finance and budgeting for maintenance

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Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”

Finance and Budgeting for Maintenance

Aryana Group - IPAMC - 2006

Ben Stevensben@ omdec.comwww.omdec.com

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Today’s Agenda

• Understanding Accountants and ROI• Basic Cost Reports• Building your Budget• Project Proposals – Financial aspects• Life Cycle Costing

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Accountants are…..

BoringUnloveableOne track mindsNarrow-mindedConservativeNegativePredictable

Add your own helpfulSuggestions

Tick where applicable

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Which Image fits your Accounting Department?

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If all that is true….

Where do little accountants come from……

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The Real Image…..

Off to another party…..

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What do accountants really do?

• --- the guardian of the company’s money

• Responsible for the integrity of the financial decisions

• Have to sit in judgement on whether this project is more “worthy” that that one

• They have to apply their rules

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Remember…

• You can’t change the rules• They can’t change the rules• They need to understand• They need to trust you• ….so you need them on your team

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Rules for Getting to Know Accountants• Ask them for help ahead of time• Understand their rules• Help them to understand what maintenance is all

about (impact on bottom line)• Seek their advice on what numbers, how to

present them• Include financial measures in your operational

and project planning• Have them along to your presentation and give

them credit• Build in numbers, present in pictures

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ROI

Revenue

Investment

CostROI =

XProduction Volume Price

XRun-time Throughput

Total time Downtime-

TotalTools Cost

TotalContractor Cost

Total Labour Cost

TotalStores cost

Total RawMaterials Value

Total StoresValue

Total FinishedGoods Value= ++

= Building Cost Building Deterioration

= Equipment Cost EquipmentDeterioration

= Land Cost LandDeterioration

Total Inventory Value

Total Land Value

Total BuildingValue

Total EquipmentValue

Total ProductionCost +

TotalMaintenance Cost

TotalAdmin Cost

+

Directly affectedBy Maintenance

Indirectly affectedBy Maintenance

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What Happens IF????Show the impact as +++ to ---

Investment

You improve your Spare Parts Management

7

You decide to outsource your maintenance

6

You increase your PM Program5

You incur a breakdown4

You prevent a breakdown3

You install new environmental protection equipment

2

You install new production equipment1

ROICostRevenue

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List areas where you are involved in ROI Impact – High,

Medium, Low

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Question….

• What if you are a Service organization?• How does this work if Revenue and Profit

are not drivers for your organization?

- Cost Reduction?- Asset Efficiency- Customer Satisfaction?- Social Benefit?

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Today’s Agenda


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This should be your starting point– Monthly and Annual Spending on: 1. Regular Maintenance

2. PM’s3. Emergency Repairs 4. Special projects

Total

Indirect and Overhead

Hot Press

Another breakdown last month! Should be solved by the major refurbishment

27,9907,7409,700

51,05096,480

300nilNilNil

300

Nilnilnil

45,00045,000

12,4404,5004,5002,550

23,990

15,2503,2405,2003,500

27,190

#5 Boiler- Regular- PM’s- Emergency- SpecialTotal

CommentsTotal $

Tools $

Contract $

Materials $

Labour $

Equipment

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Monthly and Annual Breakdown cost report

102,00012,00090,00015,00062Primary Circulation Pump

10,4002,4008,000500164#5 Boiler

Total B/D cost $

Emergency Repair $

B/D cost$

B/D cost per hour $

Breakdown - Hrs

Breakdowns #

Equipment

1. Get accounting to give you a breakdown cost per hour (= total value of lost production)

2. Get Production to agree on how to define “downtime”(not related to who is to blame)

3. Do a Root cause Analysis for EACH Significant failure

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Pareto Chart: Breakdowns Brick Manufacturing Company

0

10

20

30

40

50

60

1 2 3 4 5 6 7 8 9 10 11 12

Series1

Number of break-downs 2003

KilnSlurry Pump

0

20,000

40,000

60,000

80,000

100,000

120,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Series1

Cost of Breakdowns2003

Kiln Slurry Pump

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What is downtime?

0

2

4

6

8

10

121 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96

First sign of performance degradation

Maintenance arrivesEquipment available

Call to Maintenance

Diagnose

Get parts,start repair

Complete repair, start test

Complete test, handover to production

Full production rate

Production rate

T1 T2 T3 T4 T5 T6 T7 T8 T9

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List your Main Costs of Downtime

654321

Impact (VH – H – M - L)

Data SourceItem

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Today’s Agenda


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Sources of Budget data

• Your CMMS data from last year

• Expected changes this year• Gut feel backed up by

hunches, guesses and (maybe even) predictions

• Demands of management to reduce costs

• Inflation rates

• Must have….– All maintenance work

recorded on work orders– Work orders by line or

equipment or area– Labour Hours, Materials

used, contractors and tools per job

– Ability to convert these into $– Accurate data collection

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Maintenance Budgeting Techniques

• Historical Budgeting• Standard Costing• Zero-based• Activity-based• Activity-centre based

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1. Historical Budgeting*• Last year’s costs by maintenance

cost centre and/or class of expense• Remove major one-off expenses• Add major new projects• Multiply by an inflation factor

*easily the easiest and therefore the most popular (and easily the worst!)

…..then the dreaded “cut by 10%”

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Here’s the familiar Historical Budget

932,770127,070400,050405,650Total

951,400129,600408,050413,750X inflation 1.02

49,3006,30015,00028,000+ New Projects

-70,000-22,000nil-48,000- Special Proj

953,470142,770385,050425,650Total

22,250 3,0005,25014,000Tools

77,000789…235…345…Contractor

124,620546…456…446…Mtce Overhead

385,450234…234…123…Mtce Materials

364,15053,960140,100170,090Mtce Labour

Total $Distribution $Water Purification $

Generation $Line/Area

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2. Standard Costing*• Each product is assigned unit costs based on:

– Expected costs– Expected volumes– Expected product mix

• Through the year, cost volume and mix changes are calculated as Variances

• Net result – you are always being asked to explain variances that you don’t understand!

*The accountants dream

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Standard Cost – Budget vs Actual

0.010.580.5974,000Total

-0.020.120.1012,000Maintenance materials

00.110.1114,000Maintenance labour

0.010.070.0810,000Utilities and services

00.140.1418,000ProductionMaterials

0.020.140.1620,000Production Labour

CommentsCost Variance

Cost per mgal $ Actual

Cost per mgal $ Budget

Total $

Production cost item

Based on Production of 125,000; Question – if actual is 137,000 – so what?

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3. Zero-based Budgeting

• Popular in the 70’s – especially in Government.

• Based on the principle of building from scratch (the zero base), then adding the various programs or levels of service

• Level of service is prioritised and determined by the cash available

• Largely discredited as impractical in industry

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Zero-based budget sample

1242180118450700400423330Total1117962106605630360380997Add Predictive Mtce

93163588838525300317498Add PM’s

80741779663455260275165Add Planned Corrective

31054529613175100105833Breakdown response only

0000Zero service

Total$

Packing$

Water Pur-ification $

Generation$

Problems: - who decides priorities- long term versus short term- recipe for wrangling over the wrong issues

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4. Activity-based Budgeting

• Based on bundles of activities or functions

• Focuses on what we actually do, not buckets of resources:– Hence “Planned Maintenance on Pumps”– Rather than “total labour $”

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Sample of Activity-based Budgeting

Safety Meetings

Staff Mgmt and Supervision

Planning and Scheduling

Emergency repairs

77,50025,000100025,00018,0008500Planned Maintenance on Drills

29,30010,00080015,00020001500Planned Maintenance on well-head equipment

Total$

Cap Projs

$

Tools$

Contract$

Materials$

Labour$

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5. Activity-Centre based Budgeting

• Modification of the previous one to reflect the way we actually do business:– Select logical groups of equipment (use the

CMMS hierarchy for this)– Examine past costs – Forecast based on what we expect to happen– Last Year’s costs from the CMMS– Adjust for known factors such as labour rate

changes

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Example of Activity-centre based Budget

-15%+10%-90%

-100%

Change%*

Completed a major refurb this year; will save on Reg Mtce $ and Em $ next year; need to boost PMs

Comments

Budget Next YearActual This year

Total

2,50021,300Indirects + Overheads

Hot Press

23,7908,500

970Nil

33,260

27,9907,7409,700

51,05096,480

300nilNilNil

Nilnilnil

45,000

12,4404,5004,5002,550

15,2503,2405,2003,500

#5 Boiler- Regular- PM’s-Emergency- SpecialTotal

Total$

Total$

Tools $

Contr$

Mats $

Lab$

Equipment

•Rate increases: - Labour rate 3%- Materials and Commodities prices 4%- Contractor rates 3%

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Advantages• Can add new categories for Health and

Safety, Environmental etc• And can separate individual contractor• If you have to cut your budget, you can see

exactly where the $ will come from• And you can assess the risk• Which strengthens your ability to negotiate

with the accountants….

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Today’s Agenda


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But what is a Project?• Anything that:

– Is not “normal operations”– Requires special planning– And special approval

• Generally a one-off• Above $xxx• Size and complexity will determine the

level of detail

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Project Objectives• Be specific – especially when it comes to the numbers…

– Not “reduce costs and increase reliability”– But “reduce maintenance repair costs annually by : $xxx Labour,

$yyy Materials, $zzz Contractors”– And “reduce downtime from an annual x% to y%” or “reduce # of

breakdowns from x annually to y”• Be credible – consistent, not exaggerated, supportable.

•“To replace the main shaft and bearings on the Primary Circulation Pump; this will reduce the number of breakdowns from 2 this yearand an expected 4 next year to zero (saving a net $120,000 in lost production in year 1), and eliminate emergency repair work (saving about $24,000). Costs for the project are estimated at $48,000, for a year 1 payback of 2 times. Benefits will continue beyond year 1 at an increased level”

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Project justification- benefits

102,00012,00090,00015,00062Primary CirculationPump

10,4002,4008,000500164#5 winder

Total B/D cost $

Emergency Repair $

B/D costB/D cost per hour $

Breakdown - Hrs

Breakdowns - #

Equipment

“… Based on this year’s data (below), our Primary Circulation Pump is losing us $90,000 in lost production, plus an additional $12,000. This is based on a total of 6 breakdown hours (verified with Production), at $15,000 per breakdown hour (verified by Accounting). With no investment, and based on the machine condition (see foot note), we predict at least 4 breakdowns next year for a total loss of $200,000.”

Footnote: our analysis results show the main shaft alignment deteriorates by 1% each operating day – functional failure occurs at 50%; hence 4 breakdowns are predicted

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Project justification – benefits (2)

-30,000Nil-60,000NilLost Production during Project Implementation

24,00024,00024,00012,000Total Emergency repair costs avoided

102,000

90,000

15,000

6

2

This yearActual

174,000204,000144,000Total

180,000180,000180,000Total Lost Production cost avoided

15,00015,00015,000Lost Production cost/hr

121212Breakdown hours

444Number of Breakdowns

Year 3Year 2Year 1

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Project Justification - Costs

NilNilNilContractor costs

Nil8,000

500

NilNilNil

28,0008,0001,000

Materials Costs- New shaft- New bearings- Miscellaneous

1,0003,0001,000

Nil3,000

Nil

4,0003,0004,000

Labour costs- Installation- Alignment- Commission & Test

13,5003,00048,000Total

Year 3Year 2Year 1

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Project Financial Summary(and questions)

174,000204,000144,000Total Project Benefits

13,5003,00048,000Total Project Cost

160,500201,00096,000Net Project Return

Year 3Year 2Year 1

What’s missing?- effect of inflation- cost of capital- return on investment- project planning horizon- risk/contingency- more detail on background numbers

These are the areas where

you’ll need help from your new

friends in Accounting

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Today’s Agenda


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Life Cycle CostingLife cycle costing is designed to include all costs of a piece of equipment:

Lead

Support

Lead

Joint Lead

Advisory

Advisory

Best Practice Role of Maintenance

Current Role of Maintenance???

Engineering and MaintenanceInstallation

MaintenanceDisposal

OperationsOperations

MaintenanceMaintenance

ProcurementAcquisition

EngineeringDesigning and planning

Who Leads?

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ARC 2001- Best Practices Targets

10%6151Dispose

30%Total

65%71153Maintain

25%21952090Operate

50%71102Install

10%511401Acquire

50%71102Plan

Savings %

% of* TCO $

% of cycle time

% of* TCO $

% of cycletime

Typical Best Practices

* TCO = Total Cost of Ownership = Life Cycle Cost

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Life Cycle Costing - Example

So which pump do we buy??????

13,9009,200Annual Cost167,00092,000Total Life Cycle cost

12 Years10 yearPump Life5001,000Cost to Dispose

8,0005,000Cost to Maintain/year4,0003,000Cost to Run/year2,0001,000Cost to Install

20,00010,000Cost to BuyPump 2Pump 1

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..... add Performance

NOW WHICH DO WE BUY???

13,9009,200Annual Cost

17518.4

1008.76

Lifetime throughput– gals/hour

- m gals0.00910.0105Life time costs $/gal

167,00092,000Total Life Cycle cost12 Years10 yearPump Life

Pump 2Pump 1

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..... add Reliability

0.00910.0105Life time costs $/gal

$1000$576,000

0.0313

$1000$240,000

0.0274

Down time cost - $/hr- Total $- $ per gal

2/year1 day

1/year1 day

Breakdown – frequency- duration

0.04040.0379Total Lifetime operating cost $/gal

13,9009,200Annual Cost

17518.4

1008.76

Lifetime throughput– gals/hour

- m gals

167,00092,000Total Life Cycle cost

12 Years10 yearPump Life

Pump 2Pump 1

So are we clear on which one to buy??

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NOT YET!!

How much throughput do we need?

If we chose Pump 1, can we achieve enough capacity?

What’s the cost of losing a customer because of non-delivery?

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WHOEVER SAID....

....this stuff was easy.....??

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Summary• Accountants do have their value – but we

must learn to speak their language• Budgets are built in different ways – all

need solid data and careful analysis to be useful

• Project Finances also depend on good data and analysis, but can work for us

• Life Cycle Costing – a coming view of the Maintenance world – get used to it!!

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Workshop• Compare your current Project Costing

approach with that in slides 36 to 40.• Identify the advantages and

disadvantages of your current approach versus the one presented

• List the steps needed to improve your current project costing process

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Thank you for your attention

• Any questions….

• >>> email me ---- ben@ omdec.com

finance and budgeting for maintenance

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