The Maintenance Cost Index

Rebuilding your Maintenance Program is not an easy task but a very time-consuming endeavor and should be a living document that will change quite a bit over the next few years. Where many engineers and managers miss the mark is not completely understanding that the MCI KPI can be misleading. And as always, please make sure that you pass this around and share it with others.

But first, remember those disclaimers:

The author’s views do not necessarily reflect the views of his employers, colleagues or any professional societies he is affiliated with.

Mike Ebel

Reliability Key Performance Indicator Analysis:

The Maintenance Cost Index

Almost every industry professional in the reliability engineering field understands the maintenance cost index (MCI) matrix and its importance to an organization’s estimated targets and proper asset maintenance. However, not everyone is aware that this key performance indicator (KPI) may be misleading by portraying that overspending means more maintenance and underspending means less maintenance. In reality, the level of maintenance may be the same or even the opposite of what this KPI indicates. Therefore, it is essential to dive deeper, pairing the MCI matrix with other factors and matrices to capture the full picture.

Typically, MCI KPI has a lower and a higher limit – the measurement is expected to fall within this band. However, there are three possible scenarios where the MCI is:

• Above the higher limit

• Below the lower limit

• Within the band

Let’s discuss each scenario in detail and see why the measurement of this KPI requires the consideration of other factors to interpret the MCI correctly.

MCI Measurement: Above the Higher Limit

On the surface, when the MCI is above the higher limit it means overspending on maintenance – the most common scenario industry usually struggles with. However, overspending doesn’t necessarily mean “more maintenance.” It’s quite possible that the level of maintenance is the same or may have even reduced at a higher cost. Overspending could cost a company millions of dollars and must be addressed by dissecting the maintenance-related costs and identifying all causal factors that are driving costs. To accomplish this, a deep understanding of the MCI KPI is essential. MCI provides a baseline for the annual maintenance costs (AMC) against the replacement cost and is calculated as follows:

Maintenance Cost Index (MCI)=

(Annual Maintenance Costs (AMC))/(Estimated Replacement Value (ERV))*100

Target s can be derived from industry benchmarks to help gauge performance. Typically, two to three percent is a benchmark of best performers in the industry.

From the above equation, it is clear that MCI will increase when either the AMC goes up or the estimated replacement value (ERV) decreases. Since we have no control over the ERV, it is essential to know how the AMC is calculated and what can be done to manipulate the AMC to achieve desired results. Typically, all maintenance work orders are included in the maintenance costs except for capital project support. These may include:

• Corrective Maintenance and Repair

• Predictive Maintenance

• Preventive Maintenance

• Turnaround & Inspection (T&I)

• Minor Maintenance Ticket

• New Work & Upgrades

• General Maintenance

However, the cost breakdown alone will not tell the whole story. One must dive deeper to understand the factors contributing to the rise in cost. This can occur due to several different reasons, which may or may not be in your control. For instance:

1. Decline in reliability

New products used to replace old ones may be less reliable and are failing frequently b. Frequency of preventive maintenance (PM) increased due to frequent failures c. PM requirements became more demanding for the replaced products

2. Contracts or HR factor

a. Recent change in a contracting company utilizing inefficient labor

b. b. Employee morale declined due to reduction in incentives

c. c. Poorly trained or less-productive new generation of employees

d. d. Adoption of new technologies done with improper change management

3. External conditions

a.Unfavorable weather conditions in the region contribute to frequent equipment failures

b. Higher production demand is causing more wear and tear on equipment

c. T&I or other exceptional costs within the period

4. Decrease in ERV

a.Rapid drop in ERV due to a breakthrough in technology

Additionally, data from the following matrices must be analyzed to have a full grasp on the situation:

• Bad actor KPI may reflect on an unreliable product

• Rework KPI will indicate the quality of work has declined

• Mean time between failure (MTBF) KPI can indicate the change in failure frequency due to several reasons

• Mean time to repair (MTTR) KPI will alert you if the repair time has increased due to unproductive labor or factors beyond your control

Therefore, to investigate the rise in the MCI KPI thoroughly, one must review the cost breakdown, examine other relevant KPIs and explore additional factors as mentioned above. This will reveal all the causal factors and appropriate actions that can be taken to address the root-cause of the problem.

MCI Measurement: Below the Lower Limit

Generally, an MCI KPI below the lower limit indicates underspending on maintenance. It is perceived negatively because of the assumption that if the enough money is not spent on maintaining the equipment, it will fail unexpectedly causing unplanned outages or total shutdown. In other words, the reliability of the facility may be at stake. For the most part, this is true, and all necessary measures must be taken to keep this KPI above the lower limit. However, there could be factors lowering the AMC that could be perceived as benign or even positive. For instance, these include:

1. Enhanced Reliability

a. The new products used to replace the old ones are more reliable and failing less frequently

b. Frequency of PM decreased due to less frequent failures

c. The PM requirements are less demanding for newer products with better technology (e.g. built-in diagnostics and partial stroke testing, etc.)

2. Contracts or HR factor

a. A recent change in contracting company utilizing productive labor and/or better, efficient equipment b. Employee morale improved due to change in incentives

3. External conditions

a. Favorable weather conditions in the region contribute to infrequent equipment failures

b. Lower production demand is causing less wear and tear on equipment

4. Increase in ERV

a. Rapid rise in ERV due to inflation

These factors must be thoroughly analyzed prior to blindly increasing the spending on maintenance to bring the MCI KPI measurement back in the band. Lowering the limit could be a better approach in some scenarios.

MCI Measurement: Within the Band

Even when the MCI KPI measurement is within the band, it cannot be ignored. Referring to the earlier mentioned MCI equation, the KPI is calculated based on overall annual maintenance costs. What if all these costs are associated with just a few pieces of equipment while the others are being starved from necessary PM or repairs? The MCI KPI will be unable to catch this uneven distribution of funds.

Further analysis of the cost breakdown and fund distribution among equipment is necessary to ensure that every asset is receiving the expected care. The maintenance money drainer (MMD) report should be frequently analyzed to identify the top five to 10 assets where the most money was spent and look for ways to distribute it more evenly.

Both too much and too little maintenance are damaging to equipment and can inadvertently affect the efficiency of assets. Frequent assessment of deviations from the suggested targets and analyzing the level of maintenance expenditure is essential for reliable operation.

In addition to the 12-month maintenance cost index (based on the previous 12 months), the five-year summed value of maintenance costs can be used to compare against the current ERV. This will offer a larger window of time and will eliminate bias due to out-of-the-norm expenses. The measurement of MCI KPI cannot be taken at its face value without reviewing other factors to see the full picture and achieve desired results.

Thank you for sharing this with me Mr. Obaidullah Syed, P.E., CMRP, PMP