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Achieving Operational Excellence

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1 Achieving Operational Excellence
Nancy Majure – EAM North America Proprietary and confidential. Property of QAD, Inc. Not to be distributed or reused without prior written consent from QAD, Inc. This guide is intended to be a tool with which you can return to your own organization to begin or continue your journey towards optimal plant performance. The information in this guide draws heavily on the expertise of Ramesh Gulati in his book Maintenance and Reliability Best Practices , Industrial Press Inc, We recommend this book as a trusted reference for all areas involved in Maintenance and Reliability. Revision 2.1

2 Content Maintenance and Reliability Overview
Managing On-Time and Within-Budget Projects MRO Inventory and Purchasing – Getting Control of Operational Costs Optimizing Plant Performance and Improving Capacity Appendices Each section of this workshop is designed to help you identify where you are today with your Maintenance and Reliability program and then determine a path forward for improving your operations. Along the way, we will identify “low-hanging fruit” that you can begin to implement immediately upon your return to your base of operations.

3 Goals of this Seminar Understand and be able to express the benefits of improving Asset Management processes Take away tips that can be acted on today Develop a long-range vision to elevate your plant operations to best practice or even world class This seminar is unlike a traditional software training class. The purpose of this presentation is to equip you with software-agnostic knowledge and tips that you can begin acting upon immediately upon your return to your business. Along the way, we will provide you with measures and indicators that you can use to either begin or continue on your journey to improve your Maintenance and Reliability programs to industry leader status. As we begin this journey, ask yourself the following questions: Is my plant running today at its optimal capacity to support orders? CAN my plant run at optimal capacity if needed to support our customers? Do we have late shipments due to production outages or quality issues? What value does leadership place on operational improvement and the maintenance required to sustain it? Do we spend capital money, and if so, how healthy is our organization in controlling those budgets? Do we have a culture that encourages Engineering, Operations, and Maintenance to work closely and communicate effectively? What regularly posted key performance indicators do I see around my facility? Does leadership demonstrate that it values reliability in the measures posted? How does my organization regard the value of indirect inventory? Do I frequently hear that we cannot justify resources to better control that inventory? How are our buyers regarded – as data entry clerks or as valued contributors to the overall bottom line? Not every organization can take on every improvement opportunity at one time, but if you have the opportunity to take a big leap, you will certainly realize the benefits much more quickly. If you must move more slowly on your journey, the key is to identify your own “low hanging fruit” and begin to harvest it as you move your organization to a culture of operational excellence.

4 Maintenance and Reliability Overview
To begin to understand the importance of Maintenance and Reliability in our organizations, we must first have a common understanding of terminology and performance indicators as a foundation for our discussions. In the following section, we will discuss some important measures and how to assess your current state.

5 Important Values to Know
Acquisition Cost (or Capital Costs) Internal Labor, Purchased Materials, Subcontractor Costs, Internal Material, Expenses Obtained during Design, Construction, and Commissioning Total Cost of Ownership Obtained during Operation and Maintenance Maintenance Cost Acquisition Cost + Total Cost of Ownership Replacement Asset Value (RAV) Usually from Insurance Carrier or Engineering What it would cost to replace your facility Throughout this seminar we will discuss plant performance in relation to some key measures. Some of these measures may not even be available to you today if you do not have an asset management system in place that has been collecting these costs and building history. You should at least be able to obtain a baseline of your Annual Maintenance cost, though often that number can be missing some critical costs. Ask what costs make up your Annual Maintenance Cost and identify holes that should be filled. Replacement Asset Value (RAV) is a value that should come from your insurance company. This is what it would cost today to completely replace your facility, and should include estimated costs for dismantling, removing, and disposing of current assets. If this value is not readily available, Engineering should be able to provide a ball-park figure.

6 First Step – Where are You?
100% 0% >85% <15% CM PM Best Practices World Class Reactive CM PM Stage 1 Run to failure No records Stage 2 PM Critical Assets (Cal) No CM recorded Stage 3 PM Program (Cal) Some CM recorded Stage 4 PM (Cal & DUOM) All CM recorded Stage 5 PMs and PdMs All CM recorded The starting point in any initiative to improve Plant Operational Performance is to determine where your organization is today in terms of reactive versus proactive cultures. By honestly identifying your current state, you can begin to develop a maintenance plan that will move you forward on your journey to high-availability, high-quality, at optimal cost. The graph on this slide shows various stages in an organization’s health as a reliable plant. This graph is a result of this author’s 18-plus years in the plant maintenance and reliability field in hundreds of manufacturing facilities across all verticals. My experience has taught me that there are many shades of gray along the way. However, these stages represent typical phases characterized by certain traits. As you read through the following descriptions of those stages, begin to identify where your organization is today. Keep in mind that you may have characteristics that cross stages, which is normal. These are high-level stages, but you should be able to locate a stage closest to your current state. Stage 1: The most reactive state, at the far left of this chart is characterized by an operational culture that allows machinery and other assets to continue to run until they fail. At this phase of evolution, maintenance cost will be very high, although those costs are often “hidden” and not accurately accumulated. Because these costs are often hidden, companies at this stage will frequently find it difficult to justify implementing a more proactive maintenance plan just based upon maintenance costs. Driving factors for moving beyond this stage would thus more likely be driven by market pressures: poor quality product, missed shipments, high production downtime losses, lost business, etc. Stage 2: When market pressures drive a company to start moving away from a reactive culture, the most common first step is to introduce a preventive maintenance (PM) program for their most critical assets. These PMs are most commonly on a spreadsheet or other manually managed document, and they are calendar driven with no consideration for actual usage of the asset being maintained. At this point, a business may also begin to collect some information on corrective maintenance, though again, this documentation is usually manual and is not a complete picture of all maintenance activity. Usually in Stage 2, most maintenance costs still remain hidden within the overall operational bucket of costs. Stage 3: As a company begins to realize the value of preventing failures before they occur, a common next step in evolution would be to expand the PM program to include most assets, including secondary support equipment, though typically the driving factor for PM release will still be calendar driven. At this point, the PM program may still be controlled manually via spreadsheet, but use of a software solution to support the expanded list quickly becomes a necessity in order to demonstrate PM compliance. Usually at this stage, the maintenance organization is beginning to see the value of capturing corrective events in order to help them to further refine their PM program. And MRO (maintenance repair operations) inventory begins to be controlled and tracked, at least for critical repair parts. Because internal inventory may not have been tracked in previous stages, inventory costs will likely go up as that visibility is improved. In Stage 3, companies must take care to realize that they are now beginning to capture more effectively their true maintenance cost. This can lead to alarm and even pressures to “return to the old ways”. Leadership in this phase must be educated with regards to this seeming growth in maintenance cost, when the reality is that those costs must be compared to operational improvements reducing cost of goods sold. The alarm resulting from initial visibility into true maintenance costs can and should be leveraged to propel a business forward in the continued journey towards a more proactive culture. A reasonable and future-minded leadership group must understand that maintenance costs will likely go up as those costs are properly collected and as efforts are being made to prevent failures. BUT the end goal is to reduce maintenance costs by pushing through the culture changes towards Best Practice. That is where the cost reductions begin to be realized! Stage 4: In this stage, a company has a well established PM program, managed via software, and they have begun to introduce Predictive Maintenance (PdM) elements into their PM program. You will begin to see preventive maintenance work orders driven not just based upon a calendar due date, but more and more based upon meter readings and condition based monitoring. Often technologies such as IR Thermography, Vibration Analysis, Oil Analysis, etc. are introduced in this phase and begin detecting potential failures more accurately. At this phase, companies will ensure that all corrective maintenance activities are properly recorded and coded to allow for Root Cause Analysis and trending to improve their PM program. In Stage 4, MRO and Tooling inventory is carefully controlled and monitored and will include not only critical repair parts but also will include part records for all repair spares. Inventory records will also be created for other parts including consigned, free-issue, vendor managed, or traditional bin quantity controlled supplies. Usually, ownership of all inventory will be assigned to a responsible individual, and the inventory area will be locked with controlled access, preferably manned on all shifts. Replenishment of inventory will be automated instead of spot checked, and stock-out rates will decrease. Capital projects will be characterized by using lessons learned and historical data to begin building in additional reliability and maintainability for at least primary production assets. Engineering will begin to standardize on spare parts to simplify inventory, and critical equipment will be commissioned, including data resulting from FMEA (Failure Mode and Effect Analysis) and RCM (Reliability Centered Maintenance) activities. Commissioning will now include a formal hand-off to operations and maintenance. All costs, including Labor, Inventory, Purchase Costs, Subcontractor Costs, Expenses, etc. will be collected and properly attributed down to the equipment level. While the proper accumulation of cost collection may still trend costs up for a while, in this phase, companies can and should begin to see reductions in maintenance costs over time. Stage 5 WORLD CLASS: At this stage a company’s maintenance organization is running like a well-oiled machine. Advanced detection technology is now a common element of the overall preventive maintenance program, and corrective maintenance events occur less than 15% of the time. This stage is characterized by a high degree of communication and cooperation among production, engineering, purchasing, and maintenance leadership. All new capital projects incorporate a high-level of using historical data to build in additional reliability and maintainability in design, and all new equipment commissioned will be accompanied by specific maintenance plans resulting from FMEA (Failure Mode and Effect Analysis) and RCM (Reliability Centered Maintenance) activities. Equipment will be commissioned with clean and complete bills of material indicating all spare parts, and those spare parts will be standardized to ensure commonality in inventory. Maintenance will be prepared prior to placing assets in operation with recommended preventive maintenance criteria. In this stage, maintenance costs will be optimized and will be more predictable than in any other stages, and overall cost of maintenance will be reduced. 1Benchmarks Best Practice1 World Class1 Schedule Compliance 30% - 50% >90% % Planned Maintenance 10% - 40% >85% Production Breakdown Losses 5%-12% 1%-2% Maint Cost as % of RAV 3%-9% 2.5%-3.5% MRO Cost as % of RAV 2%-4% 0.25%-0.75% “RAV” = Replacement Asset Value, usually from insurance carrier

7 Benchmark – Very Reactive & Basic
1Benchmarks Very Reactive (est.) Basic Maintenance Program (est.) Best Practice1 World Class1 Production Breakdown Losses 25%-30% 15%-20% 5%-12% 1%-2% Maint Cost as % of RAV 3%-9% 2.5%-3.5% MRO Cost as % of RAV 10%-12% 2%-4% 0.25%-0.75% To further expand upon the Best Practice and World Class measures, which are now generally accepted as benchmarks in the community, this author has also added estimated figures for organizations that are “Very Reactive” (Stages 1 to 2) and those that have established the basics of a maintenance program (Stages 2 to 3).

8 Benchmark – Simple Example
QMI Manufacturing RAV = $10,000,000 Annual Sales = $100,000,000 1Benchmarks Very Reactive (est) Basic Maintenance Program (est) Best Practice1 World Class1 Production Breakdown Losses $25 - $30mil $15 - $20mil $5mil - $12mil $1mil - $2mil Maint Cost as % of RAV $2.5 – $3mil $1.5 – $2mil $300k - $900k $250k - $350k MRO Cost as % of RAV $1.5 - $2 mil $1 - $1.2mil $200k - $400k $25k - $35k On this slide, using the Benchmark chart including estimated measures for Stages 1 – 3 organizations, we compare the cost impact to a single fictional organization named QMI. Note the significant difference between “Basic Maintenance Program” and “Best Practice” status. As organizations begin to evolve beyond Stage 3, the benefits can dramatically increase. The RAV (replacement asset value) and Annual Sales are likely very different to your own, but using these round numbers plugged into our Benchmark chart begins to illustrate the benefits of Best Practice and World Class status.

9 Understanding Maintenance & Reliability
Reliability (R) “The probability that an item will perform its intended function for a specific interval under stated conditions.” (p. 20) Strategic task Design feature Maintenance (M) “Objective is to sustain asset reliability and to improve its availability” (p. 4) Tactical task Many people will utilize the terms Maintenance and Reliability interchangeably, but in reality, they represent two very different elements of an organization’s overall plant performance. Reliability is a built-in attribute of an asset. During the Design phase, engineers should learn from past use of similar equipment to improve upon capacity, projected length of services (lifetime), and ease of repair. Once the equipment is placed into service, the window for changing the inherent reliability of an asset is closed. Maintenance picks up once an asset is put into service, and its purpose is to ensure that the asset lives up to its designed-in reliability, capacity, and planned service life. No amount of high quality maintenance activity can overcome innate design flaws. The only way to improve the inherent reliability of an in-service asset is to return it to the design phase for overhaul. As we move throughout this workshop, think about the distinction in these two foundational terms and consider how your company regards and assigns priority to each.

10 Maintenance & Reliability (M&R) Goal
Ensure plant and its assets are available when needed in the most cost effective way with the highest quality to meet customer expectations Industry Leaders Quality producers of product With very competitive cost Known to have the lowest maintenance costs as a percentage of RAV (p. 6) However there is a cost to get there The benefit of combining Reliability and Maintenance best practices is quite simply that your plant is designed to run well and it runs as it is designed to run when it is needed. Along the way, those best practices will result in reduced operational costs, leading directly to improved margin and bottom line. Successful organizations have begun to place high priority on M&R activities and have come to see the immense potential value of improving the way in which they manage the entire life-cycle of their assets. Successful companies no longer view the maintenance organization as just a “cost center” or a “necessary cost of doing business,” but instead have elevated maintenance to have a seat at the table with leadership. Companies who are leaders in their industry are known to be quality producers of product while offering that product at a very competitive price. In addition, these industry leaders consistently demonstrate the lowest maintenance costs as a percentage of their overall replacement asset value (RAV). How did these companies get to be industry leaders? Well, it certainly did not happen overnight, and it did not happen without a solid commitment to invest the time, resources, and funds to do the job right. Per Ramesh Gulati, if a company wishes to see production losses become “small and insignificant” then “all personnel from the executive level to production operators must be responsible for the plant’s assets. The organization management must support the journey to excellence Operators must see assets as something they own which will impact their lives in a positive manner.” Reliability and performance are investments you can only expect to get out of your operations what you are willing put into them. So, let’s take a look at ways in which you can systematically begin to improve your operations. Each company is at its own point along this journey, and each company may move at a different speed, but our destination should be the same – Operational Excellence!

11 Equipment & Asset Life-Cycle
M&R in Asset Lifecycle Commission Operate Maintain Retire / Replace Design Construct Project Controls Asset Management Equipment & Asset Life-Cycle Acquisition Phase: Budget Controls, Acquisition Cost, Reliability & Maintainability Throughout this workshop and guide, we will refer to the “life cycle” of a piece of equipment (or asset). An equipment’s life is divided into two distinct phases: Acquisition Phase – which includes the design, construction and commissioning of a new asset. It is during this phase that an equipment’s inherent reliability and maintainability are decided. Reliability is measured by “MTBF” or Mean Time Between Failure: when will this asset fail and why? This is driven by how the equipment is designed, thus it is critical to include a review of similar equipment already in service to improve upon design and increase MTBF. Maintainability is another designed in feature. It is measured by “MTTR” or Mean Time to Repair. In other words, once this equipment fails, how long will it take to repair? Considerations around maintainability include use of standard repair parts, ease of access to the machine components to repair them, proper standard operating procedures, etc. It is also during this phase that budget performance is most carefully scrutinized by leadership, because in most cases significant capital monies can be consumed very quickly in a Project. Financial measurement goals include: Complete Project on-time and at or below budget Accumulate true “Acquisition Cost” Operation Phase – it is during this phase that the equipment is put into services and passes into the hands of operations and maintenance to keep it running at optimal levels. During this phase we begin collecting “Total Cost of Ownership” for the asset. In order to arrive at an asset’s complete Life Cycle Cost, we must combine the costs from both the Acquisition Phase and the Operation phase. Thus: Life Cycle Cost = Acquisition Cost + Total Cost of Ownership In general, 80% of an asset’s Life Cycle Cost (LCC) is spent during its Operation phase of existence. Think about how much attention and oversight and control is exercised in your company in the Acquisition phase? It is probably quite significant. Yet, consider that the project costs there only represent about 20% of an equipment’s overall LCC. Shouldn’t it be even more critical to spend that same kind of attention on the Operations Phase? Yet, sadly, most companies put assets in service and their costs fall into a black hole. We will examine ways in which your organization can address this oversight and get moving further along in your journey to operational excellence. Operation Phase: Maintenance, Cost of Ownership

12 Managing On-Time and Within-Budget Projects – Capital and Expense
Now that we have the basics, let’s get to what it takes to manage assets cradle-to-grave. To begin the discussion of an equipment’s life cycle, we will start at the beginning – the Acquisition Phase – when new assets are born!

13 What is Project Control?
Budgetary control PLUS . . . Design Reliability (measured by MTBF) Maintainability (measured by MTTR) Construction Standardized Spares Accessibility Commission FMEA RCM BOM Maintenance Plan For most companies, gaining control of project budgets and having real-time visibility into budget versus actual performance is a high-priority. Certainly, this is the highest calling of Project Controls as significant funds can be won or lost here. In that endeavor, one of the first steps is ensuring that all project related costs are accurately captured, including labor, parts, inventory, miscellaneous expenses, and services. Many businesses capture only a few of these cost elements, and as a result, they have a skewed vision of what is truly being invested in capital or expense projects. In fact, the overall vision of project budget performance can be significantly flawed due to missing costs. Remember that you cannot control what you do not measure! In stage 1 – 2 companies, project budget performance may actually “look” fairly good because many project costs, such as inventory or labor, are hidden in and absorbed by overall operational costs. In addition, these businesses spend very little on standardizing and improving design. These companies are prone to replicating past design flaws, utilizing non-standard repair parts in the bill of material, and commissioning assets without a proper maintenance plan. By Stage 3, businesses will have a strict approval process in place for project budgets, especially capital, though these approvals will likely be paper-based and time consuming. More effort will be made to properly collect costs such as labor, but often inventory usage may still be hidden. In these companies, some effort will be made to draw upon past lessons learned to build in more reliability and maintainability, but they may still lack useful maintenance history to assist in those efforts. At least at the plant level, Stage 3 companies have started to standardize on major repair parts. However, these companies generally lack a formal asset hand-off process at the completion of the project, so assets may still be put into service without first having a detailed maintenance plan and proper documentation. For stage 4 & 5 businesses, their project spend could conceivably appear higher than they may have had in prior stages in their culture, both because all costs are being accurately collected and because more care is taken to ensure that the highest reliability and maintainability are being designed into the assets being created. However, in these cases, overall maintenance costs in the Operations phase should be reduced as a result. Keep in mind that no amount of post-commissioning maintenance can compensate for poorly designed assets, thus, it is critical to ensure that the maintenance history and lessons learned be considered in future designs. This requires a comprehensive maintenance program also in the stage 4 or 5 level of evolution in order to provide that vital historical data. See how Project Controls and Asset Maintenance are two sides of the same coin? Another hallmark of stage 4 & 5 companies is a formalized commissioning step as part of all capital projects. During construction and commission phases, industry leaders are using standard parts to simplify inventory requirements and building assets for maximum accessibility to maintain / repair. As the asset comes into being, these businesses also have constructive communications among Engineering, Maintenance, and Operations to identify the potential failure points, projected failure frequency for each failure point, and business impact, along with developing detailed spare parts requirements and a formal plan to maintain the asset. Common tools for this phase include: FMEA (Failure Mode and Effect Analysis) – this analysis identifies what could fail on the asset, how likely it is to fail, how frequently is it likely to fail, how to prevent the failure, and what steps and spare parts will proactively address the potential failure. RCM (Reliability Centered Maintenance) – this is a formal process to develop an efficient and effective maintenance plan that will minimize probability of failure, insure safety, and optimize mission compliance. BOM (Bill of Material) – this is a list of all component items included in an asset. Typically this list will consist of parts that will be stocked as well as those that may not be stocked because they are readily available locally, not a critical spare, not likely to fail soon, etc. Included in this list of component items should be manufacturer, manufacturer part number, quantity, and original purchase information (vendor, price, etc.) Ideally, this list should be cross-referenced to the assets schematics or drawings on file. Maintenance Plan – stage 4 & 5 businesses ensure that PRIOR to being put into operation each new asset has a comprehensive maintenance plan documented and ready to initiate. Earlier stage companies often develop this only after the first failure if at all. The best time to plan for proper maintenance is in the design, construct, and commission life-cycle phases.

14 Types of Projects Capital Expense Customer Funded
Profit enhancements Increase capacity Replacement Expense Annual rebuilds Marketing / Legal / etc. Customer Funded Tooling Prototype Very common in Automotive Verticals ETO (Engineer to Order) Key Characteristic: Results in New Asset(s) Key Characteristic: No Assets created Key Characteristics: -Customer owns Asset -Customer pays you to build new production line to produce a part for them. -Customer will reimburse you for the cost to build the new production equipment. -When project is complete, the production line stays at your facility, BUT you do not own the production equipment – the customer does. Before we begin discussing Project Controls Best Practices, it is very important to understand the four major types of projects and the defining characteristics and differences of each. Capital projects are investments that result in a new asset or assets to be added to the company books. In general, capital funds are approved by a well-defined group of approvers and the approval of these funds is a very formal process. Particularly for capital projects, the measure of “acquisition cost” is critical as the assets resulting from the project will be capitalized based upon that cost. Expense projects do not result in any new assets are generally internal projects for improvement or special activities. An example of a typical expense project would be a recurring summer shutdown project during which the Maintenance team performs work that could not typically be done while the plant is running. Customer Funded projects are very common in the Automotive vertical. These projects do not result in a new asset, as the customer will actually own the resulting equipment. However, that equipment will remain inside the company’s facility to allow them to produce specialized parts in the future for the customer. ETO, or Engineer to Order, projects result in an actual sale to a customer. No new assets are created, and the resulting product of the project will be physically shipped to the customer. Key Characteristics: -Build equipment to customer specifications -Scheduled reimbursement payments from customer -At completion of project, ship equipment to customer

15 Project Controls – Best Practices
Electronic approvals “On Time, Within Budget” Real-time financials Streamlined month end reconciliation Scheduled supplier payments Scheduled customer reimbursements True acquisition cost Designed using history Built-in reliability and maintainability Formal commissioning and hand-off Regardless of their stage in the journey toward World Class, all companies have some method of approving funds for projects, especially capital funds. But even as late as Stage 3, this may involve passing around a thick packet of paper containing quotes, drawings, etc. Especially if the packet has to go outside of the plant walls for approval, this is a time consuming process, involves a lot of phone calls to see where the packet is in the approval process, and includes the danger that the packet the first approver saw could differ from what the last approver approved. For publicly held companies, in particular, the manual approval of projects opens the door for audit non-compliances. Implementing a electronic approval process addresses that danger, and also streamlines the approval process. Each approver is assured that what they approve is the same throughout the approval process. Documents can be attached and viewed easily. The originator can determine very quickly in whose queue the project resides for approval at any given time. A great many obstacles can be overcome by simply automating your approval process. After approval, budget control becomes the primary financial concern for projects. Stage 1 – 2 companies frequently exceed budget without advance visibility that this may occur. The volume of overruns is a symptom of the age and accuracy of the data with which the project manager works. In these businesses, the project manager’s latest report on project spend can be as old as 45 days. As a reaction to this, Stage 3 companies may have adopted a process of overestimating projects. Sure, their estimate vs.. actual measures may look more healthy, but their overall spend is probably still out of control. By Stage 4 & 5, project managers work with real-time data, and they can see well in advance if an overrun is likely and take steps to prevent it if possible. These companies excel at bringing in projects “On Time, Within Budget”, and they do not have artificially inflated original budgets. Also, for these businesses, getting approval for an overrun is a very formal process and often requires detailed documentation regarding the root cause for exceeding budget. The key to healthy project spend performance is real-time data. This then has a domino effect in streamlining month end and project end financial reconciliation. Stage 1 & 2 companies will often not complete monthly reconciliation until the end of the following month or later. By Stage 3, reconciliation may have been reduced to one or two weeks. In Stage 4 & 5, reconciliation becomes almost a non-event with any variances readily traceable. Another area of best practice relates to managing scheduled payments. Most large projects involving subcontractors will contain an agreement for “graduated” payments to the subcontractor as certain milestones are reached. Stage 1 & 2 companies often miss these payments, have subcontractors stop work until payments are caught up, and spend non-value-added time scrambling to get a check cut in order to see work resume. The lack of controls around supplier payments frequently results in project delays and harms the relationship with the vendor. In Stage 3, the company has some method of reminding the project manager that it is time to pay a vendor, but the method is seldom more than setting up a calendar reminder. Calendar reminders are not tied to any real milestone achievements, and as a result, may get ignored and then forgotten. In this stage, project managers will usually still have to make some phone calls or send some s to have the payment processed. Though not as common as in Stage 1 & 2, Stage 3 businesses will still have some degree of reactively rushing to pay overdue supplier payments. Stage 4 & 5 businesses will have a formal method with alerts and reminders to assist in staying on schedule with supplier payments and will provide a method for the project manager to initiate the payment themselves without the need for manual steps. Similar to scheduled supplier payments, scheduled customer reimbursements (for customer funded and ETO projects) face the same challenges, though in this case rather than a check being cut an invoice must be generated. Automating this process, providing alerts, and empowering the project manager to initiate customer invoicing is a significant step forward in improving cash flow and bottom line. Other best practices around projects deal more with the asset itself. While financial control of projects has the highest visibility to leadership, companies should always seek to accumulate the true acquisition cost of the asset (for capitalization) and to continuously draw upon lessons learned to improve design-in reliability and maintainability. A healthy organization will also ensure proper development of a maintenance plan during the commissioning process and a formal hand-off to operations complete with bill of material, recommended spares, standard operation procedures, drawings, training etc.

16 Project Controls Benchmarks
Budget vs. Actual Performance Estimate vs. Actual Margin (customer funded & ETO projects) Month-end reconciliation (time and variance) Project close reconciliation (time and variance) Most organizations already have established financial reporting requirements for monitoring project spend and performance. However, providing these reports can be time-consuming and cumbersome as it is common for source data for these reports to reside in a various locations such as third-party estimating systems, financials, time & attendance systems, and even individual engineering spreadsheets. The first step in controlling project costs is gaining real-time visibility into all elements of a project’s financial performance. In doing that, you will likely find some surprising revelations with regards to your true performance, but this will also provide insight regarding what needs to improve. Take some time to jot down the key measures your organization uses to control project spend, and then consider what effort goes into collecting that information. How accurate is it? How dated is the information?

17 Project Controls – Low Hanging Fruit
Identify all data collection points for project budget controls & consolidate Ensure all costs are collected Determine average margin (ETO & Customer Funded) Review estimates vs. actual spend Formalize commissioning process Formalize asset hand-off Develop plan for continuous improvement Regardless of where your organization may be on the journey to best practices around project controls and accounting, there are some software agnostic practices that you can put into place today to improve your processes. But, don’t stop there! The potential for savings, prevention of overruns, and improved reliability requires developing a longer term strategy to consolidate your project costing and streamline the process. To continue improvement, check with your company processes and take the following first steps if you have not already: Gather the appropriate individuals for a brainstorm session. During that session, identify all the data sources that go into your corporate project financials reporting. Are these sources integrated? Do they cover all costs (labor, inventory, material, subcontractor services, expenses, etc.)? How real-time is this data? Look for “hidden spend” that may not be collected. Is MRO inventory regarded as “free”? Is maintenance labor also regarded as having no cost? Remember that someone, somewhere pays for that inventory and maintenance labor, and if it is not being used for its original intended purpose, then those costs must be reallocated to provide a full picture. If your company has customer funded (aka “tooling) projects or if you are an Engineer to Order (ETO) shop, determine what your average margin is today on these projects. In both cases this represents actual profit, and this measure of project performance can indicate the health of your estimating and cost tracking processes. (Remember, this measure is also only useful if all costs are being included.) Compile a report of completed projects with their original estimate compared to the actual final spend on the project. If there are consistent overruns, this could be a symptom of several issues such as estimating skill sets, lack of real-time data to warn of potential overruns, etc. If they are consistently well below original estimates, this could be a sign of over estimating or not collecting and reporting all costs. A healthy project control program will run very close to budget on average without going over. Investigate the manner in which assets to be put into service are evaluated for their PM program. Is there a formal process? What steps are taken to determine what might fail and when? How are spare parts identified and selected for inclusion in stores? Do the assets have a complete bill of material (BOM) listing all potential spares, quantities, and source? Any improvements in this process will help improve the life span of your assets. Research how assets are handed off to operations and maintenance. Is there a formal process? Are operators provided with standard operating procedures? Are they formally trained? Has maintenance been involved in developing a maintenance plan for this asset? Are PM’s in place? Does the storeroom know what to stock? Are drawings and BOM provided every time in an easy to locate way? Where are the manuals stored? Stage 1 – 2 companies may already have processes in place for some of these practices, but they are probably not integrated, take place in silos, and are not complete. Stage 3 companies will either already have a consolidated system or will have recognized the need and built significant integrations to bring together data. Stage 4 & 5 organizations do not have hidden costs and have a true view of project performance and real-time opportunities to continuously improve. As you begin to identify and improve the Acquisition Phase processes in an asset’s life cycle, you should begin to see small overall improvements. The ultimate goal would be to have all activities consolidated in a single system, integrated to financials, purchasing, and accounts receivable, with that same system continuing on as the system of record in the asset’s Operation Phase. As the old saying goes, the whole really is greater than the sum of its parts.

18 MRO Inventory and Purchasing – Getting Control of Operational Costs
Now that we have discussed the first phase of an asset’s life, the Acquisition Phase, let’s explore the ways in which material costs are captured and controlled throughout the entire equipment life cycle. Purchasing and Inventory are key costs associated not only with the Acquisition Phase but also with the Operation Phase. MRO, or “Indirect” inventory, and Purchasing span all phases of an equipment’s life cycle. Many organizations have already taken steps to control MRO purchasing, but often those steps are in external systems with opportunities to lose or improperly categorize purchase costs such as inventory, services, and materials. Though many companies have provided at least for statutory controls around Purchasing, strangely enough they still allow the purchased Inventory to fall into a black hole of costs never tracked to its final consumption. Marrying together best practices in Purchasing and Inventory controls is critical to the overall health of your organization’s operational overhead.

19 What is MRO Inventory and Purchasing?
“MRO” – Maintenance repair operations Repair parts plus . . . Internally fabricated parts Supplies Consigned / Vendor-Managed Free-issue / Company Catalog Goal is to ensure right parts are available at the right time at the right price in the right quantity to sustain availability of plant assets MRO inventory is traditionally known as “maintenance repair operations” stock. As a result, most organizations think of MRO as only spare repair parts, but the truth is that this inventory goes well beyond spares. As a matter of fact, if you consider all the different non-production items you store through out your facility, you may just find that you have much more of this type of inventory than you think. Any stocked item that is not a component of a finished goods product can and probably should be managed like MRO inventory. Other terms for this kind of inventory include: Indirect Inventory Non-Production Inventory Stores We will use those terms interchangeably throughout this seminar. The item numbers that make up your list of parts can take on many forms, such as: Stocked Items – items that you keep in a bin and control their issue and reorder Catalog Items – items you do not stock but for which you have a part number in order to provide consistency and traceability (such as infrequently purchased repair parts, non-inventoried supplies, or even services such as fire suppression system inspections or lawn care) Free Issue – items that are typically place outside of the storeroom and are not issued one at a time such as with fasteners and are commonly managed using a “2-bin” approach for replenishment Supplies – these items can include safety, janitorial, or office supplies that you wish to reorder as part of stock replenishment and track consumption, perhaps to the department level Consigned Items – items physically on your shelf for which you only pay the supplier at the point you consume them Vendor Managed – items for which a supplier will periodically come in, count, and reorder such as with nuts and bolts Purchasing has a significant role in the health of one’s Inventory. Purchasing is tasked with sourcing parts, which includes not only getting the best price, but also ensuring quality standards of parts and being able to obtain the parts when needed (i.e. appropriate lead time). Price is not the only consideration in the purchase of parts, and when buyers are freed from being data entry clerks and empowered to leverage their business’ buying power, vendor base can be consolidated and more and more repeat buys can be purchased at pre-negotiated contract prices for significant savings. Maintenance and Engineering should have a significant role in determining what parts to stock and in standardizing parts and manufacturers. Purchasing a part from a new supplier and manufacturer just because it is a lower price could in fact jeopardize operations if Maintenance and Engineering are not involved in assuring quality and mission suitability. Regardless of the type of item, though, the goal of purchasing and inventory is to ensure that the right parts are available at the right time at the right price in the right quantity in order to keep operations running smoothly. It sounds simple enough, but the reality is that meeting this goal is a carefully choreographed dance among Stores, Tooling, Engineering, Operations, Maintenance, Purchasing, and Administration. If anyone gets out of step, chances are very good you will find yourself in a bind. Moral of the story: When it comes to effective Purchasing and Inventory, no functional area can be an island.

20 MRO Inventory & Purchasing Best Practices
Integrate inventory, purchasing, and maintenance planning systems Utilize EOQ analysis to refine min/max/re-order points Secure inventory and improve physical layout Automate stock replenishment to free purchasing for more strategic activities Link parts to where used Understand difference in Indirect Inventory practices Many stage 1 – 3 companies view MRO, or Indirect, inventory as “expensed on receipt” and believe that, as a result, they cannot track and control that inventory. This results in several symptoms of an unhealthy indirect inventory culture such as over-purchasing, individual stores areas, non-standardization of spares, excessive spot buys / expedite orders, etc. However, remember that indirect inventory can account for as much as 50% of a company’s operational costs. Perhaps more so in this area than any area there is a significant opportunity for true, demonstrable, and sustainable cost savings. To recognize cost reductions, though, companies must take control of inventory and implement proven purchasing strategies, and this is best accomplished by having an integrated and centralized system to control inventory, purchasing, projects, and maintenance. Per Ramesh Gulati, “Unless MRO stores are integrated with purchasing, operations, and material planning, any optimization of maintenance strategy will be suboptimal, often resulting in reduction of overall organization efficiency.” (p125) Simple fact: Just because this inventory may be “expensed upon receipt” does not mean you cannot track and control it! Unfortunately, the “expensed on receipt” mentality often results in significant hidden inventory costs, and this is rampant in Stage 1 – 2, and even sometimes in Stage 3 cultures. So, the first step in moving beyond reactionary inventory and purchasing is to get visibility into what this is truly costing your organization. Be warned, though, that leadership should be prepared to see a potentially significant jump in inventory value as you start properly identifying your stores parts, price, and quantity. Understanding that this is not “new” costs, but rather a view into what you have had all along, can ease this transition (not to mention open a few eyes). Especially in Stage 1 & 2 organizations, there is little to no visibility regarding where parts are used. Often these organizations will try to identify at the time of purchase where parts will ultimately be consumed. This does not ever work properly. Stage 3 organizations have begun to realize that part purchases and inventory issues should at least be properly tracked to the asset level, though they often overlook getting traceability also to the task (Work Order) level. Stage 4 & 5 organizations are well disciplined in making sure that all purchases and parts issues are attributed not only to the asset but also to each work order associated with a task on that asset. Having visibility into not only what the cost of ownership is for an equipment but also what each particular type of work really costs for that asset is golden. Other practices that you will see in industry leaders, especially Stage 5, include: Right sizing inventory and optimizing the purchasing process by regularly performing Economic Order Qty (EOQ) analysis for your parts, particularly for your high cost items. EOQ analysis should then drive settings for a part’s minimum order quantity, maximum on-hand, and reorder point. More so than with direct inventory, MRO inventory requires constant analysis and adjustment. Most indirect parts will not fall into the category of “set it and forget it.” EOQ is measured as: EOQ = √2DS/H Where D = demand / usage in units per year S = Ordering cost per order H = Inventory carrying cost per unit per year Controlling inventory by enclosing and providing a means of access control. Ideally, the stores area should be manned, but many organizations automatically believe that they cannot justify the cost. Take some time to get your true inventory value, analyze your inventory loss, and see how that compares to the yearly overhead of having at least one clerk managing inventory and you might be surprised. Manned or not, inventory should have controlled access and a disciplined process for receiving, issuing, and returning parts. Also, best practice dictates that the stores area itself should be clean, well lit, clearly labeled, and organized in a logical fashion (ex: slotting, logical part grouping, etc.). The stores area should provide ample space to handle receiving, kitting, and returns. Hint: Often space can be freed up by moving “free issue” items outside of the stores area. Freeing buyers from manual repetitive, non-value added spot buys by automating the replenishment orders for standard inventory items. This allows your purchasing organization to move from just being “data entry clerks” to providing the critical service of sourcing parts, reducing vendor list, negotiating contract pricing on bulk items, and leveraging your buying power to reduce overall spend. Knowing where repair parts are used which allows engineering to standardize on parts in design and providing valuable data regarding what to stock and in what quantity. Overall inventory volume can be reduced nicely by ensuring that multiple assets use the same standard repair parts. When parts are not standardized, your inventory increases because you have to stock each variation to support repairs. Understanding the nature of Indirect Inventory vs. that of Direct. Direct materials (production raw materials) tend to be more repetitive and predictable, whereas Indirect Inventory requirements can vary based upon a wide range of variables such as seasonality, special projects, production line moves, production output, etc. In addition, in stage 4 & 5 cultures, oversight of their inventory is owned by individuals who understand all these factors and have a solid understanding of maintenance planning.

21 MRO Inventory & Purchasing Facts
Order processing costs can vary between $20 - $200 per order over the actual purchase cost Cost of stocking and holding an item in inventory can be as much as 30% of item cost per year Maintenance resources can spend as much as 20-30% of their time searching for parts Organizations that have high hidden inventory have a reactive culture MRO Inventory in a reactive environment can account for up to 50% of overall operational costs All of these interesting facts can be found in Maintenance and Reliability Best Practices by Ramesh Gulati. While order processing cost in and of itself may not be good measure on which to focus, it can be helpful in driving consolidation of vendor base and purchase orders. If it costs $100 on average to process a single PO (create, approve, order / fax / , receive, put-away/deliver, voucher, pay, etc.) Imagine being able to reduce the number of purchase orders processed each month by 50 just by beginning to consolidate purchases to the same vendor on a single PO. Though it is not “real money”, already you’ve reduced the burden per month by $5,000. What that really means is that your organization has more time to focus on the value-added activities rather than repetitive record processing. Another often overlooked cost is the burden of storing inventory. In truth, holding inventory is expensive. On average the holding cost of an item can be around 30% of its purchase cost in a year. This is why the Inventory Turns measure gets so much attention. Holding costs include overhead elements such as utilities, storage space, part PM time, cleaning, etc. Many organizations, especially in Stage 1 & 2, and sometimes even in Stage 3, have no idea how much of their maintenance resource’s time is spent trying to locate parts. When you consider a typical maintenance technician working 40 hours in a given week, if spares are not readily available, cross-referenced to equipment / tasks, and easy to find and issue, at least one whole day of their 5 day week is spent looking for parts. What happens to plant performance if more of that time can be spent on proactive tasks? Sometimes to make their lives easier in an environment without a healthy inventory, maintenance resources will begin to collect their own personal stash of repair parts. If you can walk around your plant and find spare parts in lockers, closets, or drawers, you definitely have a reactive culture that needs to be corrected. These skilled resources do not hoard parts just to be rebellious. Ask yourself why they feel the need to maintain their secret inventory, and you will find some processes you can begin to address today. Take a few minutes to consider these eye-opening facts. How does your organization fit in these?

22 MRO Inventory & Purchasing Benchmarks
Inventory Turns Turns = (Inv Issue in year) / (Avg Inv) Avg Inv = (Beginning + End) / 2 Healthy value is around 2 turns per year for MRO Inventory Accuracy Best Practice > 95% (p115) Maintenance Material Cost as % of RAV Best Practice 2% - 4% World Class 0.25% % Stock Out Rate Best Practice 5% - 10% World Class 1% - 2% These important KPI’s (key performance indicators) are just a few of those that an organization may use to drive continuous improvement in Inventory and Purchasing. The Society for Maintenance and Reliability Professionals ( has made great strides in standardizing measures and formulas, and even more metrics and information may be found on their website. Let’s discuss these few key measures: Inventory Turns – too often organizations make the mistake of believing that Indirect Inventory Turns should be the compared with or included with Direct (production) Inventory Turns. But, Indirect Inventory is a much different species! Often, MRO includes high-cost items that are seldom used but must be retained because getting one when needed could take a very long time if it is even still available. Usually when these items are needed it is because of a production down situation and every hour costs money in production loss. A healthy Inventory Turn for MRO is usually around 2 turns per year. Inventory Accuracy – as previously mentioned, some organizations pay little to no attention to MRO Inventory because it is “expensed on receipt” – yet, MRO Inventory represents a significant investment. If not controlled, you may as well just lay stacks of money around your facility. As you begin to track your inventory, losses, otherwise known as cycle count or physical inventory reductions, signify a lack of discipline in properly recording consumption of spares. An accuracy level of 95% or greater indicates that solid processes are enforced to track your inventory. Maintenance Material Cost as % of RAV – knowing your true cost of maintenance material is critical to your ability to improve your purchasing and inventory processes. But, keep in mind that if you are in an earlier stage of evolution towards reliability, you will probably see your material costs go UP as you finally begin to properly track inventory costs. Be prepared for this and educate leadership well in advance. As you move into Stage 4 – 5, you should begin to see those costs level out, even go down, as you get to optimal material costs and stock levels. Stock Out Rate – this is an often underutilized measure, and in fact, it can be very cumbersome to track in Stage 1 – 3 companies because they do not have the processes, tools, and disciplined culture yet to collect this data. The Stock Out Rate measures and evaluates each time that a maintenance resource needs an inventory part that should be there and is not. In short, when a stock out occurs, work has probably been delayed. Analyzing the reasons for these events provides essential information for inventory process improvement. Consider what measures would be useful in your organization to drive the right behavior, and remember that any measure employed should be very difficult to manipulate to look better and must be fairly easy to report. Plant resources can and do look to see what leadership values and therefore measures, so sometimes just beginning to report on key indicators can be the first step towards culture change.

23 Inventory & Purchasing – Low Hanging Fruit
Secure and control access to inventory Eliminate personal stores areas Move “free issue” items out of crib Provide an inventory return area Tend to physical layout of stores area Identify all stocked parts Consolidate vendor base Negotiate contract pricing Begin developing justification for stores clerk Develop plan for continuous improvement The area of MRO Inventory is probably the area with the greatest potential for real cost savings in the shortest amount of time, and if you link those efforts with best practices in Purchasing, your bottom line will improve. As you return to your company, begin looking into the following low-hanging fruit: Take steps to secure inventory items. If they are stored out in the open and if everyone in the plant has access at anytime, chances are good that you are losing significant amounts of money. By simply enclosing and controlling access at least to your high-cost and most “pilferable” items (such as batteries and tools), you will begin to see a reduction in inventory purchase requirements. Put in place a method for recording when these items are removed from stores and where they are being used and by whom, even if this is just a sign-out sheet. A lot of companies that already have a time & attendance system find it useful to place a badge reader at the door of the storeroom to record who enters the area. They can then compare the list of who entered to the list of parts removed and begin identifying exceptions in which parts are removed and not recorded. As part of controlling your inventory, you may wish to move certain items outside of the controlled access stores area. These are low cost, high volume items that you would generally not issue one at a time anyway. Commonly reorder for these items is based upon a weekly inspection of their bins, either just visually or more accurately by weight. Items commonly placed in “free-issue” are nuts, bolts, screws, etc. Put in place a simple process for keeping these items stocked. You may even want to incorporate a 2-bin system to assist with replenishment of these items. A simple rule of thumb: People will not return unused parts to stores unless they have a simple way to do so. If you are tired of seeing unused issued parts stuffed in cabinets and cubby-holes all around the plant, put in place a simple process for their return to inventory. The easiest first step is to provide a clean, accessible area in which the parts can be placed for return. It is helpful to have tags available to indicate who is returning the part and from what work order. Also, your culture needs to provide the time to allow the maintenance resources to properly return unused parts, perhaps at the end of each shift. Improve the physical attributes of your stores or crib area. A well-lit and organized stores area is much more likely remain neat and usable. Store rooms with cramped, dark rack passageways are much more prone to inventory problems – parts will be examined and placed back in the wrong bin, technicians will get frustrated trying to find parts and resort to a spot buy, people will carry parts to an area providing better lighting and leave them there if it is not the correct part, etc. The most effective storerooms I’ve seen in my career are neat, have parts logically grouped together, have plenty of space, are well labeled, and are well lit. If you do not already have a comprehensive list of all your inventory parts, including at least a unique internal part #, location, manufacturer, vendor and price – start building one now! While in the short term you may not see great benefit from this list if not integrated with purchasing and inventory quantities, having this list complete and accurate is a critical step towards improving inventory and purchasing. Consider using the manufacture part # as the part # in order to begin developing a catalog that can be standardized across plants. I often hear “we just cannot justify the cost of a stores clerk.” While it is true that all companies are having to more with fewer resources, this role is so critical to operational excellence that I strongly advocate doing whatever is necessary to justify this role’s existence. Find the value of your inventory and what your yearly MRO material spend is (remember in many companies this can account for up to 50% of your overall operating costs). Often knowledge of these figures is enough to justify at least one clerk. If you can get visibility into your inventory losses, this too can often go a long way in persuading leadership of the strategic value in this role. Finally – develop a plan! Don’t just settle for being Stage 3, because the benefits and returns from moving to Best Practice and even World Class status are real.

24 Optimizing Plant Performance and Improving Capacity
Now that we have seen how an asset comes into being and how costs associated with materials and services are managed, let us take that information and combine those best practices to begin making a tangible and positive improvement to your overall plant performance, plant capacity, product quality, customer satisfaction, and market share. All that we have reviewed so far culminates in the asset’s most costly phase of life: Operations. Since nearly 80% of an asset’s Life Cycle Cost is accumulated in this phase, it behooves every organization to place value on and provide support for the on-going maintenance and sustainability of its critical equipment and tooling.

25 What is Asset Maintenance?
Ensuring that assets are available when needed at optimum capacity in a cost effective manner Drivers: Increased output with the same assets Reduced need for capital replacement Reduced maintenance cost per unit Reduced total cost per unit Improved performance (cost, productivity, and safety) Increased competitiveness Increased market share Before we even begin discussing “What is asset maintenance?” perhaps we should take a step back and define “What is an asset?” first. Per Ramesh Gulati in Maintenance and Reliability Best Practices assets are defined as “The physical resources of an organization, such as equipment, machines, mobile fleet, systems, or their parts and components, including software that performs a specific function or provide a service; sometimes referred to as physical assets.” (p47) “Asset Maintenance” is the comprehensive program that focuses on appropriate preventive and predictive maintenance combined with efficient corrective maintenance to ensure that the plant has what it needs when it needs it and in the optimum condition to produce a quality product with a healthy margin of profit. You will recall that Reliability is a design feature. Maintenance functions to sustain that reliability to ensure that asset enjoys a long, healthy, and productive life. Proper asset maintenance will lead to the benefits described on this slide. Take some time to review what Ramesh Gulati states that proper Asset Management can drive within an organization. Are any of these drivers NOT an element of your corporate strategy?

26 Asset Maintenance Best Practices
Record all work – PM and CM Collect all costs to the asset and task level Plan work Schedule work Implement robust PM program Predictive / Condition-Based Technology to detect potential failure Defined in FMEA and RCM activities Empower resources to report issues themselves electronically Change culture from reactive to proactive Implementation of basic best practices within a maintenance organization, perhaps more so than in other areas, often requires first a significant change in culture. As long as maintenance is regarded as simply a departmental level priority, a business cannot truly hope to evolve beyond Stage 2 or 3. Stage 1 & 2 businesses are typically focused on maintenance solely from a departmental perspective. Maintenance seldom has a seat at the table with Operations and Engineering, and they are often regarded as a necessary cost of doing business – tolerated but not appreciated. In this stage of evolution, you will frequently hear from technicians that their job is to “turn a wrench” not to sit in front of a computer and record work performed. In these environments the rewarded behavior is being a good fire-fighter. The organization praises maintenance resources for getting production lines up and running after a major outage rather than asking the question, “Why wasn’t this failure prevented in the first place?” Is there any wonder why in these stages the plant culture is reactive? They are reactive because that is what leadership rewards. Stage 3 organizations have begun to recognize the value of preventing failures, but that effort may focus only on the critical assets. Usually preventive maintenance activities will be driven solely based upon calendar days rather than upon actual usage of the asset. These businesses may have begun to plan some work, specifically large tasks such as summer shutdowns, yet they tend to not have formal schedules each week. Technicians still perform work in a somewhat artificial order of battle, basically the “squeaky wheel” approach to prioritization of tasks. In Stage 3, the value of proper maintenance is not just a departmental initiative but has at least risen in focus to the plant leadership level. Generally, though, emphasis on maintenance improvement still remains within the plant walls, and very little attention is paid at the corporate level except for big-picture pressures to reduce operational costs. Those pressures often result in poor decisions being made that reduce spend today but at a potentially dangerous future cost. In Stages 4 & 5, you will find a much different organization. In these businesses, corporate leadership places value on the maintenance and reliability of their facilities and provides support (culturally and financially) for continuous improvement. Stage 4 & 5 are characterized by robust PM programs, including the use of state-of-the-art technology to perform predictive and condition-based maintenance. These groups focus on detecting problems well in advance of failure and then taking steps to correct before failure. They also drive many of their PM tasks based upon actual condition or usage of an asset. You will find the use of such predictive technologies as IR Thermography, Vibration Analysis, Oil Sampling, etc. being an ingrained feature of these companies’ maintenance organizations. Also, in these businesses, the overall performance of the plant and care of its assets is owned by not just Maintenance but also Engineering and Operations – in fact, the entire organization. Operator based PMs are very common in these industry leaders.

27 Asset Management Facts
Unplanned work costs 2-3 times more to execute In general every hour of planning saves 1-3 hours in work execution Reactive emergency mode activities cost 3-5 times more than non-emergency Actual maintenance craft productivity can vary between only 30-50% of actual paid time An average of 80% of an asset’s Life Cycle Cost (LCC) is incurred during the Operate & Maintain phases An average of 40% of failures are due to operator error Organizations with high schedule compliance also have high uptime and asset utilization rates For many in the place of leadership within a manufacturing company, the world of Asset Management is almost like a separate universe, a mystery, and not well understood. Maintenance and Reliability professionals speak a very different language from Corporate leadership and even from Production, and for that reason we must be extra diligent in evangelizing and educating those who make decisions that impact M&R activities. Perhaps you can utilize some of these facts from Maintenance and Reliability Best Practices discussed on the next couple of slides to help start those conversations. The first fact, that an average of 40% of failures are due to operator error is not a fact to be used to beat up production. Instead, this figure can help to drive the development of Operator Based PM’s and improved operator training. The TPM (Total Productive Maintenance) school of thought focuses heavily on the reduction of the operator failures and on empowering the operators who know their work centers best to own its health. As operators take on more preventive maintenance activities for their own equipment, maintenance is freed up to focus on tasks more appropriate to their own trade and craft level. More efficient use of skill-sets will benefit any organization. The “planning” and “scheduling” aspects of a proper Asset Management program are also often misunderstood. As operational budgets get tighter, some of the first roles that are eliminated are maintenance planners and schedulers. This is a mistake. Maintenance Planners ensure that when a technician goes out to perform a task they have everything that is needed to complete the task, including parts, special tools, rental equipment (such as cranes), the right combination of skill-sets (electrician, welder, PLC programmer, etc.). By properly planning a task, the maintenance resources move effectively and efficiently from task to task with very little wasted time in their daily activities. Maintenance Schedulers, once tasks have been planned, develop the work plan for the maintenance teams. This not only provides maintenance resources with a goal of what needs to be accomplished and when, but also ensures the proper mixture of priorities and tasks in the most efficient order. Stage 1 – 2 businesses will not have formal maintenance work schedules, and their resources bounce from task to task. In these environments, the lower priority work can be overlooked long enough that it results in a critical failure. Stage 3 companies will have begun planning for large events, such as shutdown plant overhauls, but many day to day tasks do not get planned and result in increased travel time for maintenance resources. Also, Stage 3 businesses will begin utilizing a schedule for maintenance tasks, but they may struggle with schedule compliance because so many people in the plant have the authority still to pull maintenance resources off one task to work on something else. Stage 4 & 5 organizations place significant value on the planning and scheduling stages, and with good reason. Statistically, unplanned work costs 2-3 times that of planned work to execute, and organizations that pay attention to and support high schedule compliance also report high uptime and utilization rates. These businesses have a healthy backlog (yes, having a backlog of work is a good thing) and usually plan and schedule work at least one or two weeks in advance. Asset Management programs should strive to reduce reactive emergency work with an effective PM program and thus reduce operational costs and business impact. Consider that the cost of emergency reactive work (break-downs) is 3-5 times as much as for performing non-emergency proactive work to prevent an failure.

28 Benchmarks Overall Equipment Effectiveness
OEE = Availability x Performance x Quality Best Practice: 85% World Class: 98% Schedule Compliance = Scheduled Tasks Completed / Total Scheduled Tasks Best Practice: 30 – 50% World Class: >90% Planned Work = Planned Tasks / Total Tasks Best Practice: 70 – 85% World Class: 85 – 90% In the Asset Maintenance arena, more so than in all the other areas, there are many, many possible KPI’s and Benchmarking formulas available to help you measure your program’s effectiveness and identify opportunities for continuous improvement. The measures on the following slides are but a few of the options. Depending upon which areas of Asset Maintenance are a current priority for improvement, you should select appropriate measures to report AND publish. Remember, for a culture change to take place, all parties involved must know that it is important to leadership and that they are not only watching for progress but are expecting it. In some cases, you may not be ready to target even the Best Practice suggested values. Your organization should select challenging but attainable goals to work your way up towards Best Practice results and ultimately World Class. OEE calculation components Availability = Uptime / (Uptime + Downtime) Performance = (Actual Production Rate / Designed Production) x 100 Quality = Good Units / Produced Units

29 Benchmarks 2 Reactive CM Unscheduled = Unscheduled Work Time / Total Time Best Practice: % World Class: <10% Overtime Best Practice: % World Class: <5%

30 Benchmarks 3 Production Losses Due to Breakdown Best Practice: 2 – 5%
World Class: <1% PM Compliance Target: PM Completed with +/- 10% of frequency Example: 30 Day PM’s should be completed within +/- 3 days of due date

31 Asset Maintenance – Low Hanging Fruit
Identify all equipment & hierarchy Formalize a PM program Start the culture change Begin recording all work Select and Publish Monthly KPIs such as: PM:CM ratio Maintenance Unplanned Downtime Top 3 Failures & Root Cause % Schedule Compliance Initiate FMEA for most critical equipment to refine PM program Develop plan for continuous improvement The first step in improving any asset maintenance program is to ensure you have a thorough understanding of what you have and how you maintain it. If you do not already, begin to create a list of all equipment, and document the hierarchy of where that equipment is located within the parent / child hierarchy. If you are not yet using a software program to track your equipment, having this list handy and accurate will definitely speed along the implementation of such a solution. Your facility probably has some form of a Preventive Maintenance (PM) Program, but evaluate that program asking questions such as: Is our PM program comprehensive or does it only apply to critical equipment? Are work instructions associated with each PM task? Do our PM’s contain parts lists and are those lists connected to inventory and purchasing? Are all of our PM’s calendar based or have we begun to drive some PM’s based upon actual usage? Do we employ any PdM (Predictive Maintenance) techniques such as IR Thermography, Airborne Ultrasonic, Vibration Analysis, Oil Sampling, etc. How do we measure the effectiveness of our PM Program? Do we publish meaningful KPIs that drive plant performance improvement? Does leadership demonstrate commitment to and interest in plant performance improvement? Perhaps the single greatest obstacle to enacting best practices in Asset Maintenance is changing the mindset of the maintenance resources themselves. Moving them from “my job is to turn a wrench” to “my job is to be an agent of improvement and prevention” can be a difficult culture change to make and is only ever effective with top-down leadership support. If your organization can begin a discipline of recording ALL work performed and ensuring that the information recorded is thorough, searchable, and meaningful, you are well on your way to becoming an industry leader in plant reliability. As history is gathered and data becomes available for analysis and trending, involve maintenance resources in this analysis and encourage their ideas for innovation. The personnel who work on your assets today are the same people who are the key to improving plant performance tomorrow. But you have to help them understand the value, show them that you are supporting them, and empower them to make improvement. No amount of culture or process change will make a significant impact on plant performance unless it is regularly measured with interest by leadership and advertised throughout the organization as a priority. Take some time to select a few key performance indicators to support your current improvement priorities. In selecting KPI’s to monitor, keep in mind the following guidelines (p250): The performance measures should encourage the right behavior. They should be difficult to manipulate to “look good.” They should not require a lot of effort to measure. Finally, lasting and significant improvement requires a plan. Implementing isolated improvements will help, but true sustainable and consistent reliability is the result of embracing a comprehensive process and culture change. To achieve success, companies must provide an asset management system that encompasses all elements of equipment life-cycle management and is fully integrated with purchasing, inventory, accounts payable, accounts receivable, and financials.

32 Conclusion – Where Do You Go From Here?
As we conclude this seminar, give some consideration to where you and your organization go from here. By now, you probably have a good feel for where your organization lies within the Stage 1 – 5 categories. Let’s take a few minutes to complete the assessment on the next page to help you determine next steps towards becoming an industry leader producing high quality parts with a healthy margin and high customer satisfaction!

33 Determine Your Current State
100% 0% >85% <15% CM PM Best Practices World Class Reactive CM PM Stage 1 Run to failure No records Stage 2 PM Critical Assets (Cal) No CM recorded Stage 3 PM Program (Cal) Some CM recorded Stage 4 PM (Cal & DUOM) All CM recorded Stage 5 PMs and PdMs All CM recorded In the table above, take some time to assess your organization in the four major areas of: Project Controls, Purchasing Processes, Inventory Controls, and Plant Maintenance. Based upon what you have learned in this seminar, rate each area based upon in which stage you believe they currently function. You may wish to go back to the descriptions within each section to more thoroughly evaluate. Once you have evaluated each functional area, some good first steps to improvement are: First: Begin your improvement initiatives by aligning all functional areas at a similar stage. Elevate all four areas up to the one with highest stage assessment. For example, if Purchasing is functioning at Stage 3 levels, but Maintenance, Inventory, and Projects are all still at Stage 2, first focus on getting Maintenance, Inventory and Projects up to Stage 3 status. Second: Once you have aligned all areas, begin strategically moving all four as a whole to the next level. Remember, each of these areas are highly dependent upon one another. If one area lags, it will negatively impact the others. Unsure of how to elevate an area or how to move the functional areas as a whole forward? You are not alone! Give me a call and I’d be happy to provide guidance. Functional Area Estimated Stage Project Controls Purchasing Processes Inventory Controls Plant Maintenance

34 Questions? North America QAD EAM Director:
Nancy Majure Mobile: the EAM Community Forum at:

35 Appendix – Footnote 1 Maintenance and Reliability Best Practices by Ramesh Gulati, Industrial Press, Inc, 2009

36 Appendix – Other Recommended Resources
Society for Maintenance and Reliability Professionals Reliability Web Uptime Magazine Plant Services Practical Plant Failure Analysis by Neville W. Sachs, P.E., CRC Press, 2007 Reliability Based Spare Parts and Materials Management by Don Armstrong, IDCON, Inc., 2008

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