November 16, 2018, 10:22 am

Maintenance Budgeting – Real World Challenges

 

Ever had trouble justifying your maintenance budget to your accountants?  Is it difficult to explain condition based maintenance and why it is better not to know when maintenance will actually occur? Then this is the article for you. We explore the challenges of maintenance budgeting in the real world, discuss how principles such as zero-based budgeting and activity based costing apply and give some tips on how to justify good maintenance practice to accountants.

 

Different View Points – Finance and Accounting vs Maintenance

Let’s start by looking at why the conflict arises – which ultimately comes back to the point of view these different groups have. We will do them both the courtesy of assuming they have the organisation’s best interests at heart – that both of them want to spend as little as possible on maintenance, while still achieving the organisation’s output and risk reduction goals!

The Finance and Accounting Point of View

Much as we might not like to admit it, cash is king in any modern organisation and we need to respect the role of the finance and accounting people in keeping the organisation afloat.

What are Finance and Accounting people trying to do?

Maximise the return on money and minimise waste by controlling expenditure.

What is it that finance and accounting want from budgets?
  • How much money is needed, and
  • When the money is needed.
Why is this important?

Running an asset-intensive organisation is expensive and, even in good times, there can be problems in managing the cash so that more comes in than goes out over any given period. When times are tough (like now), this can be a real headache. The consequences are drastic, so the finance folks want as much certainty as they can possibly get about how much and when they need to make payments. The larger the expenditure, the more they will be concerned and we all know that many asset replacement activities are very expensive.

Beyond the direct solvency concerns, there are also questions of efficiency. If the timing of the expenditure is known accurate then the required funding can be held in a short-term investment rather than sitting around in a bank account earning little or no return. For large sums of money, the difference adds up to something significant.

The Maintenance Point of View

You’re probably pretty familiar with what the maintenance manager is trying to achieve, but let’s quickly recap.

What are Maintenance Managers trying to do?

Maintain physical assets to a level of condition that meets the needs of operations/production at the most economical cost.

What is it that Maintenance Managers want from budgets?
  • Money to be available for maintenance activities when needed,
  • A guide and reporting tool for the strategic maintenance plan for the year, and
  • Visibility of which equipment consumes the most resources.

We might also add a minimum of pain – both at preparation and when accounting for expenditure against it!

Why is this important?

Lack of funds can drive inefficient, ineffective or even unsafe maintenance practices, where components are kept in service past their useful lives, cheaper suppliers are used, temporary repairs are made or inappropriately skilled tradespeople are asked to make a repair. All of these factors can drive up maintenance risk and, in the longer term, cost.

It is also important to be able to clearly track expenditure against budget for major equipment. This can assist in determining whether the maintenance is being done (the strategic question) and also whether the equipment is meeting expectations. Any equipment that is burning money faster than expected is clearly a candidate for replacement in the next year (assuming you can get budget!).

 

The Challenges

If we look closely, it is obvious that the two groups above aren’t poles apart – they are both trying to get the best use out of the organisation’s scarce cash resources. It’s just that the finance folks want a level of predictability that the maintenance manager, trapped in a world of breakdown and condition-based maintenance, cannot provide. This leads to repeated monthly cycles of over- and under-expenditure from the maintenance department, with the inevitable grief from above. Over the long-term, a punitive environment surrounding this unpredictability (which we would argue is mostly unavoidable or even desirable) can drive a tendency to avoid unpredictable outcomes by moving maintenance towards fixed interval tasks, which provide greater certainty in terms of cash flows. As we will see, however, these have a range of negative consequences including both higher long-term cost and lower equipment reliability.

Converting Condition Monitoring Tasks to Fixed Interval Tasks

Sometimes, replacing a condition based maintenance strategy with one based on fixed interval replacement or overhaul can almost be reasonable. For failure modes such as fatigue, wear and corrosion, where there is a clear age dependence, it is possible that an optimal condition-based task can be swapped for an interval-based task with just a small increase in overall costs. The diagram below illustrates the difference between equipment or components with a fixed interval repair/replace strategy (top graph) and an on-condition repair replacement strategy (bottom graph).

 Repair replacement strategy graph

The change from an optimal condition based strategy to a fixed interval strategy leads to additional costs because replacing or repairing equipment on a fixed interval basis does not utilise the full life of all equipment. Spare parts usage will increase together with an increase in the frequency of repair/replace activities and any associated shutdown, cleaning and access (e.g. scaffolding) tasks. You will save money by not performing regular condition monitoring inspections,  may get some efficiencies through easier planning and scheduling for a known task frequency, and may reduce working capital requirements by not having to hold additional spare parts in case the inspection indicates a need for replacement or overhaul, but these are usually orders of magnitude less expensive than the repair/replace activity itself.

Of course, the greater the range from the earliest failures to the latest failures (i.e. the longer the wear out zone), the greater will be the difference in ages between a fixed interval and on-condition strategy and hence cost difference. In addition, don’t forget that Nowlan and Heap found that only 2% of failure modes follow “failure pattern B” as illustrated above.[1]Their full results are illustrated below:

conditional probability of failure

These inefficiencies will be worse for all other failure patterns and may also be accompanied by a decrease in equipment reliability, since fixed interval tasks are meaningless for the 14% of failure modes that follow failure pattern E (random failure/constant hazard rate) and downright destructive for the 68% of failure modes that follow failure pattern F (infant mortality).

Converting Breakdown Maintenance to Fixed Interval

We regularly point out that running to failure is a maintenance strategy and, frequently, a safe, effective and efficient one. This simply requires that the relevant failure mode has no safety or environmental consequences and that the cost of prevention exceeds the cost of the production losses and any secondary damage if the equipment is allowed to fail. We are now abandoning that logic simply to avoid the uncertainty associated with the randomness of failure so, provided we had correctly selected our run to failure strategies, we must end up costing ourselves more.

 

Some Solutions

We’ve seen the problems described above in many industries, which is as good an indicator as any that they are complex problems to solve. We are trying to bring together two groups from very different backgrounds and it is always getting the people to communicate that generates the most challenging problems. We can, however, offer some pointers that we have applied in the past:

  • Get your maintenance strategies right
  • Use good budgeting practices
  • Educate the accountants in maintenance
  • Educate yourself in accountancy
  • Work as a team – including with operations!

Let’s discuss these in some more detail.

Get Your Maintenance Strategies Right

Your first priority must be to get your own house in order. Ask yourself whether you really understand the failure modes that occur on your equipment and whether you’ve optimised the associated maintenance strategies accordingly. Some indicators that this may not be the case:

  • Condition monitoring tasks that never generate follow-on maintenance
  • Frequent unexpected failures
  • A high rate of “no fault found” entries against breakdown events
  • A high rate of infant mortality failures following routine maintenance
  • Regular spares or tools shortages

If you don’t have a handle on the types of failure you expect, you won’t be able to build credibility with the finance folks over the longer term as your estimates and explanations will continually be exposed by unexpected (and often high cost) failure events. Consequently, focus on the following reliability improvement techniques:

  • Conduct a maintenance strategy review using Reliability Centred Maintenance (RCM) or Preventive Maintenance Optimisation (PMO) techniques as appropriate
  • Apply good practice planning and scheduling methods to ensure your maintenance strategies are implemented effectively
  • Use experimentation and sampling to improve your understanding of the more critical failure modes where required – e.g. by better defining the failure distributions of wear components
  • Use Defect Elimination techniques to investigate unexpected events and continually improve your maintenance strategies

If you’re doing this, you can be confident that your maintenance strategies will stand up to scrutiny and your estimates of maintenance resource requirements will be correct over the longer term. We’ve done similar activities for different clients on literally hundreds of occasions, so see our articles on Lean Maintenance for a good coverage of these topics.

Use Good Budgeting Practices

Now we move into the mysterious world of the accountant. There are two ideas that we want to briefly discuss: Zero Based Budgeting (ZBB) and statistics.

Zero Based Budgeting

Put simply, Zero Based Budgeting means that every budget (annual or otherwise) starts off at zero and we need to justify all inclusions. This is basically an alternative to the “last year plus 5%” approach, where only the “+5%” needs to be justified. This does not, however, mean that you start from a blank sheet. To make Zero Based Budgeting work, you need to have a very clear idea of how expenditure is linked to organisational outcomes, which really means life cycle cost models that can be adjusted to model different levels of production, different product grades and so on.

For example, in a mining scenario, it may be necessary to adjust each year’s truck maintenance budget for the increasing hours needed to travel between the ever deepening pit and the ROM pad. This would then require a model – often a spreadsheet – that calculates annual operating hours for the truck fleet based on travel times and production tonnage and then converts this into a cost estimate for both the number of services and the number of breakdown events based on the typical reliability of all of the major components. This is a failure mode by failure mode exercise, at least for the major items.

There is no doubt that building and maintaining the models needed to support Zero Based Budgeting is more difficult than traditional budgeting approaches. The benefits, however, are worth the effort. You will be able to confidently estimate the maintenance required even in the face of significant changes to production, evaluate the effect of any arbitrary cuts and select between alternative (insource or outsource) resource procurement strategies. All of this will allow you to more easily justify your funds requests, particularly if you can link these to specific products, which is the purpose of a related technique called Activity Based Costing. It will also, provided your Cost Centres are appropriate and your maintenance records are sufficiently accurate, allow you to track the performance of your equipment in great detail. As discussed above, this will allow you to make sensible decisions about what to replace and when. It will also allow you to update you cost models to improve the accuracy of your future budget estimates.

Statistics Work (on Average!)

The nature of randomness is at the heart of this discussion. If we flip one coin, we will either get 100% heads or 0% heads (i.e. 100% tails). If we repeat this four times, we will probably (87.5% chance) get somewhere between 25% and 75% heads. As we flip it more and more, we will get closer and closer to the expected 50% result. The same is true of our maintenance budget estimates and the lesson is clear – statistics works if the buckets are big enough. If we want to accurately estimate the maintenance resources for a particular period, we need to group together the random items of expenditure to create a larger (and therefore statistically more accurate) bucket. Of course, this is in direct opposition to the need to track expenditure against specific equipment, which means you may need some assistance from the accountants to work out what is acceptable to the business but useful to you.

Educate the Accountants in Maintenance

If you’re going to get reasonable answers from the accountants, you’re going to have to help them understand what you’re trying to achieve and why. Spend some time giving them a brief background on RCM and you may be amazed at how much their tone changes (keep it brief – they probably won’t be as interested in all the technical stuff as you are!). Once this has been accomplished, seek their advice on how best to structure your budget to meet the competing demands of technical accuracy and cost accuracy.

Educate Yourself in Accountancy

If you are expecting the finance and accounting people to listen to you, it is only fair to do them the same courtesy. You can start with some Google searches on the relevant terms, but you will also need to follow up with your in-house finance team to understand how those terms are being applied in your organisation, what your current systems are capable of and how much flexibility is actually available. You may just be surprised…

Work as a Team – Including with Operations!

Our last tip builds on the previous two. Do everything you can to remember that organisational success is a team game and everybody is on the same side. We’ve already talked about working with Finance and Accounting, but the surprise new player here is Operations. As we all know, the way that equipment is used is a major driver of failure, and therefore a major driver of your maintenance budget. Consequently, you need to engage with operations both proactively to understand how they intend to use the equipment when generating your budget and reactively to understand how they actually used it and what the effects on the maintenance requirements were. This reactive engagement allows you to continuously improve your budget estimates, as well as to hold operations to account for their role. Just remember, nobody likes having their chest poked, so keep your common goals in mind and try to have a civil discussion!

 

Conclusion

Maintenance managers have no choice but to face up to the random nature of failure and good ones know that this requires maintenance strategies that result in costs that often can’t be accurately predicted on an equipment by equipment, month by month basis. This is fundamentally inconsistent with the finance and accounting need to map out future expenditure as accurately as possible and is therefore a source of major friction around budgets and tracking expenditure. Rather than adopt sub-optimal maintenance approaches, maintenance managers can try to work with the finance folks by:

  • Getting the maintenance house in order by applying good practice reliability and maintenance engineering approaches and thereby ensuring the resources required for maintenance are well justified
  • Using the accountants’ budget processes as required to generate defensible budgets, including applying Zero Based Budgeting approaches to generate good estimates from the bottom up and using statistical techniques to combine these into reasonably accurate “buckets” of expenditure
  • Engaging the accountants to help them understand the maintenance and reliability engineering concepts in play
  • Allowing the accountants to engage them and teach the principles of accounting and business rules in use by the organisation
  • Working as a team with everybody – including operations – to generate the best possible estimate of resource requirements

There’s no perfect solution, but we regularly see just how far a willingness to engage will take an organisation in generating a suitable – and mostly pain-free – budget process. If you need assistance building a process or model to support your budgeting activities, please call a consultant today.

Happy budgeting!

Lindsay Wright                                                                      

Senior Consultant                                                               

and

Scott Yates

Principal Consultant


[1] Nowlan, F. S. & Heap, H. F., 1978. Reliability Centred Maintenance. Washington D.C.: Department of Defense

 

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