12 June, 2012
In our recent article about estimating your CMMS Return on Investment (ROI), we identified eight go-to cost-saving categories inherent in a good CMMS. By examining your maintenance operations through the lens of these categories, you can create a realistic CMMS ROI.
Today we wanted to walk you through a sample CMMS ROI calculation using a hypothetical company — let’s call them Ace Shoelace.
Ace Shoelace is a leading manufacturer of shoelaces in an alternate universe. Companies in industries such as healthcare, education, and property management might find quite different results in their calculations, but the process for achieving a CMMS ROI is the same.
The fictional shoelace manufacturer 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 CMMS. What kind of ROI can Ace Shoelace expect on their CMMS investment?
CMMS ROI Formula
Ace Shoelace will evaluate their potential savings using a classic ROI model:
CMMS ROI = (CMMS Value – CMMS Cost)
To perform this calculation, Ace Shoelace will need to acquire their CMMS Cost and their CMMS Value.
By contacting their preferred CMMS vendor, Ace Shoelace has determined that their total annual cost of a CMMS — including software access and hosting — will amount to $10,000. Although this number is small in comparison to their annual revenue, the company still wants to justify the purchase with an ROI calculation.
That’s because the company’s upper management operates on a shoestring budget.
Now it’s time for Ace Shoelace to determine how much their current inefficiencies are costing the company. Although the shoelace manufacturer exists in an alternate universe, they are regular readers of the MicroMain blog. The company decided to evaluate their maintenance operations based on our CMMS ROI article.
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 Shoelace surveys their records for historic asset life and notes that, due to inefficient preventive maintenance scheduling, some of their important manufacturing equipment averages only 90% of the asset manufacturers’ forecasts. The company determines that using a CMMS to extend just a portion of their assets lfespan 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 Shoelace frequently experiences downtime. Recently, for example, there was an incident where (due to inefficient preventive maintenance scheduling) one of their packing machines 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 Shoelace has had historic problems with overstocking. Last year, for example, they ordered a surplus of aglets — those little things at the end of shoelaces — totaling $10,000. The money tied up in these aglets was money that could not be invested elsewhere at an 8% return. These lost opportunity costs totaled $800.
Additionally, they company recently phased their existing aglets in favor of a sturdier, cheaper product. The stock could not be returned to the original aglet 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 Shoelace 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 Shoelace 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 Shoelace conservatively estimates that their CMMS can create savings of 260 labor hours per week (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 Shoelace 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. Ace Shoelace estimates that their total reduction in yearly utilities will be $2,000.
Expected Annual Savings: $2,000
Ace Shoelace 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 CMMS Value. They can now input their CMMS Cost and CMMS Value into the CMMS ROI formula.
CMMS ROI = ($29,340– $10,000) = 1.934
Multiplying 1.934 by 100 to express the ROI as a present yields 193.40%. In other words, Ace Shoelace will expects a 193.40% year-on return on their investment.
Interested in the possibilities of a CMMS? To learn more about MicroMain’s plans and pricing, give us a call at 1-888-888-1600 or send us an email.