The Southern Company Uses a Probability Model for Cost Justification of Oil Sample

Analysis
Author(s): Joseph M. Mellichamp, David M. Miller and O-Joung Kwon
Source: Interfaces , May - Jun., 1993, Vol. 23, No. 3 (May - Jun., 1993), pp. 118-124
Published by: INFORMS

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 The Southern Company Uses a Probability
Model for Cost Justification of Oil Sample
Analysis
JOSEPH M. MeLLICHAMP Department of Management Science
The University of Alabama
Tuscaloosa, Alabama 35486

DAVID M. MILLER Department of Management Science

The University of Alabama

O-JOUNG KWON Department of Management Information Systems

Sangamon State University
Springfield, Illinois 62794

One of the difficult decisions facing managers responsible for

maintaining motor vehicle and construction equipment fleets is
whether or not to implement oil analysis programs. We devel
oped a simple probability model for the Southern Company
which enables their maintenance managers to evaluate various
maintenance strategies including options that incorporate oil
sampling programs. The model has been used to determine op
timum policies for five classes of equipment and to assess the
sensitivity of these results to various changes in the model
parameters.
be avoided by preventive (or scheduled)
One of the many maintenance op
tions available to motor vehicle and maintenance. Failure to detect such prob
construction equipment managers of the lems usually leads to emergency mainte
Southern Company is oil analysis. The nance and the attendant equipment down
practice of periodically taking samples of time. Handler [1986], Lass [1985], and
the lubricating oil from engines, transmis Schauer [1989] discuss oil analysis proce
sions, and other reservoirs and subjecting dures and implications.
the samples to physical and chemical tests In most cases, the diagnostic interpreta
has become an accepted practice in main tion of laboratory tests of oil samples is im
taining equipment. Traces of various kinds precise and subject to uncertainty. False
of metals or contaminants in the sample signals can be associated with a sample;
indicate potential failures, which can often for instance, a sample containing "high"
Copyright ? 1993, The Institute of Management Sciences
0091-2102/93/2303/0118$01.25
This paper was refereed.

INTERFACES 23: 3 May-June 1993 (pp. 118-124)

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SOUTHERN COMPANY
levels of iron may be thought to indicate
excessive wear of a critical component
when in fact no problem exists. If the
maintenance manager acts on the indica
tion of excessive iron, the expensive equip
ment teardown may turn out to be unnec
essary. Hence, an interesting policy ques
tion faces the maintenance manager: In
view of the potential benefits of heading
off catastrophic failures and of the risk of
misinterpreting an oil sample analysis,
should he or she rely on a regular oil sam
ple program for equipment or not? Is such
a program warranted? When?
Given the current interest in oil analysis,
it is surprising that very little has been
done to establish procedures to cost-justify
the analysis. We found no mention of such
procedures in the literature. An informal
survey of 20 utilities and construction firms draulic systems) only when failures occur.
that operate motor vehicle fleets in the
Southeast underscores this conclusion. Not
one respondent to our survey had at
tempted any sort of objectively based cost
justification. Those who were using oil
Conducting oil sample
analyses can run in the
hundreds of thousands a year
for a moderate size fleet.
analysis felt that it was worth the addi
tional cost. Several respondents indicated
that they had experimented with oil analy
sis but felt that it was not worth the addi
tional cost and had suspended the practice.
Analyzing a sample can cost more than
$100; the impact of a policy to conduct oil
samples can run in the hundreds of thou
sands each year even for a moderate size
May-June 1993 119
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fleet. Hence a method of investigating the
economic merits of sampling is desirable.
We developed a simple probability
model that has been used by a task force
of a large electric utility holding company,
the Southern Company, to assess the
merits of oil sampling.
Mathematical Model
The Southern Company formed a task
force of fleet managers and maintenance
experts to determine what maintenance
procedures should be used company wide,
such as a routine oil sampling and analysis
program. In particular, the task force
wished to determine which of the follow
ing four distinct maintenance strategies the
company should implement:
(1) No preventive maintenance. Repair
components (engines, transmissions, hy
(2) Sample only. Take oil samples at
regular intervals and perform whatever
preventive maintenance is indicated by the
oil analysis.
(3) Change oil only. Change oil at regu
lar intervals, take no samples, and perform
repairs whenever failures occur.
(4) Change oil and sample. Change oil
on a regular basis, take samples at regular
intervals and repair as indicated by the oil
analysis.
In deciding which is the most cost-effec
tive strategy, the company needed to know
what the trade-off was between the cost
savings associated with avoiding equip
ment failure (that is, emergency mainte
nance and downtime) and the cost in
curred in implementing the strategy. To
evaluate these strategies, we identified a
number of probability concepts and asso
ciated cost parameters. We next developed
MELLICHAMP, MILLER, KWON

a decision tree (Figure 1) which shows the sitivity assessment.

four maintenance strategies and the poten
tial outcomes of each strategy. Then we
formulated a mathematical model which
permits an objective assessment of the var
ious possibilities; the mathematical model
is presented in the appendix.
Application
The Southern Company task force used
the model described to evaluate the poten
tial of oil analysis for five major classes of
equipment:
? Automobiles and light trucks,
? Diesel engines,
? Construction equipment engines,
? Transmissions, and
? Hydraulic systems.
We developed a Lotus 1.2.3 model incor
porating the relationships for each strategy
to facilitate the analysis, especially the sen
Our initial analysis for automobiles and
light trucks used failure probabilities of
0.10 (for no regular maintenance) and 0.04
(for regular oil changes) and estimated that
oil analysis was 70 percent effective in
identifying defective components and 80
percent effective in identifying nondefec
tive components (Table 1). The only cost
associated with strategy 1 (do nothing) is
one of $12,000.00 for emergency mainte
nance; strategy 3 (change oil only) results
in a cost of oil changes of $1,480.00, but
would reduce the cost of emergency
maintenance to $4,800.00. Strategy 2 (sam
ple only) and strategy 4 (change oil and
sample) each result in oil change and oil
analysis costs as well as preventive and
emergency maintenance costs. The opti
mum maintenance strategy for automobiles

Defective. Emergency
Maintenance Required

Nondefective. No Sample Indicates Defective.

Maintenance Performed Preventive Maintenance Accomplished

Sample Indicates Nondefective.

Emergency Maintenance Required

Sample Indicates Defective.

Unnecessary Preventive Maintenance
Nondefective

Sample Indicates Nondefective.

No Maintenance Performed
Defective. Emergency
Maintenance Required

Nondefective. No
Maintenance Performed Sample Indicates Defective.
Preventive Maintenance Accomplished

Sample Indicates Nondefective.

Change Oil and Emergency Maintenance Required
Sample
Sample Indicates Defective.
Unnecessary Preventive Maintenance
Nondefective

Sample Indicates Nondefective.

No Maintenance Performed

Figure 1: The decision tree for oil analysis cost justification shows the four maintenance
strategies with their potential outcomes.

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SOUTHERN COMPANY

Probability Definitions
Probability of a component failure with no regular maintenance 0.1
Probability of a component failure with regular oil changes 0.04
Probability that oil analysis will identify a defective component as defective 0.7
Probability that oil analysis will identify a defective component as nondefective 0.3
Probability that oil analysis will identify a nondefective component as defective 0.2
Probability that oil analysis will identify a nondefective component as nondefective 0.8

Cost Definitions

Emergency repair $1,200.00

Preventive maintenance to restore a defective component 500.00
Preventive maintenance on a nondefective component 250.00
Oil change 14.80
Oil analysis 20.00
Other Data
Number of vehicles 100

Strategy 1 Strateg
Cost Analysis Do Nothi
Oil changes 0.00 $370.00 $1,480.00 $1,480.00
Oil analysis 0.00 2,000.00 0.00 2,000.00
Preventive maintenance 0.00 8,000.00 0.00 6,200.00
Emergency
maintenance $12,000.00 3,600.00 4,800.00 1,440.00

Total cost $12,000.00 $13,970.00 $6,280.00 $11,120.00

Table 1: Lotus 1.2.3 model inputs and results for automobiles and light trucks.
been altered slightly to avoid disclosing proprietary information.

tionoil
and light trucks is strategy 3: regular equipment engines, $8,000 for trans
changes, no analysis. This policy missions).
would (3) Changing oil is not an effec
cost about half as much as the nexttive
bestpolicy for equipment that uses large
policy, strategy 4. The results of our analyof oil because of the high cost.
quantities
sis for all classes of equipment are Oil analysis should be used for such
shown
in Table 2. equipment.
Generalizations These conclusions are not very surpris
Some important generalizations may be ing, and they have been discovered intu
inferred from these results: (1) Oil analysis itively or experientially by many mainte
is not an effective maintenance policy for nance managers. By using the model, how
equipment that costs relatively little to re ever, we could obtain an accurate
pair. (2) Both oil analysis and regular oil assessment of the savings to be realized
changes are warranted for equipment that by implementing one policy in favor of
costs a lot to repair ($12,000 for construe another.

May-June 1993 121

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MELLICHAMP, MILLER, KWON
Equipment Class Optimum Strategy
Automobiles and Change oil only
light trucks
Diesel engines Change oil only
Construction equipment Change oil and
engines sample
Transmission systems Change oil and
Probability of Failure
sample The probability of failure with no regu
Hydraulic systems Sample only
Table 2: Optimum maintenance strategies for
five major classes of equipment were gener
ated by the Lotus 1.2.3 model.
Sensitivity Analysis
Because the model was in Lotus 1.2.3,
conducting sensitivity analyses on model
parameters was quite simple. In fact, we
obtained the original probability and cost
estimates in an interactive session with the
task force using the Lotus program to eval
uate various values. We have performed
dozens of sensitivity studies; three types of
analysis deserve mention.
Oil Analysis Effectiveness
The results from our analysis for auto
mobiles and light trucks prompted manag
ers to ask how much better their oil analy
sis capability would have to be for them to
prefer strategy 4 to strategy 3? Some ex
perimentation with the probability estimate
values revealed that for strategy 4 to be
preferred, oil analysis would have to be
97+ percent effective in identifying both
defective and nondefective components.
Repair Cost Variation
A second question of interest was "How
much would repair costs have to change to
cause strategy 3 to be preferred to strategy
4 for construction equipment engines?"
The model showed that decreasing emer
gency repair cost from $12,000 to $6,000
would cause indifference. As a matter of
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fact, managers were so interested in this
particular issue, that we expanded the
model to incorporate a break-even option
which would calculate the emergency re
pair cost value that would cause managers
to prefer one policy to another.
lar maintenance was the only model pa
rameter for which we were unable to find
historical data. To determine how sensitive
the model is to this estimate, we assessed a
range of values for hydraulic systems?the
only category of equipment for which no
regular maintenance is a viable option. A
value of one and one-half times the origi
nal "most likely'' value would cause strat
egy 3 to be preferred over strategy 2?a
fairly substantial change.
We have addressed many other types of
what-if questions with the model, most of
these interactively with the task force. The
task force's general reaction to the model
was that it presented a valid picture of the
trade-offs involved in assessing the merits
of an oil sampling program and provided
useful insights that would not otherwise
have been obtained. The numerical results
matched the group's intuitive feeling for
the situation, and the sensitivity analysis
seemed to reinforce the validity of the
model. They viewed it as an invaluable
tool for generating some fairly hard evi
dence to justify maintenance policies in
general, and oil sampling strategies in
particular.
Conclusions
Our simple, straightforward decision
model was useful in setting Southern
Company policy. Without the formal anal
ysis using the probability model, the com
SOUTHERN COMPANY

Strategy 3
Strategy 1 Strategy 2 (Oil Change Strategy 4
Cost Element (Do Nothing) (Sample Only) Only) (Both)

Oil change 0 p*(l ? a)*Cc*N CC*N CC*N

+ (1 - p)*?*Cc*N
Oil analysis 0 Ca*N 0 Ca*N
Preventive 0 p*(l ? a)*Cd*N 0 P'*(l ~ a)*Cd*N
maintenance + (1 -p)*?*Cf*N + (1 -p')*?*Cf*N
Emergency p*Ce*N p*a*Ce*N p'*Ce*N p'*a*Ce*N
maintenance
Table 3: The mathematical model used to generate optimum maintenance strategies was coded
in Lotus 1.2.3.

pany's fleet management would not knowSeveral different cost estimates are also
whether oil sampling should be part of itsrequired for the analysis. The cost to per
preventive maintenance program, or to form a routine oil change is denoted by Cc.
what extent it should be used. The model Under strategy 1, oil is never changed;
when units fail, oil would be replaced
was useful in indicating the type of equipwhen emergency repairs are done; how
ment and oil reservoirs for which an oil
ever, this cost is included as a component
sampling program?with its inherent riskof the emergency repair cost. Under strat
of false alarms?would pay off and thoseegy 2, oil would only be changed for those
for which it would not. These policy deci samples which indicated a problem. Strat
egy 3 and 4 both require routine oil
sions were reinforced with insights result
changes for all units at prescribed inter
ing from a series of what-if questions vals. Ca is the cost of analyzing an oil sam
posed by the project task force in exploring ple; this cost is incurred for each unit un
the sensitivity of the model's conclusionsder strategies 2 and 4. The cost of repairing
to uncertainties in such key factors as thea component that fails is Ce; each of the
effectiveness of the oil analysis itself, thefour strategies will result in some failed
units. The cost to repair a component iden
likelihood that units will fail with no pre
tified through oil analysis as potentially de
ventive maintenance, and repair costs. Ad fective is Cd; this cost is incurred with strat
ditional work could be done to refine the
egies 2 and 4 and is basically a preventive
model, but the current formulation seemed maintenance cost. The cost to discover that
a component identified as potentially de
to achieve a good balance between sophis
tication and user acceptance. fective through oil analysis is actually not
defective is denoted as Cf. This cost is, in
APPENDIX fact, the teardown and out-of-service costs
Let p represent the failure probability as
incurred as a result of false signals from oil
sociated with strategies 1 and 2 and let p'analysis under strategies 2 and 4.
denote the failure probability associated The model was formulated to permit as
with strategies 3 and 4. Let the values (1sessment of maintenance strategies applied
a), a, ?, and (1-?) describe the accuracy of
to a fleet of similar equipment rather than
sampling; a and ? represent Type I and on a unit-by-unit basis. Hence, the esti
mates for model parameters are average
Type II errors, respectively, resulting from
oil analysis. values for the fleet as opposed to unit

May-June 1993 123

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MELLICHAMP, MILLER, KWON

specific values. Further, a scale factor?the 2641, Birmingham, Alabama 35291, writes
number of units in the fleet, N?is used to "A Southern Company task force was
provide overall cost figures that the formed in 1989 to study the utilization of
maintenance manager can use in evaluat
oil sample analysis for Southern Electric
ing trade-offs.
Given these various probability and cost System's automotive and heavy equipment
estimates, we developed the probability fleets. The Alabama Productivity Center,
model shown in Table 3. The component utilizing a University of Alabama Manage
failure probabilities p and p' are specified ment Science faculty member and a grad
as constants in the proposed model. There uate student, developed a financial model
are several arguments that support this ap
for analyzing the various parameters and
proach. First, the analysis is done on a
alternatives related to oil sample analysis.
component-by-component basis; thus the
focus is on engines or transmissions and "The model was very effective in pro
not on vehicles or other complex units. viding analytical insight into the critical is
Second, the analysis is done for a group of sues of our application, and the results
units (fleet of vehicles) not for specific were used by the task force in the deci
units. And finally, oil analysis is usually
sion-making process. To our knowledge,
performed in the steady-state portion of a
component's life. It is not done during the this is the first attempt to specify an objec
break-in phase and units are typically dis tive procedure for assessing the financial
posed of well before the wear-out phase is implications of oil sampling. We are
encountered. Another general comment is pleased to be able to use the model to
that most of the required estimates are back up our decisions with hard financial
readily available from historical records,
analysis."
for example, p', a, ?, and the cost esti
mates. The only estimate that is not likely
to be available from historical records is p,
and it can be deduced from experience
with sufficient accuracy. Sensitivity analy
sis can be done on all of the estimates to
assess the sensitivity of results to the
values used.
References
Handler, L. 1986, "Sampling and analysis of in
dustrial lubricants/' Plant Engineering (Febru
ary 13), p. 51.
Lass, H. 1985, "Early warning of equipment
failure," Chemical Week, Vol. 136, No. 10
(March 6), p. 17.
Schauer, D. 1989, "Fleets praise oil analysis,"
Fleet Equipment, Vol. 15, No. 3 (March), p.
47.

Mike Clark, Superintendent, Equip

ment/Transportation, Alabama Power
Company, 600 North 18th Street, PO Box

INTERFACES 23:3 124

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