© Life Cycle Engineering, Inc | www.LCE.

com 1
Index
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 1
Building a Business Case for Reliability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 1
Case Study #1: Food Manufacturer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 6
Case Study #2: Chemical Processing Plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 9
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 12

Introduction
Every manufacturing facility wants production equipment to operate reliably. When the equipment does what it
needs to do when it needs to do it, plant output and profitability is maximized. No organization wants assets to
break down, to produce poor quality products, or to operate inefficiently. We want them to operate perfectly. If
the right systems, structure, processes and procedures are in place and executed well, losses are minimized,
the operation is stable, production output is maximized and quality is high. We call this a state of Reliability
Excellence (Rx).

Reliability Excellence has helped manufacturers:

• Increase capacity
• Increase product availability
• Reduce Cost of Goods Sold
• Improve OEE
• Reduce maintenance costs and spending

By designing reliability into daily plant operations and creating a culture of prevention and improvement, plants
can operate as safer, more productive and more profitable businesses. How much more profitable? That
depends on each organization’s business and how it’s managed. In Keith Mobley’s article Building a Business
Case for Reliability he explains the two basic elements of building a business case: avoiding costs and improv-
ing revenue.

This resource includes two case studies of manufacturing organizations to illustrate the significant financial
improvement that can result from improving reliability from current-state to best-in-class performance. The
scenario descriptions and worksheets for a food manufacturer and a chemical processing plant show the
expenditures and potential cost savings for maintenance expenditures, MRO expenditures, production expen-
ditures, and production inventory expenditures, as well as the potential revenue improvements that can be
derived from improving overall equipment effectiveness. These worksheets show total cost savings and OEE/
AU potential of $170 million for the food manufacturer and more than $503 million for the chemical processing
plant.

Building a Business Case for Reliability

R. Keith Mobley, CMRP, Life Cycle Engineering

In 1980 Philip Crosby introduced a book titled Quality is Free, the Art of Making Quality Certain. His message
was straightforward: if you are consistently and effectively doing all of the basics there is no additional or
incremental cost of quality—it is inherent to the organization. Today, 36 years later, we are fixated on the cost
of reliability and how much of an investment must be paid to achieve it. We struggle to build a business case to
justify implementation of one or more programs that purport to create reliability. If your organization is already
consistently doing everything from strategic planning to maintenance effectively, the cost of reliability is
zero—it is already a part of its DNA and there really is no reason to build a business case.

However, if your organization is not one of the fortunate few that are already reliable, then change—perhaps
small, perhaps quite large—will be needed and there will be associated costs. This is not a cost of reliability, but
rather an investment required to become reliable. If this is the case, then building an accurate business case is
essential. But where do you start?

© Life Cycle Engineering, Inc | www.LCE.com 2

Common sense dictates that you begin by identifying the gaps between a truly reliable organization and your
current operation. Benchmarking is one approach that can be used, but it must be used with extreme caution.
It is virtually impossible to find a reliable operation that is identical to yours. While it might be in the same in-
dustrial classification, differences in size, location, mode of operation and many other factors can badly skew
the comparison. Benchmark comparison, done correctly, can be a valuable tool, but should be used only to
identify potential opportunities for reliability improvement and not as the basis for a business case.

If benchmarking is not the answer, then how does one

build a business case? The most logical approach is to
identify the gaps and their forcing functions. Where are Statistically, 17% of unscheduled
your losses, where is your waste, and where are your asset downtime results from de-
reliability issues? While this may sound like a simple ficiencies within the maintenance
exercise, it is not. For example, many organizations function. The remaining 83% is
identify unscheduled physical asset downtime as a
major reliability issue and automatically assume this is driven by deficiencies in other
a maintenance issue. After all, the repair cost shows up functions within the organization.
as a maintenance cost. However historical data dis-
agrees. Statistically, 17% of unscheduled asset down-
time results from deficiencies within the maintenance function. The remaining 83% is driven by deficiencies
in other functions within the organization. Therefore, no matter how much you invest in maintenance improve-
ment, the maximum gain is limited to a 17% improvement in unscheduled downtime. The truth is that most of
the factors that limit reliability are not maintenance or even physical asset-driven. Inconsistency (the recipro-
cal of reliability) in the way decisions are made, and how work is planned and executed, is the real reason that
many operations are reactive.

If your gap analysis is to have any validity, you must peel back the layers and identify the true forcing functions
that are preventing you from being a reliable operation. In most cases, your investigation will uncover the vari-
ability or inconsistency in the way work—in all functions of the organization—is identified, planned, scheduled
and executed. Several forcing functions contribute, including a lack of visible performance indicators and the
absence of standard work in processes, procedures and practices.

Once the gaps and forcing functions have been identified

and their impact quantified, one can accurately develop
a budget and timeline to implement improvements that
will eliminate the gaps and create a reliable organization.
If your plant has been reactive, e.g. unreliable, for more
than a few years, your budget should include a 12-18%
per year increase in current maintenance expenditures for
two to three years to restore physical assets to reliable and
maintainable state. Typically, physical assets are poorly
operated and maintained in a reactive environment. This
short-term investment is mandatory to overcome the degradation and gain minimum levels of asset reliability.

Now that the investment to close reliability gaps is known, the final step is to qualify and quantify the tangible
benefits that will be generated by gaining reliable operations. Benefits are defined in two classifications, cost
avoidance and revenue improvement.

Cost Avoidance

Within this classification are current and known future costs that can be prevented once a reliable state is
achieved. For example, unplanned events drive excessive overtime labor cost. These costs can be reduced or
eliminated as the organization becomes reliable and unplanned events are reduced. Targets for cost avoid-
ance include:

© Life Cycle Engineering, Inc | www.LCE.com 3

 • Overtime: Controllable overtime throughout the organization is typically used to provide temporary
increases in labor-hours to meet unexpected demands. As the organization becomes more reliable, the
need for overtime diminishes. Use caution with this variable cost. Many organizations have agreed to cer-
tain amounts of overtime as part of their labor agreement. These costs are not controllable and are not
avoidable without renegotiating the agreement.

• Materials Usage: In reliable operations, the usage of both production and maintenance materials is min-
imized simply because there is little, if any, waste. In maintenance, improving the quality of maintenance
performed will reduce the need for repair parts and in production the combination of standard work and
visual factory will reduce waste and quality losses. Both will reduce materials expenditures year over year.

• Contractor and Temporary Labor Cost: Gains in effective use and work execution efficiency of the orga-
nization’s workforce will decrease the need for and reliance on maintenance contractors and temporary
production labor. These savings can be significant.

• Labor Cost: Forced headcount reduction should not be considered as a possible cost avoidance oppor-
tunity. Most organizations have already reduced their workforce to or below critical levels and further
reductions would prohibit a sustainable state of reliability. If this is not the case, the efficiencies gained
through better resource utilization may permit the use of attrition as a means to lower labor cost—both
direct and indirect. If you elect to use labor cost reductions as a part of your benefits calculation, use
extreme caution and communicate the message that attrition and only attrition will drive these reductions.

If your operation is fully utilizing its installed capacity or is in a stagnant market where additional volume is un-
saleable, cost avoidance or reduction is the only option. Your business case must identify enough real benefits
to offset your investment and provide a reasonable return on investment. Reliance on cost avoidance as the
sole source of benefits will limit the investment one can make to become reliable.

Revenue Improvements

Many operations have the opportunity to increase their output, increase revenue and lower their total cost of
goods sold by becoming more reliable. For these organizations building a business case is much simpler and
quite straightforward. The number of operations that fall into this category is far greater than one would imag-
ine. Potential opportunities can be found in asset utilization and overall equipment effectiveness.

Asset Utilization

There are 8,760 possible production hours in a year, but most plants only plan to operate their plants about
6,000 hours. In part, the planned reduction is based on the perception that outages and planned downtime
are needed. In truth, physical assets must be properly maintained and some downtime is needed for these
maintenance windows, but not nearly as much as many plants plan. Depending on industry, downtime
required for sustaining maintenance ranges from 400 to 800 hours per year. So from an asset reliability
standpoint, operations would utilize between 7,960 and 8,360 hours per year for production. The volume
and increased revenue gained by increasing operating hours from 6,000 hours to 7,960 would offset a
significant investment in reliability. Yes, the investment might also include a new manning plan, increased
headcount and other incremental costs, but the benefit would more than offset the costs.

Management decisions on shift structure and scenario are another potential source of improvement. Not
only does a 24/7/365 improve asset utilization but it also improves physical asset reliability. These assets
are designed to operate, not sit idle. Startups and shutdowns cause more asset failures than any other
factor.

Another potential area for improvement is how well production planning and scheduling utilize installed
capacity. Look at changeovers, distribution of products and unscheduled time for your production assets.
In many instances, significant capacity gains are possible by improving the reliability of the production
planning and scheduling process.

© Life Cycle Engineering, Inc | www.LCE.com 4

 Overall Equipment Effectiveness (OEE)

In many operations there are also significant opportunities to increase output and reduce cost of goods
sold through improved reliability. OEE should be used to measure the performance of operating or produc-
tion teams. For business case purposes, look closely at the true reasons for losses in these three control-
lable areas: uptime, production rate, and quality.

Uptime is a measure of actual operating time, not availability, and while a catastrophic failure reduces up-
time, the majority of these losses reside with the operating team or management decisions. The absence
of reliable operating practices, and resultant variability in the methods used to operate production assets,
creates the majority of uptime losses. These losses are manifested as prolonged setups or changeovers,
operator-induced failures on startup, and a myriad of other non-maintenance issues. Inclusion of standard
work, visual factory and better training will minimize these losses, reduce costs, and increase output.

Production Rate is a measure of the actual vs. design operating speed or output. This is a major source of
lost capacity in most production and manufacturing plants. Simply stated, the operators slow the assets
down to ease the pace required to tend it. While there are other reasons that a production asset must op-
erate at reduced speed, arbitrary decisions by the operator or supervisor decisions to operate at reduced
speed may represent up to 60% of losses in the category.

Quality Rate: As Crosby stated, quality is free. Avoiding scrap, rework, or down-graded losses provides
additional output that is absolutely free. While increases in capacity achieved by improving production rate
or uptime incur variable costs (predominately direct materials and energy) that reduce the organization’s
contribution to net operating profit, reductions in quality losses drop directly to the bottom line. The pri-
mary forcing functions that generate quality losses are the absence of or minimal adherence to standard
work. Variability in all functional areas, especially production, maintenance and materials handling, is the
primary source.

Increased output, assuming that it can be sold, is the primary benefit of reliability. Not only does it increase
revenue and lower total cost of goods sold, it also significantly improves net operating profit.

Fundamentals of business case development

Keep these fundamentals of business case development in mind as you build your business case for reliability:

• The investment must be completely and accurately quantified. Too often the investment is significantly
understated—often limited to the cost of a consultant or software program with no thought of the internal,
remedial and ancillary costs that will be incurred during implementation.

• Benefits must be real. If the potential benefit does not change the bottom line of your financial statement
it is not real. Justifications are frequently made based on improved efficiency—especially wrench time in
maintenance—that does not change the incurred labor cost. If the headcount remains the same, no matter
how efficient, the cost does not change and there is no benefit. Always remember, you will be expected to
deliver on your promises.

• Benefits are not instantaneous. It takes at least a year or more to implement changes such as standard
work. As a result, there will be a lag between initial investment and the beginning of payback. Benefits will
also be exponential. They will start slowly and compound as the reliability improves. Build your business
case to match your organization’s normal financial cycle, typically three to five years. Some organizations
even look out to 10 years for justifiable financial investments.

• Couch your business case in terms your organization already uses. Not all organizations use simple re-
turn-on-investment as the evaluation tool. Talk to your senior financial team and get their help. At the end
of the day, they will decide whether to fund your reliability investment. It’s in your best interest to get them
involved early.

© Life Cycle Engineering, Inc | www.LCE.com 5

Building a business case is really quite simple, but it does require due diligence for both the cost and benefit
side of the equation. Account for all of the cost and limit benefits to the real and achievable.

Case Study #1: Food Manufacturer

A mid-size confectionary plant requested help because of chronic capacity problems believed to be the result
of poor maintenance. A Reliability Excellence analysis was performed, master plan developed and cost-ben-
efit analysis prepared. The Rx assessment indicated that the company was reactive. Unplanned events were
driving day-to-day operation and adequate sustaining maintenance was not being performed.

Maintenance was lacking, but not the primary driver of poor

performance. Cost reduction efforts over the preceding decade
precluded doing adequate levels of sustaining maintenance;
transferred too much core-value work to contractors; and creat-
ed a frustrated culture that lost focus on best practices. Most of
these deficiencies were outside of the control of the maintenance
department.

Losses from production deficiencies were also found in produc-

tion. Leading the list was extreme variation in shift-to-shift output,
low production rates and a 4% scrap rate. Lack of standard processes, procedures and visual factory were
identified as the root cause of these issues.

The Rx master plan to correct all identified deficiencies was accompanied by a business case for implement-
ing the improvements. The benchmark comparison indicated the following opportunities:

1. Total maintenance cost was $2,612,838 higher than a comparable best-in-class plant, but the number
was misleading. The higher cost was generated by overtime and contractor cost only. The reported direct
labor and MRO materials usage suggested that the client was under-maintaining its assets.

2. Total production cost was $33,360,099 too high. The major contributor was direct materials cost
($19,383,495) and energy ($8,431,798). The former was predominately the 4% scrap rate reported in their
OEE numbers. The excessive energy cost resulted from the mode of operation and lack of proper mainte-
nance.

Implementing Rx would close the gap quantified by these numbers. The total opportunity, $35,972,937 in cost
reduction, would support the investment required to implement Rx, but it would also take three to five years
to realize them. Business reengineering takes time—typically 9 – 12 months—to evaluate existing processes
and procedures and then to create best-in-class replacements. Once developed, training materials must be
developed, employees educated and the new processes and procedure rolled out to the plant. Only then will
the improvement program begin to generate benefits. Full benefits must wait until the program matures. Pro-
duction improvements will generate significate benefits as soon as the new procedures are implemented, but
benefits from the new maintenance procedures will not become evident for at least three to five years.

The business case also points to OEE and AU improvements that would dramatically increase revenue and net
operating profit. The benchmark comparison quantifies an opportunity of $134.7MM in revenue that is being
lost to uptime, production rate and quality. New procedures and enforced expectations could close this gap
quickly, generating immediate benefit.

© Life Cycle Engineering, Inc | www.LCE.com 6


< Back
Company Name:
Cost Classification
Replacement Asset Value (RAV)
Gross Square Feet
Maintenance Hourly (Craft) Headcount
Direct Burdened Labor (w/o Overtime)
MRO Materials Usage
Contract Maintenance Cost
Maintenance Overtime Cost
Maintenance Engineering Burdened Labor Cost
Indirect Cost (Management and Support)
MRO Inventory Value
Obsolete/Surplus Inventory
Inventory Write-off and Adjustments
Adjustment to Min/Max Level
Inventory Carrying Cost (Tax)
Inventory Carrying Costs
Production Hourly Headcount
Direct Burdened Labor (w/o Overtime)
Temporary Labor Cost
Production Overtime Cost
Reliability/Process Engineering Cost
Indirect Cost (Management and Support)
Direct Materials Costs
Other Costs (Utilities,etc)
Other Extraordinary Costs (Trans, Demurrage, etc)
Inventory Value (Raw Materials)
Inventory Value (WIP)
Inventory Value (Finished Goods)
Annual Planned Production Hours
Average Uptime (%)
Average Production Rate
Average Quality Rate (% Best Demo)
Design or Sustainable Production Rate (Units/Year)
Average Annual Revenue (Sales)
Average Sales Price/Unit
Gross Margin per Unit
© Life Cycle Engineering, Inc | www.LCE.com
Home
ABC Food Company City: Anywhere, USA Date:
Value
The estimated replacement value of the facility, grounds and equipments that comprise
the plant. Excludes inventories of raw, wip and finished goods
The total enclosed , e.g. building space (in square feet) occupied by the facility.
Maintenance Data
Number of maintenance craft (Hourly). A growing number of clients have elected to out-source a
95.0
substantial portion of their maintenance. Do not include contract headcount in this number
Total Annual cost for maintenance hourly workforce, including fringes and payroll added cost, e.g
$ 8,220,000
withholding etc., but should not include any overtime costs
Annual cost of MRO materials actually used or allocated to maintenance activities, e.g. repairs, rebuilds,
$ 5,695,000
PMs, etc.
$ 2,910,000 Annual actual cost of All Contract maintenance and maintenance services
Annual actual overtime cost, Must include base labor rate plus overtime premium, e.g. base 8 hours/day
$ 2,055,000
and 40 hours/week plus incremental cost
Total annual cost for the engineering support assigned to the maintenance function. May be titled
$ 521,898
Maintenance, Reliability or Process Engineers.
Total annual burdened cost of management, supervision, clerical and other indirect labor, excluding the
$ 794,000
Maintenance Engineering costs in Line 12.
MRO Inventory Data
Actual total MRO Inventory value without taxes or carrying cost. This is the actual book cost of the MRO
inventory
Actual or estimated value of obsolete or surplus MRO inventory
Estimated. adjustments ($) caused by errors. Note: Write offs must be entered as negative
Estimated adjustments ($) in stocking levels of MRO spares, parts and consumables
Percent rate of local, state and Federal inventory taxes. Generally, 3% to 12%
Percent of value for carrying cost, includes overhead, burden and other costs
663 Number of production and direct support hourly employees, exclude temporary
$ 26,759,000 Annual payroll of hourly production labor, including all benefit and payroll-added costs
$ 3,121,000 Cost of all temporary production workers
$ 6,377,000 Actual cost of production overtime, including base labor rate plus overtime premium
Total annual cost for the engineering support assigned to the Production function. May be titled Reliability
$ -
or Process Engineers.
$ 6,100,000 Cost of management, supervision, clerical and other indirect labor
This is cost of direct materials, consumables and other departmental materials used in the production
$ 229,632,000
process.
$ 51,529,000 Total of all other fixed and variable cost required to support the production of goods
This cell is for any extraordinary cost, such as expedited transportation, demurrage, etc. that have a
$ - measurable impact on total cost of goods sold (COGS)
$ - Average value ($) of Raw Materials required to support the production of goods
$ - Average value ($) of Work-in-Process (WIP) inventory
$ - Average value ($) of Finished Goods
Performance Data
8,300 Annual Planned Production hours, e.g. 24/7 equals 8760 hours
92% Average Uptime or runtime of production assets, based on Planned Production hours
87% Average Production Rate of production assets, based on Planned Production Rate
96% Average Quality Rate of production assets (reciprocal of scrap, diversions, rework)
236,777,000 Planned or best Sustainable Annual Production Rate in Units/Year
Sales(Revenue) Data
$ 748,215,320 Average Annual Revenue or Income or Sales
$ 3.16 Average of all products as Sales Price/Unit Produced
$ 1.14 Average Gross Margin/Unit
©2007 Life Cycle Engineering, Inc
Back to Table of Contents
Help
7
 < Back Next >

ABC Food Company Best-in-Class

ABC Food Best-in-Class Benchmark
Company Anywhere, USA
Benchmark (Revenue)
Annual Revenue (Income) $ 748,215,320 $/Sq. Ft. Target $/Sq. Ft. Differential
Gross Square Feet of Facility 0 $0.00 N/A
# Craft Target Craft Headcount Differential
Total Craft Headcount 95 86 9
Avg Burden Craft Rate $42 $42

MAINTENANCE EXPENDITURES AND POTENTIAL COST SAVINGS

Cost Classificaton Actual Expenditure Best-of-Class Potential Savings
Direct Labor Burdened(excluding Overtime) $ 8,220,000 $ 7,482,153 $ 737,847
MRO Material Costs (Usage) $ 5,695,000 $ 7,108,046 $ (1,413,046)
Contract Maintenance Cost $ 2,910,000 $ 748,215 $ 2,161,785
Maintenance Overtime $ 2,055,000 $ 748,215 $ 1,306,785
Maintenance Engineering Labor Cost $ 521,898 $ 748,215 $ (226,317)
Maint Management Support (L&B) $ 794,000 $ 748,215 $ 45,785
TOTAL MAINTENANCE COST $ 20,195,898 $ 17,583,060 $ 2,612,838

MRO INVENTORY EXPENDITURES AND POTENTIAL COST SAVINGS

MRO Inventory Value
Obsolete Inventory
Inventory Accuracy (Write off/Write on)
Adjustments to Min/Max Level
TOTAL MRO INVENTORY
$ -
$ -
$ -
$ -
$ -
$ 3,741,077 $ (3,741,077)
$ - $ -
$ - $ -
$ - $ -
$ 3,741,077 $ (3,741,077)

Inventory Carrying Costs (Tax) 0.00%

Inventory Carrying Costs (Carrying Cost) 0.00%

PRODUCTION EXPENDITURES AND POTENTIAL COST SAVINGS

Actual Headcount
Production Hourly Headcount 663
Cost Classificaton Actual Expenditure
Direct Labor Burdened (Excluding Overtime) $ 26,759,000
Temporary Labor $ 3,121,000
Production Overtime $ 6,377,000
Reliability/Process Engineering Cost $ -
Supervision and Management Cost $ 6,100,000
Production Material Usage Cost $ 229,632,000
Other Production Cost (Utilities, etc.) $ 51,529,000
Other Extraordinary Costs (Trans., Demurage) $ -
TOTAL PRODUCTION COST $ 323,518,000
Headcount Target Operator Headcount Differential
668 -5
Best-of-Class Potential Savings
$ 26,711,287 $ 47,713
$ 748,215 $ 2,372,785
$ 1,870,538 $ 4,506,462
$ 748,215 $ (748,215)
$ 5,985,723 $ 114,277
$ 210,248,505 $ 19,383,495
$ 43,097,202 $ 8,431,798
$ 748,215 $ (748,215)
$ 290,157,901 $ 33,360,099

PRODUCTION INVENTORY EXPENDITURES AND POTENTIAL COST SAVINGS

Inventory Value (Raw)
Inventory Value (WIP)
Inventory Value (Finished Goods)
PRODUCTION INVENTORY
Actual Expenditure
$ -
$ -
$ -
$ -
Best-of-Class
$ -
$ -
$ -
$ -
Potential Savings
$ -
$ -
$ -
$ - .

TOTAL SAVINGS POTENTIAL $ 35,972,937

OVERALL EQUIPMENT EFFECTIVENESS/ASSET UTILIZATION OPPORTUNITIES

Annual Planned Production Hours 8,300

Availablity % 87.2% Availability $ 22,446,460

Uptime % 92.0% Production Rate $ 89,785,838
Average Actual Production Rate (%) 87.0% Quality Rate $ 22,446,460
Quality (% Yield)(Quality Rate) 96.0% Total AU Potential $ 134,678,758
Average Sales Price of Product per Unit $ 3.160 (As Revenue)
Gross Margin per Unit $ 1.140
Design or Sustainable Run Rate (Units/Y) 236,777,000
Asset Utilization (A.U) 72.8%
Overall Equipment Effectiveness (O.E.E.) 76.8%

TOTAL COST SAVINGS AND OEE/AU POTENTIAL $ 170,651,694

Note: Best-of-Class Benchmark derived from composite of A. T. Kearney, Plant Engineering and HSBRT databases
Note: Best-of-Class Benchmark derived from composite of A. T.
Kearney, Plant Engineering and HSBRT databases

< Back Next >

© Life Cycle Engineering, Inc | www.LCE.com 8

©2007 Life Cycle Engineering, Inc
Case Study #2: Chemical Processing Plant
A mid-size hydrocarbon chemical plant requested help because of high maintenance cost and poor capital
asset reliability. A Reliability Excellence analysis was performed, master plan developed and cost-benefit anal-
ysis prepared.

The Rx assessment indicated that the company was emerging from its reactive state. While unplanned events
continued to drive day-to-day operation, there were signs of improvement in some plant areas. The analysis
confirmed that adequate sustaining maintenance was not performed. It also indicated that the reactivity was
prevalent throughout the operation.

The Rx master plan to correct all identified deficiencies in production, maintenance, engineering, procure-
ment and ancillary functions was accompanied by a business case. The benchmark comparison indicated the
following opportunities:

1. Total maintenance cost for the previous year was reported to be $20.2MM, or $2.6MM higher than a
comparable best-in-class plant, but the number was misleading. They underspent on MRO materials by
$1.4MM and maintenance engineering ($0.23MM). The underspend on MRO materials raised a real con-
cern that the level of actual maintenance performed was too low—that they were not providing minimum
levels of sustaining maintenance.

2. Total production cost was $323.5MM or $33.4MM higher than a comparable, best-in-class plant. The ma-
jor contributors were direct materials ($229.6MM) (driven by their high scrap rate), energy ($51.5MM) and
overtime ($6.4MM).

Implementing Rx would close the gap quantified by these numbers in two ways: cost savings and increased
revenue and net operating profit.

In this instance cost savings would be predominately

in the production area rather than maintenance. Since
they were already under-spending on MRO materials,
this cost would go up by about $1.4MM annually. This
would be offset by decreasing the reliance on con-
tractors and overtime. The maximum net saving for
maintenance was $2.0MM.

Production cost savings created by implementing Rx

would include reductions in overtime, reduced reli-
ance on—but not elimination of—temporary labor, direct material losses caused by scrap, and lower energy
usage. When these savings mature, the maximum savings would be $34.7MM annually.

The Rx Assessment and business case also points to an opportunity to increase throughput significantly
($134.7MM annually) by improving asset utilization. Data from actual performance indicated a plan to utilize
installed capacity 8,300 hours per year (94.7%) but actual usage was only 92.0% or 7,636 hours. In this indus-
try, the difference between optimal (8,760 hours) and planned was driven by the hours required to perform
sustaining maintenance and is not subject to change. These hours are required to maintain asset reliability.
However, the 664 hours lost vs. plan, 7% lost to production rate and 5% lost to scrap, represented a significant
opportunity to increase output, lower cost of goods sold, and increase net operating profit.

© Life Cycle Engineering, Inc | www.LCE.com 9


< Back
Company Name:
Cost Classification
Replacement Asset Value (RAV)
Gross Square Feet
Maintenance Hourly (Craft) Headcount
Direct Burdened Labor (w/o Overtime)
MRO Materials Usage
Contract Maintenance Cost
Maintenance Overtime Cost
Maintenance Engineering Burdened Labor Cost
Indirect Cost (Management and Support)
MRO Inventory Value
Obsolete/Surplus Inventory
Inventory Write-off and Adjustments
Adjustment to Min/Max Level
Inventory Carrying Cost (Tax)
Inventory Carrying Costs
Production Hourly Headcount
Direct Burdened Labor (w/o Overtime)
Temporary Labor Cost
Production Overtime Cost
Reliability/Process Engineering Cost
Indirect Cost (Management and Support)
Direct Materials Costs
Other Costs (Utilities,etc)
Other Extraordinary Costs (Trans, Demurrage, etc)
Inventory Value (Raw Materials)
Inventory Value (WIP)
Inventory Value (Finished Goods)
Annual Planned Production Hours
Average Uptime (%)
Average Production Rate
Average Quality Rate (% Best Demo)
Design or Sustainable Production Rate (Units/Year)
Average Annual Revenue (Sales)
Average Sales Price/Unit
Gross Margin per Unit
Home
ABC Chemical Company City: Anywhere, USA Date:
Value
The estimated replacement value of the facility, grounds and equipments that
comprise the plant. Excludes inventories of raw, wip and finished goods
The total enclosed , e.g. building space (in square feet) occupied by the facility.
Maintenance Data
Number of maintenance craft (Hourly). A growing number of clients have elected to out-source a
468
substantial portion of their maintenance. Do not include contract headcount in this number
Total Annual cost for maintenance hourly workforce, including fringes and payroll added cost, e.g
$ 36,205,499
withholding etc., but should not include any overtime costs
Annual cost of MRO materials actually used or allocated to maintenance activities, e.g. repairs, rebuilds,
$ 28,166,491
PMs, etc.
$ 5,187,056 Annual actual cost of All Contract maintenance and maintenance services
Annual actual overtime cost, Must include base labor rate plus overtime premium, e.g. base 8 hours/day
$ 2,001,854
and 40 hours/week plus incremental cost
Total annual cost for the engineering support assigned to the maintenance function. May be titled
$ 593,000
Maintenance, Reliability or Process Engineers.
Total annual burdened cost of management, supervision, clerical and other indirect labor, excluding the
$ 1,088,619
Maintenance Engineering costs in Line 12.
MRO Inventory Data
Actual total MRO Inventory value without taxes or carrying cost. This is the actual book cost of the
$ 32,450,000
MRO inventory
$ - Actual or estimated value of obsolete or surplus MRO inventory
$ - Estimated. adjustments ($) caused by errors. Note: Write offs must be entered as negative
$ - Estimated adjustments ($) in stocking levels of MRO spares, parts and consumables
0% Percent rate of local, state and Federal inventory taxes. Generally, 3% to 12%
0.0% Percent of value for carrying cost, includes overhead, burden and other costs
1,803 Number of production and direct support hourly employees, exclude temporary
$ 122,375,000 Annual payroll of hourly production labor, including all benefit and payroll-added costs
$ 695,727 Cost of all temporary production workers
$ 3,279,728 Actual cost of production overtime, including base labor rate plus overtime premium
Total annual cost for the engineering support assigned to the Production function. May be titled
$ -
Reliability or Process Engineers.
$ 29,734,410 Cost of management, supervision, clerical and other indirect labor
This is cost of direct materials, consumables and other departmental materials used in the production
$ 429,632,000
process.
$ 92,188,484 Total of all other fixed and variable cost required to support the production of goods
This cell is for any extraordinary cost, such as expedited transportation, demurrage, etc. that have a
$ - measurable impact on total cost of goods sold (COGS)
$ - Average value ($) of Raw Materials required to support the production of goods
$ - Average value ($) of Work-in-Process (WIP) inventory
$ - Average value ($) of Finished Goods
Performance Data
8,154 Annual Planned Production hours, e.g. 24/7 equals 8760 hours
84% Average Uptime or runtime of production assets, based on Planned Production hours
87% Average Production Rate of production assets, based on Planned Production Rate
93% Average Quality Rate of production assets (reciprocal of scrap, diversions, rework)
4,402,000 Planned or best Sustainable Annual Production Rate in Units/Year
Sales(Revenue) Data
$ 1,452,660,000 Average Annual Revenue or Income or Sales
$ 330.00 Average of all products as Sales Price/Unit Produced
$ 150.00 Average Gross Margin/Unit
©2007 Life Cycle Engineering, Inc
Back to Table of Contents
Help
© Life Cycle Engineering, Inc | www.LCE.com 10
 < Back Next >

ABC Chemical Best-in-Class
Annual Revenue (Income)
Gross Square Feet of Facility
Total Craft Headcount
Avg Burden Craft Rate
MAINTENANCE EXPENDITURES AND POTENTIAL COST SAVINGS
Cost Classificaton
Direct Labor Burdened(excluding Overtime)
MRO Material Costs (Usage)
Contract Maintenance Cost
Maintenance Overtime
Maintenance Engineering Labor Cost
Maint Management Support (L&B)
TOTAL MAINTENANCE COST
Best-in-Class
ABC Chemical
Benchmark
Company
Company Benchmark
(Revenue)
$ 1,452,660,000 $/Sq. Ft. Target $/Sq. Ft. Differential
0 $13.00 N/A
# Craft Target Craft Headcount Differential
468 458 10
$37 $37
Actual Expenditure Best-of-Class Potential Savings
$ 36,205,499 $ 35,299,638 $ 905,861
$ 28,166,491 $ 24,695,220 $ 3,471,271
$ 5,187,056 $ 2,905,320 $ 2,281,736
$ 2,001,854 $ 1,452,660 $ 549,194
$ 593,000 $ 1,452,660 $ (859,660)
$ 1,088,619 $ 1,016,862 $ 71,757
$ 73,242,519 $ 66,822,360 $ 6,420,159

MRO INVENTORY EXPENDITURES AND POTENTIAL COST SAVINGS

MRO Inventory Value
Obsolete Inventory
Inventory Accuracy (Write off/Write on)
Adjustments to Min/Max Level
TOTAL MRO INVENTORY
$ 32,450,000 $ 26,874,210 $ 5,575,790
$ - $ - $ -
$ - $ - $ -
$ - $ - $ -
$32,450,000 $ 26,874,210 $ 5,575,790

Inventory Carrying Costs (Tax) 0.00%

Inventory Carrying Costs (Carrying Cost) 0.00%

PRODUCTION EXPENDITURES AND POTENTIAL COST SAVINGS

Production Hourly Headcount
Cost Classificaton
Direct Labor Burdened (Excluding Overtime)
Temporary Labor
Production Overtime
Reliability/Process Engineering Cost
Supervision and Management Cost
Production Material Usage Cost
Other Production Cost (Utilities, etc.)
Other Extraordinary Costs (Trans., Demurage)
TOTAL PRODUCTION COST
Actual Headcount Headcount Target Operator Headcount Differential
1,803 1,784 19
Actual Expenditure Best-of-Class Potential Savings
$ 122,375,000 $ 121,297,110 $ 1,077,890
$ 695,727 $ - $ 695,727
$ 3,279,728 $ 2,905,320 $ 374,408
$ - $ 1,452,660 $ (1,452,660)
$ 29,734,410 $ 22,516,230 $ 7,218,180
$ 429,632,000 $ 364,617,660 $ 65,014,340
$ 92,188,484 $ 89,048,058 $ 3,140,426
$ - $ - $ -
$ 677,905,349 $ 601,837,038 $ 76,068,311

PRODUCTION INVENTORY EXPENDITURES AND POTENTIAL COST SAVINGS

Inventory Value (Raw)
Inventory Value (WIP)
Inventory Value (Finished Goods)
PRODUCTION INVENTORY
Actual Expenditure Best-of-Class Potential Savings
$ - $ 217,899,000 $ -
$ - $ 72,633,000 $ -
$ - $ 72,633,000 $ -
$ - $ 363,165,000 $ - .

TOTAL SAVINGS POTENTIAL $ 82,488,470

OVERALL EQUIPMENT EFFECTIVENESS/ASSET UTILIZATION OPPORTUNITIES

Annual Planned Production Hours 8,154

Availablity % 78.2% Availability $ 159,792,600

Uptime % 84.0% Production Rate $ 174,319,200
Average Actual Production Rate (%) 87.0% Quality Rate $ 87,159,600
Quality (% Yield)(Quality Rate) 93.0% Total AU Potential $ 421,271,400
Average Sales Price of Product per Unit $ 330.000 (As Revenue)
Gross Margin per Unit $ 150.000
Design or Sustainable Run Rate (Units/Y) 4,402,000
Asset Utilization (A.U) 63.3%
Overall Equipment Effectiveness (O.E.E.) 68.0%

TOTAL COST SAVINGS AND OEE/AU POTENTIAL $ 503,759,870

Note: Best-of-Class Benchmark derived from composite of A. T. Kearney, Plant Engineering and HSBRT databases
Note: Best-of-Class Benchmark derived from composite of A. T.
Kearney, Plant Engineering and HSBRT databases

< Back Next >

© Life Cycle Engineering, Inc | www.LCE.com 11

©2007 Life Cycle Engineering, Inc
Conclusion
These two case studies illustrate the enormous potential for operational and financial improvement that can result
from embarking on the Reliability Excellence journey. To learn more about creating a business case for improving
reliability within your organization, please visit our Reliability Excellence website, www.PoweredByRx.com, reach us
by email at info@LCE.com or call us at 800-556-9589.

© Life Cycle Engineering, Inc | www.LCE.com 12