Adding Value: You Can’t Manage What You Can’t See
Wednesday, September 26, 2018
Posted by: AEMP
By Preston Ingalls
Have you ever asked yourself, “I wish my organization would just see the value our maintenance operations bring?” It can seem to you like the maintenance operations are seen as a ‘necessary evil,’ which makes you question the lack of support and appreciation. Before making that assumption, it’s best to ask yourself how well you’ve done in showing the maintenance team’s value to the organization?
If management and production view maintenance operations as a cost with little discernable ROI, it would be natural to question its value. The Nobel and Pulitzer Prize-winning author John Steinbeck once said, “Anything that just costs money is cheap.”
A thought Experiment on Showing Added Value
Imagine you have been offered an opportunity by a friend, Lee, to invest in a manufacturing operation of a proprietary and patented barbecue cleaning device called a Widd Jet that has been sold out to Walmart. Because it’s been in high demand for several years, Lee decides to increase his investors among only those he can trust to fuel expansion. When he explains the high demand track record and shows you a distribution contract and five year patent, you borrow against your 401K and acquire a 25-percent share in this business.
After six months, you are curious as to how well your investment is working, so you ask him how business is going, and he tells you fine, but that seems general and vague. You then ask, is it up or down or staying the same, and he says it’s up. You ask how much, and he responds that because you have spent several hundred thousand dollars in investments it must be providing something back.
You press further and ask Lee for specifics on how much, and he seems puzzled that you are asking so many questions. After all, don’t you trust him? You respond affirmatively but let him know that you want to know how well your investment is paying off. He says he can’t tell you exactly but his gut is saying all is well.
You wanted to see a return on your investment (ROI), as you would justly expect for such a large outlay, but he is vague as to exactly what that is. What he does offer you is an opportunity for further investment to spur more growth, but you’re unclear as to what the previous investment produced and are rightly hesitant to throw more money in the pot.
Lee is asking for a good faith acceptance that your money is being wisely spent, which seems to be a bit of a stretch, and now he is expecting more. He provides no measures to indicate how it was spent or if it is producing anything, so that ROI is starting to look shaky.
Now, I know at this point you would never get yourself into this situation. I mean, after all, who constantly invests money without seeing specific results and returns? The truth is that it might be your organization.
How much has your senior leadership or ownership asked to see a return on their investments in equipment upkeep? Are they sending money on good faith that it is indeed producing results?
Outside of showing annual costs, many fleets and equipment maintenance organizations have done a poor job sharing what that money has been spent on. They measure money spent but not returns or results, so the shop or garage begins to look like a nebulous investment where the motto is “send money-we repair.”
The question we should be asking is how can we show our organizations we really are managing their investment wisely? The first step is to produce a series of leading and lagging Key Performance Indicators (KPIs) that not only show your activity but the results of that activity.
Lagging and Leading Key Performance Indicators
Lagging indicators are typically “output-oriented” measuring results that are easy to measure but hard to improve or influence. Leading indicators, on the other hand, are typically input oriented, hard to measure, and easy to influence. Because they measure process or activity, you must measure leading to produce lagging (process yields results). With the understanding that leading KPIs are often non-financial measures.
In your buddy’s case, a measure of the number of Widd Jet units produced per day would be a leading indicator while EBITDA would be a lagging indicator. Percent Quality would be a leading metric and Annual Revenue would be a lagging one. To put this in context, think of leading as measures of the things we do and lagging as the progress or results of those actions.
So, have we asked our organizations to accept that the money they spend each year or equipment upkeep is really producing results. Yes, we often ask it in good faith.
Now, if we equate this to the Equipment Division or Maintenance Department, we see leading indicators like Percent Preventive Maintenance (PM) of Total Maintenance Man-hours as a good measure of our PM efforts. But we should see an annual improvement in Mean Time Between Failure (MTBF) on Critical Assets. After all, if the PM program is working, we should see a reduction in failure rates. For example, an annualized 10 percent improvement on Critical or Class A equipment MTBF would be a good indication of progress.
We look at percent of Maintenance Man-hours Covered by Work Orders and percent Priority One Work (Emergency Maintenance or EM) as leading metrics for tracking maintenance activity. Conversely, Maintenance Cost as a percent of Estimated Replacement Value would be a lagging indicator with an annualized reduction showing progress. As an example, we can measure Stockroom Turn Rate and Stockroom Service Levels as leaders while Maintenance Stores as Percent of Replacement Value as a lagging indicator.
Benchmarking and Historical Comparisons
The truth is that tracking these indicators is not enough, but also comparing them to others and especially Best in Class would give us some relativity of that value. In addition to this benchmarking we should be comparing to our history to show progress over time. Here are two examples of that process:
A Storeroom Turn Rate of .6 to .8 would be the industry norm in the construction industry while a Turn Rate >2 would be considered Best in Class and >3 World Class, which enables benchmarking comparison to others. It measures progress.
While a 30-35% for Percent PM rate would be typical as shown in the graph below, Best in Class would be >50 percent while World Class would be >60 percent. This shows we have an opportunity to increase our PM efforts.
Related to that would be a reduction in Priority One Work, which is emergency (within 24 hours). A good number to shoot for would be <3% as Best in Class with 1% as World Class.
Finally, the question is, “how do I know I am getting a good return on my assets?” We can show industry averages have shown 25-30% Return on Net Assets (RONA) while Best in Class are >50%. Now, I know I am investing well.
Tracking leading and lagging metrics helps us to make the right decisions at the right time and shows the impact of those decision. It can help us to focus our efforts and when to celebrate success.
The famed management guru, Peter Drucker once said, "If you can't measure it, you can't improve it." But he also said, "Management is doing things right; leadership is doing the right things." If you want continued support for your efforts, show them what you did with what you got.