"What must we do to be a world-class equipment-management organization?” It is a question you should ask yourself, and it is a question you should be prepared to answer.
Your answer can be long and complicated, or it can be so broad as to be of no value. Here are four critical success factors for any world-class equipment organization:
- Stop your equipment from breaking
- Know your costs
- Manage fleet average age
- Maximize fleet utilization
They are not listed in order, you have to do them all, and, as the diagram shows, they are closely interrelated: Success in one depends on success in the other. Let’s look at three things that need to be done to meet world class in each area, from which a manager can develop a 12-point checklist in order to answer the question, “How good are we at this?”
Stop equipment from breaking
Your company succeeds and grows because it puts construction in place safely, on time, and on budget. Down events disrupt production and make this impossible. This cannot happen. Down events will occur, but you must reduce them to an absolute minimum. Here are three things you have to do:
Focus on your operators. Nothing has more effect on reliability and cost than the hand that turns the key and puts the machine to work. How well are your operators trained, how committed are you to their success, and how committed are they to yours?
Build your technicians. When it comes to reliability and cost, the hand that turns the wrench and keeps machines up and running is nearly on a par with the hand that turns the key. How good are you at building the standing, stature, and skills of your technicians? Do you acknowledge that field technicians are your scarcest resource?
A competent preventive maintenance program is a non-negotiable requirement that must be disciplined and systematic.
Maintain with no compromise. A competent preventive maintenance program is a non-negotiable requirement. It must be disciplined, systematic, and thorough. An efficient condition-based maintenance program built on competent damage reports and forensic analysis is also not negotiable. Procedures must be in place to catch pending failures before they happen and before they impact reliability and cost. World class organizations focus on prevention rather than cure.
Know your cost
Knowing your cost is the price of admission to the construction industry. We often work on contracts where the price charged for the work is fixed in advance. Under these conditions, we carry the risk of actual cost exceeding the agreed price and we cannot be successful if we are not able to estimate the cost of equipment with reasonable accuracy. It is not simple, and setting reasonable and reasonably accurate rates for use in the estimating process is critical. Here are three things you must do:
Set, maintain, calibrate, and balance your internal charge-out rates by rate class. Know what it costs you to own and operate each and every rate class in your fleet, and set the cost recovery rates accordingly. Although it is important to recover costs and balance the equipment account as a whole, little is achieved if this is done under conditions where the pavers are gaining 40 percent on budget while the milling machines are losing 40 percent on budget. Each rate class must balance its own books; one rate class cannot subsidize another.
Have actionable information on budget variances. Manage the owning and operating cost sides of the equipment account separately with each receiving the skill, care, and diligence it deserves. Owning costs are largely fixed annual costs, and owning cost management requires a laser focus on utilization. Operating costs are largely proportional to hours worked, and operating cost management requires a focus on spending wisely and eliminating waste.
Have a simple, efficient, and well understood cost-recovery system in place. The rate is only part of the process. Have good mechanisms in place for recording hours worked and managing the waste that occurs when machines work fewer than the minimum required hours. Charge the jobs and recover costs using the same “rules” as those used by the estimators when they set up the job budget.
Manage fleet average age
It is relatively easy, but capital-intensive and expensive, to be world class if your fleet is brand new. It is impossible to be world class if your fleet is beyond its economic life and heading for the scrap heap. World class requires that you minimize the sum of owning and operating costs by managing fleet average age and keeping it at or around the economic life for each rate class. This requires that you:
Establish economic life benchmarks for each asset class in your fleet. You can do this by analyzing your data and estimating when the average cost per hour life to date for a machine is likely to start increasing above the minimum, or you can do it by using intuition and experience. Data analysis is, of course, preferable in today’s world, but the lack of data and the complexity of the analysis should not stop you from establishing reasonable age benchmarks.
Use your age benchmarks and a knowledge of your annual utilization to develop a long-term replacement plan and capital expenditures budget. It should not be a surprise that a machine that was within 3,000 hours of its replacement benchmark two years ago now needs to be replaced. You must have in place a reasonable and reasonably competent long-term fleet replacement strategy.
Develop a culture across your organization that accepts that fleet replacement cannot be denied. Although you may be able to defer replacement in the short term, you cannot deny replacement in the medium to long term. Develop an understanding that old machines become progressively more expensive and progressively less reliable. Act on your replacement plan and invest in your future.
Maximize fleet utilization
This comes last but it is by no means least. You do not own and operate equipment as an end in itself. You own it and operate it to produce completed construction, and to this end it must be utilized to the maximum extent possible. To be world class you need to:
Know and understand that capital is a scarce and expensive resource and that the equipment fleet represents a substantial portion of the capital invested in the company. The size and configuration of your fleet must therefore be constantly adjusted to suit the work being performed. Equipment investments can be but need not be long-term investments, and nothing is achieved by providing a home for idle assets. If you are doing this, stop it. Keep your fleet trim and active.
Source your equipment wisely. Not all units in the fleet need to be purchased with your own funds; ownership is, in many cases, not the preferred way to go. Leases, rental/purchase agreements, and traditional short-term rentals provide flexibility and make it possible for world-class organizations to focus on the efficient use of their own capital. Understand the buy, borrow, lease, or rent equation.
Partner with field operations to understand the short-, medium-, and long-term requirements on each and every job site. Construction demands are extraordinarily volatile, and world-class organizations know how to meet their customers’ demands by ensuring that they have the right equipment in the right place at the right time.
These four critical success factors include three things to be done on the way to world-class performance in each. Write them out as a 12-point checklist in your own words and see how you are doing.
For more asset management, visit Construction Equipment Executive Institute.