Int. J.

Production Economics 79 (2002) 15}31

A cost model of industrial maintenance for pro"tability

analysis and benchmarking
Kari Komonen*
Tampere University of Technology, Finland
Received 13 April 2000; accepted 21 December 2000

Abstract

A hierarchical system of maintenance performance indicators is presented. An empirically tested cost model of
industrial maintenance has been used with data collected from more than 400 companies operating in various industries.
This has revealed clear causalities between certain variables and key "gures. On the basis of the above results
a benchmarking tool has been created. This gives a fairer benchmarking value for a production unit. This cost model also
provides valuable information for management in the process industry when evaluating the competitiveness of both old
and future plants.  2002 Elsevier Science B.V. All rights reserved.

Keywords: Industrial maintenance; Key "gures; Queuing theory; Cost model; Benchmarking

1. Introduction nomic performance of "rms has been established

Maintenance is a combination of all the tech-
nical, administrative and managerial actions during
the life cycle of an item intended to keep it in, or
restore it to a state in which it can perform the
required function (CEN/TC 319). Industrial main-
tenance is mainly concerned with production
equipment. In Finland, maintenance costs are on
average about 5.5% of company turnover. How-
ever, the ratio may vary from 0.5% to as much as
25%. Industrial maintenance has two essential ob-
jectives: (1) a high availability of production equip-
ment and (2) low maintenance costs. These and
other indirect impacts of maintenance on the eco-
* Correspondence address: Psyko BLC, Annankatu 42C,
00100 Helsinki, Finland.
clearly (e.g. [1]). Maintenance operations are tradi-
tionally divided into three main groups: (1)
corrective maintenance, (2) preventive maintenance
(condition monitoring, condition based actions,
scheduled maintenance) and (3) improvement
maintenance (e.g. [2]). Many writers and standards
suggest several other classi"cations which di!er
slightly from the above ([3,4] Idhammar consult
Ab, [5,6] and many other standards). PSK
Standardisation in Finland [30,31] has chosen
a somewhat di!erent approach and has divided
maintenance operations into breakdown mainten-
ance and planned maintenance, both of which in-
clude corrective maintenance (repairs).
High availability performance is achieved by
three factors: (1) reliability performance, (2) main-
tainability performance and (3) supportability
(maintenance). The state of factors are often mea-
sured by three operational variables: (1) mean time

0925-5273/02/$ - see front matter  2002 Elsevier Science B.V. All rights reserved.
PII: S 0 9 2 5 - 5 2 7 3 ( 0 0 ) 0 0 1 8 7 - 0
16 K. Komonen / Int. J. Production Economics 79 (2002) 15}31
between failure (MTBF), (2) mean time to repair
(MTTR) and (3) mean waiting time (MWT) (e.g.
[7,8]). However, the validity of these concepts is
partly low. Concepts such as MTBF, MTTR and
MWT and others refer to the time-based concepts
which divide the available time into sub-periods
according to the operation state of production
equipment.
The discipline of industrial maintenance includes
a great number of operations research studies and
practices. Technical research is also well represent-
ed in the "eld. Many national and international
standards have been determined or are being
worked out. There exist several methods for
measuring maintenance performance e$ciency and
e!ectiveness: e.g. (1) Priel's [9] indices of mainten-
ance e$ciency, (2) Luck's [10] method of measur-
ing maintenance e!ectiveness, (3) Finley's [11]
indicators, (4) Newbrought's pro"le [28], (5) VDI-
Richtlinjen [12] and (6) Corder's index of mainten-
ance e$ciency (one index) [26]. In Finland, a group
working on a standard for key "gures in industrial
maintenance easily found more than 200 indicators.
Richard Dwight [13] has taken the view that the
standard of performance must be in terms of the
organisation's goals and what is possible. He also
emphasises the measurement of performance in
terms of changes in value. As we see, the science of
industrial maintenance is well established in part
and includes a number of well-de"ned subsystems.
However, relationships between di!erent key "g-
ures or between various subsystems and the causal-
ities in their behaviour are still little studied.
The main objective of this study is to determine
a hierarchical system of key "gures for industrial
maintenance and to build a cost model for particu-
lar classes of economic variables. The theoretical
framework used, a mathematical model, is based on
the results of earlier research by Kari Komonen
(Ph.D. dissertation; Helsinki University of Techno-
logy, 1998), where a queuing model was built in
order to generate testable hypotheses. The hy-
potheses were tested by means of empirical data
(157 Finnish industrial companies from the years
1990}91).
One aim of this new study was, "rst of all, to
con"rm previous research results with the aid of
new data (from the years 1996}1997, 255 cases) and
to "nd more exact causalities between various fac-
tors. The in#uence of the amount of production
equipment, integration level of production lines,
downtime costs, utilisation rate of machinery and
amount of preventive maintenance were studied.
The economies of scale, the in#uence of integration
level, downtime costs and utilisation rate were con-
"rmed.
The second aim of this study was to create
a benchmarking tool for industrial maintenance on
the basis of empirical examination (a method to
"nd the appropriate benchmarking values for key
"gures). Benchmarking values, as they have been
de"ned here, are not the best or world class values,
but relevant industrial averages (not only one aver-
age but many of them, one in each class of produc-
tion units). One reason for this is that because of
di!ering accounting practices there is not enough
evidence for accurate ranking. In the near future we
shall also be able to specify the best units. Addition-
ally, this paper handles the comparison of key indi-
cators, but not the determination of best practices.
Thirdly this paper focuses on determining the im-
pact of the above factors on the pro"tability and
competitiveness of business units in the process
industry.
This paper includes:
(1) the description of the system of the key "gures;
(2) the summary of mathematical formulations
and hypotheses;
(3) the summary of empirical testing;
(4) the structure of a benchmarking tool;
(5) the impact of cost behaviour on the pro"tabil-
ity of a plant.
2. The system of performance indicators
According to a survey from 1995, maintenance
managers in Finland wished to have some guidance
in the use of maintenance indicators. In fact, very
often the systems of key "gures are the lists of
indicators, which are grouped according to subject
matters, but which are not in any way linked to
each other. However, for example the practitioners
of balanced scorecard have in many applications
been exceptions. The aim of this chapter is to intro-
duce the system of maintenance indicators, which
 K. Komonen / Int. J. Production Economics 79 (2002) 15}31
avoids the previously mentioned shortcomings.
This systems helps us to grasp the purpose and
signi"cance of various indicators.
The key "gures of industrial maintenance can be
classi"ed in a hierarchical manner in the following
way:
(1) external business-oriented objective variables;
(2) internal objective variables for maintenance;
(3) exogenous variables (external conditions);
(4) intermediate internal objective variables (fol-
low-up variables);
(5) action variables of maintenance function;
(6) internal explanatory variables.
External objective variables (EOV) are such-busi-
ness-oriented key "gures as return on investments
(ROI), overall equipment e!ectiveness (OEE), life
cycle costs of production machinery, etc. These
variables can be related to others in a hierarchical
manner according to Du Pont's model, for
example. The internal objective variables of mainten-
ance function (IOV) are metrics for the e!ectiveness
of maintenance operations: e.g. availability of ma-
chinery, the sum of lost production and mainten-
ance costs, maintenance costs as a % of estimated
plant replacement value (RV) or per production
volume. Exogenous independent variables (EIV) are
indicators, which help management to interpret
variables and to evaluate the state of a!airs. These
key indicators are factors which are beyond the
scope of maintenance managers to determine.
Examples of these kind of variables are the utilis-
ation rate of production machinery, the amount of
production equipment, the integration level of pro-
duction, etc. Intermediate internal objective variables
(IMV) are performance indicators, which should be
measured and followed up, since they may give
more information about the development needs
and may act as intermediate objective variables in
order to reach the main objective. For example the
mean time to repair is an intermediate objective
when the main objective is to minimise lost produc-
tion (down-time costs). IMV is an objective
variable, because a maintenance manager cannot
in#uence it directly. The action variables of mainten-
ance function (ACV) are tools of maintenance
managers, by the aid of which objectives are
reached. Preventive and improvement mainten-
17
ance, outsourcing, #exibility, operator mainten-
ance, etc. are such kind of tools. Internal explanatory
variables (IEV) give additional information, for
example, about the cost and organisation structure,
cost level and capital intensity of maintenance
function.
In this research we have tried to "nd causalities
between various indicators. These kinds of causali-
ties can be formed between action variables and
intermediate objective variables or between action
variables and main objectives. The same kind of
relationship can also be formed between intermedi-
ate variables and main objectives. From the
benchmarking and company planning point of
view it is also very important to know the impact of
exogenous independent variables on the internal
objective variables, because it makes it possible to
distinguish the in#uence of those factors which are
beyond the scope of maintenance personnel to de-
termine.
Earlier in this text it was emphasised that the
main objectives of maintenance function are linked
via availability to overall equipment e!ectiveness
(OEE) and via maintenance costs to production
costs. The third dimension of objectives is linked to
qualitative aspects of production processes. By
combining these three dimensions with the above
classes of variables it is possible to construct a sys-
tem of performance indicators, which organises
a large number of key "gures in clear way. The
result is presented in Fig. 1. The "gure does not
include all possible indicators but is rather an
example of the system. In the example, owing to
lack of space some variables are in the form of
a ratio and some in the form of a concept. However,
for all presented variables it is possible to construct
a indicator in the form of ratio or index.
Some of the key "gures can be applied to
benchmarking purposes only in limited circum-
stances although they are very suitable for the fol-
low-up of internal trends. Examples of such kinds
of variables are `mean time between failurea or
`lost production due to breakdownsa. Their abso-
lute values do not give an accurate picture of the
e!ectiveness of a plant. For example the size of
a plant should be taken into account.
The rest of this paper concentrates on the eco-
nomic side of the system. Although we have carried
18 K. Komonen / Int. J. Production Economics 79 (2002) 15}31

Fig. 1. The system of key "gures for industrial maintenance.

out several empirical studies e.g. [27] in the "eld of
customer and job satisfaction during the last dec-
ade, the qualitative part of the system is not dealt
with. Especially in the segment of quality, many key
"gures are presented in the form of concept. Many
of the action variables are "ndings of repeated
research e!orts and may be presented in the form of
an index or in the form of an average opinion of
customers or employers. It is, however, once again
important to emphasise that key "gures in the
qualitative sector of the system represent a sample
of a more comprehensive list of factors.
From the management point of view it is vital to
identify how action variables (ACV) in#uence inter-
mediate internal objectives (IMV) and internal ob-
jective variables (IOV). In addition, it is necessary
to recognise causalities between exogenous inde-
pendent variables (EIV) and internal objective vari-
ables (IOV) in order to understand the behaviour of
maintenance costs. The role of exogenous indepen-
dent variables is essential in benchmarking, because
they determine to a great extent the size of mainten-
ance costs and at the same time the costs which
cannot be in#uenced by maintenance managers.
 K. Komonen / Int. J. Production Economics 79 (2002) 15}31
3. A cost model
3.1. Variables
Such key "gures as `maintenance costs/produc-
tion equipment (replacement value RV)a or `main-
tenance costs/production volumea are often used in
benchmarking. The former is a good alternative
when the products of production units are inter-
nally or externally heterogeneous. The latter is suit-
able for homogeneous industries. However, a ratio
`maintenance costs/production equipmenta does not
take into account the success or failure of a main-
tenance function in its main task, to maintain the
high availability of machinery. A ratio `mainten-
ance costs/production volumea takes somewhat bet-
ter into account #uctuations in the production
volume of a plant. However, we meet problems here
too, since even in homogeneous industries products
may vary considerably.
We meet the above problems mainly in empirical
work. Theoretical model building allows us also to
take into account those factors which are `losta in
empirical examinations. Because the object of
maintenance e!orts is the production equipment of
a plant, the ratio `maintenance costs/production
equipmenta is a good starting point for model-
building. From a benchmarking perspective, the
main emphasis will be on the impact of exogenous
variables on internal objective (dependent) vari-
ables. However, some weight will be put on such
action variables as preventive maintenance and
subcontracting because from practical experience,
these have shown themselves to be very important
independent variables in industrial maintenance.
The estimation of the equations of a benchmarking
tool calls only for exogenous variables, because we
try to exclude the impact of action variables, i.e. to
"nd fundamental relationships between dependent
and exogenous economic variables. As stated
earlier, the qualitative factors have not been in-
cluded at this stage of the research, since we "rst
have to investigate the behaviour of maintenance
costs and then later to add organisational aspects,
which actually are very much empirical in nature.
The variables used in a theoretical cost model
are:
(A) Internal objective variables:
19
(Downtime costs#maintenance costs)/
production equipment (production equip-
ment"its replacement value)
(B) Exogenous variables:
The amount of production equipment (RV)
The downtime costs of production
Utilisation rate of production equipment
Technology factor
(C) Action variables:
Preventive maintenance
Subcontracting
3.2. Economies of scale in industrial maintenance
Three di!erent economies of scale in mainten-
ance operations can be distinguished a priori: (1)
technical economies of scale: as the size of equip-
ment increases, maintenance costs increase relative-
ly more slowly. (2) economies of scale due to
stochastic failure mechanisms and (3) economies of
scale based on the learning curve. In this chapter
the "rst two will be analysed. The purpose of a cost
model is to minimise the sum of downtime costs
(lost production) and maintenance costs.
In the literature, queuing theory has been used in
a speci"c situation, for example, to estimate the
optimum size of a maintenance crew or the opti-
mum number of crews. It has been more seldom
used for the analysis of causalities in maintenance
economics. In the present research, the factors in-
#uencing the e!ectiveness of maintenance will be
examined by measures of performance of queuing
systems. One aim will also be to create tools that
will allow the hypotheses to be tested empirically.
The analysis is initially based on a simpler stochas-
tic situation, i.e. on a M/M/1/R model, in which
the arrival rate (
) and the service rate () obey
a Poisson distribution. In this paper, we study
industrial maintenance at production line } or
plant level, not at component level. Thus it has been
assumed that reliability distribution or inter-arrival
time is exponential. If the utilisation rate "
/ is
greater than 1, the queuing system explodes. The
measures of performance used in the beginning of
the analysis "t a situation, in which the calling
population is assumed to be in"nite. Naturally, the
20 K. Komonen / Int. J. Production Economics 79 (2002) 15}31

number of devices to be maintained is not in"nite.
However, when the number of devices to be main-
tained reaches dozens, in practice the situation ap-
proximates an in"nite population.
Two factors analytically support the use of the
simpler in"nite population model: (1) in the case of
a "nite population, the results are the same at an
approximate level as these for an in"nite popula-
tion. (2) In practice, the existence of downtime costs
)
keeps the queues so short that the in"nite popula-
tion approximation is su$ciently accurate (if it is
not a question of very small production units of
a few machines) [14]. Both arguments (1) and (2)
can be applied in descriptive analysis. However, in
normative analysis they may be too strong.
The starting points of this analysis are the mod-
els of queuing systems and the optimum solutions
of Hillier & Lieberman and Whitt. Hillier and
Lieberman [15] deals with a service capacity opti-
misation based on the M/M/1 model (the calcu-
lation has also been presented by others such as
Gross and Harris [16] and Panico [17]:
We assume now that the number of failures is
indicated by bK, in which K is the amount of
production equipment, while b is a technology-
speci"c constant. Additionally it has been assumed
that the marginal cost of waiting per unit of time
(downtime costs) is (AI), where (A) is the added
value of the production unit and (I) is its level of
integration (probability of production losses). If we,
in addition, assume that coe$cient C and (
1
equal 1, we get the optimal capacity of a mainten-
ance crew ([14], p. 17):
 "bK#(AIbK. (4)

The variable (AI) requires more explanation ([14]
p. 23 and [19], pp. 50}51). The shutdown of any
machine on a particular production line may cause
the loss of production for the entire line, if the
shutdown is long enough. Similarly, a shutdown
may not cause production losses, if the shutdown is
short enough. If a production line is entirely integ-
rated (see below), every stoppage causes losses.
Thus the downtime costs per unit of time in a par-



ticular stage of production are 0 or A. The expected
C "C #C , (1)
2 1 5 !
value of stage-speci"c downtime costs is thus (as-
where C is the marginal cost of waiting per unit of suming speci"c density function and mean time to
5 repair (1/) to this production equipment, indepen-
time, C the marginal server cost per unit of time,
1 dent of manning decisions)
(
) the arrival rate of customers, the number of
arrivals in the system (waiting and serviced) the E (C )"P A (5)
service rate (),
/(!
) and C the total cost of G 5 G
2
the system. An optimum solution of  is obtained: in which P (P"f (=, B, ); = being the utilisation
G
rate of production, B the bu!er stock and the


C
 "
# 5
. (2) technology factor)) is the probability that the
 C
1 downtime of the sub-process will be so long that
In the objective function (1) units are, however, production losses, which are comparable to the
dimensionally inconsistent, which the authors have added value of the entire line, will arise. The aver-
not commented on, and thus the model is empirical. age of the expected values of production losses in
Whitt's approximation [18] o!ers a parallel opti- a production system is given in formula (6).
mum solution of  . However, these models are
 E (C )"(P A#P A#2#P A)/N
based on queuing theory and not on empirical data G 5   ,
from maintenance or any other service "eld. The
"A(P #P #2#P )/N. (6)
above dimensional problems can be avoided, if in   ,
the objective function we use a transformation coef- The integration level can now be de"ned as the
"cient (
) which transforms service rate () into the mean of P :
number of servers (Eq. (3)). G
I"(P #P #2#P )/N (7)
  ,




C "C
#C . (3)
2 1 5 !
which includes the impact of bu!er stocks.
 K. Komonen / Int. J. Production Economics 79 (2002) 15}31
The integration level of several lines is obtained
from formula (7) by multiplying by the factor 1/n.
Thus, the integration level of a production system
is:
(1) 1/n, in the case of a replicative (parallel produc-
tion system) form of production.
(2) ( P )/N, in the case of a line production model.
G
(3) (1/n) ( P )/N, in the case of a model with
G
several lines.
(4) 1, in the case of fully integrated production.
In reliability theory production processes are tra-
ditionally described to be series systems, a parallel
systems or mixed con"gurations. The integration
level of a production system is a closely related to
these concepts though not exactly the same. It takes
into account the impact of bu!er stocks, the option
to overtime work, the utilisation rate of machines,
redundancy and assumes a speci"c density function
of repair time. For example, a paper machine is
fully integrated, because it is a series system, there
are no bu!er stocks `between the sub-processesa,
there is a lack of redundancy, overtime work does
not help, etc.
It was assumed above that the frequency of fail-
ures and the amount of production equipment were
linearly dependent. Practical experience and rules
of thumb indicate however that in the process in-
dustry this dependence is a square root function
rather than a linear one. If maintenance capacity is
simultaneously calculated in relation to the amount
of production equipment, then the following opti-
mum (8) is obtained ([14], p. 18):
g(K#(AIg(K
 " , (8)
) K
where  is the optimum capacity of maintenance
)
per K and g is a coe$cient. There are good grounds
for believing that in integrated production down-
time costs per unit of time increase at the same
speed as production equipment, although in certain
situations technology representing increasing re-
turns to scale may also be available (e.g. [20, pp.
18}19]). This assumption is also reinforced by
the fact that the process industry too has replicative
characteristics. With these assumptions, on the
21
basis of Eq. (8) the following conclusion can be
drawn.
When the amount of production equipment increases,
&&maintenance labour costs/production equipment ''
ratio decreases.
Eq. (1) and the assumption of constant downtime
costs represents replicative technology because the
production equipment grows in a replicative way;
machines are operating in parallel. Thus when the
production capacity increases, the degree of integ-
ration and downtime costs do not increase. Eq. (8)
and the assumption of growing downtime costs rep-
resents integrated technology because the increase in
production capacity takes place by increasing the
output of the machinery or increasing the added-
value of production. The more integrated (tech-
nically) the production equipment is, the greater
the expected value of downtime costs.
In practice, a replicative industry may have process-
like features and a process industry may have charac-
teristics of replicative technology. If the linear model
of replicative industry and the square root model of
the process industry represent certain extreme cases, it
is possible to use them to construct a general model,
by means of which all technologies between the ex-
tremes can be depicted. The relative owntime costs
(A) and the replication coe$cient (n) can be assumed
to be a function of (K). In addition, (AI) is a function
of (n). I is the initial value of I. Formula (8) can then

be given the following form (9) ([14], p. 21):
g (Kn (K)#(A IG f (K/n (K))g (Kn (K)
 " G G G  G G G .
) K
(9)
The behaviour of the queuing model of industrial
maintenance can be illustrated graphically by
a simulation (Fig. 2). The engineering industry is
also taken as an example of a replicative sector, in
which the number of machines increases rapidly as
K increases ([21], p. 692).
The above cost model also explains material costs.
Technical scale economies apply to material con-
sumption and scale economies of queuing systems
have an impact on the turnover and size of stocks.
The increase of utilisation rate of production
equipment increases the value of coe$cient (g) and
22 K. Komonen / Int. J. Production Economics 79 (2002) 15}31

Fig. 2. Industry-speci"c optimal cost curves simulated on the basis of the general model [21].

Fig. 3. Impact of utilisation rate of production equipment on maintenance costs (simulation).

raises maintenance costs. Further, although the
technical level of integration does not grow as
utilisation rate increases, downtime costs may do,
because it is di$cult to make up for lost production
especially at the high rate of shift work. Fig. 3 illus-
trates graphically the impact of shift work rate. On
the basis of the simulation in Fig. 3, it can be
noticed that the increase of utilisation rate causes
`maintenance costs/production equipmenta ratio
to decrease if the amount of equipment grows at the
same rate. It can also be seen that the change of
shift work rate causes large cost #uctuations in
small production units: the upper boundary of the
stepwise curve decreases but the lower boundary
increases. In other words: as the amount of equip-
ment grows at the same speed as utilisation rate,
maintenance costs/production machinery ratio de-
creases [22].
3.3. Preventive maintenance
Once again we shall examine maintenance op-
erations at plant level. This means that the reliabil-
ity distribution is exponential. The analysis will
utilise Allen}Cunneen approximation of G/G/1/R
model ([23] pp. 153}154). It is now su$cient to
know the mean and standard deviation of the vari-
able. We assume that preventive maintenance does
not reduce the amount of work, but does reduce
deviations of service time and inter-arrival time.
That means that breakdown maintenance will be
replaced by planned maintenance actions so that
 K. Komonen / Int. J. Production Economics 79 (2002) 15}31
Fig. 4. The e!ect of the coe$cients of variations (failure rate and repair time) on the e$ciency of maintenance.
the number of jobs do not decrease. If the coe$cient
of variation (ratio of standard deviation to mean for
failure rate) has a value 1, Allen}Cunneen approxima-
tion obey the M/M/1 queuing model (exponential).
Thus the increase in e$ciency depends on the devi-
ation of inter-arrival time and service time.
Fig. 4 shows at the same level of arrival rates, the
loci of the failures in a service system and of the
utilisation rate of the maintenance capacity (),
which minimise the sum of downtime and mainten-
ance costs for all possible values of the coe$cient of
variation C(A, S). C(A) is coe$cient of variation for
a failure rate (
) and C(S) for maintenance capacity
(). The "gure also shows the indi!erence curves of
variation for given values of C(A, S). The points of
intersection of the curves show the optimal combina-
tion of the number of failures and utilisation rate ()
at the selected levels of C(A, S) ([14, p. 28], [19, p. 69],
[24]). In the "gure, it is assumed that, C(S) and C(A)
develop in step, as though moving `hand-in-handa.
If C(A, S) equals 1, the situation returns to the
M/M/1 model. If C(A, S) is allowed to approach
zero, the optimal utilisation rate () will approach
unity. The e!ect of total variation depends on the
downtime costs. At the level of the same failure rate
or jobs, in production units of the same size, plants
with a high integration level (I) `adapta to changes
in C(A, S) by altering the utilisation rate i.e., by
changing maintenance capacity, while companies
23
with a low integration level (I) do so mainly
through downtime costs. Now, the following con-
clusion can be drawn. This conclusion assumes that
production units follow the principle of natural
level of preventive maintenance [19].
In production units with a high integration level,
preventive maintenance reduces the maintenance capa-
city requirement in relation to production equipment (K)
more than in units with a low integration level.
3.4. Subcontracting
Komonen [19] has analysed outsourcing deci-
sions in his Ph.D. dissertation and those analyses
have been based on queuing theory. In this paper
there is no room to analyse the conditions of opti-
mal subcontracting. However, subcontracting is in-
cluded in the empirical part of this paper in order to
guarantee the correct interpretation of the behav-
iour of other variables.
On the basis of the presented models the follow-
ing conclusions can be drawn:
(1) Scale economies exist in the maintenance of
production equipment. `Maintenance costs/
production equipmenta ratio decreases as the
amount of machinery grows.
(2) Within each industrial sector the impact of
scale economies is larger than the growth of
downtime costs.
24 K. Komonen / Int. J. Production Economics 79 (2002) 15}31
(3) As the utilisation rate of production equipment
grows, `maintenance costs/production equip-
menta ratio also increases assuming that the
amount of machinery does not change.
(4) Maintenance costs increase as the integration
level of production system grows if the amount
of production equipment does not change.
(5) The impact of technology on maintenance
costs is signi"cant.
(6) Preventive maintenance decreases mainten-
ance costs more in integrated plants than in
replicative factories.
4. Testing cost models with data from Finnish
industry
Tests are based on the data collected by The
Finnish Maintenance Association for the years
1990}91 [32] and by The Finnish Maintenance
Association and The Federation of Finnish Engin-
eering and Electrotechnical Industries for the years
1996 and 1997 [29]. The total sample was 436
production units. Some of the results have been
documented in an unpublished research-report
[22].
The dependent variables were usually `mainten-
ance costs as a % of estimated plant replacement
valuea and `material costs as a % of estimated plant
replacement valuea. `Maintenance costs/production
volumea ratio was also used when data was avail-
able because that implicitly includes downtime
costs. However, no explicit data concerning down-
time costs were available. Independent variables in
empirical investigation were:
(1) the amount of production equipment (replace-
ment value),
(2) integration level of production (which is an
operational indicator of AI),
(3) industry-dummy variables (technology factor),
(4) shift work rate (utilisation rate of production
equipment),
(5) preventive maintenance,
(6) subcontracting,
(7) improvement maintenance,
(8) full-costing-dummy variable,
(9) production volume (in some industrial
branches).
Variables (1)}(6) were discussed in Section 3.
However, integration level and shift work rate re-
quire further explanation. In the cost model, at the
same level of production equipment, the increase of
downtime costs per unit of time increases mainten-
ance costs. However, in reality the growth of pro-
duction machinery increases downtime costs. The
same applies to integration level, the operational
indicator of AI. Thus the operational indicator (I)
is, at the same time, a meter of downtime costs and
of scale economies. For example, if the size of
a pipeline is doubled, downtime costs may also
double but maintenance costs will not do so. This
fact means that in empirical examination the inyuence
of integration level (I) on maintenance costs may,
a priori, be either positive or negative.
Shift work rates 1}3 stand for one to three shifts
during "ve days (weekends are excluded). Four (4)
shifts also make use of Saturdays and "ve shifts (5)
also Sundays. Improvement maintenance lowers,
a priori, both failure rate and maintenance costs
and it is partly an exogenous variable (because it is
often ordered by production department), thus it
has been included in the analysis.
Because data from various years have been in-
cluded, the inyuence of these years was examined
with the aid of dummy variables. The parameters of
these dummy variables, however, were not statist-
ically signixcant. The examination of causal rela-
tionship was carried out with two databases: (1) the
years 1990, 1991, 1996, 1997 and the years 1996,
1997. In both cases the results were parallel. In the
estimation of the equations of a benchmarking tool,
only the years 1996 and 1997 were used.
4.1. Results
Multiple regression analysis was used to estimate
the causalities between the independent variables
and the dependent factors (forward stepwise regres-
sion). Logarithmic forms of the variables were used
in the analysis, because the model to be con"rmed
was non-linear. Logarithmic transformations also
have other statistical and mathematical advantages
(e.g. estimated parameters measure elasticity of
variables). The explanatory power of the model
(adjusted R) was high (mainly between 40% and
90%) and estimated parameters were statistically
 K. Komonen / Int. J. Production Economics 79 (2002) 15}31
highly signi"cant. In the case of maintenance costs
and material costs (in relation to production equip-
ment) the most signi"cant independent variables
were (the signs # and ! indicate the direction of
the impact)
(1) Integration level of production (which is in
practice often parallel to replacement value)
(!).
(2) The amount of production equipment (replace-
ment value) (!).
(3) Shift work rate (#).
(4) Industry-dummy variables (industry speci"c
factors) (!, #).
Subcontracting rate was also a statistically sig-
ni"cant variable, but it did also measure other
factors than the impact of outsourcing. That is why
it has been omitted from this report. Improvement
maintenance and full-costing-dummy were gener-
ally insigni"cant, but in certain industrial sectors
their impact was a strong one. The impact of pre-
ventive actions on maintenance costs was not as
signi"cant as in the earlier study (1990 and 1991).
A regression analysis was performed for the
whole industry and various industrial sectors. The
purpose of the empirical examination was, at the
beginning of the project, to "nd the relative ex-
planatory power of various factors. In the second
phase the regression coe$cients were estimated for
a benchmarking tool. In this paper the relative
explanatory power of the independent variables are
presented for the industry as a whole and for one
industrial sector, as an example.
Regression analyses were carried out for eight (8)
di!erent industrial sectors. Although the integra-
tion level and shift work rate of a production unit
were generally the most signi"cant independent
variables, results di!ered from one industry to an-
other. A practical statistical problem was present in
several industries. The high multicollinearity, i.e.
the high correlation between the integration level
and the amount of production equipment meant
that, in most cases, only one of them came into an
estimated equation. The integration level and the
amount of machinery showed a high correlation
with the dependent variable. Both (I) and (K) act as
operative indicators in two roles simultaneously:
the former as a meter of (1) relative downtime costs
25
and of (2) the technical economies of scale and the
latter as a meter of (1) the technical economies of
scale and of (2) the scale economies of queuing
systems. Hence, the appearance of multicollinearity
was expected.
The explanatory power of regression equations
for several industrial branches were very high and
thus the evidence for the results of cost model is
very strong (see Table 1). The more current data
from the pulp and paper industry (year 1998) pro-
vides better results (more evidence for the cost
model), because the data has been collected accord-
ing to the instructions of the researcher. Thus there
is greater similarity than before between ac-
counting practices.
Table 2 presents the results of the regression
analysis in the wood-processing industry (mechan-
ical sector). The explanatory power of the model
was good and the parameters being investigated
were mainly statistically signi"cant.
The in#uence of the integration level, production
equipment and shift work rate were in line with the
hypotheses. The subcontracting rate was also
a statistically signi"cant variable, but as stated
earlier, it also measured factors other than the
impact of outsourcing.
In the wood-processing sector, as in several other
sectors and industries, the increase of improvement
maintenance decreases maintenance costs. The im-
pact of preventive measures on maintenance costs
was not clear.
The behaviour of maintenance costs is illustrated
in Fig. 5. This "gure gives an example in which
`maintenance costs/production equipmenta ratio
decreases as the size production machinery grows.
The in#uence of other variables such as the integra-
tion level and the shift work rate cannot, of course,
be seen in the "gure, but it can be mentioned that
the biggest factory has a highest shift work rate.
As stated earlier the ratio `maintenance costs/
production equipmenta does not take into account
those downtime costs which have been caused by a
maintenance function. The ratio `maintenance
cost/production volumea does that in an implicit
way. Scale economies play an important role here,
too. The larger the production volume is, the lower
the costs of a maintenance function/production
volume will be. This result is illustrated in Fig. 6.
26 K. Komonen / Int. J. Production Economics 79 (2002) 15}31

Table 1
Factors explaining the maintenance costs of production equipment in the whole industry (years 1990, 1991, 1996 and 1997)

Dependent variable:
log (maintenance costs/replacement value of equipment)
R"0.69, R"0.48, Adjusted R"0.46, F(14.365)"23.620, p(0.000

Variables BETA SE t(365) p-level

Intercept 5.850 0.000

log I (integration level) !1.034 0.096 !10.734 0.000
log SW (shift work rate) 0.636 0.070 9.045 0.000
Dummy-engineering industry !0.392 0.054 !7.322 0.000
Dummy-printing industry !0.194 0.040 !4.855 0.000
Dummy-plastic products !0.152 0.040 !3.839 0.000
log K (replacement value) !0.151 0.079 !1.905 0.058
Dummy-metal industry 0.144 0.042 3.473 0.001
Dummy-carpentry industry !0.14 0.041 !3.433 0.001
Dummy-foodstu!s 0.13 0.041 3.137 0.002
Dummy-textile industry !0.115 0.042 !2.717 0.007
Dummy-elec. products & electronics !0.085 0.041 !2.062 0.04
Dummy-non metal minerals 0.078 0.04 1.941 0.053
log S (subcontracting) 0.075 0.042 1.808 0.071

Table 2
Factors explaining the maintenance labour costs for the years 1996 and 1997

Wood-processing industry: mechanical sector N"27

Dependent variable:
log (maintenance labour costs/replacement value of equipment)
R"0.85, R"0.72, Adjusted R"0.64, F(6.20)"8.724, p(0.0001

Variables BETA SE t(20) p-level

Intercept 1.603 0.125

log I (integration level) !0.774 0.161 !4.823 0.000
log SW (shift work rate) 0.425 0.160 2.654 0.015
log IM (improvements) !0.288 0.120 !2.399 0.026
log S (subcontracting) 0.372 0.141 2.634 0.016
log PR (preventive maintenance) 0.223 0.137 1.631 0.119
log K (replacement value) !0.192 0.135 !1.422 0.170

Such dependent variables as integration level,
shift work rate and improvement maintenance have
the same kind of impact on the latter ratio as on the
former one. So, the level of integration and the
improvement maintenance lower `maintenance
costs/production volumea ratio and the shift work
rate increases them.
The products and the production technology of
circled cases di!er from the other cases to such an
extent that the lower cost level can be explained.
The curve in the "gure is merely descriptive. Fur-
ther industry-speci"c results are illustrated in the
following graphs. In Fig. 7, the maintenance costs
of the pulp and paper industry in relation to pro-
duction equipment has been presented as a func-
tion of integration level. Although the data from all
four years 1990, 1991, 1996 and 1997 has been
included, it behaves according to the results of the
 K. Komonen / Int. J. Production Economics 79 (2002) 15}31
Fig. 5. Maintenance costs in the wood-processing industry
(mechanical) as a function of production equipment.
Fig. 6. The behaviour of maintenance costs as a function of
production volume.
cost model. The integration level depicts, on one
hand, relative downtime costs and, on the other,
technical scale economies. In Fig. 8, `spare
parts and other material costs/production
equipmenta ratio in the foodstu!s industry has
been presented as a function of production equip-
ment. As can be seen, material costs behave in
a very similar way to labour costs. The curve in the
"gure is descriptive.
4.2. Preventive maintenance
In the years 1990 and 1991, preventive mainten-
ance did not decrease maintenance costs in a rep-
licative industry with low integration level, but did
in a highly integrated industry. The latter result was
27
Fig. 7. Maintenance costs in relation to production equipment
as a function integration level of production.
Fig. 8. The material costs of maintenance in the foodstu!s
industry as a function of production equipment.
statistically very signi"cant (Beta"!0.355 and
p-level"0.006). The in#uence of preventive actions
has changed during the last decade.
In the years 1996 and 1997, the impact of preven-
tive measures on maintenance costs was more in-
dustry-speci"c. (1) Preventive maintenance had no
impact in those factories with a single shift and the
proportion of preventive maintenance was the
lowest (23.7%). Preventive actions had a small im-
pact in factories with two shifts (prevention rate
was 29.6) and a strong impact in three-shift facto-
ries (prevention rate was 34.3). However, in facto-
ries with "ve shifts, the proportion of preventive
maintenance had no impact on maintenance costs.
In this case the prevention rate was naturally
the highest one (41.9). The lack of data made it
28 K. Komonen / Int. J. Production Economics 79 (2002) 15}31
impossible to investigate the impact of preventive
maintenance on downtime costs.
5. A benchmarking tool
On the basis of the empirical examination
a benchmarking tool can be made. The commonly
applied benchmarking procedure has been the
comparison of the average cost values of a particu-
lar industrial sector with a company's own costs.
Sometimes the order of the production units have
been arranged according to certain performance
indicators.
In the "eld of industrial maintenance this kind of
benchmarking does not help very much, as Dwight
[13] also commented. The `ownersa of the best
"gures are too `prouda of their performance and
the `ownersa of the poor ones are on the brink of
despair. According to the results of this research,
the above-mentioned methods are inappropriate.
Even the misuse of benchmarking values and op-
portunistic behaviour are possible.
Some factors can be a!ected by maintenance
management, but some of them cannot. For
example small units may avoid the lack of scale
economies in queuing systems if they use outsourc-
ing. However, it is beyond the scope of their deter-
mining power to avoid the lack of technical
scale advantage. The same applies to shift-work
rate in a factory or the utilisation rate of produc-
tion equipment. That is why there are several
benchmarking values, one for each production unit.
This may give rise, however, to opportunistic be-
haviour: in the world of many benchmarking values
managers may try to explain bad results away.
We have built a "rst version of the benchmarking
tool which takes into account the impact of the
exogenous variables and calculates the appropriate
benchmarking value for a production unit. Today,
this tool works on the basis of mean values. But in
the future lower boundary values for maintenance
costs will be sought. The benchmarking tool is
based on estimated equations, where the dependent
variable is, for example, `maintenance costs/produc-
tion equipmenta and the independent variables are
the aforementioned exogenous variables and `semi-
exogenousa improvement maintenance. In multiple
stepwise regression analyses, log-transformations
of variables have been used, and instead of the
previous industry-speci"c beta-coe$cients (elastic-
ity), b-coe$cients (y"a#bx) were estimated. Due
to the stepwise regression method, not all the inde-
pendent variables enter every equation, in every
industrial sector.
The benchmarking values tell us what are the
expected maintenance costs in a particular indus-
trial sector in the case of speci"c unit size, integra-
tion level, shift-work rate, technology and level of
improvement maintenance. Although, with a good
sample of production units this method gives more
appropriate benchmarking values than industrial
averages, there are some dangers present, too.
`Well-behavinga outliers may, for example, cause
too high or low extreme values (very small or very
large companies). Also poor accounting practices
may be dangerous in extreme zones. From the
maintenance management perspective this kind of
varying fair meter, may cause opportunistic behav-
iour, (`units of this size have high costsa) which in
turn may prevent continuous development. How-
ever, as the quality of data increases, the estimation
of `cost "gures for best practicesa becomes avail-
able and then the above risks decline.
The user of the tool chooses "rst the relevant
industrial sector and then the technology of that
sector (technology here refers to the sub-sector). In
the third phase the values of the named exogenous
factors are inserted. Finally, the program gives the
relevant benchmarking values value for a produc-
tion unit. `Not in usea means that this box of the
menu is not relevant for that industry (Fig. 9).
6. The impact of maintenance costs on the
competitiviness of a plant
According to the results of this research, `main-
tenance costs/production equipmenta ratio de-
creases as the integration level and the amount of
production equipment increase. The proportion of
the maintenance costs of a plant turnover varies
between 1% and 25% if outliers and very small
units are desregarded. In one industrial sector that
percentage may vary, e.g. between 2.5% and 10%
and maintenance costs/production equipment may
 K. Komonen / Int. J. Production Economics 79 (2002) 15}31 29

Fig. 9. A benchmarking tool for industrial maintenance: the values of key indicators are imaginary, but realistic [25].

triple as a plant size decreases. A super"cial con- and further,

clusion would be that it would be pro"table from
"vK/f (K). (10)
the point of view of maintenance costs to invest in 
larger production plants. However, all other busi- In Eq. (10) a constant (v) denotes shift work rate.
ness ratios do not necessarily improve when a plant Labour productivity increases as a plant size grows.
size grows. So, the pattern is the same as for maintenance costs.
This analysis di!ers greatly from the neo-classi- A crucial factor is capital productivity. What
cal approach. We have not tried to estimate the happens to the output}capital ratio as a factory size
production function of various industries (neither grows? There are three alternatives: it may increase,
Cobb}Douglas, Leontief, CES nor any others). be constant or decrease. According to the empirical
Rather, we have tried to determine tools for practi- data, the latter alternative, though not necessarily
cal work. The aim of this section is to "nd empirical common, is certainly possible. Output}capital ratio
links between maintenance costs and investments can be depicted by Eqs. (8)}(10).
in production equipment. The analysis of this chap-
ter is very much a preliminary one . Q/K"r, Q"rK, (11)
This pro"tability analysis is based on the amount s
of production equipment. That means that all the Q" (12)
f (K)
needed variables are de"ned as a function of K. 
According to our empirical research the integration or more generally
level grows as the size of a plant increases. This
Q"f (K). (13)
relationship often seems to be a linear one 
(I"a#bK). The ratio `replacement value/produc- In Eqs. (11) and (12) symbols (r) and (s) are con-
tion operatives of one shifta was used as an opera- stants. It is important to notice that here K stands
tional indicator of the integration level of a factory. for the replacement value and not for the book
So, the labour requirements for a plant can be value of production equipment. However, it was
easily calculated: assumed that these values were very close to each
other because of continuous replacement invest-
K/(/v)"I"f (K) ments.

30 K. Komonen / Int. J. Production Economics 79 (2002) 15}31

Now, the pro"t function of a plant can be for- tion units with a high integration level to a greater
mulated in the following way: extent than in units with a low integration level.
New data supported this result only partly.
"pf (K) ![c vK/f (K) #c mf (K) #c nK Economy of scale is an important factor in
     
  

      benchmarking, since maintenance managers have
#c f (K) #c f (K)] , (14)
 

 costs, a benchmarking tool has been created. This
where p is the price of a product, c , c , c , c , and
   
c are unit costs and m and n are constants. If we

determine that  equals zero and then solve Eq. (14)
for p, we get the minimum price for each level of
production capacity (production equipment). This
kind of exercise was carried out in two groups of
plants. In the "rst case, the output}capital ratio was
constant and in the second case the ratio was de-
creasing. In the former case, the bigger the plant
was, the lower the minimum price was and in the
latter case the result was the opposite. The third
alternative, growing output}capital ratio leads, of
course, to a pro"table solution.
Naturally, managers do not make investments
decisions on the basis of maintenance costs. How-
ever, the better the knowledge we have about the
interaction between maintenance and other busi-
ness variables, the better our decisions.
Although, the above calculations may contain
faults (e.g. capital costs) and although the product
mix of a plant may vary (as may the prices), it is
obvious that production units cannot always reap
the whole bene"t of di!erences in maintenance
costs. Indeed, in the case low of output}capital
ratio, for example, the price level was high and the
pro"tability of the production line was very good.
7. Conclusions
According to old data (1990 and 1991) and new
data (1996 and 1997) economies of scale do exist.
The larger the production plants are and the higher
the integration level, the lower maintenance costs
will be in relation to production equipment and
production volume. The increase of utilisation rate
increases the maintenance costs. Also the techno-
logy factor has a great impact on maintenance
costs. However, according to old data, preventive
maintenance reduces maintenance costs in produc-
to take it as an exogenous variable. Because several
external independent variables a!ect maintenance
tool contains estimated nonlinear equations with
the aid of which an appropriate benchmarking
value can be found.
Economies of scale may lead us to such a super"-
cial conclusion that it would be pro"table from the
point of view of maintenance costs to invest in
larger production plants. However, we have to take
into account other business decision variables in
order to draw the correct conclusions.
New data from 1999 has been collected and the
results of the analyses will carried out in the near
future.
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