The potential for improvement in FM
This article is a slightly modified and updated version of a paper published in Chinese in GongKong China Industrial Automation Observer in June 2008.
Introduction
While maintenance and facility management expenditures tend to be considered low in China (cheap labor, locally-made spare parts, cut-throat competition between contractors), studies and experience show that companies’ top executives still focus on reducing them. Outsourcing decisions are, for example, usually motivated by an immediate reduction in maintenance spending. Unfortunately, this legitimate focus on short-term Opex often exacerbates existing problems, such as the under-spending in preventive maintenance that is so prevalent in China. This results in huge additional costs further down the line, often in the form of abnormal reinvestments (shorter life-time of equipment) or consequential losses (e.g. higher utility bills). This article will attempt, based on Siveco’s long practice of maintenance in China, to identify where the true potential for improvement lies, i.e. what the priorities should be in terms of FM improvement.
| Throughout the article, we will illustrate our points with real-life stories from a large, unnamed, retailer operating in the Chinese market. This retailer is rather typical of large multi-site facility owners in China and similar situations can also be found in smaller companies. |
“Maintenance is cheap”
In one way or another, this is the comment we most often hear from companies in China. Inevitably, our interlocutors have only thought about labor cost, sometimes also counting other direct expenditures such as parts and contracts. In many cases, the exact cost of maintenance is in fact not known, for example a major piece of equipment replaced after a breakdown may be treated as a new investment, totally unrelated to maintenance.
When asked about issues they face, maintenance often doesn’t rank at the top of list. Their concern is elsewhere: energy efficiency, the need to be green to enhance corporate image, construction and the usual HR issues. The link between maintenance and these other areas is rarely discussed. Simple observation shows, however, that they are tightly related.
There are, of course, exceptions, usually companies that operate a large portfolio of properties and have already experienced the full life-cycle of a facility in China or perhaps major incidents. A stable management team, with experience in this country, helps: the high turnover observed at most companies – local managers on a fast-track career or expatriates on 2 or 3-year contracts – has proven highly counterproductive in this regard.
Another look at maintenance
Experience shows that maintenance has a dynamic effect on the whole facility. If maintenance is poor, the installation will never reach its full potential and will never be as profitable as it should be. The figure below illustrates the typical cost/loss breakdown found during Siveco audits:
Fig. 1 – Typical “iceberg” of maintenance costs
| Our large retailer experienced an incident that raised awareness of maintenance among the management team, composed mostly of experienced China managers: one of the stores had to close for the day, because of an electrical failure with the main transformer. The backup diesel generator did not start (it had never been tested). Losses: one full day of business, all the food in the refrigerated areas, not to mention the company’s image. This added up to four times the store’s annual maintenance budget… The failure was later traced back to a small electrical component that had been replaced with a cheaper locally-made part – a saving of a few hundred RMB. Audits conducted at other stores also revealed poorly maintained HVAC (very dirty coils and filters) were the norm, in spite of up-to-date maintenance records. Clogged filters could add 10-20% to the HVAC electricity bill, which represents close to 40% of the total (see Siveco Partner article in this newsletter). The resulting losses were estimated at two thirds of the annual maintenance cost. A more in-depth facility assessment was conducted in another location, revealing abnormally fast aging of the facilities, with a need to replace a number of major equipment and to launch preventive maintenance routines. The company decided instead to run the store “to failure” and to refurbish the entire facility as part of a coming expansion project. In effect, the indirect cost of poor maintenance (early replacements) was hidden in construction budgets, a very common phenomenon in China, where companies have historically experienced fast growth. |
Where to act
Even in Europe, surveys show that direct costs, i.e. the top of the iceberg, represent only one fourth of total maintenance cost – the figure tends to be much lower in China. Where should we act for maximum benefit?
Benchmarking analysis conducted by Siveco across a large numbers of facilities all over the world show that only 10-30% reduction is achievable on direct costs, i.e. on average 5% of the total. This is, of course, significant, but pales in comparison to a 20-70% reduction achievable on indirect losses (operation downtime, cost of spares in stock, abnormal Capex, energy losses etc.) adding up to over 50% of the total. All added, possible improvement on indirect costs is, on average, 10 times higher than possible improvement on direct costs. To sum it up: for every 1 RMB you can save on direct costs, you can probably save 10 RMB on indirect costs.
The conclusion is that most often the greatest areas of benefit are not in cutting manpower or subcontractor costs (although opportunities may exist, especially in organizations suffering from fraud in the purchasing process) but instead to look for ways to reduce indirect costs.
| Our retailer’s early response to maintenance issue was to look for good facility managers at store level and to appoint someone at headquarter to coordinate activities. Recruiting such profiles proved to be impossible… and the best resources ended up working instead on new construction projects, to support the group’s rapid expansion. A third-party engineering company was appointed to design preventive maintenance procedures for one of the stores, with a paper-based maintenance system to record completed tasks. Maintenance plans remained in their folders and were never put into use. Another project was then conducted on three pilot stores, still under construction. The facilities were entirely documented in a centralized maintenance management system setup at headquarter. Using existing know-how from technical teams and equipment suppliers, the system helped train the stores technical teams before opening. From day one, failures were recorded and analyzed on a regular basis, a seemingly simple task that delivered quick results: in one of the stores, after only 4 weeks of operation, analysis showed that most problems were related to lifts and were the responsibility of the supplier (poor installation, bad quality of parts used). The pilot project raised awareness of maintenance across the entire organization, to store managers, financial managers and the top management team and was considered a first success. Based on this first achievement, vendors of sophisticated monitoring systems and equipments convinced our retailer to stuff their new-built stores with sensors and to rely on an external control center. While the initial improvement project was designed to increase the know-how of maintenance personnel and to support better management decisions, with the help of a simple technological tool, this new project focused on reducing dependence on “incompetent technical staff”. By relying on technology suppliers, the fundamentals of maintenance had unfortunately been overlooked. The high-tech sensors suffered high failure rates: without in-house skills for such repair, the retailer tied themselves to a specific supplier for years to come. The external control team, involved in all procurement decisions, faces risks to become a new “corruption central”. A vendor’s dream come true, but a true maintenance nightmare for our retailer! Our partner article also touches on this subject: the intelligent building vs. the intelligent owner. |
Conclusion
Although opportunities to reduce Opex in the short term do exist, a focus on cutting down the much higher indirect costs will be more beneficial, providing quick ROI and having a major impact on the Life Cycle Cost of the facility. Recommended actions plans will often not result in an immediate Opex reduction: in fact a slight increase may be needed in the initial phase, as the current level of preventive maintenance may prove insufficient. It is also worth noting that such improvement projects, in the form of service contracts, do not require major capital investments, as opposed to purchasing energy efficient equipment, Building Management Systems and other hardware.
| Time will tell how the situation evolves for our retailer. Our advice is to go back to the basics, to focus on helping in-house managers raise their skill level, rather than rely on third-parties with their own agenda. Decisions to automate stores should be gradual, based on careful analysis of their impact (positive and negative). What is your iceberg of FM costs? Contact us for an audit! |
