Get Buy-In By Showing Predictive Maintenance ROI

on October 17, 2018

Calculating the return on investment (ROI) for new predictive maintenance (PdM) technology is a critical step to get buy-in from management. Unfortunately, it’s also a task that many teams struggle with.

To calculate an accurate figure, you need information on the condition of your existing assets and how often they fail. By obtaining and analyzing that data, you can begin to build your case.

An educated estimate for PdM ROI gives you a strong case to convince your managers to adopt new tools that will save thousands of dollars each year in machine downtime.

In this report, we’ll explain the key factors to determine so you can demonstrate the ROI and get the tools you need to move from reactive to predictive maintenance.

First, what is predictive maintenance?

Predictive Maintenance (PdM) is a maintenance strategy that goes beyond the common preventive approach. Instead of scheduling work orders on a calendar, a PdM strategy utilizes the actual condition of a machine to determine when service is needed—This can be done through regular in-person spot checks or by attaching devices to gather real-time data for automation.

Factors for Calculating Predictive Maintenance ROI

The traditional formula for ROI includes the known quantity for your net profit, the money gained over (typically) one year:

Traditional ROI Formula

But what if you just want to forecast ROI before a purchase? You can’t see the future, but when adopting new technology or software, you can use estimates, historical data and research on predictive maintenance to get a good idea of the investment multiplier.

A good first step is identifying some areas where you spend too much and where a predictive maintenance strategy can have an impact.

Factor 1: Inventory Management Costs

Inventory carrying costs can make up a significant percent of the total inventory expense, so it’s important to optimize the volume and timing of reorders by categorizing spare parts.

Here are a couple ways to do that:

ABC Analysis A method of reviewing the stock-on-hand versus how frequently inventory items are used. For example, “A Parts” make up about 80 percent of all parts used, but account for 20 percent or less of inventory stock, whereas “C Parts” make up about 5 percent of usage, but account for about half of the inventory stock.
XYZ Analysis A method similar to ABC, but focused on inventory costs—”X Parts” make up about 80 percent of inventory value, but account for 20 percent or less of inventory stock, “Y Parts” make up about 25 percent of inventory value, but account for about 30 percent of inventory stock etc.

You need to ensure you have the right parts in stock to avoid a stockout and prevent unexpected failures. This analysis process identifies which parts you must have in stock at all times and those which are less critical in preventing downtime. So, you can reduce inventory costs by finding the optimal levels of each.

This analysis will provide you with a more concrete idea of your total inventory management-related expenses each year that you can factor into your ROI forecast.

ABC Analysis Graph

ABC Analysis Graph for Inventory Managament

How does PdM improve inventory management?

Using a predictive strategy and networked sensors, repairs and spot checks occur only when the asset conditions go above or below predefined thresholds. This means you will have much fewer unexpected breakdowns, which often result in needing to use more materials or spare parts than anticipated, or having to make an emergency purchase order.

Factor 2: Asset Downtime Costs

The primary goal of predictive maintenance is to prevent failures that cost your company hundreds of dollars per hour, so your average cost of downtime can be used to calculate real savings.

After some time as a maintenance professional, you likely have records showing the frequency and duration of machine downtime. Gather the following figures to calculate how much this costs per hour:

  • Employee costs per hour: The average employee salary divided by number of hours worked, multiplied by the number of employees.
  • Average revenue per hour: An estimate of how much revenue your company generates in a given hour.
  • Employees affected by downtime: An estimate of the percent of employees who would be unable to work due to shut down machinery.
  • Revenue affected by downtime: An estimate of the percent of revenue lost due to machine downtime.

Factor 3: Common Upfront Software Costs

Another factor in finding your ROI is the total anticipated cost of the software that will enable a PdM strategy. If you’ve already identified some options, you can collect some information from the vendors about the typical expenses, then factor the numbers in your ROI calculation.

These expenses can include:

Training and support When you adopt new maintenance software, you’re also investing in a relationship with the vendor. Training helps your technicians use the system correctly. Over time, you’ll run into issues that only the vendor can fix.
Implementation services PdM requires a setup process to collect and stream the correct data to the software. Most vendors offer an implementation service to perform this step accurately.
Customizations Each factory, plant or facility has its own unique configurations, and vendors can customize the layout and functionality of the system for your specific needs.
On-premise deployment An on-premise deployment allows you to manage your own data locally—While this option gives you more control and potentially more security, this kind of deployment is often purchased with a perpetual license upfront, compared to a lower subscription payment over time.
Hardware For optimal condition-based maintenance, sensors should be attached to assets to stream real-time data. Some vendors sell these directly or work with third-party manufacturers to provide hardware to customers.

The true cost of software can include many more fees and ongoing costs, but we have an interactive total cost of ownership (TCO) calculator for a comprehensive view of the long-term expenditure for both on-premise and cloud-based deployment options.

Image of our TCO Calculator

Our TCO Calculator factors in deployment, installation, training and more to illustrate the cost of the software into the future

I’m Ready to Show ROI! Now What?

When you factor in inventory costs, identify your average cost of downtime and determine any anticipated software costs, you have the information to calculate an accurate return of investment forecast to get buy-in for predictive maintenance tools that can significantly reduce your costs.

Our interactive Predictive Maintenance ROI Calculator can take the numbers you’ve gathered and for average return on investment forecast.

Here are steps to take when you get the go-ahead to start your software search:

  • If you want to narrow down your options quickly with an expert, call us at (855) 998-8505 for a free consultation—Our maintenance software advisors can walk you through the process to identify your best options.

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