Preventive Maintenance

Look in the Internet and you will find plenty of material on the subject of preventive maintenance including cost justification. Interestingly I have not found any mention of preventive maintenance’s impact on sales revenue, Throughput, and the consequences for profit and profitability. I did not do an exhaustive search. The first page of Google results all focused on the probable positive effects on cost. Clearly focus is on the local maintenance cost benefits.

Cost Benefits

The documents I have perused have focused on the following items comparing preventive maintenance with ‘waiting until something breaks’.

1. Actual cost of preventive maintenance
2. Effects of preventive maintenance on expected useful life
3. Cost of repair/corrective maintenance
4. Frequency of required repairs when equipment is not maintained
5. Cost of replacing equipment
6. Effect of preventive maintenance on energy consumption
7. Expected useful life of equipment

The various analyses have shown that in most cases benefits are considerable although there is a few that one would find questionable. In other words in most cases the benefits are so dramatic that there is no question of the value of preventive maintenance. In the remaining cases costs with or without preventive maintenance are near enough equal – a decision either way would not be wrong. 

Throughput Benefits

I have not seen evaluations of preventive maintenance’s impact on sales, Throughput and the consequences for profits and profitability. Reliability of supply is a key issue of most companies. Unreliability of supply forces companies to hold stock as an insurance against supply interruptions. If this protection is insufficient (there is always pressure to reduce stock), then these companies may suffer further damage:

1. More price pressure due to poor reliability.
2. Lost business due to the inability to supply. This could be lost sales during the downtime of equipment or, if the problem persists or happens too often, then customers may be lost.T
3. o regain or replace lost customers results, generally, in lower prices in order to buy business back.
4. To regain or replace lost customers costs considerable effort from the sales organisation – effort that would be better focused on gaining new customers (from those competitors that suffer from poor reliability).

What might be the financial impact on your business?

Impact Model of NOT Practicing Preventive Maintenance.

Assumptions:

1. Materials cost is 40% of sales.
2. Base profit margin is 10%

Evaluation:

1. 1-5% Negative Price Impact
2. -10% Negative Sales Volume Effect
3. The 2 effects may happen concurrently but are evaluated separately.

The impact of price pressure (that we cannot resist against) on profits is enormous – in our model 1o times the relative impact on price. Clearly giving in on price can be very costly for our business. However, if we do not give in on price at least some customers my move to competitors – especially if these have a better reputation than we do. Our sales people have a tremendous conflict – resist price reductions vs. risk losing a customer’s business. Lost business also has an impact on the bottom line (see below). The pressure to resist on price is severely compromised by the threat of losing a client!

Maybe the best strategy is to ensure near 100% reliability! 

Management needs to decide whether it wants to save the expense of preventive maintenance or not. Management should, however, look at the impact of their decision based on the impact on cost and sales revenue and the consequences of the impacts. The decision whether or not to implement preventive maintenance is not just a local decision of the production or maintenance manager – it is a business decision that should be evaluated for its global impact.