Why let a lack of budget stop you from doing what makes sense?

If you read this, I'd really appreciate any and all feedback you can offer. I will describe a very common problem that occurs when companies want to make improvements that will help their business and what can be done about it.

Background

I consult in the field of physical asset maintenance and reliability management. Customers are usually medium to large size industrial operations with a heavy reliance in plant equipment and systems, vehicle fleets or extensive infrastructure to deliver product or services to market. Breakdowns in those assets are often costly to repair, but also far more costly in terms of the lost business revenue that the disruption creates.

Avoiding the high costs of failures

Maintenance of these physical assets is often done is a reactive mode - wait for the asset to break and then fix it. When we do that, the equipment usually suffers a significant amount of damage, may damage other equipment also, we lose production or service delivery capability, we increase risks of safety incidents and we may even cause environmental non-compliance.

The alternative is to take proactive steps to maintain the asset and restore it's good operating condition before it fails. The cost of that is far less than the cost of repairs (about 1/3 or less on average) and it always provides an opportunity to avoid those additional consequences of a total failure. Depending on your industry the loss of service or production is usually far more costly than the cost of repairs. Even though most of us would recognize that an ounce of prevention is better than the pound of cure, we don't always do it, or do it very thoroughly. That's probably in our human nature - after all, most of us know about doing exercise as being helpful, but we don't all do it. The first thing we need to do is appreciate the value of being proactive and then act on it.

Where we get stuck

Many managers do appreciate that being proactive will help them save money and avoid loss of opportunity while reducing other risks. Very few have quantified the potential gains. They also know that there is a cost to shifting from reactive to proactive modes. It's a "culture shift" as well as entailing a number of technical changes that will be needed. They seldom know what that will cost and they often assume it will be "too expensive". They often think in terms of their budget and how little, if any, they've set aside for improvements. They also know there's a business case, but they don't know what it is. Without analysis of what today's pain is really costing and the costs of change, they are stuck. Even an assessment to determine the business case can be more costly than their budget can tolerate. They do nothing and in so doing, tolerate the low levels of performance that exist, often also grumbling that they can't get the resources to do anything about it.

The culprit is how we look at budgets and budgeting processes. Those are run by cost accountants who are always and only concerned with spending. In functional areas outside of production or services delivery, they don't consider income. Maintenance is one of those expense budgets and in their minds it should be minimized. Those accountants usually don't have a clue about the potential to save or even create revenue from maintenance improvement activities. In the rare cases where they do, their maintainers are often not well equipped to present a credible business case. Simply saying, "there is a better way, and trust me we'll get the results," no longer flies.

Getting unstuck

The choice to make change requires a seemingly bold decision to trust in yourselves and know that you can pay for the changes easily from the benefits. If you really believe that reliability and efficiency can make a difference, then that decision is like betting on a sure thing - there's really low to no risk that you won't achieve impressive results.

Our most successful consulting customers are those where we've had senior level financial support to the improvement initiatives. The CEO or his equivalent, the COO, and the CFO are key players in achieving the improved results. Without their active support, even well conceived and funded initiatives can fail. But let's talk about getting started first. In those successful customers, the program received financial backing and was executed by a cross functional team. The improvements that are needed don't require only engineering or maintenance action. They require changes in operations practices, engineering, process operations, work and production scheduling, training, and sometimes more.

No functional level manager, e.g.: a maintenance manager, an asset management director, can make those cross functional decisions and make sure that collaboration happens. As a rule, that functional level of manager is also stuck with a budget to which he's handcuffed. Even if he can make the initiative pay for itself, he can't spend the money.

Here are two cases we worked on, where an insightful senior executive made a quick decision to address the root of the problems and achieved substantial results. The executive wasn't worried about budget in the same way as a departmental manager and he had broad responsibility for profitability of the operations. He could also ensure that needed actions, regardless of which department or division they were in, would happen. The results were terrific. They leveraged the right people to do what they do best and supported them fully.

Nickel mine - production levels were suffering because of frequent equipment breakdowns and poorly organized maintenance efforts to correct the problems. Dealing with "bad actor" equipment, targeting reliability improvements and maintenance process improvements resulted in lower maintenance costs, but more importantly achieved a 33% increase in production (fully 16% above nameplate capacity) in just 3 years. Several hundred thousand in spending, produced 10's of millions in revenues annual for years to come - the befits are continual, not just one time gains.

Diamond mining - again production levels were suffering for the same sort of reasons. The same approach to dealing with "bad actors", maintenance processes, process discipline, reliability and their management system created cost savings but also a major increase in production. The "low hanging fruit" alone, generated roughly $55.5 million in additional revenues in the first 6 months alone! That was 5 times the cost of the entire improvement initiative. The total revenue increase potential was about 4 times that and it would take about 3 years to achieve it.

Gold mining - similar situation with variable degrees of inefficiency and potential across a number of mines in the same company around the world. The estimated costs of improvements are in the order of $20 million. The cost savings, mostly in the first year, are estimated at about $50 million initially and later increased to almost $100 million. The production gains were several multiples of that. That's the equivalent, to that company, of adding an entire new producing mine, at the cost of a handful of new haul trucks!

Getting past the budget problem

If you think of yourself as stuck, then you are. Give up or change your perspective. You need to see beyond the limitations or you'll never get past them.

We have begun helping our customers to get past those initial hurdles: the assessment, the development of a business case, the initiative planning, and initiative funding. We've noticed that in almost all cases where a company thinks it has an opportunity to do better, it really does, even if they can't articulate it precisely themselves. They need an assessment that includes an evaluation of the business case and the cost of that often stops them dead in their tracks.

To solve that, we've found some financing help that can get them past those hurdles and indeed into full implementation without the need to pay for it up front. In fact, it can be paid for by the improvements (savings and revenue gains) once the improvements begin to take hold - usually within 6 months of starting.

The financing program is remarkably simple and pay for the program as the benefits come in. We can even keep the payments below the value of the benefits, making your program essentially free! It's not too good to be true - it's quite doable - contact us to discuss your program and how we might be able to help.

Conclusion

In the area of physical asset maintenance and reliability there is usually a big opportunity for improvement that will save money and earn money for your operations. Those opportunities are often stifled by lack of budgets and lack of authority at the budget holder level. Yet those opportunities will provide payback across several functional areas and provide an overall boost to productivity, efficiency and profitability of the operational site or business. The improvements are sometimes evident to the functional managers but getting them started requires much more senior level support and approval. Demonstrating business case and paying for the improvements are initial challenges.

There is an approach to financing these improvements that can make the whole thing somewhat painless by deferring up front costs, paying for the improvements only after they begin to show payback and keeping the value of those payments below the value of the benefits.

It would seem that for those of us smart enough to see the big picture, there are really no losers in this collaboration of technical, consulting and financial disciplines.

To learn more about how we can help with financing your improvements, contact me directly. James Reyes-Picknell

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