Computing the True Risk/Reward Ratio for Deferring Maintenance

If you are a senior manager in a large corporation you have experienced the disruption of operations because of maintenance issues. The best laid plans for profitable operational success have been wrecked by a busted hose, a failed bearing, the overheating of a small and seemingly insignificant component in a critical system, a leak, or a loss of pressure. In each of these circumstances you have probably asked yourself, "Why can't my maintenance manager pay attention to detail? If my other departments can be prepared, why can't maintenance?"

There is a simple answer.  Based on the sound scientific methods of management taught in our MBA programs that work very well in every other department, the collective corporate management has created a maintenance management budgeting policy that has tied the hands of the maintenance manager and set them up to fail.

The reason for this is that the collective corporate management team does not understand the exponentially increasing cost consequences to the whole organization for deferring maintenance. The cost penalty is not arithmetic, nor geometric but exponential.

To understand this statement you have to rethink the phrase "deferred maintenance". Maintenance can be deferred for many reasons outside the authority of the maintenance department. An operator may notice something wrong with a machine or process but defers maintenance to the end of the shift so they can make their quota or goal. A production manager may recognize the pending failure of an asset but decides the production goal is more important than the damage being put upon the machine by continued operation. A budget manager may refuse additional funding to maintenance to make needed repairs to make the numbers for the P&L period.

These decisions are not made with malice towards the maintenance manager. The decisions are made because the corporate managers did not know the full cost consequences to the company. All of these "deferred maintenance" events have one thing in common. In each of these circumstances the person outside of maintenance making the decision to defer maintenance does not have a functional method for evaluating the total cost consequences of their actions on the overall operations of the company.

 "No one gets to be the CEO of a large company by coming 
up through the Maintenance Department." 
~ Anonymous Maintenance Manager

Because of this, senior leaders seldom have any experience with managing maintenance until they inherit the responsibility through a subordinate branch of the company. When they try to apply the sound and proven scientific methods of management they have used to get to their position the methods fail them when managing maintenance.

There is a reason why. The business schools and MBA programs teach linear solutions to management problems. The function of maintenance is nonlinear. Linear solutions work well in the management of operations, logistics, accounting, human resources, and IT. Linear solutions do not work in the management of maintenance because there are so many uncontrollable nonlinear variables that cannot be measured or controlled.

When an asset is operated to failure (Deferred maintenance), the nonlinear cost consequences of the breakdown event is exponential compared to the "Early Intervention" costs. The manager in the office, the operator at the machine, and the maintenance personnel need a tool that can be used to predict the total breakdown event cost to a company and compare that cost to an early intervention cost that will avoid the exponential expense. If management, operators, and mechanics had such a tool they could make better decisions concerning deferring maintenance. There is such a tool.

 "I can't believe the solution is that simple." 
~ Senior VP of Operations

I have created a program that facilitates the computation of the True Risk/Reward Ratio for Deferred Maintenance for a breakdown event and have condensed the content to the key cost categories below for this paper. To use it, think of a recent breakdown event that disrupted your operations. Visit with your different department leaders and collect all the costs associated with that event and fill in the boxes below. Don't stop until you have identified every cost.

Computing the  True Risk/Reward Ratio The worksheet to the right is provided to organize the Operate to Failure costs company-wide. First: Enter the  direct maintenance cost to repair the breakdown event. Second: Enter all known measureable costs  that are not maintenance related  such as known missed sales or lost plant man/hours. Third: Enter any intangible costs such as customer dissatisfaction, estimated lost sales or lost opportunity. Fourth: Total these costs. Fifth: Enter your Early Intervention Costs. Sixth: Divide the Total Cost to your company by the Early Intervention Cost. The resultant ratio will be your True Risk/reward Ratio for  Deferring Maintenance for this event.

This ratio routinely exceeds 40:1. I would suspect that you will be very surprised at the true risk your company incurred by deferring the maintenance event. If so, conduct the same analysis for at least ten past breakdown events for the same process. I think you will find that although the dollar amounts change the True Risk/Reward Ratio will be fairly constant for like processes.

When the historical True Risk/Reward Ratio for Deferred Maintenance for a process is known it can be applied to all future decisions.

Assume you find that your risk/reward ratio is 60:1. Then, if your maintenance manager advises that maintenance is needed and an early intervention cost will be $10,000 then a few taps on a calculator will predict a $600,000 expense if the asset is Operated to Failure. This is a number that sound business decisions can be based upon.

From time to time there are business decisions that require taking the risk of operating to failure to achieve a certain goal. However, if a breakdown does occur the associated costs and disrupted operations should be recognized as an Operationally Induced Event (OIE) and not automatically charged off as a maintenance event.

When the True Risk/Reward Ratio for Deferring Maintenance is known, management can make a decision that is in the best interest of the company to balance early intervention costs against breakdown disruption costs.

Setting the Stage for Successful Maintenance

Your maintenance manager does not need much from you to dramatically reduce maintenance costs and improve reliability. You do not need to have a maintenance manager's knowledge and experience with machinery. What you do need to know is the consequences of not letting him intervene with maintenance as early as possible.

1. Know the total consequences to your operation for a breakdown event by computing the costs of past breakdown events for the whole operation. Dig until you get all the costs. Produce a good True Risk/Reward Ratio for Deferring Maintenance for each process. If you know this ratio, you will change the way you manager the maintenance manager.

2. Trust your maintenance manager's assessment of the asset's condition and how long it can operate before failure. They understand the machines and have their fingers on the pulse of use.

3. Trust your maintenance manager's cost estimates in time and money to intervene early.

4. Believe your maintenance manager's estimate of what the breakdown repair cost will be in time and money if you do not intervene early.

5. Believe your maintenance manager's delivery lead-time estimates for critical parts. This will change your decisions as to needed inventory stocking levels to support your operational goals.

When you do these things for your maintenance manager, you will begin to have a very accurate view of their challenges in time, money and parts to meet your corporate operational needs. Your confidence in the risk/reward ratios will help you to better support them with man power, training, and on the shelf parts inventories.

And you know what? When you know these things and act to support the maintenance manager your maintenance spending goes down dramatically and your asset operational readiness improves immediately. Production becomes more stable and safety improves. When you do this, the response time for improved reliability and reduced downtime benefits is not years but months. You can turnaround your downtime losses in just months by allowing your maintenance manager to intervene early.

All you have to do to support your maintenance manager is to know your True Risk/Reward Ratio for Deferred Maintenance for each process and find a way to let maintenance intervene early.

Of course, this is the first and most important step but there are more techniques you can apply to reducing maintenance costs through improving purchasing policies, altering hiring policies, and refining operations plans to build in more scheduled maintenance time.

If you should care to visit concerning how these techniques may be applied to your company, I am at your service. ~ David Geaslin