bruce hawkins, cmrp management resources group, … · how reliability impacts shareholder value...

How Reliability Impacts Shareholder

Value

Bruce Hawkins, CMRP

Management Resources Group, Inc.

Introduction

• Reliability initiatives generate shareholder value

in many ways

• Some are unexpected

• Returns on an investment in reliability

improvement (if effectively implemented)

generally exceed the planned business case

© 2014 Management Resources Group, Inc. – Proprietary and Confidential

Reliability Definition

The probability that an asset will perform its

required function under defined conditions for a

defined time interval.

A Reliability-Based Maintenance Program

Seeks to Maximize the Likelihood of

Producing at an Intended Rate.


Reliability Attributes

• Equipment is operating within its design parameters

• Disciplined M&R work process is in place

– Quantity of work is known

• Resources are utilized effectively through Planning and

Scheduling

• Mature PM/PdM program is in place with high

compliance

– Technical basis for all tasks

– Multiple technologies in use

• Relentless Root Cause Analysis is done

• Effective storeroom and spare parts management

• All plant functions are engaged in reliability improvement – Operations, Maintenance, Engineering, Procurement


Annual Maintenance Cost per Billion RAV

Performance Pays

Reliability Engineering

Condition Monitoring

Work Management

Data Management


Desired Mix of Work

PM, 30%

Requested Work , 20%

PdM, 50%

Top Performer Mix of Work

PM 30% 15% PM

15% Results

PdM 50% 15% PdM

35% Results


Key Performance Indicators

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

BOMCoverage

PM Coverage VibrationCoverage

1st Quartile 3rd Quartile


• Spend ~< 2.7% of RAV in Annual Maintenance

• Have ~< 0.9% of RAV in Stocked MRO Inventory

• Maintain >80% Equipment in “Green” Condition

• Devote 30% of Work Force to PMs & Results of PMs (15/15%)

• Devote 50% of Work Force to PdMs & Results (15%/35%)

– High Percentage Equipment Covered with Multiple Technologies

• Dedicated Planners Focus on Results of PM/PdM

– 90% Planned Work

• Have Integrated Scheduling Processes (Ops & Maintenance)

– 95–100% Scheduled Work

• Routinely Achieve 55% Wrench Time

• Use Top Tier EAM/CMMS to Control, Document & Manage Work & Data

• Apply Change Management Techniques to Sustain Performance

Balanced Performance }

Best In Class Manufacturing


Shareholder Value Drivers


Revenue Growth


Revenue Growth

• Revenue growth occurs when:

– Output volume is increased and the additional product is sold

– Greater product value (quality, consistency) commands higher

prices

• Reliability increases Capacity Utilization (OEE):

– Increases availability by reducing the incidence of unplanned

failures, providing additional production capacity

– Reduces minor stops and speed losses, increasing throughput

– Increases quality by providing stability in the manufacturing

process, reducing the incidence of “special cause” events


OEE Components

Total Available Time (365 days X 24 hrs / day)

Scheduled Hours of Production Idle Time (beyond plant

control)

Uptime Hours of Production Unscheduled

Downtime

Best Production Rate

Actual Production Rate Speed

Losses

Actual Production Volume

First Quality

Production Quality

Losses

OEE

(Overall Equipment Effectiveness)

TEEP

(Total Effective Equipment Performance)

Process Variability

• Variability in a stable manufacturing process can

be classified as one of two types:

– Common cause variability

• Random variability caused by variability in measurement and

control, raw material properties, equipment capabilities, etc.

– Special cause variability

• Abnormal events due to equipment failures, process upsets,

operational errors, etc.

• Reliability minimizes the special cause events,

allowing personnel to focus on reducing

common cause variability and increasing Cpk © 2014 Management Resources Group, Inc. – Proprietary and Confidential

Cost Effectiveness


Cost Effectiveness

• Operations and Maintenance often represent the largest

controllable cost areas

• Costs are minimized when these resources are used

efficiently

• Reliability:

– Provides for efficient labor and material resource utilization

– Improves safety

– Offers the potential to eliminate unnecessary preventive and

corrective maintenance work

– Reduces waste in operations and in maintenance

– Reduces energy losses in rotating equipment and utility systems

– Reduces stores carrying costs


Leverage of Planning

• Craft Utilization (Wrench Time) Without

Planning

– 35% Cross-Industry Average

• Craft Utilization With Planning

– 55% Cross-Industry Average

- Doc Palmer, Maintenance Planning and Scheduling Handbook

The Leverage of Planning

• Three People without “Planning” => 3 X 35% = 105%

• Two People with “Planning” =>1X0% + 2 X 55% = 110%

• Break Even is 3 Persons!

• 55%/35% = 1.57 (57% Improvement)

• One planner can plan for 15 to 20 persons

• 20 persons X 1.57 = 31.4 persons (11 extra people)

One planner can plan for 15 to 20 persons

Source: Planning & Scheduling - by Doc Palmer

For No Extra Cost!

55%/35% = 1.57 (57% Improvement)

Injury Rate v. OEE

Company A

90

95

100

105

110

115

120

15

35

55

75

95

115

135

Injury Rate

OEE

Month

OE

E-

% o

f B

as

e

The RM Group, Inc.

Knoxville, TN

Failure Probability Profiles

B

“Bathtub Curve” - High infant mortality, then a

low level of random failure, then a wear out

zone

A “Traditional View”

Random Failure then a wear out zone

C “Slow Aging” - Steady increase in the

probability of failure

D

“Best New” - Sharp increase in the probability

of failure then random failure

E “Constant Random Failure”

Random - No age related failure pattern

11%

Some Age Related Failure

72%

F “Worst New”

High infant mortality then random failure

No Age Related Failure

89%

2 %

4 %

5 %

7 %

14 %

68 %

PM Optimization

• PMs can be a big waste of resources:

– PMs derived mostly from Vendor Manuals

– PMs added as a response to a past failure

– PM and PdM Programs operated as separate entities

– Little or no basis documentation for PMs

– PM and PdM overlaps

• Organizations with high reliability:

– Have a technical basis for all maintenance tasks

– Use PdM extensively

– Focus on critical assets

– Realize that “no scheduled maintenance” sometimes is an

appropriate strategy


P-F Interval

Point where

failure starts

to occur

Changes in Vibration

P-F interval 1-9 months

Wear Debris in oil


Audible noise

P-F interval 1-4 weeks

Hot to touch

P-F interval 1-5 days

P1 P2

P5

P6

IR Thermography


P3

P = Potential Failure

F = Failure

Quantitative PM


P4

Time

Equip

ment

Conditio

n

Life at the Bottom

“Plan” on the fly

Parts may not be there

Hurry, Hurry, Hurry

No time to do it right


P-F Interval

Point where

failure starts

to occur

Changes in Vibration


Wear Debris in oil


Audible noise


Hot to touch

P-F interval 1-5 days

P1 P2

P5

P6

IR Thermography


P3

P = Potential Failure

F = Failure

Quantitative PM


P4

Time

Equip

ment

Conditio

n

Living on top of the P-F Curve

Less Call outs/forced OT

The Right Parts are there

Parts can be obtained in time

Time to do it right the first time

Time for feedback/improvement


Ron Moore’s Reliability Process

Minimum unit cost

of Operations

Design Store Operate

Defects Defects Defects

Unnecessary Work

Uptime

&

Necessary Work

Root Causes Rate Losses & Downtime Source: In Cooperation with

Andrew Fraser,

Reliable Manufacturing Assoc.

Buy

Defects

Install/

Startup

Defects

Maintain

Defects

The RM Group, Inc.

Knoxville, TN

Copyright 2003

Energy Cost Avoidance

• Reduced leaks in utility systems (steam,

compressed gases, etc.)

• Fewer stops and starts on equipment

• Improved machine alignment

• Reduced motor efficiency loss

• Reduced electrical energy loss due to

overheating connections

• Improved efficiency of insulation systems


Stores Carrying Costs

• Directly related to inventory value

• Costs include:

– Cost of capital

– Taxes

– Labor

– Energy

– Space

• Can be worth 20% - 30% of inventory value

annually!


Asset Efficiency


Asset Efficiency

• Best measured by Return on Assets (ROA)

• Indicates how profitable a company is relative to the total

assets it has at its disposal

• Measures how efficiently management uses its assets to

generate earnings

• Used by potential investors to compare companies in a

similar industry to determine which is the best value

• Calculated by dividing net income (earnings) by value of

total assets:


Deepwater Horizon – April 20, 2010

http://en.wikipedia.org/wiki/File:Deepwater_Horizon_offshore_drilling_unit_on_fire_2010.jpg

ROA History - BP

-2%

0%

2%

4%

6%

8%

10%

12%

2004 2005 2006 2007 2008 2009 2010 2011

BP Return on Assets

Asset Efficiency

• Asset efficiency is increased when:

– Fixed assets are utilized efficiently

– Asset life is extended beyond “accounting rules”

– Asset maintenance requirements are minimized

– Current asset values are minimized

• Reliability:

– Optimizes the business value produced by existing assets

– Unlocks “hidden capacity” (OEE improvement)

– Provides for extended useful life

– Minimizes turnaround cost and duration

– Offers the potential for failure mode elimination in design

– Reduces the need for excessive spare parts inventories


Depreciation

• Non-cash charge used to allocate the cost of an

investment over the expected useful life

• Extending the life of assets beyond the

“expected useful life”:

– Reduces the need for recapitalization (and future

depreciation charges)

– Allows capital funds to be deployed elsewhere for

increased business value


Turnarounds

• Time-based overhaul strategies are inappropriate for the

majority of assets

• Turnarounds are periods of high risk:

– Numerous vendors, contractors, and heavy equipment operating

within close quarters

– The potential for accidents and injuries is greater; from 1995 to

2000, >25% of lost time injuries occurred during outages*

– Delays in execution can result in significant lost production

volume and revenue

– If not effectively controlled, spending on “growth work” can cause

significant cost overruns

• Reliable organizations minimize both scope and duration


*Source: US Occupational Safety and Health Administration statistics

Reliability, Availability, & Maintainability

(RAM) Analysis

• Used for performance forecasting of process facilities

given the constraints of equipment design configuration,

equipment reliability (MTBF) and equipment

maintainability (MTTR).

• Reliability block diagramming is used to simulate

performance and test reliability or maintainability

improvement ideas (failure mode elimination)

• Sensitivity analysis can be performed to identify best

options for performance improvement

• Will be required for API 691


Spares Inventory

• Why do we maintain stores inventory?

– Protection against risk and uncertainty

– High risk of unforeseen failures requires large

inventories

– Low risk of unforeseen failures requires smaller

inventories

• If we could guarantee we would never have

another unplanned failure and could apply “just-

in-time” purchasing, would we even need a

storeroom?


Petrochemical Stores Value Benchmarks (Per Billion RAV)


35

Market Expectations


Market Expectations

• The market values a publicly traded company based on

performance, consistency and management credibility

• The analyst community has a strong influence on stock

price

• Reliability can have a significant impact on the

perception that the market has of an organization


Analysts

• Definition: A financial professional who has expertise in

evaluating investments and puts together "buy", "sell"

and "hold" recommendations for securities

• How do analysts arrive at these ratings?

– Review macroeconomic (industry) and microeconomic

(company) trends

– Study quarterly and annual reports to understand company

fundamentals

– Attend CEO conference calls

– Prepare financial models to predict future economic conditions

related to the business (factoring in potential variability and

uncertainty - RISK)


“The slightest change in an analyst's rating for a particular stock can make

the stock take off - or send it into a tailspin” - Investopedia

Market Expectations

• Reliability:

– Provides information concerning the health and

capacity of physical assets

– Provides a greater ability to be “nimble” and able to

respond to opportunities

– Provides systems, structure and discipline that

enhances management’s ability to execute

– Provides data and information to enable fact-based

decision making

– Provides the ability to identify and mitigate risk

– Enhances executive credibility in the marketplace © 2014 Management Resources Group, Inc. – Proprietary and Confidential

Shareholder Value is a Function of

Return on Assets

Shareholder

Value = f(ROA)

Total Assets

Net Income

(earnings)

Costs

Revenue

Fixed Assets

Current Assets


Summary

• A successful reliability initiative nearly always

provides greater benefits than anticipated

• Discipline and rigor inherent in a reliability

culture drives benefits in all areas of the

operation

• What other initiatives can an organization

embrace that has a comparable effect?


Questions?

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