Plavecsky's Ponderings By Jim Plavecsky
by Jim Plavecsky
September 15th, 2016

Are Preventative-Maintenance Programs Worth the Cost?

It’s the height of the busy season, and suddenly your glass cutter goes down. So you have 500 windows to produce and ship for the day and no way to cut glass. What is the backup plan? A Fletcher cutter? Not for 500 windows!

I bet you now wish you would have approved that preventative maintenance (PM) plan that your maintenance manager submitted last year. Somehow you thought it was just too expensive. Well, compare the cost of the PM plan vs. the extra cost you will incur to buy insulated glass vs. making your own for the next 30-120 days, depending on whether or not you can get your glass cutter fixed vs. having to buy a new one.

During the course of the year, I perform quality audits in many of my customers’ facilities, and these audits represent an opportunity to hear about views that my customers have toward PM programs. Some take PM quite seriously. Some do not. When asked if his company had a PM program in place, one customer laughed and said, “Sure, after the machine breaks down, we do a ‘post mortem’ on it!”

So, is a PM program worth the added cost? During graduate work on my MBA, one of my favorite courses was cost accounting, so recently I started researching to see if there was a cost-accounting approach to measuring the value of PM.

I came across an article written by Wei Koo and Tracy Hoy of Jones Lang LaSalle entitled “Determining the Economic Value of Preventative Maintenance.” Koo and Hoy proposed the use of net present value (NPV) to determine whether a PM program was worth the cost for any particular piece of equipment. I love their approach, and I believe it makes perfect sense. Now, for those of you not familiar with the concept of NPV, here’s how it’s calculated: take the cash outflows and cash inflows for each year over the life of the project and discount them back to year zero (or present day) using a discount rate, which is usually the rate of return for some safe investment or alternative investment opportunity available to the company.

So, in this case, the NPV of the PM program is calculated by comparing the repair, energy and replacement costs for both PM and non-PM scenarios. The costs for each future year are discounted back to the present day using the assumed discount rate, and the present-day difference between the two scenarios is calculated. The decision is easy – a positive NPV means that the PM program is worth implementing and a zero or negative NPV means that it is not. After using this approach, the authors concluded that the economic value of conducting a PM program is, in most cases, overwhelmingly positive.

Additional costs that I feel should also be considered in an analysis like this are additional freight costs needed to rush backlogged products to customers, lost revenue as a result of customers canceling orders, and unrealized revenue or “opportunity cost” that are due to the faltering reputation of the company for failure to deliver on a timely basis.

When the cutter goes down and your windows are delivered a week late, you can bet that your customer will be looking for alternatives. He will also be venting and word will get around, which could damage your reputation and lead to lost business opportunities. Include this lost revenue as an additional cost over the next few years and discount it as well back to present day. It will not be a pretty picture.

So, perhaps it is time to take preventative maintenance programs more seriously. It could mean the difference between enjoying a smooth ride to the top vs. enduring a rough ride to the bottom.

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2 comments
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  1. Jim,

    You can always tell that you spend time and energy on these. Really like that you actually do some research and make citations. See you at GBA.

    Mike

  2. Jim,

    very true a company that considers PM as the last item on there list is certainly destine for failure

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