MEMO TO MANAGEMENT CONSULTANTS: RECOGNIZE THE HIDDEN VALUE IN OPERATIONS

Your client’s challenge
Your client is struggling with production problems. Plant and equipment breakdowns are a nearly constant headache and keeping him / her awake at night. As a general manager or VP operations, the client can’t understand why the operations department can’t keep things running. Delivery commitments are challenging to meet, overtime and maintenance contractor costs are far too high, and too many operators are idled. What should be working smoothly, steadily and at high output, is not dependable. It is breaking down and creating significant business losses. In the worst cases there are too many near misses, accidents, and environmental incidents. 

Margin and profitability are low, working capital is being squandered, and what’s worse – it has been this way for a while and the client’s in-house experts don’t seem to have any idea how to really fix it. 

Your challenge
As a management consultant, you know lean, you know supply chain, but even if you are specialized in operations, you probably don’t have a background in maintenance, reliability, and asset management. They lie in a sort of grey area between engineering and management consulting. 

Maintenance probably looks like an expense, perhaps spent poorly in the example above, but what do you do about it? It’s driving up costs of logistics and spares inventory, but you can’t fix those without fixing maintenance. 

You and your customers in general management, finance, the board, or executive committees will understand the positive impacts of increased reliable and steady output on margin, profitability, and use of working capital. But how do you get out of that chaotic state above?

The bad news
Many plants end up in poor shape and far too few are staffed with those who know how to avoid or get out of that situation. The problems tend to show up after several years of operation, when natural aging effects combined with the neglect of maintenance that has probably occurred, have accumulated. 

The good news
No one designs a plant to run that way and they don’t need to get to that state. They can in fact be brought back up in performance if they’ve fallen. Those companies that keep things running well have learned a few things. To begin with, they don’t let their thinking be driven by a single cost accounting concept. Accountants tend to view the world through the rear view mirror – looking at past spending, and somewhat blind to what that spending is intended to deliver.  

Expenses are not all bad and shouldn’t all be minimized. You account for maintenance as an expense in your books, but you should see it as an investment in capacity – an ongoing investment that you cannot capitalize, but without it your production capacity will approach zero as time goes on.

Get operations right and costs go down while reliability goes up. Yes, it’s actually less expensive (per unit of output) to run a reliable operation.  Those who manage their operations effectively are efficient in getting work done quickly, on time, and at minimal cost. Their workforce is highly utilized and non-valued added activities are minimal. They are also effective – their maintenance program is mostly proactive, and reliability is high. The plant runs smoothly, produces to meet commitments, and breakdowns are rare events.

A simple example
There’s no point changing the oil on a car that is headed to the scrap yard. That would be inefficient and ineffective. Doing the oil change regularly on your new car, however, is effective at avoiding engine problems. Doing it with the right tools, parts on hand, right skills and knowing exactly how to do it, makes the job more efficient. It’s done faster and it’s done right. 

The key to getting out of that chaotic state described earlier is to do the right work the right way. Where you depend on plant and equipment to be working, the uptime created can be worth a lot of money. 

Reliability challenges
Maintenance departments everywhere are struggling to find skilled trades. They want work to be done efficiently, making best use of that increasingly scarce resource, and they don’t want to waste effort on work that isn’t going to keep the operation running. 

Efficient working depends heavily on well designed and management maintenance processes, integrating them with spare parts supply and with operational planning. However, even when efficient, if the wrong work is done, it wastes labor, and it can also result in creating even more work. 

There are a lot of misperceptions around proactive maintenance. Many think that equipment is more likely to fail as it ages, yet that is only partially true. In fact, most failures occur randomly, and many of those give advanced warning. Doing “preventive” maintenance addresses age related failures, but can be overdone. Doing it where the failures are random, can lead to increasing the probability of early failures. 

In your car, this shows up as extra work that’s needed after the car has been to the shop for servicing. Knowing which approach to use, and indeed whether it is even worth doing anything, is a result of making decisions in a logical process known as “Reliability Centered Maintenance” (RCM). It is commonly used in the aircraft industry, and elsewhere, where the wrong maintenance can result in disaster or other serious consequences. Arguably, it should be used wherever a failure could result in a significant consequence to safety, environment or production, regardless of the industry. RCM does have a cost, but the consequences avoided could potentially be far more costly. 

When your only tool is a hammer
Accountants keep track of costs and costs are always a lagging indicator. Cutting future budgets, (thinking they are spending) in the wrong areas can actually drive up future costs. Accountants have only one tool – cost cutting. The best maintenance is proactive – which is forward looking. Cutting maintenance cost is easy – eliminate overtime, all proactive maintenance and contractors. You will show a short term saving – usually very short. Before long, breakdowns will be preventing production and you’ll be spending whatever you need to spend (often at a premium in those situations), just to get back “up” so you can meet contracted commitments. 

Cost avoidance (cost cutting) won’t necessarily lead to saving money and it can indeed lead to very significant long-term losses. Accountants don’t, and likely can’t, consider the consequences of unanticipated failures. In truth no one can say with certainly what will go wrong if maintenance isn’t done. We can say with some confidence, however, what probably could happen. Operations leaders are usually too busy to give this a lot of thought, they just get on with maintenance repairs and whatever proactive work they can squeeze in. That can lead to trouble. 

Getting it wrong
Here’s what happened with Pacific Gas and Electric in 2018 (and subsequently). In June 2020, PG&E pled guilty to 84 counts of involuntary manslaughter, and one of unlawfully causing a fire, in the California Camp Fire that burned through 153,000 acres, and 19,000 structures in 3 towns. It went on for half a month in 2018. It was sparked by their equipment coming into contact with dried brush – something that maintenance (line clearing and vegetation management) should have handled. But, they were saving money (compared with previous budgets) on vegetation management. 

Financially, it was a disaster for the company that now piled on top of similar woes stemming from previous events in 2015, 2017 and 2018.  PG&E filed for bankruptcy, agreed to completely restructure its board, and to putting the company up for sale. They agreed to considerably greater regulatory oversight plus billions in spending to avoid future fires. The fines, totalled about $4 million, a drop in the bucket – clearly not much of a disincentive considering the potential for damage and human cost. 

In another incident, a mine tailings dam collapsed in Brumadinho, Brazil, which led to 259 confirmed deaths and another 11 missing in January, 2019. The CEO of Vale’s mining company in Brazil resigned following the incident and is now facing murder charges.

Was it avoidable?
Could PG&E (and Vale) have avoided that? Yes, PG&E had very old equipment in the field (lack of capital investment) and they were not doing the required vegetation management work (saving money on maintenance). Once the fire was raging, they had to close down a large part of their distribution system, creating blackouts that lasted for days. The shutdown lowered risks that the “out-dated” equipment couldn’t spark more fires in the dry and hot conditions. Vale, had been warned and had even had a similar incident just a few years before – they knew it could happen, but they didn’t act. 

In both cases, avoidance of the events or at least minimizing the consequences, would have required spending on non-productive maintenance, risk management and implementing mitigating strategies. 

Doing the right things to maintain that equipment and keep it functioning reliably requires thought about the nature of the failures that can occur, the likely consequences of those failures and then, and what to do to avoid or mitigate those consequences. Based on previous experience, pricing of such analysis work would most likely have been below $10 million, a reasonable figure. 

As companies account for money today, that spending would have come from one budget and the cost avoidance (something unlikely to ever be budgeted) would show up elsewhere. For instance, spending on vegetation management would have been a maintenance budget item. The “benefit” of doing it would be uninterrupted operation of their system, no fire, no fatalities, etc. 

Shareholder interests trump everything
Most shareholders don’t typically care about much other than quick returns. Spending today to save tomorrow isn’t something that boosts share price in the short term. Executive decisions are increasingly being guided by short-term considerations. Many of those executives are not in the job long enough to get much from any long term benefits and they are typically rewarded for short-term gains. If something goes wrong, it might just happen on someone else’s watch. At PG&E and Vale both, near term considerations trumped good judgement and responsible behavior in stewardship of their physical assets. 

Does this apply to your client’s operation?
Not every company has such big dollars, lives and even the company’s survival at stake when equipment fails. But they do have something to lose.

Any company that depends on physical assets to generate revenues could benefit from at least considering a hard look at their maintenance and reliability programs. How efficient are they at work execution? How effective is the work they are doing? Is there room for improvement? Where are they on the scales of efficiency and effectiveness? For that matter, what are those scales?