Maintenance economics

Maintenance economics

Life cycle cost analysis

Life-cycle cost analysis (LCCA) is a tool to determine the most cost-effective option among different competing alternatives to purchase, own, operate, maintain and, finally, dispose of an object or process, when each is equally appropriate to be implemented on technical grounds. For example, for a highway pavement, in addition to the initial construction cost, LCCA takes into account all the user costs, (e.g., reduced capacity at work zones), and agency costs related to future activities, including future periodic maintenance and rehabilitation. All the costs are usually discounted and total to a present day value known as net present value (NPV). This example can be generalized on any type of material, product, or system.

In order to perform a LCCA scoping is critical - what aspects are to be included and what not? If the scope becomes too large the tool may become impractical to use and of limited ability to help in decision-making and consideration of alternatives; if the scope is too small then the results may be skewed by the choice of factors considered such that the output becomes unreliable or partisan. Usually the LCCA term implies that energy and environmental costs are included, whereas the similar Whole Life Costing generally has a reduced scope.

Estimation of economic life of equipment

Consider an investment in a machine with an initial purchase price of $1000. The yearly operating costs and salvage value of the machine depend on its age as shown in the table below. We anticipate requiring the use of the machine far into the future. Given that the salvage value is decreasing and operating costs are increasing, there must be some optimal time to replace it. The optimal replacement time is called the economic life of the machine.

Investment analysis recognizes that money spent or earned in the future has less value when viewed from the present. This is called the time value of money principle. We compute the present value of an amount cn received n years from now as

P = cn/(1 + i)n

The quantity i is a percentage expressed as a decimal, and is variously called the interest rate, discount rate, or minimum acceptable rate of return. The term 1/(1 + i)n, is the discount factor. When i is a positive

quantity the discount factor is less than 1.

"Maintenance costs"

One universal measurement of maintenance performance, and perhaps the measure that matters most in the end, is the cost of maintenance. Unfortunately maintenance costs are often used to compare maintenance performance between companies or between plants within the same company.

Equally unfortunately, there is no standard for measuring maintenance costs. Each company, usually each plant within a company and often each department within a plant develop their own definition of "maintenance costs."

For this reason, maintenance cost comparisons should always be accompanied by a clear definition of what is included and excluded for each plant included in the comparison.

If you are in the process of defining maintenance costs, or believe that your definition needs updating, the following table may be of help.

Type of cost (materials and labor)

Preventive maintenance

Corrective maintenance (repair or replacement of failed components)

Lubrication (a specific PM task)

Contracted preventive and corrective maintenance

"Maintenance" work done by Production employees. This can included cleaning, inspections, replacement of "production" components (e.g. filter media, etc) and perhaps some lubrication.

"Non-working" maintenance labor (e.g. maintenance safety meetings, waiting time, etc)

Maintenance supervision, planning and administration

Non-capital plant improvements. This includes both process and reliability improvements

Capital improvements and replacements

Disposal of obsolete and surplus stock and

inventory adjustments (where inventory is

working capital)

Recommended cost category

Maintenance

Maintenance (unless its a capital replacement)

Maintenance (In some plants this is a Production cost)

Maintenance

Production - but remember to take these

costs into account when making

Comparisons

Maintenance

Maintenance

Probably maintenance, however its a good idea to include an "improvement" category in Work Order codes to allow improvement costs to be identified

Capital (but remember that the definition of "capital" also varies widely)

A special expense account, separate from other costs and not in the maintenance budget

There are other specific activities that may be performed by Maintenance people and these should be considered and defined, such as snow removal, reading utility meters, etc.

A clear definition is important so that cost trends can be identified, which is the "comparison" that is of the greatest value. The definition becomes critical if costs are used as part of an incentive, for example, where maintenance is contracted to an outside company

MAINTENANCE BUDGETING

The need for a maintenance budget arises from the overall budgeting need of corporate management and involves estimation of the cost of the resources (labour, spares etc.) that will be needed in the next financial year to meet the expected maintenance workload. The maintenance life plans and schedule have been laid down to achieve the maintenance objective (which incorporates the production needs, e.g. operating pattern and availability) and in turn generates the maintenance workload.