How Reliability Impacts Shareholder
Value
Bruce Hawkins, CMRP
Management Resources Group, Inc.
Introduction
• Reliability initiatives generate shareholder value
in many ways
• Some are unexpected
• Returns on a reliability investment (if effectively
implemented) generally exceed the planned
business case
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Reliability Attributes
• Equipment operating within its design parameters
• Disciplined M&R work process
– Quantity of work is known
• Effective resource utilization through Planning and
Scheduling
• Mature PM/PdM program with high compliance
– Technical basis for all tasks
– Multiple technologies in use
• Relentless Root Cause Analysis
• Effective storeroom and spare parts management
• All plant functions engaged in reliability improvement
– Operations, Maintenance, Engineering, Procurement
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Shareholder Value Drivers
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Revenue Growth
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Revenue Growth
• Revenue growth occurs when:
– Volume is increased and the additional product is sold
– Greater product value commands higher prices
• Reliability:
– Increases availability by reducing the incidence of unplanned
failures, providing additional production capacity
– Reduces minor stops and speed losses, increasing throughput
– Increases quality by providing stability in the manufacturing
process, reducing the incidence of “special cause” events
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Cost Effectiveness
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Cost Effectiveness
• Operations and Maintenance often represent the largest
controllable cost areas
• Costs are minimized when these resources are used
efficiently
• Reliability:
–
–
–
–
–
–
Provides for efficient labor and material resource utilization
Offers the potential to eliminate unnecessary maintenance work
Reduces waste in operations and in maintenance
Reduces energy losses in rotating equipment and utility systems
Reduces stores carrying costs
Reduces depreciation expense
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Ron Moore’s Reliability Process
Design
Defects
Buy
Store
Install/
Startup
Defects
Defects
Defects
Operate
Defects
Maintain
Defects
Root Causes
Source: In Cooperation with
Andrew Fraser,
Reliable Manufacturing Assoc.
The RM Group, Inc.
Knoxville, TN
Rate Losses & Downtime
Unnecessary Work
Uptime
&
Necessary Work
Minimum unit cost
of Operations
Copyright 2003
Asset Efficiency
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Asset Efficiency
• Asset efficiency is increased when:
–
–
–
–
Fixed assets are utilized efficiency
Asset life is extended beyond “accounting rules”
Asset maintenance requirements are minimized
Current asset values are minimized
• Reliability:
–
–
–
–
–
Makes efficient use of existing assets
Provides for increased useful life
Minimizes turnaround cost and duration
Offers the potential for failure mode elimination in design
Reduces the need for excessive spare parts inventories
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Market Expectations
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Market Expectations
• The market values a publicly traded company based on
performance, consistency and management credibility
• Reliability:
– Provides information concerning the health and capacity of
physical assets
– Provides a greater ability to be “nimble” and able to respond to
opportunities
– Provides systems, structure and discipline that enhances
management’s ability to execute
– Provides data and information to enable fact-based decision
making
– Provides the ability to identify and mitigate risk
– Enhances executive credibility in the marketplace
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Measuring Shareholder Value
• Best measured by Return on Assets (ROA)
• Indicates how profitable a company is relative to the total
assets it has at its disposal
• Measures how efficiently management uses its assets to
generate earnings
• Used by potential investors to compare companies in a
similar industry to determine which is the best value
• Calculated by dividing net income (earnings) by value of
total assets:
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Example
BP - 2009
BP - 2010
XOM - 2009
XOM - 2010
Earnings
$16,759MM
($3,324MM)
$19,280MM
$30,460MM
Total Assets
$235,968MM
$272,262MM
$233,323MM
$302,510MM
ROA
7%
(0.15%)
8.3%
10.1%
Which is the better investment?
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Return on Assets = Shareholder Value
Revenue
Net Income
(earnings)
Costs
Shareholder
Value = f(ROA)
Current Assets
Total Assets
Fixed Assets
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Summary
• A successful reliability initiative nearly always
provides greater benefits than anticipated
• Discipline and rigor inherent in a reliability
culture drives benefits in all areas of the
operation
• What other initiatives can an organization
embrace that has a comparable effect?
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Questions?
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