Maintenance and Reliability Reaches to Directors and Shareholders

"Maintenance and Reliability Reaches to Directors and Shareholders" Len Bradshaw

• Are management boards and shareholders now becoming interested in maintenance and reliability issues? • What are the implications for those engaged in maintenance and reliability activities. “Borrow one idea and you’re a plagiarist. Borrow many, and it’s research. ” Ref. Ridderstrale in Evolution No 1 2006

• In today’s stock market, building share price is of primary concern for managers and shareholders of companies. • In many processes the input costs and finished goods value are fixed by the market. • Any variation in profits earned comes from the process. Drew Troyer “Greasing The Way to Solid Wall Street Performance www. noria. com

THE BEST COMPANIES Maintain good relationship with customers Take a significant market share Reduce lead times Have a presence in major industrial countries Earn profit Introduce new products ahead of competition Be a low cost producer Ship high quality products Be a technological leader Maintain a well motivated work force Be independent of any customer

P MULLINS AND J WILKINSON, HUMAN FACTORS TEAM RESOURCES FOR MAINTENANCE ‘Am I clear that adequate resources and staff are made available to carry out necessary maintenance in my business? ’ ‘Do senior managers and directors understand fully the consequences of failing to provide this resource? ’

“Job cutters running 52 firms that sacked more than 1000 workers in the first half of 2001 on average earned 80 percent more than bosses of the other 365 firms in the study. Never over the years has there been such a blatant pattern of CEOs benefiting at the expense of their workers. ”

Dunlap accused of fraud… With Mr. Dunlap at the helm, sunbeam shares reached $US 50 in March 1998. In 2001 the 104 -year-old company filed for bankruptcy. The shares traded are now 7. 5 c a piece The Australian Financial Review 17 May 2001

MAINTENANCE LEGEND MAINTENANCE COST MUST BE REDUCES QUICKLY - NO • Most of us can cut maintenance costs very quickly by 40%. We simply get rid of some people and stop doing certain maintenance jobs. • If you get the opportunity to take a job like this, don't plan on staying more than a year. • The consequences will most likely be devastating to the total cost, and problems will start to show after a year or two due to ill-maintained assets. • Maintenance cost cannot be reduced quickly because it takes time to improve equipment reliability. Improved reliability will reduce cost, but reduced cost will not improve reliability. Tor Idhammer, IDCON, article Maintenance Management Legends, Maintenance Journal May 05 (see course Data disc)

TO INCREASE PROFITS • SALES • EXPENSES • ASSETS

MAINTENANCE ORGANISATION : ASSETS ARE MAINTAINED TO A STANDARD TO MEET THE BUSINESS OBJECTIVES : ðPRODUCT QUALITY ðPRODUCT OUTPUT ðON TIME DELIVERY ðSAFETY & ENVIRONMENT AT THE LOWEST SUSTAINABLE COST

DIRECT COST Easy to Quantify Difficult to Quantify Labour, Parts, Overheads, Outsourcing INDIRECT COST Downtime (planned or unplanned), Slow Running, Defect Product, Additional Labour Costs, Safety & Legal Costs, Environmental costs, Poor Company Image, Loss of Contracts, Insurance costs, etc.

REDUCING THE TOTAL COST OF MAINTENANCE Large Process Plant 3. 0 2. 0 1. 0 0 YEAR 1 YEAR 2 YEAR 3 DIRECT MAINTENANCE COSTS YEAR 4 YEAR 5 INDIRECT COSTS

Production - Monthly Availabilities EA = 27. 5 Days OA = 26 Days EA = 24. 2 Days OA = 21 Days OEE Results In 5 Additional Production Days per Month yields ~1 M lbs. /mo. ~$500, 000/yr. GAINED

Herald Sun 18 January 2007 • Rio Tinto appears to be struggling to maintain growth, with production of its 2 major earners down in the 4 th quarter due to maintenance. • Analysts are expecting lower earnings and expected profits are now $9. 9 billion • Share price is down $1. 20 to $71. 30

Herald Sun 14 Nov 2006 • A mechanical failure at Zinifex’s Century mine (in the Concentrator) is expected to halt processing for a week, costing the company about $30 million in revenue. • A maintenance shutdown of the concentrator in the September quarter also lost a further 14 days. • They expect a lower tonnes produced this year compared to last year. • Expected sales for the year are $4. 87 billion up from $3. 1 billion last year. • Zinifex is expected to report a profit of $1. 5 billion, a 36% increase on last year. • Zinifex shares gained 68 c yesterday at $17. 38

Maintenance and Profits The success of the maintenance professional depends on more than technical competence. It will be directly related to an understanding of company financial measures and their use to show a direct contribution of maintenance to company financial goals. The maintenance and reliability process is seen by the best organisations as a direct contributor to profits rather than a service cost center.

From A Cost To Reliability Provider There was a view of maintenance departments as a cost – a department with no output. If all you are is a cost, then all you can do to improve is get smaller, or preferably disappear altogether. In the last few years we have been changing the focus of maintenance from cost to Reliability Provider – the output of an effective maintenance program.

MAINTENANCE IS CAPABLE OF SIGNIFICANT CONTRIBUTIONS TO AN ORGANISATION’S PROFITABILITY, WELL BEING, AND LONG TERM SURVIVAL In taking a “Business Approach to maintenance” then perhaps the primary maintenance objective should be: “TO ASSIST IN THE ACHIEVEMENT OF MAXIMUM SUSTAINABLE NET RETURNS TO THE COMPANY”

Engineering Asset Management / An Insurance Perspective Ian Barnard Senior Risk Management Engineer American International Group WCEAM 2006 and published in the AMMJ Jan 2007

Boiler/Plant Furnace Explosion Boiler Explosion (East Asia) - $200 M and 30 Months

Asset Management Related Insurance • Property • Plant and Machinery Breakdown • Business Interruption (Loss of Profit) – BI insurance losses can easily exceed the capital outlay for all plant and equipment – BI insurance cover is crucially dependant in Asset Management strategies, which are a key focus of insurers in the operational stages of a project

Macro Surveys • Plant and Equipment – Design (proven / unproven / prototype) – Condition – Suitability – Fleet Operational History – Reliability – Equipment Support – Structural Integrity – Testing – Alarms and Controls

Macro Surveys • Human Elements – Operations and Maintenance Procedures – Employee Relations – Safety Management – Training – Organisational Structures – Staffing – Turnover

Macro Surveys • Maintenance – – – – Maintenance Management Maintenance Improvement Performance Measurement Housekeeping Spares Contingency Planning Repair Facilities Condition Monitoring

Major overhauls in maintenance legislation on the horizon For years, stockholders have pressured management to increase quarterly shareholder value without accountability for long-term decisions and implementing sustainable processes. That is changing. Shareholders have filed a “breach of duty” lawsuit against BP executives for not ensuring proper maintenance and repair processes. Joel Leonard predicts major overhauls in maintenancelegislation. AMMJ Jan 2007 Joel Leonard, leonard. joel@mpactlearning. com

• Many nervous CEOs or their minions will be doing spot inspections. Some already are. • We need to be ready for their visits, to help them understand the purpose of maintenance and strengthen maintenance to endure the imposed additional requirements. What would the CEO say if he walked into your office today? Joel Leonard, leonard. joel@mpactlearning. com

GRAPHS OF ACHIEVEMENT THROUGH CHANGE % 100 OPERATING AVAILABILITY GAINS % PLANNED MAINTENANCE (PROACTIVE) 80 60 0 OVER 5 YEARS % OVER 5 YEARS HRS. 16 0 140 MAINTENANCE COSTS TO TOTAL MANUFACTURING COST DOWNTIME REDUCTION 0 OVER 5 YEARS % NO. 20 4 TRAINING COST/PAYROLL REWORK 0 OVER 5 YEARS

As recently as five years ago, it is fair to say there was very little awareness at the corporate executive suite level regarding the contribution to financial and business performance improvements that can come from improved levels of physical asset reliability. Enterprise Reliability: Changing the Game Robert Di. Stefano and Larry Covino IMC 2006

The CEO of Chevron Corporation said in a recent letter to employees that “Reliability, like safety, is a critical element of operational excellence and requires our constant attention. ” The Vice President of Operations at Anheuser Busch said in a recent public speech to the Society of Maintenance and Reliability Professionals, that “As goes maintenance, so goes the business”. There are more and more examples of executives focusing on maintenance and reliability every day. Enterprise Reliability: Changing the Game Robert Di. Stefano and Larry Covino IMC 2006

Why is Reliability Important? Comparison of actual operating results show that “Best in Class” reliability performers typically spend about 60% less on maintenance than industry averages. While simultaneously achieving better results in process uptime, labor efficiency, equipment availability, safety, environmental compliance, and of course profitability. Enterprise Reliability: Changing the Game Robert Di. Stefano and Larry Covino IMC 2006

• In 2003 there were $4. 9 trillion of physical assets in United States industry. • the average annual maintenance spend is between 5% and 8%, in the USA • the best performers spending less than 2% to 3%. the opportunities • In addition savings associated with performance deficiencies can represent 3 X to 7 X the maintenance spend reduction benefit. Enterprise Reliability: Changing the Game Robert Di. Stefano and Larry Covino IMC 2006

Australian Potential Savings? A rough approximation using scaling on population numbers: US$738 billion savings in the USA with a population of 300 million would equate to – US$50 billion savings in Australia – population 20 million POTENTIAL SAVINGS OF Aus$75 BILLION

• Manufacturing company with annual sales of $2 billion dollars, • Earnings before interest and tax (EBIT) of $120 million and 50 million shares outstanding. • That results in earnings per share (EPS) of $2. 40. • Assuming a typical price to earnings ratio (P/E), the company’s stock would trade at $30 per share. • Improving from average performance in maintenance to world-class would increase earnings per share from $2. 40 to $3. 00. • Assuming a constant P/E ratio of 12. 5, one could argue that the share price would trade at $38 per share - an increase of $8 per share, or 27 percent! Drew Troyer “Greasing The Way to Solid Wall Street Performance www. noria. com