How Reliability Impacts Shareholder Value Bruce Hawkins, CMRP Management Resources Group, Inc.
How Reliability Impacts Shareholder
Value
Bruce Hawkins, CMRP
Management Resources Group, Inc.
Introduction
• Reliability initiatives generate shareholder value
in many ways
• Some are unexpected
• Returns on an investment in reliability
improvement (if effectively implemented)
generally exceed the planned business case
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Reliability Definition
The probability that an asset will perform its
required function under defined conditions for a
defined time interval.
A Reliability-Based Maintenance Program
Seeks to Maximize the Likelihood of
Producing at an Intended Rate.
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Reliability Attributes
• Equipment is operating within its design parameters
• Disciplined M&R work process is in place
– Quantity of work is known
• Resources are utilized effectively through Planning and
Scheduling
• Mature PM/PdM program is in place with high
compliance
– Technical basis for all tasks
– Multiple technologies in use
• Relentless Root Cause Analysis is done
• Effective storeroom and spare parts management
• All plant functions are engaged in reliability improvement – Operations, Maintenance, Engineering, Procurement
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Annual Maintenance Cost per Billion RAV
Performance Pays
Reliability Engineering
Condition Monitoring
Work Management
Data Management
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Desired Mix of Work
PM, 30%
Requested Work , 20%
PdM, 50%
Top Performer Mix of Work
PM 30% 15% PM
15% Results
PdM 50% 15% PdM
35% Results
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Key Performance Indicators
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
BOMCoverage
PM Coverage VibrationCoverage
1st Quartile 3rd Quartile
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• Spend ~< 2.7% of RAV in Annual Maintenance
• Have ~< 0.9% of RAV in Stocked MRO Inventory
• Maintain >80% Equipment in “Green” Condition
• Devote 30% of Work Force to PMs & Results of PMs (15/15%)
• Devote 50% of Work Force to PdMs & Results (15%/35%)
– High Percentage Equipment Covered with Multiple Technologies
• Dedicated Planners Focus on Results of PM/PdM
– 90% Planned Work
• Have Integrated Scheduling Processes (Ops & Maintenance)
– 95–100% Scheduled Work
• Routinely Achieve 55% Wrench Time
• Use Top Tier EAM/CMMS to Control, Document & Manage Work & Data
• Apply Change Management Techniques to Sustain Performance
Balanced Performance }
Best In Class Manufacturing
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Shareholder Value Drivers
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Revenue Growth
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Revenue Growth
• Revenue growth occurs when:
– Output volume is increased and the additional product is sold
– Greater product value (quality, consistency) commands higher
prices
• Reliability increases Capacity Utilization (OEE):
– Increases availability by reducing the incidence of unplanned
failures, providing additional production capacity
– Reduces minor stops and speed losses, increasing throughput
– Increases quality by providing stability in the manufacturing
process, reducing the incidence of “special cause” events
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OEE Components
Total Available Time (365 days X 24 hrs / day)
Scheduled Hours of Production Idle Time (beyond plant
control)
Uptime Hours of Production Unscheduled
Downtime
Best Production Rate
Actual Production Rate Speed
Losses
Actual Production Volume
First Quality
Production Quality
Losses
OEE
(Overall Equipment Effectiveness)
TEEP
(Total Effective Equipment Performance)
Process Variability
• Variability in a stable manufacturing process can
be classified as one of two types:
– Common cause variability
• Random variability caused by variability in measurement and
control, raw material properties, equipment capabilities, etc.
– Special cause variability
• Abnormal events due to equipment failures, process upsets,
operational errors, etc.
• Reliability minimizes the special cause events,
allowing personnel to focus on reducing
common cause variability and increasing Cpk © 2014 Management Resources Group, Inc. – Proprietary and Confidential
Cost Effectiveness
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Cost Effectiveness
• Operations and Maintenance often represent the largest
controllable cost areas
• Costs are minimized when these resources are used
efficiently
• Reliability:
– Provides for efficient labor and material resource utilization
– Improves safety
– Offers the potential to eliminate unnecessary preventive and
corrective maintenance work
– Reduces waste in operations and in maintenance
– Reduces energy losses in rotating equipment and utility systems
– Reduces stores carrying costs
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Leverage of Planning
• Craft Utilization (Wrench Time) Without
Planning
– 35% Cross-Industry Average
• Craft Utilization With Planning
– 55% Cross-Industry Average
- Doc Palmer, Maintenance Planning and Scheduling Handbook
The Leverage of Planning
• Three People without “Planning” => 3 X 35% = 105%
• Two People with “Planning” =>1X0% + 2 X 55% = 110%
• Break Even is 3 Persons!
• 55%/35% = 1.57 (57% Improvement)
• One planner can plan for 15 to 20 persons
• 20 persons X 1.57 = 31.4 persons (11 extra people)
One planner can plan for 15 to 20 persons
Source: Planning & Scheduling - by Doc Palmer
For No Extra Cost!
55%/35% = 1.57 (57% Improvement)
Injury Rate v. OEE
Company A
90
95
100
105
110
115
120
15
35
55
75
95
115
135
Injury Rate
OEE
Month
OE
E-
% o
f B
as
e
The RM Group, Inc.
Knoxville, TN
Failure Probability Profiles
B
“Bathtub Curve” - High infant mortality, then a
low level of random failure, then a wear out
zone
A “Traditional View”
Random Failure then a wear out zone
C “Slow Aging” - Steady increase in the
probability of failure
D
“Best New” - Sharp increase in the probability
of failure then random failure
E “Constant Random Failure”
Random - No age related failure pattern
11%
Some Age Related Failure
72%
F “Worst New”
High infant mortality then random failure
No Age Related Failure
89%
2 %
4 %
5 %
7 %
14 %
68 %
PM Optimization
• PMs can be a big waste of resources:
– PMs derived mostly from Vendor Manuals
– PMs added as a response to a past failure
– PM and PdM Programs operated as separate entities
– Little or no basis documentation for PMs
– PM and PdM overlaps
• Organizations with high reliability:
– Have a technical basis for all maintenance tasks
– Use PdM extensively
– Focus on critical assets
– Realize that “no scheduled maintenance” sometimes is an
appropriate strategy
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P-F Interval
Point where
failure starts
to occur
Changes in Vibration
P-F interval 1-9 months
Wear Debris in oil
P-F interval 1-6 months
Audible noise
P-F interval 1-4 weeks
Hot to touch
P-F interval 1-5 days
P1 P2
P5
P6
IR Thermography
P-F interval 3-12 weeks
P3
P = Potential Failure
F = Failure
Quantitative PM
P-F interval 5-8 weeks
P4
Time
Equip
ment
Conditio
n
Life at the Bottom
“Plan” on the fly
Parts may not be there
Hurry, Hurry, Hurry
No time to do it right
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P-F Interval
Point where
failure starts
to occur
Changes in Vibration
P-F interval 1-9 months
Wear Debris in oil
P-F interval 1-6 months
Audible noise
P-F interval 1-4 weeks
Hot to touch
P-F interval 1-5 days
P1 P2
P5
P6
IR Thermography
P-F interval 3-12 weeks
P3
P = Potential Failure
F = Failure
Quantitative PM
P-F interval 5-8 weeks
P4
Time
Equip
ment
Conditio
n
Living on top of the P-F Curve
Less Call outs/forced OT
The Right Parts are there
Parts can be obtained in time
Time to do it right the first time
Time for feedback/improvement
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Ron Moore’s Reliability Process
Minimum unit cost
of Operations
Design Store Operate
Defects Defects Defects
Unnecessary Work
Uptime
&
Necessary Work
Root Causes Rate Losses & Downtime Source: In Cooperation with
Andrew Fraser,
Reliable Manufacturing Assoc.
Buy
Defects
Install/
Startup
Defects
Maintain
Defects
The RM Group, Inc.
Knoxville, TN
Copyright 2003
Energy Cost Avoidance
• Reduced leaks in utility systems (steam,
compressed gases, etc.)
• Fewer stops and starts on equipment
• Improved machine alignment
• Reduced motor efficiency loss
• Reduced electrical energy loss due to
overheating connections
• Improved efficiency of insulation systems
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Stores Carrying Costs
• Directly related to inventory value
• Costs include:
– Cost of capital
– Taxes
– Labor
– Energy
– Space
• Can be worth 20% - 30% of inventory value
annually!
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Asset Efficiency
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Asset Efficiency
• Best measured by Return on Assets (ROA)
• Indicates how profitable a company is relative to the total
assets it has at its disposal
• Measures how efficiently management uses its assets to
generate earnings
• Used by potential investors to compare companies in a
similar industry to determine which is the best value
• Calculated by dividing net income (earnings) by value of
total assets:
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Deepwater Horizon – April 20, 2010
ROA History - BP
-2%
0%
2%
4%
6%
8%
10%
12%
2004 2005 2006 2007 2008 2009 2010 2011
BP Return on Assets
Asset Efficiency
• Asset efficiency is increased when:
– Fixed assets are utilized efficiently
– Asset life is extended beyond “accounting rules”
– Asset maintenance requirements are minimized
– Current asset values are minimized
• Reliability:
– Optimizes the business value produced by existing assets
– Unlocks “hidden capacity” (OEE improvement)
– Provides for extended useful life
– Minimizes turnaround cost and duration
– Offers the potential for failure mode elimination in design
– Reduces the need for excessive spare parts inventories
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Depreciation
• Non-cash charge used to allocate the cost of an
investment over the expected useful life
• Extending the life of assets beyond the
“expected useful life”:
– Reduces the need for recapitalization (and future
depreciation charges)
– Allows capital funds to be deployed elsewhere for
increased business value
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Turnarounds
• Time-based overhaul strategies are inappropriate for the
majority of assets
• Turnarounds are periods of high risk:
– Numerous vendors, contractors, and heavy equipment operating
within close quarters
– The potential for accidents and injuries is greater; from 1995 to
2000, >25% of lost time injuries occurred during outages*
– Delays in execution can result in significant lost production
volume and revenue
– If not effectively controlled, spending on “growth work” can cause
significant cost overruns
• Reliable organizations minimize both scope and duration
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*Source: US Occupational Safety and Health Administration statistics
Reliability, Availability, & Maintainability
(RAM) Analysis
• Used for performance forecasting of process facilities
given the constraints of equipment design configuration,
equipment reliability (MTBF) and equipment
maintainability (MTTR).
• Reliability block diagramming is used to simulate
performance and test reliability or maintainability
improvement ideas (failure mode elimination)
• Sensitivity analysis can be performed to identify best
options for performance improvement
• Will be required for API 691
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Spares Inventory
• Why do we maintain stores inventory?
– Protection against risk and uncertainty
– High risk of unforeseen failures requires large
inventories
– Low risk of unforeseen failures requires smaller
inventories
• If we could guarantee we would never have
another unplanned failure and could apply “just-
in-time” purchasing, would we even need a
storeroom?
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Petrochemical Stores Value Benchmarks (Per Billion RAV)
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35
Market Expectations
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Market Expectations
• The market values a publicly traded company based on
performance, consistency and management credibility
• The analyst community has a strong influence on stock
price
• Reliability can have a significant impact on the
perception that the market has of an organization
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Analysts
• Definition: A financial professional who has expertise in
evaluating investments and puts together "buy", "sell"
and "hold" recommendations for securities
• How do analysts arrive at these ratings?
– Review macroeconomic (industry) and microeconomic
(company) trends
– Study quarterly and annual reports to understand company
fundamentals
– Attend CEO conference calls
– Prepare financial models to predict future economic conditions
related to the business (factoring in potential variability and
uncertainty - RISK)
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“The slightest change in an analyst's rating for a particular stock can make
the stock take off - or send it into a tailspin” - Investopedia
Market Expectations
• Reliability:
– Provides information concerning the health and
capacity of physical assets
– Provides a greater ability to be “nimble” and able to
respond to opportunities
– Provides systems, structure and discipline that
enhances management’s ability to execute
– Provides data and information to enable fact-based
decision making
– Provides the ability to identify and mitigate risk
– Enhances executive credibility in the marketplace © 2014 Management Resources Group, Inc. – Proprietary and Confidential
© 2014 Management Resources Group, Inc. – Proprietary and Confidential
Shareholder Value is a Function of
Return on Assets
Shareholder
Value = f(ROA)
Total Assets
Net Income
(earnings)
Costs
Revenue
Fixed Assets
Current Assets
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Summary
• A successful reliability initiative nearly always
provides greater benefits than anticipated
• Discipline and rigor inherent in a reliability
culture drives benefits in all areas of the
operation
• What other initiatives can an organization
embrace that has a comparable effect?
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Questions?