Some time back, a farsighted and successful construction-company owner asked me a simple, direct question: "Mike, I want a world-class equipment operation; what must I do to get there?" It is the kind of question that has caused his company to be successful. It sets a vision and provides a focus. It is also the kind of question that causes panic. Surely, I must be able to define the essence of a world-class operation?
My on-the-spot response has stood the test of time. I have refined it a little, but there are three areas of excellence that define a world-class equipment operation.
First, you have to maintain a laser focus and achieve undeniable success in all the actions needed to prevent breakdowns and unplanned failures. You have to be proactive, get ahead of the breakdown curve, and stay there. Excellence emphasizes quiet success rather than crisis management, and you must have the courage to practice what you preach when you say that prevention is better than cure.
Second, you have to know your costs with confidence and accuracy. You can manage a fleet and make decisions based on intuition and experience, but success in a competitive, fixed-price-driven business world demands more. You must know what it costs to own and operate equipment, and you must move beyond decisions based on prejudice and personal choice.
Third, you have to minimize and conserve the capital invested in the fleet. Construction is a capital-intensive business; a company can only be successful if it optimizes the use of capital as a scarce and expensive resource. Excellence demands that every dollar of capital invested in the fleet produces a safe, consistent and competitive return.
The accompanying diagram shows howthe three areas of excellence are closely interrelated. If you are proactive and prevent unexpected breakdowns, then it will be possible to know your costs and extend economic life to the optimum. If you know your costs, it is possible to minimize and conserve capital resources and vice versa.
Knowing what is needed for excellence is not enough. You must know what to do and how to get there.
The first requirement is a nonnegotiable, systematic, disciplined and thorough scheduled preventive-maintenance program. Actions should be planned, performed and verified using appropriate checklists. Nothing should be left to chance. Scheduled preventive maintenance is, however, not enough. Excellence demands the implantation of a condition-based maintenance program that reaches out, listens to machines, and gathers condition data so that components can bereplaced with planning and foresight rather than conflict and confusion. Tire, undercarriage and other routine inspection programs are commonly used when signs of damage or wear are visible. Oil analysis, vibration, sound and temperature are used when wear and impending failure are hard to detect. Condition-based maintenance actions can be planned so as to coincide with the next scheduled maintenance or they can be performed on their own when the nature of the work and the urgency justify the additional downtime.
Companies that do not measure downtime and reliability are unable to determine whether or not their maintenance programs are effective and invariably do the bare minimum needed to change oil and progress toward the next disruptive failure. As with everything, success demands that results are measured and continuously improved. World-class maintenance operations get there and stay there by using metrics that measure both the frequency and the severity of unplanned down-time. They seek zero. It is an elusive goal.
If you do not know your costs, you are lost on the dark sea of uncertainty. The vast majority of decisions will depend on gut feel, and it will be impossible to succeed in a world where everyone is increasingly required to set and achieve finely tuned financial targets. Knowing what it costs to own and operate equipment and being able to predict future costs lies at the heart of every successful equipment operation.
It is not sufficient to know that the equipment account is, as a whole, making or losing money. Many machines of different classes and categories contribute to the revenue and the cost side of the account, and the final number is often the happy coincidence of good luck in one area and bad luck in another. The first step in successful cost management is therefore to split the fleet into clearly defined equipment classes and categories and to ensure that each class or category meets budget expectations in at least four principal cost types: owning costs, operating costs, fuel and overhead. Nothing is achieved if a fuel budget over-run in the heavy-excavator class is masked by an under-run caused by exceptional utilization in the haul-truck category. Even less is achieved if budget over-runs caused by an inability or reluctance to report hours worked in the light-vehicle category are masked by budget under-runs in the light dozer class, and if everyone goes home believing the equipment account is "well managed."
Successful cost management focuses on balancing the actual costs of each class of equipment with the revenue generated by multiplying hours, days or months of utilization by an appropriate unit rate. The actual costs and the actual utilization are facts of life; therefore, the unit rate is the only thing that can be adjusted to achieve the required balance. Adjusting the unit rate so that cost and revenue match for every class and category of equipment is not simple. It is, however, necessary if you are to know your costs and use them with confidence and reasonable accuracy in estimating. World-class companies seek and achieve variations of less than 10 percent for all major classes and categories.
Every time I see a machine with a $60,000 residual market value forlornly parked with no work to do, I imagine a phone call from the bank to the CFO in which the bank tells the CFO that they have just taken $60,000 from an interest-bearing account and put it into an account that pays a negative interest rate of 5 percent per year. That is exactly what happens when equipment stands idle. Every machine represents a substantial investment of capital; and every investment must earn a safe, sustained and competitive return.
There are two dimensions to the problem. First, the amount of capital invested in the fleet and, second, the cost of that capital. Success requires that both be addressed.
The amount of capital employed in a fleet is dependant on the utilization of the fleet and the average age of the fleet. Utilization is not a given and is not outside the control of the equipment manager. Successful companies constantly adjust the age, size and balance of their fleets to accommodate change in the nature and volume of the work they perform. Their plans and work loads are well known, their decision making is nimble, and equipment is only kept in the fleet for strategic purposes when there is absolutely no alternative. Machines are not kept "because we own them," and every idle machine, whether it is fully depreciated or not, is seen as a lost investment opportunity.
The cost of the capital employed must also be measured, managed and minimized. Equity, your own funds invested in the machine, is not free. It ties up precious working capital, and the returns must be sufficient to attract additional investment and keep the business growing. Debt certainly is not free and is limited by covenants on the debt-to-equity ratio. Leases, despite apparent advantages, carry their own cost and significantly increase fixed-cost risks. Successful companies carry a portfolio of financing alternatives to spread risk and reduce cost. More especially, they know it is a capital-intensive business and keep their investments working.