenance; Key "gures; Queuing theory; Cost model; Benchmarking
1. Introduction
Maintenance is a combination of all the technical, administrative and managerial actions during
the life cycle of an item intended to keep it in, or
restore it to a state in which it can perform the
required function (CEN/TC 319). Industrial maintenance is mainly concerned with production
equipment. In Finland, maintenance costs are on
average about 5.5% of company turnover. However, the ratio may vary from 0.5% to as much as
25%. Industrial maintenance has two essential objectives: (1) a high availability of production equipment and (2) low maintenance costs. These and
other indirect impacts of maintenance on the eco-
0925-5273/02/$ - see front matter 2002 Elsevier Science B.V. All rights reserved.
PII: S 0 9 2 5 - 5 2 7 3 ( 0 0 ) 0 0 1 8 7 - 0
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to "nd more exact causalities between various factors. The in#uence of the amount of production
equipment, integration level of production lines,
downtime costs, utilisation rate of machinery and
amount of preventive maintenance were studied.
The economies of scale, the in#uence of integration
level, downtime costs and utilisation rate were con"rmed.
The second aim of this study was to create
a benchmarking tool for industrial maintenance on
the basis of empirical examination (a method to
"nd the appropriate benchmarking values for key
"gures). Benchmarking values, as they have been
de"ned here, are not the best or world class values,
but relevant industrial averages (not only one average but many of them, one in each class of production units). One reason for this is that because of
di!ering accounting practices there is not enough
evidence for accurate ranking. In the near future we
shall also be able to specify the best units. Additionally, this paper handles the comparison of key indicators, but not the determination of best practices.
Thirdly this paper focuses on determining the impact of the above factors on the pro"tability and
competitiveness of business units in the process
industry.
This paper includes:
(1) the description of the system of the key "gures;
(2) the summary of mathematical formulations
and hypotheses;
(3) the summary of empirical testing;
(4) the structure of a benchmarking tool;
(5) the impact of cost behaviour on the pro"tability of a plant.
17
ance, outsourcing, #exibility, operator maintenance, etc. are such kind of tools. Internal explanatory
variables (IEV) give additional information, for
example, about the cost and organisation structure,
cost level and capital intensity of maintenance
function.
In this research we have tried to "nd causalities
between various indicators. These kinds of causalities can be formed between action variables and
intermediate objective variables or between action
variables and main objectives. The same kind of
relationship can also be formed between intermediate variables and main objectives. From the
benchmarking and company planning point of
view it is also very important to know the impact of
exogenous independent variables on the internal
objective variables, because it makes it possible to
distinguish the in#uence of those factors which are
beyond the scope of maintenance personnel to determine.
Earlier in this text it was emphasised that the
main objectives of maintenance function are linked
via availability to overall equipment e!ectiveness
(OEE) and via maintenance costs to production
costs. The third dimension of objectives is linked to
qualitative aspects of production processes. By
combining these three dimensions with the above
classes of variables it is possible to construct a system of performance indicators, which organises
a large number of key "gures in clear way. The
result is presented in Fig. 1. The "gure does not
include all possible indicators but is rather an
example of the system. In the example, owing to
lack of space some variables are in the form of
a ratio and some in the form of a concept. However,
for all presented variables it is possible to construct
a indicator in the form of ratio or index.
Some of the key "gures can be applied to
benchmarking purposes only in limited circumstances although they are very suitable for the follow-up of internal trends. Examples of such kinds
of variables are `mean time between failurea or
`lost production due to breakdownsa. Their absolute values do not give an accurate picture of the
e!ectiveness of a plant. For example the size of
a plant should be taken into account.
The rest of this paper concentrates on the economic side of the system. Although we have carried
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3. A cost model
3.1. Variables
Such key "gures as `maintenance costs/production equipment (replacement value RV)a or `maintenance costs/production volumea are often used in
benchmarking. The former is a good alternative
when the products of production units are internally or externally heterogeneous. The latter is suitable for homogeneous industries. However, a ratio
`maintenance costs/production equipmenta does not
take into account the success or failure of a maintenance function in its main task, to maintain the
high availability of machinery. A ratio `maintenance costs/production volumea takes somewhat better into account #uctuations in the production
volume of a plant. However, we meet problems here
too, since even in homogeneous industries products
may vary considerably.
We meet the above problems mainly in empirical
work. Theoretical model building allows us also to
take into account those factors which are `losta in
empirical examinations. Because the object of
maintenance e!orts is the production equipment of
a plant, the ratio `maintenance costs/production
equipmenta is a good starting point for modelbuilding. From a benchmarking perspective, the
main emphasis will be on the impact of exogenous
variables on internal objective (dependent) variables. However, some weight will be put on such
action variables as preventive maintenance and
subcontracting because from practical experience,
these have shown themselves to be very important
independent variables in industrial maintenance.
The estimation of the equations of a benchmarking
tool calls only for exogenous variables, because we
try to exclude the impact of action variables, i.e. to
"nd fundamental relationships between dependent
and exogenous economic variables. As stated
earlier, the qualitative factors have not been included at this stage of the research, since we "rst
have to investigate the behaviour of maintenance
costs and then later to add organisational aspects,
which actually are very much empirical in nature.
The variables used in a theoretical cost model
are:
(A) Internal objective variables:
19
20
,
C "C #C
2
1
5 !
(1)
C
5 .
(2)
C
1
In the objective function (1) units are, however,
dimensionally inconsistent, which the authors have
not commented on, and thus the model is empirical.
Whitt's approximation [18] o!ers a parallel optimum solution of . However, these models are
based on queuing theory and not on empirical data
from maintenance or any other service "eld. The
above dimensional problems can be avoided, if in
the objective function we use a transformation coef"cient (
) which transforms service rate () into the
number of servers (Eq. (3)).
"#
C "C
#C
.
2
1
5 !
(3)
(4)
(5)
(6)
(7)
(8)
21
22
Fig. 2. Industry-speci"c optimal cost curves simulated on the basis of the general model [21].
23
Fig. 4. The e!ect of the coe$cients of variations (failure rate and repair time) on the e$ciency of maintenance.
24
25
26
Table 1
Factors explaining the maintenance costs of production equipment in the whole industry (years 1990, 1991, 1996 and 1997)
Dependent variable:
log (maintenance costs/replacement value of equipment)
R"0.69, R"0.48, Adjusted R"0.46, F(14.365)"23.620, p(0.000
Variables
BETA
SE
t(365)
p-level
Intercept
log I (integration level)
log SW (shift work rate)
Dummy-engineering industry
Dummy-printing industry
Dummy-plastic products
log K (replacement value)
Dummy-metal industry
Dummy-carpentry industry
Dummy-foodstu!s
Dummy-textile industry
Dummy-elec. products & electronics
Dummy-non metal minerals
log S (subcontracting)
!1.034
0.636
!0.392
!0.194
!0.152
!0.151
0.144
!0.14
0.13
!0.115
!0.085
0.078
0.075
0.096
0.070
0.054
0.040
0.040
0.079
0.042
0.041
0.041
0.042
0.041
0.04
0.042
5.850
!10.734
9.045
!7.322
!4.855
!3.839
!1.905
3.473
!3.433
3.137
!2.717
!2.062
1.941
1.808
0.000
0.000
0.000
0.000
0.000
0.000
0.058
0.001
0.001
0.002
0.007
0.04
0.053
0.071
Table 2
Factors explaining the maintenance labour costs for the years 1996 and 1997
N"27
BETA
SE
t(20)
p-level
Intercept
log I (integration level)
log SW (shift work rate)
log IM (improvements)
log S (subcontracting)
log PR (preventive maintenance)
log K (replacement value)
!0.774
0.425
!0.288
0.372
0.223
!0.192
0.161
0.160
0.120
0.141
0.137
0.135
1.603
!4.823
2.654
!2.399
2.634
1.631
!1.422
0.125
0.000
0.015
0.026
0.016
0.119
0.170
27
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5. A benchmarking tool
On the basis of the empirical examination
a benchmarking tool can be made. The commonly
applied benchmarking procedure has been the
comparison of the average cost values of a particular industrial sector with a company's own costs.
Sometimes the order of the production units have
been arranged according to certain performance
indicators.
In the "eld of industrial maintenance this kind of
benchmarking does not help very much, as Dwight
[13] also commented. The `ownersa of the best
"gures are too `prouda of their performance and
the `ownersa of the poor ones are on the brink of
despair. According to the results of this research,
the above-mentioned methods are inappropriate.
Even the misuse of benchmarking values and opportunistic behaviour are possible.
Some factors can be a!ected by maintenance
management, but some of them cannot. For
example small units may avoid the lack of scale
economies in queuing systems if they use outsourcing. However, it is beyond the scope of their determining power to avoid the lack of technical
scale advantage. The same applies to shift-work
rate in a factory or the utilisation rate of production equipment. That is why there are several
benchmarking values, one for each production unit.
This may give rise, however, to opportunistic behaviour: in the world of many benchmarking values
managers may try to explain bad results away.
We have built a "rst version of the benchmarking
tool which takes into account the impact of the
exogenous variables and calculates the appropriate
benchmarking value for a production unit. Today,
this tool works on the basis of mean values. But in
the future lower boundary values for maintenance
costs will be sought. The benchmarking tool is
based on estimated equations, where the dependent
variable is, for example, `maintenance costs/production equipmenta and the independent variables are
the aforementioned exogenous variables and `semiexogenousa improvement maintenance. In multiple
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Fig. 9. A benchmarking tool for industrial maintenance: the values of key indicators are imaginary, but realistic [25].
triple as a plant size decreases. A super"cial conclusion would be that it would be pro"table from
the point of view of maintenance costs to invest in
larger production plants. However, all other business ratios do not necessarily improve when a plant
size grows.
This analysis di!ers greatly from the neo-classical approach. We have not tried to estimate the
production function of various industries (neither
Cobb}Douglas, Leontief, CES nor any others).
Rather, we have tried to determine tools for practical work. The aim of this section is to "nd empirical
links between maintenance costs and investments
in production equipment. The analysis of this chapter is very much a preliminary one .
This pro"tability analysis is based on the amount
of production equipment. That means that all the
needed variables are de"ned as a function of K.
According to our empirical research the integration
level grows as the size of a plant increases. This
relationship often seems to be a linear one
(I"a#bK). The ratio `replacement value/production operatives of one shifta was used as an operational indicator of the integration level of a factory.
So, the labour requirements for a plant can be
easily calculated:
K/(/v)"I"f (K)
and further,
"vK/f (K).
(10)
In Eq. (10) a constant (v) denotes shift work rate.
Labour productivity increases as a plant size grows.
So, the pattern is the same as for maintenance costs.
A crucial factor is capital productivity. What
happens to the output}capital ratio as a factory size
grows? There are three alternatives: it may increase,
be constant or decrease. According to the empirical
data, the latter alternative, though not necessarily
common, is certainly possible. Output}capital ratio
can be depicted by Eqs. (8)}(10).
Q/K"r,
Q"rK,
s
Q"
f (K)
or more generally
(11)
(12)
Q"f (K).
(13)
In Eqs. (11) and (12) symbols (r) and (s) are constants. It is important to notice that here K stands
for the replacement value and not for the book
value of production equipment. However, it was
assumed that these values were very close to each
other because of continuous replacement investments.
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Now, the pro"t function of a plant can be formulated in the following way:
"pf (K) ![c vK/f (K) #c mf (K) #c nK
#c f (K) #c f (K)] ,
(14)
where p is the price of a product, c , c , c , c , and
c are unit costs and m and n are constants. If we
determine that equals zero and then solve Eq. (14)
for p, we get the minimum price for each level of
production capacity (production equipment). This
kind of exercise was carried out in two groups of
plants. In the "rst case, the output}capital ratio was
constant and in the second case the ratio was decreasing. In the former case, the bigger the plant
was, the lower the minimum price was and in the
latter case the result was the opposite. The third
alternative, growing output}capital ratio leads, of
course, to a pro"table solution.
Naturally, managers do not make investments
decisions on the basis of maintenance costs. However, the better the knowledge we have about the
interaction between maintenance and other business variables, the better our decisions.
Although, the above calculations may contain
faults (e.g. capital costs) and although the product
mix of a plant may vary (as may the prices), it is
obvious that production units cannot always reap
the whole bene"t of di!erences in maintenance
costs. Indeed, in the case low of output}capital
ratio, for example, the price level was high and the
pro"tability of the production line was very good.
7. Conclusions
According to old data (1990 and 1991) and new
data (1996 and 1997) economies of scale do exist.
The larger the production plants are and the higher
the integration level, the lower maintenance costs
will be in relation to production equipment and
production volume. The increase of utilisation rate
increases the maintenance costs. Also the technology factor has a great impact on maintenance
costs. However, according to old data, preventive
maintenance reduces maintenance costs in produc-
References
[1] V. Siekkinen, Industrial maintenance in Finland, Kunnossapito, Vol. 2 (1994) (in Finnish).
[2] J.D. Patton, Maintainability and Maintenance Management, Instrument Society of America, Research Triangle
Park, N.C, USA, 1980.
[3] S. Nakajima, TPM Development Program: Implementing
Total Productivity Maintenance, Productivity Press, Inc.
Portland, Oregon, 1989.
[4] P. Willmott, Total Productive Maintenance, The Western
Way, Butterworth Heinemann, Oxford, 1997.
[5] A. Kelly, Maintenance Planning and Control, Butterworths, Cambridge, 1984.
[6] prEN/TC 319/WG4, Maintenance Terminology, Brussels,
1998.
[7] A. LyytikaK inen, Handbook of Availability Performance,
VTT Bulletin 678, 1987, Espoo (in Finnish).
[8] L. Hagberg, T. Henriksson, LoK nsamhet underha ll, Mentor
Gruppen, 1995.
[9] V.Z. Priel, Twenty ways to track maintenance performance, Factory, March 1962.
[10] W.S. Luck, Now you can really measure maintenance
performance, Factory Management and Maintenance 114
(1) (1956).
[11] E. Finley, How cost e!ective is your maintenance organisation, Hydrocarbon Process 1 (1972).
[12] VDI-Richtlinien 2893, Bildung von Kennzahlen fuK r die
Instandhaltung, VDI-Handbuch Betriebstechnik, Teil 4,
DuK sseldorf, 1991.
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