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What is the actual added value of maintenance? 
by Mark Haarman and Remco Jonker
Click here for a PDF version of the article (1.3 Meg)

That is a frequently heard question in boardrooms the world over. Even though maintenance is often 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 - the language being spoken in boardrooms. 

For this reason Mainnovation developed the Value Driven Maintenance® (VDM) methodology, which is implemented in leading maintenance organizations like DSM, Smurfit Kappa, Sara Lee, GlaxoSmithKline, Akzo Nobel and Volvo Cars.

VDM builds a bridge between traditional maintenance philosophies and managing by shareholder value. Not only does VDM simplify the boardroom discussion, it also shows that far from being a cost center, maintenance is actually a major economic value within the overall business performance.

What is Value?

Before you can manage by shareholder value, you have to understand what exactly value is. Reference to financial literature reveals that value is defined as the sum of all future free cash flows, discounted to today.

This sounds impressive, but what does it really mean? Let’s start by looking at the first part of the definition. 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

Some companies use highly creative lease, depreciation and reservation techniques to keep their book profits artificially high (or low). Newspapers have been crammed with articles on this subject in the recent past. As we have seen from many of these stories, questionable accounting techniques do not always contribute to shareholder value - and are rarely good for the long-term health of a company.  The second part of the definition stems from the knowledge that the value of a cash flow is related to time.  

One dollar is worth more today than one dollar next year. This is because you can deposit a dollar at the bank today and use it to generate income over a period of one year. Therefore, you have to adjust future cash flows. 

Value of Maintenance

A maintenance manager is likely to say: “This theoretical approach is all very well and good, 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 prioritize: do you want to reduce costs or increase uptime? Is a 1% increase of uptime just as valuable as a 1% reduction of costs? And how do you determine the value of safety?

VDM provides answers by identifying the value potential of four value drivers in maintenance and enabling you to manage by those drivers. 

Figure 1 shows what maintenance is all about. Today’s maintenance managers are constantly balancing between higher machine availability (asset utilization) and lower maintenance costs (cost control). In doing so, they must take into account the growing body of laws and regulations covering safety, health and environment. 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 and does 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, which results in large 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 an 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 organization. VDM provides calculation models and tools for this purpose (see next page). One of those tools is the VDM Control Centre; an online platform that allows maintenance managers to measure and benchmark their maintenance performance against anonymous companies in the same industry.  The VDM Control Centre also provides a transparent picture of the contribution a maintenance organization is making to creating value for a company.  Note that the result of the calculation of value will differ markedly depending upon the industry involved. In the bulk chemical industry, for example, 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.

In the pharmaceutical industry, the situation is the other way around. Demand for medicines continues to grow but the technical availability of the production process is relatively low. This matter is obviously receiving attention. The SHE factor here is becoming more and more important with the growing role of the regulating authority FDA (Food & Drug Administration).

Value and Time

The next example shows that value depends not only on the industry concerned, but also on time. In the aviation industry, traditionally the focus was on increasing fleet availability and meeting the regulations of the Aviation Authorities.  As a result of the attacks on September 11th, 2001, there has been a (perhaps temporary) reduction of the demand for air travel. This reduces the importance of fleet availability. At present, many airlines are concentrating on controlling costs. This requires an enormous turnaround, one in which the VDM methodology can guide the way. 

Value and Competencies

Once the value potential has been identified, the maintenance function must be organized accordingly.

Which competencies 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, all too often, we see that these decisions are not made by the maintenance department. VDM, however, does so and it creates a link between value drivers and core competencies (see Figure 2). 

Take 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.

The opposite applies to the pharmaceutical industry.  There, the left-hand value circle must be organized from equipment performance planning to loss analysis. Interestingly, both value circles include the competencies of reliability engineering, planning & preparation and maintenance execution.

These competencies 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 competencies, the next step is to organize and control them in the right way. For this purpose VDM puts forward best practices from leading maintenance organizations. Total Productive Maintenance (TPM) thus enjoys a reputation mainly as the best practice for registering, analyzing and improving production losses (asset utilization) in discrete production. In contrast, Asset Based Costing (ABC) is a proven best practice for properly controlling maintenance costs.

Using these best practices, a technical department can quickly become a professional maintenance organization that adds value to the overall business performance. In VDM terminology, this is called the Most Valuable Maintenance Organization (MVMO). To ensure that the new way of working is embedded in the day-to-day business, the processes and best practices are described in the VDM process map. This is a complete and interactive description of the processes involved and roles and responsibilities resulting from it. Naturally the people should be trained accordingly.  The different steps in the process map are also linked to the different steps in the EAM-system.

Monitoring via the EAM System

If these processes and practices are supported well by the EAM-system, that is definitely a solid basis for continuous improvement. However that is only the beginning. To enable the organization to focus on value adequately, it is necessary to visualize the management information properly. That is recognized by the leading EAM-vendors. Therefore, VDM Control Panels are developed in Maximo, Datastream 7i and SAP EAM (Figure 3).

This is a graphical overview with drill down functionality, showing the performance of the maintenance organization at a glance. It also allows for the detection of deviations, defects and their causes in just a matter of a few mouse clicks. It shows answers to questions like “Why didn’t we perform according the Service Level Agreements we made with Production?” or “Why do the actual costs deviate from the originally budgeted costs?” etc.

Valuable?

Is VDM valuable? We and a growing number of multinationals on all continents think it is.  Or, as Bengt Svensson (maintenance manager of Volvo Cars Manufacturing) explains: “If you want to improve your maintenance process, you need an operating control system. VDM is such a system, while it shows us where and how to improve.”

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 center because it contributes in various ways to a company’s economic prosperity.   In fact, VDM confirms what we in the maintenance and reliability world already thought, but now we have the proof!

Mark Haarman MSc MBA is Managing Partner in Mainnovation, the company he founded in 2000. Today the company is one of the leading maintenance consultancies in Europe and the inventor of Value Driven Maintenance®.  In the course of his career, Mr. Haarman has become a maintenance expert with a wide array of expertise, helping customers develop “World Class” maintenance and reliability policies and practices. He is a former chairman of the Dutch Maintenance Association (NVDO) and the author of the book entitled “Value Driven Maintenance, New Faith in Maintenance”. 

Remco Jonker MSc is Partner in Mainnovation. Mr. Jonker is an international expert in maintenance management and he has assisted many organizations in Europe and Asia to improve their maintenance effectiveness He contributes actively to the development of his field of specialization through published articles, seminars and training courses. In addition he is co writer of the VDM book.

References

1. Mark Haarman and Guy Delahay, “Value Driven Maintenance – New Faith in Maintenance”, Mainnovation, Dordrecht, the Netherlands, 2004.