Accordingly, it is important to have good past records if we are to do any better than guess at a value. If breakdowns are purely random occurrences, then past records are not going to give us the ability to predict precise savings for inclusion in a sound financial case. They may, however, give a feel for the likely cost when a breakdown happens. At best, we could say, for example, the likely cost of a stoppage is $8,000 per hour, and likely breakdown duration is going to be two shifts at a minimum. The question senior management then has to face is: “Are you willing to spend $10,000 on this condition monitoring device or not?” 2.2.1 Poor-Quality Product as Plant Performance Deteriorates As a machine’s bearings wear out, its lubricants decay, or its flow rates fluctuate, the product being manufactured may suffer damage. This can lead to an increase in the level of rejects or to growing customer dissatisfaction regarding product quality. Financial quantification here is similar to that outlined previously but can be even less precise because the total effect of poor quality may be unknown. In a severe case, the loss of ISO-9000 certification may take place, which can have financial implications well beyond any caused by increased rejection rates. 2.2.2 Increased Cost of Fuel and Other Consumables as the Plant Condition Deteriorates A useful example of this point is the increased fuel consumption as boilers approach their time for servicing. The cost associated with servicing can be quantified pre- cisely from past statistics or a service supplier’s data. The damaging effects of a vibrating bearing or gearbox are, however, less easy to quantify directly and even more so as one realizes that they can have further consequential effects that compound the total cost. For example, the vibration in a faulty gearbox could in turn lead to rapid wear on clutch plates, brake linings, transmission bushes, or conveyor belt fabric. Thus, the component replacement costs rise, but maintenance records will not necessarily relate this situation to the original gearbox defect. Figure 2–2 shows how the cost of deterioration in plant condition rises as the equipment decays, with the occasional sudden or gradual increases as the consequential effects add to overall costs. 2.2.3 Cost of Current Maintenance Strategy The cost of a maintenance engineering department as a whole should be fairly clearly documented, including wages, spares, overheads, and so on; however, it is usually dif- ficult to break this cost down into individual plant items and virtually impossible to allocate an accurate proportion of this total cost to a single component’s maintenance. In addition, overall costs will rise steadily in respect to routine plant maintenance as the equipment deteriorates with age and needs more careful attention to keep it running smoothly. Figure 2–3 outlines the cost of a current planned preventive maintenance strategy and shows it to be a steady outflow of cash for labor and spares, increasing as the plant ages. Financial Implications and Cost Justification 27 If CM is to replace planned preventive maintenance, considerable savings may be real- ized in the spares and labor requirement for the plant, which may be found to be over- maintained. This is more common than one might expect because maintenance has always believed that regular prevention is much less costly than a serious breakdown in service. Unit replacement at weekends or during a stop period is not reflected in lost production figures, and the cost of stripping and refurbishing the plant is often lost in the maintenance department’s wage budget for the year. In other words, the cost of planned preventive maintenance on plant and equipment can be a constant drain on resources that goes undetected. Accordingly, it should really be made avail- able for comparison with the cost of monitoring the unit’s condition on a regular basis and applying corrective measures only when needed. 28 An Introduction to Predictive Maintenance Condition deteriorating Time/usage (hours) (-ve) Cash outflow ( ) 0 0 Plant in good condition Extra cost due to knock-on effect Increasing consumption of fuel, spares, etc. Steady cost of fuel, spares, etc. S Figure 2–2 Typical cost of deterioration in plant condition. Time/usage (hours) (-ve) Cash outflow ( ) 0 0 Cost of routine ppm Increasing cost as major components begin to fail Increasing wear on moving parts Plant ‘as new’ S Figure 2–3 Typical cost of a preventive maintenance strategy. 2.3 JUSTIFYING PREDICTIVE MAINTENANCE In general, the cost of any current maintenance position is largely vague and unpre- dictable. This is true even if enough data are available to estimate past expenditure and allocate this precisely to a particular plant item. Thus, if we are to make any sense of financial justification, we must somehow overcome this impasse. The reduced cost of maintenance is usually the first factor that a financial manager looks at when we present our case, even though the real but intangible savings come from reduced down- time. Ideally, past worksheets should give the aggregated maintenance hours spent on the plant. These can then be pro-rated against total labor costs. Similarly, the spares consumption recorded on the worksheets can be multiplied by unit costs. The cost of the maintenance strategy for the plant will then be the labor cost plus the spares cost plus an overhead element. Unfortunately, the nearest we are likely to get to a value for maintenance overheads will be to take the total maintenance department’s overhead value and multiply it by the plant’s maintenance labor cost, divided by the total maintenance labor cost. Even if we manage to arrive at a satisfactory figure, its justification will be queried if we cannot show it as a tangible savings, either resulting from reduced staffing levels in the maintenance department or through reduced spares consumption, which would also be acceptable as a real savings. The estimates will need to be aggregated and grouped according to how they can be allocated (e.g., whether they are downtime- based, total cost per hour the plant is stopped, frequency-based, recovery cost per breakdown, or general cost of regaining customer orders and confidence after failure to deliver). By using these estimates, plus the performance data that have been col- lected, it should then be possible to estimate the cost of machine failure and poor per- formance during the past few years or months. In addition, it should also be possible to allocate a probable savings if machine performance is improved by a realistic amount. It may even be possible to create a traditional cash flow diagram showing expenses against savings and the final breakeven point, although its apparent precision is much less than the quality of the data would suggest. If we aggregate the graphs for the cost of the current maintenance situation, and plot that alongside the expected costs after installing CM, as shown in Figure 2–4, then the area between the two represents the potential savings. Figure 2–5, conversely, shows how the cost of installing CM equip- ment is high at first, until the capital has been paid off, and then the operating cost becomes fairly low but steady during the life of the CM equipment. Put against the savings, there will be both the capital and running costs of introduc- ing a CM project to be considered, which are outlined as follows. 2.3.1 Installation Cost Some of the capital cost will be clearly defined by the equipment price and any spe- cialist installation cost. There may also be preliminary alterations required, such as Financial Implications and Cost Justification 29 creating access, installing foundations, covering or protection, power supply, service access, and so on. Some or all may be subject to development grants or other finan- cial inducement, as may the cost of consultancy before, during, or after the installa- tion. This could well include the cost of producing a financial project justification. The cost of lost production during installation may be avoided if the equipment is installed during normal product changes or shutdown periods; however, in a continuous process this may be another overhead to be added to the initial capital investment. Finally, it may be necessary to send staff to a training course, which has not been included in the equipment price. The cost of staff time and the course itself may be offset by train- ing grants in some areas, which should be investigated. It is also possible that the 30 An Introduction to Predictive Maintenance Time/usage (hours) (-ve) Aggregated running costs Cash outflow ( ) 0 0 Likely running cost if CM eliminates stoppages Potential saving S Figure 2–4 Typical potential savings produced by use of condition monitoring. Time (hours) (-ve) Installation of CM system Cash outflow ( ) 0 0 Pay off cost of installation Routine operation of CM system S Figure 2–5 Typical cost of condition monitoring installation and operation. vendor will offer rental terms on the CM equipment, in which case the cost becomes part of the operating rather than the capital budget. 2.3.2 Operating Cost Once the unit has been installed and commissioned, the major cost is likely to be its staffing requirement. If the existing engineering staff has sufficient skill and training, and the improved plant performance reduces their workload sufficiently, then operat- ing the equipment and monitoring its results may be absorbed without additional cost. In our experience, this time-saving factor has often been ignored in justifying the case for improved maintenance techniques. In retrospect, however, it has proved to be one of the main benefits of installing a computer-based monitoring system. For example, a cable maker found that his company had increased its plant capacity by 50 percent during the year after the introduction of computer-based maintenance. Yet the level of maintenance staff needed to look after the plant had remained unchanged. This amounted to a 60 percent improvement in overall productivity. Another example of this effect was a drinks manufacturer who used a computerized scheduler to change from time-based to usage-based maintenance. This was done because demands on production fluctuated rapidly with changes in the weather. As a result, the workload on the maintenance trades fell so far that they were able to main- tain an additional production line without any staffing increase at all. If these savings can be made by better scheduling, how much more improvement in labor availability would there be if maintenance could be related to a measurable plant condition, and the servicing planned to coincide with a period of low activity in the production or maintenance schedule? So, the ongoing cost of labor needed to run the CM project must be assessed carefully and balanced against the potential labor savings as performance improves. Other continuing costs must also be considered, such as the fuel or consumables needed by the unit; however, these costs are normally small, and recent trends have shown that consumable costs tend to decrease as more companies turn to this type of equipment. Combining the aforementioned initial costs and savings should result in an early outflow of cash investment in equipment and training, but this soon crosses the breakeven point within an acceptable period. It should then level off into a steady profit, which represents a satisfying return on the initial investment, as reduced main- tenance costs, plus improved equipment performance, are realized as overall financial gains. Figure 2–6 indicates how the cash flow from investment in CM moves through the breakeven point into a region of steady positive financial gain. 2.3.3 Conclusions In conclusion, it is possible to say that the financial justification for installation of any item of CM equipment should based on a firm business plan, where investment cost is offset by quantified financial benefits; however, the vagueness of the factors avail- Financial Implications and Cost Justification 31 able for quantification, the lack of firm tangible benefits, and the financial environ- ment in which maintenance engineers operate all conspire to make the construction of such a plan difficult. Until the engineer is given the facilities to collect and analyze performance data accu- rately and consistently; until the engineering and manufacturing departments are inte- grated under a precise standard value-costing system; and until the maintenance engineering function is given the status of a profit center, then financial justification will never become the precise science it should be. Instead, the more normal process is one in which an engineer makes a decision to install a CM system and then backs it up with precise-looking figures based on imprecise data. Fortunately, once the improved system has been approved, its performance is only rarely monitored against that estimated in the original business plan. This is largely because the financial values or benefits achieved are even more difficult to extract and quantify in a post- installation audit than those in the original business plan. 2.4 ECONOMICS OF PREVENTIVE MAINTENANCE Maintenance is, and should be, managed like a business; however, few maintenance managers have the basic skill and experience needed to understand the economics of an effective business enterprise. This section provides a basic understanding of main- tenance economics. 32 An Introduction to Predictive Maintenance Time/usage (hours) (-ve) (+ve) Cash outflow ( ) 0 0 Cash saving Potential savings from CM Cost of installing CM Break even point Net cash flow S Figure 2–6 Typical overall cash flow from an investment in predictive maintenance. 2.4.1 Benefits versus Costs Preventive maintenance is an investment. Like anything in which we invest money and resources, we expect to receive benefits from preventive maintenance that are greater than our investment. The following financial overview is intended to provide enough knowledge to know what method is best and what the financial experts will need to know to provide assistance. Making preventive investment trade-offs requires consideration of the time-value of money. Whether the organization is profit-driven, not-for-profit, private, public, or government, all resources cost money. The three dimensions of payback analysis are (1) the money involved in the flow, (2) the period over which the flow occurs, and (3) the appropriate cost of money expected over that period. Preventive maintenance analysis is usually either “Yes/No” or choosing one of several alternatives. With any financial inflation, which is the time we live in, the time-value of money means that a dollar in your pocket today is worth more than that same dollar a year from now. Another consideration is that forecasting potential outcomes is much more accurate in the short term than it is in the long term, which may be several years away. Decision-making methods include the following: • Payback • Percent rate of return (PRR) • Average return on investment (ROI) • Internal rate of return (IRR) • Net present value (NPV) • Cost–benefit ratio (CBR) The corporate controller often sets the financial rules to be used in justifying capital projects. Companies have rules like, “Return on investment must be at least 20 percent before we will even consider a project” or “Any proposal must pay back within 18 months.” Preventive maintenance evaluations should normally use the same set of rules for consistency and to help achieve management support. It is also important to realize that the political or treasury drivers behind those rules may not be entirely logical for your level of working decision. Payback Payback simply determines the number of years that are required to recover the orig- inal investment. Thus, if you pay $50,000 for a test instrument that saves downtime and increases production worth $25,000 a year, then the payback is: This concept is easy to understand. Unfortunately, it disregards the fact that the $25,000 gained the second year may be worth less than the $25,000 gained this year $, $, years 50 000 25 000 2= Financial Implications and Cost Justification 33 because of inflation. It also assumes a uniform stream of payback, and it ignores any returns after the two years. Why two years instead of any other number? There may be no good reason except “The controller says so.” It should also be noted that if simple payback is negative, then you probably do not want to make the investment. Percent Rate of Return (PRR) Percent rate of return is a close relation of payback that is the reciprocal of the payback period. In our case above: This is often called the naive rate of return because, like payback, it ignores the cost of money over time, compounding effect, and logic for setting a finite time period for payback. Return on Investment (ROI) Return on investment is a step better because it considers depreciation and salvage expenses and all benefit periods. If we acquire a test instrument for $80,000 that we project to have a five-year life, at which time it will be worth $5,000, then the cost calculation, excluding depreciation, is: If we can benefit a total of $135,000 over that same five years, then the average incre- ment is: The average annual ROI is: Ask your accounting firm how they handle depreciation because that expense can make a major difference in the calculation. Internal Rate of Return (IRR) Internal rate of return is more accurate than the preceding methods because it includes all periods of the subject life, considers the costs of money, and accounts for differ- $, $3, 75 000 1 5 000 55 55==.% $3, $ , $0, years $ 2, per year1 5 000 75 000 6 000 5 1 000-= = $0 $ years $ per year 8 000 50 000 5 15 000 ,, , - () = $, $0, rate of return 25 000 5 000 05 50==.% 34 An Introduction to Predictive Maintenance ing streams of cost and/or return over life. Unfortunately, the calculation requires a computer spreadsheet macro or a financial calculator. Ask your controller to run the numbers. Net Present Value (NPV) Net present value has the advantages of IRR and is easier to apply. We decide what the benefit stream should be by a future period in financial terms. Then we decide what the cost of capital is likely to be over the same time and discount the benefit stream by the cost of capital. The term net is used because the original investment cost is subtracted from the resulting present value for the benefit. If the NPV is pos- itive, you should do the project. If the NPV is negative, then the costs outweigh the benefits. Cost–Benefit Ratio (CBR) The cost–benefit ratio takes the present value (initial project cost + NPV) divided by the initial project cost. For example, if the project will cost $250,000 and the NPV is $350,000, then: It may appear that the CBR is merely a mirror of the NPV. The valuable addition is that CBR considers the size of the financial investment required. For example, two competing projects could have the same NPV, but if one required $1 million and the other required only $250,000, that absolute amount might influence the choice. Compare the previous example with the $1 million example: There should be little question that you would take the $250,000 project instead of the $1 million choice. Tables 2–1 through 2–5 provide the factors necessary for eval- uating how much an investment today must earn over the next three years in order to achieve a target ROI. This calculation requires that we make a management judgment on what the inflation/interest rate will be for the payback time and what the pattern of those paybacks will be. For example, if we spend $5,000 today to modify a machine in order to reduce break- downs, the payback will come from improved production revenues, reduced mainte- nance labor, having the right parts, tools, and information to do the complete job, and certainly less confusion. The intention of this brief discussion of financial evaluation is to identify factors that should be considered and to recognize when to ask for help from accounting, control, $1, 0 , $ , $1, 0 , 0 0 000 350 000 0 0 000 135 + = . $, $, $, 250 000 350 000 250 000 24 + = . Financial Implications and Cost Justification 35 36 An Introduction to Predictive Maintenance Table 2–1 Future Value Interest Periods 1% 2% 4% 10% 15% 20% 1 1.010 1.020 1.040 1.100 1.150 1.200 2 1.020 1.040 1.082 1.210 1.322 1.440 3 1.030 1.061 1.125 1.331 1.521 1.728 4 1.041 1.082 1.170 1.464 1.749 2.074 5 1.051 1.104 1.217 1.610 2.011 2.488 6 1.062 1.126 1.265 1.772 2.313 2.986 7 1.072 1.149 1.316 1.316 2.660 3.583 8 1.083 1.172 1.369 1.369 3.059 4.300 9 1.094 1.195 1.423 1.423 3.518 5.160 10 1.105 1.219 1.480 1.480 4.046 6.192 11 1.116 1.243 1.539 1.539 4.652 7.430 12 1.127 1.268 1.601 1.601 5.350 8.916 18 1.196 1.428 2.026 2.026 12.359 26.623 24 1.270 1.608 2.563 2.563 36 1.431 2.040 4.104 4.104 48 1.612 2.587 6.571 6.571 60 1.817 3.281 10.520 10.520 Future Value n =+ () Princi p al 1 Interest Table 2–2 Present Value Interest Periods 1% 2% 4% 10% 15% 20% 1 .990 .980 .962 .909 .870 .833 2 .980 .961 .925 .826 .756 .694 3 .971 .942 .889 .751 .658 .579 4 .961 .924 .855 .683 .572 .482 5 .951 .906 .822 .621 .497 .402 6 .942 .888 .790 .564 .432 .335 7 .933 .871 .760 .513 .376 .279 8 .923 .853 .731 .467 .327 .233 9 .914 .837 .703 .424 .284 .194 10 .905 .820 .676 .386 .247 .162 11 .896 .804 .650 .350 .215 .135 12 .887 .788 .625 .319 .187 .112 18 .836 .700 .494 .180 .081 .038 24 .788 .622 .390 .102 .035 .013 36 .699 .490 .244 .032 48 .620 .387 .152 60 .550 .305 .096 PV S i n = + () 1 1 [...]... 7 .21 4 8 .28 6 9.369 10.4 62 11.567 12. 683 7.434 8.583 9.755 10.950 12. 169 13.4 12 7.898 9 .21 4 10.583 12. 006 13.486 15. 026 9.487 11.436 13.579 15.937 18.531 21 .384 11.067 13. 727 16.786 20 .304 24 .349 29 .0 02 12. 916 16.499 20 .799 25 .959 32. 150 39.580 18 24 36 48 60 19.615 26 .973 43.077 61 .22 3 81.670 21 .4 12 30. 422 51.994 79.354 114.0 52 25.645 39.083 77.598 139 .26 3 23 7.991 45.599 88.497 29 9. 127 960.1 72 * 75.836... 155 137 122 111 1 02 095 167 149 135 123 114 107 20 5 187 174 163 154 147 24 0 22 3 21 0 199 191 184 27 7 26 1 24 8 23 9 23 1 22 5 061 047 0033 026 022 067 053 038 0 32 028 079 066 051 045 043 120 111 094 0 92 091 163 155 151 150 150 20 8 20 3 20 0 20 0 20 0 1% 2% 1 2 3 4 5 6 1.010 508 340 25 6 20 6 173 7 8 9 10 11 12 18 24 36 48 60 and finance experts Financial evaluation of preventive maintenance is divided generally into... 1.736 2. 487 3.170 3.791 4.355 870 1. 626 2. 283 2. 855 3.3 52 3.784 833 1. 528 2. 106 2. 589 2. 991 3. 326 6.4 72 7. 325 8.1 62 8.983 9.787 10.575 6.0 02 6.733 7.435 8.111 8.760 9.385 4.868 5.335 5.759 6.145 6.495 6.814 4.160 4.487 4.7 72 5.019 5 .23 9 5. 421 3.605 3.837 4.031 4.193 4. 327 4.439 14.9 92 18.914 25 .489 30.673 34.761 12. 659 15 .24 7 18.908 21 .195 22 . 623 8 .20 1 8.985 9.677 9.897 9.967 6. 128 6.434 6. 623 4.999...Table 2 3 Future Value of Annuity in Arrears, Value of a Uniform Series of Payments n Ê (1 + i ) - 1ˆ USCA = PÁ ˜ Ë ¯ i Periods Interest 4% 1% 2% 10% 15% 20 % 1 2 3 4 5 6 1.000 2. 010 2. 030 4.060 5.101 6.1 52 1.000 2. 020 3.060 4. 122 5 .20 4 6.308 1.000 2. 040 3. 122 4 .24 6 5.416 6.633 1.000 2. 100 3.310 4.641 6.105 7.716 1.000 2. 150 3.4 72 4.993 6.7 42 8.754 1.000 2. 200 3.640 5.368 7.4 42 9.930 7 8 9 10 11 12 7 .21 4... 6.665 4.8 12 4.937 4.993 4.999 5.000 38 An Introduction to Predictive Maintenance Table 2 5 Capital Recovery, Uniform Series with Present Value $1 n Ê i(1 + i ) ˆ CP = PÁ ˜ Ë (1 + i )n - 1¯ Periods Interest 4% 10% 15% 20 % 1. 020 515 347 26 3 21 2 179 1.040 530 360 27 5 22 5 191 1.100 576 4 02 315 26 4 23 0 1.150 615 438 350 29 8 26 4 1 .20 0 654 475 386 334 301 149 131 117 106 096 089 155 137 122 111 1 02 095 167... * 128 .117 3 92. 484 * * * * Over 1,000 Table 2 4 Present Value of Annuity in Arrears, Uniform Series Worth Factor (1 + i )n - 1 PVAn = S i(1 + i )n Period 1% 2% 1 2 3 4 5 6 990 1.970 2. 941 3.9 02 4.853 5.795 980 1.9 42 2.884 3.808 4.713 5.601 7 8 9 10 11 12 6. 728 7.6 52 8.566 9.471 10.368 11 .25 5 18 24 36 48 60 16.398 21 .24 3 30.118 37.974 44.955 Interest 4% 10% 15% 20 % 9 62 1.886 2. 775 3.630 4.4 52 5 .24 2 909... OF PREDICTIVE MAINTENANCE Predictive maintenance is not a substitute for the more traditional maintenance management methods It is, however, a valuable addition to a comprehensive, totalplant maintenance program Where traditional maintenance management programs rely on routine servicing of all machinery and fast response to unexpected failures, a predictive maintenance program schedules specific maintenance. .. Including predictive maintenance in a total-plant management program will optimize the availability of process machinery and greatly reduce the cost of maintenance In reality, predictive maintenance is a condition-driven preventive maintenance program The benefits that are derived from using predictive maintenance technologies depend on the way the program is implemented If the predictive maintenance. .. preventive maintenance How do you track these costs? Figure 2 8 shows a simple record-keeping spreadsheet that helps keep data on a month-by-month basis  42 An Introduction to Predictive Maintenance It should be obvious that you must keep cost data for all maintenance efforts in order to evaluate financially the cost and benefits of preventive versus corrective maintenance and revenues A computerized maintenance. .. for something to break 3 .2. 1 Three Types of Maintenance There are three main types of maintenance and three major divisions of preventive maintenance, as illustrated in Figure 3–1: • Maintenance improvement • Corrective maintenance • Preventive maintenance • Reactive • Condition monitoring • Scheduled Maintenance Improvement Picture these divisions as the five fingers on your hand Maintenance improvement . 4.6 52 7.430 12 1. 127 1 .26 8 1.601 1.601 5.350 8.916 18 1.196 1. 428 2. 026 2. 026 12. 359 26 . 623 24 1 .27 0 1.608 2. 563 2. 563 36 1.431 2. 040 4.104 4.104 48 1.6 12 2.587 6.571 6.571 60 1.817 3 .28 1 10. 520 . 1.000 1.000 1.000 2 2.010 2. 020 2. 040 2. 100 2. 150 2. 200 3 2. 030 3.060 3. 122 3.310 3.4 72 3.640 4 4.060 4. 122 4 .24 6 4.641 4.993 5.368 5 5.101 5 .20 4 5.416 6.105 6.7 42 7.4 42 6 6.1 52 6.308 6.633 7.716. 18.531 24 .349 32. 150 12 12. 683 13.4 12 15. 026 21 .384 29 .0 02 39.580 18 19.615 21 .4 12 25.645 45.599 75.836 128 .117 24 26 .973 30. 422 39.083 88.497 184.168 3 92. 484 36 43.077 51.994 77.598 29 9. 127 *