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Edward Lowton
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ARTICLE
Bridging a gap
25 January 2013
Value Driven Maintenance builds a bridge between traditional maintenance philosophies and managing by shareholder value.Mick Saltzer of Mainnovation UK, explains Afrequently heard question in boardrooms the world over
Value Driven Maintenance builds a bridge between
traditional maintenance philosophies and managing by
shareholder value.Mick Saltzer of Mainnovation UK, explains
Afrequently heard question in boardrooms the world over is: 'What is actually the added value of maintenance?' Even though maintenance is critically important, few maintenance managers are able to answer the question convincingly. Especially when they are asked to express the benefits in terms of economic value added or shareholder value.
What is value? Before you can manage by shareholder value, you have to understand what exactly value is.
In theory, value is defined as 'the sum of all future free cash flows, discounted to today'.
Sounds impressive, but what precisely does it mean? A cash flow is the difference between income and expenditure. This is not the same as the difference between revenues and costs, because that's an item that can be greatly influenced by accounting practices.
The second part of the definition stems from the knowledge that the value of a cash flow is related to time. One euro is worth more today than one euro next year. This is because you can deposit a euro at the bank today and use it to generate income over a period of one year. Therefore, we have to adjust future cash flows.
Value of maintenance A maintenance manager is likely to say: 'This theoretical approach is all very well, but what good is it to me in practice? The value of maintenance comes from delivering maximum availability at minimum cost!'While this is true in theory, it's little help in the day to day operation. This is because you have to prioritise: do you want to reduce costs or increase uptime? Is a 1% increase in uptime as valuable as a 1% reduction in costs? How do you determine the value of safety? Value Driven Maintenance or VDM provides answers by identifying the value potential of the four value drivers in maintenance and enabling you to manage by those drivers (see figure 1).
Figure 1 shows what maintenance is all about. Today's maintenance managers are constantly balancing between higher machine availability (asset utilisation) and lower maintenance costs (cost control). In doing so, they must take into account safety, health and environment regulations. To make everything work, they need to use the right technicians, spare parts, knowledge and contractors (resource allocation).
For all four value drivers, maintenance can help to increase a company's economic value.
In a market where there is more demand than supply, greater machine availability results in more products, more income and thus higher value. On the other hand, lower maintenance costs produce higher value by avoiding expenditure. The same applies to resource allocation. One example is a technical storeroom. Smarter inventory management of spare parts can enormously increase value for a company.
Similarly, the safety, health and environment (SHE) factor affects value. SHE accidents tend to necessitate substantial expenditure, with resulting negative cash flows. Damage caused to personnel, environment and image, for example, will increase expenditure. An even greater danger is loss of the license to operate because of inability to comply with SHE legislation. No license to operate means no production and no income.
Value potential Maintenance managers must show where there is potential for value within their maintenance organisation. VDM provides calculation models and tools for this purpose. For example, in the bulk chemical industry there is currently less demand than supply and worldwide prices are under considerable pressure. The value potential here lies mainly in controlling costs and the smarter deployment of people and resources.
Value and time The next example shows that value depends not only on the industry concerned, but also on time and the market dynamics. In the aviation industry, traditionally the focus was on increasing fleet availability and meeting the regulations of the Aviation Authorities.
As a result of 9/11, there was a reduction in the demand for air travel. Thus, the focus shifted from fleet availability to cost control and required a complete change of thinking.
The economic climate, external factors and market conditions will all impact on determining which is the dominant value drivers at any point in time - and the VDM methodology will help guide the way.
Value and competences Once the value potential has been identified, the maintenance function must be organised accordingly.Which competences are, and are not, important? There will be little point in giving priority to reducing the stock of spare parts if the value potential lies in more uptime. Unfortunately, we all too often see that these decisions are not made by the maintenance department. VDM does do this, however, and it makes a link between value drivers and core competences (see figure 2).
Maintenance Core Competences Take again the example of bulk chemicals.
The market situation means that most value is currently achievable by controlling costs.
So the right-hand value circle must be configured from maintenance budgeting to cost analysis. Interestingly, both value circles include the competences of reliability engineering, planning & preparation and maintenance execution. These competences are the link between the four value drivers and thus form the heart of VDM.
Value and best practices Now that we know the important competences, the next step is to organise and control them in the right way. For this purpose VDM puts forward best practices from leading maintenance philosophies.
Total Productive Maintenance (TPM) enjoys a reputation as the best practice for registering, analysing and improving production losses (asset utilisation) in discrete production. In contrast, Asset Based Costing (ABC) is a proven best practice for properly controlling maintenance costs.
Using these, a technical department can quickly become a professional maintenance organisation that adds value to the overall business performance.
Valuable? Is VDM valuable? A growing number of multinationals in Europe and the United States think it is.Managing by value is not just a must, it is the only way to discover the true significance of maintenance.VDM makes maintenance more than a cost centre because it contributes in various ways to a company's economic prosperity.
In fact, Value Driven Maintenance confirms what we already thought, but now we have the proof!
Afrequently heard question in boardrooms the world over is: 'What is actually the added value of maintenance?' Even though maintenance is critically important, few maintenance managers are able to answer the question convincingly. Especially when they are asked to express the benefits in terms of economic value added or shareholder value.
What is value? Before you can manage by shareholder value, you have to understand what exactly value is.
In theory, value is defined as 'the sum of all future free cash flows, discounted to today'.
Sounds impressive, but what precisely does it mean? A cash flow is the difference between income and expenditure. This is not the same as the difference between revenues and costs, because that's an item that can be greatly influenced by accounting practices.
The second part of the definition stems from the knowledge that the value of a cash flow is related to time. One euro is worth more today than one euro next year. This is because you can deposit a euro at the bank today and use it to generate income over a period of one year. Therefore, we have to adjust future cash flows.
Value of maintenance A maintenance manager is likely to say: 'This theoretical approach is all very well, but what good is it to me in practice? The value of maintenance comes from delivering maximum availability at minimum cost!'While this is true in theory, it's little help in the day to day operation. This is because you have to prioritise: do you want to reduce costs or increase uptime? Is a 1% increase in uptime as valuable as a 1% reduction in costs? How do you determine the value of safety? Value Driven Maintenance or VDM provides answers by identifying the value potential of the four value drivers in maintenance and enabling you to manage by those drivers (see figure 1).
Figure 1 shows what maintenance is all about. Today's maintenance managers are constantly balancing between higher machine availability (asset utilisation) and lower maintenance costs (cost control). In doing so, they must take into account safety, health and environment regulations. To make everything work, they need to use the right technicians, spare parts, knowledge and contractors (resource allocation).
For all four value drivers, maintenance can help to increase a company's economic value.
In a market where there is more demand than supply, greater machine availability results in more products, more income and thus higher value. On the other hand, lower maintenance costs produce higher value by avoiding expenditure. The same applies to resource allocation. One example is a technical storeroom. Smarter inventory management of spare parts can enormously increase value for a company.
Similarly, the safety, health and environment (SHE) factor affects value. SHE accidents tend to necessitate substantial expenditure, with resulting negative cash flows. Damage caused to personnel, environment and image, for example, will increase expenditure. An even greater danger is loss of the license to operate because of inability to comply with SHE legislation. No license to operate means no production and no income.
Value potential Maintenance managers must show where there is potential for value within their maintenance organisation. VDM provides calculation models and tools for this purpose. For example, in the bulk chemical industry there is currently less demand than supply and worldwide prices are under considerable pressure. The value potential here lies mainly in controlling costs and the smarter deployment of people and resources.
Value and time The next example shows that value depends not only on the industry concerned, but also on time and the market dynamics. In the aviation industry, traditionally the focus was on increasing fleet availability and meeting the regulations of the Aviation Authorities.
As a result of 9/11, there was a reduction in the demand for air travel. Thus, the focus shifted from fleet availability to cost control and required a complete change of thinking.
The economic climate, external factors and market conditions will all impact on determining which is the dominant value drivers at any point in time - and the VDM methodology will help guide the way.
Value and competences Once the value potential has been identified, the maintenance function must be organised accordingly.Which competences are, and are not, important? There will be little point in giving priority to reducing the stock of spare parts if the value potential lies in more uptime. Unfortunately, we all too often see that these decisions are not made by the maintenance department. VDM does do this, however, and it makes a link between value drivers and core competences (see figure 2).
Maintenance Core Competences Take again the example of bulk chemicals.
The market situation means that most value is currently achievable by controlling costs.
So the right-hand value circle must be configured from maintenance budgeting to cost analysis. Interestingly, both value circles include the competences of reliability engineering, planning & preparation and maintenance execution. These competences are the link between the four value drivers and thus form the heart of VDM.
Value and best practices Now that we know the important competences, the next step is to organise and control them in the right way. For this purpose VDM puts forward best practices from leading maintenance philosophies.
Total Productive Maintenance (TPM) enjoys a reputation as the best practice for registering, analysing and improving production losses (asset utilisation) in discrete production. In contrast, Asset Based Costing (ABC) is a proven best practice for properly controlling maintenance costs.
Using these, a technical department can quickly become a professional maintenance organisation that adds value to the overall business performance.
Valuable? Is VDM valuable? A growing number of multinationals in Europe and the United States think it is.Managing by value is not just a must, it is the only way to discover the true significance of maintenance.VDM makes maintenance more than a cost centre because it contributes in various ways to a company's economic prosperity.
In fact, Value Driven Maintenance confirms what we already thought, but now we have the proof!
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