Defining a Return on Investment in Your Enterprise Asset Management Project Part 1
Calculating a Return on Investment for Enterprise Asset Management Software
Using a clear defined process for Enterprise Asset Management, and using a platform that supports adding functions and features such as Maintenance and Work Order tracking provides clear benefits in the form of cost savings, that can justify or pay for the cost of purchase of this type of system. I have often been asked to prove that comment and to show how this works. So in today’s blog, I will set the groundwork for this proof, and in the next blog post, I will do the math and show how to derive the cost savings.
When researching Computerized Maintenance Management System (CMMS) / Enterprise Asset Management (EAM) software for your company, it is helpful to calculate an estimated return on investment (ROI). Having a clear Return on Investment is important for justifying the purchase internally and acquiring the capital investment from upper management. A tangible number can also help guide you to a EAM vendor best equipped to meeting your expectations. We include CMMS systems in this model, because maintenance extends asset life and a good EAM system extends the line of sight on the assets through periodic tracking of complete asset life cycle costs. In this blog, I am using EAM interchangeably with CMMS. Visual Asset Manager and eQuip has a CMMS plugin that provides these functions.
Using a EAM ROI Formula
Calculating an ROI can be performed using a classic ROI model:
EAM ROI = (EAM Value – EAM Cost)/ EAM Cost
EAM ROI is commonly assessed for one-year, three-year, or five-year intervals. A one-year calculation that includes your initial EAM implementation costs will have a reduced ROI. That is because these costs are all up front, whereas the benefits of a EAM solution are realized over the course of many years.
EAM costs, which will be provided by EAM vendors, include:
- Initial software purchase
- Initial implementation (including installation and training)
- Any costs associated with new hardware purchases
- Annual support cost (multiplied by the number of years in your ROI calculation)
An EAM Value is your expected reduction in maintenance costs as a result of implementing a EAM/CMMS system. Obtaining a tangible number for your organization is a two-step process:
- First, estimate how much yearly maintenance inefficiencies have cost your organization.
- Estimate to what degree a EAM/CMMS could address those inefficiencies. This estimate can be achieved by consulting industry contacts familiar with EAM/CMMS implementation, speaking with EAM/CMMS vendors, examining industry case studies, or applying what you already know about EAM/CMMS software.
To reach a total estimated EAM/CMMS Value, it is easiest to break up the potential cost benefits of a EAM/CMMS solution into eight separate categories. By looking at each category and examining the potential for reducible maintenance costs, you can begin to formulate a concrete dollar amount.
For each category, consider the EAM/CMMS Value over a period of one year. After you have an annual savings amount, multiply this figure by the number of years considered in your ROI calculation.
1. Asset Life
Maintaining assets with preventive maintenance (PM) is fundamental to extending their lifecycles. CMMS add ins to EAM are designed to create and generate PM tasks, which makes it easier to follow PM guidelines from manufacturers.
Calculating EAM/CMMS Value: To get a dollar value, estimate the number of years you expect to extend your assets’ lifecycles with the assistance of automated preventive maintenance tasks. This improvement in years can be expressed as a tangible dollar amount when you compare it with the total purchase cost of that asset.
In addition to extending the life of your equipment, appropriate PM scheduling also reduces total downtime. When emergency maintenance must be performed on an asset, that asset cannot perform its function until it is restored to working condition. Moreover, if an asset has not been properly maintained, it is likelier to breakdown more often.
Calculating EAM/CMMS Value: First, determine how much unscheduled downtime occurs in your organization per year. Then examine how this lost production translates to lost revenue.
3. Parts / Inventory
Using a CMMS’s parts inventory management features allows your organization to avoid being both under- and over-stocked.
Calculating EAM/CMMS Value: Estimate how much time your organization has lost due to insufficient inventory (halted production, unscheduled purchase orders). Then evaluate how over-stocking has cost your organization in terms of carrying costs, inventory going stale, and depreciation.
EAM/CMMS software is able to assess inventory levels and automatically generate purchase orders (POs) based on need. This speeds up the parts and inventory management process and reduces purchasing overhead.
Calculating EAM/CMMS Value: How many labor hours does your organization spend every year creating custom purchase orders (POs)? How much time is spend on parts procurement management tasks that could be automated by a EAM/CMMS system?
Work order management systems, which are included in EAM/CMMS software, allow you to more accurately forecast labor hours (of both employees and contract workers), which reduces the need for unexpected overtime. Additionally, better-maintained assets reduces emergency maintenance, which allows for more reliable work order scheduling.
Calculating EAM/CMMS Value: First determine how much your organization spends scheduling overtime hours. Then estimate how much of this overtime could have been avoided with a well-implemented work order management system.
Gains in productivity are obtained by optimizing scheduling tasks. EAM/CMMS systems are designed to reduce the time it takes employees to perform preventive maintenance by automating the creation of work orders. Work order management systems can also help assign specific employees tasks at which they are most efficient.
Calculating EAM/CMMS Value: How many labor hours could your organization have saved with a EAM/CMMS system? What is the approximate dollar value of those hours?
7. Quality Costs (Scrap and Rework)
In manufacturing industries, EAM/CMMS systems can help reduce costs related to scrap and rework by keeping machines operating at peak efficiency and avoiding catastrophic material losses.
Calculating CMMS Value: Add up the material losses your organization experiences every year due to production failures. Estimate to what degree properly-maintained machinery could have avoided these losses.
Properly maintained assets will use fewer utilities, reducing your organization’s usage of gas, electricity, and water. HVAC units that have been properly maintenance will perform more efficiently and fail less often.
Calculating CMMS Value: Examine the total amount your organization spends on utilities over the course of a year. Then compare that amount with the expected yearly utility costs if your assets and HVAC units were operating at peak efficiency.
Once you have obtained an estimated EAM/CMMS Value for your organization, you can input that number into the CMMS ROI formula and arrive at a clear EAM/CMMS ROI.
Organizations with newly-implemented or updated EAM/CMMS solutions can experience first-year ROIs of anywhere from 25%-400%, but there are also less-tangible long-term benefits. A EAM/CMMS solution can lead to reduced better customer experience (and less customer turnover), greater employee accountability, and the mitigation of risk.
Finding the right EAM/CMMS vendor for you your organization is a significant task. Once implemented, however, the software can help keep costs down while dramatically increasing the efficiency of your organization.