Building a Business Case for Reliability Improvement

Transcription

1 Building a Business Case for Reliability Improvement Presented 8/25/08 Charleston, SC Carolina Chapter Kickoff By: Bruce Hawkins, CMRP Director of Maintenance Strategies Management Resources Group, Inc. 1

2 Agenda What is a business case? Why do we need one? What are the typical business benefits of a Reliability Improvement effort? Where will these benefits show up in the company s financial results? How do we develop a financial justification? What are the considerations for creating a compelling business case? 2

3 What is a Business Case? A Business Case is a reasoned proposal for a project or initiative It usually contains several elements: Description of the current state Definition of the future state Business benefit for closing the gap between the two Plan for closing the gap Resource requirements Financial justification 3

4 Why do we need one? Reliability improvement projects often represent a significant investment Those responsible for running the business must ensure investments are made wisely Business leaders are also non-technical people; a proposal must be in terms they understand A compelling justification is needed to gain support of the business leaders 4

5 Current State Description Perform a frank assessment of the current situation Consider having this done by an independent resource; self-assessments are rarely complete and totally objective You don t know what you don t know Outsiders have no need to protect the status quo Outsiders have an implied authority Outline the business impact of current practices Define in business terms; convert to financial terms Profound knowledge comes from the outside and by invitation. A system cannot know itself. - Dr. W. Edwards Deming 5

6 Future State Definition The Future State is a vision of the organization after implementation of the reliability initiatives It should be developed from understanding best practices (reference the SMRP Body of Knowledge) It contains a set of strategic goals and the strategies by which they will be attained: Maximize process reliability by focusing proactive maintenance strategies on the most critical assets Improve craft labor productivity through effectively planning and scheduling maintenance work 6

7 Future State Definition Should include: A definition and discussion of alternatives (including doing nothing ) An analysis of risks A straight forward recommendation 7

8 Business Benefit Future State performance levels should be quantified and tied to business benefit Show how the new performance levels will affect earnings (EBITDA) and return on assets (ROA) 8

9 EBITDA EBITDA = Revenue expenses + depreciation and amortization Reliability grows revenue through greater uptime and reduced losses (OEE) Reliability reduces expenses through: Reduced maintenance cost (labor and material) Reduced operations labor cost Reduced inventory carrying costs Reduced energy costs Reduced insurance costs Reduced capital needs (depreciation and potential for long term debt) 9

10 ROA 10

11 Gap Closure Plan Define the tactical activities required to close the gap between Current State and Future State Insert the activities into a Gantt chart and establish predecessor/successor relationships This will determine timing of the project and will be used as input to the cash flow model Be conservative! 11

12 Resource Requirements Develop a complete understanding of the cost to implement the plan Important to understand cost categories Recurring or non-recurring What are upfront, one-time costs versus ongoing costs? Software, hardware, other technologies, updates, etc. Technology Is new technology required? Buy versus lease options? People Net impact to FTE? Are outside contractors required upfront or ongoing? Tangible and intangible Inventory reduction salvage value? Disposal cost? 12

13 Financial Justification Simple Payback is too simple! Ignores the time value of money Must perform a discounted cash flow analysis Expenditures occur early (typically year one and two) Benefits begin to accrue later (typically late in year one, and ramp up to full rate later) 13

14 Financial Justification Develop a complete understanding of the benefits of the target project Operating expense reductions Energy, maintenance budget, materials, FTE reduction Capital expense reductions or delays Delayed and or avoided capital improvements Throughput Increased throughput margin Decreased scrap Align benefits with costs to achieve develop as-is and target exactly the same line by line 14

15 Discounted Cash Flow Analysis Develop net cash flow series between current state and future state Make sure line items and assumptions are consistent Evaluate risks to achieve Probability vs. consequence Develop alternative cash flow(s) based on risk evaluation 15

16 Current State Cash Flow Example 16

17 Future State Cash Flow Example 17

18 Net Impact and Analysis Results 18

19 Position the business case for success Do not use engineering language Burden is on us to speak the language of approver OEE is not understood.uptime is RAV is not understood..roa is Reliability is done by engineers..eps is improved by MBAs Right technical answer is not necessarily the right business answer Shifting the paradigm is essential Engineering view must become economic view 19

20 Position the business case for success Business owners not only want returns, but they want risk mitigation Financial: Can you break project into smaller more palatable projects? How will you avoid the dip in performance when the project goes live? Are you willing to live with the business case assumptions? Personnel: Are you addressing the costs of hiring and training personnel for new skill sets? How will you help ensure contractor knowledge transfer? System Irrelevance: How are you creating a foundation to be built on and not become irrelevant in the near future? 20

21 Position the business case for success Always use company format/ templates/ tools if available Always align cost to achieve with expected benefits Always remember that you are competing with other internal projects from within and external to the business unit Always meet the minimum hurdle rates Always evaluate the do nothing alternative Always use target audience language Always be ready to live with an approval! 21

22 Questions? For additional information on this topic, be sure to attend Workshop 1 Business and Finance for Maintenance and Reliability Professionals at the 2008 SMRP Conference in Cleveland. 22

23 For further information: Management Resources Group, Inc. 555 Heritage Road, Suite 2 Southbury, CT (203)