The true cost of maintenance
09 June 2016
Dave Acton, General Manager for Engineering Support Services at Logistex, discusses the cost versus value of out-sourcing the maintenance of the automated warehousing operation.
Automation systems in the warehouse and distribution sectors are becoming commonplace as companies compete on service and cost. With consumer expectations for speedy delivery times at an all-time high, automation delivers the benefits of being able to control, process, track and manage stock in real time. It reduces labour costs whilst increasing efficiency and accuracy. Having invested in automation to realise these benefits, a company needs to protect that investment so that the system continues to deliver over many years with minimal disruption. This is the responsibility of engineering maintenance. But what is the true cost of this maintenance?
When a company that already has its own in-house maintenance team thinks about whether outsourcing is viable, the first thing that comes into mind is usually the cost, and in particular, that it will cost more. This is actually usually not the case when the true cost of the in-house team is considered.
The costs of running the in-house team spread beyond the obvious of the team salaries. There are many costs that are hidden such as: management costs, HR costs, payroll processing costs, sick cover, paying overtime for holiday cover or temporary labour, pension costs, training and development costs, maybe additional services are being engaged because the in-house team doesn’t have the skills, the costs of processing the procurement and payment of spares. One hidden cost that is often overlooked is what it actually costs the company if production is lost. If we consider value rather than costs then the outsourced engineering support provider often delivers additional value that makes cost less relevant. It is wrong to think that by outsourcing the in-house maintenance team you are simply passing your team on to another company that will then want to make a profit on it. When you engage an outsource provider you are really engaging the support of their whole organisation. This gives you access to their more extensive capabilities and competencies in the area of engineering maintenance. It gives you access to more resources and more skills. Because of their economies of scale and the flexibility that the provider has, it also means you get opportunities to do the work differently. A reorganisation of how the work is done and when it is done becomes possible. Savings can be released through this which might involve a combination of on-site and visiting engineering teams to minimise cost and deliver maximised service delivery at the time it is needed. You don’t have to have a fixed level of resource on site all year round.
Another aspect of cost concern is often the spares that will be used. Again it is seen as another aspect that profit will be added. In reality it is more likely that the amount of money spent on spares does not suffer greatly. The better supplier discounts that the outsource provider has, because of the economies of scale of their wider business, usually means that the cost of spares can actually reduce overall.
Then of course there is the effect of competition. In-house maintenance teams seldom have any real competition and so it is difficult for a company to understand whether they are getting value for money or not. Where support is outsourced it will usually be done on a term basis of three or more years. This introduces the natural check at the anniversary as cost benchmarking can be done between suppliers.
Another approach to concerns over cost can be to let the contract on an Open Book basis. In this way the underlying costs are visible to the company and the agreed profit level is set with the engineering support provider up front. The major disadvantage of this is the cost risk is actually carried by the company not the provider. Open Book usually means transparency of costs therefore if the costs are incurred then the company is responsible for paying them. The provider is therefore really only responsible for the management of the service. So an Open Book contract usually means more risk for the company whereby in a Closed Book contract the provider carries more risk.
There is a lot to be said about sticking to what you are good at. Several aspects are at play that affect a company’s ability to maintain their automated system themselves, e.g. responsibility, resources, expertise, protecting the investment and not least the cost. A well outsourced Engineering Support Service solution can create savings, improve the service delivery, reduces risk, make life easier – the company can then focus on its core business.