Defining a Return on Investment in Your Enterprise Asset Management Project Part 2
Part 1 of this blog outlined the process for defining a return on investment (ROI) using the process of Enterprise Asset Management (EAM) and Computer Maintenance Management Software (CMMS). Lets continue this blog and outline an example based on a real-life example of a moderate size construction company called American Construction. Companies in industries such as healthcare, education, and property management might find quite different results in their calculations, but the process for achieving a EAM/CMMS ROI is the same.
This construction company currently depends on manually creating work orders and purchase orders. Their current method for generating preventive maintenance (PM) tasks relies heavily on inadequate scheduling software — and in some cases the staff’s own human memory.
The company could clearly benefit from a disciplined process of Asset Management and Maintenance Management. What kind of ROI can this construction company expect on their EAM/CMMS investment?
EAM/CMMS ROI Formula
American Construction will evaluate their potential savings using a classic ROI model:
EAM/CMMS ROI = (EAM/CMMS Value – EAM/CMMS Cost) / EAM/CMMS Cost
EAM/CMMS Cost is the cost of the software, training and onboarding.
To perform this calculation, American Construction will need to acquire their EAM/CMMS Cost and their EAM/CMMS Value.
Using eQuip! enterprise with the Maintenance Work Order Plugin the annual costs of eQuip and the Maintenance and Work Order Plugin, the first year on-boarding is $5985. Additionally American Construction spent an additional $4015 for mobile devices to ensure that the equipment in the EAM/CMMS system is kept up to date. Thus the total cost is $10,000. This is the number to use for the EAM/Cost. Any additional customization, on-boarding and added services would can factor into the first year cost, or can be amortized over a period of three years. For purposes of this example, we will use the complete cost of ownership for the first year Cost of the EAM/CMMS subscription.
Now it’s time for American Construction to determine how much their current inefficiencies are costing the company.
1. Asset Life
Assets have an inherent cost per year. If an asset costs $50,000 and is used for ten years, the asset’s cost per year is $5,000 — that is, the total cost divided by 10 Extending that asset’s life by just half a year, then, would create a savings of $2,500.
American Construction surveyed their records for historic asset life and noted that, due to inefficient preventive maintenance scheduling, some of their important construction equipment averages only 90% of the asset manufacturers’ forecasts. The company determined that using a CMMS to extend just a portion of their assets lifespan would create an estimated annual savings of $7,000.
Expected Annual Savings: $7,000
In addition to extending asset life, an effective CMMS can reduce the time in which assets experience downtime.
American Construction frequently experiences downtime. Recently, for example, there was an incident where (due to inefficient preventive maintenance scheduling) one of their crains missed its regular inspection and had to be put out of service for an entire day.
The real-dollar cost of this incident was $5,200 in lost production and $600 in unforeseen labor. The company determined that this incident could have been preventable with a CMMS, and similar incidents have occurred about once per year.
Expected Annual Savings: $5,800
3. Parts / Inventory
American Construction has had historic problems with overstocking. Last year, for example, they ordered a surplus of powder impact nails — used in framing and side construction — totaling $10,000. The money tied up in these powder impact nails was money that could not be invested elsewhere at an 8% return. These lost opportunity costs totaled $800.
Additionally, the company recently phased their existing powder impact nails in favor of a sturdier, cheaper product. The stock could not be returned to the original manufacturer, but the company was able to re-sell them at 75% of their price. This obsolescence cost the company another $2,500
Expected Annual Savings: $3,300
Without a CMMS, American Construction does not make use of automated purchase orders. Every year, the company spends 4 labor hours a week on parts procurement management, which would be reduced to 1 hour with the introduction of a CMMS.
3 labor hours per week can be multiplied by 52 (weeks per year) to equal 156. If labor hours costs the company $15 per hour for this position (including payroll tax), the total savings equals $2,340.
Expected Annual Savings: $2,340
American Construction experiences limited overtime hours, and there existing overtime hours were a necessary byproduct of their overall labor strategy. They do not project receiving a monetary benefit from a CMMS in this category and so calculated their projected overtime savings at $0.
Expected Annual Savings: $0
Productivity measures the efficiency of production — that is, how effectively labor hours can be applied to the production of revenue. Gains in productivity can be achieved through optimizing scheduling tasks and automating the creation of work orders.
American Construction conservatively estimates that their CMMS can create savings of 260 labor hours per year (5 hours per week) by assigning specific employees tasks at which they are most efficient. If the average labor hour costs the company $15, the total savings is $3,900.
Expected Annual Savings: $3,900
7. Quality Costs (Scrap and Rework)
American Construction estimates that Scrap and Reworks costs the company upwards of $20,000 a year. Based on what they know of a CMMS, they believe the software can reduce that figure by at least 25% — that is, a savings of $5,000.
Expected Annual Savings: $5,000
HVAC systems in typical commercial buildings are responsible for more than 40 percent of total energy use. HVAC units that have been properly maintenance will perform more efficiently and fail less often. American Construction estimates that their total reduction in yearly utilities will be $2,000.
Expected Annual Savings: $2,000
American Construction is a particularly excellent candidate for a new CMMS Solution. Their total reducible maintenance costs — that is, the sum total of their savings potential for each category — is $29,340. This is their EAM/CMMS Value. They can now input their EAM/CMMS Cost and EAM/CMMS Value into the EAM/CMMS ROI formula.
EAM/CMMS ROI = ($29,340– $10,000) / $10,000 = 1.934
Multiplying 1.934 by 100 to express the ROI as a present yields 193.40%. In other words, American Construction will expects a 193.40% year-one return on their investment.