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مقالات دومین همایش بینالمللی بازآموزی مدیران فنی و نگهداری و تعمیرات
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1www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Finance and Budgeting for Maintenance
Aryana Group - IPAMC - 2006
Ben Stevensben@ omdec.comwww.omdec.com
2www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Today’s Agenda
• Understanding Accountants and ROI• Basic Cost Reports• Building your Budget• Project Proposals – Financial aspects• Life Cycle Costing
3www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Accountants are…..
BoringUnloveableOne track mindsNarrow-mindedConservativeNegativePredictable
Add your own helpfulSuggestions
Tick where applicable
4www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Which Image fits your Accounting Department?
5www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
If all that is true….
Where do little accountants come from……
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Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
The Real Image…..
Off to another party…..
7www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
What do accountants really do?
• --- the guardian of the company’s money
• Responsible for the integrity of the financial decisions
• Have to sit in judgement on whether this project is more “worthy” that that one
• They have to apply their rules
8www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Remember…
• You can’t change the rules• They can’t change the rules• They need to understand• They need to trust you• ….so you need them on your team
9www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Rules for Getting to Know Accountants• Ask them for help ahead of time• Understand their rules• Help them to understand what maintenance is all
about (impact on bottom line)• Seek their advice on what numbers, how to
present them• Include financial measures in your operational
and project planning• Have them along to your presentation and give
them credit• Build in numbers, present in pictures
10www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
ROI
Revenue
Investment
CostROI =
XProduction Volume Price
XRun-time Throughput
Total time Downtime-
TotalTools Cost
TotalContractor Cost
Total Labour Cost
TotalStores cost
Total RawMaterials Value
Total StoresValue
Total FinishedGoods Value= ++
= Building Cost Building Deterioration
= Equipment Cost EquipmentDeterioration
= Land Cost LandDeterioration
Total Inventory Value
Total Land Value
Total BuildingValue
Total EquipmentValue
Total ProductionCost +
TotalMaintenance Cost
TotalAdmin Cost
+
Directly affectedBy Maintenance
Indirectly affectedBy Maintenance
11www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
What Happens IF????Show the impact as +++ to ---
Investment
You improve your Spare Parts Management
7
You decide to outsource your maintenance
6
You increase your PM Program5
You incur a breakdown4
You prevent a breakdown3
You install new environmental protection equipment
2
You install new production equipment1
ROICostRevenue
12www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
List areas where you are involved in ROI Impact – High,
Medium, Low
13www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Question….
• What if you are a Service organization?• How does this work if Revenue and Profit
are not drivers for your organization?
- Cost Reduction?- Asset Efficiency- Customer Satisfaction?- Social Benefit?
14www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Today’s Agenda
• Understanding Accountants and ROI• Basic Cost Reports• Building your Budget• Project Proposals – Financial aspects• Life Cycle Costing
15www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
This should be your starting point– Monthly and Annual Spending on: 1. Regular Maintenance
2. PM’s3. Emergency Repairs 4. Special projects
Total
Indirect and Overhead
Hot Press
Another breakdown last month! Should be solved by the major refurbishment
27,9907,7409,700
51,05096,480
300nilNilNil
300
Nilnilnil
45,00045,000
12,4404,5004,5002,550
23,990
15,2503,2405,2003,500
27,190
#5 Boiler- Regular- PM’s- Emergency- SpecialTotal
CommentsTotal $
Tools $
Contract $
Materials $
Labour $
Equipment
16www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Monthly and Annual Breakdown cost report
102,00012,00090,00015,00062Primary Circulation Pump
10,4002,4008,000500164#5 Boiler
Total B/D cost $
Emergency Repair $
B/D cost$
B/D cost per hour $
Breakdown - Hrs
Breakdowns #
Equipment
1. Get accounting to give you a breakdown cost per hour (= total value of lost production)
2. Get Production to agree on how to define “downtime”(not related to who is to blame)
3. Do a Root cause Analysis for EACH Significant failure
17www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Pareto Chart: Breakdowns Brick Manufacturing Company
0
10
20
30
40
50
60
1 2 3 4 5 6 7 8 9 10 11 12
Series1
Number of break-downs 2003
KilnSlurry Pump
0
20,000
40,000
60,000
80,000
100,000
120,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Series1
Cost of Breakdowns2003
Kiln Slurry Pump
18www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
What is downtime?
0
2
4
6
8
10
121 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96
First sign of performance degradation
Maintenance arrivesEquipment available
Call to Maintenance
Diagnose
Get parts,start repair
Complete repair, start test
Complete test, handover to production
Full production rate
Production rate
T1 T2 T3 T4 T5 T6 T7 T8 T9
19www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
List your Main Costs of Downtime
654321
Impact (VH – H – M - L)
Data SourceItem
20www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Today’s Agenda
• Understanding Accountants and ROI• Basic Cost Reports• Building your Budget• Project Proposals – Financial aspects• Life Cycle Costing
21www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Sources of Budget data
• Your CMMS data from last year
• Expected changes this year• Gut feel backed up by
hunches, guesses and (maybe even) predictions
• Demands of management to reduce costs
• Inflation rates
• Must have….– All maintenance work
recorded on work orders– Work orders by line or
equipment or area– Labour Hours, Materials
used, contractors and tools per job
– Ability to convert these into $– Accurate data collection
22www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Maintenance Budgeting Techniques
• Historical Budgeting• Standard Costing• Zero-based• Activity-based• Activity-centre based
23www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
1. Historical Budgeting*• Last year’s costs by maintenance
cost centre and/or class of expense• Remove major one-off expenses• Add major new projects• Multiply by an inflation factor
*easily the easiest and therefore the most popular (and easily the worst!)
…..then the dreaded “cut by 10%”
24www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Here’s the familiar Historical Budget
932,770127,070400,050405,650Total
951,400129,600408,050413,750X inflation 1.02
49,3006,30015,00028,000+ New Projects
-70,000-22,000nil-48,000- Special Proj
953,470142,770385,050425,650Total
22,250 3,0005,25014,000Tools
77,000789…235…345…Contractor
124,620546…456…446…Mtce Overhead
385,450234…234…123…Mtce Materials
364,15053,960140,100170,090Mtce Labour
Total $Distribution $Water Purification $
Generation $Line/Area
25www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
2. Standard Costing*• Each product is assigned unit costs based on:
– Expected costs– Expected volumes– Expected product mix
• Through the year, cost volume and mix changes are calculated as Variances
• Net result – you are always being asked to explain variances that you don’t understand!
*The accountants dream
26www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Standard Cost – Budget vs Actual
0.010.580.5974,000Total
-0.020.120.1012,000Maintenance materials
00.110.1114,000Maintenance labour
0.010.070.0810,000Utilities and services
00.140.1418,000ProductionMaterials
0.020.140.1620,000Production Labour
CommentsCost Variance
Cost per mgal $ Actual
Cost per mgal $ Budget
Total $
Production cost item
Based on Production of 125,000; Question – if actual is 137,000 – so what?
27www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
3. Zero-based Budgeting
• Popular in the 70’s – especially in Government.
• Based on the principle of building from scratch (the zero base), then adding the various programs or levels of service
• Level of service is prioritised and determined by the cash available
• Largely discredited as impractical in industry
28www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Zero-based budget sample
1242180118450700400423330Total1117962106605630360380997Add Predictive Mtce
93163588838525300317498Add PM’s
80741779663455260275165Add Planned Corrective
31054529613175100105833Breakdown response only
0000Zero service
Total$
Packing$
Water Pur-ification $
Generation$
Problems: - who decides priorities- long term versus short term- recipe for wrangling over the wrong issues
29www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
4. Activity-based Budgeting
• Based on bundles of activities or functions
• Focuses on what we actually do, not buckets of resources:– Hence “Planned Maintenance on Pumps”– Rather than “total labour $”
30www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Sample of Activity-based Budgeting
Safety Meetings
Staff Mgmt and Supervision
Planning and Scheduling
Emergency repairs
77,50025,000100025,00018,0008500Planned Maintenance on Drills
29,30010,00080015,00020001500Planned Maintenance on well-head equipment
Total$
Cap Projs
$
Tools$
Contract$
Materials$
Labour$
31www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
5. Activity-Centre based Budgeting
• Modification of the previous one to reflect the way we actually do business:– Select logical groups of equipment (use the
CMMS hierarchy for this)– Examine past costs – Forecast based on what we expect to happen– Last Year’s costs from the CMMS– Adjust for known factors such as labour rate
changes
32www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Example of Activity-centre based Budget
-15%+10%-90%
-100%
Change%*
Completed a major refurb this year; will save on Reg Mtce $ and Em $ next year; need to boost PMs
Comments
Budget Next YearActual This year
Total
2,50021,300Indirects + Overheads
Hot Press
23,7908,500
970Nil
33,260
27,9907,7409,700
51,05096,480
300nilNilNil
Nilnilnil
45,000
12,4404,5004,5002,550
15,2503,2405,2003,500
#5 Boiler- Regular- PM’s-Emergency- SpecialTotal
Total$
Total$
Tools $
Contr$
Mats $
Lab$
Equipment
•Rate increases: - Labour rate 3%- Materials and Commodities prices 4%- Contractor rates 3%
33www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Advantages• Can add new categories for Health and
Safety, Environmental etc• And can separate individual contractor• If you have to cut your budget, you can see
exactly where the $ will come from• And you can assess the risk• Which strengthens your ability to negotiate
with the accountants….
34www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Today’s Agenda
• Understanding Accountants and ROI• Basic Cost Reports• Building your Budget• Project Proposals – Financial aspects• Life Cycle Costing
35www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
But what is a Project?• Anything that:
– Is not “normal operations”– Requires special planning– And special approval
• Generally a one-off• Above $xxx• Size and complexity will determine the
level of detail
36www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Project Objectives• Be specific – especially when it comes to the numbers…
– Not “reduce costs and increase reliability”– But “reduce maintenance repair costs annually by : $xxx Labour,
$yyy Materials, $zzz Contractors”– And “reduce downtime from an annual x% to y%” or “reduce # of
breakdowns from x annually to y”• Be credible – consistent, not exaggerated, supportable.
•“To replace the main shaft and bearings on the Primary Circulation Pump; this will reduce the number of breakdowns from 2 this yearand an expected 4 next year to zero (saving a net $120,000 in lost production in year 1), and eliminate emergency repair work (saving about $24,000). Costs for the project are estimated at $48,000, for a year 1 payback of 2 times. Benefits will continue beyond year 1 at an increased level”
37www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Project justification- benefits
102,00012,00090,00015,00062Primary CirculationPump
10,4002,4008,000500164#5 winder
Total B/D cost $
Emergency Repair $
B/D costB/D cost per hour $
Breakdown - Hrs
Breakdowns - #
Equipment
“… Based on this year’s data (below), our Primary Circulation Pump is losing us $90,000 in lost production, plus an additional $12,000. This is based on a total of 6 breakdown hours (verified with Production), at $15,000 per breakdown hour (verified by Accounting). With no investment, and based on the machine condition (see foot note), we predict at least 4 breakdowns next year for a total loss of $200,000.”
Footnote: our analysis results show the main shaft alignment deteriorates by 1% each operating day – functional failure occurs at 50%; hence 4 breakdowns are predicted
38www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Project justification – benefits (2)
-30,000Nil-60,000NilLost Production during Project Implementation
24,00024,00024,00012,000Total Emergency repair costs avoided
102,000
90,000
15,000
6
2
This yearActual
174,000204,000144,000Total
180,000180,000180,000Total Lost Production cost avoided
15,00015,00015,000Lost Production cost/hr
121212Breakdown hours
444Number of Breakdowns
Year 3Year 2Year 1
39www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Project Justification - Costs
NilNilNilContractor costs
Nil8,000
500
NilNilNil
28,0008,0001,000
Materials Costs- New shaft- New bearings- Miscellaneous
1,0003,0001,000
Nil3,000
Nil
4,0003,0004,000
Labour costs- Installation- Alignment- Commission & Test
13,5003,00048,000Total
Year 3Year 2Year 1
40www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Project Financial Summary(and questions)
174,000204,000144,000Total Project Benefits
13,5003,00048,000Total Project Cost
160,500201,00096,000Net Project Return
Year 3Year 2Year 1
What’s missing?- effect of inflation- cost of capital- return on investment- project planning horizon- risk/contingency- more detail on background numbers
These are the areas where
you’ll need help from your new
friends in Accounting
41www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Today’s Agenda
• Understanding Accountants and ROI• Basic Cost Reports• Building your Budget• Project Proposals – Financial aspects• Life Cycle Costing
42www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Life Cycle CostingLife cycle costing is designed to include all costs of a piece of equipment:
Lead
Support
Lead
Joint Lead
Advisory
Advisory
Best Practice Role of Maintenance
Current Role of Maintenance???
Engineering and MaintenanceInstallation
MaintenanceDisposal
OperationsOperations
MaintenanceMaintenance
ProcurementAcquisition
EngineeringDesigning and planning
Who Leads?
43www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
ARC 2001- Best Practices Targets
10%6151Dispose
30%Total
65%71153Maintain
25%21952090Operate
50%71102Install
10%511401Acquire
50%71102Plan
Savings %
% of* TCO $
% of cycle time
% of* TCO $
% of cycletime
Typical Best Practices
* TCO = Total Cost of Ownership = Life Cycle Cost
44www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Life Cycle Costing - Example
So which pump do we buy??????
13,9009,200Annual Cost167,00092,000Total Life Cycle cost
12 Years10 yearPump Life5001,000Cost to Dispose
8,0005,000Cost to Maintain/year4,0003,000Cost to Run/year2,0001,000Cost to Install
20,00010,000Cost to BuyPump 2Pump 1
45www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
..... add Performance
NOW WHICH DO WE BUY???
13,9009,200Annual Cost
17518.4
1008.76
Lifetime throughput– gals/hour
- m gals0.00910.0105Life time costs $/gal
167,00092,000Total Life Cycle cost12 Years10 yearPump Life
Pump 2Pump 1
46www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
..... add Reliability
0.00910.0105Life time costs $/gal
$1000$576,000
0.0313
$1000$240,000
0.0274
Down time cost - $/hr- Total $- $ per gal
2/year1 day
1/year1 day
Breakdown – frequency- duration
0.04040.0379Total Lifetime operating cost $/gal
13,9009,200Annual Cost
17518.4
1008.76
Lifetime throughput– gals/hour
- m gals
167,00092,000Total Life Cycle cost
12 Years10 yearPump Life
Pump 2Pump 1
So are we clear on which one to buy??
47www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
NOT YET!!
How much throughput do we need?
If we chose Pump 1, can we achieve enough capacity?
What’s the cost of losing a customer because of non-delivery?
48www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
WHOEVER SAID....
....this stuff was easy.....??
49www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Summary• Accountants do have their value – but we
must learn to speak their language• Budgets are built in different ways – all
need solid data and careful analysis to be useful
• Project Finances also depend on good data and analysis, but can work for us
• Life Cycle Costing – a coming view of the Maintenance world – get used to it!!
50www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Workshop• Compare your current Project Costing
approach with that in slides 36 to 40.• Identify the advantages and
disadvantages of your current approach versus the one presented
• List the steps needed to improve your current project costing process
51www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance”
Thank you for your attention
• Any questions….
• >>> email me ---- ben@ omdec.com