Ownership or outsourcing?

When the pressure is on to reduce overheads – and when has it ever been worse than today? – maintenance is always among the front-line candidates. Potentially, outsourcing offers the same or higher expertise for much less. But can anyone care for your equipment like you can? It's established practice now across wide tranches of industry to leave the basics of facilities maintenance – HVAC, lifts, loading equipment, security, catering and even gardening – to the specialists. Provided these things run right, you don't even notice them and if they go askew, they are an irritant rather than a show-stopper. But it is a different story entirely when it comes to production machinery and the functions surrounding it like control systems, pumps and rotating equipment. Businesses tend to fight shy of trusting elements that are critical to their production process to anyone but their own people. Often they use external condition monitoring specialists for preventive maintenance of mechanical equipment, or use the original equipment manufacturer (OEM) for routine servicing and intransigent problem solving. But the thought of contracting out the whole responsibility for keeping them up and running makes them frankly nervous. Ewout Roozendaal is business development manager of Rockwell Automation, one of the biggest names in the supply and maintenance of control systems, both its own and other vendors. He says that in specifying and supplying systems, his competitors are the expected names like ABB and Siemens. But when it comes to all the services that surround consistent running, the picture changes completely. The contenders then become local systems integrators (often small, very keen but sometimes with limited resources) or – more often – the in-house engineering department. Let's have a look at the arguments on both sides. First of all, Roozendaal makes a clear distinction between core mechanical production equipment and the electro-mechanical control systems that surround them. In his view, there are clear reasons for leaving the former firmly in the hands of the engineering department who are always on hand and know every aspect of its running from day-to day experience, although – since a major part of Rockwell's service offering is spares inventory management – he naturally would like to see the in-house team supplemented by external expertise to "add value through 24/7 service, repair, parts on site and our knowledge". He believes that the OEM comes a poor second in this respect: "It generally makes a lot of money out of the service but it makes you dependent on them and what happens if they go bust? And if you leave the knowledge within the OEM, you are in a bad bargaining position. Equipment manufacturers are not generally built around services. You depend upon individuals who may leave or be involved with other competing projects." Gary Robins, general manager of Hertel Total Asset Management argues strongly that external maintenance can offer significant reductions in the cost of asset ownership over either OEM or in-house engineering. Often, for example, Hertel will take a totally different tack where a machine has, for unclear reasons, been under performing: "One option is to replace all, or part of the equipment. This may actually be an unnecessary capital expenditure when the root cause may be simple wear and tear requiring only the repair or replacement of key components. In these cases, considerable cost savings can be delivered while extending the asset's lifecycle." In most factories, the big repair shops are a thing of the past but many third party maintenance suppliers still retain the capability. Robins points out that maintenance assessments play an important part in ensuring minimum disruption during planned maintenance. If an OEM part is required, it often has a long lead time, up to 12 weeks, to produce and deliver. Hertel is often able to repair the asset to the original product standard within days. For four years, it has been providing pump and rotating equipment overhauls for Millenium Inorganic Chemicals (MIC), a large international producer of titanium dioxide. Reliability improvement engineer Ray Collinson stresses the importance of working with Hertel as an extension to his team. "[It] means we can rely on the team to understand our needs and the time constraints we are working to." If there is an emergency pump breakdown, MIC knows it can complete a full turnaround within 24 hours. What is more, Hertel provides a detailed report so MIC can learn from the failure and use the information in monitoring other pumps' performance. "We do take advice from Hertel which helps to improve machinery efficiency and reduce maintenance costs, which impacts on the business' bottom line," says Collinson. It's a moot point whether the OEM or the independent specialist provides the best answer. The OEM should know its own products down to the last nut, bolt and circuit board. If the machine has been built to order, there may be one-off level of complexity that can only be handled by co-operation between the business' own engineers and the manufacturer's. On the other hand, heaven help the company whose most important piece of equipment breaks down when the OEM's sole English-speaking engineer is still a Ryanair flight away in Italy. The case is far clearer when it comes to all the vital systems and equipment that surround the core production process such as control systems. This is where external maintenance support can come into its own. Roozendaal points out that there is a fundamental difference between mechanical and electrical systems maintenance: "A lot of mechanical maintenance is lubricating, replacing bearings, and so on. With electrical systems, if it works, it works. Rapid breakdown maintenance is the key." That's a simple phrase but it involves a complex equation: right parts plus right skills equal quick fix and minimal production losses. Take Shell Lubricant Centre at Stanlow in Ellesmere Port. Rockwell developed the whole control system three years ago. Basically, the processing of any order entered into its SAP system is automated through production all the way to delivery into the truck. After installation, the Rockwell team departed, leaving a big gap in support for Shell: the IT content of the system put it well outside the core competency of even its skilled maintenance team. Invited back, Rockwell put together an integrated service of people, parts and process. It put a spares holding on site that is still owned and maintained by Rockwell but accessible to the client. When inventory is used, it is replaced in 24 hours and Rockwell takes the old part back for repair. Shell also has Rockwell people on site five days a week as maintenance support. Out of hours, it can call on an application support team which can make online corrections to the system and, if necessary, provide an engineer on site within a guaranteed period. "We do incident management, tracking trends and building up a knowledge base so that neither we nor the customer are dependent on individuals," says Roozendaal. "It's a one-stop shop for the customer." Rockwell has 300 contracts like this in the UK –which represents a $5 million business. Downtime avoidance is a primary driver for Shell but there are other factors in this kind of outsourced maintenance model that could benefit many businesses across the manufacturing spectrum. First of all, they get 24-hour availability of spares without carrying them on their books, so there is an immediate improvement in return on net assets. Its impact on the service provider is far less through economies of scale. In Rockwell's case, Roozendaal points out that 300 customers make for a pretty accurate assessment of spares needs and also funds the infrastructure to provide them. The same argument applies to staffing levels: "If customers have to provide 24x7 support for themselves, they would have to hire four people, assuming they could find ones with the right skill level. We can provide the same level of competence for a fraction of the cost." Customers seek this kind of service to reduce their risks. One note of warning, however. Anyone assuming he can pass the whole thing over and everything will be taken care of is living in dreamland. All contracts are based on service level agreements and, with most providers, the customer will pay heavily in either lost production or extra call out charges if he has undersized the support needed. Some companies also provide engineers on site to manage the complete repair process, working as part of the maintenance team. Rockwell has about 13 customers who channel all its electro-mechanical work through its 'embedded' staff who can also provide in-service warranty, warranty tracking, vendor management and stock reductions. "In our experience, it's usually the difficult things that aren't done [in an in-house operation]," says Roozendaal. "We have KPIs and we deliver on things like vendor reduction which are often forgotten in-house. People go to the local store with whom they have a good relationship but not necessarily the best quality or prices. And do people really keep hold of all the equipment receipts? So when something breaks down in the warranty period, do they know which should be repaired free of charge? In many cases, we discover that they don't." There is a lot of money tied up in areas that often take a back seat when the pressure is on for the in-house team. It has been calculated that up to 63% of spares holding can be obsolete but remains on the books. "Inventory carrying cost is around 20-25% in terms of risk, insurance and storage," he reflects. "It is an enormous cost to many businesses. And much of it is effectively useless: PLCs with batteries that aren't working and shafts that get flat sides if they aren't turned." It's a compelling argument. But what about the risks in putting the fate of your manufacturing processes into a third party's hands? The first real danger is that they know a lot more about your equipment than you do. Roozendaal is adamant that reputable suppliers will always ensure that all knowledge is documented and shared with the customer: "If you don't do it, you can effectively be held to ransom by service providers. We regularly come across instances where infrastructure providers have pretty much guaranteed their own incomes by making sure something is virtually unsupportable by anyone else." He warns manufacturers to be very careful about how they structure contracts. One of the largest UK food manufacturers is effectively being held to ransom by a control engineer whose charges are three times the national average. "They have come to us a number of times to resolve it, but we can't give them the confidence that production won't be affected. From a risk point of view, it is still cheaper to hold that guy on the books rather than outsource it. When he goes off sick, they are stuffed." He points out that a contractor on the books for a long time can effectively become an employee. You may hire someone for more flexibility yet find yourself in an even more circumscribed position. There is an even bigger risk. What happens if the supplier goes bust? Of course, Roozendaal points out that large stable companies like his are a safe bet. But there is no doubt that they are going to cost more than a local provider. Beware the company that takes liquidated damages – a contract that provides for compensation if there is a specific breach leading to losses. Few big companies will accept them. On the surface it is tempting but legal action by another company could be the thing that drives your supplier into liquidation. If the lure of a cheaper deal is overwhelming, the best advice has got to be due diligence once, twice and thrice – and make sure you never entirely take your hand off the steering wheel.